<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:
JULY 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, 111,404,617 SHARES AT SEPTEMBER 6, 2000
1
<PAGE> 2
PETSMART, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets at July 30, 2000
and January 30, 2000 3
Consolidated Statements of Operations
for the thirteen and twenty-six weeks ended
July 30, 2000 and August 1, 1999 4
Consolidated Statements of Cash Flows
for the twenty-six weeks ended
July 30, 2000 and August 1, 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 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE> 3
PETSMART, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Unaudited
<TABLE>
<CAPTION>
JULY 30, JANUARY 30,
2000 2000
---- ----
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 41,039 $ 41,498
Receivables, net 57,707 68,760
Merchandise inventories 362,297 377,298
Prepaid expenses and other current assets 37,780 31,159
---------- ----------
Total current assets 498,823 518,715
Property and equipment, net 256,660 263,327
Investments (Note 2) 33,400 30,802
Other assets 14,822 15,766
Deferred income taxes 6,780 6,780
---------- ----------
Total assets $ 810,485 $ 835,390
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to bank $ 33,500 $ -
Accounts payable and bank overdraft 128,288 144,076
Accrued payroll and employee benefits 23,836 30,839
Accrued occupancy expense 17,493 13,214
Accrued merger, business integration and restructuring costs 6,934 10,410
Other accrued expenses 18,513 27,272
Current maturities of capital lease obligations 8,999 12,593
---------- ----------
Total current liabilities 237,563 238,404
Subordinated convertible notes (Note 6) 188,750 200,000
Capital lease obligations 58,461 63,951
Deferred rents and other liabilities 18,988 18,611
---------- ----------
Total liabilities 503,762 520,966
========== ==========
Stockholders' equity:
Preferred stock; $.0001 par value, 10,000 shares
authorized, none issued and outstanding - -
Common stock; $.0001 par value; 250,000 shares
authorized, 117,489 and 117,246 shares issued and outstanding 12 12
Additional paid-in capital 399,667 400,108
Deferred compensation (843) (1,903)
Accumulated deficit (58,533) (57,279)
Accumulated other comprehensive loss (2,428) (1,304)
Notes receivable from officers (Note 4) (3,574) -
Treasury stock, at cost, 6,350 and 5,550 shares (Note 3) (27,578) (25,210)
---------- ----------
Total stockholders' equity 306,723 314,424
---------- ----------
Total liabilities and stockholders' equity $ 810,485 $ 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 FOR THE 26 WEEKS ENDED
---------------------- ----------------------
JULY 30, AUGUST 1, JULY 30, AUGUST 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales (Note 5) $ 538,573 $ 564,537 $ 1,072,557 $ 1,128,649
Cost of sales 401,073 420,643 797,626 842,777
---------- ----------- ------------ ------------
Gross profit 137,500 143,894 274,931 285,872
Store operating expenses 103,848 114,118 211,790 224,503
Store preopening expenses 650 2,730 2,611 4,799
General and administrative expenses 19,673 15,713 36,845 33,736
---------- ----------- ------------ ------------
Operating income 13,329 11,333 23,685 22,834
Interest income 1,355 712 1,591 2,021
Interest expense (5,821) (5,906) (11,065) (11,858)
---------- ----------- ------------ ------------
Income before equity loss in
PETsMART.com, income tax expense
(benefit), extraordinary item, and
cumulative effect of a change in
accounting principle 8,863 6,139 14,211 12,997
Equity loss in PETsMART.com (Note 2) (15,419) (1,402) (21,226) (1,402)
---------- ----------- ------------ ------------
Income (loss) before income tax
expense (benefit), extraordinary item,
and cumulative effect of a change in
accounting principle (Note 5) (6,556) 4,737 (7,015) 11,595
Income tax expense (benefit) (3,544) 2,694 (3,747) 5,471
---------- ----------- ------------ ------------
Income (loss) before extraordinary
item and cumulative effect of a change
in accounting principle (3,012) 2,043 (3,268) 6,124
Extraordinary item, gain on early extinguishment
of debt, net of income tax expense (Note 6) 1,171 - 2,014 -
---------- ----------- ------------ ------------
Income (loss) before cumulative effect of
a change in accounting principle (1,841) 2,043 (1,254) 6,124
Cumulative effect of a change in accounting
principle, net of income tax benefit (Note 7) - - - (528)
---------- ----------- ------------ ------------
Net income (loss) (1,841) 2,043 (1,254) 5,596
---------- ----------- ------------ ------------
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments (Note 8) (374) (1,531) (1,124) (2,495)
---------- ----------- ------------ ------------
Comprehensive income (loss) $ (2,215) $ 512 $ (2,378) $ 3,101
========== =========== ============ ============
Earnings per common share - basic (Note 9):
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle $ (0.03) $ 0.02 $ (0.03) $ 0.05
Extraordinary item, net of income tax
expense 0.01 - 0.02 -
Cumulative effect of a change in
accounting principle, net of income
tax benefit - - - 0.00
---------- ----------- ------------ ------------
Net income (loss) $ (0.02) $ 0.02 $ (0.01) $ 0.05
========== =========== ============ ============
Earnings per common share - diluted (Note 9):
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle $ (0.03) $ 0.02 $ (0.03) $ 0.05
Extraordinary item, net of income tax
expense 0.01 - 0.02 -
Cumulative effect of a change in
accounting principle, net of income
tax benefit - - - 0.00
---------- ----------- ------------ ------------
Net income (loss) $ (0.02) $ 0.02 $ (0.01) $ 0.05
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
4
<PAGE> 5
PETSMART, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
FOR THE 26 WEEKS ENDED
----------------------
JULY 30, AUGUST 1,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (1,254) $ 5,596
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 21,794 22,741
Loss on disposal of property and equipment 197 250
Equity loss in PETsMART.com 21,226 1,402
Extraordinary gain on early extinguishment of debt (3,357) -
Tax benefit from exercise of stock options - 68
Changes in assets and liabilities:
Receivables, net 12,289 3,748
Merchandise inventories 15,001 (26,047)
Prepaid expenses and other current assets (6,621) (5,522)
Other assets (233) (290)
Accounts payable and bank overdraft (15,788) (24,438)
Accrued payroll and employee benefits (7,003) 2,944
Accrued occupancy expense 4,279 2,498
Accrued merger, business integration and restructuring costs (3,476) (7,386)
Other accrued expenses (8,759) 5,130
Deferred rents and other liabilities 377 341
----------- ---------
Net cash provided by (used in) operating activities 28,672 (18,965)
----------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of leaseholds, fixtures and equipment (16,031) (42,063)
Purchases of property held for sale and leaseback - (809)
Investment in cost holdings (2,598) (414)
Investment in equity holdings (21,226) (4,577)
Proceeds from sales of property and equipment 25 473
----------- ---------
Net cash used in investing activities (39,830) (47,390)
----------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 983 2,128
Notes receivable from officers (3,574) -
Purchase of treasury stock (2,368) (1,288)
Borrowings from bank credit facility 303,500 -
Repayment of bank credit facility (270,000) -
Retirement of subordinated convertible notes (7,634) -
Payments on capital lease obligations (9,084) (8,721)
----------- ---------
Net cash provided by (used in) financing activities 11,823 (7,881)
----------- ---------
FOREIGN CURRENCY TRANSLATION LOSSES (1,124) (2,495)
----------- ---------
DECREASE IN CASH AND
CASH EQUIVALENTS (459) (76,731)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 41,498 153,336
----------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 41,039 $ 76,605
=========== =========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
5
<PAGE> 6
PETSMART, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 30, 2000 AND AUGUST 1, 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 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 and twenty-six weeks ended July 30, 2000, and August
1, 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
that began operations in June 1999, and operates as an electronic commerce pet
product retailer. During the thirteen weeks ended July 30, 2000, the Company
contributed cash of approximately $15,419,000, in exchange for 3,211,991 shares
of additional preferred stock. During the twenty-six weeks ended July 30, 2000,
the Company contributed $21,226,000 for 1,361,027 shares of common stock and
3,511,991 shares of preferred stock. The preferred stock owned by the Company as
of July 30, 2000, is fully convertible to 22,488,076 shares of common stock at
the Company's option. The Company's equity investment represents 48.2% of the
outstanding common stock of PETsMART.com on a fully converted basis at July 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 Directors approved the purchase of an
aggregate of $25 million of its common stock or its subordinated convertible
notes, annually, for each of the next three fiscal years through 2002. The
Company's policy on the purchase of stock or subordinated debt is to make market
purchases when the price is advantageous and as cash flow allows, to maintain
appropriate liquidity. No purchases of the Company's common stock were made
during the thirteen weeks ended July 30, 2000, under this program. During the
twenty-six weeks ended July 30, 2000, approximately $2.3 million (before
commissions) had been used to purchase an aggregate of 800,000 shares of the
Company's common stock.
NOTE 4 - NOTES RECEIVABLE FROM OFFICERS:
During the thirteen weeks ended July 30, 2000, the Company provided loans to
certain officers totaling $3,574,000, to be used only for the purpose of
purchasing shares of the Company's common stock on the open market. These loans
mature five years after issuance and accrue interest at 7.75% per annum, with
principal and interest due at maturity. The officers are required to hold the
common stock for a minimum of 12 to 18 months. The loans are collateralized by
the Company's common stock purchased by the officers, are full recourse, and
must be repaid in full, including accrued interest, upon the earlier of the
scheduled maturity date or an event of default, including among others, the
officers' termination of employment.
6
<PAGE> 7
PETSMART, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 30, 2000 AND AUGUST 1, 1999
(UNAUDITED)
NOTE 5 - 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 U.K.
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 and twenty-six weeks ended August 1, 1999, the Company's U.K.
subsidiary recorded net sales of $48.9 million and $100.2 million, respectively,
and a loss before income taxes of $4.7 million and $9.4 million, respectively.
NOTE 6 - GAIN ON EARLY EXTINGUISHMENT OF DEBT:
During the thirteen and twenty-six weeks ended July 30, 2000, the Company
repurchased and retired at face value $7,250,000 and $11,250,000, respectively,
of the 6 3/4% Subordinated Convertible Notes (the "Notes") due 2004 (see Note 3)
at a discount. In connection with the repurchase of the Notes, the related
portion of the unamortized deferred financing costs of $167,000 and $259,000 for
the thirteen and twenty-six weeks ended July 30, 2000, respectively, was written
off and included in the determination of the extraordinary gain on early
extinguishment of debt. The Company recognized an extraordinary gain of
approximately $1,200,000, net of related income taxes of approximately $800,000,
and an extraordinary gain of approximately $2,000,000, net of taxes of
approximately $1,300,000, for the thirteen and twenty-six weeks ended July 30,
2000, respectively.
NOTE 7 - 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 8 - COMPREHENSIVE INCOME:
The income tax benefit related to the foreign currency translation adjustment
was approximately $249,000 and $1,368,000 for the thirteen weeks ended July 30,
2000, and August 1, 1999, respectively. For the twenty-six weeks ended July 30,
2000, and August 1, 1999, the income tax benefit related to the foreign currency
translation adjustment was approximately $749,000 and $2,229,000, respectively.
7
<PAGE> 8
PETSMART, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 30, 2000 AND AUGUST 1, 1999
(UNAUDITED)
NOTE 9 - EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income (loss) by the
weighted average of common shares outstanding during each period. Diluted
earnings per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period after giving
effect to dilutive stock options and 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 and twenty-six weeks ended July 30, 2000 and August 1, 1999 is as
follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------------------------------------
JULY 30, 2000 AUGUST 1, 1999
------------------------------------------ --------------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME (LOSS) SHARES AMOUNT INCOME (LOSS) SHARES AMOUNT
------------- ------ ------ ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item $ (3,012) 111,124 $ (0.03) $ 2,043 117,135 $ 0.02
Extraordinary item, gain on early
extinguishment of debt, net of
income tax expense 1,171 111,124 0.01 - 117,135 -
------------- ------- -------- ------------ ------- ---------
Net income (loss) per common
share - basic (1,841) 111,124 (0.02) 2,043 117,135 0.02
Effect of dilutive securities:
Options - - - - 1,348 -
------------- ------- -------- ------------ ------- ---------
Net income (loss) per common
share - diluted $ (1,841) 111,124 $ (0.02) $ 2,043 118,483 $ 0.02
============= ======= ========= ============= ======= =========
</TABLE>
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------
JULY 30, 2000 AUGUST 1, 1999
------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME (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 $ (3,268) 111,315 $(0.03) $ 6,124 116,995 $ 0.05
Extraordinary item, gain on early
extinguishment of debt, net of
income tax expense 2,014 111,315 0.02 - 116,995 -
Cumulative effect of a change in
accounting principle, net of income
tax benefit - 111,315 - (528) 116,995 (0.00)
---------- ------- ------ ------- ------- ---------
Net income (loss) per common
share - basic (1,254) 111,315 (0.01) 5,596 116,995 0.05
Effect of dilutive securities:
Options - - - - 1,159 -
---------- ------- ------ ------- ------- --------
Net income (loss) per common
share - diluted $ (1,254) 111,315 (0.01) $ 5,596 118,154 $ 0.05
========== ======= ====== ======= ======= ========
</TABLE>
8
<PAGE> 9
PETSMART, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 30, 2000 AND AUGUST 1, 1999
(UNAUDITED)
At July 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 21.6 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 and twenty-six weeks
ended July 30, 2000 or August 1, 1999, due to the anti-dilutive effect they
would have on earnings per share if converted.
NOTE 10 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which was amended by SFAS No. 137 and SFAS
No. 138, and is effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This standard requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company has
not yet performed an analysis to determine the impact of adopting this standard
and is, therefore, unable to disclose the impact that adopting the standard will
have on its financial position and results of operations when such statement is
adopted.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provides the Staff's view in
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101, as amended, is required to be implemented during
the fourth quarter of the Company's fiscal year ending January 2001. The Company
is analyzing the impact, if any, SAB 101 may have on its financial statements.
NOTE 11 - 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 U.K., including the
warehousing and corporate functions specific to the U.K. operations, and was
disposed of during the fourth quarter of 1999 (see Note 5). This segmentation is
consistent with the format reviewed by the Company's management.
9
<PAGE> 10
PETSMART, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 30, 2000 AND AUGUST 1, 1999
(UNAUDITED)
Operating results and other financial data by business segment for the thirteen
and twenty-six weeks ended July 30, 2000, and August 1, 1999, were as follows
(in thousands):
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 26 WEEKS ENDED
---------------------- ----------------------
JULY 30, AUGUST 1, JULY 30, AUGUST 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
PETsMART North America $ 515,702 $ 490,197 $ 1,026,763 $ 976,969
PETsMART U.K. - 48,942 - 100,174
PETsMART DIRECT - External customers 22,871 25,398 45,794 51,506
PETsMART DIRECT - Intersegment 6,324 4,975 11,995 8,867
Eliminations (6,324) (4,975) (11,995) (8,867)
---------- ---------- ------------ -----------
Total net sales $ 538,573 $ 564,537 $ 1,072,557 $ 1,128,649
========== ========== ============ ===========
Operating income (loss):
PETsMART North America $ 12,705 $ 15,514 $ 23,146 $ 30,568
PETsMART U.K. - (4,369) - (8,788)
PETsMART DIRECT 624 188 539 1,054
---------- ---------- ------------- -----------
Operating income 13,329 11,333 23,685 22,834
Interest income 1,355 712 1,591 2,021
Interest expense (5,821) (5,906) (11,065) (11,858)
---------- ---------- ------------- -----------
Income before equity loss in
PETsMART.com, income tax expense
(benefit), extraordinary item, and
cumulative effect of a change in
accounting principle $ 8,863 $ 6,139 $ 14,211 $ 12,997
========== ========== ============ ===========
</TABLE>
Total assets by business segment as of July 30, 2000, and January 30, 2000, were
as follows (in thousands):
<TABLE>
<CAPTION>
JULY 30, JANUARY 30,
2000 2000
---- ----
<S> <C> <C>
PETsMART North America $ 748,249 $ 774,807
PETsMART Direct 62,236 60,583
---------- ----------
Total assets $ 810,485 $ 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 July 30, 2000, the Company operated 525
superstores, consisting of 505 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, including but not limited to pet grooming, pet training and in many
stores, veterinarian services. PETsMART's stores utilize a format that offers a
wide product assortment to the customer at a good value, gives customers product
and service solutions, and provides a fun, pet-caring 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 $50 million in PETsMART.com, an
e-commerce business, since PETsMART.com's inception in the second quarter of
1999, through July 30, 2000. PETsMART.com is a leading 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 stores and the improved
performance of existing locations. In view of the increasing maturity of its
store base (an average age of 4.3 years as of July 30, 2000), as well as the
planned opening of additional stores 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 store openings,
and related preopening expenses, and the amount of revenue contributed by new
and existing stores may cause the Company's quarterly results of operations to
fluctuate. In addition, because new stores have higher payroll, advertising and
other store level expenses as a percentage of sales than do mature stores, the
impact of new store openings will also contribute to lower store operating
margins until they become established. The Company charges preopening costs
associated with each new location to earnings as the costs are incurred.
Therefore, the Company expects that the opening of a large number of new stores
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 U.K. 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 Iams
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, estimated to be approximately $11 million during the
thirteen weeks ended July 30, 2000 as compared to the thirteen weeks ended
August 1, 1999. The long-term impact of this development is yet to be
determined, and the Company could continue to 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, as adjusted
for the sale of the U.K. subsidiary:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 1, 1999 AUGUST 1, 1999
JULY 30, -------------------------- JULY 30, -------------------------
2000 HISTORICAL ADJUSTED (1) 2000 HISTORICAL ADJUSTED (1)
---- ---------- ------------ ---- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 74.5 74.5 73.7 74.4 74.7 73.8
----- ----- ----- ----- ----- -----
Gross profit 25.5 25.5 26.3 25.6 25.3 26.2
Store operating expenses 19.3 20.2 20.2 19.7 19.9 19.9
Store preopening expenses 0.1 0.5 0.5 0.2 0.4 0.4
General and administrative expenses 3.6 2.8 2.6 3.4 3.0 2.9
Loss on disposal of subsidiary - - 0.9 - - 0.9
----- ----- ----- ----- ----- -----
Operating income 2.5 2.0 2.1 2.3 2.0 2.1
Interest income 0.3 0.1 0.1 0.1 0.2 0.2
Interest expense 1.1 1.0 1.1 1.0 1.1 1.1
----- ----- ----- ----- ----- -----
Income before equity loss in PETsMART.com,
income tax expense (benefit),
extraordinary item, and cumulative
effect of a change in accounting principle 1.7 1.1 1.1 1.4 1.1 1.2
Equity loss in PETsMART.com (2.9) (0.2) (0.2) (2.0) (0.1) (0.1)
----- ----- ----- ----- ----- -----
Income (loss) before income tax expense
(benefit), extraordinary item, and
cumulative effect of a change in
accounting principle (1.2) 0.9 0.9 (0.6) 1.0 1.1
Income tax expense (benefit) (0.7) 0.5 0.5 (0.3) 0.5 0.5
----- ----- ----- ----- ----- -----
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle (0.5) 0.4 0.4 (0.3) 0.5 0.6
Extraordinary item, gain on early
extinguishment of debt, net of
income tax expense 0.2 - - 0.2 - -
----- ----- ----- ----- ----- -----
Income (loss) before cumulative effect
of a change in accounting principle (0.3) 0.4 0.4 (0.1) 0.5 0.6
Cumulative effect of a change in
accounting principle, net of
income tax benefit - - - - - (0.1)
----- ----- ----- ----- ----- -----
Net income (loss) (0.3)% 0.4% 0.4% (0.1)% 0.5% 0.5%
===== ===== ===== ===== ===== =====
</TABLE>
(1) The Company's U.K. subsidiary was sold to an unrelated third party on
December 15, 1999. As of the date of this transaction, the U.K. 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 and twenty-six weeks
ended August 1, 1999, have been presented on a comparable basis reflecting this
reclassification.
SECOND QUARTER FISCAL 2000 COMPARED TO SECOND QUARTER FISCAL 1999
The following discussion of results of operations for second quarter
2000 and second quarter 1999 reflects the reclassification of the Company's U.K.
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 second quarter 2000.
Net sales increased 4.5% to approximately $538.6 million for the
thirteen weeks ended July 30, 2000, from $515.6 million for the thirteen weeks
ended August 1, 1999. The 2000 results exclude sales from the United States
veterinary clinics, as the clinics were sold to Medical Management
International, Inc. ("MMI"), effective July 1999. On a comparable basis
excluding the veterinary sales from second quarter 1999, net sales increased
6.9% from approximately $503.7 million in second quarter 1999. Comparable North
American store sales increased 1.2% for the quarter. During second quarter 2000,
the Company opened 18 new superstores and relocated one store in North America.
The Company operated 525 superstores at July 30, 2000 compared to 476
superstores open at August 1, 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 25.5% for second quarter 2000, from 26.3% in second quarter 1999. This
result primarily reflected a planned inventory reduction that included the
sell-off of discontinued and slow-moving items at a discount and higher than
expected services payroll. Additionally, the decrease in gross profit as a
percentage of net sales was reflective of higher inventory shrinkage in the
second quarter of 2000, as compared to the same period in 1999.
Store operating expenses, which include payroll and benefits,
advertising and other store level expenses, decreased as a percentage of net
sales to 19.3% for second quarter 2000, from 20.2% for second quarter 1999. This
decrease reflected lower advertising expenditures during the second quarter of
2000, as compared to the same period in 1999, net of 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 0.1% for
second quarter 2000, compared to 0.5% for second quarter 1999. For the stores
that opened during the second 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, 19 stores were
opened during second quarter 2000.
General and administrative expenses as a percentage of net sales
increased to 3.6% for second quarter 2000, from 2.6% for second 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 second quarter of 1999, represents the net loss from operations before
income taxes, of the Company's U.K. subsidiary that was subsequently sold to an
unrelated third party in December 1999.
The Company's operating income increased to $13.3 million for second
quarter 2000, from $11.0 million for second quarter 1999. Operating income as a
percentage of net sales increased to 2.5% for second quarter 2000, from 2.1% for
second quarter 1999. This increase was primarily due to the impact of the $4.7
million loss that the U.K. subsidiary generated during the second quarter of
1999, partially offset by increases in general and administrative expenses in
second quarter 2000 as compared to the same period last year.
Interest income increased to $1.4 million for second quarter 2000 from
$0.7 million for second quarter 1999, principally due to interest earned from
certain receivables during the second quarter of 2000. Interest expense
decreased slightly to $5.8 million for the second quarter 2000, from $5.9
million for second quarter 1999.
The equity loss in PETsMART.com, in which the Company has a 48.2%
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 losses for the thirteen weeks ended July 30, 2000 was approximately
$15.4 million, as compared to $1.4 million during the second quarter of 1999.
For second quarter 2000, the $3.5 million income tax benefit represents
an effective rate of 54.1%. The Company's effective tax rate differs from the
expected U.S. federal rate due principally to the non-deductibility of the
losses from the Company's equity investment in PETsMART.com and other permanent
differences. Excluding the effects of the non-deductible equity losses, the
Company's annual effective tax rate for second quarter 2000 becomes 40.3%,
compared to 43.5% for second quarter 1999. The decrease in the effective tax
rate is principally due to the change in the mix of foreign taxable income and
other tax rate adjustments.
As a result of the foregoing, the Company reported a loss before
extraordinary item of $3.0 million (or $0.03 per share - diluted) for second
quarter 2000, compared to income before extraordinary item of $2.0 million (or
$0.02 per share - diluted) for second quarter 1999.
During the second quarter of fiscal 2000, the Company repurchased and
retired at face value $7.25 million of its 6 3/4% Subordinated Convertible Notes
due 2004 at a discount from par. The Company recognized an extraordinary gain in
the second quarter of fiscal 2000 of approximately $1.2 million, net of
unamortized deferred financing costs of $0.2 million and net of related income
taxes of approximately $0.8 million, related to the early extinguishment of this
debt.
13
<PAGE> 14
The following table summarizes the earnings per share impact of the
Company's interest in the electronic commerce corporate joint venture
(PETsMART.com) and the U.K. subsidiary:
<TABLE>
<CAPTION>
Thirteen weeks ended
--------------------
July 30, 2000 August 1, 1999
------------- --------------
<S> <C> <C>
North America stores and Direct $ 0.05 $ 0.06
PETsMART.com (0.08) (0.01)
U.K. subsidiary - (0.03)
-------- -------
Income (loss) before extraordinary item (0.03) 0.02
Extraordinary gain on early extinguishment
of debt, net of tax 0.01 -
-------- -------
Total earnings (loss) per share - diluted $ (0.02) $ 0.02
======== ========
</TABLE>
TWENTY-SIX WEEKS ENDED JULY 30, 2000 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
1, 1999
The following discussion of results of operations for the twenty-six
weeks ended July 30, 2000, and the twenty-six weeks ended August 1, 1999,
reflects the reclassification of the Company's U.K. 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
the 2000 period.
Net sales increased 4.3% to approximately $1.1 billion for the
twenty-six weeks ended July 30, 2000, from $1.0 billion for the twenty-six weeks
ended August 1, 1999. The 2000 results exclude sales from the United States
veterinary clinics as the clinics were sold to MMI effective July 1999. On a
comparable basis excluding the veterinary sales from the twenty-six weeks ended
August 1, 1999, net sales increased 7.1% during the same period in 2000.
Comparable North American store sales increased 1.5% for the twenty-six week
period ended July 30, 2000, and the Company opened 42 new superstores, relocated
two stores, and closed one store in North America during the period. The Company
operated 525 superstores at July 30, 2000, compared to 476 superstores open at
August 1, 1999.
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 25.6% for the twenty-six weeks ended July 30, 2000, from 26.2% in the
same period in 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 a planned inventory reduction that included the sell-off of
discontinued and slow-moving items at a discount, increased store occupancy
costs, and increased grooming payroll costs in the first half of fiscal 2000, as
compared to the same period in 1999.
Store operating expenses, which includes payroll and benefits,
advertising and other store level expenses, decreased slightly as a percentage
of net sales to 19.7% for the twenty-six weeks ended July 30, 2000, from 19.9%
for the same period in 1999. This decrease reflected lower advertising
expenditures during the period, partially offset by 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.
14
<PAGE> 15
Store preopening expenses as a percentage of net sales was 0.2% for the
twenty-six weeks ended July 30, 2000, compared to 0.4% for the same period in
1999. For the stores that opened during the first half of fiscal 2000, the
average preopening expense incurred was approximately $95,000 per store, which
is consistent with the Company's prior experience. Including two replacement
stores, 44 stores were opened during the twenty-six weeks ended July 30, 2000.
General and administrative expenses as a percentage of net sales
increased to 3.4% for the twenty-six weeks ended July 30, 2000, from 2.9% for
the same period in 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 $9.4 million during
the twenty-six weeks ended August 1, 1999, represents the net loss from
operations before income taxes, of the Company's U.K. subsidiary that was sold
subsequently to an unrelated third party in December 1999.
The Company's operating income increased slightly to $23.7 million for
the twenty-six weeks ended July 30, 2000, from $22.2 million for the same period
in 1999. Operating income as a percentage of net sales increased to 2.3% for the
twenty-six weeks ended July 30, 2000, from 2.1% for the same period in 1999.
Interest income decreased to $1.6 million for the twenty-six weeks
ended July 30, 2000, from $2.0 million for the same period in 1999, principally
due to the decrease in average cash balances available for short-term
investment. Interest expense decreased slightly to $11.1 million for the
twenty-six weeks ended July 30, 2000, from $11.3 million for the same period in
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 48.2%
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 losses for the twenty-six weeks ended July 30, 2000, was
approximately $21.2 million, as compared to $1.4 million during the same period
in 1999.
For the twenty-six weeks ended July 30, 2000, the $3.7 million income
tax benefit represents an effective rate of 53.4%. The Company's effective tax
rate differs from the expected U.S. federal rate due principally to the
non-deductibility of the losses from the Company's equity investment in
PETsMART.com and other permanent differences. Excluding the effects of the
non-deductible equity losses, the Company's annual effective tax rate for the
first half of fiscal 2000 becomes 40.3%, compared to 43.5% for the same period
in 1999. The decrease in the effective tax rate is principally due to the change
in the mix of foreign taxable income and other tax rate adjustments.
As a result of the foregoing, the Company reported a loss before
extraordinary item and cumulative effect of a change in accounting principle of
$3.3 million (or $0.03 per share - diluted) for the twenty-six weeks ended July
30, 2000, compared to income before extraordinary item and cumulative effect of
a change in accounting principle of $6.1 million (or $0.05 per share - diluted)
for the twenty-six weeks ended August 1, 1999.
During the first half of fiscal 2000, the Company repurchased and
retired at face value $11.25 million of its 6 3/4% Subordinated Convertible
Notes due 2004 at a discount from par. The Company recognized an extraordinary
gain during the twenty-six weeks ended July 30, 2000 of approximately $2.0
million, net of unamortized deferred financing costs of $0.3 million and net of
related income taxes of approximately $1.3 million, related to the early
extinguishment of this debt.
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.
15
<PAGE> 16
The following table summarizes the earnings per share impact of the
Company's interest in the electronic commerce corporate joint venture
(PETsMART.com) and the U.K. subsidiary:
<TABLE>
<CAPTION>
Twenty-six weeks ended
----------------------
July 30, 2000 August 1, 1999
------------- --------------
<S> <C> <C>
North America stores and Direct $ 0.08 $ 0.11
PETsMART.com (0.11) (0.01)
U.K. subsidiary - (0.05)
-------- --------
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle (0.03) 0.05
Extraordinary gain on early extinguishment
of debt, net of tax 0.02 -
Cumulative effect of a change in accounting
principle, net of tax - 0.00
-------- --------
Total earnings (loss) per share - diluted $ (0.01) $ 0.05
======== ========
</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 purchase 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. No purchases
were made during the thirteen weeks ended July 30, 2000.
On April 13, 2000, the Company's Board of Directors 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 purchase 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.
The Company consummated a sale of its U.K. 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 July 30, 2000, total assets were $810.5 million, of which $498.8
million were current assets. Cash and cash equivalents were $41.0 million.
16
<PAGE> 17
Cash provided by operations was $28.7 million for the twenty-six weeks
ended July 30, 2000, compared to cash used in operations of $19.0 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 35.4% at July
30, 2000, compared to 38.2% at January 30, 2000. Inventory balances were
approximately $362.3 million at July 30, 2000, and $377.3 million at January 30,
2000. Average North American store inventory, which excludes the inventory of
PETsMART DIRECT, decreased 11.4% to approximately $643,000 per store at July 30,
2000, from approximately $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 possible 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
$39.8 million for the twenty-six weeks ended July 30, 2000, compared to $47.4
million used for the twenty-six weeks ended August 1, 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 previous 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 $350,000
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. Capital expenditures, net of
construction allowances, were approximately $16.0 million during the twenty-six
weeks ended July 30, 2000. Such expenditures were used primarily for the opening
of new stores in North America, the continued development and implementation of
the Company's information systems and the remodel and maintenance of the
Company's existing stores.
Based upon the Company's current plan to open approximately 11 new
North American stores during the remaining 26 weeks of fiscal 2000,
approximately $5.4 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. As of July 30, 2000, substantially all
of the costs associated with the implementation and enhancement of the
information system had been incurred.
17
<PAGE> 18
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, at either the 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 purchase of the Company's common stock
or subordinated convertible notes.
Management believes that its existing cash and cash equivalents,
together with cash flows 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 fluctuations 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
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which was amended by SFAS No.
137 and SFAS No. 138, and is effective for fiscal years beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This standard requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company has
not yet performed an analysis to determine the impact of adopting this standard
and is, therefore, unable to disclose the impact that adopting the standard will
have on its financial position and results of operations when such statement is
adopted.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provides the Staff's view in
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101, as amended, is required to be implemented during
the fourth quarter of the Company's fiscal year ending January 2001. The Company
is analyzing the impact, if any, SAB 101 may have on its financial statements.
18
<PAGE> 19
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. See disclosures under Item 7a,
"Quantitative and Qualitative Disclosures About Market Risks" in the Company's
annual report on Form 10-K for the year ended January 30, 2000. No significant
changes have occurred during the twenty-six weeks ended July 30, 2000 in
relation to the interest rate risk.
19
<PAGE> 20
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 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 the allegations that 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on June 22, 2000. At the Annual Meeting, the stockholders of the Company
(i) elected each of the persons below to serve as a director of the Company
until the specific Annual Meeting of Stockholders listed below or until his or
her successor is elected; and (ii) ratified the selection of Deloitte & Touche
LLP as the Company's Independent Accountants for the fiscal year ending January
28, 2001.
The Company had 111,951,905 shares of Common Stock outstanding as of
May 1, 2000, the record date for the Annual Meeting. At the Annual Meeting,
holders of a total of 99,370,306 shares of Common Stock were present in person
or represented by Proxy. The following sets forth information regarding the
results of the voting at the Annual Meeting:
PROPOSAL 1 - ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
Director To Serve Through
-------- ----------------
<S> <C>
Jane Evans 2003 Annual Meeting
Walter J. Salmon 2003 Annual Meeting
Thierry Defforey 2003 Annual Meeting
</TABLE>
<TABLE>
<CAPTION>
Votes in Favor Votes Against
<S> <C> <C>
Jane Evans 96,556,570 2,813,736
Walter J. Salmon 96,582,465 2,787,841
Thierry Defforey 96,597,159 2,773,147
</TABLE>
PROPOSAL 2 - RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
<TABLE>
<S> <C>
Votes in Favor 98,745,999
Votes Against 406,533
Abstentions 217,774
</TABLE>
20
<PAGE> 21
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 July 30, 2000, the Company filed no
reports on Form 8-K.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on September 12, 2000.
PETSMART, INC.
(Registrant)
/s/ Neil T. Watanabe
----------------
Neil T. Watanabe
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE> 23
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
Ex - 27 Financial Data Schedule
</TABLE>
