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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number:
January 29, 2000 0-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 33-047990
- ------------------------------------ ------------------------------------
(Sate or Other Jurisdiction (I.R.S. Employer Identification No.)
Of Incorporation or Organization)
9125 Rehco Road, San Diego, California 92121
(Address, Including Zip Code, of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(858) 453-7845
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $. 0001 par value
-------------------------------
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: |X|
As of April 7, 2000, there were outstanding 21,107,299 shares of the
Registrant's Common Stock, $0.0001 par value. As of that date, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
approximately $253,947,191.
Documents Incorporated By Reference: The information called for by Part
III is incorporated by reference from the Proxy Statement relating to the 2000
Annual Meeting of Stockholders of the Registrant.
PART I
ITEM 1. BUSINESS
PETCO Animal Supplies, Inc. ("PETCO" or the "Company") is a leading
specialty retailer of premium pet food and supplies. As of January 29, 2000, the
Company operated 490 stores in 39 states and the District of Columbia. PETCO's
strategy is to be the leading category-dominant national chain of community pet
food and supply superstores by offering its customers a complete assortment of
pet-related products at competitive prices, with superior levels of customer
service at convenient locations.
The Company's expansion strategy is to open and acquire superstores,
including relocations, expansions or remodels of existing, smaller format stores
into superstores (collectively referred to herein as "conversions"), and to
close underperforming stores. During fiscal 1999, the Company opened or acquired
42 stores, including the conversion of 10 stores into superstores, and closed 18
stores.
Unless otherwise indicated, all references in this Annual Report to a
fiscal year refer to the fiscal year ending on the Saturday closest to January
31 of the following year. For example, references to fiscal 1999 refer to the
fiscal year beginning on January 31, 1999 and ending on January 29, 2000.
The Pet Food, Supply and Services Industry
General. In 1998, retail sales in the United States of pet food, supplies,
small animals (excluding dogs and cats) and services were estimated at $22
billion. Pet food accounted for the majority of this market with an estimated
$11 billion in sales, pet supply and small animal sales were estimated at $5
billion, while sales of pet services, which include veterinary services,
obedience training and grooming services, were estimated at $6 billion.
According to recent estimates, approximately 60 million households in the United
States, or over half of all U.S. households, owned at least one pet and over
half of pet-owning households owned more than one pet.
Pet Food. Historically, the pet food industry has been dominated by
national supermarket brands such as Alpo, Kal Kan and Purina, which are
primarily sold through grocery stores, convenience stores and mass merchants. In
recent years, supermarkets' share of total pet food sales has steadily decreased
as a result of competition from superstores, warehouse clubs, mass merchandisers
and specialty pet stores as well as the growing proportion of premium pet food
sales. Premium pet food brands such as Science Diet, Nutro, Eukanuba and Iams,
which offer higher levels of nutrition than non-premium brands, account for
approximately 30% of the total pet food market according to recent estimates.
Science Diet, Nutro and Eukanuba currently are not sold through supermarkets,
warehouse clubs and mass merchandisers due to manufacturers' restrictions but
are sold primarily through superstores like PETCO, specialty pet stores,
veterinarians and farm and feed stores.
Pet Supplies. The market for pet supplies consists of items such as collars
and leashes, cages and habitats, toys, treats, aquatic supplies, pet carriers,
vitamins and supplements and grooming and veterinary products. The channels of
distribution for pet supplies are highly fragmented with products sold by many
types of retailers, including supermarkets, discounters and other mass
merchandisers, specialty pet stores, direct mail and veterinarians. Superstores
such as PETCO, with wide assortments of pet supplies and higher levels of
customer service, represent a growing channel for sales of pet supplies.
Small Animals. The market for small animals (other than dogs and cats)
includes sales of fish, birds, reptiles, rabbits, hamsters, mice and other small
pets. Because of the overpopulation of dogs and cats and the controversial
practices of some breeders, the Company has elected to limit its selection of
animals to birds, fish, reptiles and other small animals. PETCO does, however,
participate in pet adoption programs for dogs and cats, which are administered
through local animal welfare programs.
Pet Services. The market for pet services includes veterinary services,
obedience training and grooming services. The Company offers a range of
veterinary services at only a selected number of stores. Limited veterinary
services such as routine vaccinations are offered at a number of stores. The
Company does offer obedience training in most of its stores and offers grooming
in many of its stores. Although such services do not generate a significant
portion of the Company's revenues, the Company believes that offering selected
pet services does create increased customer traffic in the Company's stores.
Business Strategy
PETCO's strategy is to be the leading category-dominant national chain of
community pet food and supply superstores by offering its customers a complete
assortment of pet-related products at competitive prices, with superior levels
of customer service at convenient locations. The key components of PETCO's
strategy are:
Superstore Expansion. The Company believes that opportunities for
additional superstores exist in both new and existing markets. The Company
intends to continue to increase the number of superstores it operates by opening
and acquiring superstores in new and existing markets.
Acquisitions. A significant part of the Company's expansion strategy has
been to capitalize on the consolidation of the fragmented pet food and supply
industry. Generally, the Company has acquired established and well-located
stores or chains of stores that are similar in size and format to the Company's
existing superstores. Consistent with this strategy, the Company has completed
21 acquisitions, representing 216 stores located in 28 states, since the
Company's initial public offering in March 1994. The Company believes that there
may be further opportunistic acquisition opportunities that would allow the
Company to attract new customers, enter new markets and leverage operating
costs.
Complete Merchandise Assortment. PETCO's prototype 15,000 square foot
superstores carry a complete merchandise assortment of more than 10,000 active
SKUs of high quality pet-related products. PETCO's products include premium pet
food, fish, birds, reptiles and other small animals and related food and
supplies, collars and leashes, grooming products, toys, pet carriers, cat
furniture, dog houses, vitamins, treats and veterinary supplies.
Competitive Prices. PETCO's pricing strategy is to offer everyday low
prices on all food items which are important in attracting and retaining
customers. The Company believes in offering value to customers through fair
prices coupled with a complete merchandise assortment and superior customer
service.
Superior Customer Service. Providing knowledgeable and friendly customer
service is a key aspect of PETCO's business strategy. PETCO seeks store managers
and sales associates who are pet owners and enthusiasts themselves as they are
better able to assist customers with their needs. PETCO provides comprehensive
training to its personnel, and the Company believes that this enables it to
attract and retain highly motivated, well-qualified store managers and sales
associates committed to providing superior levels of customer service.
Convenient Store Locations. PETCO's stores are located in high-traffic
retail areas with ample parking, often in community shopping centers anchored by
a large supermarket. The Company selects sites which are characterized by weekly
or more frequent shopping patterns. All stores offer extended shopping hours and
typically are open seven days a week.
Enjoyable Shopping Experience. PETCO's stores are attractively designed to
create a fun and exciting shopping environment for customers and their pets. The
Company's stores are brightly illuminated with colorful fixtures and graphics
and feature prominent and attractive signage. Stores typically feature an
assortment of aquatics, reptiles, birds and small animals. Birds and other
animals are available for demonstration by PETCO employees and for handling by
customers. Many of the Company's stores also contain a glassed-in grooming area
that allows customers to observe the grooming process while they shop.
Innovative Community Programs. PETCO's long-standing neighborhood marketing
programs are designed to introduce consumers to its stores and maintain
long-term customer and community relationships. Due to the large numbers of dogs
and cats available at local animal shelters, PETCO's long-standing corporate
policy has been to encourage its customers to adopt these pets from animal
shelters. On designated days, in cooperation with animal welfare organizations,
the Company offers pet adoption services at its stores. The Company's other
community programs include in-store vaccination clinics, programs with local
pet-related charities, a product sample program to introduce consumers and their
pets to premium food and supplies and a preferred customer program. In addition,
the Company maintains referral programs and other relationships with local
breeders and veterinarians.
Internet Investment. The Company has a strategic alliance with and an
investment in Petopia.com, a comprehensive pet commerce destination on the
Internet. The relationship provides PETCO customers with content, commerce and
community via the Internet, while enabling Petopia.com to benefit from PETCO's
industry leadership position, strong customer base and supplier relationships.
PETCO also provides order fulfillment services to Petopia.com at its three
central distribution centers. PETCO customers can shop on-line by visiting
PETCO's Petopia at www.petco.com.
Merchandising
Complete Merchandise Assortment. PETCO stores offer the pet owner one of
the most complete and exciting assortments of pet products and services
available in the marketplace. PETCO's products and services generally fall into
five main categories.
Pet Food. PETCO offers a complete assortment of leading name brand
premium food for dogs and cats, such as Nutro, Science Diet, Eukanuba and
Iams, as well as selected mass brand foods. Due to manufacturers'
restrictions, Nutro, Science Diet and Eukanuba are sold exclusively through
specialty pet stores and veterinarians. The Company also offers private
label and exclusive label brands of premium dog and cat food. In addition
to food for dogs and cats, the Company features a variety of treats and
rawhide chew items. The Company also sells an extensive variety of foods
for fish, birds, reptiles and small animals.
Pet Supplies. PETCO's broad assortment of supplies for dogs and cats
includes many private label items and offers collars and leashes, grooming
products, toys, pet carriers, cat furniture, dog houses, vitamins, treats
and veterinary supplies. The Company also offers broad lines of supplies
for other pets, including aquariums, terrariums, bird cages and supplies
for small animals.
Small Animals. PETCO superstores feature specialty departments which
stock a large assortment of fish, domestically bred birds, reptiles and
other small pets. The stores' animal selection typically includes
cockatiels, parakeets and finches in the bird category; iguanas, turtles
and snakes in the reptile category; and hamsters, rats and mice in the
small animal category. The Company's superstores normally carry both fresh
and saltwater fish. The Company believes that its interactive small animal
displays add excitement to shopping at PETCO.
Grooming and Other Services. Professional grooming is available at many
of the Company's superstores. Grooming services are typically performed in
glass-walled stations in the stores to increase customer awareness and
confidence in the service. In addition, the Company offers vaccinations and
obedience training.
Novelty Items. PETCO carries a variety of novelty items, including pet
apparel, calendars and other pet-related merchandise. In addition, the
Company features a variety of seasonal and holiday pet items.
Competitive Prices. PETCO's pricing strategy is to offer everyday low
prices on all food items which are important in attracting and retaining
customers. The Company believes in offering value to customers through fair
prices coupled with a complete merchandise assortment. PETCO's large buying
volume and sophisticated distribution network allows it to compete effectively
on price. PETCO's price guarantee program offers to match all competitors'
advertised prices.
Store Development
PETCO plans to open superstores in the future and expects that these will
be the Company's current prototype superstores which average approximately
15,000 square feet. These prototype superstores offer a complete merchandise
assortment and, in addition, carry fish, birds, reptiles and other small
animals, and grooming services.
The Company intends to continue to increase the number of superstores it
operates by opening and acquiring superstores in new and existing markets and
converting existing stores into superstores. Although the Company plans to open
superstores in the future, it will continue to operate profitable and
well-situated stores with other formats.
PETCO attempts to obtain convenient, high-traffic stores located in prime
community shopping centers. The Company undertakes substantial market research
prior to entering new markets. Key factors in market and site selection include
high visibility, easy access, ample parking, population, demographics and the
number and location of competitors.
In fiscal 1999, the Company opened or acquired 42 stores, including the
conversion of 10 stores into superstores, and closed 18 stores.
Purchasing and Distribution
The Company's centralized purchasing and distribution system minimizes the
delivered cost of merchandise and maximizes the in-stock position of its stores.
PETCO purchases most of its merchandise directly from specialty suppliers
and manufacturers of national brands. The Company purchases the majority of its
pet food products from three vendors; The Iams Company, Hill's Pet Products,
Inc. (which produces Science Diet), and Nutro, Inc., the first of which supplied
products that accounted for more than 10% and less than 15% of the Company's
sales in fiscal 1999. While the Company does not maintain long-term supply
contracts with any of its vendors, PETCO believes that it enjoys a favorable and
stable relationship with each of these vendors.
PETCO currently operates three central and five regional distribution
centers. The central distribution centers are located in Mira Loma, California;
Dayton, New Jersey; and Joliet, Illinois. Bulk items for all stores are either
shipped to regional distribution centers for redistribution or are sent directly
to store locations. Manufacturers ship non-bulk supplies to the central
distribution facilities which the Company then distributes either to regional
centers or directly to store locations. Management believes that its centralized
distribution system enables its stores to maximize selling space by reducing
necessary levels of safety stock carried in each store. PETCO also provides
order fulfillment services to Petopia.com at its three central distribution
centers.
Competition
The pet food and supply business is highly competitive. This competition
can be categorized into three different segments: (i) mass merchants, including
supermarkets, (ii) single store and conventional pet shops and (iii) specialty
pet supply chains. Many of the premium pet food brands offered by the Company,
such as Nutro, Science Diet, and Eukanuba, are not available to grocery stores
or other mass merchants due to manufacturers' restrictions. The Company believes
that the principal competitive factors influencing the Company's business are
product selection and quality, convenient store locations, customer service and
price. The Company believes that PETCO competes effectively within its various
geographic areas; however, some of the Company's competitors are much larger in
terms of sales volume and have access to greater capital and management
resources than the Company.
One of the Company's premium pet food vendors, The Iams Company, was
purchased by Procter & Gamble in fiscal 1999. Through the end of fiscal 1999,
Iams brand pet food was not widely available in supermarkets or mass merchants.
In fiscal 2000, Procter & Gamble widened the distribution of Iams to
supermarkets and mass merchants across the country. The Eukanuba brand of pet
food, which is also manufactured by The Iams Company, remains not available to
grocery stores or other mass merchants.
The pet food and supply industry has been characterized in recent years by
the consolidation of a number of pet supply chains. This consolidation has been
accomplished through the acquisition of independent pet stores by larger
specialty pet supply chains and the acquisition of these larger chains by
similar competitors. The Company believes this consolidation trend may have a
positive impact on industry conditions as store capacity may be rationalized,
both in existing and in new units.
The pet food and supply industry has recently seen the growth of several
e-commerce retailers on the Internet. Sales of pet food and supplies via the
Internet have not been significant to date. However, some e-commerce retailers
have substantial financial and technical resources and some e-commerce retailers
have strong alliances with established Internet partners. There can be no
assurance that in the future the Company will not face greater competition from
e-commerce retailers or from land-based national or regional retailers.
Trademarks and Licenses
The Company has registered numerous service marks and trademarks with the
United States Patent and Trademark Office. The Company believes the PETCO
trademark has become an important component in its merchandising and marketing
strategy. The Company believes it has all licenses necessary to conduct its
business.
Regulation
The transportation and sale of small animals is governed by various state
and local regulations. To date, these regulations have not had a material effect
on the Company's business or operations. The Company's fish and small animal
buyers and real estate department are responsible for compliance with such
regulations. Prior to the opening of each store, the Company's fish and small
animal buyers and real estate department review the regulations of the relevant
state and local governments. The Company's fish and small animal buyers and real
estate department then ensure ongoing compliance by keeping abreast of industry
publications and maintaining contacts with the Company's fish and small animal
suppliers and the appropriate regulatory agency within each such state and local
government.
Employees
As of January 29, 2000, the Company employed approximately 10,200
associates, of whom approximately 5,000 were employed full-time. Approximately
92% of the Company's employees were employed in stores or in direct field
supervision, approximately 4% in distribution centers and approximately 4% in
the National Support Center in San Diego. Management believes its labor
relations are generally good.
Certain Cautionary Statements
Certain statements in this Annual Report, including, but not limited to,
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the
Securities Act of 1934, as amended, and the Private Securities Litigation Reform
Act of 1995, that are not historical facts but rather reflect current
expectations concerning future results and events. The words "believes,"
"expects," "intends," "plans," "anticipates," "likely," "will," and similar
expressions identify such forward-looking statements. These forward-looking
statements are subject to risks, uncertainties, and other factors, some of which
are beyond the Company's control, that could cause actual results to differ
materially from those forecast or anticipated in such forward-looking
statements. Such risks, uncertainties and other factors include, but are not
limited to, the following:
Expansion Plans. The Company's continued growth depends, to a significant
degree, on its ability to open and operate new superstores on a profitable basis
and to increase sales in existing stores. The Company's performance is also
dependent upon a number of other factors, including its ability to locate and
obtain favorable superstore sites and negotiate acceptable lease terms, to
obtain and distribute adequate product supplies to its stores, to hire and train
employees and to upgrade its management information and other operating systems
to control the anticipated growth and expanded operations. There can be no
assurance that the Company will achieve its planned expansion or that such
expansion will be profitable. The Company has previously opened stores in new
markets and plans to open additional stores in new markets. The performance of
new or existing stores may be adversely affected by regional economic
conditions. The Company's expansion strategy could have the effect of drawing
customers from its existing stores. In addition, average store contribution and
operating margins may be adversely affected in the near term due to the level of
preopening expenses and lower anticipated sales volumes of its immature stores.
The Company's existing Senior Credit Facility (the "Credit Facility") contains
certain covenants which may restrict or impair the Company's growth plans.
Management continues to evaluate the Company's long-term distribution needs to
accommodate store and sales growth beyond fiscal 2000. Either the Company's
failure to expand its distribution facilities in accordance with its growth
plans or difficulties incurred in operating its distribution facilities could
adversely affect the Company's ability to deliver merchandise to its stores in a
timely fashion.
Integration of Operations as the Result of Acquisitions. Operations of
acquired companies must be integrated and combined efficiently for the Company
to realize the anticipated benefits of its acquisitions. There can be no
assurance that the integration process has been successful or that the
anticipated benefits of these acquisitions will be fully realized. For example,
in fiscal 1998 the Company experienced disappointing results from some of the
stores it acquired in fiscal 1997. The dedication of management resources to
acquisitions may detract attention from the day-to-day business of the Company.
The difficulties of integration are increased by the necessity of coordinating
geographically separated organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures and accounting
and computer systems. There can be no assurance that the Company will achieve
expected expense reductions with the acquired companies, that there will not be
substantial costs associated with any such reductions, that such reductions will
not result in a decrease in revenues or that there will not be other material
adverse effects of these integration efforts. Such effects could materially
reduce the short-term earnings of the Company. In fiscal 1997 and 1998, merger
and business integration costs of $38.7 million and $23.0 million, respectively,
were recorded by the Company in connection with acquisition activities. These
costs include transaction costs, costs attributable to lease cancellation and
closure of duplicate or inadequate facilities and activities, reformatting,
facility conversion and other integration costs, severance, and other costs. The
Company recorded no merger and business integration costs in fiscal 1999. The
Company acquired two stores during fiscal 1999 in a purchase transaction,
without incurring charges for merger and business acquisition costs. However,
the Company may make additional acquisitions in the future, which may result in
additional costs. Acquisitions require significant financial and management
resources both at the time of the transaction and during the process of
integrating the newly acquired business into the Company's operations. The
Company's operating results could be adversely affected if the Company is unable
to successfully integrate such new companies into its operations. Future
acquisitions by the Company could also result in potentially dilutive issuances
of securities, additional debt and contingent liabilities, and amortization
expenses related to goodwill and other intangible assets, which could materially
adversely affect the Company's profitability.
Reliance on Vendors and Product Lines and Exclusive Distribution
Arrangements. The Company purchases significant amounts of products from three
key vendors, The Iams Company, Hill's Pet Products, Inc. (which produces Science
Diet), and Nutro, Inc., the first of which supplied products that accounted for
more than 10% and less than 15% of the Company's sales in fiscal 1999. The
Company does not maintain long-term supply contracts with any of its vendors and
the loss of any of these vendors or other significant vendors of premium pet
food or pet supplies offered by the Company could have a material adverse effect
on the Company. In addition, it could materially adversely affect the Company if
any premium pet food manufacturers were to make premium pet food products widely
available in supermarkets or through other mass merchants, or if the premium
brands currently available to such supermarkets and mass merchants were to
increase their market share at the expense of the premium brands sold only
through specialty pet food and supply retailers. The Company's principal vendors
currently provide the Company with certain incentives such as volume purchasing,
trade discounts, cooperative advertising and market development funds. A
reduction or discontinuance of these incentives could also have a material
adverse effect on the Company.
One of the Company's primary premium pet food vendors, The Iams Company,
was purchased by Procter & Gamble in fiscal 1999. Through the end of fiscal
1999, the premium pet food brands that the Company purchases from The Iams
Company, Hill's Pet Products, Inc. (which produces Science Diet), and Nutro,
Inc., were not widely available in supermarkets or mass merchants. In fiscal
2000, Procter & Gamble widened the distribution of the Iams brand to
supermarkets and mass merchants across the country. The Eukanuba brand of pet
food, which is also manufactured by The Iams Company, remains not available to
grocery stores or other mass merchants. This change in the distribution of one
of the Company's most important products could have a material adverse effect on
the Company.
Competition. The pet food and supply retailing industry is highly
competitive. The Company competes with a number of pet superstore chains,
smaller pet store chains and independent pet stores. The Company also competes
with supermarkets and other mass merchants (see "Reliance on Vendors and Product
Lines and Exclusive Distribution Arrangements," above). In addition, several pet
food and supply e-commerce retailers commenced business in fiscal 1999 with
plans to gain substantial market share. Many of the Company's competitors are
larger and have significantly greater resources than the Company. If any of the
Company's major competitors seek to gain or retain market share by reducing
prices or by introducing additional products, the Company may be required to
reduce its prices on key items in order to remain competitive, which may have
the affect of reducing its profitability. There is no assurance that in the
future the Company will not face greater competition from e-commerce retailers
or other land-based national, regional and local retailers.
Performance of New Superstores; Future Operating Results. The Company has
recently opened and acquired superstores in new markets and plans to open and
acquire additional superstores in other new markets. There can be no assurance
that these stores will be profitable in the near term or that profitability, if
achieved, will be sustained. In addition, there can be no assurance that the
Company's existing stores will maintain their profitability or that new stores
will generate sales levels necessary to achieve store-level profitability, much
less profitability comparable to that of existing stores. The Company's
comparable store net sales increases were 11.5%, 6.4%, and 11.1% for fiscal
1997, 1998 and 1999, respectively. The Company anticipates that its rate of
comparable stores sales growth may be lower in future periods than the growth
rates previously experienced due to maturation of the existing store base, the
effects of opening additional stores in existing markets, and the wider
availability of certain premium pet foods. Due in part to the effect of the
timing of store openings and acquisitions, changes in sales growth rates and the
changing competitive environment, period-to-period comparisons of financial
results may not be meaningful and the results of operations for historical
periods may not be indicative of future results.
Quarterly and Seasonal Fluctuations. The timing of new store openings,
related preopening expenses and the amount of revenue contributed by new and
existing stores may cause the Company's quarterly results of operations to
fluctuate. The Company's business is also subject to seasonal fluctuation.
Historically, the Company has realized a higher portion of its net sales during
the month of December than during the other months of the year.
Dependence on Senior Management. The Company is dependent upon the efforts
of its principal executive officers. In particular, the Company is dependent
upon the management and leadership of Brian K. Devine, Chairman, President and
Chief Executive Officer. The loss of Mr. Devine or certain of the Company's
other principal executive officers could materially adversely effect the
Company's business. The Company has entered into an employment agreement with
Mr. Devine which provides for an indefinite term and which may be terminated by
Mr. Devine on 90 days notice. The Company has obtained a key man insurance
policy on the life of Mr. Devine in the amount of $1.0 million, of which the
Company is the sole beneficiary. The Company's success will depend on its
ability to retain its current management and to attract and retain qualified
personnel in the future.
Possible Volatility of Stock Price. Since the initial public offering of
the Company's common stock in March 1994, the market value of the common stock
has been subject to significant fluctuations. The market price of the common
stock may continue to be subject to significant fluctuations in response to
operating results and other factors. In the past, the market price of the
Company's stock has responded to changes in outside analysts' expectations,
stock market movements relating to retailers particularly, and to general stock
market fluctuations. In addition, the stock market in recent years has
experienced price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies. These fluctuations,
as well as general economic and market conditions, may adversely affect the
market price of the common stock. The Company is currently involved in
stockholder class action litigation precipitated by a sudden drop in the price
of the Company's common stock. See "Legal Proceedings." Management believes that
future fluctuations in the market value of the Company's common stock may
trigger further litigation. Defending the Company in such stockholder class
action litigation is costly, and the outcome is unpredictable.
Readers are cautioned not to place undue reliance on forward-looking
statements which reflect management's view only as of the date of this Annual
Report. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 2. PROPERTIES
The Company leases substantially all of its store and warehouse locations.
Original lease terms for the Company's 490 stores generally range from five to
twenty years, many of which contain renewal options. Leases on 112 stores expire
within the next three years, with leases on 74 of these stores containing
renewal options.
The table below shows the location and number of the Company's stores as of
January 29, 2000.
Location Stores
-------- ------
Alabama 2
Arizona 13
Arkansas 3
California 131
Colorado 10
Connecticut 13
Delaware 1
District of Columbia 1
Idaho 2
Illinois 41
Indiana 5
Iowa 6
Kansas 9
Kentucky 1
Louisiana 1
Maine 1
Maryland 7
Massachusetts 21
Michigan 7
Minnesota 18
Missouri 11
Montana 1
Nebraska 6
Nevada 6
New Hampshire 6
New Jersey 14
New Mexico 1
New York 21
North Dakota 2
Ohio 3
Oregon 13
Pennsylvania 16
Rhode Island 1
South Dakota 1
Tennessee 6
Texas 43
Utah 2
Virginia 9
Washington 26
Wisconsin 9
----
490
====
The Company's headquarters, located in San Diego, California, occupy
approximately 70,000 square feet of office space which is financed under an
obligation which expires February 2006. The Company's five regional distribution
centers collectively occupy over 200,000 square feet of space in Stockton,
California; Portland, Oregon; New Hope, Minnesota; Mansfield, Massachusetts; and
Garland, Texas under leases which expire in April 2001, February 2002, September
2002, December 2003, and August 2004, respectively. The Company's three central
distribution centers collectively occupy approximately 800,000 square feet of
space in Dayton, New Jersey; Joliet, Illinois; and Mira Loma, California under
leases which expire in June 2002, April 2005, and September 2005, respectively.
Each of the distribution center leases contains a renewal option.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United States
District Court for the Southern District of California between August and
November, 1998. These cases have been consolidated and will be administered as
one case. The plaintiffs purport to represent a class of all persons who
purchased the Company's common stock between January 30, 1997 and July 10, 1998.
The complaints allege that the defendants violated various federal securities
laws through material misrepresentations and omissions during the class period,
and seek unspecified monetary damages. These matters have been tendered to the
Company's insurance carrier. While the Company believes the allegations
contained in these lawsuits are without merit, the claims have not progressed
sufficiently for the Company to estimate a range of possible exposure, if any.
The Company and its officers intend to defend themselves vigorously.
In addition, the Company is involved in routine litigation arising in the
ordinary course of its business. While the results of such litigation cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended January 29, 2000.
ITEM 4.1. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Brian K. Devine 58 Chairman, President and Chief Executive Officer
Bruce C. Hall 55 Executive Vice President - Operations
Janet D. Mitchell 44 Senior Vice President - Human Resources and
Administration
James M. Myers 42 Senior Vice President and
Chief Financial Officer
William M. Woodard 51 Senior Vice President - Business Development
BRIAN K. DEVINE, Chairman, President and Chief Executive Officer, joined
the Company in August 1990 and has served as Chairman since January 1994. Prior
to joining the Company, Mr. Devine was President of Krause's Sofa Factory, a
furniture retailer and manufacturer, from 1988 to 1989. From 1970 until 1988,
Mr. Devine held various positions with Toys 'R' Us, a retailer of children's
toys, including Senior Vice President, Director of Stores; and Senior Vice
President, Growth, Development and Operations. Mr. Devine graduated from
Georgetown University with a degree in economics.
BRUCE C. HALL, Executive Vice President, Operations, joined the Company in
April 1997. Mr. Hall spent 34 years from 1963 to 1997 with Toys 'R' Us, a
retailer of children's toys, where he progressively advanced from field
operations through a number of positions, including Senior Vice President of
Operations.
JANET D. MITCHELL, Senior Vice President, Human Resources and
Administration, joined the Company in February 1989. From 1989 to 1998, Ms.
Mitchell served as Vice President, Human Resources. From 1981 to 1989, Ms.
Mitchell held various management positions in human resources with the Southland
Corporation's 7-Eleven division. From 1978 to 1981, Ms. Mitchell held various
positions with the El Torito Restaurant chain. Ms. Mitchell received a
bachelor's degree from California State University, San Diego.
JAMES M. MYERS, Senior Vice President and Chief Financial Officer, joined
the Company in May 1990. From 1996 to 1998, Mr. Myers served as Senior Vice
President, Finance and prior to that as Vice President, Finance and as Vice
President and Controller of the Company. From 1980 to 1990, Mr. Myers held
various positions at the accounting firm KPMG LLP, including Senior Audit
Manager. Mr. Myers is a CPA and received an accounting degree from John Carroll
University.
WILLIAM M. WOODARD, Senior Vice President, Business Development, joined the
Company in January 1991. From 1991 to 1999, Mr. Woodard served as Senior Vice
President, Store Operations. From 1987 to 1990, Mr. Woodard was Vice President,
Director of Marketing at J. M. Jones, Inc., a wholesale division of SuperValu
Stores, Inc. From 1970 to 1987, Mr. Woodard was employed by Safeway Stores,
Inc., a grocery retailer, in a number of positions including Retail Operations
Manager and Marketing Operations Manager. Mr. Woodard holds an administrative
management degree from North Texas State University and an MBA in marketing from
the University of Southern California.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.0001 par value, is quoted on the Nasdaq
National Market under the symbol "PETC." Public trading of the common stock
commenced on March 17, 1994. The following table sets forth for the periods
indicated the high and low reported sale prices per share for the common stock
as reported by the Nasdaq National Market:
High Low
---- ---
Fiscal 1998
First Quarter $25.00 $13.13
Second Quarter 21.13 9.75
Third Quarter 10.63 5.38
Fourth Quarter 11.25 7.75
Fiscal 1999
First Quarter $13.50 $ 6.50
Second Quarter 18.38 12.44
Third Quarter 16.50 9.63
Fourth Quarter 15.50 9.38
On April 7, 2000, there were 660 stockholders of record of the Company's
common stock.
The Company has never paid cash dividends on its common stock. The Company
currently anticipates that it will retain all available funds for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share and operating data)
The following table sets forth selected consolidated financial and
operating data for the Company for the five fiscal years ended January 29, 2000.
The selected consolidated financial data presented below under the caption
"Income Statement Data" for the five-year period ended January 29, 2000 is
derived from the audited consolidated financial statements of the Company and
its subsidiaries. The selected consolidated financial data presented below under
the caption "Balance Sheet Data" as of February 3, 1996 is derived from the
unaudited consolidated financial statements of the Company and its subsidiaries
as restated to reflect the poolings of interests during the years ended February
1, 1997 and January 31, 1998. The selected consolidated financial data presented
below under the caption "Balance Sheet Data" as of February 1, 1997, January 31,
1998, January 30, 1999, and January 29, 2000 is derived from the audited
consolidated financial statements of the Company and its subsidiaries. The
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements as of January 29, 2000 and for each of the
years in the three-year period ended January 29, 2000 and the independent
auditors' report thereon, included and incorporated by reference elsewhere in
this Annual Report.
Fiscal Year Ended
------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Income Statement Data:
Net sales $443,585 $600,637 $749,789 $839,622 $990,289
Cost of sales and occupancy costs 337,873 446,315 553,566 624,818 720,711
------- ------- ------- ------- -------
Gross profit 105,712 154,322 196,223 214,804 269,578
Selling, general and administrative expenses 101,760 132,745 173,667 187,938 220,800
Merger and business integration costs 9,196 37,208 38,693 22,963 --
------- ------- ------- ------- -------
Operating income (loss) (5,244) (15,631) (16,137) 3,903 48,778
Loss on disposal of stores 3,500 -- -- -- --
Interest expense, net 71 600 2,530 6,718 8,936
------- ------- ------- ------- -------
Earnings (loss) before Internet operations
and equity in loss of unconsolidated
affiliates and income taxes (8,815) (16,231) (18,667) (2,815) 39,842
Internet operations and equity in loss of
unconsolidated affiliates -- -- -- -- (1,254)
------- ------- ------- ------- -------
Earnings (loss) before income taxes (8,815) (16,231) (18,667) (2,815) 38,588
Income taxes (benefit) (1) (14,601) (4,075) (5,486) (438) 16,831
------- ------- ------- ------- -------
Net earnings (loss) $ 5,786 $(12,156) $(13,181) $ (2,377) $ 21,757
======= ======= ======= ======= =======
Operating earnings per common share, basic (2) -- -- -- -- $ 1.14
Operating earnings per common share, diluted (2) -- -- -- -- $ 1.13
Net earnings (loss) per common share, basic $0.36 $(0.63) $(0.64) $(0.11) $ 1.03
Net earnings (loss) per common share, diluted $0.35 $(0.63) $(0.64) $(0.11) $ 1.02
Weighted average common shares outstanding, basic 16,147 19,426 20,646 21,073 21,094
Weighted average common shares outstanding, diluted 16,427 19,426 20,646 21,073 21,338
Operating Data:
Total stores open end of period 353 413 457 476 490
Aggregate gross square footage 3,169,472 4,435,019 5,299,535 5,637,708 6,075,030
Average net sales per store (3) $1,183,000 $1,438,000 $1,696,000 $1,811,000 $2,042,000
Average net sales per gross square foot (4) $ 168 $ 162 $ 158 $ 157 $ 168
Percentage increase in comparable store net sales 16.5% 16.1% 11.5% 6.4% 11.1%
Balance Sheet Data:
Working capital $ 29,064 $ 59,928 $ 33,360 $ 39,316 $ 68,883
Total assets 214,498 312,617 335,195 387,135 453,894
Long-term debt, excluding current portion -- -- 26,625 65,375 89,050
Capital lease and other obligations, excluding
current portion 13,334 15,581 11,369 20,982 12,436
Total stockholders' equity 130,040 196,499 186,057 183,841 205,890
- --------------
(1) Includes $11.8 million benefit from previously unrecognized deferred tax
assets in fiscal 1995.
(2) Operating earnings exclude Internet operations and equity in loss of
unconsolidated affiliates and $1.1 million of related tax effects.
(3) Calculated using net sales divided by the number of stores open, weighted
by the number of months stores are open during the period.
(4) Calculated using net sales divided by gross square footage of stores open,
weighted by the number of months stores are open during the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
At January 29, 2000, the Company operated 490 stores in 39 states and the
District of Columbia. PETCO plans to open superstores in the future and follows
a strategy of converting and expanding its existing smaller format stores to the
superstore format. As a result of this strategy, the Company has opened and
acquired superstores, has expanded and relocated smaller format stores into
superstores and has closed underperforming stores. As a result of the Company's
store expansion strategy, operating results may reflect lower average store
contribution and operating margins due to increased store preopening expenses
and lower anticipated sales volumes of immature stores.
During fiscal 1997 the Company completed four acquisitions of retailers of
pet food and supplies, operating 22 stores which were accounted for as
immaterial poolings of interests. The Company also acquired a retailer that
operated 82 pet food and supply stores under the trade name PetCare located in
10 Midwestern and Southern states which was accounted for as a pooling of
interests.
During fiscal 1998 the Company completed two acquisitions of retailers of
pet food and supplies operating four stores in transactions accounted for as
purchases.
During fiscal 1999 the Company completed one acquisition of a retailer of
pet food and supplies operating two stores in a transaction accounted for as a
purchase.
All results of operations have been restated to reflect the poolings of
interests and to reflect the purchase transactions from their respective
acquisition dates. Results of operations from immaterial poolings are reflected
from the beginning of the period from which these acquisitions were consummated.
(See footnote 2 to the consolidated financial statements).
Results of Operations
The following table sets forth certain items expressed as a percentage of
net sales for the periods indicated. As a result of operational and strategic
changes, period-to-period comparisons of financial results may not be meaningful
and the results of operations for historical periods may not be indicative of
future results.
Jan. 31, Jan. 30, Jan. 29,
1998 1999 2000
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy costs 73.8 74.4 72.8
----- ----- -----
Gross profit 26.2 25.6 27.2
Selling, general and administrative expenses 23.2 22.4 22.3
Merger and business integration costs 5.2 2.7 --
----- ----- -----
Operating income (loss) (2.2) 0.5 4.9
Interest expense, net 0.3 0.8 0.9
----- ----- -----
Earnings (loss) before internet operations
and equity in loss of unconsolidated
affiliates and income taxes (2.5) (0.3) 4.0
Internet operations and equity in loss of
unconsolidated affiliates -- -- (0.1)
----- ----- -----
Earnings (loss) before income taxes (2.5) (0.3) 3.9
Income taxes (benefit) (0.7) (0.0) 1.7
----- ----- -----
Net earnings (loss) (1.8) (0.3) 2.2
===== ===== =====
Fiscal Year Ended January 29, 2000 Compared with Fiscal Year Ended January 30,
1999
Net sales increased 17.9% to $990.3 million in fiscal 1999 from $839.6
million in fiscal 1998. The increase in net sales in fiscal 1999 resulted
primarily from the addition of 42 stores, including the conversion of 10 stores
into superstores, the closing of 18 stores, and a comparable store net sales
increase of 11.1%. The comparable store net sales increase was attributable to
maturing superstores, increased marketing and merchandising efforts and
increased customer traffic. The increase in comparable store net sales accounted
for approximately $91.2 million, or 60.5%, of the net sales increase, and $59.5
million, or 39.5% of the net sales increase, was attributable to the net
increase in the Company's store base.
Gross profit, defined as net sales less the cost of sales including store
occupancy costs, increased $54.8 million, or 25.5%, to $269.6 million in fiscal
1999 from $214.8 million in fiscal 1998. Gross profit as a percentage of net
sales increased to 27.2% in fiscal 1999 from 25.6% in fiscal 1998. The majority
of this increase in gross margin is due to the continuing shift in the sales mix
from lower-margin pet food sales to higher-margin categories such as companion
animals, toys and supplies. Also, the fiscal 1998 gross margin was adversely
affected by increased distribution costs resulting from the investment in two
new central distribution centers and lower leverage of store occupancy costs in
the acquired stores during the conversion process.
Selling, general and administrative expenses increased $32.9 million, or
17.5%, to $220.8 million in fiscal 1999 from $187.9 million in fiscal 1998. The
increase was due primarily to increased personnel and related costs associated
with supporting increased sales and new store openings. As a percentage of net
sales, these expenses decreased to 22.3% in fiscal 1999 from 22.4% in fiscal
1998. Included in selling, general and administrative expenses in fiscal 1998
are a $1.4 million charge for severance and legal costs related to the Company's
management realignment and a $4.5 million charge related to the write-off of
assets in connection with the relocation of the Company's main distribution
center and the replacement of point-of-sale equipment in a chain-wide conversion
of this equipment and other assets. Excluding these charges, selling, general
and administrative expenses were 21.7% in fiscal 1998, compared with 22.3% in
1999. The increase in 1999 was primarily due to increased personnel and related
costs associated with decentralization of field staff, depreciation and
maintenance of the Company's investments in infrastructure in the prior year,
and the accrual for management bonuses based on improved financial performance.
Merger and business integration costs of $23.0 million were recorded in
fiscal 1998 in connection with the conversion activities of the stores acquired
in the last half of fiscal 1997. These costs consisted of $0.5 million of
transaction costs, $2.0 million of costs attributable to lease cancellations and
closure of duplicate or inadequate facilities and activities, $19.1 million of
reformatting, facility conversion and other integration costs and $1.4 million
of severance and other costs.
Operating income was $48.8 million in fiscal 1999 compared with operating
income of $3.9 million in fiscal 1998. Excluding merger and business integration
costs and other charges, on a comparable basis, the Company would have reported
operating income of $32.8 million or 3.9% of net sales in fiscal 1998, compared
with operating income of $48.8 million, or 4.9% of net sales in fiscal 1999.
Internet operations and equity in loss of unconsolidated affiliates was
$1.3 million in fiscal 1999. This consists of $4.0 million of equity in the
losses of Petopia.com, partially offset by $2.7 million earned by the Company
for its support of Petopia.com under the terms of its alliance agreement.
Net interest expense was $8.9 million in fiscal 1999 compared with net
interest expense of $6.7 million in fiscal 1998. Increased borrowings in fiscal
1999 led to the increase in interest expense.
Income taxes were $16.8 million in fiscal 1999 compared with income tax
benefit of $0.4 million in fiscal 1998. Income tax benefit reflects the Federal
and state tax benefits of the loss before income taxes, net of the effect of
non-deductible expenses. The Company has not recognized any tax benefit for its
equity share of the losses in Petopia.com, which impacts the effective tax rate
in fiscal 1999. The Company's effective tax rate before Internet operations and
equity in loss of unconsolidated affiliates was 39.5% in fiscal 1999.
Net earnings were $21.8 million, or $1.02 per diluted share, in fiscal
1999, compared with net loss of $2.4 million, or $0.11 per diluted share, in
fiscal 1998. Net earnings, excluding Internet operations and equity in loss of
unconsolidated affiliates, and related tax effects, increased to $24.1 million,
or $1.13 per diluted share, compared with net earnings in the prior year,
excluding merger and business integration costs and related charges and tax
benefits of $15.6 million, or $0.74 per diluted share.
Fiscal Year Ended January 30, 1999 Compared with Fiscal Year Ended January 31,
1998
Net sales increased 12.0% to $839.6 million in fiscal 1998 from $749.8
million in fiscal 1997. The increase in net sales in fiscal 1998 resulted
primarily from the addition of 40 stores, including the conversion of 9 stores
into superstores, the closing of 12 stores, and a comparable store net sales
increase of 6.4%. The comparable store net sales increase was attributable to
maturing superstores, increased advertising and merchandising efforts in
existing stores. The net increase in the Company's store base accounted for
approximately $48.0 million, or 53.5% of the net sales increase, and $41.8
million, or 46.5% of the net sales increase, was attributable to the increase in
comparable store net sales.
Gross profit increased $18.6 million, or 9.5%, to $214.8 million in fiscal
1998 from $196.2 million in fiscal 1997. Gross profit as a percentage of net
sales decreased to 25.6% in fiscal 1998 from 26.2% in fiscal 1997. This decrease
reflects lower gross margins generated from sales in the stores acquired in the
last half of fiscal 1997, which were undergoing conversions to PETCO's
assortment and selling through non-continuing inventory at reduced gross
margins. Also, increased distribution costs resulting from the investment in two
new central distribution centers and lower leverage of store occupancy costs,
particularly in the acquired stores during the conversion process, contributed
to this decline.
Selling, general and administrative expenses increased $14.2 million, or
8.2%, to $187.9 million in fiscal 1998 from $173.7 million in fiscal 1997.
Selling, general and administrative expenses increased primarily as a result of
higher personnel and related costs associated with new store openings and
acquisitions. As a percentage of net sales, these expenses decreased to 22.4% in
fiscal 1998 from 23.2% in fiscal 1997. Included in selling, general and
administrative expenses in fiscal 1998 are a $1.4 million charge for severance
and legal costs related to the Company's management realignment and a $4.5
million charge related to the write-off of assets in connection with the
relocation of the Company's main distribution center and the replacement of
point-of-sale equipment in a chain-wide conversion of this equipment and other
assets. Selling, general and administrative expenses in fiscal 1997 included
charges of $11.0 million related to the acquisition of PetCare. Excluding these
charges, these expenses were unchanged at 21.7% in both fiscal 1998 and fiscal
1997.
Merger and business integration costs of $23.0 million were recorded in
fiscal 1998 in connection with the conversion activities of the stores acquired
in the last half of fiscal 1997. These costs consisted of $0.5 million of
transaction costs, $2.0 million of costs attributable to lease cancellations and
closure of duplicate or inadequate facilities and activities, $19.1 million of
reformatting, facility conversion and other integration costs and $1.4 million
of severance and other costs. In fiscal 1997, merger and business integration
costs of $38.7 million were recorded in connection with acquisition activities.
These costs consisted of $4.5 million of transaction costs, $17.8 million of
costs attributable to lease cancellations and closure of duplicate or inadequate
facilities and activities, $12.2 million of reformatting, facility conversion
and other integration costs and $4.2 million of severance and other costs.
Operating income was $3.9 million in fiscal 1998 compared with an operating
loss of $16.1 million in fiscal 1997. Excluding merger and business integration
costs and other charges, on a comparable basis, the Company would have reported
operating income of $32.8 million or 3.9% of net sales in fiscal 1998 and $33.6
million or 4.5% of net sales in fiscal 1997.
Net interest expense was $6.7 million in fiscal 1998 compared with net
interest expense of $2.5 million in fiscal 1997. Increased borrowings in fiscal
1998 led to the increase in interest expense.
Income tax benefit was $0.4 million in fiscal 1998 compared with income tax
benefit of $5.5 million in fiscal 1997. Income tax benefit reflects the Federal
and state tax benefits of the loss before income taxes, net of the effect of
non-deductible expenses.
Net loss was $2.4 million in fiscal 1998 compared with net loss of $13.2
million in fiscal 1997. Excluding merger and business integration costs and
related charges and tax benefits, net earnings for fiscal 1998 would have been
$15.6 million, or $0.74 per diluted share, compared with $18.6 million, or $0.88
per diluted share in fiscal 1997.
Quarterly Data
The following tables set forth the unaudited quarterly results of
operations for fiscal 1998 and fiscal 1999. This information includes all
adjustments management considers necessary for fair presentation of such data.
The results of operations for historical periods are not necessarily indicative
of results for any future period. The Company expects quarterly results of
operations to fluctuate depending on the timing and amount of revenue
contributed by new stores.
The Company believes that its business is moderately seasonal, with net
sales and earnings generally higher in the fourth fiscal quarter due to year-end
holiday purchases.
Fiscal Quarter Ended
-------------------------------------------
May 2, Aug. 1, Oct. 31, Jan. 30,
Fiscal 1998 1998 1998 1998 1999
- ----------- --------- --------- --------- ---------
Net sales $ 196,296 $ 197,318 $ 204,785 $ 241,223
Gross profit 46,676 48,343 51,955 67,830
Operating income (loss) (338) (10,130) (819) 15,190
Net earnings (loss) (1,068) (7,261) (1,849) 7,801
Net earnings (loss) per share, basic and diluted $ (0.05) $ (0.34) $ (0.09) $ 0.37
Stores open at end of period 458 461 467 476
Aggregate gross square footage 5,328,996 5,420,586 5,602,596 5,637,708
Percentage increase in comparable store net sales 5.7% 5.4% 5.0% 8.7%
Fiscal Quarter Ended
-------------------------------------------
May 1, Jul. 31, Oct. 30, Jan. 29,
Fiscal 1999 1999 1999 1999 2000
- ----------- --------- --------- --------- ---------
Net sales $ 229,657 $ 236,184 $ 249,007 $ 275,441
Gross profit 59,122 61,880 67,638 80,938
Operating income 7,812 8,889 11,387 20,690
Net earnings 3,562 4,121 4,889 9,185
Operating earnings 3,562 4,121 5,349 11,072
Operating earnings per share, basic (1) $ 0.17 $ 0.20 $ 0.25 $ 0.52
Operating earnings per share, diluted (1) $ 0.17 $ 0.19 $ 0.25 $ 0.52
Net earnings per share, basic $ 0.17 $ 0.20 $ 0.23 $ 0.44
Net earnings per share, diluted $ 0.17 $ 0.19 $ 0.23 $ 0.43
Stores open at end of period 482 485 494 490
Aggregate gross square footage 5,773,881 5,889,004 6,068,222 6,075,030
Percentage increase in comparable store net sales 10.9% 12.1% 13.2% 8.5%
(1) Operating earnings exclude Internet operations and equity in loss of
unconsolidated affiliates, net of tax effects.
Year 2000 Issues
In 1997, the Company implemented a comprehensive risk-based program to
assure that both its information technology ("IT") and non-IT systems are Year
2000 compliant. Many Year 2000 IT issues have been resolved through hardware and
software updates and upgrades undertaken for other reasons. As part of the
Company's ongoing IT upgrade plans, in fiscal 1998 the Company completed the
conversion of its store point-of-sale systems to a Year 2000 compliant version
at a cost of approximately $20 million, which has been capitalized and will be
depreciated over the components' estimated useful lives. This conversion,
although not undertaken specifically for Year 2000 purposes, was accelerated in
order to achieve Year 2000 compliance in this critical area. The amount of other
expenditures for updates and upgrades that relate specifically to Year 2000
compliance is not separable from the total, but is not believed to be a material
amount.
The change from calendar year 1999 to 2000 passed without any Year 2000
problems for the Company. The potential does exist, however, for Year 2000
problems to arise at various dates in the future. The Company continues to
monitor the issue. There can be no assurance, however, that the Company's
assessment of the impact of Year 2000 is complete and that further analysis and
study, as well as the testing and implementation of planned solutions, will not
reveal the need for additional remedial work. The Company is potentially
vulnerable to mistakes made by key suppliers of products and services, and to
operational difficulties in the Company's corporate offices, distribution
centers or store locations. The financial magnitude of these risks cannot
currently be estimated.
The foregoing statements as to the Company's Year 2000 efforts are forward
looking and, along with all other forward-looking statements herein, are made in
reliance on the safe harbor provisions discussed under the caption "Certain
Cautionary Statements" in Item 1, above.
New Accounting Standards
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"(the "Statement").
The Statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. The Statement also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Statement, as amended, is
effective for fiscal years beginning after June 15, 2000 and is not expected to
have a material impact on the Company's consolidated financial statements.
Liquidity and Capital Resources
The Company has financed its operations and expansion program through
internal cash flow, external borrowings and the sale of equity securities. At
January 29, 2000, total assets were $453.9 million, $185.2 million of which were
current assets. Net cash provided by operating activities was $14.5 million,
$27.9 million and $77.1 million for fiscal 1997, 1998 and 1999, respectively.
The Company's sales are substantially on a cash basis. Therefore, cash flow
generated from operating stores provides a significant source of liquidity to
the Company. The principal use of operating cash is for the purchase of
merchandise inventories. A portion of the Company's inventory purchases is
financed through vendor credit terms.
The Company uses cash in investing activities to purchase fixed assets for
new stores, to acquire stores and, to a lesser extent, to purchase warehouse and
office fixtures, equipment and computer hardware and software in support of its
distribution and administrative functions. During fiscal 1999 the Company
invested $18.5 million in affiliates. The affiliates include Petopia.com, an
e-commerce destination for the sales of pet food and supplies, and a limited
partnership that operates retail pet food and supply stores in Canada. During
fiscal 1998 the Company invested $4.9 million in the limited partnership and
made loans of $6.5 million to a limited partner in the limited partnership. Cash
used in investing activities was $69.5 million, $62.3 million and $62.3 million
for fiscal 1997, 1998 and 1999, respectively.
The Company also finances some of its purchases of equipment and fixtures
through capital lease and other obligations. No purchases of fixed assets were
financed in this manner during fiscal 1999. Purchases of $1.3 million and $20.3
million of fixed assets were financed in this manner during fiscal 1997 and
1998, respectively. The Company believes additional sources of capital lease and
other obligation financing are available on a cost-effective basis and plans to
use them, as necessary, in connection with its expansion program.
During fiscal 1996, the Company completed two acquisitions of retailers of
pet food and supplies in purchase transactions. The aggregate fair value of
assets acquired was $14.4 million and assumed liabilities were $1.4 million with
$13.0 million of net cash invested in the acquisition of these businesses, of
which $6.0 was expended in fiscal 1997.
During fiscal 1998, the Company completed two acquisitions of retailers of
pet food and supplies in purchase transactions. The aggregate fair value of
assets acquired and the net cash invested in the acquisition of these businesses
was $2.1 million, of which $0.3 million was expended in fiscal 1999.
During fiscal 1999, the Company completed the acquisition of a retailer of
pet food and supplies in a purchase transaction. The aggregate fair value of
assets acquired and the net cash invested in the acquisition of this business
was $2.6 million.
The Company's primary long-term capital requirement is funding for the
opening or acquisition of superstores. Cash flows provided by financing
activities were $13.5 million, $33.3 million and $18.9 million in fiscal 1997,
1998 and 1999, respectively. In fiscal 1997, 1998, and 1999, net proceeds of
$2.4 million, $0.1 million, and $0.3 million, respectively, were generated from
sales of common stock. Remaining cash flows provided by financing activities
were borrowings under long-term debt agreements, net of repayment of long-term
debt agreements and other obligations. Cash flows from financing activities were
used to fund the Company's expansion program, investment in affiliates and
working capital requirements.
The Company has a credit facility with a syndicate of banks with a
commitment of up to $150.0 million that expires between July 15, 2004 and July
15, 2006. The credit facility provides for $100.0 million in term loans and
$50.0 million in revolving loans. Borrowings under the credit facility are
secured by substantially all of the assets of the Company and bear interest, at
the Company's option, at the agent bank's corporate base rate plus up to 0.50%,
or LIBOR plus 1.00% to 3.25%, based on the Company's leverage ratio at the time.
The credit agreement contains certain affirmative and negative covenants related
to indebtedness, interest and fixed charges coverage and consolidated net worth.
The Company was in full compliance with all such covenants at January 29, 2000.
As of January 29, 2000, the Company had $50.0 million of revolving loans
available under the credit facility.
As of January 29, 2000, the Company had available net operating loss
carryforwards of $47.9 million for federal income tax purposes, which begin
expiring in 2012, and $24.0 million for state income tax purposes, which begin
expiring in 2005.
The Company anticipates that funds generated by operations, funds available
under the credit facility and currently available vendor financing and capital
lease and other obligation financing will be sufficient to finance its continued
operations and planned store openings at least through fiscal 2000.
Inflation
Although the Company cannot accurately anticipate the effect of inflation
on its operations, it does not believe that inflation has had, or is likely in
the foreseeable future to have, a material impact on its net sales or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in short-term interest rates as the Company's credit facility utilizes a
portfolio of short-term LIBOR contracts. LIBOR contracts are fixed rate
instruments for a period of between one and six months, at the Company's
discretion. The Company's portfolio of LIBOR contracts vary in length and
interest rate, such that adverse changes in short-term interest rates could
affect the Company's overall borrowing rate when contracts are renewed. The
lengths of contracts within the portfolio are adjusted to balance the Company's
working capital requirements, fixed asset purchases and general corporate
purposes. The Company continuously evaluates the portfolio with respect to total
debt, including an assessment of the current and future economic environment.
As of January 29, 2000, the Company had $98.2 million in debt under the
credit facility. The average debt outstanding for the fiscal year was $92.2
million. Based on this average debt level, a hypothetical 10% adverse change in
LIBOR rates would increase net interest expense by approximately $0.6 million on
an annual basis, and likewise would decrease earnings and cash flows. The
Company cannot predict market fluctuations in interest rates and their impact on
debt, nor can there be any assurance that long-term fixed-rate debt will be
available at favorable rates, if at all. Consequently, future results may differ
materially from the estimated results due to adverse changes in interest rates
or debt availability.
The Company did not have any material foreign exchange or other significant
market risk or any derivative financial instruments at January 29, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements required by this Item are set forth
at the pages indicated in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K, except information concerning the executive
officers of the Company which is set forth in Item 4.1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Page
Independent Auditors' Report 23
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of
this Annual Report.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Petco Animal Supplies, Inc.:
We have audited the accompanying consolidated balance sheets of Petco Animal
Supplies, Inc. and subsidiaries as of January 30,1999 and January 29, 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended January 29,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Petco Animal
Supplies, Inc. and subsidiaries as of January 30, 1999 and January 29, 2000 and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 29, 2000, in conformity with generally
accepted accounting principles.
KPMG LLP
San Diego, California
March 7, 2000
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
January 30, January 29,
1999 2000
----------- -----------
Current assets:
Cash and cash equivalents $ 2,324 $ 36,059
Receivables 7,638 8,721
Inventories 104,789 116,913
Deferred tax assets (note 7) 16,769 18,686
Other 5,993 4,844
-------- --------
Total current assets 137,513 185,223
Fixed assets (note 5):
Equipment 76,992 96,324
Furniture and fixtures 58,963 62,901
Leasehold improvements 123,761 134,429
-------- --------
259,716 293,654
Less accumulated depreciation and amortization (72,206) (101,251)
-------- --------
187,510 192,403
Goodwill 37,804 36,362
Deferred tax assets (note 7) 9,681 --
Investment in affiliates (note 3) 3,862 26,360
Other assets 10,765 13,546
-------- --------
$ 387,135 $ 453,894
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,099 $ 52,147
Accrued expenses 23,783 31,929
Accrued salaries and employee benefits 9,792 15,285
Current portion of long-term debt (note 4) 4,500 9,125
Current portion of capital lease and other
obligations (note 5) 9,023 7,854
-------- --------
Total current liabilities 98,197 116,340
Long-term debt, excluding current portion (note 4) 65,375 89,050
Capital lease and other obligations, excluding current
portion (note 5) 20,982 12,436
Accrued store closing costs 7,005 5,378
Deferred tax liability (note 7) -- 7,083
Deferred rent and other liabilities 11,735 17,717
Stockholders' equity (note 6):
Common stock, $.0001 par value, 100,000 shares
authorized, 21,074 and 21,107 shares issued
and outstanding, respectively 2 2
Additional paid-in capital 270,916 271,208
Accumulated deficit (87,077) (65,320)
-------- --------
Total stockholders' equity 183,841 205,890
Commitments and contingencies (notes 5, 6, and 9)
-------- ---------
$ 387,135 $ 453,894
======== ========
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
-----------------------------------
January 31, January 30, January 29,
1998 1999 2000
---------- ---------- ----------
Net sales $ 749,789 $ 839,622 $ 990,289
Cost of sales and occupancy costs 553,566 624,818 720,711
--------- --------- ---------
Gross profit 196,223 214,804 269,578
Selling, general and administrative expenses 173,667 187,938 220,800
Merger and business integration costs (note 2) 38,693 22,963 --
--------- --------- ---------
Operating income (loss) (16,137) 3,903 48,778
Interest income (588) (176) (863)
Interest expense 3,118 6,894 9,799
--------- --------- ---------
Earnings (loss) before Internet
operations and equity in loss of
unconsolidated affiliates
and income taxes (18,667) (2,815) 39,842
Internet operations and equity in loss
of unconsolidated affiliates (note 3) -- -- (1,254)
--------- --------- ---------
Earnings (loss) before income taxes (18,667) (2,815) 38,588
Income taxes (benefit) (note 7) (5,486) (438) 16,831
--------- --------- ---------
Net earnings (loss) $ (13,181) $ (2,377) $ 21,757
========= ========= =========
Earnings (loss) per common share:
Basic $ (0.64) $ (0.11) $ 1.03
========= ========= =========
Diluted $ (0.64) $ (0.11) $ 1.02
========= ========= =========
Weighted average common shares:
Basic 20,646 21,073 21,094
Diluted 20,646 21,073 21,338
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
-------------------
Shares Amount Capital Deficit Equity
------------------- ---------- ----------- ------------
Balances at
February 1, 1997 20,153 $ 2 $265,971 $(69,474) $196,499
Beginning balance of
immaterial poolings
of interests (note 2) 613 -- 2,311 (2,045) 266
Exercise of options 293 -- 2,449 -- 2,449
Issuance of stock
for services 1 -- 24 -- 24
Net loss -- -- -- (13,181) (13,181)
-------- ----- ------- ------- -------
Balances at
January 31, 1998 21,060 $ 2 $270,755 $(84,700) $186,057
Exercise of options 13 -- 143 -- 143
Issuance of stock
for services 1 -- 18 -- 18
Net loss -- -- -- ( 2,377) ( 2,377)
-------- ----- ------- ------- -------
Balances at
January 30, 1999 21,074 $ 2 $270,916 $(87,077) $183,841
Exercise of options 33 -- 292 -- 292
Net earnings -- -- -- 21,757 21,757
-------- ----- ------- -------- -------
Balances at
January 29, 2000 21,107 $ 2 $271,208 $(65,320) $205,890
======== ===== ======= ======= =======
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
-----------------------------------------
January 31, January 30, January 29,
1998 1999 2000
----------- ----------- -----------
Cash flows from operating activities:
Net earnings (loss) $(13,181) $ (2,377) $ 21,757
Depreciation and amortization 24,289 30,382 39,280
Deferred taxes (5,391) (211) 14,847
Equity in loss of unconsolidated affiliates -- -- 1,254
Loss on retirement of fixed assets 5,908 1,743 30
Issuance of stock for services 24 18 --
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (2,845) 3,241 (1,083)
Inventories (7,992) (7,916) (11,975)
Other assets (3,378) (767) (784)
Accounts payable 12,667 (695) 1,048
Accrued expenses 567 2,225 6,937
Accrued salaries and employee benefits 145 550 5,493
Accrued store closing costs 2,489 (1,069) (1,544)
Deferred rent 1,170 2,822 1,856
------- ------- -------
Net cash provided by operating activities 14,472 27,946 77,116
------- ------- -------
Cash flows from investing activities:
Additions to fixed assets (59,633) (51,689) (40,050)
Investment in affiliates -- (4,879) (18,459)
Net cash invested in acquisitions of businesses (6,028) (1,813) (2,927)
Loan to affiliate -- (6,545) --
Change in other assets (3,869) 2,622 (822)
------- ------- -------
Net cash used in investing activities (69,530) (62,304) (62,258)
------- ------- --------
Cash flows from financing activities:
Borrowings under long-term debt agreements 28,591 43,250 32,375
Repayment of long-term debt agreements (10,335) (3,375) (4,075)
Repayment of capital lease and other obligations (7,221) (6,690) (9,715)
Proceeds from the issuance of common stock 2,449 143 292
------- ------- -------
Net cash provided by financing activities 13,484 33,328 18,877
------- ------- -------
Net increase (decrease) in cash and cash equivalents (41,574) (1,030) 33,735
Cash and cash equivalents at beginning of year 44,338 3,354 2,324
Beginning cash and cash equivalents of immaterial
poolings of interests 590 -- --
------- ------- -------
Cash and cash equivalents at end of year $ 3,354 $ 2,324 $ 36,059
======= ======= =======
Supplemental cash flow disclosures:
Interest paid on debt $ 3,105 $ 5,684 $ 9,481
Income taxes paid $ 920 $ 141 $ 1,101
Supplemental disclosure of noncash financing
activities:
Additions to capital leases $ 1,268 $ 20,253 $ --
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. Summary of Significant Accounting Policies
(a) Description of Business:
PETCO Animal Supplies, Inc., (the Company or PETCO) a Delaware corporation,
is a national specialty retailer of premium pet food and supplies with stores in
39 states and the District of Columbia.
(b) Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments in affiliates are accounted for
on the equity method. All significant intercompany accounts and transactions
have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(c) Fiscal Year:
The Company's fiscal year ends on the Saturday closest to January 31,
resulting in years of either 52 or 53 weeks. All fiscal years presented herein
consisted of 52 weeks. All references to a fiscal year refer to the fiscal year
ending on the Saturday closest to January 31 of the following year.
(d) Cash Equivalents:
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
(e) Inventories:
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
(f) Pre-opening Costs:
Costs incurred in connection with opening new stores are expensed as
incurred.
(g) Fixed Assets:
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three to ten years. Equipment under capital leases is stated at the present
value of minimum lease payments at the inception of the lease. Amortization is
computed using the straight-line method over the lesser of the lease term or the
estimated useful lives of the assets, generally five to fifteen years.
(h) Goodwill and Long-Lived Assets:
Costs in excess of net assets of acquired businesses is amortized on the
straight-line method over 15 years. The carrying value of goodwill is reviewed
on a periodic basis for recoverability based on expectations for future
undiscounted cash flows from the related operations. Should the review indicate
that goodwill is not recoverable, the Company adjusts the goodwill to the extent
carrying value exceeds the fair value of the goodwill. Accumulated amortization
at January 30, 1999 and January 29, 2000 was $9,569 and $12,790, respectively.
In addition, the Company periodically assesses long-lived assets for
impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," based on expectations of
future undiscounted cash flows from the related operations, and when
circumstances dictate, adjusts the asset to the extent carrying value exceeds
the fair value of the asset. These factors, along with management's plans with
respect to the operations, are considered in assessing the recoverability of
goodwill, other purchased intangibles and property and equipment.
(i) Other Assets:
The Company has a secured loan to another limited partner in a limited
partnership which operates retail pet food and supply stores in Canada. The loan
bears interest at 7.5% and matures on October 1, 2003. The loan balance at
January 30, 1999 and January 29, 2000 was $6,545, and is included in other
assets on the accompanying balance sheet.
The remainder of other assets consists primarily of lease deposits,
non-compete agreements, debt issuance costs and prepaid expenses. Non-compete
agreements are amortized using the straight-line method over the periods of the
agreements, generally five to seven years. Debt issuance costs are amortized to
interest expense using the effective interest method over the life of the
related debt, generally five years. Accumulated amortization for intangible
other assets at January 30, 1999 and January 29, 2000 was $802 and $1,580,
respectively.
(j) Store Closing Costs:
Management continually reviews the ability of stores to provide positive
contributions to the Company's results. The Company charges costs associated
with store closures, consisting primarily of lease obligations, to operations
upon commitment to close a store within the next 12 months.
(k) Income Taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
(l) Fair Value of Financial Instruments:
Because of their short maturities, the carrying amounts for cash and cash
equivalents, receivables, accounts payable, accrued expenses, and accrued
salaries and employee benefits approximate fair value. The carrying amounts for
long-term debt, other obligations and loan to affiliate approximate fair value
as the interest rates and terms are substantially similar to those that could be
obtained currently for similar instruments.
(m) Stock Options:
The Company accounts for stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," which recognizes compensation expense on the
grant date if the current market price of the stock exceeds the exercise price.
In 1996, the Company elected to adopt the disclosure provisions of Statement of
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
(n) Earnings (Loss) Per Share:
The consolidated financial statements are presented in accordance with SFAS
No. 128, "Earnings per Share." Basic net earnings (loss) per common share is
computed using the weighted average number of common shares outstanding during
the period. Diluted net earnings per common share incorporates the incremental
shares issuable upon the assumed exercise of stock options.
Dilutive effect of stock options of 581 and 84 shares were not included in
computing diluted loss per share for fiscal years 1997 and 1998, respectively,
because the effect would have been antidilutive. In addition, options to
purchase common shares that were outstanding but were not included in the
computation of diluted net earnings (loss) per share because the options'
exercise price was greater than the average market price of the common shares
were 942, 1,995 and 1,621 for the fiscal years 1997, 1998 and 1999,
respectively.
(o) Comprehensive Income:
SFAS No. 130, "Reporting Comprehensive Income" requires that certain items
of comprehensive income other than net earnings or loss be reported in the
financial statements. For the three years ended January 29, 2000, the Company's
comprehensive income (loss) equaled net earnings (loss).
(p) Segment Reporting:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires annual and interim reporting for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. An operating segment is defined as a
component of an enterprise that engages in business activities from which it may
earn revenues and incur expenses, and about which separate financial information
is regularly evaluated by the chief operating decision maker in deciding how to
allocate resources. All of the Company's stores are aggregated into one
reportable segment given the similarities of economic characteristics between
the operations represented by the stores and the common nature of the products,
customers and methods of distribution.
(q) Reclassifications:
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
2. Business Combinations
The Company acquired all of the outstanding equity securities of a retailer
with four pet food and supply stores operated under the tradename Super Pets in
August 1997, a retailer with nine pet food and supply stores operated under the
tradename Paws in October 1997, a retailer with five pet food and supply stores
operated under the tradename The PetCare Company in October 1997, and a retailer
with four pet food and supply stores operated under the tradename Pet Food
Savemart in October 1997, in exchange for an aggregate 613 shares of common
stock. These acquisitions were accounted for as poolings of interests with their
financial positions and results of operations included in the accompanying
consolidated financial statements from the beginning of the period in which each
immaterial pooling was completed. Previously reported financial statements have
not been restated to include the results of these acquisitions as revenues and
results of operations prior to the acquisition were not material to the
consolidated financial position or results of operations of the Company.
The Company acquired all of the outstanding equity securities of a retailer
with eighty-two pet food and supply stores operated under the tradename PetCare
("PetCare") in November 1997, in exchange for 1,543 shares of common stock. This
transaction has been accounted for as a pooling of interests, and accordingly,
the consolidated financial statements for the periods presented have previously
been restated to include the accounts of PetCare.
During fiscal 1998, the Company completed two acquisitions of retailers of
pet food and supplies in transactions accounted for as purchases. The aggregate
fair value of assets acquired and the net cash invested in these businesses was
$2,088, of which $275 was expended in fiscal 1999. The excess of the aggregate
cost over the fair value of net assets acquired was $1,814, which was recorded
as goodwill and is being amortized over fifteen years.
During fiscal 1999, the Company completed one acquisition of a retailer of
pet food and supplies in a transaction accounted for as a purchase. The
aggregate fair value of assets acquired and the net cash invested in this
business was $2,616. The excess of the aggregate cost over the fair value of net
assets acquired was $1,468, which was recorded as goodwill and is being
amortized over fifteen years.
The consolidated financial statements include the operating results from
the closing date for each respective purchase acquisition. The purchase
acquisitions during fiscal years 1998 and 1999 did not materially affect results
of operations and accordingly, pro-forma results are not presented.
In fiscal 1997, merger and business integration costs of $38,693 were
recorded in connection with acquisition activities. These costs consisted of
$4,470 of transaction costs, $17,790 of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and activities,
$12,216 of reformatting, facility conversion and other integration costs and
$4,217 of severance and other costs.
In fiscal 1998, merger and business integration costs of $22,963 were
recorded related to fiscal 1997 acquisition activity. These costs consisted of
$522 of transaction costs, $1,995 of costs attributable to lease cancellations
and closure of duplicate or inadequate facilities and activities, $19,088 of
reformatting, facility conversion and other integration costs and $1,358 of
severance and other costs.
3. Investment in Affiliates
During fiscal 1999, the Company acquired an equity interest in Petopia.com,
an e-commerce destination for the sale of pet food and supplies. At January 29,
2000, the Company owned 4,335 shares of Petopia.com preferred stock,
representing an ownership interest of 10.0%, and warrants to purchase additional
preferred shares. The Company accounts for its investment in Petopia.com using
the equity method and records its proportionate share of earnings or loss.
Because the financial statements of Petopia.com are recorded on a calendar year
basis, the Company records its proportionate share of earnings or loss with a
lag of one month. The Company recognized $4,021 in equity in losses for fiscal
1999. The Company also provides certain marketing and fulfillment services to
Petopia.com according to the terms of a strategic alliance agreement, under
which the Company may earn an additional 3,843 Series C preferred shares.
Including these shares, the Company's ownership interest would have been 17.4%
at January 29, 2000, prior to the exercise of any warrants granted to the
Company. The Company earned $2,767 from Petopia.com, primarily under the terms
of the agreement in fiscal 1999. These items are reflected as Internet
operations and equity in loss of unconsolidated affiliates in the accompanying
statements of operations.
The Company has a 60% limited partner interest in a limited partnership
(the "LP") which operates retail pet food and supply stores in Canada. Pursuant
to the terms of an option agreement, the Company may increase its interest in
the LP. The Company accounts for its investment in the LP using the equity
method as it does not exercise control over the LP and records its proportionate
share of earnings or loss according to the partnership agreement. The Company
did not record any earnings or loss for the years ended January 30, 1999 and
January 29, 2000. The Company's investment in the LP at January 30, 1999 and
January 29, 2000 was $5,862 and $12,415, respectively.
4. Long-Term Debt
The Company has a credit facility with a syndicate of banks with a
commitment of up to $150.0 million that expires between July 15, 2004 and July
15, 2006. The credit facility provides for $100.0 million in term loans and
$50.0 million in revolving loans. Borrowings under the credit facility are
secured by substantially all of the assets of the Company and bear interest, at
the Company's option, at the agent bank's corporate base rate plus up to 0.50%,
or LIBOR plus 1.00% to 3.25%, based on the Company's leverage ratio at the time.
The effective interest rate of these borrowings at January 29, 2000 was 8.18% to
9.74%. The credit agreement contains certain affirmative and negative covenants
related to indebtedness, interest and fixed charges coverage, and consolidated
net worth.
Long-term debt consists of:
January 30, January 29,
1999 2000
----------- -----------
Revolving loans $43,250 $ --
Term loan 26,625 98,175
------ ------
69,875 98,175
Less current portion 4,500 9,125
------ ------
$65,375 $89,050
====== ======
Annual maturities of long-term debt for the next five fiscal years are as
follows: $9,125, $8,425, $10,675, $11,800 and $15,525.
5. Lease Commitments and Other Obligations
The Company finances certain fixed assets under capital leases. There are
approximately $42,753 and $37,272 in fixed assets financed through capital
leases at January 30, 1999 and January 29, 2000, respectively. Accumulated
amortization related to these financed assets was approximately $12,866 and
$16,690 at January 30, 1999 and January 29, 2000, respectively.
The Company leases warehouse and store facilities and equipment under
operating leases. These operating leases generally have terms from three to ten
years. Certain store leases include additional contingent rental payments
ranging from 2% to 6% of store revenues above defined levels. Contingent rentals
during fiscal years 1997, 1998, and 1999 were $33, $44 and $68, respectively.
At January 29, 2000, the present value of future minimum payments for
capital lease and other obligations, and minimum lease payments under
noncancelable operating leases were as follows:
Capital Leases
and Other Operating
Years Obligations Leases
----- ------------- -----------
2000 $ 9,246 $ 97,211
2001 7,036 96,270
2002 4,409 87,356
2003 314 81,952
2004 276 73,397
Thereafter 2,021 319,772
------ -------
Total minimum payments 23,302 $755,958
=======
Less amount representing interest 3,012
------
Present value of net minimum capital
lease and other obligations payments 20,290
Less current portion of capital lease
and other obligations 7,854
------
Capital lease and other obligations $12,436
======
Rent expense under operating leases for fiscal years 1997, 1998, and 1999
was approximately $70,506, $79,672, and $89,352, respectively.
6. Equity
(a) Common Stock:
The authorized number of shares is 100,000.
(b) Stock Options:
In February 1994, the Company's stockholders approved the 1994 Stock Option
Plan ("1994 Company Plan") which provides for the granting of stock options,
stock appreciation rights or restricted stock with respect to shares of common
stock to executives and other key employees. Stock options may be granted in the
form of incentive stock options or non-statutory stock options and are
exercisable for up to ten years following the date of grant. Stock option
exercise prices must be equal to or greater than the fair market value of the
common stock on the grant date. In June 1996, the Company's stockholders
approved an amendment to the 1994 Company Plan to increase the number of shares
available for issuance under the plan for each of the next five fiscal years by
3.0% of the number of shares of common stock issued and outstanding as of the
end of the immediately preceding fiscal year.
In February 1994, the Company's stockholders approved the Directors 1994
Stock Option Plan ("Directors Plan") which provides for the granting of common
stock options to directors. Stock option exercise prices must be equal to the
fair market value of the common stock on the grant date. In June 1995, the
Company's stockholders approved an amendment to the Directors Plan to increase
the number of shares available for issuance under the plan for each of the next
five fiscal years by 0.1% of the number of shares of common stock issued and
outstanding as of the end of the immediately preceding fiscal year.
In 1996, the Company assumed an employee stock option plan ("1993 Company
Plan") from Pet Food Warehouse which provided for the granting of incentive and
nonqualified stock options with exercise prices equal to their fair market
values on their grant dates that become exercisable over various periods and
expire five or six years after the date of grant. The common shares and exercise
prices under this plan were adjusted based on the common share conversion rate
per the merger agreement with Pet Food Warehouse. No further grants will be made
under this plan.
In 1997, the Company assumed an employee stock option plan ("1989 Company
Plan") from PetCare which provided for the granting of incentive and
non-qualified stock options with exercise prices equal to their fair market
values on their grant dates that became exercisable over various periods and
expire up to ten years after the date of grant. The common shares and exercise
prices under this plan were adjusted in accordance with the terms of the merger
agreement with PetCare. No further grants will be made under this plan.
Information regarding the stock option plans follows:
1994 Company Plan 1993 Company Plan
-------------------------------- --------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------ -------
Outstanding at
February 1, 1997 926 $10.33-$23.17 $ 14.77 209 $14.95-$42.27 $ 19.52
Granted 645 $22.50-$30.31 $ 23.17 -- $ -- $ --
Exercised (164) $ 10.33 $ 10.33 (75) $15.24-$27.21 $ 20.11
Cancelled (85) $10.33-$23.17 $ 20.52 (13) $14.95-$42.27 $ 23.71
----- -----
Outstanding at
January 31, 1998 1,322 $10.33-$30.31 $ 18.89 121 $14.95-$27.73 $ 18.74
Granted 715 $17.44-$18.44 $ 17.47 -- $ -- $ --
Exercised (4) $10.33-$12.33 $ 12.23 (1) $18.40-$20.70 $ 18.67
Cancelled (170) $10.33-$23.17 $ 19.74 (4) $14.95-$24.73 $ 20.53
----- -----
Outstanding at
January 30, 1999 1,863 $10.33-$30.31 $ 18.28 116 $14.95-$27.73 $ 18.67
Granted 649 $ 7.31-$15.50 $ 7.43 -- $ -- $ --
Exercised (12) $10.33-$12.33 $ 10.77 -- $ -- $ --
Cancelled (211) $ 7.31-$27.50 $ 13.81 (4) $14.95-$27.21 $ 23.67
----- -----
Outstanding at
January 29, 2000 2,289 $ 7.31-$30.31 $ 15.66 112 $14.95-$27.73 $ 18.49
===== =====
Exercisable at
January 31, 1998 372 $10.33-$30.25 $ 12.55 111 $14.95-$27.73 $ 18.63
Exercisable at
January 30, 1999 512 $10.33-$30.31 $ 12.88 112 $14.95-$27.73 $ 18.65
Exercisable at
January 29, 2000 742 $10.33-$30.31 $ 16.27 112 $14.95-$27.73 $ 18.49
Available for grant at
January 29, 2000 1,067 --
Directors' Plan 1989 Company Plan
-------------------------------- --------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------ --------
Outstanding at
February 1, 1997 14 $10.33-$31.67 $ 15.96 188 $ 7.70-$11.54 $ 9.40
Granted 12 $21.38-$22.50 $ 21.67 -- $ 11.54 $ 11.54
Exercised -- $ -- $ -- (134) $ 7.70-$11.54 $ 9.61
Cancelled -- $ -- $ -- -- $ -- $ --
----- -----
Outstanding at
January 31, 1998 26 $10.33-$31.67 $ 18.64 54 $ 7.70-$11.54 $ 8.89
Granted 35 $ 4.78-$17.44 $ 8.60 -- $ -- $ --
Exercised -- $ -- $ -- (13) $ 11.54 $ 11.54
Cancelled -- $ -- $ -- (2) $ 11.54 $ 11.54
----- -----
Outstanding at
January 30, 1999 61 $ 4.78-$31.67 $ 13.02 39 $ 7.70-$11.54 $ 7.87
Granted 50 $ 6.22-$14.03 $ 9.12 -- $ -- $ --
Exercised -- $ -- $ -- (21) $ 7.70 $ 7.70
Cancelled -- $ -- $ -- -- $ -- $ --
----- -----
Outstanding at
January 29, 2000 111 $ 4.78-$31.67 $ 11.26 18 $ 7.70-$11.54 $ 8.06
===== =====
Exercisable at
January 31, 1998 26 $10.33-$31.67 $ 18.64 54 $ 7.70-$11.54 $ 8.89
Exercisable at
January 30, 1999 61 $ 4.78-$31.67 $ 13.02 39 $ 7.70-$11.54 $ 7.87
Exercisable at
January 29, 2000 111 $ 4.78-$31.67 $ 11.26 18 $ 7.70-$11.54 $ 8.06
Available for grant at
January 29, 2000 22 --
In March 2000, options for 737 shares were granted under the 1994 Company
Plan which vest in March 2003 and are exercisable at $12.44 per share. In
February and March 2000, options for 15 shares were granted under the Directors
Plan that were immediately exercisable at a range of $10.20 to $12.44 per share.
(c) Accounting for Stock Options:
The Company accounts for stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, under
which no compensation expense was recognized. Had compensation costs for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans, consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and loss per share would have been increased by $3,850, or
$0.18 per share, during 1997, the Company's net loss and loss per share would
have been increased by $3,749, or $0.18 per share, during 1998, and the
Company's net earnings and earnings per share would have been decreased by
$3,521, or $0.17 per share, during 1999. The pro forma change in net earnings
(loss) reflects only options granted since 1995. Therefore, the full impact of
calculating compensation costs for stock options under SFAS No. 123 is not
reflected in the pro forma change in net earnings (loss) amounts presented above
because compensation cost is reflected over the options vesting period of three
years and compensation cost for options granted prior to January 1, 1995 is not
considered. The weighted average fair value of the options granted during 1997,
1998 and 1999 were estimated as $11.65, $9.46 and $4.48 on the date of grant
using the Black-Scholes option pricing model with the following assumptions: no
dividend yield, volatility of 47.5%, 59.0% and 62.1%, risk-free interest rate of
6.0%, 5.0% and 6.0% for 1997, 1998 and 1999, respectively, and an expected life
of five years for all grants.
The following table summarizes information about the options outstanding
under all stock option plans at January 29, 2000:
Options Outstanding Options Exercisable
----------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
---------- ----------- ------------ -------- ----------- ---------
$ 4.78-$10.33 940 7.35 $ 8.36 400 $ 9.78
$10.63-$17.44 716 7.53 $ 16.37 156 $ 12.87
$17.54-$21.38 126 3.13 $ 18.63 115 $ 18.64
$22.50-$31.67 748 6.80 $ 23.23 312 $ 23.95
--------- --------
2,530 7.03 $ 15.53 983 $ 15.81
========= ========
(d) Stockholder Rights Agreement:
On September 10, 1998, the Board of Directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of the
Company's common stock, which Rights expire on September 22, 2008. Each Right
entitles a stockholder to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock of the Company, at the price of $75.00 per
one one-hundredth of a preferred share, subject to adjustment, or, under certain
circumstances, shares of common stock of the Company or a successor company
which at the time of such transaction would have a market value equal to two
times the exercise price of the Right. The Rights would become exercisable for
all other persons only if a person acquires or announces a tender offer to
acquire beneficial ownership of 15% or more of the Company's common stock. Each
share of Series A Junior Participating Preferred Stock will be entitled to
certain minimum dividends and an aggregate dividend of 100 times the dividend
declared per common share, if any. The Rights have no voting privileges and the
Board of Directors may terminate the Stockholder Rights Agreement at any time or
redeem outstanding Rights at a price of $0.01 per Right at any time prior to a
person acquiring beneficial ownership of 15% or more of the Company's
outstanding common stock.
7. Income Taxes
Income taxes (benefit) consists of the following:
Years Ended
----------------------------------------
January 31, January 30, January 29,
1998 1999 2000
----------- ----------- -----------
Current:
Federal $ 416 $ 64 $ 991
State (370) (423) 993
Foreign -- 132 --
------- ------- -------
46 (227) 1,984
------- ------- -------
Deferred:
Federal (4,290) (876) 12,945
State (1,242) 665 1,902
Foreign -- -- --
------- ------- -------
(5,532) (211) 14,847
------- ------- -------
Income taxes (benefit) $ (5,486) $ (438) $ 16,831
======= ======= =======
A reconciliation of income taxes at the federal statutory rate of 34% for
the fiscal years ended January 31, 1998 and January 30, 1999 and 35% for the
fiscal year ended January 29, 2000 with the provision for income taxes (benefit)
follows:
Years Ended
----------------------------------------
January 31, January 30, January 29,
1998 1999 2000
----------- ----------- -----------
Income taxes at federal
statutory rate $ (6,347) $ (957) $ 13,506
Non-deductible expenses 1,489 286 463
State taxes, net of federal
tax benefit (1,064) 160 1,882
Foreign taxes, net of federal
tax benefit -- 87 --
Change in valuation allowance -- -- 1,600
Other 436 (14) (620)
------- ------- -------
$ (5,486) $ (438) $ 16,831
======= ======= =======
The sources of significant temporary differences which gave rise to the
deferred tax provision and their effects follow:
Years Ended
----------------------------------------
January 31, January 30, January 29,
1998 1999 2000
----------- ----------- -----------
Inventory $ (1,216) $ 2,693 $ 26
Deferred rent (588) (779) (779)
Depreciation 1,611 4,220 7,808
Accrued fringes (699) 204 (680)
Intangibles 1,771 686 (221)
Store closing costs (1,941) 1,840 974
Fixed assets 1,128 1,571 24
Other assets (2,358) 1,450 (970)
Benefit of net operating
loss carryforwards (3,929) (12,482) 9,093
Change in valuation allowance -- -- 1,600
Other 689 386 (2,028)
------- ------- -------
$ (5,532) $ (211) $ 14,847
======= ======= =======
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets follow:
January 30, January 29,
1999 2000
----------- -----------
Deferred tax assets:
Inventory $ 3,556 $ 3,530
Deferred rent 4,191 4,970
Accrued fringes 1,901 2,581
Store closing costs 3,656 2,682
Fixed assets 29 5
Other assets 908 1,878
Net operating loss carryforwards 27,104 18,011
Other -- 1,323
------ ------
Total deferred tax assets 41,345 34,980
Valuation allowance (4,900) (6,500)
------ ------
Net deferred tax assets 36,445 28,480
------ ------
Deferred tax liabilities:
Depreciation (7,386) (15,194)
Intangibles (1,904) (1,683)
Other (705) --
------ ------
Total deferred tax liabilities (9,995) (16,877)
------ ------
Net deferred tax assets $26,450 $11,603
====== ======
The valuation allowance of $4,900 at January 30, 1999 and $6,500 at January
29, 2000 relates primarily to net operating loss carryforwards of PetCare, with
the increase in the valuation allowance at January 29, 2000 relating to the
Company's equity share in the losses of Petopia.com. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods for which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net of
the valuation allowance.
At January 29, 2000, the Company has available net loss carryforwards of
$47,869 for federal income tax purposes, which begin expiring in 2012, and
$24,002 for state income tax purposes, which begin expiring in 2005.
8. Employee Savings Plan
The Company has employee savings plans which permit eligible participants
to make contributions by salary reduction pursuant to either section 401(k) of
the Internal Revenue Code or under the Company's non-qualified deferred
compensation plan. The Company matches 50% of the first 6% of compensation that
is contributed by each participating employee to the plans. In connection with
the required match, the Company's contributions to the plans were $199 in 1997,
$532 in 1998 and $873 in 1999.
9. Commitments and Contingencies
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United States
District Court for the Southern District of California between August and
November, 1998. These cases have been consolidated and will be administered as
one case. The plaintiffs purport to represent a class of all persons who
purchased the Company's common stock between January 30, 1997 and July 10, 1998.
The complaints allege that the defendants violated various federal securities
laws through material misrepresentations and omissions during the class period,
and seek unspecified monetary damages. These matters have been tendered to the
Company's insurance carrier. While the Company believes the allegations
contained in these lawsuits are without merit, the claims have not progressed
sufficiently for the Company to estimate a range of possible exposure, if any.
The Company and its officers intend to defend themselves vigorously.
In addition, the Company is involved in routine litigation arising in the
ordinary course of its business. While the results of such litigation cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
EXHIBIT INDEX
Number Document
- ------ --------
3.1 Amended and Restated Certificate of Incorporation, as
amended. (1)
3.2 Amended and Restated By-Laws. (2)
4.1 Form of Common Stock Certificate. (2)
4.2 Stockholder Rights Agreement. (3)
10.1 Amended and Restated Credit Agreement, dated July 15, 1999 between the
Company and Union Bank, as Syndicating Agent. (4)
10.2 Distribution Center Lease, dated July 1, 1997 between the Company and
Knickerbocker Industrial Properties East LP for 152 Dayton Jamesburg
Road, South Brunswick, New Jersey. (5)
10.3 Distribution Center Lease, dated February 20, 1998 between the Company
and Industrial Developments International, Inc. for 3801 Rock Creek
Boulevard, Joliet, Illinois. (5)
10.4 Distribution Center Lease, dated November 24, 1997 between the Company
and Opus West Corporation for 4345 Parkhurst Street, Mira Loma,
California. (5)
10.5 Master Equipment Lease Agreement, dated March 10, 1995, between the
Company and KeyCorp Leasing Ltd. (6)
10.6 Master Equipment Lease Agreement, dated November 15, 1995, between the
Company and Fleet Credit Corporation. (6)
10.7 Master Equipment Lease Agreement, dated September 15, 1998, between the
Company and IBM Leasing. (7)
10.8 Master Equipment Lease Agreement, dated January 25, 1999, between the
Company and Matrix funding. (7)
10.9 Master Lease Agreement, dated December 27, 1995, between the Company
and Newcourt Financial USA, Inc. (6)
10.10 Master Lease Agreement, dated September 28, 1995, between the Company
and USL Capital Corporation. (6)
10.11 Employment Agreement, dated March 17, 1996, between the Company and
Brian K. Devine. (6)
10.12 Form of Indemnification Agreement between the Company and certain
officers and directors. (2)
10.13 Form of Retention Agreement for executive officers. (5)
10.14 Form of Retention Agreement for non-executive officers. (5)
10.15 Petco Animal Supplies 401(k) Plan. (2)
10.16 The 1994 Stock Option and Restricted Stock Plan for Executive and Key
Employees of Petco Animal Supplies, Inc., as amended and restated on
March 18, 1998. (7)
10.17 Petco Animal Supplies, Inc. Group Benefit Plan, dated July 29, 1991,
as amended. (6)
10.18 Petco Animal Supplies, Inc. Directors' 1994 Stock Option Plan, as
amended. (6)
10.19 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option
Agreement. (2)
10.20 Form of Petco Animal Supplies, Inc. Incentive Stock Option
Agreement. (2)
10.21 Form of Petco Animal Supplies, Inc. Restricted Stock Agreement. (2)
10.22 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option Agreement
(Directors' 1994 Stock Option Plan). (2)
10.23 The Pet Food Warehouse, Inc. 1993 Stock Option Plan (8)
10.24 Pet Food Warehouse, Inc. Amendment to 1993 Stock Option Plan. (9)
10.25 The PetCare Plus, Inc. 1989 Stock Option Plan (the "1989 Stock Option
Plan"). (10)
10.26 Form of Incentive Stock Option Agreement under the 1989 Stock Option
Plan. (10)
10.27 Form of Nonqualified Stock Option Agreement under the 1989 Stock Option
Plan. (10)
21.1 Subsidiaries of the registrant. (4)
23.1 Consent of KPMG LLP. (4)
27.1 Financial Data Schedule. (4)
- -------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-4
dated October 23, 1996, File No. 333-14699, including Amendment No. 1
thereto dated November 20, 1996.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
dated January 13, 1994, File No. 33-77094, including Amendment No. 1
thereto dated February 24, 1994 and Amendment No. 2 thereto dated March
11, 1994.
(3) Filed as an exhibit to the Company's Report on 8-K dated September 22, 1998,
File No. 000-23574.
(4) Filed herewith.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
April 30, 1998.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated April 4, 1996, File No. 333-3156, including Amendment No. 1 thereto
dated April 24, 1996.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
April 29, 1999.
(8) Filed as an exhibit to Pet Food Warehouse, Inc.'s Registration Statement on
Form SB-2 dated July 6, 1993, File No.33-65734C, including Amendment No. 1
thereto, dated effective August 13, 1993, Post-Effective Amendment No. 1
thereto, dated January 7, 1994, Post-Effective Amendment No. 2 thereto,
dated February 1, 1994, and Post-Effective Amendment No. 3 thereto, dated
February 10, 1994.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated February 26, 1997, File No. 333-14699.
(10)Filed as an exhibit to the Company's Registration Statement on Form S-8
dated March 20, 1998, File No. 333-48311.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 12th day of
April, 2000.
PETCO ANIMAL SUPPLIES, INC.
By: /s/BRIAN K. DEVINE
--------------------------
Brian K. Devine
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/BRIAN K. DEVINE Chairman of the Board, President April 12, 2000
- -----------------------
Brian K. Devine and Chief Executive Officer
(Principal Executive Officer)
/s/JAMES M. MYERS Senior Vice President and April 12, 2000
- -----------------------
James M. Myers Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ANDREW G. GALEF Director April 12, 2000
- -----------------------
Andrew G. Galef
/s/RICHARD J. LYNCH Director April 12, 2000
- -----------------------
Richard J. Lynch
/s/JAMES F. McCANN Director April 12, 2000
- -----------------------
James F. McCann
/s/PETER M. STARRETT Director April 12, 2000
- -----------------------
Peter M. Starrett