<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:
OCTOBER 29, 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, 111,409,347 SHARES AT DECEMBER 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 October 29, 2000 and
January 30, 2000 3
Consolidated Statements of Operations for the thirteen
and thirty-nine weeks ended October 29, 2000 and
October 31, 1999 4
Consolidated Statements of Cash Flows for the thirty-nine
weeks ended October 29, 2000 and October 31, 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 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)
<TABLE>
<CAPTION>
(Unaudited)
OCTOBER 29, JANUARY 30,
2000 2000
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 40,082 $ 41,498
Receivables, net (Note 2) 55,881 68,760
Merchandise inventories 366,072 377,298
Prepaid expenses and other current assets 33,704 31,159
----------- -----------
Total current assets 495,739 518,715
Property and equipment, net 266,268 263,327
Investments (Note 2) 28,642 30,802
Other assets 14,864 15,766
Deferred income taxes 6,780 6,780
----------- -----------
Total assets $ 812,293 $ 835,390
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to bank $ 34,000 $ -
Accounts payable and bank overdraft 131,197 144,076
Accrued payroll and employee benefits 21,643 30,839
Accrued occupancy expense 19,430 13,214
Accrued merger, business integration and restructuring costs 5,699 10,410
Current maturities of capital lease obligations 9,205 12,593
Other accrued expenses 29,227 27,272
----------- -----------
Total current liabilities 250,401 238,404
Subordinated convertible notes (Note 6) 181,250 200,000
Capital lease obligations 56,330 63,951
Deferred rents and other liabilities 19,529 18,611
----------- -----------
Total liabilities 507,510 520,966
----------- -----------
Stockholders' equity:
Preferred stock; $.0001 par value, 10,000 shares
authorized, none issued and outstanding - -
Common stock; $.0001 par value; 250,000 shares
authorized, 117,756 and 117,246 shares issued and outstanding 12 12
Additional paid-in capital 400,498 400,108
Deferred compensation (765) (1,903)
Accumulated deficit (60,949) (57,279)
Accumulated other comprehensive loss (2,808) (1,304)
Notes receivable from officers (Note 4) (3,627) -
Treasury stock, at cost, 6,350 and 5,550 shares (Note 3) (27,578) (25,210)
----------- -----------
Total stockholders' equity 304,783 314,424
---------- -----------
Total liabilities and stockholders' equity $ 812,293 $ 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 39 WEEKS ENDED
------------------------- -----------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2000 1999 2000 1999
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales (Note 5) $ 541,316 $ 511,836 $ 1,613,873 $ 1,540,311
Cost of sales (Note 5) 407,717 379,867 1,205,343 1,138,551
----------- ----------- ------------- -------------
Gross profit 133,599 131,969 408,530 401,760
Store operating expenses (Note 5) 110,551 102,365 322,341 306,731
Store preopening expenses 640 381 3,251 4,800
General and administrative expenses (Note 5) 18,090 12,988 54,347 41,850
Loss on disposal of subsidiary (Note 5) - 34,221 - 43,607
----------- ----------- ------------- -------------
Operating income (loss) 4,318 (17,986) 28,591 4,772
Interest income 1,015 503 2,606 2,524
Interest expense (5,843) (6,361) (17,496) (18,143)
----------- ----------- ------------- -------------
Income (loss) before equity loss in PETsMART.com,
income tax expense (benefit), extraordinary item,
and cumulative effect of a change in accounting
principle (510) (23,844) 13,701 (10,847)
Equity loss in PETsMART.com (Note 2) (5,945) (9,880) (27,171) (11,282)
----------- ----------- ------------- -------------
Loss before income tax expense (benefit),
extraordinary item, and cumulative effect of a
change in accounting principle (Note 5) (6,455) (33,724) (13,470) (22,129)
Income tax expense (benefit) (3,241) (495) (6,988) 4,976
----------- ----------- ------------- -------------
Loss before extraordinary item and cumulative
effect of a change in accounting principle (3,214) (33,229) (6,482) (27,105)
Extraordinary item, gain on early extinguishment of debt, net
of income tax expense (Note 6) 798 - 2,812 -
----------- ----------- ------------- -------------
Loss before cumulative effect of a change in
accounting principle (2,416) (33,229) (3,670) (27,105)
Cumulative effect of a change in accounting principle, net of
income tax benefit (Note 7) - - - (528)
----------- ----------- ------------- -------------
Net loss (2,416) (33,229) (3,670) (27,633)
----------- ----------- ------------- -------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (Note 8) (380) 731 (1,504) (1,764)
----------- ----------- ------------- -------------
Comprehensive loss $ (2,796) $ (32,498) $ (5,174) $ (29,397)
=========== =========== ============= =============
Earnings per common share - basic (Note 9):
Loss before extraordinary item and cumulative
effect of a change in accounting principle $ (0.03) $ (0.29) $ (0.06) $ (0.23)
Extraordinary item, net of income tax expense 0.01 - 0.03 -
Cumulative effect of a change in accounting principle,
net of income tax benefit - - - (0.01)
----------- ----------- ------------- -------------
Net loss $ (0.02) $ ( 0.29) $ (0.03) $ ( 0.24)
=========== ============ ============= =============
Earnings per common share - diluted (Note 9):
Loss before extraordinary item and cumulative
effect of a change in accounting principle $ (0.03) $ (0.29) $ (0.06) $ (0.23)
Extraordinary item, net of income tax expense 0.01 - 0.03 -
Cumulative effect of a change in accounting principle,
net of income tax benefit - - - (0.01)
----------- ----------- ------------- -------------
Net loss $ (0.02) $ (0.29) $ (0.03) $ (0.24)
=========== =========== ============= =============
</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 39 WEEKS ENDED
------------------------------
OCTOBER 29, OCTOBER 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (3,670) $ (27,633)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 32,250 35,114
Loss on disposal of property and equipment 170 2,267
Loss on disposal of subsidiary - 29,000
Equity loss in PETsMART.com 27,171 11,282
Extraordinary gain on early extinguishment of debt (4,688) -
Tax benefit from exercise of stock options - 68
Changes in assets and liabilities:
Receivables, net 9,228 (13,008)
Merchandise inventories 11,226 (86,480)
Prepaid expenses and other current assets (2,545) (4,786)
Other assets (862) (1,006)
Accounts payable and bank overdraft (12,879) 59,153
Accrued payroll and employee benefits (9,196) 6,101
Accrued occupancy expense 6,216 (600)
Accrued merger, business integration and restructuring costs (4,711) (8,694)
Other accrued expenses 1,955 (2,867)
Deferred rents and other liabilities 918 880
----------- -----------
Net cash provided by (used in) operating activities 50,583 (1,209)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of leaseholds, fixtures and equipment (30,689) (65,413)
Purchases of property held for sale and leaseback - (977)
Investment in cost holdings (3,677) (486)
Investment in equity holdings (21,334) (29,585)
Proceeds from sales of property and equipment 25 473
----------- -----------
Net cash used in investing activities (55,675) (95,988)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,814 3,271
Notes receivable from officers (3,627) -
Purchase of treasury stock (2,368) (25,210)
Borrowings from bank credit facility 366,500 23,000
Repayment of bank credit facility (332,500) (6,000)
Retirement of subordinated convertible notes (13,630) -
Payments on capital lease obligations (11,009) (10,812)
----------- -----------
Net cash provided by (used in) financing activities 5,180 (15,751)
----------- -----------
FOREIGN CURRENCY TRANSLATION LOSSES (1,504) (1,764)
----------- -----------
DECREASE IN CASH AND
CASH EQUIVALENTS (1,416) (114,712)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 41,498 153,336
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 40,082 $ 38,624
=========== ===========
</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 THIRTY-NINE WEEKS ENDED OCTOBER 29, 2000 AND OCTOBER 31, 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 thirty-nine weeks ended October 29,
2000, and October 31, 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, Inc.
("PETsMART.com"), a corporate joint venture that began operations in
June 1999, and operates as an electronic commerce pet product retailer.
During the thirty-nine weeks ended October 29, 2000, the Company
contributed $21,226,000 for 1,361,027 shares of common stock and
3,211,991 shares of preferred stock. The preferred stock owned by the
Company as of October 29, 2000, is fully convertible to 22,488,076
shares of common stock at the Company's option. The Company's equity
investment represents 46.3% of the outstanding common stock of
PETsMART.com on a fully converted basis at October 29, 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. As a result of the recent approval by the
Board of Directors for both the Company and PETsMART.com to allow the
Company to acquire a controlling interest in PETsMART.com, losses
generated by PETsMART.com in excess of the Company's investment have
been recognized during the thirteen week period ended October 29, 2000
(See Note 12). As of October 29, 2000, the investment in PETsMART.com
balance was ($5,945,000). At October 29, 2000 there was approximately
$16.7 million due from PETsMART.com, related to fulfillment of product,
which is included in Receivables in the Company's accompanying
consolidated balance sheets.
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 under
this program during the thirteen weeks ended October 29, 2000. During
the thirty-nine weeks ended October 29, 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 thirty-nine weeks ended October 29, 2000, the Company
provided loans to certain officers totaling $3,627,000, 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 THIRTY-NINE WEEKS ENDED OCTOBER 29, 2000 AND OCTOBER 31, 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.
In connection with the Transaction, the Company recorded a net loss of
$29 million including a write-down of the net assets of $26 million and
transaction fees of approximately $3 million. Additionally, the Company
reflected the subsidiary's results of operations, excluding the related
tax effects, for the thirteen week and the thirty-nine week period
ended October 31, 1999 in loss on disposal of subsidiary in the
accompanying consolidated statements of operations.
NOTE 6 - GAIN ON EARLY EXTINGUISHMENT OF DEBT:
----------------------------------------------
During the thirteen and thirty-nine weeks ended October 29, 2000, the
Company repurchased and retired at face value $7,500,000 and
$18,750,000, 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 $173,000 and $432,000 for the
thirteen and thirty-nine weeks ended October 29, 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 $800,000, net of related income
taxes of approximately $500,000, and an extraordinary gain of
approximately $2,800,000, net of related income taxes of approximately
$1,900,000, for the thirteen and thirty-nine weeks ended October 29,
2000, respectively.
NOTE 7 - CHANGE IN ACCOUNTING PRINCIPLE:
----------------------------------------
In April 1998, the American Institute of Certified Public Accountants
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 expense (benefit) related to the foreign currency
translation adjustment was approximately $(253,000) and $574,000 for
the thirteen weeks ended October 29, 2000, and October 31, 1999,
respectively. For the thirty-nine weeks ended October 29, 2000, and
October 31, 1999, the income tax benefit related to the foreign
currency translation adjustment was approximately $(1,003,000) and
$(1,386,000), respectively.
7
<PAGE> 8
PETSMART, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 29, 2000 AND OCTOBER 31, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 9 - EARNINGS PER SHARE:
----------------------------
Basic earnings per share is computed by dividing net income or loss by
the weighted average of common shares outstanding during each period.
Diluted earnings per share is computed by dividing net income or 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 thirty-nine weeks ended October 29,
2000 and October 31, 1999 is as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------
OCTOBER 29, 2000 OCTOBER 31, 1999
------------------------------------- ------------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME (LOSS) SHARES AMOUNT INCOME (LOSS) SHARES AMOUNT
------------- -------- --------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loss before extraordinary item $ (3,214) 111,273 $ (0.03) $ (33,229) 114,599 $ (0.29)
Extraordinary item, gain on early
extinguishment of debt, net of
income tax expense 798 111,273 0.01 - 114,599 -
----------- -------- ---------- ----------- -------- --------
Net loss per common
share - basic (2,416) 111,273 (0.02) (33,229) 114,599 (0.29)
Effect of dilutive securities:
Options - - - - - -
----------- -------- --------- ----------- -------- --------
Net loss per common
share - diluted $ (2,416) 111,273 $ (0.02) $ (33,229) 114,599 $ (0.29)
=========== ======== ========= =========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------
OCTOBER 29, 2000 OCTOBER 31, 1999
------------------------------------- ------------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME (LOSS) SHARES AMOUNT INCOME (LOSS) SHARES AMOUNT
------------- -------- --------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loss before extraordinary
item and cumulative effect of a
change in accounting principle $ (6,482) 111,338 $ (0.06) $ (27,105) 115,701 $ (0.23)
Extraordinary item, gain on early
extinguishment of debt, net of
income tax expense 2,812 111,338 0.03 - 115,701 -
Cumulative effect of a change in
accounting principle, net of
income tax benefit - 111,338 - (528) 115,701 (0.01)
----------- -------- ---------- ----------- -------- --------
Net loss per common
share - basic (3,670) 111,338 (0.03) (27,633) 115,701 (0.24)
Effect of dilutive securities:
Options - - - - - -
----------- -------- ---------- ----------- -------- --------
Net loss per common
share - diluted $ (3,670) 111,338 $ (0.03) $ (27,633) 115,701 $ (0.24)
=========== ======== ========== =========== ======== ========
</TABLE>
8
<PAGE> 9
PETSMART, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 29, 2000 AND OCTOBER 31, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
At October 29, 2000, no shares of common stock had been issued upon
conversion of the Company's 6-3/4% Subordinated Convertible Notes due
2004 issued in November 1997. The Notes are convertible into an
aggregate of approximately 20.7 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
thirty-nine weeks ended October 29, 2000 or October 31, 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 issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), 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 is performing 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 has determined that the impact of SAB
101 is not material to the 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. 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 THIRTY-NINE WEEKS ENDED OCTOBER 29, 2000 AND OCTOBER 31, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
Operating results and other financial data by business segment for the
thirteen and thirty-nine weeks ended October 29, 2000, and October 31,
1999, were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 39 WEEKS ENDED
---------------------------- ----------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales:
PETsMART North America $ 519,623 $ 485,949 $ 1,546,386 $ 1,462,918
PETsMART DIRECT - External customers 21,693 25,887 67,487 77,393
PETsMART DIRECT - Intersegment 5,847 5,977 17,842 14,844
Eliminations (5,847) (5,977) (17,842) (14,844)
----------- ----------- ----------- -----------
Total net sales $ 541,316 $ 511,836 $ 1,613,873 $ 1,540,311
=========== =========== =========== ===========
Operating income (loss):
PETsMART North America $ 5,739 $ 15,314 $ 29,473 $ 46,404
PETsMART DIRECT (1,421) 921 (882) 1,975
Loss on disposal of subsidiary -- (34,221) -- (43,607)
----------- ----------- ----------- -----------
Operating income (loss) 4,318 (17,986) 28,591 4,772
Interest income 1,015 503 2,606 2,524
Interest expense (5,843) (6,361) (17,496) (18,143)
----------- ----------- ----------- -----------
Income (loss) before equity loss in PETsMART.com,
income tax expense (benefit), extraordinary
item, and cumulative effect of a change in
accounting principle $ (510) $ (23,844) $ 13,701 $ (10,847)
=========== =========== =========== ===========
</TABLE>
Total assets by business segment as of October 29, 2000, and January 30, 2000,
were as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 29, JANUARY 30,
2000 2000
----------- -----------
<S> <C> <C>
PETsMART North America $ 753,541 $ 774,807
PETsMART Direct 58,752 60,583
----------- -----------
Total assets $ 812,293 $ 835,390
=========== ===========
</TABLE>
NOTE 12 - SUBSEQUENT EVENT:
---------------------------
On November 15, 2000 the Company announced plans to acquire a majority
controlling interest in PETsMART.com. Under the proposed terms, the
Company will contribute $20 million in cash, as well as its pet catalog
business with net assets valued at approximately $10 million. The
Company will assume control and consolidation rights with this
transaction, which is expected to close during the Company's fiscal
2000 fourth quarter.
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 October 29, 2000, the Company operated 533
superstores, consisting of 513 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.
Since the inception of PETsMART.com in the second quarter of 1999
through October 29, 2000, the Company has invested approximately $50 million in
PETsMART.com. In November 2000, the Company announced plans to invest $30
million in cash and assets and will acquire a controlling interest in
PETsMART.com. PETsMART.com, an e-commerce business, is the 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 an
equity ownership in PETsMART.com of approximately 46 percent as of October 29,
2000.
The Company expects that any future increases in net sales and net
income 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 4.5 years as of October 29, 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,
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.
11
<PAGE> 12
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 $13 million during the
thirteen weeks ended October 29, 2000 as compared to the thirteen weeks ended
October 31, 1999. The long-term impact of this development is yet to be
determined, and the Company could continue to be adversely affected by it.
On November 15, 2000 the Company announced plans to acquire a
controlling interest in PETsMART.com. Under terms of the agreement with
PETsMART.com, the Company will contribute $20 million in cash, as well as its
pet catalog business with net assets valued at approximately $10 million. As a
result of the transaction, the Company will have an ownership percentage in
excess of 80 percent. The Company will assume full control and consolidation
rights. The transaction is expected to close during the Company's fiscal 2000
fourth quarter.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales
of certain items included in the Company's Consolidated Statement of Operations:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------- ------------------------
OCT. 29, OCT. 31, OCT. 29, OCT. 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 75.3 74.2 74.7 73.9
-------- -------- -------- --------
Gross profit 24.7 25.8 25.3 26.1
Store operating expenses 20.4 20.0 20.0 19.9
Store preopening expenses 0.1 0.1 0.2 0.3
General and administrative expenses 3.4 2.5 3.4 2.8
Loss on disposal of subsidiary - 6.7 - 2.8
-------- -------- -------- --------
Operating income (loss) 0.8 (3.5) 1.7 0.3
Interest income 0.2 0.1 0.2 0.2
Interest expense 1.1 1.2 1.1 1.2
-------- -------- -------- --------
Income (loss) before equity in loss of PETsMART.com,
income tax expense (benefit), extraordinary item, and
cumulative effect of a change in accounting principle (0.1) (4.6) 0.8 (0.7)
Equity in loss of PETsMART.com 1.1 2.0 1.6 0.7
-------- -------- -------- --------
Loss before income tax expense (benefit), extraordinary item,
and cumulative effect of a change in accounting principle (1.2) (6.6) (0.8) (1.4)
Income tax expense (benefit) (0.6) (0.1) (0.4) 0.4
-------- -------- -------- --------
Loss before extraordinary item and cumulative
effect of a change in accounting principle (0.6) (6.5) (0.4) (1.8)
Extraordinary item, gain on early extinguishment of debt, net
of income tax expense 0.2 - 0.2 -
-------- -------- -------- --------
Loss before cumulative effect of
a change in accounting principle (0.4) (6.5) (0.2) (1.8)
Cumulative effect of a change in accounting principle - - - (0.0)
-------- -------- -------- --------
Net loss (0.4)% (6.5)% (0.2)% (1.8)%
========= ========= ======== ========
</TABLE>
12
<PAGE> 13
THIRD QUARTER FISCAL 2000 COMPARED TO THIRD QUARTER FISCAL 1999
Net sales increased 5.8% to approximately $541.3 million for the
thirteen weeks ended October 29, 2000, from $511.8 million for the thirteen
weeks ended October 31, 1999. Comparable North American store sales increased
1.3% for the quarter. During third quarter 2000, the Company opened eight new
superstores in North America. The Company operated 533 superstores at October
29, 2000 compared to 484 superstores open at October 31, 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 24.7% for third quarter 2000, from 25.8% in third quarter 1999. This
result primarily reflected higher inventory shrinkage during the third quarter
of 2000 as compared to the same period in 1999 and higher store rent from lease
renewals, partially offset by improved product margins.
Store operating expenses, which include payroll and benefits,
advertising and other store level expenses, increased as a percentage of net
sales to 20.4% for third quarter 2000, from 20.0% for third quarter 1999. This
increase reflected higher repairs and maintenance expenses due to timing of
these costs, partially offset by decreased advertising expenditures, during the
third quarter of 2000 as compared to the third quarter of 1999.
Store preopening expenses as a percentage of net sales were 0.1% for
third quarter 2000, consistent with third quarter 1999. For the stores that
opened during the third quarter 2000, the average preopening expense incurred
was approximately $95,000 per store, which is consistent with the Company's
prior experience. Eight stores were opened during third quarter 2000.
General and administrative expenses as a percentage of net sales
increased to 3.4% for third quarter 2000, from 2.5% for third quarter 1999. This
increase was due to a planned increase in field management to expand the
grooming and pet training service areas and increased professional fees related
to strategic initiatives.
Loss on disposal of subsidiary for third quarter 1999 was $34.2
million, including $29.0 million of losses and transaction-related expenses on
the sale of the Company's U.K. subsidiary, $2.2 million of U.K. closed store
costs and executive severance costs, and $3.0 million of loss from operations in
the U.K. segment.
The Company's operating income increased to $4.3 million for third
quarter 2000, from a $18.0 million operating loss for third quarter 1999.
Excluding the loss on disposal of subsidiary from third quarter 1999, the
Company's operating income for third quarter 1999 was $16.2 million. Operating
income as a percentage of net sales increased to 0.8% for third quarter 2000,
from (3.5)% for third quarter 1999, including the loss on disposal of
subsidiary.
Interest income increased to $1.0 million for third quarter 2000 from
$0.5 million for third quarter 1999, principally due to interest earned from
receivables from PETsMART.com during the third quarter of 2000. Interest expense
decreased to $5.8 million for the third quarter 2000, from $6.4 million for
third quarter 1999, primarily due to the decreased amount of subordinated
convertible notes outstanding.
The equity loss in PETsMART.com, in which the Company has a 46.3%
equity investment, represents the Company's proportionate share of losses from
PETsMART.com (see Note 2), which began operations in June 1999. The Company's
portion of PETsMART.com losses for the thirteen weeks ended October 29, 2000 was
approximately $5.9 million, as compared to $9.9 million during the third quarter
of 1999. Due to the Company's commitment to fund the ongoing operations of
PETsMART.com, the recognition of losses in PETsMART.com has exceeded the
Company's investment as of October 29, 2000.
For third quarter 2000, the $3.2 million income tax benefit represents
an effective rate of 50.2%. 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 third quarter 2000 is 40.9%, compared to
41.0% for third quarter 1999, excluding the U.K.. 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.
13
<PAGE> 14
As a result of the foregoing, the Company reported a loss before
extraordinary item of $3.2 million (or $0.03 per share - diluted) for third
quarter 2000, compared to a loss before extraordinary item of $33.2 million (or
$0.29 per share - diluted) for third quarter 1999.
During the third quarter of fiscal 2000, the Company repurchased and
retired at face value $7.5 million of its 6-3/4% Subordinated Convertible Notes
due 2004 at a discount from par. The Company recognized an extraordinary gain
related to the early extinguishment of this debt in the third quarter of fiscal
2000 of approximately $0.8 million, net of unamortized deferred financing costs
of $0.2 million and net of related income taxes of approximately $0.5 million.
The following table summarizes the earnings per share impact of the
Company's interest in the e-commerce corporate joint venture (PETsMART.com) and
the U.K. subsidiary:
<TABLE>
<CAPTION>
Thirteen weeks ended
-------------------------------------
October 29, 2000 October 31, 1999
---------------- ----------------
<S> <C> <C>
North America stores and Direct $ (0.00) $ 0.08
PETsMART.com (0.03) (0.09)
U.K. subsidiary - (0.28)
---------- ----------
Loss before extraordinary item (0.03) (0.29)
Extraordinary gain on early extinguishment
of debt, net of tax 0.01 -
---------- ----------
Total loss per share - diluted $ (0.02) $ (0.29)
========== ==========
</TABLE>
THIRTY-NINE WEEKS ENDED OCTOBER 29, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1999
Net sales increased 4.8% to approximately $1.6 billion for the
thirty-nine weeks ended October 29, 2000, from $1.5 billion for the thirty-nine
weeks ended October 31, 1999. North America store sales for the thirty-nine
weeks ended October 29, 2000 increased 5.7% from the same period in 1999.
Comparable North American store sales increased 1.5% for the thirty-nine week
period ended October 29, 2000, and the Company opened 50 new superstores,
relocated two stores, and closed one store in North America during the period.
The Company operated 533 superstores at October 29, 2000, compared to 484
superstores open at October 31, 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 25.3% for the thirty-nine weeks ended October 29, 2000, from 26.1% in
the same period in 1999. 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, higher inventory shrinkage,
and increased store occupancy costs in the first three quarters of fiscal 2000,
as compared to the same period in 1999, partially offset by higher product gross
margins as a result of more competitive unit pricing with vendors.
Store operating expenses, which includes payroll and benefits,
advertising and other store level expenses, increased slightly as a percentage
of net sales to 20.0% for the thirty-nine weeks ended October 29, 2000, from
19.9% for the same period in 1999. As a percentage of net sales, all major
components of store operating expenses were consistent on a year-to-date basis
for fiscal 2000 as compared to the prior year.
14
<PAGE> 15
Store preopening expenses as a percentage of net sales was 0.2% for the
thirty-nine weeks ended October 29, 2000, compared to 0.3% for the same period
in 1999. For the stores that opened during the first three quarters 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, 52 stores were opened during the thirty-nine weeks ended
October 29, 2000.
General and administrative expenses as a percentage of net sales
increased to 3.4% for the thirty-nine weeks ended October 29, 2000, from 2.8%
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,
increased professional fees related to strategic initiatives, and increased
depreciation expense related to the Company's new information system that was
installed during the summer of 1999.
Loss on disposal of subsidiary for the thirty-nine weeks ended October
31, 1999 was $43.6 million, including $29.0 million of loss and
transaction-related expenses on the sale of the Company's U.K. subsidiary, $3.5
million of U.K. closed store costs and executive severance costs, and $11.1
million of loss from operations in the U.K. segment.
The Company's operating income increased to $28.6 million for the
thirty-nine weeks ended October 29, 2000, from $4.8 million for the same period
in 1999. Excluding the loss on disposal of subsidiary from the thirty-nine weeks
ended October 31, 1999, the Company's operating income on a comparable basis was
$48.4 million. Operating income as a percentage of net sales decreased to 1.7%
for the thirty-nine weeks ended October 29, 2000, from 3.1% for the same period
in 1999, excluding the loss on disposal of subsidiary. This decrease was
primarily due to the decrease in gross margin and the increase in general and
administrative expenses discussed above.
Interest income increased slightly to $2.6 million for the thirty-nine
weeks ended October 29, 2000, from $2.5 million for the same period in 1999.
Interest expense decreased to $17.5 million for the thirty-nine weeks ended
October 29, 2000, from $18.1 million for the same period in 1999. The decrease
in interest expense was due primarily to the decreased debt outstanding on the
subordinated convertible notes.
The equity loss in PETsMART.com, in which the Company has a 46.3%
equity investment, represents the Company's proportionate share of losses from
PETsMART.com (see Note 2), which began operations in June 1999. The Company's
portion of PETsMART.com losses for the thirty-nine weeks ended October 29, 2000,
was approximately $27.2 million, as compared to $11.3 million during the same
period in 1999. Due to the Company's commitment to fund the ongoing operations
of PETsMART.com, the recognition of losses in PETsMART.com has exceeded the
Company's investment as of October 29, 2000.
For the thirty-nine weeks ended October 29, 2000, the $7.0 million
income tax benefit represents an effective rate of 51.9%. 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 three quarters of fiscal 2000 becomes 40.9%, compared to 41.0% for the
same period in 1999, excluding the U.K. The decrease in the effective tax rate
is principally due to the change in the mix of foreign taxable income.
As a result of the foregoing, the Company reported a loss before
extraordinary item and cumulative effect of a change in accounting principle of
$6.5 million (or $0.06 per share - diluted) for the thirty-nine weeks ended
October 29, 2000, compared to a loss before extraordinary item and cumulative
effect of a change in accounting principle of $27.1 million (or $0.23 per share
- diluted) for the thirty-nine weeks ended October 31, 1999.
During the first three quarters of fiscal 2000, the Company repurchased
and retired at face value $18.8 million of its 6-3/4% Subordinated Convertible
Notes due 2004 at a discount from par. The Company recognized an extraordinary
gain during the thirty-nine weeks ended October 29, 2000 of approximately $2.8
million, net of unamortized deferred financing costs of $0.4 million and net of
related income taxes of approximately $1.9 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 e-commerce corporate joint venture (PETsMART.com) and
the U.K. subsidiary:
<TABLE>
<CAPTION>
Thirty-nine weeks ended
--------------------------------------
October 29, 2000 October 31, 1999
---------------- ----------------
<S> <C> <C>
North America stores and Direct $ 0.07 $ 0.21
PETsMART.com (0.13) (0.10)
U.K. subsidiary - (0.34)
--------- ---------
Loss before extraordinary item and
cumulative effect of a change in
accounting principle (0.06) (0.23)
Extraordinary gain on early extinguishment
of debt, net of tax 0.03 -
Cumulative effect of a change in accounting
principle, net of tax - (0.01)
--------- ---------
Total loss per share - diluted $ (0.03) $ (0.24)
========= =========
</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
due 2004 (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 or October 29, 2000,
respectively.
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. During the thirty-nine weeks ended October 29, 2000, the
Company has used approximately $2.4 million to purchase its common stock and
approximately $13.6 million to purchase $18.8 million at face value of its
subordinated convertible notes.
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 October 29, 2000, total assets were $812.3 million, of which $495.7
million were current assets. Cash and cash equivalents were $40.1 million.
16
<PAGE> 17
Cash provided by operations was $50.6 million for the thirty-nine weeks
ended October 29, 2000, compared to cash used in operations of $1.2 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 35.8% at
October 29, 2000, compared to 38.2% at January 30, 2000. Inventory balances were
approximately $366.1 million at October 29, 2000, and $377.3 million at January
30, 2000. Average North American store inventory, which excludes the inventory
of PETsMART DIRECT, decreased 12.0% to approximately $639,000 per store at
October 29, 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 forward 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 its minority interest
holdings of MMI as well as the equity holdings of PETsMART.com. The Company
intends to make an additional $20 million investment in PETsMART.com during the
fiscal fourth quarter of 2000 and may have to fund operations of PETsMART.com on
an on-going basis. PETsMART.com, combined with the Pet Catalog business, expects
to generate sufficient cash flow in 2001 to operate without further funds from
the Company. Net cash used in investing activities was $55.7 million for the
thirty-nine weeks ended October 29, 2000, compared to $96.0 million used for the
thirty-nine weeks ended October 31, 1999.
Net cash provided by or 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 consist of opening
new superstores and distribution centers, costs related to closing redundant or
inadequate stores, 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 store 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 $30.7 million during the thirty-nine
weeks ended October 29, 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 3 new North
American stores during the remaining thirteen weeks of fiscal 2000,
approximately $1.5 million will be needed to finance these openings. Also, based
upon the Company's current plan to open approximately 18 new North American
stores during the first fiscal quarter of 2001, a major portion of the
approximately $8.9 million needed to finance these openings will likely be
expended during the latter portion of fourth quarter 2000. 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 store.
PETsMART completed its initial implementation of an integrated North
America information system, which features a common set of applications, during
second quarter 1999. 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, are
approximately $70 million from the inception of the project through the end of
the third quarter of fiscal year 2000. As of October 29, 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. In November 2000, the revolving credit
agreement was increased an additional $10 million for working capital needs.
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 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 stores 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 issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), 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 is performing 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
does not believe SAB 101 will have a material impact 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 thirty-nine weeks ended October 29, 2000 in
relation to the interest rate risk.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain former shareholders of Pet City have asserted, since 1997, that
the Company misled the shareholders of Pet City at the time of the 1996 Pet City
acquisition, concerning the value of the Company's stock, the prospects of the
Company and its stock price, and the financial performance of the Company. No
lawsuit has been filed with respect to this matter, and the Company believes the
allegations that have been made are without merit. The potential plaintiffs have
threatened to file a complaint. Mediation is currently ongoing. If any lawsuit
is filed, the Company intends to vigorously defend itself.
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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 October 29, 2000, the Company filed no
reports on Form 8-K.
21
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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 December 13, 2000.
PETSMART, INC.
(Registrant)
/s/ Neil T. Watanabe
Neil T. Watanabe
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
22
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- -----------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
