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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 30, 1999 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
Of Incorporation or Organization) Identification No.)
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 23, 1999, there were outstanding 21,074,305 shares of the
Registrant's Common Stock, $0.0001 par value. As of that date, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $259,087,055.
Documents Incorporated By Reference: The information called for by Part III
is incorporated by reference from the Proxy Statement relating to the 1999
Annual Meeting of Stockholders of the Registrant.
1
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 30,
1999, the Company operated 476 stores in 37 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.
Over the last few years, PETCO has expanded its store format from smaller,
traditional stores to the current superstore format. At the end of fiscal
1998, superstore square footage represented over 95% of the Company's total
square footage. 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 1998, the
Company opened or acquired 40 stores and closed 21 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 1998 refer to the fiscal
year beginning on February 1, 1998 and ending on January 30, 1999.
THE PET FOOD, SUPPLY AND SERVICES INDUSTRY
GENERAL. In 1997, retail sales in the United States of pet food, supplies,
small animals (excluding dogs and cats) and services were estimated at $21
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 $5 billion, while sales of pet services, which include
veterinary services, obedience training and grooming services, were
estimated at $6 billion. According to recent estimates, approximately 60
million households in the United States, or over half of all U.S.
households, owned at least one pet and over half of pet-owning households
owned more than one pet.
PET FOOD. Historically, the pet food industry has been dominated by
national supermarket brands such as Alpo, Kal Kan and Purina, which are
primarily sold through grocery stores, convenience stores and mass
merchants. In recent years, supermarkets' share of total pet food sales has
steadily decreased as a result of competition from superstores, warehouse
clubs, mass merchandisers and specialty pet stores as well as the growing
proportion of premium pet food sales. Premium pet food brands such as
Science Diet, Nutro and IAMS, which offer higher levels of nutrition than
non-premium brands, account for more than 25% of the total pet food market
according to recent estimates. These premium pet foods currently are not
sold through supermarkets, warehouse clubs and mass merchandisers due to
manufacturers' restrictions but are sold primarily through superstores like
PETCO, specialty pet stores, veterinarians and farm and feed stores.
2
PET SUPPLIES. The market for pet supplies consists of items such as
collars and leashes, cages and habitats, toys, treats, aquatic supplies,
pet carriers, vitamins and supplements and grooming and veterinary
products. The channels of distribution for pet supplies are highly
fragmented with products sold by many types of retailers, including
supermarkets, discounters and other mass merchandisers, specialty pet
stores, direct mail and veterinarians. Superstores such as PETCO, with
wide assortments of pet supplies and higher levels of customer service,
represent a growing channel for sales of pet supplies.
SMALL ANIMALS. The market for small animals (other than dogs and cats)
includes sales of fish, birds, reptiles, rabbits, hamsters, mice and other
small pets. Because of the overpopulation of dogs and cats and the
controversial practices of some breeders, the Company has elected to limit
its selection of animals to birds, fish, reptiles and other small animals.
PETCO does, however, participate in pet adoption programs for dogs and
cats, which are administered through local animal welfare programs.
PET SERVICES. The market for pet services includes veterinary services,
obedience training and grooming services. The Company offers a range of
veterinary services at only a selected number of stores. Limited veterinary
services such as routine vaccinations are offered at a number of stores.
The Company does offer obedience training in most of its stores and offers
grooming in many of its stores. Although such services do not generate a
significant portion of the Company's revenues, the Company believes that
offering selected pet services does create increased customer traffic in
the Company's stores.
BUSINESS STRATEGY
PETCO's strategy is to be the leading category-dominant national chain of
community pet food and supply superstores by offering its customers a
complete assortment of pet-related products at competitive prices, with
superior levels of customer service at convenient locations. The key
components of PETCO's strategy are:
SUPERSTORE EXPANSION. The Company believes that opportunities for
additional superstores exist in both new and existing markets. The Company
intends to continue to increase the number of superstores it operates by
opening and acquiring superstores in new and existing markets.
ACQUISITIONS. A significant part of the Company's expansion strategy has
been to capitalize on the consolidation of the fragmented pet food and
supply industry. Generally, the Company has acquired established and well-
located stores or chains of stores that are similar in size and format to
the Company's existing superstores. Consistent with this strategy, the
Company has completed 19 acquisitions, representing 208 stores located in
28 states, since the Company's initial public offering in March 1994. The
Company believes that there may be further acquisition opportunities that
would allow the Company to attract new customers, enter new markets and
leverage operating costs.
COMPLETE MERCHANDISE ASSORTMENT. PETCO's prototype 15,000 square foot
superstores carry a complete merchandise assortment of more than 10,000
active SKUs of high quality pet-related products. PETCO's products include
premium pet food, fish, birds, reptiles and other small animals and related
food and supplies, collars and leashes, grooming products, toys, pet
carriers, cat furniture, dog houses, vitamins, treats and veterinary
supplies.
3
COMPETITIVE PRICES. PETCO's pricing strategy is to offer everyday low
prices on all food items which are important in attracting and retaining
customers. The Company believes in offering value to customers through fair
prices coupled with a complete merchandise assortment.
SUPERIOR CUSTOMER SERVICE. Providing knowledgeable and friendly customer
service is a key aspect of PETCO's business strategy. PETCO seeks store
managers and sales associates who are pet owners and enthusiasts themselves
as they are better able to assist customers with their needs. PETCO
provides comprehensive training to its personnel, and the Company believes
that this enables it to attract and retain highly motivated, well-qualified
store managers and sales associates committed to providing superior levels of
customer service.
CONVENIENT STORE LOCATIONS. PETCO's stores are located in high-traffic
retail areas with ample parking, often in community shopping centers
anchored by a large supermarket. The Company selects sites which are
characterized by weekly or more frequent shopping patterns. All stores
offer extended shopping hours and typically are open seven days a week.
ENJOYABLE SHOPPING EXPERIENCE. PETCO's stores are attractively designed to
create a fun and exciting shopping environment for customers and their
pets. The Company's stores are brightly illuminated with colorful fixtures
and graphics and feature prominent and attractive signage. Stores typically
feature an assortment of aquatics, reptiles, birds and small animals.
Birds and other animals are available for demonstration by PETCO employees
and for handling by customers. Many of the Company's stores also contain a
glassed-in grooming area that allows customers to observe the grooming
process while they shop.
INNOVATIVE COMMUNITY PROGRAMS. PETCO's long-standing neighborhood
marketing programs are designed to introduce consumers to its stores and
maintain long-term customer and community relationships. Due to the large
numbers of dogs and cats available at local animal shelters, PETCO's long-
standing corporate policy has been to encourage its customers to adopt
these pets from animal shelters. On designated days, in cooperation with
animal welfare organizations, the Company offers pet adoption services at
its stores. The Company's other community programs include in-store
vaccination clinics, programs with local pet-related charities, a product
sample program to introduce consumers and their pets to premium food and
supplies and a preferred customer program. In addition, the Company
maintains referral programs and other relationships with local breeders and
veterinarians.
MERCHANDISING
COMPLETE MERCHANDISE ASSORTMENT. PETCO stores offer the pet owner one of
the most complete and exciting assortments of pet products and services
available in the marketplace. PETCO's products and services generally fall
into five main categories.
PET FOOD. PETCO offers a complete assortment of leading name brand premium
food for dogs and cats, such as Iams, Nutro, and Science Diet, as well as
selected mass brand foods. Due to manufacturers' restrictions, premium
brands are sold exclusively through specialty pet stores and veterinarians.
The Company also offers a PetGold Masters(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.
4
PET SUPPLIES. PETCO's broad assortment of supplies for dogs and cats
includes many private label items and offers collars and leashes, grooming
products, toys, pet carriers, cat furniture, dog houses, vitamins, treats
and veterinary supplies. The Company also offers broad lines of supplies
for other pets, including aquariums, terrariums, bird cages and supplies
for small animals.
SMALL ANIMALS. PETCO superstores feature specialty departments which stock
a large assortment of fish, domestically bred birds, reptiles and other
small pets. The stores' animal selection typically includes cockatiels,
parakeets and finches in the bird category; iguanas, turtles and snakes in
the reptile category; and hamsters, rats and mice in the small animal category.
The Company's superstores normally carry both fresh and saltwater fish. The
Company believes that its interactive small animal displays add excitement
to shopping at PETCO.
GROOMING AND OTHER SERVICES. Professional grooming is available at many of
the Company's superstores. Grooming services are typically performed in
glass-walled stations in the stores to 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 pet
apparel, calendars and other pet-related merchandise. In addition, the
Company features a variety of seasonal and holiday pet items.
COMPETITIVE PRICES. PETCO's pricing strategy is to offer everyday low
prices on all food items which are important in attracting and retaining
customers. The Company believes in offering value to customers through fair
prices coupled with a complete merchandise assortment. PETCO's large buying
volume and sophisticated distribution network allows it to compete
effectively on price. PETCO's price guarantee program offers to match all
competitors' advertised prices.
STORE DEVELOPMENT
Over the last few years, PETCO has expanded its store format from smaller,
traditional stores to the current superstore format. At the end of fiscal
1998, superstore square footage represented over 95% of the Company's total
square footage. PETCO plans to open superstores in the future and expects
that these will be the Company's current prototype superstores which
average approximately 15,000 square feet. These prototype superstores offer
our complete merchandise assortment and, in addition, carry fish, birds,
reptiles and other small animals, and grooming services.
The Company intends to continue to increase the number of superstores it
operates by opening and acquiring superstores in new and existing markets
and converting existing stores into superstores. Although the Company plans
to open superstores in the future, it will continue to operate profitable
and well-situated stores with other formats.
PETCO attempts to obtain convenient, high-traffic stores located in prime
community shopping centers. The Company undertakes substantial market
research prior to entering new markets. Key factors in market and site
selection include high visibility, easy access, ample parking, population,
demographics and the number and location of competitors.
In fiscal 1998, the Company opened or acquired 40 stores, including the
conversion of 9 stores into superstores, and closed 12 stores.
5
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 1998. While the Company does not maintain
long-term supply contracts with any of its vendors, PETCO believes that it
enjoys a favorable and stable relationship with each of these vendors.
PETCO currently operates three central and five regional distribution
centers. The central distribution centers are located in Mira Loma,
California; Dayton, New Jersey; and Joliet, Illinois. Bulk items for all
stores are either shipped to regional distribution centers for
redistribution or are sent directly to store locations. Manufacturers ship
non-bulk supplies to the central distribution facilities which the Company
then distributes either to regional centers or directly to store locations.
Management believes that its centralized distribution system enables its
stores to maximize selling space by reducing necessary levels of safety
stock carried in each store.
COMPETITION
The pet food and supply business is highly competitive. This competition
can be categorized into three different segments: (i) mass merchants,
including supermarkets, (ii) single store and conventional pet shops and
(iii) specialty pet supply chains. Many of the premium pet food brands
offered by the Company, such as 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 and the acquisition of these larger
chains by similar competitors. The Company believes this consolidation
trend may have a positive impact on industry conditions as store capacity
may be rationalized, both in existing and in new units. There can be no
assurance that in the future the Company will not face greater competition
from other national or regional retailers.
TRADEMARKS AND LICENSES
The Company has registered numerous service marks and trademarks with the
United States Patent and Trademark Office. The Company believes the PETCO
trademark has become an important component in its merchandising and
marketing strategy. The Company believes it has all licenses necessary to
conduct its business.
6
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 30, 1999, the Company employed approximately 9,300
associates, of whom approximately 4,500 were employed full-time.
Approximately 92% of the Company's employees were employed in stores or in
direct field supervision, approximately 4% in distribution centers and
approximately 4% in the 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 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:
7
EXPANSION PLANS. The Company's continued growth depends, to a significant
degree, on its ability to open and operate new superstores on a profitable
basis and to a lesser extent on increasing sales in existing stores. The
Company's performance is also dependent upon a number of other factors,
including its ability to locate and obtain favorable superstore sites and
negotiate acceptable lease terms, to obtain and distribute adequate product
supplies to its stores, to hire and train employees and to upgrade its
management information and other operating systems to control the
anticipated growth and expanded operations. There can be no assurance that
the Company will achieve its planned expansion or that such expansion will
be profitable. The Company has previously opened stores in new markets and
plans to open additional stores in new markets. The performance of new or
existing stores may be adversely affected by regional economic conditions.
The Company's expansion strategy could have the effect of drawing customers
from its existing stores. In addition, average store contribution and
operating margins may be adversely affected in the near term due to the
level of preopening expenses and lower anticipated sales volumes of its
immature stores. The Company's existing Senior Credit Facility (the "Credit
Facility") contains certain covenants which may restrict or impair the
Company's growth plans. Management continues to evaluate the Company's
long-term distribution needs to accommodate store and sales growth beyond
fiscal 1999. Either the Company's failure to expand its distribution
facilities in accordance with its growth plans or difficulties incurred in
operating its distribution facilities could adversely affect the Company's
ability to deliver merchandise to its stores in a timely fashion.
INTEGRATION OF OPERATIONS AS THE RESULT OF ACQUISITIONS. Operations of
acquired companies must be integrated and combined efficiently for the
Company to realize the anticipated benefits of its acquisitions. There can
be no assurance that the integration process has been successful or that
the anticipated benefits of these acquisitions will be fully realized. For
example, in fiscal 1998 the Company experienced disappointing results from
some of the stores it acquired in fiscal 1997. The dedication of management
resources to acquisitions may detract attention from the day-to-day
business of the Company. The difficulties of integration are increased by
the necessity of coordinating geographically separated organizations,
integrating personnel with disparate business backgrounds and combining
different corporate cultures and accounting and computer systems. There can
be no assurance that the Company will achieve expected expense reductions
with the acquired companies, that there will not be substantial costs
associated with any such reductions, that such reductions will not result
in a decrease in revenues or that there will not be other material adverse
effects of these integration efforts. Such effects could materially reduce
the short-term earnings of the Company. In fiscal 1996, 1997 and 1998, merger
and business integration costs of $37.2 million, $38.7 million, and $23.0
million, respectively, were recorded by the Company in connection with
acquisition activities. These costs include transaction costs, costs
attributable to lease cancellation and closure of duplicate or inadequate
facilities and activities, reformatting, facility conversion and other
integration costs, severance, and other costs. The Company may make
additional acquisitions in the future, which may result in additional costs.
Acquisitions require significant financial and management resources both at
the time of the transaction and during the process of integrating the newly
acquired business into the Company's operations. The Company's operating
results could be adversely affected if the Company is unable to successfully
integrate such new companies into its operations. Future acquisitions by the
Company could also result in potentially dilutive issuances of securities,
additional debt and contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, which could materially adversely
affect the Company's profitability.
8
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 1998. 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 widely
available in supermarkets or through other mass merchants, or if the
premium brands currently available to such supermarkets and mass merchants
were to increase their market share at the expense of the premium brands
sold only through specialty pet food and supply retailers. The Company's
principal vendors currently provide the Company with certain incentives
such as volume purchasing, trade discounts, cooperative advertising and
market development funds. A reduction or discontinuance of these incentives
could also have a material adverse effect on the Company.
COMPETITION. The pet food and supply retailing industry is highly
competitive. The Company competes with a number of pet superstore chains,
smaller pet store chains and independent pet stores. The Company also
competes with supermarkets and other mass merchants. 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
16.1%, 11.5%, and 6.4% for fiscal 1996, 1997 and 1998, respectively. The
Company anticipates that its rate of comparable stores sales growth may be
lower in future periods than the growth rates previously experienced due to
maturation of the existing store base and the effects of opening additional
stores in existing markets. Due in part to recent acquisitions,
period-to-period comparisons of financial results may not be meaningful and
the results of operations for historical periods may not be indicative of future
results.
QUARTERLY AND SEASONAL FLUCTUATIONS. The timing of new store openings,
related preopening expenses and the amount of revenue contributed by new
and existing stores may cause the Company's quarterly results of operations
to fluctuate. The Company's business is also subject to 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.
9
DEPENDENCE ON SENIOR MANAGEMENT. The Company is dependent upon the efforts
of its principal executive officers. In particular, the Company is
dependent upon the management and leadership of Brian K. Devine, Chairman,
President and Chief Executive Officer. The loss of Mr. Devine or certain of
the Company's other principal executive officers could materially adversely
effect the Company's business. The Company has entered into an employment
agreement with Mr. Devine which provides for an indefinite term and which
may be terminated by Mr. Devine on 90 days notice. The Company has obtained
a key man insurance policy on the life of Mr. Devine in the amount of $1.0
million, of which the Company is the sole beneficiary. The Company's
success will depend on its ability to retain its current management and to
attract and retain qualified personnel in the future.
POSSIBLE VOLATILITY OF STOCK PRICE. Since the initial public offering of
the Company's common stock in March 1994, the market value of the common
stock has been subject to significant fluctuations. The market price of the
common stock may continue to be subject to significant fluctuations in
response to operating results and other factors. In the past, the market
price of the Company's stock has responded to changes in outside analysts'
expectations, stock market movements relating to retailers particularly,
and to general stock market fluctuations. In addition, the stock market in
recent years has experienced price and volume fluctuations that often have
been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the common stock. The
Company is currently involved in stockholder class action litigation
precipitated by a sudden drop in the price of the Company's common stock.
See "Legal Proceedings." Management believes that future fluctuations in
the market value of the Company's common stock may trigger further
litigation. Defending the Company in such stockholder class action
litigation is costly, and the outcome is unpredictable.
Readers are cautioned not to place undue reliance on forward-looking
statements which reflect management's view only as of the date of this
Annual Report. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
10
ITEM 2. PROPERTIES
The Company leases substantially all of its store and warehouse locations.
Original lease terms for the Company's 476 stores generally range from five
to twenty years, many of which contain renewal options. Leases on 124
stores expire within the next three years, with leases on 85 of these
stores containing renewal options.
The table below shows the location and number of the Company's stores as of
January 30, 1999.
Location Stores
- - ------------------ ------
Alabama 2
Arizona 13
Arkansas 2
California 133
Colorado 8
Connecticut 12
Delaware 1
District of Columbia 1
Idaho 2
Illinois 46
Indiana 2
Iowa 6
Kansas 8
Kentucky 1
Louisiana 1
Maryland 7
Massachusetts 18
Michigan 7
Minnesota 18
Missouri 13
Montana 1
Nebraska 5
Nevada 5
New Hampshire 4
New Jersey 14
New Mexico 1
New York 16
North Dakota 2
Ohio 3
Oregon 13
Pennsylvania 18
Rhode Island 1
South Dakota 1
Tennessee 5
Texas 41
Virginia 9
Washington 27
Wisconsin 9
---
476
===
11
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; New Hope,
Minnesota; and Mansfield, Massachusetts under leases which expire in August
1999, April 2001, February 2002, September 2002, and December 2003,
respectively. The Company's three central distribution centers collectively
occupy approximately 800,000 square feet of space in Dayton, New Jersey;
Joliet, Illinois; and Mira Loma, California under leases which expire in
June 2002, April 2005, and September 2005, respectively. Each of the
distribution center leases contains a renewal option.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United
States District Court for the Southern District of California between
August and November, 1998. These cases have recently been consolidated and
will be administered as one case. The plaintiffs purport to represent a
class of all persons who purchased the Company's common stock between
January 30, 1997 and July 10, 1998. The complaints allege that the
defendants violated various federal securities laws through material
misrepresentations and omissions during the class period, and seek
unspecified monetary damages. These matters have been tendered to the
Company's insurance carrier. While the Company believes the allegations
contained in these lawsuits are without merit, the claims have not
progressed sufficiently for the Company to estimate a range of possible
exposure, if any. The Company and its officers intend to defend themselves
vigorously.
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 30, 1999.
ITEM 4.1. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
- - -------------------- --- -----------------------------------------------
Brian K. Devine 57 Chairman, President and Chief Executive Officer
Bruce C. Hall 54 Executive Vice President - Operations
Janet D. Mitchell 43 Senior Vice President - Human Resources and
Administration
James M. Myers 41 Senior Vice President and
Chief Financial Officer
William M. Woodard 50 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.
12
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.
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
held various positions with the El Torito Restaurant chain. Ms. Mitchell
received a bachelor's degree from California State University, San Diego.
JAMES M. MYERS, Senior Vice President and Chief Financial Officer, joined
the Company in May 1990. From 1996 to 1998, Mr. Myers served as Senior Vice
President, Finance and prior to that as Vice President, Finance and as Vice
President and Controller of the Company. From 1980 to 1990, Mr. Myers held
various positions at the accounting firm KPMG 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.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.0001 par value, is quoted on the Nasdaq
National Market under the symbol "PETC." Public trading of the common stock
commenced on March 17, 1994. The following table sets forth for the periods
indicated the high and low reported sale prices per share for the common
stock as reported by the Nasdaq National Market:
High Low
------ ------
FISCAL 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
FISCAL 1998
First Quarter $25.00 $13.13
Second Quarter 21.13 9.75
Third Quarter 10.63 5.38
Fourth Quarter 11.25 7.75
On April 23, 1999, there were 782 stockholders of record of the Company's
common stock.
The Company has never paid cash dividends on its common stock. The Company
currently anticipates that it will retain all available funds for use in
the operation and expansion of its business and does not anticipate paying
any cash dividends in the foreseeable future.
13
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share and operating data)
The following table sets forth selected consolidated financial and
operating data for the Company for the five-year period ended January 30,
1999. The selected consolidated financial data presented below under the
caption "Income Statement Data" for the year 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 four-year period ended January 30, 1999 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 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, January 31, 1998 and January
30, 1999 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 30, 1999 and for each of the years in
the three-year period ended January 30, 1999 and the independent auditors'
report thereon, included and incorporated by reference elsewhere in this
Annual Report.
Historical
-----------------------------------------------------
Fiscal Year Ended
-----------------------------------------------------
Jan. 28, Feb 3, Feb. 1, Jan. 31, Jan. 30,
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Net sales $313,809 $443,585 $600,637 $749,789 $839,622
Cost of sales and occupancy costs 234,400 337,873 446,315 553,566 624,818
-------- -------- -------- -------- --------
Gross profit 79,409 105,712 154,322 196,223 214,804
Selling, general and
administrative expenses 75,416 101,760 132,745 173,667 187,938
Merger and business integration costs -- 9,196 37,208 38,693 22,963
-------- -------- -------- -------- --------
Operating income (loss) 3,993 (5,244) (15,631) (16,137) 3,903
Loss on disposal of stores -- 3,500 -- -- --
Interest expense, net 1,080 71 600 2,530 6,718
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes 2,913 (8,815) (16,231) (18,667) (2,815)
Income taxes (benefit) (1) 1,969 (14,601) (4,075) (5,486) (438)
-------- -------- -------- -------- --------
Net earnings (loss) $ 944 $ 5,786 $(12,156) $(13,181) $ (2,377)
======== ======== ======== ======== ========
Net earnings (loss) per
common share, basic $0.08 $0.36 $(0.63) $(0.64) $(0.11)
Net earnings (loss) per
common share, diluted $0.08 $0.35 $(0.63) $(0.64) $(0.11)
Weighted average common
shares outstanding, basic 11,373 16,147 19,426 20,646 21,073
Weighted average common
shares outstanding, diluted 11,390 16,427 19,426 20,646 21,073
OPERATING DATA:
Total stores open end of period 288 353 413 457 476
Aggregate gross square footage 2,047,078 3,169,472 4,435,019 5,299,535 5,637,708
Average net sales per store (2) $ 974,000 $1,183,000 $1,438,000 $1,696,000 $1,811,000
Average net sales per
gross square foot (3) $ 153 $ 168 $ 162 $ 158 $ 157
Percentage increase in
comparable store net sales 18.5% 16.5% 16.1% 11.5% 6.4%
BALANCE SHEET DATA:
Working capital $ 31,918 $ 29,064 $ 59,928 $ 33,360 $ 39,316
Total assets 126,918 214,498 312,617 335,195 387,135
Long-term debt,
excluding current portion -- -- -- 26,625 65,375
Capital lease and other obligations,
excluding current portion 5,779 13,334 15,581 11,369 20,982
Total stockholders' equity 48,397 130,040 196,499 186,057 183,841
- - --------------------
(1) Includes $11.8 million benefit from previously unrecognized deferred
tax assets in fiscal 1995.
(2) Calculated using net sales divided by the number of stores open,
weighted by the number of months stores are open during the period.
(3) Calculated using net sales divided by gross square footage of stores
open, weighted by the number of months stores are open during the period.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Over the past few years, PETCO has expanded its store format from smaller,
traditional stores to the current superstore format. At the end of fiscal
1998, superstore square footage represented over 95% of the Company's total
square footage. PETCO plans to open superstores in the future and follows a
strategy of converting and expanding its existing store base to conform to
the superstore format. As a result of this strategy, the Company has opened
and acquired superstores, has expanded and relocated smaller stores into
superstores and has closed underperforming stores. As a result of the
Company's store expansion strategy, operating results may reflect lower
average store contribution and operating margins due to increased store
preopening expenses and lower anticipated sales volumes of immature stores.
During fiscal 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 22 stores which were accounted for as
immaterial poolings of interests. The Company also acquired a retailer that
operated 82 pet food and supply stores under the trade name PetCare located
in 10 Midwestern and Southern states which was accounted for as a pooling
of interests.
During fiscal 1998 the Company completed two acquisitions of retailers of
pet food and supplies operating four stores in transactions accounted for
as purchases.
All results of operations have been restated to reflect the poolings of
interests and to reflect the purchase transactions from their respective
acquisition dates. Results of operations from immaterial poolings are
reflected from the beginning of the period from which these acquisitions
were consummated. (See footnote 2 to the consolidated financial
statements).
At January 30, 1999, the Company operated 476 stores in 37 states and the
District of Columbia.
15
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. 1, Jan. 31, Jan. 30,
1997 1998 1999
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy costs 74.3 73.8 74.4
----- ----- -----
Gross profit 25.7 26.2 25.6
Selling, general and administrative expenses 22.1 23.2 22.4
Merger and business integration costs 6 .2 5.2 2.7
----- ----- -----
Operating income (loss) (2.6) (2.2) 0.5
Interest expense, net 0.1 0.3 0.8
----- ----- -----
Earnings (loss) before income taxes (2.7) (2.5) (0.3)
Income taxes (benefit) (0.7) (0.7) (0.0)
----- ----- -----
Net earnings (loss) (2.0) (1.8) (0.3)
===== ===== =====
FISCAL YEAR ENDED JANUARY 30, 1999 COMPARED WITH FISCAL YEAR ENDED JANUARY
31, 1998
NET SALES increased 12.0% to $839.6 million in fiscal 1998 from $749.8
million in fiscal 1997. The increase in net sales in fiscal 1998 resulted
primarily from the addition of 40 stores, including the conversion of 9
stores into superstores, the closing of 12 stores, and a comparable store
net sales increase of 6.4%. The comparable store net sales increase was
attributable to maturing superstores, increased advertising and
merchandising efforts in existing stores. The net increase in the Company's
store base accounted for approximately $48.0 million, or 53.5% of the net
sales increase, and $41.8 million, or 46.5% of the net sales increase, was
attributable to the increase in comparable store net sales.
GROSS PROFIT, defined as net sales less the cost of sales including store
occupancy costs, increased $18.6 million, or 9.5%, to $214.8 million in
fiscal 1998 from $196.2 million in fiscal 1997. Gross profit as a
percentage of net sales decreased to 25.6% in fiscal 1998 from 26.2% in
fiscal 1997. This decrease reflects lower gross margins generated from
sales in the stores acquired in the last half of fiscal 1997, which were
undergoing conversions to PETCO's assortment and selling through non-
continuing inventory at reduced gross margins. Also, increased distribution
costs resulting from the investment in two new central distribution centers
and lower leverage of store occupancy costs, particularly in the acquired
stores during the conversion process, contributed to this decline.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $14.2 million, or
8.2%, to $187.9 million in fiscal 1998 from $173.7 million in fiscal 1997.
Selling, general and administrative expenses increased primarily as a
result of higher personnel and related costs associated with new store
openings and acquisitions. As a percentage of net sales, these expenses
decreased to 22.4% in fiscal 1998 from 23.2% in fiscal 1997. Included in
selling, general and administrative expenses in fiscal 1998 are a $1.4
million charge for severance and legal costs related to the Company's
management realignment and a $4.5 million charge related to the write-off
of assets in connection with the relocation of the Company's main
distribution center and the replacement of point-of-sale equipment in a
chain-wide conversion of this equipment and other assets. Selling, general
and administrative expenses in fiscal 1997 included charges of $11.0
million related to the acquisition of PetCare. Excluding these charges,
these expenses were unchanged at 21.7% in both fiscal 1998 and fiscal 1997.
16
MERGER AND BUSINESS INTEGRATION COSTS of $23.0 million were recorded in
fiscal 1998 in connection with the conversion activities of the stores
acquired in the last half of fiscal 1997. These costs consisted of $0.5
million of transaction costs, $2.0 million of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $19.1 million of reformatting, facility conversion and other
integration costs and $1.4 million of severance and other costs. In fiscal
1997, merger and business integration costs of $38.7 million were recorded
in connection with acquisition activities. These costs consisted of $4.5
million of transaction costs, $17.8 million of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $12.2 million of reformatting, facility conversion and other
integration costs and $4.2 million of severance and other costs.
OPERATING INCOME was $3.9 million in fiscal 1998 compared with an operating
loss of $16.1 million in fiscal 1997. Excluding merger and business
integration costs and other charges, on a comparable basis, the Company
would have reported operating income of $32.8 million or 3.9% of net sales
in fiscal 1998 and $33.6 million or 4.5% of net sales in fiscal 1997.
NET INTEREST EXPENSE was $6.7 million in fiscal 1998 compared with net
interest expense of $2.5 million in fiscal 1997. Increased borrowings in
fiscal 1998 led to the increase in interest expense.
INCOME TAX BENEFIT was $0.4 million in fiscal 1998 compared with income tax
benefit of $5.5 million in fiscal 1997. Income tax benefit reflects the
Federal and state tax benefits of the loss before income taxes, net of the
effect of non-deductible expenses.
NET LOSS was $2.4 million in fiscal 1998 compared with net loss of $13.2
million in fiscal 1997. Excluding merger and business integration costs and
related charges and tax benefits, net earnings for fiscal 1998 would have
been $15.6 million, or $0.74 per diluted share, compared with $18.6
million, or $0.88 per diluted share in fiscal 1997.
FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED WITH 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 64 stores, including the conversion of 10
stores into superstores, 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 reflected greater purchasing leverage during the
period.
17
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
included 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
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.
OPERATING LOSS of $16.1 million was incurred in fiscal 1997 compared with
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 with 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 with 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 with 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 with $12.6
million, or $0.63 per diluted share in fiscal 1996.
QUARTERLY DATA
The following tables set forth the unaudited quarterly results of
operations for fiscal 1997 and fiscal 1998. 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.
18
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 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 41,401 45,089 50,221 59,512
Operating income (loss) 2,704 (2,884) (24,989) 9,032
Net earnings (loss) 1,297 (2,811) (17,013) 5,346
Net earnings (loss) per share,
basic and diluted $ 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%
Fiscal Quarter Ended
------------------------------------------
May 2, Aug. 1, Oct. 31, Jan. 30,
Fiscal 1998 1998 1998 1998 1999
- - ----------- --------- --------- --------- ---------
Net sales $ 196,296 $ 197,318 $ 204,785 $ 241,223
Gross profit 46,676 48,343 51,955 67,830
Operating income (loss) (338) (10,130) (819) 15,190
Net earnings (loss) (1,068) (7,261) (1,849) 7,801
Net earnings (loss) per share,
basic and diluted $ (0.05) $ (0.34) $ (0.09) $ 0.37
Stores open at end of period 458 461 467 476
Aggregate gross square footage 5,328,996 5,420,586 5,602,596 5,637,708
Percentage increase in
comparable store net sales 5.7% 5.4% 5.0% 8.7%
YEAR 2000 ISSUES
In 1997, the Company implemented a comprehensive risk-based program to
assure that both its information technology ("IT") and non-IT systems are
Year 2000 compliant. The Company's compliance program includes various
initiatives, including conducting an inventory and identification of all
Year 2000-sensitive components of the Company's IT and non-IT systems
(including hardware, software, security, and telecommunications),
requesting compliance status statements from the Company's business
partners, suppliers and vendors, and testing of new and existing systems.
The inventory and identification of Year 2000 IT and non-IT issues is now
largely complete. Many Year 2000 IT issues have been resolved through
hardware and software updates and upgrades undertaken for other reasons. As
part of the Company's ongoing IT upgrade plans, in fiscal 1998 the Company
completed the conversion of its store point-of-sale systems to a Year 2000
compliant version at a cost of approximately $20 million, which has been
capitalized and will be depreciated over the components' estimated useful
lives. This conversion, although not undertaken specifically for Year 2000
purposes, was accelerated in order to achieve Year 2000 compliance in this
critical area. With respect to non-IT systems, the Company has nearly
completed the inventory and assessment of its embedded systems contained in
the corporate offices, distribution centers and store locations. This
assessment is focusing principally on the Company's telecommunications
system hardware and software and security systems. The amount of other
expenditures for updates and upgrades that relate specifically to Year 2000
compliance is not separable from the total, but is not believed to be a
material amount. The remaining Year 2000 compliance activities are expected
to be substantially completed by mid-1999.
19
For certain of the Company's key suppliers, such as pet food suppliers, the
disruption of product deliveries would have a material adverse impact on
the Company's results of operations. The Company is actively extending its
relationships with these suppliers to include joint Year 2000 risk
assessments, remedial actions, and contingency plans in the event of non-
compliance. Contingency plans, which are expected to be substantially
completed by mid-1999, may include backup manual ordering procedures and
inventory buildup by the Company prior to December 31, 1999. Any additional
inventory buildup by the Company would generate unfavorable cash flows and
inventory valuation exposures of uncertain amount and duration.
The Company does not expect the cost of its Year 2000 compliance program to
be material to its business, results of operations, or financial condition.
There can be no assurance, however, that the Company's assessment of the
impact of Year 2000 is complete and that further analysis and study, as
well as the testing and implementation of planned solutions, will not
reveal the need for additional remedial work. The Company is potentially
vulnerable to mistakes made by key suppliers of products and services in
their advice to the Company with respect to their Year 2000 readiness. The
Company is also potentially vulnerable to operational difficulties in the
Company's corporate offices, distribution centers or store locations,
including the risk of power and water outages and the potential failure of
credit card and check authorization systems. The financial magnitude of these
risks cannot currently be estimated.
The foregoing statements as to the Company's Year 2000 efforts are forward
looking and, along with all other forward-looking statements herein, are
made in reliance on the safe harbor provisions discussed under the caption
"Certain Cautionary Statements" in Item 1, above.
NEW ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"(the
"Statement"). The Statement establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet
as either an asset or liability measured at its fair value. The Statement
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
The Statement is effective for fiscal years beginning after June 15, 1999
and is not expected to have a material impact on the Company's consolidated
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and expansion program through
internal cash flow, external borrowings and the sale of equity securities.
At January 30, 1999, total assets were $387.1 million, $137.5 million of
which were current assets. Net cash provided by (used in) operating
activities was $(0.6) million, $14.5 million, and $27.9 million for fiscal
1996, 1997 and 1998, 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.
20
The Company uses cash in investing activities primarily 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.
During fiscal 1998 the Company invested $4.9 million in a limited
partnership that operates retail pet food and supply stores in Canada and
made loans of $6.5 million to a limited partner in the limited partnership.
Cash used in investing activities was $51.6 million, $69.5 million and
$62.3 million for fiscal 1996, 1997 and 1998, respectively.
The Company also finances some of its purchases of equipment and fixtures
through capital lease and other obligations. Purchases of $8.0 million,
$1.3 million and $20.3 million of fixed assets were financed in this manner
during fiscal 1996, 1997 and 1998, respectively. The Company believes
additional sources of capital lease and other obligation financing are
available on a cost-effective basis and plans to use them, as necessary, in
connection with its expansion program.
During fiscal 1996, the Company completed two acquisitions of retailers of
pet food and supplies in purchase transactions. The aggregate fair value of
assets acquired was $14.4 million and assumed liabilities were $1.4 million
with $13.0 million of net cash invested in the acquisition of these
businesses, of which $6.0 million was expended in fiscal 1997.
During fiscal 1998, the Company completed two acquisitions of retailers of
pet food and supplies in purchase transactions. The aggregate fair value of
assets acquired and the net cash invested in the acquisition of these
businesses was $1.8 million.
The Company's primary long-term capital requirement is funding for the
opening or acquisition of superstores and conversion of existing stores
into superstores. Cash flows provided by financing activities were $79.4
million, $13.5 million and $33.3 million in fiscal 1996, 1997 and 1998,
respectively. In fiscal 1996, 1997, and 1998, net proceeds of $79.4
million, $2.4 million, and $0.1 million, respectively, were generated from
sales of common stock. Remaining cash flows provided by financing
activities were borrowings under long-term debt agreements, net of
repayment of long-term debt agreements and other obligations. Cash flows
from financing activities were used to 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
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 30, 1999, the Company had $36.8
million of revolving loans available under the credit facility.
As of January 30, 1999, the Company had available net operating loss
carryforwards of $71.2 million for federal income tax purposes, which begin
expiring in 2004, and $35.5 million for state income tax purposes, which
begin expiring in 1999.
21
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
1999.
INFLATION
Although the Company cannot accurately anticipate the effect of inflation
on its operations, it does not believe that inflation has had, or is likely
in the foreseeable future to have, a material impact on its net sales or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in short-term interest rates as the Company's unsecured credit
facility utilizes a portfolio of short-term LIBOR contracts. LIBOR
contracts are fixed rate instruments for a period of between one and six
months, at the Company's discretion. The Company's portfolio of LIBOR
contracts vary in length and interest rate, such that adverse changes in
short-term interest rates could affect the Company's overall borrowing rate
when contracts are renewed. The lengths of contracts within the portfolio
are adjusted to balance the Company's working capital requirements, fixed
asset purchases and general corporate purposes. The Company continuously
evaluates the portfolio with respect to total debt, including an assessment
of the current and future economic environment.
As of January 30, 1999, the Company had $69.9 million in debt under the
credit facility. The average debt outstanding for the fiscal year was $60.4
million. Based on this average debt level, a hypothetical 10% adverse
change in LIBOR rates would increase net interest expense by approximately
$0.3 million on an annual basis, and likewise would decrease our earnings
and cash flows. The Company cannot predict market fluctuations in interest
rates and their impact on debt, nor can there be any assurance that long-
term fixed-rate debt will be available at favorable rates, if at all.
Consequently, future results may differ materially from the estimated
adverse changes in interest rates or debt availability.
The Company did not have any material foreign exchange or other significant
market risk or any derivative financial instruments at January 30, 1999.
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.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's Proxy Statement relating to
the 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Page
----
Independent Auditors' Reports 23
Consolidated Balance Sheets 25
Consolidated Statements of Operations 26
Consolidated Statements of Stockholders' Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 29
(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.
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Petco Animal Supplies, Inc.:
We have audited the accompanying consolidated balance sheets of Petco
Animal Supplies, Inc. and subsidiaries as of January 31, 1998 and January
30, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended January 30, 1999. 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 revenues constituting 17 percent for
the year ended January 25, 1997, of the related consolidated total. 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 January 31, 1998 and January 30, 1999, and the
results of their operations and their cash flows for each of the years in
the three-year period ended January 30, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
San Diego, California
March 17, 1999
24
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 PricewaterhouseCoopers LLP
April 16, 1997, except as to the
information presented in Note 4,
for which the date is June 10, 1997
25
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
January 31, January 30,
1998 1999
----------- -----------
Current assets:
Cash and cash equivalents $ 3,354 $ 2,324
Receivables 10,879 7,638
Inventories 96,873 104,789
Deferred tax assets (note 6) 8,354 16,769
Other 4,942 5,993
----------- -----------
Total current assets 124,402 137,513
Fixed assets (note 4):
Equipment 51,525 76,992
Furniture and fixtures 50,575 58,963
Leasehold improvements 100,151 123,761
----------- -----------
202,251 259,716
Less accumulated depreciation and amortization (54,822) (72,206)
----------- -----------
147,429 187,510
Goodwill 39,348 37,804
Deferred tax assets (note 6) 17,885 9,681
Other assets 6,131 14,627
$ 335,195 $ 387,135
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,794 $ 51,099
Accrued expenses 21,558 23,783
Accrued salaries and employee benefits 9,242 9,792
Current portion of long-term debt (note 3) 3,375 4,500
Current portion of capital lease and other
obligations (note 4) 5,073 9,023
----------- -----------
Total current liabilities 91,042 98,197
Long-term debt, excluding current portion (note 3) 26,625 65,375
Capital lease and other obligations, excluding current
portion (note 4) 11,369 20,982
Accrued store closing costs 11,189 7,005
Deferred rent 8,913 11,735
Stockholders' equity (note 5):
Common stock, $.0001 par value, 100,000 shares
authorized, 21,060 and 21,074 shares issued
and outstanding, respectively 2 2
Additional paid-in capital 270,755 270,916
Accumulated deficit (84,700) (87,077)
----------- -----------
Total stockholders' equity 186,057 183,841
Commitments and contingencies (notes 4, 5, and 8)
----------- -----------
$ 335,195 $ 387,135
=========== ===========
See accompanying notes to consolidated financial statements.
26
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
---------- ---------- -----------
Net sales $ 600,637 $ 749,789 $ 839,622
Cost of sales and occupancy costs 446,315 553,566 624,818
---------- ---------- ----------
Gross profit 154,322 196,223 214,804
Selling, general and
administrative expenses 132,745 173,667 187,938
Merger and business
integration costs (note 2) 37,208 38,693 22,963
---------- ---------- ----------
Operating income (loss) (15,631) (16,137) 3,903
Interest income (2,179) (588) (176)
Interest expense 2,779 3,118 6,894
---------- ---------- ----------
Earnings (loss) before income taxes (16,231) (18,667) (2,815)
Income tax benefit (note 6) (4,075) (5,486) (438)
---------- ---------- ----------
Net earnings (loss) $ (12,156) $ (13,181) $ (2,377)
========== ========== ==========
Net earnings (loss) per common share,
basic and diluted $ (0.63) $ (0.64) $ (0.11)
========== ========== ==========
Basic and diluted weighted
average common shares 19,426 20,646 21,073
See accompanying notes to consolidated financial statements.
27
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Additional Total
--------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------------- ---------- ----------- -------------
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
Exercise of options 13 -- 143 -- 143
Issuance of stock
for services 1 -- 18 -- 18
Net loss -- -- -- ( 2,377) ( 2,377)
------ ------ -------- -------- --------
Balances at
January 30, 1999 21,074 $ 2 $270,916 $(87,077) $183,841
====== ====== ======== ======== ========
See accompanying notes to consolidated financial statements.
28
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
-----------------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(12,156) $(13,181) $ (2,377)
Depreciation and amortization 18,089 24,289 30,382
Provision for deferred taxes (5,204) (5,391) (211)
Loss on retirement of fixed assets 4,712 5,908 1,743
Issuance of stock for services 21 24 18
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (2,348) (2,845) 3,241
Inventories (15,342) (7,992) (7,916)
Other assets (2,765) (3,378) (767)
Accounts payable 3,112 12,667 (695)
Accrued expenses 2,592 567 2,225
Accrued salaries and employee benefits 3,238 145 550
Accrued store closing costs 3,887 2,489 (1,069)
Deferred rent 1,540 1,170 2,822
-------- -------- --------
Net cash provided by (used in) operating
activities (624) 14,472 27,946
-------- -------- --------
Cash flows from investing activities:
Additions to fixed assets (46,246) (59,633) (51,689)
Investment in limited partnership -- -- (4,879)
Net cash invested in acquisitions of businesses (7,021) (6,028) (1,813)
Loan to affiliate -- -- (6,545)
Change in other assets -- (3,869) 2,622
Proceeds from sale of fixed assets 1,626 -- --
-------- -------- --------
Net cash used in investing activities (51,641) (69,530) (62,304)
-------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt agreements 5,450 28,591 43,250
Repayment of long-term debt agreements -- (10,335) (3,375)
Repayment of capital lease and other obligations (4,626) (7,221) (6,690)
Proceeds from the issuance of common stock 79,363 2,449 143
Distributions to shareholders (769) -- --
-------- -------- --------
Net cash provided by financing activities 79,418 13,484 33,328
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 27,153 (41,574) (1,030)
Cash and cash equivalents at beginning of year 17,185 44,338 3,354
Beginning cash and cash equivalents of immaterial
poolings of interests -- 590 --
-------- -------- --------
Cash and cash equivalents at end of year $ 44,338 $ 3,354 $ 2,324
======== ======== ========
Supplemental cash flow disclosures:
Interest paid on debt $ 2,792 $ 3,105 $ 6,662
Income taxes paid $ 1,854 $ 920 $ 141
Supplemental disclosure of noncash financing
activities:
Additions to capital leases $ 8,015 $ 1,268 $ 20,253
See accompanying notes to consolidated financial statements.
29
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 37 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 and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(c) FISCAL YEAR:
The Company's fiscal year ends on the Saturday closest to January 31,
resulting in years of either 52 or 53 weeks. All fiscal years presented
herein consisted of 52 weeks. All references to a fiscal year refer to the
fiscal year ending on the Saturday closest to January 31 of the following
year.
(d) CASH EQUIVALENTS:
The Company considers all liquid investments with original maturities
of three months or less to be cash equivalents.
(e) INVENTORIES:
Inventories are stated at the lower of cost, determined by the first-
in, first-out method, or market.
(f) PRE-OPENING COSTS:
Costs incurred in connection with opening new stores are expensed as
incurred.
(g) FIXED ASSETS:
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets,
generally three to ten years. Equipment under capital leases is stated at
the present value of minimum lease payments at the inception of the lease.
Amortization is computed using the straight-line method over the lesser of
the lease term or the estimated useful lives of the assets, generally five
to fifteen years.
(h) GOODWILL:
Goodwill represents the excess of the cost over the fair value of net
assets acquired by the Company. Goodwill is amortized using the straight-
line method over fifteen years. The Company continually reviews goodwill to
assess recoverability from future undiscounted cash flows. Accumulated
amortization at January 31, 1998 and January 30, 1999 was $6,483 and
$9,569, respectively.
30
(i) OTHER ASSETS:
During 1998, the Company acquired a 47% limited partner interest in a
limited partnership (the "LP") which operates retail pet food and supply
stores in Canada. Pursuant to the terms of an option agreement, the Company
may increase its interest in the LP. The Company accounts for its
investment in the LP using the equity method and records its proportionate
share of earnings or loss according to the partnership agreement. The
Company did not record any earnings or loss for the year ended January 30,
1999. The Company's investment in the LP at January 30, 1999 was $5,862 and
is included in other assets on the accompanying consolidated balance sheet.
During 1998, the Company made a secured loan to another limited
partner in the LP. The loan bears interest at 7.5% and matures on October
1, 2003. The loan balance at January 30, 1999 was $6,545 and is included in
other assets on the accompanying balance sheet.
The remainder of other assets consists primarily of lease deposits,
non-compete agreements, debt issuance costs and prepaid expenses. Non-
compete agreements are amortized using the straight-line method over the
periods of the agreements, generally five to seven years. Debt issuance
costs are amortized to interest expense using the effective interest method
over the life of the related debt, generally five years. Accumulated
amortization for intangible other assets at January 31, 1998 and January
30, 1999 was $177 and $802, 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, 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, other obligations and loan to affiliate
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 undiscounted cash flows from the related
operations, and when circumstances dictate, adjusts the asset to the extent
carrying value exceeds the fair value of the asset. These factors, along
with management's plans with respect to the operations, are considered in
assessing the recoverability of goodwill, other purchased intangibles and
property and equipment.
31
(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 exceeds
the exercise price. In 1996, the Company elected to adopt the disclosure
provisions of Statement of Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation."
(o) EARNINGS (LOSS) PER SHARE:
The consolidated financial statements are presented in accordance with
SFAS No. 128, "Earnings per Share." Basic net earnings (loss) per common
share is computed using the weighted average number of common shares
outstanding during the period. Diluted net earnings (loss) per common share
incorporates the incremental shares issuable upon the assumed exercise of
stock options.
Dilutive effect of stock options of 561, 581 and 84 shares were not
included in computing diluted loss per share for fiscal years 1996, 1997
and 1998, respectively, because the effect would have been antidilutive.
(p) COMPREHENSIVE INCOME:
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that certain items of comprehensive income
other than net earnings or loss be reported in the financial statements.
For the three years ended January 30, 1999, the Company's comprehensive
income (loss) equaled net loss.
(q) SEGMENT REPORTING:
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas and
major customers. An operating segment is defined as a component of an
enterprise that engages in business activities from which it may earn
revenues and incur expenses, and about which separate financial information
is regularly evaluated by the chief operating decision maker in deciding
how to allocate resources. All of the Company's stores are aggregated into
one reportable segment given the similarities of economic characteristics
between the operations represented by the stores and the common nature of
the products, customers and methods of distribution.
(r) 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.
32
The Company acquired all of the outstanding equity securities of a retailer
with four pet food and supply stores operated under the tradename Super
Pets in August 1997, a retailer with nine pet food and supply stores
operated under the tradename Paws in October 1997, a retailer with five pet
food and supply stores operated under the tradename The PetCare Company in
October 1997, and a retailer with four pet food and supply stores operated
under the tradename Pet Food Savemart in October 1997, in exchange for an
aggregate 613 shares of common stock. These acquisitions were accounted for
as poolings of interests with their financial positions and results of
operations included in the accompanying consolidated financial statements
from the beginning of the period in which each immaterial pooling was
completed. Previously reported financial statements have not been restated
to include the results of these acquisitions as revenues and results of
operations prior to the acquisition were not material to the consolidated
financial position or results of operations of the Company.
The Company acquired all of the outstanding equity securities of a retailer
with eighty-two pet food and supply stores operated under the tradename
PetCare ("PetCare") in November 1997, in exchange for 1,543 shares of
common stock. This transaction has been accounted for as a pooling of
interests, and accordingly, the consolidated financial statements for the
periods presented have previously been restated to include the accounts of
PetCare.
During fiscal 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.
During fiscal 1998, the Company completed two acquisitions fo retailers of
pet food and supplies in transactions accounted for as purchases. The
aggregate fair value of assets acquired and the net cash invested in these
businesses was $1,813. The excess of the aggregate cost over the fair value
of net assets acquired was $1,539, which was recorded as goodwill and is being
amortized over fifteen years.
The consolidated financial statements include the operating results from
the closing date for each respective purchase acquisition. The purchase
acquisitions during fiscal years 1996 and 1998 did not materially affect
results of operations and accordingly, pro-forma results are not presented.
In fiscal 1996, merger and business integration costs of $37,208 were
recorded in connection with 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 in connection with acquisition activities. These costs consisted
of $4,470 of transaction costs, $17,790 of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $12,216 of reformatting, facility conversion and other
integration costs and $4,217 of severance and other costs.
In fiscal 1998, merger and business integration costs of $22,963 were
recorded related to fiscal 1997 acquisition activity. These costs consisted
of $522 of transaction costs, $1,995 of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $19,088 of reformatting, facility conversion and other
integration costs and $1,358 of severance and other costs.
Distributions to shareholders reflected in the accompanying Consolidated
Statement of Stockholders' Equity reflect activities of the pooled
companies.
33
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
effective interest rate of these borrowings at January 30, 1999 was 6.57%
to 6.75%. The credit agreement contains certain affirmative and negative
covenants related to indebtedness, interest and fixed charges coverage, and
consolidated net worth.
Long-term debt consists of:
January 31, January 30,
1998 1999
---------- ----------
Revolving loans $ -- $43,250
Term loan 30,000 26,625
------- -------
30,000 69,875
Less current portion 3,375 4,500
------- -------
$26,625 $65,375
========= =========
Annual maturities of long-term debt for the next four fiscal years are as
follows: $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 $22,500 and $42,753 in fixed assets financed through capital
leases at January 31, 1998 and January 30, 1999, respectively. Accumulated
amortization related to these financed assets was approximately $7,500 and
$16,389 at January 31, 1998 and January 30, 1999, respectively.
The Company leases warehouse and store facilities and equipment under
operating leases. These operating leases generally have terms from three to
ten years. Certain stores leases include additional contingent rental
payments ranging from 2% to 6% of store revenues above defined levels.
Contingent rentals during fiscal years 1996, 1997, and 1998 were $24, $33
and $44, respectively.
At January 30, 1999, the present value of future minimum payments for
capital lease and other obligations, and minimum lease payments under
noncancelable operating leases were as follows:
Capital Leases
and Other Operating
Years Obligations Leases
----- -------------- ---------
1999 $11,073 $ 86,198
2000 9,097 83,935
2001 7,386 79,144
2002 4,913 70,043
2003 314 64,347
Thereafter 2,315 282,977
------- --------
Total minimum payments 35,098 $666,644
========
Less amount representing interest 5,093
-------
Present value of net minimum capital
lease and other obligations payments 30,005
Less current portion of capital lease
and other obligations 9,023
-------
Capital lease and other obligations $20,982
=======
Rent expense under operating leases for fiscal years 1996, 1997, and 1998
was approximately $55,023, $70,506, and $79,672, respectively.
34
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 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.
35
Information regarding the stock option plans follows:
1994 Company Plan 1993 Company Plan
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------ --------
Outstanding at
February 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
Granted 715 $17.44-$18.44 $ 17.47 -- -- $ --
Exercised (4) $10.33-$12.33 $ 12.23 (1) $18.40-$20.70 $ 18.67
Cancelled (170) $10.33-$23.17 $ 19.74 (4) $14.95-$24.73 $ 20.53
----- -----
Outstanding at
January 30, 1999 1,863 $10.33-$30.31 $ 18.28 116 $14.95-$27.73 $ 18.67
===== =====
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
Exercisable at
January 30, 1999 512 $10.33-$30.31 $ 12.88 112 $14.95-$27.73 $ 18.65
Available for grant at
January 30, 1999 871 --
Directors' Plan 1989 Company Plan
------------------------------------ ------------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------ --------
Outstanding at
February 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
Granted 35 $ 4.78-$17.44 $ 8.60 -- $ -- $ --
Exercised -- $ -- $ -- (13) $ 11.54 $ 11.54
Cancelled -- $ -- $ -- (2) $ 11.54 $ 11.54
----- -----
Outstanding at
January 30, 1999 61 $ 4.78-$31.67 $ 13.02 39 $ 7.70-$11.54 $ 7.87
===== =====
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
Exercisable at
January 30, 1999 61 $ 4.78-$31.67 $ 13.02 39 $ 7.70-$11.54 $ 7.87
Available for grant at
January 30, 1999 50 --
In March 1999, options for 637 shares were granted under the 1994 Company
Plan which vest in March 2002 and are exercisable at $7.31 per share. In
February and March 1999, options for 20 shares were granted under the
Directors Plan that were immediately exercisable at a range of $6.22 to
$7.31 per share.
36
(c) ACCOUNTING FOR STOCK OPTIONS:
The Company accounts for stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations,
under which no compensation expense was recognized. Had compensation costs
for the Company's stock option plans been determined based upon the fair
value at the grant date for awards under these plans, consistent with the
methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and loss per share would have been
increased by $2,340, or $0.12 per share, during 1996, the Company's net
loss and loss per share would have been increased by $3,850, or $0.18 per
share, during 1997, and the Company's net loss and loss per share would
have been increased by $3,749, or $0.18 per share, during 1998. The pro
forma change in net earnings (loss) reflects only options granted since
1995. Therefore, the full impact of calculating compensation costs for
stock options under SFAS No. 123 is not reflected in the pro forma change
in net earnings (loss) amounts presented above because compensation cost is
reflected over the options vesting period of three years and compensation
cost for options granted prior to January 1, 1995 is not considered. The
weighted average fair value of the options granted during 1996, 1997 and
1998 were estimated as $12.01, $11.65 and $9.46 on the date of grant using
the Black-Scholes option pricing model with the following assumptions: no
dividend yield, volatility of 52.7%, 47.5% and 59.0%, risk-free interest
rate of 6.5%, 6.0% and 5.0% for 1996, 1997 and 1998, 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 30, 1999:
Options Outstanding Options Exercisable
--------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- - ----------- ---------- ------------ -------- ----------- ---------
$ 4.78-$12.33 522 5.57 $ 10.46 521 $ 10.46
$14.95-$17.44 639 9.00 $ 17.41 19 $ 16.50
$17.54-$21.38 127 4.12 $ 18.63 110 $ 18.65
$22.50-$31.67 791 7.78 $ 23.22 74 $ 26.72
--------- -----------
2,079 7.38 $ 17.95 724 $ 13.51
========= ===========
(d) STOCKHOLDER RIGHTS AGREEMENT:
On September 10, 1998, the Board of Directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of the
Company's common stock, which Rights expire on September 22, 2008. Each Right
entitles a stockholder to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock of the Company, at the price of $75.00
per one one-hundredth of a preferred share, subject to adjustment, or, under
certain circumstances, shares of common stock of the Company or a successor
company which at the time of such transaction would have a market value equal
to two times the exercise price of the Right. The Rights would become
exercisable for all other persons only if a person acquires or announces a
tender offer to acquire beneficial ownership of 15% or more of the Company's
common stock. Each share of Series A Junior Participating Preferred Stock
will be entitled to certain minimum dividends and an aggregate dividend of
100 times the dividend declared per common share, if any. The Rights have no
voting privileges and the Board of Directors may terminate the Stockholder
Rights Agreement at any time or redeem outstanding Rights at a price of $0.01
per Right at any time prior to a person acquiring beneficial ownership of 15%
or more of the Company's outstanding common stock.
37
6. INCOME TAXES
Income taxes (benefit) consists of the following:
Years Ended
---------------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
Current:
Federal $ 958 $ 416 $ 64
State 171 (370) (423)
Foreign -- -- 132
-------- -------- --------
1,129 46 (227)
-------- -------- --------
Deferred:
Federal (5,186) (4,290) (876)
State (18) (1,242) 665
Foreign -- -- --
-------- -------- --------
(5,204) (5,532) (211)
-------- -------- --------
Income taxes (benefit) $ (4,075) $ (5,486) $ (438)
======== ======== ========
A reconciliation of income taxes at the federal statutory rate of 34% with
the provision for income taxes (benefit) follows:
Years Ended
---------------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
Income taxes at federal
statutory rate $ (5,518) $ (6,347) $ (957)
Non-deductible expenses 1,323 1,489 286
State taxes, net of federal
tax benefit 101 (1,064) 160
Foreign taxes, net of federal
tax benefit -- -- 87
Other 19 436 (14)
-------- -------- --------
$ (4,075) $ (5,486) $ (438)
======== ======== ========
The sources of significant temporary differences which gave rise to the
deferred tax provision and their effects follow:
Years Ended
---------------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
Inventory $ (2,891) $ (1,216) $ 2,693
Deferred rent (1,072) (588) (779)
Depreciation 1,424 1,611 4,220
Accrued fringes (96) (699) 204
Intangibles (178) 1,771 686
Store closing costs (1,833) (1,941) 1,840
Fixed assets (1,318) 1,128 1,571
Other assets -- (2,358) 1,450
Benefit of net operating
loss carryforwards 943 (3,929) (12,482)
Other (183) 689 386
-------- -------- --------
$ (5,204) $ (5,532) $ (211)
======== ======== ========
38
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets follow:
Years Ended
--------------------------
January 31, January 30,
1998 1999
----------- -----------
Deferred tax assets:
Inventory $ 6,249 $ 3,556
Deferred rent 3,412 4,191
Accrued fringes 2,105 1,901
Store closing costs 5,496 3,656
Fixed assets 1,600 29
Other assets 2,358 908
Net operating loss carryforwards 14,622 27,104
------- -------
Total deferred tax assets 35,842 41,345
Valuation allowance (4,900) (4,900)
------- -------
Net deferred tax assets 30,942 36,445
------- -------
Deferred tax liabilities:
Depreciation (3,166) (7,386)
Intangibles (1,218) (1,904)
Other (319) (705)
------- -------
Total deferred tax liabilities (4,703) (9,995)
------- -------
Net deferred tax assets $26,239 $26,450
======= =======
The valuation allowance of $4,900 at January 31, 1998 and January 30, 1999
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
for which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of these
deductible differences, net of the valuation allowance.
At January 30, 1999, the Company has available net loss carryforwards of
$71,155 for federal income tax purposes, which begin expiring in 2004, and
$35,513 for state income tax purposes, which begin expiring in 1999.
7. 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. Effective July 1, 1998, the
Company adopted a matching provision for 50% of the first 6% 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, $199 in 1997 and $532 in 1998.
39
8. COMMITMENTS AND CONTINGENCIES
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United
States District Court for the Southern District of California between
August and November, 1998. These cases have recently been consolidated and
will be administered as one case. The plaintiffs purport to represent a
class of all persons who purchased the Company's common stock between
January 30, 1997 and July 10, 1998. The complaints allege that the
defendants violated various federal securities laws through material
misrepresentations and omissions during the class period, and seek
unspecified monetary damages. These matters have been tendered to the
Company's insurance carrier. While the Company believes the allegations
contained in these lawsuits are without merit, the claims have not
progressed sufficiently for the Company to estimate a range of possible
exposure, if any. The Company and its officers intend to defend themselves
vigorously.
40
EXHIBIT INDEX
Number Document
- - ------ -------------------------------------------------------
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)
4.2 Stockholder Rights Agreement. (3)
10.1 Credit Agreement, dated January 30, 1998 between the
Company and Union Bank, as Syndicating Agent. (4)
10.2 First Amendment to Credit Agreement, dated February 26,
1998, between the Company and Union Bank.(5)
10.3 Second Amendment to Credit Agreement, dated October 30,
1998, between the Company and Union Bank.(5)
10.4 Third Amendment to Credit Agreement, dated March 31,
1999, between the Company and Union Bank.(5)
10.5 Term loan Agreement, dated January 29, 1996, between
the Company and Union Bank. (6)
10.6 First Amendment to Term loan Agreement, dated April 24,
1997, between the Company and Union Bank.(7)
10.7 Distribution Center Lease, dated March 24, 1994, between
the Company and The Principal Mutual Life Insurance
Company for 10401 Seventh Street, Rancho Cucamonga,
California. (8)
10.8 Distribution Center Lease, dated July 1, 1997 between
the Company and Knickerbocker Industrial Properties East
LP for 152 Dayton Jamesburg Road, South Brunswick, New
Jersey. (4)
10.9 Distribution Center Lease, dated February 20, 1998
between the Company and Industrial Developments
International, Inc. for 3801 Rock Creek Boulevard,
Joliet, Illinois. (4)
10.10 Distribution Center Lease, dated November 24, 1997
between the Company and Opus West Corporation for 4345
Parkhurst Street, Mira Loma, California. (4)
10.11 Master Equipment Lease Agreement, dated October 19,
1992, between the Company and Sanwa Business Credit
Corporation. (2)
10.12 Master Equipment Lease Agreement, dated September 21,
1994, between the Company and General Electric Credit
Corporation. (8)
10.13 Master Equipment Lease Agreement, dated March 10, 1995,
between the Company and KeyCorp Leasing Ltd. (6)
10.14 Master Equipment Lease Agreement, dated November 15,
1995, between the Company and Fleet Credit
Corporation. (6)
10.15 Master Equipment Lease Agreement, dated September 15,
1998, between the Company and IBM Leasing. (5)
10.16 Master Equipment Lease Agreement, dated January 25,
1999, between the Company and Matrix funding. (5)
10.17 Master Lease Agreement, dated December 27, 1995, between
the Company and Newcourt Financial USA, Inc. (6)
10.18 Master Lease Agreement, dated September 28, 1995, between
the Company and USL Capital Corporation. (6)
10.19 Employment Letter Agreement, dated October 3, 1996, by
and between Petco and Marvin W. Goldstein. (1)
10.20 Employment Agreement, dated March 17, 1996, between the
Company and Brian K. Devine. (6)
10.21 Form of Indemnification Agreement between the Company
and certain officers and directors. (2)
10.22 Form of Retention Agreement for executive officers. (4)
10.23 Form of Retention Agreement for non-executive officers. (4)
10.24 Petco Animal Supplies 401(k) Plan. (2)
10.25 The 1994 Stock Option and Restricted Stock Plan for
Executive and Key Employees of Petco Animal Supplies,
Inc., as amended and restated on March 18, 1998. (5)
10.26 Petco Animal Supplies, Inc. Group Benefit Plan, dated
July 29, 1991, as amended. (6)
41
10.27 Petco Animal Supplies, Inc. Directors' 1994 Stock Option
Plan, as amended. (6)
10.28 Form of Petco Animal Supplies, Inc. Nonstatutory Stock
Option Agreement. (2)
10.29 Form of Petco Animal Supplies, Inc. Incentive Stock Option
Agreement. (2)
10.30 Form of Petco Animal Supplies, Inc. Restricted Stock
Agreement. (2)
10.31 Form of Petco Animal Supplies, Inc. Nonstatutory Stock
Option Agreement (Directors' 1994 Stock Option Plan). (2)
10.32 The Pet Food Warehouse, Inc. 1993 Stock Option Plan (9)
10.33 Pet Food Warehouse, Inc. Amendment to 1993 Stock Option
Plan. (10)
10.34 The PetCare Plus, Inc. 1989 Stock Option Plan (the "1989
Stock Option Plan"). (11)
10.35 Form of Incentive Stock Option Agreement under the 1989
Stock Option Plan. (11)
10.36 Form of Nonqualified Stock Option Agreement under the 1989
Stock Option Plan. (11)
21.1 Subsidiaries of the registrant. (5)
23.1 Consent of KPMG LLP. (5)
23.2 Consent of PricewaterhouseCoopers LLP. (5)
27.1 Financial Data Schedule. (5)
_____________
(1) Filed as an exhibit to the Company's Registration Statement on Form S-4
dated October 23, 1996, File No. 333-14699, including Amendment No. 1
thereto dated November 20, 1996.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
dated January 13, 1994, File No. 33-77094, including Amendment No. 1
thereto dated February 24, 1994 and Amendment No. 2 thereto dated March
11, 1994.
(3) Filed as an exhibit to the Company's Report on 8-K dated September 22,
1998, File No. 000-23574.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
April 30, 1998.
(5) Filed herewith.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated April 4, 1996, File No. 333-3156, including Amendment No. 1
thereto dated April 24, 1996.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
April 30, 1997.
(8) 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.
(9) 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.
(10)Filed as an exhibit to the Company's Registration Statement on Form S-8
dated February 26, 1997, File No. 333-14699.
(11)Filed as an exhibit to the Company's Registration Statement on Form S-8
dated March 20, 1998, File No. 333-48311.
42
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
29th day of April, 1999.
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 29, 1999
- - ------------------------ and Chief Executive Officer
Brian K. Devine (Principal Executive Officer)
/s/JAMES M. MYERS Senior Vice President and April 29, 1999
- - ------------------------ Chief Financial Officer
James M. Myers (Principal Financial and
Accounting Officer)
/s/ANDREW G. GALEF Director April 29, 1999
- - ------------------------
Andrew G. Galef
/s/RICHARD J. LYNCH Director April 29, 1999
- - ------------------------
Richard J. Lynch
/s/JAMES F. McCANN Director April 29, 1999
- - ------------------------
James F. McCann
/s/PETER M. STARRETT Director April 29, 1999
- - ------------------------
Peter M. Starrett