PETCO ANIMAL SUPPLIES INC - 10-Q Quarterly Report

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

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 2, 2002
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 0-23574

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

Delaware (State or other jurisdiction of incorporation or organization)		33-0479906 (IRS Employer Identification No.)
9125 Rehco Road, San Diego, California (Address of principal executive offices)		92121 (zip code)
(858) 453-7845 (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

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

Title	Date	Outstanding

Common Stock, $0.001 Par Value	November 26, 2002	57,366,473

PETCO ANIMAL SUPPLIES, INC.

FORM 10-Q
For the Quarter Ended November 2, 2002

INDEX

			Page
Part I	Financial Information
	Item 1.	Consolidated Financial Statements
		Consolidated Balance Sheets at February 2, 2002 and November 2, 2002	3
		Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended November 3, 2001 and November 2, 2002	4
		Consolidated Statements of Cash Flows for the thirty-nine weeks ended November 3, 2001 and November 2, 2002	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
	Item 4.	Controls and Procedures	24
Part II	Other Information
	Item 1.	Legal Proceedings	25
	Item 5.	Other Information	25
	Item 6.	Exhibits and Reports on Form 8-K	26
Signatures			27
Certifications			28

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

			February 2, 2002			November 2, 2002
						(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	36,215		$	44,663
	Receivables			9,694			12,658
	Inventories			128,991			144,855
	Deferred tax assets			26,287			9,474
	Other			8,249			11,060

		Total current assets		209,436			222,710
Fixed assets, net				211,132			218,355
Debt issuance costs				6,086			6,099
Goodwill				40,928			40,644
Other assets				5,990			6,339

			$	473,572		$	494,147

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
	Accounts payable		$	52,223		$	52,009
	Accrued expenses			42,709			45,273
	Accrued interest			6,580			871
	Accrued salaries and employee benefits			32,943			36,194
	Current portion of long-term debt			2,000			2,000
	Current portion of capital lease and other obligations			4,552			451

		Total current liabilities		141,007			136,798
Long-term debt, excluding current portion				192,500			191,000
Senior subordinated notes payable				200,000			170,000
Capital lease and other obligations, excluding current portion				2,105			2,018
Accrued store closing costs				1,467			2,259
Deferred tax liability				6,219			6,219
Deferred rent and other liabilities				16,699			16,965

		Total liabilities		559,997			525,259

Preferred stock:
	$.01 par value, 5,000 shares authorized, 111 and 78 shares issued and outstanding at February 2, 2002 and no shares issued and outstanding at November 2, 2002
	14% Series A senior redeemable preferred stock			130,038			—
	12% Series B junior redeemable preferred stock			89,244			—
Stockholders' deficit:
	Common stock, $.001 par value, 250,000 shares authorized and 39,117 and 57,366 shares issued and outstanding at February 2, 2002 and November 2, 2002, respectively			39			57
	Additional paid-in capital			(187,380	)		64,920
	Deferred compensation			(8,439	)		—
	Accumulated deficit			(108,460	)		(95,751	)
	Accumulated other comprehensive loss			(1,467	)		(338	)

		Total stockholders' deficit		(305,707	)		(31,112	)

			$	473,572		$	494,147

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)

		Thirteen weeks ended						Thirty-nine weeks ended
		November 3, 2001			November 2, 2002			November 3, 2001			November 2, 2002
Net sales		$	322,853		$	367,530		$	937,249		$	1,071,211
Cost of sales and occupancy costs			226,177			253,253			662,614			744,811

	Gross profit		96,676			114,277			274,635			326,400
Selling, general and administrative expenses			76,740			86,460			222,561			252,340
Management fees and termination costs			780			—			2,340			12,760
Stock-based compensation and other costs			4,708			—			12,292			8,176
Merger and non-recurring costs			—			—			445			—

	Operating income		14,448			27,817			36,997			53,124
Interest income			(179	)		(239	)		(492	)		(548	)
Interest expense			10,018			8,374			32,037			25,816

	Earnings before equity in loss of unconsolidated affiliate, income taxes and extraordinary item		4,609			19,682			5,452			27,856
Equity in loss of unconsolidated affiliate			(865	)		—			(2,505	)		—

	Earnings before income taxes and extraordinary item		3,744			19,682			2,947			27,856
Income taxes			1,562			7,676			1,895			13,143

	Earnings before extraordinary item		2,182			12,006			1,052			14,713
Extraordinary item-loss on early extinguishment of debt (net of income tax benefit of $7,888 and $1,332)			(12,942	)		—			(12,942	)		(2,004	)

	Net earnings (loss)		(10,760	)		12,006			(11,890	)		12,709
Increase in carrying amount and premium on redemption of preferred stock			(6,961	)		—			(20,493	)		(20,487	)

	Net earnings (loss) available to common stockholders	$	(17,721	)	$	12,006		$	(32,383	)	$	(7,778	)

Basic and diluted earnings (loss) per common share:
	Earnings (loss) before extraordinary item	$	(0.12	)	$	0.21		$	(0.51	)	$	(0.10	)
	Extraordinary loss on early extinguishment of debt		(0.34	)		—			(0.33	)		(0.04	)

Earnings (loss) per common share		$	(0.46	)	$	0.21		$	(0.84	)	$	(0.14	)

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

			Thirty-nine weeks ended
			November 3, 2001			November 2, 2002
Cash flows from operating activities:
	Net earnings (loss)		$	(11,890	)	$	12,709
	Depreciation and amortization			38,830			38,247
	Provision for deferred taxes			(5,423	)		16,443
	Equity in loss of unconsolidated affiliate			2,505			—
	Stock-based compensation			14,842			8,439
	Non-cash write-off of debt issuance costs			12,430			186
Changes in assets and liabilities:
	Receivables			(3,258	)		(2,964	)
	Inventories			(11,307	)		(15,864	)
	Other assets			(16,217	)		(2,270	)
	Accounts payable			2,514			(214	)
	Accrued expenses			15,171			3,666
	Accrued interest			(9,065	)		(5,709	)
	Accrued salaries and employee benefits			5,427			3,251
	Accrued store closing costs			(1,903	)		819
	Deferred rent and other liabilities			440			(124	)

		Net cash provided by operating activities		33,096			56,615

Cash flows from investing activities:
	Additions to fixed assets			(39,209	)		(44,362	)
	Investment in affiliate			(9,093	)		—

		Net cash used in investing activities		(48,302	)		(44,362	)

Cash flows from financing activities:
	Borrowings under long-term debt agreements			215,650			—
	Repayment of long-term debt agreements			(209,650	)		(31,500	)
	Debt issuance costs			(934	)		(1,465	)
	Repayment of capital lease and other obligations			(4,863	)		(4,188	)
	Net proceeds from the issuance of common stock			23			273,117
	Redemption of Series A senior redeemable preferred stock			—			(142,231	)
	Redemption of Series B junior redeemable preferred stock			—			(97,538	)

		Net cash provided by (used in) financing activities		226			(3,805	)

Net increase (decrease) in cash and cash equivalents				(14,980	)		8,448
Cash and cash equivalents at beginning of year				18,044			36,215

Cash and cash equivalents at end of period			$	3,064		$	44,663

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

Note 1—General

In the opinion of management of PETCO Animal Supplies, Inc. (the "Company" or "PETCO"), the unaudited consolidated financial statements presented herein contain all adjustments, consisting of normal recurring adjustments, necessary to present the financial position, results of operations and cash flows as of November 2, 2002 and for the thirteen week and thirty-nine week periods ended November 3, 2001 and November 2, 2002. Because of the seasonal nature of the Company's business, the results of operations for the thirteen and thirty-nine weeks ended November 3, 2001 and November 2, 2002 are not necessarily indicative of the results to be expected for the full year. The Company's fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year. For example, references to fiscal 2002 refer to the fiscal year beginning on February 3, 2002, and ending on February 1, 2003. For further information, refer to the consolidated financial statements and footnotes thereto for fiscal 2001 included in the Company's Annual Report on Form 10-K and Form 10-K/A (File No. 0-23574) filed with the Securities and Exchange Commission on April 23, 2002 and April 30, 2002, respectively.

Note 2—New Accounting Standards

In July 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, which supersede Accounting Principles Board Opinion 17, Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet one of two criteria set forth in the statement. This statement applies to all business combinations initiated after June 30, 2001. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested at least annually for impairment. Separable intangible assets with defined lives will continue to be amortized over their useful lives. The provisions of SFAS No. 142 apply to goodwill and intangible assets acquired before and after the statement's effective date. SFAS No. 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company has completed its assessment and recorded $0.3 million of transitional goodwill impairment in the second quarter of 2002. The impact of this change in accounting principle is not material to the consolidated financial statements and, accordingly, the effect of this change is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. Non-compete agreements, which comprise all of the Company's intangible assets with defined lives, had a carrying value of $0.5 million and $0.3 million and accumulated amortization of $1.5 million and $1.7 million at February 2, 2002 and November 2, 2002, respectively. Amortization of non-compete agreements was $0.1 million for each of the thirteen weeks ended November 3, 2001 and November 2, 2002 and $0.2 million for each of the thirty-nine weeks ended November 3, 2001 and November 2, 2002.

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

	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	November 3, 2001			November 2, 2002		November 3, 2001			November 2, 2002
Net earnings (loss) available to common stockholders as reported	$	(17,721	)	$	12,006	$	(32,383	)	$	(7,778	)
Add back goodwill impairment		—			—		—			173
Add back amortization of goodwill		771			—		2,309			—

Net earnings (loss) available to common stockholders as adjusted	$	(16,950	)	$	12,006	$	(30,074	)	$	(7,605	)

Basic and diluted net earnings loss) per common share
Net earnings (loss) as reported	$	(0.46	)	$	0.21	$	(0.84	)	$	(0.14	)
Add back amortization of goodwill		0.02			—		0.06			—

Net earnings (loss) as adjusted	$	(0.44	)	$	0.21	$	(0.78	)	$	(0.14	)

	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	November 3, 2001			November 2, 2002		November 3, 2001			November 2, 2002
Before extraordinary item:
Net earnings (loss) available to common stockholders as reported	$	(4,779	)	$	12,006	$	(19,441	)	$	(5,774	)
Add back goodwill impairment		—			—		—			173
Add back amortization of goodwill		771			—		2,309			—

Net earnings (loss) available to common stockholders as adjusted	$	(4,008	)	$	12,006	$	(17,132	)	$	(5,601	)

Basic and diluted net earnings (loss) per common share
Net earnings (loss) as reported	$	(0.12	)	$	0.21	$	(0.51	)	$	(0.10	)
Add back amortization of goodwill		0.02			—		0.06			—

Net earnings (loss) as adjusted	$	(0.10	)	$	0.21	$	(0.45	)	$	(0.10	)

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

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002, which is effective for fiscal years beginning after May 15, 2002. SFAS No. 145 rescinds SFAS No. 4 which required that all gains and losses from extinguishment of debt be aggregated, and if material, classified as an extraordinary item. As a result, gains and losses from debt extinguishment are to be classified as extraordinary only if they meet the criteria set forth in Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 145 also requires that sale-leaseback accounting be used for capital lease modifications with economic effects similar to sale-leaseback transactions. The Company does not expect implementation of SFAS No. 145 to have a significant effect on its results of operation or consolidated financial condition.

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

Note 3—Net Earnings Per Share

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

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

	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	November 3, 2001			November 2, 2002		November 3, 2001			November 2, 2002
Net earnings (loss) available to common stockholders as reported	$	(17,721	)	$	12,006	$	(32,383	)	$	(7,778	)
Common shares, basic		38,421			57,334		38,336			55,667
Dilutive effect of stock options		—			614		—			—

Common shares, diluted		38,421			57,948		38,336			55,667

Options and warrants to purchase common shares that were outstanding at November 3, 2001 and November 2, 2002, but were not included in the computation of diluted net earnings (loss) per share

because of their anti-dilutive impact on earnings (loss) per common share, were 1,878 and 1,295, respectively.

Note 4—Related Party Transactions

In October 2000, the Company entered into a management services agreement with two entities who were sponsors of the Company's merger and recapitalization transaction. Under the terms of this agreement, the Company paid management fees in an aggregate amount of $0.8 million in the thirteen weeks ended November 3, 2001, and $2.3 million and $0.3 million in the thirty-nine weeks ended November 3, 2001 and November 2, 2002, respectively, to these two related parties. Shortly after its initial public offering, the Company terminated the management services agreement and paid an aggregate amount of $12.5 million as a one-time termination fee.

The Company issued senior subordinated notes to related parties in October 2000 and redeemed them in October 2001. Interest expense incurred on the senior subordinated notes, primarily paid to related parties, including amortization of the discount, was $3.6 million and $12.0 million in the thirteen weeks and thirty-nine weeks ended November 3, 2001, respectively.

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

Note 5—Initial Public Offering

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

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

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

Note 6—Contingencies

In July 2001, two former employees instituted an action against the Company in the Superior Court of California for the County of Los Angeles. The complaint in the action was filed individually and on behalf of a purported class consisting of all current and former employees who worked as

salaried managers or assistant managers in the Company's stores in the state of California at any time between July 30, 1997 and the present. The complaint alleges that the individual plaintiffs and the purported class members worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law, and that they were classified as "exempt" store management employees but were forced to work more than 50% of their time in non-exempt tasks. The complaint alleges violations of the California Labor Code and the California Business and Professions Code. The relief sought includes compensatory damages, penalties, preliminary and permanent injunctions requiring the Company to pay overtime compensation under California law, prejudgment interest, costs and attorneys' fees and such other relief as the court deems proper. In November 2001, the case was transferred to the Superior Court of California for the County of San Diego. The Company has answered the complaint and is vigorously defending the action. A motion for certification of this action as a class action was filed on November 1, 2002. The Company has filed its written opposition to the motion for class certification. A ruling is expected within the next 60 days. If successful, this litigation could have a material adverse effect on the Company's financial condition, and any required change in the Company's labor practices could have a negative impact on its results of operations.

Recently, allegations have been made in a complaint filed in the San Francisco Superior Court by the San Francisco City Attorney's office to the effect that certain PETCO associates have not properly cared for companion animals for sale in the Company's two San Francisco stores. The complaint which has been subsequently transferred to the Santa Clara Superior Court seeks damages, penalties and an injunction against the sale of companion animals in the Company's San Francisco stores. The complaint and related news reports have caused negative publicity in San Francisco and the surrounding area. The Company takes seriously any allegations regarding the proper care of companion animals and has taken steps to reiterate to all associates the importance of proper care for all companion animals in all stores. The Company is responding to the complaint and is defending it vigorously. The complaint and any similar actions which could be filed in the future could cause negative publicity which could have a material adverse effect on the Company's results of operations.

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

Note 7—Supplemental Guarantor Condensed Consolidating Financial Statements

In October 2001, the Company issued $200 million in principal amount of its 10.75% senior subordinated notes due 2011 under which certain of its subsidiaries (the guarantor subsidiaries) serve as guarantors on a full and unconditional basis. Certain other subsidiaries (the non-guarantor subsidiaries) will not guarantee such debt. In March 2002, the Company repurchased $30 million in aggregate principal amount of these notes.

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

PETCO ANIMAL SUPPLIES, INC.

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
November 2, 2002
(unaudited, in thousands)

			PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
ASSETS
Current assets:
	Cash and cash equivalents		$	43,985		$	678		$	—	$	—		$	44,663
	Receivables			3,893			8,765			—		—			12,658
	Inventories			134,948			9,907			—		—			144,855
	Deferred tax assets			9,474			—			—		—			9,474
	Other			11,035			25			—		—			11,060

		Total current assets		203,335			19,375			—		—			222,710
Fixed assets, net				198,086			20,269			—		—			218,355
Debt issuance costs				6,099			—			—		—			6,099
Goodwill				—			40,644			—		—			40,644
Intercompany investments and advances				200,084			55,180			—		(255,264	)		—
Other assets				6,339			—			—		—			6,339

			$	613,943		$	135,468		$	—	$	(255,264	)	$	494,147

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	(5,214	)	$	57,223		$	—	$	—		$	52,009
	Intercompany payables			184,126			(184,126	)		—		—			—
	Accrued expenses			37,478			7,795			—		—			45,273
	Accrued interest			871			—			—		—			871
	Accrued salaries and employee benefits			35,399			795			—		—			36,194
	Current portion of long-term debt			2,000			—			—		—			2,000
	Current portion of capital lease and other obligations			451			—			—		—			451

		Total current liabilities		255,111			(118,313	)		—		—			136,798
Long-term debt, excluding current portion				191,000			—			—		—			191,000
Senior subordinated notes payable				170,000			—			—		—			170,000
Capital lease and other obligations, excluding current portion				2,018			—			—		—			2,018
Accrued store closing costs				2,259			—			—		—			2,259
Deferred tax liability				6,219			—			—		—			6,219
Deferred rent and other liabilities				16,399			566			—		—			16,965

Total liabilities				643,006			(117,747	)		—		—			525,259
Stockholders' equity (deficit)				(29,063	)		253,215			—		(255,264	)		(31,112	)

			$	613,943		$	135,468		$	—	$	(255,264	)	$	494,147

PETCO ANIMAL SUPPLIES, INC.

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
February 2, 2002
(unaudited, in thousands)

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

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

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

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

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

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

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

PETCO ANIMAL SUPPLIES, INC.

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the thirteen weeks ended November 2, 2002
(unaudited, in thousands)

			PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Net sales			$	338,943		$	251,023	$	—	$	(222,436	)	$	367,530
Cost of sales and occupancy costs				237,793			214,873		—		(199,413	)		253,253

	Gross profit			101,150			36,150		—		(23,023	)		114,277
Selling, general and administrative expenses				83,739			25,744		—		(23,023	)		86,460

	Operating income			17,411			10,406		—		—			27,817
Interest income				(239	)		—		—		—			(239	)
Interest expense				8,374			—		—		—			8,374

	Earnings before income taxes			9,276			10,406		—		—			19,682
Income taxes				7,676			—		—		—			7,676

	Earnings before equity in earnings of subsidiaries			1,600			10,406		—		—			12,006
Equity in earnings of subsidiaries				10,406			—		—		(10,406	)		—

		Net earnings	$	12,006		$	10,406	$	—	$	(10,406	)	$	12,006

PETCO ANIMAL SUPPLIES, INC.

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the thirty-nine weeks ended November 2, 2002
(unaudited, in thousands)

				PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Net sales				$	984,615		$	711,057	$	—	$	(624,461	)	$	1,071,211
Cost of sales and occupancy costs					697,992			602,893		—		(556,074	)		744,811

	Gross profit				286,623			108,164		—		(68,387	)		326,400
Selling, general and administrative expenses					249,437			71,290		—		(68,387	)		252,340
Management fees and termination costs					12,760			—		—		—			12,760
Stock-based compensation and other costs					8,176			—		—		—			8,176

		Operating income			16,250			36,874		—		—			53,124
Interest income					(548	)		—		—		—			(548	)
Interest expense					25,816			—		—		—			25,816

		Earnings (loss) before income taxes extraordinary item			(9,018	)		36,874		—		—			27,856
Income taxes					13,143			—		—		—			13,143

		Earnings (loss) before extraordinary item			(22,161	)		36,874		—		—			14,713
Extraordinary item—loss on early extinguishment of debt (net of income tax benefit of $1,332)					(2,004	)		—		—		—			(2,004	)

		Earnings (loss) before equity in earnings of subsidiaries			(24,165	)		36,874		—		—			12,709
Equity in earnings of subsidiaries					36,874			—		—		(36,874	)		—

			Net earnings	$	12,709		$	36,874	$	—	$	(36,874	)	$	12,709

PETCO ANIMAL SUPPLIES, INC.

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the thirteen weeks ended November 3, 2001

(unaudited, in thousands)

		PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Net sales		$	297,177		$	229,692	$	—		$	(204,016	)	$	322,853
Cost of sales and occupancy costs			207,268			201,715		—			(182,806	)		226,177

	Gross profit		89,909			27,977		—			(21,210	)		96,676
Selling, general and administrative expenses			78,207			19,745		(2	)		(21,210	)		76,740
Management fees and termination costs			780			—		—			—			780
Stock-based compensation and other costs			4,708			—		—			—			4,708

	Operating income		6,214			8,232		2			—			14,448
Interest income			(179	)		—		—			—			(179	)
Interest expense			10,016			—		2			—			10,018

	Earnings (loss) before equity in loss of unconsolidated affiliate, income taxes and extraordinary item		(3,623	)		8,232		—			—			4,609
Equity in loss of unconsolidated affiliate			—			—		(865	)		—			(865	)

	Earnings (loss) before income taxes and extraordinary item		(3,623	)		8,232		(865	)		—			3,744
Income taxes			1,562			—		—			—			1,562

	Earnings (loss) before extraordinary Item		(5,185	)		8,232		(865	)		—			2,182
Extraordinary item—loss on early extinguishment of debt (net of income tax benefit of $7,888)			(12,942	)		—		—			—			(12,942	)

	Earnings (loss) before equity in earnings of subsidiaries		(18,127	)		8,232		(865	)		—			(10,760	)
Equity in earnings of subsidiaries			7,367			—		—			(7,367	)		—

	Net earnings (loss)	$	(10,760	)	$	8,232	$	(865	)	$	(7,367	)	$	(10,760	)

PETCO ANIMAL SUPPLIES, INC.

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the thirty-nine weeks ended November 3, 2001

(unaudited, in thousands)

		PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Net sales		$	859,449		$	636,595	$	—		$	(558,795	)	$	937,249
Cost of sales and occupancy costs			616,430			544,647		—			(498,463	)		662,614

	Gross profit		243,019			91,948		—			(60,332	)		274,635
Selling, general and administrative expenses			218,212			64,587		94			(60,332	)		222,561
Management fees and termination costs			2,340			—		—			—			2,340
Stock-based compensation and other costs			12,292			—		—			—			12,292
Merger and non-recurring costs			445			—		—			—			445

	Operating income (loss)		9,730			27,361		(94	)		—			36,997
Interest income			(492	)		—		—			—			(492	)
Interest expense			32,035			—		2			—			32,037

	Earnings (loss) before equity in loss of unconsolidated affiliate, income taxes and extraordinary item		(21,813	)		27,361		(96	)		—			5,452
Equity in loss of unconsolidated affiliate			—			—		(2,505	)		—			(2,505	)

	Earnings (loss) before income taxes and extraordinary item		(21,813	)		27,361		(2,601	)		—			2,947
Income taxes			1,895			—		—			—			1,895

	Earnings (loss) before extraordinary item		(23,708	)		27,361		(2,601	)		—			1,052
Extraordinary item—loss on early extinguishment of debt (net of income tax benefit of $7,888)			(12,942	)		—		—			—			(12,942	)

	Earnings (loss) before equity in earnings of subsidiaries		(36,650	)		27,361		(2,601	)		—			(11,890	)
Equity in earnings of subsidiaries			24,760			—		—			(24,760	)		—

	Net earnings (loss)	$	(11,890	)	$	27,361	$	(2,601	)	$	(24,760	)	$	(11,890	)

PETCO ANIMAL SUPPLIES, INC.

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the thirty-nine weeks ended November 2, 2002

(unaudited, in thousands)

			PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Cash flows from operating activities:
	Net earnings		$	12,709		$	36,873		$	—	$	(36,873	)	$	12,709
Adjustments to reconcile net earnings to net cash provided by operating activities				42,700			(35,667	)		—		36,873			43,906

		Net cash provided by operating activities		55,409			1,206			—		—			56,615

Cash flows from investing activities:
	Additions to fixed assets			(43,619	)		(743	)		—		—			(44,362	)

		Net cash used in investing activities		(43,619	)		(743	)		—		—			(44,362	)

Cash flows from financing activities:
	Repayment of long term debt agreements			(31,500	)		—			—		—			(31,500	)
	Debt issuance costs			(1,465	)		—			—		—			(1,465	)
	Repayment of capital lease and other obligations			(4,188	)		—			—		—			(4,188	)
	Net proceeds from the issuance of common stock			273,117			—			—		—			273,117
	Redemption of Series A senior redeemable preferred stock			(142,231	)		—			—		—			(142,231	)
	Redemption of Series B junior redeemable preferred stock			(97,538	)		—			—		—			(97,538	)

		Net cash used in financing activities		(3,805	)		—			—		—			(3,805	)

Net increase in cash and cash equivalents				7,985			463			—		—			8,448
Cash and cash equivalents at the beginning of the period				36,000			215			—		—			36,215

Cash and cash equivalents at the end of the period			$	43,985		$	678		$	—	$	—		$	44,663

PETCO ANIMAL SUPPLIES, INC.

CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the thirty-nine weeks ended November 3, 2001

(unaudited, in thousands)

			PETCO Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			PETCO Animal Supplies, Inc. and Subsidiaries
Cash flows from operating activities:
	Net earnings (loss)		$	(11,890	)	$	27,361		$	(2,601	)	$	(24,760	)	$	(11,890	)
Adjustments to reconcile net earnings to net cash provided by operating activities				33,821			(25,289	)		11,694			24,760			44,986

		Net cash provided by operating activities		21,931			2,072			9,093			—			33,096

Cash flows from investing activities:
	Additions to fixed assets			(36,611	)		(2,598	)		—			—			(39,209	)
	Investment in affiliate			—			—			(9,093	)		—			(9,093	)

		Net cash used in investing activities		(36,611	)		(2,598	)		(9,093	)		—			(48,302	)

Cash flows from financing activities:
	Borrowings under long-term debt agreements			215,650			—			—			—			215,650
	Repayment of long term debt agreements			(209,650	)		—			—			—			(209,650	)
	Debt issuance costs			(934	)		—			—			—			(934	)
	Repayment of capital lease and other obligations			(4,863	)		—			—			—			(4,863	)
	Net proceeds from the issuance of common stock			23			—			—			—			23

		Net cash provided by financing activities		226			—			—			—			226

Net decrease in cash and cash equivalents				(14,454	)		(526	)		—			—			(14,980	)
Cash and cash equivalents at the beginning of the period				17,104			940			—			—			18,044

Cash and cash equivalents at the end of the period			$	2,650		$	414		$	—		$	—		$	3,064

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

General

PETCO is a leading specialty retailer of premium pet food, supplies and services. At November 2, 2002, we operated 600 stores in 43 states and the District of Columbia. We plan to follow a strategy of opening new superstores in new and existing markets, expanding or relocating certain existing stores and closing under-performing stores. Since the middle of fiscal 2001, all new stores have been opened in our new millennium format. As a result of our store expansion strategy, operating results may reflect lower average store contribution and operating margins due to increased store pre-opening expenses and lower anticipated sales volumes of newer stores.

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

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

Results of Operations

Third Quarter 2002 Compared with Third Quarter 2001

Net sales increased 13.8% to $367.5 million for the thirteen weeks ended November 2, 2002 from $322.9 million for the thirteen weeks ended November 3, 2001. The increase in net sales resulted primarily from the comparable store net sales increase of 8.3% and the addition of 64 superstores, partially offset by the closing of 24 stores, of which 17 were relocated. The comparable store net sales increase was attributable to maturing superstores, increased marketing and merchandising efforts and increased customer traffic. The increase in comparable store net sales accounted for approximately $26.4 million, or 59.2%, of the net sales increase. The net increase in our store base accounted for approximately $18.2 million, or 40.8%, of the net sales increase.

Gross profit, defined as net sales less cost of sales including store occupancy costs, increased $17.6 million, or 18.2%, to $114.3 million from $96.7 million in the prior year quarter. The prior year quarter included $1.0 million in non-cash stock-based compensation expense on the deemed fair value of our common stock as a result of our initial public offering. Gross profit, excluding the non-cash stock-based compensation expense, as a percentage of net sales increased to 31.1% for the third quarter of 2002 from 30.2% in the prior year quarter. The increase was primarily driven by the continuing change in mix from lower-margin premium pet food sales to higher margin categories, such as companion animals, toys, supplies and services, favorable shrink results, leverage of occupancy and additional efficiencies in distribution logistics and freight costs for the quarter.

Selling, general and administrative expenses increased to $86.5 million in the third quarter of 2002 from $76.7 million in the prior year quarter. As a percentage of net sales, these expenses decreased to 23.6% in the third quarter from 23.8% in the prior year quarter. Increased investments in store associate training and pre-opening costs, increased fees to process debit and credit cards, and increased insurance, medical, dental, legal and travel costs mostly offset the leverage of the adoption of Statement of Financial Accounting Standards, or SFAS, No. 142 which eliminated goodwill amortization and resulted in $0.8 million of benefit to net earnings.

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

Non-cash stock-based compensation in the prior year quarter was $5.7 million and was based on the deemed fair value of our common stock as a result of our initial public offering.

Operating income in the third quarter of 2002 increased to $27.8 million, or 7.6% of net sales, from $14.4 million, or 4.5% of net sales, in the prior year quarter. Excluding the management fees and stock-based compensation totaling $6.5 million in the prior year quarter, we would have reported an increase of $6.9 million, or 33.1%, over the prior year quarter of $20.9 million.

Net interest expense was $8.1 million for the third quarter of 2002, compared with $9.8 million in the prior year quarter. Lower debt levels and decreased interest rates, as a result of the amendment and restatement of our senior credit facility in October 2001, the repurchase of $30 million of our senior subordinated notes in the first quarter of 2002 and the refinancing of our senior credit facility in August 2002 contributed to the reduction in interest expense.

We recognized $0.9 million of equity in loss of unconsolidated affiliate in the prior year third quarter from our former limited partner interest in a limited partnership which operated retail pet food and supplies stores in Canada. We accounted for our investment in the limited partnership using the equity method, as we did not exercise control over the limited partnership, and we recorded our proportionate share of earnings or loss according to the partnership agreement.

Income taxes for the third quarter of 2002 were $7.7 million, compared with $1.6 million in the prior year quarter. Our effective tax rate for the quarter was 39.0%. In the prior year quarter, we did not recognize any tax benefit for our equity in loss of unconsolidated affiliate. Our effective tax rate, before equity in loss of unconsolidated affiliate, was 38.7%.

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

Net earnings available to common stockholders increased to $12.0 million, or $0.21 per diluted share, for the third quarter of 2002, compared to a net loss of $17.7 million, or a $0.46 loss per diluted share, for the prior year quarter. The third quarter of 2001 included the following: a $5.7 million stock-based compensation expense related to our initial public offering; management fees of $0.8 million; equity in loss of unconsolidated affiliate of $0.9 million; loss on the early extinguishment of debt of $12.9 million; and, an increase in the carrying amount of previously outstanding preferred stock of $7.0 million. Excluding the previously mentioned items, the third quarter net earnings for the prior year would have been $6.8 million, or $0.12 per diluted share.

Thirty-nine Weeks Ended November 2, 2002 Compared with Thirty-nine Weeks Ended November 3, 2001

Net sales increased 14.3% to $1.1 billion for the thirty-nine weeks ended November 2, 2002 from $937.2 million for the thirty-nine weeks ended November 3, 2001. The increase in net sales resulted primarily from the comparable store net sales increase of 8.7% and the addition of 64 superstores, partially offset by the closing of 24 stores, of which 17 were relocated. The comparable store net sales increase was attributable to maturing superstores, increased marketing and merchandising efforts and increased customer traffic. The increase in comparable store net sales accounted for approximately $81.0 million, or 60.4%, of the net sales increase. The net increase in our store base accounted for approximately $53.0 million, or 39.6%, of the net sales increase.

Gross profit increased $51.8 million, or 18.8%, to $326.4 million in the thirty-nine weeks ended November 2, 2002 from $274.6 million in the prior year period. Gross profit included $1.5 million in non-cash stock-based compensation expense on the deemed fair value of our common stock as a result of our initial public offering for the thirty-nine weeks ended November 2, 2002 compared to $2.6 million in the prior year period. Gross profit, excluding the non-cash stock-based compensation expense, as a percentage of net sales increased to 30.6% for the thirty-nine weeks ended November 2, 2002 from 29.6% in the prior year period. The increase was driven by the continuing change in mix from lower-margin premium pet food sales to higher margin categories, such as companion animals, toys, supplies and services, favorable shrink results and improved margins on premium pet food due to shifts within the mix of pet food to higher margin segments. The current year period also benefited from the leveraging of occupancy and efficiencies in distribution logistics and freight costs for the period.

Selling, general and administrative expenses increased to $252.3 million in the thirty-nine weeks ended November 2, 2002 from $222.6 million in the prior year period. As a percentage of net sales, these expenses decreased to 23.6% in the period from 23.8% in the prior year period. Increased investments in store associate training and pre-opening costs, increased fees to process debt and credit cards, and increased insurance, medical, dental, legal and travel costs offset the benefit from the elimination of goodwill amortization and the leverage of store operating costs. The adoption of SFAS No. 142 resulted in the recognition of goodwill impairment of $0.2 million net of related tax benefit in the second quarter of 2002, which offset some of the $2.3 million benefit net of related tax impact from the elimination of goodwill amortization.

Management fees and termination costs were $12.8 million for the thirty-nine weeks ended November 2, 2002, compared to management fees of $2.3 million in the prior year period. We paid $12.5 million in termination costs in February 2002 to terminate the management services agreement that we entered into in conjunction with our leveraged recapitalization.

Non-cash stock-based compensation increased to $8.4 million for the thirty-nine weeks ended November 2, 2002 from $14.8 million in the prior year period. These expenses were based on the deemed fair value of our common stock as a result of our initial public offering.

Operating income for the thirty-nine weeks ended November 2, 2002 increased to $53.1 million, or 5.0% of net sales, from $37.0 million, or 4.0% of net sales, in the prior year period. Excluding the management fees and termination costs and stock-based compensation and other costs of $22.4 million for the thirty-nine weeks ended November 2, 2002 and $17.6 million in the prior year period, we would have reported operating income of $75.5 million in the thirty-nine weeks ended November 2, 2002, an increase of $20.9 million, or 38.2%, over the prior year period of $54.6 million.

Net interest expense was $25.3 million for the thirty-nine weeks ended November 2, 2002, compared with $31.5 million in the prior year period. Lower debt levels and decreased interest rates, as a result of the refinancing of our senior subordinated notes and the amendment and restatement of our

senior credit facility, both in October 2001, the repurchase of $30 million of our senior subordinated notes in the first quarter of 2002 and the refinancing of our senior credit facility in August 2002, contributed to the reduction in interest expense.

We recognized $2.5 million of equity in loss of unconsolidated affiliate in the prior year thirty-nine week period from our former limited partner interest in a limited partnership which operated retail pet food and supplies stores in Canada. We accounted for our investment in the limited partnership using the equity method, as we did not exercise control over the limited partnership, and we recorded our proportionate share of earnings or loss according to the partnership agreement.

Income taxes for the thirty-nine weeks ended November 2, 2002 were $13.1 million, compared with $1.9 million in the prior year period. Our effective tax rate for the period, before transactions related to our initial public offering and the use of proceeds thereof, was 39.0%. In the prior year period, we did not recognize any tax benefit for our equity in loss of unconsolidated affiliate. Our effective tax rate, before equity in loss of unconsolidated affiliate, was 38.7%.

Net loss available to common stockholders increased to $7.8 million, or a $0.14 loss per diluted share, for the thirty-nine weeks ended November 2, 2002, compared to a net loss of $32.4 million, or an $0.84 loss per diluted share, for the prior year period. We completed an initial public offering in the first quarter of fiscal 2002 and our results include the following items: $12.8 million in management fees and termination costs related to the termination in February 2002 of a management services agreement; $8.4 million in stock-based compensation expense and other primarily financing and legal costs of $1.2 million related to our initial public offering; an extraordinary loss, net of related tax benefit, of $2.0 million related to the early repurchase of our senior subordinated notes with proceeds of the offering; and, an increase in the carrying amount and premium on redemption of previously outstanding preferred stock of $20.5 million. The prior year period included the following: stock-based compensation expense of $14.8 million related to our initial public offering; management fees of $2.3 million; equity in loss of unconsolidated affiliate of $2.5 million; merger and non-recurring costs of $0.4 million and, an increase in the carrying amount of previously outstanding preferred stock of $20.5 million. Excluding the previously mentioned items and related tax effects, net earnings available to common stockholders for the thirty-nine weeks ended November 2, 2002 increased to $30.7 million, or $0.53 per diluted share, compared to $14.2 million, or $0.25 per diluted share, in the prior year period.

Liquidity and Capital Resources

We have financed our operations and expansion program through internal cash flow, external borrowings and the sale of equity securities. At November 2, 2002, total assets were $494.1 million, $222.7 million of which were current assets. Net cash provided by operating activities was $56.6 million for the thirty-nine weeks ended November 2, 2002, compared with $33.1 million provided by operations for the prior year period. Our sales are substantially on a cash basis. Therefore, cash flow generated from operating stores provides a significant source of liquidity. We use operating cash principally to make interest payments on our debt and to purchase inventory. A portion of the inventory we purchase is financed through vendor credit terms. We have been highly leveraged since our leveraged

recapitalization in October 2000, and we use cash generated from operating activities to service the increased debt levels.

We use cash in investing activities to purchase fixed assets for new stores, to acquire stores and, to a lesser extent, to purchase warehouse and office fixtures, equipment and computer hardware and software in support of our distribution and administrative functions. We invested $9.1 million in the thirty-nine weeks ended November 3, 2001 in a limited partnership that operated retail pet food and supplies stores in Canada in which we formerly had a limited partnership interest. Total cash used in investing activities was $44.4 million for the thirty-nine weeks ended November 2, 2002 and $48.3 million for the prior year period.

We have preliminary plans to remodel 25 to 50 existing stores with features of our new millennium store format next year. This remodel program would be in addition to our plans to open new stores.

We have also financed some of our purchases of equipment and fixtures through capital lease and other obligations in the past. No purchases of fixed assets were financed in this manner during the thirty-nine weeks ended November 3, 2001 or November 2, 2002.

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

Our primary long-term capital requirement is funding for the opening or acquisition of stores. Cash flows used in financing activities were $3.8 million in the thirty-nine weeks ended November 2, 2002 compared with cash flows provided by financing activities of $0.2 million in the thirty-nine weeks ended November 3, 2001. In the thirty-nine weeks ended November 2, 2002, net proceeds of $273.1 million were generated from sales of common stock. In the thirty-nine weeks ended November 2, 2002, we used $239.8 million to redeem our series A senior preferred stock and our series B junior preferred stock and approximately $32.4 million, plus approximately $2.1 million in cash-on-hand, to repurchase $30.0 million in aggregate principal amount of our senior subordinated notes at 110.5% of their face amount plus accrued interest, leaving $170.0 million outstanding of 10.75% 10-year senior subordinated notes originally issued in October 2001. Remaining cash flows provided by financing activities consisted of borrowings under long-term debt agreements, net of repayment of long-term debt agreements and other obligations. Cash flows from financing activities were used to fund our expansion program and working capital requirements.

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

As a result of the refinancing, the senior credit facility now consists of a $75.0 million revolving credit facility and a $193.5 million term loan C facility for a total commitment of $268.5 million. Borrowings under the senior credit facility are secured by substantially all of our assets and bear interest (1) in the case of the revolving facility, at our option, at the agent bank's base rate plus a margin of up to 2.25%, or LIBOR plus a margin of up to 3.25%, based on our leverage ratio at the time, and (2) in the case of the term loan C facility, at our option, at the agent bank's base rate plus a fixed margin of 2.0%, or LIBOR plus a fixed margin of 3.0%. The credit agreement contains certain

affirmative and negative covenants related to, among other things, indebtedness, interest and fixed charges coverage and consolidated net worth. We were in full compliance with all of these covenants at November 2, 2002. At November 2, 2002, the outstanding balance of our term C loan facility was $193.0 million and there were no borrowings on our revolving credit facility.

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to our operations result primarily from changes in short-term London Interbank Offered Rates, or LIBOR, as our senior credit facility utilizes a portfolio of short-term LIBOR contracts. These LIBOR contracts are fixed rate instruments for a period of between one and six months, at our discretion. Our portfolio of LIBOR contracts vary in length and interest rate, such that adverse changes in short-term interest rates could affect our overall borrowing rate when contracts are renewed. We have entered into a $75.0 million interest rate collar agreement, or hedge, to limit our exposure to the interest rate risk associated with our variable rate debt. Changes in the intrinsic value of the hedge are recorded as accumulated other comprehensive income (loss). Amounts received or paid under the hedge are recorded as reductions of or additions to interest expense. We had a cumulative deferred loss on our hedge of $0.3 million, net of deferred tax benefit of $0.2 million, at November 2, 2002.

Of the total $193 million in debt under our senior credit facility as of November 2, 2002, after giving effect to the hedge, $118 million was subject to variable interest rate fluctuations. Based on this debt level, and taking into account the hedge, a hypothetical 10% increase in LIBOR from the applicable rate at November 2, 2002 would increase net interest expense by approximately $0.05 million on a quarterly basis, and likewise would decrease both earnings and cash flows for that quarterly period by a corresponding amount. We cannot predict market fluctuations in interest rates and their impact on debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable rates, if at all. Consequently, future results may differ materially from estimated results due to adverse changes in interest rates or debt availability.

We did not have any material foreign exchange or other significant market risk at November 2, 2002.

Item 4. Controls and Procedures

As of November 2, 2002, an evaluation was performed under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of November 2, 2002. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to November 2, 2002.

Part II. Other Information

Item 1. Legal Proceedings

In July 2001, two former employees instituted an action against us in the Superior Court of California for the County of Los Angeles. The complaint in the action was filed individually and on behalf of a purported class consisting of all current and former employees who worked as salaried managers or assistant managers in our stores in the state of California at any time between July 30, 1997 and the present. The complaint alleges that the individual plaintiffs and the purported class members worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law, and that they were classified as "exempt" store management employees but were forced to work more than 50% of their time in non-exempt tasks. The complaint alleges violations of the California Labor Code and the California Business and Professions Code. The relief sought includes compensatory damages, penalties, preliminary and permanent injunctions requiring us to pay overtime compensation under California law, prejudgment interest, costs and attorneys' fees and such other relief as the court deems proper. In November 2001, the case was transferred to the Superior Court of California for the County of San Diego. We have answered the complaint and are vigorously defending the action. A motion for certification of this action as a class action was filed on November 1, 2002. We have filed a written opposition to the motion for class certification. A ruling is expected within the next 60 days. If successful, this litigation could have a material adverse effect on our financial condition, and any required change in our labor practices could have a negative impact on our results of operations.

Recently, allegations have been made in a complaint filed in the San Francisco Superior Court by the San Francisco City Attorney's office to the effect that certain PETCO associates have not properly cared for companion animals for sale in our two San Francisco stores. The complaint which has been subsequently transferred to the Santa Clara Superior Court seeks damages, penalties and an injunction against the sale of companion animals in our San Francisco stores. The complaint and related news reports have caused negative publicity in San Francisco and the surrounding area. We take seriously any allegations regarding the proper care of companion animals and have taken steps to reiterate to all associates the importance of proper care for all companion animals in all stores. We are responding to the complaint and are defending it vigorously. The complaint and any similar actions which could be filed in the future could cause negative publicity which could have a material adverse effect on our results of operations.

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

Item 5. Other Information

Certain Cautionary Statements

Certain statements in this Quarterly Report on Form 10-Q, including, but not limited to, Part I, Item 2—"Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that are not historical facts but rather reflect current expectations concerning future results and events. We generally identify forward-looking statements in this Quarterly Report using words such as "believe," "intend," "target," "expect," "estimate," "may," "should," "plan," "project," "contemplate," "anticipate," "predict" or similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking

statements. These factors, such as performance of new superstores, ability to execute expansion strategy and sustain growth, debt levels, reliance on vendors and exclusive distribution arrangements, competition, integration of operations as a result of acquisitions, compliance with various state and local regulations and dependence on senior management, are discussed from time to time in the reports we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K, as amended, for the fiscal year ended February 2, 2002.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

On September 5, 2002, the Company filed a report on Form 8-K in connection with the filing of its Quarterly Report on Form 10-Q for the quarterly period ended August 3, 2002, in order to provide the Securities and Exchange Commission the certifications, as required by 18 U.S.C. § 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		PETCO ANIMAL SUPPLIES, INC.
		By:	/s/ BRIAN K. DEVINE Brian K. Devine Chairman, President and Chief Executive Officer

By:

/s/ JAMES M. MYERS

James M. Myers
Executive Vice President and
Chief Financial Officer

Date: November 27, 2002

Certifications

I, Brian K. Devine, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of PETCO Animal Supplies, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 27, 2002

/s/ BRIAN K. DEVINE

Chief Executive Officer

I, James M. Myers, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of PETCO Animal Supplies, Inc.;

2.

3.

4.

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 27, 2002

/s/ JAMES M. MYERS

Chief Financial Officer

QuickLinks

INDEX
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING GUARANTOR, NON–GUARANTOR AND PARENT COMPANY BALANCE SHEET November 2, 2002
CONDENSED CONSOLIDATING GUARANTOR, NON–GUARANTOR AND PARENT COMPANY BALANCE SHEET February 2, 2001
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND PARENT COMPANY STATEMENT OF OPERATIONS For the thirteen weeks ended November 3, 2001
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND PARENT COMPANY STATEMENT OF OPERATIONS For the thirty-nine weeks ended November 3, 2001
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND PARENT COMPANY STATEMENT OF CASH FLOWS For the thirty-nine weeks ended November 2, 2002
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND PARENT COMPANY STATEMENT OF CASH FLOWS For the thirty-nine weeks ended November 3, 2001

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Part II. Other Information

Item 1. Legal Proceedings

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signatures
Certifications