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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 1997
OR
[ ] 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 0-21888
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PETSMART, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3024325
State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization No.)
10000 NORTH 31ST AVENUE, SUITE C100, PHOENIX, AZ 85051
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 944-7070
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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
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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 report(s), 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 pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ ]
Based on the closing sale price of $20.3125 on April 1, 1997, the aggregate
market value of the voting stock held by non-affiliates of the registrant was
$1,918,516,647.
On April 1, 1997 there were outstanding 114,526,781 shares of the
Registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
Registrant's Proxy Statement (specified portions) with respect to the Annual
Meeting of Stockholders to be held June 20, 1997.
TABLE OF CONTENTS
ITEM PAGE
----- -----
PART I
1. Business............................................................................................ 3
2. Properties.......................................................................................... 13
3. Legal Proceedings................................................................................... 14
4. Submission of Matters to a Vote of Security Holders................................................. 14
PART II
5. Market for the Registrant's Common Stock and Related Stockholder Matters............................ 15
6. Selected Financial Data............................................................................. 15
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................................ 16
8. Financial Statements and Supplementary Data......................................................... 23
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................................ 23
PART III
10. Directors and Executive Officers of the Registrant.................................................. 24
11. Executive Compensation.............................................................................. 24
12. Security Ownership of Certain Beneficial Owners and Management...................................... 24
13. Certain Relationships and Related Transactions...................................................... 24
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 25
2
PART I
ITEM 1. BUSINESS
GENERAL
PETsMART, Inc. and its subsidiaries ("PETsMART" or "the Company") is a
leading worldwide operator of superstores specializing in pet food, supplies and
services. As of March 31, 1997, the Company operated 348 superstores in North
America and 57 stores in the United Kingdom, and four retail tack and equine
supply stores in New Hampshire, Delaware, and the Houston, Texas metropolitan
area. PETsMART endeavors to offer the pet owner the most complete assortment of
pet products and services available, at prices that are typically 5% to 25%
below those offered by supermarkets and other traditional pet food and pet
supply outlets.
PETsMART carries an extensive selection of pet foods and treats, including
premium labels such as Science Diet and IAMS, as well as other national
brand-name products such as Ralston Purina and Alpo and its own corporate brand
products. PETsMART's broad assortment of pet supplies includes collars, leashes,
health aids, shampoos, medications, toys, animal carriers, dog houses, cat
furniture and equestrian supplies. Other products include fresh water tropical
fish and, in most superstores, domestically bred birds. To attract new customers
and to engender customer loyalty, the Company is a leader in the introduction of
innovative marketing programs, merchandising techniques and services for the pet
owner. For example, the Company offers on-site professional grooming services in
most superstores, conducts periodic vaccination clinics and obedience classes,
sponsors a Luv-A-Pet adoption program, and, in selected superstores, leases
space to veterinary clinics.
Through its catalog subsidiaries, the Company is the leading direct marketer
of pet related and equine products. Sporting Dog Specialties, Inc. and its
affiliates ("Sporting Dog") sell pet supplies and products for small and large
animals to individuals and small businesses through five catalogs: R. C. Steele,
Pedigrees, Groomer Direct, Wiese Equine Supply and PETsMART Direct. Sporting Dog
also operates five retail pet supply stores and a warehouse outlet store in
upstate New York. State Line Tack, Inc. ("State Line Tack") is a worldwide
catalog retailer specializing in discount brand name tack, riding apparel and
equine supplies.
PETsMART's prototype 26,000 square foot North American superstore carries
approximately 12,000 pet-related items as compared to an average of
approximately 800 such items in a typical supermarket, 20 such items in a
typical warehouse club, 500 such items in a typical mass merchandiser and 1,000
items in a traditional pet store. The Company's superstores utilize a hybrid
retail-warehouse format that reinforces the image of warehouse shopping at
discount prices, enhances merchandise presentation and provides a fun shopping
experience for customers and their pets. PETsMART superstores are generally
located in sites co-anchored by strong consumables-oriented retailers or other
destination superstores, or near major regional malls.
PETsMART was incorporated in Delaware in August 1986. The Company's
principal executive offices are located at 10000 N. 31st Avenue, Suite C-100,
Phoenix, Arizona 85051, and its telephone number is (602) 944-7070. The
Company's home page on the World Wide Web, which contains store locations and
other information about the Company, can be accessed at HTTP://WWW.PETSMART.COM.
OVERVIEW OF THE PET FOOD AND PET SUPPLY INDUSTRY
The Company estimates that total worldwide pet food and supplies market in
1995 was approximately $34 billion and growing at a 4.5% annual rate.
Approximately 40% and 48% of households in Europe and North America,
respectively, own at least one pet.
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The Company estimates that total U.S. sales of pet food and supplies in
calendar 1995 were approximately $13 billion. Approximately 54 million
households, or over half of all U.S. households, own at least one pet, with more
than 40% of pet-owning households owning more than one type of pet. The largest
segments of pet ownership are dogs and cats with an estimated 57 million dogs
and 70 million cats in the United States. Demand is primarily influenced by
family formation, with most pets owned by families with children between ages 5
and 19. PETsMART believes that there is a potential for 900 to 1,000 superstores
in North America.
Europe is estimated to be an approximate $9 billion market, with the United
Kingdom, France and Germany presenting the largest opportunities. With its
acquisition of Pet City in 1996, which as of March 31, 1997 operated 57 stores
in the United Kingdom, the Company entered the United Kingdom, which the Company
believes to be a 250 to 300 store potential opportunity.
Pet food, primarily dog and cat food, represents the largest volume category
of pet-related products, with U.S. sales estimated at $9.3 billion in 1995.
Supermarket brands, such as Alpo, Kal Kan and Ralston Purina accounted for
approximately 55% of pet food sales. In recent years, the percentage of total
pet food sales attributable to supermarkets has decreased as a result of
increased competition from warehouse clubs, mass merchandisers and specialty pet
stores. In addition, sales of premium pet foods such as Science Diet, IAMS,
Nutro and Pro Plan, which offer higher levels of nutrition than non-premium
brands, are growing at a faster rate than brands sold through supermarkets,
warehouse clubs and mass merchandisers. These premium pet foods are not sold
through supermarkets but are sold primarily through specialty pet stores,
veterinarians and farm and feed stores.
Pet supplies, consisting of items such as dog and cat toys, collars and
leashes, cages and habitats, books, vitamins and supplements, shampoos, flea and
tick control, and aquatic supplies, achieved U.S. sales of approximately $3.7
billion in 1995. Pet supplies are sold by many types of retailers, including
supermarkets, discount stores and other mass merchandisers, specialty pet
stores, direct mail houses and veterinarians. The channels of distribution for
pet supplies are highly fragmented, with specialty pet stores and discount
stores accounting for over 50% of U.S. sales volume. The primary competitive
factors in the pet supply business include completeness of assortment, price,
convenience and, in many categories, knowledgeable service.
The market for live animals, referred to in the pet industry as "livestock",
includes sales of dogs, cats, fish, birds, reptiles and small animals. Because
of the overpopulation of dogs and cats and the inhumane practices of some
breeders, the Company limits its livestock sales to domestically bred birds,
freshwater tropical fish, and, in selected superstores, certain species of
reptiles and small animals.
PETsMART is expanding its operations to include grooming, obedience training
and veterinary services. This highly-fragmented domestic market is estimated at
$5 billion to $8 billion in 1995. The Company considers the pet services
industry to be significantly under-served as many pet owners do not regularly
use pet services due to the inconvenience of obtaining these services, lack of
awareness or the cost of the services provided.
Lastly, PETsMART's expansion into the equine food and equestrian riding
supplies and equipment market gives the Company access to this approximately $8
billion domestic market. This market is highly fragmented and the Company
believes consolidation of this industry will provide consumers with better
service and quality merchandise.
THE PETSMART STRATEGY
PETsMART's mission is to become the leading retailer of pet food, supplies
and services throughout the world. The key components of the Company's strategy
are:
- THE BROADEST ASSORTMENT OF PET FOOD, SUPPLIES AND SERVICES. PETsMART's
strategy is to offer the most complete assortment of pet-related products
and services in the marketplace. PETsMART
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North American superstores carry over 12,000 pet related items. However,
the Company does not sell dogs or cats, but supports the activities of
local humane organizations through in-store pet adoption centers.
PETsMART's products generally fall into three main categories:
1. PET FOOD, TREATS AND LITTER. PETsMART emphasizes premium foods for
dogs and cats which currently are not available in supermarkets,
warehouse clubs or mass merchandisers. The Company also sells quality
national brand name products traditionally found in supermarkets and
pet stores. PETsMART also offers a wide-range of its own corporate
brand food products including "Authority-Registered Trademark-"
premium dog and cat food, "Sophista Cat-Registered Trademark-" cat
food and "Grreat Choice-Registered Trademark-" dog food. The sale of
pet food, treats and litter comprised approximately 49% of PETsMART's
revenues in fiscal 1996.
2. PET SUPPLIES. PETsMART's broad assortment of pet supplies includes
collars, leashes, health aids, shampoos, medication, toys, animal
carriers, dog houses, cat furniture and equestrian supplies. The
Company also offers a complete line of supplies for the specialty
consumer, including aquariums, filters, bird cages and small animal
supply products. Corporate brand pet supplies include "Top
Fin-Registered Trademark-" and "Top Wing-TM-". The sale of pet
supplies comprised approximately 46% of PETsMART's revenues in fiscal
1996.
3. SERVICES AND OTHER GOODS. All PETsMART superstores feature tropical
freshwater fish departments and most stores also sell domestically
bred birds. Professional grooming services are available at most
PETsMART superstores every day, and the Company had leased space to
veterinarians in 176 superstores as of its fiscal 1996 year end.
Services, live fish and birds and other non-pet supply goods
comprised approximately 5% of the Company's revenues in fiscal 1996.
- THE LOWEST EVERYDAY PRICES. PETsMART endeavors to be the low-price leader
in each of the markets it serves for each product that is sells. The
Company purchases all of its pet food products and nearly all of its pet
supply products directly from manufacturers and obtains significant volume
discounts on most products. The Company reinforces customers' expectations
of savings by offering a "double-the-difference" price guarantee on all of
its products. Company-employed shoppers regularly check prices at
competitors' operations to ensure that PETsMART's prices are competitive
within each market.
- SUPERIOR CUSTOMER SERVICE AND KNOWLEDGEABLE SALES ASSISTANCE. To build and
enhance customer confidence and loyalty, PETsMART strives to provide
prompt, knowledgeable sales assistance and enthusiastic customer service.
The Company views the quality of its customers' interaction with its
associates as critical to its continued success. Through its emphasis on
training and personnel development, the Company believes it attracts and
retains well qualified, highly-motivated associates committed to providing
superior levels of customer service.
- INNOVATIVE PROGRAMS AND SERVICES. The Company believes it is a leader in
the introduction of innovative marketing programs, merchandising
techniques and pet services. The Company offers on-site professional
grooming services, conducts periodic vaccination clinics and obedience
classes, sponsors an in-store pet adoption program, and, in selected
superstores, leases space to veterinary clinics.
- AN ENJOYABLE, INTERACTIVE SHOPPING EXPERIENCE. PETsMART superstores are
designed to create a "fun" shopping experience for customers and their
pets. Owners are invited to shop with their pets, creating an enjoyable
social atmosphere in the superstore.
- DIRECT MARKETING CAPABILITIES. Through the fulfillment capabilities of its
catalog subsidiaries, the Company has the ability to use direct marketing
to increase its market share in pet and equine products.
5
- EXPANSION STRATEGY. The Company's strategy is to increase its market share
in existing markets and to penetrate new markets with a goal of
establishing a significant position in each market it serves in order to
achieve efficiencies in advertising, distribution and management. At the
end of fiscal 1997, PETsMART expects to operate approximately 385
superstores in North America and approximately 80 superstores in the
United Kingdom. PETsMART believes that there is a potential for an
aggregate of at least 900 pet food and pet supply superstores in the
United States and an aggregate of at least 900 to 1,000 superstores in
Europe, including 250 to 300 superstores in the United Kingdom. The
European market trends of increasing dry pet food market share,
significant growth potential for super premium foods and the absence of
any significant pet supply superstores, along with growing foreign
consumer disposable income and opportunities for global product sourcing,
provide an opportunity for expansion of the Company's business. The
Company's planned expansion is dependent on adequate sources of capital as
discussed under EXPANSION PLANS in the RISK FACTORS section of this Annual
Report on Form 10-K.
PURCHASING AND DISTRIBUTION
PETsMART is committed to purchasing and distribution strategies which the
Company believes minimize delivered cost on the merchandise that it sells. Each
item and category of items as well as each vendor are reviewed against
distribution alternatives, and the Company employs a hybrid distribution system
including, as appropriate, full truckload shipments to individual superstores,
the splitting of full truckloads among several closely located superstores,
consolidation centers to service regional clusters of superstores and central
distribution centers. The Company operates a 230,000 square foot distribution
center located 30 miles southeast of Dallas, Texas, a 300,000 square foot
distribution center in Columbus, Ohio, and a 430,000 square foot distribution
center in Phoenix, Arizona. Pet City operates a 110,000 square foot break bulk
center in Gloucester, England. These centers primarily handle high margin,
low-cube (small, light and easy to handle) non-food products, including store
supplies. The Company currently operates 12 regional consolidation centers in
the United States.
A significant portion of PETsMART's net sales consists of sales of premium
foods for dogs and cats, such as Science Diet and IAMS. Currently, these premium
pet foods are not sold in supermarkets, warehouse clubs or by other mass
merchandisers. The Company may be materially adversely affected if any of the
manufacturers of these premium pet foods were to make their products available
in supermarkets or through other mass merchandisers, or if the brands currently
available to such retailers were to gain market share at the expense of the
premium brands sold only through specialty pet food and supply outlets. In
addition, PETsMART'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. While the
Company believes its vendor relationships are satisfactory, a vendor could
discontinue selling to the Company at any time. The Company buys from
approximately 700 vendors worldwide, of which the two largest vendors account
for approximately 21% of total purchases.
The Company purchases significant amounts of pet supplies from a number of
vendors with limited supply capabilities. There can be no assurance that the
Company's current pet supply vendors will be able to accommodate its anticipated
growth. PETsMART is continuously seeking to expand its base of pet supply
vendors and to identify new pet supply products. Additionally, the Company
purchases significant amounts of pet supplies from vendors outside of the United
States. There can be no assurance that the Company's overseas vendors will be
able to satisfy PETsMART's requirements, including timeliness of delivery,
acceptable product quality, packaging and labeling requirements, and other
requirements of the Company. An inability of PETsMART's existing vendors to meet
its expanding product demands and any inability of the Company to identify new
vendors or sources of supply in a timely or cost-effective manner could have a
material adverse effect on the Company.
6
COMPETITION
The pet food and pet supply retail business is highly competitive. PETsMART
believes that the principal competitive factors influencing its business are
product selection and quality, customer service, superstore location and price.
Based on total sales, PETsMART is one of the largest pet food and supply
retailers in the world, and while the Company believes that it competes
effectively within its various market areas, many of its supermarket, warehouse
club and mass merchandise competitors are larger in terms of total sales volume
and have access to greater capital and management resources than the Company.
PETsMART also competes with a number of other smaller pet store chains, feed
stores, veterinarians and independent pet stores.
PETsMART also faces a number of specialty store competitors operating
warehouse-style superstores similar in format to PETsMART or smaller convenience
stores. Most of these competitors are focused in a particular geographic area or
are regional in their orientation. Warehouse-style competitors may sell a
similar assortment of pet food and pet supplies. Convenience store chains
typically focus on a more upscale retail environment for the higher end customer
of premium pet foods and supplies. The fastest rate of growth in terms of new
stores in North America comes from this convenience specialty store segment. The
convenience specialty stores range in size from 3,000 to 12,000 square feet, and
often have a small fish department and grooming area.
The Company's competitors, including operators of other warehouse-style pet
food and pet supply superstores, as well as supermarkets, warehouse clubs, mass
merchandisers or specialty pet stores, may seek to gain or retain market share
by reducing prices. To the extent this occurs, the Company may be required to
reduce its prices in order to remain competitive, which may have the effect of
reducing profits. There can be no assurance that the Company will not face
greater competition from other foreign, national or regional retailers in the
future.
TRADEMARKS
The Company owns several service marks and trademarks registered with the
United States Patent and Trademark Office ("USPTO"), including
"PETsMART-Registered Trademark-," "Santa Claws-Registered Trademark-," "Grreat
Choice-Registered Trademark-," "Sophista-Cat-Registered Trademark-,"
"Authority-Registered Trademark-," "Top Paw-Registered Trademark-," "Top
Fin-Registered Trademark-," and the PETsMART Logos. PETsMART also has several
applications pending with the USPTO for additional trademarks, including "Top
Wing-TM-," "All Living Things-TM-," "Adopt Your World-TM-," and "Where Pets Are
Family-TM-" and PETsMART anticipates filing additional applications in the
future. The Company believes its trademarks and logos have become important
components in its merchandising and marketing strategy. The Company believes it
has all the licenses necessary to conduct its business. However, the Company
periodically encounters challenges to the use of its name in certain market
areas.
EMPLOYEES
As of March 31, 1997, the Company employed approximately 15,500 associates
worldwide, approximately 7,100 of whom were employed full time. PETsMART's
associates receive wages and benefits competitive with those of the local
community. The Company is not subject to any collective bargaining agreements
and has not experienced any work stoppages. The Company considers its
relationship with its associates to be good.
RISK FACTORS
The risk factors below, along with those discussed in the Purchasing and
Distribution and Competition sections of this Annual Report on Form 10-K, are
some, but not necessarily all, of the matters which present risks and
uncertainties which could have a material adverse affect on the Company's
ability to operate its businesses successfully or in a manner consistent with
historical operating results. The Company's actual results could differ
materially from those projected results due to some or all of the factors
discussed below.
- EXPANSION PLANS. PETsMART has expanded from two superstores at the
beginning of fiscal 1988 to 348 superstores in North America as of March
31, 1997, and is anticipating expanding North
7
American store square footage at an annual rate of 20% for the foreseeable
future. The Company's continued growth is dependent in part on its ability
to identify markets and open superstores in those markets which will
contribute to sales and earnings growth. Additionally, the Company intends
to reposition approximately 30 of the smaller former Petstuff and PETZAZZ
units, which currently average about 18,000 square feet, to prototype
26,000 square foot locations. The Company plans to reposition 5 to 6
stores in fiscal 1997, 15 to 20 stores in fiscal 1998, and 5 to 10 stores
in fiscal 1999. The cost of relocating the units will be expensed as
incurred, with no unusual one-time write-offs currently anticipated. The
openings are dependent on adequate sources of capital for store site
acquisition, building construction, fixturing and inventory, the training
and retention of skilled managers and personnel, and other factors, some
of which may be beyond the Company's control. As a result, there can be no
assurance that the Company will be able to achieve its targets for opening
new superstores. To the extent the Company is unable to obtain
satisfactory financing for new store growth, the Company's ability to open
new superstores, and profitably operate its current superstores, will be
negatively impacted. There can be no assurance that the Company will
continue to be able to finance its operations without additional financing
or other arrangements, or that such financing will be available to the
Company at an acceptable cost. To manage its expansion, PETsMART is
continuously evaluating the adequacy of its existing systems and
procedures, including financial controls and management information
systems, product distribution facilities and field and superstore
management. There can be no assurance that PETsMART will anticipate all of
the changing demands which its expanding operations and the acquisitions
of Pet Food Giant, State Line Tack and Pet City will impose on such
systems. PETsMART's failure to expand its distribution capabilities or
other internal systems or procedures as required could adversely affect
its future operating results.
The Company is currently evaluating its Company-wide management
information systems, and anticipates upgrading these systems over the next
two to three years. There can be no assurance that the anticipated system
enhancements will be completed as planned, that such enhancements will be
completed at an acceptable cost, or that the process will not cause a
disruption of business operations.
- INTERNATIONAL OPERATIONS. The Company recently entered the Canadian market
by opening eight superstores in Ontario. The Company has also recently
entered the European market by acquiring Pet City, which as of March 31,
1997 operated 57 superstores in the United Kingdom. PETsMART's management
had previously not operated any locations outside of the United States and
there can be no assurance PETsMART will be able to successfully operate
internationally or that the international expansion will be implemented
successfully. International expansion will require significant management
resources and, if unsuccessful, may materially and adversely affect the
Company. International operations are expected to be an increasingly
important contributor to PETsMART's overall operations. As a result,
operating results are increasingly affected by the risks of such
activities, including fluctuations in currency exchange rates, changes in
international regulatory requirements, international staffing and
employment issues, tariff and other trade barriers, the burden of
complying with foreign laws, including but not limited to, local packaging
and labeling requirements, content laws, and income tax laws, and
political and economic instability and developments.
- INTEGRATION OF OPERATIONS AS A RESULT OF ACQUISITIONS. If PETsMART is to
realize the anticipated benefits of its acquisitions of Petstuff, Inc.
(Petstuff), Sporting Dog Specialties, Inc. (Sporting Dog), The Pet Food
Giant, Inc. (Pet Food Giant), and State Line Tack, Inc. (State Line Tack)
the operations of these companies must be integrated and combined
efficiently. The process of rationalizing stores, supply and distribution
channels, computer and accounting systems and other aspects of operations,
while managing a larger and geographically expanded entity with new equine
and catalog businesses, will present a significant challenge to PETsMART's
management. Similarly, PETsMART's 1996 acquisition of Pet City Holdings
plc (Pet City), a public company incorporated in England and Wales,
presents significant coordination and logistical challenges to PETsMART's
8
management. There can be no assurance that the integration process,
including the change of Pet City's tradename, will be successful or
accepted, or that the anticipated benefits of these acquisitions will be
fully realized. The dedication of management resources to such integration
may detract attention from the day-to-day business of the Company. The
difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations, integrating personnel
with disparate business backgrounds and combining different corporate
cultures. These difficulties are likely to be particularly acute with the
integration of Pet City, given geographical separation and the differences
in U.S. and U.K. business cultures. Substantial management resources at
both PETsMART and Pet City have been devoted to making the integration of
the two companies successful and to realizing the anticipated benefits of
the combination of the two companies. There can be no assurance that the
Company can achieve any expense reductions with the acquired companies,
that there will not be substantial costs associated with any such
reductions or 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.
PETsMART incurred a charge in its fourth fiscal quarter ended February 2,
1997 of $20.3 million to reflect the acquisition of Pet City including
transaction and integration and store conversion costs. The Company
anticipates that approximately $14.7 million of similar business
integration costs associated with the Pet City merger will be recognized
when incurred during the first half of fiscal 1997.
There can be no assurance that the Company will not incur additional
charges in subsequent quarters to reflect costs associated with its
acquisitions of Pet Food Giant and State Line Tack. The Company may also
make additional acquisitions in the future. 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 impacted if it is unable to successfully integrate such
new companies into its operations. Future acquisitions by the Company
could also result in potential dilutive issuances of securities, the
incurrence of additional debt and contingent liabilities, and amortization
expenses related to goodwill and other intangible assets, which could
materially adversely affect the Company's profitability.
- ENTRY INTO NEW BUSINESSES. The Company entered the mail order catalog
business with its acquisition of Sporting Dog and substantially increased
its equine direct marketing business with the acquisition of State Line
Tack. Prior to these acquisitions, the Company had no direct experience
with the mail order catalog business and only limited experience with the
equine direct marketing business. There can be no assurance that the
operation of such businesses as PETsMART subsidiaries or that the
Company's strategy of combining retail store and catalog purchasing,
marketing and product line offerings will be successful.
- CHANGES IN GOVERNMENT REGULATION. The Company is subject to laws governing
its relationships with associates, including minimum wage requirements,
overtime, working conditions, and citizenship requirements. An increase in
the minimum wage rate, employee benefit costs or other costs associated
with employees could adversely affect the Company as well as the retail
industry in general. In certain locations, PETsMART leases space to
veterinary clinics, including both clinics operated by a subsidiary of
PETsMART and independently-operated clinics, and the Company intends to
lease space to clinics in other superstores as appropriate. Statutes and
regulations in certain states, Canadian provinces or other foreign
countries affecting the ownership of veterinary practices or the operation
of veterinary clinics within retail stores or the operation of superstores
may impact the Company's ability to operate veterinary clinics within
certain of its facilities. Internationally, some countries may regulate
the operation of superstores directly and such regulations may materially
affect PETsMART's expansion plans.
9
EXECUTIVE OFFICERS
The executive officers of the Company and their ages and positions at March
31, 1997, are as follows:
NAME AGE POSITION
- ---------------------------------------- --- -----------------------------------------------------------------
Mark S. Hansen.......................... 42 President, Chief Executive Officer
Donna R. Ecton.......................... 49 Chief Operating Officer
C. Donald Dorsey........................ 55 Executive Vice President
Ronald H. Butler........................ 48 Executive Vice President, Marketing
Ronald E. Brown......................... 50 Senior Vice President, Store Operations
Ronald E. Grove......................... 55 Senior Vice President, Logistics and Business Development
H. Jake Mendelsohn...................... 40 Senior Vice President, Chief Information Officer
Susan C. Schnabel....................... 35 Senior Vice President, Chief Financial Officer
Marcia R. Meyer......................... 47 President, PETsMART International Supply Company
C. Giles Clarke......................... 43 Executive Vice President, Europe
MARK S. HANSEN, President and Chief Executive Officer, joined the Company in
December 1989, as Senior Vice President. Mr. Hansen was appointed Chief
Operating Officer in December 1991 and President in January 1993. Effective with
the annual meeting in June 1995, Mr. Hansen became Chief Executive Officer. He
has been a Director of the Company since 1993.
DONNA R. ECTON was appointed Chief Operating Officer of the Company in
December 1996. Ms. Ecton has served as a director of PETsMART since June 1994,
and was Chairman, President and Chief Executive Officer of Business Mail
Express, Inc., a business services company, from 1995 to December 1996. From
1991 to 1994, she served as President and Chief Executive Officer of Van Houten
North America, Inc. and Andes Candies Inc., manufacturers of confectionery
products. Ms. Ecton also serves as a director of the Barnes Group, Inc., Vencor,
Inc., and H&R Block, Inc.
C. DONALD DORSEY joined the Company in March 1989 as Senior Vice President
and Chief Financial Officer. He was elected Executive Vice President in January
1994 and is presently responsible for the Company's corporate development
activities.
RONALD H. BUTLER joined PETsMART in April 1995, as Executive Vice President,
Marketing. From September 1991 through March 1995, Mr. Butler held several
senior management positions with Payless Cashways, Inc., a home improvement
center operation, including Senior Vice President and General Merchandise Manger
and Senior Vice President, Store Operations.
RONALD E. BROWN joined the Company in January 1995, as Senior Vice President
of Store Operations. From 1986 through 1994, Mr. Brown held several senior
management positions with Kash-N-Karry, a Florida-based supermarket operation,
including Vice President of General Merchandise, Vice President of Warehousing
and Distribution, Senior Vice President of Perishables and Senior Vice President
of Store Services.
RONALD E. GROVE joined PETsMART in July 1995, as Senior Vice President,
Logistics and Business Development. Prior to joining the Company, Mr. Grove held
several senior management positions including Senior Vice President of Logistics
for Montgomery Ward, a retailer, from January 1994 to March 1995, President/CEO
of Task Wholesale from 1992 to 1993, and President/COO of E & B Marine Supply, a
wholesale catalog retailer, from 1990 to 1992.
H. JAKE MENDELSOHN joined PETsMART in February 1996, as Senior Vice
President, Chief Information Officer. Mr. Mendelsohn, who has been associated
with PETsMART in a consulting capacity since January 1989, was a principal of
the Windsor Park Group from 1987 to January 1996.
SUSAN C. SCHNABEL joined the Company in February 1997, as Senior Vice
President, Chief Financial Officer. From 1991 to January 1997 she was with
Donaldson, Lufkin & Jenrette Securities Corporation in
10
various capacities, most recently serving as a managing director in the firm's
Investment Banking Division. Ms. Schnabel also serves as a director of Dick's
Clothing and Sporting Goods.
MARCIA R. MEYER joined the Company in July 1990 as Vice President and
General Merchandise Manager. In March 1997 she was appointed President of
PETsMART International Supply Company, and is responsible for all international
and domestic merchandise procurement activities.
C. GILES CLARKE was named Executive Vice President, Europe in December 1996
following the Company's merger with Pet City, of which he had been Deputy
Chairman and Chief Executive Officer since June 1993. Mr. Clarke co-founded Pet
City in 1989 and served as its President until June 1993.
ITEM 2. PROPERTIES
PETsMART leases all of its superstores, its corporate offices and its
distribution centers. The terms of the superstore leases generally range from 10
to 20 years and typically allow the Company to renew for three to five
additional five year terms. Superstore leases, excluding renewal options, expire
at various dates through 2015. Certain leases require payment of property taxes,
utilities, common area maintenance and insurance and, if annual sales at certain
superstores exceed specified amounts, provide for additional rents. No
additional rents have been paid by the Company to date. PETsMART's 348 North
American
11
superstores at March 31, 1997, average approximately 25,000 square feet. The
following table summarizes the locations of the superstores by country and state
at March 31, 1997:
NUMBER OF
SUPERSTORES
---------------
United States:
Arizona.......................................................................... 14
Arkansas......................................................................... 2
California....................................................................... 49
Colorado......................................................................... 12
Florida.......................................................................... 27
Georgia.......................................................................... 14
Idaho............................................................................ 1
Illinois......................................................................... 23
Indiana.......................................................................... 7
Iowa............................................................................. 1
Kentucky......................................................................... 1
Maryland......................................................................... 15
Massachusetts.................................................................... 4
Michigan......................................................................... 5
Minnesota........................................................................ 10
Mississippi...................................................................... 1
Missouri......................................................................... 7
Nebraska......................................................................... 2
Nevada........................................................................... 6
New Hampshire.................................................................... 1
New Jersey....................................................................... 12
New Mexico....................................................................... 2
New York......................................................................... 9
North Carolina................................................................... 5
Ohio............................................................................. 21
Oklahoma......................................................................... 5
Oregon........................................................................... 5
Pennsylvania..................................................................... 8
Rhode Island..................................................................... 1
South Carolina................................................................... 2
Tennessee........................................................................ 3
Texas............................................................................ 33
Utah............................................................................. 5
Virginia......................................................................... 16
Washington....................................................................... 11
---
Total United States superstore locations......................................... 340
Canada........................................................................... 8
---
Total North America superstore locations......................................... 348
England.......................................................................... 48
Scotland......................................................................... 6
Wales............................................................................ 1
Northern Ireland................................................................. 2
---
Total United Kingdom superstore locations........................................ 57
---
Total worldwide superstore locations............................................. 405
PETsMART intends to lease the land and buildings for its superstores in the
future wherever it is feasible to do so. However, where the Company believes it
is financially more advantageous to purchase land for new superstores and
construct its superstore buildings, or where purchasing becomes necessary to
secure desirable superstore sites, the Company will use its existing financing
sources or cash during the construction period and subsequently secure financing
through a traditional mortgage or a sale and leaseback transaction.
12
The Company's corporate offices cover approximately 85,000 square feet. Its
lease for this space expires in June 1997. The Company has negotiated a lease
for its new corporate headquarters (approximately 160,000 square feet), and
expects to occupy its new headquarters in mid-1997.
PETsMART's distribution center in Ennis, Texas covers approximately 230,000
square feet, of which approximately 100,000 square feet has been subleased. The
Company's lease for this distribution center expires in 2013. PETsMART's
distribution center in Columbus, Ohio covers 300,000 square feet. The lease on
this distribution center expires in 2008. The Company operates 12 regional
consolidation centers in public warehouse facilities. In addition, the Company
has opened a new 430,000 square foot small goods distribution center in Phoenix,
Arizona, the lease on which expires in April 2002, subject to various renewal
options. Pet City operates a 110,000 square foot break-bulk center outside of
Gloucester, England, the lease on which expires in 2001.
Sporting Dog owns its warehouse and catalog fulfillment center in Brockport,
New York which covers approximately 200,000 square feet. Sporting Dog also has a
purchase option on approximately seven acres of industrial-zoned land adjacent
to its warehouse. The Company has recently completed the integration of its
State Line Tack warehouse and catalog fulfillment facilities into the Brockport,
New York facility.
ITEM 3. LEGAL PROCEEDINGS
PETsMART is not party to any legal proceedings other than various claims and
lawsuits arising in the normal course of its business which, in the opinion of
PETsMART's management, are not individually or collectively material to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year ended February 2, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's common stock
is traded on the Nasdaq Stock Market under the symbol "PETM." Public trading of
the common stock commenced on July 23, 1993. Prior to that, there was no public
market for the common stock. The following table sets forth for the periods
indicated the high and low price per share of the common stock on the Nasdaq
Stock Market, as adjusted for the 2-for-1 stock split effected as a stock
dividend on July 19, 1996 to stockholders of record on July 8, 1996 and for the
3-for-2 stock split effected as a stock dividend on May 1, 1995 to stockholders
of record on April 17, 1995. These prices represent quotations among dealers
without adjustments for retail mark-ups, mark-downs or commissions, and may not
represent actual transactions.
FISCAL YEAR ENDED JANUARY 28, 1996 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
First Quarter ended April 30, 1995......................................... $ 13.09 $ 10.42
Second Quarter ended July 30, 1995......................................... 15.75 10.88
Third Quarter ended October 29, 1995....................................... 18.06 13.63
Fourth Quarter ended January 28, 1996...................................... 18.00 12.63
FISCAL YEAR ENDED FEBRUARY 2, 1997 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
First Quarter ended April 28, 1996......................................... $ 22.50 $ 14.88
Second Quarter ended July 28, 1996......................................... 24.00 18.56
Third Quarter ended October 27, 1996....................................... 29.88 22.38
Fourth Quarter ended February 2, 1997...................................... 27.00 20.38
13
The Company has never paid cash dividends on its common stock. The Company
presently intends to retain earnings for use in the operation and expansion of
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's revolving credit agreement
restricts the payment of dividends.
On April 4, 1997, there were 4,224 holders of record of the Company's common
stock.
On December 18, 1996, the Company completed its acquisition of the
outstanding stock of Pet City pursuant to a Scheme of Arrangement approved by
the High Court of England and Wales under Section 425 of the Companies Act of
1925 (the "Scheme"). Pursuant to the Scheme, the Company issued approximately
7,800,000 shares of its Common Stock in exchange for the 24,270,659 ordinary
shares of Pet City then outstanding. The issuance of such shares was exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Act") pursuant to Section 3(a)(10) of the Act.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is attached at Appendix A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could materially differ from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled PURCHASING AND DISTRIBUTION, COMPETITION, and RISK FACTORS
in this Annual Report on Form 10-K for the year ended February 2, 1997, and the
RISK FACTORS section contained in the prospectus to the Company's Registration
Statement on Form S-4 (Commission File No. 333-12019), an updated copy of which
was filed with the Commission on March 11, 1997.
GENERAL
At February 2, 1997, PETsMART operated 320 superstores in North America and
56 superstores in the United Kingdom. Net sales grew 28.5% for the fiscal year
ended February 2, 1997 compared to the fiscal year ended January 28, 1996
("fiscal 1995"). Excluding the fifty-third week in fiscal 1996, net sales
increased 26.4% over fiscal 1995. Comparable store sales for the North American
stores, excluding the fifty-third week, increased 11.9% for the year, and
increased 9.2% for the Company's United Kingdom stores. The Company believes
that comparable store sales increases have been largely due to increased
customer traffic and to improvements in its merchandising and marketing
activities. In view of the increasing maturity of its superstore base, as well
as the opening of additional superstores in existing markets, the Company
anticipates that its rate of comparable store sales growth may be lower in
future periods than previously reported. The Company also expects that future
increases in net sales and net income, if any, will be somewhat dependent on the
opening and profitability of new superstores. There can be no assurance that the
Company will be able to achieve its planned expansion on a timely and profitable
basis or that the combined operations and recent mergers with Petstuff, Sporting
Dog, Pet Food Giant, State Line Tack and Pet City will be successful or that
there will be no material adverse effects on the financial results of the
Company from the efforts to integrate the above acquisitions.
As a result of its expansion plans, the Company anticipates certain costs,
such as preopening expenses and occupancy, may increase as a percentage of sales
in the near term. In addition, the timing of new superstore openings and related
preopening expenses and the amount of revenue contributed by new and existing
superstores may cause the Company's quarterly results of operations to
fluctuate. Since new superstores have higher payroll, advertising and other
store level expenses as a percentage of sales than mature superstores, the level
of recent new superstore openings will also contribute to lower store operating
margins. During fiscal 1997, the Company anticipates opening at least 65
superstores in North
14
America, including 28 stores in the first fiscal quarter of fiscal 1997, 20 to
25 stores in the second quarter of fiscal 1997, and 25 to 30 stores in the
United Kingdom. In addition, the Company charges preopening costs associated
with each new superstore to earnings when the superstore is opened. Therefore,
the Company expects that the opening of large numbers of new superstores in a
given quarter will adversely impact its quarterly results of operations for that
quarter.
The Company's business also is subject to some seasonal fluctuation.
Historically, the Company has realized a higher portion of its net sales during
the month of December and a lower portion of its net sales during the summer
months. PETsMART's superstores typically draw from a large retail area and can
therefore be impacted by adverse weather and travel conditions. Sales of certain
of the Company's products and services designed to address seasonal flea and
tick problems may also be negatively impacted by the introduction of new
alternative treatments, as well as by weather conditions that are not favorable
to the development of fleas and ticks.
In May 1995, PETsMART acquired Sporting Dog, a catalog retailer of pet and
animal supplies and accessories. Although the results of Sporting Dog were
accretive to fiscal 1996 earnings and not dilutive on PETsMART's fiscal 1995
operating results, there can be no assurance that Sporting Dog can maintain its
profitability.
In June 1995, PETsMART acquired 52 superstores in the Eastern United States
and four superstores in Canada from Petstuff. During the second quarter 1995, 15
of the redundant and non-productive superstores, including all of the Canadian
stores, were closed. As of February 2, 1997, a total of 17 redundant or
nonproductive former Petstuff superstores had been closed. The Company has
completed the integration of the remaining Petstuff superstores, including
changing the merchandise mix and operating and marketing philosophies. The
Petstuff acquisition was dilutive to fiscal 1995 operating results and accretive
to fiscal 1996 earnings, and PETsMART expects the acquisition to contribute to
earnings in fiscal 1997; however, there can be no assurance these superstores
can achieve their anticipated profitability.
In September 1995, PETsMART acquired Pet Food Giant, an operator of 10 pet
food and supply superstores in the New Jersey, Long Island and Philadelphia
metropolitan areas. As of February 2, 1997, one redundant superstore had been
closed. The Company has completed the process of integrating the Pet Food Giant
stores into the PETsMART format, including changing the merchandise mix and
operating and marketing philosophies. The Pet Food Giant stores were not
dilutive to fiscal 1996 earnings; however, there can be no assurance that Pet
Food Giant can achieve its anticipated profitability.
On January 30, 1996, PETsMART completed the acquisition of State Line Tack,
the leading worldwide catalog operator specializing in discount brand name tack,
riding apparel and equine supplies. Although State Line Tack was accretive to
earnings in fiscal 1996, there can be no assurance that State Line Tack can
maintain its profitability.
On December 18, 1996, the Company completed its acquisition of all of the
outstanding equity interests of Pet City, the largest pet industry specialty
retailer in the United Kingdom. As of February 2, 1997, the Company was in the
process of integrating the Pet City stores into the PETsMART format, including
changing the tradename, modifying the merchandise mix and implementing
PETsMART's operating and marketing philosophies. Although PETsMART does not
expect the results of Pet City to be dilutive to fiscal 1997 operating results,
there can be no assurance that Pet City can achieve its anticipated
profitability.
The discussion below relates to the results of operations of PETsMART
reflecting the mergers with Petstuff, Sporting Dog, Pet Food Giant, State Line
Tack, and Pet City as if they had taken place from the inception of PETsMART.
All of these acquisitions have been accounted for as poolings of interests.
Additionally, all share and per share data have been restated to reflect the
Company's 2-for-1 stock split
15
effected in the form of a stock dividend paid on July 19, 1996 to stockholders
of record on July 8, 1996, and a 3-for-2 stock split effected in the form of a
stock dividend paid on May 1, 1995 to stockholders of record on April 17, 1995.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales,
unless otherwise indicated, of certain items included in the Company's
statements of operations (totals may not add to 100% due to rounding):
FISCAL FISCAL FISCAL
STATEMENT OF OPERATIONS DATA: 1996 1995 1994
--------- --------- ---------
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 71.6% 73.6% 73.4%
Gross profit........................................... 28.4% 26.4% 26.6%
Store operating expenses............................... 19.3% 19.5% 21.1%
Store preopening expenses.............................. 0.7% 0.5% 0.8%
General and administrative expenses.................... 2.8% 3.1% 3.8%
Merger and business integration costs.................. 2.7% 4.0% 1.5%
Operating income (loss)................................ 2.8% (0.7)% (0.7)%
Interest income........................................ 0.1% 0.2% 0.4%
Interest expense....................................... 0.6% 0.8% 0.8%
Income (loss) before income taxes...................... 2.3% (1.3)% (1.1)%
Income tax expense (benefit)........................... 0.9% (0.8)% 0.1%
Net income (loss)...................................... 1.4% (0.5)% (1.3)%
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased 28.5% to approximately $1.5 billion for fiscal 1996 from
approximately $1.2 billion for the fiscal 1995. Excluding the fifty-third week
in fiscal 1996, net sales increased 26.4% over fiscal 1995. Comparable store
sales for the North American stores, excluding the fifty-third week, increased
11.9% for fiscal 1996, as compared to an increase of 12.5% for fiscal 1995,
excluding the Petstuff and Pet Food Giant stores, some of which were closed for
retrofitting during the year. Due to the increasing maturity of its superstore
base, as well as the opening of additional superstores in existing markets, the
Company anticipates that its rate of comparable store sales growth may be lower
in future periods than previously reported. Comparable store sales for the
United Kingdom stores increased 9.2% for fiscal 1996. During fiscal 1996, the
Company opened 82 new superstores, including 21 in the United Kingdom, and
relocated three superstores. Net sales from the 82 superstores opened in fiscal
1996 contributed $88.6 million or 26.6% of the total increase in net sales. Of
the remainder of the total net sales increase, $167.3 million or 50.3% was
contributed by superstores opened in fiscal 1995. The Company had 376
superstores in operation at the end of fiscal 1996 compared to 297 superstores
open at the end of fiscal 1995, after giving effect to its recent mergers.
Gross profit, defined as net sales less cost of sales, including
distribution costs and store occupancy costs, increased as a percentage of net
sales to 28.4% for fiscal 1996 as compared to 26.4% for fiscal 1995. The
increase in margin was principally due to a change in sales mix in retail
stores, improved margins in catalog operations, and the continued maturation of
the Company's store base.
Store operating expenses, which includes payroll and benefits, advertising
and other store level expenses, were 19.3% of net sales for fiscal 1996 versus
19.5 % for fiscal 1995.
Store preopening expenses as a percentage of net sales increased to 0.7% for
fiscal 1996 compared to 0.5% for fiscal 1995. The average preopening expenses
for the 64 North American PETsMART-format superstores opened in fiscal 1996
increased to $133,000 from $74,000 for the 42 PETsMART-format
16
superstores opened during fiscal 1995. The increase in preopening expenses on a
per unit basis reflected the additional training and store setup costs incurred
with the Company's initial entry into Canada which occurred in fourth quarter
fiscal 1996, as well as the Company's five 40,000 square foot stores which
opened in Southern California.
General and administrative expenses were 2.8% of net sales for fiscal 1996
versus 3.1% for fiscal 1995, due primarily to the elimination of the duplicate
overhead costs related to the Petstuff and Pet Food Giant acquisitions.
Merger and business integration charges of $28.4 million related to the
State Line Tack and Pet City acquisitions were recorded in fiscal 1996. This
charge included legal, investment banking, and accounting fees ($8.8 million),
costs associated with reformatting, refixturing and remerchandising the acquired
Pet City superstores to the format consistent with that of a PETsMART-format
superstore ($11.0 million), a provision for the closure of redundant and
inadequate facilities ($5.5 million) and other costs of consolidation ($3.1
million). The Company is also estimating that approximately $14.7 million of
similar business integration costs, primarily store conversion costs, associated
with the Pet City merger will be recognized as nonrecurring charges when
incurred during the first half of fiscal 1997.
Also during fiscal 1996, the Company recorded merger and business
integration charges of $12.3 million to reflect additional lease termination
costs anticipated to be incurred in connection with the settlement of lease
obligations for the 17 former Petstuff stores closed by the Company immediately
following the 1995 merger with Petstuff, along with seven lease commitments for
future Petstuff locations that were either duplicate or inadequate facilities
and, therefore, never opened.
The Company generated operating income of $42.6 million for fiscal 1996
compared to an operating loss of $8.7 million in fiscal 1995. However, excluding
the merger and business integration charges recorded in both fiscal 1996 and
fiscal 1995, operating income increased $44.9 million to $83.4 million from
$38.5 million for fiscal 1995. Excluding the merger and related non-recurring
charge, operating income as a percentage of sales increased to 5.6% for fiscal
1996 from 3.3% for fiscal 1995.
Interest income decreased to $1.1 million for fiscal 1996 from $2.7 million
for fiscal 1995 principally due to the decrease in average cash balances in
fiscal 1996 compared to fiscal 1995. Interest expense increased to $9.5 million
for fiscal 1996 from $8.9 million for fiscal 1995 principally due to higher
average borrowings outstanding during the period.
Income tax expense was $13.7 million for fiscal 1996 compared to a benefit
of $9.4 million for fiscal 1995. The Company's effective income tax rate for
fiscal 1996 was 38% compared to 35% for fiscal 1995, excluding the effect of
permanent differences within the merger and business integration charges
recorded in fiscal 1996 and fiscal 1995 and the effects of net operating loss
carryforwards recognized in both years. This increase was primarily due to an
increased federal rate due to the absence of targeted job tax credits, lower
tax-advantaged investments, and a higher effective state income tax rate.
As a result of the foregoing, the Company reported net income of $20.6
million (or $0.17 per share) for fiscal 1996 compared to a net loss, before
accretion of the Pet Food Giant and State Line Tack preferred stock, of $5.4
million (or $0.05 per share) for fiscal 1995. Excluding the merger and business
integration charges and the related tax benefits and recognition of net
operating loss carryforwards recorded in both years, net income for fiscal 1996,
on a comparable basis, increased $26.2 million to $46.5 million (or $0.39 per
share) from $21.0 million (or $0.19 per share) for fiscal 1995. The Company's
North American operations, excluding merger and business integration charges and
their related income tax effects, reported net income of $0.44 per share for
fiscal 1996 as compared to net income of $0.22 per share for fiscal 1995.
17
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased 26.4% to approximately $1.2 billion for the fiscal 1995
from approximately $924.2 million for the fiscal year ended January 29, 1995
("fiscal 1994"). Comparable store sales for the North American stores, excluding
the Petstuff and Pet Food Giant stores which were closed for retrofitting during
the year, increased 12.5% for fiscal 1995, as compared to an increase of 19.1%,
excluding the Petstuff and Pet Food Giant stores, for fiscal 1994. Due to the
increasing maturity of its superstore base, as well as the opening of additional
superstores in existing markets, the Company anticipates that its rate of
comparable store sales growth may be lower in future periods than previously
reported. Comparable store sales for the United Kingdom stores increased 6.9%
for fiscal 1995. During fiscal 1995, the Company opened 42 new North American
superstores and closed 22 superstores, including four relocated stores, 17
redundant and non-performing Petstuff superstores and one redundant Pet Food
Giant store, and opened eight superstores in the United Kingdom during the year.
Net sales from the 64 North American superstores opened in fiscal 1995
contributed $68.8 million or 28.2% of the total increase in net sales. Of the
remainder of the total net sales increase, $74.0 million or 30.3% was
contributed by superstores opened in fiscal 1994. The Company had 297
superstores in operation at the end of fiscal 1995 compared to 269 superstores
open at the end of fiscal 1994, after giving effect to its recent mergers.
Gross profit, defined as net sales less cost of sales, including
distribution costs and store occupancy costs, decreased as a percentage of net
sales to 26.4% for fiscal 1995 as compared to 26.6% for fiscal 1994. The
decrease in margin was principally the result of higher occupancy costs, as a
percentage of sales, in the Petstuff and Pet Food Giant superstores during the
year.
Store operating expenses, which include payroll and benefits, advertising
and other store level expenses, were 19.5% of net sales for fiscal 1995 versus
21.1% for fiscal 1994. This decrease as a percentage of net sales was due to
improved payroll expense management and reduced advertising expenditures,
primarily as the result of changing the PETsMART superstores' media mix from
direct mail to newspaper inserts and improved advertising leverage as the result
of the addition of new superstores in existing markets.
Store preopening expenses as a percentage of net sales decreased to 0.5% for
fiscal 1995 compared to 0.8% for fiscal 1994 primarily due to fewer store
openings in fiscal 1995 versus fiscal 1994. The average preopening expenses for
the 42 North American PETsMART-format superstores opened in fiscal 1995
decreased to $74,000 from $91,000 for the 43 PETsMART-format superstores, 21
Petstuff format superstores, and four Pet Food Giant superstores opened during
fiscal 1994. This decrease was the result of management efforts to improve
efficiency by shortening the time required to open new superstores, as well as
the lower cost to open a PETsMART format superstore compared to Petstuff and Pet
Food Giant format superstores.
General and administrative expenses were 3.1% of net sales for fiscal 1995
versus 3.8% for fiscal 1994. This decrease is due primarily to the elimination
of the duplicate overhead costs related to The Weisheimer Companies, Inc. d/b/a
PETZAZZ, Petstuff and Pet Food Giant acquisitions.
Merger and business integration charges of $47.1 million related to the
Petstuff, Sporting Dog, and Pet Food Giant acquisitions were recorded in fiscal
1995. This charge included legal, investment banking, and accounting fees ($6.2
million), costs associated with reformatting, refixturing and remerchandising
the acquired superstores to the format consistent with that of a PETsMART-format
superstore ($14.1 million), a provision for the closure of redundant and
inadequate facilities ($18.9 million) and other costs of consolidation,
including employee severance, relocation costs and early termination fees on a
credit facility ($7.9 million).
As a result of the above merger and business integration charges, the
Company incurred an operating loss of $8.7 million for fiscal 1995 compared to
an operating loss of $6.4 million in fiscal 1994. However, excluding the merger
and business integration charges recorded in both fiscal 1995 and fiscal 1994,
18
operating income increased $30.8 million to $38.5 million from $7.7 million for
fiscal 1994. Excluding the merger and related non-recurring charge, operating
income as a percentage of sales increased to 3.3% for fiscal 1995 from 0.8% for
fiscal 1994.
Interest income decreased to $2.7 million for fiscal 1995 from $3.6 million
for fiscal 1994 principally due to the decrease in average cash balances in
fiscal 1995 compared to fiscal 1996. Interest expense increased to $8.9 million
for fiscal 1995 from $7.6 million for fiscal 1994 principally due to higher
average borrowings outstanding during the period.
Income tax benefit of $9.4 million was recorded for fiscal 1995 compared to
income tax expense of $1.3 million for fiscal 1994. The Company's effective
income tax rate for fiscal 1995 was 35% compared to 34% for fiscal 1994,
excluding the effect of permanent differences within the merger and business
integration charges recorded in fiscal 1995 and fiscal 1994 and the effects of
net operating loss carryforwards recognized in both years. This increase was
primarily due to an increased federal rate due to the absence of targeted job
tax credits, lower tax-advantaged investments, and a higher effective state
income tax rate.
As a result of the foregoing, the Company reported a net loss, before
accretion of the Pet Food Giant and State Line Tack preferred stock, of $5.4
million (or $0.05 per share) for fiscal 1995 compared to a net loss, before
accretion of the Pet Food Giant and State Line Tack preferred stock, of $11.6
million (or $0.11 per share) for fiscal 1994. Excluding the merger and business
integration charges and the related tax benefits and recognition of net
operating loss carryforwards recorded in both years, net income for fiscal 1995,
on a comparable basis and before the Pet Food Giant and State Line Tack
accretion, increased $17.8 million to $20.3 million (or $0.19 per share) from
$2.5 million (or $0.02 per share) in fiscal 1994. The Company's North American
operations, excluding merger and business integration charges and their related
income tax effects, reported net income of $0.22 per share for fiscal 1995 as
compared to net income of $0.03 per share for fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and expansion program to date
principally through the sale of equity securities, raising an aggregate of
approximately $310 million since the Company's inception, as well as from cash
flow from operations. Additional sources of financing include real and personal
property leases, bank lines of credit and vendor terms on inventory purchases.
At February 2, 1997, total assets were $689.8 million, of which $409.3
million were current assets. Cash and cash equivalents were $39.9 million. The
principal use of operating cash is the purchase of merchandise inventories. This
usage is reduced by vendor credit terms that allow the Company to finance a
portion of its inventory purchases. Since PETsMART's sales are on a cash and
carry basis, cash flow generated from operating superstores provides a source of
liquidity to the Company.
Net cash used in operations was $25.7 million for fiscal 1996, compared to
cash provided of $17.9 million fiscal 1995. Approximately $66.7 million of the
cash used in operations during fiscal 1996 related to the timing of inventory
purchases and payments for inventory balances required for the stores opened in
the same period. Merchandise accounts payable leveraging (the percentage of
merchandise inventory financed by vendor credit terms, e.g. accounts payable
divided by merchandise inventory), decreased to 46.2% at February 2, 1997,
compared to 55.0% at January 28, 1996. Inventory balances were approximately
$300.9 million at February 2, 1997, and $211.9 million at January 28, 1996. The
$89.0 million increase from January 28, 1996 reflected approximately $21.0
million of inventory required for the 25 to 30 superstores to be opened in the
first quarter 1997, approximately $31.0 million for Pet City and catalog
inventories, and approximately $12.1 million of inventory necessary to stock the
Company's new Phoenix, Arizona distribution center which began operations in
fiscal 1996. Therefore, on a comparable basis, inventory increased approximately
$25.0 million, or 11.8%, from January 28, 1996 and average inventory
19
per open store was approximately $800,000 at February 2, 1997, as compared to
approximately $700,000 at January 28, 1996.
The Company has used cash in investing activities since inception to
purchase leaseholds, fixtures and equipment for new superstores and, to a lesser
extent, to purchase equipment and computer software in support of its
administrative functions. The Company has also used cash to purchase superstores
for sale and leaseback. Net cash used in investing activities was $41.6 million
for fiscal 1996.
Net cash flow from financing activities, primarily borrowings and repayments
under the Company's bank credit facility, was $17.8 million for fiscal 1996.
Subsequent to year end, the Company amended its revolving bank credit
arrangement to provide for a $125 million arrangement that expires April 30,
2000. Borrowings under the credit facility are unsecured and bear interest, at
PETsMART's option, at either the bank's prime rate or LIBOR plus 0.625%. The
credit facility contains certain restrictive covenants relating to net worth,
debt to equity ratios, capital expenditures and minimum fixed charge coverage.
The Company met all existing covenants in its credit agreement for fiscal 1996
and anticipates meeting all requirements for fiscal 1997. At February 2, 1997,
$25.0 million was outstanding under the credit facility.
The Company also has several lease arrangements with leasing companies that
the Company uses to finance certain store and warehouse fixtures and equipment,
point-of-sale equipment and management information systems.
The Company's primary long-term capital requirement is for opening new
superstores. All of the Company's superstores are leased facilities. The Company
currently expects to open at least 65 additional North American superstores in
fiscal 1997, in addition to at least 25 stores in the United Kingdom. The
Company estimates that its net cash requirements to open each superstore,
including store fixtures and equipment, leasehold improvements, preopening costs
and inventory will range from $680,000 to $1,240,000. This amount will include
from $50,000 to $600,000 for leasehold improvements, depending upon whether the
superstore site is a build-to-suit or a rehabilitated unit. Based upon the
Company's current plan to open at least 65 North American superstores during
fiscal 1997, between $44.2 million and $80.6 million will be needed to finance
the Company's new superstore openings in the fiscal 1997, of which approximately
$22.0 million to $51.0 million will be financed through equipment leases. The
Company may also expend additional funds to take advantage of opportunities that
arise from time to time for the acquisition of businesses or lease rights from
tenants occupying retail space that is suitable for a PETsMART superstore. The
Company intends to reposition approximately 30 of its smaller former Petstuff
and PETZAZZ units to larger stores in the same geographical areas. The Company
intends to reposition 5 to 6 stores in fiscal 1997, 15 to 20 stores in fiscal
1998, and 5 to 10 stores in fiscal 1999. The cost of relocating the units will
be expensed as incurred, with no unusual one-time write-offs currently
anticipated.
The United States federal minimum wage is scheduled for a mandatory increase
during fiscal 1997. The Company does not believe this legislation will have a
material adverse effect on its store operating expenses or results of operations
for the next twelve months.
The Company does not intend to own the land and buildings for its
superstores. However, to the extent the Company believes that it is advantageous
to purchase land for new superstores and to construct new superstore buildings
itself, it will use its existing financing sources or cash to finance
construction and, after the superstores are open, complete sale/leaseback
transactions or attempt to secure other permanent financing.
The Company's expansion and store openings are dependent on adequate sources
of capital for store site acquisition, building construction, fixturing and
inventory, the training and retention of skilled managers and personnel, and
other factors, some of which may be beyond the Company's control. As a result,
there can be no assurance that the Company will be able to achieve its targets
for opening new
20
superstores. To the extent the Company is unable to obtain satisfactory
financing for new store growth, the Company's ability to open new superstores,
and profitably operate its current superstores, will be negatively impacted.
There can be no assurance that the Company will continue to be able to finance
its operations without additional financing or other arrangements, or that such
financing will be available to the Company at an acceptable cost. The Company
believes that its current cash balances, together with funds available from bank
facilities, equipment lease arrangements and from operations will be adequate to
meet its anticipated working capital and capital expenditure requirements for at
least the next twelve months. However, numerous factors, such as future
acquisition opportunities or a change in expansion plans, may cause the Company
to change its current plans and seek additional funds. The Company is
continually evaluating financing possibilities, and it may seek to raise
additional funds through a debt or equity financing if it believes it would be
in the best interests of the Company and its stockholders to do so.
The Company has historically had higher short-term cash requirements during
periods of high store opening activity and during the holiday inventory build-up
in its third fiscal quarter.
Although the Company cannot accurately anticipate the effect of inflation on
its operations, it does not believe inflation is likely to have a material
adverse effect on its net sales or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is attached as Appendix F.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to Directors is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's definitive proxy statement in connection
with the solicitation of proxies for the Company's 1997 Annual Meeting of
Stockholders to be held on June 20, 1997 (the "Proxy Statement").
The required information concerning Executive Officers of the Company is
contained in Item 1, Part 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K.
1. FINANCIAL STATEMENTS: The financial statements of PETsMART are
included as Appendix F of this report. See Index to Financial Statements on
page F-1.
2. FINANCIAL STATEMENT SCHEDULES: Financial statement schedules
required under the related instructions are not applicable for the period
ended February 2, 1997, and have therefore been omitted or the information
is presented in the consolidated financial statements or related notes.
3. EXHIBITS: The exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibit Index on page
27.
(b) Reports on Form 8-K.
During the fourth quarter of fiscal 1996, the Company filed the
following report on Form 8-K:
I. Report on Form 8-K dated December 18, 1996, and filed on or
about December 31, 1996, as amended by a Form 8-K/A dated December 18,
1996, and filed on or about February 14, 1997, announcing the acquisition
of all of the outstanding equity interests of Pet City Holdings, plc, a
public limited company incorporated in England and Wales, pursuant to a
Merger Agreement dated October 24, 1996. Upon consummation of the
Acquisition, Pet City Holdings became a wholly-owned subsidiary of
PETsMART.
22
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 April 25, 1997.
PETSMART, INC.
By: /s/ MARK S. HANSEN
-----------------------------------------
Mark S. Hansen
PRESIDENT, CHIEF EXECUTIVE OFFICER
(PRINCIPAL 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/ SAMUEL J. PARKER
- ------------------------------ Chairman of the Board of April 25, 1997
Samuel J. Parker Directors
/s/ MARK S. HANSEN
- ------------------------------ President, Chief Executive April 25, 1997
Mark S. Hansen Officer and Director
Senior Vice President,
/s/ SUSAN C. SCHNABEL Chief Financial Officer
- ------------------------------ (Principal Financial April 25, 1997
Susan C. Schnabel Officer)
/s/ KENNETH A. CONWAY Vice President, Controller
- ------------------------------ (Principal Accounting April 25, 1997
Kenneth A. Conway Officer)
/s/ DONNA R. ECTON
- ------------------------------ Chief Operating Officer and April 25, 1997
Donna R. Ecton Director
/s/ DENIS L. DEFFOREY
- ------------------------------ Director April 25, 1997
Denis L. Defforey
/s/ PHILIP L. FRANCIS
- ------------------------------ Director April 25, 1997
Philip L. Francis
/s/ RICHARD M. KOVACEVICH
- ------------------------------ Director April 25, 1997
Richard M. Kovacevich
23
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -----
- ------------------------------ Director
F. Richard Northcott
/s/ LAWRENCE S. PHILLIPS
- ------------------------------ Director April 25, 1997
Lawrence S. Phillips
/s/ THOMAS G. STEMBERG
- ------------------------------ Director April 25, 1997
Thomas G. Stemberg
24
APPENDIX A
PETSMART SELECTED HISTORICAL FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
FISCAL YEAR ENDED
--------------------------------------------------------------------
FEB. 2, JAN. 28, JAN. 29, JAN. 30, JAN. 31,
1997 (2) 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
HISTORICAL STATEMENT OF OPERATIONS DATA:
Net Sales................................ $ 1,501,017 $ 1,168,056 $ 924,199 $ 544,762 $ 319,627
Gross profit............................. 426,351 308,237 245,779 149,073 96,063
Store operating expenses................. 289,622 228,046 195,222 118,013 69,315
Store preopening expenses................ 10,907 5,388 7,750 7,583 3,448
General and adminstrative expenses....... 42,463 36,348 35,072 28,499 20,099
Merger and business integration costs.... 40,714 47,129 14,100 -- --
------------ ------------ ------------ ------------ ------------
Operating income (loss).................. 42,645 (8,674) (6,365) (5,022) 3,201
Interest income.......................... 1,058 2,731 3,594 2,124 763
Interest expense......................... 9,450 8,934 7,587 4,298 3,052
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes,
extraordinary credit and cumulative
effect of change in accounting
principle.............................. 34,253 (14,877) (10,358) (7,196) 912
Net income (loss)(3)..................... $ 20,591 $ (5,436) $ (11,620) $ (10,301) $ (30)
Income (loss) per share before
extraordinary credit and cumulative
effect of change in accounting
principle(4)........................... $ 0.17 $ (0.06) $ (0.13) $ (0.13) $ (0.06)
Net income (loss) per share(4)........... $ 0.17 $ (0.06) $ (0.13) $ (0.13) $ (0.04)
Weighted average number of common and
common equivalent shares outstanding... 118,226 108,387 105,443 89,015 70,814
HISTORICAL OPERATING DATA:
Net sales growth......................... 28.51% 26.39% 69.65% 70.44% 79.48%
Increase in comparable store sales(5).... 11.90% 12.50% 19.10% 19.80% 19.00%
Stores open at end of period(6).......... 376 297 269 192 103
Average square footage(7)................ 8,537,540 6,784,608 5,718,937 3,108,418 1,624,458
HISTORICAL BALANCE SHEET DATA:
Inventories.............................. $ 300,892 $ 211,933 $ 171,344 $ 107,736 $ 59,726
Working capital.......................... 158,182 146,236 155,356 185,765 45,250
Total assets............................. 689,810 572,104 484,885 415,592 166,471
Capital lease obligations(8)............. 62,535 56,368 66,324 40,549 25,700
Stockholders' equity and redeemable
preferred stock........................ $ 361,045 $ 301,798 $ 266,216 $ 265,445 $ 81,142
- ------------------------
(1) Reflects the historical financial data of PETsMART after restatement (except
as otherwise noted) for: the acquisition of PETZAZZ in March 1994, Sporting
Dog Specialties in May 1995, Petstuff in June 1995, Pet Food Giant in
September 1995, State Line Tack in January 1996 and Pet City
25
Holdings plc in December 1996, all of which were accounted for under the
pooling of interests method; the 3-for-2 stock split effected in the form of
a stock dividend paid to holders of PETsMART Common Stock of record on April
17, 1995; and the 2-for-1 stock split effected in the form of a stock
dividend paid July 19, 1996 to holders of PETsMART Common Stock of record on
July 8, 1996. Fiscal 1995 includes the results of operations of Pet City for
the 52 weeks ended July 27, 1996, and fiscal 1996 includes the results of
operations of Pet City for the 53 weeks ended Feburary 2, 1997. Fiscal 1994
includes Pet City results for the 52 weeks ended July 29, 1995 and fiscal
1993 and fiscal 1992 include the financial results of Pet City for the 52
weeks ended April 2, 1994 and April 3, 1993, respectively. An adjustment of
$682,000 was made to retained earnings at January 30, 1994 to conform the
fiscal year of Pet City and PETsMART.
(2) Fiscal 1996 consisted of 53 weeks; all other years reported consisted of 52
weeks.
(3) Includes an extraordinary credit of $1,673,000 for fiscal 1992 and a
$210,000 benefit in fiscal 1993 for the cumulative effect of a change in
accounting principle.
(4) After accretion of redeemable preferred stock of $2,736,000, $1,521,000,
$1,921,000 and $1,582,000 for fiscal years 1992 through 1995, respectively.
See Note 1 to the consolidated financial statements.
(5) Includes only superstores open at least 52 weeks. Fiscal 1992 and fiscal
1993 have not been restated to reflect the acquisition of PETZAZZ in March
1994, and the periods from fiscal 1992 through fiscal 1995 have not been
restated for the acquisitions of Petstuff and Pet Food Giant in 1995. No
periods have been restated for the Pet City acquisition in December 1996.
Fiscal 1996 data has been adjusted to reflect the first 52 weeks of the
53-week year.
(6) Two superstores were relocated in fiscal 1992, one superstore was relocated
in fiscal 1995, and three superstores were relocated in fiscal 1996.
(7) Excludes PETZAZZ and Pet Food Giant for fiscal 1992.
(8) Excludes portions related to current maturities.
26
PETSMART, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization by and among PETsMART, PETsMART Acquisition Corp. and
Petstuff, Inc., dated February 7, 1995, as amended(5).........................................
2.2 Agreement and Plan of Reorganization between PETsMART and The Weisheimer Companies, Inc., dated
January 28, 1994(2)...........................................................................
2.3 Agreement and Plan of Reorganization between PETsMART, Remington Acquisition Corp., Sporting Dog
Specialties, Inc. and certain individual shareholders named therein, dated as of April 3, 1995
(the Sporting Dog Agreement)(3)...............................................................
2.4 Form of First Amendment to the Sporting Dog Agreement, dated as of April 18, 1995(3)............
2.5 Agreement and Plan of Reorganization and Plan of Merger by and among PETsMART, Turnpike
Acquisition Corp., and The Pet Food Giant, Inc., dated as of August 17, 1995(5)...............
2.6 Agreement and Plan of Reorganization by and among PETsMART, Stallion Acquisition Corp., and
State Line Tack, Inc., dated as of December 20, 1995(7).......................................
2.7 Merger Agreement by and among PETsMART and Pet City Holdings plc, dated as of October 24,
1996(9).......................................................................................
3.1 Restated Certificate of Incorporation of PETsMART(1)............................................
3.2 By-laws of PETsMART(1)..........................................................................
3.3 Certificate of Amendment of Restated Certificate of Incorporation of PETsMART(8)................
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3..................................................
4.2 Restated Registration and First Refusal Rights Agreement, among PETsMART and the parties named
therein, dated October 30, 1992(1)............................................................
4.3 Series H Preferred Stock Purchase Agreement between PETsMART and the other parties named
therein, dated as of September 8,1991(1)......................................................
10.1 Form of Indemnity Agreement entered into between PETsMART and its directors and officers, with
related schedules (1).........................................................................
10.2* PETsMART's 1995 Equity Incentive Plan (the Incentive Plan)(an amendment and restatement of the
Registrant's 1988 Stock Option Plan)(4).......................................................
10.3* Form of Incentive Stock Option Grant under the Incentive Plan(4)................................
10.4* Form of Non-qualified Stock Option Grant under the Incentive Plan(4)............................
10.5* PETsMART's 1992 Non-Employee Director's Stock Option Plan (the Director's Plan)(1)..............
10.6* PETsMART's Employee Stock Purchase Plan(1)......................................................
10.11 Amended and Restated Credit Agreement among PETsMART, certain lenders and NationsBank of Texas,
N.A. as administrative lender, dated as of September 15, 1995(6)..............................
27
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
10.12* Employment Agreement between Giles Clarke, PETsMART and Pet City Holdings plc, dated as of
October 23, 1996(9)...........................................................................
11.1 Statement of Computation of Common and Common Equivalent Shares and Earnings Per Share..........
23.1 Consent of Price Waterhouse LLP.................................................................
23.2 Consent of Coopers & Lybrand L.L.P..............................................................
23.3 Consent of Deloitte & Touche LLP................................................................
23.4 Consent of Davie, Kaplan & Braverman, P.C.......................................................
23.5 Consent of Arthur Andersen LLP..................................................................
23.6 Consent of Grant Thornton.......................................................................
- ------------------------
* Management Contract or Compensatory Plan or Agreement
(1) Incorporated by reference to the indicated exhibit to PETsMART's
Registration Statement on Form S-1 (File No. 33-63912).
(2) Incorporated by reference to the indicated exhibit to PETsMART's Current
Report on Form 8-K (File No. 0-21888), filed on April 8, 1994.
(3) Incorporated by reference to the indicated exhibit to PETsMART's
Registration Statement on Form S-4 (File No. 33-91356), as amended.
(4) Incorporated by reference to Exhibits 10.1 and 10.2 to PETsMART's Quarterly
Report on Form 10-Q (File No. 0-21888), filed on June 8, 1995.
(5) Incorporated by reference to Exhibit 2.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed on September 28, 1995.
(6) Incorporated by reference to Exhibit 10.5 to PETsMART's Quarterly Report on
Form 10-Q (File No. 0-21888), filed on December 11, 1995.
(7) Incorporated by reference to Exhibit 10.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed on February 13, 1996.
(8) Incorporated by reference to Exhibit 3.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed September 11, 1996.
(9) Incorporated by reference to Exhibits 2.1 and 10.1 to PETsMART's Current
Report on Form 8-K (File No. 0-21888), filed on December 31, 1996, as
amended by PETsMART's Current Report of Form 8-K/A (File No. 0-21888), filed
on February 14, 1997.
28
PETSMART, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----------
Report of Price Waterhouse LLP, Independent Accountants............................................... F-2
Consolidated Balance Sheets as of February 2, 1997 and January 28, 1996............................... F-3
Consolidated Statements of Operations for the fiscal years ended February 2, 1997, January 28, 1996
and January 29, 1995................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended February 2, 1997, January
28, 1996, and January 29, 1995...................................................................... F-5 - F-6
Consolidated Statements of Cash Flows for the fiscal years ended February 2, 1997, January 28, 1996
and January 29, 1995................................................................................ F-7
Notes to Consolidated Financial Statements............................................................ F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
PETsMART, Inc. and Subsidiaries
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of PETsMART, Inc. and Subsidiaries
("the Company") at February 2, 1997 and January 28, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended February 2, 1997, in conformity with generally accepted accounting
principles. 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 did not audit the financial statements of
Petstuff, Inc., Sporting Dog Specialties, Inc., The Pet Food Giant, Inc., State
Line Tack, Inc. and Pet City Holdings plc, which statements reflect total assets
of $61,812,000 at January 28, 1996 and total revenues of $43,747,000,
$137,393,000 and $323,167,000 for each of the three years in the period ended
February 2, 1997, respectively. Those statements were audited by other auditors
whose reports thereon have been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for Petstuff, Inc.,
Sporting Dog Specialties, Inc., The Pet Food Giant, Inc., State Line Tack, Inc.
and Pet City Holdings plc at January 28, 1996 and for each of the three years in
the period ended February 2, 1997, is based solely on the reports of the other
auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe our audits and the reports of other auditors provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Phoenix, Arizona
February 25, 1997
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of Petstuff, Inc.:
We have audited the consolidated statements of operations, shareholders'
equity, and cash flows of Petstuff, Inc. and subsidiaries for the year ended
January 29, 1995 (which are not presented separately herein). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Petstuff,
Inc. and subsidiaries for the year ended January 29, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, Petstuff
Canada, Ltd. (a wholly owned subsidiary) has been named as a defendant in a
complaint by a competitor in Canada stemming from alleged advertising practices.
No provision has been made for any loss that may result upon the resolution of
this matter. The ultimate outcome of this matter cannot presently be determined.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 17, 1995
(June 21, 1995 as to Note 11)
F-2a
INDEPENDENT AUDITORS' REPORT
Stockholders
Sporting Dog Specialties, Inc. and Affiliates
We have audited the accompanying combined balance sheet of Sporting Dog
Specialties, Inc. and Affiliates as of January 31, 1995, and the related
combined statements of income, retained earnings and cash flows for the year
then ended. 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Sporting
Dog Specialties, Inc. and Affiliates as of January 31, 1995, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
DAVIE, KAPLAN & BRAVERMAN, P.C.
June 9, 1995
Rochester, New York
F-2b
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of
Pet City Holdings Plc
We have audited the accompanying consolidated balance sheets of Pet City
Holdings Plc (a United Kingdom public limited company) and subsidiaries as of
July 27, 1996 and July 29, 1995 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the 52 weeks then
ended. 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 U.S. 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 consolidated financial position of Pet City
Holdings plc and subsidiaries as of July 27, 1996 and July 29, 1995 and the
consolidated results of their operations and their consolidated cash flows for
each of the 52 weeks then ended in conformity with U.S. generally accepted
accounting principles.
/s/ Grant Thornton
Grant Thornton
Chartered Accountants
Registered Auditors
London
England
October 24, 1996
except for Note O--Subsequent Events
as to which the date is November 20, 1996
F-2c
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
State Line Tack, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of State Line
Tack, Inc. and subsidiaries (a New Hampshire corporation) as of December 31,
1994, and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of State Line
Tack, Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
March 22, 1996
F-2d
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of The Pet Food Giant, Inc.:
We have audited the accompanying statements of operations and cash flows of
The Pet Food Giant, Inc. (the "Company") for the fiscal year ended December 31,
1994. 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 audit.
We conducted our audit 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 estimate made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of The Pet
Food Giant, Inc. for the fiscal year ended December 31, 1994 in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
April 21, 1995, except for Note 10(b)
which is as of September 18, 1995
F-2e
PETSMART, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FEBRUARY 2, JANUARY 28,
1997 1996
----------- -----------
ASSETS
Cash and cash equivalents........................................... $ 39,868 $ 88,303
Receivables......................................................... 43,664 32,155
Merchandise inventories............................................. 300,892 211,933
Prepaid expenses and other current assets........................... 24,860 14,515
----------- -----------
Total current assets............................................ 409,284 346,906
Property held for sale and leaseback................................ -- 10,126
Property and equipment, net......................................... 219,263 178,822
Other assets........................................................ 61,263 36,250
----------- -----------
Total assets.................................................... $ 689,810 $ 572,104
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to bank............................................... $ 25,000 $ 22,248
Accounts payable.................................................... 138,913 116,623
Accrued payroll and employee benefits............................... 14,192 16,365
Accrued occupancy expense........................................... 6,306 7,546
Accrued merger and integration costs................................ 21,584 3,962
Other accrued expenses.............................................. 35,962 24,569
Current maturities of capital leases................................ 9,145 9,357
----------- -----------
Total current liabilities....................................... 251,102 200,670
Capital lease obligations........................................... 62,535 56,368
Deferred rents...................................................... 13,412 11,316
Other liabilities................................................... 1,716 1,952
----------- -----------
Total liabilities............................................... 328,765 270,306
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock (Note 7)........................................ -- 6,511
Common stock; $.0001 par value; 250,000 shares authorized,
113,958 and 109,751 shares issued and outstanding............. 11 6
Additional paid-in capital...................................... 373,764 330,935
Accumulated deficit............................................. (13,696) (35,541)
Cumulative foreign currency translation adjustments............. 966 (113)
----------- -----------
Total stockholders' equity.................................. 361,045 301,798
----------- -----------
Total liabilities and stockholders' equity.................. $ 689,810 $ 572,104
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
F-3
PETSMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED
-------------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
------------ ---------------- -----------
Net sales........................................................... $ 1,501,017 $ 1,168,056 $ 924,199
Cost of sales....................................................... 1,074,666 859,819 678,420
------------ ---------------- -----------
Gross profit.................................................... 426,351 308,237 245,779
Store operating expenses............................................ 289,622 228,046 195,222
Store preopening expenses........................................... 10,907 5,388 7,750
General and administrative expenses................................. 42,463 36,348 35,072
Merger and business integration costs............................... 40,714 47,129 14,100
------------ ---------------- -----------
Operating income (loss)......................................... 42,645 (8,674) (6,365)
Interest income..................................................... 1,057 2,731 3,594
Interest expense.................................................... (9,450) (8,934) (7,587)
------------ ---------------- -----------
Income (loss) before income taxes............................... 34,252 (14,877) (10,358)
Income tax expense (benefit)........................................ 13,661 (9,441) 1,262
------------ ---------------- -----------
Net income (loss)............................................... 20,591 (5,436) (11,620)
Accretion of redeemable preferred stock............................. -- (1,582) (1,921)
------------ ---------------- -----------
Net income (loss) applicable to holders of common stock......... $ 20,591 $ (7,018) $ (13,541)
------------ ---------------- -----------
------------ ---------------- -----------
Net income (loss) per common share and common share
equivalent.................................................... $ 0.17 $ (0.06) $ (0.13)
------------ ---------------- -----------
------------ ---------------- -----------
Weighted average number of common and common equivalent shares
outstanding....................................................... 118,226 108,387 105,443
------------ ---------------- -----------
------------ ---------------- -----------
The accompanying notes are an integral part of these financial statements.
F-4
PETSMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AMOUNTS
------------------------------
SHARES
-----------------------------------------------
REDEEMABLE NONREDEEMABLE REDEEMABLE NONREDEEMABLE
PREFERRED PREFERRED COMMON PREFERRED(1) PREFERRED
------------- ------------------- ----------- ------------- ---------------
BALANCES AT JANUARY 30, 1994............ 3,474 20 102,805 $ 5,012 $ 2,000
Tax benefit from exercise of stock
options...............................
3-for-2 stock split effected in the form
of a stock dividend...................
Issue of common for employee benefit
plan and exercise of stock options.... 686
Accretion of redeemable preferred stock
and State Line Tack warrant........... 699
Distributions to Sporting Dog
shareholders..........................
Repurchase and retirement of Petstuff
common in equivalent PETsMART
common................................ (6)
Issue of Petstuff common in equivalent
PETsMART common....................... 10
Issue of Petstuff common upon exercise
of stock options in equivalent
PETsMART common....................... 14
Issue of Pet City common in equivalent
PETsMART common....................... 707
Foreign currency translation
adjustments...........................
Net loss................................
--
------ ----------- ------ ------
BALANCES AT JANUARY 29, 1995............ 3,474 20 104,216 $ 5,711 $ 2,000
CUMULATIVE
RETAINED FOREIGN CURRENCY
ADDITIONAL PAID EARNINGS TRANSLATION
COMMON IN CAPITAL (DEFICIT) ADJUSTMENTS TOTAL
------------- --------------- ----------- ----------------- ---------
BALANCES AT JANUARY 30, 1994............ $ 5 $ 269,742 $ (16,749) $ 38 $ 260,048
Tax benefit from exercise of stock
options............................... 451 451
3-for-2 stock split effected in the form
of a stock dividend................... 1 (1) --
Issue of common for employee benefit
plan and exercise of stock options.... 1,642 1,642
Accretion of redeemable preferred stock
and State Line Tack warrant........... 69 (1,921) (1,153)
Distributions to Sporting Dog
shareholders.......................... (423) (423)
Repurchase and retirement of Petstuff
common in equivalent PETsMART
common................................ (1) (1)
Issue of Petstuff common in equivalent
PETsMART common....................... --
Issue of Petstuff common upon exercise
of stock options in equivalent
PETsMART common....................... 94 94
Issue of Pet City common in equivalent
PETsMART common....................... 1 3,159 3,160
Foreign currency translation
adjustments........................... (128) (128)
Net loss................................ (11,620) (11,620)
--- --------------- ----------- ------- ---------
BALANCES AT JANUARY 29, 1995............ $ 6 $ 275,157 $ (30,714) $ (90) $ 252,070
- ------------------------------
(1) Redeemable preferred carried at liquidation value.
The accompanying notes are an integral part of these financial statements.
F-5
PETSMART, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AMOUNTS
-------------------------------------------
SHARES
---------------------------------------------
REDEEMABLE NONREDEEMABLE REDEEMABLE NONREDEEMABLE
PREFERRED PREFERRED COMMON PREFERRED(1) PREFERRED COMMON
------------- ----------------- ----------- ------------- --------------- -----------
BALANCES AT JANUARY 29, 1995............ 3,474 20 104,216 $ 5,711 $ 2,000 $ 6
Tax benefit from exercise of stock
options...............................
Issue of common for employee benefit
plan and exercise of stock options.... 1,512
Accretion of redeemable preferred stock
and State Line Tack warrant........... 800
Conversion of Pet Food Giant redeemable
preferred to equivalent PETsMART
common................................ 1,034
Conversion of Pet Food Giant
nonredeemable preferred stock to
equivalent PETsMART common............ (20) 846 (2,000)
Issue of Pet City common in equivalent
PETsMART common....................... 2,143
Foreign currency translation
adjustments...........................
Net loss................................
------ --- ----------- ------ ------ -----
BALANCES AT JANUARY 28, 1996............ 3,474 -- 109,751 6,511 -- 6
Tax benefit from exercise of stock
options...............................
2-for-1 stock split effected in the form
of a stock dividend................... 5
Issue of common for employee benefit
plan and exercise of stock options.... 2,763
Issue of common for acquisitions,
including veterinary clinics.......... 522
Accretion of redeemable preferred stock
and State Line Tack warrant........... 77
Conversion of State Line Tack preferred
stock and warrant, and Pet City stock
options, to PETsMART common........... (3,474) 922 (6,588)
Foreign currency translation
adjustments...........................
Net income..............................
Adjustment to conform fiscal year of Pet
City..................................
------ --- ----------- ------ ------ -----
BALANCES AT FEBRUARY 2, 1997............ -- -- 113,958 $ -- $ -- $ 11
------ --- ----------- ------ ------ -----
------ --- ----------- ------ ------ -----
CUMULATIVE
RETAINED FOREIGN CURRENCY
ADDITIONAL PAID EARNINGS TRANSLATION
IN CAPITAL (DEFICIT) ADJUSTMENTS TOTAL
--------------- ----------- ------------------- ---------
BALANCES AT JANUARY 29, 1995............ $ 275,157 $ (30,714) $ (90) $ 252,070
Tax benefit from exercise of stock
options............................... 2,219 2,219
Issue of common for employee benefit
plan and exercise of stock options.... 9,077 9,077
Accretion of redeemable preferred stock
and State Line Tack warrant........... 68 (1,582) (714)
Conversion of Pet Food Giant redeemable
preferred to equivalent PETsMART
common................................ 12,326 2,191 14,517
Conversion of Pet Food Giant
nonredeemable preferred stock to
equivalent PETsMART common............ 2,000 --
Issue of Pet City common in equivalent
PETsMART common....................... 30,088 30,088
Foreign currency translation
adjustments........................... (23) (23)
Net loss................................ (5,436) (5,436)
--------------- ----------- ----- ---------
BALANCES AT JANUARY 28, 1996............ 330,935 (35,541) (113) 301,798
Tax benefit from exercise of stock
options............................... 9,595 9,595
2-for-1 stock split effected in the form
of a stock dividend................... (5) --
Issue of common for employee benefit
plan and exercise of stock options.... 15,486 15,486
Issue of common for acquisitions,
including veterinary clinics.......... 11,160 11,160
Accretion of redeemable preferred stock
and State Line Tack warrant........... (77) --
Conversion of State Line Tack preferred
stock and warrant, and Pet City stock
options, to PETsMART common........... 6,588 --
Foreign currency translation
adjustments........................... 1,079 1,079
Net income.............................. 20,591 20,591
Adjustment to conform fiscal year of Pet
City.................................. 1,336 1,336
--------------- ----------- ----- ---------
BALANCES AT FEBRUARY 2, 1997............ $ 373,764 $ (13,696) $ 966 $ 361,045
--------------- ----------- ----- ---------
--------------- ----------- ----- ---------
(1) Redeemable preferred carried at liquidation value.
The accompanying notes are an integral part of these financial statements.
F-6
PETSMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)...................................................... $ 20,591 $ (5,436) $ (11,620)
Adjustments to reconcile net income (loss) to net cash from (used in)
operating activities--
Adjustment to conform fiscal year of Pet City...................... 1,336
Depreciation and amortization...................................... 28,186 24,466 20,740
Loss on disposal of property and equipment......................... 340 11,068 3,143
Changes in assets and liabilities:
Receivables........................................................ (11,509) (10,578) (9,782)
Merchandise inventories............................................ (88,959) (40,774) (62,267)
Prepaid expenses and other current assets.......................... (10,345) (1,702) (4,792)
Other assets....................................................... (15,354) (18,780) (4,667)
Accounts payable................................................... 22,290 50,640 7,020
Accrued payroll and employee benefits.............................. (2,173) 4,362 4,016
Accrued occupancy expense.......................................... (1,240) 2,128 2,835
Accrued merger and integration charges............................. 17,867 1,500 2,462
Other accrued expenses............................................. 11,393 823 5,651
Deferred rents..................................................... 1,371 1,453 3,372
Other liabilities.................................................. 489 (1,258) (105)
----------- ----------- -----------
Net cash from (used in) operating activities........................... (25,717) 17,912 (43,994)
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of leaseholds, fixtures and equipment........................ (51,886) (42,186) (51,820)
Purchases of property held for sale and leaseback...................... (18,629) (16,285) (16,300)
Purchases of investments............................................... -- -- (6,782)
Proceeds from sales of investments..................................... -- 3,999 5,030
Proceeds from sales of property held for sale and leaseback............ 28,883 9,598 25,013
----------- ----------- -----------
Net cash (used in) investing activities................................ (41,632) (44,874) (44,859)
----------- ----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of stock--
Preferred stock...................................................... -- -- 7,934
Common stock......................................................... 15,486 38,763 4,919
Borrowings from bank credit facility................................... 142,900 61,038 32,063
Repayment of bank credit facility...................................... (140,148) (60,063) (20,653)
Payment on capital lease obligations................................... (9,998) (11,488) (6,765)
Distributions to Sporting Dog shareholders............................. -- -- (423)
Tax benefit resulting from exercise of stock options................... 9,595 2,219 451
----------- ----------- -----------
Net cash from financing activities..................................... 17,835 30,469 17,526
----------- ----------- -----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)................................ 1,079 (23) (128)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (48,435) 3,484 (71,455)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 88,303 84,819 156,274
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $ 39,868 $ 88,303 $ 84,819
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-7
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
PETsMART, Inc. and Subsidiaries ("the Company") is a superstore retailer of
pet food, pet supplies, accessories and professional pet services throughout
North America and the United Kingdom. The Company, through its wholly-owned
subsidiaries, Sporting Dog Specialties, Inc., and State Line Tack, Inc., is also
the leading mail order retailer of pet and animal products, and equine and
riding supplies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Financial data for all periods presented reflect the retroactive effects of
the March 1994 merger with The Weisheimer Companies, Inc. d/b/a PETZAZZ
("PETZAZZ"), the May 1995 merger with Sporting Dog Specialties, Inc. ("Sporting
Dog"), the June 1995 merger with Petstuff, Inc. ("Petstuff"), the September 1995
merger with The Pet Food Giant, Inc. ("Pet Food Giant"), the January 1996 merger
with State Line Tack, Inc. ("State Line Tack") and the December 1996 merger with
Pet City Holdings plc ("Pet City"), all of which have been accounted for as
poolings of interests (see Note 2).
The financial statements have been prepared by combining the historical
financial statements of PETsMART with the historical financial statements of the
acquired entities. None of the above transactions, except Pet City, required any
material adjustments to retained earnings in order to conform with PETsMART's
fiscal year end, as all prior historical financial statements of the acquired
entities were for fiscal years ended within 93 days of the Company's fiscal year
end. The Pet City transaction was accounted for by combining the historical
financial statements of PETsMART for each of the three years in the period ended
February 2, 1997 with the historical financial statements of Pet City Holdings
for the 53 week period ended February 2, 1997, the 52 week period ended July 27,
1996, and the 52 week period ended July 29, 1995, respectively. An adjustment of
$1.3 million was required to the retained earnings of PETsMART during the 53
week period ended February 2, 1997 in order to conform the fiscal year end of
Pet City to PETsMART's fiscal year. No material adjustments were necessary in
any of the above transactions to conform the accounting practices of the
companies, nor, for periods preceding the mergers, were there any intercompany
transactions which required elimination from the combined consolidated results.
FISCAL YEAR
The Company's fiscal year ends on the Sunday nearest January 31. The fiscal
year ending in 1997 comprised 53 weeks, while fiscal years ending in 1996 and
1995 each comprised 52 weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company utilizes a cash management system under which a book balance
cash overdraft exists for the Company's primary disbursement accounts. This
overdraft represents uncleared checks in excess of cash balances in bank
accounts. The Company's funds are transferred on an as-needed basis to pay for
clearing checks. At February 2, 1997 and January 28, 1996, cash overdrafts of
$62.7 million and $42.1 million, respectively, were included in accounts
payable. The Company considers any liquid investments with an original maturity
of three months or less to be cash equivalents.
MERCHANDISE INVENTORIES AND COST OF SALES
Merchandise inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method based on moving average costs
and includes certain general, administrative and distribution costs relating to
the processing of merchandise.
Total general and administrative costs charged to inventory during the
fiscal years ended 1997, 1996, and 1995 were $12,869,000, $11,850,000 and
$8,457,000, respectively. General and administrative costs remaining in
inventory at February 2, 1997 and January 28, 1996 were $3,797,000 and
$3,323,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is provided on fixtures, equipment and software using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements and capital lease assets are amortized using the
straight-line method over the shorter of the base lease term or the estimated
useful lives of the related assets. Maintenance and repairs are expensed as
incurred.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net assets. Goodwill is being amortized using the
straight-line method over fifteen years. Other intangibles are being amortized
using the straight-line method over the estimated useful life of the related
asset which ranges from five to twenty years.
In December 1993, the Accounting Standards Executive Committee issued
Statement of Position 93-7, "Reporting on Advertising Costs" ("SOP 93-7") which
the Company adopted during the fiscal year ended January 28, 1996. In accordance
with SOP 93-7, the Company charges advertising costs to expense as incurred
except for direct-response advertising which is capitalized and amortized over
its expected period of future benefits. At January 29, 1995, deferred
advertising costs approximated $450,000. In accordance with the provisions of
SOP 93-7, upon adoption in the first quarter of fiscal 1995, the Company
recorded a charge to operations for the full amount of the deferred costs. Total
advertising expenditures, other than direct-response advertising were
$25,765,000, $17,976,800, and $24,598,800 for the fiscal years ended 1997, 1996,
and 1995. Direct response advertising consists primarily of product catalogs of
the Company's mail order subsidiaries. The capitalized costs of the advertising
are amortized over the six month to one year period following the mailing of the
respective catalog. At February 2, 1997, $3,445,000 of direct-response
advertising was included in current assets.
F-9
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, accrued payroll and employee benefits and other
accrued expenses. These balances, as presented in the financial statements at
February 2, 1997 and January 28, 1996, approximate their fair value. The
Company's $100 million credit facility (see Note 5), of which $25 million was
outstanding on February 2, 1997, reflects fair value as it is subject to fees
and rates competitively determined in the marketplace.
STORE PREOPENING COSTS
Store preopening costs are expensed in the month the store opens. Total
preopening costs of $1,194,000 and $890,000 were deferred at February 2, 1997
and January 28, 1996, respectively. Internal costs incurred in selecting and
developing sites for new stores are expensed as incurred.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the use of an asset and liability approach for financial accounting and
reporting for income taxes, whereby deferred income tax assets and liabilities
result from temporary differences. Temporary differences are differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in taxable or deductible
amounts in future years.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common and common equivalent share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of redeemable and
nonredeemable convertible preferred stock (using the if-converted method) and
stock options and warrants (using the treasury stock method). Common equivalent
shares are excluded from the computation if their effect is anti-dilutive.
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), issued in February 1997, and effective for financial statements
for both interim and annual periods ending after December 15, 1997, specifies
the computation, presentation and disclosure requirements for earnings per share
and is expected to result in an increase in the Company's reported amounts of
earnings per share upon adoption. Earlier application of the provisions of SFAS
128 is not permitted.
FOREIGN CURRENCY TRANSLATION
The local currency has been used as the functional currency in both the
United Kingdom and Canada. The assets and liabilities denominated in foreign
currency are translated into U.S. dollars at the current rate of exchange
existing at year end and revenues and expenses are translated at the average
exchange rate for the year. The translation gains and losses are included as a
separate component of stockholders' equity. Transaction gains and losses
included in net income (loss) are not material.
F-10
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 2--BUSINESS COMBINATIONS
1996 ACQUISITIONS
During fiscal 1996, the Company acquired, in two separate transactions, all
of the outstanding equity interests of State Line Tack in exchange for 1,200,000
shares of PETsMART common stock, including approximately 76,000 shares reserved
for issuance upon exercise of State Line Tack stock options assumed in the
merger, and of Pet City for approximately 7,844,000 shares of PETsMART common
stock, plus approximately 304,000 shares reserved for issuance upon exercise of
Pet City stock options assumed in the merger.
In connection with the above transactions, the Company recorded merger and
integration charges of $28.4 million. These charges included investment banking,
legal and accounting fees, and miscellaneous transaction costs ($8.8 million),
provision for the closure of redundant or inadequate facilities ($5.5 million),
costs associated with reformatting, refixturing, and remerchandising the
acquired superstores to the format consistent with that of a PETsMART superstore
($11.0 million), and other costs of integration ($3.1 million).
The Company anticipates that approximately $14.7 million of similar business
integration costs, primarily store conversion costs, associated with the Pet
City merger will be recognized as nonrecurring charges when incurred during the
first half of fiscal 1997.
Also during fiscal 1996, the Company recorded merger and integration charges
of $12.3 million, principally as a result of a change in its accounting estimate
of the lease termination costs anticipated to be incurred in connection with the
settlement of lease obligations for the 17 former Petstuff stores closed by the
Company immediately following the 1995 merger with Petstuff, along with seven
lease commitments for future Petstuff locations that were either duplicate or
inadequate facilities and, therefore, never opened. The Company believes lease
settlement costs associated with the closed stores, and the leases related to
the unopened locations, will require $10.8 million of such additional
expenditures. The remaining $1.5 million of the additional charge was primarily
related to Petstuff store conversion costs.
1995 ACQUISITIONS
During fiscal 1995, the Company acquired, in three separate transactions,
all of the outstanding equity interests of Sporting Dog, Petstuff, and Pet Food
Giant in exchange for an aggregate of 13,661,520 shares of PETsMART common
stock, plus 411,570 shares of PETsMART common stock reserved for issuance upon
exercise of Petstuff and Pet Food Giant stock options assumed in the mergers.
As a result of these transactions, the Company recorded merger and
integration charges totaling $47.1 million during fiscal 1995. These charges
included investment banking, legal and accounting fees, and miscellaneous
transaction costs ($6.2 million), costs associated with reformatting,
refixturing, and remerchandising the acquired superstores to the format
consistent with that of a PETsMART superstore ($14.1 million), provision for the
closure of redundant and non-performing superstores ($18.9 million), and other
costs of integration ($7.9 million).
In connection with the Pet Food Giant merger (see above), the Company
converted all Pet Food Giant redeemable convertible preferred stock with an
aggregate carrying value of $14.5 million, which was
F-11
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
being accreted to its redemption value by Pet Food Giant through charges to
retained earnings, into PETsMART equivalent common shares.
Selected information for the combining entities included in the Consolidated
Statements of Operations for the two years ended January 28, 1996 is as follows:
FISCAL YEAR ENDED
------------------------
1996(A) 1995(A)
------------ ----------
(IN THOUSANDS)
Net sales
PETsMART........................................................ $ 1,030,663 $ 601,032
State Line Tack................................................. 53,367 47,156
Pet Food Giant.................................................. -- 26,344
Petstuff........................................................ 115,008
Sporting Dog.................................................... -- 75,171
Pet City Holdings............................................... 84,026 59,488
------------ ----------
Combined.................................................... $ 1,168,056 $ 924,199
------------ ----------
------------ ----------
Income (loss) before cumulative effect of change in accounting
principle
PETsMART........................................................ $ (2,803) $ 4,072
State Line Tack................................................. (1,127) 60
Pet Food Giant.................................................. -- (2,346)
Petstuff........................................................ -- (12,209)
Sporting Dog.................................................... -- 653
PetCity Holdings................................................ (1,506) (1,850)
------------ ----------
Combined.................................................... $ (5,436) $ (11,620)
------------ ----------
------------ ----------
Income (loss) applicable to holders of common stock
PETsMART........................................................ $ (3,517) $ 4,072
State Line Tack (b)............................................. (1,995) (708)
Pet Food Giant (c).............................................. -- (3,499)
Petstuff........................................................ -- (12,209)
Sporting Dog.................................................... -- 653
Pet City Holding................................................ (1,506) (1,850)
------------ ----------
Combined.................................................... $ (7,018) $ (13,541)
------------ ----------
------------ ----------
- ------------------------
(a) Fiscal years ended 1996 and 1995 include financial information for the years
ended July 27, 1996 and July 29, 1995, respectively, for Pet City.
(b) Net loss of State Line Tack includes accretion of preferred stock to
liquidation value and common stock warrants to fair value of $868,000 and
$768,000 for fiscal years ended 1996 and 1995, respectively.
F-12
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
(c) Net loss of Pet Food Giant includes accretion of redeemable convertible
preferred stock of $714,000 and $1,153,000 for fiscal year ended 1996 and
1995, respectively.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
FEBRUARY 2, JANUARY 28,
1997 1996
----------- -----------
(IN THOUSANDS)
Land................................................................ $ 466 $ 466
Buildings........................................................... 3,115 3,115
Fixtures and equipment.............................................. 70,460 61,897
Leasehold improvements.............................................. 101,883 70,449
Computer software................................................... 8,554 5,409
Equipment under capital leases...................................... 45,863 34,711
Buildings under capital leases...................................... 55,821 46,971
----------- -----------
286,162 223,018
Less: accumulated depreciation and amortization..................... 85,144 59,296
----------- -----------
201,018 163,722
Construction in progress............................................ 18,245 15,100
----------- -----------
$ 219,263 $ 178,822
----------- -----------
----------- -----------
Accumulated amortization of equipment and buildings under capital leases
approximated $35,055,000 and $23,897,000 at February 2, 1997 and January 28,
1996, respectively.
NOTE 4--LEASES
The Company leases substantially all of its stores, distribution centers,
corporate offices and certain equipment under noncancelable operating leases.
The leases expire at various dates through 2014. The Company has the option to
extend the terms of the leases for periods ranging from 5 to 20 years. Certain
leases required payment of property taxes, utilities, common area maintenance
and insurance and, if annual sales at certain stores exceed specified amounts,
provide for additional rents. No additional rent payments were required during
the fiscal years ended 1997, 1996, or 1995. Total rent expense incurred under
operating leases during the fiscal years ended 1997, 1996, and 1995 was
$91,791,300, $66,100,000, and $45,834,000, respectively.
The Company has entered into sale and leaseback transactions for several of
its store locations which included buildings and underlying land. Such assets
are sold at cost and are leased back at terms similar to those of other leased
stores. The Company also leases certain fixtures and equipment under capital
leases.
F-13
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
At February 2, 1997, the future minimum annual rental commitments under all
noncancelable leases were as follows:
OPERATING CAPITAL
LEASES LEASES
------------ ---------
(IN THOUSANDS)
1998................................................................. $ 94,644 $ 15,253
1999................................................................. 92,277 13,062
2000................................................................. 91,571 9,652
2001................................................................. 85,854 8,062
2002................................................................. 78,877 7,164
Thereafter........................................................... 656,570 76,010
------------ ---------
Total minimum rental commitments..................................... $ 1,099,793 129,203
------------
------------
Less: amounts representing interest.................................. 57,523
---------
Present value of obligations......................................... 71,680
Less: current portion................................................ 9,145
---------
Long-term obligations................................................ $ 62,535
---------
---------
At February 2, 1997, the Company had entered into operating lease agreements
for 88 additional stores. These leases have terms to a maximum of 25 years. The
Company's obligations and options to renew are similar to those of existing
leases. Such leases will commence at various dates upon the completion of
certain events in the lease agreements. Future minimum lease commitments under
these leases aggregate approximately $545,282,000. Minimum rental commitments
under operating leases exclude commitments of up to $22,375,000 relating to
residual values of property under such leases.
NOTE 5--BANK CREDIT FACILITIES:
At February 2, 1997, PETsMART had a revolving credit arrangement with a
bank, expiring on July 6, 1998, which provided for borrowings and letters of
credit up to $100,000,000. Borrowings under this arrangement bore interest, at
PETsMART's option, at the bank's prime rate or LIBOR plus 0.875%. At February 2,
1997 and January 28, 1996, borrowings bore interest at an average annual
interest rate of 7.2% and 6.7%, respectively. Among other things, the credit
facility contains certain restrictive covenants relating to net worth, debt to
equity ratios, capital expenditures and minimum fixed charge coverage.
At February 2, 1997, an aggregate of $25.0 million was outstanding under the
agreement and during the year ended February 2, 1997, an average of $43.4
million was outstanding under the agreement. Outstanding letters of credit at
February 2, 1997 and January 28, 1996 were $4.0 million and $6.3 million,
respectively.
Upon closing of the State Line Tack merger in January 1996 (see Note 2), the
Company paid in full approximately $816,000 of State Line Tack notes payable to
a bank and $1.5 million of State Line Tack subordinated shareholder notes
payable. These amounts have been included in "Current maturities of capital
leases" and "Other liabilities" in the accompanying consolidated balance sheet
at January 28, 1996.
The Company has entered into interest rate swaps to lower funding costs and
alter interest rate exposures for short-term borrowings. Interest rate swaps
allow the Company to fix the variable borrowing rate on its line of credit
arrangement for certain periods of time. At February 2, 1997, the Company had
F-14
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 5--BANK CREDIT FACILITIES: (CONTINUED)
four interest rate swaps outstanding with a financial institution, having a
total notional amount of $100 million. The total notional amount of interest
rate swaps at January 28, 1996 was $25 million. Under this agreement, the
Company may convert variable rate borrowings into borrowings at a fixed rate of
approximately 5.5%. Contracts are marked-to-market and settled monthly. The
interest rate swap agreements are scheduled to terminate in July 2000 or August
2001. The Company has only limited involvement with derivative financial
instruments, and does not use them for trading purposes.
The Company is exposed to credit loss in the event of nonperformance by the
counterparty to its interest rate swap agreement. The Company anticipates the
counterparty will be able to fully satisfy its obligation under the agreement.
The counterparty is a financial institution whose credit rating was AA or better
at the time the agreement was instituted. No collateral is held in relation to
the agreement. Credit exposure exists in relation to all the Company's financial
instruments, and is not unique to derivatives.
NOTE 6--INCOME TAXES:
Income (loss) before income taxes is as follows:
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
United States.................................................... $ 54,519 $ (7,794) $ (8,508)
Foreign.......................................................... (20,267) (7,083) (1,850)
----------- ----------- -----------
Total............................................................ $ 34,252 $ (14,877) $ (10,358)
----------- ----------- -----------
----------- ----------- -----------
The provision (benefit) for income taxes consists of the following:
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
Current Liability:
Federal.............................................. $ 22,056 $ 3,762 $ 3,499
State................................................ 4,489 1,531 403
Foreign.............................................. -- -- --
----------- ----------- -----------
26,545 5,293 3,902
----------- ----------- -----------
Deferred asset:
Federal.............................................. (1,592) (14,549) (2,374)
State................................................ (2,725) (185) (266)
Foreign.............................................. (8,567) -- --
----------- ----------- -----------
(12,884) (14,734) (2,640)
----------- ----------- -----------
Income tax expense (benefit)........................... $ 13,661 $ (9,441) $ 1,262
----------- ----------- -----------
----------- ----------- -----------
F-15
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 6--INCOME TAXES: (CONTINUED)
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
FISCAL YEAR ENDED
----------------------------------------------------------------
JANUARY
FEBRUARY 2, 1997 JANUARY 28, 1996 29, 1995
-------------------------- ------------------------- ---------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS
--------- --------------- --------- -------------- ---------
(DOLLARS IN THOUSANDS)
Provision at federal statutory tax rate............... $ 11,988 35% $ (5,058) 34% $ (3,522)
State income taxes, net of federal tax benefit........ 1,756 5% (440) 3% 221
Foreign tax rate differential......................... 335 1% 15 -- 19
Operating losses with no current benefit.............. -- -- 6,683 (45)% 5,559
Nondeductible acquisition costs....................... 3,071 9% 2,387 (16)% 1,196
Utilization of prior years' operating losses.......... (3,169) (9)% (12,143) 82% (1,700)
Utilization of credits................................ -- -- (1,677) 11% (410)
Other................................................. (320) (1)% 792 (5)% (101)
-- --
--------- --------- ---------
$ 13,661 40% $ (9,441) 64% $ 1,262
-- --
-- --
--------- --------- ---------
--------- --------- ---------
PERCENTAGE
--------------
Provision at federal statutory tax rate............... 34%
State income taxes, net of federal tax benefit........ (2)%
Foreign tax rate differential......................... --
Operating losses with no current benefit.............. (54)%
Nondeductible acquisition costs....................... (12)%
Utilization of prior years' operating losses.......... 17%
Utilization of credits................................ 4%
Other................................................. 1%
--
(12)%
--
--
As of February 2, 1997, net operating loss carryforwards of $39,978,000 were
available for U.S. tax purposes, representing operating losses of PETZAZZ
($5,199,000), Petstuff ($28,850,000) and Pet Food Giant ($5,929,000) prior to
the mergers. The net operating loss carryforwards begin to expire in 2007. For
tax purposes, the pre-merger losses are subject to limitations resulting from a
change in ownership of PETZAZZ, Petstuff and Pet Food Giant and the losses are
treated as separate return limitation year losses. In addition, as of February
2, 1997, net operating loss carryforwards of $15,718,000 were available for
United Kingdom tax purposes, representing operating losses of Pet City prior to
the merger. These United Kingdom net operating losses have no expiration date
and the Company expects to fully utilize such losses to offset Pet City taxable
income in future years. The Company also expects to fully utilize the PETZAZZ,
Petstuff, and Pet Food Giant domestic losses in future years.
F-16
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 6--INCOME TAXES: (CONTINUED)
The components of deferred income tax liability (asset), included in other
assets in the accompanying consolidated balance sheet, are as follows:
FEBRUARY 2, JANUARY 28,
1997 1996
----------- -----------
(IN THOUSANDS)
Normalization of rents.............................................. $ (5,239) $ (4,041)
Reserve for closed stores........................................... (8,305) (1,608)
Depreciation........................................................ (973) 1,650
Employee benefit expense............................................ (430) (1,769)
Inventory reserve................................................... (1,106) (801)
Loss carryforward................................................... (21,698) (18,150)
AMT credit.......................................................... -- (1,224)
Jobs tax credit..................................................... -- (2,092)
Inventory capitalization............................................ 1,236 899
Other items, net.................................................... (1,775) 702
----------- -----------
(38,290) (26,434)
Valuation allowance................................................. 2,715 2,715
----------- -----------
$ (35,575) $ (23,719)
----------- -----------
----------- -----------
The valuation allowance relates to Petstuff operating loss carryforwards in
Canada. It is the opinion of management that, due to the change in control
resulting from the June 1995 merger with Petstuff (see Note 2), it is more
likely than not the Company will not be able to realize a benefit for these
Canadian losses.
F-17
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 7--STOCKHOLDERS' EQUITY:
COMMON STOCK
The Company's Board of Directors approved a 2-for-1 split of its common
stock effected in the form of a stock dividend to stockholders of record on July
8, 1996, with a payment date of July 18, 1996, and a 3-for-2 split of its common
stock effected in the form of a stock dividend to stockholders of record on
April 17, 1995, with a payment date of May 1, 1995. All share and per share data
has been restated to reflect the stock splits effected in the form of a stock
dividend.
In May 1993, the Board of Directors adopted an Employee Stock Purchase Plan
under which essentially all employees with six or more months of service can
purchase common stock on semi-annual offering dates at 85% of the fair market
value on the offering date or, if lower, at 85% of the fair market value of the
shares on the exercise date. A maximum of 1,500,000 shares are authorized for
purchase until the plan termination date of December 31, 2002. During each of
the three years in the period ended February 2, 1997, a total of 167,000,
116,000, and 93,000 shares were purchased for aggregate proceeds of $2,200,000,
$1,700,000, and $985,000, respectively.
NONREDEEMABLE PREFERRED STOCK
At January 29, 1995, 18,000 shares of Pet Food Giant Series B Preferred
Stock were issued and outstanding and 2,000 shares of Pet Food Giant Series C
Preferred Stock were issued and outstanding. In connection with the merger of
the Company and Pet Food Giant in September 1995, all preferred stock of Pet
Food Giant was included in the conversion into PETsMART equivalent common shares
(see Note 2).
REDEEMABLE PREFERRED STOCK
At December 31, 1995, State Line Tack had issued and outstanding
approximately 3.5 million shares of redeemable preferred stock, which State Line
Tack was accreting to liquidation value through charges to retained earnings. At
January 28, 1996, the carrying value of the State Line Tack preferred stock was
$6.5 million. In connection with the merger with the Company (see Note 2), all
shares of State Line Tack redeemable preferred stock were exchanged for
approximately 784,000 shares of PETsMART Common Stock.
COMMON STOCK WARRANTS
In August 1992 and June 1993, under the terms and provisions of Warrant
Agreements, Petstuff issued two warrants to an equipment financing company (the
"Lessor") to acquire shares of Petstuff's then authorized and issued Series A
and Series B Preferred Stock. Under the terms and provisions of the Warrant
Agreements, the warrants permitted the Lessor to acquire up to 22,116 equivalent
shares of PETsMART's common stock for $1.41 per share, and up to 13,934
equivalent shares of PETsMART's common stock for $2.50 per share, in lieu of the
Petstuff Series A and Series B Preferred Stock. During fiscal 1995, the warrants
were exercised by the Lessor.
In connection with the issuance of its subordinated debt in 1993 (see Note
5), State Line Tack issued warrants to purchase up to 935,000 shares of State
Line Tack common stock. At December 31, 1995, the estimated value of these
warrants was $177,000 and State Line Tack accreted $68,023 and $68,023 through
charges to retained earnings in 1995 and 1994, respectively. In connection with
the merger of State Line
F-18
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 7--STOCKHOLDERS' EQUITY: (CONTINUED)
Tack and the Company in January 1996, these warrants were exercised and
exchanged for approximately 92,000 shares of PETsMART Common Stock.
NOTE 8--STOCK OPTIONS:
The Company may grant under a stock option plan (the "Plan") either
incentive stock options or supplemental stock options to purchase up to
19,714,286 shares of common stock to key employees (including officers),
consultants or directors of the Company at fair market value at the date of
grant. At February 2, 1997 stock options to purchase 10,629,734 shares of common
stock, including options assumed in connection with the Petstuff, Pet Food
Giant, State Line Tack and Pet City acquisitions, are outstanding with exercise
prices ranging from $0.061 to $28.750 per share. In June 1992, the Board
established a nonemployee director stock option pool of 429,000 shares available
for grant at fair market value on date of grant. Options vest over a period of
four years and expire ten years after the date of grant. At February 2, 1997,
stock options to purchase 376,878 shares of common stock are outstanding under
the 1992 director plan with exercise prices ranging from $1.167 to $23.000 per
share.
Prior to their respective mergers with the Company, Petstuff, Pet Food
Giant, State Line Tack and Pet City adopted plans which permitted the granting
of incentive stock options to officers and key employees to purchase shares of
the respective companies' common stock at prices not less than the fair market
value of the common stock at the date of the grant. Options granted under these
plans typically vested over four years from the date of grant. State Line Tack
also adopted a nonqualified incentive stock option plan for directors of State
Line Tack who were not employees. In connection with the PETZAZZ, Petstuff, Pet
Food Giant, State Line Tack and Pet City acquisitions described in Note 2, the
option plans aggregating 905,996 shares available for grant were assumed by
PETsMART.
PETsMART applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based compensation, and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's plans been
determined based on the fair value at the grant date for awards in fiscal 1996
and fiscal 1995 consistent with the provisions of SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
FISCAL YEAR ENDED
----------------------
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss)--as reported........................................ $ 20,591 $ (5,436)
Net income (loss)--pro forma.......................................... $ 11,499 $ (10,503)
Earnings (loss) per share--as reported................................ $ 0.17 $ (0.06)
Earnings (loss) per share--pro forma.................................. $ 0.10 $ (0.10)
Weighted average number of shares outstanding--as reported............ 118,226 108,387
Weighted average number of shares outstanding--pro forma.............. 113,958 108,387
F-19
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 8--STOCK OPTIONS: (CONTINUED)
The effects of applying SFAS 123 in the above pro forma disclosure is not
necessarily indicative of future amounts. The fair value of each option grant
was estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in fiscal 1996
and fiscal 1995, respectively: dividend yield of 0.00% in both years; expected
volatility of 40.0 to 50.0 percent; risk-free interest rates of 5.13 to 6.85
percent and 5.05 to 7.03 percent; and expected lives of 0.75 to 2.5 years for
both years. The weighted average fair value of options granted during the years
ended February 2, 1997 and January 28, 1996 was $7.17 and $5.57, respectively.
Activity in all of the Company's stock option plans is as follows:
WEIGHTED AVERAGE
EXERCISE
PRICE PER SHARE
SHARES ------------------------
---------------
(IN THOUSANDS)
Outstanding, January 30, 1994....................... 5,360 $ 3.659
Granted........................................... 3,314 10.590
Exercised......................................... (492) 1.236
Canceled.......................................... (321) 7.387
------
Outstanding, January 29, 1995....................... 7,861 6.581
Granted........................................... 5,862 14.384
Exercised......................................... (1,171) 4.757
Canceled.......................................... (535) 10.246
------
Outstanding January 28, 1996........................ 12,017 10.442
Granted........................................... 1,996 19.081
Exercised......................................... (2,389) 5.367
Canceled.......................................... (995) 14.539
------
Outstanding February 2, 1997........................ 10,629 $ 12.827
------
------
At February 2, 1997 options for a total of 4,301,000 shares are exercisable.
The following table summarizes information about the Company's stock options
at February 2, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISABLE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------ ------------ ----------------- ------------- ---------- ----------------
$ 0.061-$ 9.667... 2,196,102 6.38 $ 4.562 1,881,503 $ 4.0898
$ 9.892-$11.458... 2,125,423 7.84 $ 11.168 1,022,920 $ 11.0934
$11.542-$15.250... 2,443,052 8.87 $ 13.879 427,071 $ 13.0935
$15.375-$17.000... 2,684,009 8.58 $ 16.298 938,089 $ 16.2974
$17.836-$28.750... 1,181,148 10.22 $ 21.114 31,812 $ 18.6421
------------ ----------
$ 0.061-$28.750... 10,629,734 8.23 $ 12.827 4,301,395 $ 9.4192
F-20
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 9--INTEREST EXPENSE:
Interest costs incurred and capitalized on construction in progress are as
follows:
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
Interest costs incurred..................................... $ 10,211 $ 9,234 $ 7,877
Interest costs capitalized.................................. 761 300 290
----------- ----------- -----------
Interest expense............................................ $ 9,450 $ 8,934 $ 7,587
----------- ----------- -----------
NOTE 10--SUPPLEMENTAL SCHEDULE OF CASH FLOWS:
Interest paid during each fiscal year ended 1997, 1996, and 1995 amounted to
$10,161,000, $8,533,000, and $7,210,000, respectively. Such amounts include
interest paid on the bank credit facility, capital leases and interest
capitalized on construction in progress.
Income taxes paid, net of refunds, during each fiscal year ended 1997, 1996,
and 1995 amounted to $4,310,000, $2,356,000, and $4,144,000, respectively.
During each fiscal year ended 1997, 1996, and 1995, the Company incurred
capital lease obligations of $15,944,000, $6,137,000, and $33,722,000,
respectively, for new equipment and buildings.
NOTE 11--OTHER CONTINGENCIES:
The Company is involved in certain litigation arising from various matters.
Management believes that the ultimate resolution of such legal matters will not
have a material adverse affect on the Company's financial position or results of
operations.
F-21
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 12--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
FIRST SECOND THIRD FOURTH
FISCAL YEAR ENDED FEBRUARY 2, 1997 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................................................ $ 330,783 $ 345,044 $ 367,825 $ 457,365
Gross profit..................................................... 91,833 99,567 101,757 133,194
Merger and integration costs..................................... 8,064 12,300 -- 20,350
Operating income................................................. 3,103 5,961 19,742 13,839
Net income....................................................... 409 2,164 10,433 7,585
Net income applicable to holders of common stock................. $ 409 $ 2,164 $ 10,433 $ 7,585
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share:
Net income................................................... $ 0.00 $ 0.02 $ 0.09 $ 0.06
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and common equivalent shares
outstanding.................................................... 115,805 117,538 118,943 118,926
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FIRST SECOND THIRD FOURTH
FISCAL YEAR ENDED JANUARY 28, 1996 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................................................ $ 271,094 $ 279,768 $ 286,064 $ 331,130
Gross profit..................................................... 69,016 71,413 74,206 93,602
Merger and integration costs..................................... -- 40,729 6,400 --
Operating income (loss).......................................... 2,163 (33,219) 2,220 20,162
Net income (loss)................................................ (1,947) (17,507) (407) 14,425
Net income (loss) applicable to holders of common stock.......... $ (2,445) $ (18,005) $ (776) $ 14,208
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share:
Net income (loss)............................................ $ (0.02) $ (0.17) $ (0.01) $ 0.13
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and common equivalent shares
outstanding.................................................... 106,376 107,440 112,691 113,327
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
A reconciliation of the results of the previously separate companies prior
to the 1996 business combination with Pet City accounted for as a pooling of
interests (see Note 2) and amounts previously
F-22
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
NOTE 12--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): (CONTINUED)
reported by the Company on Form 10-Q during the fiscal year ended February 2,
1997 follows (in thousands):
PETSMART PET CITY COMBINED
----------- --------- ----------
Thirteen weeks ended
April 28, 1996:
Net sales............................................... $ 310,200 $ 20,583 $ 330,783
Net income (loss)....................................... $ 925 $ (516) $ 409
Thirteen weeks ended
July 26, 1996:
Net sales............................................... $ 321,872 $ 23,172 $ 345,044
Net income (loss)....................................... $ 2,898 $ (734) $ 2,164
Thirteen weeks ended
October 27, 1996
Net sales............................................... $ 339,930 $ 27,895 $ 367,825
Net income (loss)....................................... $ 11,157 $ (724) $ 10,433
F-23