<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1998
REGISTRATION NO. 333-41111
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PETSMART, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 94-3024325
(State of Incorporation) (I.R.S. Employer
Identification
No.)
</TABLE>
19601 N. 27TH AVENUE
PHOENIX, AZ 85027
(602) 580-6100
(Address, including zip code, and telephone number, including
area code of Registrant's principal executive offices)
SAMUEL J. PARKER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PETSMART, INC.
19601 N. 27TH AVENUE
PHOENIX, AZ 85027
(602) 580-6100
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
ALAN C. MENDELSON, ESQ.
ROBERT J. BRIGHAM, ESQ.
COOLEY GODWARD LLP
FIVE PALO ALTO SQUARE
3000 EL CAMINO REAL
PALO ALTO, CA 94306
(650) 843-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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<PAGE>
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
6 3/4% Convertible Subordinated Notes due 2004... $200,000,000 100% $200,000,000 $60,606.06
Common Stock, par value $.0001 per share(2)...... -- -- -- --
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(i) of the Securities Act of 1933 based upon the
proposed offering price of the convertible securities.
(2) Such currently indeterminate number of shares of Common Stock as shall be
issuable from time to time upon conversion of the 6-3/4% Convertible
Subordinated Notes due 2004 being registered hereby.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS BE MADE OR ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THE PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES ACT.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 28, 1998
PROSPECTUS
$200,000,000
[LOGO]
6 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2004
This Prospectus relates to the public offering and sale from time to time by
the holders (the "Selling Securityholders") of (i) up to $200,000,000 aggregate
principal amount of 6 3/4% Convertible Subordinated Notes due 2004 (the "Notes")
of PETsMART, Inc., a Delaware corporation ("PETsMART" or the "Company") and (ii)
the shares of Common Stock, par value $0.0001 per share, of the Company (the
"Common Stock") into which the Notes are convertible (the "Conversion Shares").
Interest on the Notes is payable semi-annually in cash in arrears on May 1 and
November 1 of each year, commencing May 1, 1998. The Notes will mature on
November 1, 2004. The Notes are convertible at the option of the holder thereof
at any time prior to maturity, unless previously redeemed, into shares of Common
Stock at a conversion price of $8.75 per share (initially equivalent to a
conversion rate of 114.2857 shares per $1,000 principal amount of Notes),
subject to adjustment in certain events. No fractional shares of Common Stock
shall be issued but in lieu thereof an appropriate amount will be paid in cash.
On January 23, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market (symbol "PETM") was $6.62 per share.
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after November 1, 2000, at the redemption prices set forth
herein, plus accrued and unpaid interest and Liquidated Damages (as defined), if
any, to the date of redemption. The Notes do not provide for any sinking fund.
Upon the occurrence of a Change of Control (as defined), the Company will be
required to offer to purchase the Notes at a purchase price equal to 100% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase. See "Description of Notes."
Additionally, the purchase of the Notes, in the event of a Change of Control (as
defined) may result in an event of default under the Company's Senior
Indebtedness the effect of which may be to permit acceleration of such debt.
The Notes are general subordinated obligations of the Company and are
subordinated in right of payment to all current and future Senior Indebtedness
(as defined) of the Company. In addition, the Notes are structurally
subordinated to all current and future liabilities of the Company's
subsidiaries. At November 2, 1997, after giving effect to the sale of
$200,000,000 of the Notes in November 1997 and the application of the net
proceeds therefrom, the Company would have had approximately $66.4 million of
Senior Indebtedness outstanding and, excluding intercompany indebtedness, the
Company's subsidiaries would have had approximately $41.5 million of
liabilities, primarily trade payables, which would have effectively ranked
senior to the Notes. There can be no assurance that in the event of a Change of
Control (as defined) the Company will have, or will have access to sufficient
funds to repurchase the Notes. The Indenture (as defined) may not afford the
Holders (as defined) protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger, spin-off or similar transaction, if such
transaction does not constitute a Change of Control (as defined). The Indenture
(as defined) will permit the Company and its subsidiaries to incur additional
indebtedness, including Senior Indebtedness. See "Description of Notes."
Prior to this offering, there has been no public market for the Notes. The
Company does not intend to apply for listing of the Notes on any securities
exchange or for quotation through any automated quotation system. The Notes have
been designated as eligible for trading in the Private Offerings, Resale and
Trading through Automated Linkages ("PORTAL") market of the National Association
of Securities Dealers, Inc. upon issuance. The Notes are not expected to remain
eligible for trading on the PORTAL System. There can be no assurance that any
trading market will develop for the Notes.
The Notes were issued by the Company in November 1997 and were sold to
"qualified institutional buyers" (as defined) in transactions exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), and in sales outside the United States within the meaning of Regulation S
under the Securities Act. The Notes were issued in the form of a Global Note,
and so long as the Notes remain in such form, the Company's obligations to pay
interest and principal will be satisfied when the Company pays the record
holder, Cede & Co. See "Description of Notes."
The Selling Securityholders, directly or through agents, broker-dealers or
underwriters, may sell the Notes or the Conversion Shares offered hereby from
time to time on terms to be determined at the time of sale. Such Notes or
Conversion Shares may be sold at market prices prevailing at the time of sale or
at negotiated prices. The Selling Securityholders and any agents, broker-dealers
or underwriters that participate with the Selling Securityholders in the
distribution of the Notes or Conversion Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commission
received by them and any profit on the resale of the Common Stock purchased by
them may be deemed to be underwriting discounts or commissions under the
Securities Act. Each of the Selling Securityholders reserves the right to accept
and, together with their agents from time to time to reject, in whole or in
part, any proposed purchase of Notes or Conversion Shares to be made directly or
through agents. The Company will not receive any proceeds from the sale of Notes
or Conversion Shares by the Selling Securityholders. See "Selling
Securityholders" and "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION WITH AN
INVESTMENT IN THE NOTES OFFERED HEREBY.
The aggregate proceeds to the Selling Securityholders from the sale of the
Notes or Conversion Shares will be the purchase price of such Notes or
Conversion Shares sold less the aggregate agents' commissions and underwriters'
discounts. The Selling Securityholders are entitled to registration of their
Notes and Conversion Shares pursuant to a Registration Rights Agreement dated as
of November 7, 1997 (the "Registration Rights Agreement") and this offer is
intended to satisfy the rights granted by the Registration Rights Agreement. The
Company has agreed to pay substantially all of the expenses of the offering of
the Notes and the Conversion Shares by holders thereof other than underwriting
discounts and commissions, if any. The Company has agreed to indemnify the
Selling Securityholders and certain other persons against certain liabilities,
including liabilities under the Securities Act. See "Plan of Distribution."
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is .
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act,
and in accordance therewith, files annual and quarterly reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information may be
inspected and copied at the Commission's Public Reference Section, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, as well as at the Commission's
Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048;
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission's Internet address is http://www.sec.gov. The Commission's Web site
also contains reports, proxy and information statements, and other information
regarding the Company that has been filed electronically with the Commission.
The Common Stock of the Company is quoted on the Nasdaq National Market. Reports
and other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W. Washington, D.C.
20006.
The Company has agreed that if, at any time while the Notes or the Common
Stock issuable upon conversion of the Notes are "restricted securities" within
the meaning of the Securities Act, and the Company is not subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Company will promptly furnish or cause to be furnished upon
request of a Holder of restricted securities and to qualified prospective
purchasers designated by such Holders, the information required to be delivered
pursuant to Rule 144(d)(4) under the Securities Act, to the extent required to
permit compliance with Rule 144A in connection with resales of Notes and such
Common Stock.
ADDITIONAL INFORMATION
A registration statement on Form S-3 with respect to the Notes and
Conversion Shares offered hereby (together with all amendments, exhibits and
schedules thereto, the "Registration Statement") has been filed with the
Commission under the Securities Act. This Prospectus does not contain all of the
information contained in such Registration Statement, certain portions of which
have been omitted pursuant to the rules and regulations of the Commission. For
further information with respect to the Company and the Notes and Conversion
Shares offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus regarding the contents of any contract
or any other documents are not necessarily complete and, in each instance,
reference is hereby made to the copy of such contract or document filed as an
exhibit to the Registration Statement. The Registration Statement may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section, Securities and Exchange Commission,
Washington, D.C., 20549, upon payment of the prescribed fees.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents of the Company, filed with the Commission under the
Exchange Act (File No. 0-21888), are hereby incorporated by reference into this
Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
February 2, 1997, filed on April 28, 1997;
(b) The Company's Proxy Statement for its Annual Meeting of Stockholders,
filed on May 16, 1997, as amended May 19, 1997;
(c) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
May 4, 1997, filed on June 11, 1997;
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<PAGE>
(d) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
August 3, 1997, filed on September 16, 1997;
(e) The Company's Current Report on Form 8-K dated August 4, 1997, filed on
August 21, 1997;
(f) The Company's Current Report on Form 8-K dated October 27, 1997, filed
on November 12, 1997; and
(g) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
November 2, 1997, filed on December 16, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained in this Prospectus or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the documents that have been
incorporated by reference herein (not including exhibits to such documents
unless such exhibits are specifically incorporated by reference herein or into
such documents). Such request may be directed to: Investor Relations, PETsMART,
Inc., 19601 North 27th Avenue, Phoenix, Arizona 85027.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act that involve risks and uncertainties. Those statements include words such as
"anticipate," "estimate," "project," "intend," and similar expressions which are
intended to identify forward-looking statements and appear throughout this
Prospectus and include statements regarding the intent, belief, or current
expectations of the Company, primarily with respect to the operations of the
Company or related industry developments. Prospective purchasers of the Notes
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
could differ materially from those discussed here and in the documents
incorporated by reference herein. Factors that could cause or contribute to such
differences include, but are not limited to, superstore performance, success of
implementing the Company's new management information system, risk of dependence
on certain product lines and on third-party vendors, seasonal fluctuations and
litigation risks, as well as those risks discussed elsewhere in this Prospectus
and in any documents incorporated herein by reference.
ii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN. ALL REFERENCES
TO FISCAL YEARS IN THIS PROSPECTUS REFER TO THE FISCAL YEARS ENDING ON THE
SUNDAY CLOSEST TO JANUARY 31 OF THE FOLLOWING CALENDAR YEAR. REFERENCES TO THE
THIRD QUARTER 1996 AND THIRD QUARTER 1997 REFER TO THE 39 WEEKS ENDED OCTOBER
27, 1996, AND NOVEMBER 2, 1997, RESPECTIVELY. UNLESS OTHERWISE STATED IN THIS
PROSPECTUS OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "PETSMART" OR THE
"COMPANY" ARE TO PETSMART, INC. AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS.
THE COMPANY
PETsMART is the largest operator of superstores specializing in pet food,
supplies and services in North America and the United Kingdom. At November 2,
1997, PETsMART operated 458 superstores, consisting of 371 superstores in the
United States, 77 superstores in the United Kingdom and 10 superstores in
Canada. PETsMART offers a complete assortment of pet products, at prices
typically below those offered by supermarkets, mass merchandisers and
traditional pet food and supply retailers, as well as a wide range of pet
services. PETsMART's superstores utilize a hybrid retail-warehouse format that
reinforces the image of warehouse shopping at discount prices, enhances
merchandise presentation and provides a fun shopping experience for customers
and their pets.
The pet food, supplies and services business, fueled by growth in pet
populations and the trend toward better pet care, generated U.S. sales of
approximately $31 billion in 1996. According to recent estimates, approximately
58 million U.S. households, or over half of all U.S. households, own at least
one pet and over half of pet-owning households own more than one pet. Pet food,
primarily dog and cat food, represents the largest volume category of
pet-related products, with 1996 U.S. sales estimated at approximately $9
billion. Of this amount, premium pet food accounted for approximately 25% of the
total and has represented an increasing share of the pet food market in recent
years. U.S. sales of pet supplies were approximately $3.3 billion in 1996. In
addition, 1996 U.S. sales of pet services, which include veterinary services,
grooming, boarding and obedience training, were estimated at approximately $11
billion. The Company estimates that U.S. sales of equine food, tack, riding
apparel and related supplies and equipment were approximately $8 billion in
1996.
The Company's U.S. prototype superstore carries approximately 12,000
pet-related items. PETsMART sells an extensive selection of pet food and treats,
including premium labels such as Science Diet and IAMS, other national brands
such as Purina, Alpo and Friskies, as well as PETsMART's own corporate brands.
PETsMART is the largest volume retailer in the world of premium pet foods.
PETsMART also offers a broad assortment of pet supplies including collars,
leashes, health and beauty aids, shampoos, medications, toys, animal carriers,
dog houses, cat furniture and equestrian supplies. In addition to pet food and
supplies, PETsMART sells fresh water tropical fish and, in certain superstores,
domestically bred birds, small animals and reptiles.
Unlike its principal competitors, PETsMART offers a wide range of services
for the pet owner, including on-site veterinary care and grooming in most
superstores, obedience classes and the Luv-A-Pet adoption program for dogs and
cats. At November 2, 1997, veterinary clinics were operating in 190 PETsMART
stores in North America. Veterinary clinics operated in PETsMART stores
generally offer routine examinations and vaccinations, dental care, pharmacy and
most surgical procedures. The Company's prototype 2,000 square foot in-store
clinic provides state-of-the-art operating and examining rooms, as well as
on-site X-ray machines and blood diagnostic equipment. These clinics offer
customers more sophisticated services than traditional veterinary competitors
typically provide. In addition, many PETsMART stores without these full-service
veterinary clinics offer routine vaccination and wellness services.
1
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PETsMART's superstores are generally located in sites co-anchored by strong
consumables-oriented retailers or other destination superstores, typically in or
near major regional shopping centers. The Company's U.S. prototype superstore is
26,000 square feet in size. In addition, PETsMART is opening smaller 22,000
square foot superstores in Canada and 10,000 to 15,000 square foot superstores
in the United Kingdom, in each case using store formats specifically adapted to
meet the unique characteristics of those markets. PETsMART has also opened
hybrid pet/equine megastores of up to 40,000 square feet to serve selected
regional trade areas in the United States which have high rates of horse
ownership. Finally, the Company is experimenting with a 20,000 square foot
superstore to allow it to effectively access smaller communities in the United
States. Of the Company's 371 superstores in the United States at November 2,
1997, 280 were 26,000 square foot prototype superstores.
The Company believes that PETsMART Direct, the Company's catalog operation,
is the leading direct-mail retailer of pet-related and equine products in North
America. PETsMART Direct sells pet supplies through three catalogs: R.C. Steele,
Pedigrees and Groomer Direct. PETsMART Direct also offers discount brand tack,
riding apparel and equine supplies through four additional catalogs: State Line
Tack Western, State Line Tack English, Wiese Equine Supply and National Bridle
Shop. In fiscal 1996, PETsMART Direct circulated more than 37 million catalogs.
PETsMART Direct's proprietary customer database currently contains the names of
approximately 1.2 million customers who have made a purchase from PETsMART
Direct catalogs within the past 24 months.
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 The
Weisheimer Companies, Inc. ("PETZAZZ") in March 1994, Petstuff, Inc.
("Petstuff") in June 1995, The Pet Food Giant, Inc. ("Pet Food Giant") in
September 1995, and Pet City Holdings plc ("Pet City") in December 1996. The
Company also acquired two leading catalog retailers, Sporting Dog Specialties,
Inc. ("Sporting Dog") in May 1995 and State Line Tack, Inc. ("State Line Tack")
in January 1996.
The Company's principal executive offices are located at 19601 North 27th
Avenue, Phoenix, Arizona 85027 and its telephone number is (602) 580-6100. The
Company's home page on the World Wide Web, which contains store locations and
other information about the Company, can be accessed at
http://www.petsmart.com.
RECENT DEVELOPMENTS
In November 1997, $200,000,000 of 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. The net proceeds to PETsMART from the sale of the Notes were
approximately $193,250,000.
2
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RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE THE FOLLOWING
FACTORS RELATING TO THE COMPANY AND THE OFFERING OF THE NOTES AND THE CONVERSION
SHARES, TOGETHER WITH THE INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN
THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN, BEFORE MAKING AN INVESTMENT
IN THE NOTES OR THE CONVERSION SHARES.
SUPERSTORE EXPANSION PLANS, MATURATION OF EXISTING SUPERSTORES AND DEPENDENCE ON
PERFORMANCE OF SUPERSTORES
PETsMART currently operates superstores in many of the major market areas of
North America and the United Kingdom. In North America, the Company's current
plans for fiscal 1998 include opening an aggregate of 50 superstores in existing
markets and 25 superstores in new markets, of which 17 are considered to be
single store markets. Additionally, the Company anticipates opening up to 20
superstores in the United Kingdom in fiscal 1998. It has been the Company's
experience that superstores opened in existing markets may result in some
cannibalization of the sales of other PETsMART superstores already in operation
in those markets. In addition, as a result of the Company's rapid expansion in
recent years, many of its superstores are still relatively immature.
Approximately one-third of the Company's North America superstores have been
opened since the beginning of fiscal 1996. As superstores reach maturity the
rate of comparable store sales increases tends to decline. The Company believes
these factors, and the negative effects of the inventory management difficulties
which resulted in out-of-stock conditions and lost sales, as well as an
ineffective advertising program during the first six months of fiscal 1997 (see
"Management's Discussion and Analysis--Recent Developments"), have contributed
to the decline in the rate of comparable store sales increases which it has
reported in recent years. PETsMART's comparable store sales increases were 19.1%
in fiscal 1994, 12.5% in fiscal 1995, 11.9% in fiscal 1996 and 5.1% for the
first half of fiscal 1997. As a result of new store openings in existing markets
and because mature superstores will represent an increasing proportion of the
Company's store base over time, it is likely that the Company's comparable store
sales increases will continue to be lower than historical levels. There can be
no assurance that new or existing superstores will perform in accordance with
historical patterns or current management expectations, or that any
cannibalization of sales will not be greater than historical experience or
current management expectations. Operating margins are also expected to be
impacted by new superstore openings because of the recognition of preopening
expenses and the lower sales volumes characteristic of immature stores. Compared
to results achieved in other regions, the Company has experienced lower
comparable store sales increases and levels of store contribution in certain
North American geographic regions that it has recently entered. In addition,
certain operating costs, particularly those related to occupancy, are expected
to be higher than historical levels in some of these newly-entered geographic
regions and tight labor markets in certain areas are expected to increase store
personnel expenses more rapidly than historical trends. As a result of the
expected slower overall rate of comparable store sales increases and the impact
of these rising costs, the Company expects its store contribution and operating
margins to continue to be lower than historical levels in future periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
OPERATIONAL RESTRUCTURING AND INITIATIVES
During the first three quarters 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 the departure from the Company's historically more
effective advertising programs. As a result, the Company has moved to implement
a series of "Back to Basics" initiatives intended to refocus the Company and
improve its financial performance. Additionally, the Company 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. See "Management's Discussion and Analysis--Recent Developments". There can
be no assurance that the Company's recent initiatives will be successful or that
financial performance can be improved as a result of these efforts.
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Should these efforts prove unsuccessful, the Company may conclude that further
restructuring and other actions are necessary in order to attempt to improve the
Company's operating and financial performance. As such, additional restructuring
and other costs may be incurred in future periods which would adversely affect
financial performance.
NEW INFORMATION SYSTEM
The Company's existing information systems are not fully integrated on a
worldwide basis. PETsMART has completed the conceptual design of an integrated,
worldwide information system which will feature a common set of applications.
The Company is currently negotiating with various vendors with respect to the
hardware and software needs associated with this system. It is anticipated that
the development and implementation of the new system will require significant
capital expenditures, operating expense and management effort to complete. There
can be no assurance that the new system will 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, or to do so on a timely basis, could materially adversely affect the
Company's future operating results or its ability to expand. Costs of the new
system will be expensed as incurred or capitalized and expensed in future
periods. The new system will require significant financing, a portion of which
will be provided by the November 1997 Note offering. 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 may be
leased, although there can be no assurance that such lease financing will be
available to the Company on acceptable terms. There also can be no assurance
that the actual costs for the new system will not exceed current estimates or
extend beyond fiscal year 2000. 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.
INTERNATIONAL OPERATIONS
The Company entered the European market by acquiring Pet City in December
1996 and operated 77 superstores in the United Kingdom at November 2, 1997. The
Company also recently entered the Canadian market, where it operated ten
superstores at November 2, 1997. Operating these businesses requires significant
management and financial resources. In particular, international operations
require coordination of geographically separate management organizations, the
integration of personnel with disparate cultural and business backgrounds and an
understanding of the relevant differences in the legal and regulatory
environments. The Company had not previously operated stores outside of the
United States and there can be no assurance that PETsMART will be able to do so
successfully. As the Company's international operations expand, PETsMART's
results will be increasingly affected by the risks of such activities, including
fluctuations in currency exchange rates, changes in international regulatory
requirements, country-specific labelling requirements and customer preferences,
international staffing and employment issues, tariff and other trade barriers,
the burden of complying with foreign laws, including tax laws, and political and
economic instability and developments. Presently, the United Kingdom store
expansion program is, and is anticipated to continue to be, financed in large
part by North American operations and financing sources, including a portion of
the proceeds of the 1997 Note offering. There can be no assurance that the North
American operations will continue to be able to provide funding for the opening
of superstores in the United Kingdom or that adequate alternative sources of
capital could be obtained on acceptable terms. The Credit Facility contains
covenants restricting the amounts invested in certain foreign subsidiaries,
including Pet City. See "Description of Credit Facility."
LITIGATION
On January 6, 1998 the Company and certain of its officers and directors
were named as defendants in a securities class action lawsuit by a putative
class of investors in PETsSMART securities. The lawsuit
4
<PAGE>
alleges, among other things, that the Company and its officers issued materially
false financial statements about the Company's flea and tick product inventory,
financial condition and results of operations. On January 20, 1998, the Company
and certain of its officers and directors were named as defendants in a second
securities class action lawsuit with allegations substantially similar to the
ones made in the first complaint. On January 22, 1998, the Company and certain
of its officers and directors were named as defendants of a third securities
class action with allegations substantially similar to the ones made in the
first complaint. The Company believes the allegations contained in each
complaint are without merit and the Company intends to vigorously defend itself
against the claims.
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.
GOVERNMENT REGULATION
The Company is subject to laws governing its operation of veterinary clinics
in its retail stores. Statutes and regulations in certain states or Canadian
provinces or abroad affecting the ownership of veterinary practices or the
operation of veterinary clinics within retail stores or the operation of
superstores may impact the Company's ability to operate veterinary clinics
within certain of its facilities.
The laws of many states prohibit veterinarians from splitting fees with
non-veterinarians and prohibit business corporations from providing, or holding
themselves out as providers of, veterinary medical care. These laws vary from
state to state and are enforced by the courts and by regulatory authorities with
broad discretion. While the Company seeks to structure its operations to comply
with the corporate practice of veterinary medicine laws of each state in which
it operates, there can be no assurance that, given varying and uncertain
interpretations of such laws, the Company would be found to be in compliance
with restrictions on the corporate practice of veterinary medicine in all
states. A determination that the Company is in violation of applicable
restrictions on the practice of veterinary medicine in any state in which it
operates could require the Company to restructure its operations to comply with
the requirements of such states.
EXPANSION PLANS
PETsMART has expanded since its inception in 1986 to 371 superstores in
North America, 77 superstores in the United Kingdom and 10 superstores in Canada
at November 2, 1997. For the remainder of fiscal 1997, the Company currently
anticipates opening an additional seven superstores in North America and seven
superstores in the United Kingdom. In North America, the Company currently
anticipates opening an additional 75 superstores in fiscal 1998 and 55
superstores in fiscal 1999. The Company also currently anticipates opening up to
20 new superstores annually in the United Kingdom. The Company's ability to open
additional superstores is dependent on adequate sources of capital for leasehold
improvements, fixtures and inventory, preopening expenses, the training and
retention of skilled managers and personnel and other factors, some of which may
be beyond the Company's control. Presently, the Company's store expansion plans
are expected to be financed by cash flow from operations, lease financing, a
portion of the proceeds from the November 1997 Note offering and borrowing
capacity under the Credit Facility. To the extent the Company is unable to
obtain adequate financing for new store growth on acceptable terms, the
Company's ability to open new superstores will be negatively impacted. As a
result, there can be no assurance that the Company will be able to achieve its
current plans for the opening of new superstores. Any failure by PETsMART to
expand its distribution capabilities or other internal systems or procedures as
required could also adversely affect its ability to support its planned new
store growth.
5
<PAGE>
While the Company has no present plans with respect to future acquisitions
or disposition of assets, the Company may make additional acquisitions in the
future. Future acquisitions by the Company, if any, could result in potentially
dilutive issuances of securities, the incurrence of additional debt or
contingent liabilities, and amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect the Company's
profitability. The Company's operating results also could be adversely affected
if it is unable to successfully integrate any future acquisition into its
operations.
PETsMART routinely evaluates its strategic alternatives with respect to each
of its superstores, the operations of PETsMART Direct and the Company's other
operating assets and investments. In connection with such evaluation, the
Company may elect to close superstores or to sell or otherwise dispose of
selected assets or investments. There can be no assurance that any such future
sale or disposition would be achieved on terms favorable to the Company.
Additionally, the Company has announced its intention to close 33 U.S.
superstores, including 31 of the smaller former Petstuff, Pet Food Giant and
PETZAZZ superstores, and to replace 24 of them with 26,000 square foot prototype
superstores. At November 2, 1997, eight of these superstores had been closed and
three replacement superstores had been opened.
RELIANCE ON VENDORS AND PRODUCT LINES
PETsMART does not have any long-term supply contracts with any of its
premium food or other product vendors. Sales of premium pet food for dogs and
cats, such as Science Diet and IAMS, make up a significant portion of PETsMART's
revenues. Currently, the major vendors of premium pet foods do not permit these
products to be sold in supermarkets, warehouse clubs or through other mass
merchandisers. The Company could be materially adversely affected were any of
these vendors to make their products available in supermarkets or through mass
merchandisers, or if the grocery brands currently available to such retailers
were to gain market share at the expense of the premium brands sold only through
specialty pet food and supply outlets.
PETsMART's principal vendors currently provide it with certain incentives,
such as trade discounts, cooperative advertising and market development funds. A
reduction or discontinuance of these incentives could have a material adverse
effect on the Company.
The Company purchases significant amounts of pet supplies from a number of
vendors with limited supply capabilities. There can be no assurance that
PETsMART's current pet supply vendors will be able to accommodate the Company's
anticipated growth. PETsMART is continually seeking to expand its base of pet
supply vendors and to identify new pet supply products. Additionally, the
Company purchases significant amounts of pet supplies from vendors outside of
the United States. There can be no assurance that the Company's overseas vendors
will be able to satisfy PETsMART's requirements, including timeliness of
delivery, acceptable product quality, packaging and labeling requirements, and
other requirements of the Company. An inability of PETsMART's existing vendors
to provide products in a timely or cost-effective manner could have a material
adverse effect on the Company. While the Company believes its vendor
relationships are satisfactory, any vendor could discontinue selling to the
Company at any time.
COMPETITION
The pet food and supply retailing industry is highly competitive. PETsMART
competes with supermarkets, warehouse clubs and mass merchandisers, many of
which are larger and have significantly greater resources than PETsMART.
PETsMART also competes with a number of pet supply warehouse or specialty
stores, smaller pet store chains and independent pet stores. The industry has
become increasingly competitive due to the entrance of other specialty retailers
into the pet food and supply market, some of which have developed store formats
similar to PETsMART's. There can be no assurance that the Company will not face
greater competition from these or other retailers in the future. In particular,
if any of the Company's major competitors seek to gain or retain market share by
reducing prices, the Company may reduce its prices in order to remain
competitive, which could have a material adverse effect on the Company.
6
<PAGE>
QUARTERLY AND SEASONAL FLUCTUATIONS
The timing of new superstore openings may cause the Company's quarterly
results of operations to fluctuate. In addition, the Company's business is
subject to some seasonal fluctuation. PETsMART typically realizes a higher
portion of its net sales and operating profit 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 are
expected to continue to be negatively impacted by the introduction of
alternative pharmaceutical treatments, as well as by variations in weather
conditions. In addition, because PETsMART superstores typically draw customers
from a large trade area, sales may be impacted by adverse weather or travel
conditions.
SUBORDINATION OF NOTES
The Notes are general subordinated obligations of the Company and are
subordinated in right of payment to all current and future Senior Indebtedness.
In addition, the Notes are structurally subordinated to all current and future
liabilities of the Company's subsidiaries. By reason of such subordination, in
the event of the insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of the business of the Company, the assets of the
Company will be available to pay the amounts due on the Notes only after all
Senior Indebtedness has been paid in full and, therefore, there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes then
outstanding. At November 2, 1997, after giving effect to the sale of the Notes
and the application of the net proceeds therefrom, the Company would have had
approximately $66.4 million of Senior Indebtedness outstanding, and excluding
intercompany indebtedness, the Company's subsidiaries would have had
approximately $41.5 million of liabilities, principally trade payables, which
would have effectively ranked senior to the Notes. The Indenture will permit the
Company and its subsidiaries to incur additional indebtedness, including Senior
Indebtedness. Borrowings under the Credit Facility will constitute Senior
Indebtedness. The Credit Facility contains certain restrictions on the Company's
ability to incur additional indebtedness. In the event of a payment default with
respect to Senior Indebtedness, no payments may be made on account of the Notes
until such default has been cured or waived. In addition, under certain
circumstances, no payments with respect to the Notes may be made for a period of
up to 179 days if certain non-payment defaults exist with respect to Senior
Indebtedness of the Company. See "Description of Notes--Subordination," and
"Description of Credit Facility."
ANTI-TAKEOVER MEASURES
The PETsMART Restated Certificate of Incorporation, as amended (the
"Restated Certificate") and the PETsMART By-laws include provisions that may
delay, defer or prevent a change in management or control that holders of Notes
or stockholders might consider to be in their best interests. These provisions
include (i) a classified Board of Directors consisting of three classes, (ii)
the ability of the Board of Directors to issue without stockholder approval up
to 10,000,000 shares of preferred stock in one or more series with such rights,
obligations, and preferences as the Board of Directors may determine, (iii) no
right of stockholders to call special meetings of stockholders, (iv) no right of
stockholders to act by written consent and (v) certain advance notice procedures
for nominating candidates for election to the Board of Directors. In addition,
the Restated Certificate requires a 66 2/3% vote of stockholders to (i) alter or
amend the PETsMART By-laws, (ii) remove a director without cause, or (iii)
alter, amend or repeal certain provisions of the Restated Certificate. The
Restated Certificate does not permit cumulative voting. In August 1997, the
Company's Board of Directors adopted a Share Purchase Rights Plan, commonly
referred to as a "poison pill." The Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. See "Description of Capital Stock."
7
<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE; ABSENCE OF DIVIDENDS
Since the initial public offering of the Company's Common Stock in July
1993, the market value of the Company's Common Stock has been subject to
significant fluctuation. The market price of the Common Stock may continue to be
subject to significant fluctuations in response to operating results and other
factors. During the first three quarters of fiscal 1997, the price of the
Company's Common Stock ranged from a high of $23.00 in the first quarter of
fiscal 1997 to a low of $6.09 in the fourth quarter of fiscal 1997. In addition,
the stock market in recent years has experienced price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Common Stock.
PETsMART has never paid any cash dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and therefore does
not anticipate paying cash dividends in the foreseeable future. In addition,
under the terms of the Credit Facility, the Company is prohibited from paying
any cash dividends without prior bank approval.
LIMITED PUBLIC MARKET FOR THE NOTES AND RESTRICTIONS ON TRANSFER
Prior to this offering, the Notes have been eligible for trading on the
PORTAL Market. The Notes sold pursuant to this Registration Statement of which
this Prospectus forms a part are not expected to remain eligible for trading on
the PORTAL system. The Notes are not listed on any national securities exchange
in the United States and are not quoted in the Nasdaq Stock Market. There can be
no assurance that any market for the Notes will develop or, if one does develop,
that it will be maintained. If an active market for the Notes fails to develop
or be sustained, the trading price of such Notes could be materially adversely
affected.
LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
offer to purchase the Notes. If a Change of Control were to occur, there can be
no assurance that the Company would have sufficient financial resources, or
would be able to arrange adequate financing on acceptable terms, to pay for the
repurchase of all Notes tendered by holders thereof. In addition, the Company's
repurchase of the Notes as a result of a Change of Control may be prohibited or
limited by, or create an event of default under, the terms of the Credit
Facility and other agreements related to borrowings which the Company may enter
into from time to time. Failure of the Company to purchase tendered Notes would
constitute an Event of Default under the Indenture. See "Description of
Notes--Repurchase of Notes at the Option of the Holder Upon a Change of
Control."
8
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Notes and the
Conversion Shares by the Selling Securityholders in the offering.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"PETM." Public trading of the Common Stock commenced on July 23, 1993. The
following table sets forth for the periods indicated the high and low price per
share of the Common Stock on the Nasdaq National Market, as adjusted for the
2-for-1 stock split effected as a stock dividend on July 19, 1996 and for the
3-for-2 stock split effected as a stock dividend on May 1, 1995. These prices
represent quotations among dealers without adjustments for retail mark-ups,
mark-downs or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW
--------- ---------
<S> <C> <C>
First Quarter ended April 30, 1995.......................... $ 13.09 $ 10.42
Second Quarter ended July 30, 1995.......................... 15.75 10.88
Third Quarter ended October 29, 1995........................ 18.06 13.63
Fourth Quarter ended January 28, 1996....................... 18.00 12.63
<CAPTION>
FISCAL 1996
<S> <C> <C>
First Quarter ended April 28, 1996.......................... $ 22.50 $ 14.88
Second Quarter ended July 28, 1996.......................... 24.00 18.56
Third Quarter ended October 27, 1996........................ 29.88 22.38
Fourth Quarter ended February 2, 1997....................... 27.00 20.38
<CAPTION>
FISCAL 1997
<S> <C> <C>
First Quarter ended May 4, 1997............................. $ 23.00 $ 11.00
Second Quarter ended August 3, 1997......................... 12.75 9.81
Third Quarter ended November 2, 1997........................ 12.25 6.44
Fourth Quarter ending February 1, 1998 (through January
23)....................................................... 8.00 6.09
</TABLE>
On January 23, 1998, the closing sale price reported by the Nasdaq National
Market for the Common Stock was $6.62. At November 2, 1997, there were 5,170
holders of record of the Company's Common Stock.
DIVIDEND POLICY
PETsMART has never paid any cash dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and therefore does
not anticipate paying cash dividends in the foreseeable future. In addition,
under the terms of its Credit Facility, the Company is prohibited from paying
any cash dividends without prior bank approval.
9
<PAGE>
CAPITALIZATION
The following table sets forth at November 2, 1997, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to reflect the November 1997 sale of the Notes and the application of
the net proceeds therefrom.
<TABLE>
<CAPTION>
AT NOVEMBER 2, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
Cash and cash equivalents........................................................... $ 42,353 $ 137,603
---------- -----------
---------- -----------
Short term debt:
Current portion of capital lease obligations...................................... $ 8,434 $ 8,434
Credit Facility(1)................................................................ 98,000 --
---------- -----------
Total short term debt........................................................... 106,434 8,434
---------- -----------
Long term debt:
Long term capital lease obligations(2)............................................ 58,027 58,027
6 3/4% Convertible Subordinated Notes due 2004.................................. -- 200,000
---------- -----------
Total long term debt............................................................ 58,027 258,027
---------- -----------
Stockholders' equity:
Preferred Stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued
or outstanding.................................................................. -- --
Common Stock, $0.0001 par value, 250,000,000 shares authorized; 115,155,177 shares
issued and outstanding(3)....................................................... 11 11
Additional paid-in capital........................................................ 382,417 382,417
Cumulative foreign currency translation adjustments............................... 3,070 3,070
Accumulated deficit............................................................... (49,978) (49,978)
---------- -----------
Total stockholders' equity...................................................... 335,520 335,520
---------- -----------
Total capitalization.......................................................... $ 499,981 $ 601,981
---------- -----------
---------- -----------
</TABLE>
- --------------------------
(1) At November 2, 1997, in addition to the $98.0 million of borrowings
outstanding under the Credit Facility, an additional $6.6 million was
committed under the Credit Facility for letters of credit. At January 22,
1998, no amounts were outstanding under the Credit Facility. Upon the
effectiveness of the Amendment, the Company's ability to borrow under the
Credit Facility will be subject to certain borrowing base limitations. See
"Description of Credit Facility."
(2) See Note 4 of Notes to Consolidated Financial Statements incorporated by
reference herein regarding operating leases.
(3) Excludes 11,824,764 shares of Common Stock reserved for issuance as of
November 2, 1997 upon the exercise of outstanding stock options. At such
date, the weighted average exercise price of outstanding options was $14.42
per share.
10
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" have been derived from the historical
financial statements of the Company. The selected financial data for the 39
weeks ended October 27, 1996 and November 2, 1997 have been derived from the
unaudited financial statements of the Company. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and results of operations for the unaudited interim
periods. The operating results for the 39 weeks ended November 2, 1997 are not
necessarily indicative of the results that may be expected for the full fiscal
year ending February 1, 1998. The as adjusted financial data presented below
give effect to the November 1997 Note offering and the application of the net
proceeds therefrom and certain adjustments as described in the accompanying
footnotes. Such data do not purport to represent what the Company's results of
operations or financial position would have been had the November 1997 Note
offering been consummated on the date specified or to project the Company's
results of operations or financial position for any future period or date. The
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto incorporated by
reference in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) 39 WEEKS ENDED
----------------------------------------------------- ------------------------
JAN. 31, JAN. 30, JAN. 29, JAN. 28, FEB. 2, OCT. 27, NOV. 2,
1993 1994 1995 1996 1997(2) 1996 1997
--------- --------- --------- --------- --------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 319,627 $ 544,762 $ 924,199 $1,168,056 $1,501,017 $1,043,653 $ 1,279,970
Cost of sales............................. 223,564 395,689 678,420 859,819 1,074,666 750,495 977,764
Gross profit.............................. 96,063 149,073 245,779 308,237 426,351 293,158 302,206(3)
Store operating expenses.................. 69,315 118,013 195,222 228,046 289,622 203,715 250,351(3)
Store preopening expenses................. 3,448 7,583 7,750 5,388 10,907 7,788 7,925
General and administrative expenses....... 20,099 28,499 35,072 36,348 42,463 32,484 35,345(3)
Merger and business integration costs..... -- -- 14,100 47,129 40,714 20,364 55,988(4)
--------- --------- --------- --------- --------- --------- -------------
Operating income (loss)................... 3,201 (5,022) (6,365) (8,674) 42,645 28,807 (47,403)
Interest income........................... 763 2,124 3,594 2,731 1,057 906 182
Interest expense.......................... 3,052 4,298 7,587 8,934 9,450 6,844 9,608
--------- --------- --------- --------- --------- --------- -------------
Income (loss) before income taxes,
extraordinary credit and cumulative
effect of change in accounting
principle............................... 912 (7,196) (10,358) (14,877) 34,252 22,869 (56,829)
Income tax expense (benefit).............. 2,615 3,315 1,262 (9,441) 13,661 9,863 (20,547)
Net income (loss)(5)...................... $ (30) $ (10,301) $ (11,620) $ (5,436) $ 20,591 $ 13,006 $ (36,282)
Income (loss) per share before
extraordinary credit and cumulative
effect of change in accounting
principle(6)............................ $ (0.06) $ (0.14) $ (0.13) $ (0.06) $ 0.17 $ 0.11 $ (0.32)
Net income (loss) per share(6)............ $ (0.04) $ (0.13) $ (0.13) $ (0.06) $ 0.17 $ 0.11 $ (0.32)
Weighted average number of common and
common equivalent shares outstanding.... 70,814 89,015 105,443 108,387 118,226 117,429 114,642
Ratio of earnings to fixed charges(7)..... 1.1 -(8) -(8) -(8) 1.8 1.8 --(8)
AS ADJUSTED DATA:(9)
Interest expense, net..................... $ 19,704 $ 15,811
Net income (loss)......................... $ 13,691 $ (40,177)
Net income (loss) per share............... $ 0.12 $ (0.35)
Ratio of earnings to fixed charges(7)..... 1.4 --(10)
SELECTED OPERATING DATA:
Stores open at end of period.............. 103 192 269 297 376 360 458
Average square footage(11)................ 1,786,428 3,379,860 5,200,319 6,380,672 7,616,245 7,302,267 8,962,601
Net sales per square foot(12)............. $ 139.11 $ 131.97 $ 154.20 $ 163.62 $ 179.71 $ 142.92 $ 142.81
Net sales growth.......................... 79.5% 70.4% 69.7% 26.4% 28.5% 24.7% 22.6%
Increase in comparable North American
store sales(13)......................... 19.0% 19.8% 19.1% 12.5% 11.9% 12.2% 5.4%
BALANCE SHEET DATA:
Inventories............................... $ 59,726 $ 107,736 $ 171,344 $ 211,933 $ 300,892 $ 272,536 $ 322,988
Working capital........................... 45,250 185,765 155,356 146,236 158,182 171,163 125,730
Total assets.............................. 166,471 415,592 484,885 572,104 689,810 649,801 743,695
Capital lease obligations(14)............. 29,711 48,171 74,240 65,725 71,680 68,410 66,461
Total debt................................ 32,011 55,691 95,956 87,973 96,680 96,970 164,461
Stockholders' equity and
redeemable preferred stock.............. $ 81,142 $ 265,445 $ 266,216 $ 301,798 $ 361,045 $ 348,341 $ 335,520
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
11
<PAGE>
- ------------------------------
(1) Reflects the historical financial data of PETsMART after restatement (except
as otherwise noted) for the acquisition of PETZAZZ in March 1994, Sporting
Dog in May 1995, Petstuff in June 1995, Pet Food Giant in September 1995,
State Line Tack in January 1996 and Pet City in December 1996, all of which
were accounted for under the pooling of interests method, the 3-for-2 stock
split effected in the form of a stock dividend paid May 1, 1995, and the
2-for-1 stock split effected in the form of a stock dividend paid July 19,
1996. Fiscal 1996 includes the results of operations of Pet City for the 53
weeks ended February 2, 1997. Fiscal 1995, fiscal 1994, fiscal 1993 and
fiscal 1992 include the financial results of Pet City for the 52 weeks ended
July 27, 1996, July 29, 1995, April 2, 1994 and April 3, 1993, respectively.
An adjustment of $682 was made to retained earnings at January 30, 1994 to
conform the fiscal year of Pet City and PETsMART.
(2) Fiscal 1996 consisted of 53 weeks; all other years reported consisted of 52
weeks.
(3) The Company recorded an aggregate $16,150 in restructuring expenses during
the 39 weeks ended November 2, 1997. Such costs have been recorded as
components of cost of sales, store operating expenses and general and
administrative expenses in the amounts of $9,450, $3,300 and $3,400,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments."
(4) Excludes the $16,150 of restructuring expenses discussed in footnote (3)
above.
(5) Includes an extraordinary credit of $1,673 for fiscal 1992 and a $210
benefit in fiscal 1993 for the cumulative effect of a change in accounting
principle.
(6) After accretion of redeemable preferred stock of $2,736, $1,521, $1,921 and
$1,582 for fiscal years 1992 through 1995, respectively. See Note 2 of Notes
to the Consolidated Financial Statements incorporated by reference herein.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before income taxes, interest expense and one-third of rental
expense relating to operating leases (assumed to be the interest portion
thereof). Fixed charges consist of interest expense, capitalized interest
and one-third of rental expense relating to operating leases.
(8) Earnings were insufficient to cover fixed charges by $7,582, $10,648, and
$15,177 for fiscal 1993, 1994 and 1995, respectively. Earnings did not cover
fixed charges by $56,829 for the 39 weeks ended November 2, 1997.
(9) The as adjusted data for the year ended February 2, 1997 and the 39 weeks
ended November 2, 1997 give effect to the issuance of the Notes and the
application of the net proceeds therefrom as if such transactions had
occurred on January 29, 1996. Adjustments to historical net interest expense
represent: (a) the net increase in interest expense resulting from interest
on the Notes, plus (b) amortization of the estimated $6,750 capitalized debt
issuance costs over seven years, offset by (c) a decrease in interest
expense related to the repayment of outstanding borrowings under the Credit
Facility. Adjustments to historical net income represent the increase in net
interest expense described above offset by related tax effects calculated at
a statutory tax rate of 39%.
(10) Earnings were insufficient to cover fixed charges during the 39 weeks ended
November 2, 1997 on a pro forma basis by $63,214.
(11) Average square footage is the mathematical average of beginning of year
square footage and end of year square footage.
(12) Net sales per square foot is calculated by dividing net sales, excluding
sales of PETsMART Direct, by average square footage.
(13) Includes only North American superstores open at least 52 weeks. The
periods from fiscal 1992 through fiscal 1993 have not been restated to
reflect the acquisition of PETZAZZ in March 1994, and the periods from
fiscal 1992 through fiscal 1995 have not been restated for the acquisitions
of Petstuff and Pet Food Giant in 1995. No periods have been restated for
the Pet City acquisition in December 1996. Fiscal 1996 data has been
adjusted to reflect the first 52 weeks of the 53-week year.
(14) Includes portions related to current maturities.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD MATERIALLY DIFFER FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN
THE SECTIONS ENTITLED PURCHASING AND DISTRIBUTION, COMPETITION, AND RISK FACTORS
IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED FEBRUARY 2, 1997, AND THE RISK
FACTORS SECTION CONTAINED ELSEWHERE IN THIS PROSPECTUS. SEE "DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS."
OVERVIEW
PETsMART is the largest operator of superstores specializing in pet food,
supplies and services in North America and the United Kingdom. At November 2,
1997, PETsMART operated 458 superstores, consisting of 371 superstores in the
United States, 77 superstores in the United Kingdom and 10 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.
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 less 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 anticipated level of new superstore
openings will also contribute to lower store operating margins. 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 period. See "Risk Factors--Performance
of Superstores" and "--Quarterly and Seasonal Fluctuations."
RECENT DEVELOPMENTS
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, the Company's Chairman, Samuel J. Parker, resumed his
former role as Chief Executive Officer. Since Mr. Parker resumed his operating
role, the Company has moved to implement a series of "Back to Basics"
initiatives intended to refocus the Company and improve its financial
performance. See "Business--The PETsMART Strategy: Back to Basics." 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
($38.2 million or $0.33 per share after 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
13
<PAGE>
$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. In the first quarter and third quarter of fiscal 1997, the Company had
also recorded charges of $9.6 million and $1.5 million, respectively, for merger
and business integration costs, resulting in total charges for merger and
business integration costs of $56.0 million for the 39 weeks ended November 2,
1997.
The $16.1 million of other one-time restructuring expenses in the second
quarter of fiscal 1997 were comprised of the write-down or write-off of certain
discontinued merchandise and impaired assets, reserves for litigation 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 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 Company expects to sell
substantially all of its discontinued inventory by the end of fiscal 1997. 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, 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 long-term assets 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 $1.5 million during the third quarter
of fiscal 1997, $1.1 million during the second quarter of fiscal 1997, and $9.6
million during the first quarter of fiscal 1997, primarily related to
reformatting, refixturing, and remerchandising the acquired stores to the
PETsMART superstore format and other costs of integration. The Company expects
to recognize additional charges for merger and business integration costs of up
to $2.5 million in the fourth quarter of fiscal 1997 relating to the acquisition
of Pet City. These remaining charges are anticipated to be associated with the
reformatting, refixturing, and remerchandising of the acquired stores to the
PETsMART superstore format and will be expensed as incurred. The majority of
these expenses relate 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.
In November 1997, $200,000,000 of 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. The net proceeds to PETsMART from the sale of the Notes were
approximately $193,250,000.
14
<PAGE>
In November 1997, following the resignation of the Company's Chief Financial
Officer, the Company's Executive Vice President, C. Donald Dorsey, resumed his
former role as Chief Financial Officer.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales,
unless otherwise indicated, of certain items included in the Company's
statements of operations:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 39 WEEKS ENDED
------------------------------------- ------------------------
JAN. 29, JAN. 28, FEB. 2, OCT. 27, NOV. 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 73.4 73.6 71.6 71.9 76.4(1)
----- ----- ----- ----- -----
Gross profit................................................ 26.6 26.4 28.4 28.1 23.6(1)
Store operating expenses.................................... 21.2 19.6 19.3 19.5 19.6(1)
Store preopening expenses................................... 0.8 0.5 0.7 0.7 0.6
General and administrative expenses......................... 3.8 3.1 2.8 3.1 2.8(1)
Merger and business integration costs....................... 1.5 3.9 2.8 2.0 4.4
----- ----- ----- ----- -----
Operating income (loss)..................................... (0.7) (0.7) 2.8 2.8 (3.7)
Interest income............................................. 0.4 0.2 0.1 0.1 0.0
Interest expense............................................ 0.8 0.8 0.6 0.7 0.8
----- ----- ----- ----- -----
Income (loss) before income taxes........................... (1.1) (1.3) 2.3 2.2 (4.4)
Income tax expense (benefit)................................ 0.1 (0.8) 0.9 0.9 (1.6)
----- ----- ----- ----- -----
Net income (loss)........................................... (1.2)% (0.5)% 1.4% 1.2% (2.8)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- --------------------------
(1) Includes the $16,150 of restructuring expenses recorded in the first three
quarters of fiscal 1997.
THRITY-NINE WEEKS ENDED NOVEMBER 2, 1997 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 27, 1996
The following discussion of results of operations for the thirty-nine week
periods ended November 2, 1997 and October 27, 1996 excludes the effect of the
restructuring, merger and business integration costs discussed above in "Recent
Developments."
Net sales increased 22.6% to $1.28 billion for the thirty-nine weeks ended
November 2, 1997 from $1.04 billion for the thirty-nine weeks ended October 27,
1996. Comparable North American store sales increased 5.4% in the period, and
comparable United Kingdom store sales increased 5.6%. During the period, the
Company opened 69 new superstores and closed 8 relocated stores in North America
and opened 22 stores and closed 1 relocated store in the United Kingdom. The
Company had 458 superstores in operation at November 2, 1997 compared to 360
superstores open at October 27, 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 24.3% for 1997 year to date as compared to 28.1% for the same period in
1996. The decrease is primarily a result of higher occupancy costs in newer
locations, increased warehouse and distribution costs, and the effects of
certain vendor cost increases and lower than anticipated vendor monies resulting
from decreased purchasing activities.
Store operating expenses, which includes payroll and benefits, advertising
and other store level expenses, decreased as a percentage of net sales to 19.3%
for the period from 19.5% for the first thirty-
15
<PAGE>
nine weeks 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 0.6% for
the period compared to 0.7% for the same period in 1996, primarily as a result
of the higher preopening costs associated with the five super-regional format
stores opened in San Diego and the eight Canadian stores opened in 1996. The
Company opened 69 North American stores and 22 United Kingdom stores during the
period, as compared to 52 stores during the same period last year. Average
preopening costs for 1997 approximated $100,000 per store.
General and administrative expenses decreased as a percentage of sales to
2.8% for year to date 1997 from 3.1% for the comparable period of 1996. This
decrease was the result of management's focus on expense management in both
North American and United Kingdom operations.
The Company's operating income decreased to $24.7 million for the
thirty-nine weeks ended November 2, 1997 from $49.2 million for the comparable
period in 1996. Operating income as a percentage of sales decreased to 1.9% for
the 1997 period from 4.7% for the same period of 1996, primarily as a result of
the decrease in gross margin described above.
Interest income decreased to $0.2 million for year to date 1997 from $0.9
for the same period of 1996 principally due to the decrease in average cash
balances in 1997 compared to 1996. Interest expense increased to $9.6 million
for year to date 1997 from $6.8 million for the same period of 1996 principally
due to higher average borrowings during the thirty-nine weeks ended November 2,
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 1997 and 1996, respectively.
Excluding the merger and restructuring charges and other charges, and the
related tax benefits, net income for the 1997 period, decreased to $9.4 million
(or $0.08 per share), compared to $26.8 million (or $0.23 per share) for the
first thirty-nine weeks of fiscal 1996. Including the effect of the
restructuring and other charges recorded in both years, the Company reported a
net loss of $36.3 million (or $0.32 per share) for the thirty-nine weeks ended
November 2, 1997 compared to net income of $13.0 million (or $0.11 per share)
for the 1996 comparable period.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased 28.5% to approximately $1.5 billion for fiscal 1996 from
approximately $1.2 billion for fiscal 1995. Excluding the fifty-third week in
fiscal 1996, net sales increased 26.4% over fiscal 1995. Excluding the
fifty-third week in fiscal 1996, comparable North American store sales increased
11.9% as compared to an increase of 12.5% for fiscal 1995, excluding the
Petstuff and Pet Food Giant stores, some of which were closed for retrofitting
during the year. Due to the increasing maturity of its superstore base, as well
as the opening of additional superstores in existing markets, the Company
anticipates that its rate of comparable store sales growth may be lower in
future periods than previously reported. Comparable United Kingdom store sales
increased 9.2% for fiscal 1996. During fiscal 1996, the Company opened 82 new
superstores, including 21 in the United Kingdom, and relocated three
superstores. Net sales from the 82 superstores opened in fiscal 1996 contributed
$88.6 million or 26.6% of the total increase in net sales. Of the remainder of
the total net sales increase, $167.3 million or 50.3% was contributed by
superstores opened in fiscal 1995. The Company had 376 superstores in operation
at the end of fiscal 1996 as compared to 297 superstores open at the end of
fiscal 1995.
16
<PAGE>
Gross profit, defined as net sales less cost of sales, including
distribution costs and store occupancy costs, increased as a percentage of net
sales to 28.4% for fiscal 1996 as compared to 26.4% for fiscal 1995. The
increase in margin was principally due to a change in sales mix in retail
stores, improved margins in catalog operations, and the continued maturation of
the Company's store base.
Store operating expenses, which includes payroll and benefits, advertising
and other store level expenses, were 19.3% of net sales for fiscal 1996 versus
19.6% for fiscal 1995.
Store preopening expenses as a percentage of net sales increased to 0.7% for
fiscal 1996 compared to 0.5% for fiscal 1995. The average preopening expenses
for the 61 North American PETsMART superstores opened in fiscal 1996 increased
to $127,000 from $74,000 for the 42 PETsMART superstores opened during fiscal
1995. The increase in preopening expenses on a per unit basis reflected the
additional training and store setup costs incurred with the Company's initial
entry into Canada, which occurred in fourth quarter fiscal 1996, as well as the
impact of the Company's five 40,000 square foot hybrid pet/equine megastores
opened in Southern California.
General and administrative expenses were 2.8% of net sales for fiscal 1996
versus 3.1% for fiscal 1995, due primarily to the elimination of the duplicate
overhead costs related to the acquisitions in fiscal 1995 of Petstuff and Pet
Food Giant.
Charges for merger and business integration costs of $28.4 million related
to the State Line Tack and Pet City acquisitions were recorded in fiscal 1996.
These charges included legal, investment banking, and accounting fees ($8.8
million), costs associated with reformatting, refixturing and remerchandising
the acquired Pet City superstores to the format consistent with that of a
PETsMART prototype superstore ($11.0 million), a provision for the closure of a
redundant warehouse and other inadequate facilities ($5.5 million) and other
costs of consolidation ($3.1 million).
Also during fiscal 1996, the Company recorded charges for merger and
business integration costs of $12.3 million to reflect additional lease
termination costs anticipated to be incurred in connection with the settlement
of lease obligations for the 17 former Petstuff stores closed by the Company
immediately following the 1995 merger with Petstuff, along with the settlement
of obligations with respect to seven lease commitments for future Petstuff
locations that were either duplicate or inadequate facilities and therefore
abandoned.
The Company generated operating income of $42.6 million for fiscal 1996
compared to an operating loss of $8.7 million in fiscal 1995. However, excluding
the charges for merger and business integration costs recorded in both fiscal
1996 and fiscal 1995, operating income increased $44.9 million to $83.4 million
from $38.5 million for fiscal 1995. Excluding the charges for merger and related
business integration costs, operating income as a percentage of sales increased
to 5.6% for fiscal 1996 from 3.2% for fiscal 1995.
Interest income decreased to $1.1 million for fiscal 1996 from $2.7 million
for fiscal 1995, principally due to the decrease in average cash balances in
fiscal 1996 compared to fiscal 1995. Interest expense increased to $9.5 million
for fiscal 1996 from $8.9 million for fiscal 1995 principally due to higher
average borrowings outstanding during the period.
Income tax expense was $13.7 million for fiscal 1996 compared to a benefit
of $9.4 million for fiscal 1995. The Company's effective income tax rate for
fiscal 1996 was 38% compared to 35% for fiscal 1995, excluding the effect of
permanent differences within the merger and business integration charges
recorded in fiscal 1996 and fiscal 1995 and the effects of net operating loss
carryforwards recognized in both years. This increase was primarily due to an
increased federal rate due to the absence of targeted job tax credits, lower
tax-advantaged investments, and a higher effective state income tax rate.
As a result of the foregoing, the Company reported net income of $20.6
million (or $0.17 per share) for fiscal 1996 compared to a net loss, before
accretion of the Pet Food Giant and State Line Tack preferred stock, of $5.4
million (or $0.05 per share) for fiscal 1995. Excluding the charges for merger
and business integration costs and related tax benefits as well as the
recognition of net operating loss carryforwards recorded in both years, net
income for fiscal 1996 increased $26.2 million to $46.5 million (or $0.39 per
share) from $21.0 million (or $0.19 per share) for fiscal 1995. The Company's
North
17
<PAGE>
American operations, excluding charges for merger and business integration costs
and their related income tax effects, reported net income of $0.44 per share for
fiscal 1996 as compared to net income of $0.22 per share for fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased 26.4% to approximately $1.2 billion for fiscal 1995 from
approximately $924.2 million for fiscal 1994. Excluding the Petstuff and Pet
Food Giant stores which were closed for retrofitting during the year, comparable
North American store sales increased 12.5% for fiscal 1995, as compared to an
increase of 19.1%, for fiscal 1994. Comparable United Kingdom store sales
increased 6.9% for fiscal 1995. During fiscal 1995, the Company opened 42 North
American superstores and closed 22 superstores, including four relocated stores,
17 redundant and non-performing Petstuff superstores and one redundant Pet Food
Giant store. The Company opened eight superstores in the United Kingdom during
the year. Net sales from the 42 North American superstores opened in fiscal 1995
contributed $65.5 million or 28.2% of the total increase in net sales. Of the
remainder of the total net sales increase, $143 million or 30.3% was contributed
by North American superstores that opened during fiscal 1994. After giving
effect to its recent acquisitions, the Company had 297 superstores in operation
at the end of fiscal 1995 compared to 269 superstores open at the end of fiscal
1994.
Gross profit, defined as net sales less cost of sales including distribution
costs and store occupancy costs, decreased as a percentage of net sales to 26.4%
for fiscal 1995 as compared to 26.6% for fiscal 1994. This decrease was
primarily the result of higher occupancy costs, as a percentage of sales, in the
Petstuff and Pet Food Giant superstores during the year.
Store operating expenses, which include payroll and benefits, advertising
and other store level expenses, were 19.6% of net sales for fiscal 1995, versus
21.2% for fiscal 1994. This decrease as a percentage of net sales was due to
improved payroll expense management and reduced advertising expenditures,
primarily as the result of changing the PETsMART superstores' media mix from
direct mail to newspaper inserts and improved advertising leverage as the result
of the addition of new superstores in existing markets.
Store preopening expenses as a percentage of net sales decreased to 0.5% for
fiscal 1995, compared to 0.8% for fiscal 1994 primarily due to fewer store
openings in fiscal 1995 versus fiscal 1994. The average preopening expense for
the 42 North American PETsMART prototype superstores opened in fiscal 1995
decreased to $74,000 from a combined average of $87,000 for the 46 PETsMART
prototype superstores, 21 Petstuff-format superstores and four Pet Food Giant
superstores opened during fiscal 1994. This decrease was the result of
management efforts to improve efficiency in shortening the time required to open
new superstores, as well as the lower cost to open a PETsMART prototype
superstore compared to Petstuff or Pet Food Giant-format superstores.
General and administrative expenses were 3.1% of net sales for fiscal 1995
versus 3.8% for fiscal 1994. This decrease reflected continued expense
management, along with the elimination of duplicate overhead costs related to
the PETZAZZ, Petstuff and Pet Food Giant acquisitions.
Charges for merger and business integration costs of $47.1 million related
to the Petstuff, Sporting Dog and Pet Food Giant acquisitions were recorded in
fiscal 1995. This charge included legal, investment banking, and accounting fees
($6.2 million), costs associated with reformatting, refixturing and
remerchandising the acquired superstores to the format consistent with that of a
PETsMART prototype superstore ($14.1 million), a provision for the closure of
redundant superstores and other facilities ($18.9 million) and other costs of
consolidation, including employee severance, relocation costs and early
termination fees on the credit facility of an acquired entity ($7.9 million).
As a result of the above charges for merger and business integration costs,
the Company incurred an operating loss of $8.7 million for fiscal 1995 compared
to an operating loss of $6.4 million in fiscal 1994. However, excluding these
charges for merger and business integration costs recorded both in fiscal 1995
and fiscal 1994, operating income increased $30.8 million, from $7.7 million in
fiscal 1994 to $38.5 million
18
<PAGE>
in fiscal 1995. Excluding the merger and related non-recurring costs, operating
income as a percentage of sales increased to 3.3% for fiscal 1995 from 0.8% for
fiscal 1994.
Interest income decreased to $2.7 million for fiscal 1995, from $3.6 million
for fiscal 1994, principally due to the decrease in average cash balances in
fiscal 1995 compared to fiscal 1994. Interest expense increased to $8.9 million
for fiscal 1995, from $7.6 million for fiscal 1994, principally due to higher
outstanding borrowings during the period.
Income tax benefit of $9.4 million was recorded for fiscal 1995, compared to
income tax expense of $1.3 million for fiscal 1994. Excluding the effect of
permanent differences within the charges for merger and business integration
costs recorded in fiscal 1995 and fiscal 1994 and the effects of net operating
loss carryforwards recognized in both years PETsMART's effective income tax rate
for fiscal 1995 was 35% compared to 34% for fiscal year 1994. This increase was
primarily due to an increased federal rate due to the absence of targeted job
tax credits, lower tax-advantaged investments, and a higher effective state
income tax rate.
As a result of the foregoing, PETsMART recorded a net loss, before accretion
of the Pet Food Giant and State Line Tack preferred stock, of $5.4 million (or
$0.05 per share) for fiscal 1995, compared to a net loss, before accretion of
the Pet Food Giant and State Line Tack preferred stock, of $11.6 million (or
$0.11 per share) for fiscal 1994. Excluding charges for merger and business
integration costs and related tax benefits and the recognition of net operating
loss carryforwards recorded in both years, net income for fiscal 1995, on a
comparable basis and before the Pet Food Giant and State Line Tack accretion,
increased $17.8 million to $20.3 million (or $0.19 per share) in fiscal 1995,
from $2.5 million (or $0.02 per share) in fiscal 1994. The Company's North
American operations, excluding charges for merger and business integration costs
and related income tax effects, reported net income of $0.22 per share for
fiscal 1995 as compared to net income of $0.03 per share for fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and expansion program to date
principally through cash flows from operations, the sale of equity securities,
lease financing and borrowings under the Credit Facility. Additional sources of
financing include vendor terms on inventory purchases.
At November 2, 1997, total assets were $743.7 million, of which $457.8
million were current assets. Cash and cash equivalents were $42.4 million.
Cash used in operations was $45.3 million for the thirty-nine weeks ended
November 2, 1997, compared to cash used in operations of $29.7 million for the
same period of the prior year. Approximately $15.1 million of the net cash used
in operations during the thirty-nine weeks ended November 2, 1997 related to the
timing of inventory purchases on account and payment of those accounts during
the year to date. Merchandise accounts payable leveraging (the percentage of
merchandise inventory financed by vendor credit terms, e.g., accounts payable
divided by merchandise inventory), decreased to 45.2% at November 2, 1997,
compared to 46.7% at February 2, 1997. Inventory balances were approximately
$323.0 million at November 2, 1997, and $300.9 million at February 2, 1997.
Average North American store inventory, which excludes the inventory of PETsMART
Direct, decreased 8% to $736,000 per store at November 2, 1997, from
approximately $800,000 at February 2, 1997, due to management's efforts to
improve inventory turns. As part of the Company's efforts to reduce the carrying
value of North American superstore inventories, certain actions were taken which
caused a severe and sudden decrease in inventory purchasing activities during
the first quarter of fiscal 1997. As a consequence, store deliveries of certain
key merchandise were temporarily interrupted and resulted in out-of-stock
conditions in several key merchandise categories and locations. As a result,
certain merchandise was not available for customer purchase during the later
half of the first quarter and the first half of the second fiscal quarter of
1997. Management currently anticipates that inventory balances, in the
aggregate, may increase slightly over the remainder of fiscal 1997. This
inventory increase is anticipated to occur as a consequence of the inventory
purchasing requirements, prior to the end of fiscal 1997, of the Company's
current plan to open up to 30 new North American superstores in the first fiscal
quarter of 1998.
19
<PAGE>
Cash used in operations was offset by $23.2 million by the recording in
second quarter 1997 of the non-cash portion of the accrued merger and
restructuring costs. Future cash uses for restructuring costs will be partially
offset by cash inflows from the liquidation of inventory and the related tax
benefits associated with the discontinuation of certain departments within all
superstores and the closing of certain superstores.
The Company estimates an approximate $12.0 million to $13.0 million
aggregate positive net cash flow from the restructuring activities over the next
two years.
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 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 has also used cash to purchase properties for sale and leaseback. Net
cash used in investing activities was $27.9 million for the thirty-nine weeks
ended November 2, 1997.
Net cash flow from financing activities, primarily borrowings and repayments
under the Company's Credit Facility and proceeds from the exercise of employee
stock options, was $73.6 million for the thirty-nine weeks ended November 2,
1997.
The Company's primary long-term capital requirement is for opening new
superstores, the costs of closing redundant or inadequate superstores identified
in second quarter 1997, merger and business integration costs, 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 $600,000. This
amount will 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 $450,000 for inventory, net of accounts payable. Approximately
$400,000 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 seven additional
North American superstores and seven United Kingdom superstores in the fourth
quarter of fiscal 1997, approximately $14.8 million will be needed to finance
these new superstores, prior to related lease financing proceeds of
approximately $8.5 million, a portion of which may not be received until fiscal
1998.
PETsMART is in the initial phases of developing and implementing an
integrated worldwide information system which will feature a common set of
applications. The new system will require significant financing, a portion of
which will be provided by proceeds from the offering. 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 may be
financed through lease transactions, although there can be no assurance that the
actual costs for the new system will not exceed current estimates. There can be
no assurance 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, or 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. See "Risk Factors--New Information
System."
20
<PAGE>
The Company expects that capital expenditures, net of construction
allowances, during the fourth quarter of fiscal 1997 and during fiscal 1998 will
be approximately $15.0 million and $65.0 million, respectively, primarily to
fund the opening a total of 77 superstores in North America and a total of 38
superstores in 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. See "Business--PETsMART Superstores."
The Company incurred additional indebtedness as a result of the November
1997 offering of $200 million of Notes. On an adjusted basis, after giving
effect to such offering and application of the net proceeds therefrom, the
Company would have had approximately $266.5 million of indebtedness outstanding
at November 2, 1997 as compared to historical indebtedness outstanding of $164.5
million.
Management believes that proceeds from the November 1997 Note offering,
together with cash flow from operations, borrowing capacity under the 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. See "Risk Factors."
SEASONALITY AND INFLATION
The Company's business is subject to some seasonal fluctuation and it
typically realizes a higher 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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which will be effective for fiscal
years beginning after December 15, 1997. SFAS 131 redefines how operating
segments are determined and requires expanded quantitative and qualitative
disclosures relating to an entity's operating segments. The Company has not yet
completed its analysis of how it will comply with this pronouncement.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which will be effective for the Company's fiscal year ending January
31, 1999. Under SFAS 130, companies are required to report comprehensive income
as a measure of overall performance. Comprehensive income includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. The Company will be required to report net income
(loss) and foreign currency translation adjustments as the components of
comprehensive income. The Company has not yet completed its analysis of how it
will comply with this pronouncement.
In November 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "EITF") issued consensus number 97-13, "Accounting for
Costs Incurred in Connection with a Consulting Contract or an Internal Project
that Combines Business Process Reengineering and Information Technology
Transformation". This consensus requires that the cost of business process
reengineering activities,
21
<PAGE>
whether done internally or by third parties, is to be expensed as incurred, and
is also applicable when the business process reengineering activities are part
of a project to acquire, develop, or implement internal-use software. The EITF
also reached a consensus that if costs were previously capitalized for the
business process reengineering activities, then any remaining unamortized
portion of those identifiable costs should be written off in the quarter that
contains November 20, 1997 and reported like a cumulative effect of a change in
accounting principle as described in paragraph 20 of Opinion 20. The Company
will comply with this consensus in its financial statements for the fiscal year
ended February 1, 1998 and is currently evaluating the impact of the required
change on its financial results.
22
<PAGE>
BUSINESS
PETsMART is the largest operator of superstores specializing in pet food,
supplies, and services in North America and the United Kingdom. At November 2,
1997, the Company operated 458 superstores, consisting of 371 superstores in the
United States, 77 superstores in the United Kingdom and 10 superstores in
Canada. PETsMART offers a complete assortment of pet products at prices
typically below those offered by supermarkets, mass merchandisers, and
traditional pet food and supply retailers, as well as a wide range of pet
services. PETsMART's superstores utilize a hybrid retail-warehouse format that
reinforces the image of warehouse shopping at discount prices, enhances
merchandise presentation, and provides a fun shopping experience for customers
and their pets.
THE PET FOOD AND PET SUPPLY INDUSTRY
The pet food, supplies and services business, fueled by growth in pet
populations and the trend toward better pet care, generated U.S. sales of
approximately $31 billion in 1996. According to recent estimates, approximately
58 million U.S. households, or over half of all U.S. households, owned at least
one pet and over half of pet-owning households owned more than one pet. There
were an estimated 57 million dogs, 70 million cats and 11 million horses in the
United States in 1996. Demand for pets is primarily influenced by family
formation; most pets are owned by families with children between ages five and
19.
Pet food, primarily dog and cat food, represents the largest volume category
of pet-related products, with 1996 U.S. sales estimated at approximately $9
billion. The Company estimates that supermarket pet food brands, such as Purina,
Alpo, Friskies and Kal Kan accounted for approximately 75% of U.S. pet food
sales in 1996. In recent years, supermarkets' share of total pet food sales has
steadily decreased as a result of increased competition from superstores,
warehouse clubs, mass merchandisers and specialty pet stores as well as the
growing proportion of pet food sales accounted for by premium foods. Premium pet
foods brands such as Science Diet and IAMS, which offer higher levels of
nutrition than non-premium brands, accounted for approximately 25% of total pet
food sales in 1996. These premium pet foods currently are not sold through
supermarkets, warehouse clubs and mass merchandisers due to manufacturers'
restrictions but are sold primarily through superstores such as PETsMART,
specialty pet stores, veterinarians and farm and feed stores.
U.S. sales of pet supplies, consisting of items such as dog and cat toys,
collars and leashes, cages and habitats, books, vitamins and supplements,
shampoos, flea and tick control products and aquatic supplies, were
approximately $3.3 billion in 1996. Pet supplies are sold by many types of
retailers, including supermarkets, discount stores and other mass merchandisers,
superstores, specialty pet stores, catalog retailers and veterinarians. The
channels of distribution for pet supplies are highly fragmented, with
superstores and discount stores estimated to account for over 50% of U.S. sales
volume.
The Company estimates that U.S. sales of equine food, tack, riding apparel
and related supplies and equipment were approximately $8 billion in 1996.
U.S. sales of pet services were estimated at approximately $11 billion in
1996. Major pet-related services include veterinary care, grooming, boarding and
obedience training. The Company considers the pet services industry also to be
highly fragmented and significantly under-served; many pet owners do not
regularly use pet services due to inconvenience, a lack of awareness or the cost
of the services provided.
23
<PAGE>
MERCHANDISE
Merchandise, which represented approximately 94.8% of PETsMART's North
American retail revenues in fiscal 1996, generally falls into three main
categories:
- PET FOOD, TREATS AND LITTER. PETsMART emphasizes premium dog and cat
foods, which currently are not available in supermarkets, warehouse clubs
or mass merchandisers, as well as quality national grocery brands
traditionally found in supermarkets and pet stores. PETsMART also offers a
wide selection of its own corporate brand food products including
"Authority-Registered Trademark-" premium dog and cat food and treats,
"SophistaCat-Registered Trademark-" cat food and "Grreat
Choice-Registered Trademark-" dog food. The sale of pet food, treats and
litter comprised approximately 49.3% of PETsMART's North American retail
revenues in fiscal 1996.
- PET SUPPLIES. PETsMART's broad assortment of pet supplies includes
collars, leashes, health and beauty aids, shampoos and conditioners,
medications, toys, animal carriers, dog houses, cat furniture and
equestrian supplies. The Company also offers a complete line of supplies
for fish, birds and small animals, including aquariums, filters, bird
cages and small animal supplies. Corporate brand pet supplies include "Top
Paw-Registered Trademark-", "Top Fin-Registered Trademark-" and "Top
Wing-Registered Trademark-." PETsMART also has an equine department in
certain superstores serving trade areas which have high rates of horse
ownership. The sale of pet supplies comprised approximately 42.3% of
PETsMART's North American retail revenues in fiscal 1996.
- LIVESTOCK AND OTHER GOODS. PETsMART superstores feature fresh water
tropical fish and, in certain superstores, domestically bred birds,
reptiles and small animals. In addition, PETsMART actively supports the
activities of local humane organizations through its in-store Luv-A-Pet
pet adoption centers. Livestock and other non-pet supply goods comprised
approximately 3.2% of the Company's North American retail revenues in
fiscal 1996.
PET SERVICES
Unlike its principal competitors, PETsMART offers a wide range of services
for the pet owner. Services comprised approximately 5.2% of the Company's North
American retail revenues in fiscal 1996. Approximately one-half of PETsMART's
North American superstores include veterinary clinics. In most superstores,
PETsMART also offers on-site grooming and conducts obedience classes.
Veterinary clinics operated in PETsMART stores generally offer routine
examinations and vaccinations, dental care, pharmacy and most surgical
procedures. The availability of comprehensive veterinary care further
differentiates PETsMART and reflects the Company's overall commitment to animal
care. The Company's prototype 2,000 square foot in-store clinic provides
state-of-the-art operating and examining rooms as well as on-site X-ray machines
and blood diagnostic equipment. These clinics offer customers more sophisticated
services than traditional veterinary competitors typically provide. In addition,
many PETsMART stores without these in-store clinics offer routine vaccination
and wellness services. At November 2, 1997, veterinary clinics were operating
within 190 PETsMART stores in North America. Of these, 91 were operated directly
by PETsMART and 84 were leased to and operated by Medical Management
International, Inc., a third party operator of veterinary clinics. An additional
15 veterinary clinics were leased to and operated by independent veterinarians.
24
<PAGE>
THE PETSMART STRATEGY: BACK-TO-BASICS
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 of the Company. Since Mr. Parker resumed
his operating role, the Company has moved to implement a series of "Back to
Basics" initiatives intended to refocus the Company and to improve financial
performance. The "Back to Basics" initiatives consist of:
- PROVIDING CUSTOMERS WITH VALUE THROUGH A FIRM COMMITMENT TO EVERYDAY LOW
PRICING. PETsMART endeavors to be the low-price leader in each of the
markets it serves for each product that it offers. The Company reinforces
customers' expectations of savings by offering a "double-the-difference"
price guarantee on all of its products. The Company regularly checks
prices at competitors' stores to ensure that PETsMART's prices are
competitive within each market.
- MAINTAINING A BROAD PRODUCT ASSORTMENT. PETsMART's strategy is to offer
the most complete assortment of pet-related products and services in the
marketplace. PETsMART U.S. prototype superstores typically carry
approximately 12,000 pet related items.
- ENSURING A HIGH IN-STOCK POSITION ON KEY ITEMS WHILE IMPROVING INVENTORY
TURNS. The Company's inventory management systems are designed to maintain
inventory levels that provide optimum in-stock positions. The Company is
focused on ensuring that factors which led to widespread out-of-stock
conditions in the first half of fiscal 1997 are not repeated in the
future. Also, in August 1997, the Company decided to discontinue the
Discovery Center department within all of its stores, to eliminate or
reduce certain other merchandise categories and to expand other offerings.
The elimination of the Discovery Center in particular will allow the
central "drive" aisle of PETsMART stores to be remerchandised to enhance
store productivity. In addition, the elimination of the Discovery Center
and other slower-moving merchandise is expected over time to improve
inventory turnover rates.
- REEMPHASIZING EMPLOYEE TRAINING TO ENSURE A HIGH LEVEL OF CUSTOMER
SERVICE. The Company has renewed its emphasis on training and personnel
development. PETsMART views the quality of its customers' interaction with
its associates as critical to its continued success in building and
enhancing customer confidence and loyalty. PETsMART strives to provide
customers with personalized service and a friendly shopping atmosphere. To
enhance the stores' fun environment, customers are encouraged to bring
their pets into PETsMART superstores while they shop.
- REINSTATING PROVEN MARKETING AND ADVERTISING PROGRAMS TO REBUILD SALES
MOMENTUM. In the first half of fiscal 1997, the Company experimented with
alternative marketing programs. Due to disappointing results, the Company
has returned to its historically more successful strategy of using
circular, radio and television advertising that focuses on specific buying
opportunities to encourage customers to shop at PETsMART.
- CLOSING OR RELOCATING CERTAIN UNDERPERFORMING SUPERSTORES. The Company has
decided to accelerate the closing of approximately 33 underperforming or
redundant superstores which had been slated for closing over the next two
years, of which 31 were acquired superstores. Twenty-four of the 33
superstores are being replaced by superstores to be opened in the same
trade area. At November 2, 1997, eight of these 33 superstores had been
closed, and three replacement superstores had been opened.
25
<PAGE>
PETSMART SUPERSTORES
At November 2, 1997, PETsMART operated 458 superstores, consisting of 371
superstores in the United States, 77 superstores in the United Kingdom and 10
superstores in Canada. PETsMART's superstores are generally located in sites
co-anchored by strong consumables-oriented retailers and other destination
superstores, typically in or near major regional shopping centers. The map below
illustrates the locations of the 381 PETsMART superstores operated in North
America at November 2, 1997.
[LOGO]
The table below describes the recent historical and forecast changes in the
Company's North American store base (square footage in thousands):
<TABLE>
<CAPTION>
HISTORICAL STORE ACTIVITY
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL FISCAL FISCAL Q1 Q2 Q3
1994 1995 1996 1997 1997 1997
----------- ----------- ----------- --------- ----------- -----------
Superstores open at beginning of period......... 178 242 262 320 351 373
New superstores opened.......................... 71 38 58 32 22 11
Relocated superstores opened.................... -- 4 3 -- 2 2
Superstores closed.............................. (7) (22) (3) (1) (2) (5)
----- ----- ----- --------- ----- -----
Superstores open at end of period............... 242 262 320 351 373 381
----- ----- ----- --------- ----- -----
----- ----- ----- --------- ----- -----
Total square footage at end of period........... 5,745 6,362 7,910 8,650 9,232 9,444
<CAPTION>
FORECAST STORE
ACTIVITY
--------------------
<S> <C> <C>
Q4 FISCAL
1997 1998
--------- ---------
Superstores open at beginning of period......... 381 382
New superstores opened.......................... 6 60
Relocated superstores opened.................... 1 15
Superstores closed.............................. (6) (15)
--------- ---------
Superstores open at end of period............... 382 442
--------- ---------
--------- ---------
Total square footage at end of period........... 9,518 10,916
</TABLE>
The Company's expansion strategy is to increase its market share in existing
markets and to penetrate new markets with a goal of establishing a leading
position in each market it serves and to achieve operating efficiencies and
economies in advertising, distribution and management. By the end of fiscal
1997, PETsMART currently expects to operate 382 superstores in North America and
85 superstores in the United Kingdom. PETsMART believes that there is a
potential for an aggregate of 900 to 1,000 PETsMART superstores in North America
and up to 250 PETsMART superstores in the United Kingdom. See "Risk
Factors--Expansion Plans."
26
<PAGE>
PETSMART DIRECT
PETsMART Direct, the Company's catalog operation, is the leading direct mail
retailer of pet-related and equine products in North America. PETsMART Direct
sells pet supplies through three catalogs: R.C. Steele, Pedigrees and Groomer
Direct. PETsMART Direct also offers discount brand name tack, riding apparel and
equine supplies through four additional catalogs: State Line Tack Western, State
Line Tack English, Wiese Equine Supply and National Bridle Shop. In fiscal 1996,
PETsMART Direct circulated more than 37 million catalogs. PETsMART Direct's
marketing and customer database management is designed to attract new customers
and to generate additional sales from existing catalog or retail customers.
PETsMART Direct's proprietary customer database currently contains the names of
approximately 1.2 million customers who have made a purchase from PETsMART
Direct catalogs within the past 24 months. In fiscal 1996, PETsMART Direct's
average transaction was approximately $90.
DISTRIBUTION
PETsMART is committed to pursuing distribution strategies which the Company
believes minimize delivered cost on the merchandise that it sells. The Company
buys from approximately 700 vendors worldwide, the two largest of which account
for approximately 21% of total purchases. The Company employs a hybrid
distribution system including, as appropriate, full truckload shipments to
individual superstores, the splitting of full truckloads among several closely
located superstores, consolidation centers to service regional clusters of
superstores, and central distribution centers. The Company operates a 300,000
square foot distribution center in Columbus, Ohio, and a 430,000 square foot
distribution center in Phoenix, Arizona. The Company's 230,000 square foot
distribution center in Ennis, Texas is in the process of being consolidated into
PETsMART's Phoenix facility. These centers primarily handle small, light and
easy to handle products. The Company also currently operates 13 regional
consolidation centers in the United States and operates a 110,000 square foot
distribution center in Gloucester, England. In addition, PETsMART Direct
operates a 200,000 square foot catalog fulfillment and equine distribution
center in Brockport, New York.
INFORMATION SYSTEMS
The Company is committed to making ongoing investments in its information
systems to increase operating efficiency, provide superior customer service and
support its anticipated growth. The Company has made, and continues to make,
significant investments in information systems to support point of sale
applications, inventory replenishment, merchandising, inventory control,
warehousing and distribution, financial controls and reporting. PETsMART has
completed the conceptual design of an integrated, worldwide information system
which will feature a common set of applications. The Company estimates that its
costs in connection with the development 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 can be financed through lease
transactions, although there can be no assurance that adequate financing will be
available to the Company on acceptable terms. When complete, it is anticipated
that the system will provide the Company with a significant competitive
advantage in better serving its customers and improving its business operations.
There can be no assurance that the actual costs for the new system will not
exceed current estimates or extend beyond fiscal year 2000. 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. See "Risk Factors--New Information
System" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
27
<PAGE>
COMPETITION
Based on total sales, the Company is the largest retailer of pet food,
supplies and services in North America and the United Kingdom. The pet food and
supply business is highly competitive and can be categorized into three
different segments: (i) supermarkets, warehouse clubs and other mass
merchandisers, (ii) specialty pet supply chains and pet supply superstores and
(iii) independent pet stores. The Company believes that the principal
competitive factors influencing the Company's business are product selection and
quality, convenience of store locations, customer service and price. In this
regard, the major premium pet food brands offered by the Company, such as
Science Diet and IAMS, are not currently available to grocery stores, warehouse
clubs or other mass merchandisers due to manufacturers' restrictions. PETsMART
believes that it competes effectively within its various markets; however, some
of the Company's competitors are larger in terms of overall sales volume and
have access to greater capital and management resources than the Company. See
"Risk Factors--Competition."
GOVERNMENT REGULATION
The Company is subject to laws governing its relationship with employees,
including minimum wage requirements, overtime, working conditions and
citizenship requirements. In certain locations, PETsMART leases space to
independent veterinary operators. Statutes and regulations in certain states or
Canadian provinces or abroad affecting the ownership of veterinary practices or
the operation of veterinary clinics within retail stores or the operation of
superstores may impact the Company's ability to operate veterinary clinics
within certain of its facilities.
The laws of many states prohibit veterinarians from splitting fees with
non-veterinarians and prohibit business corporations from providing, or holding
themselves out as providers of, veterinary medical care. These laws vary from
state to state and are enforced by the courts and by regulatory authorities with
broad discretion. While the Company seeks to structure its operations to comply
with the corporate practice of veterinary medicine laws of each state in which
it operates, there can be no assurance that, given varying and uncertain
interpretations of such laws, the Company would be found to be in compliance
with restrictions on the corporate practice of veterinary medicine in all
states. A determination that the Company is in violation of applicable
restrictions on the practice of veterinary medicine in any state in which it
operates could require the Company to restructure its operations to comply with
the requirements of such states, or render it unable to operate veterinary
clinics in those states. See "Risk Factors-- Government Regulations."
INSURANCE
The Company maintains standard product and casualty insurance on all of its
superstores, as well as product liability insurance covering the sale of live
animals and veterinary malpractice insurance covering its veterinary clinics.
TRADEMARKS
The Company owns several service marks and trademarks registered with the
United States Patent
and Trademark Office ("USPTO"), including "PETsMART-Registered Trademark-,"
"Santa Claws-Registered Trademark-," "Grreat Choice-Registered Trademark-,"
"SophistaCat-Registered Trademark-," "Authority-Registered Trademark-," "Top
Paw-Registered Trademark-," "Top Wing-Registered Trademark-," "Top
Fin-Registered Trademark-," "Where Pets Are Family-Registered Trademark-" and
the PETsMART logos. PETsMART also has several applications pending with the
USPTO for additional trademarks and anticipates filing additional applications
in the future. The Company believes its trademarks and logos have become
important components in its merchandising and marketing strategy. The Company
believes it has all the licenses necessary to conduct its business.
EMPLOYEES
As of November 2, 1997, the Company employed approximately 18,200 associates
worldwide, approximately 8,200 of whom were employed full time. PETsMART's
associates receive wages and benefits competitive with those of the local retail
community. The Company is not subject to any collective bargaining agreements
and has not experienced any work stoppages. The Company considers its
relationship with its associates to be good.
28
<PAGE>
PROPERTIES
The following table summarizes the locations of the superstores operated by
PETsMART by country and in the United States by state at November 2, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SUPERSTORES
---------------
<S> <C>
NORTH AMERICAN SUPERSTORES
United States:
Arizona.......................................................................... 14
Arkansas......................................................................... 2
California....................................................................... 51
Colorado......................................................................... 13
Florida.......................................................................... 27
Georgia.......................................................................... 15
Idaho............................................................................ 1
Illinois......................................................................... 26
Indiana.......................................................................... 8
Iowa............................................................................. 1
Kansas........................................................................... 3
Kentucky......................................................................... 1
Maryland......................................................................... 15
Massachusetts.................................................................... 3
Michigan......................................................................... 13
Minnesota........................................................................ 10
Mississippi...................................................................... 1
Missouri......................................................................... 9
Nebraska......................................................................... 2
Nevada........................................................................... 6
New Hampshire.................................................................... 1
New Jersey....................................................................... 12
New Mexico....................................................................... 2
New York......................................................................... 8
North Carolina................................................................... 5
Ohio............................................................................. 24
Oklahoma......................................................................... 5
Oregon........................................................................... 5
Pennsylvania..................................................................... 10
Rhode Island..................................................................... 1
South Carolina................................................................... 2
Tennessee........................................................................ 6
Texas............................................................................ 34
Utah............................................................................. 5
Virginia......................................................................... 15
Washington....................................................................... 11
---
Total United States PETsMART superstores......................................... 367
State Line Tack (Delaware, New Hampshire and Texas).............................. 4
---
Total United States superstores.................................................. 371
Canada........................................................................... 10
---
Total North America superstores.................................................. 381
UNITED KINGDOM SUPERSTORES
England.......................................................................... 62
Scotland......................................................................... 9
Wales............................................................................ 3
Northern Ireland................................................................. 3
---
Total United Kingdom superstores................................................. 77
---
TOTAL WORLDWIDE SUPERSTORES...................................................... 458
---
---
</TABLE>
29
<PAGE>
PETsMART leases substantially all of its superstores, retail distribution
centers and corporate offices under noncancellable operating leases. The terms
of the superstore leases, other than leases under its Structured Lease
Facilities, as described below, generally range from 10 to 20 years and
typically allow the Company to renew for three to five additional five year
terms. Superstore leases, excluding renewal options, expire at various dates
through 2015. Certain leases require payment of property taxes, utilities,
common area maintenance and insurance and, if annual sales at certain
superstores exceed specified amounts, provide for additional rents. To date, no
additional rents have been paid by the Company pursuant to such leases.
The Company has entered into lease agreements for certain of its superstores
as part of structured lease financing facilities (the "Structured Lease
Facilities"). The Structured Lease Facilities provide a special purpose entity
(not affiliated with the Company) with the necessary financing to complete the
acquisition and construction of new PETsMART superstores. Once construction has
been completed, another special purpose entity (also not affiliated with the
Company) leases the completed superstores to the Company for a five-year term.
See "Description of Credit Facility."
The Company's corporate offices cover approximately 165,000 square feet. Its
lease for this space expires in 2012. PETsMART's distribution center in
Columbus, Ohio covers 300,000 square feet. The lease on this distribution center
expires in 2008. The Company operates 13 regional consolidation centers in
public warehouse facilities. In addition, the Company has opened a new 430,000
square foot small goods distribution center in Phoenix, Arizona, the lease on
which expires in April 2002. PETsMART also operates a 110,000 square foot
break-bulk center outside of Gloucester, England, the lease on which expires in
2001.
PETsMART Direct operates a catalog fulfillment and equine distribution
center in Brockport, New York, which covers approximately 200,000 square feet.
The Company has a purchase option on approximately seven acres of
industrial-zoned land adjacent to this facility.
LITIGATION
On January 6, 1998, the Company and certain of its officers and directors
were named as defendants in a securities class action lawsuit by a putative
class of investors in PETsMART securities. The lawsuit alleges, among other
things, that the Company and its officers issued materially false financial
statements about the Company's flea and tick product inventory, financial
condition and results of operations. On January 20, 1998, the Company and
certain of its officers and directors were named as defendants of a second
securities class action with allegations substantially similar to the ones made
in the first complaint. On January 22, 1998, the Company and certain of its
officers and directors were named as defendants of a third securities class
action with allegations substantially similar to the ones made in the first
complaint. The Company believes the allegations contained in each complaint are
without merit and the Company intends to vigorously defend itself against the
claims.
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.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages and
positions at December 1, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Samuel J. Parker....................... 55 Chairman of the Board and Chief Executive Officer
Donna R. Ecton......................... 50 Chief Operating Officer and Director
C. Donald Dorsey....................... 55 Executive Vice President, Chief Financial Officer
Ronald H. Butler....................... 48 Executive Vice President, Marketing
C. Giles Clarke........................ 44 Executive Vice President, Europe
Ronald E. Brown........................ 50 Senior Vice President, Store Operations
J. Patrick Johnston.................... 54 Senior Vice President, Human Resources
H. Jake Mendelsohn..................... 41 Senior Vice President, Chief Information Officer
Marcia R. Meyer........................ 48 President, PETsMART International Supply Company
James D. Nelson........................ 44 Senior Vice President, Logistics and Distribution
Denis L. Defforey...................... 72 Director
Philip L. Francis(1)................... 51 Director
Richard M. Kovacevich(1)(3)............ 54 Director
Lawrence S. Phillips(2)................ 70 Director
Walter J. Salmon(3).................... 67 Director
Thomas G. Stemberg(2)(3)............... 48 Director
</TABLE>
- --------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Corporate Governance Committee.
Samuel J. Parker joined the Company in 1989 as President and Chief Executive
Officer. Mr. Parker served as President and Chief Executive Officer until 1993,
when he was elected Chairman. Effective with the annual meeting of stockholders
in 1995, Mr. Parker resigned as Chief Executive Officer but remained as Chairman
of the Board. Effective January 1997, Mr. Parker resigned as an employee of the
Company and became non-executive Chairman of the Board. In June 1997, following
the resignation of the Chief Executive Officer, Mr. Parker again became Chief
Executive Officer of the Company.
Donna R. Ecton has been a director of the Company since 1994 and joined the
Company as Chief Operating Officer of the Company in December 1996. From 1995
until December 1996, Ms. Ecton was Chairman, President and Chief Executive
Officer of Business Mail Express, Inc., a business services company. From 1991
to 1994, she served as the President and Chief Executive Officer of Van Houten
North America, Inc. and Andes Candies, Inc., manufacturers of confectionery
products. Ms. Ecton also serves as a director of the Barnes Group Inc., Vencor,
Inc. and H&R Block, Inc.
C. Donald Dorsey joined the Company in 1989 as Senior Vice President and
Chief Financial Officer. He was elected Executive Vice President in 1994 and
remained Chief Financial Officer until February
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<PAGE>
1997. In November 1997, following the resignation of the Company's Chief
Financial Officer, Mr. Dorsey resumed the position of Chief Financial Officer on
an interim basis.
Ronald H. Butler joined the Company in 1995 as Executive Vice President,
Marketing. From 1991 to 1995, Mr. Butler held several senior management
positions with Payless Cashways, Inc., a home improvement center operation,
including Senior Vice President and General Merchandise Manager and Senior Vice
President, Store Operations.
C. Giles Clarke was named Executive Vice President, Europe in 1996 following
the Company's merger with Pet City, of which he had been Deputy Chairman and
Chief Executive Officer since 1993. Mr. Clarke co-founded Pet City in 1989 and
served as its President until 1993.
Ronald E. Brown joined the Company in 1995 as Senior Vice President of Store
Operations. From 1986 through 1994, Mr. Brown held several senior management
positions with Kash-N-Karry, a Florida-based supermarket operation, including
Vice President of General Merchandise, Vice President of Warehousing and
Distribution, Senior Vice President of Perishables and Senior Vice President of
Store Services.
J. Patrick Johnston joined the Company in June 1997 as Senior Vice President
of Human Resources. From 1985 to 1997, Mr. Johnston was Vice President of Human
Resources for American Drug Stores, a division of American Stores Company.
H. Jake Mendelsohn joined the Company in 1996 as Senior Vice President,
Chief Information Officer. Mr. Mendelsohn, had been associated with PETsMART in
a consulting capacity since 1989, and was a principal of the Windsor Park Group
from 1987 to 1996.
Marcia R. Meyer joined the Company in 1990 as Vice President and General
Merchandise Manager. In March 1997, she was promoted to President of PETsMART
International Supply Company, a unit of PETsMART. From 1985 to 1989, Ms. Meyer
held various executive positions with Broadway Southwest, a division of Carter
Hawley Hale Stores, Inc., most recently as Senior Vice President and General
Merchandise Manager.
James D. Nelson joined the Company in October 1997 as Senior Vice President,
Logistics and Distribution. Prior to joining PETsMART, from 1996 to 1997, Mr.
Nelson was Vice President of Logistics Administration at K-Mart Corporation.
From 1995 to 1996, Mr. Nelson was a Senior Manager at Ernst & Young LLP. From
1994 to 1995, he was Director of Logistics (North and Latin America) at Compaq
Computer Corporation, and from 1990 to 1994, he was Vice President of Retail
Distribution for Sears Logistics Services, a wholly-owned subsidiary of Sears
Roebuck & Co.
Denis L. Defforey has been a director of the Company since 1991. Mr.
Defforey, retired Chairman of Carrefour, S.A, a discount retailing company, has
served that company in various capacities since 1959.
Philip L. Francis has been a director of the Company since 1989. Since 1991,
Mr. Francis has been President of, and since 1993, Chief Executive Officer of
Shaw's Supermarkets Inc., a subsidiary of J. Sainsbury plc, a supermarket
operator. From 1991 to 1993, Mr. Francis served as Chief Operating Officer of
Shaw's.
Richard M. Kovacevich has been a director of the Company since 1996. Mr.
Kovacevich has served as the Chairman since 1995, as Chief Executive Officer
since 1993, President since 1989, and as a Director since March 1986, of Norwest
Corporation. Mr. Kovacevich served as Vice Chairman and Chief Operating Officer
of Norwest Corporation from 1986 to 1989. Mr. Kovacevich also serves as a
director of Dayton Hudson Corporation, Northern States Power Company and
ReliaStar Financial Corp.
Lawrence S. Phillips has been a director of the Company since 1993. Mr.
Phillips also served as a director of the Company from 1987 to 1991. Mr.
Phillips has served as Chairman of Phillips-Van Heusen
32
<PAGE>
Corporation, an apparel manufacturer and retail company, from 1987 to 1994, as
Chief Executive Officer from 1969 to 1993, and as a director from 1951 to 1995.
Walter J. Salmon has been a director of the Company since June 1997. Mr.
Salmon has been the Stanley Roth, Sr., Professor of Retailing at the Harvard
Business School since 1980. Mr. Salmon also serves as a director of Circuit City
Stores, Inc., Hannaford Bros. Company, Harrah's Entertainment, Inc., Luby's
Cafeterias, Inc., The Neiman Marcus Group, and the Quaker Oats Company.
Thomas G. Stemberg has been a director of the Company since 1988. Mr.
Stemberg has served as Chairman of the Board of Directors and Chief Executive
Officer of Staples, Inc., an office supply superstore retailer, since 1988 and
as President from 1986 to 1988.
The terms of office of the Board of Directors are divided into three
classes: Class I, Class II and Class III. The terms of office of the respective
classes of directors will be as follows: Class II will expire at the annual
meeting of stockholders to be held in 1998, Class III will expire at the annual
meeting of stockholders to be held in 1999 and Class I will expire at the annual
meeting of stockholders to be held in 2000. At each annual meeting of
stockholders, the successors to directors whose terms will then expire are
elected to serve from the time of election and qualification until the third
annual meeting following election and until successors will have been duly
elected and will have qualified. In addition, the Company's Restated Certificate
provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. Although directors of the Company may be
removed for cause by the affirmative vote of the holders of a majority of the
Common Stock, the Company's Restated Certificate provides that holders of
66 2/3% of the Common Stock must vote to approve the removal of a director
without cause.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships between any of the directors or executive officers of
the Company.
BOARD COMMITTEES
The Board's Audit Committee consists of Messrs. Francis and Kovacevich. The
Audit Committee, which meets periodically with management and the Company's
independent accountants, reviews the results and scope of the audit and other
services provided by the Company's independent accountants and the need for
internal auditing procedures and the adequacy of internal controls.
The Compensation Committee consists of Messrs. Phillips and Stemberg. The
Compensation Committee establishes salaries, incentives and other forms of
compensation for officers and other employees, administers the various incentive
compensation and benefit plans, including the Company's 1995 Equity Incentive
Plan, and recommends policies relating to such plan.
In 1997, the Company established a Corporate Governance Committee, which
consists of Messrs. Kovacevich, Salmon and Stemberg. The Corporate Governance
Committee oversees administrative matters related to the Board and Board
Committees and selects nominees to the Board and members for Board Committees.
33
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's By-laws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its By-laws to enter into indemnification agreements with its
directors and officers and to purchase insurance on behalf of any person whom it
is required or permitted to indemnify. Pursuant to this provision, the Company
has entered into indemnity agreements with each of its directors and executive
officers. In addition, the Company maintains director and officer liability
insurance which, subject to certain exceptions and limitations, insures
directors and officers for any alleged breach of duty, neglect, error,
misstatement, misleading statement, omission or act in their respective
capacities as directors and officers of the Company.
The Company's Restated Certificate provides that, to the fullest extent
permitted by Delaware law, the Company's directors will not be liable for
monetary damages for breach of a director's fiduciary duty of care to the
Company and its stockholders. This provision in the Restated Certificate does
not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under Delaware law. The Restated Certificate also restricts the
liability of the Company's directors to the Company or its stockholders for
money damages for any breach of fiduciary duty as a director. Each director will
continue to be subject to liability for breach of the director's duty of loyalty
to the Company, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for acts or omissions that the director
believes to be contrary to the best interests of the Company or its
stockholders, for any transaction from which the director derived an improper
personal benefit.
34
<PAGE>
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The Notes
were issued in November 1997 pursuant to an indenture (the "Indenture") dated as
of November 7, 1997, by and between the Company and Norwest Bank Minnesota,
N.A., as trustee (the "Trustee"). The following summary of the Notes, the
Indenture and the Registration Rights Agreement does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all of the
provisions of the Indenture and the Registration Rights Agreement, including the
definitions therein. Copies of the Indenture and the Registration Rights
Agreement can be obtained from the Company upon request. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The definitions of certain terms used in the following summary are set
forth below under "--Certain Definitions." As used in this section, the
"Company" refers to PETsMART, Inc., exclusive of its subsidiaries. Capitalized
terms used herein without definition have the meanings ascribed to them in the
Indenture or the Registration Rights Agreement, as applicable.
GENERAL
The Notes are general subordinated obligations of the Company and are
limited to the aggregate principal amount of $200,000,000. The Notes are
subordinated in right of payment to all current and future Senior Indebtedness
of the Company, as described under "--Subordination" below. The Notes have been
issued in registered form, without coupons, and in denominations of $1,000 and
integral multiples thereof.
The Notes will mature on November 1, 2004. The Notes bear interest at 6 3/4%
per annum from their date of issuance or from the most recent Interest Payment
Date to which interest has been paid or provided for, payable semi-annually in
cash in arrears on May 1 and November 1 of each year, commencing May 1, 1998, to
the persons in whose names such Notes are registered at the close of business on
the April 15 and October 15 immediately preceding such Interest Payment Date.
Principal of, premium, if any, and interest on, and Liquidated Damages with
respect to, the Notes will be payable, the Notes will be convertible and the
Notes may be presented for registration of transfer or exchange, at the office
or agency of the Company maintained for such purpose, which office or agency
shall be maintained in the Borough of Manhattan, The City of New York. Interest
will be calculated on the basis of a 360-day year comprised of twelve 30-day
months.
No service charge will be made for any registration of transfer or exchange
of Notes, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. Until
otherwise designated by the Company, the Company's office or agency will be the
corporate trust office of the Trustee presently located in New York City.
The Indenture does not contain any financial covenants or restrictions on
the payment of dividends, the issuance or repurchase of securities of the
Company or the incurrence of Indebtedness or Senior Indebtedness. The Indenture
contains no covenants or other provisions affording protection to Holders of
Notes in the event of a highly leveraged transaction or a change in control of
the Company, except to the extent described under "--Repurchase of Notes at the
Option of Holders Upon a Change of Control."
CONVERSION RIGHTS
Each Holder of Notes has the right at any time prior to maturity of the
Notes, unless previously redeemed or repurchased, at the Holder's option, to
convert such Notes, or any portion thereof which is an integral multiple of
$1,000, into shares of Common Stock of the Company, at the conversion price
stated on the cover page of this Offering Memorandum (which is initially
equivalent to a conversion rate of 114.2857 shares per $1,000 principal amount
of Notes), subject to adjustment as described below (the "Conversion Price").
The right to convert Notes called for redemption or delivered for repurchase and
not withdrawn will terminate at the close of business on the Business Day
immediately preceding the
35
<PAGE>
Redemption Date or Repurchase Date for such Notes, unless the Company
subsequently fails to pay the applicable Redemption Price or Repurchase Price,
as the case may be.
In the case of any Note that has been converted into Common Stock after any
Record Date, but on or before the next Interest Payment Date, interest, the
stated due date of which is on such Interest Payment Date, shall be payable on
such Interest Payment Date notwithstanding such conversion, and such interest
shall be paid to the Holder of such Note who is a Holder on such Record Date.
Any Note converted after any Record Date but before the next Interest Payment
Date (other than Notes called for redemption) must be accompanied by payment of
an amount equal to the interest payable on such Interest Payment Date on the
principal amount of Notes being surrendered for conversion. No fractional shares
of Common Stock will be issued upon conversion but, in lieu thereof, an
appropriate amount will be paid in cash by the Company based on the market price
of Common Stock (determined in accordance with the Indenture) at the close of
business on the day of conversion.
The Conversion Price will be subject to adjustment upon the occurrence of
certain events, including: (i) the issuance of shares of Common Stock as a
dividend or distribution on the Common Stock; (ii) the subdivision, combination
or reclassification of the outstanding Common Stock; (iii) the issuance to all
holders of Common Stock of rights, warrants or options to subscribe for or
purchase Common Stock (or securities convertible into Common Stock) at a price
per share less than the then current market price per share, as defined in the
Indenture; (iv) the distribution of shares of Capital Stock of the Company
(other than Common Stock), evidences of indebtedness or other assets (excluding
dividends payable exclusively in cash) to all holders of Common Stock; (v) the
issuance of Common Stock for a price per share less than the current market
price per share (determined as set forth in the Indenture) on the date the
Company fixes the offering price of such additional shares (other than issuances
of Common Stock under certain employee benefit plans of the Company and certain
other issuances described in the Indenture and other than issuances of shares in
connection with any acquisition by the Company with an aggregate purchase price
of $15 million or less); (vi) the distribution, by dividend or otherwise, of
cash (excluding any cash portion of a distribution resulting in an adjustment
pursuant to clause (iv) above) to all holders of Common Stock in an aggregate
amount that, combined together with (A) all other distributions of cash that did
not trigger a Conversion Price adjustment to all holders of Common Stock within
the 12 months preceding the date fixed for determining the shareholders entitled
to such distribution plus (B) any cash and the fair market value of
consideration that did not trigger a Conversion Price adjustment payable in
respect of any tender offer by the Company or any of its subsidiaries for Common
Stock (as described in clause (vii) below) consummated within the 12 months
preceding the date fixed for determining the shareholders entitled to such
distribution, exceeds 15% of the product of the current market price per share
(determined as set forth below) on the date fixed for the determination of
shareholders entitled to receive such distribution multiplied by the number of
shares of Common Stock outstanding on such date; and (vii) the completion of a
tender offer made by the Company or any of its subsidiaries for Common Stock
involving an aggregate consideration that, together with (A) any cash and the
fair market value of any consideration that did not trigger a Conversion Price
adjustment paid or payable in respect of any previous tender offer by the
Company or any of its subsidiaries for Common Stock consummated with the 12
months preceding the consummation of such tender offer plus (B) the aggregate
amount of any distribution of cash that did not trigger a Conversion Price
adjustment (as described in clause (vi) above) to all holders of Common Stock
within the 12 months preceding the consummation of such tender offer, exceeds
15% of the product of the current market price per share (determined as set
forth in the Indenture) immediately prior to the expiration of such offer times
the number of shares of Common Stock outstanding at the expiration of such
offer. In the event of a distribution to all or substantially all holders of
Common Stock of rights to subscribe for additional shares of the Company's
Capital Stock (other than those referred to in clause (iii) above), the Company
may, instead of making an adjustment in the Conversion Price, make proper
provisions so that each Holder of a Note who converts such Note after the record
date for such distribution and prior to the expiration or redemption of such
rights shall be entitled to receive upon such conversion, in addition to shares
of Common Stock, an appropriate number of such
36
<PAGE>
rights. No adjustment of the Conversion Price will be made until cumulative
adjustments amount to one percent or more of the Conversion Price as last
adjusted.
The Company, from time to time and to the extent permitted by law, may
reduce the Conversion Price by any amount for any period of at least 20 Business
Days, in which case the Company shall give at least 15 days notice of such
reduction, if the Board of Directors has made a determination that such
reduction would be in the best interests of the Company, which determination
shall be conclusive. The Company may, at its option, make such reductions in the
Conversion Price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for United States federal
income tax purposes. See "Certain Federal Income Tax Considerations."
In case of any consolidation or merger of the Company with or into any other
corporation, or in the case of any consolidation or merger of another
corporation into the Company in which the Company is the surviving corporation,
involving in either case a reclassification, conversion, exchange or
cancellation of shares of Common Stock, or any sale or transfer of all or
substantially all of the assets of the Company, the Holder of each Note shall,
after such consolidation, merger, sale or transfer, have the right to convert
such Note into the kind and amount of securities or other property, which may
include cash, which such Holder would have been entitled to receive upon such
consolidation, merger, sale or transfer if such Holder had held the Common Stock
issuable upon the conversion of such Note immediately prior to the effective
date of such consolidation, merger, sale or transfer.
The Company will cause all registrations to be made with, and will obtain
any approvals by, any governmental authority under any Federal or state law of
the United States that may be required on the part of the Company in connection
with the conversion of the Notes into Common Stock. If, prior to the second
anniversary of the date of the original issuance of the Notes a registration
statement under the Securities Act covering the resale of the shares of Common
Stock issuable upon conversion of the Notes is not effective or is otherwise
unavailable for effecting resales of such shares, shares of Common Stock issued
upon conversion of the Notes ("Restricted Shares") may not be sold or otherwise
transferred except in accordance with or pursuant to an exemption from, or
otherwise in a transaction not subject to, the registration requirements of the
Securities Act, and, if a registration statement under the Securities Act is not
effective or is otherwise unavailable for effecting resales of such shares at
the time of a conversion, the Restricted Shares will bear a legend to that
effect. The transfer agent for the Common Stock will not be required to accept
for registration of transfer any Restricted Shares, except upon presentation of
satisfactory evidence that these restrictions on transfer have been complied
with, all in accordance with such reasonable regulations as the Company may from
time to time agree with the Transfer Agent. Under certain circumstances, the
holders of the Restricted Securities will be entitled to Liquidated Damages
during such period. See "--Registration Rights; Liquidated Damages."
SUBORDINATION
The payment of principal, premium, if any, interest and Liquidated Damages,
if any, on the Notes is subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Indebtedness, whether
outstanding on the date of the Indenture or thereafter incurred. Upon any
distribution to the creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
other similar proceeding relating to the Company or its property, an assignment
for the benefit of creditors or any marshalling of the Company's assets and
liabilities, the holders of the Senior Indebtedness will be entitled to receive
payment in full of all obligations in respect of such Senior Indebtedness before
the Holders will be entitled to receive any payment with respect to the Notes
(other than Junior Securities).
In the event of any acceleration of the Notes because of an Event of
Default, the holders of any Senior Indebtedness then outstanding would be
entitled to payment in full of all obligations then due and payable
37
<PAGE>
in respect of such Senior Indebtedness before the Holders are entitled to
receive any payment or distribution in respect of the Notes (other than Junior
Securities). The Indenture further requires that the Company promptly notify
holders of Senior Indebtedness if payment of the Notes is accelerated because of
an Event of Default.
The Company also may not make any payment upon or in respect of the Notes
(other than with Junior Securities) if (i) a default in the payment of the
principal of, premium, if any, interest, rent or other Obligations in respect of
Designated Senior Indebtedness occurs and is continuing beyond any applicable
period of grace or (ii) any other default occurs and is continuing with respect
to Designated Senior Indebtedness that permits holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice") from any
person permitted to give such notice under the Indenture. Payments on the Notes
may and shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived and (b) in the case of a nonpayment
default, the earlier of the date on which such nonpayment default is cured or
waived or 179 days after the date on which the applicable Payment Blockage
Notice is received by the Trustee. No new period of payment blockage may be
commenced unless and until (i) 365 days shall have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the Notes that
have come due have been paid in full in cash. No nonpayment default that existed
or was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis of a subsequent Payment Blockage Notice
unless such default shall have been cured or waived for a period of not less
than 90 days.
By reason of the subordination provisions described above, in the event of
the Company's liquidation or insolvency, holders of Senior Indebtedness may
receive more, ratably, and Holders of the Notes may receive less, ratably, than
the other creditors of the Company. Such subordination will not prevent the
occurrences of any Event of Default under the Indenture.
The Notes are obligations exclusively of the Company. Because certain
operations of the Company are conducted through its subsidiaries, the cash flow
and the consequent ability to service debt of the Company, including the Notes,
may depend, in part, upon the earnings of its subsidiaries and their ability to
distribute cash to the Company. The payment of dividends and the making of loans
and advances to the Company by its subsidiaries may be subject to statutory or
contractual restrictions, are dependent upon the earnings of those Subsidiaries
and are subject to various business considerations. Any right of the Company to
receive assets of any of its subsidiaries upon their liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors (including trade creditors), except to the extent
that the Company is itself recognized as a creditor of such subsidiary, in which
case the claims of the Company would still be subordinate to any security
interests in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Company.
At November 2, 1997, after giving effect to the November 1997 Note offering
and the application of the net proceeds therefrom, the Company had approximately
$66.4 million of Indebtedness outstanding which would have constituted Senior
Indebtedness and, excluding intercompany liabilities, approximately $41.5
million of liabilities, primarily trade payables, which would have effectively
ranked senior to the Notes. The Indenture does not limit the amount of
additional Indebtedness, including Senior Indebtedness, which the Company is
permitted to create, incur, assume or guarantee, nor does the Indenture limit
the amount of Indebtedness and other liabilities that any subsidiary is
permitted to create, incur, assume or guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any Holder
receives any payment or distribution of assets of the Company of any kind in
contravention of any of the terms of the Indenture, whether in cash, property or
securities, including, without limitation, by way of set-off or otherwise, in
respect of the Notes before all Senior Indebtedness is paid in full, then such
payment or distribution will be
38
<PAGE>
held by the recipient in trust for the benefit of holders of Senior
Indebtedness, and will be immediately paid over or delivered to the holders of
Senior Indebtedness or their representative or representatives to the extent
necessary to make payment in full of all Senior Indebtedness remaining unpaid,
after giving effect to any concurrent payment or distribution, or provision
therefor, to or for the holders of Senior Indebtedness.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not redeemable at the Company's option prior to November 1,
2000. Thereafter, the Notes are subject to redemption at the option of the
Company, in whole or in part (in any integral multiple of $1,000), upon not less
than 20 nor more than 60 days' notice at the following redemption prices
(expressed as percentages of principal amount), if redeemed during the 12-month
period beginning on November 1 of the years indicated in each case together with
accrued but unpaid interest and Liquidated Damages, if any, to the redemption
date (subject to the right of Holders of record on the relevant record date to
receive interest due on an Interest Payment Date that is on or prior to the
Redemption Date):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2000.............................................................................. 103.857%
2001.............................................................................. 102.893
2002.............................................................................. 101.929
2003.............................................................................. 100.964
</TABLE>
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange or national market
system, if any, on which the Notes are listed, or, if the Notes are not so
listed, on a pro rata basis, by lot or by such other method as the Trustee shall
deem fair and appropriate; provided that no Notes of $1,000 principal amount or
less shall be redeemed in part. Notice of any redemption will be sent, by
first-class mail, at least 20 days and not more than 60 days prior to the date
fixed for redemption, to the Holder of each Note to be redeemed to such Holder's
last address as then shown upon the registry books of the Registrar. The notice
of redemption must state the Redemption Date, the Redemption Price and the
amount of accrued interest to be paid. Any notice that relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the Redemption
Date, upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion thereof will be issued. On and after the Redemption
Date, interest will cease to accrue on the Notes or portion thereof called for
redemption, unless the Company defaults in its obligations with respect thereto.
The Notes will not have the benefit of any sinking fund.
REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control (as
defined below) has occurred, each Holder will have the right, at such Holder's
option, pursuant to an irrevocable and unconditional offer by the Company (the
"Repurchase Offer"), to require the Company to repurchase all or any part of
such Holder's Notes (provided, that the principal amount of such Notes must be
$1,000 or an integral multiple thereof) on the date (the "Repurchase Date") that
is no later than 60 days after the occurrence of such Change of Control at a
cash price equal to 100% of the principal amount thereof, together with accrued
and unpaid interest and Liquidated Damages, if any, to the Repurchase Date (the
"Repurchase Price"). The Repurchase Offer shall be made within 30 days following
a Change of Control and shall remain open for a period specified by the Company
but not less than 20 Business Days following its commencement (the "Repurchase
Offer Period"). Upon expiration of the Repurchase Offer Period, the Company
shall purchase all Notes tendered in response to the Repurchase Offer in the
manner described below. If required by applicable law, the Repurchase Date and
the Repurchase Offer Period may be
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extended to the extent required; however, if so extended, it shall nevertheless
constitute an Event of Default if the Repurchase Date does not occur within 90
days of the Change of Control.
The Indenture provides that a "Change of Control" will be deemed to have
occurred when: (i) any "person" or "group," is or becomes the "beneficial
owner," directly or indirectly, of shares representing more than 50% of the
combined total voting power of the then outstanding securities entitled to vote
generally in elections of directors of the Company ("Voting Stock"), (ii) the
Company consolidates with or merges into any other person or conveys, transfers
or leases, whether directly or indirectly, all or substantially all of its
assets to any person, or any other person merges into the Company, and, in the
case of any such transaction, the outstanding Common Stock of the Company is
changed or exchanged as a result, unless the shareholders of the Company
immediately before such transaction own, directly or indirectly immediately
following such transaction, at least a majority of the combined voting power of
the outstanding voting securities of the corporation resulting from such
transaction in substantially the same proportion INTER SE as their ownership of
the Voting Stock immediately before such transaction, (iii) at any time the
Continuing Directors (as defined below) do not constitute the majority of the
Board of Directors of the Company (or, if applicable, a successor corporation to
the Company), or (iv) the Common Stock of the Company (or other common stock
into which the Notes are then convertible) is neither listed for trading on a
United States national securities exchange or approved for trading on an
established automatic over-the-counter trading market in the United States.
"Continuing Directors" means, as of any date of determination, any member of the
Board of Directors of the Company who (i) was a member of the Board of Directors
on the date of the Indenture or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of the Board of Directors at the time of such
nomination or election.
On or before the Repurchase Date, the Company will (i) accept for payment
Notes or portions thereof properly tendered pursuant to the Repurchase Offer,
(ii) deposit with the Paying Agent cash sufficient to pay the Repurchase Price
of all Notes so tendered and (iii) deliver to the Trustee Notes so accepted,
together with an Officers' Certificate listing the Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly pay for Notes so
accepted an amount equal to the Repurchase Price (together with accrued and
unpaid interest and Liquidated Damages, if any), and the Trustee will promptly
authenticate and mail or deliver to such Holders a new Note or Notes equal in
principal amount to any unpurchased portion of the Notes surrendered. Any Notes
not so accepted will be promptly mailed or delivered by the Company to the
Holder thereof. The Company will publicly announce the results of the Repurchase
Offer on or as soon as practicable after the Repurchase Date.
The phrase "all or substantially all" of the assets of the Company is likely
to be interpreted by reference to applicable state law at the relevant time, and
will be dependent on the facts and circumstances existing at such time. As a
result, there may be a degree of uncertainty in ascertaining whether a sale or
transfer of "all or substantially all" of the assets of the Company has
occurred.
For purposes of the definition of Change of Control, (i) the terms "person"
and "group" shall have the meaning used for purposes of Rules 13d-3 and 13d-5 of
the Exchange Act as in effect on the Issuance Date, whether or not applicable;
and (ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3
and 13d-5 under the Exchange Act as in effect on the Issuance Date, whether or
not applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time or upon
the occurrence of certain events.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The provisions of the Indenture relating to a Change of Control may not
afford the Holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger, spin-off or
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similar transaction that may adversely affect Holders, if such transaction does
not constitute a Change of Control, as set forth above. In addition, the Company
may not have sufficient financial resources available to fulfill its obligation
to repurchase the Notes upon a Change of Control or to repurchase other debt
securities of the Company or its Subsidiaries providing similar rights to the
holders thereof.
To the extent applicable and if required by law, the Company will comply
with Section 14 of the Exchange Act and the provisions of Regulation 14E and any
other tender offer rules under the Exchange Act and any other securities laws,
rules and regulations that may then be applicable to any offer by the Company to
purchase the Notes at the option of Holders upon a Change of Control.
The right to require the Company to repurchase Notes as a result of the
occurrence of a Change of Control could create an event of default under Senior
Indebtedness as a result of which any repurchase could, absent a waiver, be
blocked by the subordination provisions of the Notes. See "--Subordination."
Failure of the Company to repurchase the Notes when required would result in an
Event of Default with respect to the Notes whether or not such repurchase is
permitted by the subordination provisions.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not consolidate or merge with or
into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, person or entity unless (i) the Company is
the surviving corporation or the person or entity formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; and (iii) immediately after
such transaction no Default or Event of Default exists.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Trustee (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, an audit report
thereon by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing).
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture) or failure to perform any conversion
of the Securities and the continuance of such failure for a period of 30 days;
(ii) default in payment when due of the principal of or premium, if any, on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (iii) failure by the Company to comply with the provisions described
under the caption "--Repurchase of Notes at the Option of Holders Upon a Change
of Control"; (iv) failure by the Company for 60 days after notice to comply with
any of its other agreements in the Indenture or the
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Notes; (v) default under any mortgage, indenture or instrument under which there
is issued or by which there is secured or evidenced any indebtedness for money
borrowed by the Company or any of its Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Subsidiaries) whether such indebtedness
or guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such indebtedness prior to the expiration of the grace period
provided in such indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such indebtedness prior to its express
maturity and, in each case, the principal amount of any such indebtedness,
together with the principal amount of any other such indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, is an amount which, in the aggregate, is equal to or greater than
$20 million; (vi) failure by the Company or any of its Subsidiaries to pay final
judgments in an amount which, in the aggregate, exceeds $20 million and which
judgments are not paid, discharged, bonded or stayed within 60 days after their
entry; and (vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Subsidiary or any group
of Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of all Holders waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of interest on,
or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, the Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offeror exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption or repurchase of the
Notes, (iii) reduce the rate of or change the time for payment of interest on
any Note, (iv) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest or Liquidated Damages, if any, on the Notes
(except a rescission of acceleration of the Notes by the Holders of at least a
majority in
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aggregate principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Note payable in money other than
that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of, premium, if any, interest or Liquidated
Damages, if any, on the Notes, (vii) modify the conversion or subordination
provisions of the Indenture in a manner adverse to the Holders of the Notes or
(viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder, the
Company and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes
in addition to or in place of certificated Notes, to provide for the assumption
of the Company's obligations to Holders in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders or that does not adversely affect the legal rights under
the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder, by accepting a Note, waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Notes sold within the United States to "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act) ("Qualified Institutional
Buyers") were initially issued in the form of one or more registered global
notes without interest coupons (collectively, the "U.S. Global Notes"). Upon
issuance, the U.S. Global Notes were deposited with the Trustee, as custodian
for DTC, in New York, New York, and registered in the name of DTC or its
nominee, in each case for credit to the accounts of DTC's Direct and Indirect
Participants (as defined below). The Notes sold in offshore transactions in
reliance on Regulation S were initially issued in the form of one or more
registered, global book-entry notes without interest coupons (the "Reg S Global
Notes"). The Reg S Global Notes were deposited with the Trustee, as custodian
for DTC, in New York, New York, and registered in the name of a nominee of DTC
(a "Nominee") for credit to the accounts of Indirect Participants at Euroclear
and Cedel. During the 40-day period commencing on the day after the original
Issuance Date of a Note (the "40-Day Restricted Period"), beneficial interests
in the Reg S Global Note may be held only through Euroclear or Cedel, and,
pursuant to DTC's procedures, Indirect Participants that hold a beneficial
interest in the Reg S Global Note will not be able to transfer such interest to
a person that takes delivery thereof in the form of an interest in the U.S.
Global Notes. After the 40 Day Restricted Period, (i) beneficial interests in
the Reg S Global Notes may be transferred to a person that takes delivery in the
form of an interest in the U.S. Global Notes and (ii) beneficial interests in
the U.S. Global Notes may be transferred to a person that takes delivery in the
form of an interest in the Reg S Global Notes, provided, in each case, that the
certification requirements described below are complied with. See "--Transfers
of Interests in One Global Note for Interests in Another Global Note." All
registered global notes are referred to herein collectively "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes (as
defined below), if any, will be subject to certain restrictions on transfer and
will bear a restrictive legend. In addition, transfer of beneficial interests in
any Global Notes will be subject to the applicable rules and procedures of DTC
and its Direct or Indirect Participants (including, if applicable, those of
Euroclear and Cedel), which may change from time to time.
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The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See "--Transfer
of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and Cedel. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant (collectively, the "Indirect Participants"). DTC may hold
securities beneficially owned by other persons only through the Direct
Participants or Indirect Participants and such other persons' ownership interest
and transfer of ownership interest will be recorded only on the records of the
Direct Participant and/or Indirect Participant, and not on the records
maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes allocated by the Initial Purchasers to such Direct
Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. Investors in the Reg S Global
Notes may hold their interests therein directly through Euroclear or Cedel or
indirectly through organizations that are participants in Euroclear or Cedel.
After the expiration of the 40-Day Restricted Period (but not earlier),
investors may also hold interests in the Reg S Global Notes through
organizations other than Euroclear and Cedel that are Direct Participants in the
DTC system. Morgan Guaranty Trust Company of New York, Brussels office is the
operator and depository of Euroclear and Citibank, N.A. is the operator and
depository of Cedel (each a "Nominee" of Euroclear and Cedel, respectively).
Therefore, they will each be recorded on DTC's records as the holders of all
ownership interests held by them on behalf of Euroclear and Cedel, respectively.
Euroclear and Cedel will maintain on their records the ownership interests, and
transfers of ownership interests by and between, their own customer's securities
accounts. DTC will not maintain records of the ownership interests of, or the
transfer of ownership interests by and between, customers of Euroclear or Cedel.
All ownership interests in any Global Notes, including those of customers'
securities accounts held through Euroclear or Cedel, may be subject to the
procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form, of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global
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Note to pledge such interest to persons or entities that are not Direct
Participants in DTC, or to otherwise take actions in respect of such interests,
may be affected by the lack of physical certificates evidencing such interests.
For certain other restrictions on the transferability of the Notes see and
"--Transfers of Interests in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Notes are registered (including Notes represented by
Global Notes) as the owners thereof for the purpose of receiving payments and
for any and all other purposes whatsoever. Payments in respect of the principal,
premium, Liquidated Damages, if any, and interest on Global Notes registered in
the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered holder under the Indenture. Consequently, neither the
Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Direct Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, or the Company. Neither the Company nor the Trustee will be liable for
any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes, and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or Cedel) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the Notes through Euroclear and Cedel will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the Notes
described herein, cross-market transfers between Direct Participants in DTC, on
the one hand, and Indirect Participants who hold interests in the Notes through
Euroclear or Cedel, on the other hand, will be effected by Euroclear or Cedel's
respective Nominee through DTC in accordance with DTC's rules on behalf of
Euroclear or Cedel; HOWEVER, delivery of instructions relating to crossmarket
transactions must be made directly to Euroclear or Cedel, as the case may be, by
the counterparty in accordance with the rules and procedures of Euroclear or
Cedel and within their established deadlines (Brussels time for Euroclear and UK
time for Cedel). Indirect Participants who hold interest in the Notes through
Euroclear and Cedel may not deliver instructions directly to Euroclear's or
Cedel's Nominee. Euroclear or Cedel will, if the transaction meets its
settlement requirements, deliver instructions to its respective Nominee to
deliver or receive interests on
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Euroclear's or Cedel's behalf in the relevant Global Note in DTC, and make or
receive payment in accordance with normal procedures for same-day fund
settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or Cedel
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or Cedel during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and Cedel customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a Reg
S Global Note to a DTC Participant until the European business day for Euroclear
or Cedel immediately following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"Transfers of Interests in Global Notes for Certificated Notes."
Beneficial owners of Notes who desire to convert their Notes into Common
Stock pursuant to the terms of the Indenture should contact their brokers or
other Direct or Indirect Participants to obtain information on procedures,
including proper forms and cut-off times, for submitting such requests.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Reg S Global Notes and in the U.S.
Global Notes among Direct Participants, Euroclear and Cedel, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Initial
Purchasers or the Trustee will have any responsibility for the performance by
DTC, Euroclear or Cedel or their respective Direct and Indirect Participants of
their respective obligations under the rules and procedures governing any of
their operations.
The information in this section concerning DTC, Euroclear and Cedel and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
Prior to the expiration of the 40-Day Restricted Period, an Indirect
Participant who holds an interest in the Reg S Global Note through Euroclear or
Cedel will not be permitted to transfer its interest to a U.S. Person who takes
delivery in the form of an interest in U.S. Global Notes. After the expiration
of the 40-Day Restricted Period, an Indirect Participant who holds an interest
in Reg S Global Notes will be permitted to transfer its interest to a U.S.
Person who takes delivery in the form of an interest in U.S. Global Notes only
upon receipt by the Trustee of a written certification from the transferor to
the effect that such transfer is being made in accordance with the restrictions
on transfer set forth in the legend printed on the Reg S Global Notes.
Prior to the expiration of the 40-Day Restricted Period, a Direct or
Indirect Participant who holds an interest in the U.S. Global Note will not be
permitted to transfer its interests to any person that takes delivery thereof in
the form of an interest in the Reg S Global Notes. After the expiration of the
40-Day Restricted Period, a Direct or Indirect Participant who holds an interest
in U.S. Global Notes may transfer its interests to a person who takes delivery
in the form of an interest in Reg S Global Notes only upon receipt by the
Trustee of a written certification from the transferor to the effect that such
transfer is being made in accordance with Rule 904 of Regulation S.
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Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC (x)
notifies the Company that it is unwilling or unable to continue as depositary
for the Global Notes and the Company thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Certificated Notes or (iii)
there shall have occurred and be continuing a Default or an Event of Default
with respect to the Notes. In any such case, the Company will notify the Trustee
in writing that, upon surrender by the Direct and Indirect Participants of their
interest in such Global Note, Certificated Notes will be issued to each person
that such Direct and Indirect Participants and the DTC identify as being the
beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear a
restrictive legend unless the Company determines otherwise in compliance with
applicable law.
Neither the Company nor the Trustee will be liable for any delay by the
holder of the Global Notes or the DTC in identifying the beneficial owners of
Notes, and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Note or the
DTC for all purposes.
TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the applicable restrictions on transfer.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the holder of interests in such Global Note.
With respect to Certificated Notes, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the holders thereof or, if no such account is specified, by mailing a check to
each
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such holder's registered address. The Company expects that secondary trading in
the Certificated Notes will also be settled in immediately available funds.
TRANSFER AND EXCHANGE IN ACCORDANCE WITH INDENTURE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed. The
registered Holder of a Note is treated as the owner of the Note for all
purposes.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Registration Rights Agreement, the Company has agreed for
the benefit of the Holders, that (i) it will, at its cost, within 90 days after
the closing of the Offering (the "Closing"), file a shelf registration statement
(the "Shelf Registration Statement") with the Commission to register the public
offer and resale of the Notes and the Conversion Shares (as defined below) under
the Securities Act, (ii) it will use its best efforts to cause such Shelf
Registration Statement to be declared effective by the Commission within 180
days after the Closing, and (iii) it will use its best efforts to keep such
Shelf Registration Statement continuously effective under the Securities Act,
subject to certain exceptions specified in the Registration Rights Agreement,
for two years. The Company is permitted to suspend use of the Prospectus forming
a part of the Shelf Registration Statement during certain periods of time and in
certain circumstances relating to pending corporate developments and similar
events. If (a) the Company fails to file the Shelf Registration Statement on or
before the date specified for such filing in the Registration Rights Agreement,
(b) the Shelf Registration Statement is not declared effective by the Commission
on or prior to the date specified for such effectiveness in the Registration
Rights Agreement or (c) the Shelf Registration Statement ceases to be effective
or usable (other than for certain limited periods specified in the Registration
Rights Agreement including up to 90 days in the aggregate during any 365-day
period in connection with certain pending corporate developments) in connection
with resales of Transfer Restricted Securities (as defined below) (each such
event a "Registration Default"), then the Company is required to pay damages
("Liquidated Damages") to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 aggregate
principal amount of the Notes, or, if applicable, an equivalent amount per week
per share (subject to adjustment as set forth above) of Common Stock,
constituting Transfer Restricted Securities, held by such Holder. The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
aggregate principal amount of the Notes held by each Holder (or shares of Common
Stock, as noted above) with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.50 per week per $1,000 aggregate principal amount of the Notes (or
shares of Common Stock, as noted above) held by each Holder. All accrued
Liquidated Damages will be paid by the Company on each Interest Payment Date in
cash. Such payment will be made to Holders as set forth under "--Same Day
Settlement and Payment." Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
For purposes of the foregoing, "Transfer Restricted Securities" means the
Notes and the shares of Common Stock into which the Notes are convertible (the
"Conversion Shares") until (i) the date on which such Transfer Restricted
Securities have been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement, (ii) the date
on which such Transfer Restricted Securities are distributed to the public
pursuant to Rule 144 under the Securities Act (or any similar provision then in
effect) or are saleable pursuant to Rule 144(k) under the Securities Act and all
legends
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relating to transfer restrictions have been removed or (iii) the date on which
such Transfer Restricted Securities cease to be outstanding.
Holders of Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Transfer
Restricted Securities included in the Shelf Registration Statement and benefit
from the provisions regarding Liquidated Damages set forth above.
If the Company determines that it is permissible to do so under applicable
law, in lieu of filing or maintaining the effectiveness of the shelf
registration statement with respect to Notes, the Company may, at its option,
file with the Commission a registration statement with respect to an issue of
notes identical in all material respects to the Notes (the "New Notes") except
as to transfer restrictions and, upon such registration statement becoming
effective, offer the holders of the Notes the opportunity to exchange their
Notes for the New Notes. The Company has not determined that any such registered
exchange offer is permissible under applicable law, and there can be no
assurance that it will do so in the future.
The Company will provide to each registered holder of the Transfer
Restricted Securities, who is named in the prospectus and who so requests in
writing, copies of the prospectus which will be a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
Transfer Restricted Securities has become effective and take certain other
actions as are required to permit unrestricted resales of the Transfer
Restricted Securities. A holder of Transfer Restricted Securities that sells
such securities pursuant to a Shelf Registration Statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification and contribution
rights and obligations).
THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee is permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to
continue, or resign.
The Holders of a majority in principal amount of the then outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that in case an Event of Default shall occur
(which shall not be cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or
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indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Credit Facility" means that certain Third Amended and Restated Credit
Agreement among PETsMART, certain lenders and NationsBank of Texas, N.A. as
administrative lender, dated as of April 18, 1997, as amended.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all outstanding Indebtedness
under the Credit Facility and (ii) any other Senior Indebtedness which (a) at
the time of determination has an outstanding principal amount or commitment in
excess of $20 million and (b) is specifically designated in the instrument
creating or evidencing the same or the assumption or guarantee thereof (or
related agreements or documents to which the Company is a party) as "Designated
Senior Indebtedness" for purposes of the Indenture (provided that such
instrument, agreement or other document may place limitations and conditions on
the right of such Senior Indebtedness to exercise the rights of Designated
Senior Indebtedness.) For purposes of this definition, the term "Credit
Facility" shall include any agreement governing Indebtedness incurred to refund,
replace or refinance borrowings under the Credit Facility, or any subsequent
replacement or refinancing thereof.
"Disqualified Capital Stock" means, with respect to the Company, Capital
Stock of the Company that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time would be, required to be redeemed or
repurchased (including at the option of the holder thereof) by the Company, in
whole or in part, on or prior to the Stated Maturity of the Notes, provided that
only the portion of such Capital Stock which is so convertible, exercisable,
exchangeable or redeemable or subject to repurchase prior to such Stated
Maturity shall be deemed to be Disqualified Capital Stock.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Global Notes" means U.S. Global Notes and Reg S Global Notes.
"Indebtedness" means, with respect to any person, all obligations, whether
or not contingent, of such person (i)(a) for borrowed money (including, but not
limited to, any indebtedness secured by a security interest, mortgage or other
lien on the assets of the Company which is (1) given to secure all or part of
the purchase price of property subject thereto, whether given to the vendor of
such property or to another, or (2) existing on property at the time of
acquisition thereof), (b) evidenced by a note, debenture, bond or other written
instrument, (c) under a lease required to be capitalized on the balance sheet of
the lessee under GAAP, (d) in respect of letters of credit, bank guarantees or
bankers' acceptances (including reimbursement obligations with respect to any of
the foregoing), (e) with respect to Indebtedness secured by a mortgage, pledge,
lien, encumbrance, charge or adverse claim affecting title or resulting in an
encumbrance to which the property or assets of such person are subject, whether
or not the obligation secured thereby shall have been assumed by or shall
otherwise be such person's legal liability, (f) in respect of the balance of
deferred and unpaid purchase price of any property or assets or (g) under
interest rate or currency swap agreements, cap, floor and collar agreements,
spot and forward contracts and similar agreements and arrangements; (ii) with
respect to any obligation of others of the type described in the
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preceding clause (i) or under clause (iii) below assumed by or guaranteed in any
manner by such person, contingent or otherwise (and, without duplication, the
obligations of such person under any such assumptions, guarantees or other such
arrangements); and (iii) any and all deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements to,
any of the foregoing.
"Issuance Date" means the date on which the Notes are originally issued and
authenticated under the Indenture.
"Junior Securities" means any Qualified Capital Stock and any Indebtedness
of the Company that is fully subordinated in right of payment to Senior
Indebtedness to the same extent as the Notes and has no scheduled installment of
principal due, by redemption, sinking fund payment or otherwise, on or prior to
the Stated Maturity of the Notes.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"person" or "Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Qualified Capital Stock" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"Regulation S" means Regulation S promulgated under the Securities Act.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on, rent under, and any other amounts payable on or in respect of the Credit
Facility and any other Indebtedness of the Company (including, without
limitation, any Obligations in respect of such Indebtedness and, in the case of
Designated Senior Indebtedness, any interest accruing after the filing of a
petition by or against the Company under any Bankruptcy Law, whether or not
allowed as a claim after such filing in any proceeding under such Bankruptcy
Law), whether outstanding on the date of this Indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by the Company (including
all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to the foregoing); provided, however, that Senior
Indebtedness does not include (v) Indebtedness evidenced by the Notes, (w) any
liability for federal, state, local or other taxes owed or owing by the Company,
(x) Indebtedness of the Company to any of its Subsidiaries, (y) trade payables
of the Company, and (z) any particular Indebtedness in which the instrument
creating or evidencing the same or the assumption or guarantee thereof (or
related agreements or documents to which the Company is a party) expressly
provides that such Indebtedness shall not be senior in right of payment to, or
is pari passu with, or is subordinated or junior to, the Notes.
"Significant Subsidiary" means any subsidiary of the Company that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act and the Exchange Act, as such
Regulation is in effect on the date of the Indenture.
"Stated Maturity" when used with respect to the Notes, means November 1,
2004.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
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DESCRIPTION OF CREDIT FACILITY
In connection with the initial offering of the Notes, the Company negotiated
an amendment (the "Amendment") to its existing Credit Facility. The Amendment
permitted the Company to issue the Notes and otherwise modified the terms of the
Credit Facility as set forth below.
The following summary of the Credit Facility does not purport to be complete
and is subject to the detailed provisions thereof and various related documents
entered into in connection with the Credit Facility.
The Credit Facility provides for revolving borrowings in a maximum amount of
up to $125.0 million, subject to borrowing base limitations as set forth below,
and matures on April 17, 2000. Up to $15.0 million of the Credit Facility is
available for issuances of standby and commercial letters of credit. Borrowings
under the Credit Facility are unsecured except for the pledge of 65% of the
outstanding voting shares of two of the Company's foreign subsidiaries and are
guaranteed by substantially all of the Company's North American subsidiaries.
Borrowings under the Credit Facility are available for working capital and
general corporate purposes. Under the Amendment, borrowings under the Credit
Facility, together with amounts outstanding under the Construction Facility (as
defined below) and outstanding letters of credit, may not exceed 50% of the
Company's working capital (as defined therein).
Borrowings under the Credit Facility bear interest, at the option of the
Company, at either (i) LIBOR plus an applicable margin or (ii) the Base Rate (as
defined therein). The applicable margin over LIBOR is set quarterly based on (i)
the Company's rating, if any, by Standard & Poor's Rating Group or Moody's
Investors Service, and (ii) the Company's fixed charges coverage ratio (as
defined therein). The Company is required to pay certain fees in connection with
the Credit Facility, including a commitment fee payable quarterly ranging from
0.200% to 0.400% of the unused portion of the Credit Facility.
The Credit Facility contains certain financial covenants which require the
Company to maintain a specified fixed charge coverage ratio, total debt to
capitalization ratio, debt ratio and net worth. The Credit Facility contains
customary representations and warranties and requires compliance by the Company
with certain other covenants, including, without limitation, covenants limiting
(i) capital expenditures, (ii) other indebtedness, (iii) liens on the Company's
assets, (iv) mergers and consolidations, (v) the payment of dividends and other
distributions and (vi) acquisitions. The Credit Facility also contains customary
events of default, including, without limitation, (a) the failure to pay
interest, principal or other amounts payable in connection with the Credit
Facility when due, (b) the material inaccuracy of representations or warranties,
(c) insolvency, bankruptcy proceedings or material judgments, and (d) the
occurrence of a change of control (as defined therein) of the Company.
Additionally, the Credit Facility contains cross-default provisions to certain
other indebtedness of the Company, and specifically to obligations of the
Company under agreements for the lease of certain of its retail stores (the
"Lease Agreements").
The Company has entered into the Lease Agreements in connection with the
structured lease financing of certain of its retail stores (the "Structured
Lease Facilities"). The Structured Lease Facilities currently include a $60
million facility, up to $10 million of which may be used by a special purpose
entity (not affiliated with the Company) to acquire and hold undeveloped land,
and the balance of which may be used by such entity for the construction of new
stores (the "Construction Facility"). Under the Structured Lease Facilities,
another special purpose entity (not affiliated with the Company) leases the
completed stores to the Company. The Structured Lease Facilities have initial
maturities ranging from April 17, 1999 to April 17, 2002 and contains certain
options for renewal. The Company does not hold title at any time to any of the
properties covered by the Lease Agreements, but may elect to purchase the
properties at specified dates during the lease term. At the end of the lease
term or upon the occurrence of an event of default, the Company is required to
either purchase the properties at a specified price or arrange for the sale of
the properties to a third party and thereby guarantee a minimum residual value
of the leased property to the lessor. The lease rates under Structured Lease
Facilities are reflective of the landlord's cost of financing, and the Company
believes such lease rates to be the best available alternative for the occupancy
of its retail stores. Each of the Lease Agreements contain financial covenants
substantially
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identical to those contained in the Credit Facility and a cross-default
provision to the Credit Facility, among other provisions.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 250,000,000 shares
of Common Stock, $.0001 par value, and 10,000,000 shares of preferred stock,
$.0001 par value (the "Preferred Stock"). As of January 26, 1998, there were
115,400,224 shares of Common Stock and no shares of Preferred Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders of
the Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
Preferred Stock. Holders of Common Stock have no preemptive rights and no right
to convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are fully paid and nonassessable.
AUTHORIZED BUT UNISSUED PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.
SHARE PURCHASE RIGHTS PLAN
In August 1997, the Company's Board of Directors adopted a Share Purchase
Rights Plan, commonly known as a "poison pill." The Share Purchase Rights Plan
provides for the distribution of certain rights to acquire shares of the
Company's Series A Junior Participating Preferred Stock (the "Rights") as a
dividend for each share of Common Stock held of record as of August 29, 1997.
The Rights are triggered and become potentially exercisable upon the occurrence
of either the (i) acquisition of 15% or more (20% or more in certain instances)
beneficial ownership of the Company's Common Stock by a person or group, or (ii)
ten days (or such later time as may be set by the Board of Directors) after a
public announcement of a tender or exchange offer for 15% or more beneficial
ownership of the Company's Common Stock by a person or group. If triggered and
certain other conditions are met, each Right effectively provides its holder,
other than holders who are "Acquiring Persons," the right to purchase shares of
Common Stock at a 50% discount from the market price at that time, upon payment
of an exercise price of $65 per Right. In addition, in the event of certain
business combinations, the Rights permit the purchase of shares of common stock
of an acquirer at a 50% discount from the market price at that time. The Board
of Directors has the right to redeem the Rights at a price of $0.001 per Right
at any time prior to the close of business on the day of the first public
announcement that a person has become an "Acquiring Person." If the Rights are
triggered the Board of Directors may elect to exchange each Right (other than
Rights held by Acquiring Persons) for one share of Common Stock. The Rights have
no voting privileges and are attached to and trade with Company's Common Stock.
The Board of Directors also generally may amend the terms
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of the Rights without the consent of the holders of the Rights. The Rights
expire on August 28, 2007. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of the Company.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Norwest Bank Minnesota,
N.A.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences of the acquisition, ownership and disposition of Notes.
This discussion is based upon the United States federal tax law now in effect,
which is subject to change, possibly retroactively. The tax treatment of holders
of the Notes may vary depending upon their particular situations. Certain
holders (including insurance companies, tax exempt organizations, financial
institutions, subsequent purchasers of Notes and broker-dealers) may be subject
to special rules not discussed below. In addition, this discussion does not
describe any tax consequences arising under the laws of any state, locality or
taxing jurisdiction other than the United States federal government. In general,
this discussion assumes that a holder acquires a Note at original issuance and
holds such Note as a capital asset and not as part of a "hedge," "straddle,"
"conversion transaction," "synthetic security" or other integrated investment.
Prospective investors are urged to consult their tax advisors regarding the
United States federal tax consequences of acquiring, holding and disposing of
Notes, as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdiction.
As used herein, the term "United States Holder" means a beneficial owner of
a Note that is, for United States federal income tax purposes, a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in the United States or under the law of the United States
or of any political subdivision thereof, an estate whose income is includible in
gross income for United States federal income tax purposes regardless of its
source or a trust, if a United States court is able to exercise primary
supervision over the administration of the trust and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust.
UNITED STATES HOLDERS
STATED INTEREST
Stated interest on a Note will be taxable to a United States Holder as
ordinary interest income at the time that such interest accrues or is received,
in accordance with the United States Holder's regular method of accounting for
federal income tax purposes. The Company expects that the Notes will not be
considered to be issued with original issue discount for federal income tax
purposes.
PAYMENTS ON REGISTRATION DEFAULT
The treatment of interest as described above with respect to the Notes is
based in part on the assumption that as of the date of issuance of the Notes,
the possibility that Liquidated Damages would be paid to United States Holders
of the Notes pursuant to a Registration Default was remote. The Internal Revenue
Service (the "IRS") may take a different position, which could affect the timing
and character of interest income by United States Holders of the Notes. While
not free from doubt, if Liquidated Damages are in fact paid, the Company
believes that each United States Holder will be required to include the
Liquidated Damages in income in accordance with such United States Holder's
method of accounting as ordinary income.
CONVERSION OF NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for income tax purposes on a
conversion of the Notes into shares of Common Stock. However, cash paid in lieu
of a fractional share of Common Stock will result in taxable gain (or loss),
which will be capital gain (or loss) to the extent that the amount of such cash
exceeds (or is exceeded by) the portion of the adjusted basis of the Note
allocable to such fractional share.
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The adjusted basis of shares of Common Stock received on conversion will equal
the adjusted basis of the Note converted, reduced by the portion of adjusted
basis allocated to any fractional share of Common Stock exchanged for cash. The
holding period of an investor in the Common Stock received on conversion will
include the period during which the converted Notes were held.
The conversion price of the Notes is subject to adjustment under certain
circumstances. See "Description of Notes--Conversion Rights." Section 305 of the
Code and the Treasury Regulations issued thereunder may treat the holders of the
Notes as having received a constructive distribution, resulting in ordinary
income to the extent of the Company's current and accumulated earnings and
profits if and to the extent that certain adjustments in the conversion price
that may occur in limited circumstances (particularly an adjustment to reflect a
taxable dividend to holders of Common Stock) increase the proportionate interest
of a holder of Notes in the fully diluted Common Stock, whether or not such
holder ever exercises its conversion privilege. Moreover, if there is not a full
adjustment to the conversion price of the Notes to reflect a stock dividend or
other event increasing the proportionate interest of the holders of outstanding
Common Stock in the assets or earnings and profits of the Company, then such
increase in the proportionate interest of the holders of the Common Stock
generally will be treated as a distribution to such holders, taxable as ordinary
income to the extent of the Company's current and accumulated earnings and
profits.
MARKET DISCOUNT
Investors acquiring Notes should note that the resale of Notes may be
adversely affected by the market discount provisions of Sections 1276 through
1278 of the Code. Under the market discount rules, if a holder of a Note
purchases it at market discount (I.E., at a price below its stated redemption
price at maturity) in excess of a statutorily-defined DE MINIMIS amount and
thereafter recognizes gain upon a disposition or retirement of the Note, then
the lesser of the gain recognized or the portion of the market discount that
accrued on a ratable basis (or, if elected, on a constant interest rate basis)
generally will be treated as ordinary income at the time of the disposition.
Moreover, any market discount on a Note may be taxable to an investor to the
extent of appreciation at the time of certain otherwise non-taxable transactions
(E.G., gifts). Any accrued market discount not previously taken into income
prior to a conversion of a Note, however, should (under Treasury Regulations not
yet issued) carry over to the Common Stock received on conversion and be treated
as ordinary income upon a subsequent disposition of such Common Stock to the
extent of any gain recognized on such disposition. In addition, absent an
election to include market discount in income as it accrues, a holder of a
market discount debt instrument may be required to defer a portion of any
interest expense that otherwise may be deductible on any indebtedness incurred
or maintained to purchase or carry such debt instrument until the holder
disposes of the debt instrument in a taxable transaction.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Except as described above under "--Conversion of Notes into Common Stock,"
upon the sale, exchange, redemption, retirement at maturity or other disposition
of a Note, a United States Holder will generally recognize taxable gain or loss
equal to the difference between the sum of cash plus the fair market value of
all other property received on such disposition (except to the extent such cash
or property is attributable to accrued interest which will be taxable as
ordinary income) and such holder's adjusted tax basis in the Note. Each United
States Holder of Common Stock into which the Notes are converted will generally
recognize gain or loss upon the sale, exchange, redemption or other disposition
of the Common Stock measured under rules similar to those described in the
preceding sentence for the Notes. Gain or loss recognized on the disposition of
a Note or Common Stock generally will be capital gain or loss (subject to the
market discount rules described above under "--Market Discount." Pursuant to the
recently enacted Taxpayer Relief Act of 1997, long-term capital gains tax rates
will apply to dispositions by individuals of capital assets (such as the Notes
or Common Stock) held for more than 18 months. The maximum long-term capital
gains tax rate applicable to individuals is currently 20% (10% for individuals
in
55
<PAGE>
the 15% tax bracket). Mid-term capital gains tax rates will apply to
dispositions by individuals of capital assets held for more than one year but
not more than 18 months. The maximum mid-term capital gains tax rate applicable
to individuals is currently 28% (15% for individuals in the 15% tax bracket).
Corporate taxpayers continue to be subject to a maximum regular tax rate of 35%
on all capital gains and ordinary income.
The exchange of a Note by a United States Holder for a new Note should not
constitute a taxable exchange of the Note. As a result, a United States Holder
should not recognize taxable gain or loss upon receipt of a new Note, a United
States Holder's holding period for a new Note should generally include the
holding period for the Note so exchanged and such holder's adjusted tax basis in
a new Note should generally be the same as such holder's adjusted tax basis in
the Note so exchanged.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A United States Holder of a Note, or of Common Stock issued upon conversion
of a Note, may be subject to information reporting and possibly backup
withholding. If applicable, backup withholding would apply at a rate of 31% with
respect to dividends or interest on, or the proceeds of a sale, exchange,
redemption, retirement, or other disposition of, such Note or Common Stock, as
the case may be, unless (i) such United States Holder is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (ii) provides a taxpayer identification number, certifies as to no loss
of exemption from backup withholding, and otherwise complies with applicable
backup withholding rules. Amounts withheld under the backup withholding rules
from a payment to a United States Holder will be
allowed as a credit against such United States Holder's United States federal
income tax and may entitle the United States Holder to a refund, provided that
the required information is provided to the IRS.
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1998, modify the currently effective information reporting and backup
withholding procedures and requirements, and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payer. To avoid backup
withholding with respect to payments made after December 31, 1998, initial
United States Holders will be required to provide certification, if applicable,
that conforms to the requirements of the Final Withholding Regulations, subject
to certain transitional rules which may apply to extend until December 31, 1999
a certification given in accordance with prior Treasury Regulations. Because the
application of the Final Withholding Regulations will vary depending on the
United States Holder's particular circumstances, United States Holders are urged
to consult their tax advisors regarding the application of the Final Withholding
Regulations.
NON-UNITED STATES HOLDERS
NOTES
Interest paid by the Company to any beneficial owner of a Note that is not a
United States Holder (a "Non-United States Holder") will generally not be
subject to United States federal withholding tax if (i) the interest is not
effectively connected with the conduct of a trade or business within the United
States, (ii) the Non-United States Holder does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote, (iii) the Non-United States Holder is not a
controlled foreign corporation that is related to the Company actually or
constructively through stock ownership and (iv) either (A) the beneficial owner
of the Note certifies to the Company or its agent, under penalties of perjury,
that it is not a United States Holder and provides its name and address on
United States Treasury Form W-8 (or on a suitable substitute form) or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the Note, certifies under penalties of
perjury that such a Form W-8 (or suitable substitute form) has been received
from the beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payer with a copy thereof.
56
<PAGE>
Payments to a Non-United States Holder not described in clauses (ii) through
(iv), above, will be subject to withholding at a rate of 30% on the gross amount
of such payment, unless the rate of withholding is reduced or eliminated by an
applicable income tax treaty and the Non-United States Holder provides the
Company with a properly completed Form 1001 certifying to its exemption from
withholding under such treaty. For a Non-United States Holder for which payments
on the Notes constitute income effectively connected with a United States trade
or business of such Holder, such Holder must provide a properly executed Form
4224 (or such successor forms as the IRS designates) in order to avoid
imposition of withholding tax at a rate of 30% (and, in the case of corporate
Holders, the branch profits tax). Non-United States Holders providing such
certification instead will be subject to United States net income taxation at
regular graduated rates on such effectively connected income. The Final
Withholding Regulations consolidate and modify the current certification
requirements and means by which a Non-United States Holder may claim exemption
from United States federal income tax withholding. A Non-United States Holder
must provide certification that complies with the procedures in the Final
Withholding Regulation, where required, by the first payment date after the
effective date of those regulations, subject to certain transitional rules which
may extend certifications previously provided by such Non-United States Holder
in accordance with the currently effective Treasury Regulations until December
31, 1999. Non-United States Holders claiming benefits under an income tax treaty
may be required to obtain a taxpayer identification number and to certify its
eligibility under the applicable treaty's limitations on benefits article in
order to comply with the Final Withholding Regulations' certification
requirements. All Non-United States Holders should consult their tax advisors
regarding the application of the Final Withholding Regulations, which are
generally effective with respect to payments made after December 31, 1998.
A Non-United States Holder generally will not be subject to United States
federal income tax on any capital gain realized in connection with the sale,
exchange, retirement, or other disposition of a Note, including the exchange of
a Note for Common Stock, provided (i) such gain is not effectively connected
with the conduct by such holder of a trade or business in the United States, and
(ii) in the case of a Non-United States Holder that is an individual, such
holder is not present in the United States for 183 days or more in the taxable
year of the disposition.
A Note held directly by an individual who, at the time of death, is not a
citizen or resident of the United States should not be includible in such
individual's gross estate for United States estate tax purposes as a result of
such individual's death if the individual does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote and, at the time of the individual's death, if
payments with respect to such Note would not have been effectively connected
with the conduct by such individual of a trade or business in the United States.
Even if the Note was includible in the gross estate under the foregoing rules,
the Note may be excluded under the provisions of an applicable estate tax
treaty.
COMMON STOCK
In general, dividends paid to a Non-United States Holder of the Common Stock
will be subject to United States federal income tax withholding at a 30% rate
unless such rate is reduced by an applicable income tax treaty. Dividends that
are effectively connected with such Non-United States Holder's conduct of a
trade or business in the United States or, if a tax treaty applies, attributable
to a permanent establishment, or, in the case of an individual, a "fixed base,"
in the United States ("United States trade or business income") are generally
subject to United States federal income tax at regular rates, but are not
generally subject to the 30% withholding tax if the Non-United States Holder
files the appropriate form with the payer. Any United States trade or business
income received by a Non-United States Holder that is a corporation may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be applicable under an income tax treaty.
Dividends paid to an address in a foreign country are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding tax discussed above and, under current Treasury
Regulations, for purposes of determining the applicability of a tax treaty rate.
57
<PAGE>
Under the Final Withholding Regulations, which are generally effective with
respect to payments made after December 31, 1998, a Non-United States Holder of
the Common Stock who wishes to claim the benefit of an applicable tax treaty
rate would be required to satisfy applicable certification and other
requirements, which might include filing a Form W-8 that contains the Non-United
States Holder's name and address and a certification that such Holder is
eligible for the benefits of such treaty under its Limitations on Benefits
Article.
A Non-United States Holder of the Common Stock generally will not be subject
to United States income or withholding tax on capital gain realized on the sale,
exchange or redemption of such stock, provided (i) such gain is not effectively
connected with the conduct by such holder of a trade or business in the United
States, and (ii) in the case of a Non-United States Holder that is an
individual, such individual is not present in the United States for 183 days or
more in the taxable year of the disposition. Common Stock held directly by an
individual who at the time of death is not a citizen or resident of the United
States will nevertheless generally be includible in the gross estate of such
individual for United States estate tax purposes, subject to contrary provisions
of an applicable estate tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments on the Notes made by the Company or any paying agent of the Company
to Non-United States Holders generally should not be subject to information
reporting and backup withholding at the rate of 31% if the certification
described under "--The Notes" above is received and the payer does not have
actual knowledge that the Holder is a United States Holder. If paid to an
address outside the United States, dividends on Common Stock held by Non-United
States Holders will generally not be subject to information reporting and backup
withholding, provided that the payer does not have actual knowledge that the
Holder is a United States person. However, under the Final Withholding
Regulations, which will not be effective prior to January 1, 1999, dividend
payments will be subject to information reporting and backup withholding unless
applicable certification requirements are satisfied.
Payment of proceeds from a sale of a Note or the Common Stock to or through
the United States office of a broker is subject to information reporting and
backup withholding unless the Non-United States Holder certifies as to its
Non-United States Holder status or otherwise establishes an exemption from
information reporting and backup withholding. Payment outside the United States
of the proceeds of the sale of a Note or the Common Stock to or through a
foreign office of a "broker" (as defined in applicable United States Treasury
Regulations) should not be subject to information reporting or backup
withholding, except that if the broker is a United States person, a controlled
foreign corporation for United States federal income tax purposes or a foreign
person 50% or more of whose gross income is from a United State trade or
business, information reporting should apply to such payment unless the broker
has documentary evidence in its records that the beneficial owner is not a
United States Holder and certain other conditions are not met or the beneficial
owner otherwise establishes an exemption.
All Non-United States Holders are urged to consult their tax advisors
regarding the possible application of information reporting and backup
withholding in light of their particular circumstances under the Final
Withholding Regulations.
58
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth the names of the Selling Securityholders, the
number of shares of Common Stock owned by each of them as of December 31, 1997,
and the principal amount of Notes and number of Conversion Shares which may be
offered pursuant to this Prospectus. This information is based upon information
provided by or on behalf of the Selling Securityholders. The Selling
Securityholders may offer all, some or none of their Notes or Conversion Shares.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT
NOTES OWNED OF NOTES
NAME PRIOR TO OFFERING(1) OFFERED HEREBY
- --------------------------------------------------------------------------- -------------------- ----------------
<S> <C> <C>
AAM/Zazove Institutional Income Fund, L.P.................................. $ 1,800,000 $ 1,800,000
Argent Classic Convertible Arbitrage Fund, L.P............................. 3,500,000 3,500,000
Argent Classic Convertible Arbitrage Fund (Bermuda), Ltd................... 3,500,000 3,500,000
Bank of America Pension Plan............................................... 2,000,000 2,000,000
California PERS............................................................ 2,500,000 2,500,000
Canadian Imperial Holdings, Inc............................................ 4,000,000 4,000,000
Carrigaholt Holdings, Ltd.................................................. 500,000 500,000
The Class IC Company, Ltd.................................................. 500,000 500,000
Commonwealth Life Insurance Company........................................ 2,750,000 2,750,000
Cramblit & Carney Incorporated............................................. 3,441,000 3,441,000
Daniel H. Renberg and Associates, Inc...................................... 675,000 675,000
Dean Witter Convertible Securities Trust................................... 4,500,000 4,500,000
Dean Witter Income Builder Fund............................................ 3,800,000 3,800,000
Dean Witter Variable Income Builder Fund................................... 400,000 400,000
Donaldson, Lufkin & Jenrette Securities Corporation (3).................... 10,720,000 10,720,000
Forest Convertible Opportunity Fund........................................ 248,000 248,000
Forest Fulcrum Fund, LP.................................................... 3,611,000 3,611,000
Forest Global Convert Fund Ser A-1......................................... 100,000 100,000
Forest Global Convert Fund Ser A-5......................................... 3,236,000 3,236,000
Forest Global Convert Fund Ser B-1......................................... 252,000 252,000
Forest Global Convert Fund Ser B-2......................................... 200,000 200,000
Forest Global Convert Fund Ser B-3......................................... 200,000 200,000
Forest Global Convert Fund Ser B-5......................................... 275,000 275,000
Forest Performance Fund.................................................... 280,000 280,000
Forest Performance Greyhound............................................... 220,000 220,000
Forum Capital Markets LP................................................... 1,000,000 1,000,000
Fox Family Foundation...................................................... 150,000 150,000
Fox Family Portfolio Partnership........................................... 400,000 400,000
GPZ Trading................................................................ 2,000,000 2,000,000
Grace Brothers, Ltd........................................................ 1,000,000 1,000,000
Highbridge Capital Corporation............................................. 4,700,000 4,700,000
HSBC Securities Inc........................................................ 2,200,000 2,200,000
KA Management Ltd.......................................................... 855,000 855,000
KA Trading L.P............................................................. 645,000 645,000
<CAPTION>
COMMON STOCK
OWNED PRIOR COMMON STOCK
NAME TO OFFERING(1)(2) OFFERED HEREBY
- --------------------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
AAM/Zazove Institutional Income Fund, L.P.................................. 0 0
Argent Classic Convertible Arbitrage Fund, L.P............................. 0 0
Argent Classic Convertible Arbitrage Fund (Bermuda), Ltd................... 0 0
Bank of America Pension Plan............................................... 0 0
California PERS............................................................ 0 0
Canadian Imperial Holdings, Inc............................................ 0 0
Carrigaholt Holdings, Ltd.................................................. 0 0
The Class IC Company, Ltd.................................................. 0 0
Commonwealth Life Insurance Company........................................ 0 0
Cramblit & Carney Incorporated............................................. 126,500 0
Daniel H. Renberg and Associates, Inc...................................... 111,900 0
Dean Witter Convertible Securities Trust................................... 0 0
Dean Witter Income Builder Fund............................................ 0 0
Dean Witter Variable Income Builder Fund................................... 0 0
Donaldson, Lufkin & Jenrette Securities Corporation (3).................... 0 0
Forest Convertible Opportunity Fund........................................ 0 0
Forest Fulcrum Fund, LP.................................................... 0 0
Forest Global Convert Fund Ser A-1......................................... 0 0
Forest Global Convert Fund Ser A-5......................................... 0 0
Forest Global Convert Fund Ser B-1......................................... 0 0
Forest Global Convert Fund Ser B-2......................................... 0 0
Forest Global Convert Fund Ser B-3......................................... 0 0
Forest Global Convert Fund Ser B-5......................................... 0 0
Forest Performance Fund.................................................... 0 0
Forest Performance Greyhound............................................... 0 0
Forum Capital Markets LP................................................... 0 0
Fox Family Foundation...................................................... 0 0
Fox Family Portfolio Partnership........................................... 0 0
GPZ Trading................................................................ 453 0
Grace Brothers, Ltd........................................................ 0 0
Highbridge Capital Corporation............................................. 0 0
HSBC Securities Inc........................................................ 0 0
KA Management Ltd.......................................................... 0 0
KA Trading L.P............................................................. 0 0
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT
NOTES OWNED OF NOTES
NAME PRIOR TO OFFERING(1) OFFERED HEREBY
- --------------------------------------------------------------------------- -------------------- ----------------
<S> <C> <C>
LDG Limited................................................................ $ 300,000 $ 300,000
LLT Limited................................................................ 1,500,000 1,500,000
McMahan Securities Company, L.P............................................ 750,000 750,000
The Minnesota Mutual Life Insurance Company................................ 565,000 565,000
Orrington International Fund Ltd........................................... 350,000 350,000
Orrington Investments Limited Partnership.................................. 650,000 650,000
Paloma Securities L.L.C.................................................... 3,150,000 3,150,000
Phoenix Capital Offshore Fund Ltd.......................................... 500,000 500,000
Pillar Equity Income Fund.................................................. 500,000 500,000
Shepard Investments International, Ltd..................................... 1,500,000 1,500,000
Silverton International Fund Limited....................................... 2,100,000 2,100,000
Societe Generale Securities Corp........................................... 4,300,000 4,300,000
South Dakota Retirement System............................................. 1,000,000 1,000,000
Southport Management Partners L.P.......................................... 3,000,000 3,000,000
Southport Partners International
LTD...................................................................... 2,000,000 2,000,000
Stark International........................................................ 1,500,000 1,500,000
TQA Arbitrage Fund, L.P.................................................... 550,000 550,000
TQA Leverage Fund, L.P..................................................... 1,000,000 1,000,000
TQA Vantage Fund, Ltd...................................................... 750,000 750,000
TQA Vantage Plus, Ltd...................................................... 400,000 400,000
-------------------- ----------------
TOTAL.................................................................. $92,523,000 $92,523,000
-------------------- ----------------
-------------------- ----------------
<CAPTION>
COMMON STOCK
OWNED PRIOR COMMON STOCK
NAME TO OFFERING(1)(2) OFFERED HEREBY
- --------------------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
LDG Limited................................................................ 0 0
LLT Limited................................................................ 0 0
McMahan Securities Company, L.P............................................ 0 0
The Minnesota Mutual Life Insurance Company................................ 0 0
Orrington International Fund Ltd........................................... 0 0
Orrington Investments Limited Partnership.................................. 0 0
Paloma Securities L.L.C.................................................... 0 0
Phoenix Capital Offshore Fund Ltd.......................................... 0 0
Pillar Equity Income Fund.................................................. 0 0
Shepard Investments International, Ltd..................................... 0 0
Silverton International Fund Limited....................................... 0 0
Societe Generale Securities Corp........................................... 0 0
South Dakota Retirement System............................................. 0 0
Southport Management Partners L.P.......................................... 0 0
Southport Partners International
LTD...................................................................... 0 0
Stark International........................................................ 0 0
TQA Arbitrage Fund, L.P.................................................... 0 0
TQA Leverage Fund, L.P..................................................... 0 0
TQA Vantage Fund, Ltd...................................................... 0 0
TQA Vantage Plus, Ltd...................................................... 0 0
--
-------
TOTAL.................................................................. 238,853 0
--
--
-------
-------
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the Rules of the SEC
and generally includes voting or investment power with respect to
securities. Except as otherwise indicted by footnote, and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Includes Conversion Shares based on a conversion price of $8.75 per share
and a cash payment in lieu of any fractional interest.
(3) Securities are held by the Placement Agent of the original offering of the
Notes.
Because the Selling Securityholders may offer all or some of the Notes that
they hold and/or Conversion Shares pursuant to the offering contemplated by this
Prospectus, and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the Notes or Conversion Shares
by the Selling Securityholders, no estimate can be given as to the principal
amount of Notes or Conversion Shares that will be held by the Selling
Securityholders after completion of this offering.
60
<PAGE>
PLAN OF DISTRIBUTION
The Notes and the Conversion Shares offered hereby may be sold from time to
time by the Selling Securityholders to purchasers directly by any of the Selling
Securityholders in one or more transactions at a fixed price, which may be
changed, or at varying prices determined at the time of sale or at negotiated
prices. Such prices will be determined by the holders of such securities or by
agreement between such holders and underwriters or dealers who may receive fees
or commissions in connection therewith.
Any of the Selling Securityholders may from time to time offer the Notes or
Conversion Shares beneficially owned by them through underwriters, dealers or
agents, who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Securityholders and the purchasers
of the Notes or Conversion Shares for whom they may act as agent. Each Selling
Securityholder will be responsible for payment of commissions, concessions and
discounts of underwriters, dealers or agents. The aggregate proceeds to the
Selling Securityholders from the sale of the Notes or Conversion Shares offered
by them hereby will be the purchase price of such Notes or Conversion Shares
less discounts and commissions, if any. Each of the Selling Securityholders
reserves the right to accept and, together with their agents from time to time
to reject, in whole or in part, any proposed purchase of Notes or Conversion
Shares to be made directly or through agents. The Company will not receive any
of the proceeds from this offering. Alternatively, the Selling Securityholders
may sell all or a portion of the Notes and the Conversion Shares beneficially
owned by them and offered hereby from time to time on any exchange on which the
securities are listed on terms to be determined at the times of such sales. The
Selling Securityholders may also make private sales directly or through a broker
or brokers.
The Company's outstanding Common Stock is listed for trading on Nasdaq.
Prior to this offering, the Notes were eligible for trading on the PORTAL
market. The Notes sold pursuant to the Registration Statement of which this
Prospectus forms a part are not expected to remain eligible for trading on the
PORTAL system. The Company does not intend to list the Notes for trading on any
national securities exchange or on the Nasdaq Stock Market. Accordingly, no
assurance can be given as to the development of any trading market for the
Notes. See "Risk Factors--Limited Public Market for the Notes; Possible
Volatility of Stock Price; Absence of Dividends."
In order to comply with the securities laws of certain states, if
applicable, the Notes and Conversion Shares may be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states the Notes and Conversion Shares may not be sold unless it has been
registered or qualified for sale or an exemption from registration or
qualification requirements is available and is complied with.
The Selling Securityholders and any underwriters, dealers or agents that
participate in the distribution of the Notes and Conversion Shares offered
hereby may be deemed to be underwriters within the meaning of the Securities
Act, and any discounts, commissions or concessions received by them and any
provided pursuant to the sale of shares by them might be deemed to be
underwriting discounts and commissions under the Securities Act.
In addition, any securities covered by this Prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this Prospectus. There is no
assurance that any Selling Securityholder will sell any or all of the Notes or
Conversion Shares described herein, and any Selling Securityholder may transfer,
devise or gift such securities by other means not described herein.
To the extent required, the specific Notes or Conversion Shares to be sold,
the names of the Selling Securityholders, the respective purchase prices and
public offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying Prospectus Supplement or, if appropriate, a
post-effective amendment to the Registration Statement of which this Prospectus
is a part. The Company entered into a Registration Rights Agreement for the
benefit of holders of the Notes to register their Notes and Conversion Shares
under
61
<PAGE>
applicable federal and state securities laws under certain circumstances and at
certain times. The Registration Rights Agreement provides for
cross-indemnification of the Selling Securityholders and the Company and their
respective directors, officers and controlling persons against certain
liabilities in connection with the offer and sale of the Notes and the
Conversion Shares, including liabilities under the Securities Act of 1933, as
amended, and to contribute to payments the parties may be required to make in
respect thereof.
The Company will pay substantially all of the expenses incurred by the
Selling Securityholders and the Company incident to the offering and sale of the
Notes and the Conversion Shares excluding any underwriting discounts or
commissions.
LEGAL MATTERS
The validity of the Notes and the Conversion Shares offered hereby will be
passed upon for the Company by Cooley Godward LLP, Palo Alto, California. As of
the date of this Prospectus certain attorneys with such firm beneficially owned
approximately 31,000 shares of Common Stock of the Company.
EXPERTS
The consolidated financial statements of PETsMART, Inc. as of February 2,
1997 and January 28, 1996 and for each of the three years in the period ended
February 2, 1997 incorporated in this Prospectus by reference to the Company's
Annual Report on Form 10-K, except as they relate to Petstuff, Inc. and
subsidiaries ("Petstuff"), Sporting Dog Specialties, Inc. and affiliates
("Sporting Dog"), The Pet Food Giant, Inc. ("Pet Food Giant"), State Line Tack,
Inc. and subsidiaries ("State Line Tack") and Pet City Holdings Plc and
subsidiaries ("Pet City"), have been audited by Price Waterhouse LLP,
independent accountants, and, insofar as they relate to the financial statements
of Petstuff for the year ended January 29, 1995, not included separately herein,
by Deloitte & Touche LLP, and insofar as they relate to the financial statements
of Sporting Dog as of January 31, 1995 and for the year then ended, not included
separately herein, by Davie Kaplan Chapman & Braverman, P.C., and insofar as
they relate to the financial statements of Pet Food Giant, for the year ended
December 31, 1994, not included separately herein, by Coopers & Lybrand L.L.P.,
and insofar as they relate to the financial statements of State Line Tack as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995, not included separately herein, by Arthur Andersen LLP, and
insofar as they relate to the financial statements of Pet City as of July 27,
1996 and July 29, 1995 and for each of the 52 weeks then ended, not included
separately herein, by Grant Thornton, whose reports thereon are incorporated in
this Prospectus by reference to the Company's Annual Report on Form 10-K. Such
financial statements have been so incorporated in reliance on the reports of
such independent accountants given on the authority of said firms as experts in
auditing and accounting.
The consolidated statements of operations, shareholders' equity, and cash
flows of Petstuff for the year ended January 29, 1995, not separately presented
in this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is incorporated in this Prospectus by reference
to the Company's Annual Report on Form 10-K (which report expresses an
unqualified opinion and includes an explanatory paragraph regarding a certain
complaint). Such financial statements, to the extent they have been included in
the consolidated financial statements of PETsMART, Inc., have been so
incorporated in reliance on their report given on the authority of said firm as
experts in accounting and auditing.
The combined balance sheet of Sporting Dog as of January 31, 1995, and the
related combined statements of income, retained earnings and cash flows for the
year then ended, not separately presented in this Prospectus, have been audited
by Davie Kaplan Chapman & Braverman, P.C., independent auditors, whose report
thereon is incorporated in this Prospectus by reference to the Company's Annual
Report on Form 10-K. Such financial statements, to the extent they have been
included in the consolidated financial
62
<PAGE>
statements of PETsMART, Inc., have been so incorporated in reliance on their
report given on the authority of said firm as experts in accounting and
auditing.
The statements of operation and cash flows of Pet Food Giant for the fiscal
year ended December 31, 1994, not separately presented in this Prospectus, have
been audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon is incorporated in this Prospectus by reference to the Company's Annual
Report on Form 10-K. Such financial statements, to the extent they have been
included in the consolidated financial statements of PETsMART, Inc., have been
so incorporated in reliance on their report given on the authority of said firm
as experts in accounting and auditing.
The consolidated balance sheets of State Line Tack as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995, not separately presented in this Prospectus, have been audited by
Arthur Andersen LLP, independent public accountants, whose report thereon is
incorporated in this Prospectus by reference to the Company's Annual Report on
Form 10-K. Such financial statements, to the extent they have been included in
the consolidated financial statements of PETsMART, Inc., have been so
incorporated in reliance on their report given on the authority of said firm as
experts in accounting and auditing.
The consolidated balance sheets of Pet City as of July 27, 1996 and July 29,
1995 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the 52 weeks then ended, not separately presented in
this Prospectus, have been audited by Grant Thornton, independent chartered
accountants, whose report thereon is incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-K. Such financial
statements, to the extent they have been included in the consolidated financial
statements of PETsMART, Inc., have been so incorporated in reliance on their
report given on the authority of said firm as experts in accounting and
auditing.
63
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY
OTHER THAN THE NOTES OR CONVERSION SHARES OFFERED HEREBY, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES OR
CONVERSION SHARES TO ANYONE IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR IMPLY THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information...................................................................................... i
Incorporation of Certain Documents by Reference............................................................ i
Disclosure Regarding Forward-Looking Statements............................................................ ii
Summary.................................................................................................... 1
Risk Factors............................................................................................... 3
Use of Proceeds............................................................................................ 9
Price Range of Common Stock................................................................................ 9
Dividend Policy............................................................................................ 9
Capitalization............................................................................................. 10
Selected Financial Data.................................................................................... 11
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13
Business................................................................................................... 23
Management................................................................................................. 31
Description of Notes....................................................................................... 35
Description of Credit Facility............................................................................. 52
Description of Capital Stock............................................................................... 53
Certain Federal Income Tax Considerations.................................................................. 54
Selling Securityholders.................................................................................... 59
Plan of Distribution....................................................................................... 61
Legal Matters.............................................................................................. 62
Experts.................................................................................................... 62
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.................................................. $ 60,606
NASD filing fee................................................... --
Nasdaq listing fee................................................ 17,500
Blue sky qualification fees and expenses.......................... --
Printing and engraving expenses................................... 10,000
Legal fees and expenses........................................... 20,000
Accounting fees and expenses...................................... 15,000
Transfer agent and registrar fees................................. --
Miscellaneous..................................................... 1,894
---------
Total............................................................. $ 125,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended ("Securities Act"). The Registrant's Bylaws also provide
that the Registrant will indemnify its directors and executive officers and may
indemnify its other officers, employees and other agents to the fullest extent
permitted by Delaware law.
The Registrant's Restated Certificate of Incorporation ("Restated
Certificate") provides that the liability of its directors for monetary damages
shall be eliminated to the fullest extent permissible under Delaware law.
Pursuant to Delaware law, this includes elimination of liability for monetary
damages for breach of the directors' fiduciary duty of care to the Registrant
and its stockholders. These provisions do not eliminate the directors' duty of
care and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for act or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
The Registrant has entered into agreements with its directors and officers
that require the Company to indemnify such persons to the fullest extent
authorized or permitted by the provisions of the Restated Certificate and
Delaware law against expenses, judgements, fines, settlements and other amounts
actually and responsibly incurred (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director, officer, employee or other agent of the Registrant or any of its
affiliated enterprise. Delaware law permits such indemnification, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interest of the Registrant and, with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder. In
addition, the Registrant maintains director and officer liability
II-1
<PAGE>
insurance which, subject to certain exceptions and limitations, insures
directors and officers for any alleged breach of duty, neglect, error,
misstatement, misleading statement, omission or act in their respective
capacities as directors and officers of the Registrant.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
2.1 Agreement and Plan of Reorganization by and among PETsMART, PETsMART Acquisition Corp. and
Petstuff, Inc., dated February 7, 1995, as amended.(5)
2.2 Agreement and Plan of Reorganization between PETsMART and The Weisheimer Companies, Inc., dated
January 28, 1994.(2)
2.3 Agreement and Plan of Reorganization between PETsMART, Remington Acquisition Corp., Sporting Dog
Specialties, Inc. and certain individual shareholders named therein, dated as of April 3, 1995
(the Sporting Dog Agreement).(3)
2.4 Form of First Amendment to the Sporting Dog Agreement, dated as of April 18, 1995.(3)
2.5 Agreement and Plan of Reorganization and Plan of Merger by and among PETsMART, Turnpike
Acquisition Corp., and The Pet Food Giant, Inc., dated as of August 17, 1995.(5)
2.6 Agreement and Plan of Reorganization by and among PETsMART, Stallion Acquisition Corp., and
State Line Tack, Inc., dated as of December 20, 1995.(6)
2.7 Merger Agreement by and among PETsMART and Pet City Holdings plc, dated as of October 24,
1996.(9)
3.1 Restated Certificate of Incorporation of PETsMART.(1)
3.2 By-laws of PETsMART.(1)
3.3 Certificate of Amendment of Restated Certificate of Incorporation of PETsMART.(7)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Restated Registration and First Refusal Rights Agreement, among PETsMART and the parties named
therein, dated October 30, 1992.(1)
4.3 Series H Preferred Stock Purchase Agreement between PETsMART and the other parties named
therein, dated as of September 8, 1991.(1)
4.4 Indenture between PETsMART and Norwest Bank Minnesota, N.A., as Trustee dated as of November 7,
1997.(11)
4.5 Purchase Agreement by and among PETsMART, Donaldson, Lufkin & Jenrette Securities Corporation,
and NationsBanc Montgomery Securities, Inc., dated as of November 4, 1997.(11)
4.6 Registration Rights Agreement by and among PETsMART, Donaldson, Lufkin & Jenrette Securities
Corporation, and NationsBanc Montgomery Securities, Inc., dated as of November 7, 1997.(11)
5.1 Opinion of Cooley Godward LLP.(11)
10.1 Form of Indemnity Agreement entered into between PETsMART and its directors and officers, with
related schedules.(1)
10.2* PETsMART's 1995 Equity Incentive Plan (the Incentive Plan)(an amendment and restatement of the
Registrant's 1988 Stock Option Plan).(4)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
10.3* Form of Incentive Stock Option Grant under the Incentive Plan.(4)
10.4* Form of Non-qualified Stock Option Grant under the Incentive Plan.(4)
10.5* PETsMART's 1992 Non-Employee Director's Stock Option Plan (the Director's Plan).(1)
10.6* PETsMART's Employee Stock Purchase Plan.(1)
10.12* Employment Agreement between Giles Clarke, PETsMART and Pet City Holdings plc, dated as of
October 23, 1996.(8)
10.13 Third Amended and Restated Credit Agreement among PETsMART, certain lenders, and NationsBank of
Texas, N.A. as Administrative Lender, dated as of April 18, 1997.(9)
10.14 First Amendment, dated as of August 6, 1997, to Third Amended and Restated Credit Agreement
among PETsMART, certain lenders, and NationsBank of Texas, N.A. as Administrative Lender.(10)
10.15 Second Amendment, dated as of October 29, 1997, to Third Amended and Restated Credit Agreement
among PETsMART, certain lenders, and NationsBank of Texas, N.A. as Administrative Lender.(11)
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Davie Kaplan Chapman & Braverman, P.C.
23.5 Consent of Arthur Andersen LLP.
23.6 Consent of Grant Thornton.
23.7 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
25.1 Statement of Eligibility of Indenture Trustee on Form T-1.
</TABLE>
- ------------------------
* Management Contract or Compensatory Plan or Agreement
(1) Incorporated by reference to the indicated exhibit to PETsMART's
Registration Statement on Form S-1 (File No. 33-63912).
(2) Incorporated by reference to the indicated exhibit to PETsMART's Current
Report on Form 8-K (File No. 0-21888), filed April 8, 1994.
(3) Incorporated by reference to the indicated exhibit to PETsMART's
Registration Statement on Form S-4 (File No. 33-91356), as amended.
(4) Incorporated by reference to Exhibits 10.1 and 10.2 to PETsMART's Quarterly
Report on Form 10-Q (File No. 0-21888), filed June 8, 1995.
(5) Incorporated by reference to Exhibit 2.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed September 28, 1995.
(6) Incorporated by reference to Exhibit 10.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed February 13, 1996.
(7) Incorporated by reference to Exhibit 3.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed September 11, 1996.
(8) Incorporated by reference to Exhibits 2.1 and 10.1 to PETsMART's Current
Report on Form 8-K (File No. 0-21888), filed on December 31, 1996, as
amended by PETsMART's Current Report on Form 8-K/A (File No. 0-21888), filed
February 14, 1997.
(9) Incorporated by reference to Exhibit 10.13 to PETsMART's Quarterly Report on
Form 10-Q for the quarter ended May 4, 1997 (File No. 0-21888), filed June
11, 1997.
II-3
<PAGE>
(10) Incorporated by reference to Exhibit 10.13 to PETsMART's Quarterly Report
on Form 10-Q for the quarter ended August 3, 1997 (File No. 0-21888), filed
September 16, 1997.
(11) Previously filed with this Registration Statement.
(B) SCHEDULES.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of periodic
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") containing information required to be included
in a post-effective amendment that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
The undersigned Registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
The undersigned Registrant hereby undertakes to remove from registration by
mean of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act, the information omitted from the form of
prospectus as filed as part of the registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contained a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under Subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Trust
Indenture Act.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Phoenix, State of Arizona, on the 26
day of January, 1998.
<TABLE>
<S> <C> <C>
PETSMART, INC.
By: /s/ SAMUEL J. PARKER
------------------------------------------
Samuel J. Parker
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------------------- ----------------------
<C> <S> <C>
/s/ SAMUEL J. PARKER
------------------------------------------- Chairman of the Board of Directors and Chief January 26, 1998
Samuel J. Parker Executive Officer (PRINCIPAL EXECUTIVE OFFICER)
/s/ C. DONALD DORSEY
------------------------------------------- Executive Vice President, Chief Financial Officer January 26, 1998
C. Donald Dorsey (PRINCIPAL FINANCIAL OFFICER)
*
------------------------------------------- Vice-President, Controller (PRINCIPAL ACCOUNTING January 26, 1998
Kenneth A. Conway OFFICER)
*
------------------------------------------- Chief Operating Officer and Director January 26, 1998
Donna R. Ecton
------------------------------------------- Director
Denis L. Defforey
*
------------------------------------------- Director January 26, 1998
Philip L. Francis
*
------------------------------------------- Director January 26, 1998
Richard M. Kovacevich
*
------------------------------------------- Director January 26, 1998
Lawrence S. Philips
*
------------------------------------------- Director January 26, 1998
Walter J. Salmon
*
------------------------------------------- Director January 26, 1998
Thomas G. Stemberg
</TABLE>
*By: /s/ SAMUEL J. PARKER
-------------------------
Samuel J. Parker
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
2.1 Agreement and Plan of Reorganization by and among PETsMART, PETsMART Acquisition Corp. and
Petstuff, Inc., dated February 7, 1995, as amended.(5)
2.2 Agreement and Plan of Reorganization between PETsMART and The Weisheimer Companies, Inc., dated
January 28, 1994.(2)
2.3 Agreement and Plan of Reorganization between PETsMART, Remington Acquisition Corp., Sporting Dog
Specialties, Inc. and certain individual shareholders named therein, dated as of April 3, 1995
(the Sporting Dog Agreement).(3)
2.4 Form of First Amendment to the Sporting Dog Agreement, dated as of April 18, 1995.(3)
2.5 Agreement and Plan of Reorganization and Plan of Merger by and among PETsMART, Turnpike
Acquisition Corp., and The Pet Food Giant, Inc., dated as of August 17, 1995.(5)
2.6 Agreement and Plan of Reorganization by and among PETsMART, Stallion Acquisition Corp., and
State Line Tack, Inc., dated as of December 20, 1995.(6)
2.7 Merger Agreement by and among PETsMART and Pet City Holdings plc, dated as of October 24,
1996.(9)
3.1 Restated Certificate of Incorporation of PETsMART.(1)
3.2 By-laws of PETsMART.(1)
3.3 Certificate of Amendment of Restated Certificate of Incorporation of PETsMART.(7)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Restated Registration and First Refusal Rights Agreement, among PETsMART and the parties named
therein, dated October 30, 1992.(1)
4.3 Series H Preferred Stock Purchase Agreement between PETsMART and the other parties named
therein, dated as of September 8, 1991.(1)
4.4 Indenture between PETsMART and Norwest Bank Minnesota, N.A., as Trustee dated as of November 7,
1997.(11)
4.5 Purchase Agreement by and among PETsMART, Donaldson, Lufkin & Jenrette Securities Corporation,
and NationsBanc Montgomery Securities, Inc., dated as of November 4, 1997.(11)
4.6 Registration Rights Agreement by and among PETsMART, Donaldson, Lufkin & Jenrette Securities
Corporation, and NationsBanc Montgomery Securities, Inc., dated as of November 7, 1997.(11)
5.1 Opinion of Cooley Godward LLP.(11)
10.1 Form of Indemnity Agreement entered into between PETsMART and its directors and officers, with
related schedules.(1)
10.2* PETsMART's 1995 Equity Incentive Plan (the Incentive Plan)(an amendment and restatement of the
Registrant's 1988 Stock Option Plan).(4)
10.3* Form of Incentive Stock Option Grant under the Incentive Plan.(4)
10.4* Form of Non-qualified Stock Option Grant under the Incentive Plan.(4)
10.5* PETsMART's 1992 Non-Employee Director's Stock Option Plan (the Director's Plan).(1)
10.6* PETsMART's Employee Stock Purchase Plan.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
10.12* Employment Agreement between Giles Clarke, PETsMART and Pet City Holdings plc, dated as of
October 23, 1996.(8)
10.13 Third Amended and Restated Credit Agreement among PETsMART, certain lenders, and NationsBank of
Texas, N.A. as Administrative Lender, dated as of April 18, 1997.(9)
10.14 First Amendment, dated as of August 6, 1997, to Third Amended and Restated Credit Agreement
among PETsMART, certain lenders, and NationsBank of Texas, N.A. as Administrative Lender.(10)
10.15 Second Amendment, dated as of October 29, 1997, to Third Amended and Restated Credit Agreement
among PETsMART, certain lenders, and NationsBank of Texas, N.A. as Administrative Lender.(11)
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Davie Kaplan Chapman & Braverman, P.C.
23.5 Consent of Arthur Andersen LLP.
23.6 Consent of Grant Thornton.
23.7 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
25.1 Statement of Eligibility of Indenture Trustee on Form T-1.
</TABLE>
- ------------------------
* Management Contract or Compensatory Plan or Agreement
(1) Incorporated by reference to the indicated exhibit to PETsMART's
Registration Statement on Form S-1 (File No. 33-63912).
(2) Incorporated by reference to the indicated exhibit to PETsMART's Current
Report on Form 8-K (File No. 0-21888), filed April 8, 1994.
(3) Incorporated by reference to the indicated exhibit to PETsMART's
Registration Statement on Form S-4 (File No. 33-91356), as amended.
(4) Incorporated by reference to Exhibits 10.1 and 10.2 to PETsMART's Quarterly
Report on Form 10-Q (File No. 0-21888), filed June 8, 1995.
(5) Incorporated by reference to Exhibit 2.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed September 28, 1995.
(6) Incorporated by reference to Exhibit 10.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed February 13, 1996.
(7) Incorporated by reference to Exhibit 3.1 to PETsMART's Current Report on
Form 8-K (File No. 0-21888), filed September 11, 1996.
(8) Incorporated by reference to Exhibits 2.1 and 10.1 to PETsMART's Current
Report on Form 8-K (File No. 0-21888), filed on December 31, 1996, as
amended by PETsMART's Current Report on Form 8-K/A (File No. 0-21888), filed
February 14, 1997.
(9) Incorporated by reference to Exhibit 10.13 to PETsMART's Quarterly Report on
Form 10-Q for the quarter ended May 4, 1997 (File No. 0-21888), filed June
11, 1997.
(10) Incorporated by reference to Exhibit 10.13 to PETsMART's Quarterly Report
on Form 10-Q for the quarter ended August 3, 1997 (File No. 0-21888), filed
September 16, 1997.
(11) Previously filed with this Registration Statement.
<PAGE>
PETsMART, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
Fiscal Years Ended 39 Weeks Ended
------------------------------------------------------------ ---------------------
Jan. 31, Jan. 30, Jan. 29, Jan. 28, Feb. 2, Oct. 27, Nov. 2,
1993 1994 1995 1996 1997 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
CALCULATION OF FIXED CHARGES:
Interest expense 3,052 4,298 7,587 8,934 9,450 6,844 9,608
Capitalized interest 182 386 290 300 761 676 -
Appropriate portion (1/3)
of rentals 4,751 8,739 15,278 22,033 30,597 21,363 32,558
------------------------------------------------------------ ----------------------
Total fixed charges 7,985 13,423 23,155 31,267 40,808 28,883 42,166
------------------------------------------------------------ ----------------------
------------------------------------------------------------ ----------------------
CALCULATION OF EARNINGS BEFORE
FIXED CHARGES:
Pre-tax income (loss) from
continuing operations 912 (7,196) (10,358) (14,877) 34,252 22,869 (56,829)
------------------------------------------------------------ ----------------------
Fixed charges:
Interest expense 3,052 4,298 7,587 8,934 9,450 6,844 9,608
Capitalized interest (excluded)
Appropriate portion (1/3)
of rentals 4,751 8,739 15,278 22,033 30,597 21,363 32,558
------------------------------------------------------------ ----------------------
Total fixed charges 7,803 13,037 22,865 30,967 40,047 28,207 42,166
------------------------------------------------------------ ----------------------
Earnings before income
taxes and fixed charges 8,715 5,841 12,507 16,090 74,299 51,076 (14,663)
------------------------------------------------------------ ----------------------
------------------------------------------------------------ ----------------------
Merger and integration charges -- -- 14,100 47,129 40,714 20,364 55,988
Earnings before merger costs,
income taxes and fixed charges 8,715 5,841 26,607 63,219 115,013 71,440 41,325
------------------------------------------------------------ ----------------------
------------------------------------------------------------ ----------------------
Ratio of earnings to fixed
charges (actual) 1.1 0.4 0.5 0.5 1.8 1.8 (0.3)(a)
------------------------------------------------------------ ----------------------
------------------------------------------------------------ ----------------------
Ratio of earnings before merger
costs to fixed charges 1.1 0.4 1.1 2.0 2.8 2.5 1.0
------------------------------------------------------------ ----------------------
------------------------------------------------------------ ----------------------
</TABLE>
(a) As a result of the loss incurred in the 39 weeks ended November 2, 1997, the
Company was unable to cover the indicated fixed charges by $56,829.
Page 1
<PAGE>
PETsMART, INC.
COMPUTATION OF PRO FORMA RATIO OF EARNINGS
TO FIXED CHARGES AFTER ADJUSTMENT FOR ISSUANCE OF
CONVERTIBLE SUBORDINATED NOTES
<TABLE>
<CAPTION>
CALCULATION OF FIXED CHARGES: Feb. 2, 1997 Nov. 2, 1997
------------ ------------
<S> <C> <C>
Interest expense 20,761 15,993
Capitalized interest 761 --
Appropriate portion (1/3)
of rentals 30,597 32,558
--------- --------
Total fixed charges 52,119 48,551
--------- --------
--------- --------
CALCULATION OF EARNINGS BEFORE FIXED CHARGES:
Pre-tax income (loss) from
continuing operations 22,941 (63,214)
Fixed charges:
Interest expense 20,761 15,993
Capitalized interest (excluded)
Appropriate portion (1/3)
of rentals 30,597 32,558
--------- --------
Subtotal 51,358 48,551
Earnings before income
taxes and fixed charges 74,299 (14,663)
--------- --------
--------- --------
Merger and integration costs 40,714 55,988
Earnings before merger costs, income
taxes and fixed charges 115,013 41,325
--------- --------
--------- --------
Ratio of earnings to fixed
charges (actual) 1.4 (0.3) (b)
--------- --------
--------- --------
Ratio of earnings before merger
costs to fixed charges 2.2 0.9
--------- --------
--------- --------
</TABLE>
(b) As a result of the loss incurred in the 39 weeks ended November 2, 1997, the
Company was unable to cover the indicated fixed charges by $63,214.
Page 2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
February 25, 1997 appearing on page F-2 of PETsMART Inc.'s Annual Report on Form
10-K for the year ended February 2, 1997. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Phoenix, Arizona
January 22, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement of PETsMART, Inc. and Subsidiaries on Form S-3 (Registration No.
333-41111) of our report dated April 21, 1995, (except for Note 10(b) as to
which the date is September 18, 1995), on our audit of the financial statements
of The Pet Food Giant, Inc., for the year ended December 31, 1994, which report
is included on Form 10-K of PETsMART, Inc. for the fiscal year ended February 2,
1997. We also consent to the reference to our firm under the caption "Experts"
in the Prospectus, which is a part of such Registration Statement.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
January 22, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to the
Registration Statement of PETsMART, Inc. on Form S-3 of our report relating to
the consolidated financial statements of Petstuff, Inc. and subsidiaries for the
year ended January 29, 1995, dated March 17, 1995 (June 21, 1995 as to Note
11)(which expresses an unqualified opinion and includes an explanatory paragraph
regarding a certain complaint), appearing in the Annual Report on Form 10-K of
PETsMART, Inc. for the fiscal year ended February 2, 1997, and to the reference
to us under the heading "Experts" in the Prospectus, which is part of such
Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Atlanta, Georgia
January 22, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 and in the Prospectus constituting part of such
Registration Statement of PETsMART, Inc. and Subsidiaries of our report dated
June 9, 1995, relating to the combined financial statements of Sporting Dog
Specialties, Inc. and Affiliates which appears in the Annual Report on Form 10-K
for the fiscal year ended February 2, 1997. We also consent to the reference to
us under the heading "Experts" in such Prospectus.
/s/ Davie Kaplan Chapman & Braverman, P.C.
DAVIE KAPLAN CHAPMAN & BRAVERMAN, P.C.
Rochester, New York
January 22, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in Form S-3 of our report dated March 22, 1996 on the financial
statements of State Line Tack, Inc. (the Company) as of December 31, 1994 and
1995, and for each of the three years in the period ended December 31, 1995
included in PETsMART, Inc.'s Form 10-K filed on April 28, 1997, and to the
reference made to us under the heading "Experts" in the prospectus, which is
part of such registration statement. It should be noted that we have not audited
any financial statements of the Company subsequent to December 31, 1995 or
performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
January 22, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
October 24, 1996 (except for Note O-- Subsequent Events--as to which the date is
November 20, 1996) appearing on page F-2c of PETsMART, Inc.'s Annual Report on
Form 10-K for the year ended February 2, 1997. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
/s/ Grant Thornton
GRANT THORNTON
London, England
January 26, 1998
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
-----------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
A U.S. NATIONAL BANKING ASSOCIATION 41-1592157
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national Identification No.)
bank)
SIXTH STREET AND MARQUETTE AVENUE
Minneapolis, Minnesota 55479
(Address of principal executive offices) (Zip code)
Stanley S. Stroup, General Counsel
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
(612)667-1234
(Agent for Service)
-----------------------
PETsMART, INC.
(Exact name of obligor 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 85027
PHOENIX, AZ (Zip code)
(Address of principal executive offices)
-----------------------
6.75% CONVERTIBLE SUBORDINATED NOTES DUE 2004
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 1. GENERAL INFORMATION. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority
to which it is subject.
Comptroller of the Currency
Treasury Department
Washington, D.C.
Federal Deposit Insurance Corporation
Washington, D.C.
The Board of Governors of the Federal Reserve System
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust
powers.
Item 2. AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the
trustee, describe each such affiliation.
None with respect to the trustee.
No responses are included for Items 3-14 of this Form T-1 because the obligor is
not in default as provided under Item 13.
Item 15. FOREIGN TRUSTEE. Not applicable.
Item 16. LIST OF EXHIBITS. List below all exhibits filed as a part of this
Statement of Eligibility. Norwest Bank
incorporates by reference into this Form T-1 the
exhibits attached hereto.
Exhibit 1. a. A copy of the Articles of Association of the
trustee now in effect.*
Exhibit 2. a. A copy of the certificate of authority of the
trustee to commence business issued June 28, 1872,
by the Comptroller of the Currency to The
Northwestern National Bank of Minneapolis.*
b. A copy of the certificate of the Comptroller of
the Currency dated January 2, 1934, approving the
consolidation of The Northwestern National Bank of
Minneapolis and The Minnesota Loan and Trust
Company of Minneapolis, with the surviving entity
being titled Northwestern National Bank and Trust
Company of Minneapolis.*
c. A copy of the certificate of the Acting
Comptroller of the Currency dated January 12,
1943, as to change of corporate title of
Northwestern National Bank and Trust Company of
Minneapolis to Northwestern National Bank of
Minneapolis.*
<PAGE>
d. A copy of the letter dated May 12, 1983 from the
Regional Counsel, Comptroller of the Currency,
acknowledging receipt of notice of name change
effective May 1, 1983 from Northwestern National
Bank of Minneapolis to Norwest Bank Minneapolis,
National Association.*
e. A copy of the letter dated January 4, 1988 from
the Administrator of National Banks for the
Comptroller of the Currency certifying approval of
consolidation and merger effective January 1, 1988
of Norwest Bank Minneapolis, National Association
with various other banks under the title of
"Norwest Bank Minnesota, National Association."*
Exhibit 3. A copy of the authorization of the trustee to exercise
corporate trust powers issued January 2, 1934, by the
Federal Reserve Board.*
Exhibit 4. Copy of By-laws of the trustee as now in effect.*
Exhibit 5. Not applicable.
Exhibit 6. The consent of the trustee required by Section 321(b)
of the Act.
Exhibit 7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.**
Exhibit 8. Not applicable.
Exhibit 9. Not applicable.
* Incorporated by reference to exhibit number 25 filed with
registration statement number 33-66026.
** Incorporated by reference to exhibit number 25 filed with
registration statement number 333-25301.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the
trustee, Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Minneapolis and State of Minnesota on the 25th day of November, 1997.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ Jane Y. Schweiger
---------------------
Jane Y. Schweiger
Corporate Trust Officer
<PAGE>
EXHIBIT 6
November 25, 1997
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
In accordance with Section 321(b) of the Trust Indenture Act of 1939, as
amended, the undersigned hereby consents that reports of examination of the
undersigned made by Federal, State, Territorial, or District authorities
authorized to make such examination may be furnished by such authorities to the
Securities and Exchange Commission upon its request therefor.
Very truly yours,
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ Jane Y. Schweiger
---------------------
Jane Y. Schweiger
Corporate Trust Officer
