PETCO ANIMAL SUPPLIES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-23574

PETCO ANIMAL SUPPLIES, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		33-0479906 (I.R.S. Employer Identification No.)
9125 Rehco Road, San Diego, California (Address of principal executive offices)		92121 (Zip Code)

(858) 453-7845
(Registrant's telephone number, including area code)

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 ý No o

(Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.)

Title		Date		Outstanding
Common Stock, $0.001 Par Value		September 3, 2002		57,329,673

PETCO ANIMAL SUPPLIES, INC.

FORM 10-Q
For the Quarter Ended August 3, 2002

INDEX

			Page
Part I Financial Information
	Item 1.	Consolidated Financial Statements
		Consolidated Balance Sheets at February 2, 2002 and August 3, 2002	3
		Consolidated Statements of Operations for the thirteen and twenty-six weeks ended August 4, 2001 and August 3, 2002	4
		Consolidated Statements of Cash Flows for the twenty-six weeks ended August 4, 2001 and August 3, 2002	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Part II Other Information
	Item 1.	Legal Proceedings	24
	Item 5.	Other Information	25
	Item 6.	Exhibits and Reports on Form 8-K	25
Signatures			26
Certifications			27

PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

			February 2, 2002			August 3, 2002
						(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	36,215		$	43,746
	Receivables			9,694			9,548
	Inventories			128,991			127,931
	Deferred tax assets			26,287			22,153
	Other			8,249			18,859

		Total current assets		209,436			222,237
Fixed assets, net				211,132			214,555
Debt issuance costs				6,086			5,670
Goodwill				40,928			40,644
Other assets				5,990			6,566

			$	473,572		$	489,672

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
	Accounts payable		$	52,223		$	42,917
	Accrued expenses			42,709			58,725
	Accrued interest			6,580			5,529
	Accrued salaries and employee benefits			32,943			33,561
	Current portion of long-term debt			2,000			2,000
	Current portion of capital lease and other obligations			4,552			1,711

		Total current liabilities		141,007			144,443
Long-term debt, excluding current portion				192,500			191,500
Senior subordinated notes payable				200,000			170,000
Capital lease and other obligations, excluding current portion				2,105			2,047
Accrued store closing costs				1,467			2,222
Deferred tax liability				6,219			6,219
Deferred rent and other liabilities				16,699			17,463

		Total liabilities		559,997			533,894

Preferred stock:
	$.01 par value, 5,000 shares authorized, no shares were issued and outstanding at August 3, 2002
	14% Series A senior redeemable preferred stock			130,038			—
	12% Series B junior redeemable preferred stock			89,244			—
Stockholders' deficit:
	Common stock, $.001 par value, 250,000 shares authorized and 39,117 and 57,311 shares issued and outstanding at February 2, 2002 and August 3, 2002, respectively			39			57
	Additional paid-in capital			(187,380	)		64,291
	Deferred compensation			(8,439	)		—
	Accumulated deficit			(108,460	)		(107,757	)
	Accumulated comprehensive loss			(1,467	)		(813	)

		Total stockholders' deficit		(305,707	)		(44,222	)

			$	473,572		$	489,672

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)

			Thirteen weeks ended						Twenty-six weeks ended
			August 4, 2001			August 3, 2002			August 4, 2001			August 3, 2002
Net sales			$	309,902		$	354,469		$	614,396		$	703,681
Cost of sales and occupancy costs				219,830			246,049			436,437			491,558

	Gross profit			90,072			108,420			177,959			212,123
Selling, general and administrative expenses				73,277			83,767			145,821			165,880
Management fees and termination costs				780			—			1,560			12,760
Stock-based compensation and other costs				4,804			—			7,584			8,176
Merger and non-recurring costs				445			—			445			—

	Operating income			10,766			24,653			22,549			25,307
Interest income				(140	)		(152	)		(313	)		(309	)
Interest expense				10,667			8,527			22,019			17,442

	Earnings before equity in loss of unconsolidated affiliate, income taxes and extraordinary item			239			16,278			843			8,174
Equity in loss of unconsolidated affiliate				(839	)		—			(1,640	)		—

	Earnings (loss) before income taxes and extraordinary item			(600	)		16,278			(797	)		8,174
Income taxes				94			6,348			333			5,467

	Earnings (loss) before extraordinary item			(694	)		9,930			(1,130	)		2,707
Extraordinary item-loss on early extinguishment of debt (net of income tax benefit of $1,332)				—			—			—			(2,004	)

	Net earnings (loss)			(694	)		9,930			(1,130	)		703
Increase in carrying amount of redeemable preferred stock				(6,785	)		—			(13,532	)		(20,487	)

	Net earnings (loss) available to common stockholders		$	(7,479	)	$	9,930		$	(14,662	)	$	(19,784	)

Basic and diluted earnings (loss) per common share:
	Earnings (loss) before extraordinary item		$	(0.19	)	$	0.17		$	(0.38	)	$	(0.32	)
	Extraordinary loss on early extinguishment of debt			—			—			—			(0.04	)

		Earnings (loss) per common share	$	(0.19	)	$	0.17		$	(0.38	)	$	(0.36	)

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

			Twenty-six weeks ended
			August 4, 2001			August 3, 2002
Cash flows from operating activities:
	Net earnings (loss)		$	(1,130	)	$	703
	Depreciation and amortization			25,873			25,190
	Provision for deferred taxes			(1,021	)		3,562
	Equity in loss of unconsolidated affiliate			1,640			—
	Stock-based compensation			9,171			8,439
	Non-cash write-off of debt issuance costs			—			186
Changes in assets and liabilities:
	Receivables			(3,993	)		146
	Inventories			5,859			1,060
	Other assets			(11,350	)		(10,230	)
	Accounts payable			(1,094	)		(9,306	)
	Accrued expenses			8,632			16,543
	Accrued interest			(2,828	)		(1,051	)
	Accrued salaries and employee benefits			1,271			618
	Accrued store closing costs			(1,528	)		882
	Deferred rent and other liabilities			(54	)		69

		Net cash provided by operating activities		29,448			36,811

Cash flows from investing activities:
	Additions to fixed assets			(23,497	)		(27,945	)
	Investment in affiliate			(6,405	)		—

		Net cash used in investing activities		(29,902	)		(27,945	)

Cash flows from financing activities:
	Borrowings under long-term debt agreements			15,650			—
	Repayment of long-term debt agreements			(17,650	)		(31,000	)
	Debt issuance costs			—			(446	)
	Repayment of capital lease and other obligations			(3,210	)		(2,899	)
	Net proceeds from the issuance of common stock			16			272,779
	Redemption of Series A senior redeemable preferred stock			—			(142,231	)
	Redemption of Series B junior redeemable preferred stock			—			(97,538	)

		Net cash used in financing activities		(5,194	)		(1,335	)

Net increase (decrease) in cash and cash equivalents				(5,648	)		7,531
Cash and cash equivalents at beginning of year				18,044			36,215

Cash and cash equivalents at end of period			$	12,396		$	43,746

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

Note 1—General

In the opinion of management of PETCO Animal Supplies, Inc. (the "Company" or "PETCO"), the unaudited consolidated financial statements presented herein contain all adjustments, consisting of normal recurring adjustments, necessary to present the financial position, results of operations and cash flows as of August 3, 2002 and for the thirteen week and twenty-six week periods ended August 4, 2001 and August 3, 2002. Because of the seasonal nature of the Company's business, the results of operations for the thirteen and twenty-six weeks ended August 4, 2001 and August 3, 2002 are not necessarily indicative of the results to be expected for the full year. The Company's fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year. For example, references to fiscal 2002 refer to the fiscal year beginning on February 3, 2002, and ending on February 1, 2003. For further information, refer to the consolidated financial statements and footnotes thereto for fiscal 2001 included in the Company's Annual Report on Form 10-K and Form 10-K/A (File No. 0-23574) filed with the Securities and Exchange Commission on April 23, 2002 and April 30, 2002, respectively.

Note 2—New Accounting Standards

In July 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, which supersede Accounting Principles Board Opinion 17, Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet one of two criteria set forth in the statement. This statement applies to all business combinations initiated after June 30, 2001. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested at least annually for impairment. Separable intangible assets with defined lives will continue to be amortized over their useful lives. The provisions of SFAS No. 142 apply to goodwill and intangible assets acquired before and after the statement's effective date. SFAS No. 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company has completed its assessment and recorded $0.3 million of transitional goodwill impairment in the thirteen weeks ended August 3, 2002. The impact of this change in accounting principal is not material to the consolidated financial statements and, accordingly, the effect of this change is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. Non-compete agreements, which comprise all of the Company's intangible assets with defined lives, had a carrying value of $0.5 million and $0.4 million and accumulated amortization of $1.5 million and $1.6 million at February 2, 2002 and August 3, 2002, respectively. Amortization of non-compete agreements was $0.1 million for each of the thirteen weeks ended August 4, 2001 and August 3, 2002 and $0.2 million and $0.1 million for the twenty-six weeks ended August 4, 2001 and August 3, 2002, respectively.

The effect of adoption of SFAS No. 142 on the reported net earnings (loss) for the periods presented is as follows:

	Thirteen Weeks Ended					Twenty-six Weeks Ended
	August 4, 2001			August 3, 2002		August 4, 2001			August 3, 2002
Net earnings (loss) available to common stockholders as reported	$	(7,479	)	$	9,930	$	(14,662	)	$	(19,784	)
Add back goodwill impairment		—			284		—			284
Add back amortization of goodwill		761			—		1,538			—

Net earnings (loss) available to common stockholders as adjusted	$	(6,718	)	$	10,214	$	(13,124	)	$	(19,500	)

Basic and diluted net earnings (loss) per common share
Net earnings (loss) as reported	$	(0.19	)	$	0.17	$	(0.38	)	$	(0.36	)
Add back goodwill impairment		—			0.01		—			—
Add back amortization of goodwill		0.02			—		0.04			—

Net earnings (loss) as adjusted	$	(0.17	)	$	0.18	$	(0.34	)	$	(0.36	)

	Thirteen Weeks Ended					Twenty-six Weeks Ended
Before extraordinary item	August 4, 2001			August 3, 2002		August 4, 2001			August 3, 2002
Net earnings (loss) available to common stockholders as reported	$	(7,479	)	$	9,930	$	(14,662	)	$	(17,780	)
Add back goodwill impairment		—			284		—			284
Add back amortization of goodwill		761			—		1,538			—

Net earnings (loss) available to common stockholders as adjusted	$	(6,718	)	$	10,214	$	(13,124	)	$	(17,496	)

Basic and diluted net earnings (loss) per common share
Net earnings (loss) as reported	$	(0.19	)	$	0.17	$	(0.38	)	$	(0.32	)
Add back goodwill impairment		—			0.01		—			—
Add back amortization of goodwill		0.02			—		0.04			—

Net earnings (loss) as adjusted	$	(0.17	)	$	0.18	$	(0.34	)	$	(0.32	)

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, a company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company has not yet determined the impact, if any, of the adoption of SFAS No. 143.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002, which is effective for fiscal years beginning after May 15, 2002. SFAS No. 145 rescinds SFAS No. 4 which required that all gains and losses from extinguishment of debt be aggregated, and if material, classified as an extraordinary item. As a result, gains and losses from debt extinguishment are to be classified as

extraordinary only if they meet the criteria set forth in Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 145 also requires that sale-leaseback accounting be used for capital lease modifications with economic effects similar to sale-leaseback transactions. The Company does not expect implementation of SFAS No. 145 to have a significant effect on its results of operation or consolidated financial condition.

In June 2002, the FASB issued SFAS No. 146, Accounting for Restructuring Costs. SFAS No. 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets, such as eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS No. 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS No. 146, a company may not restate its previously issued financial statements, and SFAS No. 146 grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. The Company has not yet determined the impact, if any, of the adoption of SFAS No. 146.

Note 3—Net Earnings Per Share

Basic net earnings per common share are computed using the weighted average number of common shares outstanding during the period. Diluted net earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options and warrants.

Net earnings (loss) and the weighted average number of common shares used to compute net earnings (loss) per share, basic and diluted, are presented below:

	Thirteen Weeks Ended					Twenty-six Weeks Ended
	August 4, 2001			August 3, 2002		August 4, 2001			August 3, 2002
Net earnings (loss) available to common stockholders	$	(7,479	)	$	9,930	$	(14,662	)	$	(19,784	)
Common shares, basic		38,356			57,300		38,293			54,834
Dilutive effect of stock options		—			707		—			—
Dilutive effect of stock warrants		—			—		—			—

Common shares, diluted		38,356			58,007		38,293			54,834

Options and warrants to purchase common shares that were outstanding at August 4, 2001 and August 3, 2002, but were not included in the computation of diluted net earnings (loss) per share because of their anti-dilutive impact on earnings (loss) per common share, were 1,387 and 1,345, respectively.

Note 4—Related Party Transactions

In October 2000, the Company entered into a management services agreement with two entities who were sponsors of the Company's merger and recapitalization transaction. Under the terms of this agreement, the Company paid management fees in an aggregate amount of $0.8 million in the thirteen weeks ended August 4, 2001, and $1.6 million and $0.3 million in the twenty-six weeks ended August 4, 2001 and August 3, 2002, respectively, to these two related parties. Shortly after its initial public

offering, the Company terminated the management services agreement and paid an aggregate amount of $12.5 million as a one-time termination fee.

The Company issued senior subordinated notes to related parties in October 2000 and redeemed them in October 2001. Interest expense incurred on the senior subordinated notes, primarily paid to related parties, including amortization of the discount, was $4.2 million and $8.4 million in the thirteen weeks and twenty-six weeks ended August 4, 2001, respectively.

In February 2002, the Company redeemed, for approximately $239.8 million, all of the then outstanding series A and series B preferred stock, primarily from related parties.

Note 5—Initial Public Offering

On February 27, 2002, the Company completed an initial public offering of 14,500,000 shares of common stock for net proceeds of approximately $254.5 million, after deducting the underwriting discount and estimated offering expenses. On March 14, 2002, the Company received additional net proceeds of approximately $17.7 million from the sale of 1,000,000 additional shares of common stock pursuant to the exercise of the underwriters' over-allotment option. The Company used approximately $239.8 million of the net proceeds of its initial public offering to redeem in full all of the Company's then outstanding shares of series A and series B preferred stock. In connection with the initial public offering the Company also amended and restated its stockholders agreement and its securityholders agreement, terminated its management services agreement and used approximately $32.4 million of the net proceeds of the initial public offering, plus approximately $2.1 million in cash on-hand, to repurchase $30.0 million in aggregate principal amount of its 10.75% senior subordinated notes due 2011 at 110.5% of their face amount, plus accrued and unpaid interest through the repurchase date.

Concurrent with the initial public offering, warrants to purchase 2,132,000 shares of common stock were exercised, all outstanding options prior to the initial public offering became fully vested and the Company issued options to purchase 573,000 shares of common stock.

In connection with the initial public offering, the Company also effected a 2-for-1 stock split of its common stock. All references in the consolidated financial statements to the number of shares outstanding, price per share and per share amounts have been retroactively restated to reflect the stock split for all periods presented.

Note 6—Contingencies

In July 2001, two former employees instituted an action against the Company in the Superior Court of California for the County of Los Angeles. The complaint in the action was filed individually and on behalf of a purported class consisting of all current and former employees who worked as salaried managers or assistant managers in the Company's stores in the state of California at any time between July 30, 1997 and the present. The complaint alleges that the individual plaintiffs and the purported class members worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law, and that they were classified as "exempt" store management employees but were forced to work more than 50% of their time in non-exempt tasks. The complaint alleges violations of the California Labor Code and the California Business and Professions Code. The relief sought includes compensatory damages, penalties, preliminary and permanent injunctions requiring the Company to pay overtime compensation under California law, prejudgment interest, costs and attorneys' fees and such other relief as the court deems proper. In November 2001, the case was transferred to the Superior Court of California for the County of San Diego. The Company has answered the complaint and discovery is nearing completion. The Company is vigorously defending the action, including contesting the certification of the action as a class action. If successful, this litigation could have a material adverse effect on the Company's financial condition, and

any required change in the Company's labor practices could have a negative impact on its results of operations.

From time to time the Company is involved in routine litigation and proceedings in the ordinary course of its business. The Company is not currently involved in any other pending litigation matters that the Company believes would have a material adverse effect on the Company.

Note 7—Supplemental Guarantor Condensed Consolidating Financial Statements

The Company issued $200 million in principal amount of its 10.75% senior subordinated notes due 2011 under which certain of its subsidiaries (the guarantor subsidiaries) serve as guarantors on a full and unconditional basis. Certain other subsidiaries (the non-guarantor subsidiaries) will not guarantee such debt.

The following tables present the unaudited condensed consolidating balance sheets of PETCO Animal Supplies, Inc., as a parent company, its guarantor subsidiaries and its non-guarantor subsidiaries as of August 3, 2002 and February 2, 2002 and the related unaudited condensed consolidating statements of operations for the thirteen weeks and twenty-six weeks ended August 3, 2002 and August 4, 2001, and unaudited condensed consolidating statements of cash flows for the twenty-six weeks ended August 3, 2002 and August 4, 2001.

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
August 3, 2002
(unaudited, in thousands)

			PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
ASSETS
Current assets:
	Cash and cash equivalents		$	43,138		$	608		$	—	$	—		$	43,746
	Receivables			1,858			7,690			—		—			9,548
	Inventories			124,122			3,809			—		—			127,931
	Deferred tax assets			22,153			—			—		—			22,153
	Other			18,980			(121	)		—		—			18,859

		Total current assets		210,251			11,986			—		—			222,237
Fixed assets, net				189,533			25,022			—		—			214,555
Debt issuance costs				5,670			—			—		—			5,670
Goodwill				—			40,644			—		—			40,644
Intercompany investments and advances				179,177			51,304			—		(230,481	)		—
Other assets				6,573			(7	)		—		—			6,566

			$	591,204		$	128,949		$	—	$	(230,481	)	$	489,672

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	(4,875	)	$	47,792		$	—	$	—		$	42,917
	Intercompany payables			168,782			(168,782	)		—		—			—
	Accrued expenses			51,504			7,221			—		—			58,725
	Accrued interest			5,529			—			—		—			5,529
	Accrued salaries and employee benefits			33,211			350			—		—			33,561
	Current portion of long-term debt			2,000			—			—		—			2,000
	Current portion of capital lease and other obligations			1,711			—			—		—			1,711

		Total current liabilities		257,862			(113,419	)		—		—			144,443
Long-term debt, excluding current portion				191,500			—			—		—			191,500
Senior subordinated notes payable				170,000			—			—		—			170,000
Capital lease and other obligations,
excluding current portion				2,047			—			—		—			2,047
Accrued store closing costs				2,222			—			—		—			2,222
Deferred tax liability				6,219			—			—		—			6,219
Deferred rent and other liabilities				16,885			578			—		—			17,463

		Total liabilities		646,735			(112,841	)		—		—			533,894
Stockholders' equity (deficit)				(55,531	)		241,790			—		(230,481	)		(44,222	)

			$	591,204		$	128,949		$	—	$	(230,481	)	$	489,672

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
February 2, 2002
(unaudited, in thousands)

			PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
ASSETS
Current assets:
	Cash and cash equivalents		$	36,000		$	215		$	—	$	—		$	36,215
	Receivables			920			8,774			—		—			9,694
	Inventories			125,990			3,001			—		—			128,991
	Deferred tax assets			26,287			—			—		—			26,287
	Other			8,234			15			—		—			8,249

		Total current assets		197,431			12,005			—		—			209,436
Fixed assets, net				188,754			22,378			—		—			211,132
Debt issuance costs				6,086			—			—		—			6,086
Goodwill				—			40,928			—		—			40,928
Intercompany investments and advances				179,157			45,695			—		(224,852	)		—
Other assets				5,990			—			—		—			5,990

			$	577,418		$	121,006		$	—	$	(224,852	)	$	473,572

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	(2,361	)	$	54,584		$	—	$	—		$	52,223
	Intercompany payables			155,912			(159,626	)		—		3,714			—
	Accrued expenses			33,820			8,889			—		—			42,709
	Accrued interest			6,580			—			—		—			6,580
	Accrued salaries and employee benefits			32,520			423			—		—			32,943
	Current portion of long-term debt			2,000			—			—		—			2,000
	Current portion of capital lease and other obligations			4,552			—			—		—			4,552

		Total current liabilities		233,023			(95,730	)		—		3,714			141,007
Long-term debt, excluding current portion				192,500			—			—		—			192,500
Senior subordinated notes payable				200,000			—			—		—			200,000
Capital lease and other obligations, excluding current portion				2,105			—			—		—			2,105
Accrued store closing costs				1,467			—			—		—			1,467
Deferred tax liability				6,219			—			—		—			6,219
Deferred rent and other liabilities				16,180			519			—		—			16,699

		Total liabilities		651,494			(95,211	)		—		3,714			559,997
Preferred stock:
	14% Series A senior redeemable preferred stock			130,038			—			—		—			130,038
	12% Series B junior redeemable preferred stock			89,244			—			—		—			89,244
Stockholders' equity (deficit)				(293,358	)		216,217			—		(228,566	)		(305,707	)

			$	577,418		$	121,006		$	—	$	(224,852	)	$	473,572

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the thirteen weeks ended August 3, 2002
(unaudited, in thousands)

		PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Net sales		$	324,919		$	236,009	$	—	$	(206,459	)	$	354,469
Cost of sales and occupancy costs			229,830			200,245		—		(184,026	)		246,049

	Gross profit		95,089			35,764		—		(22,433	)		108,420
Selling, general and administrative expenses			83,794			22,406		—		(22,433	)		83,767

	Operating income		11,295			13,358		—		—			24,653
Interest income			(152	)		—		—		—			(152	)
Interest expense			8,527			—		—		—			8,527

	Earnings before income taxes		2,920			13,358		—		—			16,278
Income taxes			6,348			—		—		—			6,348

	Earnings (loss) before equity in earnings of subsidiaries		(3,428	)		13,358		—		—			9,930
Equity in earnings of subsidiaries			13,358			—		—		(13,358	)		—

	Net earnings	$	9,930		$	13,358	$	—	$	(13,358	)	$	9,930

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the twenty-six weeks ended August 3, 2002
(unaudited, in thousands)

		PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Net sales		$	645,672		$	460,034	$	—	$	(402,025	)	$	703,681
Cost of sales and occupancy costs			460,199			388,020		—		(356,661	)		491,558

	Gross profit		185,473			72,014		—		(45,364	)		212,123
Selling, general and administrative expenses			165,698			45,546		—		(45,364	)		165,880
Management fees and termination costs			12,760			—		—		—			12,760
Stock-based compensation and other costs			8,176			—		—		—			8,176

	Operating income (loss)		(1,161	)		26,468		—		—			25,307
Interest income			(309	)		—		—		—			(309	)
Interest expense			17,442			—		—		—			17,442

	Earnings (loss) before income taxes and extraordinary item		(18,294	)		26,468		—		—			8,174
Income taxes			5,467			—		—		—			5,467

	Earnings (loss) before extraordinary item		(23,761	)		26,468		—		—			2,707
Extraordinary item—loss on early extinguishment of debt (net of income tax benefit of $1,332)			(2,004	)		—		—		—			(2,004	)

	Earnings (loss) before equity in earnings of subsidiaries		(25,765	)		26,468		—		—			703
Equity in earnings of subsidiaries			26,468			—		—		(26,468	)		—

Net earnings		$	703		$	26,468	$	—	$	(26,468	)	$	703

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the thirteen weeks ended August 4, 2001
(unaudited, in thousands)

		PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Net sales		$	283,761		$	206,604	$	—		$	(180,463	)	$	309,902
Cost of sales and occupancy costs			206,165			174,573		—			(160,908	)		219,830

	Gross profit		77,596			32,031		—			(19,555	)		90,072
Selling, general and administrative expenses			70,397			22,339		96			(19,555	)		73,277
Management fees and termination costs			780			—		—			—			780
Stock-based compensation and other costs			4,804			—		—			—			4,804
Merger and non-recurring costs			445			—		—			—			445

	Operating income (loss)		1,170			9,692		(96	)		—			10,766
Interest income			(140	)		—		—			—			(140	)
Interest expense			10,667			—		—			—			10,667

	Earnings (loss) before equity in loss of unconsolidated affiliate, income taxes		(9,357	)		9,692		(96	)		—			239
Equity in loss of unconsolidated affiliate			—			—		(839	)		—			(839	)

	Earnings (loss) before income taxes		(9,357	)		9,692		(935	)		—			(600	)
Income taxes			94			—		—			—			94

	Earnings (loss) before equity in earnings of subsidiaries		(9,451	)		9,692		(935	)		—			(694	)
Equity in earnings of subsidiaries			8,757			—		—			(8,757	)		—

	Net earnings (loss)	$	(694	)	$	9,692	$	(935	)	$	(8,757	)	$	(694	)

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the twenty-six weeks ended August 4, 2001
(unaudited, in thousands)

		PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Net sales		$	562,272		$	406,903	$	—		$	(354,779	)	$	614,396
Cost of sales and occupancy costs			409,162			342,932		—			(315,657	)		436,437

	Gross profit		153,110			63,971		—			(39,122	)		177,959
Selling, general and administrative expenses			140,005			44,842		96			(39,122	)		145,821
Management fees and termination costs			1,560			—		—			—			1,560
Stock-based compensation and other costs			7,584			—		—			—			7,584
Merger and non-recurring costs			445			—		—			—			445

	Operating income (loss)		3,516			19,129		(96	)		—			22,549
Interest income			(313	)		—		—			—			(313	)
Interest expense			22,019			—		—			—			22,019

	Earnings (loss) before equity in loss of unconsolidated affiliate, income taxes		(18,190	)		19,129		(96	)		—			843
Equity in loss of unconsolidated affiliate			—			—		(1,640	)		—			(1,640	)

	Earnings (loss) before income taxes		(18,190	)		19,129		(1,736	)		—			(797	)
Income taxes			333			—		—			—			333

	Earnings (loss) before equity in earnings of subsidiaries		(18,523	)		19,129		(1,736	)		—			(1,130	)
Equity in earnings of subsidiaries			17,393			—		—			(17,393	)		—

Net earnings (loss)		$	(1,130	)	$	19,129	$	(1,736	)	$	(17,393	)	$	(1,130	)

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the twenty-six weeks ended August 3, 2002
(unaudited, in thousands)

			PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Cash flows from operating activities:
	Net earnings		$	703		$	26,467		$	—	$	(26,467	)	$	703
Adjustments to reconcile net earnings to net cash provided by operating activities				31,217			(21,576	)		—		26,467			36,108

		Net cash provided by operating activities		31,920			4,891			—		—			36,811

Cash flows from investing activities:
	Additions to fixed assets			(23,447	)		(4,498	)		—		—			(27,945	)

		Net cash used in investing activities		(23,447	)		(4,498	)		—		—			(27,945	)

Cash flows from financing activities:
	Repayment of long term debt agreements			(31,000	)		—			—		—			(31,000	)
	Debt issuance costs			(446	)		—			—		—			(446	)
	Repayment of capital lease and other obligations			(2,899	)		—			—		—			(2,899	)
	Net proceeds from the issuance of common stock			272,779			—			—		—			272,779
	Redemption of Series A senior redeemable preferred stock			(142,231	)		—			—		—			(142,231	)
	Redemption of Series B junior redeemable preferred stock			(97,538	)		—			—		—			(97,538	)

		Net cash used in financing activities		(1,335	)		—			—		—			(1,335	)

Net increase in cash and cash equivalents				7,138			393			—		—			7,531
Cash and cash equivalents at the beginning of the period				36,000			215			—		—			36,215

Cash and cash equivalents at the end of the period			$	43,138		$	608		$	—	$	—		$	43,746

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the twenty-six weeks ended August 4, 2001
(unaudited, in thousands)

			PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Cash flows from operating activities:
	Net earnings (loss)		$	(1,130	)	$	19,129		$	(1,736	)	$	(17,393	)	$	(1,130	)
Adjustments to reconcile net earnings to net cash provided by operating activities				22,895			(17,851	)		8,141			17,393			30,578

		Net cash provided by operating activities		21,765			1,278			6,405			—			29,448

Cash flows from investing activities:
	Additions to fixed assets			(21,623	)		(1,874	)		—			—			(23,497	)
	Investment in affiliate			—			—			(6,405	)		—			(6,405	)

		Net cash used in investing activities		(21,623	)		(1,874	)		(6,405	)		—			(29,902	)

Cash flows from financing activities:
	Borrowings under long-term debt agreements			15,650			—			—			—			15,650
	Repayment of long term debt agreements			(17,650	)		—			—			—			(17,650	)
	Repayment of capital lease and other obligations			(3,210	)		—			—			—			(3,210	)
	Net proceeds from the issuance of common stock			16			—			—			—			16

		Net cash used in financing activities		(5,194	)		—			—			—			(5,194	)

Net decrease in cash and cash equivalents				(5,052	)		(596	)		—			—			(5,648	)
Cash and cash equivalents at the beginning of the period				17,104			940			—			—			18,044

Cash and cash equivalents at the end of the period			$	12,052		$	344		$	—		$	—		$	12,396

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

PETCO is a leading specialty retailer of premium pet food, supplies and services. At August 3, 2002, we operated 585 stores in 42 states and the District of Columbia. We plan to follow a strategy of opening new superstores in new and existing markets, expanding or relocating certain existing stores and closing under-performing stores. As a result of our store expansion strategy, operating results may reflect lower average store contribution and operating margins due to increased store pre-opening expenses and lower anticipated sales volumes of newer stores.

On October 2, 2000, we completed a leveraged recapitalization with an entity controlled by affiliates of Leonard Green & Partners, L.P. and Texas Pacific Group, the sponsors of the transaction. The transaction was financed by a combination of equity, senior subordinated debt and a senior credit facility. A group of equity investors led by the sponsors contributed a total of approximately $200 million of equity to PETCO in the transaction. The transaction was accounted for as a recapitalization and as such, a step-up of assets to fair market value was not required.

On February 27, 2002, we completed an initial public offering of our common stock. We received net proceeds of approximately $272.2 million from the offering of 15,500,000 shares of our common stock, including 1,000,000 shares of our common stock pursuant to the subsequent exercise of the underwriters' over-allotment option. We used approximately $239.8 million of the net proceeds of our initial public offering to redeem in full all of our then outstanding shares of series A and series B preferred stock and used approximately $32.4 million of the net proceeds of our initial public offering plus approximately $2.1 million in cash-on-hand to repurchase $30.0 million in aggregate principal amount of our senior subordinated notes at 110.5% of their face amount plus accrued interest. In connection with the initial public offering, we effected a 2-for-1 stock split of our common stock. All references to number of shares outstanding, price per share and per share amounts have been retroactively restated to reflect the stock split for all periods presented.

Results of Operations
Second Quarter 2002 Compared with Second Quarter 2001

Net sales increased 14.4% to $354.5 million for the thirteen weeks ended August 3, 2002 from $309.9 million for the thirteen weeks ended August 4, 2001. The increase in net sales resulted primarily from the comparable store net sales increase of 8.5% and the addition of 61 superstores, partially offset by the closing of 24 stores, of which 18 were relocated. The comparable store net sales increase was attributable to maturing superstores, increased marketing and merchandising efforts and increased customer traffic. The increase in comparable store net sales accounted for approximately $26.3 million, or 59.0%, of the net sales increase. The net increase in our store base accounted for approximately $18.3 million, or 41.0%, of the net sales increase.

Gross profit, defined as net sales less cost of sales including store occupancy costs, increased $18.3 million, or 20.3%, to $108.4 million from $90.1 million in the prior year quarter. The prior year quarter included $1.0 million in non-cash stock-based compensation expense on the deemed fair value of our common stock as a result of our initial public offering. Gross profit, excluding the non-cash stock-based compensation expense, as a percentage of net sales increased to 30.6% for the second quarter of 2002 from 29.4% in the prior year quarter. More than half of the increase was driven by the combination of the continuing change in mix from lower-margin premium pet food sales to higher margin categories, such as companion animals, toys and supplies, and improved margins on premium pet food due to shifts within the mix of pet food to higher margin segments. The remaining gross margin improvement resulted from the leverage of occupancy, and additional efficiencies in distribution logistics and freight costs for the quarter.

Selling, general and administrative expenses increased to $83.8 million in the second quarter of 2002 from $73.3 million in the prior year quarter. As a percentage of net sales, these expenses were comparable with the prior year at 23.6%. Increased pre-opening costs from opening 60 new stores in fiscal 2002 compared to 50 new stores in the prior year, increased fees to process debit and credit cards, and increased insurance, medical, dental, legal and travel costs offset the leverage of store operating costs produced in the period. The adoption of Statement of Financial Accounting Standards, or SFAS, No. 142 resulted in the recognition of $0.3 million of goodwill impairment in the second quarter of 2002, which offset some of the $1.3 million benefit from the elimination of goodwill amortization.

Management fees in the prior year quarter were $0.8 million. We paid $12.5 million in termination costs in February 2002 to terminate the management services agreement that we entered into in conjunction with our leveraged recapitalization.

Non-cash stock-based compensation in the prior year quarter was $4.8 million and was based on the deemed fair value of our common stock as a result of our initial public offering.

Operating income in the second quarter of 2002 increased to $24.7 million, or 7.0% of net sales, from $10.8 million, or 3.5% of net sales, in the prior year quarter. Excluding the management fees, stock-based compensation and other costs totaling $7.0 million in the prior year quarter, we would have reported an increase of $6.9 million, or 38.8%, over the prior year quarter of $17.8 million.

Net interest expense was $8.4 million for the second quarter of 2002, compared with $10.5 million in the prior year quarter. Lower debt levels and decreased interest rates, as a result of the refinancing of our senior subordinated notes and the amendment and restatement of our senior credit facility, both in October 2001, and the repurchase of $30 million of our senior subordinated notes in the first quarter of 2002, contributed to the reduction in interest expense.

We recognized $0.8 million of equity in loss of unconsolidated affiliate in the prior year second quarter from our former limited partner interest in a limited partnership which operated retail pet food and supplies stores in Canada. We accounted for our investment in the limited partnership using the equity method, as we did not exercise control over the limited partnership, and we recorded our proportionate share of earnings or loss according to the partnership agreement.

Income taxes for the second quarter of 2002 were $6.3 million, compared with $0.1 million in the prior year quarter. Our effective tax rate for the quarter was 39.0%. In the prior year quarter, we did not recognize any tax benefit for our equity in loss of unconsolidated affiliate. Our effective tax rate, before equity in loss of unconsolidated affiliate, was 39.3%.

Prior to the redemption in the first quarter of 2002 of all of our previously outstanding preferred stock in connection with our initial public offering, the holders of our series A preferred stock and our series B preferred stock were entitled to receive dividends at a rate of 14% and 12%, respectively. We were not required to pay these dividends in cash, and the unpaid dividends compounded quarterly. The dividends earned were added to the principal balance of the preferred stock, with a corresponding reduction in net earnings available to common stockholders.

Net earnings available to common stockholders increased to $9.9 million, or $0.17 per diluted share, for the second quarter of 2002, compared to a net loss of $7.5 million, or $0.19 per diluted share, for the prior year quarter. The second quarter of 2001 included the following: a $5.8 million stock-based compensation expense related to our initial public offering; management fees of $0.8 million; equity in loss of unconsolidated affiliate of $0.8 million; merger and non-recurring costs of $0.4 million; and, an increase in the carrying amount of previously outstanding preferred stock of $6.8 million. Excluding the previously mentioned items, the second quarter net earnings for the prior year would have been $4.5 million, or $0.08 per diluted share.

Twenty-six Weeks Ended August 3, 2002 Compared with Twenty-six Weeks Ended August 4, 2001

Net sales increased 14.5% to $703.7 million for the twenty-six weeks ended August 3, 2002 from $614.4 million for the twenty-six weeks ended August 4, 2001. The increase in net sales resulted primarily from the comparable store net sales increase of 8.9% and the addition of 61 superstores, partially offset by the closing of 24 stores, of which 18 were relocated. The comparable store net sales increase was attributable to maturing superstores, increased marketing and merchandising efforts and increased customer traffic. The increase in comparable store net sales accounted for approximately $54.5 million, or 61.0%, of the net sales increase. The net increase in our store base accounted for approximately $34.8 million, or 39.0%, of the net sales increase.

Gross profit increased $34.1 million, or 19.2%, to $212.1 million in the twenty-six weeks ended August 3, 2002 from $178.0 million in the prior year period. Gross profit included $1.5 million in non-cash stock-based compensation expense on the deemed fair value of our common stock as a result of our initial public offering for the twenty-six weeks ended August 3, 2002 compared to $1.6 million in the prior year period. Gross profit, excluding the non-cash stock-based compensation expense, as a percentage of net sales increased to 30.4% for the twenty-six weeks ended August 3, 2002 from 29.2% in the prior year period. The increase was driven by the combination of the continuing change in mix from lower-margin premium pet food sales to higher margin categories, such as companion animals, toys and supplies, and improved margins on premium pet food due to shifts within the mix of pet food to higher margin segments. The current year period also benefited from the leveraging of occupancy and efficiencies in distribution logistics and freight costs for the period.

Selling, general and administrative expenses increased to $165.9 million in the twenty-six weeks ended August 3, 2002 from $145.8 million in the prior year period. As a percentage of net sales, these expenses decreased to 23.6% in the period from 23.7% in the prior year period. Increases in pre-opening costs from opening 60 new stores in fiscal 2002 compared to 50 new stores in the prior year, fees to process debit and credit cards, and insurance, medical, dental, legal and travel costs mostly offset the benefit from the elimination of goodwill amortization and the leverage of store operating costs. The adoption of SFAS No. 142 resulted in the recognition of goodwill impairment of $0.3 million in the second quarter of 2002, which offset some of the $2.5 million benefit from the elimination of goodwill amortization.

Management fees and termination costs were $12.8 million for the twenty-six weeks ended August 3, 2002, compared to management fees of $1.6 million in the prior year period. We paid $12.5 million in termination costs in February 2002 to terminate the management services agreement that we entered into in conjunction with our leveraged recapitalization.

Non-cash stock-based compensation increased to $8.2 million for the twenty-six weeks ended August 3, 2002 from $7.6 million in the prior year period. These expenses were based on the deemed fair value of our common stock as a result of our initial public offering.

Operating income for the twenty-six weeks ended August 3, 2002 increased to $25.3 million, or 3.6% of net sales, from $22.5 million, or 3.7% of net sales, in the prior year period. Excluding the management fees and termination costs and stock-based compensation and other costs of $22.4 million for the twenty-six weeks ended August 3, 2002 and $11.2 million in the prior year period, we would have reported operating income of $47.7 million in the twenty-six weeks ended August 3, 2002, an increase of $14.0 million, or 41.5%, over the prior year period of $33.7 million.

Net interest expense was $17.1 million for the twenty-six weeks ended August 3, 2002, compared with $21.7 million in the prior year period. Lower debt levels and decreased interest rates, as a result of the refinancing of our senior subordinated notes and the amendment and restatement of our senior credit facility, both in October 2001, and the repurchase of $30 million of our senior subordinated notes in the first quarter of 2002, contributed to the reduction in interest expense.

We recognized $1.6 million of equity in loss of unconsolidated affiliate in the prior year twenty-six week period from our former limited partner interest in a limited partnership which operated retail pet food and supplies stores in Canada. We accounted for our investment in the limited partnership using the equity method, as we did not exercise control over the limited partnership, and we recorded our proportionate share of earnings or loss according to the partnership agreement.

Income taxes for the twenty-six weeks ended August 3, 2002 were $5.5 million, compared with $0.3 million in the prior year period. Our effective tax rate for the period, before transactions related to our initial public offering and the use of proceeds thereof, was 39.0%. In the prior year period, we did not recognize any tax benefit for our equity in loss of unconsolidated affiliate. Our effective tax rate, before equity in loss of unconsolidated affiliate, was 39.5%.

Net loss available to common stockholders increased to $19.8 million, or $0.36 per diluted share, for the twenty-six weeks ended August 3, 2002, compared to a net loss of $14.7 million, or $0.38 per diluted share, for the prior year period. We completed an initial public offering in the first quarter of fiscal 2002 and our results include the following items: $12.8 million in management fees and termination costs related to the termination in February 2002 of a management services agreement; $8.4 million in stock-based compensation expense and other primarily financing and legal costs of $1.2 million related to our initial public offering; an extraordinary loss, net of related tax benefit, of $2.0 million related to the early repurchase of our senior subordinated notes with proceeds of the offering; and, an increase in the carrying amount and premium on redemption of previously outstanding preferred stock of $20.5 million. The prior year period included the following: stock-based compensation expense of $9.2 million related to our initial public offering; management fees of $1.6 million; equity in loss of unconsolidated affiliate of $1.6 million; merger and non-recurring costs of $0.4 million and, an increase in the carrying amount of previously outstanding preferred stock of $13.5 million. Excluding the previously mentioned items and related tax effects, net earnings available to common stockholders for the twenty-six weeks ended August 3, 2002 increased to $18.6 million, or $0.32 per diluted share, compared to $7.4 million, or $0.13 per diluted share, in the prior year period.

Liquidity and Capital Resources

We have financed our operations and expansion program through internal cash flow, external borrowings and the sale of equity securities. At August 3, 2002, total assets were $489.7 million, $222.2 million of which were current assets. Net cash provided by operating activities was $36.8 million for the twenty-six weeks ended August 3, 2002, compared with $29.4 million provided by operations for the prior year period. Our sales are substantially on a cash basis. Therefore, cash flow generated from operating stores provides a significant source of liquidity. We use operating cash principally to make interest payments on our debt and to purchase inventory. A portion of our inventory purchased is financed through vendor credit terms. We have been highly leveraged since our leveraged recapitalization in October 2000, and we use cash generated from operating activities to service the increased debt levels.

We use cash in investing activities to purchase fixed assets for new stores, to acquire stores and, to a lesser extent, to purchase warehouse and office fixtures, equipment and computer hardware and software in support of our distribution and administrative functions. We invested $6.4 million in the

twenty-six weeks ended August 4, 2001 in a limited partnership that operated retail pet food and supplies stores in Canada in which we formerly had a limited partnership interest. Total cash used in investing activities was $27.9 million for the twenty-six weeks ended August 3, 2002 and $29.9 million for the prior year period.

We have also financed some of our purchases of equipment and fixtures through capital lease and other obligations in the past. No purchases of fixed assets were financed in this manner during the twenty-six weeks ended August 4, 2001 or August 3, 2002.

On February 27, 2002, we completed an initial public offering of our common stock. We received net proceeds of approximately $272.2 million from the offering of 15,500,000 shares of our common stock, including 1,000,000 shares of our common stock pursuant to the subsequent exercise of the underwriters' over-allotment option. We used approximately $239.8 million of the net proceeds of our initial public offering to redeem in full all of our then outstanding shares of series A and series B preferred stock and used approximately $32.4 million of the net proceeds of our initial public offering, plus approximately $2.1 million in cash-on-hand, to repurchase $30.0 million in aggregate principal amount of our senior subordinated notes at 110.5% of their face value plus accrued interest.

Our primary long-term capital requirement is funding for the opening or acquisition of stores. Cash flows used in financing activities were $1.3 million in the twenty-six weeks ended August 3, 2002 compared with $5.2 million in the twenty-six weeks ended August 4, 2001. In the twenty-six weeks ended August 3, 2002, net proceeds of $272.8 million were generated from sales of common stock. In the twenty-six weeks ended August 3, 2002, we used $239.8 million to redeem our series A senior preferred stock and our series B junior preferred stock and approximately $32.4 million, plus approximately $2.1 million in cash-on-hand, to repurchase $30.0 million in aggregate principal amount of our senior subordinated notes at 110.5% of their face amount plus accrued interest. Remaining cash flows provided by financing activities consisted of borrowings under long-term debt agreements, net of repayment of long-term debt agreements and other obligations. Cash flows from financing activities were used to fund our expansion program and working capital requirements.

We have a senior credit facility with a syndicate of banks that expires between October 2, 2006 and October 2, 2008. As of August 3, 2002, the senior credit facility consisted of a $75.0 million revolving credit facility and a $195.0 million term loan B facility. On August 6, 2002, we completed a refinancing of our existing term loan B facility into a new $193.5 million term loan C facility. The refinancing resulted in an interest rate reduction of 0.5% on the term loan facility.

As a result of the refinancing, the senior credit facility now consists of a $75.0 million revolving credit facility and a $193.5 million term loan C facility for a total commitment of $268.5 million. Borrowings under the senior credit facility are secured by substantially all of our assets and bear interest (1) in the case of the revolving facility, at our option, at the agent bank's base rate plus a margin of up to 2.25%, or LIBOR plus a margin of up to 3.25%, based on our leverage ratio at the time, and (2) in the case of the term loan C facility, at our option, at the agent bank's base rate plus a fixed margin of 2.0%, or LIBOR plus a fixed margin of 3.0%. The credit agreement contains certain affirmative and negative covenants related to, among other things, indebtedness, interest and fixed charges coverage and consolidated net worth. We were in full compliance with all of these covenants at August 3, 2002. At August 3, 2002, there were no borrowings on our revolving credit facility.

We may from time to time seek to retire some or all of our 10.75% senior subordinated notes in open market purchases, negotiated transactions or otherwise. The scope of such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Such repurchases may have a material effect on our liquidity, financial condition and results of operations.

As of February 2, 2002, we had available net operating loss carryforwards of $43.6 million for federal income tax purposes, which begin expiring in 2012, and $27.9 million for state income tax purposes, which begin expiring in 2005.

We anticipate that funds generated by operations and funds available under our credit facility will be sufficient to finance our continued operations and planned store openings at least through the next twelve months.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to our operations result primarily from changes in short-term London Interbank Offered Rates, or LIBOR, as our senior credit facility utilizes a portfolio of short-term LIBOR contracts. These LIBOR contracts are fixed rate instruments for a period of between one and six months, at our discretion. Our portfolio of LIBOR contracts vary in length and interest rate, such that adverse changes in short-term interest rates could affect our overall borrowing rate when contracts are renewed. We have entered into a $75.0 million interest rate collar agreement, or hedge, to limit our exposure to the interest rate risk associated with our variable rate debt. Changes in the intrinsic value of the hedge are recorded as accumulated other comprehensive income (loss). Amounts received or paid under the hedge are recorded as reductions of or additions to interest expense. We had a cumulative deferred loss on our hedge of $0.8 million, net of deferred tax benefit of $0.5 million, at August 3, 2002.

Of the total $193.5 million in debt under our senior credit facility as of August 3, 2002, after giving effect to the hedge, $118.5 million was subject to variable interest rate fluctuations. Based on this debt level, and taking into account the hedge, a hypothetical 10% increase in LIBOR from the applicable rate at August 3, 2002 would increase net interest expense by approximately $0.05 million on a quarterly basis, and likewise would decrease both earnings and cash flows for that quarterly period by a corresponding amount. We 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 estimated results due to adverse changes in interest rates or debt availability.

We did not have any material foreign exchange or other significant market risk at August 3, 2002.

Part II. Other Information

Item 1. Legal Proceedings

In July 2001, two former employees instituted an action against us in the Superior Court of California for the County of Los Angeles. The complaint in the action was filed individually and on behalf of a purported class consisting of all current and former employees who worked as salaried managers or assistant managers in our stores in the state of California at any time between July 30, 1997 and the present. The complaint alleges that the individual plaintiffs and the purported class members worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law, and that they were classified as "exempt" store management employees but were forced to work more than 50% of their time in non-exempt tasks. The complaint alleges violations of the California Labor Code and the California Business and Professions Code. The relief sought includes compensatory damages, penalties, preliminary and permanent injunctions requiring us to pay overtime compensation under California law, prejudgment interest, costs and attorneys' fees and such other relief as the court deems proper. In November 2001, the case was transferred to the Superior Court of California for the County of San Diego. We have answered the complaint and discovery is nearing completion. We are vigorously defending the action, including contesting the certification of the action as a class action. If successful, this litigation could have a

material adverse effect on our financial condition, and any required change in our labor practices could have a negative impact on our results of operations.

From time to time we are involved in routine litigation and proceedings in the ordinary course of our business. We are not currently involved in any other pending litigation matters that we believe would have a material adverse effect on us.

Item 5. Other Information

Certain Cautionary Statements

Certain statements in this Quarterly Report on Form 10-Q, including, but not limited to, Part I, Item 2—"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 Exchange 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. We generally identify forward-looking statements in this Quarterly Report using words such as "believe," "intend," "target," "expect," "estimate," "may," "should," "plan," "project," "contemplate," "anticipate," "predict" or similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These factors, such as performance of new superstores, ability to execute expansion strategy and sustain growth, debt levels, reliance on vendors and exclusive distribution arrangements, competition, integration of operations as a result of acquisitions and dependence on senior management, are discussed from time to time in the reports we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K, as amended, for the fiscal year ended February 2, 2002.

Item 6. Exhibits and Reports on Form 8-K

(a): Exhibits

10.27

Second Amendment to Amended and Restated Credit Agreement.

(b): Reports on Form 8-K

On July 5, 2002, the Company filed a report on Form 8-K in connection with the establishment by certain executive officers of the Company of trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934.

Signatures

Pursuant to the requirements 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.

		PETCO ANIMAL SUPPLIES, INC.
		By:		/s/ BRIAN K. DEVINE Brian K. Devine Chairman, President and Chief Executive Officer
		By:		/s/ JAMES M. MYERS James M. Myers Executive Vice President and Chief Financial Officer
				Date: September 5, 2002

Certifications

I, Brian K. Devine, certify that:

1.: I have reviewed this quarterly report on Form 10-Q of PETCO Animal Supplies, Inc.;
2.: Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.: Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: September 5, 2002

/s/ BRIAN K. DEVINE

Chief Executive Officer

I, James M. Myers, certify that:

1.: I have reviewed this quarterly report on Form 10-Q of PETCO Animal Supplies, Inc.;
2.: Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.: Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: September 5, 2002

/s/ JAMES M. MYERS

Chief Financial Officer

QuickLinks

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Part II. Other Information

Item 1. Legal Proceedings

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signatures
Certifications