<PAGE> 1
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 2, 1998
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 N. 27TH AVENUE
PHOENIX, ARIZONA 85027
(Address of principal executive offices, including Zip Code)
(602) 580-6100
(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, 116,138,274 SHARES AT SEPTEMBER 4, 1998
1
<PAGE> 2
PETsMART, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at August 2, 1998
and February 1, 1998 3
Consolidated Statements of Operations
for the thirteen and twenty-six weeks ended
August 2, 1998 and August 3, 1997 4
Consolidated Statements of Cash Flows
for the twenty-six weeks ended
August 2, 1998 and August 3, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Part II. Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE> 3
PETsMART, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
AUGUST 2, FEBRUARY 1,
1998 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 120,166 $ 125,082
Receivables 51,325 45,853
Merchandise inventories 309,740 317,547
Prepaid expenses and other current assets 29,695 27,228
--------- ---------
Total current assets 510,926 515,710
Property held for sale and leaseback 6,752 2,212
Property and equipment, net 252,504 242,384
Other assets 81,333 79,381
--------- ---------
Total assets $ 851,515 $ 839,687
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 121,492 $ 114,692
Accrued payroll and employee benefits 19,206 18,559
Accrued occupancy expense 16,171 10,548
Accrued merger and restructuring costs 27,034 33,737
Other accrued expenses 26,909 29,980
Current maturities of capital leases 11,975 10,753
--------- ---------
Total current liabilities 222,787 218,269
6 3/4% Subordinated Convertible Notes 200,000 200,000
Capital lease obligations 72,197 68,008
Deferred rents 16,720 17,015
Other liabilities 1,701 1,701
--------- ---------
Total liabilities 513,405 504,993
--------- ---------
Stockholders' equity:
Preferred stock; $.0001 par value, 10,000 shares
authorized, none outstanding -- --
Common stock; $.0001 par value; 250,000 shares
authorized, 116,137 and 115,629 shares issued and outstanding 11 11
Additional paid-in capital 389,788 383,338
Accumulated deficit (49,651) (48,126)
Cumulative foreign currency translation adjustments (2,038) (529)
--------- ---------
Total stockholders' equity 338,110 334,694
--------- ---------
Total liabilities and stockholders' equity $ 851,515 $ 839,687
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
3
<PAGE> 4
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
--------------------------- ---------------------------
AUG. 2, AUG. 3, AUG. 2, AUG. 3,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 509,846 $ 425,860 $ 1,006,410 $ 838,514
Cost of sales 388,252 329,413 762,675 640,386
----------- ----------- ----------- -----------
Gross profit 121,594 96,447 243,735 198,128
Store operating expenses 96,579 87,257 194,626 164,396
Store preopening expenses 3,276 2,827 7,534 6,009
General and administrative expenses 19,637 15,082 34,443 24,501
Merger, business integration and
restructuring costs -- 44,891 -- 54,522
----------- ----------- ----------- -----------
Operating income (loss) 2,102 (53,610) 7,132 (51,300)
Interest income 1,138 63 1,620 113
Interest expense (5,969) (3,404) (11,233) (6,116)
----------- ----------- ----------- -----------
Loss before income taxes (2,729) (56,951) (2,481) (57,303)
Income tax benefit (1,051) (21,235) (956) (20,841)
----------- ----------- ----------- -----------
Net loss (1,678) (35,716) (1,525) (36,462)
----------- ----------- ----------- -----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (2,539) 170 (1,509) 549
----------- ----------- ----------- -----------
Other comprehensive income (loss) (2,539) 170 (1,509) 549
----------- ----------- ----------- -----------
Comprehensive loss $ (4,217) $ (35,546) $ (3,034) $ (35,913)
=========== =========== =========== ===========
Earnings per common share - basic:
Net loss $ (0.01) $ (0.31) $ (0.01) $ (0.32)
=========== =========== =========== ===========
Earnings per common share - assuming dilution:
Net loss $ (0.01) $ (0.31) $ (0.01) $ (0.32)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
4
<PAGE> 5
PETsMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
FOR THE 26 WEEKS ENDED
-----------------------
AUG. 2, AUG. 3,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net loss $ (1,525) $ (36,462)
Adjustments to reconcile net loss to net cash
from (used in) operating activities -
Depreciation and amortization 21,222 16,579
Loss on disposal of property and equipment 808 124
Changes in assets and liabilities:
Receivables (14,650) (6,898)
Merchandise inventories 7,951 15,912
Prepaid expenses and other current assets (2,467) (12,236)
Other assets (2,592) (14,012)
Accounts payable (677) (14,416)
Accrued payroll and employee benefits 647 267
Accrued occupancy expense 5,623 4,763
Accrued merger and integration charges (6,873) 32,196
Other accrued expenses (3,065) (21,585)
Deferred rents (295) 1,001
Other liabilities -- 120
--------- ---------
Net cash from (used in) operating activities 4,107 (34,647)
--------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of leaseholds, fixtures and equipment (21,305) (17,888)
Purchases of property held for sale and leaseback (3,063) --
Proceeds from sales of property 11,742 171
--------- ---------
Net cash used in investing activities (12,626) (17,717)
--------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 4,673 6,398
Borrowings from bank credit facility -- 95,100
Repayment of bank credit facility -- (39,100)
Increase (decrease) in bank overdraft 7,477 (12,318)
Tax benefit resulting from exercise of stock options 427 1,500
Payment on capital lease obligations (7,465) (5,122)
--------- ---------
Net cash from financing activities 5,112 46,458
--------- ---------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES) (1,509) 549
--------- ---------
DECREASE IN CASH
AND CASH EQUIVALENTS (4,916) (5,357)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 125,082 39,868
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 120,166 $ 34,511
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
5
<PAGE> 6
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
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.
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS 130"), during the first
quarter of fiscal 1998. SFAS 130 establishes standards for reporting of
comprehensive income and its components. All prior periods have been
presented in accordance with SFAS 130. The income tax expense (benefit)
related to items of other comprehensive income was approximately
$(1,589,000) and $106,000 for second quarter 1998 and 1997,
respectively. For the twenty-six weeks ended August 2, 1998 and August
3, 1997, the income tax expense (benefit) related to items of other
comprehensive income was approximately $(945,000) and $344,000,
respectively.
Because of the seasonal nature of the Company's business, the results
of operations for the thirteen weeks and twenty-six weeks ended August
2, 1998 and August 3, 1997 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 1, 1998, included in the Company's Annual Report on
Form 10-K (File No. 0-21888) filed with the Securities and Exchange
Commission on April 6, 1998.
NOTE 2 - EARNINGS PER SHARE:
PETsMART adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") in fiscal 1997. SFAS 128 revised
standards for the computation and presentation of earnings per share,
requiring the presentation of both basic earnings per share and
earnings per share assuming dilution. All prior period earnings per
share data presented has been restated in accordance with SFAS 128.
Basic earnings per share are computed by dividing net income (loss) by
the weighted average of common shares outstanding during each period.
Earnings per share assuming dilution are computed by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period after giving effect to dilutive stock
options and adjusted for dilutive common shares assumed to be issued on
conversion of PETsMART's subordinated convertible notes.
A reconciliation of the basic and diluted per share computations for
the thirteen weeks and twenty-six weeks ended August 2, 1998 and August
3, 1997 are as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------------------------------------------------
AUGUST 2, 1998 AUGUST 3, 1997
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME (LOSS) SHARES AMOUNT INCOME (LOSS) SHARES AMOUNT
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (1,678) 116,104 $(0.01) $(35,716) 114,758 $(0.31)
-------- -------- ------ -------- -------- ------
Earnings (loss) per common share (1,678) 116,104 (0.01) (35,716) 114,758 (0.31)
Effect of dilutive securities:
Options -- -- -- -- -- --
-------- -------- ------ -------- -------- ------
Earnings (loss) per common
share - assuming dilution $ (1,678) 116,104 $(0.01) $(35,716) 114,758 $(0.31)
========= ======== ====== ========= ======== ======
</TABLE>
6
<PAGE> 7
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
----------------------------------------------------------------------
AUGUST 2, 1998 AUGUST 3, 1997
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME (LOSS) SHARES AMOUNT INCOME (LOSS) SHARES AMOUNT
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (1,525) 115,984 $(0.01) $(36,462) 114,475 $(0.32)
-------- -------- ------ -------- -------- ------
Earnings (loss) per common share (1,525) 115,984 (0.01) (36,462) 114,475 (0.32)
Effect of dilutive securities:
Options -- -- -- -- -- --
-------- -------- ------ -------- -------- ------
Earnings (loss) per common
share - assuming dilution $ (1,525) 115,984 $(0.01) $(36,462) 114,475 $(0.32)
======== ======== ====== ======== ======== ======
</TABLE>
At August 2, 1998, no shares of common stock had been issued upon
conversion of the subordinated convertible notes issued in November
1997. These notes are convertible into an aggregate of approximately
22.8 million shares of common stock. These shares were not included in
the calculation of diluted earnings per share for the thirteen and
twenty-six weeks ended August 2, 1998 due to the anti-dilutive effect
they would have on earnings per share if converted.
NOTE 3 - BUSINESS COMBINATIONS:
During the fourth quarter of 1996, the Company acquired all of the
outstanding equity interests of Pet City Holdings plc 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.
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. These charges included
costs associated with reformatting, refixturing, and remerchandising of
the acquired superstores 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. Throughout
fiscal 1997, the Company recorded a total of $13.6 million of similar
business integration costs, primarily store conversion costs,
associated with the Pet City merger. 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.
NOTE 4 - MERGER AND RESTRUCTURING COSTS:
In second quarter 1997, the Company incurred charges of
$61.0 million to cover (i) the costs of closing nine underperforming
stores and relocating 24 stores previously identified as candidates for
closure over the next two years, (ii) the discontinuance of the
Discovery Center department within all stores, including the write-off
of related inventory and fixtures, (iii) provisions for the closure of
excess facilities, and (iv) other charges, including merger and
7
<PAGE> 8
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
integration charges of $4.1 million as a result of the Pet City
acquisition and additional costs resulting from the Company's prior
acquisitions (See Note 3). 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
second quarter 1997. The $16.1 million of other one-time
expenses were comprised of the write-down or write-off of certain
discontinued Discovery Center merchandise from cost to net realizable
value and impaired assets, reserves for litigation and other matters.
The $3.3 million of other expenses reflected as a component of store
operating expenses and the $3.4 million of one-time expenses reflected
as general and administrative expenses consist primarily of a change in
estimated self-insurance costs due to adverse loss developments in the
Company's worker's compensation experience, expenses related to the
preliminary stages of a consulting project for the new management
information system, certain costs of several litigation matters, as
well as expenses related to other miscellaneous matters.
The activity within the accrued merger and restructuring costs
liability account during the first and second quarter 1998 is
summarized below (in thousands):
<TABLE>
<CAPTION>
BALANCE AT ADDITIONAL PAYMENTS/ BALANCE AT
FEB. 1, 1998 EXPENSES ASSET WRITE-OFFS AUG. 2, 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Lease termination & real estate costs $ 33,390 $ -- $ (6,596) $ 26,794
Accrued business integration costs 347 -- (107) 240
-------- -------- -------- --------
$ 33,737 $ -- $ (6,703) $ 27,034
======== ======== ======== ========
</TABLE>
NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use" ("SOP 98-1"). SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. Under the provisions of
SOP 98-1, software development is divided into three phases: the
preliminary project stage, which includes conceptual formulation and
selection of alternatives; the application development stage, which
includes design of chosen path, coding, installation of hardware and
testing; and the post-implementation/operation stage, which includes
training and application maintenance. Generally, only internal and
external costs incurred during the second phase, application
development stage, should be capitalized with the exception of data
conversion and training costs, which, when incurred during this phase,
should be expensed. The Company is substantially in compliance with the
provisions of SOP 98-1 and does not anticipate a material effect on its
financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 is
effective for financial statements for fiscal years beginning after
December 15, 1998. Under the provisions of SOP 98-5, costs of start-up
activities, including organization costs, should be expensed as
incurred. The Company currently expenses its store preopening costs in
the period in which the store opens. The Company will adopt SOP 98-5 in
the first quarter of fiscal 1999 and does not anticipate a material
effect on earnings as a result of the adoption of SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective
for financial statements for fiscal years beginning after June 15,
1999. This statement establishes the accounting and reporting standards
for derivative instruments and hedging activities, requiring that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure them at fair value. It also
provides for matching of the timing of gain or loss recognition on the
hedging instrument with the recognition of (i) the changes in
8
<PAGE> 9
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
the fair value of the hedged asset or liability related to the hedged
risk or (ii) the hedged forecasted transaction earnings effect. The
Company is evaluating the effect SFAS 133 will have on its financial
reporting and disclosures and when the statement will be adopted.
NOTE 6 - FINANCIAL INFORMATION BY BUSINESS SEGMENT:
PETsMART adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") at the beginning of fiscal 1998. SFAS 131 revised
standards for the reporting of information about operating segments of
public business enterprises. There was no change in the basis of
segmentation or in the measurement of segment profit or loss compared
to the 1997 fiscal year as a result of the adoption of SFAS 131.
The Company operates three reportable business segments. PETsMART North
American operations, the largest segment, includes all retail stores in
the United States and Canada, including veterinary services, along with
the warehousing and corporate functions that support them. The PETsMART
U.K. segment includes all retail stores in the United Kingdom,
including the warehousing and corporate functions specific to the U.K.
operations. The PETsMART DIRECT segment represents the Company's direct
marketing operations, including its separate corporate and warehousing
functions. This segmentation is consistent with the format reviewed by
the Company's management, in accordance with the provisions of SFAS
131.
Operating results and other financial data by business segment for the
thirteen and twenty-six weeks ended August 2, 1998 and August 3, 1997,
were as follows:
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 26 WEEKS ENDED
--------------------------- ---------------------------
AUG. 2, AUG. 3, AUG. 2, AUG. 3,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales:
PETsMART North America $ 436,085 $ 361,334 $ 858,378 $ 711,848
PETsMART U.K 48,384 39,353 96,952 73,226
PETsMART DIRECT - External customers 25,377 25,173 51,080 53,440
PETsMART DIRECT - Intersegment 3,785 4,014 6,273 5,383
Eliminations (3,785) (4,014) (6,273) (5,383)
----------- ----------- ----------- -----------
Total net sales $ 509,846 $ 425,860 $ 1,006,410 $ 838,514
=========== =========== =========== ===========
Operating income (loss):
PETsMART North America $ 4,058 $ 5,584 $ 11,972 $ 14,040
PETsMART U.K (3,422) 571 (7,086) 1,652
PETsMART DIRECT 1,466 1,276 2,246 3,680
Merger, business integration and restructuring costs -- (61,041) -- (70,672)
----------- ----------- ----------- -----------
Operating income (loss) 2,102 (53,610) 7,132 (51,300)
Interest income 1,138 63 1,620 113
Interest expense (5,969) (3,404) (11,233) (6,116)
----------- ----------- ----------- -----------
Loss before income taxes $ (2,729) $ (56,951) $ (2,481) $ (57,303)
=========== =========== =========== ===========
</TABLE>
9
<PAGE> 10
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
Total assets by business segment as of August 2, 1998, and February 1,
1998, were as follows:
<TABLE>
<CAPTION>
AUG. 2, FEB. 1,
1998 1998
---------- ----------
(in thousands)
<S> <C> <C>
PETsMART North America $ 720,870 $ 715,691
PETsMART U.K. 94,975 87,731
PETsMART DIRECT 35,670 36,265
---------- ----------
Total assets $ 851,515 $ 839,687
========== ==========
</TABLE>
Net sales in the PETsMART North America segment increased $74.8
million, or 20.7%, during the second quarter of fiscal 1998 as compared
to the same period in fiscal 1997. The main sources of this increase
were a net increase in the number of stores open in North America from
373 at August 3, 1997 to 432 at August 2, 1998, and a comparable store
sales increase of 8.0% for the second quarter of fiscal 1998. Operating
income in the PETsMART North America segment decreased $1.5 million
from the second quarter of fiscal 1997. This decrease reflected
increased general and administrative expenses resulting from $4.7
million of expenses associated with legal and settlement costs and
executive severance.
Net sales for the second quarter 1998 increased $9.0 million, or 22.9%,
from the second quarter 1997 in the PETsMART U.K. segment. The number
of open stores increased from 67 at August 3, 1997 to 89 at August 2,
1998. Comparable stores sales decreased 3.3%. The U.K. segment reported
an operating loss of $3.4 million in the second quarter 1998 versus
operating income of $0.6 million for the second quarter 1997. The
decline was the result of the U.K. comparable store sales decreases due
to reduced advertising expenditures in 1998 versus last year when the
Company was changing the trade name from Pet City to PETsMART, higher
occupancy costs, particularly in the new, larger stores, and increased
warehouse and distribution costs.
The PETsMART DIRECT segment reported slightly increased net sales and
operating income in the second quarter 1998 compared to second quarter
1997. The increases in both areas were inclusive of a decision to
reduce circulation of nonproductive catalogs during the first and
second quarters of 1998.
For the twenty-six weeks ended August 2, 1998, net sales in the
PETsMART North America segment increased $146.5 million, or 20.6%, as
compared to the same period in fiscal 1997. The main sources of this
increase were a net increase in the number of stores open in North
America from 373 at August 3, 1997 to 432 at August 2, 1998, and a
comparable store sales increase of 7.2% for the twenty-six weeks ended
August 2, 1998. Operating income in the PETsMART North America segment
decreased $2.1 million from the comparable twenty-six week period of
fiscal 1997. This decrease reflected increased general and
administrative expenses resulting from $4.7 million of expenses
associated with legal and settlement costs and executive severance.
Net sales for the PETsMART U.K. segment increased $23.7 million, or
32.4%, in the twenty-six weeks ended August 2, 1998 as compared to the
same period in 1997. The number of open stores increased from 67 at
August 3, 1997 to 89 at August 2, 1998. Comparable stores sales for the
twenty-six week period decreased 1.3%. The U.K. segment reported an
operating loss of $7.1 million in the twenty-six week period ended
August 2, 1998 versus operating income of $1.7 million for the same
period in 1997. The decline was the result of the disappointing U.K.
comparable store sales increases due to decreased advertising
expenditures in 1998 versus last year when the Company was changing the
trade name from Pet City to PETsMART, higher occupancy costs,
particularly in the new, larger stores, and increased warehouse and
distribution costs.
10
<PAGE> 11
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
The PETsMART DIRECT segment reported decreased net sales and operating
income in the twenty-six week period ended August 2, 1998 compared to
the same period in 1997. The decreases in both areas reflected a
decision to reduce circulation of nonproductive catalogs during the
first and second quarters of 1998.
11
<PAGE> 12
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
included in the Company's Form 10-K for the year ended February 1, 1998.
OVERVIEW
PETsMART is the largest operator of superstores specializing in pet
food, supplies and services in North America and the United Kingdom. At August
2, 1998, the Company operated 521 superstores, consisting of 414 superstores in
the United States, 89 superstores in the United Kingdom, and 18 superstores in
Canada. PETsMART's store base has grown rapidly since the Company's inception in
1986 through the opening of new stores and through the acquisitions of PETZAZZ
in March 1994, Petstuff in June 1995, Pet Food Giant in September 1995, and Pet
City in December 1996. The Company also acquired two leading catalog retailers,
Sporting Dog in May 1995 and State Line Tack in January 1996. All of these
transactions were accounted for as poolings of interest. Earnings (loss) per
share are presented in conformity with Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
The Company expects that future increases in net sales and net income,
if any, will be dependent on the opening of additional superstores and the
improved performance of new and existing superstores. In view of the increasing
maturity of its superstore base, as well as the planned opening of additional
superstores in existing markets and single-store markets, the Company
anticipates that its comparable store sales increases may be lower in future
periods. As a result of its expansion plans, the Company anticipates 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 has achieved less
favorable operating results in certain North American geographic regions it
recently entered than it has achieved historically in other regions. In
addition, because new superstores have higher payroll, advertising and other
store level expenses as a percentage of sales than mature superstores, the
impact of new superstore openings will also contribute to lower store operating
margins until they become established. The Company currently 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 period.
DEVELOPMENTS DURING FISCAL 1997
For the first half of fiscal 1997, the Company reported disappointing
operating results due to a combination of reduced inventory levels, which led to
out-of-stock conditions in certain key categories, and lost sales momentum as a
result of a departure from the Company's historically more effective advertising
programs. In June 1997, Samuel J. Parker, the Company's Chairman, resumed his
former role as Chief Executive Officer and began the implementation of a series
of "Back to Basics" initiatives intended to refocus the Company and to improve
financial performance. In connection with the implementation of these
initiatives and other considerations, PETsMART recorded restructuring expenses
and a charge for merger and business integration costs aggregating $61.0 million
before tax benefits in the second quarter of fiscal 1997, of which approximately
$40.0 million represented a cash charge. These charges consisted of $44.9
million in restructuring expenses related to the closure and relocation of
certain stores, the elimination of certain departments within PETsMART
superstores, and additional costs associated with certain of the Company's prior
acquisitions, and $16.1 million of other one-time charges which were recorded as
components of cost of goods sold, store operating expenses and general and
administrative expenses.
The $16.1 million of other one-time expenses in the second quarter of
fiscal 1997 were comprised of the write-down or write-off of certain
discontinued merchandise and impaired assets, and other matters. Of these
expenses, the $9.4 million that was reflected as a component of cost of goods
sold included 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.
As a consequence of its "Back to Basics" initiatives and to better focus its
merchandise selections on pet-related products, the
12
<PAGE> 13
Company determined that its "Discovery Center" merchandise, consisting primarily
of educational and human-oriented items, should be discontinued. Given the
square footage and store location devoted to this area, combined with the lower
turnover and sell-through gross margin, management believed the store area would
be better utilized with different merchandise. The $3.3 million of other
expenses reflected as a component of store operating expenses and the $3.4
million of one-time expenses reflected as general and administrative expenses
consist primarily of a change in estimated self-insurance costs due to adverse
loss developments in the Company's worker's compensation experience, expenses
related to the preliminary stages of a consulting project for the new management
information system, certain costs of several litigation matters, as well as
expenses related to other miscellaneous matters.
Of the $44.9 million in restructuring charges recorded in the second
quarter of fiscal 1997, approximately $30.0 million was related to the costs of
closing or relocating 33 stores, of which 31 were former PETZAZZ, Petstuff or
Pet Food Giant stores, approximately $8.5 million was related to the costs of
discontinuing the Discovery Center department in all superstores and the
write-down or write-off of related fixtures and approximately $4.1 million was
related to the Company's previous acquisitions. The remaining charges of $2.3
million included approximately $1.0 million of anticipated 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 other entities accounted for under the cost method, which
were impaired as a result of the Company's decision to exit certain departments
within the PETsMART superstores.
As a result of the acquisition of Pet City, the Company recorded
charges for merger and business integration costs of $13.6 million during the
full fiscal year 1997 (including $10.7 million incurred through second quarter
1997), primarily related to reformatting, refixturing, and remerchandising the
acquired stores to the PETsMART superstore format and other costs of
integration. The majority of these expenses related to an advertising program to
promote the new store image and format. The Company also recorded charges of
approximately $3.0 million for merger and business integration costs during
second quarter 1997 as a result of additional real estate costs incurred in
connection with certain of its previous acquisitions.
The activity within the accrued merger and restructuring costs liability account
during first and second quarter 1998 is summarized below (in thousands):
<TABLE>
<CAPTION>
BALANCE AT ADDITIONAL PAYMENTS/ BALANCE AT
FEB. 1, 1998 EXPENSES ASSET WRITE-OFFS AUG. 2, 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Lease termination & real
estate costs $ 33,390 $ -- $ (6,596).. $ 26,794
Accrued business
integration costs 347 -- (107).. 240
-------- -------- -------- --------
$ 33,737 $ -- $ (6,703).. $ 27,034
======== ======== ======== ========
</TABLE>
In November 1997, $200,000,000 of 6 3/4% Subordinated Convertible Notes
(the "Notes") were issued by the Company and sold to "qualified institutional
buyers" (as defined in Rule 144A of the Securities Act) in transactions exempt
from registration under the Securities Act, and in sales outside the United
States within the meaning of Regulation S under the Securities Act of 1933, as
amended. The net proceeds to PETsMART from the sale of the Notes were
approximately $193,250,000.
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<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net
sales, unless otherwise indicated, of certain items included in the Company's
statement of operations:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------- ----------------
AUG. 2, AUG. 3, AUG. 2, AUG. 3,
1998 1997(a) 1998 1997(a)
----- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.2 75.1 75.8 75.2
----- ----- ----- -----
Gross profit 23.8 24.9 24.2 24.8
Store operating expenses 18.9 19.7 19.3 19.2
Store preopening expenses 0.6 0.7 0.7 0.7
General and administrative expenses 3.9 2.7 3.4 2.5
Merger, business integration and restructuring costs -- 10.5 -- 6.5
----- ----- ----- -----
Operating income (loss) 0.4 (8.8) 0.7 (4.2)
Interest income 0.2 0.0 0.2 0.0
Interest expense 1.2 0.8 1.1 0.7
----- ----- ----- -----
Loss before income taxes (0.5) (9.6) (0.2) (4.9)
Income tax benefit (0.2) (3.6) (0.1) (1.8)
----- ----- ----- -----
Net loss (0.3)% (6.0)% (0.2)% (3.1)%
===== ===== ===== =====
</TABLE>
(a) Excludes restructuring charges of $9.4 million, $3.3 million, and $3.4
million recorded as components of cost of sales, store operating expenses,
and general and administrative expenses, respectively. See "Developments
During Fiscal 1997" above.
SECOND QUARTER FISCAL 1998 COMPARED TO SECOND QUARTER FISCAL 1997
The following discussion of results of operations for second quarter
1998 and second quarter 1997 excludes the effects of the restructuring, merger
and business integration costs discussed above in "Developments During Fiscal
1997."
Net sales increased 19.7% to approximately $509.8 million for the
thirteen weeks ended August 2, 1998 from $425.9 million for the thirteen weeks
ended August 3, 1997. Comparable North American store sales increased 8.0% for
the quarter, and comparable United Kingdom store sales decreased 3.3%. During
second quarter 1998, the Company opened 28 new superstores, including four
replacement stores, and closed two stores in North America and opened one store
and closed one store in the United Kingdom. The Company had 521 superstores in
operation at August 2, 1998 compared to 440 superstores open at August 3, 1997.
Gross profit, defined as net sales less cost of sales, including
distribution costs and store occupancy costs, decreased as a percentage of net
sales from 24.9% for second quarter 1997 to 23.8% in second quarter 1998. This
result principally reflected improved product margins offset by higher occupancy
costs in certain new locations, particularly in newer United Kingdom stores,
increased warehouse and distribution costs and higher personnel costs in
veterinarian operations.
Store operating expenses, which includes payroll and benefits,
advertising and other store level expenses, decreased as a percentage of net
sales to 18.9% for second quarter 1998 from 19.7% for second quarter 1997. The
decrease reflected a reduction in North American advertising expenses and an
ongoing focus on expense management in the retail operations.
Store preopening expenses as a percentage of net sales decreased to
0.6% for second quarter 1998, compared to 0.7% for second quarter 1997.
Including four North American replacement stores and one new United Kingdom
store, 29 stores were opened during second quarter 1998. The average store
preopening expense of $113,000 per store in second quarter 1998 was higher than
historical levels due to the need to hire temporary setup personnel in certain
tight labor markets.
14
<PAGE> 15
General and administrative expenses as a percentage of sales increased
to 3.9% for second quarter 1998, as compared to 2.7% for second quarter 1997.
The increase was directly related to legal and settlement costs, executive
severance, costs incurred in connection with the closure of stores and
additional management information system costs related to worldwide systems
initiatives. Excluding the $4.7 million of nonrecurring legal and settlement
costs and executive severance, general and administrative expenses as a
percentage of sales were 2.9% for second quarter 1998.
The Company's operating income decreased to $2.1 million for second
quarter 1998 from $7.4 million for second quarter 1997, excluding the $61.0
million of merger and restructuring charges recorded in second quarter 1997.
Excluding the merger and restructuring charges, operating income as a percentage
of net sales decreased from 1.7% for second quarter 1997 to 0.4% for second
quarter 1998. This decrease was primarily due to increased cost of sales and
general and administrative expenses as described above. The decrease also was a
result of disappointing sales and gross margins in the United Kingdom stores.
Interest income increased to $1.1 million for second quarter 1998 from
$0.1 million for second quarter 1997 principally due to the increase in average
cash balances from the offering of Notes completed in November 1997, as well as
the planned reduction in per-store inventory during 1998. Interest expense
increased to $6.0 million for the second quarter 1998 from $3.4 million for
second quarter 1997. The increase was also primarily related to the note
offering completed in November 1997.
For second quarter 1998, income taxes were provided at an annual
effective rate of 38.5%. The Company's income tax provision for second quarter
1997 reflected the effects of the nondeductibility of certain of the costs
associated with the merger and restructuring charges recorded. 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%
for the first half of 1997.
As a result of the foregoing, the Company reported a net loss of $1.7
million (or $0.01 per share - diluted) for second quarter 1998 compared to a net
loss of $35.7 million (or $0.31 per share - diluted) for the second quarter
1997. Excluding the second quarter 1997 merger and restructuring 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 - diluted).
TWENTY-SIX WEEKS ENDED AUGUST 2, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
3, 1997
The following discussion of results of operations for the twenty-six
weeks ended August 2, 1998 and August 3, 1997 excludes the effects of the
restructuring, merger and business integration costs discussed above in
"Developments During Fiscal 1997."
Net sales increased 20.0% to approximately $1.01 billion for the
twenty-six weeks ended August 2, 1998 from $838.5 million for the twenty-six
weeks ended August 3, 1997. Comparable North American store sales increased 7.2%
for the period, and comparable United Kingdom store sales decreased 1.3%. During
the twenty-six weeks ended August 2, 1998, the Company opened 62 new
superstores, including 11 replacement stores, and closed 10 stores in North
America and opened seven stores and closed two stores in the United Kingdom. The
Company had 521 superstores in operation at August 2, 1998 compared to 440
superstores open at August 3, 1997.
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 24.2% for the twenty-six week periods ended August 2, 1998 from 24.8%
for the same period in 1997. This result principally reflected improved product
margins offset by higher occupancy costs in certain new locations, particularly
in newer United Kingdom stores, increased United Kingdom warehouse and
distribution costs and higher personnel costs in veterinarian operations.
Store operating expenses, which includes payroll and benefits,
advertising and other store level expenses, increased slightly as a percentage
of net sales to 19.3% for the twenty-six weeks ended August 2, 1998 from 19.2%
for the twenty-six weeks ended August 3, 1997.
15
<PAGE> 16
Store preopening expenses as a percentage of net sales remained
constant at 0.7% for the twenty-six weeks ended August 2, 1998, compared to 0.7%
for the same period in 1997. Including 11 North American replacement stores and
seven new United Kingdom stores, 69 stores were opened during the first
twenty-six weeks of fiscal 1998. The average store preopening expense of
$109,000 per store in the first twenty-six weeks of fiscal 1998 was higher than
historical levels due to the need to hire temporary setup personnel in certain
tight labor markets.
General and administrative expenses as a percentage of sales increased
to 3.4% for the twenty-six weeks ended August 2, 1998, as compared to 2.5% for
the twenty-six weeks ended August 3, 1997. The increase was directly related to
costs incurred in connection with the closure of stores and additional
management information system costs related to worldwide systems initiatives, as
well as $4.7 million of nonrecurring legal and settlement costs and executive
costs recorded in second quarter 1998. Excluding the legal and severance costs,
general and administrative costs as a percentage of sales were 3.0% for the
first twenty-six weeks of fiscal 1998.
The Company's operating income decreased to $7.1 million for the
twenty-six weeks ended August 2, 1998 from $19.4 million for the twenty-six
weeks ended August 3, 1997, excluding the $70.7 million of merger and
restructuring charges recorded in the twenty-six weeks ended August 3, 1997.
Excluding the merger and restructuring charges, operating income as a percentage
of net sales decreased from 2.3% for the twenty-six weeks ended August 3, 1997
to 0.7% for the twenty-six weeks ended August 2, 1998. This decrease was
primarily due to increased cost of sales and general and administrative expenses
as described above. The decrease also was a result of disappointing sales and
gross margins in the United Kingdom stores.
Interest income increased to $1.6 million for the twenty-six weeks
ended August 2, 1998 from $0.1 million for the same fiscal period in 1997
principally due to the increase in average cash balances from the note offering
completed in November 1997, as well as the planned reduction in per-store
inventory during 1998. Interest expense increased to $11.2 million for the
twenty-six weeks ended August 2, 1998 from $6.1 million for the twenty-six weeks
ended August 3, 1997. The increase was also primarily related to the note
offering completed in November 1997.
For the twenty-six weeks ended August 2, 1998, income taxes were
provided at an annual effective rate of 38.5%. The Company's income tax
provision for 1997 reflects the effects of the nondeductibility of certain of
the costs associated with the merger and restructuring charges recorded.
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% for the first half of 1997.
As a result of the foregoing, the Company reported a net loss of $1.5
million (or $0.01 per share - diluted) for the twenty-six weeks ended August 2,
1998 compared to a net loss of $36.5 million (or $0.32 per share - diluted) for
the same period in fiscal 1997. Excluding the first and second quarter 1997
merger and restructuring charges and the related tax benefits, net income for
the twenty-six weeks ended August 3, 1997, on a comparable basis, was $8.2
million (or $0.07 per share - diluted).
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and expansion program to date
principally through cash flows from operations, the sale of equity and debt
securities, lease financing and borrowings under its credit facility. Additional
sources of financing have included vendor terms on inventory purchases.
At August 2, 1998, total assets were $851.5 million, of which $510.9
million were current assets. Cash and cash equivalents were $120.2 million.
Cash provided by operations was $4.1 million for the twenty-six weeks
ended August 2, 1998, compared to cash used in operations of $34.6 million for
the same period of the prior year. Approximately $8.0 million of the net cash
provided by operations during the twenty-six weeks ended August 2, 1998 was
directly attributable to the Company's planned reduction in per-store inventory
during the 1998 fiscal year. Merchandise accounts payable leveraging (the
percentage of merchandise inventory financed by vendor credit terms, e.g.,
accounts payable divided by merchandise inventory), increased to 39.2% at August
2, 1998, compared to 36.1% at February 1, 1998. Inventory balances were
approximately $309.7 million at August 2, 1998, and $317.5 million at February
1, 1998. Average North American store inventory, which excludes the inventory of
16
<PAGE> 17
PETsMART DIRECT, decreased 12.9% to $616,000 per store at August 2, 1998, from
approximately $707,000 at February 1, 1998.
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 $12.6 million
for the twenty-six weeks ended August 2, 1998.
Net cash flow from financing activities, primarily the change in the
Company's bank overdraft and proceeds from the exercise of employee stock
options, was $5.1 million for the twenty-six weeks ended August 2, 1998.
The Company's primary long-term capital requirements are for opening
new superstores, the costs of closing redundant or inadequate superstores
identified in second quarter 1997, merger and business integration costs and
corporate investment, including costs associated with the development and
implementation of the Company's new information system and for working capital.
All of the Company's superstores are leased facilities. The Company
estimates that the cash requirements after lease financing to open each new U.S.
prototype superstore, including store fixtures and equipment, leasehold
improvements, preopening costs and inventory is approximately $525,000. This
amount will typically include an average of approximately $50,000 for leasehold
improvements (an average of approximately $200,000 if the superstore site is a
rehabilitated unit), approximately $100,000 for preopening costs, and
approximately $375,000 for inventory, net of accounts payable. Approximately
$450,000 is required for store fixtures and equipment, which is typically
fully-funded through lease financing.
Based upon the Company's current plan to open approximately 12
additional North American superstores by the end of fiscal 1998, approximately
$11.7 million will be needed to finance the Company's new superstore openings in
the remainder of fiscal 1998, of which approximately $5.4 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.
PETsMART is in the design/application development stage of developing
and implementing an integrated worldwide information system which will feature a
common set of applications. The Company estimates that its costs in connection
with the development and implementation of the new system, before giving
consideration to any lease financing that may be available, will be up to $20
million annually through fiscal 2000. The Company believes that certain hardware
and software components of the new system will be financed through lease
transactions, some of which have been completed. There can be no assurance that
the actual costs for the new system will not exceed current estimates, or that
the new system can be developed, tested and implemented on a timely basis, or at
all, or that it will deliver the anticipated operational benefits in a reliable
manner. Failure to complete the new system on a timely basis could materially
adversely affect the Company's future operating results or its ability to
expand. In particular, should the new system not be operational, or should an
alternate solution not be implemented by January 1, 2000, the Company may
experience software difficulties as a result of the so-called "Year 2000"
problem. In the event that additional financing is required to complete the
Company's new information system, there can be no assurance that such additional
financing will be available to the Company on acceptable terms.
Capital expenditures, net of construction allowances, were
approximately $21.3 million during the twenty-six weeks ended August 2, 1998.
Such expenditures were used primarily for the opening of new superstores in
North America and the United Kingdom, the development and implementation of the
Company's new information system and the remodel and maintenance of the
Company's existing superstores.
Management believes that its existing cash and cash equivalents,
together with cash flow from operations, borrowing capacity under its bank
credit facility and available lease financing will provide adequate funds for
the Company's foreseeable working capital needs, planned capital expenditures
and debt service obligations. The Company's ability to fund its operations and
to make planned capital expenditures and scheduled debt payments, to refinance
indebtedness and to remain in compliance with all of the financial covenants
under its debt agreements depends on its future operating performance and cash
flow, which in turn are subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond the Company's
control.
17
<PAGE> 18
SEASONALITY AND INFLATION
The Company's business is subject to some seasonal fluctuation and it
typically realizes a substantial portion of its net sales and operating profits
during the fourth fiscal quarter. In addition, sales of certain of the Company's
products and services designed to address pet health needs, such as flea and
tick problems, have been and may continue to be negatively impacted by the
introduction of alternative treatments, as well as by variations in weather
conditions. In addition, because PETsMART's superstores typically draw customers
from a large trade area, sales may be impacted by adverse weather or travel
conditions.
The Company's results of operations and financial position are
presented based upon historical cost. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"). SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. Under the provisions of SOP 98-1, software
development is divided into three phases: the preliminary project stage, which
includes conceptual formulation and selection of alternatives; the application
development stage, which includes design of chosen path, coding, installation of
hardware and testing; and the post-implementation/operation stage, which
includes training and application maintenance. Generally, only internal and
external costs incurred during the second phase, application development stage,
should be capitalized with the exception of data conversion and training costs,
which, when incurred during this phase, should be expensed. The Company is
substantially in compliance with the provisions of SOP 98-1 and does not
anticipate a material effect on its financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Under
the provisions of SOP 98-5, costs of start-up activities, including organization
costs, should be expensed as incurred. The Company currently expenses its store
preopening costs in the period in which the store opens. The Company will adopt
SOP 98-5 in the first quarter of fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
financial statements for fiscal years beginning after June 15, 1999. This
statement establishes the accounting and reporting standards for derivative
instruments and hedging activities, requiring that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure them at fair value. It also provides for matching of the
timing of gain or loss recognition on the hedging instrument with the
recognition of (i) the changes in the fair value of the hedged asset or
liability related to the hedged risk or (ii) the hedged forecasted transaction
earnings effect. The Company is evaluating the effect SFAS 133 will have on its
financial reporting and disclosures and when the statement will be adopted.
YEAR 2000 READINESS
The Year 2000 systems processing problem, as it is commonly known, is
caused by currently utilized computer systems, including several used by the
Company, being coded to only accept two-digit codes for the year field in a date
set of data. Beginning in the year 2000, these date fields must be able to
accept four-digit entries to distinguish 1900 base-year dates with 2000
base-year dates. The Company is and has been addressing the Year 2000 systems
issue through various initiatives, all of which are in progress. A new
integrated worldwide information system, which is already Year 2000 compliant,
is currently in the development and implementation stages. The system is
scheduled to be operational by the first half of fiscal 1999. Other initiatives
in place include issue awareness programs, inventory and identification of all
Year 2000-sensitive components (including hardware, software, and
telecommunications), requesting of compliance status statements from Company
business partners, suppliers, and vendors, and testing of all new and existing
systems. Year 2000 compliance activities are expected to be complete by June
1999. The Company estimates that its costs in connection with the development
and implementation of the new worldwide information system, before giving
consideration to any lease financing that may be available, will be up to $20
million annually through fiscal year 2000, plus maintenance and upkeep costs
which are not expected to be material. Similar Year 2000 readiness programs are
in place in the Company's United Kingdom and Catalog operational segments, with
costs to address those segment's Year 2000 issues not expected to be material.
18
<PAGE> 19
There can be no assurance, however, that the new worldwide information
system can be developed, tested, and implemented on a timely basis or that it
will deliver the desired operational benefits. Nor can there be assurance that
the initiatives put in place to address the Year 2000 issues will identify and
remove all potential operational impacts. While significant economic detriment
from Year 2000 issues is not expected, there can be no assurance that there will
not be operational difficulties in the Company's stores, warehouses, or
corporate offices, the financial magnitude of which is not currently estimable.
The Company does, however, have a number of back-up alternatives available for
its store and corporate systems if the new worldwide information system is not
implemented on schedule or if it encounters significant operating difficulties.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 6, 1998, the Company was served with a complaint entitled
Miller v. Parker, et al. (Case No. CV 98-0020 PHX RCS) in the Federal District
Court for the District of Arizona, Phoenix Division by a putative class of
investors in PETsMART, Inc. securities. The lawsuit alleges, among other things,
that the Company and its officers and directors issued materially false
financial statements about the Company's flea and tick product inventory,
financial condition, sales and use tax obligations, and results of operations.
Several additional complaints by putative class representatives alleging
substantially the same allegations have been filed in the District of Arizona.
On May 18, 1998, the District Court entered an order consolidating the
securities class action litigation into a single action entitled In Re PETsMART,
Inc. Securities Litigation, CIV-98-20-PHX-ROS (JBM), and appointing lead
counsel. On July 21, 1998 Plaintiff filed a consolidated amended complaint in
the District Court. The Company and the individual defendants intend to file a
motion to dismiss the amended complaint. The Company believes that the
allegations in the amended complaint are without merit and the Company intends
to defend itself vigorously.
In addition, a former Pet City affiliate has retained counsel in the
United States and made allegations claiming that the Company misled the
shareholders of Pet City at the time of the acquisition of Pet City concerning
PETsMART's business, finances and prospects. On September 30, 1997, shortly
after the receipt of the allegations by PETsMART, Richard Northcott, the former
Chairman of Pet City, resigned as a director of the Company. No litigation has
been filed with respect to this matter, and the Company believes that the
allegations are without merit. Nevertheless, there can be no assurance that one
or more former Pet City affiliates will not initiate litigation seeking monetary
damages or an equitable remedy.
On March 28, 1998, a lawsuit was filed in Federal District Court in the
Middle District of Florida entitled Cavucci et al. v. PETsMART, Inc. (Case No.
98-CV-340). This class-action complaint alleges unspecified damages based on
various alleged violations of the Fair Labor Standards Act, including alleged
failures to pay overtime premiums. On May 12, 1998, the Company answered the
complaint denying all material allegations. The court entered an order of
procedure and schedule for trial on July 20, 1998 which outlines all discovery
and trial dates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Stockholders (Annual Meeting) was
held on June 25, 1998. At the Annual Meeting, the stockholders of the registrant
(i) elected each of the persons below to serve as a director of the Registrant
until the specific Annual Meeting of Stockholders listed below or until his or
her successor is elected; (ii) approved the amendment of the Company's 1995
Equity Incentive Plan, as amended, to increase the number of shares of Common
Stock covered thereunder from 19,714,286 to 24,714,286; and (iii) ratified the
selection of Price Waterhouse LLP as the Registrant's Independent Accountants
for the fiscal year ending January 31, 1999. On July 1, 1998, Price Waterhouse
LLP merged with Coopers & Lybrand LLP and the combined firm is now named
PricewaterhouseCoopers LLP.
The registrant had 115,674,766 shares of Common Stock outstanding as of May 1,
1998, the record date for the Annual Meeting. At the Annual Meeting, holders of
a total of 98,969,128 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 To Serve Through
- -------- ----------------
Richard M. Kovacevich 2001 Annual Meeting
Thomas G. Stemberg 2001 Annual Meeting
Richard K. Lochridge 1999 Annual Meeting
Votes in Favor 97,980,752
Withhold Authority 988,376
20
<PAGE> 21
PROPOSAL 2 - APPROVAL OF AMENDMENT TO 1995 EQUITY INCENTIVE PLAN
<TABLE>
<S> <C>
Votes in Favor 70,852,858
Votes Against 27,886 443
Abstentions 229,827
</TABLE>
PROPOSAL 3 - RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
<TABLE>
<S> <C>
Votes in Favor 98,248,587
Votes Against 236,783
Abstentions 483,758
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.14 Third Amendment, Dated as of July 31, 1998, 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 27 Financial Data Schedule
(b) Reports on Form 8-K
During the thirteen weeks ended August 2, 1998, the Company filed no
reports on Form 8-K.
21
<PAGE> 22
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 11, 1998.
PETsMART, INC.
(Registrant)
/s/ Neil T. Watanabe /s/ Kenneth A. Conway
----------------------------- -----------------------------
Neil T. Watanabe Kenneth A. Conway
Executive Vice President and Vice President and
Chief Financial Officer Controller
(Principal Financial Officer) (Principal Accounting Officer)
22
<PAGE> 23
EXHIBIT INDEX
Exhibit
No. Description
-------- -----------
Exhibit 10.14 Third Amendment, Dated as of July 31, 1998, 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 27 Financial Data Schedule
<PAGE> 1
Exhibit 10.14
THIRD AMENDMENT TO
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT
(this "Third Amendment"), dated as of July 31, 1998 is entered into among
PETsMART, INC., a Delaware corporation (the "Company"), the banks listed on the
signature pages hereof (the "Lenders") and NATIONSBANK, 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, as amended by that certain First Amendment to Third Amended
and Restated Credit Agreement dated as of August 6, 1997, and that certain
Second Amendment to Third Amended and Restated Credit Agreement dated October
29, 1997 (as amended, 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 "Letter of Credit" in Section 1.1 of the
Credit Agreement is amended by deletion of "$15,000,000" and replacing
that amount with "$25,000,000".
(b) The definition of "EBITDA" set forth in Section 1.1 of the
Credit Agreement is hereby amended to read as follows:
"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
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
<PAGE> 2
(but excluding from the calculation thereof (i) the effect of 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 effect of one
time charges to operating income with respect to costs and expenses
relating to certain litigation in the amount of $4,000,000 and that
certain severance package for Donna Ecton in the amount of $1,526,000),
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 following is added as Section 5.13 of the Credit Agreement:
"The Borrower has (i) initiated a review and assessment of all areas
within its and each of its Subsidiaries' business and operations (and
has made appropriate inquiry regarding those affected by suppliers and
vendors) that could be adversely affected by the "Year 2000 Problem"
(that is, the risk that computer applications used by the Borrower or
any of its Subsidiaries (or its suppliers and vendors) may be unable to
recognize and perform properly date-sensitive functions involving
certain dates prior to and any date after December 31, 1999), (ii)
developed a plan for addressing the Year 2000 Problem on a timely
basis, and (iii) to date, operated in accordance with such plan. The
Borrower reasonably believes that all computer applications (including
those of its suppliers and vendors) that are material to its or any of
its Subsidiaries' business and operations on January 1, 2000 will, on a
timely basis, be able to perform properly date-sensitive functions for
all dates before and after January 1, 2000 (that is, be "Year 2000
compliant"), except to the extent that a failure to do so could not
reasonably be expected to cause a Material Adverse Change."
(d) The following is added as Section 6.19 of the Credit Agreement:
"The Borrower will promptly notify the Administrative Lender in the
event the Borrower discovers or determines that any computer
application (including those of its suppliers and vendors) that is
material to its or any of its Subsidiaries' business and operations
will not be Year 2000 compliant on a timely basis, except to the extent
that such failure could not reasonably be expected to cause a Material
Adverse Change."
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-2-
<PAGE> 3
(e) The first sentence of Section 6.3 of the Credit Agreement
is amended in its entirety to read as follows: "The Company shall not,
and shall not permit any of its Subsidiaries to, create or suffer to
exist any Lien upon any of their Properties, except (a) Liens shown on
Schedule II attached hereto, (b) Liens securing Indebtedness permitted
under (i) Section 6.2(d) hereof, encumbering only the assets purchased
or financed with such Indebtedness and (ii) Section 6.2(i) hereof,
provided that the value of the collateral secured by such Liens does
not exceed the aggregate principal amount of such Indebtedness, and (c)
Tax, mechanic's, materialmen's, and landlord Liens relating to amounts
that are not yet due and payable, or that are being contested in good
faith by appropriate proceedings, for which adequate reserves have been
established.
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 Third Amendment, and this Third 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 Third Amendment.
3. CONDITIONS OF EFFECTIVENESS. This Third 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 Third Amendment executed by the Lenders comprising the Majority
Lenders;
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-3-
<PAGE> 4
(b) The Administrative Lender shall have received counterparts of
this Third Amendment executed by the Company and acknowledged by each
Guarantor (as hereinafter defined);
(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 Third
Amendment;
(d) 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; and
(e) The Administrative Lender shall have received for the account of
each Lender a consent fee in an amount equal to the product of (i) 0.05
multiplied by (ii) such Lender's portion of the commitment.
4. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Third 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 Third 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") (a) acknowledges, consents and
agrees to the execution, delivery and performance by Borrowers of this Third
Amendment, (b) 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 Third Amendment or any of the provisions contemplated
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-4-
<PAGE> 5
herein, (c) ratifies and confirms its obligations under its Guaranty, and (d)
acknowledges and agrees that it has no claims or offsets against, or defenses or
counterclaims to, its Guaranty.
7. EXECUTION IN COUNTERPARTS. This Third 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.
8. GOVERNING LAW; BINDING EFFECT. This Third 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 Third Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Third Amendment for any other purpose.
10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS THIRD
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
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-5-
<PAGE> 6
IN WITNESS WHEREOF, this Third Amendment is executed as of the date
first set forth above.
COMPANY:
PETsMART, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
-----------------------
Title: CFO
-----------------------
ADMINISTRATIVE LENDER: NATIONSBANK, N.A., as
Administrative Lender
By:/s/ Kimberley A. Knop
-----------------------
Name: Kimberley A. Knop
-----------------------
Title: Vice President
-----------------------
ISSUING BANK: NATIONSBANK,
N.A., as Issuing Bank
By:/s/ Kimberley A. Knop
-----------------------
Name: Kimberley A. Knop
-----------------------
Title: Vice President
-----------------------
LENDERS:
NATIONSBANK, N.A.,
Individually
By:/s/ Kimberley A. Knop
-----------------------
Name: Kimberley A. Knop
-----------------------
Title: Vice President
-----------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-6-
<PAGE> 7
WELLS FARGO BANK, N.A.
By:/s/ Timothy A. McDevitt
--------------------------
Name: Timothy A. McDevitt
-------------------------
Title: Vice President
-------------------------
By:/s/ Steven A. Newell
-----------------------
Name: Steven A. Newell
----------------------
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/ W. Jeffrey Vollack
--------------------------
Name: W. Jeffrey Vollack
------------------------
Title: Senior Credit Officer
Senior Vice President
---------------------
By:/s/ Chris G. Kortlandt
-------------------------
Name: Chris G. Kortlandt
------------------------
Title: Vice President
---------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-7-
<PAGE> 8
ABN AMRO BANK N.V., LOS ANGELES
INTERNATIONAL BRANCH
By:
------------------------
Name:
----------------------
Title:
----------------------
By:
----------------------------
Name:
----------------------
Title:
----------------------
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
LOS ANGELES AGENCY
By:/s/ Vicente L. Timiraos
-----------------------------
Name: Vicente L. Timiraos
----------------------
Title: SVP & SDGM
----------------------
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By: /s/ Koh Takemoto
---------------------------
Name: Koh Takemoto
----------------------
Title: General Manager
----------------------
By: /s/ Bryan Read
---------------------------
Name: Bryan Read
----------------------
Title: Vice President
----------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-8-
<PAGE> 9
U.S. BANK NATIONAL ASSOCIATION
By:/s/ David Y. Kopolow
----------------------------
Name: David Y. Kopolow
----------------------
Title: Vice President
----------------------
CORESTATES BANK, N.A.
By:
----------------------------
Name:
----------------------
Title:
----------------------
FLEET NATIONAL BANK
By: /s/ Thomas J. Bullard
----------------------------
Name: Thomas J. Bullard
----------------------
Title: Vice President
----------------------
THE SUMITOMO BANK OF CALIFORNIA
By: /s/ Ann L. Darnall
----------------------------
Name: Ann L. Darnall
----------------------
Title: Vice President
----------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-9-
<PAGE> 10
THE BANK OF NOVA SCOTIA
By: /s/ John A. Quick
----------------------------
Name: John A. Quick
----------------------
Title: Senior Relationship Manager
----------------------------
THE SAKURA BANK, LIMITED
By: /s/ Masayuki Kobayashi
----------------------------
Name: Masayuki Kobayashi
----------------------
Title: Joint General Manager
----------------------
CREDIT LYONNAIS LOS ANGELES BRANCH
By: /s/ Dianne M. Scott
----------------------------
Name: Dianne M. Scott
----------------------
Title:First 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 General Manager
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-10-
<PAGE> 11
BANK OF MONTREAL
By:
----------------------------
Name:
----------------------
Title:
----------------------
ACKNOWLEDGED AND AGREED TO:
THE WEISHEIMER COMPANIES, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
PETSTUFF, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
SPORTING DOG SPECIALTIES, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-11-
<PAGE> 12
THE PET FOOD GIANT, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
PETSTUFF CANADA (USA) HOLDINGS, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
PETSTUFF NOVA SCOTIA, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
STATE LINE TACK, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-12-
<PAGE> 13
PETSMART VETERINARY SERVICES INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
PACIFIC COAST DISTRIBUTING, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
STATE LINE TACK OF TEXAS, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
NATIONAL BRIDLE SHOP, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-13-
<PAGE> 14
SPAT PRODUCTIONS, INC.
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
3003300 NOVA SCOTIA COMPANY
By: /s/ Neil T. Watanabe
-----------------------
Name: Neil T. Watanabe
----------------------
Title: CFO
----------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-14-
<PAGE> 15
LENDERS (continued): FIRST UNION NATIONAL BANK
By: /s/ John A. Ginter
----------------------
Name: John A. Ginter
----------------------
Title: Assistant Vice President
----------------------
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT - PETsMART
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE 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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-02-1998
<PERIOD-END> AUG-02-1998
<EXCHANGE-RATE> 1
<CASH> 120,166
<SECURITIES> 0
<RECEIVABLES> 51,325
<ALLOWANCES> 0
<INVENTORY> 309,740
<CURRENT-ASSETS> 510,926
<PP&E> 380,562
<DEPRECIATION> 128,058
<TOTAL-ASSETS> 851,515
<CURRENT-LIABILITIES> 222,787
<BONDS> 272,197
0
0
<COMMON> 11
<OTHER-SE> 338,099
<TOTAL-LIABILITY-AND-EQUITY> 851,515
<SALES> 1,006,410
<TOTAL-REVENUES> 1,006,410
<CGS> 762,675
<TOTAL-COSTS> 762,675
<OTHER-EXPENSES> 236,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,233
<INCOME-PRETAX> (2,481)
<INCOME-TAX> (956)
<INCOME-CONTINUING> (1,525)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,525)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
