<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
APRIL 28, 1996
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
PETsMART, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3024325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10000 N. 31ST AVENUE, SUITE C-100
PHOENIX, ARIZONA 85051
(Address of principal executive offices, including Zip Code)
(602) 944-7070
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
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.
(1) Yes (X) No ( )
(2) Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
COMMON STOCK, $.0001 PAR VALUE, 52,031,400 SHARES AT MAY 31, 1996
1
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PETsMART, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
April 28, 1996 and January 28, 1996 3
Consolidated Statements of Operations
for the thirteen weeks ended
April 28, 1996 and April 30, 1995 4
Consolidated Statements of Cash Flows
for the thirteen weeks ended
April 28, 1996 and April 30, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
2
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PETsMART, INC. AND SUBSIDIARIES
______________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
April 28, January 28,
1996 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 51,752 $ 74,540
Receivables 30,032 31,236
Merchandise inventories 209,238 201,574
Prepaid expenses and other current assets 19,173 11,898
----------- ----------
Total current assets 310,195 319,248
Property held for sale and leaseback 8,465 10,126
Property and equipment, net 165,090 163,067
Other assets 35,556 36,250
----------- ----------
Total assets $519,306 $528,691
----------- ----------
----------- ----------
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Notes payable to bank $ 35,125 $ 22,248
Accounts payable 93,010 110,678
Accrued payroll and employee benefits 10,242 15,321
Accrued occupancy expense 8,066 7,546
Other accrued expenses 21,603 25,046
Current maturities of capital leases 7,900 8,953
----------- ----------
Total current liabilities 175,946 189,792
Capital lease obligations 55,805 56,143
Deferred rents 11,175 11,316
Other liabilities 125 1,227
----------- ----------
Total liabilities 243,051 258,478
----------- ----------
Preferred stock, common stock and other stockholders'
equity:
Preferred stock (Note 7) -- 6,510
Common stock; $.0001 par value; 75,000 shares authorized,
51,615 and 50,975 shares issued and outstanding 5 5
Additional paid-in capital 301,916 290,289
Cumulative foreign currency translation adjustments (42) (42)
Accumulated deficit (25,624) (26,549)
----------- ----------
Total preferred stock, common stock and other
stockholders' equity 276,255 270,213
----------- ----------
Total liabilities, preferred stock, common stock and
other stockholders' equity $519,306 $528,691
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of
these unaudited financial statements.
3
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
______________________________________________________________________________
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the 13 weeks ended
April 28, April 30,
1996 1995
--------- ---------
<S> <C> <C>
Net sales $ 310,200 $ 251,589
Cost of sales 225,103 189,219
--------- ---------
Gross profit 85,097 62,370
Store operating expenses 62,457 50,852
Store preopening expenses 2,037 667
General and administrative expenses 8,687 8,904
Merger and nonrecurring costs 8,064 --
--------- ---------
Operating income 3,852 1,947
Interest income 158 382
Interest expense 1,839 2,048
--------- ---------
Income before income taxes 2,171 281
Income tax expense 1,246 2,252
--------- ---------
Net income (loss) 925 (1,971)
Accretion of redeemable preferred stock -- (498)
--------- ---------
Net income (loss) applicable to holders of
common stock $ 925 $ (2,469)
--------- ---------
--------- ---------
Income (loss) per common share
and common share equivalent $ 0.02 $ (0.05)
--------- ---------
--------- ---------
Weighted average number of common and common
equivalent shares outstanding 53,857 50,359
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of
these unaudited financial statements.
4
<PAGE>
PETSMART, INC. AND SUBSIDIARIES
______________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the 13 Weeks Ended
April 28, April 30,
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 925 $ (1,971)
Adjustments to reconcile net income (loss) to
net cash from (used in) operating activities:
Depreciation and amortization 6,203 5,600
Loss on disposal of assets 87 --
Changes in assets and liabilities:
Receivables 1,204 1,988
Merchandise inventories (7,664) 1,141
Prepaid expenses and other current assets (7,275) (2,541)
Other assets 2,035 1,033
Accounts payable (17,668) 3,649
Accrued payroll and employee benefits (5,079) (5,296)
Accrued occupancy expense 520 (2,299)
Other accrued expenses (3,443) (966)
Deferred rents (141) 682
Other liabilities (1,102) (971)
----------- ----------
Net income from (used in) operating activities (31,398) 49
----------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of leaseholds, fixtures and equipment (6,584) (6,672)
Purchases of property held for sale and leaseback (3,990) (3,345)
Purchases of investments -- 2,960
Proceeds from sale of property 5,651 --
----------- ----------
Net cash from (used in) investing activities (4,923) (7,057)
----------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 3,017 1,001
Borrowings from bank credit facility 71,000 6,383
Payments on bank credit facility (58,123) (4,510)
Tax benefit of exercise of stock options 759 562
Payment on capital lease obligations (3,120) (1,308)
----------- ----------
Net cash from (used in) financing activities 13,533 2,128
----------- ----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES) -- (45)
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,788) (4,925)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 74,540 84,746
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,752 $ 79,821
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of
these unaudited financial statements.
5
<PAGE>
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 28, 1996 AND APRIL 30, 1995
_______________________________________________________________________________
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements of PETsMART, Inc.
and Subsidiaries ("PETsMART" or "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for financial
statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included.
Because of the seasonal nature of the Company's business, the results of
operations for the thirteen weeks ended April 28, 1996 and April 30, 1995 are
not necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements and footnotes thereto for
the fiscal year ended January 28, 1996, included in the Company's Annual Report
on Form 10-K (File No. 0-21888) filed with the Securities and Exchange
Commission on April 12, 1996.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
PETsMART and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been 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, 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") and the January 1996 merger with State
Line Tack, Inc. ("State Line Tack"), all of which have been accounted for as
poolings of interest. The consolidated financial statements have been prepared
by combining the historical financial statements of PETsMART, PETZAZZ,Sporting
Dog, Petstuff, Pet Food Giant and State Line Tack.
NOTE 3 - ACCOUNTING CHANGE
During the quarter ended April 30, 1995, PETsMART adopted Accounting Standards
Executive Committee Statement of Position 93-7, "Reporting on Advertising Costs"
("SOP 93-7"). Under SOP 93-7 the Company is required to expense advertising
costs for other than direct-response advertising either as incurred or the first
time the advertising takes place. As a result of the adoption of SOP 93-7, the
Company charged to operations during the quarter ended April 30, 1995 previously
deferred advertising costs of approximately $450,000.
NOTE 4 - STOCK SPLIT
On May 1, 1995, the Company effected a 3-for-2 split of its common stock in
the form of a stock dividend to stockholders of record on April 17, 1995. All
share and per share data has been restated to reflect the stock split effected
in the form of a stock dividend.
6
<PAGE>
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 28, 1996 AND APRIL 30, 1995
_______________________________________________________________________________
NOTE 5 - 1995 ACQUISITIONS
SPORTING DOG SPECIALTIES, INC.
On May 16, 1995 the Company acquired all of the outstanding equity securities
of Sporting Dog Specialties, Inc. and its affiliates ("Sporting Dog") for an
aggregate consideration of 1,875,000 shares of PETsMART Common Stock.
Sporting Dog, a Rochester, New York based company, is the leading world-wide
catalog retailer of pet and animal supplies and accessories. The transaction
was accounted for by the pooling of interests method; therefore, prior
financial statements have been restated to reflect this merger.
As a result of the acquisition, the Company recorded merger and related non-
recurring charges of $1.8 million in its fiscal quarter ended July 30, 1995.
This one-time charge included legal and accounting fees, a provision for
closure of inadequate facilities and other costs of consolidation.
PETSTUFF, INC.
On June 1, 1995, the Company acquired all of the outstanding equity securities
of Petstuff, Inc. ("Petstuff") for an aggregate consideration of 4,016,089
shares of PETsMART Common Stock, plus an additional 158,769 shares of PETsMART
Common Stock reserved for issuance upon exercise of Petstuff Stock options
assumed in the merger. Petstuff was an Atlanta, Georgia based operator of pet
food and supply superstores in the Eastern United States and Canada. The
transaction was accounted for by the pooling of interests method; therefore,
prior financial statements have been restated to reflect this merger.
As a result of the acquisition, the Company recorded merger and related non-
recurring charges of $38.9 million in its fiscal quarter ended July 30, 1995.
This one-time charge included legal and accounting fees, costs associated with
reformatting, refixturing and remerchandising the acquired superstores to the
format consistent with that of a PETsMART superstore, a provision for the
closure of redundant and non-productive superstores and other costs of
integration.
THE PET FOOD GIANT, INC.
On September 18, 1995, the Company acquired all of the outstanding equity
securities of Pet Food Giant for an aggregate consideration of 939,671 shares of
PETsMART Common Stock, plus 47,016 shares of PETsMART Common Stock reserved for
issuance upon exercise of Pet Food Giant stock options assumed in the merger.
Pet Food Giant, based in New Jersey, is an operator of pet food and supply
superstores in the New Jersey, Long Island and Philadelphia metropolitan areas.
As a result of the acquisition, the Company recorded a merger and related
non-recurring charge during its fiscal quarter ended October 29, 1995 of
$6.4 million. This one-time charge included investment banking, legal and
miscellaneous transaction costs, costs associated with the consolidation of the
companies' operations, and termination benefits to be paid to key employees of
Pet Food Giant.
7
<PAGE>
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 28, 1996 AND APRIL 30, 1995
_______________________________________________________________________________
NOTE 6 - 1996 ACQUISITIONS
STATE LINE TACK, INC.
On January 30, 1996, the Company acquired State Line Tack, a New Hampshire
based catalog retailer specializing in discount brand name tack, riding apparel,
and equine supplies, by issuing 600,000 shares, including approximately 38,000
shares reserved for State Line Tack stock options assumed in the merger, of the
Company's Common Stock in exchange for all of the outstanding equity interests
of State Line Tack.
As a result of the acquisition, the Company recorded a merger and related non-
recurring charge during its quarter ended April 28, 1996 of $8.1 million. This
one-time charge included investment banking, legal and miscellaneous transaction
costs ($1.2 million), costs associated with the consolidation of the companies'
operations ($6.9 million), including provision for the closure of inadequate
and duplicative facilities and systems, severance and employee relocation costs,
cancellation of certain contractual obligations and other costs.
Net sales and net income (loss) applicable to holders of common stock for
PETsMART and the 1996 acquisition for the thirteen week period ended April 30,
1995 were as follows (in thousands):
<TABLE>
<CAPTION>
PETsMART State Line Tack Combined
-------- --------------- --------
<S> <C> <C> <C>
Net sales $241,884 $9,705 $251,589
Net income (loss) applicable
to holders of common stock (1) $ (1,964) $ (505) $ (2,469)
</TABLE>
- --------------
(1) Includes accretion of redeemable convertible preferred stock of PETsMART
of $281,000 and accretion of preferred stock to liquidation value of State
Line Tack of $217,000, respectively.
NOTE 7 - PREFERRED STOCK
REDEEMABLE PREFERRED STOCK
At December 31, 1995, 3,099,172 shares of State Line Tack Series A Preferred
Stock and 375,000 shares of State Line Tack Series B Preferred Stock were
issued and outstanding. The Series A Preferred Stock was subject to a 15%
cumulative dividend and had a liquidation preference of $0.91963 per share and
the Series B Preferred Stock was subject to a 8.55% cumulative dividend and
had a liquidation preference of $2 per share. All series of preferred stock
were redeemable at the discretion of the State Line Tack Board of Directors.
The Series A and Series B Preferred Stock were being accreted to their
liquidation value through charges to retained earnings. The carrying value of
the Series A and Series B Preferred Stock at January 28, 1996 was $6.51 million.
In connection with the merger with the Company (see Note 6), all shares of
State Line Tack Series A and Series B Preferred Stock were included in the
conversion into PETsMART equivalent common shares.
8
<PAGE>
ITEM 2. 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 the Company's
Form 10-K for the year ended January 28, 1996, and the RISK FACTORS section
contained in the Company's Registration Statement on Form S-3 (Commission
File No. 333-03251) filed with the Commission on May 7, 1996.
GENERAL
At April 28, 1996, PETsMART operated 283 superstores in 33 states. Net sales
grew 23.3% for the thirteen weeks ended April 28, 1996, compared to the same
period of 1995, due principally to the opening of new superstores and comparable
store sales increases of 12.1%. 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 Specialties,
Pet Food Giant and State Line Tack will be successful or that there will be no
material adverse effects from the integration efforts of Petstuff, Sporting Dog
Specialties, Pet Food Giant and State Line Tack on the financial results of the
Company.
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. The Company expects continued downward pressure on its gross profit
as a percentage of sales due to higher occupancy costs in new superstores,
including the increasing number of superstores located in geographic areas where
occupancy costs are higher relative to sales, along with competitive pressures
in certain market areas. Since new superstores have higher payroll, advertising
and other store level expenses as a percentage of sales than mature superstores,
the anticipated level of new superstore openings will also contribute to lower
store operating margins. The Company anticipates opening at least 34 stores
over the remainder of fiscal 1996, including 17 stores in the second fiscal
quarter and five stores in Canada in the third fiscal quarter. In
9
<PAGE>
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.
In March 1994, PETsMART acquired 30 superstores in five midwestern states from
The Weisheimer Companies, Inc., operating under the trade name PETZAZZ. In
August 1994, PETsMART substantially completed the process of integrating the
PETZAZZ chain into the PETsMART format of superstores, including changing the
merchandise mix and operating and marketing philosophies. Due to their smaller
size, and lack of veterinary clinics or grooming facilities, the converted
PETZAZZ superstores have a lower average weekly sales volume compared to other
PETsMART superstores, and have not achieved their anticipated profitability.
In May 1995, PETsMART acquired Sporting Dog Specialties and affiliates (Sporting
Dog). Although the results of Sporting Dog were 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 April 28, 1996, a total of 17 redundant or
nonproductive former Petstuff superstores have been closed. During the third
quarter 1995, PETsMART 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, but PETsMART expects the acquisition to contribute to earnings in
fiscal 1996; however, there can be no assurance these superstores can achieve
their anticipated profitability.
In September 1995, PETsMART acquired The Pet Food Giant, Inc., an operator of 10
pet food and supply superstores in the New Jersey, Long Island and Philadelphia
metropolitan areas. As of April 28, 1996, one redundant superstore has 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. Although PETsMART does not expect the
results of Pet Food Giant to be dilutive to 1996 operating results, there can be
no assurance that Pet Food Giant can achieve its anticipated profitability.
10
<PAGE>
On January 30, 1996, PETsMART completed the acquisition of State Line Tack,
Inc., the leading worldwide catalog operator specializing in discount brand name
tack, riding apparel and equine supplies. This acquisition was accounted for as
a pooling of interests, and PETsMART does not believe the results of this
acquisition will be dilutive to fiscal 1996 operating results.
The discussion below relates to the results of operations of PETsMART reflecting
the mergers with PETZAZZ, Petstuff, Sporting Dog, Pet Food Giant, and State Line
Tack as if they had taken place from the inception of PETsMART. All of these
acquisitions have been accounted for as poolings of interests.
RESULTS OF OPERATIONS
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
Net sales increased 23.3% to $310.2 million for the thirteen weeks ended April
28, 1996 ("first quarter 1996") from $251.6 million for the thirteen weeks ended
April 30, 1995,("first quarter 1995"). However, sales increased 30.2%, after
excluding the effect of the closure of certain former Petstuff stores.
Comparable store sales increased 12.1% in first quarter 1996. During first
quarter 1996 the Company opened 23 new superstores and closed two relocated
stores. The Company had 283 superstores in operation at the end of first quarter
1996 compared to 249 superstores open at the end of first quarter 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 27.4%
for first quarter 1996 as compared to 24.8% for first quarter 1995, primarily as
a result of a change in sales mix and improved store occupancy cost leverage for
the quarter.
Store operating expenses, which includes payroll and benefits, advertising and
other store level expenses, decreased as a percentage of net sales to 20.1% for
first quarter 1996 from 20.2% for first quarter 1995. This decrease as a
percentage of net sales was due to improved payroll expense management as
compared to the prior year.
Store preopening expenses as a percentage of net sales increased to 0.7% for
first quarter 1996 compared to 0.3% for first quarter 1995, primarily as a
result of the large number (23) of superstores opened in first quarter 1996.
The average preopening expenses for the 23 PETsMART format superstores opened in
first quarter 1996 decreased to $89,000 from $95,000 for the seven PETsMART
format superstores opened during first quarter 1995. This decrease is the
result of management efforts to improve efficiency in shortening the time
required to open new superstores.
11
<PAGE>
General and administrative expenses decreased as a percentage of sales to 2.8%
for first quarter 1996 from 3.5% for first quarter 1995. This decrease was due
primarily to the Company's ability to increase net sales without a proportionate
increase in overhead expense and the elimination of duplicate overhead costs
related to the Petstuff and Pet Food Giant acquisitions.
Merger and non-recurring charges of $8.1 million related to the State Line Tack
acquisition were recorded in first quarter 1996. The State Line Tack one-time
charge included legal and accounting fees ($1.4 million), a provision for the
closure of duplicate or inadequate facilities and systems ($5.5 million) and
other costs of consolidation, including employee severance, relocation costs and
early termination fees on bank debt ($1.2 million).
The Company generated operating income of $3.9 million for the first quarter
1996 compared to $1.9 million in the first quarter 1995. However, excluding the
merger and related non-recurring charge, operating income increased
$10.0 million to $11.9 million for first quarter 1996 from $1.9 million for
first quarter 1995. Excluding the merger and related non-recurring charge,
operating income as a percentage of sales increased to 3.8% for first quarter
1996 from 0.8% for first quarter 1995.
Interest income decreased to $158,000 for first quarter 1996 from $382,000 for
first quarter 1995 principally due to the decrease in average cash balances in
first quarter 1996 compared to first quarter 1995. Interest expense decreased
to $1.8 million for first quarter 1996 from $2.0 million for first quarter 1995
principally due to a lower average interest rate during the first quarter 1996.
Income tax expense was $1.2 million for first quarter 1996 compared to $2.3
million for first quarter 1995. Included in the first quarter 1996 tax
provision is a charge for the nondeductibility of certain items included in the
State Line Tack merger and nonrecurring charge. Excluding the effect of
permanent differences within the merger and non-recurring charge, the Company's
effective income tax rate for first quarter 1996 was 38% compared to 35% for
first quarter 1995. This increase was primarily due to an increased federal
rate due to the absence of targeted job tax credits and increased state income
taxes.
As a result of the foregoing, the Company reported net income of
$0.9 million (or $0.02 per share) for first quarter 1996 compared to a net loss,
before accretion of the Pet Food Giant and State Line Tack preferred stock, of
$2.0 million (or $0.04 per share) for first quarter 1995. Excluding the first
quarter 1996 merger and related non-recurring charge and the related tax
benefits, net income for first quarter 1996, on a comparable basis, increased to
$6.3 million (or $0.12 per share), an $8.3 million increase over first quarter
1995.
12
<PAGE>
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 $275 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 April 28, 1996, total assets were $519.3 million, of which $310.2 million
were current assets. Cash and cash equivalents were $51.8 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.
Cash used in operations was $31.4 million for the thirteen weeks ended April 28,
1996, compared to cash provided of $0.05 million for the same period of the
prior year. Approximately $25.3 million of the cash used in operations during
the thirteen weeks ended April 28, 1996 related to the timing of inventory
purchases and payments during the first quarter 1996 for inventory balances
required for the stores opened in first quarter 1996. Merchandise accounts
payable leveraging (the percentage of merchandise inventory financed by vendor
credit terms, e.g. accounts payable divided by merchandise inventory), decreased
to 44.5% at April 28, 1996, compared to 54.9% at January 28, 1996. Inventory
balances were approximately $209.2 million at April 28, 1996, and $201.6 million
at January 29, 1995. Average store inventory decreased 3.9% to $739,000 at
April 28, 1996, from $769,000 at January 28, 1996, due to management's efforts
to improve inventory turns.
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 $4.9 million for the
thirteen weeks ended April 28, 1996.
Net cash flow from financing activities, primarily borrowings and repayments
under the Company's bank credit facility, was $13.5 million for the thirteen
weeks ended April 28, 1996.
The Company currently has a $65 million revolving bank credit arrangement that
expires July 6, 1998. On May 17, 1996, the Company obtained a commitment for an
increase to $90 million in the bank credit arrangement. Borrowings under the
credit facility are unsecured and bear interest, at PETsMART's option, at either
the bank's prime rate or LIBOR plus 0.875%. The credit facility contains
certain restrictive covenants relating to net worth, debt to equity ratios,
capital expenditures and minimum fixed charge coverage. The
13
<PAGE>
Company expects to meet all existing covenants in its credit agreement for
the remainder of fiscal 1996. At April 28, 1996, $35.1 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 34 additional superstores in the
remainder of fiscal 1996, including five stores in Canada. 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 34 additional superstores by the end of
fiscal 1996, between $23.1 million and $42.2 million will be needed to finance
the Company's new superstore openings in the remainder of fiscal 1996, of which
approximately $9.0 million to $20.0 million will be financed through equipment
leases. During the remainder of fiscal 1996, the Company plans to
remodel/retrofit approximately 30 older PETsMART stores and several former
Petstuff and Pet Food Giant stores to the current store prototype which will
require approximately $15.0 million of expenditure. The Company also has a new
distribution center under construction in Phoenix, Arizona which will require
approximately $17.0 million of expenditures. 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 United States Congress is currently considering legislation which would
increase the federal minimum wage. Currently, the Company does not believe the
passage of such legislation would 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 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 12 months. However, numerous factors, such
as future acquisition opportunities or a change in expansion plans, may cause
the Company to
14
<PAGE>
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1995, Petstuff Canada, LTD., a wholly-owned subsidiary of Petstuff,
Inc., was named as a defendant in a complaint filed by a competitor alleging
breach of the Competition Act, injurious falsehood, and damages to the
trademarks and reputation of the competitor, stemming from alleged advertising
practices. The suit seeks $20 million (Canadian) in damages plus $500,000
(Canadian) for punitive damages plus costs and interest. Petstuff Canada, LTD.
intends to vigorously defend itself against the allegations set forth in the
complaint and has filed counterclaims in this action. The ultimate outcome of
this matter cannot presently be determined. Accordingly, no provision for any
liability that might result from this lawsuit has been made in the Company's
consolidated financial statements.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1 Computation of Per Share Earnings
(b) Reports on Form 8-K
During the thirteen weeks ended April 28, 1996, the Company
filed the following reports on Form 8-K or Form 8-K/A:
i. Report on Form 8-K dated January 30, 1996, filed February 12,
1996, announcing the consummation of the acquisition of State Line
Tack, Inc.
ii. Report on Form 8-K dated January 30, 1996, filed February 12,
1996, announcing the consummation of the acquisition of State Line
Tack, Inc., as amended by a Report on Form 8-K/A, filed April 15,
1996, containing certain accounting information related to the
acquisition of State Line Tack, Inc.
16
<PAGE>
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.
PETSMART, INC.
(Registrant)
Date: June 11, 1996 /s/ C. DONALD DORSEY
---------------------------------------
C. Donald Dorsey
Executive Vice President and Chief
Financial Officer (Duly Authorized
Officer and Principal Financial and
Accounting Officer)
17
<PAGE>
PETSMART, INC.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
11.1 Computation of Per Share Earnings.
18
<PAGE>
Exhibit 11.1
PETsMART, Inc. and Subsidiaries
Statement of Computation of Common
and Common Equivalent Shares and
Earnings per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the 13 Weeks Ended
April 28, April 30,
1996 1995
--------- ---------
<S> <C> <C>
PRIMARY(1)
Weighted average common shares
outstanding 51,515 50,359
Incremental common equivalents from
options and warrants 2,342 --
-------- --------
Weighted average shares outstanding 53,857 50,359
-------- --------
-------- --------
Net income (loss) $ 925 $ (1,971)
Accretion of redeemable convertible
preferred stock -- (498)
-------- --------
Net income (loss) applicable to
holders of common stock $ 925 $ (2,469)
-------- --------
-------- --------
Net income (loss) per share
applicable to holders of common
stock $ 0.02 $ (0.05)
-------- --------
-------- --------
</TABLE>
- --------------
(1) Primary and Fully Diluted earnings are the same for all periods
presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-START> JAN-30-1996
<PERIOD-END> APR-28-1996
<CASH> 51,752
<SECURITIES> 0
<RECEIVABLES> 30,032
<ALLOWANCES> 0
<INVENTORY> 209,238
<CURRENT-ASSETS> 310,195
<PP&E> 226,145
<DEPRECIATION> 61,055
<TOTAL-ASSETS> 519,306
<CURRENT-LIABILITIES> 175,946
<BONDS> 55,805
0
0
<COMMON> 5
<OTHER-SE> 276,250
<TOTAL-LIABILITY-AND-EQUITY> 519,306
<SALES> 310,200
<TOTAL-REVENUES> 310,200
<CGS> 225,103
<TOTAL-COSTS> 225,103
<OTHER-EXPENSES> 81,245<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,839
<INCOME-PRETAX> 2,171
<INCOME-TAX> 1,246
<INCOME-CONTINUING> 925
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 925
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<FN>
<F1>Includes merger and nonrecurring charges of $8,064.
</FN>
</TABLE>
