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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:
February 1, 1997 0-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 33-0479906
(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:
(619) 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:
As of April 21, 1997, there were outstanding 18,618,988 shares of the
Registrant's Common
Stock, $.0001 par value. As of that date, the aggregate market value of the
voting stock held by non-
affiliates of the Registrant was approximately $406,031,428.
Documents Incorporated By Reference: The information called for by Part III
is incorporated by
reference from the Proxy Statement relating to the 1997 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 February 1,
1997, the Company operated 336 stores, including 278 superstores, in 21
states and the District of Columbia. PETCO's strategy is to become 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 believes that this strategy provides
PETCO with a competitive advantage by combining the broad merchandise
selection and everyday low prices of a pet supply warehouse store with the
convenience and service of a neighborhood pet supply store.
PETCO currently utilizes both superstore and traditional store formats.
The Company's expansion strategy is to open and acquire superstores,
including relocations, expansions or remodels of existing traditional
stores into superstores (collectively referred to herein as "conversions"),
and to close underperforming stores. In fiscal 1996, the Company opened or
acquired 82 superstores, including 24 conversions, closed eight stores and
merged with companies with 30 superstores. 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 1996 refer to the fiscal year beginning on
February 4, 1996 and ending on February 1, 1997.
The Pet Food, Supply and Services Industry
General. In 1995, retail sales in the United States of pet food,
supplies and small animals (excluding dogs and cats) were estimated at $13
billion. Pet food accounted for the majority of this market with an
estimated $9.3 billion in sales, while pet supply and small animal sales
were estimated at $3.7 billion. In addition, sales of pet services, which
include veterinary services, obedience training and grooming services, were
estimated at $4 billion in 1995. In 1995, an estimated 58 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. The Company believes that these numbers reflect important demographic
changes occurring in the United States which have been favorable to the pet
food and supply industry, such as an increase in families with young
children and an increase in the number of "empty-nest" households with
additional disposable income to spend on pets.
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. These brands are generally considered less nutritious than
premium brands and sell at lower prices. Until the early 1980s, such
brands had little retail competition from specialty pet food manufacturers.
However, over the past five years, sales of national supermarket brands
have represented a decreasing percentage of the total annual pet food sales
as premium food such as Iams, Nature's Recipe, Nutro and Science Diet,
which are not available through supermarkets or mass merchants due to
manufacturers' restrictions, has increased in popularity. Sales of premium
pet food are estimated to have increased at a compound annual growth rate
of approximately 18% in recent years and now account for an estimated 25%
of the total pet food market. The Company believes that premium pet food
sales have increased due to the changing demographics discussed above, the
increasing concern for animal welfare and nutrition, recommendations by
veterinarians and breeders and the increasing availability and variety of
premium pet food products. As one of the leading specialty premium pet
food retailers in the country, PETCO believes that it is in an excellent
position to capitalize on these trends.
Pet Supplies. The Company believes that the growing preference for
premium pet food has also affected the pet supply industry. As consumers
focus on pet health and nutrition, they tend to purchase more and higher
quality pet supplies, particularly vitamins and veterinary products. Pet
supplies are often an impulse purchase made during a customer's regular
visit to purchase pet food, cat litter or flea control products. The
Company believes that demand for pet supplies is less price sensitive than
the demand for pet food. Consequently, pet supply products are less
frequently discounted, resulting in higher gross margins. For these
reasons, the pet supply industry has attracted strong interest from
supermarkets, although due to space constraints, supermarkets tend to carry
a limited assortment of basic items such as cat litter, collars, dog chews,
leashes, flea collars and toys. Pet supply stores such as PETCO, on the
other hand, carry a wider variety of these basic items and a wide
assortment of other supplies, which also includes grooming products, pet
carriers, cat furniture, dog houses, vitamins, treats and veterinary
products. The Company believes that sales of supplies at specialty stores
should continue to increase due to the wide variety of products and the
high level of customer service available at such stores and the growing
preference for premium pet food.
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
inhumane 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. The
Company purchases small animals only through domestic breeders.
Pet Services. The market for pet services includes veterinary services,
obedience training and grooming services. The Company offers only limited
veterinary services such as routine vaccinations because it believes that a
broader offering of such services would cause it to lose significant
referral business from veterinarians in the community. 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 become 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 and
converting traditional stores into superstores.
Acquisitions. A significant part of the Company's expansion strategy is
to capitalize on the consolidation of the fragmented pet food and supply
industry. The Company believes that there are acquisition opportunities
which would allow the Company to attract new customers in existing markets,
enter new markets and leverage operating costs. Generally, the Company
seeks to acquire established and well-located stores or chains of stores
which are similar in size and format to the Company's existing superstores.
Consistent with this strategy, the Company has completed 12 acquisitions,
representing 100 stores located in 16 states, since the Company's initial
public offering in March 1994.
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. This is equivalent to
the number of SKUs carried by a typical pet supply warehouse store and far
exceeds the approximately 2,000 such items in a typical independent store,
500 such items in a typical mass merchant, 400 such items in a typical
supermarket and 20 such items in a typical warehouse club. 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. PETCO's traditional stores, which average 3,500
square feet, also carry a wide variety of premium pet food and supplies
(approximately 5,000 active SKUs).
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 that offering competitive prices on food
items increases customer traffic and generates sales of high-margin
supplies.
Superior Customer Service. Providing knowledgeable and friendly
customer service is a key aspect of PETCO's business strategy, which the
Company believes gives it a competitive advantage over lower-service pet
supply warehouse stores. Most PETCO store managers and sales associates
are better able to assist customers with their needs because they are pet
owners and enthusiasts. PETCO emphasizes the training and development of
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 are open seven days a week. Furthermore,
the Company's superstore format offers the Company more flexibility in site
selection than is available to the larger pet supply warehouse stores.
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 superstores are brightly illuminated with colorful
fixtures and graphics and feature prominent and attractive signage.
Superstores feature an assortment of fish, aquarium systems, 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 superstores also contain a glassed-in grooming area that
allows customers to observe the grooming process while they shop. The
Company believes its superstore format allows it to create a more customer-
friendly environment than pet supply warehouse stores because of its size,
layout and design.
Innovative Community Programs. PETCO has several long-standing
neighborhood marketing programs in effect 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.
Merchandising
Complete Merchandise Assortment. Management believes that 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 Iams, Nature's Recipe, Nutro and
Science Diet as well as selected mass brand foods. Due to
manufacturers' restrictions, premium brands are not currently sold
through supermarkets, warehouse clubs, or mass merchants, but are sold
exclusively through specialty pet stores and veterinarians. The Company
also offers a PetGold(R) private label brand 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 food 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, filters, 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. Birds and other animals are available for
demonstration by PETCO employees and handling by customers. The Company
believes that its small animal displays add excitement to shopping at
PETCO and generate increased sales of high-margin small animals and
related food and supplies.
Grooming and Other Services. Professional grooming is available at
many of the Company's superstores. Grooming services are performed in
glass-walled stations in the stores to provide an eye-catching display
and 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
apparel for pets, calendars, as well as 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 that offering competitive prices on key
food items increases customer traffic and generates sales of higher-margin
pet supplies. PETCO's large buying volume and sophisticated distribution
network allows it to compete effectively on price. The Company modifies
its pricing policies by regional or local markets and is able to institute
overnight price changes, as necessary, to meet market competition. PETCO's
price guarantee program offers to match all competitors advertised prices.
Marketing and Advertising. PETCO's advertising program utilizes a
multimedia approach to attract new customers and reemphasize values to
existing customers. Television, radio, direct mail circulars and newspaper
advertisements communicate promotional activities and major events.
Database marketing provides strategic information for targeting existing
customers' specific purchasing needs and for supporting customer loyalty
programs. Local store marketing efforts communicate unique events to the
community for individual stores. In addition to Company-paid advertising,
PETCO receives cooperative advertising support from its major vendors. The
Company's advertising targets middle- to upper-middle-income households
with pets.
Pet Adoption Program. Due to the overpopulation of cats and dogs,
PETCO's long-standing corporate policy has been to aggressively encourage
its customers to adopt their next pet. In partnership with local animal
welfare organizations, such as county shelters and local humane societies,
PETCO holds adopt-a-pet events in its stores in an effort to find loving
homes for homeless pets. Every year these highly successful efforts find
new homes for tens of thousands of pets and prevent them from being
destroyed. Adopt-a-pet events generate goodwill for PETCO in local
communities and create customer loyalty from the new pet owners.
Promotional Activities. PETCO has implemented several community service
programs designed to familiarize customers with the Company and to maintain
long-term customer relationships. The Company offers monthly low-cost
vaccination services designed for customers who currently do not utilize a
veterinarian. PETCO stores also participate in a number of local programs
with pet-related organizations and sponsor events such as dog washes, pet
walks, pet look-alike contests and holiday pet photo sessions. Proceeds
from these events go to specified animal welfare organizations. The
Company uses a product sampling program in which each store offers a
selection of premium food and supply samples to customers. This program
introduces premium pet food to customers who purchase supermarket brand pet
food and targets first-time customers during special promotional events.
Store Development
The Company utilizes both superstore and traditional store formats. The
Company plans only 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. All of the Company's superstores offer
fish, aquarium systems, reptiles and other small animals, and many of the
superstores offer birds and grooming services. Overall, the Company's
superstores average approximately 13,000 square feet in size. The
Company's traditional stores average approximately 3,500 square feet in
size and generally do not sell fish, birds, reptiles or small animals.
The Company's experience indicates that its superstore format achieves
increased customer traffic, sales volume and profitability compared to its
traditional stores. As a result, 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 traditional stores
into superstores.
Although the Company does not plan to open any new traditional stores in
the future, it will continue to operate profitable and well-situated
traditional stores until such time as they may be converted into
superstores.
In fiscal 1996, the Company opened or acquired 82 superstores, including
24 conversions, closed eight stores and merged with companies with 30
superstores. The table below sets forth the number of each type of store
the Company operated at the end of each fiscal year indicated.
Traditional
Superstores Stores Total Stores
Fiscal 1992 37 161 198
Fiscal 1993 76 132 208
Fiscal 1994 132 107 239
Fiscal 1995 207 79 286
Fiscal 1996 278 58 336
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.
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. The Company takes advantage of both volume purchasing and
quick payment discounts. These discounts are particularly beneficial given
the dynamics of the pet food and supply industry. These discounts enable
the Company to price its products competitively with larger pet supply
warehouse stores and below the independent operators and small chains that
cannot take advantage of these purchasing economies. The Company
anticipates that it will continue to recognize benefits through these
discounts especially as sales volume increases via store expansion. In
addition, the Company will pursue other measures designed to reduce or
control the cost of goods sold such as direct importing, co-packing and
private-label products.
PETCO purchases most of its merchandise directly from approximately 550
specialty suppliers and manufacturers of national brands. The Company
purchases the majority of its pet food products from four vendors, Iams,
Nutro, Science Diet and Nature's Recipe, the first three of which each
supplied products that accounted for more than 10% and less than 15% of the
Company's sales in fiscal 1996. While the Company does not maintain long-
term supply contacts with any of its vendors, PETCO believes that it enjoys
a favorable and stable relationship with each of these vendors.
PETCO currently operates one central and five regional distribution
centers. The central distribution center is located in Rancho Cucamonga,
California. 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 Rancho Cucamonga
facility 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.
Competition
The pet food and supply business is highly competitive. This
competition can be categorized into four different segments: (i)
supermarkets and other mass merchants, (ii) single store and conventional
pet shops, (iii) specialty pet supply chains and (iv) pet supply warehouse
stores. Many of the premium pet food brands offered by the Company, such
as Iams, Nature's Recipe, Nutro and Science Diet, 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. Based on total sales, the Company
is one of the largest specialty premium pet food and supply retailers in
the United States. 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.
The pet food and supply industry is also highly fragmented. There are
approximately 11,000 independent pet supply stores in the United States,
many of which are unable to offer a broad product selection and are unable
to obtain volume or time discounts from distributors. Many of these stores
have an established presence in a particular geographic area. The Company
believes that its ability to satisfy consumers' desire for value, quality,
selection, convenience and service will enable PETCO to gain market share
from independent pet stores. In addition, certain pet supply warehouse
stores and warehouse chains, which are expanding rapidly throughout the
country, attempt to offer lower prices and a wider selection of pet food
(due to the inclusion of non-premium pet food) and supplies than the
Company. However, PETCO believes it is able to compete effectively on
price on all key food items, to offer essentially the same product
selection and to offer a superior level of customer service at more
convenient locations than that offered by lower-service pet supply
warehouse stores.
The pet food and supply industry recently has been characterized by the
consolidation of a number of pet supply stores. This consolidation has
been accomplished through the acquisition of independent pet stores by
larger specialty pet supply chains or pet supply warehouse 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. There can be no assurance that in the future the Company will
not face greater competition from other national or regional retailers.
Trademarks and Licenses
The Company has registered several service marks and trademarks with the
United States Patent and Trademark Office, including PETCO(R), Advantage
Pet Products(R), Aquatic Gardens(R), Avian Select(R), Finishing Touch(R),
Mighty Marble(R), Paw Pals(R), PetGold(R), Ruff Toys(R), Small Animal
Kingdom(R), Where the Pets Go(TM) and Your Pet's Second Best Friend(R). 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 February 1, 1997, the Company employed approximately 5,700
associates, of whom approximately 2,800 were employed full-time.
Approximately 93% of the Company's employees were employed in stores or in
direct field supervision, approximately 3% in distribution centers and
approximately 4% in the corporate office in San Diego. Management believes
its labor relations are generally good.
Certain Cautionary Statements
Certain statements in this Annual Report that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other facts which may
cause the actual results of the Company to be materially different from
historical results or from any results expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors
include, but are not limited to, the following risks:
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 a lesser extent on increasing 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 recently opened stores in new markets
and plans to open additional stores in new markets. The performance of
new 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 revolving credit facility (the
"Revolving 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 increase product handling
capacity to accommodate store and sales growth beyond fiscal 1997. 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. If the Company
is to realize the anticipated benefits of its past acquisitions, the
operations of the acquired companies must be integrated and combined
efficiently. The process of rationalizing stores, supply and distribution
channels, computer and accounting systems and other aspects of operations,
while managing a larger and geographically expanded entity, presents a
significant challenge to the Company's management. There can be no
assurance that the integration process will be successful or that the
anticipated benefits of these acquisitions will be fully realized. The
dedication of management resources to integration efforts may detract
attention from the day-to-day business of the Company. The difficulties of
integration may be increased by the necessity of coordinating
geographically separated organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures.
There can be no assurance that the Company will be able to achieve any
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 1995
and 1996, merger and nonrecurring charges of $9.2 million and $37.2
million, respectively, were recorded by the Company following acquisition
activities, including transaction costs, costs attributable to lease
cancellation and closure of duplicate or inadequate facilities and
activities, reformatting, facility conversion and other integration costs,
write-downs of certain assets and severance and other costs. There can be
no assurance that the Company will not incur additional charges in
subsequent periods to reflect costs associated with its previous
acquisitions. In addition, the Company may make additional acquisitions in
the future, which may result in additional charges. 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, incurrence of 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
four key vendors, Iams, Nutro, Science Diet and Nature's Recipe, the first
three of which each supplied products that accounted for more than 10% and
less than 15% of the Company's sales in fiscal 1996. 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 would materially adversely affect the Company
if any of these manufacturers of premium pet food were to make their
products 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 affect on the Company.
Competition. The pet food and supply retailing industry is highly
competitive. The Company competes with a number of pet supply warehouse
stores, smaller pet store chains and independent pet stores. The Company
also competes with supermarkets and other mass merchants. 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, 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 other
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 sales were 18.5%,
16.5%, and 16.1% for fiscal 1994, 1995 and 1996, respectively. The Company
anticipates that its rate of comparable stores sales growth may be lower in
future periods than the growth rate previously experienced due to
maturation of the existing store base and the effects of opening additional
stores in existing markets. As a result of the Company's rapid expansion,
the Company expects its average store contribution and operating margins to
be lower in the near term due to the level of preopening expenses and the
lower anticipated sales volume of its immature stores. In addition,
certain costs, such as those related to occupancy, are expected to be
higher in some of the new geographic markets that the Company has recently
entered. Finally, due in part to recent acquisitions, 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 some seasonal
fluctuation. Historically, the Company has realized a higher portion of
its net sales during the month of December than during the others 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 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.
ITEM 2. PROPERTIES
The Company leases all of its store and warehouse locations. Original
lease terms for the Company's 336 stores generally range from five to ten
years, many of which contain renewal options. Leases on 123 stores expire
within the next three years, with leases on 78 of these stores containing
renewal options.
The table below shows the location and number of the Company's stores as
of February 1, 1997.
Traditional
Location Superstores Stores Total Stores
Arizona 11 -- 11
California 92 43 135
Colorado 4 -- 4
Connecticut 9 -- 9
District of Columbia 1 -- 1
Iowa 5 -- 5
Maryland 6 -- 6
Massachusetts 15 3 18
Minnesota 17 -- 17
New Hampshire 3 -- 3
New Jersey 12 -- 12
New York 13 1 14
Nevada 3 -- 3
North Dakota 2 -- 2
Oregon 8 2 10
Pennsylvania 9 -- 9
Rhode Island 1 -- 1
South Dakota 1 -- 1
Texas 37 -- 37
Virginia 7 1 8
Washington 15 8 23
Wisconsin 7 -- 7
278 58 336
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 190,000 square feet of space
in Arlington, Texas; Stockton, California; Portland, Oregon; Mansfield,
Massachusetts; and Dayton, New Jersey under leases which expire in August
1999, December 2000, January 2002, December 1998, and August 1997,
respectively. The Company's central distribution center, located in Rancho
Cucamonga, California, occupies approximately 200,000 square feet of space
under a lease which expires in May 1999. Each of the distribution center
leases contains a renewal option. The Company expects to add additional
capacity in fiscal 1997, at an estimated cost of approximately $3.0
million, to accommodate the Company's current expansion plans.
ITEM 3. LEGAL PROCEEDINGS
PETCO is not a party to any legal proceedings other than various claims
and lawsuits arising in the normal course of its business which, in the
opinion of the Company's management, are not individually or in the
aggregate material to its business.
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 February 1, 1997.
ITEM 4.1. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
Brian K. Devine 55 Chairman, President and Chief Executive Officer
Bruce C. Hall 52 Executive Vice President - Operations
Richard C. St. Peter 48 Executive Vice President - Administration and
Chief Financial Officer
Larry D. Asselin 49 Senior Vice President - Merchandising and
Distribution
James M. Myers 39 Senior Vice President - Finance
William M. Woodard 48 Senior Vice President - Store Operations
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 his entire career of 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
and most recently served as Senior Vice President of Operations.
RICHARD C. ST. PETER, Executive Vice President, Administration and Chief
Financial Officer, joined the Company in September 1990. From 1986 to
1990, Mr. St. Peter was Vice President and Chief Financial Officer at Stor,
a furniture retailer. From 1982 to 1986, Mr. St. Peter held various
positions at W.R. Grace's Home Centers, which operated 90 retail stores,
including Vice President and Chief Financial Officer. From 1980 to 1982,
Mr. St. Peter was Controller at Smart & Final, a 120-store grocery
retailer. From 1971 to 1980, Mr. St. Peter was employed by Alpha Beta, a
grocery retailer and a division of American Stores, where he held a number
of positions including Controller. Mr. St. Peter received a bachelor's
degree from California State University at Long Beach and an MBA from the
University of Southern California.
LARRY D. ASSELIN, Senior Vice President, Merchandising and Distribution,
joined the Company in April 1991. Prior to that time, beginning in 1987,
Mr. Asselin was Vice President and General Merchandising Manager at
Oshman's, a sporting goods retailer. From 1969 to 1987, Mr. Asselin was in
various positions including Division Merchandising Manager at Foley's
Department Stores, a division of Federated Department Stores. Mr. Asselin
received a marketing degree from the University of Arkansas.
JAMES M. MYERS, Senior Vice President, Finance joined the Company in May
1990. From 1994 to 1996, Mr. Myers served as Vice President, Finance and
prior to that as Vice President and Controller of the Company. From 1980
to 1990, Mr. Myers held various positions at the accounting firm KPMG Peat
Marwick 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, Store Operations, joined the
Company in January 1991. 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $.0001 par value (the "Common Stock"), is
quoted on The Nasdaq National Market under the symbol "PETC." The Common
Stock was initially offered to the public on March 17, 1994 at $10.33 per
share. 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. The table reflects the three-for-two split of
the Common Stock effected in the form of a stock dividend on April 15,
1996.
High Low
Fiscal 1995
First Quarter $15.33 $11.33
Second Quarter 15.67 12.33
Third Quarter 18.00 14.33
Fourth Quarter 22.83 16.33
Fiscal 1996
First Quarter $32.67 $20.50
Second Quarter 29.25 21.63
Third Quarter 29.00 21.50
Fourth Quarter 26.00 18.75
The number of stockholders of record of Common Stock on April 21, 1997
was 598.
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 share, store and square foot data)
The following table sets forth selected consolidated financial and
operating data for the Company for the five-year period ended February 1,
1997. The selected consolidated financial data presented below under the
caption "Income Statement Data" for the two-year period ended January 29,
1994 is derived from the unaudited consolidated financial statements of the
Company and its subsidiaries as restated to reflect the poolings of
interests during the year ended February 1, 1997. The selected
consolidated financial data presented below under the caption "Income
Statement Data" for the three-year period ended February 1, 1997 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 January 30, 1993, January 29,
1994 and January 28, 1995 is derived from the unaudited consolidated
financial statements of the Company and its subsidiaries as restated to
reflect the poolings of interests during the year ended February 1, 1997.
The selected consolidated financial data presented below under the caption
"Balance Sheet Data" as of February 3, 1996 and February 1, 1997 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 February 1, 1997 and for each of the years in the three-
year period ended February 1, 1997 and the independent auditors' report
thereon, included and incorporated by reference elsewhere in this Annual
Report.
Historical
Fiscal Year Ended x
Jan.30, Jan. 29, Jan. 28, Feb. 3, Feb. 1,
1993 1994 1995 1996 1997 x
Income Statement Data:
Net sales $136,339 $179,786 $ 243,839 $ 358,951 $ 500,036
Cost of sales and occupancy costs(1) 99,610 135,224 183,262 274,102 371,420
Gross profit 36,729 44,562 60,577 84,849 128,616
Selling, general and administrative expenses 31,590 41,854 55,672 78,751 107,228
Merger and nonrecurring charges -- -- -- 9,196 37,208
Operating income (loss) 5,139 2,708 4,905 (3,098) (15,820)
Loss on disposal of stores -- -- -- 3,500 --
Interest expense (income), net 4,394 5,070 170 (605) (387)
Earnings (loss) before income taxes 745 (2,362) 4,735 (5,993) (15,433)
Income taxes (benefit) (2) 97 42 1,969 (13,458) (3,748)
Net earnings (loss) $ 648 $ (2,404)$ 2,766 $ 7,465 $ (11,685)
Net earnings (loss) per share (3) $0.27 $0.51 $(0.65)
Weighted average common shares outstanding 10,293,005 14,715,615 17,882,376
Operating Data:
Superstores open end of period 37 76 132 207 278
Traditional stores open end of period 161 132 107 79 58
Total stores open end of period 198 208 239 286 336
Aggregate gross square footage 865,000 1,124,000 1,683,000 2,662,000 3,308,000
Average net sales per store (4) $689,000 $849,000 $1,054,000 $ 1,349,000 $ 1,656,000
Average net sales per gross square foot (5) $ 158 $ 166 $ 157 $ 173 $ 163
Percentage increase in comparable store net sales 2.1% 15.0% 18.5% 16.5% 16.1%
Balance Sheet Data:
Working capital $ 5,372 $ 4,399 $ 28,100 $ 24,908 $ 53,790
Total assets 38,505 50,391 106,055 188,602 280,348
Current portion of capital lease and
other obligations 5,889 5,059 1,102 2,897 4,575
Capital lease and other obligations, excluding
current portion 47,076 50,092 4,494 11,873 14,102
Total stockholders' equity (deficit) (31,094) (30,360) 63,567 117,697 184,624
______________
(1) Includes $4.3 million of charges from the write-down of fixed assets and related costs with respect to
the Company's central distribution facility in fiscal 1995.
(2) Includes $11.1 million benefit from previously unrecognized deferred tax assets in fiscal 1995.
(3) Due to differences in capital structure, the Company's net earnings per share information prior to
fiscal 1994 is not comparable and, accordingly, is not presented.
(4) Calculated using net sales divided by the number of stores open, weighted by the number of months stores
are open during the period.
(5) 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
The Company currently utilizes both superstore and traditional store
formats and follows a strategy of converting and expanding its store base
from a traditional store format to a superstore format. As a result of
this strategy, the Company has opened and acquired superstores, has
expanded and relocated traditional stores into superstores and has closed
underperforming stores. At February 1, 1997, the Company operated 336
stores, including 278 superstores, in 21 states and the District of
Columbia. PETCO's experience has indicated that its superstore format
achieves increased customer traffic, sales volume and profitability as
compared to its traditional store format. The Company seeks to open
superstores in high-traffic retail areas with ample parking, typically in
community shopping centers anchored by a large supermarket. PETCO has
increased its prototype superstore size to 15,000 square feet over the past
few years, and has expanded the merchandise assortment to more than 10,000
active SKUs of high quality pet-related products. This merchandise
assortment features higher-margin fish, reptiles, birds and other small
animals and related supplies. 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 1995 and 1996, the Company completed six and two
acquisitions of retailers of premium pet food and supplies, respectively,
which were accounted for as purchases.
In July 1996, the Company acquired a retailer that operated eight pet
food and supply stores under the trade name Pet Nosh located in New York,
New Jersey and Connecticut.
In October 1996, the Company acquired a retailer that operated four pet
food and supply stores under the trade name PETS USA located in Colorado.
In December 1996, the Company acquired a retailer that operated 32 pet
food and supply stores under the trade name Pet Food Warehouse located in
Minnesota, Iowa, Wisconsin, North Dakota and South Dakota.
These three acquisitions have been accounted for as poolings of
interests and accordingly, the consolidated financial statements for the
periods presented have been restated to include the accounts of Pet Nosh,
PETS USA and Pet Food Warehouse.
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. 28, Feb. 3, Feb. 1,
1995 1996 1997 x
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy costs 75.2 76.4 74.3
Gross profit 24.8 23.6 25.7
Selling, general and administrative expenses 22.8 21.9 21.4
Merger and nonrecurring charges -- 2.6 7.5
Operating income (loss) 2.0 (0.9) (3.2)
Loss on disposal of stores -- 1.0 --
Interest expense (income), net 0.1 (0.2) (0.1)
Earnings (loss) before income taxes 1.9 (1.7) (3.1)
Income taxes (benefit) 0.8 (3.8) (0.8)
Net earnings (loss) 1.1 2.1 (2.3)
Fiscal Year Ended February 1, 1997 Compared to Fiscal Year Ended February
3, 1996
Net Sales increased 39.3% to $500.0 million in fiscal 1996 from $359.0
million in fiscal 1995. The increase in net sales in fiscal 1996 resulted
primarily from the addition of 82 superstores, including the conversion of
24 traditional stores into superstores, partially offset by the closing of
eight stores, and a comparable store net sales increase of 16.1%. The
comparable store net sales increase was attributable to maturing
superstores, increased advertising and expanded merchandise assortments in
existing stores. The net increase in the Company's store base accounted
for approximately $99.9 million, or 70.9% of the net sales increase, and
$41.1 million, or 29.1% of the net sales increase, was attributable to the
increase in comparable store net sales.
Gross profit, defined as net sales less the cost of sales including
store occupancy costs, increased $43.8 million, or 51.7%, to $128.6 million
in fiscal 1996 from $84.8 million in fiscal 1995. Gross profit as a
percentage of net sales increased to 25.7% in fiscal 1996 from 23.6% in
fiscal 1995. This increase reflects a better sales mix, increased
occupancy leverage and lowered distribution expenses related to the more
efficient operation of the Company's central distribution facility during
the current period. In addition, charges of $4.3 million were recorded
during the third quarter of fiscal 1995 from the write-down of fixed assets
and related costs with respect to the Company's central distribution
facility. Excluding these charges, gross profit as a percentage of net
sales in fiscal 1995 would have been 24.8%.
Selling, general and administrative expenses increased $28.4 million, or
36.0%, to $107.2 million in fiscal 1996 from $78.8 million in fiscal 1995.
Selling, general and administrative expenses increased primarily as a
result of higher personnel and related costs associated with new store
openings. As a percentage of net sales, these expenses decreased to 21.4%
in fiscal 1996 from 21.9% in fiscal 1995 due to net sales increasing at a
greater rate than related expenses.
Merger and nonrecurring charges of $9.2 million were recorded in fiscal
1995 following acquisition activities. These charges were primarily
associated with lease cancellations and closure of traditional stores
located in the same markets as acquired stores, write-downs of certain
assets, and the conversion and integration of certain acquired stores. In
fiscal 1996, merger and nonrecurring charges of $37.2 million were recorded
following acquisition activities. These charges consisted of $7.2 million
of transaction costs, $22.2 million of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $3.8 million of reformatting, facility conversion and other
integration costs and $4.0 million of severance and other costs. The
Company expects to incur an additional $6.0-$8.0 million in merger and
nonrecurring charges for continuing integration efforts in fiscal 1997 from
reformatting, facility conversion costs and other integration costs.
Operating loss of $15.8 million was incurred in fiscal 1996 compared to
operating loss of $3.1 million in fiscal 1995. Excluding merger and
nonrecurring charges and the $4.3 million write-down of fixed assets in
1995, operating income would have increased to 4.3% of net sales in fiscal
1996 from 2.9% in fiscal 1995.
Net interest income was $0.4 million in fiscal 1996 compared to net
interest income of $0.6 million in fiscal 1995. Interest income was
produced by the short-term investment of the proceeds from public stock
offerings.
Income tax benefit was $3.7 million in fiscal 1996 compared to income
tax benefit of $13.5 million in fiscal 1995. In fiscal 1995, an income tax
benefit of $11.1 million from previously unrecognized deferred tax assets
was recognized.
Net loss was $11.7 million in fiscal 1996 compared to net earnings of
$7.5 million in fiscal 1995. Excluding merger and nonrecurring charges,
the $4.3 million write-down of fixed assets, the $3.5 million loss on
disposal of stores, and their related tax benefits, and recognition of
$11.1 million from previously unrecognized deferred tax assets in fiscal
1995, net earnings for the fiscal 1996 would have been $13.2 million, or
$0.74 per share, compared to $6.4 million, or $0.44 per share in fiscal
1995.
Fiscal Year Ended February 3, 1996 Compared to Fiscal Year Ended January
28, 1995
Net Sales increased 47.3% to $359.0 million in fiscal 1995 from $243.8
million in fiscal 1994. The increase in net sales in fiscal 1995 resulted
primarily from the addition of 79 superstores, including the conversion of
23 traditional stores into superstores, partially offset by the closing of
13 stores, and a comparable store net sales increase of 16.5%. The
comparable store net sales increase was attributable to maturing
superstores, increased advertising and expanded merchandise assortments in
existing stores. The net increase in the Company's store base accounted
for approximately $84.7 million, or 73.5% of the net sales increase, and
$30.5 million, or 26.5% of the net sales increase, was attributable to the
increase in comparable store net sales.
Gross profit increased $24.2 million, or 39.9%, to $84.8 million in
fiscal 1995 from $60.6 million in fiscal 1994. Gross profit as a
percentage of net sales decreased to 23.6% in fiscal 1995 from 24.8% in
fiscal 1994. This decrease resulted primarily from $4.3 million in charges
reflected in the third quarter of fiscal 1995 from the write-down of fixed
assets and related costs with respect to the Company's central distribution
facility. These charges resulted from the Company's decision to replace
certain hardware and software in this facility which did not produce the
planned benefits. Excluding these charges, gross profit as a percentage of
net sales in fiscal 1995 would have remained constant with fiscal 1994 at
24.8%.
Selling, general and administrative expenses increased $23.1 million, or
41.5%, to $78.8 million in fiscal 1995 from $55.7 million in fiscal 1994.
Selling, general and administrative expenses increased primarily as a
result of higher personnel and related costs associated with new store
openings. As a percentage of net sales, these expenses decreased to 21.9%
in fiscal 1995 from 22.8% in fiscal 1994 due to net sales increasing at a
greater rate than related expenses.
Merger and nonrecurring charges of $9.2 million were recorded in fiscal
1995 following acquisition activities. These charges were primarily
associated with lease cancellations and closure of traditional stores
located in the same markets as acquired stores, write-downs of certain
assets, and the conversion and integration of certain acquired stores.
Operating loss of $3.1 million was incurred in fiscal 1995 compared to
operating income of $4.9 million in fiscal 1994. Excluding the merger and
nonrecurring charges and the $4.3 million write-down of fixed assets in
1995, operating income would have increased to 2.9% of net sales in fiscal
1995 from 2.0% in fiscal 1994.
Loss on disposal of stores of $3.5 million was recognized in fiscal 1995
on the sale of eight Pet Food Warehouse stores in Michigan and Ohio.
Net interest income was $0.6 million in fiscal 1995 compared to net
interest expense of $0.2 million in fiscal 1994. Interest income was
produced by the short-term investment of the proceeds from public stock
offerings.
Income tax benefit was $13.5 million in fiscal 1995, due primarily to
recognition of an income tax benefit of $11.1 million from previously
unrecognized deferred tax assets in fiscal 1995, compared to income taxes
of $2.0 million in fiscal 1994.
Net earnings increased to $7.5 million in fiscal 1995 from $2.8 million
in fiscal 1994. Excluding merger and nonrecurring charges, the $4.3
million write-down of fixed assets, the $3.5 million loss on disposal of
stores, and their related tax benefits, and the recognition of $11.1
million from previously unrecognized deferred tax assets in fiscal 1995,
net earnings for fiscal 1995 would have been $6.4 million, or $0.44 per
share, compared to $2.8 million, or $0.27 per share in the prior year.
Quarterly Data
The following tables set forth the unaudited quarterly results of
operations for fiscal 1995 and fiscal 1996. 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 x
Apr. 29, Jul. 29, Oct. 28, Feb. 3,
Fiscal 1995 1995 1995 1995 1996 x
Net sales $ 73,391 $ 77,820 $ 87,669 $120,071
Gross profit 16,975 18,808 16,944 32,122
Operating income (loss) 796 1,253 (11,745) 6,598
Net earnings 306 885 4,300 1,974
Net earnings per share $ 0.03 $ 0.06 $ 0.27 $ 0.13
Stores open at end of period 240 246 258 286
Aggregate gross square footage 1,763,000 1,909,000 2,206,000 2,662,000
Percentage increase in comparable store net sales 16.3% 13.7% 14.6% 20.4%
Fiscal Quarter Ended x
May 4, Aug. 3, Nov. 2, Feb. 1,
Fiscal 1996 1996 1996 1996 1997 x
Net sales $111,102 $120,585 $125,812 $142,537
Gross profit 27,164 31,227 32,970 37,255
Operating income (loss) 2,726 (10,320) 2,177 (10,403)
Net earnings (loss) 1,533 (6,739) 1,278 (7,757)
Net earnings (loss) per share $ 0.10 $ (0.36) $ 0.07 $ (0.42)
Stores open at end of period 299 301 315 336
Aggregate gross square footage 2,974,000 3,063,000 3,341,000 3,808,000
Percentage increase in comparable store net sales 18.2% 18.3% 17.0% 12.6%
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 February 1, 1997, total assets were $280.3 million, $120.6 million of
which were current assets. Net cash provided by (used in) operating
activities was $4.9 million, $11.1 million, and $(2.0) million for fiscal
1994, 1995 and 1996, 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 acquire stores,
purchase fixed assets for new and converted 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.
Cash used in investing activities was $26.5 million, $58.6 million and
$45.6 million for fiscal 1994, 1995 and 1996, respectively.
The Company also finances some of its purchases of equipment and
fixtures through capital lease and other obligations. Purchases of $3.4
million, $9.6 million and $7.7 million of fixed assets were financed in
this manner during fiscal 1994, 1995 and 1996, 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 1994, the Company acquired a retailer of premium pet food
and supplies in a purchase transaction with a fair market value of assets
acquired of $5.3 million and assumed liabilities of $1.6 million, with $3.7
million of net cash invested in the acquisition. During fiscal 1995, the
Company completed six acquisitions of retailers of premium pet food and
supplies in purchase transactions. The aggregate fair market value of
assets acquired was $38.8 million and assumed liabilities were $8.4
million, with $30.4 million of net cash invested in the acquisition of
these businesses. During fiscal 1996, the Company completed two
acquisitions of retailers of premium pet food and supplies in purchase
transactions. The aggregate fair market 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.
The Company's primary long-term capital requirement is funding for the
opening or acquisition of superstores and conversion of traditional stores
into superstores. Cash flows provided by financing activities were $36.3
million, $46.4 million and $74.8 million in fiscal 1994, 1995 and 1996,
respectively. In fiscal 1994, net proceeds of $58.2 million from public
offerings of common stock were used to repay $20.0 million of subordinated
debt and $5.4 million outstanding under a revolving credit facility. In
fiscal 1995 and 1996, net proceeds of $46.8 and $78.6 million,
respectively, from public offerings were used to finance the acquisition of
related businesses and fund the Company's expansion program and working
capital requirements.
The Company has a Revolving Credit Facility with a commitment of up to
$40.0 million that expires December 6, 1998. Borrowings under this
facility are unsecured and bear interest, at the Company's option, at
either the bank's reference rate or LIBOR plus 0.375% based on the
Company's leverage ratio at February 1, 1997. The Revolving Credit
Facility contains certain affirmative and negative covenants related to
debt, interest and fixed charges coverage and consolidated net worth.
As of February 1, 1997, the Company had available net operating loss
carryforwards of $14.9 million for federal income tax purposes, which begin
expiring in 2004, and $8.9 million for state income tax purposes, which
begin expiring in 1997.
The Company anticipates that funds generated by operations, funds
available under the Revolving 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 1997.
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 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 1997 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 1997 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 1997 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 1997 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 Auditor's Reports 25
Consolidated Balance Sheets 27
Consolidated Statements of Operations 28
Consolidated Statements of Stockholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 10, 1997, regarding the merger of the Company with
Pet Food Warehouse, Inc. (includes pro forma financial information).
(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 February 3, 1996 and
February 1, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended February 1, 1997. 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 did not audit the financial statements
of Pet Food Warehouse, Inc., which statements reflect total assets
constituting 11 percent at February 3, 1996, and total revenues
constituting 15 percent and 17 percent for the years ended January 28, 1995
and February 3, 1996, respectively, of the related consolidated totals.
Those financial statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Pet Food Warehouse, Inc., is based solely on the report of the
other auditors.
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, based on our audits and the report of the other
auditors, 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 February 3, 1996 and February 1,
1997, and the results of their operations and their cash flows for each of
the years in the three-year period ended February 1, 1997 in conformity
with generally accepted accounting principles.
San Diego, California KPMG Peat Marwick LLP
March 24, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pet Food Warehouse, Inc.:
We have audited the balance sheet of Pet Food Warehouse, Inc. (a
Minnesota corporation) as of February 3, 1996 and the related statements of
operations, changes in stockholders' equity and cash flows for the years
ended January 28, 1995 and February 3, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these 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 reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Pet Food
Warehouse, Inc. as of February 3, 1996 and the results of its operations
and its cash flows for the years ended January 28, 1995 and February 3,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 15, 1996
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
ASSETS
February 3, February 1,
1996 1997
Current assets:
Cash and cash equivalents $ 15,740 $ 42,932
Receivables 5,224 7,212
Inventories 52,075 68,498
Other 1,435 1,976
Total current assets 74,474 120,618
Fixed assets (note 4):
Equipment 21,449 38,942
Furniture and fixtures 26,639 27,533
Leasehold improvements 40,652 60,356
88,740 126,831
Less accumulated depreciation and amortization 22,212 30,457
66,528 96,374
Goodwill 31,767 42,408
Deferred tax assets (note 6) 14,194 19,071
Other assets 1,639 1,877
$ 188,602 $ 280,348
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,888 $ 36,090
Accrued expenses 13,923 17,067
Accrued salaries and employee benefits 5,858 9,096
Revolving credit facility (note 3) -- --
Current portion of capital lease and other
obligations (note 4) 2,897 4,575
Total current liabilities 49,566 66,828
Capital lease and other obligations, excluding current
portion (note 4) 11,873 14,102
Accrued store closing costs 4,804 8,691
Deferred rent 4,662 6,103
Stockholders' equity (note 5):
Preferred stock, $.0001 par value, 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common Stock, $.0001 par value, 100,000,000 shares
authorized, 15,643,534 and 18,609,978 shares issued
and outstanding, respectively 1 2
Additional paid-in capital 157,386 236,766
Accumulated deficit (39,690) (52,144)
Total stockholders' equity 117,697 184,624
Commitments and contingencies (notes 3, 4, 5, 7 and 10)
x
$ 188,602 $ 280,348
See accompanying notes to consolidated financial statements
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Net sales $ 243,839 $ 358,951 $ 500,036
Cost of sales and occupancy costs 183,262 274,102 371,420
Gross profit 60,577 84,849 128,616
Selling, general and administrative expenses 55,672 78,751 107,228
Merger and nonrecurring charges (note 2) -- 9,196 37,208
Operating income (loss) 4,905 (3,098) (15,820)
Loss on disposal of stores (note 7) -- 3,500 --
Interest income (1,037) (1,513) (2,175)
Interest expense 1,207 908 1,788
Earnings (loss) before income taxes 4,735 (5,993) (15,433)
Income taxes (benefit) (note 6) 1,969 (13,458) (3,748)
Net earnings (loss) $ 2,766 $ 7,465 $ (11,685)
Net earnings (loss) per common and common
equivalent share $ 0.27 $ 0.51 $ (0.65)
Weighted average number of common and common
equivalent shares outstanding 10,293,005 14,715,615 17,882,376
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Senior Junior Additional Total
Preferred Stock Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity x
Balances at
January 29, 1994 53,300 $5,330 108,378 $3,000 8,143 $ -- $ 2,903 $ (47,762) $(36,529)
Restatement for
poolings of
interests (note 2) -- -- -- -- 1,934,305 -- 7,635 (1,466) 6,169
Balances at
January 29, 1994 53,300 $5,330 108,378 $3,000 1,942,448 $ -- $ 10,538 $ (49,228) $(30,360)
Issuance of stock
for services 200 20 -- -- -- -- -- -- 20
Exchange of sub-
ordinated debt and
preferred stock
for Common Stock (53,500) (5,350)(108,378) (3,000) 4,607,144 -- 39,771 -- 31,421
Sale of Common Stock -- -- -- -- 5,255,657 1 58,243 -- 58,244
Exercise of warrants -- -- -- -- 209,686 -- 1,757 -- 1,757
Exercise of options -- -- -- -- 4,658 -- 89 -- 89
Distributions to
shareholders -- -- -- -- -- -- -- (370) (370)
Net earnings -- -- -- -- -- -- -- 2,766 2,766
Balances at
January 28, 1995 -- -- -- -- 12,019,593 $ 1 $110,398 $ (46,832) $ 63,567
Sale of Common Stock -- -- -- -- 3,618,108 -- 46,936 -- 46,936
Exercise of options -- -- -- -- 5,833 -- 60 -- 60
Distributions to
shareholders -- -- -- -- -- -- (8) (323) (331)
Net earnings -- -- -- -- -- -- -- 7,465 7,465
Balances at
February 3, 1996 -- -- -- -- 15,643,534 $ 1 $157,386 $ (39,690) $117,697
Issuance of stock
for services -- -- -- -- 897 -- 21 -- 21
Sale of Common Stock -- -- -- -- 2,896,966 1 78,694 -- 78,695
Cash in lieu of
fractional shares -- -- -- -- (169) -- (5) -- (5)
Exercise of options -- -- -- -- 68,750 -- 670 -- 670
Distributions to
shareholders -- -- -- -- -- -- -- (769) (769)
Net loss -- -- -- -- -- -- -- (11,685) (11,685)
Balances at
February 1, 1997 -- -- -- -- 18,609,978 $ 2 $236,766 $ (52,144) $184,624
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Cash flows from operating activities:
Net earnings (loss) $ 2,766 $ 7,465 $(11,685)
Depreciation and amortization 5,361 9,194 15,359
Deferred taxes (623) (14,888) (4,877)
Loss on retirement of fixed assets 285 3,603 4,712
Loss on disposal of stores -- 3,500 --
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (1,946) (1,138) (1,970)
Inventories (14,016) (10,366) (14,380)
Other assets 363 192 (2,626)
Accounts payable 5,938 6,306 3,174
Accrued expenses 4,900 409 1,759
Accrued salaries and employee benefits 1,128 719 3,238
Accrued store closing costs (662) 5,179 3,887
Deferred rent 1,380 937 1,441
Net cash provided by (used in) operating
activities 4,874 11,112 (1,968)
Cash flows from investing activities:
Additions to fixed assets (22,248) (30,872) (40,220)
Net cash invested in acquisitions of businesses (3,705) (30,373) (7,021)
Proceeds from sale of fixed assets -- -- 1,626
Proceeds from disposal of stores -- 2,426 --
Other (512) 224 --
Net cash used in investing activities (26,465) (58,595) (45,615)
Cash flows from financing activities:
Net repayments under revolving agreements (3,271) -- --
Borrowings under other obligations 860 1,178 --
Repayment of capital lease and other obligations (1,042) (1,421) (3,837)
Repayment of subordinated debt (20,000) -- --
Proceeds from the issuance of common stock 60,110 46,996 79,381
Distributions to shareholders (370) (331) (769)
Net cash provided by financing activities 36,287 46,422 74,775
Net increase (decrease) in cash and cash equivalents 14,696 (1,061) 27,192
Cash and cash equivalents at beginning of year 2,105 16,801 15,740
Cash and cash equivalents at end of period $ 16,801 $ 15,740 $ 42,932
Supplemental cash flow disclosures:
Interest paid on debt $ 389 $ 834 $ 1,741
Income taxes paid $ 465 $ 1,436 $ 1,854
Supplemental disclosure of noncash financing
activities:
Additions to capital leases $ 3,411 $ 9,642 $ 7,744
Subordinated debt, and related accrued interest, and all preferred stock with a combined
carrying value of $39,771 were exchanged for Common Stock during the year ended January
28, 1995 (note 5).
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except 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 21 states and the District of Columbia.
(b) Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
(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. The years ended January 28,
1995 and February 1, 1997 consisted of 52 weeks, and the year ended
February 3, 1996 consisted of 53 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) Use of Estimates:
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 at
the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period.
(e) Cash Equivalents:
The Company considers all liquid investments with maturities of three
months or less to be cash equivalents.
(f) Inventories:
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
(g) Pre-opening Costs:
Costs incurred in connection with opening new stores are expensed as
incurred.
(h) 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 ten years.
(i) Goodwill:
Goodwill represents the excess of the cost over the fair market value of
net assets acquired by the Company. Goodwill is amortized straight-line
over fifteen years. The Company continually reviews goodwill to assess
recoverability from future undiscounted cash flows. Accumulated
amortization at February 3, 1996 and February 1, 1997 was $844 and $2,579,
respectively.
(j) Other Assets:
Other assets consist primarily of lease deposits, non-compete agreements
and debt issuance costs. Non-compete agreements are amortized straight-
line 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 February 3, 1996
and February 1, 1997 was $66 and $114, respectively.
(k) Store Closing Costs:
Management continually reviews the ability of stores to provide positive
contributions to the Company's results. Costs associated with closing
stores, consisting primarily of lease obligations and provisions to reduce
assets to net realizable value are charged to operations upon the decision
to close a store.
(l) 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.
(m) 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 capital leases and other obligations approximate fair
value as the interest rates are substantially similar to rates which could
be obtained currently for similar instruments.
(n) Impairment of Long-Lived Assets:
The Company periodically assesses the recoverability of assets based on
its expectations of future profitability and undiscounted cash flow of the
related operations, and when circumstances dictate, adjusts the carrying
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.
(o) Stock Options:
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations
under which compensation expense would be recorded on the date of the grant
only if the current market price of the underlying stock exceeded the
exercise price. In 1996, the Company elected to adopt the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
(p) Net Earnings Per Common and Common Equivalent Share:
Net earnings per common and common equivalent share were computed using
the weighted average number of common and common equivalent shares (if
dilutive) outstanding during the period.
(q) Reclassifications:
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
2. Business Combinations
In July 1996, the Company acquired all of the outstanding equity
securities of a retailer that operated stores under the trade name Pet Nosh
in exchange for 645,553 shares of common stock. Pet Nosh operated eight
pet food and supply stores located in New York, New Jersey and Connecticut.
In October 1996, the Company acquired all of the outstanding equity
securities of a retailer that operated stores under the trade name PETS USA
in exchange for 231,153 shares of common stock. PETS USA operated four pet
food and supply stores located in Colorado.
Pet Nosh and PETS USA are collectively referred to as the "Other Pooled
Companies."
In December 1996, the Company acquired all of the outstanding equity
securities of a retailer that operated stores under the trade name Pet Food
Warehouse ("Pet Food Warehouse") in exchange for 2,052,190 shares of common
stock. Pet Food Warehouse operated 32 pet food and supply stores located
in Minnesota, Iowa, Wisconsin, North Dakota and South Dakota.
The above transactions have been accounted for as poolings of interests
and accordingly, the consolidated financial statements for the periods
presented have been restated to include the accounts of Pet Food Warehouse
and the Other Pooled Companies. The Other Pooled Companies fiscal year
ends have been changed from December 31 to the Saturday closest to
January 31 to conform to the Company's year end. The effect of the change
in fiscal year ends was not material to the results of operations.
Net sales and net earnings (loss) of the separate companies for the
periods preceding the acquisitions were as follows:
Net Earnings
Net Sales (Loss) x
Year ended January 28, 1995:
PETCO, as previously reported $ 188,578 $ 4,520
Pet Food Warehouse 36,285 (2,194)
Other Pooled Companies 18,976 440
Combined $ 243,839 $ 2,766
Year ended February 3, 1996:
PETCO, as previously reported $ 270,681 $ 8,413
Pet Food Warehouse (1) 61,095 (1,419)
Other Pooled Companies 27,175 471
Combined $ 358,951 $ 7,465
Year ended February 1, 1997:
PETCO $ 423,454 $ (12,376)
Pet Food Warehouse 63,876 644
Other Pooled Companies 12,706 47
Combined $ 500,036 $ (11,685)
_______________
(1) In connection with the pooling of Pet Food Warehouse, an additional $3,674
of deferred tax assets were recognized.
During fiscal 1994, the Company acquired a retailer of premium pet food
and supplies in a purchase transaction with the fair market value of assets
acquired of $5,274 and assumed liabilities of $1,569 with $3,705 of net
cash invested in the acquisition. The excess of the cost over the fair
market value of net assets acquired was $4,789, which has been recorded as
goodwill and is being amortized over fifteen years.
During fiscal 1995, the Company completed six acquisitions of retailers
of premium pet food and supplies. All of these acquisitions were accounted
for as purchases. The aggregate fair market value of assets acquired was
$38,756 and assumed liabilities were $8,383 with $30,373 of net cash
invested in the acquisition of these businesses. The excess of the
aggregate cost over the fair market value of net assets acquired was
$28,905 which has been recorded as goodwill and is being amortized over
fifteen years.
During fiscal 1996, the Company completed two acquisitions of retailers
of premium pet food and supplies in transactions accounted for as
purchases. The aggregate fair market value of assets acquired was $14,433
and assumed liabilities were $1,384 with $13,049 of net cash invested in
the acquisition of these businesses of which $6,028 was expended subsequent
to fiscal year end. The excess of the aggregate cost over the fair market
value of net assets acquired was $11,293 which has been 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 following summary presents pro forma consolidated results of
operations as if the purchase acquisitions of fiscal 1994 and 1995 occurred
at the beginning of fiscal 1994 and 1995, and include adjustments for
estimated amounts of goodwill amortization, reductions in selling, general
and administrative and interest expense and income tax effects. The
purchase acquisitions during fiscal 1996 did not materially affect results
of operations and accordingly, pro forma results are not presented for
fiscal 1996.
The pro forma results are for illustrative purposes only and do not
purport to be indicative of the actual results which would have occurred
had the transactions been completed as of the beginning of the periods, nor
are they indicative of results of operations which may occur in the future.
Year Ended Year Ended
January 28, 1995 February 3, 1996
(unaudited)
Net sales $ 300,509 $ 400,763
Net earnings 2,935 7,316
Net earnings per common share $ 0.29 $ 0.50
In fiscal 1995, merger and nonrecurring charges of $9,196 were recorded
following acquisition activities. These charges were primarily associated
with lease cancellations and closure of traditional stores located in the
same markets as acquired stores, write-downs of certain assets, and the
conversion and integration of certain acquired stores.
In fiscal 1996, merger and nonrecurring charges of $37,208 were recorded
following acquisition activities. These charges consisted of $7,182 of
transaction costs, $22,224 of costs attributable to lease cancellations and
closure of duplicate or inadequate facilities and activities, $3,835 of
reformatting, facility conversion and other integration costs and $3,967 of
severance and other costs.
Distributions to shareholders reflected in the accompanying Consolidated
Statement of Stockholders' Equity reflect activities of the Other Pooled
Companies.
3. Revolving Credit Facility
The Company has a Revolving Credit Facility with a commitment of up to
$40,000 that expires December 6, 1998. Borrowings under the Revolving
Credit Facility are unsecured and bear interest, at the Company's option,
at either the bank's reference rate or LIBOR plus 0.375% based on the
Company's leverage ratio at February 1, 1997.
At February 1, 1997, $573 of letters of credit secured insurance
programs. No amounts were drawn on the letters of credit at February 1,
1997.
4. Lease Commitments and Other Obligations
The Company finances certain fixed assets under capital leases. There
are approximately $15,400 and $23,200 in fixed assets financed through
capital leases at February 3, 1996 and February 1, 1997, respectively.
Accumulated amortization related to these financed assets was approximately
$2,200 and $4,600 at February 3, 1996 and February 1, 1997, respectively.
The Company leases warehouse and store facilities under operating
leases. These operating leases generally have terms from three to ten
years. Certain stores leases include additional contingent rental payments
ranging from 2% to 6% of store revenues above defined levels. Contingent
rentals incurred during fiscal years 1994, 1995, and 1996 were $31, $61 and
$24, respectively.
At February 1, 1997, the present value of future minimum payments for
capital lease and other obligations, and minimum lease payments under
noncancellable operating leases follows:
Capital Leases
and Other Operating
Years Obligations Leases x
1997 $ 5,847 $ 54,986
1998 5,167 52,580
1999 4,328 49,265
2000 3,012 47,306
2001 1,384 45,639
Thereafter 2,809 238,110
Total minimum payments 22,547 $487,886
Less amount representing interest 3,870
Present value of net minimum capital
lease and other obligations payments 18,677
Less current portion of capital lease
and other obligations 4,575
Capital lease and other obligations $14,102
Rent expense under operating leases for fiscal years 1994, 1995, and
1996 was approximately $24,305, $33,950, and $48,446, respectively.
5. Equity
(a) Senior Preferred Stock:
The Company designated 60,000 shares of the authorized 2,000,000 shares
of preferred stock as Senior Preferred Stock with a par value of $.0001 and
liquidation value of $100 per share.
Concurrent with the initial public offering in March 1994, all
outstanding shares of the Senior Preferred Stock were exchanged for Common
Stock. In March 1996, the Board of Directors authorized the removal of the
designation of Senior Preferred Stock.
(b) Junior Preferred Stock:
The Company designated 108,378 shares of the authorized 2,000,000 shares
of preferred stock as Junior Preferred Stock with a par value of $.0001 and
liquidation value of $100 per share.
Concurrent with the initial public offering in March 1994, all
outstanding shares of Junior Preferred Stock were exchanged for Common
Stock. In March 1996, the Board of Directors authorized the removal of the
designation of Junior Preferred Stock.
(c) Common Stock:
In March 1996, the Board of Directors approved a three-for-two stock
split of the Common Stock effective on April 15, 1996. All references to
common share information in the accompanying consolidated financial
statements and notes reflect recognition of these stock splits. In June
1996, the Company's stockholders approved an increase in the number of
authorized shares to 100,000,000.
In 1994, the Company completed public offerings of 5,254,135 common
shares with net proceeds of $58,216. Concurrent with a public offering,
remaining subordinated debt and related accrued interest and all preferred
stock with a combined carrying value of $39,771 were exchanged for
4,607,144 shares of Common Stock.
In 1995, the Company completed a public offering of 5,422,500 common
shares. The Company sold 3,615,000 common shares and 1,807,500 common
shares were sold by selling stockholders. Net proceeds to the Company from
this offering were $46,807.
In 1996, the Company completed a public offering of 5,335,000 common
shares. The Company sold 2,892,758 common shares and 2,442,242 common
shares were sold by selling stockholders. Net proceeds to the Company from
this offering were $78,634.
In 1994, 1995 and 1996, Pet Food Warehouse sold 1,522, 3,108, and 4,208
common shares, respectively, under its employee stock purchase plan which
has been terminated.
(d) Stock Options:
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 under this plan were adjusted to Company common shares based
on the common share conversion rate per the merger agreement with Pet Food
Warehouse. No future grants will be made under this plan.
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
stock options to directors with respect to shares of Common Stock. 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.
Information regarding the stock option plans follows:
1993 Company Plan 1994 Company Plan x
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price x
Outstanding at
January 29, 1994 60,581 $ 8.05-$42.27 $ 29.11 -- -- --
Granted 55,410 $18.40-$27.05 $ 19.11 563,409 $ 8.83-$10.33 $ 10.32
Exercised (4,658) $ 19.14 $ 19.14 -- -- --
Cancelled (4,830) $23.05-$32.48 $ 29.11 (14,964) $ 8.83-$10.33 $ 10.18
Outstanding at
January 28, 1995 106,503 $ 8.05-$42.27 $ 24.31 548,445 $ 10.33 $ 10.33
Granted 166,846 $14.95-$24.75 $ 18.08 155,505 $12.33-$18.33 $ 12.57
Exercised -- -- -- (5,833) $ 10.33 $ 10.33
Cancelled (64,248) $16.72-$27.23 $ 24.31 (7,680) $10.33-$12.33 $ 11.49
Outstanding at
February 3, 1996 209,101 $ 8.05-$42.27 $ 19.73 690,437 $10.33-$18.33 $ 12.58
Granted 40,931 $18.40-$23.58 $ 18.51 333,068 $ 23.17 $ 23.17
Exercised (190) $16.68-$19.12 $ 17.50 (49,926) $ 10.33 $ 10.33
Cancelled (41,136) $ 8.05-$23.58 $ 19.13 (47,473) $10.33-$23.17 $ 20.52
Outstanding at
February 1, 1997 208,706 $14.95-$42.27 $ 19.52 926,106 $10.33-$23.17 $ 14.77
Exercisable at
January 28, 1995 18,415 $ 8.05-$42.27 $ 26.32 245,175 $ 10.33 $ 10.33
Exercisable at
February 3, 1996 64,319 $ 8.05-$42.27 $ 23.69 336,392 $ 10.33 $ 10.33
Exercisable at
February 1, 1997 181,708 $14.95-$42.27 $ 19.40 382,731 $ 10.33 $ 10.33
Available for grant at
February 1, 1997 -- 678,657
Directors Plan x
Weighted
Average
Option Price Exercise
Shares Per Share Price x
Outstanding at
January 29, 1994 -- -- --
Granted 4,500 $ 10.33 $ 10.33
Exercised -- -- --
Cancelled -- -- --
Outstanding at
January 28, 1995 4,500 $ 10.33 $ 10.33
Granted 6,000 $ 12.33 $ 12.33
Exercised -- -- --
Cancelled -- -- --
Outstanding at
February 3, 1996 10,500 $10.33-$12.33 $ 11.47
Granted 3,000 $ 31.67 $ 31.67
Exercised -- -- --
Cancelled -- -- --
Outstanding at
February 1, 1997 13,500 $10.33-$31.67 $ 15.96
Exercisable at
January 28, 1995 4,500 $ 10.33 $ 10.33
Exercisable at
February 3, 1996 10,500 $10.33-$12.33 $ 11.47
Exercisable at
February 1, 1997 13,500 $10.33-$31.67 $ 15.96
Available for grant at
February 1, 1997 55,347
Options were exercised under a Pet Food Warehouse plan not assumed by
the Company for an additional 18,634 common shares in 1996.
In March 1997, options for 598,660 shares were granted under the 1994
Company Plan which vest in March 2000 and are exercisable at $22.50 per
share, and options for 3,000 shares were granted under the Directors Plan
that were immediately exercisable at $22.50 per share.
(e) Accounting for Stock Options:
The Company accounts for stock option plans under Accounting Principles
Board 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 Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
Company's net earnings and earnings per share would have been reduced by
approximately $740 or $0.05 per share during 1995, and the Company's net
loss and loss per share would have been increased by $1,836, or $0.10 per
share, during 1996. The pro forma change in net earnings (loss) reflects
only options granted in 1995 and 1996. 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 1995 and 1996 were estimated as $9.43 and $12.25 on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, volatility of 66.0% and 52.7%,
risk-free interest rate of 6.5% for both years, 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 February 1, 1997:
Options Outstanding Options Exercisable x
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price x
$10-$20 767,434 6.4 $11.49 545,094 $11.72
$20-$30 375,704 9.0 $23.15 27,827 $23.25
$30-$45 5,174 8.2 $34.95 5,018 $35.02
1,148,312 577,939
(f) Warrants:
In connection with Pet Food Warehouse's public offering completed in
1994, the Company received $1,757 from the exercise of warrants with
respect to 209,686 common shares. In addition, underwriters received, for
nominal consideration, warrants to purchase 21,738 common shares at $26.56
per share which are exercisable through February 24, 1999.
6. Income Taxes
Income taxes (benefit) consists of the following:
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Current:
Federal $2,140 $ 1,090 $ 958
State 452 340 171
2,592 1,430 1,129
Deferred:
Federal (520) (14,486) (4,934)
State (103) (402) 57
(623) (14,888) (4,877)
Income taxes (benefit) $1,969 $(13,458) $ (3,748)
A reconciliation of income taxes at the federal statutory rate of 34%
with the provision for income taxes (benefit) follows:
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Income taxes at federal
statutory rate $1,610 $ (2,038) $ (5,247)
Non-deductible expenses -- -- 1,316
Restructured debt carrying
value adjustment (55) -- --
State taxes, net of federal
tax benefit 230 (62) 150
Change in valuation
allowance 914 (11,809) --
Other (730) 451 33
$1,969 $(13,458) $ (3,748)
The sources of significant temporary differences which gave rise to the
deferred tax provision and their effects follow:
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Inventory $ (250) $ (240) $ (2,905)
Deferred rent (305) (420) (1,035)
Depreciation 236 1,069 1,843
Accrued fringes (93) (161) (343)
Intangibles 255 245 (178)
Store closing costs (210) (1,182) (1,833)
Fixed assets -- (1,410) (1,318)
Benefit of net operating
loss carryforwards (1,068) (156) 1,059
Other (102) (227) (167)
Change in valuation
allowance 914 (11,809) --
Prior year adjustments -- (597) --
$ (623) $(14,888) $ (4,877)
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:
Years Ended x
February 3, February 1,
1996 1997 x
Deferred tax liabilities:
Depreciation $ (575) $(2,418)
Deferred tax assets:
Inventory 1,490 4,395
Deferred rent 1,719 2,754
Accrued fringes 848 1,191
Intangibles 375 553
Store closing costs 1,722 3,555
Fixed assets 1,410 2,728
Net operating loss carryforwards 6,664 5,605
Other 541 708
Total deferred tax assets 14,769 21,489
Net deferred tax assets $14,194 $19,071
Following the resolution of the Internal Revenue Service examination of
certain of the Company's federal income tax returns during the year ended
February 3, 1996, the existing valuation allowance of $11,809 was
eliminated and income taxes provided in prior years adjusted. 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
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.
At February 1, 1997, the Company has available net loss carryforwards of
$14,884 for federal income tax purposes, which begin expiring in 2004, and
$8,922 for state income tax purposes, which begin expiring in 1997.
7. Disposal of Stores
In November 1995, Pet Food Warehouse sold certain assets of its eight
retail stores in Michigan and Ohio for $2,426 in cash pursuant to an Asset
Purchase Agreement and Addendum (the Agreements). The Agreements provided
for the sale of certain assets used in the operation of the Michigan and
Ohio stores and the assumption of certain liabilities by the buyer. The
sale of these assets resulted in a loss on the sale of stores of $3,500 in
the fourth quarter of fiscal 1995 from, among other things, rent
concessions and the loss on disposal of inventory and property and
equipment. Pursuant to the Agreements, if the buyer defaults under the
sublease arrangements, the Company is contingently liable for amounts owing
under the lease agreements.
8. Related Party Transactions
The Company recognized interest expense on subordinated debt obligations
to stockholders of $683 during fiscal 1994.
9. Employee Savings Plan
The Company has an employee savings plan which permits eligible
participants to make contributions by salary reduction pursuant to section
401(k) of the Internal Revenue Code. Effective January 1, 1996, the
Company adopted a matching provision for 25% of the first 4% of
compensation that is contributed by all participating employees. In
connection with the required match, the Company's contribution to the plan
was $58 in 1996. Prior to 1996, there was no matching contribution.
10. Commitments and Contingencies
Because of the nature of its activities, the Company is subject to legal
actions which arise out of the normal course of business. In the opinion of
management, based in part upon the advice of outside counsel, the ultimate
disposition of these matters will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
EXHIBIT INDEX
Sequentially
Numbered
Number Document Page x
2.1 Agreement and Plan of Merger, dated as of October 3, 1996,
by and among Petco, PASI Acquisition Corp. and Pet Food
Warehouse, Inc. (1)
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)
10.1 Employment Letter Agreement, dated October 3, 1996, by and
between Petco and Marvin W. Goldstein. (1)
10.2 Form of Affiliate Agreement by and between Petco and
affiliates of Pet Food Warehouse, Inc. (1)
10.3 Stockholder's Agreement entered into as of April 19, 1991,
between the Company and the stockholders identified
therein. (2)
10.4 Common Stock Subscription Agreements, dated April 19, 1991,
between the Company and various stockholders identified
therein. (2)
10.5 Preferred Stock Subscription Agreements, dated April 19, 1991,
between the Company and various stockholders identified
therein. (2)
10.6 Term loan Agreement, dated January 29, 1996, between the
Company and Union Bank. (3)
10.7 First Amendment to Term loan Agreement, dated April 24, 1997,
between the Company and Union Bank.(4)
10.8 Revolving Loan Agreement, dated December 6, 1996, between
the Company and Union Bank. (4)
10.9 Distribution Center Lease, dated March 24, 1994, between the
Company and The Principal Mutual Life Insurance Company for
10401 Seventh Street, Rancho Cucamonga, California. (5)
10.10 Distribution Center Lease, dated August 12, 1994, between the
Company and John Kaiseratt for 515 113th Street, Arlington,
Texas. (5)
10.11 Distribution Center Lease, dated September 24, 1991, between
the Company and S-H-Eddy-Souther #238 Partners for 11006 N.E.
37th Circle, Vancouver, Washington. (2)
10.12 Distribution Center Lease, dated August 3, 1992, between the
Company and Isaac Heller for 2-A Corn Road, Dayton, New
Jersey. (2)
10.13 Distribution Center Lease, dated October 25, 1995, between the
Company and Stockton 215 Venture for 8616 Elder Creek Road,
Sacramento, California. (3)
10.14 Executive Management Agreement, as amended, dated July 20,
1988, between the Company and The Spectrum Group. (2)
10.15 The 1994 Stock Option and Restricted Stock Plan for Executive
and Key Employees of Petco Animal Supplies, Inc., as
amended. (6)
10.16 First Amendment to 1994 Stock Option and Restricted Stock
Plan for Executive and Key Employees of Petco Animal
Supplies, Inc. (4)
10.17 Employment Agreement, dated March 17, 1996, between the
Company and Brian K. Devine. (3)
10.18 Petco Animal Supplies 401(k) Plan. (2)
10.19 Master Equipment Lease Agreement, dated October 19, 1992,
between the Company and Sanwa Business Credit Corporation. (2)
10.20 Master Equipment Lease Agreement, dated September 21, 1994,
between the Company and General Electric Credit
Corporation. (5)
10.21 Master Equipment Lease Agreement, dated March 10, 1995,
between the Company and KeyCorp Leasing Ltd. (3)
10.22 Master Lease Agreement, dated December 27, 1995, between the
Company and Newcourt Financial USA, Inc. (3)
10.23 Master Lease Agreement, dated September 28, 1995, between the
Company and USL Capital Corporation. (3)
10.24 Master Equipment Lease Agreement, dated November 15, 1995,
between the Company and Fleet Credit Corporation. (3)
10.25 Petco Animal Supplies, Inc. Group Benefit Plan, dated July 29,
1991, as amended. (3)
10.26 First Amendment to Stockholders' Agreement, dated as of March
1994. (5)
10.27 Petco Animal Supplies, Inc. Directors' 1994 Stock Option Plan,
as amended. (3)
10.28 Form of Indemnification Agreement between the Company and
certain officers and directors. (2)
10.29 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option
Agreement. (2)
10.30 Form of Petco Animal Supplies, Inc. Incentive Stock Option
Agreement. (2)
10.31 Form of Petco Animal Supplies, Inc. Restricted Stock
Agreement. (2)
10.32 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option
Agreement (Directors' 1994 Stock Option Plan). (2)
10.33 Agreement for Purchase of Assets, dated June 16, 1995, between
the Company and Pet Metro, Inc. (7)
10.34 Stock Purchase Agreement, dated October 28, 1995, among the
Company, New England Serum Company, Inc., Andrew S. Katz, The
Andrew S. Katz Family Trust, The Debra E. Katz Family Trust
and Just for Pets Superstores, Inc. (8)
10.35 Stock Purchase Agreement, dated October 29, 1995, among the
Company, Peter Chernis, Edward Field, Jeffrey Ross, Bryan
Shlager, Paul Sudman and Pet Supply Depot, Inc. (8)
21.1 Subsidiaries of the registrant. (4)
23.1 Consent of KPMG Peat Marwick LLP. (4)
23.2 Consent of Arthur Andersen 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 Registration Statement on Form S-3
dated April 4, 1996, File No. 333-3156, including Amendment No. 1
thereto dated April 24, 1996.
(4) Filed herewith.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-1
dated March 31, 1995, File No. 33-90804, including Amendment No. 1
thereto dated April 27, 1995.
(6) Filed as an exhibit to the Company's Proxy Statement dated May 24, 1996
relating to the 1996 Annual Meeting of Stockholders of Petco.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K dated
August 23, 1995.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 15, 1995, as amended.
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
30th day of April, 1997.
PETCO ANIMAL SUPPLIES, INC.
By: BRIAN K. DEVINE x
Brian K. Devine
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 30, 1997
Brian K. Devine and Chief Executive Officer
(Principal Executive Officer)
/s/RICHARD C. ST. PETER Executive Vice President, Chief April 30, 1997
Richard C. St. Peter Financial Officer and Secretary
(Principal Financial Officer)
/s/JAMES M. MYERS Senior Vice President, Finance April 30, 1997
James M. Myers (Principal Accounting Officer)
/s/C. HUNTER BOLL Director April 30, 1997
C. Hunter Boll
/s/ANDREW G. GALEF Director April 30, 1997
Andrew G. Galef
/s/SHAHAN D. SOGHIKIAN Director April 30, 1997
Shahan D. Soghikian
/s/PETER M. STARRETT Director April 30, 1997
Peter M. Starrett
Exhibit 21.1
PETCO ANIMAL SUPPLIES, INC.
SUBSIDIARIES
Name Jurisdiction of Incorporation
International Pet Supplies and Distribution, Inc. California
Pet Nosh Consolidated Co., Inc. New York
Exhibit 23.1
The Board of Directors
Petco Animal Supplies, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 33-82302, 33-95352 and 333-04442) on Form S-8 and (No. 333-14699) on
Post-Effective Amendment No. 1 on Form S-8 to Form S-4 of Petco Animal
Supplies, Inc. of our report dated March 24, 1997, relating to the
consolidated balance sheets of Petco Animal Supplies, Inc. and subsidiaries
as of February 3, 1996 and February 1, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the years in the three-year period ended February 1, 1997, which report
appears in the February 1, 1997, annual report on Form 10-K of Petco Animal
Supplies, Inc.
KPMG Peat Marwick LLP
San Diego, California
April 28, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of
our report dated March 15, 1996 on the financial statements of Pet Food
Warehouse, Inc. (which are included in the restated pooled financial
statements of Petco Animal Supplies, Inc.) in this Form 10-K of Petco
Animal Supplies, Inc. It should be noted that we have not audited any
financial statements of Pet Food Warehouse, Inc. subsequent to February 3,
1996 or performed any audit procedures subsequent to the date of our
report.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 28, 1997