<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:
AUGUST 3, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM __________ TO ___________
Commission file number: 0-21888
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.)
19601 NORTH 27TH AVENUE
PHOENIX, AZ 85027
(Address of principal executive offices, including Zip Code)
(602) 580-6100
(Registrant's telephone number, including area code)
10000 NORTH 31ST AVENUE, SUITE C-100
PHOENIX, AZ 85051
(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, 115,199,609 SHARES AT SEPTEMBER 3, 1997
1
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PETsMART, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
August 3, 1997 and February 2, 1997 3
Consolidated Statements of Operations
for the thirteen and twenty-six weeks ended
August 3, 1997 and July 28, 1996 4
Consolidated Statements of Cash Flows
for the twenty-six weeks ended
August 3, 1997 and July 28, 1996 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 18
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
2
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PETsMART, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
August 3, February 2,
ASSETS 1997 1997
-------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 34,511 $ 39,868
Receivables 55,832 43,664
Merchandise inventories 284,980 300,892
Prepaid expenses and other current assets 37,096 24,860
---------- ----------
Total current assets 412,419 409,284
Property and equipment, net 206,900 219,263
Other assets 73,167 61,263
---------- ----------
Total assets $ 692,486 $ 689,810
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to bank $ 81,000 $ 25,000
Accounts payable 112,179 138,913
Accrued payroll and employee benefits 14,459 14,192
Accrued occupancy expense 11,069 6,306
Accrued merger and business restructuring costs 44,322 21,584
Other accrued expenses 12,271 35,962
Current maturities of capital leases 8,693 9,145
---------- ----------
Total current liabilities 283,993 251,102
Capital lease obligations 59,216 62,535
Deferred rents 14,413 13,412
Other liabilities 1,836 1,716
---------- ----------
Total liabilities 359,458 328,765
---------- ----------
Stockholders' equity:
Preferred stock; $0.0001 par value; 10,000 shares authorized;
none outstanding - -
Common stock; $.0001 par value; 250,000 shares authorized,
115,163 and 113,958 shares issued and outstanding 11 11
Additional paid-in capital 381,662 373,764
Cumulative foreign currency translation adjustments 1,515 966
Accumulated deficit (50,160) (13,696)
---------- ----------
Total stockholders' equity 333,028 361,045
---------- ----------
Total liabilities and stockholders' equity $ 692,486 $ 689,810
---------- ----------
---------- ----------
</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 For the 26 weeks ended
August 3, July 28, August 3, July 28,
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 425,860 $ 345,044 $ 838,514 $ 675,827
Cost of sales 329,413 245,477 640,386 484,427
--------- --------- --------- ---------
Gross profit 96,447 99,567 198,128 191,400
Store operating expenses 87,257 66,745 164,396 135,254
Store preopening expenses 2,827 3,016 6,009 5,511
General and administrative
expense 15,082 11,545 24,501 21,207
Merger and restructuring costs 44,891 12,300 54,522 20,364
--------- --------- --------- ---------
Operating income (loss) (53,610) 5,961 (51,300) 9,064
Interest income 63 339 113 754
Interest expense (3,404) (2,357) (6,116) (4,218)
--------- --------- --------- ---------
Income (loss) before income
taxes (56,951) 3,943 (57,303) 5,600
Income tax expense (benefit) (21,235) 1,779 (20,841) 3,027
--------- --------- --------- ---------
Net income (loss) $ (35,716) $ 2,164 $ (36,462) $ 2,573
--------- --------- --------- ---------
--------- --------- --------- ---------
Income (loss) per common share
and common share equivalent $ (0.31) $ 0.02 $ (0.32) $ 0.02
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of
common and common equivalent
shares outstanding 114,758 117,538 114,475 116,672
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 26 Weeks Ended
August 3, July 28,
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (36,462) $ 2,573
Adjustments to reconcile net income (loss) to net cash
from (used in) operating activities:
Adjustment to conform fiscal year of Pet City - 1,250
Depreciation and amortization 16,579 12,540
Loss on disposal of property and equipment 124 240
Changes in assets and liabilities:
Receivables (6,898) (6,717)
Merchandise inventories 15,912 (20,276)
Prepaid expenses and other current assets (12,236) (9,548)
Other assets (14,012) (703)
Accounts payable (26,734) (9,763)
Accrued payroll and employee benefits 267 (2,723)
Accrued occupancy expense 4,763 1,686
Accrued merger and restructuring costs 32,196 12,300
Other accrued expenses (21,585) (9,899)
Deferred rents 1,001 536
Other liabilities 120 (1,119)
--------- ---------
Net cash from (used in) operating activities (46,965) (29,623)
--------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of leaseholds, fixtures and equipment (17,888) (23,058)
Purchases of property held for sale and leaseback - (8,470)
Proceeds from sale of property held for sale and leaseback 171 11,421
--------- ---------
Net cash from (used in) investing activities (17,717) (20,107)
--------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 6,398 11,739
Borrowings from bank credit facility 95,100 99,400
Repayment of bank credit facility (39,100) (82,123)
Tax benefit resulting from exercise of stock options 1,500 6,174
Payment on capital lease obligations (5,122) (5,163)
--------- ---------
Net cash from (used in) financing activities 58,776 30,027
--------- ---------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES) 549 -
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,357) (19,703)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 39,868 88,303
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,511 $ 68,600
--------- ---------
--------- ---------
</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 AND TWENTY SIX WEEKS ENDED AUGUST 3, 1997 AND JULY 28, 1996
- --------------------------------------------------------------------------------
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 and twenty-six weeks ended August 3, 1997
and July 28, 1996 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
February 2, 1997, included in the Company's Annual Report on Form 10-K
(File No. 0-21888) filed with the Securities and Exchange Commission on
April 28, 1997.
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 January 1996 merger with State Line Tack, Inc. ("State Line Tack"), and
the December 1996 merger with Pet City Holdings plc ("Pet City"), both 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 with the historical financial statements
of the acquired entities.
Of the above transactions, only Pet City required any material adjustments
to retained earnings in order to conform with PETsMART's fiscal year end,
as all prior historical financial statements of State Line Tack were for
fiscal years ended within 93 days of the Company's fiscal year end. The
Pet City transaction was accounted for by combining the historical
financial statements of PETsMART for each of the two years in the period
ended February 2, 1997 with the historical financial statements of Pet City
Holdings for the 53 week period ended February 2, 1997 and the 52 week
period ended July 27, 1996, respectively. An adjustment of $1.3 million
was required to the retained earnings of PETsMART during the 53 week period
ended February 2, 1997 in order to conform the fiscal year end of Pet City
to PETsMART's fiscal year. No material adjustments were necessary in
either of the above transactions to conform the accounting practices of the
companies, nor, for periods preceding the mergers, were there any
intercompany transactions which required elimination from the combined
consolidated results.
NOTE 3 - STOCK SPLITS
On July 19, 1996, the Company effected a 2-for-1 split of its common stock
in the form of a stock dividend to stockholders of record on July 8, 1996.
All share and per share data has been restated to reflect the stock splits
effected in the form of a stock dividend.
6
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS AND TWENTY SIX WEEKS ENDED AUGUST 3, 1997 AND JULY 28, 1996
- --------------------------------------------------------------------------------
NOTE 4 - BUSINESS COMBINATIONS:
1996 ACQUISITIONS
During fiscal 1996, the Company acquired, in two separate transactions, all
of the outstanding equity interests of State Line Tack in exchange for
1,200,000 shares of PETsMART common stock, including approximately 76,000
shares reserved for issuance upon exercise of stock options, and of Pet
City for approximately 7,844,000 shares of PETsMART common stock, plus
approximately 304,000 shares reserved for issuance upon exercise of Pet
City stock options assumed in the merger.
In connection with the above transactions, the Company recorded merger and
business integration charges of $28.4 million in fiscal 1996, of which $8.1
million related to the State Line Tack acquisition and was recorded in the
first fiscal quarter ended April 28, 1996 and of which $20.3 million
related to Pet City and was recorded in the fourth fiscal quarter ended
February 2, 1997. These charges included investment banking, legal and
accounting fees, and miscellaneous transaction costs ($8.8 million),
provision for the closure of redundant or inadequate facilities ($5.5
million), costs associated with the reformatting, refixturing and
remerchandising the acquired superstores to the format consistent with that
of a PETsMART superstore ($11.0 million), and other costs of integration
($3.1 million).
Also during the thirteen weeks ended July 28, 1996 ("second quarter 1996"),
the Company recorded merger and integration charges of $12.3 million,
principally as a result of a change in its accounting estimate of the lease
termination costs anticipated to be incurred in connection with the
settlement of lease obligations for the 17 former Petstuff, along with
seven lease commitments for future Petstuff locations that were either
duplicate or inadequate facilities and, therefore, never opened. The
Company estimated lease settlement costs associated with the closed stores,
and the leases related to the unopened locations, would require $10.8
million of additional expenditures. The remaining $1.5 million of the
additional charge was primarily related to Petstuff store conversion costs.
During the first fiscal quarter ended May 4, 1997, the Company recorded
merger and business integration charges related to the Pet City acquisition
of $9.6 million before income taxes. This charge included costs associated
with the reformatting, refixturing and remerchandising of the acquired
stores to the format consistent with that of a PETsMART superstore,
including changing the tradename ($8.6 million), and other costs of
integration ($1.0 million).
During the thirteen weeks ended August 3, 1997 ("second quarter 1997"), the
Company recorded $1.1 million before income taxes of merger and business
integration charges related to the Pet City acquisition. This charge
included costs associated with reformatting, refixturing and
remerchandising the acquired stores to the format consistent with that of a
PETsMART superstore, and other costs of integration. Further merger and
integration charges related to the Pet City transaction, if any, will be
recorded in the period incurred and are not expected to exceed the
Company's original total estimate for second fiscal quarter of 1997 of $5.1
million. The Company also recorded approximately $3.0 million of merger
and integration charges during second quarter 1997 as a result of certain
additional real estate costs incurred in connection with certain of its
previous acquisitions.
7
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS AND TWENTY SIX WEEKS ENDED AUGUST 3, 1997 AND JULY 28, 1996
- --------------------------------------------------------------------------------
NOTE 5 - MERGER AND RESTRUCTURING COSTS:
In second quarter 1997, the Company incurred charges of $61.0 million
($38.2 million after its related income tax benefit, or $0.33 per share) to
cover the costs of closing 9 underperforming stores and relocating 24
stores previously identified as candidates for closure over the next two
years, the discontinuance of the Discovery Center department within all
stores, including the write-off of related inventory and fixtures, as well
as provisions for the closure of excess facilities, and other charges,
including merger and integration charges of $4.1 million as a result of its
December 1996 merger with Pet City and additional costs resulting from the
Company's prior mergers (See Note 4). Approximately $44.9 million of the
$61.0 million total charge was recorded as a separate restructuring charge
during second quarter 1997. Of the remaining $16.1 million, approximately
$9.4 million of related charges were recorded as cost of goods sold, $3.3
million were recorded as store operating expenses, and $3.4 million were
included in general and administrative expenses for the period.
The activity within the accrued merger and restructuring costs liability
account is summarized below (in thousands):
<TABLE>
<CAPTION>
Balance at Additional Payments/ Balance at
Feb. 2, 1997 Expenses Asset Write-offs Aug. 3, 1997
------------ ---------- ---------------- ------------
<S> <C> <C> <C> <C>
Professional fees $ 938 $ 948 $ (1,379) $ 507
Accrued severance 1,287 1,083 (1,287) 1,083
Lease termination & real estate costs 8,329 42,646 (11,687) 39,288
Accrued business integration costs 7,950 11,718 (17,969) 1,699
Store conversion costs 3,080 14,277 (15,612) 1,745
------- ------- -------- -------
$21,584 $70,672 $(47,934) $44,322
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
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 Annual Report on Form 10-K for the year
ended February 2, 1997.
GENERAL
At August 3, 1997, PETsMART operated 373 superstores in North America and 67
stores in the United Kingdom. Net sales grew 23.4% for the thirteen weeks
ended August 3, 1997 compared to the same period of 1996, due principally to
the opening of new superstores and comparable store sales increases of 4% for
the North American superstores and 7% for the United Kingdom superstores.
The Company believes that comparable store sales increases have been largely
due to increased customer traffic. In view of the increasing maturity of its
superstore base, as well as the opening of additional superstores in existing
markets and single-store markets, the Company anticipates that its rate of
comparable store sales growth may continue to be lower in future periods than
historically reported. The Company also expects that future increases in net
sales and net income, if any, will be 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 State Line Tack
and Pet City will be successful or that there will be no material adverse
effects on the financial results of the Company from the efforts to integrate
the above acquisitions.
As a result of its expansion plans, the Company anticipates certain costs,
such as preopening expenses and occupancy, may increase in the near term. In
addition, the timing of new superstore openings and related preopening
expenses and the amount of revenue contributed by new and existing
superstores may cause the Company's quarterly results of operations to
fluctuate. Since new superstores have higher payroll, advertising and other
store level expenses as a percentage of sales than mature superstores, the
anticipated level of new superstore openings will also contribute to lower
store operating margins. The Company anticipates opening at least 28
superstores over the remainder of fiscal 1997, including 14 stores in the
United Kingdom and approximately 21 stores worldwide in the third fiscal
quarter. 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
9
<PAGE>
sales during the month of December and a lower portion of its net sales
during the summer months. PETsMART's superstores typically draw from a large
retail area and can therefore be impacted by adverse weather and travel
conditions. Sales of certain of the Company's products and services designed
to address seasonal flea and tick problems have been and may continue to be
negatively impacted by the introduction of new alternative treatments, as
well as by weather conditions that are not favorable to the development of
fleas and ticks.
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. The Company has recently
completed the integration of the State Line Tack administrative and
fulfillment operations into its Rochester, New York facility. Although State
Line Tack was accretive to earnings in fiscal 1996, there can be no assurance
that State Line Tack can maintain its profitability.
On December 18, 1996, the Company completed its acquisition of all of the
outstanding equity interests of Pet City Holdings, plc, the largest pet
industry specialty retailer in the United Kingdom. The Company has
substantially completed the process of integrating the Pet City stores into
the PETsMART format, including changing the tradename, modifying the
merchandise mix and implementing PETsMART's operating and marketing
philosophies.
RESULTS OF OPERATIONS
GENERAL
Over the past three years, the Company has acquired several businesses to
complement and expand the Company's geographical presence, store locations
and business, all of which have been accounted for under the pooling of
interests method. Additionally, during second quarter 1997, the Company
initiated a restructuring of certain aspects of its operations and, as a
consequence, the Company recorded charges during the thirteen weeks ended
August 3, 1997 ("second quarter 1997") totaling $61.0 million. Such charges
consist of $44.9 million, before income taxes, of merger and restructuring
charges related to the closure and relocation of certain stores, the
elimination of certain departments within all stores, and additional costs
associated with the Company's previous mergers, and $16.1 million, before
income taxes, of other charges. Approximately $9.4 million of these other
charges have been recorded in the second quarter 1997 Statement of Operations
as a component of cost of goods sold, $3.3 million has been recorded as a
component of store operating expenses, and $3.4 million has been included in
general and administrative expenses.
Due to the cash inflows from the liquidation of inventory and the related tax
benefits associated with the discontinued concepts and the closed stores, the
Company estimates an approximate $12.0 million to $13.0 million positive net
cash flow from the restructuring activities over the next two years.
10
<PAGE>
The $44.9 million of merger and restructuring charges includes approximately
$30.0 million related to the closure and relocation of 33 underperforming
stores. Nine stores will be permanently closed, and the remaining 24 stores
will be closed and replaced with new stores in the same general trade area.
The charges comprise the net present value of amounts anticipated to be
incurred in connection with the settlement of the leases for the closed
stores and the write-off of related Company-owned store fixtures and
leasehold improvements.
Approximately $8.5 million of the $44.9 million of restructuring charges
relates to the discontinuance of the Discovery Center department within all
stores and includes the costs associated with disposal of fixtures and
equipment related to this department.
Also included in the $44.9 million of restructuring charges is a total of
approximately $4.1 million related to the Company's previous acquisitions.
As a result of its acquisition of Pet City in December 1996, the Company
recorded merger and integration charges of $1.1 million during second quarter
1997 primarily related to reformatting, refixturing, and remerchandising the
acquired stores to the format consistent with that of a PETsMART superstore,
and other costs of integration. This amount is consistent with previous
Company estimates. Further merger and integration charges related to the Pet
City transaction will be recorded in the period incurred and are not expected
to exceed the Company's original total estimate for second quarter 1997 of
$5.1 million. The Company also recorded approximately $3.0 million of merger
and integration charges during second quarter 1997 as a result of additional
real estate costs incurred in connection with certain of its previous
acquisitions.
The remaining $2.3 million of the $44.9 million merger and restructuring
charges includes approximately $1.0 million of costs associated with the
Company's decision to complete the consolidation of the Ennis, Texas
distribution center into the Company's new Phoenix, Arizona facility and
approximately $1.3 million representing the write-off of the Company's
investments in certain long-term assets which were impaired as a result of
the Company's decision to exit certain store departments.
The $9.4 million of other charges reflected as a component of cost of goods
sold includes the writedown of the Discovery Center inventory from cost to
net realizable value in connection with the discontinuance of that
department, as well as the writedown of certain non-Discovery Center
inventory from cost to net realizable value as a result of the decision to
exit other product categories. The Company anticipates that all such
discontinued inventory will be sold by the end of fiscal 1997.
The $3.3 million of other charges reflected as a component of store operating
expenses and the $3.4 million of one-time charges reflected as general and
administrative expenses consist primarily of charges related to certain costs
of several litigation matters, expenses related to the preliminary stages of
a consulting project for new management information systems, as well as
charges related to other miscellaneous matters.
11
<PAGE>
The following discussion of results of operations for the thirteen and
twenty-six week periods ended August 3, 1997 and July 28, 1996 excludes the
effect of the merger and restructuring charges and other charges discussed
above for all periods presented.
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
Net sales increased 23.4% to $425.9 million for the thirteen weeks ended
August 3, 1997 from $345.0 million for the thirteen weeks ended July 28,
1996("second quarter 1996"). Second quarter 1997 sales were adversely
affected by continued softness in sales, as well as by the operational
difficulties which arose late in first quarter 1997 related to inventory
levels and ineffective advertising. The Company anticipates that certain of
the negative sales impacts will continue through third quarter 1997, since
the Company competes with back to school spending and other seasonal consumer
buying patterns, as well as potential sales disruptions due to the Company's
efforts to retrofit and remerchandise the discontinued Discovery Center
department in all stores. Comparable North American store sales increased 4%
in second quarter 1997, and comparable United Kingdom store sales increased
7%. The Company opened 28 new superstores in North America, four in the
United Kingdom and relocated two superstores in the thirteen weeks ended
August 3, 1997. The Company had 440 superstores in operation worldwide at the
end of second quarter 1997 compared to 342 superstores open at the end of
second quarter 1996, after giving effect to its recent mergers.
Gross profit, defined as net sales less cost of sales, including distribution
costs and store occupancy costs, decreased as a percentage of net sales to
24.9% for second quarter 1997 as compared to 28.9% for second quarter 1996,
primarily as a result of higher occupancy costs in newer locations, increased
warehouse and distribution costs, and lower than anticipated vendor moneys
due to reduced purchasing activities.
Store operating expenses, which includes payroll and benefits, advertising
and other store level expenses, increased as a percentage of net sales to
19.7% for second quarter 1997 from 19.3% for second quarter 1996. This
increase as a percentage of net sales was due to increased store labor costs
and increased advertising expenditures.
Store preopening expenses as a percentage of net sales decreased to 0.7% of
net sales for second quarter 1997 compared to 0.9% for second quarter 1996,
primarily as a result of the higher preopening costs associated with the five
large-box format stores opened in San Diego in 1996. The Company opened 28
North American stores and four United Kingdom stores during the period, as
compared to 20 stores during the same period last year. Average preopening
costs for second quarter 1997 remained consistent with prior periods at
approximately $100,000 per store.
General and administrative expenses decreased as a percentage of sales to
2.7% for second quarter 1997 from 3.3% for second quarter 1996.
12
<PAGE>
This decrease was the result of an ongoing focus on expense management in
both the North American and United Kingdom retail operations.
The Company generated operating income of $7.4 million for the second quarter
1997 compared to $18.3 million in the second quarter 1996. Operating income
as a percentage of sales decreased to 1.7% for second quarter 1997 from 5.3%
for second quarter 1996.
Interest income decreased to $0.1 million for second quarter 1997 from $0.3
million for second quarter 1996 principally due to the decrease in average
cash balances in second quarter 1997 compared to second quarter 1996.
Interest expense increased to $3.4 million for second quarter 1997 from $2.4
million for second quarter 1996 principally due to higher average borrowings
during the second quarter 1997.
The Company's income tax provision for both second quarter 1997 and second
quarter 1996 reflects the effects of the nondeductibility of certain of the
costs associated with the merger and restructuring charges recorded in both
years. Additionally, the statutory reduction in the United Kingdom corporate
tax rate enacted during second quarter 1997 required a $0.6 million charge to
reflect the decrease in the deferred tax asset due to the rate reduction.
After excluding the effects of these items, the Company's effective income
tax rate from operations was 38.5% and 38% for the first half of 1997 and
1996, respectively.
Excluding the second quarter 1997 and second quarter 1996 merger and
restructuring charges and other charges, and the related tax benefits, net
income for second quarter 1997, on a comparable basis, was $2.5 million (or
$0.02 per share), as compared to net income of $10.1 million (or $0.09 per
share) for second quarter 1996. Including the effect of the restructuring
and other charges recorded in both years, the Company reported a net loss of
$35.7 million (or $0.31 per share) for second quarter 1997 compared to net
income of $2.2 million (or $0.02 per share) for second quarter 1996.
TWENTY-SIX WEEKS ENDED AUGUST 3, 1997 COMPARED TO TWENTY-SIX WEEKS ENDED
JULY 28, 1996
Net sales increased 24.1% to $838.5 million for the twenty-six weeks ended
August 3, 1997 from $675.8 million for the twenty-six weeks ended July 28,
1996. Comparable North American store sales increased 5.1% in the first half
of 1997, and comparable United Kingdom store sales increased 6.2%. During
the period, the Company opened 68 new superstores and closed four relocated
stores. The Company had 440 superstores in operation at August 3, 1997
compared to 342 superstores open at July 28, 1996, after giving effect to its
recent mergers.
Gross profit, defined as net sales less cost of sales, including distribution
costs and store occupancy costs, decreased as a percentage of net sales to
24.8% for 1997 year to date as compared to 28.3% for the same period of 1996.
The decrease is primarily a result of higher occupancy costs in newer
locations, increased warehouse and distribution costs, and lower than
anticipated vendor moneys due to reduced purchasing activities.
13
<PAGE>
Store operating expenses, which includes payroll and benefits, advertising
and other store level expenses, decreased as a percentage of net sales to
19.2% for the period from 20.0% for the first half of last year. This
decrease is the result of improved expense leverage in the United Kingdom
stores.
Store preopening expenses as a percentage of net sales decreased to 0.7% for
1997 compared to 0.8% for 1996, primarily as a result of the higher
preopening costs associated with the five large-box format stores opened in
San Diego in 1996. The Company opened 57 North American stores and eleven
United Kingdom stores during the period, as compared to 46 stores during the
same period last year. Average preopening costs for first half 1997 remained
consistent with prior periods at approximately $100,000 per store.
General and administrative expenses decreased as a percentage of sales to
2.5% for the year to date 1997 from 3.1% for the comparable period of 1996.
These expenses reflected continued expense management in both North American
and United Kingdom operations.
The Company's operating income decreased to $19.4 million for the twenty-six
weeks ended August 3, 1997 from $29.4 million for the comparable period of
1996. Operating income as a percentage of sales decreased to 2.3% for 1997
from 4.4% for 1996.
Interest income decreased to $0.1 million for 1997 from $0.8 for 1996
principally due to the decrease in average cash balances in 1997 compared to
1996. Interest expense increased to $6.1 million for 1997 from $4.2 million
for 1996 principally due to higher average borrowings during the twenty-six
weeks ended August 3, 1997.
The Company's income tax provision for both 1997 and 1996 reflects the
effects of the nondeductibility of certain of the costs associated with the
merger and restructuring charges recorded in both years. Additionally, the
statutory reduction in the United Kingdom corporate tax rate enacted during
second quarter 1997 required a $0.6 million charge to reflect the decrease in
the deferred tax asset due to the rate reduction. After excluding the
effects of these items, the Company's effective income tax rate from
operations was 38.5% and 38% for the first half of 1997 and 1996,
respectively.
Excluding the merger and restructuring charges and other charges, and the
related tax benefits, net income for the 1997 period, on a comparable basis,
decreased to $8.2 million (or $0.07 per share), a $7.9 million decrease from
the first half of fiscal 1996. Including the effect of the restructuring and
other charges recorded in both years, the Company reported a net loss of
$36.5 million (or $0.32 per share) for the twenty-six weeks ended August 3,
1997 compared to net income of $2.6 million (or $0.02 per share) for the 1996
comparable period.
14
<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 $382 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 August 3, 1997, total assets were $692.5 million, of which $412.4 million
were current assets. Cash and cash equivalents were $34.5 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 $47.0 million for the twenty-six weeks ended
August 3, 1997, compared to cash used in operations of $29.6 million for the
same period of the prior year. Approximately $11.0 million of the net cash
used in operations during the twenty-six weeks ended August 3, 1997 related
to the timing of inventory purchases and payments during the second quarter
1997 for inventory balances required for the stores opened in second quarter
1997. Merchandise accounts payable leveraging (the percentage of merchandise
inventory financed by vendor credit terms, e.g. accounts payable divided by
merchandise inventory), decreased to 39.4% at August 3, 1997, compared to
46.1% at February 2, 1997. Inventory balances were approximately $285.0
million at August 3, 1997, and $300.9 million at February 2, 1997. Average
North American store inventory, which excludes catalog distribution center
inventories, decreased 16% to $673,000 per store at August 3, 1997, from
approximately $800,000 at February 2, 1997, due to management's efforts to
improve inventory turns. The initial reduction during first quarter 1997 was
in excess of management's plans and the Company believes sales were lost due
to out-of-stock conditions in certain categories and locations. Management
currently anticipates that inventory balances, in the aggregate, will
increase moderately over the remainder of fiscal 1997.
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 $17.7 million for the twenty-six weeks ended August 3, 1997.
Net cash flow from financing activities, primarily borrowings and repayments
under the Company's bank credit facility and proceeds from the exercise of
employee stock options, was $58.8 million for the twenty-six weeks ended
August 3, 1997.
15
<PAGE>
During second quarter 1997, the Company amended certain covenants, interest
rates, and definitions within its $125 million revolving bank credit
arrangement that expires April 30, 2000. Borrowings under the credit
facility are unsecured and bear interest, at PETsMART's option, at either the
bank's prime rate or LIBOR plus 0.875%. The credit facility contains certain
restrictive covenants relating to net worth, debt to equity ratios, capital
expenditures and minimum fixed charge coverage. The Company expects to meet
all existing covenants in its credit agreement for the remainder of fiscal
1997. At August 3, 1997, $81.0 million was outstanding under the credit
facility.
The Company also has several lease arrangements with leasing companies that
the Company uses to finance certain store and warehouse fixtures and
equipment, point-of-sale equipment and management information systems.
The Company's primary long-term capital requirement is for opening new
superstores, as well as funding for its planned management information system
upgrade and annual inventory buildup in anticipation of the holiday season.
All of the Company's superstores are leased facilities. The Company
currently expects to open at least 28 additional superstores in the remainder
of fiscal 1997, including five stores in Canada and 14 stores in the United
Kingdom. The Company estimates that its net cash requirements to open each
superstore, including store fixtures and equipment, leasehold improvements,
preopening costs and inventory will range from $680,000 to $1,240,000. This
amount will include from $50,000 to $600,000 for leasehold improvements,
depending upon whether the superstore site is a build-to-suit or a
rehabilitated unit. Based upon the Company's current plan to open at least
28 additional superstores by the end of fiscal 1997, between $19.0 million
and $34.7 million will be needed to finance the Company's new superstore
openings in the remainder of fiscal 1997, of which approximately $9.0 million
to $18.0 million will be financed through equipment leases. The Company may
also expend additional funds to take advantage of opportunities that arise
from time to time for the acquisition of businesses or lease rights from
tenants occupying retail space that is suitable for a PETsMART superstore.
The Company does not believe the recent increase in the United States federal
minimum wage will have a material adverse effect on its store operating
expenses or results of operations for the next twelve months.
The Company does not intend to own the land and buildings for its
superstores. However, to the extent the Company believes that it is
advantageous to purchase land for new superstores and to construct new
superstore buildings itself, it will use its existing financing sources or
cash to finance construction and, after the superstores are open, complete
sale/leaseback transactions or attempt to secure other permanent financing.
The Company's expansion and store openings are dependent on adequate sources
of capital for store site acquisition, building construction, fixturing and
inventory, the training and retention of skilled
16
<PAGE>
managers and personnel, and other factors, some of which may be beyond the
Company's control. As a result, there can be no assurance that the Company
will be able to achieve its targets for opening new superstores. To the
extent the Company is unable to obtain satisfactory financing for new store
growth, the Company's ability to open new superstores, and profitably operate
its current superstores, will be negatively impacted. There can be no
assurance that the Company will continue to be able to finance its operations
and planned management information systems upgrade without additional
financing or other arrangements, or that such financing will be available to
the Company at an acceptable cost. However, 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, excluding
extraordinary expenditures related to the management information system
upgrade, for at least the next twelve months. The Company can manage the cash
requirements for the planned management information system upgrade based upon
operational cash needs. Additionally, numerous factors, such as future
acquisition opportunities or a change in expansion plans, may cause the
Company to change its current plans and seek additional funds. The Company
is continually evaluating financing possibilities, and it may seek to raise
additional funds through a debt or equity financing if it believes it would
be in the best interests of the Company and its stockholders to do so.
The Company has historically had higher short-term cash requirements during
periods of high store opening activity and during the holiday inventory
build-up in its third fiscal quarter.
Although the Company cannot accurately anticipate the effect of inflation on
its operations, it does not believe inflation is likely to have a material
adverse effect on its net sales or results of operations.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PETsMART is not party to any legal proceedings other than various claims and
lawsuits arising in the normal course of business which, in the opinion of
PETsMART's management, are not individually or collectively material to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Stockholders (Annual Meeting) was held on
June 20, 1997. At the Annual Meeting, the stockholders of the registrant (i)
elected each of the persons listed below to serve as a director of the
Registrant until the 2000 Annual Meeting of Stockholders or until his or her
successor is elected; (ii) approved the amendment of the Company's 1996
Non-Employee Directors' Stock Option Plan, as amended, to increase the number
of shares of Common Stock covered thereunder from 492,570 to 700,000; and
(iii) ratified the selection of Price Waterhouse LLP as the Registrant's
Independent Accountants for the fiscal year ending February 1, 1998.
The registrant had 114,608,616 shares of Common Stock outstanding as of May
1, 1997, the record date for the Annual Meeting. At the Annual Meeting,
holders of a total of 97,614,246 shares of Common Stock were present in
person or represented by Proxy. The following sets forth information
regarding the results of the voting at the Annual Meeting:
PROPOSAL 1 - ELECTION OF DIRECTORS
Director
- --------
Samuel J. Parker Votes in Favor 96,856,971
Withhold Authority 657,275
Philip L. Francis Votes in Favor 96,937,411
Withhold Authority 676,835
Donna R. Ecton Votes in Favor 96,634,161
Withhold Authority 980,085
Walter J. Salmon Votes in Favor 96,917,462
Withhold Authority 676,374
PROPOSAL 2 - APPROVAL OF AMENDMENT OF
1996 NON-EMPLOYEE DIRECTORS'STOCK OPTION PLAN
Votes in Favor 76,231,880
Votes Against 21,158,176
Abstentions 224,190
18
<PAGE>
PROPOSAL 3 - RATIFICATION OF SELECTION OF
INDEPENDENT ACCOUNTANTS
Votes in Favor 97,379,421
Votes Against 160,720
Abstentions 54,105
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.14 First Amendment, Dated as of August
6, 1997, to the Third Amended and
Restated Credit Agreement, Among
PETsMART, Inc., Certain Lenders, and
NationsBank of Texas, N.A. as
Administrative Lender, Dated as of April 18,
1997.
Exhibit 11.1 Statement of Computation of Common and Common
Equivalent Shares and Earnings Per Share.
(b) Reports on Form 8-K
During the thirteen weeks ended August 3, 1997, the Company filed no
reports on Form 8-K.
19
<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, on September 16, 1997.
PETsMART, INC.
(Registrant)
/s/ Susan C. Schnabel /s/ Kenneth A. Conway
----------------- -----------------
Susan C. Schnabel Kenneth A. Conway
Senior Vice President and Vice President and
Chief Financial Officer Controller
(Principal Financial Officer) (Principal Accounting
Officer)
20
<PAGE>
PETsMART, INC.
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.14 First Amendment, Dated as of August 6, 1997, to the Third Amended
and Restated Credit Agreement, Among PETsMART, Inc., Certain
Lenders, and NationsBank of Texas, N.A. as Administrative Lender,
Dated as of April 18, 1997.
11.1 Computation of Per Share Earnings.
21
<PAGE>
Exhibit 10.14
FIRST AMENDMENT TO
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (this
"First Amendment"), dated as of August 6, 1997 is entered into among PETsMART,
INC., a Delaware corporation (the "Company"), the banks listed on the signature
pages hereof (the "Lenders") and NATIONSBANK OF TEXAS, N.A., as Administrative
Lender (in said capacity, the "Administrative Lender").
BACKGROUND
A. The Company, the Lenders and the Administrative Lender heretofore
entered into that certain Third Amended and Restated Credit Agreement, dated as
of April 18, 1997, (the "Credit Agreement"). The terms defined in the Credit
Agreement and not otherwise defined herein shall be used herein as defined in
the Credit Agreement.
B. The Company, the Lenders and the Administrative Lender desire to
amend the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Company, the
Lenders and the Administrative Lender covenant and agree as follows:
1. AMENDMENTS.
(a) The definition of "APPLICABLE MARGIN" set forth in Section 1.1
of the Credit Agreement is hereby amended to read as follows:
"'APPLICABLE MARGIN' shall mean the following per annum
percentages, applicable in the following situations:
<TABLE>
<CAPTION>
Non-Investment Grade Investment Grade
Applicability LIBOR Margin LIBOR Margin
------------- ------------ ------------
<S> <C> <C>
(i) If the Fixed Charges 0.375% 0.375%
Coverage Ratio is equal
to or greater than 2.5
to 1
(ii) If the Fixed Charges 0.500% 0.500%
Coverage Ratio is less
than 2.5 to 1 but is
<PAGE>
equal to or greater
than 2.0 to 1
(iii) If the Fixed Charges 0.625% 0.500%
Coverage Ratio is less
than 2.0 to 1 but is
equal to or greater than
1.75 to 1
(iv) If the Fixed Charges 0.750% 0.625%
Coverage Ratio is less
than 1.75 to 1 but is
greater than or equal
to 1.50 to 1
(v) If the Fixed Charges 0.875% 0.875%
Coverage Ratio is less
than 1.50 to 1
</TABLE>
The Applicable Margin payable by the Company on the Advances
outstanding hereunder shall be subject to reduction or increase, as
applicable and as set forth in the table above, on a quarterly basis
according to the Fixed Charges Coverage Ratio; PROVIDED, that each
adjustment in the Applicable Margin shall be effective as of the
fifth day following the date of receipt by the Administrative Lender
of the financial statements required pursuant to Section 6.14(a) or
6.14(b) hereof, as appropriate. If financial statements of the
Company (and corresponding Quarterly Compliance Certificate setting
forth the Fixed Charges Coverage Ratio) are not received by the
Administrative Lender by the fifth day following the date required
pursuant to Section 6.14(a) or 6.14(b) hereof, as appropriate, the
Applicable Margin shall be determined as if the Fixed Charges
Coverage Ratio is less than 1.50 to 1 until such time as such
financial statements and Quarterly Compliance Certificate are
received. The Applicable Margin from and including August 4, 1997 to
the date of the initial adjustment to be made therein as provided
above shall be 0.750%. During any period in which the Company has a
rating of BBB- or better from S&P or Baa3 or better from Moody's, the
Applicable Margin shall be equal to the applicable LIBOR Margin set
forth above in the column designated Investment Grade LIBOR Margin.
At all other times the Applicable Margin shall be equal to the
applicable LIBOR Margin set forth above in the column designated Non-
Investment Grade LIBOR Margin. Any decrease or increase in the LIBOR
Margins based on a change in the Company's rating by S&P or Moody's
shall be effective as of the fifth day following any such change in
the rating which requires a change in the LIBOR Margin used to
calculate the Applicable Margin."
(b) The definition of "EBITDA" set forth in Section 1.1 of the
Credit Agreement is hereby amended to read as follows:
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<PAGE>
"'EBITDA' means, for the Company and its Subsidiaries,
calculated on a consolidated basis in accordance with GAAP, the sum
of (a) Net profit before Taxes (but excluding from the calculation
thereof the effect of (i) one-time charges to operating income with
respect to the costs related to Pooling Acquisitions by the Company;
provided that such costs shall not, together with the aggregate
Acquisition Consideration (other than capital stock of the Company)
and Capital Expenditures paid or incurred in connection with
Acquisitions during each fiscal year, exceed 15% of Tangible Net
Worth during each fiscal year, and (ii) the one-time operating charge
and restructuring charge of the Company for the fiscal quarter ending
August 3, 1997, not to exceed $65,000,000), plus (b) depreciation and
amortization expense, and other non-cash items deducted in the
calculation of net operating income, plus (c) interest expense
(including interest expense pursuant to Capital Leases), net of
interest and other investment income, plus (d) any net extraordinary
losses included in the calculation of net operating income, minus
(e) any net extraordinary gains included in the calculation of net
operating income."
(c) The definition of "NET WORTH" set forth in Section 1.1 of the
Credit Agreement is duly amended to read as follows:
"NET WORTH" means, for the Company and its Subsidiary
on a consolidated basis, determined in accordance with
GAAP, the sum of (a) capital stock taken at stated or par
value, plus (b) capital surplus, plus (c) retained earnings
less treasury stock, plus or minus, as the case may be (d)
the effect of foreign currency translation.
(d) Section 2.3(a) of the Credit Agreement is hereby amended to read
as follows:
"(a) COMMITMENT FEE. Subject to Section 10.9 hereof, the
Company agrees to pay to the Administrative Lender, for the ratable
account of the Lenders, a commitment fee (which shall be payable
quarterly in arrears on each Quarterly Date and on the Maturity Date)
based on the daily average unused portion of the Commitment (subject
to Section 10.9 hereof, computed on the basis of a year of 360-day
year for the actual number of days elapsed) at the following per
annum percentages, applicable in the following situations:
Applicability Percentage
------------- ----------
(A) If the Fixed Charges Coverage Ratio is 0.175%
greater than or equal to 2.5 to 1
-3-
<PAGE>
(B) If the Fixed Charges Coverage Ratio is 0.200%
less than 2.5 to 1 but is equal to or
greater than 2.0 to 1
(C) If the Fixed Charges Coverage Ratio is 0.250%
less than 2.0 to 1 but is equal to or
greater than 1.75 to 1
(D) If the Fixed Charges Coverage Ratio is 0.300%
less than 1.75 to 1 but is greater than
or equal to 1.50 to 1
(E) If the Fixed Charges Coverage Ratio is 0.350%
less than 1.50 to 1
For purposes of calculation of the commitment fee, Letters of
Credit outstanding from time to time will reduce the unused portion
of the Commitment. The commitment fee shall be subject to reduction
or increase, as applicable and as set forth above, on a quarterly
basis according to the performance of the Company as tested by the
Fixed Charges Coverage Ratio. Any such increase or decrease in such
fee shall be effective on the fifth day following the date of receipt
by the Administrative Lender of the financial statements required
pursuant to Section 6.14(a) or 6.14(b) hereof, as appropriate. If
such financial statements are not received by the fifth day following
the date required, the commitment fee shall be determined as if the
Fixed Charges Coverage Ratio is less than 1.50 to 1 until such time
as such financial statements are received. From and including
August 4, 1997 to the date of the initial adjustment of the
commitment fee to be made as provided above, the percentage shall be
0.300%."
(e) Section 6.1(b) of the Credit Agreement is hereby amended to read
as follows:
"(b) FIXED CHARGES COVERAGE RATIO. The Fixed Charges
Coverage Ratio shall not be less than (i) 1.45 to 1.00 at the end of
any fiscal quarter of the Company until and including the last fiscal
quarter of fiscal year 1998, (ii) 1.50 to 1 at the end of any fiscal
quarter of the Company during fiscal year 1999, (iii) 1.60 to 1 at
the end of any fiscal quarter of the Company during fiscal year 2000,
and (iv) 1.75 to 1 at the end of any fiscal quarter of the Company
thereafter."
(f) Section 6.5 of the Credit Agreement is hereby amended by adding
the following language to the end of subsection (a) thereof:
-4-
<PAGE>
"or (iii) the Company's Ennis warehouse and
underperforming or replacement stores listed on
Schedule 6.5 hereto and related inventory and inventory and
fixtures related to the discontinuance of Discovery Centers
and 3 Dog Bakeries."
(g) The Credit Agreement is hereby amended to add a Schedule 6.5
thereto in the form of Schedule 6.5 to this First Amendment.
(h) The Quarterly Compliance Certificate is hereby amended to be in
the form of EXHIBIT B to this First Amendment.
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
execution and delivery hereof, Company represents and warrants that, as of the
date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1:
(a) the representations and warranties contained in the Credit
Agreement are true and correct on and as of the date hereof as made on and
as of such date;
(b) no event has occurred and is continuing which constitutes a
Default or an Event of Default;
(c) The Company has full power and authority to execute and deliver
this First Amendment, and this First Amendment and the Credit Agreement,
as amended hereby, constitute the legal, valid and binding obligations of
the Company, enforceable in accordance with their respective terms, except
as enforceability may be limited by applicable debtor relief laws and by
general principles of equity (regardless of whether enforcement is sought
in a proceeding in equity or at law) and except as rights to indemnity may
be limited by federal or state securities laws; and
(d) no authorization, approval, consent, or other action by, notice
to, or filing with, any governmental authority or other Person (other than
the Board of Directors of the Company) is required for the execution,
delivery or performance by Company of this First Amendment.
3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective
as of the date first above written, subject to the following:
(a) The Administrative Lender shall have received counterparts of
this First Amendment executed by the Lenders comprising the Majority
Lenders;
(b) The Administrative Lender shall have received counterparts of
this First Amendment executed by the Company and acknowledged by each
Guarantor (as hereinafter defined);
-5-
<PAGE>
(c) The Administrative Lender shall have received a certified
corporate resolution of the Board of Directors of the Company authorizing
the execution, delivery and performance of this First Amendment;
(d) The Administrative Lender shall have received for the account of
each Lender executing this First Amendment a consent fee in an amount
equal to the product of (i) 0.075% multiplied by (ii) such Lender's
Commitment; and
(e) The Administrative Lender shall have received, in form and
substance satisfactory to the Administrative Lender and its counsel, such
other documents, certificates and instruments as the Administrative Lender
shall require.
4. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this First Amendment, each reference
in the Credit Agreement to "this Agreement", "hereunder", or words of like
import shall mean and be a reference to the Credit Agreement, as affected
and amended hereby.
(b) The Credit Agreement, as amended by the amendments referred to
above, shall remain in full force and effect and is hereby ratified and
confirmed.
5. COSTS, EXPENSES AND TAXES. The Company agrees to pay on demand all
costs and expenses of the Administrative Lender in connection with the
preparation, reproduction, execution and delivery of this First Amendment and
the other instruments and documents to be delivered hereunder (including the
reasonable fees and out-of-pocket expenses of counsel for the Administrative
Lender with respect thereto).
6. GUARANTOR'S ACKNOWLEDGMENT. By signing below, each Subsidiary
executing a Subsidiary Guaranty (a "Guarantor") (i) acknowledges, consents and
agrees to the execution, delivery and performance by Borrowers of this First
Amendment, (ii) acknowledges and agrees that its obligations in respect of its
Guaranty are not released, diminished, waived, modified, impaired or affected
in any manner by this First Amendment or any of the provisions contemplated
herein, (iii) ratifies and confirms its obligations under its Guaranty, and
(iv) acknowledges and agrees that it has no claims or offsets against, or
defenses or counterclaims to, its Guaranty.
7. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which when taken together shall constitute but one
and the same instrument.
-6-
<PAGE>
8. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be
governed by and construed in accordance with the laws of the State of Texas and
shall be binding upon the Company and each Lender and their respective
successors and assigns.
9. HEADINGS. Section headings in this First Amendment are included
herein for convenience of reference only and shall not constitute a part of
this First Amendment for any other purpose.
10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST
AMENDMENT, AND THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
- -----------------------------------------------------------------------------
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
- -----------------------------------------------------------------------------
-7-
<PAGE>
IN WITNESS WHEREOF, this First Amendment is executed as of the date first
set forth above.
COMPANY: PETsMART, INC.
By: /s/ C. Donald Dorsey
----------------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
ADMINISTRATIVE LENDER: NATIONSBANK OF TEXAS, N.A., as
Administrative Lender
By: /s/ Natalie Hebert
----------------------------------------
Name: Natalie Hebert
Title: Vice President
ISSUING BANK: NATIONSBANK OF TEXAS, N.A., as
Issuing Bank
By: /s/ Natalie Hebert
----------------------------------------
Name: Natalie Hebert
Title: Vice President
LENDERS: NATIONSBANK OF TEXAS, N.A.,
Individually
By: /s/ Natalie Hebert
----------------------------------------
Name: Natalie Hebert
Title: Vice President
-8-
<PAGE>
WELLS FARGO BANK, N.A.
By: /s/ Edith R. Lim
----------------------------------------
Name: Edith R. Lim
Title: Vice President
By: /s/ Gene Fuentes
----------------------------------------
Name: Gene Fuentes
Title: Assistant Vice President
NORWEST BANK COLORADO, N.A.
By: /s/ Karen I. Hardy
----------------------------------------
Name: Karen I. Hardy
Title: Vice President
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK NEDERLAND", NEW YORK BRANCH
By: /s/ Angela R. Reilly
----------------------------------------
Name: Angela R. Reilly
Title: Vice President
By: /s/ Ian Reece
----------------------------------------
Name: Ian Reece
Title: Senior Credit Officer
-9-
<PAGE>
ABN AMRO BANK N.V., LOS ANGELES
INTERNATIONAL BRANCH
By: /s/ Ellen M. Coleman
----------------------------------------
Name: Ellen M. Coleman
Title: Vice President/Director
By: /s/ Matthew S. Thompson
----------------------------------------
Name: Matthew S. Thompson
Title: Group Vice President/Director
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, LOS ANGELES AGENCY
By: /s/ Vicente L. Timiraos
----------------------------------------
Name: Vicente L. Timiraos
Title: Senior Vice President/Senior
Manager
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By: /s/ T. Morgan Edwards II
----------------------------------------
Name: T. Morgan Edwards II
Title: Deputy General Manager
-10-
<PAGE>
UNITED STATES
NATIONAL BANK OF OREGON
By: /s/ Roger H. Weis
----------------------------------------
Name: Roger H. Weis
Title: Vice President
CORESTATES BANK, N.A.
By: /s/ John A. Ginter
----------------------------------------
Name: John A. Ginter
Title: Assistant Vice President
FLEET NATIONAL BANK
By: /s/ Thomas J. Bullard
----------------------------------------
Name: Thomas J. Bullard
Title: Vice President
THE SUMITOMO BANK OF CALIFORNIA
By: /s/ Matthew R. Van Steenhuyse
----------------------------------------
Name: Matthew R. Van Steenhuyse
Title: Vice President
-11-
<PAGE>
THE BANK OF NOVA SCOTIA
By: /s/ John Quick
----------------------------------------
Name: John Quick
Title: Senior Relationship Manager
THE SAKURA BANK, LIMITED
By: /s/ Ofusa Sato
----------------------------------------
Name: Ofusa Sato
Title: Assistant General Manager
CREDIT LYONNAIS LOS ANGELES BRANCH
By: /s/ Dianne M. Scott
----------------------------------------
Name: Dianne M. Scott
Title: Vice President and Manager
THE DAI-ICHI KANGYO BANK, LTD.,
LOS ANGELES AGENCY
By: /s/ Masatsugu Morishita
----------------------------------------
Name: Masatsugu Morishita
Title:Sr. Vice President & Joint GM
-12-
<PAGE>
BANK OF MONTREAL
By: /s/ Julia B. Buthma
----------------------------------------
Name: Julia B. Buthma
Title: Managing Director
ACKNOWLEDGED AND AGREED TO:
THE WEISHEIMER COMPANIES, INC.
By: /s/ C. Donald Dorsey
---------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
PETSTUFF, INC.
By: /s/ C. Donald Dorsey
---------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
SPORTING DOG SPECIALTIES, INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Chief Financial Officer
-13-
<PAGE>
THE PET FOOD GIANT, INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice Presient
PETSTUFF CANADA (USA) HOLDINGS, INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
PETSTUFF NOVA SCOTIA, INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
STATE LINE TACK, INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
PETSMART VETERINARY SERVICES INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
-14-
<PAGE>
PACIFIC COAST DISTRIBUTING, INC.
By: /s/ C. Donald Dorsey
---------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
STATE LINE TACK OF TEXAS, INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
NATIONAL BRIDLE SHOP, INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
SPAT PRODUCTIONS, INC.
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
3003300 NOVA SCOTIA COMPANY
By: /s/ C. Donald Dorsey
--------------------------------
Name: C. Donald Dorsey
Title: Executive Vice President
-15-
<PAGE>
PETsMART, Inc. and Subsidiaries Exhibit 11.1
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 For the 26 Weeks Ended
August 3, July 28, August 3, July 28,
PRIMARY (1) 1997 1996 1997 1996
- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 114,758 112,302 114,475 111,639
Incremental common equivalents from options and warrants - 5,235 - 5,033
--------------------------- ----------------------------
Weighted average shares outstanding 114,758 117,538 114,475 116,672
--------------------------- ----------------------------
--------------------------- ----------------------------
Net income (loss) $ (35,716) $ 2,164 $ (36,462) $ 2,573
--------------------------- ----------------------------
--------------------------- ----------------------------
Net income (loss) per share $ (0.31) $ 0.02 $ (0.32) $ 0.02
--------------------------- ----------------------------
--------------------------- ----------------------------
</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> 6-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> FEB-03-1997
<PERIOD-END> AUG-03-1997
<CASH> 34,511
<SECURITIES> 0
<RECEIVABLES> 55,832
<ALLOWANCES> 0
<INVENTORY> 284,980
<CURRENT-ASSETS> 412,419
<PP&E> 305,674
<DEPRECIATION> 98,774
<TOTAL-ASSETS> 692,486
<CURRENT-LIABILITIES> 283,993
<BONDS> 59,216
0
0
<COMMON> 11
<OTHER-SE> 333,017
<TOTAL-LIABILITY-AND-EQUITY> 692,486
<SALES> 838,514
<TOTAL-REVENUES> 838,514
<CGS> 640,386<F2>
<TOTAL-COSTS> 640,386
<OTHER-EXPENSES> 249,428<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,116
<INCOME-PRETAX> (57,303)
<INCOME-TAX> (20,841)
<INCOME-CONTINUING> (36,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,462)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
<FN>
<F1> INCLUDES MERGER AND RESTRUCTURING COSTS AND OTHER CHARGES OF $61,222.
<F2> INCLUDES MERGER AND RESTRUCTURING COSTS AND OTHER CHARGES OF $9,400.
</FN>
</TABLE>