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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number:
January 31, 1998 0-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 33-0479906
(State 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 24, 1998, there were outstanding 21,068,826 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 $ 374,789,092.
Documents Incorporated By Reference: The information called for by
Part III is incorporated by reference from the Proxy Statement relating to
the 1998 Annual Meeting of Stockholders of the Registrant.
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PART I
ITEM 1. BUSINESS
PETCO Animal Supplies, Inc. ("PETCO" or the "Company") is a leading
specialty retailer of premium pet food and supplies. As of January 31,
1998, the Company operated 457 stores, including 392 superstores, in 33
states and the District of Columbia. PETCO's strategy is to be the leading
category-dominant national chain of community pet food and supply
superstores by offering its customers a complete assortment of pet-related
products at competitive prices, with superior levels of customer service at
convenient locations. The Company 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 1997, the
Company opened or acquired 141 stores and closed 20 stores. Unless
otherwise indicated, all references in this Annual Report to a fiscal year
refer to the fiscal year ending on the Saturday closest to January 31 of
the following year. For example, references to fiscal 1997 refer to the
fiscal year beginning on February 2, 1997 and ending on January 31, 1998.
THE PET FOOD, SUPPLY AND SERVICES INDUSTRY
GENERAL. In 1996, retail sales in the United States of pet food,
supplies, small animals (excluding dogs and cats) and services were
estimated at $18 billion. Pet food accounted for the majority of this
market with an estimated $10 billion in sales, pet supply and small animal
sales were estimated at $4 billion, while sales of pet services, which
include veterinary services, obedience training and grooming services, were
estimated at $4 billion. In 1996, 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, 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.
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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. The Company
does offer obedience training in most of its stores and offers grooming in
many of its stores. Although such services do not generate a significant
portion of the Company's revenues, the Company believes that offering
selected pet services does create increased customer traffic in the
Company's stores.
BUSINESS STRATEGY
PETCO's strategy is to be the leading category-dominant national
chain of community pet food and supply superstores by offering its
customers a complete assortment of pet-related products at competitive
prices, with superior levels of customer service at convenient locations.
The key components of PETCO's strategy are:
Superstore Expansion. The Company believes that opportunities for
additional superstores exist in both new and existing markets. The Company
intends to continue to increase the number of superstores it operates by
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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 17 acquisitions,
representing 204 stores located in 27 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. 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. 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.
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.
INNOVATIVE COMMUNITY PROGRAMS. PETCO has several long-standing
neighborhood marketing programs in effect designed to introduce consumers
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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, 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
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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.
STORE DEVELOPMENT
The Company utilizes both superstore and traditional store formats.
The Company plans to open only superstores in the future and expects that
these will be the Company's current prototype superstores which average
approximately 15,000 square feet. These prototype superstores offer fish,
birds, reptiles and other small animals, 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 1997, the Company opened or acquired 141 stores and closed
20 stores. The table below sets forth the number of each type of store the
Company operated at the end of each fiscal year indicated, as restated for
the pooling of interests with PetCare Plus, Inc. ("PetCare").
Traditional
Superstores Stores Total Stores
----------- ----------- ------------
Fiscal 1993 108 139 247
Fiscal 1994 174 114 288
Fiscal 1995 264 89 353
Fiscal 1996 345 68 413
Fiscal 1997 392 65 457
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.
6
PURCHASING AND DISTRIBUTION
The Company's centralized purchasing and distribution system
minimizes the delivered cost of merchandise and maximizes the in-stock
position of its stores.
PETCO purchases most of its merchandise directly from specialty
suppliers and manufacturers of national brands. The Company purchases the
majority of its pet food products from three vendors, Iams, Nutro, and
Science Diet, the first of which supplied products that accounted for more
than 10% and less than 15% of the Company's sales in fiscal 1997. While
the Company does not maintain long-term supply contracts with any of its
vendors, PETCO believes that it enjoys a favorable and stable relationship
with each of these vendors.
PETCO currently operates three central and five regional distribution
centers. The central distribution centers are located in Rancho Cucamonga,
California; Dayton, New Jersey; and Aurora, Illinois. Bulk items for all
stores are either shipped to regional distribution centers for
redistribution or are sent directly to store locations. Manufacturers ship
non-bulk supplies to the central distribution facilities which the Company
then distributes either to regional centers or directly to store locations.
Management believes that its centralized distribution system enables its
stores to maximize selling space by reducing necessary levels of safety
stock carried in each store.
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, 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. 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 has been characterized in recent
years by the consolidation of a number of pet supply chains. This
consolidation has been accomplished through the acquisition of independent
pet stores by larger specialty pet supply chains 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.
7
TRADEMARKS AND LICENSES
The Company has registered several service marks and trademarks with
the United States Patent and Trademark Office, including PETCO(r), PETCO
Pals(tm), 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 January 31, 1998, the Company employed approximately 9,400
associates, of whom approximately 4,200 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, including, but not limited
to, Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations," contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, Section 21E of the Securities Act of 1934, as amended, and the
Private Securities Litigation Reform Act of 1995, that are not historical
facts but rather reflect current expectations concerning future results and
events. The words "believes," "expects," "intends," "plans,"
"anticipates," "likely," "will," and similar expressions identify such
forward-looking statements. These forward-looking statements are subject
to risks, uncertainties, and other factors, some of which are beyond the
Company's control, that could cause actual results to differ materially
from those forecast or anticipated in such forward-looking statements.
Such risks, uncertainties and other factors include, but are not limited
to, the following 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
8
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 Senior Credit Facility (the
"Credit Facility") contains certain covenants which may restrict or impair
the Company's growth plans. Management continues to evaluate the Company's
long-term distribution needs to increase product handling capacity to
accommodate store and sales growth beyond fiscal 1998. 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 1996
and 1997, merger and business integration costs of $37.2 million and $38.7
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,
severance, and other costs. The Company expects to incur additional
business integration costs 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
costs. Acquisitions require significant financial and management resources
both at the time of the transaction and during the process of integrating
the newly acquired business into the Company's operations. The Company's
operating results could be adversely affected if the Company is unable to
successfully integrate such new companies into its operations. Future
9
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
three key vendors, Iams, Nutro, and Science Diet, the first of which
supplied products that accounted for more than 10% and less than 15% of the
Company's sales in fiscal 1997. 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 effect 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 net sales
increases were 16.5%, 16.1%, and 11.5% for fiscal 1995, 1996 and 1997,
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
10
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 other
months of the year.
DEPENDENCE ON SENIOR MANAGEMENT. The Company is dependent upon the
efforts of its principal executive officers. In particular, the Company is
dependent upon the management and leadership of Brian K. Devine, Chairman,
President and Chief Executive Officer. The loss of Mr. Devine or certain
of the Company's other principal executive officers could materially
adversely effect the Company's business. The Company has entered into an
employment agreement with Mr. Devine which provides for an indefinite term
and which may be terminated by Mr. Devine on 90 days' notice. The Company
has obtained a key man insurance policy on the life of Mr. Devine in the
amount of $1.0 million, of which the Company is the sole beneficiary. The
Company's success will depend on its ability to retain its current
management and to attract and retain qualified personnel in the future.
POSSIBLE VOLATILITY OF STOCK PRICE. Since the initial public
offering of the Company's common stock in March 1994, the market value of
the common stock has been subject to significant fluctuations. The market
price of the common stock may continue to be subject to significant
fluctuations in response to operating results and other factors. In
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.
Readers are cautioned not to place undue reliance on forward-looking
statements which reflect management's view only as of the date of this
Annual Report. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may
be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 2. PROPERTIES
The Company leases substantially all of its store and warehouse
locations. Original lease terms for the Company's 457 stores generally
range from five to twenty years, many of which contain renewal options.
Leases on 126 stores expire within the next three years, with leases on 88
of these stores containing renewal options.
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The table below shows the location and number of the Company's stores as of
January 31, 1998.
Traditional
Location Superstores Stores Total Stores
- ------------------------ ----------- ----------- ------------
Alabama 1 1 2
Arizona 12 0 12
Arkansas 2 0 2
California 101 38 139
Colorado 7 0 7
Connecticut 11 0 11
District of Columbia 1 0 1
Idaho 1 0 1
Illinois 39 6 45
Indiana 2 0 2
Iowa 6 0 6
Kansas 9 0 9
Kentucky 1 0 1
Maryland 6 0 6
Massachusetts 14 3 17
Michigan 7 0 7
Minnesota 17 0 17
Missouri 12 2 14
Nebraska 2 0 2
Nevada 4 0 4
New Hampshire 3 0 3
New Jersey 13 1 14
New York 14 1 15
North Dakota 2 0 2
Ohio 3 0 3
Oregon 9 2 11
Pennsylvania 14 3 17
Rhode Island 1 0 1
South Dakota 1 0 1
Tennessee 5 0 5
Texas 39 0 39
Virginia 7 1 8
Washington 19 7 26
Wisconsin 7 0 7
--- -- ---
392 65 457
=== == ===
The Company's headquarters, located in San Diego, California, occupy
approximately 70,000 square feet of office space which is financed under an
obligation which expires February 2006. The Company's five regional
distribution centers collectively occupy over 200,000 square feet of space
in Arlington, Texas; Stockton, California; Portland, Oregon; Mansfield,
Massachusetts; and New Hope, Minnesota under leases which expire in August
1999, December 2000, January 2002, December 1998, and September 2002,
respectively. The Company's three central distribution centers
collectively occupy over 460,000 square feet of space in Rancho Cucamonga,
California; Dayton, New Jersey; and Aurora, Illinois under leases which
expire in May 1999, June 2002, and April 1998, respectively. The Company
has entered into leases for two new central distribution centers to replace
the centers located in Rancho Cucamonga, California and Aurora, Illinois.
These two central distribution centers collectively occupy over 580,000
square feet of space in Mira Loma, California and Joliet, Illinois, under
leases which expire in August 2005 and April 2005, respectively. Each of
12
the other distribution center leases contains a renewal option. The Company
expects to expend approximately $7.0 million to provide the additional
capacity 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 January 31, 1998.
13
ITEM 4.1. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
- -------------------- --- -----------------------------------------------
Brian K. Devine 56 Chairman, President and Chief Executive Officer
Bruce C. Hall 53 Executive Vice President - Operations
Richard C. St. Peter 49 Executive Vice President - Administration and
Chief Financial Officer
Larry D. Asselin 50 Senior Vice President - Merchandising and
Distribution
Janet D. Mitchell 42 Senior Vice President - Human Resources and
Administration
James M. Myers 40 Senior Vice President - Finance
William M. Woodard 49 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.
JANET D. MITCHELL, Senior Vice President, Human Resources and
Administration joined the Company in February 1989. From 1981 to 1989, Ms.
Mitchell held various management positions in human resources with the
Southland Corporation's 7-Eleven division. From 1978 to 1981, Ms. Mitchell
14
held various positions with the El Torito Restaurant chain. Ms. Mitchell
received a bachelor's degree from California State University, San Diego.
JAMES M. MYERS, Senior Vice President, 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 is quoted on The Nasdaq
National Market under the symbol "PETC." Public trading of the common
stock commenced on March 17, 1994. The following table sets forth for the
periods indicated the high and low reported sale prices per share for the
common stock as reported by The Nasdaq National Market. 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 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
FISCAL 1997
First Quarter $28.25 $19.00
Second Quarter 30.75 19.63
Third Quarter 33.00 26.25
Fourth Quarter 31.13 19.50
On April 24, 1998, there were 704 shareholders of record of the
Company's common stock.
The Company has never paid cash dividends on its common stock. The
Company currently anticipates that it will retain all available funds for
use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
15
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per 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 January 31,
1998. The selected consolidated financial data presented below under the
caption "Income Statement Data" for the two-year period ended 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 years ended February 1, 1997 and January 31, 1998.
The selected consolidated financial data presented below under the caption
"Income Statement Data" for the three-year period ended January 31, 1998 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 29, 1994,
January 28, 1995, and February 3, 1996 is derived from the unaudited
consolidated financial statements of the Company and its subsidiaries as
restated to reflect the poolings of interests during the years ended
February 1, 1997 and January 31, 1998. The selected consolidated financial
data presented below under the caption "Balance Sheet Data" as of February
1, 1997 and January 31, 1998 is derived from the audited consolidated
financial statements of the Company and its subsidiaries. The financial
data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements as of January 31, 1998 and for
each of the years in the three-year period ended January 31, 1998 and the
independent auditors' report thereon, included and incorporated by
reference elsewhere in this Annual Report.
Historical
-----------------------------------------------------
Fiscal Year Ended
-----------------------------------------------------
Jan.29, Jan. 28, Feb 3, Feb. 1, Jan. 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Net sales $224,979 $313,809 $443,585 $600,637 $749,789
Cost of sales and occupancy costs(1) 169,831 234,400 337,873 446,315 553,566
-------- -------- -------- -------- --------
Gross profit 55,148 79,409 105,712 154,322 196,223
Selling, general and administrative expenses 56,812 75,416 101,760 132,745 173,667
Merger and business integration costs -- -- 9,196 37,208 38,693
-------- -------- -------- -------- --------
Operating income (loss) (1,664) 3,993 (5,244) (15,631) (16,137)
Loss on disposal of stores -- -- 3,500 -- --
Interest expense (income), net 5,308 1,080 71 600 2,530
-------- -------- -------- -------- --------
Earnings (loss) before income taxes (6,972) 2,913 (8,815) (16,231) (18,667)
Income taxes (benefit) (2) 42 1,969 (14,601) (4,075) (5,486)
-------- -------- -------- -------- --------
Net earnings (loss) $ (7,014) $ 944 $ 5,786 $(12,156) $(13,181)
======== ======== ======== ======== ========
Basic net earnings (loss) per common share (3) $0.08 $0.36 $(0.63) $(0.64)
Diluted net earnings (loss) per common share $0.08 $0.35 $(0.63) $(0.64)
Basic weighted average common shares outstanding 11,373 16,147 19,426 20,646
Diluted weighted average common shares outstanding 11,390 16,427 19,426 20,646
OPERATING DATA:
Superstores open end of period 108 174 264 345 392
Traditional stores open end of period 139 114 89 68 65
--------- ---------- ---------- ---------- ----------
Total stores open end of period 247 288 353 413 457
Aggregate gross square footage 1,418,585 2,047,078 3,169,472 4,435,019 5,299,535
Average net sales per store (4) $842,000 $ 974,000 $1,183,000 $1,438,000 $1,696,000
Average net sales per gross square foot (5) $ 162 $ 153 $ 168 $ 162 $ 158
Percentage increase in comparable store net sales 15.0% 18.5% 16.5% 16.1% 11.5%
BALANCE SHEET DATA:
Working capital $ 9,505 $ 31,918 $ 29,064 $ 59,928 $ 33,540
Total assets 71,302 126,918 214,498 312,617 335,195
Long-term debt, excluding current portion 48,531 -- -- -- 26,625
Capital lease and other obligations, excluding
current portion 2,959 5,779 13,334 15,581 11,369
Total stockholders' equity (deficit) (43,716) 48,397 130,040 196,499 186,057
______________
(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 $11.8 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.
17
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. PETCO's experience has indicated that its
superstore format achieves increased customer traffic, sales volume and
profitability as compared to its traditional store format. 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 the Company completed three acquisitions of
retailers of pet food and supplies which were accounted for as purchases.
During fiscal 1996 the Company completed two acquisitions of retailers of
pet food and supplies which were accounted for as purchases. The Company
also acquired three retailers of pet food and supplies which operated under
the trade names Pet Nosh, with eight stores in the New York area, PETS USA
with four stores in Colorado, and Pet Food Warehouse with 32 stores in the
Upper Midwestern states. These acquisitions were accounted for as poolings
of interests.
During fiscal 1997, the Company completed four acquisitions of
retailers of pet food and supplies, operating 21 stores which were
accounted for as immaterial poolings of interests. The Company also
acquired a retailer that operated 82 pet food and supply stores under the
trade name PetCare located in 10 Midwestern and Southern states which was
accounted for as a pooling of interests.
All results of operations have been restated to reflect the poolings
of interests and to reflect the purchase transactions and immaterial
poolings from their respective acquisition dates. (See footnote 2 to the
consolidated financial statements).
At January 31, 1998, the Company operated 457 stores, including 392
superstores, in 33 states and the District of Columbia.
18
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.
Feb. 3, Feb. 1, Jan. 31,
1996 1997 1998
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy costs 76.2 74.3 73.8
----- ----- -----
Gross profit 23.8 25.7 26.2
Selling, general and administrative expenses 22.9 22.1 23.2
Merger and business integration costs 2.1 6.2 5.2
----- ----- -----
Operating income (loss) (1.2) (2.6) (2.2)
Loss on disposal of stores .8 -- --
Interest expense (income), net -- 0.1 0.3
----- ----- -----
Earnings (loss) before income taxes (2.0) (2.7) (2.5)
Income taxes (benefit) (3.3) (0.7) (0.7)
----- ----- -----
Net earnings (loss) 1.3 (2.0) (1.8)
===== ===== =====
FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED TO FISCAL YEAR ENDED FEBRUARY
1, 1997
Net sales increased 24.8% to $749.8 million in fiscal 1997 from
$600.6 million in fiscal 1996. The increase in net sales in fiscal 1997
resulted primarily from the addition of 57 superstores, including the
conversion of 10 traditional stores into superstores, the acquisition of
seven traditional stores, the closing of 10 stores, and a comparable store
net sales increase of 11.5%. 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 $103.2 million, or 69.2%
of the net sales increase, and $46.0 million, or 30.8% 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 $41.9 million, or 27.2%, to $196.2 million
in fiscal 1997 from $154.3 million in fiscal 1996. Gross profit as a
percentage of net sales increased to 26.2% in fiscal 1997 from 25.7% in
fiscal 1996. This increase reflects greater purchasing leverage during the
current period.
Selling, general and administrative expenses increased $41.0 million,
or 30.9%, to $173.7 million in fiscal 1997 from $132.7 million in fiscal
1996. Selling, general and administrative expenses increased primarily as a
result of higher personnel and related costs associated with new store
openings. Selling, general and administrative expenses in fiscal 1997
include charges of $11.0 million related to the acquisition of PetCare.
Excluding these charges, these expenses decreased as a percentage of net
sales to 21.7% in fiscal 1997 from 22.1% in fiscal 1996 due to net sales
increasing at a greater rate than related expenses.
Merger and business integration costs of $37.2 million were recorded
in fiscal 1996 following acquisition activities. These costs 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
19
activities, $3.8 million of reformatting, facility conversion and other
integration costs and $4.0 million of severance and other costs. In fiscal
1997, merger and business integration costs of $38.7 million were recorded
following acquisition activities. These costs consisted of $4.5 million of
transaction costs, $17.8 million of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $12.2 million of reformatting, facility conversion and other
integration costs and $4.2 million of severance and other costs. The
Company expects to incur an additional $14.0 to $18.0 million in merger and
business integration costs for continuing integration efforts in fiscal
1998 from reformatting, facility conversion costs and other integration
costs.
Operating loss of $16.1 million was incurred in fiscal 1997 compared
to operating loss of $15.6 million in fiscal 1996. Excluding merger and
business integration costs and the $11.0 million in charges related to the
PetCare acquisition, the Company would have reported operating income of
4.5% of net sales in fiscal 1997 and 3.6% in fiscal 1996.
Net interest expense was $2.5 million in fiscal 1997 compared to net
interest expense of $0.6 million in fiscal 1996. Increased borrowings in
fiscal 1997 led to the increase in interest expense.
Income tax benefit was $5.5 million in fiscal 1997 compared to income
tax benefit of $4.1 million in fiscal 1996. Income tax benefit reflects
the Federal and state tax benefits of the loss before income taxes, net of
the effect of non-deductible expenses.
Net loss was $13.2 million in fiscal 1997 compared to net loss of
$12.2 million in fiscal 1996. Excluding merger and business integration
costs and related charges and tax benefits, net earnings for fiscal 1997
would have been $18.6 million, or $0.88 per diluted share, compared to
$12.6 million, or $0.63 per diluted share in fiscal 1996.
FISCAL YEAR ENDED FEBRUARY 1, 1997 COMPARED TO FISCAL YEAR ENDED FEBRUARY
3, 1996
Net sales increased 35.4% to $600.6 million in fiscal 1996 from
$443.6 million in fiscal 1995. The increase in net sales in fiscal 1996
resulted primarily from the addition of 91 superstores, including the
conversion of 22 traditional stores into superstores, the acquisition of
one traditional store, the closing of 10 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 $115.9 million, or 73.8%
of the net sales increase, and $41.1 million, or 26.2% of the net sales
increase, was attributable to the increase in comparable store net sales.
Gross profit increased $48.6 million, or 46%, to $154.3 million in
fiscal 1996 from $105.7 million in fiscal 1995. Gross profit as a
percentage of net sales increased to 25.7% in fiscal 1996 from 23.8% 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 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
20
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 $30.9 million,
or 30.4%, to $132.7 million in fiscal 1996 from $101.8 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 22.1%
in fiscal 1996 from 22.9% in fiscal 1995 due to net sales increasing at a
greater rate than related expenses.
Merger and business integration costs of $9.2 million were recorded
in fiscal 1995 following acquisition activities. These costs were
primarily associated with lease cancellations and closure of traditional
stores located in the same markets as acquired stores and the conversion
and integration of certain acquired stores. In fiscal 1996, merger and
business integration costs of $37.2 million were recorded following
acquisition activities. These costs 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.
Operating loss of $15.6 million was incurred in fiscal 1996 compared
to operating loss of $5.2 million in fiscal 1995. Excluding merger and
business integration costs and the $4.3 million write-down of fixed assets,
the Company would have reported operating income of 3.6% of net sales in
fiscal 1996 and 1.9% in fiscal 1995.
Net interest expense was $0.6 million in fiscal 1996 compared to net
interest expense of $0.1 million in fiscal 1995.
Income tax benefit was $4.1 million in fiscal 1996 compared to income
tax benefit of $14.6 million in fiscal 1995. In fiscal 1995, an income tax
benefit of $11.8 million from previously unrecognized deferred tax assets
was recognized.
Net loss was $12.2 million in fiscal 1996 compared to net earnings of
$5.8 million in fiscal 1995. Excluding merger and business integration
costs, 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
$11.8 million from previously unrecognized deferred tax assets, net
earnings for fiscal 1996 would have been $12.6 million, or $0.63 per
diluted share, compared to $4.9 million, or $0.30 per diluted share in
fiscal 1995.
21
QUARTERLY DATA
The following tables set forth the unaudited quarterly results of
operations for fiscal 1996 and fiscal 1997. This information includes all
adjustments management considers necessary for fair presentation of such
data. The results of operations for historical periods are not necessarily
indicative of results for any future period. The Company expects quarterly
results of operations to fluctuate depending on the timing and amount of
revenue contributed by new stores.
The Company believes that its business is moderately seasonal, with
net sales and earnings generally higher in the fourth fiscal quarter due to
year-end holiday purchases.
Fiscal Quarter Ended
------------------------------------------
May 4, Aug. 3, Nov. 2, Feb. 1,
Fiscal 1996 1996 1996 1996 1997
- ----------- --------- --------- --------- ---------
Net sales $ 133,659 $ 143,614 $ 151,556 $ 171,808
Gross profit 32,628 36,799 39,461 45,434
Operating income (loss) 1,988 (10,867) 2,179 (8,931)
Net earnings (loss) 976 (7,208) 1,117 (7,041)
Basic net earnings (loss) per share $ 0.06 $ (0.36) $ 0.06 $ (0.35)
Diluted net earnings (loss) per share $ 0.05 $ (0.36) $ 0.05 $ (0.35)
Stores open at end of period 367 372 389 413
Aggregate gross square footage 3,489,187 3,618,650 3,925,025 4,435,019
Percentage increase in comparable store net sales 18.2% 18.3% 17.0% 12.6%
Fiscal Quarter Ended
------------------------------------------
May 3, Aug. 2, Nov. 1, Jan. 31,
Fiscal 1997 1997 1997 1997 1998
- ----------- --------- --------- --------- --------
Net sales $ 170,909 $ 175,460 $ 191,775 $211,645
Gross profit 42,212 45,339 50,471 58,201
Operating income (loss) 2,704 (2,884) (24,989) 9,032
Net earnings (loss) 1,297 (2,811) (17,013) 5,346
Basic net earnings (loss) per share $ 0.06 $ (0.14) $ (0.81) $ 0.25
Diluted net earnings (loss) per share $ 0.06 $ (0.14) $ (0.81) $ 0.25
Stores open at end of period 420 427 451 457
Aggregate gross square footage 4,564,145 4,759,811 5,132,350 5,299,535
Percentage increase in comparable store net sales 14.0% 12.4% 10.2% 10.2%
YEAR 2000 ISSUES
The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
In 1997, the Company developed a plan to deal with the Year 2000 problem to
assure that its systems are Year 2000 compliant. In general, the Company
expects to resolve Year 2000 issues through planned replacements or
upgrades. The Company does not expect that the cost of its Year 2000
compliance program will be material to its business, results of operations,
or financial condition. Although the impact on the Company caused by the
failure of the Company's significant suppliers to achieve Year 2000
compliance in a timely or effective manner is uncertain, the Company's
business and results of operations could be materially adversely affected
by such failure.
22
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and expansion program through
internal cash flow, external borrowings and the sale of equity securities.
At January 31, 1998, total assets were $335.2 million, $124.4 million of
which were current assets. Net cash provided by (used in) operating
activities was $6.6 million, $(0.6) million, and $10.6 million for fiscal
1995, 1996 and 1997, 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 $63.1 million, $51.6 million and
$65.7 million for fiscal 1995, 1996 and 1997, respectively.
The Company also finances some of its purchases of equipment and
fixtures through capital lease and other obligations. Purchases of $11.1
million, $8.0 million and $1.3 million of fixed assets were financed in
this manner during fiscal 1995, 1996 and 1997, 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 1995, the Company completed six acquisitions of
retailers of 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 pet food and supplies in
purchase transactions. The aggregate fair value of assets acquired was
$14.4 million and assumed liabilities were $1.4 million with $13.0 million
of net cash invested in the acquisition of these businesses, of which $6.0
million was expended in fiscal 1997.
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
$54.3 million, $79.4 million and $13.5 million in fiscal 1995, 1996 and
1997, respectively. In fiscal 1995, 1996, and 1997, net proceeds of $53.7
million, $79.4 million, and $2.5 million, respectively, were generated from
sales of common stock. Cash flows from financing activities were used to
finance the acquisition of related businesses and fund the Company's
expansion program and working capital requirements.
The Company has a credit facility with a syndicate of banks with a
commitment of up to $110.0 million that expires January 30, 2003. The
credit facility provides for $80.0 million in revolving loans and a $30.0
million term loan. Borrowings under the credit facility are unsecured and
bear interest, at the Company's option, at the agent bank's corporate base
rate or LIBOR plus 0.50% to 1.50%, based on the Company's leverage ratio at
23
the time. The credit agreement contains certain affirmative and negative
covenants related to indebtedness, interest and fixed charges coverage, and
consolidated net worth. As of January 31, 1998, the Company had $80.0
million of revolving loans available under the credit facility.
As of January 31, 1998, the Company had available net operating loss
carryforwards of $39.2 million for federal income tax purposes, which begin
expiring in 2004, and $36.4 million for state income tax purposes, which
begin expiring in 1998.
The Company anticipates that funds generated by operations, funds
available under the credit facility and currently available vendor
financing and capital lease and other obligation financing will be
sufficient to finance its continued operations and planned store openings
at least through fiscal 1998.
24
INFLATION
Although the Company cannot accurately anticipate the effect of
inflation on its operations, it does not believe that inflation has had, or
is likely in the foreseeable future to have, a material impact on its net
sales or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 1998 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 1998 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 1998 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 1998 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Page
Independent Auditor's Reports 26
Consolidated Balance Sheets 28
Consolidated Statements of Operations 29
Consolidated Statements of Stockholders' Equity 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as
part of this Annual Report.
26
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 1, 1997 and
January 31, 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended January 31, 1998. 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 PetCare Plus, Inc., which statements reflect total assets constituting
10 percent at February 1, 1997, and total revenues constituting 19 percent
and 17 percent for the years ended January 27, 1996 and January 25, 1997,
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
PetCare Plus, 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 1, 1997 and January 31, 1998
and the results of their operations and their cash flows for each of the
years in the three-year period ended January 31, 1998 in conformity with
generally accepted accounting principles.
San Diego, California KPMG Peat Marwick LLP
April 17, 1998
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
PetCare Plus, Inc.:
We have audited the accompanying balance sheets of PetCare Plus, Inc. as of
January 25, 1997 and the related statements of operations, redeemable
convertible preferred stock and stockholder's equity and cash flows for the
years ended January 25, 1997 and January 27, 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 a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PetCare Plus, Inc. as
of January 25, 1997, and the results of its operations and its cash flows
for the years ended January 25, 1997 and January 27, 1996 in conformity
with generally accepted accounting principles.
Chicago, Illinois Coopers & Lybrand L.L.P.
April 16, 1997, except as to the
information presented in Note 4,
for which the date is June 10, 1997
28
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
February 1, January 31,
1997 1998
---------- -----------
Current assets:
Cash and cash equivalents $ 44,338 $ 3,354
Receivables 7,881 10,879
Inventories 82,782 96,873
Deferred tax assets (note 6) 6,439 8,354
Other 2,428 4,942
--------- ---------
Total current assets 143,868 124,402
Fixed assets (note 4):
Equipment 43,613 51,525
Furniture and fixtures 36,298 50,575
Leasehold improvements 67,936 100,151
--------- ---------
147,847 202,251
Less accumulated depreciation and amortization (38,018) (54,822)
--------- --------
109,829 147,429
Goodwill 42,408 39,348
Deferred tax assets (note 6) 14,268 17,885
Other assets 2,244 6,131
--------- ---------
$ 312,617 $ 335,195
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42,457 $ 51,794
Accrued expenses 19,680 21,558
Accrued salaries and employee benefits 9,096 9,242
Current portion of long-term debt (note 3) 8,950 3,375
Current portion of capital lease and other
obligations (note 4) 4,575 5,073
-------- ---------
Total current liabilities 84,758 91,042
Long-term debt, excluding current portion (note 3) -- 26,625
Capital lease and other obligations, excluding current
portion (note 4) 15,581 11,369
Accrued store closing costs 8,691 11,189
Deferred rent 7,088 8,913
Stockholders' equity (note 5):
Common stock, $.0001 par value, 100,000 shares
authorized, 20,153 and 21,060 shares issued
and outstanding, respectively 2 2
Additional paid-in capital 265,971 270,755
Accumulated deficit (69,474) (84,700)
-------- -------
Total stockholders' equity 196,499 186,057
Commitments and contingencies (notes 4, 5, and 9)
-------- ------
$ 312,617 $ 335,195
======== =======
See accompanying notes to consolidated financial statements
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
-----------------------------------
February 3, February 1, January 31,
1996 1997 1998
---------- ---------- ----------
Net sales $ 443,585 $ 600,637 $ 749,789
Cost of sales and occupancy costs 337,873 446,315 553,566
--------- --------- --------
Gross profit 105,712 154,322 196,223
Selling, general and administrative expenses 101,760 132,745 173,667
Merger and business integration costs (note 2) 9,196 37,208 38,693
--------- --------- ---------
Operating loss (5,244) (15,631) (16,137)
Loss on disposal of stores (note 7) 3,500 -- --
Interest income (1,477) (2,179) (588)
Interest expense 1,548 2,779 3,118
--------- -------- --------
Loss before income taxes (8,815) (16,231) (18,667)
Income tax benefit (note 6) (14,601) (4,075) (5,486)
--------- -------- --------
Net earnings (loss) $ 5,786 $ (12,156) $ (13,181)
========= ========= =========
Net earnings (loss) per common share, basic $ 0.36 $ (0.63) $ (0.64)
========= ========= =========
Net earnings (loss) per common share, diluted $ 0.35 $ (0.63) $ (0.64)
========= ========= =========
See accompanying notes to consolidated financial statements.
30
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------------- ---------- ----------- -------------
Balances at
January 28, 1995 12,020 $ 1 $110,398 $ (46,832) $ 63,567
Restatement for
poolings of
interests (Note 2) 1,264 -- 22,523 (15,180) 7,343
------ ----- ------- -------- -------
Balances at
January 28, 1995 13,284 $ 1 $132,921 $ (62,012) $ 70,910
Sale of common stock 3,897 -- 53,614 -- 53,614
Exercise of options 5 -- 60 -- 60
Distributions to
shareholders (note 2) -- -- (8) (323) (331)
Net earnings -- -- -- 5,786 5,786
------ ----- ------- ------- ------
Balances at
February 3, 1996 17,186 $ 1 $186,587 $(56,549) $130,039
Sale of common stock 2,897 1 78,698 -- 78,699
Cash in lieu of
fractional shares -- -- (5) -- (5)
Exercise of options 69 -- 670 -- 670
Issuance of stock
for services 1 -- 21 -- 21
Distributions to
shareholders (note 2) -- -- -- (769) (769)
Net loss -- -- -- (12,156) (12,156)
----- ---- ------ ------- -------
Balances at
February 1, 1997 20,153 $ 2 $265,971 $(69,474) $196,499
Beginning balance of
immaterial poolings
of interests (note 2) 613 -- 2,311 (2,045) 266
Exercise of options 293 -- 2,449 -- 2,449
Issuance of stock
For services 1 -- 24 -- 24
Net loss -- -- -- (13,181) (13,181)
------ ----- ------- ------- ------
Balances at
January 31, 1998 21,060 $ 2 $270,755 $(84,700) $ 186,057
====== ===== ======= ======= ========
See accompanying notes to consolidated financial statements.
31
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
-----------------------------------------
February 3, February 1, January 31,
1996 1997 1998
---------- ---------- ----------
Cash flows from operating activities:
Net earnings (loss) $ 5,786 $(12,156) $ (13,181)
Depreciation and amortization 11,190 18,089 24,289
Deferred taxes (16,031) (5,204) (5,391)
Loss on retirement of fixed assets 3,603 4,712 5,908
Loss on disposal of stores 3,500 -- --
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (1,226) (2,348) (2,845)
Inventories (14,006) (15,342) (7,992)
Other assets 210 (2,766) (7,247)
Accounts payable 6,550 3,112 12,667
Accrued expenses 53 2,592 567
Accrued salaries and employee benefits 720 3,238 145
Accrued store closing costs 5,179 3,887 2,489
Deferred rent 1,040 1,540 1,170
------- ------- --------
Net cash provided by (used in) operating
activities 6,568 (646) 10,579
------- ------- --------
Cash flows from investing activities:
Additions to fixed assets (35,361) (46,246) (59,633)
Net cash invested in acquisitions of businesses (30,373) (7,021) (6,028)
Proceeds from sale of fixed assets -- 1,626 --
Proceeds from disposal of stores 2,426 -- --
Other 224 -- --
------- ------- --------
Net cash used in investing activities (63,084) (51,641) (65,661)
------- ------- --------
Cash flows from financing activities:
Borrowings under long-term debt agreements 2,750 5,450 28,591
Repayment of long-term debt agreements -- -- (10,335)
Borrowings under other obligations 1,178 -- --
Repayment of capital lease and other obligations (2,984) (4,626) (7,221)
Proceeds from the issuance of common stock 53,675 79,385 2,473
Distributions to shareholders (331) (769) --
------- ------- --------
Net cash provided by financing activities 54,288 79,440 13,508
------- ------- --------
Net increase (decrease) in cash and cash equivalents (2,228) 27,153 (41,574)
Cash and cash equivalents at beginning of year 19,413 17,185 44,338
Beginning cash and cash equivalents of immaterial
poolings of interests -- -- 590
------- ------- -------
Cash and cash equivalents at end of year $ 17,185 $ 44,338 $ 3,354
======= ======= =======
Supplemental cash flow disclosures:
Interest paid on debt $ 1,340 $ 2,792 $ 3,105
Income taxes paid $ 1,436 $ 1,854 $ 920
Supplemental disclosure of noncash financing
activities:
Additions to capital leases $ 11,093 $ 8,015 $ 1,268
See accompanying notes to consolidated financial statements.
32
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. Summary of Significant Accounting Policies
(a) Description of Business:
PETCO Animal Supplies, Inc., (the Company or PETCO) a Delaware
corporation, is a national specialty retailer of premium pet food and
supplies with stores in 33 states and the District of Columbia.
(b) Basis of Presentation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(c) Fiscal Year:
The Company's fiscal year ends on the Saturday closest to January 31,
resulting in years of either 52 or 53 weeks. The year ended February 3,
1996 consisted of 53 weeks and the years ended February 1, 1997 and January
31, 1998 consisted of 52 weeks. All references to a fiscal year refer to
the fiscal year ending on the Saturday closest to January 31 of the
following year.
(d) Cash Equivalents:
The Company considers all liquid investments with maturities of three
months or less to be cash equivalents.
(e) Inventories:
Inventories are stated at the lower of cost, determined by the first-
in, first-out method, or market.
(f) Pre-opening Costs:
Costs incurred in connection with opening new stores are expensed as
incurred.
(g) Fixed Assets:
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets,
generally three to ten years. Equipment under capital leases is stated at
the present value of minimum lease payments at the inception of the lease.
Amortization is computed using the straight-line method over the lesser of
the lease term or the estimated useful lives of the assets, generally five
to fifteen years.
(h) Goodwill:
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 1, 1997 and January 31, 1998 was $3,423 and
$6,483, respectively.
33
(i) 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 1,
1997 and January 31, 1998 was $100 and $177, respectively.
(j) 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.
(k) Income Taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in operations in the period that includes the enactment date.
(l) Fair Value of Financial Instruments:
Because of their short maturities, the carrying amounts for cash and
cash equivalents, receivables, accounts payable, accrued expenses, and
accrued salaries and employee benefits approximate fair value. The
carrying amounts for long-term debt and 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.
(m) Impairment of Long-Lived Assets:
The Company periodically assesses the impairment of long-lived assets
based on expectations of future profitability and undiscounted cash flow
from 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.
(n) Stock Options:
The Company accounts for stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", which recognizes compensation
expense on the grant date if the current market price of the stock exceeded
the exercise price. In 1996, the Company elected to adopt the disclosure
provisions of Statement Of Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation".
(o) Earnings Per Share:
The consolidated financial statements are presented in accordance
with SFAS No. 128, "Earnings per Share." Basic net earnings (loss) per
common share are computed using the weighted average number of common
34
shares outstanding during the period. Diluted net earnings (loss) per
common share incorporate the incremental shares issuable upon the assumed
exercise of stock options. All prior period net earnings (loss) per common
share information are presented in accordance with SFAS No. 128.
Net earnings (loss) and weighted average common shares used to
compute net earnings (loss) per share, basic and diluted, are presented
below:
Years Ended
----------------------------------
February 3, February 1, January 31,
1996 1997 1998
---------- ---------- ---------
Net earnings (loss) $ 5,786 $(12,156) $(13,181)
Common shares, basic 16,147 19,426 20,646
Dilutive effect of stock options 280 -- --
------- ------- -------
Common shares, diluted 16,427 19,426 20,646
======= ======= =======
Dilutive effect of stock options of 561 and 581 shares were not included in
computing diluted earnings (loss) per share for fiscal 1996 and fiscal
1997, respectively, because the effect would have been antidilutive.
(p) Reclassifications:
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
2. BUSINESS COMBINATIONS
The Company acquired all of the outstanding equity securities of a retailer
with eight pet food and supply stores operated under the tradename Pet Nosh
in July 1996, a retailer with four pet food and supply stores operated
under the tradename PETS USA in October 1996, and a retailer with thirty-
two pet food and supply stores operated under the tradename Pet Food
Warehouse in December 1996, in exchange for an aggregate 2,929 shares of
common stock in transactions accounted for as poolings of interests. All
prior period financial statements have previously been restated for these
acquisitions.
The Company acquired all of the outstanding equity securities of a retailer
with four pet food and supply stores operated under the tradename Super
Pets in August 1997, a retailer with nine pet food and supply stores
operated under the tradename Paws in October 1997, a retailer with five pet
food and supply stores operated under the tradename The PetCare Company in
October 1997, and a retailer with four pet food and supply stores operated
under the tradename Pet Food Savemart in October 1997, in exchange for an
aggregate 613 shares of common stock. These acquisitions were accounted
for as poolings of interests with their financial positions and results of
operations included in the accompanying consolidated financial statements
from the beginning of the period in which each immaterial pooling was
completed. Previously reported financial statements have not been restated
to include the results of these acquisitions as revenues and results of
operations prior to the acquisition were not material to the consolidated
financial position or results of operations of the Company.
The Company acquired all of the outstanding equity securities of a retailer
with eighty-two pet food and supply stores operated under the tradename
PetCare ("PetCare") in November 1997, in exchange for 1,543 shares of
common stock. This transaction has been accounted for as a pooling of
interests, and accordingly, the consolidated financial statements for the
periods presented have been restated to include the accounts of PetCare.
35
Net sales and net earnings (loss) for the separate companies for the
periods preceding the PetCare acquisition were as follows:
Net Earnings
Net Sales (Loss)
--------- ------------
Year ended February 3, 1996:
PETCO, as previously reported $ 358,951 $ 7,465
PetCare (1) 84,634 $ (1,679)
--------- --------
Combined $ 443,585 $ 5,786
========= ========
Year ended February 1, 1997:
PETCO, as previously reported $ 500,036 $ (11,685)
PetCare (1) 100,601 (471)
--------- --------
Combined $ 600,637 $ (12,156)
========= ========
Year ended January 31, 1998:
PETCO $ 695,713 $ (11,193)
PetCare 54,076 (1,988)
--------- --------
Combined $ 749,789 $ (13,181)
========= ========
(1)In connection with the pooling with PetCare, an additional $1,143
and $327 of deferred tax assets were recognized in fiscal 1995 and fiscal
1996, respectively.
During fiscal 1995, the Company completed six acquisitions of retailers of
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
pet food and supplies in transactions accounted for as purchases. The
aggregate fair 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 in fiscal 1997. The excess of the
aggregate cost over the fair value of net assets acquired was $11,293 which
was recorded as goodwill and is being amortized over fifteen years.
The consolidated financial statements include the operating results from
the closing date for each respective purchase acquisition. The purchase
acquisitions during fiscal 1996 did not materially affect results of
operations and accordingly, pro-forma results are not presented for fiscal
1996.
In fiscal 1995, merger and business integration costs of $9,196 were
recorded following acquisition activities. These costs were primarily
associated with lease cancellations and closure of traditional stores
located in the same markets as acquired stores and the conversion and
integration of certain acquired stores.
In fiscal 1996, merger and business integration costs of $37,208 were
recorded following acquisition activities. These costs 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.
In fiscal 1997, merger and business integration costs of $38,693 were
recorded following acquisition activities. These costs consisted of $4,470
of transaction costs, $17,790 of costs attributable to lease cancellations
and closure of duplicate or inadequate facilities and activities, $12,216
of reformatting, facility conversion and other integration costs and $4,217
of severance and other costs.
Distributions to shareholders reflected in the accompanying Consolidated
Statement of Stockholders' Equity reflect activities of the pooled
companies.
36
3. LONG-TERM DEBT
On January 30, 1998, the Company agreed to a five year credit facility with
a syndicate of banks which provides for borrowings up to $110,000. The
credit facility provides $80,000 in revolving loans and $30,000 for a term
loan. Borrowings under the credit facility are unsecured and bear
interest, at the Company's option, at the agent bank's corporate base rate
or LIBOR plus 0.50% to 1.50% based on the Company's leverage ratio at the
time. The credit agreement contains certain affirmative and negative
covenants related to indebtedness, interest and fixed charges coverage, and
consolidated net worth.
Long-term debt consists of:
February 1, January 31,
1997 1998
---------- ----------
Revolving loans $ 8,950 $ --
Term loan -- 30,000
------ ------
8,950 30,000
Less current portion 8,950 3,375
------ ------
$ -- $26,625
====== ======
Annual maturities of long-term debt for the next five fiscal years are as
follows:
$3,375, $4,500, $7,125, $7,500 and $7,500.
4. Lease Commitments and Other Obligations
The Company finances certain fixed assets under capital leases.
There are approximately $21,200 and $22,500 in fixed assets financed
through capital leases at February 1, 1997 and January 31, 1998,
respectively. Accumulated amortization related to these financed assets
was approximately $5,000 and $7,500 at February 1, 1997 and January 31,
1998, 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 during fiscal years 1995, 1996, and 1997 were $61, $24 and $33,
respectively.
At January 31, 1998, the present value of future minimum payments for
capital lease and other obligations, and minimum lease payments under
noncancellable operating leases were as follows:
Capital Leases
and Other Operating
Years Obligations Leases
----- -------------- ---------
1998 $ 6,700 $ 67,414
1999 5,288 65,295
2000 3,121 62,627
2001 1,591 56,234
2002 323 52,190
Thereafter 2,644 239,554
------ -------
Total minimum payments 19,667 $543,314
=======
Less amount representing interest 3,225
------
Present value of net minimum capital
lease and other obligations payments 16,442
Less current portion of capital lease
and other obligations 5,073
------
Capital lease and other obligations $11,369
======
37
Rent expense under operating leases for fiscal years 1995, 1996, and
1997 was approximately $39,639, $55,023, and $70,506, respectively.
5. EQUITY
(a) Common Stock:
All references to common share information in the accompanying
consolidated financial statements and notes reflect recognition of an April
15, 1996, three for two stock split. In June 1996, the Company's
stockholders approved an increase in the number of authorized shares to
100,000.
In 1995, the Company sold 3,897 common shares, for net proceeds to
the Company of $53,614. In 1996, the Company sold 2,897 common shares, for
net proceeds to the Company of $78,699.
(b) Stock Options:
In February 1994, the Company's stockholders approved the 1994 Stock
Option Plan ("1994 Company Plan") which provides for the granting of stock
options, stock appreciation rights or restricted stock with respect to
shares of common stock to executives and other key employees. Stock
options may be granted in the form of incentive stock options or non-
statutory stock options and are exercisable for up to ten years following
the date of grant. Stock option exercise prices must be equal to or
greater than the fair market value of the common stock on the grant date.
In June 1996, the Company's stockholders approved an amendment to the 1994
Company Plan to increase the number of shares available for issuance under
the plan for each of the next five fiscal years by 3.0% of the number of
shares of common stock issued and outstanding as of the end of the
immediately preceding fiscal year.
In February 1994, the Company's stockholders approved the Directors
1994 Stock Option Plan ("Directors Plan") which provides for the granting
of common stock options to directors. Stock option exercise prices must be
equal to the fair market value of the common stock on the grant date. In
June 1995, the Company's stockholders approved an amendment to the
Directors Plan to increase the number of shares available for issuance
under the plan for each of the next five fiscal years by 0.1% of the number
of shares of common stock issued and outstanding as of the end of the
immediately preceding fiscal year.
In 1996, the Company assumed an employee stock option plan ("1993
Company Plan") from Pet Food Warehouse which provided for the granting of
incentive and nonqualified stock options with exercise prices equal to
their fair market values on their grant dates that become exercisable over
various periods and expire five or six years after the date of grant. The
common shares and exercise prices under this plan were adjusted based on
the common share conversion rate per the merger agreement with Pet Food
Warehouse. No future grants will be made under this plan.
In 1997, the Company assumed an employee stock option plan ("1989
Company Plan") from PetCare which provided for the granting of incentive
and non-qualified stock options with exercise prices equal to their fair
market values on their grant dates that became exercisable over various
periods and expire up to ten years after the date of grant. The common
shares and exercise prices under this plan were adjusted in accordance with
the terms of the merger agreement with PetCare. No further grants will be
made under this plan.
38
Information regarding the stock option plans follows:
1994 Company Plan 1993 Company Plan
--------------------------------- ---------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------- --------
Outstanding at
January 28, 1995 548 $ 10.33 $ 10.33 107 $ 8.05-$42.27 $ 24.31
Granted 156 $12.33-$18.33 $ 12.57 167 $14.95-$24.75 $ 18.08
Exercised (6) $ 10.33 $ 10.33 -- -- --
Cancelled (8) $10.33-$12.33 $ 11.49 (65) $16.72-$27.23 $ 24.31
------ ------------ ------- ------ ------------ -------
Outstanding at
February 3, 1996 690 $10.33-$18.33 $ 12.58 209 $ 8.05-$42.27 $ 19.73
Granted 333 $ 23.17 $ 23.17 41 $18.40-$23.58 $ 18.51
Exercised (50) $ 10.33 $ 10.33 -- $16.68-$19.12 $ 17.50
Cancelled (47) $10.33-$23.17 $ 20.52 (41) $8.05-$23.58 $ 19.13
------ ------------ ------- ------ ------------ -------
Outstanding at
February 1, 1997 926 $10.33-$23.17 $ 14.77 209 $14.95-$42.27 $ 19.52
Granted 645 $22.50-$30.31 $ 23.17 -- -- $ --
Exercised (164) $ 10.33 $ 10.33 (75) $15.24-$27.21 $ 20.11
Cancelled (85) $10.33-$23.17 $ 20.52 (13) $14.95-$42.27 $ 23.71
------ ------------ ------- ------ ------------ -------
Outstanding at
January 31, 1998 1,322 $10.33-$30.31 $ 18.89 121 $14.95-$27.73 $ 18.74
====== ------------ ------- ====== ------------ -------
Exercisable at
February 3, 1996 336 $ 10.33 $ 10.33 64 $ 8.05-$42.27 $ 23.69
Exercisable at
February 1, 1997 383 $ 10.33 $ 10.33 182 $14.95-$42.27 $ 19.40
Exercisable at
January 31, 1998 372 $10.33-$30.25 $ 12.55 111 $14.95-$27.73 $ 18.63
Available for grant at
January 31, 1998 784 --
Directors Plan 1989 Company Plan
--------------------------------- ---------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ -------------- --------
Outstanding at
January 28, 1995 5 $ 10.33 $ 10.33 105 $ 7.70-$11.54 $ 7.71
Granted 6 $ 12.33 $ 12.33 78 $ 11.54 $ 11.54
Exercised -- -- -- -- $ -- $ --
Cancelled -- -- -- -- $ -- $ --
------ ------------ ------- ------ ------------ -------
Outstanding at
February 3, 1996 11 $10.33-$12.33 $ 11.47 183 $ 7.70-$11.54 $ 9.34
Granted 3 $ 31.67 $ 31.67 5 $ 11.54 $ 11.54
Exercised -- $ -- $ -- -- $ -- $ --
Cancelled -- -- -- -- $ -- $ --
------ ------------ ------- ------ ------------ -------
Outstanding at
February 1, 1997 14 $10.33-$31.67 $ 15.96 188 $ 7.70-$11.54 $ 9.40
Granted 12 $21.38-$22.50 $ 21.67 -- $ 11.54 $ 11.54
Exercised -- $ -- $ -- (134) $ 7.70-$11.54 $ 9.61
Cancelled -- $ -- $ -- -- -- --
------ ------------ ------- ------ ------------ -------
Outstanding at
January 31, 1998 26 $10.33-$31.67 $ 18.64 54 $ 7.70-$11.54 $ 8.89
====== ------------ ------- ====== ------------ -------
Exercisable at
February 3, 1996 11 $10.33-$12.33 $ 11.47 78 $ 7.70-$11.54 $ 7.75
Exercisable at
February 1, 1997 14 $10.33-$31.67 $ 15.96 107 $ 7.70-$11.54 $ 8.22
Exercisable at
January 31, 1998 26 $10.33-$31.67 $ 18.64 54 $ 7.70-$11.54 $ 8.89
Available for grant at
January 31, 1998 64 --
In March 1998, options for 689 shares were granted under the 1994 Company
Plan which vest in March 2001 and are exercisable at $17.44 per share, and
options for 6,000 shares were granted under the Directors Plan that were
immediately exercisable at $17.44 per share.
(c) Accounting for Stock Options:
The Company accounts for stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations,
under which no compensation expense was recognized. Had compensation costs
for the Company's stock option plans been determined based upon the fair
value at the grant date for awards under these plans, consistent with the
39
methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net earnings and earnings per share would have
been reduced by approximately $650 or $0.04 per share during 1995, the
Company's net loss and loss per share would have been increased by $2,340,
or $0.12 per share, during 1996, and the Company's net loss and loss per
share would have been increased by $3,850, or $0.18 per share, during 1997.
The pro forma change in net earnings (loss) reflects only options granted
in 1995, 1996, and 1997. 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, 1996 and 1997 were estimated as $7.30, $12.01 and $11.65 on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, volatility of 66%, 52.7%, and
47.5%, risk-free interest rate of 6.5%, 6.5%, and 6.0% for 1995, 1996 and
1997, respectively, and an expected life of five years for all grants.
The following table summarizes information about the options
outstanding under all stock option plans at January 31, 1998:
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
----------- ------------ -------- ----------- --------
$10-$20 635 5.90 $ 12.03 493 $11.82
$20-$30 850 8.73 $ 22.84 34 $22.98
$30-$45 38 9.34 $ 30.37 36 $30.37
--------- --------
1,523 563
========= ========
40
6. INCOME TAXES
Income taxes (benefit) consists of the following:
Years Ended
----------------------------------------
February 3, February 1, January 31,
1996 1997 1998
----------- ---------- ----------
Current:
Federal $ 1,090 $ 958 $ 416
State 340 171 (370)
------- ------- -------
1,430 1,129 46
------- ------- -------
Deferred:
Federal (15,370) (5,186) (4,290)
State (661) (18) (1,242)
------- ------- -------
(16,031) (5,204) (5,532)
------- ------- -------
Income taxes (benefit) $(14,601) $ (4,075) $ (5,486)
======= ======= =======
A reconciliation of income taxes at the federal statutory rate of 34%
with the provision for income taxes (benefit) follows:
Years Ended
---------------------------------------
February 3, February 1, January 31,
1996 1997 1998
---------- ---------- ----------
Income taxes at federal
statutory rate $ (2,998) $ (5,518) $ (6,347)
Non-deductible expenses 4 1,323 1,489
State taxes, net of federal
tax benefit (233) 101 (1,064)
Change in valuation
allowance (11,809) -- --
Other 435 19 436
------- ------- -------
$(14,601) $ (4,075) $ (5,486)
======= ======= =======
The sources of significant temporary differences which gave rise to
the deferred tax provision and their effects follow:
Years Ended
---------------------------------------
February 3, February 1, January 31,
1996 1997 1998
---------- ---------- ----------
Inventory $ (344) $ (2,891) $ (1,216)
Deferred rent (420) (1,072) (588)
Depreciation 833 1,424 1,611
Accrued fringes (527) (96) (699)
Intangibles 245 (178) 1,771
Store closing costs (1,182) (1,833) (1,941)
Fixed assets (1,410) (1,318) 1,128
Other assets -- -- (2,358)
Benefit of net operating
loss carryforwards (604) 943 (3,929)
Other (216) (183) 689
Change in valuation
allowance (11,809) -- --
Prior year adjustments (597) -- --
------- ------- -------
$(16,031) $ (5,204) $ (5,532)
======= ======= =======
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:
41
Years Ended
-------------------------
February 1, January 31,
1997 1998
---------- ----------
Deferred tax assets:
Inventory $ 5,033 $ 6,249
Deferred rent 2,824 3,412
Accrued fringes 1,406 2,105
Intangibles 553 --
Store closing costs 3,555 5,496
Fixed assets 2,728 1,600
Other assets -- 2,358
Net operating loss carryforwards 10,693 14,622
Other 370 --
------ ------
Total deferred tax assets 27,162 35,842
Valuation allowance (4,900) (4,900)
------ ------
Net deferred tax assets 22,262 30,942
------ ------
Deferred tax liabilities:
Depreciation (1,555) (3,166)
Intangibles -- (1,218)
Other -- (319)
------ ------
Total deferred tax liabilities (1,555) (4,703)
------ ------
Net deferred tax assets $20,707 $26,239
====== ======
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 valuation allowance of $11,809 was eliminated
and income taxes provided in prior years adjusted. The valuation allowance
of $4,900 at February 1, 1997 and January 31, 1998 relates to net operating
loss carryforwards of PetCare. 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,
net of the valuation allowance.
At January 31, 1998, the Company has available net loss carryforwards
of $39,239 for federal income tax purposes, which begin expiring in 2004,
and $36,406 for state income tax purposes, which begin expiring in 1998.
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.
42
8. 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 April 1, 1997, the Company
adopted a matching provision for 50% of the first 3% of compensation that
is contributed by each participating employee. In connection with the
required match, the Company's contribution to the plan was $58 in 1996 and
$199 in 1997. Prior to 1996, there was no matching contribution.
9. 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, results of operations, or
liquidity of the Company.
43
EXHIBIT INDEX
Sequentially
Numbered
Number Document Page
- ------ -------- ------------
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 Credit Agreement, dated January 30, 1998 between the Company 51
and Union Bank, as Syndicating Agent. (3)
10.2 Term loan Agreement, dated January 29, 1996, between the --
Company and Union Bank. (4)
10.3 First Amendment to Term loan Agreement, dated April 24, 1997, --
between the Company and Union Bank.(5)
10.4 Distribution Center Lease, dated March 24, 1994, between the --
Company and The Principal Mutual Life Insurance Company for
10401 Seventh Street, Rancho Cucamonga, California. (6)
10.5 Lease Dayton (3) 120
10.6 Distribution Center Lease, dated February 20, 1998 between the 213
Company and Industrial Developments International, Inc. for
3801 Rock Creek Boulevard, Joliet, Illinois. (3)
10.7 Lease Mira Loma (3) 274
10.8 Master Equipment Lease Agreement, dated October 19, 1992, --
between the Company and Sanwa Business Credit Corporation. (2)
10.9 Master Equipment Lease Agreement, dated September 21, 1994, --
between the Company and General Electric Credit Corporation. (6)
10.10 Master Equipment Lease Agreement, dated March 10, 1995, between --
the Company and KeyCorp Leasing Ltd. (4)
10.11 Master Equipment Lease Agreement, dated November 15, 1995, --
between the Company and Fleet Credit Corporation. (4)
10.12 Master Lease Agreement, dated December 27, 1995, between the --
Company and Newcourt Financial USA, Inc. (4)
10.13 Master Lease Agreement, dated September 28, 1995, between the --
Company and USL Capital Corporation. (4)
10.14 Employment Letter Agreement, dated October 3, 1996, by and --
between Petco and Marvin W. Goldstein. (1)
10.15 Employment Agreement, dated March 17, 1996, between the Company --
and Brian K. Devine. (4)
10.16 Form of Indemnification Agreement between the Company and --
certain officers and directors. (2)
10.17 Form of Retention Agreement for executive officers. (3) 366
10.18 Form of Retention Agreement for officers. (3) 375
10.19 Petco Animal Supplies 401(k) Plan. (2) --
10.20 The 1994 Stock Option and Restricted Stock Plan for Executive --
and Key Employees of Petco Animal Supplies, Inc., as amended. (7)
10.21 First Amendment to 1994 Stock Option and Restricted Stock Plan --
for Executive and Key Employees of Petco Animal Supplies, Inc. (5)
10.22 Petco Animal Supplies, Inc. Group Benefit Plan, dated July 29, --
1991, as amended. (4)
10.23 Petco Animal Supplies, Inc. Directors' 1994 Stock Option Plan, --
as amended. (4)
10.24 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option --
Agreement. (2)
10.25 Form of Petco Animal Supplies, Inc. Incentive Stock Option --
Agreement. (2)
44
10.26 Form of Petco Animal Supplies, Inc. Restricted Stock Agreement. (2) --
10.27 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option --
Agreement (Directors' 1994 Stock Option Plan). (2)
10.28 The Pet Food Warehouse, Inc. 1993 Stock Option Plan (8) --
10.29 Pet Food Warehouse, Inc. Amendment to 1993 Stock Option Plan. (9) --
10.30 The PetCare Plus, Inc. 1989 Stock Option Plan (the "1989 Stock --
Option Plan"). (10)
10.31 Form of Incentive Stock Option Agreement under the 1989 Stock --
Option Plan. (10)
10.32 Form of Nonqualified Stock Option Agreement under the 1989 --
Stock Option Plan. (10)
21.1 Subsidiaries of the registrant. (3) 47
23.1 Consent of KPMG Peat Marwick LLP. (3) 48
23.2 Consent of Coopers & Lybrand L.L.P. (3) 49
27.1 Financial Data Schedule. (3) 50
_____________
(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 herewith.
(4) 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.
(5) Filed as an exhibit to the Company's Current Report on Form 10-K dated
April 30, 1997.
(6) 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.
(7) Filed as an exhibit to the Company's Proxy Statement dated May 24, 1996
relating to the 1996 Annual Meeting of Stockholders of Petco.
(8) Filed as an exhibit to Pet Food Warehouse, Inc.'s Registration
Statement on Form SB-2 dated July 6, 1993, File No. 33-65734C,
including Amendment No. 1 thereto, dated effective August 13, 1993,
Post-Effective Amendment No. 1 thereto, dated January 7, 1994, Post-
Effective Amendment No. 2 thereto, dated February 1, 1994, and Post-
Effective Amendment No. 3 thereto, dated February 10, 1994.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated February 26, 1997, File No. 333-14699.
(10)Filed as an exhibit to the Company's Registration Statement on Form S-8
dated March 20, 1998, File No. 333-48311.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
30th day of April, 1998.
PETCO ANIMAL SUPPLIES, INC.
By: /s/BRIAN K. DEVINE
-------------------------------------
Brian K. Devine
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/BRIAN K. DEVINE Chairman of the Board, President April 30, 1998
- -----------------------
Brian K. Devine and Chief Executive Officer
(Principal Executive Officer)
/s/RICHARD C. ST. PETER Executive Vice President, Chief April 30, 1998
- -----------------------
Richard C. St. Peter Financial Officer and Secretary
(Principal Financial Officer)
/s/JAMES M. MYERS Senior Vice President, Finance April 30, 1998
- -----------------------
James M. Myers (Principal Accounting Officer)
/s/ANDREW G. GALEF Director April 30, 1998
- -----------------------
Andrew G. Galef
/s/RICHARD J. LYNCH Director April 30, 1998
- -----------------------
Richard J. Lynch
/s/JAMES F. McCANN Director April 30, 1998
- -----------------------
James F. McCann
/s/PETER M. STARRETT Director April 30, 1998
- -----------------------
Peter M. Starrett
46
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
47
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, 333-04442, 333-26301, and 333-48311) 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 April 17, 1998,
relating to the consolidated balance sheets of Petco Animal Supplies, Inc.
and subsidiaries as of February 1, 1997 and January 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended January 31,
1998, which report appears in the January 31, 1998, annual report on Form
10-K of Petco Animal Supplies, Inc.
KPMG Peat Marwick LLP
San Diego, California
April 28, 1998
48
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Petco Animal Supplies, Inc. on Form S-3 (File No. 333-45889) and Form
S-8 (File No. 333-48311) of our report dated April 16, 1997, on our audits
of the financial statements of PetCare Plus, Inc. (which are included in
the restated pooled financial statements of Petco Animal Supplies, Inc.) as
of January 25, 1997 and for the years ended January 25, 1997 and January
27, 1996, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 29, 1998