<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
APRIL 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM __________ TO ___________
Commission file number: 0-21888
PETSMART, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3024325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19601 N. 27TH AVENUE
PHOENIX, ARIZONA 85027
(Address of principal executive offices, including Zip Code)
(623) 580-6100
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes (X) No ( )
(2) Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
COMMON STOCK, $.0001 PAR VALUE, 111,117,039 SHARES AT JUNE 8, 2000
1
<PAGE> 2
PETSMART, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets at April 30, 2000
and January 30, 2000 3
Consolidated Statements of Operations
for the thirteen weeks ended
April 30, 2000 and May 2, 1999 4
Consolidated Statements of Cash Flows
for the thirteen weeks ended
April 30, 2000 and May 2, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risks 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2
<PAGE> 3
PETSMART, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except par value)
Unaudited
<TABLE>
<CAPTION>
APRIL 30, JANUARY 30,
2000 2000
--------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $37,415 $41,498
Receivables, net 67,188 68,760
Merchandise inventories 378,703 377,298
Prepaid expenses and other current assets 33,717 31,159
------ ------
Total current assets 517,023 518,715
Property and equipment, net 259,955 263,327
Investments (Note 2) 32,458 30,802
Other assets 15,688 15,766
Deferred income taxes 6,780 6,780
----- -----
Total assets $831,904 $835,390
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to bank $26,500 $-
Accounts payable and bank overdraft 124,255 144,076
Accrued payroll and employee benefits 26,927 30,839
Accrued occupancy expense 15,618 13,214
Accrued merger, business integration and restructuring costs 8,633 10,410
Other accrued expenses 31,722 27,272
Current maturities of capital lease obligations 10,164 12,593
------ ------
Total current liabilities 243,819 238,404
Subordinated convertible notes (Note 5) 196,000 200,000
Capital lease obligations 60,433 63,951
Deferred rents and other liabilities 19,234 18,611
------ ------
Total liabilities 519,486 520,966
------- -------
Stockholders' equity:
Preferred stock; $.0001 par value, 10,000 shares
authorized, none issued and outstanding - -
Common stock; $.0001 par value; 250,000 shares
authorized, 117,459 and 117,246 shares issued and outstanding 12 12
Additional paid-in capital 399,691 400,108
Deferred compensation (961) (1,903)
Accumulated deficit (56,692) (57,279)
Accumulated other comprehensive loss (2,054) (1,304)
Less: treasury stock, at cost, 6,350 and 5,550 shares (Note 3) (27,578) (25,210)
-------- --------
Total stockholders' equity 312,418 314,424
------- -------
Total liabilities and stockholders' equity $831,904 $835,390
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
3
<PAGE> 4
PETSMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED
------------------------------
APRIL 30, MAY 2,
2000 1999
------------ ---------
<S> <C> <C>
Net sales $533,984 $564,112
Cost of sales 396,553 422,134
------- -------
Gross profit 137,431 141,978
Store operating expenses 107,942 110,385
Store preopening expenses 1,961 2,069
General and administrative expenses 17,172 18,023
------ ------
Operating income 10,356 11,501
Interest income 236 1,310
Interest expense (5,244) (5,953)
------- -------
Income before equity loss in PETsMART.com, income
tax expense (benefit), extraordinary item, and cumulative
effect of a change in accounting principle 5,348 6,858
Equity loss in PETsMART.com (Note 2) (5,807) -
------- -------
Income (loss) before income tax expense (benefit), extraordinary item, and
cumulative effect of a change in accounting principle (459) 6,858
Income tax expense (benefit) (203) 2,777
------- -------
Income (loss) before extraordinary item and cumulative effect of
a change in accounting principle (256) 4,081
Extraordinary item, gain on early extinguishment of debt, net of
income tax expense (Note 5) 843 -
------- -------
Income before cumulative effect of a change in accounting principle 587 4,081
Cumulative effect of a change in accounting principle, net of income
tax benefit (Note 6) - (528)
------- -------
Net income 587 3,553
--- -----
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (Note 7) (750) (964)
----- -----
Comprehensive income (loss) $(163) $2,589
====== ======
Earnings per common share - basic (Note 8):
Income (loss) before extraordinary item and cumulative effect
of a change in accounting principle $(0.00) $0.03
Extraordinary item, net of income tax expense 0.01 -
Cumulative effect of a change in accounting principle, net of income
tax benefit - 0.00
------- -------
Net income $0.01 $0.03
===== =====
Earnings per common share - diluted (Note 8):
Income (loss) before extraordinary item and cumulative effect
of a change in accounting principle $(0.00) $0.03
Extraordinary item, net of income tax expense 0.01 -
Cumulative effect of a change in accounting principle, net of income
tax benefit - 0.00
------- -------
Net income $0.01 $0.03
===== =====
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
4
<PAGE> 5
PETSMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
Unaudited
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED
-----------------------
APRIL 30, MAY 2,
2000 1999
--------- ------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $587 $3,553
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 10,420 11,462
Loss (gain) on disposal of property and equipment 252 (74)
Equity loss in PETsMART.com 5,807 -
Extraordinary gain on early extinguishment of debt (1,405) -
Changes in assets and liabilities:
Receivables, net 2,808 8,187
Merchandise inventories (1,405) (20,135)
Prepaid expenses and other current assets (2,558) (5,504)
Other assets (484) (1,414)
Accounts payable and bank overdraft (19,821) (6,789)
Accrued payroll and employee benefits (3,912) 6,302
Accrued occupancy expense 2,404 132
Accrued merger, business integration and restructuring costs (1,777) (4,995)
Other accrued expenses 4,450 567
Deferred rents and other liabilities 623 (202)
--- -----
Net cash used in operating activities (4,011) (8,910)
------- -------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of leaseholds, fixtures and equipment (8,412) (18,979)
Purchases of property held for sale and leaseback - (251)
Investment in cost holdings (1,656) (2)
Investment in equity holdings (5,807) -
Proceeds from sales of property and equipment 25 450
-------- --------
Net cash used in investing activities (15,850) (18,782)
-------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 938 184
Purchase of treasury stock (2,368) -
Borrowings from bank credit facility 226,500 -
Repayment of bank credit facility (200,000) -
Retirement of subordinated convertible notes (2,595) -
Payments on capital lease obligations (5,947) (4,639)
------- -------
Net cash provided by (used in) financing activities 16,528 (4,455)
------ -------
FOREIGN CURRENCY TRANSLATION LOSSES (750) (964)
----- -----
DECREASE IN CASH AND
CASH EQUIVALENTS (4,083) (33,111)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 41,498 153,336
------ -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $37,415 $120,225
======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
5
<PAGE> 6
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 30, 2000 AND MAY 2, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1 - GENERAL:
-----------------
The accompanying unaudited consolidated financial statements of
PETsMART, Inc. and Subsidiaries ("PETsMART" or "the Company") have been
prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for financial statements. In the opinion of
management, the accompanying consolidated financial statements reflect
all adjustments which are both of a normal recurring nature and
necessary for a fair statement of the results of the interim periods
presented. Certain reclassifications have been made to prior period
financial statements to present them on a basis comparable with the
current period's presentation.
Because of the seasonal nature of the Company's business, the results
of operations for the thirteen weeks ended April 30, 2000 and May 2,
1999 are not necessarily indicative of the results to be expected for
the full year. For further information, refer to the financial
statements and footnotes thereto for the fiscal year ended January 30,
2000, included in the Company's Annual Report on Form 10-K (File No.
0-21888) filed with the Securities and Exchange Commission on April 24,
2000.
NOTE 2 - INVESTMENTS:
---------------------
The Company has an equity investment in PETsMART.com, a corporate joint
venture which began operations in June 1999 and operates as an
electronic commerce pet product retailer. During 1999, the Company
contributed cash of approximately $29,061,000 in exchange for 8,287,135
shares of preferred stock. During the thirteen weeks ended April 30,
2000, the Company contributed cash of approximately $5,000,000 in
exchange for 300,000 shares of additional preferred stock. The
preferred stock is fully convertible to 20,287,135 shares of common
stock at the Company's option. Additionally, during the first quarter
of fiscal year 2000 the Company contributed cash of approximately
$807,000 for 1,361,027 shares of common stock. The Company's equity
investment represents 47.5% of the outstanding common stock on a fully
converted basis at April 30, 2000. The Company accounts for the
investment using the equity method in accordance with Accounting
Principles Board Opinion No. 18. Accordingly, the Company has recorded
its proportionate share of the equity in losses of PETsMART.com in the
accompanying consolidated statements of operations, which reduced the
carrying value of the Company's investment to zero.
NOTE 3 - TREASURY STOCK:
------------------------
On April 13, 2000, the Company's Board of Director's approved the
purchase of an aggregate of $25 million of its common stock or its
convertible debentures annually for each of the next three fiscal years
through 2002. The Company's policy on the repurchase of stock or
subordinated debt is to make market purchases when the price is
advantageous and as cash flow allows to maintain appropriate liquidity.
During the thirteen weeks ended April 30, 2000, approximately $2.3
million (before commissions) had been used to repurchase an aggregate
of 800,000 shares of the Company's Common Stock under this program.
6
<PAGE> 7
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 30, 2000 AND MAY 2, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 4 - SALE OF UNITED KINGDOM SUBSIDIARY:
-------------------------------------------
The Company consummated the sale of its United Kingdom ("U.K.")
subsidiary (the "Transaction") to an unrelated third party on December
15, 1999. The Transaction was structured as a stock sale, whereby the
Company sold 100% of the stock in its subsidiary in exchange for cash.
As of the date of the Transaction, the United Kingdom subsidiary's
losses from operations, before income taxes, for fiscal 1999 were
reclassified as "Loss on disposal of subsidiary" in the Company's
consolidated statement of operations included in the Company's Annual
Report on Form 10-K. For the thirteen weeks ended May 2, 1999, the
Company's U.K. subsidiary recorded net sales of $51.2 million and a
loss before income taxes of $4.7 million.
NOTE 5 - GAIN ON EARLY EXTINGUISHMENT OF DEBT:
----------------------------------------------
During the first quarter of fiscal 2000, the Company retired $4.0
million of its 6 3/4% Subordinated Convertible Notes due 2004 (see
Note 3) at a discount from par. The Company recognized an extraordinary
gain in the first quarter of fiscal 2000 of approximately $0.8 million,
net of related income taxes of approximately $0.6 million, related to
the early extinguishment of this debt.
NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE:
----------------------------------------
In April 1998, the American Institute of Certified Public Accountants
(AICPA") issued Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP-98-5"). SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. Under
the provisions of SOP 98-5, costs of start-up activities, including
organization costs, should be expensed as incurred. The Company adopted
SOP 98-5 at the beginning of the first quarter of fiscal 1999. Prior to
its adoption of SOP 98-5, the Company expensed its store preopening
costs in the month in which the store opened. The charge against
earnings during the first quarter of fiscal 1999 related to this change
in accounting principle was $888,000, before taxes, and was recorded as
a cumulative effect of a change in accounting principle.
NOTE 7 - COMPREHENSIVE INCOME:
------------------------------
The income tax benefit related to the foreign currency translation
adjustment was approximately $595,000 and $656,000 for first quarter
2000 and 1999, respectively.
7
<PAGE> 8
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 30, 2000 AND MAY 2, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 8 - EARNINGS PER SHARE:
----------------------------
Basic earnings per share are computed by dividing net income by the
weighted average of common shares outstanding during each period.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period
after giving effect to dilutive stock options and adjusting for
dilutive common shares assumed to be issued on conversion of the
Company's subordinated convertible notes.
A reconciliation of the basic and diluted earnings per share
computations for the thirteen weeks ended April 30, 2000 and May 2,
1999 is as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------
APRIL 30, 2000 MAY 2, 1999
-------------- -----------
WEIGHTED WEIGHTED
INCOME AVERAGE PER SHARE AVERAGE PER SHARE
(LOSS) SHARES AMOUNT INCOME (LOSS) SHARES AMOUNT
------- ------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary
item and cumulative effect of a change
in accounting principle $(256) 111,402 $(0.00) $4,081 116,825 $0.03
Extraordinary item, gain on early
extinguishment of debt, net of
income tax expense 843 111,402 0.01 - 116,825 -
Cumulative effect of a change in
accounting principle, net of income
tax benefit - 111,402 - (528) 116,825 (0.00)
------ ------- ------ ----- ------- ------
Net income per common
share - basic 587 111,402 0.01 3,553 116,825 0.03
Effect of dilutive securities:
Options - 92 - - 998 -
------ ------- ------ ----- ------- ------
Net income per common
share - diluted $587 111,494 $0.01 $3,553 117,823 $0.03
==== ======= ===== ====== ======= =====
</TABLE>
At April 30, 2000, no shares of common stock had been issued upon
conversion of the subordinated convertible notes issued in November
1997. These notes are convertible into an aggregate of approximately
22.4 million shares of common stock and may be redeemed, in whole or in
part, by the Company at any time after November 1, 2000 at a premium.
These shares were not included in the calculation of diluted earnings
per share for the thirteen weeks ended April 30, 2000 or May 2, 1999
due to the anti-dilutive effect they would have on earnings per share
if converted.
8
<PAGE> 9
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 30, 2000 AND MAY 2, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 9 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
---------------------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS 133" issued in June 1999 defers
the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which was issued in June 1998. SFAS
133 establishes the accounting and reporting standards for derivative
instruments and hedging activities, requiring that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure them at fair value. It also provides for
matching of the timing of gain or loss recognition on the hedging
instrument with the recognition of (i) the changes in the fair value of
the hedged asset or liability related to the hedged risk or (ii) the
hedged forecasted transaction earnings effect. Adoption is required for
fiscal years beginning after June 15, 2000. The Company will adopt SFAS
133 in the first quarter of fiscal 2001. The Company has not yet
analyzed the impact of adopting this statement.
NOTE 10 - FINANCIAL INFORMATION BY BUSINESS SEGMENT:
----------------------------------------------------
The Company operates two reportable business segments. PETsMART North
American operations, the largest segment, includes all retail stores in
the United States and Canada, along with the warehousing and corporate
functions that support them. The PETsMART Direct segment represents the
Company's direct marketing operations, including its separate corporate
and warehousing functions. During fiscal year 1999, the PETsMART U.K.
subsidiary was also a reportable business segment. The U.K. segment
included all retail stores in the United Kingdom, including the
warehousing and corporate functions specific to the U.K. operations,
and was disposed of during the fourth quarter of 1999 (see Note 4).
This segmentation is consistent with the format reviewed by the
Company's management.
Operating results and other financial data by business segment for the
thirteen weeks ended April 30, 2000 and May 2, 1999, were as follows
(in thousands):
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED
--------------------------
APRIL 30, MAY 2,
2000 1999
-------- -------
<S> <C> <C>
Net sales:
PETsMART North America $511,061 $486,772
PETsMART U.K. - 51,232
PETsMART Direct - External customers 22,923 26,108
PETsMART Direct - Intersegment 5,671 3,892
Eliminations (5,671) (3,892)
------- -------
Total net sales $533,984 $564,112
======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED
---------------------------
APRIL 30, MAY 2,
2000 1999
--------- ------
<S> <C> <C>
Operating income (loss):
PETsMART North America $ 10,441 $ 15,054
PETsMART U.K. - (4,419)
PETsMART Direct (85) 866
------- --------
Operating income 10,356 11,501
Interest income 236 1,310
Interest expense (5,244) (5,953)
------- --------
Income before equity loss in PETsMART.com,
income tax expense (benefit), extraordinary item,
and cumulative effect of a change in accounting principle $ 5,348 $ 6,858
======== =======
</TABLE>
9
<PAGE> 10
PETSMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 30, 2000 AND MAY 2, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
Total assets by business segment as of April 30, 2000, and January 30,
2000, were as follows:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 30,
2000 2000
---------- -----------
(in thousands)
<S> <C> <C>
PETsMART North America $ 761,424 $ 774,807
PETsMART Direct 70,480 60,583
----------- ------------
Total assets $ 831,904 $ 835,390
========== ==========
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could materially differ from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled PETsMART Superstores, Distribution, Information Systems,
Competition, Government Regulation and Business Risks included in the Company's
Form 10-K for the year ended January 30, 2000.
OVERVIEW
PETsMART, Inc. and its subsidiaries ("PETsMART" or "the Company") is
the largest operator of superstores specializing in pet food, supplies and
services in North America. At April 30, 2000, the Company operated 507
superstores, consisting of 487 superstores in the United States, and 20
superstores in Canada. PETsMART offers a complete assortment of pet products at
prices typically at or 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. Through its PETsMART Direct ("Direct") subsidiary, the Company
is also the largest direct mail catalog retailer of pet and equine supplies as
well as an e-commerce fulfillment center.
The Company has invested approximately $35 million in PETsMART.com, an
e-commerce business, since its inception in the second quarter of 1999 through
April 30, 2000. PETsMART.com is the Internet's most visited pet related Internet
site as rated by independent internet sources. The site, which was developed in
partnership with idealab!, provides visitors with convenience, security and
service. It features a broad range of merchandise, expert advice and community
activities for consumers who care about pets. The Company has approximately a 48
percent equity ownership in PETsMART.com.
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 existing superstores. In view of the increasing maturity
of its superstore base (an average age of 4.2 years as of April 30, 2000), as
well as the planned opening of additional superstores in existing markets, the
Company's comparable store sales increases may be lower in future periods. As a
result of its expansion plans, the Company anticipates the timing of new
superstore openings, and related preopening expenses, and the amount of revenue
contributed by new and existing superstores may cause the Company's quarterly
results of operations to fluctuate. The Company has achieved less favorable
operating results in certain North American geographic regions it recently
entered than it has achieved historically in other regions. In addition, because
new superstores have higher payroll, advertising and other store level expenses
as a percentage of sales than mature superstores, the impact of new superstore
openings will also contribute to lower store operating margins until they become
established. The Company charges preopening costs associated with each new
superstore to earnings as the costs are incurred. 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.
SALE OF SUBSIDIARY
The Company consummated the sale of its United Kingdom ("U.K.")
subsidiary (the "Transaction") to an unrelated third party on December 15, 1999.
The Transaction was structured as a stock sale, whereby the Company sold 100% of
the stock in its subsidiary in exchange for cash. As of the date of the
Transaction, the United Kingdom subsidiary's losses from operations, before
income taxes, for fiscal 1999 were reclassified as "Loss on disposal of
subsidiary" in the Company's consolidated statement of operations included in
the Company's Annual Report on Form 10-K.
DEVELOPMENTS DURING FISCAL 2000
In August 1999, The Proctor and Gamble Company purchased the I ams
Company, whose Iams and Eukanuba product lines of premium dog and cat foods are
sold in PETsMART superstores. In early March 2000, the Iams product line became
available to the consumer in supermarkets, warehouse clubs, and other mass
merchandisers for the first time. As a result, PETsMART experienced a decrease
in sales of Iams products which is estimated to have a 150 basis point effect on
comparable store sales. The long-term impact of this development is yet to be
determined, and the Company could be adversely affected by it.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales
of certain items included in the Company's statements of operations, adjusted
for the sale of the U.K. subsidiary:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------
MAY 2, 1999
APRIL 30, ------------------------
2000 HISTORICAL ADJUSTED (1)
--------- ---------- ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.3 74.8 73.9
------ ------ ------
Gross profit 25.7 25.2 26.1
Store operating expenses 20.2 19.6 19.5
Store preopening expenses 0.4 0.4 0.4
General and administrative expenses 3.2 3.2 3.1
Loss on disposal of subsidiary - - 0.9
---------- ---------- -------
Operating income 1.9 2.0 2.2
Interest income 0.1 0.2 0.2
Interest expense 1.0 1.0 1.1
-------- ------ -------
Income before equity loss in PETsMART.com, income tax expense (benefit),
extraordinary item, and cumulative effect
of a change in accounting principle 1.0 1.2 1.3
Equity loss in PETsMART.com 1.1 - -
-------- ---------- ----------
Income (loss) before income tax expense (benefit), extraordinary item,
and cumulative effect of a change in accounting principle (0.1) 1.2 1.3
Income tax expense (benefit) (0.0) 0.5 0.5
--------- ------- -------
Income (loss) before extraordinary item and cumulative effect
of a change in accounting principle (0.1) 0.7 0.8
Extraordinary item, gain on early extinguishment of debt, net of
income tax expense 0.2 - -
-------- ---------- ----------
Income before cumulative effect of a change in
accounting principle 0.1 0.7 0.8
Cumulative effect of a change in accounting principle, net of
income tax benefit - 0.1 0.1
---------- -------- ---------
Net income 0.1% 0.6% 0.7%
========= ======== =========
</TABLE>
(1) The Company's United Kingdom subsidiary was sold to an unrelated third party
on December 15, 1999. As of the date of this transaction, the United Kingdom
subsidiary's losses from operations, before income taxes, for fiscal 1999 were
reclassified as "Loss on disposal of subsidiary" in the Company's consolidated
statement of operations included in the Company's Annual Report on Form 10-K.
For comparative purposes, the statement of operations data for the thirteen
weeks ended May 2, 1999 has been presented on a comparable basis reflecting this
reclassification.
FIRST QUARTER FISCAL 2000 COMPARED TO FIRST QUARTER FISCAL 1999
The following discussion of results of operations for first quarter
2000 and first quarter 1999 reflects the reclassification of the Company's
United Kingdom subsidiary's results from operations to "Loss on disposal of
subsidiary" for the 1999 period as discussed above in "Sale of Subsidiary", to
form a comparable basis with the results from first quarter 2000.
Net sales increased 4.1% to approximately $534.0 million for the
thirteen weeks ended April 30, 2000 from $512.9 million for the thirteen weeks
ended May 2, 1999. The 2000 results exclude sales from the United States
veterinary clinics as the clinics were sold to MMI in July 1999. On a comparable
basis excluding the veterinary sales from first quarter 1999, net sales
increased 7.4% from approximately $497.4 million in first quarter 1999.
Comparable North American store sales increased 1.8% for the quarter. During
first quarter 2000, the Company opened 24 new superstores, relocated one store,
and closed one store in North America. The Company operated 507 superstores at
April 30, 2000 compared to 463 superstores open at May 2, 1999.
12
<PAGE> 13
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 25.7% for first quarter 2000 from 26.1% in first quarter 1999. This
result principally reflected a shift in purchasing arrangements with vendors,
beginning first quarter 2000, from the traditional volume and promotional
discounts received to a more competitive unit pricing. Additionally, the
decrease in gross profit as a percentage of net sales was reflective of higher
distribution costs, store occupancy costs, and increased grooming costs in the
first quarter of 2000 as compared to the same period in 1999.
Store operating expenses, which includes payroll and benefits,
advertising and other store level expenses, increased as a percentage of net
sales to 20.2% for first quarter 2000 from 19.5% for first quarter 1999. This
increase reflected lower cooperative advertising monies being received from
vendors (as a result of the new purchasing arrangements discussed in gross
profit, above) and increased equipment leasing expenses related to the Company's
new point-of-sale systems installed during the second half of fiscal 1999.
Store preopening expenses as a percentage of net sales was 0.4% for
first quarter 2000, unchanged from first quarter 1999. For the stores that
opened during the first quarter 2000, the average preopening expense incurred
was approximately $95,000 per store, which is consistent with the Company's
prior experience. Including one replacement store, 25 stores were opened during
first quarter 2000.
General and administrative expenses as a percentage of sales increased
slightly to 3.2% for first quarter 2000 from 3.1% for first quarter 1999. This
increase was due to a planned increase in field management to expand the
grooming and pet training service areas and increased depreciation expense
related to the Company's new information system that was installed during the
summer of 1999.
The loss on disposal of subsidiary of approximately $4.7 million during
the first quarter of 1999, represents the net loss from operations before income
taxes, of the Company's United Kingdom subsidiary that was subsequently sold to
an unrelated third party in December 1999.
The Company's operating income decreased to $10.4 million for first
quarter 2000 from $11.2 million for first quarter 1999. Operating income as a
percentage of net sales decreased from 2.2% for first quarter 1999 to 1.9% for
first quarter 2000. This decrease was primarily due to the shift in purchasing
arrangements with vendors that began at the beginning of fiscal 2000.
Interest income decreased to $0.2 million for first quarter 2000 from
$1.3 million for first quarter 1999 principally due to the decrease in average
cash balances available for short-term investment. Interest expense decreased to
$5.2 million for the first quarter 2000 from $5.7 million for first quarter
1999. The decrease in interest expense was due primarily to decreased capital
lease obligations.
The equity loss in PETsMART.com, in which the Company has a 47.5%
equity investment, represents the Company's proportionate share of losses from
PETsMART.com, which began operations in June 1999. The Company's portion of
PETsMART.com's losses for the thirteen weeks ended April 30, 2000 was
approximately $5.8 million.
For first quarter 2000, the $0.2 million income tax benefit resulted in
a reported effective rate of 44.2%. Losses from the Company's equity investment
in PETsMART.com are excluded from the Company's consolidated income tax return.
Excluding the effects of the non-deductible charges, the Company's annual
effective rate for first quarter 2000 becomes 41.5%, compared to 40.5% for first
quarter 1999. The increase in the effective tax rate is principally due to a
higher effective tax rate on Canadian income and other tax rate adjustments.
During the first quarter of fiscal 2000, the Company retired $4.0
million of its 6 3/4% Subordinated Convertible Notes due 2004 at a discount
from par. The Company recognized an extraordinary gain in the first quarter of
fiscal 2000 of approximately $0.8 million, net of related income taxes of
approximately $0.6 million, related to the early extinguishment of this debt.
13
<PAGE> 14
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities" ("SOP-98-5"). SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Under
the provisions of SOP 98-5, costs of start-up activities, including organization
costs, should be expensed as incurred. The Company adopted SOP 98-5 at the
beginning of the first quarter of fiscal 1999. Prior to its adoption of SOP
98-5, the Company expensed its store preopening costs in the month in which the
store opened. The charge against earnings during the first quarter of fiscal
1999 related to this change in accounting principle was $0.9 million, before
taxes, and was recorded as a cumulative effect of a change in accounting
principle.
As a result of the foregoing, the Company reported a loss before
extraordinary item and cumulative effect of a change in accounting principle of
$0.3 million (or $0.00 per share - diluted) for first quarter 2000 compared to
income before extraordinary item and cumulative effect of a change in accounting
principle of $4.1 million (or $0.03 per share - diluted) for first quarter 1999.
The following table summarizes the earnings per share impact of the
Company's electronic commerce business (PETsMART.com) corporate joint venture
and the United Kingdom retail subsidiary:
<TABLE>
<CAPTION>
Thirteen weeks ended
------------------------------------
April 30, 2000 May 2, 1999
-------------- -----------
<S> <C> <C>
North America stores and Direct $ 0.03 $ 0.06
PETsMART.com (0.03) --
United Kingdom retail subsidiary -- (0.03)
------------ ---------
Income before extraordinary item and
cumulative effect of a change in
accounting principle 0.00 0.03
Extraordinary gain on early extinguishment
of debt, net of tax 0.01 -
Cumulative effect of a change in accounting
principle - 0.00
------------ ---------
Total earnings per share - diluted $ 0.01 $ 0.03
======== ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and expansion program to date
principally through cash flows from operations, the sale of equity and debt
securities, lease financing and borrowings under its credit facility. Additional
sources of financing have included vendor terms on inventory purchases.
In November 1997, $200 million of 6 3/4% Subordinated Convertible Notes
(the "Notes") were issued by the Company and sold to "qualified institutional
buyers" as defined in Rule 144A of the Securities Act of 1933, as amended (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. In April 1998, the Notes were registered publicly
through an S-3 filing. The net proceeds to PETsMART from the sale of the Notes
were approximately $193,250,000.
During fiscal 1999, approximately $25.0 million (before commissions) in
cash was used to repurchase 5,550,000 shares of the Company's Common Stock, at
an average price of $4.50. During the thirteen weeks ended April 30, 2000,
approximately $2.3 million (before commissions) was used to purchase 800,000
shares of the Company's Common Stock at an average price of $2.92.
On April 13, 2000, the Company's Board of Director's approved the
purchase of $25 million of its common stock or its subordinated convertible
notes annually for each of the next three fiscal years. The Company's policy on
the repurchase of common stock or subordinated convertible notes is to make
market purchases when the price is advantageous and as cash flow allows to
maintain appropriate liquidity.
14
<PAGE> 15
The Company consummated a sale of its United Kingdom subsidiary with an
unrelated third party on December 15, 1999. This transaction provided the
Company cash proceeds before transaction costs of approximately $48.9 million
less debt of approximately $7.0 million.
At April 30, 2000, total assets were $831.9 million, of which $517.0
million were current assets. Cash and cash equivalents were $37.4 million.
Cash used in operations was $4.0 million for the thirteen weeks ended
April 30, 2000, compared to cash used in operations of $8.9 million for the same
period of the prior year. Merchandise accounts payable leveraging (the
percentage of merchandise inventory financed by vendor credit terms, e.g.,
accounts payable divided by merchandise inventory), decreased to 32.8% at April
30, 2000, compared to 38.2% at January 30, 2000. Inventory balances were
approximately $378.7 million at April 30, 2000, and $377.3 million at January
30, 2000. Average North American store inventory, which excludes the inventory
of PETsMART DIRECT, decreased 4.0% to $697,000 per store at April 30, 2000, from
$726,000 at January 30, 2000. This decrease reflected a planned reduction of the
weeks of supply of consumables product and favorable efficiencies gained in
stores served by the distribution center in Ennis, Texas.
The Company has used cash for 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 systems
initiatives. The Company has also used cash to invest in the cost holdings of
MMI as well as the equity holdings of PETsMART.com. It is likely that the
Company will need to make additional investments in PETsMART.com to fund
operations if PETsMART.com is unable to generate sufficient funds from
operations or from other sources. Net cash used in investing activities was
$15.9 million for the thirteen weeks ended April 30, 2000, compared to $18.8
million used for the thirteen weeks ended May 2, 1999.
Net cash used in financing activities consist primarily of borrowings
and repayments on the Company's credit facility, principal payments on capital
lease obligations, retirement of subordinated convertible debt, and repurchase
of the Company's common stock.
The Company's primary long-term capital requirements are for opening
new superstores and distribution centers, the costs of closing redundant or
inadequate superstores, expenditures associated with the continued development
and implementation of the Company's information systems, and for working
capital.
All of the Company's superstores are leased facilities. The Company
expects to open 40 new 19,000 square foot superstore locations, primarily as
fill-in locations in existing markets for Fiscal Year 2000. The older 26,000
square foot prototype will be used in the remaining 15 new store locations for
Fiscal Year 2000. The Company expects that these smaller stores will comprise
all of its new store locations in future years as the Company's real estate
strategy matures. These locations are generally leased facilities and capital
expenditures for these locations will typically include approximately $250,000
for inventory, net of accounts payable, approximately $95,000 for preopening
costs, and an average of approximately $50,000 for leasehold improvements.
Approximately $375,000 is required for store fixtures and equipment, which are
also typically financed through leases.
Based upon the Company's current plan to open approximately 30 new
North American stores during the remaining 39 weeks of fiscal 2000,
approximately $11.9 million will be needed to finance these openings. The
Company may also expend additional funds to take advantage of opportunities that
arise from time to time for the acquisition of businesses or lease rights from
tenants occupying retail space that is suitable for a PETsMART superstore.
PETsMART completed its initial implementation of an integrated North
America information system, which features a common set of applications, during
second quarter 1999. The Company estimates that its total costs in connection
with the original and continued development and implementation of the system and
subsequent enhancements, before giving consideration to any lease financing that
may be available, will be approximately $70 million from the inception of the
project through the end of fiscal 2000.
Capital expenditures, net of construction allowances, were
approximately $8.4 million during the thirteen weeks ended April 30, 2000. Such
expenditures were used primarily for the opening of new superstores in North
America, the continued development and implementation of the Company's
information systems and the remodel and maintenance of the Company's existing
superstores.
15
<PAGE> 16
On April 13, 2000, the Company renewed its credit agreement with its
lenders. As a result, the capacity of the revolving credit agreement increased
to $70 million for working capital and $40 million for real estate commitments.
The Company may also obtain additional financing or debt outside of the
revolving credit agreement up to $40 million. Borrowings under the agreement
bear interest at the Company's option, of either Prime Rate plus 0.25% to 0.50%
or LIBOR plus 1.75% to 2.25%. The agreement expires on April 13, 2003. The
working capital line is secured by the inventory of the U.S. store operations.
The collateral is released if the Company can meet specific financial hurdles
for three consecutive quarters. The restrictive covenants remain the same as the
previous revolving credit agreement. The new agreement also allows the Company
$25 million annually to be used for the repurchase of common stock or
subordinated convertible notes.
Management believes that its existing cash and cash equivalents,
together with cash flow from operations, borrowing capacity under its bank
credit facility and available lease financing will provide adequate funds for
the Company's foreseeable working capital needs, planned capital expenditures
and debt service obligations. The Company's ability to fund its operations and
to make planned capital expenditures, scheduled debt payments, refinance
indebtedness, purchase outstanding equity and subordinated debt 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.
SEASONALITY AND INFLATION
The Company's business is subject to some seasonal fluctuation and it
typically realizes increased sales volume and a substantial portion of its
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
Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS 133" issued in June 1999 defers the effective date of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which was issued in June 1998. SFAS 133 establishes the accounting and reporting
standards for derivative instruments and hedging activities, requiring that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure them at fair value. It also provides
for matching of the timing of gain or loss recognition on the hedging instrument
with the recognition of (i) the changes in the fair value of the hedged asset or
liability related to the hedged risk or (ii) the hedged forecasted transaction
earnings effect. Adoption is required for fiscal years beginning after June 15,
2000. The Company will adopt SFAS 133 in the first quarter of fiscal 2001. The
Company has not yet analyzed the impact of adopting this statement.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to the risk of fluctuating interest rates in the
ordinary course of business on certain assets including cash and cash
equivalents, borrowings under its revolving credit arrangement and its
convertible subordinated notes. The Company does not expect changes in fair
value of the arrangements to have a significant effect on the Company's
operations, cash flow or financial position.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1996, Richard Northcott, the former chairman of Pet City,
became a member of the Company's Board of Directors in connection with the
Company's acquisition of Pet City. Certain former Pet City affiliates thereafter
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
concerning the Company's business, finances, and prospects. On September 30,
1997, shortly after the receipt of the allegations by the Company, Mr. Northcott
resigned as a director of the Company. No litigation has been filed with respect
to this matter, and the Company believes that the allegations which have been
made are without merit. Nevertheless, there can be no assurance that these
former affiliates will not initiate litigation seeking monetary damages or an
equitable remedy. An initial mediation meeting was held on May 3, 2000, and
mediation is currently ongoing.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the thirteen weeks ended April 30, 2000, the Company filed no
reports on Form 8-K.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on June 14, 2000.
PETSMART, INC.
(Registrant)
/s/ Neil T. Watanabe
----------------
Neil T. Watanabe
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
20
<PAGE> 21
Exhibit Index
(a) Exhibits
27 Financial Data Schedule
