<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PETCO ANIMAL SUPPLIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5999 33-0479906
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
9125 REHCO ROAD
SAN DIEGO, CALIFORNIA 92121
(619) 453-7845
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
BRIAN K. DEVINE, CHAIRMAN
9125 REHCO ROAD
SAN DIEGO, CALIFORNIA 92121
(619) 453-7845
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS A. EDWARDS, ESQ. TIMOTHY M. HEANEY, ESQ.
CRAIG M. GARNER, ESQ. DANIEL A. YARANO, ESQ.
LATHAM & WATKINS FREDRIKSON & BYRON, P.A.
701 "B" STREET, SUITE 2100 1100 INTERNATIONAL CENTRE
SAN DIEGO, CA 92101-8197 900 SECOND AVENUE SOUTH
(619) 236-1234 MINNEAPOLIS, MN 55402-3397
(612) 347-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Common Stock, $.0001 par value... 2,288,436 shares Not Applicable $50,002,334 $15,153
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Based on the assumed maximum number of shares that may be issued in the
merger described herein.
(2) The proposed maximum offering price represents the value of securities to be
received by the Registrant in exchange for its Common Stock, computed
pursuant to Rule 457(f)(1) under the Securities Act of 1933, as $4.75 (the
average of the high and low prices of the securities of the company to be
acquired in the merger as of October 22, 1996), multiplied by 10,526,807
(the aggregate number of outstanding shares of such company and shares
issuable pursuant to outstanding stock options and warrants). Such value is
estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PETCO ANIMAL SUPPLIES, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS IN
FORM S-4 AND PROSPECTUS PURSUANT TO
ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
- -------- -------------------------------------- ------------------------------------------------
<S> <C> <C>
Item 1 Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus.......................... Outside Front Cover Page of Proxy State-
ment/Prospectus
Item 2 Inside Front and Outside Back Cover
Pages of Prospectus................. Table of Contents; Available Information
Item 3 Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information......................... Summary; Risk Factors; Selected Historical
Consolidated Financial Data; Selected Pro
Forma Condensed Combining Consolidated
Financial Data; Comparative Per Share Data;
The Merger and Related Transactions; Unaudited
Pro Forma Condensed Combining Consolidated
Financial Statements
Item 4 Terms of the Transaction.............. Summary; The Merger and Related Transactions;
Comparison of Rights of Stockholders of Petco
and PFW
Item 5 Pro Forma Financial Information....... Summary; Unaudited Pro Forma Condensed Combining
Consolidated Financial Statements
Item 6 Material Contracts with the Company
Being Acquired...................... Summary; The Merger and Related Transactions
Item 7 Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters........... Not Applicable
Item 8 Interests of Named Experts and
Counsel............................. Legal Matters; Experts
Item 9 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................... Not Applicable
Item 10 Information with Respect to S-3
Registrants......................... Available Information; Summary; Selected
Historical Consolidated Financial Data;
Selected Pro Forma Condensed Combining
Consolidated Financial Data; Comparative Per
Share Data; Unaudited Pro Forma Condensed
Combining Consolidated Financial Statements;
Risk Factors; Petco Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Petco Business;
Description of Petco Capital Stock; Petco
Financial Statements
Item 11 Incorporation of Certain Information
by Reference........................ Incorporation of Certain Documents by Reference
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
- -------- -------------------------------------- ------------------------------------------------
<S> <C> <C>
Item 12 Information with Respect to S-2 or S-3
Registrants......................... Not Applicable
Item 13 Incorporation of Certain Information
by Reference........................ Not Applicable
Item 14 Information with Respect to
Registrants Other Than S-3 or S-2
Registrants......................... Not Applicable
Item 15 Information with Respect to S-3
Companies........................... Not Applicable
Item 16 Information with Respect to S-2 or S-3
Companies........................... Not Applicable
Item 17 Information with Respect to Companies
Other than S-2 or S-3 Companies..... Summary; Selected Historical Financial Data;
Selected Pro Forma Condensed Combining
Consolidated Financial Data; Comparative Per
Share Data; Unaudited Pro Forma Condensed
Combining Consolidated Financial Statements;
Risk Factors; PFW Management's Discussion and
Analysis of Financial Condition and Results of
Operations; PFW Business; PFW Financial
Statements
Item 18 Information if Proxies, Consents or
Authorizations are to be
Solicited........................... Summary; The Special Meeting; The Merger and
Related Transactions; PFW Management; Petco
Principal Stockholders; PFW Principal
Stockholders
Item 19 Information if Proxies, Consents or
Authorizations are not to be
Solicited, or in an Exchange
Offer............................... Not Applicable
</TABLE>
<PAGE> 4
PET FOOD WAREHOUSE, INC.
INTERCHANGE TOWER, SUITE 701
600 SOUTH HIGHWAY 169
ST. LOUIS PARK, MN 55426
, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Pet Food Warehouse, Inc., a Minnesota corporation ("PFW"), which will be held on
, 1996 at a.m., local time, at
(the "Special Meeting").
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of
October 3, 1996 (the "Merger Agreement"), by and among PFW, Petco Animal
Supplies, Inc., a Delaware corporation ("Petco"), and PASI Acquisition Corp., a
newly formed, wholly owned Minnesota subsidiary of Petco ("Merger Sub"),
pursuant to which Merger Sub will be merged with and into PFW (the "Merger"),
with the result that Merger Sub will cease to exist and PFW will become a wholly
owned subsidiary of Petco. In the Merger, each outstanding share of PFW common
stock (other than dissenting PFW shares, if any) will be converted into the
right to receive that fraction of a share of Petco common stock equal to (i)
0.2173913 of a share of Petco common stock if the average of the closing prices
of Petco common stock as reported on The Nasdaq National Market with respect to
the ten (10) trading days immediately preceding the closing of the Merger (the
"Petco Stock Price") is less than or equal to $23.00, (ii) the quotient of (A)
$5.00 divided by (B) the Petco Stock Price if the Petco Stock Price is greater
than $23.00 and less than $25.00, or (iii) 0.2 if the Petco Stock Price is
greater than or equal to $25.00. On October 15, 1996, the closing price of Petco
common stock as reported on The Nasdaq National Market was $25.00, and the
closing price of PFW common stock as reported on The Nasdaq National Market was
$5.00.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders and a Proxy Statement/Prospectus relating to the actions
to be taken by PFW stockholders at the Special Meeting. The Proxy
Statement/Prospectus more fully describes the Merger and includes information
about PFW and Petco. You are urged to read the Proxy Statement/Prospectus
carefully.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF PFW HAS APPROVED AND
ADOPTED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND
RECOMMENDS THAT YOU VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AT THE SPECIAL MEETING.
It is important that your shares be represented at the Special Meeting.
Whether or not you plan to attend the Special Meeting, we urge you to complete,
sign, date and return the enclosed proxy at your earliest convenience in the
enclosed postage-prepaid envelope. Your shares of PFW common stock will be voted
in accordance with the instructions you provide on your proxy. If you do not
return the accompanying form of proxy, your shares will not be voted in favor of
approval and adoption of the Merger Agreement and will have the same effect as a
no vote. If you attend the Special Meeting, you may revoke your proxy by voting
in person. Your prompt cooperation is greatly appreciated.
Sincerely,
MARVIN W. GOLDSTEIN
Chairman, President and Chief
Executive Officer
<PAGE> 5
PET FOOD WAREHOUSE, INC.
INTERCHANGE TOWER, SUITE 701
600 SOUTH HIGHWAY 169
ST. LOUIS PARK, MN 55426
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1996
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Pet Food
Warehouse, Inc., a Minnesota corporation ("PFW"), will be held on
, 1996 at a.m., local time, at
(the "Special Meeting"), for the following purposes, as more fully
described in the accompanying Proxy Statement/Prospectus:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of October 3, 1996 (the "Merger
Agreement"), by and among PFW, Petco Animal Supplies, Inc., a Delaware
corporation ("Petco"), and PASI Acquisition Corp., a newly formed, wholly
owned Minnesota subsidiary of Petco ("Merger Sub"), pursuant to which
Merger Sub will be merged with and into PFW (the "Merger"), with the result
that Merger Sub will cease to exist and PFW will become a wholly owned
subsidiary of Petco. In the Merger, each outstanding share of PFW common
stock (other than dissenting PFW shares, if any) will be converted into the
right to receive that fraction of a share of Petco common stock equal to
(i) 0.2173913 of a share of Petco common stock if the average of the
closing prices of Petco common stock as reported on The Nasdaq National
Market with respect to the ten (10) trading days immediately preceding the
closing of the Merger (the "Petco Stock Price") is less than or equal to
$23.00, (ii) the quotient of (A) $5.00 divided by (B) the Petco Stock Price
if the Petco Stock Price is greater than $23.00 and less than $25.00, or
(iii) 0.2 if the Petco Stock Price is greater than or equal to $25.00.
2. To transact such other business as may properly come before the
Special Meeting and any adjournments or postponements thereof.
The Merger is more fully described in the accompanying Proxy
Statement/Prospectus and in the Merger Agreement, a copy of which is attached as
Appendix A to the accompanying Proxy Statement/Prospectus.
Only holders of record of PFW common stock at the close of business on
, 1996 are entitled to notice of, and to vote at, the Special
Meeting and any adjournments or postponements thereof.
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING.
EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN
THE ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. THIS WILL NOT LIMIT YOUR RIGHT TO ATTEND OR VOTE AT THE MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
GEORGE E. KLINE
Secretary
St. Louis Park, Minnesota
, 1996
<PAGE> 6
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 23, 1996
PETCO ANIMAL SUPPLIES, INC.
PET FOOD WAREHOUSE, INC.
PROXY STATEMENT/PROSPECTUS FOR
THE SPECIAL MEETING OF PET FOOD WAREHOUSE, INC.
STOCKHOLDERS TO BE HELD ON , 1996
This Proxy Statement/Prospectus is being furnished to the stockholders of
Pet Food Warehouse, Inc., a Minnesota corporation ("PFW"), in connection with
the solicitation of proxies by the Board of Directors of PFW for use at a
Special Meeting of Stockholders to be held on , 1996 at a.m.,
local time, at (the "Special
Meeting"), and at any adjournments or postponements thereof.
The Special Meeting is being called to consider and vote upon a proposal to
approve and adopt an Agreement and Plan of Merger, dated as of October 3, 1996
(the "Merger Agreement"), by and among PFW, Petco Animal Supplies, Inc., a
Delaware corporation ("Petco"), and PASI Acquisition Corp., a newly formed,
wholly owned Minnesota subsidiary of Petco ("Merger Sub"), pursuant to which
Merger Sub will be merged with and into PFW (the "Merger"), with the result that
Merger Sub will cease to exist and PFW will become a wholly owned subsidiary of
Petco. In the Merger, each outstanding share of common stock, $.01 par value, of
PFW ("PFW Common Stock") (other than dissenting PFW shares, if any) will be
converted into the right to receive that fraction of a share of common stock,
$.0001 par value, of Petco ("Petco Common Stock") equal to (i) 0.2173913 of a
share of Petco Common Stock if the average of the closing prices of Petco Common
Stock as reported on The Nasdaq National Market with respect to the ten (10)
trading days immediately preceding the closing of the Merger (the "Petco Stock
Price") is less than or equal to $23.00, (ii) the quotient of (A) $5.00 divided
by (B) the Petco Stock Price if the Petco Stock Price is greater than $23.00 and
less than $25.00, or (iii) 0.2 if the Petco Stock Price is greater than or equal
to $25.00. On October 15, 1996, the closing price of Petco Common Stock as
reported on The Nasdaq National Market was $25.00, and the closing price of PFW
Common Stock as reported on The Nasdaq National Market was $5.00.
Holders of PFW Common Stock who did not vote in favor of the Merger may, by
complying with Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act (the "Minnesota Law"), be entitled to dissenters' rights as set
forth therein with respect to the Merger. See "The Merger and Related
Transactions -- Dissenters' Rights" and Appendix C to this Proxy
Statement/Prospectus which sets forth Sections 302A.471 and 302A.473 of the
Minnesota Law.
This Proxy Statement/Prospectus also serves as the Prospectus of Petco
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the issuance of the Petco Common Stock into which shares of PFW
Common Stock will be converted upon consummation of the Merger. See "Description
of Petco Capital Stock."
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to the stockholders of PFW on or about , 1996.
------------------------
THE MATTERS DESCRIBED ABOVE ARE DISCUSSED IN DETAIL IN THIS PROXY
STATEMENT/PROSPECTUS. THE MERGER IS A COMPLEX TRANSACTION. PFW STOCKHOLDERS ARE
STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/PROSPECTUS IN
ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
COMMENCING ON PAGE 14.
NEITHER THIS TRANSACTION NOR THE SECURITIES TO BE ISSUED IN THE MERGER HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is , 1996.
<PAGE> 7
AVAILABLE INFORMATION
Petco and PFW are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). These materials can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the public reference section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Electronic reports, proxy statements
and other information filed through the Commission's Electronic Data Gathering,
Analysis and Retrieval system are publicly available through the Commission's
Web site (http://www.sec.gov). In addition, the Petco Common Stock and PFW
Common Stock are quoted on The Nasdaq National Market and similar information
concerning Petco and PFW can be inspected and copied at the offices of the
National Association of Securities Dealers, Inc., 1735 "K" Street, N.W.,
Washington, D.C. 20006.
Petco has filed with the Commission a Registration Statement on Form S-4
(including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to the Petco Common Stock to be issued in connection
with the Merger. As permitted by the rules and regulations of the Commission,
this Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information, reference is made to the Registration Statement and the
exhibits and schedules thereto, which may be examined without charge at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of which may
be obtained from the Commission upon payment of the prescribed fees.
Statements made in this Proxy Statement/Prospectus concerning the contents
of any contract or other document accurately describe the material provisions of
such contract or other document but are not necessarily complete. With respect
to each contract or other document attached as an appendix to this Proxy
Statement/Prospectus, reference is hereby made to that appendix for a more
complete description of the matter involved, and each such statement is hereby
qualified in its entirety by such reference.
All information contained in this Proxy Statement/Prospectus relating to
Petco has been supplied by Petco, and all information relating to PFW has been
supplied by PFW.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Petco with the Commission are incorporated
by reference in this Proxy Statement/Prospectus: (i) Annual Report on Form 10-K
for the fiscal year ended February 3, 1996, (ii) Quarterly Report on Form 10-Q
for the quarter ended May 4, 1996, (iii) Quarterly Report on Form 10-Q for the
quarter ended August 3, 1996, and (iv) the description of Petco Common Stock set
forth in the Registration Statement on Form 8-A dated February 28, 1994 (as
amended by Petco's Form 8-A/A dated March 15, 1994).
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. A COPY OF SUCH DOCUMENTS
(EXCLUDING EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) WILL BE PROVIDED WITHOUT CHARGE TO ANY PERSON TO WHOM A COPY OF THIS
PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST OF ANY
SUCH PERSON. REQUESTS SHOULD BE DIRECTED TO PETCO ANIMAL SUPPLIES, INC., 9125
REHCO ROAD, SAN DIEGO, CALIFORNIA 92121, ATTENTION: CORPORATE SECRETARY
(TELEPHONE NUMBER: (619) 453-7845). IN ORDER TO ENSURE DELIVERY PRIOR TO THE
SPECIAL MEETING, REQUESTS SHOULD BE RECEIVED BY , 1996.
All documents filed by Petco pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Proxy Statement/Prospectus and prior
to the date of the Special Meeting shall be deemed to be incorporated by
reference in this Proxy Statement/Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by
<PAGE> 8
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement/Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement/Prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN AS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, IN
CONNECTION WITH THE SOLICITATION AND THE OFFERING MADE BY THIS PROXY
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PETCO OR PFW. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY OR AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES IN ANY
JURISDICTION IN WHICH SUCH SOLICITATION OR OFFER MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF PETCO OR PFW SINCE THE DATE
HEREOF.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY............................................................................... 1
General............................................................................. 1
The Parties......................................................................... 1
The Special Meeting................................................................. 1
The Merger.......................................................................... 2
Recommendation of PFW Board of Directors............................................ 3
Opinion of PFW Financial Advisor.................................................... 3
Merger Agreement.................................................................... 4
Related Agreements.................................................................. 6
Other Matters Related to the Merger................................................. 6
Comparative Market Price Information................................................ 7
Selected Historical Consolidated Financial Data..................................... 9
Selected Pro Forma Condensed Combining Consolidated Financial Data.................. 12
Comparative Per Share Data.......................................................... 13
RISK FACTORS.......................................................................... 14
THE SPECIAL MEETING................................................................... 17
Date, Time and Place................................................................ 17
Purpose............................................................................. 17
Record Date; Quorum................................................................. 17
Vote Required....................................................................... 17
Voting of Proxies................................................................... 17
Solicitation of Proxies............................................................. 18
Board Recommendation................................................................ 18
THE MERGER AND RELATED TRANSACTIONS................................................... 19
General............................................................................. 19
Effects of the Merger............................................................... 19
Background of the Merger............................................................ 21
PFW's Reasons For the Merger........................................................ 24
Opinion of PFW Financial Advisor.................................................... 24
PFW Board Recommendation............................................................ 29
Petco's Reasons For the Merger...................................................... 29
Merger Agreement.................................................................... 30
Related Agreements; Interests of Certain Persons in the Merger...................... 32
Regulatory Matters.................................................................. 33
Certain Federal Income Tax Matters.................................................. 33
Accounting Treatment................................................................ 35
Dissenters' Rights.................................................................. 35
Merger Expenses and Fees and Other Costs............................................ 38
Affiliates' Restrictions on Sale of Petco Common Stock.............................. 38
Surrender of Certificates........................................................... 39
UNAUDITED PRO FORMA CONDENSED COMBINING CONSOLIDATED FINANCIAL STATEMENTS............. 40
PETCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 48
PFW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 54
PETCO BUSINESS........................................................................ 60
The Pet Food, Supply and Services Industry.......................................... 60
Business Strategy................................................................... 61
Merchandising....................................................................... 63
Store Development, Expansion and Acquisition Strategy............................... 64
Store Operations.................................................................... 65
</TABLE>
i
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management Information and Control Systems.......................................... 66
Purchasing and Distribution......................................................... 66
Competition......................................................................... 67
Trademarks and Licenses............................................................. 67
Regulation.......................................................................... 67
Employees........................................................................... 68
Properties.......................................................................... 68
Legal Proceedings................................................................... 68
PFW BUSINESS.......................................................................... 69
General Development of Business..................................................... 69
Industry............................................................................ 69
Operating Strategy.................................................................. 69
Expansion Strategy.................................................................. 70
Merchandise......................................................................... 70
Marketing, Advertising and Promotion................................................ 71
Management Information System....................................................... 71
Purchasing and Distribution......................................................... 71
Competition......................................................................... 71
Employees........................................................................... 72
Trademarks and Service Marks........................................................ 72
Properties.......................................................................... 72
Legal Proceedings................................................................... 72
PFW MANAGEMENT........................................................................ 73
General............................................................................. 73
Executive Compensation.............................................................. 73
Employment Agreement................................................................ 74
PETCO PRINCIPAL STOCKHOLDERS.......................................................... 75
PFW PRINCIPAL STOCKHOLDERS............................................................ 76
DESCRIPTION OF PETCO CAPITAL STOCK.................................................... 78
COMPARISON OF RIGHTS OF STOCKHOLDERS OF PETCO AND PFW................................. 80
LEGAL MATTERS......................................................................... 85
EXPERTS............................................................................... 85
INDEX TO PETCO FINANCIAL STATEMENTS................................................... F-1
PETCO FINANCIAL STATEMENTS............................................................ F-3
INDEX TO PFW FINANCIAL STATEMENTS..................................................... F-16
PFW FINANCIAL STATEMENTS.............................................................. F-18
The following appendices also constitute part of this Proxy Statement/Prospectus:
A -- Agreement and Plan of Merger
B -- Opinion of Dain Bosworth Incorporated
C -- Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act
</TABLE>
ii
<PAGE> 11
SUMMARY
The following is a summary of certain information contained or incorporated
by reference in this Proxy Statement/Prospectus. The following summary is not
intended to be complete and is qualified in its entirety by reference to the
more detailed information contained in this Proxy Statement/Prospectus and the
exhibits hereto or incorporated herein by reference. Stockholders are urged to
review the entire Proxy Statement/Prospectus carefully. Unless otherwise
indicated, all references in this Proxy Statement/Prospectus to a fiscal year
refer to a fiscal year ending on the Saturday closest to January 31 of the
following year. For example, references to fiscal 1995 refer to the fiscal year
beginning on January 29, 1995 and ending on February 3, 1996.
GENERAL
This Proxy Statement/Prospectus is being provided to the stockholders of
PFW in connection with the Merger of Merger Sub with and into PFW, pursuant to
which Merger Sub will cease to exist and PFW will survive as a wholly owned
subsidiary of Petco. The Merger will be effected pursuant to the Merger
Agreement, a copy of which is attached hereto as Appendix A and incorporated
herein by reference.
THE PARTIES
Petco
Petco is a leading specialty retailer of premium pet food and supplies.
Petco currently utilizes both superstore and traditional store formats and
follows a strategy of converting and expanding its store base from a traditional
store format to a superstore format. As a result of this strategy, Petco has
opened and acquired superstores, has expanded, remodeled and relocated
traditional stores into superstores, collectively referred to as conversions,
and has closed underperforming stores. As of August 3, 1996, Petco operated 274
stores, including 206 superstores, in 15 states and the District of Columbia.
Petco's executive offices are located at 9125 Rehco Road, San Diego,
California 92121, and its telephone number is (619) 453-7845. Petco is
incorporated under the laws of the State of Delaware. See "Petco Business" for a
more detailed description of Petco's business and "Risk Factors" for a
discussion of the risks associated with the ownership of Petco Common Stock,
including risks related to the Merger.
Merger Sub
Merger Sub is a Minnesota corporation that was organized for the sole
purpose of effecting the Merger. It is a wholly owned subsidiary of Petco and
has no material assets or liabilities and has not engaged in any activities
except in connection with the Merger. Merger Sub's executive offices are located
at 9125 Rehco Road, San Diego, California 92121, and its telephone number is
(619) 453-7845.
PFW
PFW is an operator of warehouse superstores specializing in pet food,
supplies and services in the Upper Midwest (i.e., Minnesota, Wisconsin, Iowa,
North Dakota and South Dakota). PFW's goal is to be the foremost provider of pet
related products and services in the Upper Midwest. As of August 3, 1996, PFW
operated 25 warehouse superstores in such region.
PFW's executive offices are located at Interchange Towers, Suite 701, 600
South Highway 169, St. Louis Park, Minnesota 55426, and its telephone number is
(612) 542-0123. PFW is incorporated under the laws of the State of Minnesota.
See "PFW Business" for a more detailed description of PFW's business.
THE SPECIAL MEETING
Date, Time and Place. The Special Meeting of Stockholders of PFW will be
held on , 1996, at a.m., local time, at .
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<PAGE> 12
Purpose. At the Special Meeting, stockholders of PFW will be asked to
consider and vote upon a proposal to approve and adopt the Merger Agreement.
Record Date; Quorum. Only holders of record of PFW Common Stock at the
close of business on , 1996 (the "Record Date") are entitled to
notice of and to vote at the Special Meeting. As of the close of business on the
Record Date, shares of PFW Common Stock were outstanding and entitled
to vote at the Special Meeting. The presence (in person or by proxy) of the
holders of a majority of the outstanding shares of PFW Common Stock entitled to
vote at the Special Meeting is necessary to constitute a quorum.
Vote Required. Each PFW stockholder is entitled to one vote for each share
of PFW Common Stock held as of the Record Date. The affirmative vote of a
majority of the outstanding shares of PFW Common Stock as of the Record Date is
required to approve and adopt the Merger Agreement. As a group, all executive
officers and directors of PFW beneficially owned 1,570,019 shares, or 16.6%, of
the PFW Common Stock outstanding as of the Record Date.
THE MERGER
General. As a result of the Merger, PFW will become a wholly owned
subsidiary of Petco and each outstanding share of PFW Common Stock (other than
dissenting PFW shares, if any) will be converted into the right to receive that
fraction of a share of Petco Common Stock equal to (i) 0.2173913 of a share of
Petco Common Stock if the average of the closing prices of Petco common stock as
reported on The Nasdaq National Market with respect to the ten (10) trading days
immediately preceding the closing of the Merger (the "Petco Stock Price") is
less than or equal to $23.00, (ii) the quotient of (A) $5.00 divided by (B) the
Petco Stock Price if the Petco Stock Price is greater than $23.00 and less than
$25.00, or (iii) 0.2 if the Petco Stock Price is greater than or equal to
$25.00. Cash will be paid in lieu of issuing fractional shares.
Based on the assumption that the Petco Stock Price on October 15, 1996
equaled the Petco Common Stock price on such date, each outstanding share of PFW
Common Stock would have been converted into the right to receive 0.2 of a share
of Petco Common Stock, and based upon the closing price per share of Petco
Common Stock on October 15, 1996 of $25.00, such fraction of a share of Petco
Common Stock would have had a value of $5.00. Based on such information, an
aggregate of 1,887,865 shares of Petco Common Stock would have been issued in
the Merger, and the former holders of PFW Common Stock would own shares of Petco
Common Stock representing 10.4% of the shares of Petco Common Stock to be
outstanding immediately after consummation of the Merger. The market price for
shares of Petco Common Stock fluctuates daily. Accordingly, the exchange ratio
and the aggregate number of shares of Petco Common Stock to be issued in the
Merger may be subject to adjustment up to the date of the closing of the Merger.
PFW stockholders are urged to obtain current market quotations for Petco Common
Stock and PFW Common Stock.
Conversion of Options. As a result of the Merger, each outstanding option
to purchase PFW Common Stock (a "PFW Option") will be assumed by Petco and
converted into an option to acquire, on the same terms and conditions as were
applicable under such PFW Option prior to the Effective Time, the number
(rounded to the nearest whole number) of shares of Petco Common Stock as the
holder of such PFW Option would have been entitled to receive pursuant to the
Merger had such holder exercised such option in full immediately prior to the
Effective Time (not taking into account whether or not such option was in fact
exercisable), at a price per share of Petco Common Stock equal to (i) the
aggregate exercise price for PFW Common Stock otherwise purchasable pursuant to
such PFW Option divided by (ii) the number of shares of Petco Common Stock
deemed purchasable pursuant to such PFW Option. Under the Merger Agreement,
Petco is obligated to file a Registration Statement on Form S-8 with the
Commission with respect to the issuance of shares of Petco Common Stock upon
exercise of the assumed PFW Options as promptly as practicable following the
Effective Time.
As of the Record Date, shares of PFW Common Stock were subject to
outstanding PFW Options. Assuming no exercise or termination of such PFW Options
prior to the consummation of the Merger, and based on the assumption that the
Petco Stock Price on , 1996 equaled the Petco Common
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<PAGE> 13
Stock Price on such date, at the Effective Time, the PFW Options would be
converted into options to purchase an aggregate of shares of Petco
Common Stock.
Conversion of Warrants. As a result of the Merger, each outstanding
warrant to purchase PFW Common Stock (a "PFW Warrant") will be assumed by Petco
and converted into a warrant to acquire, on the same terms and conditions as
were applicable under such PFW Warrant prior to the Effective Time, the number
(rounded to the nearest whole number) of shares of Petco Common Stock as the
holder of such PFW Warrant would be entitled to receive pursuant to the Merger
had such holder exercised such PFW Warrant in full immediately prior to the
Effective Time (not taking into account whether or not such PFW Warrant was in
fact exercisable), at a price per share of Petco Common Stock equal to (i) the
aggregate exercise price for PFW Common Stock otherwise purchasable pursuant to
such PFW Warrant divided by (ii) the number of shares of Petco Common Stock
deemed purchasable pursuant to such PFW Warrant.
As of the Record Date, shares of PFW Common Stock were subject to
outstanding PFW Warrants. Assuming no exercise or termination of such PFW
Warrants prior to the consummation of the Merger, and based on the assumption
that the Petco Stock Price on , 1996 equaled the Petco Common
Stock price on such date, at the Effective Time, the PFW Warrants would be
converted into warrants to purchase an aggregate of shares of Petco
Common Stock.
Other Effects of the Merger. The Merger will be consummated promptly after
the approval by the PFW stockholders of the Merger Agreement and the
satisfaction or waiver of the other conditions to consummation of the merger
(the "Closing Date"). The Merger will become effective upon the filing of
articles of merger (the "Articles of Merger") with the Minnesota Secretary of
State (the "Effective Time"). At the Effective Time, Merger Sub will be merged
with and into PFW, with the result that PFW will be the surviving corporation in
the Merger and a wholly owned subsidiary of Petco. It is anticipated that,
promptly after the Effective Time, PFW will then be merged with Petco, with the
result that PFW will cease to exist and Petco will continue as the surviving
corporation. The stockholders of PFW will become stockholders of Petco, and
their rights will be governed by Petco's Amended and Restated Certificate of
Incorporation (the "Petco Certificate"), Petco's Amended and Restated Bylaws
(the "Petco Bylaws") and the General Corporation Law of the State of Delaware
(the "Delaware Law"). At the Effective Time, the PFW Common Stock will cease to
be traded on The Nasdaq National Market, and there will no longer be any public
trading market for PFW Common Stock.
There will be no change in the current Board of Directors and officers of
Petco as a result of the Merger, except that Marvin W. Goldstein, the current
Chairman, President and Chief Executive Officer of PFW, will become a Senior
Vice President of Petco. At the Effective Time, the officers and directors of
Merger Sub (who are currently officers of Petco) will become the officers and
directors of PFW.
RECOMMENDATION OF PFW BOARD OF DIRECTORS
The Board of Directors of PFW has approved and adopted the Merger Agreement
and the transactions contemplated thereby and recommends that the holders of PFW
Common Stock vote in favor of approval and adoption of the Merger Agreement at
the Special Meeting. The primary factors considered and relied upon by the PFW
Board in reaching its recommendation are described below under "The Merger and
Related Transactions -- PFW's Reasons for the Merger."
OPINION OF PFW FINANCIAL ADVISOR
On October 3, 1996, PFW's financial advisor, Dain Bosworth Incorporated
("Dain"), delivered to the PFW Board its oral opinion, subsequently confirmed in
writing, to the effect that, as of the date of such opinion, the consideration
to be received by the stockholders of PFW in the Merger was fair, from a
financial point of view, to the PFW stockholders. The full text of the opinion
of Dain, which sets forth the assumptions made, matters considered, limitations
on and scope of its review, is attached hereto as Appendix B. PFW stockholders
are urged to, and should, read such opinion in its entirety. See "The Merger and
Related Transactions -- Opinion of PFW Financial Advisor."
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<PAGE> 14
MERGER AGREEMENT
Representations and Covenants. Under the Merger Agreement, Petco and PFW
have each made a number of representations regarding their respective capital
structures, operations, financial condition and other matters, including their
authority to enter into the Merger Agreement and to consummate the Merger. In
addition, they have each covenanted that, until the consummation of the Merger
or the termination of the Merger Agreement, they will not take certain actions
relating to the operation of their respective businesses without the other's
consent. Each of Petco and PFW has also covenanted that it will use all
reasonable efforts to consummate the Merger in accordance with the Merger
Agreement as promptly as practicable, to obtain all necessary waivers, consents
and approvals (though Petco will not be required to dispose of any assets or
change its operations), to effect all necessary registrations and filings, and
otherwise to satisfy all conditions precedent to its obligations under the
Merger Agreement.
Under the Merger Agreement, PFW has agreed that it will not, directly or
indirectly, solicit or enter into any discussions or negotiations with, or
encourage or otherwise cooperate in any other way with, any person or entity,
other than Petco, concerning any sale of any shares of capital stock of PFW, or
any merger, consolidation or similar transaction involving PFW, subject to the
good faith exercise by the PFW Board of Directors of its fiduciary obligations,
supported by a written legal opinion from counsel for PFW as to the necessity of
such action. PFW has further agreed, among other things, to: (i) conduct its
business in the ordinary course consistent with past practice and to not take
certain actions, even if in the ordinary course of business, without Petco's
consent, (ii) provide reasonable access to its properties, books and records and
deliver certain financial and operating data to Petco, (iii) terminate PFW's
Employee Stock Purchase Plan, and (iv) use its best efforts to obtain and
deliver to Petco at the closing of the Merger various Related Agreements (as
defined below) and other documents. In addition, Petco has agreed, among other
things, not to declare or pay any cash dividend or amend the Petco Certificate
or Petco Bylaws in any manner which would adversely affect PFW, without PFW's
consent, and to provide certain indemnification to PFW's officers and directors
following the consummation of the Merger. See "The Merger and Related
Transactions -- Merger Agreement."
Conditions to the Merger. In addition to the requirement that the Merger
Agreement be approved by the requisite vote of PFW stockholders, the obligations
of Petco and PFW to consummate the Merger are subject to the satisfaction of a
number of other conditions that, if not satisfied or waived, may cause the
Merger not to be consummated and the Merger Agreement to be terminated. Each
party's obligation is conditioned on the effectiveness of, and the absence of
any stop orders with respect to, the Registration Statement; the approval for
quotation on The Nasdaq National Market of the Petco Common Stock to be issued
in the Merger, subject to official notice of issuance; the expiration of all
applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"); the accuracy of the representations and
warranties made by the other party; the performance by the other party of its
covenants; the receipt of all permits and waivers necessary to consummate the
Merger; the absence of any order by any governmental agency to enjoin or
otherwise prevent the consummation of the Merger; the receipt of certain legal
opinions from counsel to the other party; the receipt of a comfort letter from
the other party's independent auditors; and the receipt of an update, dated as
of the Closing Date, to the fairness opinion provided by their respective
financial advisors.
Petco's obligation to consummate the Merger is further conditioned on (i)
the receipt from KPMG Peat Marwick LLP, Petco's independent auditors, of a
letter to the effect that the Merger qualifies for pooling of interests
accounting treatment, which letter will be based in part on a letter from Arthur
Andersen LLP, PFW's independent public accountants, stating that they are not
aware of any conditions that would preclude PFW from being pooled with Petco;
(ii) the absence of any material adverse change with respect to the business or
financial condition of PFW; (iii) the exercise by holders of not more than 7.5%
of the outstanding shares of PFW Common Stock of their dissenters' rights; and
(iv) the receipt of other documents, including the Related Agreements. See "The
Merger and Related Transactions -- Merger Agreement" and "-- Related Agreements;
Interests of Certain Persons in the Merger."
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<PAGE> 15
At any time prior to the Effective Time, to the extent legally allowed,
Petco or PFW, without approval of the stockholders of PFW, may waive compliance
with any of the agreements or conditions contained in the Merger Agreement for
the benefit of that company. Neither Petco nor PFW currently intends to waive
compliance with any such agreements or conditions.
Termination or Amendment. The Merger Agreement may be terminated by mutual
agreement of both parties or by either Petco or PFW: (i) if the Merger has not
been consummated by January 31, 1997, other than as a result of the failure by
the terminating party to perform any obligation under the Merger Agreement; (ii)
if a court or governmental agency issues a nonappealable final order or decree
or otherwise takes any action having the effect of permanently restraining or
enjoining the Merger, other than as a result of the failure by the terminating
party to use all reasonable efforts to consummate the Merger; (iii) if the
meeting of PFW stockholders to approve the Merger has been held and the Merger
Agreement is not approved by the requisite vote of the PFW stockholders; (iv) if
(A) under the applicable fiduciary duties of the directors of PFW, as determined
by such directors in good faith after consultation with and based upon the
advice of independent legal counsel, the PFW Board of Directors withdraws or
modifies its approval or recommendation of the Merger Agreement or the Merger in
a manner adverse to Petco or resolves to do so; (B) the PFW Board of Directors
recommends to the stockholders of PFW an Alternative Transaction (as defined
under the caption "The Merger and Related Transactions -- Merger
Agreement -- Termination or Amendment"); or (C) a tender offer or exchange offer
for 25% or more of the outstanding shares of PFW Common Stock is commenced
(other than by Petco) and the PFW Board of Directors recommends that the
stockholders of PFW tender their shares in such tender offer or exchange offer;
(v) if under the applicable fiduciary duties of the directors of Petco, as
determined by such directors in good faith after consultation with and based
upon the advice of independent legal counsel, the Petco Board of Directors
withdraws or modifies its approval of the Merger Agreement or the Merger in a
manner adverse to PFW or resolves to do so; or (vi) as a result of a material
uncured breach by the other party of a representation, warranty or covenant set
forth in the Merger Agreement which is either not curable or which the breaching
party has not used reasonable efforts to cure.
Petco may also terminate the Merger Agreement if any person (or group of
persons) other than Petco is or becomes the beneficial owner of 25% or more of
the outstanding shares of PFW Common Stock; provided, that Petco may not
terminate the Merger Agreement pursuant to this condition by reason of the
ownership of shares of PFW Common Stock by any person listed in the beneficial
ownership table in PFW's proxy statement dated May 17, 1996 in amount not
exceeding the amount of shares indicated therein as being owned by such person.
Upon termination of the Merger Agreement by reason of any of the matters
set forth in the immediately preceding paragraph or in clauses (iii), (iv) or
(vi) above (as (vi) relates to a material uncured breach by PFW), or in the
event of the non-satisfaction of PFW's condition to closing that PFW receive an
update, dated as of the Closing Date, to the fairness opinion provided by its
financial advisor, PFW would be required to pay Petco a fee of $1.7 million,
plus actual, documented and reasonable out-of-pocket expenses of Petco relating
to the transactions contemplated by the Merger Agreement in an aggregate amount
not to exceed $450,000. PFW would not be required to pay such fee, however, in
all such cases other than those described in clause (iv) above unless and until
PFW also consummates an Alternative Transaction within one year from the date of
termination of the Merger Agreement.
The Merger Agreement provides that it may be amended by Petco and PFW at
any time before or after approval of the PFW stockholders. Pursuant to Delaware
Law, an amendment to the Merger Agreement made after adoption by stockholders
may not, without further stockholder approval, (i) change the exchange ratio,
(ii) change the articles of incorporation of PFW as the corporation surviving
the Merger, or (iii) change the terms and conditions of the Merger Agreement in
a manner that would adversely affect holders of PFW Common Stock.
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<PAGE> 16
RELATED AGREEMENTS
In connection with the Merger Agreement, certain stockholders and employees
of PFW have entered into, or are expected to enter into prior to the Effective
Time, related agreements (the "Related Agreements"), as described below:
Employment, Consulting, Severance and Non-Competition Agreements. Marvin
W. Goldstein, Chairman, President and Chief Executive Officer of PFW, has
entered into an employment letter agreement (the "Letter Agreement") with Petco,
pursuant to which he will be employed by Petco as a Senior Vice President in
charge of Petco's Midwest Region for a period commencing on the Closing Date and
ending on March 31, 1997. The Letter Agreement provides, among other things,
that following termination of his employment with Petco, Mr. Goldstein will
enter into a six-month consulting agreement, and that Mr. Goldstein will enter
into a five-year non-competition agreement prior to the Effective Time (in
exchange for which he will be paid $375,000 by Petco) which will begin at the
earlier of (i) the termination of Mr. Goldstein's consulting period, or (ii)
October 1, 1997. The Letter Agreement further provides that Petco will honor Mr.
Goldstein's existing severance arrangements with PFW. Under the Merger
Agreement, Petco has agreed to honor the existing severance arrangements of
certain other employees of PFW and to pay PFW's remaining corporate managerial
staff (totaling 45 persons) severance benefits upon their termination of
employment under certain circumstances. See "The Merger and Related
Transactions -- Related Agreements; Interests of Certain Persons in the
Merger -- Employment, Consulting, Severance and Non-Competition Agreements."
Affiliate Agreements. To help ensure that the Merger will be accounted for
as a pooling of interests, it is a condition to Petco's obligation to consummate
the Merger that PFW affiliates (as defined for purposes of Rule 145 promulgated
under the Securities Act ("Rule 145")) enter into agreements that prohibit such
persons from disposing of their shares of Petco Common Stock until Petco
publicly releases its first report of at least 30 days of "combined operations,"
as defined by the Commission. Such affiliates also will agree not to sell,
pledge or otherwise transfer such shares, except in compliance with Rule 145 or
under certain other limited circumstances. See "The Merger and Related
Transactions -- Related Agreements; Interests of Certain Persons in the
Merger -- Affiliate Agreements."
OTHER MATTERS RELATED TO THE MERGER
Regulatory Matters. Certain acquisition transactions such as the Merger
are reviewed by the U.S. Department of Justice (the "Justice Department") or the
U.S. Federal Trade Commission (the "FTC") to determine whether they comply with
applicable antitrust laws. Under the provisions of the HSR Act, the Merger may
not be consummated until certain information has been furnished to the Justice
Department and the FTC and certain waiting period requirements of the HSR Act
have been satisfied. On , 1996, Petco and PFW each filed
Premerger Notification and Report Forms pursuant to the HSR Act with the Justice
Department and the FTC. The waiting period under the HSR Act expired with
respect to the Merger without any request for additional information on
, 1996. See "The Merger -- Regulatory Matters."
Certain Federal Income Tax Matters. The Merger is expected to be a
tax-free reorganization for federal income tax purposes, so that no gain or loss
will be recognized by the PFW stockholders on the exchange of PFW Common Stock
for Petco Common Stock or by the Petco stockholders pursuant to the Merger,
except to the extent that PFW stockholders receive cash in lieu of fractional
shares. As a condition to PFW's obligation to consummate the Merger, since the
date of the Merger Agreement there shall not have been any change in the facts,
circumstances or applicable federal tax laws that would prevent PFW from
receiving an opinion dated on or prior to the time that the Registration
Statement shall have become effective under the Securities Act, or that would
cause the withdrawal of such opinion on or prior to the Closing Date, from its
legal counsel to the effect that the Merger will be treated as a tax-free
reorganization for federal income tax purposes. PFW stockholders are urged to
consult their own tax advisors regarding the tax consequences of the Merger. See
"The Merger and Related Transactions -- Certain Federal Income Tax Matters."
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<PAGE> 17
Accounting Treatment. The Merger is intended to qualify as a pooling of
interests for accounting and financial reporting purposes. It is a condition to
Petco's obligation to consummate the Merger that, among other things, Petco
receive from KPMG Peat Marwick LLP, its independent auditors, a letter to the
effect that pooling of interests accounting (under Accounting Principles Board
Opinion No. 16) is appropriate for the Merger. Such letter will be based in part
on a letter from Arthur Andersen LLP, PFW's independent public accountants,
stating that they are not aware of any conditions that would preclude PFW from
being pooled with Petco. See "The Merger and Related Transactions -- Accounting
Treatment."
Dissenters' Rights. If the Merger Agreement is approved by the required
vote of PFW stockholders and is not abandoned or terminated, holders of PFW
Common Stock who did not vote in favor of the Merger may, by complying with
Sections 302A.471 and 302A.473 of the Minnesota Law, a copy of which is attached
hereto as Appendix C, assert dissenters' rights as described therein, and the
shares of PFW Common Stock held by such persons will be deemed to be "Dissenting
Shares." However, it is a condition to Petco's obligation to consummate the
Merger that holders of at least 92.5% of the outstanding shares of PFW Common
Stock not exercise dissenters' rights pursuant to Sections 302A.471 and 302A.473
of the Minnesota Law. See "The Merger and Related Transactions -- Dissenters'
Rights."
Merger Expenses and Fees and Other Costs. Whether or not the Merger is
consummated, each party will bear its own costs and expenses in connection with
the Merger and the transactions related thereto, except that Petco and PFW have
agreed to share equally all fees and expenses, other than attorneys',
accountants' and representatives' fees, incurred in connection with the printing
and filing of this Proxy Statement/Prospectus. Petco has agreed to pay
PaineWebber Incorporated ("PaineWebber") a transaction fee of $750,000 if the
Merger is consummated. PFW has agreed to pay Dain a transaction fee equal to
1.2% of the total transaction value if the Merger is consummated and a fee of
$175,000 in connection with rendering an opinion concerning the fairness of
consideration to be received by the stockholders of PFW, which amount will be
credited against the transaction fee. Pursuant to the Merger Agreement, in no
event shall Dain's fees exceed $750,000. See "The Merger and Related
Transactions -- Opinion of PFW Financial Advisor" and "-- Merger Expenses and
Fees and Other Costs."
Petco and PFW anticipate that they will incur combined direct transaction
costs currently estimated to be approximately $2.3 million associated with the
Merger. These nonrecurring transaction costs will be charged to operations upon
consummation of the Merger, expected in the fiscal year ending February 1, 1997.
In addition, Petco anticipates incurring an additional charge upon consummation
of the Merger currently estimated to be in the range of $15.0- $23.0 million to
reflect costs and expenses related to integrating the two companies. See
"Unaudited Pro Forma Condensed Combining Consolidated Financial Statements."
Surrender of Certificates. If the Merger becomes effective, Petco will
mail a letter of transmittal with instructions to all holders of record of PFW
Common Stock as of the Effective Time for use in surrendering their stock
certificates in exchange for certificates representing Petco Common Stock and a
cash payment in lieu of fractional shares. CERTIFICATES REPRESENTING SHARES OF
PFW COMMON STOCK SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS
RECEIVED.
COMPARATIVE MARKET PRICE INFORMATION
The table below sets forth, for the fiscal quarters indicated, the range of
high and low bid quotations for shares of Petco Common Stock and PFW Common
Stock as reported by The Nasdaq National Market (giving effect to the
three-for-two split of the Petco Common Stock effected in the form of a stock
dividend on April 15, 1996). The Petco Common Stock is traded on The Nasdaq
National Market under the symbol "PETC" and the PFW Common Stock is traded on
The Nasdaq National Market under the symbol "PFWA."
7
<PAGE> 18
<TABLE>
<CAPTION>
PETCO PFW
COMMON STOCK(1) COMMON STOCK(2)
------------------ -----------------
PERIOD HIGH LOW HIGH LOW
----------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Fiscal year ended January 28, 1995
1st Quarter.................................. $11.17 $ 7.48 $ 5.88 $ 4.25
2nd Quarter.................................. $ 9.50 $ 7.17 $ 5.38 $ 3.88
3rd Quarter.................................. $11.83 $ 8.00 $ 6.13 $ 4.75
4th Quarter.................................. $12.33 $ 9.67 $ 5.88 $ 3.13
Fiscal year ended February 3, 1996
1st Quarter.................................. $15.33 $11.33 $ 4.13 $ 3.00
2nd Quarter.................................. $15.67 $12.33 $ 5.13 $ 3.19
3rd Quarter.................................. $18.00 $14.33 $ 5.38 $ 3.44
4th Quarter.................................. $22.83 $16.33 $ 3.88 $ 2.88
Fiscal year ending February 1, 1997
1st Quarter.................................. $32.67 $20.50 $ 4.44 $ 3.38
2nd Quarter.................................. $29.25 $21.63 $ 4.50 $ 3.44
3rd Quarter (through October 15)............. $29.00 $21.50 $ 5.38 $ 3.38
</TABLE>
- ---------------
(1) The Petco Common Stock was initially offered to the public on March 17,
1994. Prior to such date, there was no public market for the Petco Common
Stock.
(2) The PFW Common Stock prices are as reported on The Nasdaq National Market
following PFW's listing on February 17, 1994. Prior to February 17, 1994,
the PFW Common Stock was listed on The Nasdaq SmallCap Market. For the
period through February 16, 1994, the high and low bid quotations for shares
of PFW Common Stock were $7.38 and $5.63, respectively. These prices
represent interdealer prices without adjustment for mark-up, mark-down or
commission and do not reflect actual transactions.
As of the Record Date, there were stockholders of record of Petco
Common Stock as shown on the records of Petco's transfer agent and
stockholders of record of PFW Common Stock as shown on the records of PFW's
transfer agent.
Neither Petco nor PFW has ever paid any cash dividends on its stock, and
each anticipates that, for the foreseeable future, it will continue to retain
any earnings for use in the operation of its business. Under the terms of
Petco's revolving credit agreement, Petco is not permitted to declare or pay
dividends on its capital stock. Under PFW's credit agreement, PFW is also not
permitted to declare or pay any dividends.
The following table sets forth the closing price per share for Petco Common
Stock and PFW Common Stock as reported on The Nasdaq National Market on October
3, 1996, the last full trading day prior to the date of the public announcement
of the Merger Agreement, and on , 1996, the latest practicable
trading day before the printing of this Proxy Statement/Prospectus.
Additionally, the table below sets forth the equivalent per share prices for PFW
Common Stock based on the Petco Common Stock prices on such dates.
<TABLE>
<CAPTION>
PETCO PFW
COMMON STOCK COMMON STOCK PFW EQUIVALENT
PRICE PRICE PER SHARE PRICE(1)
------------ ------------ ------------------
<S> <C> <C> <C>
October 3, 1996........................ $29.00 $ 5.13 $ 5.80
, 1996.................. $ $ $
</TABLE>
- ---------------
(1) PFW equivalent per share price was calculated by multiplying an assumed
exchange ratio (0.2 on October 3, 1996 and on , 1996,
based on the assumption that the Petco Stock Price on the dates shown
equaled the Petco Common Stock price on such dates) by the Petco Common
Stock price on such dates.
8
<PAGE> 19
PETCO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE, STORE AND SQUARE FOOT DATA)
The following table sets forth selected historical consolidated financial
data of Petco for each of the years in the five-year period ended February 3,
1996, and as of February 1, 1992, January 30, 1993, January 29, 1994, January
28, 1995, February 3, 1996, July 29, 1995 and August 3, 1996, and for the
twenty-six week periods ended July 29, 1995 and August 3, 1996. The selected
historical consolidated financial data as of and for each of the years in the
three-year period ended February 3, 1996 shown below have been derived from the
audited consolidated financial statements of Petco, which have been restated to
reflect the merger in July 1996 with Pet Nosh Consolidated Co., Inc. ("Pet
Nosh") using the pooling of interests method. The selected historical
consolidated financial data as of and for each of the years in the two-year
period ended January 30, 1993 have been derived from the unaudited historical
consolidated financial statements of Petco restated for the merger with Pet
Nosh. The historical consolidated financial data for Petco for the twenty-six
week periods ended July 29, 1995 and August 3, 1996 have been derived from
Petco's unaudited consolidated financial statements and reflect all adjustments
and accruals, consisting only of normal, recurring adjustments and accruals
which are, in the opinion of Petco management, necessary for a fair presentation
of the results for the interim periods presented. These historical data are not
necessarily indicative of results to be expected after the Merger is consummated
and should be read in conjunction with the information set forth under the
captions "Petco Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the separate consolidated financial statements and
the notes thereto of Petco incorporated herein by reference.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
FISCAL YEAR ENDED ENDED
-------------------------------------------------------- --------------------
FEB. 1, JAN. 30, JAN. 29, JAN. 28, FEB. 3, JULY 29 AUG. 3,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales................................ $112,444 $125,231 $160,841 $205,178 $293,631 $122,512 $197,272
Cost of sales and occupancy costs(1)..... 80,869 91,186 120,574 153,607 224,540 93,151 147,764
-------- -------- -------- -------- -------- -------- --------
Gross profit............................. 31,575 34,045 40,267 51,571 69,091 29,361 49,508
Selling, general and administrative
expenses(2)............................ 24,586 29,147 35,969 44,128 70,808 25,531 42,787
Merger and nonrecurring charges(3)....... -- -- -- -- -- -- 14,945
-------- -------- -------- -------- -------- -------- --------
Operating income (loss).................. 6,989 4,898 4,298 7,443 (1,717) 3,830 (8,224)
Interest expense (income)................ 4,823 4,356 5,104 720 (245) (79) 88
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income taxes...... 2,166 542 (806) 6,723 (1,472) 3,909 (8,312)
Income taxes (benefit)(4)................ 161 28 51 1,969 (9,785) 1,177 (2,395)
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)...................... $ 2,005 $ 514 $ (857) $ 4,754 $ 8,313 $ 2,732 $ (5,917)
======== ======== ======== ======== ======== ======== ========
Net earnings (loss) per share(5)......... -- -- -- $ 0.57 $ 0.67 $ 0.24 $ (0.40)
Weighted average common shares
outstanding............................ 8,340,803 12,430,720 11,443,860 14,874,304
OPERATING DATA:
Superstores open end of period........... 11 39 69 117 184 139 206
Traditional stores open end of period.... 167 158 132 107 79 92 68
-------- -------- -------- -------- -------- -------- --------
Total stores open end of period.......... 178 197 201 224 263 231 274
Aggregate gross square footage........... 652,800 833,000 996,000 1,427,000 2,278,000 1,608,000 2,601,000
Percentage increase in comparable store
net sales.............................. 5.5% 2.1% 15.0% 18.5% 16.5% 15.0% 18.3%
BALANCE SHEET DATA:
Working capital.......................... $ 139 $ 1,591 $ 785 $ 14,183 $ 14,414 $ 50,089 $ 66,803
Total assets............................. 25,293 32,586 41,771 79,850 162,115 126,270 236,628
Current portion of capital lease and
other obligations...................... 1,110 5,770 4,999 1,016 2,747 1,627 3,941
Capital lease and other obligations,
excluding current portion.............. 44,148 46,990 50,064 4,200 11,522 5,742 12,619
Total stockholders' equity............... ( 36,119) (35,470) (36,181) 41,348 96,280 90,849 169,226
</TABLE>
9
<PAGE> 20
- ---------------
(1) Includes $4.3 million of charges from the write-down of fixed assets and
related costs with respect to Petco's central distribution facility in
fiscal 1995.
(2) Includes $9.2 million of costs incurred following acquisitions in fiscal
1995. These costs were primarily associated with lease cancellations,
closure of traditional stores located in the same markets as acquired
stores, write-downs of certain assets, and the conversion and integration of
certain acquired stores.
(3) Merger and nonrecurring charges of $14.9 million reflected in the twenty-six
weeks ended August 3, 1996 include transaction costs, costs attributable to
lease cancellation and closure of duplicate or inadequate facilities,
facility conversion costs, cancellation of certain contractual obligations
and other integration costs.
(4) Includes an $8.7 million benefit from previously unrecognized deferred tax
assets in fiscal 1995.
(5) Due to differences in capital structure, Petco's net earnings per share
information prior to fiscal 1994 is not comparable and, accordingly, is not
presented.
10
<PAGE> 21
PFW SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE, STORE AND SQUARE FOOT DATA)
The following table sets forth selected historical financial data of PFW.
The balance sheet data presented below as of December 31, 1991, 1992 and 1993,
January 29, 1994, January 28, 1995 and February 3, 1996 and the statements of
operations data for each of the years in the three-year period ended December
31, 1993, the twenty-nine days ended January 29, 1994, the year ended January
28, 1995 and the year ended February 3, 1996 have been derived from the audited
financial statements of PFW, all of which have been audited by Arthur Andersen
LLP, except as of and for the year ended December 31, 1991, which was audited by
another firm. The balance sheet data as of July 29, 1995 and August 3, 1996 and
the statements of operations data for the twenty-six weeks ended July 29, 1995
and August 3, 1996 presented below have been derived from PFW's unaudited
condensed financial statements and reflect all adjustments and accruals,
consisting only of normal, recurring adjustments and accruals which are, in the
opinion of PFW management, necessary for a fair presentation of the results for
the interim periods presented. The historical interim results data are not
necessarily indicative of results to be expected after the Merger is consummated
and should be read in conjunction with the information set forth under the
caption "PFW Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the separate financial statements and the notes
thereto of PFW included herein.
<TABLE>
<CAPTION>
TWENTY-NINE TWENTY-SIX
FISCAL YEAR ENDED DAYS FISCAL YEAR ENDED WEEKS ENDED
-------------------------------- ENDED --------------------- ---------------------
DEC. 31, DEC. 31, DEC. 31, JAN. 29, JAN. 28, FEB. 3, JULY 29, AUG. 3,
1991 1992 1993 1994 1995 1996 1995 1996
-------- --------- --------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales....................... $ 7,050 $ 11,108 $ 18,170 $ 1,842 $ 36,285 $ 61,095 $ 26,767 $ 31,903
Cost of sales................... 5,364 8,424 14,113 1,437 28,052 46,747 20,971 23,630
-------- --------- --------- ----------- --------- --------- --------- ---------
Gross profit.................... 1,686 2,684 4,057 405 8,233 14,348 5,796 8,273
Selling, general and
administrative expenses....... 1,747 2,443 5,671 714 10,997 16,332 7,835 7,778
-------- --------- --------- ----------- --------- --------- --------- ---------
Operating income (loss)......... (61 ) 241 (1,614) (309) (2,764) (1,984) (2,039) 495
Loss on disposal................ -- -- -- -- -- (3,500) -- --
Interest expense (income)....... 88 38 (34) 3 (570) (391) (239) (111)
-------- --------- --------- ----------- --------- --------- --------- ---------
Earnings (loss) before income
taxes......................... (149 ) 203 (1,580) (312) (2,194) (5,093) (1,800) 606
Income taxes (benefit).......... -- 69 (9) -- -- -- -- --
-------- --------- --------- ----------- --------- --------- --------- ---------
Net earnings (loss)............. (149 ) 134 (1,571) (312) (2,194) (5,093) (1,800) 606
======= ======== ======== =========== ======== ======== ======== ========
Net earnings (loss) per share... $ (.52 ) $ .07 $ (.38) $ (.06) $ (.24) $ (.55) $ (.19) $ .06
Weighted average common shares
outstanding................... 285,714 2,011,450 4,117,055 4,866,206 9,001,257 9,330,171 9,327,522 9,422,378
OPERATING DATA:
Stores open end of period....... 5 5 8 8 21 22 25 25
Aggregate gross square
footage....................... 77,000 77,000 133,000 133,000 379,000 376,000 454,000 427,000
Percentage increase in
comparable store net sales.... 53.3 % 30.0% 23.8% 29.7% 23.3% 17.9% 18.0% 6.9%
BALANCE SHEET DATA:
Working capital (deficit)....... (420 ) 3,781 3,679 3,151 13,898 9,544 10,937 10,197
Total assets.................... 1,658 5,919 8,354 7,866 25,426 21,443 24,533 22,823
Current maturities of capital
lease obligations............. 346 207 60 109 86 149 76 154
Capital lease obligation, less
current maturities............ 160 86 28 282 294 349 250 270
Total stockholders' equity...... (105 ) 4,376 5,806 5,494 21,686 16,635 19,886 17,345
</TABLE>
11
<PAGE> 22
SELECTED PRO FORMA CONDENSED COMBINING CONSOLIDATED FINANCIAL DATA
The selected pro forma condensed combining consolidated financial
information presented below provides financial information giving effect to the
Merger on a pooling of interests basis for the periods presented. The financial
information of PFW has been adjusted to conform PFW's presentation format to
that of Petco. The pro forma information is provided for informational purposes
only and is not necessarily indicative of actual results that would have been
achieved had the Merger been consummated at the beginning of the periods
presented or of future results. The pro forma information is derived from the
Unaudited Pro Forma Condensed Combining Consolidated Financial Statements
appearing elsewhere herein and should be read in conjunction with, and is
qualified in its entirety by reference to, such information.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------- TWENTY-SIX
JANUARY 29, JANUARY 28, FEBRUARY 3, WEEKS ENDED
1994(1)(2) 1995 1996 AUGUST 3, 1996
----------- ----------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
PRO FORMA COMBINING STATEMENT OF OPERATIONS DATA:
Net sales......................................... $ 179,011 $ 241,463 $ 354,726 $229,175
Gross profit...................................... 44,324 59,804 83,439 57,781
Operating income (loss)........................... 2,684 4,679 (3,701) (7,729)
Net interest expense (income)..................... 5,070 150 (636) (23)
Earnings (loss) before income taxes............... (2,386) 4,529 (6,565) (7,706)
Net earnings (loss)............................... $ (1,976) $ 3,515 $ 4,971 $ (5,523)
Net earnings (loss) per share..................... -- $ 0.34 $ 0.35 $ (0.33)
Weighted average common shares outstanding........ -- 10,227,403 14,317,320 16,760,904
</TABLE>
<TABLE>
<CAPTION>
AUGUST 3, 1996
--------------
(IN THOUSANDS)
<S> <C>
PRO FORMA COMBINING BALANCE SHEET DATA:
Working capital................................................................ $ 74,750
Total assets................................................................... 262,397
Current portion of capital lease and other obligations......................... 4,095
Capital lease and other obligations, excluding current portion................. 12,889
Total stockholders' equity..................................................... 187,267
</TABLE>
- ---------------
(1) PFW historical financial data included is for the year ended December 31,
1993.
(2) Due to differences in capital structure, Petco's net earnings per share
information prior to fiscal 1994 is not comparable and, accordingly, is not
presented.
12
<PAGE> 23
COMPARATIVE PER SHARE DATA
The following table summarizes certain selected consolidated financial
information on an historical basis, a pro forma basis and a pro forma equivalent
per share basis and is derived from, should be read in conjunction with and is
qualified in its entirety by reference to, the Unaudited Pro Forma Condensed
Combining Consolidated Financial Statements included elsewhere in this Proxy
Statement/Prospectus and the historical financial statements of Petco and PFW,
which are included elsewhere in this Proxy Statement/Prospectus or incorporated
in this Proxy Statement/Prospectus by reference. The information presented in
this table is for informational purposes only and is not necessarily indicative
of actual results that would have been achieved had the Merger been consummated
at the beginning of the periods presented or of future results.
<TABLE>
<CAPTION>
PFW
HISTORICAL EQUIVALENT
----------------- PRO FORMA PRO FORMA
PETCO(3) PFW COMBINED(1)(3) COMBINED(1)(2)(3)
-------- ------ -------------- -----------------
<S> <C> <C> <C> <C>
Net earnings (loss) per share:
Twenty-six weeks ended August 3, 1996....... $(0.40) $ 0.06 $(0.33) $ (0.07)
Twenty-six weeks ended July 29, 1995........ 0.24 (0.19) 0.10 0.02
Fiscal year ended February 3, 1996.......... 0.67 (0.55) 0.35 0.07
Fiscal year ended January 28, 1995.......... 0.57 (0.24) 0.34 0.07
Twenty-nine days ended January 29, 1994..... -- (0.06) -- --
Fiscal year ended January 29, 1994(3)(4).... -- (0.38) -- --
Book value per share at(5):
August 3, 1996.............................. $10.37 $ 1.84 $10.29 $ 2.06
February 3, 1996............................ 7.19 1.78 7.45 1.49
</TABLE>
- ---------------
(1) Petco and PFW anticipate that the combined company will incur Merger-related
expenses totaling approximately $2.3 million. Such expenses include only
financial advisory fees, legal and accounting expenses and other
miscellaneous transaction costs; they do not include any severance payments
that may be made to PFW employees in connection with the Merger (see "The
Merger and Related Transactions -- Related Agreements; Interests of Certain
Persons in the Merger"), any costs relating to possible store conversions
or closures or any other costs that may arise in connection with the Merger
(see "The Merger and Related Transactions -- Merger Expenses and Fees and
Other Costs"). These Merger-related expenses are estimated to be in the
range of $15.0 -- $23.0 million and are expected to be charged to the
operations of Petco and PFW as incurred. The effects of the $2.3 million in
direct costs have not been reflected in the historical or pro forma
earnings per share data but are reflected in the pro forma book value per
share as of August 3, 1996 and February 3, 1996.
(2) The PFW equivalent pro forma combined per share amounts are calculated by
multiplying the Petco pro forma combined per share amounts by an assumed
exchange ratio of 0.2, based on the assumption that the Petco Stock Price
on October 15, 1996 equaled the Petco Common Stock price on such date.
(3) Due to differences in capital structure, Petco net earnings (loss) per share
information prior to fiscal 1994 is not comparable and, accordingly, is not
presented.
(4) PFW historical financial data included is for the year ended December 31,
1993.
(5) Historical book value per share is computed by dividing stockholders' equity
by the number of shares of common stock outstanding at the end of each
period. Petco's pro forma book value per share is computed by dividing pro
forma stockholders' equity, including the effect of pro forma adjustments,
by the pro forma number of Petco Common Stock which would have been
outstanding had the Merger been consummated as of each balance sheet date.
13
<PAGE> 24
RISK FACTORS
In addition to the other information regarding Petco, PFW and the Merger
contained in this Proxy Statement/Prospectus, the following factors should be
considered carefully by PFW stockholders before voting on the Merger.
Certain statements in this Proxy Statement/Prospectus that are not
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results of Petco, PFW and the combined entity to be
materially different from historical results or from any results expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
factors include, but are not limited to, the following risks:
INTEGRATION OF OPERATIONS
If the combined company is to realize the anticipated benefits of the
Merger, the operations of the two companies must be integrated and combined
efficiently. The process of rationalizing management services, administrative
organizations, facilities, management information systems and other aspects of
operations, while managing a larger and geographically expanded entity, will
present a significant challenge to the management of the combined company. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the business combination will be fully realized. The
dedication of management resources to such integration may detract attention
from the day-to-day business of the combined company. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with the
integration process, that such activities will not result in a decrease in
revenues or that there will not be other material adverse effects of these
integration efforts. Such effects could materially reduce the short-term
earnings of the combined company. Subsequent to the Merger, Petco expects to
incur a charge estimated to be in the range of $15.0-$23.0 million to reflect
integration costs expected to result from the combination of the two companies.
This amount is a preliminary estimate only. There can be no assurance that Petco
will not incur additional charges in the current quarter and subsequent quarters
to reflect costs associated with the Merger.
TAX-FREE REORGANIZATION; CONTINUITY OF INTEREST REQUIREMENT
The proper characterization of the Merger as a tax-free reorganization (a
"Reorganization") under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), is subject to the satisfaction of certain requirements. Of
particular importance is the "continuity of interest" requirement. To satisfy
the "continuity of interest" requirement, PFW stockholders must not, pursuant to
a plan or intent existing at or prior to the Effective Time, dispose of or
transfer so much of either (i) their PFW Common Stock in anticipation of the
Merger, or (ii) the Petco Common Stock to be received in the Merger
(collectively, "Planned Dispositions"), such that the PFW stockholders, as a
group, would no longer have a significant equity interest in the PFW business
being conducted by Petco after the Merger. PFW stockholders will generally be
regarded as having a significant equity interest as long as the Petco Common
Stock received in the Merger (after taking into account Planned Dispositions),
in the aggregate, represents a substantial portion of the entire consideration
received by the PFW stockholders in the Merger.
A successful Internal Revenue Service ("IRS") challenge to the
Reorganization status of the Merger (as a result of a failure of the "continuity
of interest" requirement or otherwise) would result in significant tax
consequences. A PFW stockholder would recognize gain or loss with respect to
each share of PFW Common Stock surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, as of the Effective
Time, of the Petco Common Stock received in exchange therefor. In such event, a
stockholder's aggregate basis in the Petco Common Stock so received would equal
its fair market value, and the stockholder's holding period for such stock would
begin the day after the Merger is consummated. Neither Petco nor PFW has
requested a ruling from the IRS with regard to the federal income tax
consequences of the
14
<PAGE> 25
Merger. Counsel for PFW will render certain legal opinions with respect to tax
matters. See "The Merger and Related Transactions -- Certain Federal Income Tax
Matters."
EXPANSION PLANS
Petco's continued growth depends, to a significant degree, on its ability
to open and operate new superstores on a profitable basis and to a lesser extent
on increasing sales in existing stores. Petco's performance is also dependent
upon a number of other factors, including its ability to locate and obtain
favorable superstore sites and negotiate acceptable lease terms, to obtain and
distribute adequate product supplies to its stores, to hire and train employees
and to upgrade its management information and other operating systems to control
the anticipated growth and expanded operations. In fiscal 1996, Petco expects to
open or acquire 55 superstores, including 16 conversions, and to close 14
stores. In fiscal 1997, Petco expects to open 45 superstores, including 20
conversions, and to close five stores. While Petco expects the costs of closing
the aforementioned stores to be insignificant, it is Petco's policy to accrue
such expenses at the time management makes the decision to close a store. Petco
expects to expend approximately $28.0 million in each of fiscal 1996 and fiscal
1997 for capital expenditures and pre-opening costs related to such expansion.
There can be no assurance that Petco will achieve its planned expansion or that
such expansion will be profitable. Petco has recently opened stores in new
markets and plans to open additional stores in new markets. The performance of
new stores may be adversely affected by regional economic conditions. Petco's
expansion strategy could have the effect of drawing customers from its existing
stores. In addition, average store contribution and operating margins may be
adversely affected in the near term due to the level of preopening expenses and
lower anticipated sales volumes of its immature stores. See "Petco Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Management's experience has been that a superstore achieves positive cash flow,
positive store contribution and GAAP income within approximately seven months.
See "Petco Business -- Store Development, Expansion and Acquisition Strategy."
Petco's existing revolving credit facility contains certain covenants which may
restrict or impair Petco's growth plans. See "Petco Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Management continues to evaluate Petco's long-term
distribution needs to increase product handling capacity to accommodate store
and sales growth beyond fiscal 1997. Either Petco's failure to expand its
distribution facilities in accordance with its growth plans or difficulties
incurred in operating its distribution facilities could adversely affect Petco's
ability to deliver merchandise to its stores in a timely fashion. See "Petco
Business -- Purchasing and Distribution."
RELIANCE ON VENDORS AND PRODUCT LINES AND EXCLUSIVE DISTRIBUTION ARRANGEMENTS
Petco purchases significant amounts of products from four key vendors,
Iams, Nutro, Science Diet and Nature's Recipe, the first three of which each
supplied products that accounted for more than 10% and less than 15% of Petco's
sales in calendar 1995. Petco does not maintain long-term supply contracts with
any of its vendors and the loss of any of these vendors or other significant
vendors of premium pet food or pet supplies offered by Petco could have a
material adverse effect on Petco. In addition, it would materially adversely
affect Petco if any of these manufacturers of premium pet food were to make
their products available in supermarkets or through other mass merchants, or if
the premium brands currently available to such supermarkets and mass merchants
were to increase their market share at the expense of the premium brands sold
only through specialty pet food and supply retailers. Petco's principal vendors
currently provide Petco with certain incentives such as volume purchasing, trade
discounts, cooperative advertising and market development funds. A reduction or
discontinuance of these incentives could also have a material adverse effect on
Petco.
COMPETITION
The pet food and supply retailing industry is highly competitive. Petco
competes with a number of pet supply warehouse stores, smaller pet store chains
and independent pet stores. Petco also competes with supermarkets and other mass
merchants. Many of Petco's competitors are larger and have significantly greater
resources than Petco. If any of Petco's major competitors seek to gain or retain
market share by reducing prices, Petco may be required to reduce its prices on
key items in order to remain competitive, which may
15
<PAGE> 26
have the effect of reducing its profitability. There is no assurance that in the
future Petco will not face greater competition from other national, regional and
local retailers. See "Petco Business -- Competition."
OPERATING LOSSES; FUTURE OPERATING RESULTS; ECONOMIC CONDITIONS
Petco incurred significant losses in fiscal 1989 and 1990. As of August 3,
1996, Petco had an accumulated deficit of $41.3 million. Beginning in fiscal
1990, Petco hired a new management team which redirected Petco's business
strategies. In fiscal 1991, Petco completed a restructuring. The decreased debt
(and attendant reduced interest payments) from the restructuring, coupled with
merchandising and operational improvements implemented by the new management
team, enabled Petco to realize profits in fiscal 1991 and 1992. Petco realized a
loss in fiscal 1993 due to lower gross margins on key food items as a result of
the implementation of an everyday low pricing strategy, increased operating
costs and immature sales volumes related to Petco's new store expansion,
increased interest expense and a loss on a writedown of intangible assets.
Although Petco realized net profits in fiscal 1994 and 1995 and believes that it
has successfully implemented its business strategies, there is no assurance that
they will continue to be effective or that Petco will be profitable in the
future.
Many regions of the United States, including California, where, as of
August 3, 1996, 122 of Petco's 274 stores were located, continue to experience
an economic recession. Adverse economic conditions in any of Petco's major
markets, or further adverse changes in general or local economic conditions,
could adversely affect Petco's operating results and expansion plans.
QUARTERLY AND SEASONAL FLUCTUATIONS
The timing of new store openings, related preopening expenses and the
amount of revenue contributed by new and existing stores may cause Petco's
quarterly results of operations to fluctuate. Petco's business is also subject
to some seasonal fluctuation. Historically, Petco has realized a higher portion
of its net sales during the month of December than during the other months of
the year and also typically has higher sales in the second and third fiscal
quarters due to increased demand for flea and tick control products. See "Petco
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Data."
DEPENDENCE ON SENIOR MANAGEMENT
Petco is dependent upon the efforts of its principal executive officers. In
particular, Petco is dependent upon the management and leadership of Brian K.
Devine, Chairman, President and Chief Executive Officer. The loss of Mr. Devine
or certain of Petco's other principal executive officers could materially
adversely affect Petco's business. Petco has entered into an employment
agreement with Mr. Devine which provides for an indefinite term and which may be
terminated by Mr. Devine on 90 days' notice. Petco has obtained a key man
insurance policy on the life of Mr. Devine in the amount of $1.0 million, of
which Petco is the sole beneficiary. Petco's success will depend on its ability
to retain its current management and to attract and retain qualified personnel
in the future.
POSSIBLE VOLATILITY OF STOCK PRICE
The Petco Common Stock is quoted on The Nasdaq National Market. The market
price of the Petco Common Stock could be subject to significant fluctuations in
response to operating results and other factors. In addition, the stock market
in recent years has experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Petco Common Stock. In
addition, the absence or discontinuance of the listing of the Petco Common Stock
on The Nasdaq National Market could adversely affect the liquidity and price of
the Petco Common Stock.
16
<PAGE> 27
THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the stockholders of
PFW in connection with the solicitation by the PFW Board of Directors of proxies
in the accompanying form to be used at the Special Meeting and at any
adjournments or postponements thereof.
DATE, TIME AND PLACE
The Special Meeting will be held on , 1996, at a.m., local
time, at .
PURPOSE
At the Special Meeting, including any adjournments or postponements
thereof, stockholders of PFW will be asked to consider and vote upon a proposal
to approve and adopt the Merger Agreement.
RECORD DATE; QUORUM
Only holders of record of PFW Common Stock at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting. As of
the close of business on the Record Date, there were shares of PFW Common
Stock outstanding and entitled to vote, held of record by stockholders. The
presence (in person or by proxy) of the holders of a majority of the outstanding
shares of PFW Common Stock entitled to vote at the Special Meeting is necessary
to constitute a quorum. Abstentions and broker non-votes will each be included
in determining whether a quorum is present.
VOTE REQUIRED
Each PFW stockholder is entitled to one vote for each share of PFW Common
Stock held as of the Record Date. The affirmative vote of a majority of the
outstanding shares of PFW Common Stock as of the Record Date, present in person
or represented by proxy, is required to approve and adopt the Merger Agreement.
Because approval of the Merger Agreement requires the affirmative vote of a
majority of the outstanding shares of PFW Common Stock, abstentions and broker
non-votes will have the effect of votes against the Merger Agreement. As a
group, all executive officers and directors of PFW beneficially owned 1,570,019
shares, or 16.6%, of the PFW Common Stock outstanding as of the Record Date.
VOTING OF PROXIES
The shares represented by properly executed proxies received prior to or at
the Special Meeting in response to this solicitation and not revoked will be
voted at the Special Meeting. A proxy may be revoked at any time before it is
exercised at the Special Meeting by (i) delivering to the Corporate Secretary of
PFW, Interchange Towers, Suite 701, 600 South Highway 169, St. Louis Park,
Minnesota 55426, a written notice bearing a later date than the date of the
proxy, stating that the proxy is revoked, (ii) signing and so delivering a proxy
relating to the same shares and bearing a later date prior to the vote at the
Special Meeting, or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not, by itself, revoke a
proxy). All proxies that are properly executed and returned and that are not
revoked will be voted at the Special Meeting in accordance with the instructions
indicated on the proxies or, if no direction is indicated, to approve and adopt
the Merger Agreement, as recommended by the PFW Board of Directors. The PFW
Board is not currently aware of any business to be brought before the Special
Meeting other than the specific proposals referred to in this Proxy
Statement/Prospectus and specified in the accompanying notice of the Special
Meeting. As to any other business that may properly come before the Special
Meeting, however, it is intended that proxies, in the form enclosed, will be
voted in respect thereof in accordance with the judgment of the persons voting
such proxies.
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SOLICITATION OF PROXIES
The expense of printing and mailing this Proxy Statement/Prospectus and
accompanying proxy materials will be borne equally by Petco and PFW. In addition
to the solicitation of proxies by mail, solicitation may be made by certain
directors, officers and other employees of PFW by personal interview, telephone
or telegraph. No additional compensation will be paid to such persons for such
solicitation. PFW may reimburse brokerage firms and others for their reasonable
expenses in forwarding solicitation materials to beneficial owners of the PFW
Common Stock.
BOARD RECOMMENDATION
THE PFW BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
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THE MERGER AND RELATED TRANSACTIONS
GENERAL
This section of the Proxy Statement/Prospectus describes certain aspects of
the Merger. The Merger Agreement provides for the merger of Merger Sub, a newly
formed, wholly owned Minnesota subsidiary of Petco, with and into PFW. The
discussion in this Proxy Statement/Prospectus of the Merger and the description
of the principal terms of the Merger Agreement are accurate in all material
respects but do not purport to be complete and are subject to and qualified in
their entirety by reference to the Merger Agreement, a copy of which is attached
to this Proxy Statement/Prospectus as Appendix A and incorporated herein by
reference. All PFW stockholders are urged to read the Merger Agreement in its
entirety.
EFFECTS OF THE MERGER
General
The Merger will be consummated promptly following approval of the Merger
Agreement by the PFW stockholders and the satisfaction or waiver of all other
conditions to consummation of the Merger. At the Effective Time, Merger Sub will
merge with and into PFW, with the result that PFW will be the surviving
corporation in the Merger and a wholly owned subsidiary of Petco. It is
anticipated that, promptly after the Effective Time, PFW will then be merged
with Petco, with the result that PFW will cease to exist and Petco will continue
as the surviving corporation. As described below, the stockholders of PFW will
become stockholders of Petco, and their rights will be governed by the Petco
Certificate, the Petco Bylaws and the Delaware Law. See "Comparison of Rights of
Stockholders of Petco and PFW."
At the Effective Time, the PFW Common Stock will cease trading on The
Nasdaq National Market, and there will no longer be any public trading market
for PFW Common Stock. In addition, Petco intends to take action, promptly
following the Effective Time, to terminate the registration of the PFW Common
Stock under the Exchange Act. As a result, at prescribed dates thereafter,
neither Petco nor PFW will be required to continue to file with the Commission
reports, proxy statements and other information required under the Exchange Act
with respect to PFW as a separate entity, although Petco will continue to file
such reports, proxy statements and other information with respect to the
combined company for so long as Petco remains subject to such Exchange Act
requirements.
There will be no change in the current Board of Directors and officers of
Petco as a result of the Merger, except that Marvin W. Goldstein, the current
Chairman, President and Chief Executive Officer of PFW, will become a Senior
Vice President of Petco. At the Effective Time, the officers and directors of
Merger Sub (who are currently officers of Petco) will become the officers and
directors of PFW.
Conversion of Shares
At the Effective Time, each outstanding share of PFW Common Stock (other
than dissenting PFW shares, if any) will be converted into the right to receive
that fraction of a share of Petco Common Stock equal to (i) 0.2173913 of a share
of Petco Common Stock if the Petco Stock Price is less than or equal to $23.00,
(ii) the quotient of (A) $5.00 divided by (B) the Petco Stock Price if the Petco
Stock Price is greater than $23.00 and less than $25.00, or (iii) 0.2 if the
Petco Stock Price is greater than or equal to $25.00.
Based on the assumption that the Petco Stock Price on October 15, 1996
equaled the Petco Common Stock price on such date, each outstanding share of PFW
Common Stock would have been converted into the right to receive 0.2 of a share
of Petco Common Stock, and based upon the closing price per share of Petco
Common Stock on October 15, 1996 of $25.00, such fraction of a share of Petco
Common Stock would have had a value of $5.00. Based on such information, an
aggregate of 1,887,865 shares of Petco Common Stock would have been issued in
the Merger, and the former holders of PFW Common Stock would own shares of Petco
Common Stock representing 10.4% of the shares of Petco Common Stock to be
outstanding immediately after consummation of the Merger. The market price for
shares of Petco Common Stock fluctuates daily. Accordingly, the exchange ratio
and the aggregate number of shares of Petco Common Stock
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to be issued in the Merger may be subject to adjustment up to the Closing Date.
PFW stockholders are urged to obtain current market quotations for Petco Common
Stock and PFW Common Stock.
Fractional Shares
No fractional shares of Petco Common Stock will be issued in the Merger.
Instead, each PFW stockholder who would otherwise be entitled to receive a
fraction of a share of Petco Common Stock will receive an amount in cash
(without interest) equal to such holder's proportionate interest in the proceeds
from the sale or sales in the open market of the aggregate fractional shares of
Petco Common Stock issued in the Merger.
Conversion of Options
As a result of the Merger, each outstanding PFW Option will be assumed by
Petco and converted into an option to acquire, on the same terms and conditions
as were applicable under such PFW Option prior to the Effective Time, the number
(rounded to the nearest whole number) of shares of Petco Common Stock as the
holder of such PFW Option would have been entitled to receive pursuant to the
Merger had such holder exercised such option in full immediately prior to the
Effective Time (not taking into account whether or not such option was in fact
exercisable), at a price per share of Petco Common Stock equal to (i) the
aggregate exercise price for PFW Common Stock otherwise purchasable pursuant to
such PFW Option divided by (ii) the number of shares of Petco Common Stock
deemed purchasable pursuant to such PFW Option. Under the Merger Agreement,
Petco is obligated to file a Registration Statement on Form S-8 with the
Commission with respect to the issuance of shares of Petco Common Stock upon
exercise of the assumed PFW Options as promptly as practicable following the
Effective Time.
As of the Record Date, shares of PFW Common Stock were subject to
outstanding PFW Options. Assuming no exercise or termination of such PFW Options
prior to the consummation of the Merger, and based on the assumption that the
Petco Stock Price on , 1996 equaled the Petco Common Stock price on
such date, at the Effective Time, the PFW Options would be converted into
options to purchase an aggregate of shares of Petco Common Stock.
Conversion of Warrants
As a result of the Merger, each outstanding PFW Warrant will be assumed by
Petco and converted into a warrant to acquire, on the same terms and conditions
as were applicable under such PFW Warrant prior to the Effective Time, the
number (rounded to the nearest whole number) of shares of Petco Common Stock as
the holder of such PFW Warrant would have been entitled to receive pursuant to
the Merger had such holder exercised such PFW Warrant in full immediately prior
to the Effective Time (not taking into account whether or not such PFW Warrant
was in fact exercisable), at a price per share of Petco Common Stock equal to
(i) the aggregate exercise price for PFW Common Stock otherwise purchasable
pursuant to such PFW Warrant divided by (ii) the number of shares of Petco
Common Stock deemed purchasable pursuant to such PFW Warrant.
As of the Record Date, shares of PFW Common Stock were subject to
outstanding PFW Warrants. Assuming no exercise or termination of such PFW
Warrants prior to the consummation of the Merger, and based on the assumption
that the Petco Stock Price on , 1996 equaled the Petco Common Stock
price on such date, at the Effective Time, the PFW Warrants would be converted
into warrants to purchase an aggregate of shares of Petco Common Stock.
PFW Employee Stock Purchase Plan
Pursuant to the Merger Agreement, in the event that the Closing Date occurs
before December 31, 1996, PFW has agreed to terminate PFW's Employee Stock
Purchase Plan (the "PFW Purchase Plan") as of the Closing Date. To the extent of
the accumulated payroll deductions made as of the Closing Date, all outstanding
options to purchase PFW Common Stock ("Purchase Options") granted thereunder
will be deemed exercised in full on the Closing Date and converted into the
right to receive on the Closing Date the
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number (rounded to the nearest whole number) of shares of Petco Common Stock as
the holder of such Purchase Option would have been entitled to receive pursuant
to the Merger had such holder exercised such Purchase Option in full immediately
prior to the Effective Time.
In the event that the Closing Date occurs after December 31, 1996, PFW has
agreed to continue the PFW Purchase Plan only with respect to completion of the
current phase ending on December 31, 1996, and the exercise of Purchase Options
thereunder.
PFW estimates that approximately 11,500 shares of PFW Common Stock will be
purchased upon plan termination, which would be converted in the Merger into
approximately 2,300 shares of Petco Common Stock, based on the assumption that
the Petco Stock Price on October 15, 1996 equaled the Petco Common Stock price
on such date.
BACKGROUND OF THE MERGER
From May to July 1995, Petco and PFW held occasional preliminary
discussions to determine whether there was a mutually agreeable basis on which a
combination of the two companies could occur. After various meetings and
telephone conversations during this period, they were unable to reach agreement
and ceased discussions.
In March 1996, Petco and PFW again held preliminary discussions regarding a
possible combination of the two companies. After various meetings and telephone
conversations, they were again unable to reach agreement and ceased discussions.
Several months later, at a pet food and supply industry convention in
mid-June 1996, Petco management met with PFW management regarding their interest
in pursuing a business combination. Both parties expressed a willingness to
resume discussions. PFW remained interested in exploring its merger and other
strategic alternatives, due largely to the continuing consolidation of the pet
food and supply industry, while Petco remained interested in expanding its
operations into the Upper Midwest.
In July 1996, Petco approached PaineWebber to provide financial advisory
services regarding a possible combination with PFW. On July 27, 1996, Richard
St. Peter, Petco's Chief Financial Officer, met with George Kline, a Board
member of PFW, and provided PFW with a proposal for merger in the form of a
draft of an Agreement and Plan of Merger (the "Agreement"). The draft Agreement
proposed an exchange ratio for the conversion of shares of PFW into shares of
Petco which in effect would value PFW stock at not more than $4.00 per share and
Petco stock at the average of its closing price for the ten days preceding
execution of the Agreement. The Board of Directors of PFW met on August 5, 1996
to consider the proposal. On such date, shares of PFW's stock were trading at
approximately $3.50 per share. The directors were dissatisfied with the terms
offered but agreed that the overture should be given serious consideration and
appointed a committee composed of Messrs. Goldstein, Stofer, Kline and Johnson
(the "First Special Committee") to conduct preliminary discussions and engage an
investment banker.
The First Special Committee met on August 6, 1996 with legal counsel and
with representatives of Dain. The directors discussed valuations of PFW, the
possible retention of Dain as PFW's investment banker and pressure from Petco
for prompt execution of the Agreement. The directors determined to reject early
execution, to seek additional information including results of Petco's most
recent fiscal quarter and to define the terms and conditions of PFW's engagement
of Dain.
Members of the First Special Committee had individual telephone
conversations with representatives of Petco over the next two days in which
representatives of Petco pressed for execution of the Agreement or a letter of
intent by August 13, 1996. The First Special Committee met on August 8, 1996 and
agreed to reject the deadline, take additional time to evaluate Petco's offer
and complete PFW's engagement of Dain. The First Special Committee met again on
August 21, 1996. The members agreed that a valuation of PFW stock at
approximately $4.00 per share for purposes of an exchange ratio with Petco was
not acceptable and that Dain's focus should be on determining whether a
valuation of higher than $4.00 could be elicited from Petco. On August 22, 1996,
PFW executed a formal engagement letter with Dain pursuant to which Dain agreed
to
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act as PFW's investment advisor in connection with any transaction with Petco
and to determine whether Petco could be engaged in negotiations which would
value PFW stock in excess of $4.00 per share.
On August 28, 1996 the First Special Committee met and representatives of
Dain reported on communications with representatives of Petco's investment
banker, PaineWebber. It was reported that an exchange ratio based on a valuation
in excess of $4.00 was achievable. The directors reviewed historical data on the
market price of PFW's stock and the prospects for and difficulties of obtaining
a higher valuation in the future. They compared this to the market performance
of Petco's stock and analysts' projections for Petco. The Committee members
determined to call a meeting of the full PFW Board of Directors.
The Board of Directors of PFW met on September 4, 1996. Representatives of
Dain attended and reported on discussions with PaineWebber regarding an exchange
ratio and timetable. The directors discussed Petco's announcement of second
quarter earnings of $0.17 per share, PFW's capacity for growth, the fact that
the stock market had not reacted positively to the improvements at PFW since the
one year old change in PFW's top management, the lack of market analyst coverage
of PFW and the absence of institutional investors and the difficulty of changing
those facts in the foreseeable future. Some directors expressed the view that
PFW stockholders had a higher probability of realizing an increase in the value
of their investment if PFW merged with Petco than if PFW remained independent.
The directors determined to continue negotiations with Petco.
On September 11, 1996, George Kline contacted Petco's Chairman, Brian
Devine, and Richard St. Peter and indicated that Petco's $4.00 per share offer
was inadequate and asked Petco to submit a higher offer.
On September 12, 1996, Brian Devine communicated an offer to PFW for Petco
to acquire PFW for Petco Common Stock with a fixed 5-for-1 exchange ratio of PFW
shares to Petco shares.
On September 17, 1996, Dain contacted PaineWebber regarding the possibility
of providing some additional protection to PFW stockholders if the price of
Petco stock were to fall below certain levels. Discussions also began between
Petco's and PFW's attorneys regarding the terms of a definitive merger
agreement.
The PFW Board of Directors met again on September 18, 1996 with
representatives of Dain attending. Mr. Goldstein reported the receipt of a
letter from Tara Capital Partners ("Tara") dated September 10, 1996 proposing an
investment in PFW by the Tara group, including Norman Brinker, of $20.0 - $25.0
million over an unspecified period of time at an unspecified price and the
addition of Mr. Brinker and three unnamed individuals to the PFW Board. Mr.
Goldstein stated that principals of Tara and Mr. Brinker had visited some PFW
stores with him in March and July of 1996. They expressed interest in a possible
investment in PFW at the time of the July visit but no proposal was made until
the September 10, 1996 letter. The directors determined that the interest
expressed by Tara should be explored further. Representatives of Dain reported
on the status of additional negotiations with PaineWebber regarding Petco and
models for the future growth of PFW. The directors discussed values which might
be realized in the future on PFW stock and Petco stock. The consensus of
directors was that greater value for stockholders of PFW might be realized in a
merger with Petco than by remaining independent. The directors resolved to
appoint a new committee composed of Messrs. Finkelstein, Kline and Stofer (the
"Second Special Committee") to consider and make a recommendation to the PFW
Board in compliance with Section 302A.673 of the Minnesota Law on a possible
merger with Petco at a 5-for-1 exchange ratio and directed the Second Special
Committee to negotiate a contingency based on Dain's fairness opinion, a breakup
fee of $1.7 million plus expenses and appropriate retention of and severance
arrangements for corporate employees.
On September 20, 1996, PaineWebber contacted Dain offering the same fixed
5-for-1 exchange ratio with a "collar" (i.e., adjustments in exchange ratio
depending upon changes in prices of Petco stock) between $23.00 and $25.00 for
Petco Common Stock. The collar would provide PFW stockholders with an implied
$5.00 share value within such range.
The Second Special Committee met on September 20, 1996 and discussed a new
draft of a proposed merger agreement submitted by Petco. The PFW directors
discussed the terms of collars and the terms of retention of and severance
compensation for corporate employees.
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Between September 20, 1996 and September 30, 1996, senior management of
Petco and PFW and Petco's and PFW's legal and financial advisors were in
communication regarding due diligence matters and negotiations regarding other
material terms of the proposed transaction. The terms of a proposed merger
agreement and related documents were negotiated during this period and a draft
agreement was distributed to the respective Boards of Directors.
On September 30, 1996, the Second Special Committee met again and for part
of the meeting consulted with representatives of Dain and Mr. Goldstein. The
Committee members discussed a letter received from Tara on September 27, 1996 in
which Tara changed its expressed interest in PFW from an investment in PFW to a
tender offer by a corporation to be formed by Tara and Mr. Brinker for not less
than a majority of the outstanding shares of PFW at a cash per share price of
$6.00. The proposal was stated to be subject to approval by PFW's Board,
execution of a definitive agreement and election of persons designated by Tara
as a majority of PFW's Board. The Committee recessed its meeting and with the
participation of representatives of Dain called Tara and Mr. Brinker. The
Committee members asked questions of Tara and Mr. Brinker concerning terms and
conditions of their proposed tender offer. The Committee meeting reconvened and
Committee members expressed their unanimous opinion that the Tara proposal was
neither likely to come to fruition nor competitive with the Petco proposal for
the following reasons: (i) the belief that the offer was subject to additional
due diligence before being made firm or comparable to the Petco proposal and the
risk of losing the Petco proposal during the period of additional due diligence;
(ii) uncertainty of financing because only a portion of the financing would come
from Mr. Brinker and the balance would need to be raised from unknown
associates; (iii) uncertainty of the impact of a transaction with Tara on future
management of PFW and concerns about directors' duties to stockholders in this
regard; (iv) concern caused by the dramatic shifts in Tara's approach from
investment in PFW to a purchase of fewer than all outstanding shares; (v)
concern about the market for outstanding shares of PFW not purchased by Tara;
(vi) the current lack of commitment to an infusion of new capital by Tara into
PFW; (vii) the Tara transaction would be a cash, taxable transaction, for only a
part of PFW's outstanding shares whereas the Petco transaction would be for all
shares and allow stockholders to choose the date of a taxable sale or hold their
shares; (viii) the ability of Tara to make a tender offer without approval by
PFW's Board and, in spite of the Petco merger proposal, whether Tara's interest
was bona fide and, in fact, competitive with the Petco offer; and (ix) the
probability that Petco would follow PetSmart, Inc. into the Upper Midwest and
implement its publicly announced strategy to open stores in the Upper Midwest,
creating additional competition for PFW, which could adversely affect PFW's
stock price. At its September 30, 1996 meeting, the Second Special Committee
also discussed terms of the collar being negotiated and, with a private attorney
for Mr. Goldstein, the terms of Mr. Goldstein's future relationship with Petco.
On October 2, 1996, the Second Special Committee met in the morning and
again in the afternoon to review negotiations with Petco and a letter received
on that date from Tara. The letter proposed to reduce the minimum number of
shares sufficient to close on its tender offer to 40%, to acquire shares from
current stockholders, PFW or both, to promptly register for resale the shares
purchased by Tara and to have Mr. Brinker serve as a part-time chairman of the
PFW Board of Directors. A representative of Dain reported on his conversations
with Tara and expressed his concern that with additional due diligence by Tara
required, the likelihood of a formal, binding offer was uncertain. The Committee
members agreed and stated that they did not favor a partial tender with
uncertain upside potential for the remaining shares. The Committee members
reviewed the status of negotiations and authorized Mr. Stofer to have a final
conversation with Petco regarding retention of and severance compensation for
corporate employees. The Committee unanimously adopted a resolution approving
and recommending to PFW's full Board of Directors the proposed Merger Agreement
with Petco, including such final terms as negotiated by Mr. Stofer.
On October 3, 1996, the Board of Directors of PFW, except one Board member
who was out of town, met and representatives of Dain participated. The directors
discussed the October 2, 1996 letter from Tara and a telephone conversation of
the same date which a director had with Mr. Brinker. The director stated that
Mr. Brinker effectively put conditions and qualifications on the Tara offer,
including additional pre-offer due diligence and the syndication of financing of
the offer. The Second Special Committee reported their consideration of the Tara
offer and their unanimous rejection of it because it was uncertain, partial and
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taxable. It was the consensus of the directors that Tara's offer was uncertain
of completion and not as attractive as the Petco proposal. The directors
reviewed copies of the final Merger Agreement and discussed its terms.
Representatives of Dain presented their analysis and opinion on fairness as
described below under the caption "-- Opinion of PFW Financial Advisor."
Following discussion of the Dain analysis and opinion, the directors voted to
approve and recommend to PFW's stockholders approval of the Merger Agreement.
On October 3, 1996, the Petco Board of Directors met telephonically and
heard presentations from Petco's management and its financial and legal advisors
about the proposed transaction, the history of the negotiations and the terms of
the proposed Merger Agreement. After a full discussion, the Merger Agreement was
unanimously approved by the Petco Board.
At approximately 5:00 p.m. Pacific time on October 3, 1996, each company
executed and delivered the Merger Agreement. The signing of the Merger Agreement
was announced prior to the opening of The Nasdaq National Market on October 4,
1996 by the issuance of separate press releases by each company.
PFW'S REASONS FOR THE MERGER
PFW believes that its stockholders will realize greater appreciation in the
value of their investment as part of Petco than as an independent company. PFW
believes that its performance and growth potential have not been and will not be
recognized in the foreseeable future by a sufficient number of securities
analysts and institutional investors to support the market evaluation afforded
to larger companies such as Petco. In addition, PFW believes that market
segments such as the pet food superstore category in which it operates tend to
consolidate into a small number of dominant chains. The Merger with Petco
affords PFW the opportunity to consolidate with a national chain which currently
has no stores in PFW's geographic region, has the capital to fund expansion and,
therefore, is willing to acquire PFW on terms favorable to PFW's stockholders.
OPINION OF PFW FINANCIAL ADVISOR
PFW retained Dain on August 22, 1996 to act as PFW's financial advisor in
connection with merger and acquisition transactions such as the Merger with
Petco, including rendering its opinion to the Board of Directors of PFW as to
the fairness, from a financial point of view, of the consideration to be
received by PFW's stockholders in connection with the Merger (the "Opinion").
At the October 3, 1996 special meeting of PFW's Board of Directors, Dain
delivered an oral Opinion, which was subsequently confirmed in writing, that,
subject to the assumptions set forth below, as of such date and based on the
matters described therein, the consideration to be received was fair to the
stockholders of PFW from a financial point of view. Dain has consented to the
use of its name and the Dain Opinion included in this Proxy
Statement/Prospectus. No limitations were imposed by the PFW Board upon Dain
with respect to the investigations made or procedures followed by it in
rendering its Opinion.
THE FULL TEXT OF DAIN'S WRITTEN OPINION DATED OCTOBER 3, 1996, WHICH SETS
FORTH AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX B. AND IS INCORPORATED
HEREIN BY REFERENCE. PFW STOCKHOLDERS ARE URGED TO READ THE DAIN OPINION IN ITS
ENTIRETY. THE SUMMARY OF THE DAIN OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS SETS FORTH THE MATERIAL ANALYSES AND MATTERS PRESENTED BY
DAIN TO THE PFW BOARD AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION. THE DAIN OPINION IS DIRECTED TO THE PFW BOARD, ADDRESSES
ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE
RECEIVED BY THE STOCKHOLDERS OF PFW AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY PFW STOCKHOLDER AS TO HOW SUCH A STOCKHOLDER SHOULD VOTE AT THE PFW SPECIAL
MEETING. THE DAIN OPINION WAS RENDERED TO THE PFW BOARD FOR ITS CONSIDERATION IN
DETERMINING WHETHER TO APPROVE THE MERGER AGREEMENT.
In connection with the Dain Opinion, Dain, among other things: (i) reviewed
the Merger Agreement; (ii) held discussions with senior members of the
management of PFW and Petco concerning the business, operations and prospects of
each company and the reasons for completing the Merger; (iii) reviewed certain
business and financial information on PFW and Petco, including certain publicly
available documents filed by
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PFW and Petco with the Commission pursuant to the Exchange Act; (iv) compared
certain financial statistics of PFW and Petco with statistics of other publicly
traded companies deemed comparable; (v) reviewed price and trading data of the
common stock of both PFW and Petco; and (vi) to the extent publicly available,
compared the financial terms of the Merger with those of other transactions
deemed comparable.
In conducting its review and arriving at its Opinion that the consideration
to be received by the stockholders of PFW was fair, from a financial point of
view, Dain assumed and relied upon, without independent verification, the
accuracy, completeness and fairness of the information furnished to or otherwise
reviewed by or discussed with it for purposes of rendering its Opinion. With
respect to the financial projections of PFW and other information relating to
the prospects of PFW provided to Dain by PFW, Dain assumed that such projections
and other information were reasonably prepared and reflected the best currently
available judgments and estimates of the management of PFW as to the likely
future financial performances of PFW and of the combined entity. In addition,
Dain relied upon estimates and judgments of the PFW and Petco managements as to
the potential revenue and cost savings and synergies that could result from the
Merger. Dain assumed, with the consent of PFW, that the Merger will qualify for
pooling of interests accounting treatment and as a tax-free transaction for the
stockholders of PFW. Dain did not make and it was not provided with an
independent evaluation or appraisal of the assets of PFW and Petco, nor has Dain
been furnished with any such evaluations or appraisals. The Dain Opinion is
based on market, economic and other conditions as they existed and could be
evaluated as of the date of the Opinion letter.
The following paragraphs summarize the most significant quantitative and
qualitative analyses performed by Dain in arriving at its Opinion and reviewed
with the PFW Board and do not purport to be a complete description of the
analyses performed by Dain. The information presented below is based on the
financial condition of PFW and Petco as of a date or dates shortly before the
Merger Agreement was executed on October 3, 1996 and stock price information
through the close of the market on October 2, 1996.
Analysis of Certain Other Publicly Traded Companies. This analysis
examines a company's valuation in the public market as compared to the valuation
in the public market of other selected publicly traded companies. Dain compared
certain financial and stock market information for both PFW and Petco with
similar information from comparable publicly traded companies. The valuation
analysis was based on several variables, including sales, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), operating income, net
income for the last twelve months, and projected net income for both the 1996
and 1997 fiscal years. The earnings estimates used in this analysis for PFW and
Petco for fiscal years 1996 and 1997 were as reported by First Call Corporation.
Dain compared certain financial and stock market information for PFW and
Petco with similar information from two groups of comparable publicly traded
companies. The first comparable group consisted of Petco and PETsMART, Inc. (the
"Specialty Pet Retailing Comparables"). The second comparable group consisted of
Baby Superstore, Inc., Bed, Bath & Beyond, Inc., Home Depot, Inc., Office Depot
Inc., and Pep Boys -- Manny, Moe & Jack (the "High-Growth Retailing
Comparables"). Dain noted from this analysis that the multiples for PFW and
Petco were generally within the range of multiples for both comparable groups.
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<PAGE> 36
<TABLE>
<CAPTION>
ENTERPRISE VALUE/ MARKET VALUE/
-------------------------------- ----------------------------
LTM LTM 1996 1997
LTM OPERATING LTM NET NET NET
REVENUE INCOME EBITDA INCOME INCOME INCOME
------- --------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PFW(1).............................. 0.65x 35.1x 16.7x 31.5x 54.2x 29.5x
PFW(2).............................. 0.43x 23.5x 11.2x 22.2x 38.2x 20.8x
Petco(3)............................ 1.19x 29.9x 15.9x 53.2x 37.0x 27.1x
Specialty Pet Retailing:
High.............................. 2.56x 47.2x 34.4x 79.4x 63.1x 44.1x
Low............................... 1.19x 29.9x 15.9x 53.2x 37.0x 27.1x
Median............................ 1.88x 38.6x 25.2x 66.3x 50.0x 35.6x
High Growth Retailing:
High.............................. 2.86x 26.3x 22.9x 45.7x 36.8x 31.9x
Low............................... 0.73x 15.8x 12.0x 24.4x 21.9x 18.0x
Median............................ 1.57x 19.0x 15.6x 30.5x 28.0x 22.5x
</TABLE>
- ---------------
(1) Closing price per share on October 2, 1996 of $4.88.
(2) Closing price per share on August 1, 1996 (receipt of first draft of
definitive agreement) of $3.44 per share.
(3) Closing price per share on October 2, 1996 of $29.00.
LTM = Last twelve months.
Enterprise Value = Market value plus total debt less cash.
Analysis of Selected Merger and Acquisition Transactions. Dain reviewed
and summarized the financial terms, to the extent publicly available, of seven
recent merger transactions completed by either Petco or PETsMART, Inc., which
were deemed relevant and comparable to the business of PFW (the "Comparable
Transactions"). In this analysis, Dain calculated the ratio of the implied
Enterprise Value to the last twelve months revenue and the price paid for PFW
stock to total stores and total store square footage. All multiples for the
Comparable Transactions were based on public information available at the time
of announcement of such transaction, without taking into account differing
market and other conditions present at the time of the Comparable Transactions.
The following table summarizes the results of Dain's analysis comparing the
high, low and median multiples to the midpoint of the pricing range proposed by
the Merger.
<TABLE>
<CAPTION>
MARKET VALUE/ MARKET VALUE/
ENTERPRISE VALUE/ ------------- -------------
----------------- TOTAL TOTAL
LTM STORES SQUARE
REVENUE ($ MILLIONS) FOOTAGE
----------------- ------------- -------------
<S> <C> <C> <C>
PFW(1).......................................... 0.75x $ 1.8 $ 99
Comparable Transactions:
High.......................................... 1.01x $ 3.0 $ 129
Low........................................... 0.35x $ 1.0 $ 82
Median........................................ 0.68x $ 2.0 $ 93
</TABLE>
- ---------------
(1) Assumes a purchase price per PFW share of $5.54.
LTM = Last twelve months.
Enterprise Value = Market value plus total debt less cash.
Discounted Cash Flow Analysis. Dain performed two discounted cash flow
analyses for PFW: a moderate growth case (the "Moderate Case") and an aggressive
growth case (the "Aggressive Case"). The primary difference between the two
cases was the store growth assumption. The Moderate Case assumed that PFW would
have 82 stores open by the end of fiscal 2001, while the Aggressive Case assumed
that PFW would have 108 stores open by the end of fiscal 2001. Neither case
assumed additional capital required beyond PFW's existing credit facilities. The
discounted cash flow approach values a business based on the current value of
the future cash flow that the business will generate. To establish a current
value under the approach, future cash flow must be estimated and an appropriate
discount rate determined.
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<PAGE> 37
In the Moderate Case, Dain used estimates of projected financial
performance for PFW for the fiscal years 1996 through 2001 prepared by PFW's
management. Dain aggregated the present value of the cash flows through fiscal
year 2001 with the present value of a range of terminal values. Dain discounted
these cash flows at weighted average cost of capital rates ranging from 21.0% to
28.0%. The terminal value was computed based on projected EBITDA in fiscal year
2001 and a range of terminal multiples from 6.0x to 11.0x. Dain arrived at such
discount rates based upon the consideration of a number of factors, including
cost of capital, required rates of return to investors and risks attributable to
the uncertainty of achieving the projected cash flows. Based on the foregoing
analysis, PFW's implied equity values per share ranged from $2.71 to $6.67. Dain
also analyzed the impact on PFW's implied equity value per share from factoring
potential synergies from the Merger ranging from 0% to 100% of the potential
synergies being realized. Based on the foregoing synergy analysis, PFW's implied
equity values per share ranged from $3.63 to $8.23.
In the Aggressive Case, as with the Moderate Case, Dain aggregated the
present value of the cash flows through fiscal year 2001 with the present value
of a range of terminal values. Dain discounted these cash flows at weighted
average cost of capital rates ranging from 21.0% to 28.0%. The terminal value
was computed based on projected EBITDA in fiscal year 2001 and a range of
terminal multiples from 6.0x to 11.0x. Dain arrived at such discount rates based
upon the consideration of a number of factors, including cost of capital,
required rates of return to investors and risks attributable to the uncertainty
of achieving the projected cash flows. Based on the foregoing analysis, PFW's
implied equity values per share ranged from $3.16 to $8.15. Dain also analyzed
the impact on PFW's implied equity value per share from factoring potential
synergies from the Merger ranging from 0% to 100% of the potential synergies
being realized. Based on the foregoing synergy analysis, PFW's implied equity
values per share ranged from $4.34 to $9.48.
Contribution Analysis. Dain analyzed the relative contributions of PFW and
Petco to the pro forma income statement of the combined company and compared
such contributions to the pro forma ownership of Petco by the PFW stockholders.
The analysis was performed based on the financial results for the projected
fiscal years ended January 31, 1997, 1998 and 1999, respectively, as provided by
the management of PFW and Petco, under both the Moderate and Aggressive Cases.
This analysis showed that PFW would contribute under the Moderate Case 14.4%,
14.6% and 15.7% of net revenue, 13.8%, 14.1% and 14.9% of gross income, 2.5%,
6.8% and 8.3% of operating income and 5.2%, 7.8% and 8.9% of net income of the
combined company for fiscal years 1996, 1997 and 1998, respectively. Under the
Aggressive Case, this analysis showed that PFW would contribute 14.4%, 15.4% and
16.5% of net revenue, 13.8%, 14.8% and 15.7% of gross income, 2.5%, 8.8% and
11.2% of operating income and 5.2%, 9.1% and 10.8% of net income of the combined
company for fiscal years 1996, 1997 and 1998, respectively. These ranges do not
give effect to potential cost savings and synergies that could be achieved in
the Merger. Based on Petco's closing stock price of $29.00 on October 2, 1996,
PFW stockholders would own approximately 10.4% of the combined company.
Pro Forma Merger Analysis. Dain analyzed certain pro forma effects on the
combined company resulting from the Merger. Dain computed the resulting
dilution/accretion to the combined company's earnings per share estimate for the
fiscal years ending January 31, 1997 and 1998 pursuant to the Merger before and
after taking into account any net operating loss carryforwards (the "NOLs") of
PFW and potential cost savings, revenue loss and other synergies that PFW and
Petco could achieve if the Merger were consummated and before nonrecurring costs
relating to the Merger.
Under the Moderate Case, Dain noted that before taking into account any
potential cost savings, revenue loss, and other synergies and before certain
nonrecurring costs relating to the Merger, the Merger would be approximately
8.3% dilutive and 4.8% dilutive to the combined company's earnings per share
before factoring in the NOLs for the fiscal years 1996 and 1997, respectively,
and 0.5% accretive and 1.4% accretive to the combined company's earnings per
share after factoring in the NOLs for the fiscal years 1996 and 1997,
respectively. Dain also noted that assuming (i) an offer price per PFW share
ranging from $5.00 to $6.00, (ii) potential operating synergies that PFW and
Petco could achieve if the Merger were consummated, and (iii) no impact from
nonrecurring costs relating to the Merger, the Merger would have a
dilutive/accretive impact on the combined company's earnings per share ranging
from approximately 9.1% dilutive to 3.0% dilutive and 5.6% dilutive to 5.3%
accretive for fiscal years 1996 and 1997, respectively, before factoring in NOLs
and 0.3% accretive to 5.0% accretive and 1.0% accretive to 10.9% accretive for
fiscal years 1996 and
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<PAGE> 38
1997, respectively, after factoring in NOLs. There can be no assurance that the
combined company will be able to minimize the potential revenue loss or realize
any potential operating synergies in the amounts estimated, or at all, following
the Merger.
Under the Aggressive Case, Dain noted that before taking into account any
potential cost savings, revenue loss, and other synergies and before certain
nonrecurring costs relating to the Merger, the Merger would be approximately
8.3% dilutive and 2.8% dilutive to the combined company's earnings per share
before factoring in the NOLs for the fiscal years 1996 and 1997, respectively,
and 0.5% accretive and 3.4% accretive to the combined company's earnings per
share after factoring in the NOLs for the fiscal years 1996 and 1997,
respectively. Dain also noted that assuming (i) an offer price per PFW share
ranging from $5.00 to $6.00, (ii) potential operating synergies that PFW and
Petco could achieve if the Merger were consummated, and (iii) no impact from
nonrecurring costs relating to the Merger, the Merger would have a
dilutive/accretive impact on the combined company's earnings per share ranging
from approximately 9.1% dilutive to 3.0% dilutive and 3.6% dilutive to 7.4%
accretive for fiscal years 1996 and 1997, respectively, before factoring in NOLs
and 0.3% accretive to 5.0% accretive and 3.0% accretive to 13.0% accretive for
fiscal years 1996 and 1997, respectively, after factoring in NOLs. There can be
no assurance that the combined company will be able to minimize the potential
revenue loss or realize any potential operating synergies in the amounts
estimated, or at all, following the Merger.
No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisitions summarized
above is identical to PFW, Petco or the Merger. Accordingly, such analyses must
take into account differences in the financial and operating characteristics of
the Specialty Pet Retailing Comparables and High Growth Retailing Comparables
(collectively, the "Comparable Companies") for PFW and Petco and the companies
in the Comparable Transactions and other factors that would affect the public
trading value and acquisition value of the Comparable Companies and Comparable
Transactions, respectively.
While the foregoing summary describes all analyses and factors that Dain
deemed material in its presentation to the PFW Board, it is not a comprehensive
description of all analyses and factors considered by Dain. The preparation of a
fairness opinion is a complex process that involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
applications of these methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Dain believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and other factors considered by it, without considering all
analyses and factors, would create an incomplete view of the evaluation process
underlying the Dain Opinion. In performing its analyses, Dain considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of PFW and Petco. The analyses performed by Dain are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. Additionally, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business actually
may be sold. Furthermore, no opinion is being expressed as to the prices at
which shares of Petco Common Stock may trade at any future time.
Pursuant to an agreement dated August 22, 1996 between PFW and Dain, the
fees payable to Dain consist of a $15,000 progress fee, a $175,000 fee for
rendering its Opinion to the PFW Board on October 2, 1996 in connection with the
transactions contemplated by the Merger Agreement, which aggregate amount will
be credited against a transaction fee equal to 1.2% of the total transaction
value (as defined in the agreement), payable upon consummation of the Merger.
Pursuant to the Merger Agreement, in no event shall Dain's fees exceed $750,000.
In addition, PFW has agreed to reimburse Dain for its reasonable out-of-pocket
expenses and to indemnify Dain against certain expenses and liabilities arising
in connection with its engagement, including liabilities under the Securities
Act and the Exchange Act.
Dain was selected by PFW on the basis of its experience in valuing
securities in connection with mergers and acquisitions, knowledge of PFW and
other specialty retailers and expertise in transactions involving retailers.
Dain is a nationally recognized investment banking firm and is regularly engaged
in the valuation of
28
<PAGE> 39
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Dain is familiar with PFW having provided certain investment banking
services to PFW from time to time, including a public offering of the PFW Common
Stock on February 16, 1994. In connection with the public offering, Dain
received warrants to purchase 60,000 shares of PFW Common Stock expiring in
February 1999. Also, Dain has from time to time issued research reports and
recommendations on PFW Common Stock and, in the ordinary course of business,
makes a market in PFW Common Stock. In the course of its market making and other
trading activities, Dain may have, from time to time, a long or short position
in, and buy and sell securities of, PFW. These activities may have created a
potential conflict of interest for Dain when it rendered its Opinion.
PFW BOARD RECOMMENDATION
THE PFW BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER
AGREEMENT.
PETCO'S REASONS FOR THE MERGER
In the course of evaluating the Merger, Petco identified several benefits
that it believes will contribute to the success of the combined company. These
potential benefits include:
- The Merger provides Petco with an opportunity to add an established store
base in certain geographic areas in the Upper Midwest where Petco
presently has no stores and thus facilitates execution of Petco's
nationwide expansion plans.
- The Merger is expected to permit a reduction in certain corporate
overhead expenses and the achievement of certain operating efficiencies
and economies of scale.
- Although the issuance of Petco Common Stock may have a short term
dilutive effect on earnings per share, the Merger is expected to
contribute to earnings per share over the long term.
- PFW's strong store-level management can benefit the combined company by
providing a larger pool of skilled and experienced managers.
- The similar superstore format and operating philosophy of the two
companies will help facilitate a combination of the businesses.
The Petco Board also considered a variety of potentially negative factors
concerning the Merger, including (i) the risk that the combined company might
not achieve revenue equal to the sum of the separate companies' anticipated
revenue; (ii) the risk that the combined company might not achieve sufficient
operating efficiencies to ensure that the Merger would not have a negative
effect on Petco's earnings per share; (iii) the substantial charges expected to
be incurred in connection with the Merger, including transaction costs and costs
of integrating the businesses of the companies; (iv) the risk that the public
market price of Petco Common Stock might be adversely affected by announcement
of the Merger; (v) the risk that the other benefits sought to be achieved in the
Merger would not be achieved; and (vi) the other risks described above under
"Risk Factors."
Based on the factors described above, the Petco Board determined that the
Merger is fair to, and in the best interests of, Petco and its stockholders and
unanimously approved and adopted the Merger Agreement and the transactions
contemplated thereby.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive but is believed to include the material factors
considered by the Petco Board. In view of the wide variety of factors
considered, the Petco Board did not find it practical to, and did not, quantify
or otherwise assign relative weights to the specific factors.
29
<PAGE> 40
MERGER AGREEMENT
Representations and Covenants
Under the Merger Agreement, Petco and PFW have each made a number of
representations regarding their respective capital structures, operations,
financial condition and other matters, including their authority to enter into
the Merger Agreement and to consummate the Merger. In addition, they have each
covenanted that, until the consummation of the Merger or the termination of the
Merger Agreement, they will not take certain actions relating to the operation
of their respective businesses without the other's consent. Each of Petco and
PFW has also covenanted that it will use all reasonable efforts to consummate
the Merger in accordance with the Merger Agreement as promptly as practicable,
to obtain all necessary waivers, consents and approvals (though Petco will not
be required to dispose of any assets or change its operations), to effect all
necessary registrations and filings, and otherwise to satisfy all conditions
precedent to its obligations under the Merger Agreement.
In addition, PFW has agreed that it will not, directly or indirectly, enter
into, solicit, initiate or continue any discussions or negotiations with, or
encourage or respond to any inquiries or proposals by, or provide any
information to, or otherwise cooperate in any other way with, any person or
entity, other than Petco, concerning any sale of any shares of capital stock of
PFW, or any merger, consolidation, liquidation, dissolution or similar
transaction involving PFW (each, a "Proposed Acquisition Transaction"), subject
to the good faith exercise by the PFW Board of Directors of its fiduciary
obligations, supported by a written legal opinion from counsel for PFW as to the
necessity of such action. In connection with such covenant, PFW represented that
it was not engaged in discussions or negotiations with any party other than
Petco with respect to any of the foregoing. Further, PFW agreed to promptly
notify Petco if any discussions or negotiations are sought to be initiated, any
inquiry or proposal is made, or any information is requested with respect to any
Proposed Acquisition Transaction.
Under the Merger Agreement, Petco has agreed to keep in effect the
provisions in PFW's Bylaws (the "PFW Bylaws") with respect to exculpation of
director and officer liability and indemnification in effect on the date of the
Merger Agreement to the fullest extent permitted under the Minnesota Law;
provided that nothing in the Merger Agreement shall prevent PFW from merging
into Petco subsequent to the Merger so long as following such merger the
exculpation of director and officer liability and indemnification provided the
former directors and officers of PFW shall be the same standards of exculpation
of director and officer liability and indemnification as that applying to the
directors and officers of Petco. For a period of three years following the
Effective Time, Petco will also maintain PFW's current directors' and officers'
liability insurance with respect to matters occurring prior to the Effective
Time, or substitute policies providing comparable coverage, subject to a
limitation on maximum expenditures for such insurance policy. In addition, from
and after the closing, Petco will indemnify the officers and directors of PFW
who served in such capacity prior to the Effective Time for any and all claims
related to matters occurring prior to the Effective Time.
PFW has further agreed, among other things, to: (i) conduct its business in
the ordinary course consistent with past practice and to not take certain
actions, even if in the ordinary course of business, without Petco's consent,
(ii) provide reasonable access to its properties, books and records and deliver
certain financial and operating data to Petco, (iii) terminate PFW's Employee
Stock Purchase Plan, and (iv) use its best efforts to obtain and deliver to
Petco at the closing of the Merger various Related Agreements and other
documents. Petco has also agreed, among other things, not to declare or pay any
cash dividend or amend the Petco Certificate or Petco Bylaws in any manner which
would adversely affect PFW, without PFW's consent.
In addition, Petco and PFW have agreed to extend their best efforts to
consummate the Merger by January 2, 1997 (the "Expectation Date"). In the event
that the Merger has not closed prior to the Expectation Date and PFW shall have
received the necessary approval of its stockholders and all required approvals
under the HSR Act on or prior to December 20, 1996, then no later than May 2,
1997 Petco will publish stub period financial statements (reflecting a 30-day
period of combined operations) sufficient to terminate the lock-up of PFW's
affiliates required to qualify the Merger for pooling of interests accounting
treatment.
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<PAGE> 41
Conditions to the Merger
In addition to the requirement that the Merger Agreement be approved by the
requisite vote of PFW stockholders, the obligations of Petco and PFW to
consummate the Merger are subject to the satisfaction of a number of other
conditions that, if not satisfied or waived, may cause the Merger not to be
consummated and the Merger Agreement to be terminated. Each party's obligation
is conditioned on the effectiveness of, and the absence of any stop orders with
respect to, the Registration Statement; the approval for quotation on The Nasdaq
National Market of the Petco Common Stock to be issued in the Merger, subject to
official notice of issuance; the expiration of all applicable waiting periods
under the HSR Act; the accuracy of the representations and warranties made by
the other party; the performance by the other party of its covenants; the
receipt of all permits and waivers necessary to consummate the Merger; the
absence of any order by any governmental agency to enjoin or otherwise prevent
the consummation of the Merger; the receipt of certain legal opinions from
counsel to the other party; the receipt of a comfort letter from the other
party's independent auditors (in form and substance as is customary in a
registered public offering); and the receipt of an update, dated as of the
Closing Date, to the fairness opinion provided by their respective financial
advisors.
Petco's obligation to consummate the Merger is further conditioned on (i)
the receipt from KPMG Peat Marwick LLP, Petco's independent auditors, of a
letter to the effect that the Merger qualifies for pooling of interests
accounting treatment, which will be based in part on a letter from Arthur
Andersen LLP, PFW's independent public accountants, stating that they are not
aware of any conditions that would preclude PFW from being pooled with Petco;
(ii) the absence of any material adverse change with respect to the business or
financial condition of PFW; (iii) the exercise by holders of not more than 7.5%
of the outstanding shares of PFW Common Stock of their dissenters' rights; and
(iv) the receipt of other documents, including the Related Agreements.
At any time prior to the Effective Time, to the extent legally allowed,
Petco or PFW, without approval of the stockholders of PFW, may waive compliance
with any of the agreements or conditions contained in the Merger Agreement for
the benefit of that company. Neither Petco nor PFW currently intends to waive
compliance with any such agreements or conditions.
Termination or Amendment
The Merger Agreement may be terminated by mutual agreement of both parties
or by either Petco or PFW: (i) if the Merger has not been consummated by January
31, 1997, other than as a result of the failure by the terminating party to
perform any obligation under the Merger Agreement; (ii) if a court or
governmental agency issues a nonappealable final order or decree or otherwise
takes any action having the effect of permanently restraining or enjoining the
Merger, other than as a result of the failure by the terminating party to use
all reasonable efforts to consummate the Merger; (iii) if the meeting of PFW
stockholders to approve the Merger has been held and the Merger Agreement is not
approved by the requisite vote of the PFW stockholders; (iv) if (A) under the
applicable fiduciary duties of the directors of PFW, as determined by such
directors in good faith after consultation with and based upon the advice of
independent legal counsel, the PFW Board of Directors withdraws or modifies its
approval or recommendation of the Merger Agreement or the Merger in a manner
adverse to Petco or resolves to do so; (B) the PFW Board of Directors recommends
to the stockholders of PFW an Alternative Transaction (as defined below); or (C)
a tender offer or exchange offer for 25% or more of the outstanding shares of
PFW Common Stock is commenced (other than by Petco) and the PFW Board of
Directors recommends that the stockholders of PFW tender their shares in such
tender offer or exchange offer; (v) if under the applicable fiduciary duties of
the directors of Petco, as determined by such directors in good faith after
consultation with and based upon the advice of independent legal counsel, the
Petco Board of Directors withdraws or modifies its approval of the Merger
Agreement or the Merger in a manner adverse to PFW or resolves to do so; or (vi)
as a result of a material uncured breach by the other party of a representation,
warranty or covenant set forth in the Merger Agreement which is either not
curable or which the breaching party has not used reasonable efforts to cure.
For purposes of the Merger Agreement, "Alternative Transaction" means any
of (a) a transaction pursuant to which any person (or group of persons) other
than Petco (a "Third Party") acquires or would
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<PAGE> 42
acquire more than 25% of the outstanding shares of PFW Common Stock, whether
from PFW or pursuant to a tender offer or exchange offer or otherwise, (b) a
merger or other business combination involving PFW pursuant to which any Third
Party acquires more than 25% of the outstanding equity securities of PFW or the
entity surviving such merger or business combination, or (c) any other
transaction pursuant to which any Third Party acquires or would acquire control
of assets of PFW or any of its subsidiaries having a fair market value (as
determined by the PFW Board of Directors in good faith) equal to more than 25%
of the fair market value of all of the assets of PFW and its subsidiaries, taken
as a whole, immediately prior to such transaction.
Petco may also terminate the Merger Agreement if any person (or group of
persons) other than Petco is or becomes the beneficial owner of 25% or more of
the outstanding shares of PFW Common Stock; provided, that Petco may not
terminate the Merger Agreement pursuant to this condition by reason of the
ownership of shares of PFW Common Stock by any person listed in the beneficial
ownership table in PFW's proxy statement dated May 17, 1996 in amount not
exceeding the amount of shares indicated therein as being owned by such person.
Upon termination of the Merger Agreement by reason of any of the matters
set forth in the immediately preceding paragraph or in clauses (iii), (iv) or
(vi) above (as (vi) relates to a material uncured breach by PFW), or in the
event of the non-satisfaction of PFW's condition to closing that PFW receive an
update, dated as of the Closing Date, to the fairness opinion provided by its
financial advisor, PFW would be required to pay Petco a fee of $1.7 million,
plus actual, documented and reasonable out-of-pocket expenses of Petco relating
to the transactions contemplated by the Merger Agreement in an aggregate amount
not to exceed $450,000. PFW would not be required to pay such fee, however, in
all such cases other than those described in clause (iv) above unless and until
PFW also consummates an Alternative Transaction within one year from the date of
termination of the Merger Agreement.
The Merger Agreement provides that it may be amended by Petco and PFW at
any time before or after approval of the PFW stockholders. Pursuant to Delaware
Law, an amendment to the Merger Agreement made after adoption by stockholders
may not, without further stockholder approval, (i) change the exchange ratio,
(ii) change the articles of incorporation of PFW as the corporation surviving
the Merger, or (iii) change the terms and conditions of the Merger Agreement in
a manner that would adversely affect holders of PFW Common Stock.
RELATED AGREEMENTS; INTERESTS OF CERTAIN PERSONS IN THE MERGER
Employment, Consulting, Severance and Non-Competition Agreements
Marvin W. Goldstein, Chairman, President and Chief Executive Officer of
PFW, has entered into an employment letter agreement (the "Letter Agreement")
with Petco, pursuant to which he will be employed by Petco as a Senior Vice
President in charge of Petco's Midwest Region for a period commencing on the
Closing Date and ending on March 31, 1997. The Letter Agreement provides, among
other things, that following termination of his employment with Petco, Mr.
Goldstein will enter into a six-month consulting agreement, and that Mr.
Goldstein will enter into a five-year non-competition agreement prior to the
Effective Time (in exchange for which he will be paid $375,000 by Petco) which
will begin at the earlier of (i) the termination of Mr. Goldstein's consulting
period, or (ii) October 1, 1997. The Letter Agreement further provides that
Petco will honor Mr. Goldstein's existing severance arrangements with PFW, which
allow for a $125,000 lump sum payment upon termination of employment under
certain circumstances and for the continuation of certain other benefits for a
one-year period.
Under the Merger Agreement, Petco has agreed to honor the existing
severance arrangements of certain other employees of PFW, which generally allow
for the continuation of salary and certain other benefits for six or nine months
following termination of employment under certain circumstances. In addition,
Petco has agreed to pay PFW's remaining corporate managerial staff (totaling 45
persons) severance benefits equal to three weeks' salary upon their termination
of employment under certain circumstances.
32
<PAGE> 43
Affiliate Agreements
To help ensure that the Merger will be accounted for as a pooling of
interests, it is a condition to Petco's obligation to consummate the Merger that
PFW affiliates (as defined for purposes of Rule 145) enter into agreements
("Affiliate Agreements") that prohibit such persons from disposing of their
shares of Petco Common Stock until Petco publicly releases its first report of
at least 30 days of "combined operations," as defined by the Commission. Such
affiliates also will agree not to sell, pledge or otherwise transfer such
shares, except in compliance with Rule 145 or under certain other limited
circumstances. In consideration for receiving the Affiliate Agreements, Petco
has agreed not to terminate the affiliates' employment with Petco, except under
certain limited circumstances, on or prior to February 10, 1997.
REGULATORY MATTERS
Certain acquisition transactions such as the Merger are reviewed by the
Justice Department or the FTC to determine whether they comply with applicable
antitrust laws. Under the provisions of the HSR Act, the Merger may not be
consummated until certain information has been furnished to the Justice
Department and the FTC and certain waiting period requirements of the HSR Act
have been satisfied. On , 1996, Petco and PFW each filed Premerger
Notification and Report Forms pursuant to the HSR Act with the Justice
Department and the FTC. The waiting period under the HSR Act expired with
respect to the Merger without any request for additional information on
, 1996.
Petco and PFW are not aware of any other governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
federal and applicable state securities laws.
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of PFW
Common Stock. This discussion is based on currently existing provisions of the
Code, existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to Petco, PFW or PFW's stockholders, as described herein.
PFW stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular PFW
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons or who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of the Merger under foreign, state or local tax laws or the tax
consequences of transactions effectuated prior to or after the Merger (whether
or not such transactions are in connection with the Merger). The following
discussion also assumes that the PFW Common Stock will be held as a capital
asset by each PFW stockholder at the Effective Time of the Merger. ACCORDINGLY,
PFW STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES. THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS NOT INTENDED AS AND SHOULD NOT BE CONSIDERED TAX ADVICE.
Neither Petco nor PFW has requested, or will request, a ruling from the IRS
with regard to any of the federal income tax consequences of the Merger. As a
condition to PFW's obligation to consummate the Merger, since the date of the
Merger Agreement, there shall not have been any change in the facts,
circumstances or applicable federal tax laws that would prevent PFW from
receiving an opinion (the "Tax Opinion"), dated on or prior to the time that the
Registration Statement shall have become effective under the Securities Act, or
that would cause the withdrawal of such Tax Opinion on or prior to the Closing
Date, of Fredrikson & Byron, P.A., counsel to PFW, to the effect that, subject
to customary conditions and representations of PFW, Petco and Merger Sub, (i)
the Merger will be treated for federal income tax purposes
33
<PAGE> 44
as a Reorganization within the meaning of Section 368(a) of the Code, (ii)
Petco, Merger Sub and PFW will each be a party to the Reorganization within the
meaning of Section 368(b) of the Code, (iii) no income, gain or loss will be
recognized for federal income tax purposes by either PFW or Petco as a result of
the consummation of the Merger, and (iv) no income, gain or loss will be
recognized for federal income tax purposes by stockholders of PFW upon the
exchange in the Merger of shares of PFW Common Stock solely for shares of Petco
Common Stock (except to the extent of any cash received in lieu of fractional
shares). The discussion below assumes that the Merger will qualify as a
Reorganization. The tax description set forth below has been reviewed by
Fredrikson & Byron, P.A., and in the opinion of such firm, to the extent such
description relates to statements of law, it is correct in all material
respects.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, the following federal
income tax consequences should, under currently applicable law, result:
- No gain or loss will be recognized for federal income tax purposes by the
holders of PFW Common Stock upon the receipt of Petco Common Stock solely
in exchange for such PFW Common Stock in the Merger (except to the extent
that cash is received in lieu of fractional shares).
- The aggregate tax basis of the Petco Common Stock so received by PFW
stockholders in the Merger (including any fractional shares of Petco
Common Stock not actually received) will be the same as the aggregate tax
basis of the PFW Common Stock surrendered in exchange therefor.
- The holding period of the Petco Common Stock so received by each PFW
stockholder in the Merger will include the period for which the PFW
Common Stock surrendered in exchange therefor was considered to be held.
- Cash payments received by holders of PFW Common Stock in lieu of
fractional shares will be treated as if such fractional shares of Petco
Common Stock had been issued in the Merger and then redeemed by Petco. A
PFW stockholder receiving such cash will recognize gain or loss upon such
payment, measured by the difference (if any) between the amount of cash
received and the basis in such fractional shares. The gain or loss should
be capital gain or loss.
The Tax Opinion will be subject to certain assumptions and qualifications
and will be based on the truth and accuracy of certain representations of Petco,
PFW, Merger Sub and certain stockholders of PFW, including representations in
certain certificates delivered to counsel by the respective managements of
Petco, PFW and Merger Sub and certain stockholders of PFW. See "The Merger and
Related Transactions -- Related Agreements; Interests of Certain Persons in the
Merger -- Affiliate Agreements."
One key assumption is that the "continuity of interest" requirement will be
satisfied in the Merger. In order for this requirement to be met, stockholders
of PFW must not, pursuant to a plan or intent existing at or prior to the
Effective Time, dispose of or transfer so much of either (i) their PFW Common
Stock in anticipation of the Merger, or (ii) the Petco Common Stock to be
received in the Merger (collectively, "Planned Dispositions"), such that the PFW
stockholders, as a group, would no longer have a significant equity interest in
the PFW business being conducted by Petco after the Merger. PFW stockholders
will generally be regarded as having a significant equity interest as long as
the Petco Common Stock received in the Merger (after taking into account Planned
Dispositions), in the aggregate, represents a substantial portion of the entire
consideration received by the PFW stockholders in the Merger.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in significant tax consequences. A PFW stockholder would recognize
gain or loss with respect to each share of PFW Common Stock surrendered equal to
the difference between the stockholder's basis in such share and the fair market
value, as of the Effective Time, of the Petco Common Stock received in exchange
therefor. In such event, a stockholder's aggregate basis in the Petco Common
Stock so received would equal its fair market value, and the stockholder's
holding period for such stock would begin the day after the Merger is
consummated.
34
<PAGE> 45
Even if the Merger qualifies as a Reorganization, a recipient of Petco
Common Stock would recognize income to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the PFW Common
Stock surrendered. Generally, such income is taxable as ordinary income upon
receipt. In addition, to the extent that a PFW stockholder were treated as
receiving (directly or indirectly) consideration other than Petco Common Stock
in exchange for such stockholder's PFW Common Stock, gain or loss would have to
be recognized.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
purposes. Under this accounting treatment, the recorded assets and liabilities
and the operating results of both Petco and PFW are carried forward to the
combined operations of the surviving corporation at their recorded amounts. No
recognition of goodwill in the combination is required of either party to the
Merger.
To support the treatment of the Merger as a pooling of interests, the
affiliates of PFW will enter into agreements imposing certain resale limitations
on their stock. It is a condition to Petco's obligation to consummate the Merger
that, among other things, Petco receive a letter from KPMG Peat Marwick LLP,
Petco's independent auditors, to the effect that the Merger qualifies for
pooling of interests accounting treatment. Such letter will be based in part on
a letter from Arthur Andersen LLP, PFW's independent public accountants, stating
that they are not aware of any conditions that would preclude PFW from being
pooled with Petco.
DISSENTERS' RIGHTS
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under Minnesota Law and is qualified in its entirety by
reference to the full text of Sections 302A.471 and 302A.473 of the Minnesota
Law attached to this Proxy Statement/Prospectus as Appendix C. ANY STOCKHOLDER
WHO WISHES TO EXERCISE SUCH DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE HIS OR
HER RIGHT TO DO SO SHOULD REVIEW THE FOLLOWING DISCUSSION AND APPENDIX C
CAREFULLY BECAUSE FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE PROCEDURES
SPECIFIED WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS UNDER MINNESOTA LAW.
Procedure to Preserve Dissenters' Rights
Any holder of PFW Common Stock who follows the procedures set forth in
Section 302A.473 of the Minnesota Law will be entitled to receive payment in
cash of the "fair value" of such stockholder's shares.
Under Section 302A.473 of the Minnesota Law, if a corporation calls a
stockholder meeting at which a plan of merger to which such corporation is a
party is to be voted upon, the notice of the meeting must inform each
stockholder of the right to dissent and must include a copy of Sections 302A.471
and 302A.473 of the Minnesota Law and a brief description of the procedures to
be followed under such sections. This Proxy Statement/Prospectus constitutes
such notice to the stockholders of PFW and the applicable statutory provisions
of the Minnesota Law are attached to this Proxy Statement/Prospectus as Appendix
C.
The Merger Agreement must be approved by the holders of a majority of the
outstanding shares of PFW Common Stock. A stockholder who wishes to exercise
dissenters' rights must file with PFW before the vote on the Merger Agreement a
written notice of intent to demand the fair value of the shares owned by such
stockholder and must not vote his or her shares in favor of the Merger
Agreement.
The "fair value of the shares" means the value of the shares of PFW
immediately before the effective date of the Merger.
After the proposed Merger has been approved by the PFW Board and the PFW
stockholders, PFW must send a written notice to all stockholders who have not
voted their shares in favor of the Merger Agreement and
35
<PAGE> 46
who have filed with PFW before the vote on the Merger Agreement a written notice
of intent to demand the fair value of the shares owned by such stockholders. The
notice from PFW must contain:
(1) The address to which a demand for payment and certificates of
certified shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertified shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the stockholder, or
the beneficial owner on whose behalf the stockholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of Sections 302A.471 and 302A.473 of the Minnesota Law and
a brief description of the procedures to be followed under such sections.
In order to receive the fair market value of the shares, a dissenting
stockholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a stockholder
until the Merger takes effect.
A stockholder may not assert dissenters' rights as to less than all of the
shares registered in the name of the stockholder, unless the stockholder
dissents with respect to all the shares that are beneficially owned by another
person but registered in the name of the stockholder and discloses the name and
address of each beneficial owner on whose behalf the stockholder dissents. In
that event, the rights of the dissenter will be determined as if the shares as
to which the stockholder has dissented and the other shares were registered in
the names of different stockholders.
A beneficial owner of shares who is not the stockholder may assert
dissenters' rights with respect to shares held on behalf of such beneficial
owner, and will be treated as a dissenting stockholder under the terms of
Sections 302A.471 and 302A.473 of the Minnesota Law, if the beneficial owner
submits written consent of the stockholder holding such beneficial owner's
shares to PFW at the time of or before the assertion of the rights.
Procedures Following an Assertion of Dissenters' Rights
After the Merger takes effect, or after PFW receives a valid demand for
payment, whichever is later, PFW must remit to each dissenting stockholder who
has not voted his or her shares in favor of the proposed Merger and has filed
with PFW before the vote on the proposed Merger a written notice of intent to
demand the fair value of the shares owned by such stockholder, the amount PFW
estimates to be the fair value of the shares, plus interest ("interest"
commences five days after the effective date of the Merger up to and including
the date of payment, calculated at a rate provided under Minnesota Law for
interest on verdicts and judgments), accompanied by:
(1) PFW's balance sheet and statement of operations for a fiscal year
ending not more than 16 months before the effective date of the Merger,
together with the latest available interim financial statements;
(2) An estimate by PFW of the fair value of the shares and a brief
description of the procedures to be followed in demanding supplemental
payment; and
(3) A copy of Sections 302A.471 and 302A.473 of the Minnesota Law, and
a brief description of the procedures to be followed in demanding
supplemental payment.
PFW may withhold the above-described remittance from a person who was not a
stockholder on the date the Merger Agreement was first announced to the public
or who is dissenting on behalf of a person who was not a beneficial owner on
that date. If such dissenter has not voted his or her shares in favor of the
Merger Agreement and has filed with PFW before the vote on the Merger Agreement
a written notice of intent to demand the fair value of the shares owned by such
stockholder, PFW must forward to such dissenter the materials described in the
preceding paragraph, a statement of reason for withholding the remittance, and
an offer to pay to such dissenter the amount listed in the materials if the
dissenter agrees to accept that amount in
36
<PAGE> 47
full satisfaction. Such dissenter may decline the offer and demand payment of
such dissenter's own estimate of the fair value of the shares, plus interest, by
written notice to PFW. Failure to do so entitles such dissenter only to the
amount offered. If such dissenter makes demand, the procedures, costs, fees and
expenses described below for petitioning the court shall apply.
If PFW fails to remit payment within 60 days of the deposit of certificates
or the imposition of transfer restrictions on uncertified shares, it must return
all deposited certificates and cancel all transfer restrictions. However, PFW
may require deposit or restrict transfer at a later time and again give notice
that contains:
(1) The address to which a demand for payment and certificates of
certified shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the stockholder, or
the beneficial owner on whose behalf the stockholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of Sections 302A.471 and 302A.473 of the Minnesota Law and
a brief description of the procedures to be followed under such sections.
If a dissenter believes that the amount remitted by PFW is less than the
fair value of the shares plus interest, the dissenter may give written notice to
PFW of the dissenter's own estimate of the fair value of shares, plus interest,
within 30 days after PFW mails the remittance, and demand payment of the
difference (a "Demand"). Otherwise, a dissenter is entitled only to the amount
remitted by PFW.
If PFW receives a Demand, it must, within 60 days after receiving the
Demand, either pay to the dissenter the amount demanded, or an amount agreed to
by the dissenter after discussion with PFW, or file in court a petition
requesting that the court determine the fair value of the shares, plus interest.
The petition must be filed in Hennepin County, Minnesota. The petition must name
as parties all dissenters who made a Demand and who have not reached agreement
with PFW. The jurisdiction of the court is plenary and exclusive. The court may
appoint appraisers, with powers and authorities the court deems proper, to
receive evidence on and recommend the amount of the fair value of the shares.
The court must determine whether the stockholder or stockholders in question
have fully complied with the requirements of Section 302A.473 of the Minnesota
Law, and must determine the fair value of the shares, taking into account any
and all factors the court finds relevant, computed by any method or combination
of methods that the court, in its discretion, sees fit to use, whether or not
used by PFW or by a dissenter. The fair value of the shares as determined by the
court is binding on all stockholders, wherever located. A dissenter is entitled
to judgment for the amount by which the fair value of the shares as determined
by the court, plus interest, exceeds the amount, if any, remitted by PFW, but
shall not be liable to PFW for the amount, if any, by which the amount, if any,
remitted to the dissenter exceeds the fair value of the shares as determined by
the court, plus interest.
The court must determine the costs and expenses of any appraisers of a
proceeding under the preceding paragraph, including the reasonable expenses and
compensation of any appraisers appointed by the court, and must assess those
costs and expenses against PFW, except that the court may assess part or all of
those costs and expenses against a dissenter whose Demand is found to be
arbitrary, vexatious, or not in good faith.
If the court finds that PFW has failed to comply substantially with Section
302A.473 of the Minnesota Law, the court may assess all fees and expenses of any
experts or attorneys as the court deems equitable. These fees and expenses may
also be assessed against a person who has acted arbitrarily, vexatiously, or not
in good faith in bringing the proceeding, and may be awarded to a party injured
by those actions.
The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
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<PAGE> 48
MERGER EXPENSES AND FEES AND OTHER COSTS
Whether or not the Merger is consummated, each party will bear its own
costs and expenses in connection with the Merger and the transactions related
thereto, except that Petco and PFW have agreed to share equally all fees and
expenses, other than attorneys', accountants' and representatives' fees,
incurred in connection with the printing and filing of this Proxy
Statement/Prospectus. In the event of a termination of the Merger Agreement due
to the occurrence of certain events and the satisfaction of certain conditions,
however, PFW would be required to pay Petco a termination fee in the amount of
$1.7 million and to reimburse Petco for all reasonable expenses incurred by
Petco in connection with the Merger up to a maximum of $450,000. See
"-- Termination or Amendment."
Petco has agreed to pay PaineWebber a transaction fee of $750,000 if the
Merger is consummated. Petco will also reimburse PaineWebber for the reasonable
out-of-pocket expenses incurred by PaineWebber in rendering services to Petco in
connection with the Merger. In addition, Petco has agreed to indemnify
PaineWebber against certain claims and liabilities, including claims under the
federal securities laws. PFW has agreed to pay Dain a progress fee of $15,000
and a fee of $175,000 in connection with rendering an opinion concerning the
fairness of consideration to be received by the stockholders of PFW, which
aggregate amount will be credited against a transaction fee equal to 1.2% of the
total transaction value payable upon consummation of the Merger. Pursuant to the
Merger Agreement, in no event shall Dain's fees exceed $750,000. PFW will also
reimburse Dain for the reasonable out-of-pocket expenses incurred by Dain in
rendering services to PFW in connection with the Merger. In addition, PFW has
agreed to indemnify Dain against certain claims and liabilities, including
claims under the federal securities laws. See "Opinion of PFW Financial
Advisor."
Petco and PFW anticipate that they will incur combined direct transaction
costs currently estimated to be approximately $2.3 million associated with the
Merger. These nonrecurring transaction costs will be charged to operations upon
consummation of the Merger, expected in the fiscal year ending February 1, 1997.
In addition, Petco anticipates incurring an additional charge upon consummation
of the Merger currently estimated to be in the range of $15.0 - $23.0 million to
reflect costs and expenses related to integrating the two companies. See
"Unaudited Pro Forma Condensed Combining Consolidated Financial Statements."
AFFILIATES' RESTRICTIONS ON SALE OF PETCO COMMON STOCK
The shares of Petco Common Stock issued in the Merger will be registered
under the Securities Act pursuant to the Registration Statement, thereby
allowing such shares to be traded without restriction by all former holders of
PFW Common Stock who (i) are not deemed to be affiliates of PFW at the time of
the Special Meeting (as "affiliates" is defined for purposes of Rule 145), and
(ii) who do not become affiliates of Petco after the Merger. PFW stockholders
who may be deemed to be affiliates of PFW will be so advised prior to the
Merger.
The Merger Agreement requires PFW to cause its affiliates to enter into
agreements not to make any public sale of any Petco Common Stock received upon
conversion of PFW Common Stock in the Merger prior to the date Petco shall have
publicly released financial results for a period that includes at least 30 days
of combined operations of Petco and PFW, and thereafter not to make any sale of
Petco Common Stock received upon conversion of PFW Common Stock in the Merger,
except in compliance with Rule 145 or under certain other limited circumstances.
See "-- Related Agreements; Interests of Certain Persons in the Merger --
Affiliate Agreements." In general, Rule 145, as currently in effect, imposes
restrictions on the manner in which such affiliates may make resales of Petco
Common Stock and also on the number of shares of Petco Common Stock that such
affiliates and others (including persons with whom the affiliates act in
concert) may sell within any three month period. Rule 145 will not generally
preclude sales by affiliates. These restrictions will generally apply for a
period of at least two years after the Effective Time (or longer if the person
remains or becomes an affiliate of Petco).
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SURRENDER OF CERTIFICATES
If the Merger becomes effective, Petco will mail a letter of transmittal
with instructions to all holders of record of PFW Common Stock as of the
Effective Time for use in surrendering their stock certificates in exchange for
certificates representing Petco Common Stock and a cash payment in lieu of
fractional shares. CERTIFICATES REPRESENTING SHARES OF PFW COMMON STOCK SHOULD
NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED.
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<PAGE> 50
UNAUDITED PRO FORMA CONDENSED COMBINING CONSOLIDATED
FINANCIAL STATEMENTS
The unaudited pro forma condensed combining consolidated balance sheet
combines Petco's consolidated balance sheet as of August 3, 1996 with PFW's
balance sheet as of that date, giving effect to the Merger as if it occurred on
August 3, 1996. The unaudited pro forma condensed combining consolidated
statements of operations combine Petco's consolidated statements of operations
for the twenty-six weeks ended August 3, 1996 and July 29, 1995 and for each of
the years in the three-year period ended February 3, 1996 with PFW's statements
of operations for the twenty-six weeks ended August 3, 1996 and July 29, 1995
and for the fiscal years ended February 3, 1996, January 28, 1995 and December
31, 1993, giving effect to the Merger as if it had occurred at the beginning of
each period presented on a pooling of interests basis. The historical
information of Petco has been derived from the unaudited condensed consolidated
financial statements for the twenty-six weeks ended August 3, 1996 and July 29,
1995 which are incorporated by reference herein and the audited consolidated
financial statements for each of the years in the three-year period ended
February 3, 1996 which are included herein and should be read in conjunction
with such financial statements and notes thereto. The historical financial
information of PFW has been derived from the unaudited condensed financial
statements for the twenty-six weeks ended August 3, 1996 and July 29, 1995, the
audited financial statements for the fiscal years ended February 3, 1996 and
January 28, 1995 which are included herein and the year ended December 31, 1993
and should be read in conjunction with such financial statements and notes
thereto. In the opinion of the managements of Petco and PFW, the above-mentioned
unaudited interim condensed consolidated financial statements of the respective
companies include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for unaudited
interim periods. The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of actual results that would
have been achieved had the Merger been consummated at the beginning of the
periods presented or of future results.
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<PAGE> 51
UNAUDITED PRO FORMA CONDENSED COMBINING
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 3, 1996
------------------------------------------------
HISTORICAL PRO FORMA
------------------ -------------------------
PETCO PFW ADJUSTMENTS(1) COMBINED
-------- ------- -------------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 52,232 $ 5,399 $ -- $ 57,631
Receivables.................................... 4,526 789 -- 5,315
Inventories.................................... 54,699 6,922 -- 61,621
Other.......................................... 993 1,016 -- 2,009
-------- ------- ------- --------
Total current assets................... 112,450 14,126 -- 126,576
Fixed assets, net................................ 71,610 8,492 -- 80,102
Goodwill......................................... 38,095 -- -- 38,095
Deferred tax assets.............................. 12,777 -- 2,946 15,723
Other assets..................................... 1,696 205 -- 1,901
-------- ------- ------- --------
$236,628 $22,823 $ 2,946 $262,397
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 22,035 $ 1,431 $ -- $ 23,466
Accrued expenses............................... 14,610 1,530 2,250 18,390
Accrued salaries and employee benefits......... 5,061 814 -- 5,875
Current portion of capital lease and other
obligations................................. 3,941 154 -- 4,095
-------- ------- ------- --------
Total current liabilities.............. 45,647 3,929 2,250 51,826
Capital lease and other obligations, excluding
current portion................................ 12,619 270 -- 12,889
Accrued store closing costs...................... 7,126 -- -- 7,126
Deferred rent.................................... 2,010 1,279 -- 3,289
Stockholders' equity:
Common Stock................................... 2 94 (94) 2
Additional paid-in capital..................... 210,485 25,682 94 236,261
Accumulated deficit............................ (41,261) (8,431) 696 (48,996)
-------- ------- ------- --------
Total stockholders' equity............. 169,226 17,345 696 187,267
-------- ------- ------- --------
$236,628 $22,823 $ 2,946 $262,397
======== ======= ======= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combining Consolidated
Financial Statements.
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<PAGE> 52
UNAUDITED PRO FORMA CONDENSED COMBINING
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED AUGUST 3, 1996
-----------------------------------------------------
HISTORICAL PRO FORMA
--------------------- ---------------------------
PETCO PFW ADJUSTMENTS(1) COMBINED
-------- -------- -------------- --------
<S> <C> <C> <C> <C>
Net sales................................... $197,272 $ 31,903 $ -- $229,175
Cost of sales and occupancy costs........... 147,764 23,630 -- 171,394
---------- ---------- ---------- ----------
Gross profit...................... 49,508 8,273 -- 57,781
Selling, general and administrative
expenses.................................. 42,787 7,778 -- 50,565
Merger and nonrecurring charges............. 14,945 -- -- 14,945
---------- ---------- ---------- ----------
Operating income (loss)........... (8,224) 495 -- (7,729)
Interest income............................. 798 141 -- 939
Interest expense............................ (886) (30) -- (916)
---------- ---------- ---------- ----------
Earnings (loss) before income
taxes........................... (8,312) 606 -- (7,706)
Income taxes (benefit)...................... (2,395) -- 212 (2,183)
---------- ---------- ---------- ----------
Net earnings (loss)............... $ (5,917) $ 606 $ (212) $ (5,523)
=========== ========== ========== ===========
Net earnings (loss) per common and common
equivalent share.......................... $ (0.40) $ 0.06 $ -- $ (0.33)
=========== ========== ========== ===========
Weighted average number of common and common
equivalent shares outstanding(1).......... 14,874,304 9,422,378 (7,535,778) 16,760,904
=========== ========== ========== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combining Consolidated
Financial Statements.
42
<PAGE> 53
UNAUDITED PRO FORMA CONDENSED COMBINING
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED JULY 29, 1995
---------------------------------------------------
HISTORICAL PRO FORMA
-------------------- --------------------------
PETCO PFW ADJUSTMENTS(1) COMBINED
-------- -------- -------------- --------
<S> <C> <C> <C> <C>
Net sales..................................... $122,512 $ 26,767 $ -- $149,279
Cost of sales and occupancy costs............. 93,151 20,971 -- 114,122
---------- ---------- ---------- ----------
Gross profit........................ 29,361 5,796 -- 35,157
Selling, general and administrative
expenses.................................... 25,531 7,835 -- 33,366
---------- ---------- ---------- ----------
Operating income (loss)............. 3,830 (2,039) -- 1,791
Interest income............................... 498 258 -- 756
Interest expense.............................. (419) (19) -- (438)
---------- ---------- ---------- ----------
Earnings (loss) before income
taxes............................. 3,909 (1,800) -- 2,109
Income taxes (benefit)........................ 1,177 -- (361) 816
---------- ---------- ---------- ----------
Net earnings (loss)................. $ 2,732 $ (1,800) $ 361 $ 1,293
========== ========== ========== ==========
Net earnings (loss) per common and common
equivalent share............................ $ 0.24 $ (0.19) $ -- $ 0.10
========== ========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding(1)............ 11,443,860 9,327,522 (7,440,922) 13,330,460
========== ========== ========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combining Consolidated
Financial Statements.
43
<PAGE> 54
UNAUDITED PRO FORMA CONDENSED COMBINING
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 3, 1996
---------------------------------------------------
HISTORICAL PRO FORMA
-------------------- --------------------------
PETCO PFW ADJUSTMENTS(1) COMBINED
-------- -------- -------------- --------
<S> <C> <C> <C> <C>
Net sales..................................... $293,631 $ 61,095 $ -- $354,726
Cost of sales and occupancy costs............. 224,540 46,747 -- 271,287
---------- ---------- ---------- ----------
Gross profit........................ 69,091 14,348 -- 83,439
Selling, general and administrative
expenses.................................... 70,808 16,332 -- 87,140
---------- ---------- ---------- ----------
Operating income (loss)............. (1,717) (1,984) -- (3,701)
Loss on disposal of stores.................... -- (3,500) -- (3,500)
Interest income............................... 1,081 427 -- 1,508
Interest expense.............................. (836) (36) -- (872)
---------- ---------- ---------- ----------
Earnings (loss) before income
taxes............................. (1,472) (5,093) -- (6,565)
Income taxes (benefit)........................ (9,785) -- (1,751) (11,536)
---------- ---------- ---------- ----------
Net earnings (loss)................. $ 8,313 $ (5,093) $ 1,751 $ 4,971
========== ========== ========== ===========
Net earnings (loss) per common and common
equivalent share............................ $ 0.67 $ (0.55) $ -- $ 0.35
========== ========== ========== ===========
Weighted average number of common and common
equivalent shares outstanding(1)............ 12,430,720 9,330,171 (7,443,571) 14,317,320
========== ========== ========== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combining Consolidated
Financial Statements.
44
<PAGE> 55
UNAUDITED PRO FORMA CONDENSED COMBINING
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 28, 1995
---------------------------------------------------
HISTORICAL PRO FORMA
-------------------- --------------------------
PETCO PFW ADJUSTMENTS(1) COMBINED
-------- -------- -------------- --------
<S> <C> <C> <C> <C>
Net sales..................................... $205,178 $ 36,285 $ -- $241,463
Cost of sales and occupancy costs............. 153,607 28,052 -- 181,659
---------- ---------- ----------- ----------
Gross profit........................ 51,571 8,233 -- 59,804
Selling, general and administrative
expenses.................................... 44,128 10,997 -- 55,125
---------- ---------- ----------- ----------
Operating income (loss)............. 7,443 (2,764) -- 4,679
Interest income............................... 427 610 -- 1,037
Interest expense-primarily to related
parties..................................... (1,147) (40) -- (1,187)
---------- ---------- ----------- ----------
Earnings (loss) before income
taxes............................. 6,723 (2,194) -- 4,529
Income taxes (benefit)........................ 1,969 -- (955) 1,014
---------- ---------- ----------- ----------
Net earnings (loss)................. $ 4,754 $ (2,194) $ 955 $ 3,515
========== ========== =========== ==========
Net earnings (loss) per common and common
equivalent share............................ $ 0.57 $ (0.24) $ -- $ 0.34
========== ========== =========== ==========
Weighted average number of common and common
equivalent shares outstanding(1)............ 8,340,803 9,001,257 (7,114,657) 10,227,403
========== ========== =========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combining Consolidated
Financial Statements.
45
<PAGE> 56
UNAUDITED PRO FORMA CONDENSED COMBINING
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
HISTORICAL
-------------------------
JAN. 29, PRO FORMA
1994 DEC. 31, 1993 --------------------------
PETCO PFW ADJUSTMENTS(1) COMBINED
-------- ------------- -------------- --------
<S> <C> <C> <C> <C>
Net sales.................................... $160,841 $ 18,170 $ -- $179,011
Cost of sales and occupancy costs............ 120,574 14,113 -- 134,687
---------- ---------- ---------- ----------
Gross profit....................... 40,267 4,057 -- 44,324
Selling, general and administrative
expenses................................... 35,969 5,671 -- 41,640
---------- ---------- ---------- ----------
Operating income (loss)............ 4,298 (1,614) -- 2,684
Interest income.............................. 1 60 -- 61
Interest expense-primarily to related
parties.................................... (5,105) (26) -- (5,131)
---------- ---------- ---------- ----------
Earnings (loss) before income
taxes............................ (806) (1,580) (2,386)
Income taxes (benefit)....................... 51 (9) (452) (410)
---------- ---------- ---------- ----------
Net earnings (loss)................ $ (857) $ (1,571) $ 452 $ (1,976)
========== ========== ========== ==========
Net earnings (loss) per common and common
equivalent share(4)........................ $ -- $ (0.38) $ -- $ --
========== ========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding(1)........... -- 4,117,055 -- --
========== ========== ========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combining Consolidated
Financial Statements.
46
<PAGE> 57
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINING CONSOLIDATED FINANCIAL STATEMENTS
(1) The adjustments to the unaudited pro forma condensed combining consolidated
balance sheet give effect to the assumed issuance of 1.9 million shares of
Petco Common Stock as if the Merger had been consummated as of August 3,
1996 and an anticipated charge for Merger-related expenses totaling
approximately $2.3 million. Such Merger-related expenses include only
financial advisory fees, legal and accounting expenses and other
miscellaneous transaction costs; they do not include any severance payments
that may be made to PFW employees in connection with the Merger (see "The
Merger and Related Transactions -- Related Agreements; Interests of Certain
Persons in the Merger"), any costs relating to possible store conversions or
closures (see "The Merger and Related Transactions -- Merger Expenses and
Fees and Other Costs") or any other costs that may arise in connection with
the Merger. These Merger-related expenses are estimated to be in the range
of $15.0-$23.0 million and are expected to be charged to the operations of
Petco and PFW as incurred. The unaudited pro forma condensed combining
consolidated statements of operations do not reflect these non-recurring
charges which will be recorded as incurred. The pro forma combining common
stock in the unaudited pro forma condensed combining consolidated balance
sheet is based on the historical par value of PFW Common Stock being valued
at the Petco Common Stock par value of $0.0001. The unaudited pro forma
condensed combining consolidated statements of operations include
adjustments to recognize deferred income taxes (benefit) related to
previously unrecognized PFW net operating loss carryforwards in accordance
with SFAS No. 109. The pro forma combining per share amounts in the
unaudited pro forma condensed combining consolidated statements of
operations are based upon the historical weighted average number of shares
of common stock and dilutive common stock equivalents of Petco outstanding
during each period presented. In addition, the shares of Petco Common Stock
to be issued in connection with the Merger, based on the equivalent weighted
average shares and the dilutive common share equivalents of PFW outstanding
during each period presented, are treated as outstanding during each such
period.
(2) The unaudited pro forma condensed combining consolidated financial
statements do not include adjustments to conform the accounting policies of
PFW to those followed by Petco. The nature and extent of such adjustments,
if any, will be based upon further study and analysis and are not expected
to be significant in relationship to the consolidated financial statements
of Petco.
(3) Certain financial statement balances of PFW have been reclassified to
conform with Petco's financial statement presentation.
(4) Due to differences in capital structure, Petco net earnings (loss) per share
information prior to fiscal 1994 is not comparable and, accordingly, is not
presented.
47
<PAGE> 58
PETCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Petco currently utilizes both superstore and traditional store formats and
follows a strategy of converting and expanding its store base from a traditional
store format to a superstore format. As a result of this strategy, Petco has
opened and acquired superstores, has expanded, remodeled and relocated
traditional stores into superstores, collectively referred to as conversions,
and has closed underperforming stores. At August 3, 1996, Petco operated 274
stores, including 206 superstores, in 15 states and the District of Columbia.
As a result of Petco's plan to open approximately 40 to 50 superstores each
year, including conversions of existing traditional stores into superstore
formats, Petco anticipates certain costs to increase as a percentage of sales in
the near term. In addition, the timing of new superstore openings and related
preopening expenses and the amount of revenue contributed by new and existing
superstores may cause Petco's quarterly results of operations to fluctuate.
Petco expects continued downward pressure on its gross profit as a percentage of
sales from higher occupancy costs in new stores and increased competitive
pressures in certain markets. This trend should be offset, however, by increased
sales from maturing stores and the benefit of expanded merchandise assortments
in existing stores. Increased payroll, advertising and other store level
expenses as a percentage of sales in new stores should also contribute to lower
store operating margins. In addition, Petco charges preopening costs associated
with each new superstore to earnings as incurred. Therefore, Petco expects that
the opening of a large number of new superstores in a given quarter may
adversely impact its quarterly results of operations for that quarter.
In March 1996, Petco acquired eight P.T. Moran stores and in July 1996
acquired eight Pet Nosh stores. Petco is in the process of integrating the
merchandise mix, and operating and marketing philosophies into Petco's format of
superstores. Although Petco does not expect the results of the P.T. Moran and
Pet Nosh stores to be dilutive on its fiscal 1996 operating results, there can
be no assurance that these stores can achieve their anticipated profitability.
Petco's business is also subject to some seasonal fluctuations.
Historically, Petco has realized a higher portion of its net sales during the
month of December and a lower portion of its net sales in other winter months
and fall than during the other months of the year.
Twenty-six Weeks Ended August 3, 1996 Compared to Twenty-six Weeks Ended July
29, 1995
RESULTS OF OPERATIONS
Net sales increased 61.1% to $197.3 million for the twenty-six weeks ended
August 3, 1996 from $122.5 million for the twenty-six weeks ended July 29, 1995.
The increase in net sales resulted primarily from the addition of 69
superstores, including the conversion of 26 traditional stores into superstores,
partially offset by the closing of nine stores in the past year, and a
comparable store net sales increase of 18.3%. The comparable store net sales
increase was attributable to maturing superstores, more effective marketing
efforts and expanded merchandise assortments in existing stores. The net
increase in Petco's store base accounted for approximately $53.6 million, or
71.7% of the net sales increase, and $21.2 million, or 28.3% of the net sales
increase, was attributable to the increase in comparable store net sales.
Gross profit, defined as net sales less cost of sales including store
occupancy costs, increased $20.1 million or 68.4% to $49.5 million for the
twenty-six weeks ended August 3, 1996 from $29.4 million for the same period
last year. Gross profit as a percentage of net sales increased to 25.1% for the
twenty-six weeks ended August 3, 1996 from 24.0% for the twenty-six weeks ended
July 29, 1995 primarily due to lower distribution expenses related to the more
efficient operation of Petco's central distribution facility during the current
period.
Selling, general and administrative expenses increased $17.3 million, or
67.8%, to $42.8 million for the twenty-six weeks ended August 3, 1996 compared
to $25.5 million for the same period last year. Selling, general and
administrative expenses increased primarily as a result of higher personnel and
related costs
48
<PAGE> 59
associated with new store openings and acquisitions. As a percentage of net
sales, these expenses increased to 21.7% for the twenty-six weeks ended August
3, 1996 from 20.8% for the twenty-six weeks ended July 29, 1995 primarily due to
increased amortization of goodwill. Merger and nonrecurring charges of $14.9
million were recorded in the twenty-six weeks ended August 3, 1996 following the
acquisition of P.T. Moran, Pet Nosh and the former Herman's Sporting Goods
locations.
Operating loss of $8.2 million was incurred in the twenty-six weeks ended
August 3, 1996, reflecting the $14.9 million in merger and nonrecurring charges,
compared to operating income of $3.8 million in the prior year. Operating
income, excluding the merger and nonrecurring charges, on a comparable basis,
increased 76.3% to $6.7 million for the twenty-six weeks ended August 3, 1996
from $3.8 million for the twenty-six weeks ended July 29, 1995 and increased as
a percentage of net sales to 3.4% for the twenty-six weeks ended August 3, 1996
from 3.1% for the same period last year.
Net interest expense was $0.1 million for the twenty-six weeks ended August
3, 1996 compared to net interest income of $0.1 million for the same period last
year.
Income tax benefits were $2.4 million in the twenty-six weeks ended August
3, 1996, primarily due to the merger and nonrecurring charges recorded in second
quarter 1996, compared to income taxes of $1.2 million in the prior year.
Net loss of $5.9 million was incurred for the twenty-six weeks ended August
3, 1996, reflecting the merger and nonrecurring charges and related income tax
benefits, compared to net earnings of $2.7 million for the same period of the
prior year. Net earnings, excluding merger and nonrecurring charges and related
tax benefits, on a comparable basis, increased 40.7% to $3.8 million, or $0.26
per share, for the twenty-six weeks ended August 3, 1996 compared to net
earnings of $2.7 million, or $0.24 per share, for the twenty-six weeks ended
July 29, 1995.
Fiscal Year Ended February 3, 1996 Compared to Fiscal Year Ended January 28,
1995
RESULTS OF OPERATIONS
The following table sets forth certain items expressed as a percentage of
net sales for the periods indicated. As a result of operational and strategic
changes, period-to-period comparisons of financial results may not be meaningful
and the results of operations for historical periods may not be indicative of
future results.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------
JAN. 29, JAN. 28, FEB. 3,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0%
Cost of sales and occupancy costs........................ 75.0 74.9 76.5
----- ----- -----
Gross profit............................................. 25.0 25.1 23.5
Selling, general and administrative expenses............. 22.3 21.5 24.1
----- ----- -----
Operating income (loss).................................. 2.7 3.6 (0.6)
Interest expense (income)................................ 3.2 0.4 (0.1)
----- ----- -----
Earnings (loss) before income taxes...................... (0.5) 3.2 (0.5)
Income taxes (benefit)................................... -- 0.9 (3.3)
----- ----- -----
Net earnings (loss)...................................... (0.5)% 2.3% 2.8%
===== ===== =====
</TABLE>
Net sales increased 43.1% to $293.6 million in fiscal 1995 from $205.2
million in fiscal 1994. The increase in net sales in fiscal 1995 resulted
primarily from the addition of 69 superstores, including the conversion of 23
traditional stores into superstores, partially offset by the closing of 13
stores, and a comparable store net sales increase of 16.5%. The comparable store
net sales increase was attributable to maturing superstores, increased
advertising and expanded merchandise assortments in existing stores. The net
increase in Petco's store base
49
<PAGE> 60
accounted for approximately $57.9 million, or 65.5% of the net sales increase,
and $30.5 million, or 34.5% of the net sales increase, was attributable to the
increase in comparable store net sales.
Gross profit increased $17.5 million, or 34.0%, to $69.1 million in fiscal
1995 from $51.6 million in fiscal 1994. Gross profit as a percentage of net
sales decreased to 23.5% in fiscal 1995 from 25.1% in fiscal 1994. This decrease
resulted primarily from $4.3 million in charges reflected in the third quarter
of fiscal 1995 from the write-down of fixed assets and related costs with
respect to Petco's central distribution facility. These charges resulted from
Petco's decision to replace certain hardware and software in this facility which
have not produced the planned benefits. Excluding these charges, gross profit as
a percentage of net sales in fiscal 1995 would have been 25.0%.
Selling, general and administrative expenses increased $26.7 million, or
60.5%, to $70.8 million in fiscal 1995 from $44.1 million in fiscal 1994.
Selling, general and administrative expenses included $9.2 million of costs
reflected in the third quarter of fiscal 1995 following acquisition activities.
These costs were primarily associated with lease cancellations and closure of
traditional stores located in the same markets as acquired stores, write-downs
of certain assets, and the conversion and integration of certain acquired
stores. As a percentage of net sales, these expenses increased to 24.1% in
fiscal 1995 from 21.5% in fiscal 1994 due to these additional costs. Excluding
these additional costs, selling, general and administrative expenses would have
decreased as a percentage of net sales to 21.0%. Selling, general and
administrative expenses also increased as a result of higher personnel and
related costs associated with new store openings.
Operating loss of $1.7 million was incurred in fiscal 1995, reflecting the
combined $13.5 million in charges described above, compared to operating income
of $7.4 million in fiscal 1994. Excluding these combined charges, Petco would
have reported operating income of $11.8 million in fiscal 1995 or 4.0% of net
sales.
Net interest income was $0.2 million in fiscal 1995 compared to net
interest expense of $0.7 million in fiscal 1994. Interest income was produced by
the short-term investment of the proceeds from public stock offerings. Interest
expense decreased due to the repayment of subordinated debt with proceeds of
Petco's initial public offering in fiscal 1994.
Income tax benefit was $9.8 million in fiscal 1995, due in part to
recognition of an income tax benefit of $8.7 million from previously
unrecognized deferred tax assets during the third quarter of fiscal 1995,
compared to income taxes of $2.0 million in fiscal 1994.
Net earnings increased to $8.3 million in fiscal 1995 from $4.8 million in
fiscal 1994. As a percentage of net sales, net earnings increased to 2.8% in
fiscal 1995 from 2.3% in fiscal 1994.
Fiscal Year Ended January 28, 1995 Compared to Fiscal Year Ended January 29,
1994
RESULTS OF OPERATIONS
Net sales increased 27.6% to $205.2 million in fiscal 1994 from $160.8
million in fiscal 1993. The increase in net sales in fiscal 1994 resulted
primarily from the addition of 48 superstores, including the conversion of 21
traditional stores into superstores, partially offset by the closing of five
stores, and a comparable store net sales increase of 18.5%. The comparable store
net sales increase was attributable to increased sales volume of both food and
supplies resulting from the full implementation in fiscal 1994 of Petco's
everyday low pricing strategy on key food items and from expanded merchandise
assortments. The net increase in Petco's store base accounted for approximately
$17.4 million, or 39.3%, of the net sales increase, and $26.9 million, or 60.7%,
of the net sales increase was attributable to the increase in comparable store
net sales.
Gross profit increased $11.3 million, or 28.0%, to $51.6 million in fiscal
1994 from $40.3 million in fiscal 1993. Gross profit as a percentage of net
sales was 25.1% in fiscal 1994 compared to 25.0% in fiscal 1993.
Selling, general and administrative expenses increased $8.1 million, or
22.5%, to $44.1 million in fiscal 1994 from $36.0 million in fiscal 1993.
Selling, general and administrative expenses increased primarily as a result of
higher personnel and related costs associated with new store openings. As a
percentage of net sales, these expenses decreased to 21.5% in fiscal 1994 from
22.3% in fiscal 1993 due to net sales increasing at a
50
<PAGE> 61
greater rate than related expenses. Selling, general and administrative expenses
included a write-down of non-compete agreements of $0.8 million in fiscal 1993.
Operating income increased 72.1% to $7.4 million in fiscal 1994 from $4.3
million in fiscal 1993 and increased as a percentage of net sales to 3.6% in
fiscal 1994 from 2.7% in fiscal 1993.
Net interest expense decreased $4.4 million to $0.7 million in fiscal 1994
from $5.1 million in fiscal 1993 due to the repayment of amounts outstanding
under Petco's revolving credit facility, the repayment of $20.0 million of
subordinated debt and the extinguishment of the remaining outstanding
subordinated debt, all in connection with the initial public offering.
Income taxes were $2.0 million in fiscal 1994, representing an effective
income tax rate of 29.3% after the recognition of $0.6 million in deferred tax
assets, compared to $51,000 in fiscal 1993.
Net earnings increased to $4.8 million for fiscal 1994 from a net loss of
$0.9 million in fiscal 1993.
QUARTERLY DATA
The following tables set forth the unaudited quarterly results of
operations for fiscal 1996, 1995 and 1994, all of which have been restated to
reflect the merger with Pet Nosh in July 1996 which was accounted for as a
pooling of interests (see Note 2 to the Notes to Consolidated Financial
Statements of Petco included herein). This information includes all adjustments
management considers necessary for a fair presentation of such data. The results
of operations for historical periods are not necessarily indicative of results
for any future period. Petco expects quarterly results of operations to
fluctuate depending on the timing and amount of revenue contributed by new
stores.
Petco believes that its business is moderately seasonal, with net sales and
earnings generally higher in the fourth fiscal quarter due to year-end holiday
purchases and during the second and third fiscal quarters due to demand for flea
and tick control products.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
----------------------
MAY 4, AUG. 3,
FISCAL 1996 1996 1996
- ------------------------------------------------- --------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales........................................ $ 93,701 $103,571
Gross profit..................................... 22,666 26,842
Operating income (loss).......................... 2,388 (10,612)
Net earniings (loss) per share................... 1,133 (7,050)
Net earnings (loss) per share.................... $ 0.08 $ (0.43)
Stores open at end of period..................... 273 274
Aggregate gross square footage................... 2,525,000 2,601,000
Percentage increase in comparable store net
sales.......................................... 18.2% 18.3%
</TABLE>
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
------------------------------------------------
APRIL 29, JULY 29, OCT. 28, FEB. 3,
FISCAL 1995 1995 1995 1995 1996
- -------------------------------------------------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales......................................... $ 59,211 $ 63,301 $ 70,053 $101,066
Gross profit...................................... 13,857 15,504 12,690 27,040
Operating income (loss)........................... 1,545 2,285 (11,348) 5,801
Net earnings (loss)............................... 924 1,808 2,203 3,378
Net earnings (loss) per share..................... $ 0.09 $ 0.14 $ 0.16 $ 0.25
Stores open at end of period...................... 223 228 237 263
Aggregate gross square footage.................... 1,479,000 1,608,000 1,837,000 2,278,000
Percentage increase in comparable store net
sales........................................... 16.3% 13.7% 14.6% 20.4%
</TABLE>
51
<PAGE> 62
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-----------------------------------------------
JAN.
APRIL 30, JULY 30, OCT. 29, 28,
FISCAL 1994 1994 1994 1994 1995
- ---------------------------------------------------- --------- -------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales........................................... $ 44,947 $ 48,554 $ 51,844 $59,833
Gross profit........................................ 11,090 12,702 12,691 15,088
Operating income (loss)............................. 1,232 2,065 1,195 2,951
Net earnings (loss)................................. 329 1,388 693 2,344
Net earnings (loss) per share....................... $ 0.08 $ 0.14 $ 0.07 $ 0.24
Stores open at end of period........................ 203 207 211 224
Aggregate gross square footage...................... 1,038,000 1,117,000 1,212,000 1,427,000
Percentage increase in comparable store net sales... 23.9% 20.5% 15.4% 15.6%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Petco has financed its operations and expansion program through internal
cash flow, external borrowings and the sale of equity securities. At August 3,
1996, total assets were $236.6 million, of which $112.5 million were current
assets, while at February 3, 1996, total assets were $162.1 million, $60.5
million of which were current assets. Net cash used in operating activities was
$11.8 million for the twenty-six weeks ended August 3, 1996 and $3.2 million for
the same period of the prior year. Net cash provided by operating activities was
$8.8 million, $8.2 million and $13.1 million for fiscal years 1993, 1994 and
1995, respectively. Petco's sales are substantially on a cash basis, therefore
cash flow generated from operating stores provides a source of liquidity to
Petco. The principal use of operating cash is for the purchase of merchandise
inventories. A portion of Petco's inventory purchases is financed through vendor
credit terms.
Petco uses cash in investing activities to acquire stores, purchase fixed
assets for new and converted stores and, to a lesser extent, to purchase
warehouse and office fixtures, equipment and computer hardware and software in
support of its distribution and administrative functions. During the twenty-six
weeks ended August 3, 1996, Petco acquired two retailers of pet food and
supplies, and during the twenty-six weeks ended July 29, 1995, Petco acquired
two retailers of pet food and supplies. Net cash of $7.8 million and $2.4
million, respectively, was invested in acquisitions for the twenty-six weeks
ended August 3, 1996 and July 29, 1995. Cash used in investing activities was
$23.8 million for the twenty-six weeks ended August 3, 1996 and $16.3 million
for the same period of the prior year.
During fiscal 1995, Petco completed six acquisitions of retailers of
premium pet food and supplies. The aggregate fair market value of assets
acquired was $37.7 million and assumed liabilities were $7.3 million, with $30.4
million of net cash invested in the acquisition of these businesses. During
fiscal 1994, Petco acquired a retailer of premium pet food and supplies with a
fair market value of assets acquired of $5.3 million and assumed liabilities of
$1.6 million, with $3.7 million of net cash invested in the acquisition. Cash
used in investing activities was $7.1 million, $19.2 million and $56.7 million
for fiscal years 1993, 1994 and 1995, respectively.
Petco also finances some of its purchases of equipment and fixtures through
capital leases and other obligations. Purchases of $3.1 million and $2.1 million
of fixed assets were financed in this manner during the twenty-six weeks ended
August 3, 1996 and July 29, 1995, respectively. Purchases of $1.2 million, $3.3
million and $9.4 million of fixed assets were financed in this manner during
fiscal years 1993, 1994 and 1995, respectively. Petco believes that additional
sources of capital lease and other financing are available on a cost-effective
basis and plans to use them, as necessary, in connection with its expansion
program.
Petco's primary long-term capital requirement is funding for the opening or
acquisition of superstores and the conversion of traditional stores into
superstores. During the twenty-six weeks ended August 3, 1996 and July 29, 1995,
net proceeds of $78.6 million and $46.9 million, respectively, were obtained
from public offerings of common stock to provide funds for Petco's expansion
program, the acquisition of related businesses and for working capital
requirements.
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Cash flows provided by financing activities were $17.7 million and $46.3
million in fiscal 1994 and 1995, respectively. In fiscal 1994, net proceeds of
$41.7 million from an initial public offering of common stock were used to repay
$20.0 million of subordinated debt and $5.4 million outstanding under a
revolving credit facility. In fiscal 1995, net proceeds of $46.8 million from a
public offering were used to finance the acquisition of related businesses and
to fund Petco's expansion program and working capital requirements.
Petco has a revolving credit facility with a commitment of up to $25.0
million that expires June 2, 1997. Borrowings under this facility are unsecured
and bear interest, at Petco's option, at either the bank's reference rate or
LIBOR plus 1.0%. The revolving credit facility contains certain affirmative and
negative covenants related to working capital, net worth, leverage,
profitability, capital expenditures and payment of cash dividends.
As of February 3, 1996, Petco had available net operating loss
carryforwards of $8.5 million for federal income tax purposes, which begin
expiring in 2004, and $1.8 million for California income tax purposes, which
began expiring in 1996.
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Proxy Statement/Prospectus that are not
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results of Petco to be materially different from
historical results or from any results expressed or implied by such
forward-looking statements. These factors are discussed herein under the caption
"Risk Factors."
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. ("SFAS") 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective for
fiscal years beginning after December 15, 1995. SFAS 121 provides guidance for
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill related both to assets to be held and used
and assets to be disposed of. The adoption of SFAS 121 is not expected to have a
material effect on Petco's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation," effective for fiscal years beginning
after December 15, 1995. Under the provisions of SFAS 123, Petco is encouraged,
but not required, to measure compensation costs related to its employee stock
compensation under the fair value method. If Petco elects not to recognize
compensation expense under this method, it is required to disclose the pro forma
effects based on the SFAS 123 methodology. Petco has not determined its method
of adoption.
INFLATION
Although Petco cannot accurately anticipate the effect of inflation on its
operations, it does not believe that inflation has had, or is likely in the
foreseeable future to have, a material impact on its net sales or results of
operations.
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PFW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
PFW operated 25 warehouse superstores as of August 3, 1996 and 25 warehouse
superstores (17 excluding the Michigan and Ohio ("MI/OH") stores) as of July 29,
1995. PFW opened ten new warehouse superstores during the year ended February 3,
1996 (fiscal 1995) and 13 new warehouse superstores during the year ended
January 28, 1995 (fiscal 1994). PFW closed nine stores during fiscal 1995. As of
February 3, 1996 and January 28, 1995, PFW operated 22 and 21 warehouse stores,
respectively.
Comparable store sales, for the twenty-six weeks ended August 3, 1996
compared to the twenty-six weeks ended July 29, 1995, increased 6.9%. PFW
anticipates that the rate of comparable store sales growth will remain
relatively consistent in future periods as existing warehouse superstores mature
and additional warehouse superstores are opened in existing markets. Also
impacting comparable store sales growth was the opening of five stores in the
Minneapolis/St. Paul metropolitan area in first quarter fiscal 1996 by a
national superstore competitor. Same store sales, calculated on a comparable
52-week fiscal year basis, increased 17.9% for the year ended February 3, 1996
and 23.3% for the year ended January 28, 1995.
PFW's operations are relatively "young" with an average age of PFW's 25
stores of approximately two years. Future operating results may be adversely
affected by costs associated with the opening of a significant number of new
stores over a relatively short period of time. PFW expects downward pressure on
its gross profit and operating profit margins because certain store level
expenses, primarily occupancy and payroll, are higher as a percentage of sales
for new warehouse superstores than for mature warehouse superstores due to the
relatively lower sales of the new warehouse superstores. Store operating
expenses decreased as a percentage of net sales for the twenty-six weeks ended
August 3, 1996 compared to the twenty-six weeks ended July 29, 1995 primarily
due to the disposition of the underperforming MI/OH market stores in fourth
quarter fiscal 1995. Excluding the MI/OH stores, store operating expenses
increased as a percentage of net sales due to increased saturation and
competition primarily in the Minneapolis/St. Paul market.
General and administrative expenses as a percentage of sales decreased from
7.2% (8.4% excluding MI/OH stores) for the twenty-six weeks ended July 29, 1995
to 5.1% for the twenty-six weeks ended August 3, 1996 as sales growth outpaced
the general and administrative expenses incurred to support PFW's expansion.
Management expects general and administrative expenses will continue to decrease
as a percentage of sales. General and administrative expenses as a percentage of
sales decreased from 7.4% in fiscal 1994 to 6.3% in fiscal 1995 as sales growth
outpaced expenses incurred to support PFW's expansion.
PFW charges preopening costs, which are estimated to be approximately
$75,000 to $85,000 for each new warehouse superstore, to expense in the quarter
the warehouse superstore opens. Therefore, the opening of a large number of new
warehouse superstores in a given quarter will adversely affect PFW's results of
operations for that quarter. In addition, although the pet food supply industry
does not experience the same degree of seasonal fluctuations as many retailers,
a mature warehouse superstore's sales are typically higher than average during
the winter and lower than average during the summer. As a result of the
foregoing, period to period comparisons of financial results may not be
meaningful and the results of operations for historical periods may not be
indicative of future results.
In November 1995, PFW exited the MI/OH market. Accordingly, PFW sold
certain assets of its eight retail locations in the MI/OH stores for $2.4
million in cash to SuperPetz, Inc. pursuant to an Asset Purchase Agreement and
Addendum (the "Agreements"). The Agreements provided for the purchase of certain
assets used in the operation of the MI/OH stores and the assumption of certain
liabilities. The decision to exit the MI/OH market resulted in a loss on the
sale of these stores of $3.5 million (approximately $0.38 per share) in the
fourth quarter of fiscal 1995. The loss includes estimates for, among other
things, rent concessions and the loss on disposal of inventory and property and
equipment. Pursuant to the Agreements, if SuperPetz, Inc. defaults under the
sublease arrangements, PFW is contingently liable for amounts owing under the
lease agreements.
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This disposition and the relative maturity of the stores involved affect
the comparability of results between years. Had the sale of the MI/OH stores
occurred at the beginning of the fiscal years ended January 28, 1995 and
February 3, 1996 and the twenty-six weeks ended July 29, 1995, the selected
unaudited pro forma results would have been as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
TWENTY-SIX
WEEKS ENDED
FISCAL 1994 FISCAL 1995 JULY 29, 1995
----------- ----------- -------------
<S> <C> <C> <C>
Revenues......................................... $33,160 $52,960 $22,322
Operating loss................................... (1,152) (47) (707)
Net income (loss)................................ (532) 419 (423)
Net income (loss) per common share............... $ (0.06) $ 0.05 $ (0.04)
</TABLE>
On March 16, 1994, PFW changed its fiscal year-end from December 31 to the
Saturday closest to January 31. The 29-day transition period, January 1, 1994
through January 29, 1994, is reported as a separate period in the financial
statements.
Twenty-six Weeks Ended August 3, 1996 Compared to Twenty-six Weeks Ended July
29, 1995
RESULTS OF OPERATIONS
Net sales increased 19.2% (42.9% excluding MI/OH stores) to $31.9 million
for the twenty-six weeks ended August 3, 1996 from $26.8 million for the
twenty-six weeks ended July 29, 1995. The increase is due to comparable store
sales growth and the eight warehouse superstores opened since July 29, 1995,
offset by the disposition of eight MI/OH stores in November 1995 which were
opened prior to the end of second quarter fiscal 1995. PFW's fiscal 1996
comparable store sales increased 6.9% over fiscal 1995 comparable store sales.
Gross profit, defined as net sales less cost of sales, including
distribution, purchasing and store occupancy costs, increased as a percentage of
net sales for the twenty-six weeks ended August 3, 1996 to 25.9% from 21.7%
(24.0% excluding the MI/OH stores) for the twenty-six weeks ended July 29, 1995.
This improvement reflects increased product margins primarily due to revised
marketing and distribution programs. In addition, store occupancy costs declined
as a percentage of sales as stores continued to mature.
Store operating expenses decreased as a percentage of net sales to 18.5%
for the twenty-six weeks ended August 3, 1996 from 20.6% (17.8% excluding the
MI/OH stores) for the twenty-six weeks ended July 29, 1995. Store operating
expenses decreased as a percentage of net sales during the first twenty-six
weeks of fiscal 1996 primarily due to the disposition of the underperforming
MI/OH stores in fourth quarter fiscal 1995. Excluding the MI/OH stores, store
operating expenses increased as a percentage of net sales due to increased
saturation and competition primarily in the Minneapolis/St. Paul market.
Preopening expenses decreased as a percentage of net sales to 0.8% for the
twenty-six weeks ended August 3, 1996 from 1.5% for the twenty-six weeks ended
July 29, 1995. Average preopening expenses per store for the three stores opened
during the first twenty-six weeks of fiscal 1996 was $80,000 compared to $80,000
($77,000 excluding the MI/OH stores) for the five stores opened during the first
twenty-six weeks of fiscal 1995.
General and administrative expenses decreased as a percentage of net sales
to 5.1% for the twenty-six weeks ended August 3, 1996 from 7.2% (8.4% excluding
the MI/OH stores) for the twenty-six weeks ended July 29, 1995. Sales growth
outpaced the growth in general and administrative expenses incurred to build the
corporate infrastructure to support PFW's expansion plans. Included in fiscal
1995 general and administrative expenses were approximately $242,000 (0.9% of
net sales) for separation expenses associated with the resignation of PFW's
President and Chief Executive Officer.
Net interest income was $111,000 for the twenty-six weeks ended August 3,
1996 compared to $239,000 for the twenty-six weeks ended July 29, 1995. The
decline is due to the decrease of available cash and cash equivalents for
temporary investment.
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Provision for income taxes for the twenty-six weeks ended August 3, 1996
was not recorded by PFW due to sufficient net operating loss carryforwards
available at February 3, 1996 to offset income tax liabilities. No provision for
income taxes was recorded for the twenty-six weeks ended July 29, 1995 due to
PFW's net operating loss.
Net income for the twenty-six weeks ended August 3, 1996 was $606,000
($0.06 per share) compared to a net loss of $1.8 million ($0.19 per share) for
the twenty-six weeks ended July 29, 1995. PFW's net loss for the twenty-six
weeks ended July 29, 1995, excluding the MI/OH stores, was $423,000 ($0.04 per
share).
Fiscal Year Ended February 3, 1996 Compared to Fiscal Year Ended January 28,
1995
RESULTS OF OPERATIONS
Net sales for the fifty-three weeks of fiscal 1995 were $61.1 million. On a
fifty-two week basis, net sales increased 65.0% (56.0% excluding the MI/OH
stores) to $59.9 million for the fiscal year ended February 3, 1996 from $36.3
million for the fiscal year ended January 28, 1995. The increase is primarily
due to the ten warehouse superstores opened since January 28, 1995. In addition,
PFW's fiscal 1995 same store sales, calculated on a fifty-two week basis,
increased 17.9%. (Same stores are those stores open 12 months or longer.)
Gross profit improved as a percentage of net sales for the fiscal year
ended February 3, 1996 to 23.5% (25.3% excluding the MI/OH stores) from 22.7%
(23.9% excluding the MI/OH stores) for the fiscal year ended January 28, 1995.
This improvement reflects improved margins on products sold as well as increased
profits from services. These improvements were partially offset by higher
occupancy costs for new warehouse superstores which have not reached mature
sales levels.
Store operating expenses decreased as a percentage of net sales to 19.1%
(17.0% excluding the MI/OH stores) for the fiscal year ended February 3, 1996
from 20.0% (18.0% excluding the MI/OH stores) for the fiscal year ended January
28, 1995. This decrease resulted from improved payroll and advertising expenses
as a percentage of sales as stores matured and certain store level promotional
and customer service programs were refined.
Store contribution increased as a percentage of net sales to 4.4% (8.3%
excluding the MI/OH stores) for the fiscal year ended February 3, 1996 from 2.7%
(5.8% excluding the MI/OH stores) for the fiscal year ended January 28, 1995.
The increase is a result of the improved margins on products sold and the
decline in store operating expenses.
Preopening expenses decreased as a percentage of net sales to 1.3% (1.2%
excluding the MI/OH stores) for the fiscal year ended February 3, 1996 from 2.9%
(1.5% excluding the MI/OH stores) for the fiscal year ended January 28, 1995.
Average preopening expense per store for the stores opened during fiscal 1995
and fiscal 1994 was $79,000 ($85,000 for the MI/OH stores) and $81,000 ($95,000
for the MI/OH stores), respectively.
General and administrative expenses decreased as a percentage of net sales
to 6.3% (7.2% excluding the MI/OH stores) for the fiscal year ended February 3,
1996 from 7.4% (7.8% excluding the MI/OH stores) for the fiscal year ended
January 28, 1995. Sales growth outpaced the general and administrative expenses
incurred to build the corporate infrastructure to support PFW's expansion plans.
In addition, fiscal 1995 general and administrative expenses include
approximately $395,000 (0.6% of net sales) in separation expenses associated
with the resignation of two officers of PFW. Fiscal 1994 general and
administrative expenses include approximately $97,000 (0.3% of net sales) in
transition expenses incurred related to relocation and store design activities
initiated in 1993 and completed in fiscal 1994.
Loss on disposal of stores of $3.5 million ($0.38 per share) for the fiscal
year ended February 3, 1996 was a one-time charge incurred to exit the MI/OH
market by selling the eight stores operating in that market.
Net interest income was $391,000 for the fiscal year ended February 3, 1996
compared to $570,000 for the fiscal year ended January 28, 1995.
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Net loss for the fiscal year ended February 3, 1996 was $5.1 million ($0.55
per share) compared to a net loss of $2.2 million ($0.24 per share) for the
fiscal year ended January 28, 1995. PFW's net loss for the year was due to the
MI/OH market related losses ($0.22) and the one-time charge for the sale of the
eight stores ($0.38) operating in that market.
Fiscal Year Ended January 28, 1995 Compared to Fiscal Year Ended December 31,
1993
RESULTS OF OPERATIONS
Net sales increased 99.7% to $36.3 million for the fiscal year ended
January 28, 1995 from $18.2 million for the fiscal year ended December 31, 1993.
The increase is primarily due to the 13 warehouse superstores opened during the
year. In addition, PFW's fiscal 1994 same store sales, calculated on a
comparable fiscal 1994 basis, increased 23.3%. Comparable store sales increases
were impacted by the retrofit of four warehouse superstores, including the
addition of grooming salons at three locations.
Gross profit improved as a percentage of net sales for the fiscal year
ended January 28, 1995 to 22.7% from 22.3% for the fiscal year ended December
31, 1993. This improvement reflects improved margin on products sold as well as
increased profits from grooming and other services. These improvements were
partially offset by higher occupancy costs for new warehouse superstores which
had not reached mature sales levels and increased distribution costs due to
PFW's Upper Midwest expansion.
Store operating expenses increased as a percentage of net sales to 20.0%
for the fiscal year ended January 28, 1995 from 17.6% for the fiscal year ended
December 31, 1993. This increase resulted from lower sales relative to store
operating expenses for the warehouse superstores opened since December 31, 1993
compared to the more mature stores. In addition, payroll and operating supplies
expenses increased due to the completion of store retrofits in the first
quarter, as well as expanded promotional and customer service programs. These
program costs as a percentage of net sales decreased over the course of fiscal
1994 as the programs matured.
Preopening expenses increased as a percentage of net sales to 2.9% for the
fiscal year ended January 28, 1995 from 0.5% for the fiscal year ended December
31, 1993. Average preopening expense per store for the stores opened during
fiscal 1994 was $81,000.
General and administrative expenses decreased as a percentage of net sales
to 7.1% for the fiscal year ended January 28, 1995 from 9.3% for the fiscal year
ended December 31, 1993. Sales growth outpaced the general and administrative
expenses incurred to build the corporate infrastructure to support PFW's
expansion plans.
Recruitment, relocation, consultation and severance expenses were $97,000
for the fiscal year ended January 28, 1995 and $682,000 for the fiscal year
ended December 31, 1993 and include costs associated with enhancing PFW's
management team as well as consulting costs incurred to upgrade PFW's warehouse
superstore design. These transition activities, initiated in 1993, were
completed in the second quarter of fiscal 1994.
Net interest income was $570,000 for the fiscal year ended January 28, 1995
compared to $34,000 for the fiscal year ended December 31, 1993. This increase,
primarily due to interest earned on the proceeds of the February 1994 public
offering of PFW Common Stock, was partially offset by interest expenses incurred
under a capital lease obligation for PFW's new computer system.
Net loss for the fiscal year ended January 28, 1995 was $2.2 million
compared to a net loss of $1.6 million for the fiscal year ended December 31,
1993.
LIQUIDITY AND CAPITAL RESOURCES
Historically, PFW has financed its operations and growth primarily through
the sale of equity securities. PFW has financed the purchase of its computer
hardware and software systems with capital lease arrangements under which
$424,000 was outstanding at August 3, 1996. PFW's net working capital at August
3, 1996 was $10.2 million and at February 3, 1996 was $9.5 million.
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PFW's primary capital requirement is related to the opening of new
warehouse superstores. All of PFW's existing warehouse superstores are in leased
facilities, and PFW intends to continue to lease, rather than purchase, new
warehouse superstore facilities. PFW estimates the average expenditures for
opening a new warehouse superstore to be $650,000, including an average of
$235,000 for inventory (net of vendor payables), $330,000 for equipment, fixture
and leasehold improvements and $85,000 for preopening expenses. PFW plans to
open an additional five new superstores during the remainder of fiscal 1996. The
success of PFW's remaining fiscal 1996 expansion plans will depend on various
business and economic factors.
Net cash provided by operating activities for the twenty-six weeks ended
August 3, 1996 was $841,000 compared to net cash used for operating activities
of $1.4 million for the twenty-six weeks ended July 29, 1995. The cash provided
by operating activities for the twenty-six weeks ended August 3, 1996 was
primarily from PFW's operating profits. Cash used was primarily for purchasing
inventory for new store openings. The cash used in operations for the twenty-six
weeks ended July 29, 1995 was primarily for purchasing inventory for new stores,
the funding of PFW's net losses and the timing of payments to vendors.
PFW's primary use of cash for investing activities in the twenty-six weeks
ended August 3, 1996 and July 29, 1995 related to leasehold improvements and
equipment additions, including computer hardware and software, for warehouse
superstore expansion. In second quarter fiscal 1996, PFW received proceeds of
approximately $1.6 million related to the sale-leaseback of property and
equipment.
PFW had a revolving bank line of credit arrangement that provided for
borrowings up to $2.0 million. The line of credit expired May 31, 1996. There
were no amounts outstanding against this credit facility at February 3, 1996.
Effective May 31, 1996, PFW obtained a new three-year credit facility, which
provides for a line equal to the lesser of PFW's borrowing base, as defined, or
$10.0 million. The credit facility will accrue interest on the outstanding
balance at an index rate (30-day high-grade unsecured commercial paper) plus
3.0% and is collateralized by PFW's inventories, receivables, investments and
general intangibles. PFW will pay a facility fee of 0.375% per annum. The
facility fee will not be applicable on the committed amount in excess of $5.0
million until outstanding borrowings exceed $5.0 million for the first time and
thereafter, such fee will not be applicable on the committed amount in excess of
$7.5 million until outstanding borrowings exceed $7.5 million for the first
time. There were no amounts outstanding against this credit facility at August
3, 1996.
PFW does not believe that inflation is likely to have a material impact on
its sales or results of operations.
SUBSEQUENT EVENT
In October 1996, PFW and Petco announced that they had entered into an
agreement whereby PFW would become a wholly owned subsidiary of Petco.
Consummation of the Merger is subject to various conditions, including among
other things the approval by PFW's stockholders of the Merger; qualification of
the Merger as a pooling of interests for accounting and financial reporting
purposes; and other customary closing conditions.
OTHER BUSINESS CONSIDERATIONS
PFW plans to open an additional five new superstores during the remainder
of fiscal 1996 and plans to continue to open a significant number of new stores.
The success of PFW's future expansion depends upon various factors, including
the availability of additional financing.
The pet food and supply industry is highly competitive. PFW competes with a
variety of supermarkets, warehouse clubs and mass merchandisers. PFW also faces
competition from smaller pet store chains, independent pet supply stores,
veterinarians and other regional medium-size pet food and supply stores. In
addition, a national pet supply superstore chain opened five stores in the
Minneapolis/St. Paul metropolitan area in 1996. PFW's 11 warehouse superstores
in the Minneapolis/St. Paul metropolitan area generated approximately 49.0% of
PFW's sales for the twenty-six weeks ended August 3, 1996. PFW's planned
expansion includes opening additional warehouse superstores in the
Minneapolis/St. Paul metropolitan area, which may attract customers away from
PFW's existing stores in that market.
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PFW expects that its quarterly results of operations may fluctuate as a
result of a variety of factors, including the timing of new warehouse superstore
openings and related preopening expenses, competitive market entries and the
amount of revenue contributed by new and existing warehouse superstores. These
factors are difficult to forecast, and these or other factors could materially
adversely affect quarterly or annual operating results. In addition,
period-to-period comparisons of financial results may not be meaningful and the
results of operations for historical periods may not be indicative of future
results.
PFW receives products at its warehouse superstores from a number of
distributors and manufactures. If these distributors or manufacturers altered
the brands offered or their channels of distribution, PFW's operations may be
adversely affected. During fiscal 1995, PFW purchased approximately 69.0% of its
merchandise from five suppliers. PFW believes its vendor relationships are
satisfactory and has established alternative supply relationships with other
vendors which may be used if a vendor discontinued selling to PFW.
In 1995, PFW sold its eight retail locations in the MI/OH market under
sublease arrangements to SuperPetz, Inc. If SuperPetz, Inc. defaults under the
sublease arrangements, PFW is contingently liable for amounts owing under the
lease agreements.
PFW future operations, financial condition and stock price may be subject
to volatility due to, but not limited to, the factors noted above. In addition,
an actual or anticipated shortfall in revenue, gross margin, or earnings from
securities analysts' expectations could have an immediate effect on the trading
price of PFW's stock in any given period.
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Proxy Statement/Prospectus that are not
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results of PFW to be materially different from
historical results or from any results expressed or implied by such
forward-looking statements. These factors are discussed herein under the
captions "Risk Factors" and "Other Business Considerations."
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PETCO BUSINESS
Petco is a leading specialty retailer of premium pet food and supplies. As
of August 3, 1996, Petco operated 274 stores, including 206 superstores, in 15
states and the District of Columbia. Petco's strategy is to become the leading
category-dominant national chain of community pet food and supply superstores by
offering its customers a complete assortment of pet-related products at
competitive prices, with superior levels of customer service at convenient
locations. Petco believes that this strategy provides Petco with a competitive
advantage by combining the broad merchandise selection and everyday low prices
of a pet supply warehouse store with the convenience and service of a
neighborhood pet supply store.
Petco currently utilizes both superstore and traditional store formats.
Petco's expansion strategy is to continue to open and acquire superstores,
including relocations, expansions or remodels of existing traditional stores
into superstores ("conversions"), and to close underperforming stores. In fiscal
1995, Petco opened or acquired 69 superstores, including 23 conversions,
acquired four traditional stores and closed 13 stores. In fiscal 1996, Petco
expects to open or acquire 55 superstores, including 16 conversions, and to
close 14 stores. In fiscal 1997, Petco expects to open 45 superstores, including
20 conversions, and to close five stores. Based on this expansion plan,
excluding the Merger, Petco expects to operate a total of 288 stores, including
232 superstores, by the end of fiscal 1996 and a total of 308 stores, including
277 superstores, by the end of fiscal 1997.
THE PET FOOD, SUPPLY AND SERVICES INDUSTRY
General. In 1994, retail sales in the United States of pet food, supplies
and small animals (excluding dogs and cats) were approximately $12 billion.
Sales of pet food accounted for the majority of this market, totaling
approximately $8.5 billion, while pet supply and small animal sales totalled
approximately $3 billion and $500 million, respectively. In addition, sales of
pet services, which include veterinary services, obedience training and grooming
services, totalled approximately $4 billion in 1994. In 1994, approximately 53
million households in the United States, or over half of all U.S. households,
owned at least one pet and over half of pet-owning households owned more than
one pet. Petco believes that these numbers reflect important demographic changes
occurring in the United States which have been favorable to the pet food and
supply industry, such as an increase in families with young children and an
increase in the number of "empty-nest" households with additional disposable
income to spend on pets.
Pet Food. Historically, the pet food industry has been dominated by
national supermarket brands such as Alpo, Kal Kan and Purina, which are
primarily sold through grocery stores, convenience stores and mass merchants.
These brands are generally considered less nutritious than premium brands and
sell at lower prices. Until the early 1980s, such brands had little retail
competition from specialty pet food manufacturers. However, over the past five
years, sales of national supermarket brands have represented a decreasing
percentage of total annual pet food sales as premium food such as Iams, Nature's
Recipe, Nutro and Science Diet, which are not available through supermarkets or
mass merchants due to manufacturers' restrictions, has increased in popularity.
Sales of premium pet food have increased at a compound annual growth rate of
approximately 18% in recent years and now account for approximately 22% of the
total pet food market. Petco believes that premium pet food sales have increased
due to the changing demographics discussed above, the increasing concern for
animal welfare and nutrition, recommendations by veterinarians and breeders and
the increasing availability and variety of premium pet food products. As one of
the leading specialty premium pet food retailers in the country, Petco believes
that it is in an excellent position to continue to capitalize on these trends.
Due in part to the increasing demand for premium pet food and
manufacturers' restrictions on the sale of premium pet food at supermarkets and
other mass merchants, major changes are occurring in the channels of
distribution of pet food and supplies. Such restrictions include requiring
minimum levels of sales associate training, requiring a majority of floor space
to be devoted to pet food and supplies, and, in certain cases, requiring a
majority of pet food sold to be premium pet food. Traditional pet food retailers
such as supermarkets are losing market share to specialty pet stores. Although
the national supermarket brands have attempted to introduce their own "premium"
brands of pet food, and such brands have captured a portion of
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the overall pet food market, Petco believes it has been largely at the expense
of the less-expensive national supermarket brands, rather than the premium
brands sold through specialty pet supply stores. Sales of pet food through
retailers other than supermarkets increased at a compound annual growth rate of
approximately 11% from 1989 through 1994 while sales of pet food through
supermarkets decreased at a compound annual rate of approximately 1% during the
same period.
Pet Supplies. Petco believes that the growing preference for premium pet
food has also affected the pet supply industry. As consumers focus on pet health
and nutrition, they tend to purchase more and higher quality pet supplies,
particularly vitamins and veterinary products. Pet supplies are often an impulse
purchase made during a customer's regular visit to purchase pet food, cat litter
or flea control products. Petco believes that demand for pet supplies is less
price sensitive than the demand for pet food. Consequently, pet supply products
are less frequently discounted, resulting in higher gross margins. For these
reasons, the pet supply industry has attracted strong interest from
supermarkets, although due to space constraints, supermarkets tend to carry a
limited assortment of basic items such as cat litter, collars, dog chews,
leashes, flea collars and toys. Pet supply stores such as Petco, on the other
hand, carry a wider variety of these basic items and a wide assortment of other
supplies, which also includes grooming products, pet carriers, cat furniture,
dog houses, vitamins, treats and veterinary products. Petco believes that sales
of supplies at specialty stores should continue to increase due to the wide
variety of products and the high level of customer service available at such
stores and the growing preference for premium pet food.
Small Animals. The market for small animals (other than dogs and cats)
includes sales of fish, birds, reptiles, rabbits, hamsters, mice and other small
pets. Because of the overpopulation of dogs and cats and the inhumane practices
of some breeders, Petco has elected to limit its selection of animals to birds,
fish, reptiles and other small animals. Petco does, however, participate in pet
adoption programs for dogs and cats, which are administered through local humane
societies. Petco purchases small animals only through domestic breeders.
Pet Services. The market for pet services includes veterinary services,
obedience training and grooming services. Petco typically does not offer
veterinary services other than routine vaccinations because it believes offering
such services may cause it to lose referral business from veterinarians in the
community. Petco does offer obedience training in most of its stores and offers
grooming in certain of its stores. Although such services do not generate a
significant portion of Petco's revenues, Petco believes that offering selected
pet services does create increased customer traffic in Petco's stores.
BUSINESS STRATEGY
Petco's strategy is to become the leading category-dominant national chain
of community pet food and supply superstores by offering its customers a
complete assortment of pet-related products at competitive prices, with superior
levels of customer service at convenient locations. The key components of
Petco's strategy are:
Superstore Expansion. Petco believes that opportunities for additional
superstores exist in both new and existing markets. Petco intends to continue to
increase the number of superstores it operates by implementing the following
strategy:
- Opening and acquiring superstores in new and existing markets
- Converting traditional stores into superstores
Based on this expansion plan, excluding the Merger, Petco expects to operate 288
stores, including 232 superstores, by the end of fiscal 1996 and 308 stores,
including 277 superstores, by the end of fiscal 1997.
Acquisitions. A significant part of Petco's expansion strategy is to
capitalize on the consolidation of the fragmented pet food and supply industry.
Petco believes that there are acquisition opportunities which would allow Petco
to attract new customers in existing markets, enter new markets and leverage
operating costs. Generally, Petco seeks to acquire established and well-located
stores or chains of stores which are similar in size and format to Petco's
existing superstores. Consistent with this strategy, Petco has completed nine
acquisitions, representing 54 stores located in ten states, since Petco's
initial public offering in March 1994.
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Complete Merchandise Assortment. Petco's prototype 15,000 square foot
superstores carry a complete merchandise assortment of more than 10,000 active
SKUs of high quality pet-related products. This is equivalent to the number of
SKUs carried by a typical pet supply warehouse store and far exceeds the
approximately 2,000 such items in a typical independent pet store, 500 such
items in a typical mass merchant, 400 such items in a typical supermarket and 20
such items in a typical warehouse club. Petco's products include premium pet
food, fish, birds, reptiles and other small animals and related food and
supplies, collars and leashes, grooming products, toys, pet carriers, cat
furniture, dog houses, vitamins, treats and veterinary supplies. Petco's
traditional stores, which average 3,500 square feet, also carry a wide variety
of premium pet food and supplies (approximately 5,000 active SKUs).
Competitive Prices. Petco's pricing strategy is to offer everyday low
prices on all food items which are important in attracting and retaining
customers. Petco believes that offering competitive prices on food items
increases customer traffic and generates sales of higher-margin supplies.
Petco's food prices are typically 10% to 30% below those generally offered by
independent pet stores and are competitive with prices offered by pet supply
warehouse stores.
Superior Customer Service. Providing knowledgeable and friendly customer
service is a key aspect of Petco's business strategy, which Petco believes gives
it a competitive advantage over lower-service pet supply warehouse stores. Most
Petco store managers and sales associates are better able to assist customers
with their needs because they are pet owners and enthusiasts. Petco emphasizes
the training and development of its personnel, and Petco believes that this
enables it to attract and retain highly motivated, well-qualified store managers
and sales associates committed to providing superior levels of customer service.
Convenient Store Locations. Petco's stores are located in high-traffic
retail areas with ample parking, often in community shopping centers anchored by
a large supermarket. Petco selects sites which are characterized by weekly or
more frequent shopping patterns. All stores offer extended shopping hours and
are open seven days a week. Furthermore, Petco's superstore format offers Petco
more flexibility in site selection than is available to the larger pet supply
warehouse stores.
Enjoyable Shopping Experience. Petco's stores are attractively designed to
create a fun and exciting shopping environment for customers and their pets.
Petco's superstores are brightly illuminated with colorful fixtures and graphics
and feature prominent and attractive signage. Superstores feature an assortment
of fish, aquarium systems, reptiles, birds and other small animals. Birds and
other animals are available for demonstration by Petco employees and for
handling by customers. Many of Petco's superstores also contain a glassed-in
grooming area that allows customers to observe the grooming process while they
shop. Petco believes its superstore format allows it to create a more
customer-friendly environment than pet supply warehouse stores because of its
size, layout and design.
Innovative Community Programs. Petco has several long-standing neighborhood
marketing programs in effect designed to introduce consumers to its stores and
to maintain long-term customer and community relationships. Due to the large
numbers of dogs and cats available at local animal shelters, Petco's long-
standing corporate policy has been to encourage its customers to adopt these
pets from animal shelters. On designated days, in cooperation with local humane
societies, Petco offers pet adoption services at its stores. Petco's other
community programs include in-store vaccination clinics, programs with local
pet-related charities, a product sample program to introduce consumers and their
pets to premium food and supplies and a preferred customer program. In addition,
Petco maintains referral programs and other relationships with local breeders
and veterinarians.
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MERCHANDISING
Complete Merchandise Assortment. Management believes that Petco stores
offer the pet owner one of the most complete and exciting assortments of pet
products and services available in the marketplace. Petco's products and
services generally fall into five main categories:
Pet Food. Petco offers a complete assortment of leading name brand
premium food for dogs and cats, such as Iams, Nature's Recipe, Nutro and
Science Diet. Due to manufacturers' restrictions, these brands are not
currently sold through supermarkets, warehouse clubs or mass merchants, but
are sold exclusively through specialty pet stores and veterinarians. Petco
also offers a PetGold(R) private label brand of premium dog and cat food.
In addition to food for dogs and cats, Petco features a variety of treats
and rawhide chew items. Petco also sells an extensive variety of food for
fish, birds, reptiles and small animals.
Pet Supplies. Petco's broad assortment of supplies, including many
private label items, for dogs and cats includes collars and leashes,
grooming products, toys, pet carriers, cat furniture, dog houses, vitamins,
treats and veterinary supplies. Petco also offers broad lines of supplies
for other pets, including aquariums, filters, bird cages and supplies for
small animals.
Small Animals. Petco superstores feature specialty departments that
stock a large assortment of fish, domestically bred birds, reptiles and
other small pets. The stores' animal selection typically includes
cockatiels, parakeets and finches in the bird category; iguanas, turtles
and snakes in the reptile category; and hamsters, rats and mice in the
small animal category. Birds and other animals are available for
demonstration by Petco employees and for handling by customers. Petco
believes that its small animal displays add excitement to shopping at Petco
and generate increased sales of high-margin small animals and related food
and supplies.
Grooming and Other Services. Professional grooming is available at
many of Petco's superstores. Grooming services are performed in
glass-walled stations in the stores to provide an eye-catching display and
to increase customer awareness and confidence in the service. In addition,
Petco offers vaccinations and obedience training.
Novelty Items. Petco carries a variety of novelty items, including
apparel for pets, calendars, as well as other pet-related merchandise. In
addition, Petco features a variety of seasonal and holiday pet items.
Competitive Prices. Petco's pricing strategy is to offer everyday low
prices on all food items which are important in attracting and retaining
customers. Petco believes that offering competitive prices on key food items
increases customer traffic and generates sales of higher-margin pet supplies.
Petco's large buying volume and sophisticated distribution network allows it to
compete effectively on price. Petco's food prices typically are 10% to 30% below
those generally offered by independent pet stores and are competitive with
prices offered by pet supply warehouse stores. Petco modifies its pricing
policies by regional or local markets and is able to institute overnight price
changes, as necessary, to meet market competition. Petco also offers price
guarantees on advertised dog and cat food items to its customers.
Marketing and Advertising. Petco's advertising program utilizes a
multimedia approach to attract new customers and to reemphasize values to
existing customers. Television, radio, direct mail circulars and newspaper
advertisements communicate promotional activities and major events. Database
marketing provides strategic information for targeting existing customers'
specific purchasing needs and for supporting customer loyalty programs. Local
store marketing efforts communicate unique events to the community for
individual stores. In addition to Company-paid advertising, Petco receives
cooperative advertising support from its major vendors. Petco's advertising
targets middle- to upper-middle-income households with pets.
Pet Adoption Program. Due to the overpopulation of cats and dogs, Petco's
long-standing corporate policy has been to aggressively encourage its customers
to adopt their next pet. In partnership with local animal welfare organizations,
such as county shelters and the local humane society, Petco holds adopt-a-pet
events in each of its stores in an effort to find loving homes for homeless
pets. Every year, these highly successful efforts find new homes for tens of
thousands of pets and prevent them from being destroyed. Adopt-
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a-pet events generate goodwill for Petco in local communities and create
customer loyalty from the new pet owners.
Promotional Activities. Petco has implemented several community service
programs designed to familiarize customers with Petco and to maintain long-term
customer relationships. Petco offers monthly low-cost vaccination services
designed for customers who currently do not utilize a veterinarian. Petco stores
also participate in a number of local programs with pet-related organizations
and sponsor events such as dog washes, pet walks, pet look-alike contests and
holiday pet photo sessions. Proceeds from these events go to specified animal
welfare organizations. Petco uses a product sampling program in which each store
offers a selection of premium food and supply samples to customers. This program
introduces premium pet food to customers who purchase supermarket brand pet food
and targets first-time customers during special promotional events.
STORE DEVELOPMENT, EXPANSION AND ACQUISITION STRATEGY
Petco utilizes both superstore and traditional store formats. Petco plans
only to open superstores in the future and expects that these will be Petco's
current prototype superstores which average approximately 15,000 square feet.
All of Petco's superstores offer fish, aquarium systems, reptiles and other
small animals, and many of the superstores offer birds and grooming services.
Overall, Petco's superstores currently average approximately 11,500 square feet
in size. Petco's traditional stores average approximately 3,500 square feet in
size and generally do not sell fish, birds, reptiles or small animals.
Petco's experience indicates that its superstore format achieves increased
customer traffic, sales volume and profitability compared to its traditional
stores. As a result, Petco intends to continue to increase the number of
superstores it operates by implementing the following strategy:
- Opening and acquiring superstores in new and existing markets
- Converting traditional stores into superstores
Based on this expansion plan, excluding the Merger, Petco expects to operate 288
stores, including 232 superstores, by the end of fiscal 1996 and 308 stores,
including 277 superstores, by the end of fiscal 1997. Although Petco does not
plan to open any new traditional stores in the future, it will continue to
operate highly profitable and well-situated traditional stores until such time
as they may be converted into superstores.
In fiscal 1995, Petco opened or acquired 69 superstores, including 23
conversions, acquired four traditional stores, and closed 13 stores. In fiscal
1996, Petco expects to open 55 superstores, including 16 conversions, and to
close 14 stores. In fiscal 1997, Petco expects to open 45 superstores, including
20 conversions, and to close five stores. The table below sets forth the number
of each type of store Petco operated and expects to operate at the end of each
fiscal year indicated.
<TABLE>
<CAPTION>
TRADITIONAL
SUPERSTORES STORES TOTAL STORES
----------- ----------- ------------
<S> <C> <C> <C>
Fiscal 1992............................... 39 158 197
Fiscal 1993............................... 69 132 201
Fiscal 1994............................... 117 107 224
Fiscal 1995............................... 184 79 263
Fiscal 1996(1)............................ 232 56 288
Fiscal 1997(1)............................ 277 31 308
</TABLE>
- ---------------
(1) Data shown for fiscal 1996 and 1997 are estimates based upon Petco's
anticipated expansion plans excluding the Merger. See "Risk
Factors -- Expansion Plans."
Petco expects to spend approximately $600,000 per new superstore,
consisting of leasehold improvements, furniture, fixtures and equipment,
merchandise inventory and pre-opening costs. In addition, Petco expects to spend
approximately $400,000 per store to expand an existing traditional store into a
superstore. Petco attempts to obtain convenient, high-traffic sites located in
prime community shopping centers. Petco undertakes substantial market research
prior to entering new markets. Key factors in market and site selection
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include high visibility, easy access, ample parking, population, demographics
and the number and location of competitors.
STORE OPERATIONS
The table below shows the location and number of Petco's stores as of
August 3, 1996.
<TABLE>
<CAPTION>
TRADITIONAL
LOCATION SUPERSTORES STORES TOTAL STORES
------------------------------------------ ----------- ----------- ------------
<S> <C> <C> <C>
Arizona................................... 9 -- 9
California................................ 72 50 122
Connecticut............................... 9 -- 9
District of Columbia...................... 1 -- 1
Maryland.................................. 6 -- 6
Massachusetts............................. 12 4 16
New Hampshire............................. 3 -- 3
New Jersey................................ 13 -- 13
New York.................................. 10 1 11
Nevada.................................... 2 -- 2
Oregon.................................... 7 3 10
Pennsylvania.............................. 7 -- 7
Rhode Island.............................. 1 -- 1
Texas..................................... 33 1 34
Virginia.................................. 7 1 8
Washington................................ 14 8 22
--- --- ---
206 68 274
======== ======== =========
</TABLE>
Each store has a manager, one or two assistant managers and typically
between ten and thirty sales associates, depending on sales volume. Store
managers are responsible for all aspects of store operations including
merchandise receiving and stocking, store staffing and shrinkage control. Each
manager has a policy and procedures manual which details all aspects of store
operations. Each store performs physical inventory counts two to three times
annually and makes periodic cycle counts for inventory adjustments in
conjunction with Petco's automatic inventory replenishment system. Each store
manager reports to a district manager who is responsible for approximately ten
stores and further ensures that the stores are operating properly. District
managers are, in turn, accountable to one of seven regional managers who report
directly to the Senior Vice President of Store Operations. All merchandising,
pricing and inventory replenishment decisions are centralized and made at the
corporate level.
Petco emphasizes knowledgeable and friendly customer service with each of
its employees. During the course of their employment, employees attend numerous
product-related training programs. Petco's training department, under the
direction of the corporate and regional training managers, continually develops
programs for new and existing sales associates and field managers. Each new
Petco sales associate completes an orientation program, an in-house training
program and a product training course. The new-employee program includes
customer service, safety, sales and product training that helps employees
develop extensive product knowledge and refine service skills. The programs'
media include video, self-study guides and interactive seminars. In addition,
several of Petco's vendors provide Petco with employee training programs
designed to increase employee knowledge of specific product categories. Petco
also has a variety of training programs for its management team. These include a
store manager and assistant store manager training program, a district
management assessment center, management skills seminars and personally tailored
programs for upper management candidates. On an annual basis, all field managers
attend a four-day national meeting and training seminar with all of Petco's
major food and supply vendors.
Petco has a performance-based bonus and incentive system for all of its
managerial employees, from individual store managers through upper level
corporate management. Store managers are responsible for
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achieving store sales, shrinkage control and labor cost goals set by management
in conjunction with store, district and regional managers. Store managers who
meet these goals receive a quarterly incentive bonus which customarily
represents approximately 5% to 15% of their total salary. District managers,
regional managers and members of Petco's corporate staff are also eligible for
incentive bonuses based on earnings goals for Petco.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
Petco's state-of-the-art management information and control system includes
a multi-tasking PC-based point-of-sale computer reporting system that connects
stores to corporate headquarters via modem. Through automatic scanning at its
point-of-sale registers, Petco is able to track merchandise, sales volume and
inventory by SKU, department, store and merchandise category. Each store records
unit sales data via the point-of-sale register located in the store and
transmits that data nightly to Petco's corporate headquarters. Petco has
merchandising systems that integrate key retailing functions such as seasonal
merchandise planning, purchase order management and receiving and sales capture.
Petco utilizes an automatic inventory replenishment system and communicates via
electronic data interchange ("EDI") with certain of its vendors. Petco believes
that the management information and control systems in place, along with routine
upgrades, are sufficient to accommodate Petco's planned expansion for the
foreseeable future.
PURCHASING AND DISTRIBUTION
Petco's centralized purchasing and distribution system minimizes the
delivered cost of merchandise and maximizes the in-stock position of its stores.
Petco takes advantage of both volume purchasing and quick payment discounts.
These discounts are particularly beneficial given the dynamics of the pet food
and supply industry. These discounts enable Petco to price its products
competitively with larger pet supply warehouse stores and below the independent
operators and small chains that cannot take advantage of these purchasing
economies. Petco anticipates that it will continue to recognize benefits through
these discounts especially as sales volume increases via store expansion. In
addition, Petco will pursue other measures designed to reduce or control the
cost of goods sold such as direct importing, co-packing and private-label
products. Petco also manufactures a portion of its private label products and
sells domestically and internationally certain pet food and supplies through its
Revere Manufacturing division.
Petco purchases most of its merchandise directly from approximately 400
specialty suppliers and manufacturers of national brands. Petco purchases the
majority of its pet food products from four vendors, Iams, Nutro, Science Diet
and Nature's Recipe, the first three of which each supplied products that
accounted for more than 10% and less than 15% of Petco's sales in calendar 1995.
While Petco does not maintain long-term supply contracts with any of its
vendors, Petco believes that it enjoys a favorable and stable relationship with
each of these vendors. See "Risk Factors -- Reliance on Vendors and Product
Lines and Exclusive Distribution Arrangements."
Petco currently operates one central and five regional distribution
centers. The central distribution center is located in Rancho Cucamonga,
California. Bulk items for all stores are either shipped to regional
distribution centers for redistribution or are sent directly to store locations.
Manufacturers ship non-bulk supplies to the Rancho Cucamonga facility which
Petco then distributes either to regional centers or directly to store
locations. Where cost effective, non-bulk supplies are purchased for delivery
directly to stores. Management believes that its centralized distribution system
enables its stores to maximize selling space by reducing necessary levels of
safety stock carried in each store. In fiscal 1995, Petco decided to replace
certain hardware and software at its central distribution center in Rancho
Cucamonga which, together with related costs, resulted in a charge of $4.3
million. See "Petco Management's Discussion and Analysis of Financial Condition
and Results of Operations." Petco believes that the changes to these systems are
substantially complete and that its central distribution center is operating at
satisfactory levels. Petco also believes that its distribution capacity is
sufficient to meet its expansion needs through fiscal 1996, at which time Petco
expects to add capacity, at an estimated cost of approximately $3.0 million, to
accommodate Petco's current expansion plans.
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COMPETITION
The pet food and supply business is highly competitive. This competition
can be categorized into four different segments: (i) supermarkets and other mass
merchants, (ii) single store and conventional pet shops, (iii) specialty pet
supply chains and (iv) pet supply warehouse stores. Supermarkets account for
approximately 62% of all pet food sales and approximately 26% of all pet supply
sales. Pet supply warehouse stores and specialty pet supply chains, such as
Petco, account for approximately 10% of all pet food and supply sales. Many of
the premium pet food brands offered by Petco, such as Iams, Nature's Recipe,
Nutro and Science Diet, are not currently available to grocery stores or other
mass merchants due to manufacturers' restrictions. See "Risk Factors -- Reliance
on Vendors and Product Lines and Exclusive Distribution Arrangements." Petco
believes that the principal competitive factors influencing Petco's business are
product selection and quality, convenient store locations, customer service and
price. Based on total sales, Petco is one of the largest specialty premium pet
food and supply retailers in the United States. Petco believes that it competes
effectively within its various geographic areas; however, some of Petco's
competitors are much larger in terms of sales volume and have access to greater
capital and management resources than Petco. See "Risk Factors -- Competition."
The pet food and supply industry is also highly fragmented. There are
approximately 11,000 independent pet supply stores in the United States, many of
which are unable to offer a broad product selection and are unable to obtain
volume or time discounts from distributors. Many of these stores have an
established presence in a particular geographic area. Petco believes that its
ability to satisfy consumers' desire for value, quality, selection, convenience
and service will enable Petco to gain market share from independent pet stores.
In addition, certain pet supply warehouse stores and warehouse chains, which are
expanding rapidly throughout the country, attempt to offer lower prices and a
wider selection of pet food (due to the inclusion of non-premium pet food) and
supplies than Petco. However, Petco believes it is able to compete effectively
on price on all key food items, to offer essentially the same product selection
and to offer a superior level of customer service at more convenient locations
than that offered by lower-service pet supply warehouse stores.
The pet food and supply industry recently has been characterized by the
consolidation of a number of pet supply stores. This consolidation has been
accomplished through the acquisition of independent pet stores by larger
specialty pet supply chains or pet supply warehouse chains and the acquisition
of these larger chains by similar competitors. Petco believes this consolidation
trend may have a positive impact on industry conditions as store capacity may be
rationalized, both in existing and in new units.
TRADEMARKS AND LICENSES
Petco has registered several service marks and trademarks with the United
States Patent and Trademark Office, including Petco(R), Aquatic Gardens(R),
Avian Select(R), Finishing Touch(R), Mighty Marble(R), Paw Pals(R), PetGold(R),
Ruff Toys(R), Small Animal Kingdom(R) and Your Pet's Second Best Friend(R).
Petco believes the Petco trademark has become an important component in its
merchandising and marketing strategy. Petco believes it has all licenses
necessary to conduct its business.
REGULATION
The transportation and sale of small animals is governed by various state
and local regulations. To date, these regulations have not had a material effect
on Petco's business or operations. Petco's fish and small animal buyers and real
estate department are responsible for compliance with such regulations. Prior to
the opening of each store, Petco's fish and small animal buyers and real estate
department review the regulations of the relevant state and local government.
Petco's fish and small animal buyers and real estate department then ensure
ongoing compliance by keeping abreast of industry publications and maintaining
contacts with Petco's fish and small animal suppliers and the appropriate
regulatory agency within each such state and local government.
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EMPLOYEES
As of August 3, 1996, Petco employed 3,906 people, approximately 1,562 of
whom were employed full-time. Approximately 91% of Petco's employees were
employed in stores or in direct field supervision, approximately 4% in
distribution centers and approximately 5% in the corporate office in San Diego.
Management believes its labor relations are generally good.
PROPERTIES
Petco leases all of its store and warehouse locations. Original lease terms
for Petco's 274 stores generally range from three to 10 years, many of which
contain renewal options. Leases on 113 stores expire within the next three
years, with leases on 80 of these stores containing renewal options.
Petco's headquarters, located in San Diego, California, occupy
approximately 70,000 square feet of office space which is financed under an
obligation which expires February 2006. Petco's five regional distribution
centers collectively occupy over 150,000 square feet of space in Arlington,
Texas; Stockton, California; Vancouver, Washington; Mansfield, Massachusetts;
and Dayton, New Jersey under leases which expire in August 1999, December 2000,
January 1997, December 1998 and August 1997, respectively. Petco's central
distribution center, located in Rancho Cucamonga, California, occupies
approximately 200,000 square feet of space under a lease which expires in May
1999. Each of the distribution center leases contains a renewal option. Petco
occupies 20,000 square feet of manufacturing space in San Diego, California
under a lease which expires November 1999.
LEGAL PROCEEDINGS
Petco is not a party to any legal proceedings other than various claims and
lawsuits arising in the normal course of its business which, in the opinion of
Petco's management, are not individually or in the aggregate material to its
business.
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PFW BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
PFW is an operator of warehouse superstores specializing in pet food,
supplies and services in the Upper Midwest (i.e., Minnesota, Wisconsin, Iowa,
North Dakota and South Dakota). During the fiscal year ended January 28, 1995
(fiscal 1994), PFW opened 13 warehouse superstores, closed no stores and
retrofitted two existing warehouse superstores. During the fiscal year ended
February 3, 1996 (fiscal 1995), PFW opened ten stores, closed nine stores and
retrofitted one existing warehouse superstore. In November 1995, PFW exited the
Michigan/Ohio market and accordingly, sold its eight retail locations in that
market to SuperPetz, Inc. See "PFW Management's Discussion and Analysis of
Financial Condition and Results of Operations."
During fiscal 1995, PFW hired a new president and chief executive officer
and made certain other changes to the management team.
PFW's executive offices are located at Interchange Towers, Suite 701, 600
South Highway 169, St. Louis Park, Minnesota 55426, and its telephone number is
(612) 542-0123.
INDUSTRY
PFW estimates, based on industry sources, that total U.S. sales of pet
food, supplies and services in 1994 were approximately $17 billion.
Approximately 53 million households, or more than half of all U.S. households,
own at least one pet, with over 40% of pet-owning households owning more than
one type of pet. The largest segments of pet ownership are dogs and cats, with
an estimated 54 million dogs and 59 million cats in the U.S. in 1994. At the end
of 1994, an estimated 9 million households owned freshwater fish and an
estimated 13 million households owned birds, reptiles or other small animals.
Industry studies indicate that families with children ages 6 to 17 are
especially likely to own pets, and that the peak years of pet spending are ages
45 to 54. The U.S. Census Bureau projects that the number of households headed
by 45- to 54-year-olds will increase from 14.5 million in 1990 to 21.6 million
in 2000. This and other positive demographic factors are expected to increase
demand in the future for quality pet food, supplies and services.
OPERATING STRATEGY
PFW's goal is to be the foremost provider of pet related products and
services in the Upper Midwest. Key elements of the PFW strategy are:
Commitment to Customer Service. PFW is committed to customer service in
all forms -- associate service levels, in-stock position, assortment,
convenience of locations, signage and store layout. PFW seeks to provide the
best customer service in the industry. PFW believes its customer service
program, which includes extensive training of associates, evaluation of customer
comments, scored survey reports provided by an independent service evaluation
firm and compensation programs designed to reward superior service,
differentiates PFW from its competitors.
Broad Merchandise Assortment. PFW seeks to offer a broad assortment of pet
food, supplies and services with approximately 10,000 pet-related items in each
warehouse superstore. Comparatively, management believes that on average a
typical warehouse club carries approximately 100 such items, a typical mass
merchandiser carries approximately 500 such items, a typical supermarket carries
approximately 800 such items and a traditional pet store carries approximately
1,000 such items.
Guaranteed Low Prices. PFW uses competitive shopping, advertising and
in-store signage to support its low price guarantee. In addition, store
associates are able to match competitors' prices using PFW's "Power Card"
program to further support PFW's low-price guarantee.
Low-Cost Pet Services. To complement PFW's wide selection of merchandise,
better meet the needs of its customers and enhance warehouse superstore traffic,
PFW offers low-cost pet services, including
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professional pet grooming. In addition, PFW leases space to veterinarians to
provide in-store vaccinations and engages independent contractors to conduct dog
obedience training classes.
Innovative Programs and Events. PFW promotes a unique array of in-store
programs and events to create a fun shopping environment and to educate
customers about pet care, products and services. PFW also participates in pet
adoption and other programs in coordination with non-profit organizations.
Enjoyable Shopping Environment. PFW endeavors to create an enjoyable
shopping experience for customers by creating an open, bright warehouse shopping
atmosphere and inviting pet owners to shop with their pets.
EXPANSION STRATEGY
PFW's expansion strategy is to open additional warehouse superstores in the
five-state Upper Midwest as it seeks to become the foremost provider of
pet-related products and services in the markets it serves. PFW plans to locate
its warehouse superstores in the best sites available in metropolitan and
moderate size markets that meet PFW's demographic standards. The success of
PFW's planned future expansion depends on various factors including the
availability of additional debt financing. PFW has an integrated management
information system, including an inventory auto-replenishment system, to monitor
and manage store productivity and profitability.
MERCHANDISE
Pet Food, Treats and Litter. PFW carries and promotes premium foods for
dogs and cats, which are not generally available in supermarkets, warehouse
clubs or mass merchandisers, but are sold primarily through specialty pet stores
and veterinarians. PFW's knowledgeable staff allows it to sell premium products
such as Science Diet, Iams, Nutro Max, Eukanuba, Nature's Recipe, Masters
Premium Diet(TM) and many others. PFW also sells grocery store brand dog and cat
foods including Ralston Purina, Tuffy's, Alpo, Pedigree, Friskies, Founders(TM)
and many others. In addition, PFW offers foods and treats for small animals,
birds, reptiles and fish and a variety of prepackaged and bulk wild bird seed.
The pet food, treats and litter segment generates in-store customer traffic as
pet owners return regularly to purchase these consumable products and is the
most aggressively and competitively priced by PFW. Approximately 58% of PFW's
sales during fiscal 1995 were pet food, treats and litter.
Pet Supplies. PFW offers a wide variety of pet supplies for dogs and cats,
such as collars, leashes, beds, kennels, over-the-counter supplements and toys.
PFW also offers a broad assortment of supplies for fish, small animals and
birds. Most of the pet supplies are basic stock items which are reordered as
they are sold. However, certain pet supplies are seasonal, such as holiday gift
items. Pet supplies comprised approximately 29% of PFW's sales during fiscal
1995.
Aquatics. The only pets that PFW offers for sale on a regular basis are
freshwater fish. PFW believes that sales of freshwater fish are important
because customers generally purchase aquatic supplies at the same store they
purchase fish. Fish are obtained from local distributors and displayed in
state-of-the-art aquarium systems. Fish sales are backed by a two-week
guarantee. Fish and aquatic supplies comprised approximately 9% of total sales
in fiscal 1995.
Pet Services. To complement PFW's wide selection of merchandise, better
meet the needs of its customers and enhance warehouse superstore traffic, PFW
offers, subject to local regulations, certain pet services for the care and
enjoyment of pets. Grooming services are competitively priced and are performed
by associates who are professional groomers. In addition, PFW offers low-cost
vaccinations in most locations subject to local regulation. PFW leases space to
state-licensed veterinarians to provide basic vaccinations and limited
examinations and treatments on a regularly scheduled basis. PFW's warehouse
superstores also offer dog obedience training classes through contract
arrangements with local professional trainers and schools. Pet services revenues
were approximately 4% of total sales in fiscal 1995.
Pets. To enhance warehouse superstore traffic, PFW regularly offers
special two or three day promotions on small animals such as iguanas, hamsters,
hermit crabs, birds, rabbits and guinea pigs. These promotions
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<PAGE> 81
meet customers' needs while allowing PFW to properly care for the animals, which
management believes enhances PFW's image as a responsible retailer.
Private Label Program. PFW has developed its private label program with
the objective of providing quality products at prices which represent great
value for customers while enhancing PFW's overall gross margin. PFW's private
label products program includes: Masters Premium Diet(TM) premium dry and canned
dog and cat food, Founder's Blend(TM) grocery dry and canned dog and cat food,
Fluffy's(TM) litter, Bone Buddies(R) rawhide products, Toy Buddies(R) cat and
dog toys, Bed Buddies(TM) dog beds, Lil' Buddies(TM) small animal and bird toys
and treats and Northern Backyard Blend(TM) wild bird seed.
MARKETING, ADVERTISING AND PROMOTION
PFW's advertising promotes a service-oriented and value-oriented image
while communicating its operating strategy of being the foremost provider of
pet-related products and services in the Upper Midwest and offering its
customers an exceptional shopping experience. The tagline for PFW's advertising
program is "Making life better for pets and owners alike." PFW conducts various
promotional and special events. PFW is active in community relations through
donations, memberships in various organizations and events sponsored through the
warehouse superstores.
MANAGEMENT INFORMATION SYSTEM
PFW has an integrated management information system to monitor and control
all facets of the organization including sales, distribution, purchasing,
inventory control, merchandise planning and replenishment, as well as various
financial systems. The system runs on an IBM AS/400 platform which is connected
to PFW's local area network.
The management information system provides daily information on sales,
gross margins, promotional activity and inventory at summary and detail levels.
Price management and sign preparation are automated and centrally controlled.
PFW uses point-of-sale bar code scanning on substantially all of its products so
that sales information can be polled daily from the warehouse superstores. In
addition, PFW has automated its plan-o-grams to facilitate new store
merchandising and initial stock ordering and existing store merchandising on an
ongoing basis.
PURCHASING AND DISTRIBUTION
An auto-replenishment system generates purchase orders for over half of
PFW's purchases based on historical sales activity. Store management creates the
remaining orders and enters them on-line to PFW's management information system.
All purchase orders are transmitted electronically to vendors. Deliveries are
received and counted at the warehouse superstores and entered into the system
for later invoice matching.
PFW receives products at its warehouse superstores from a number of
distributors and manufacturers. During fiscal 1995, PFW purchased approximately
69% of its merchandise from five suppliers. PFW believes its vendor
relationships are satisfactory and has established alternative supply
relationships with other vendors which may be used if a vendor discontinued
selling to PFW.
PFW, on a limited basis, leases the services of an outside distribution
center to stage product for new stores and consolidate shipments. PFW believes
ample alternative sources for these warehousing services are available as
necessary in the future.
COMPETITION
The pet food and supply industry is highly competitive. PFW competes with a
variety of supermarkets, warehouse clubs and mass merchandisers, most of which
have significantly greater financial and other resources than PFW. PFW also
faces competition from smaller pet store chains, independent pet supply stores,
veterinarians and other regional medium size pet food and supply stores. The pet
food and supply industry nationally has become increasingly competitive due to
the entry of new medium and large format pet supply retailers, several of which
are larger and have greater resources than PFW. PFW expects to face
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<PAGE> 82
increased competition if such competitors enter its market areas or if PFW
expands into market areas currently served by such competitors. In March 1996, a
national pet supply superstore chain opened five stores in the Minneapolis/St.
Paul metropolitan area.
EMPLOYEES
PFW had approximately 310 full-time and 340 part-time employees as of
August 3, 1996. PFW is not party to a collective bargaining agreement. PFW
believes that its employee relations are good.
TRADEMARKS AND SERVICE MARKS
PFW operates its warehouse superstores under the name "Pet Food Warehouse."
While PFW believes it has common law trademark rights to this name, it may
encounter challenges in certain market areas and, therefore, PFW may vary the
name in the future as it expands operations. PFW has obtained federal
registration for its logo and has filed for federal registration for the
trademarks for Professor Pet(TM) and certain private label products which
include: Masters Premium Diet(TM), Founders(TM), Fluffy's(TM), Bone Buddies(TM),
Toy Buddies(TM), Bed Buddies(TM), Lil' Buddies(TM) and Northern Backyard
Blend(TM). No assurance can be given that PFW will be successful in registering
these marks with the U.S. Patent and Trademark Office or in otherwise protecting
its intellectual property.
PROPERTIES
PFW's corporate headquarters are located in St. Louis Park, Minnesota. This
facility consists of approximately 8,100 square feet and is held under a lease
which expires in June 1998. PFW leases its warehouse superstore locations under
operating leases generally with ten to fifteen year terms. The following table
summarizes certain information on PFW's retail store locations in operation as
of August 3, 1996, as well as leases signed through October 15, 1996:
<TABLE>
<CAPTION>
OPENED OPENED CLOSED OPENED CLOSED TOTAL STORES
BEFORE DURING DURING DURING DURING OPEN AS OF LEASES SIGNED
STATE FISCAL 1995 FISCAL 1995 FISCAL 1995 FISCAL 1996 FISCAL 1996 OCTOBER 15, 1996 FOR FISCAL 1996
- ---------------- ----------- ----------- ----------- ----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minnesota....... 11 -- 1 7 1 16* 1
Wisconsin....... 2 5 -- -- -- 7 --
Iowa............ 1 2 -- -- -- 3 2
North Dakota.... 1 -- -- -- -- 1 1
South Dakota.... -- 1 -- -- -- 1 --
Michigan........ 5 2 7 -- -- -- --
Ohio............ 1 -- 1 -- -- -- --
-- -- -- -- -- -- --
21 10 9 7 1 28 4
== == == == == == ==
</TABLE>
- ---------------
*Includes 14 warehouse superstores in the Minneapolis/St. Paul metropolitan
area.
PFW's warehouse superstore facilities average 17,000 square feet but range
in size from 12,500 to 22,000 square feet. Most of PFW's leases provide for
fixed minimum rents payable monthly, plus a percentage of gross receipts in
excess of the minimum rent, and renewal options. PFW anticipates that it will be
able to renew its existing leases as they expire, although no assurance can be
given that it will be able to do so.
LEGAL PROCEEDINGS
PFW is not a party to any legal proceedings other than various claims and
lawsuits arising in the normal course of its business which, in the opinion of
PFW's management, are not individually or collectively material to its business.
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<PAGE> 83
PFW MANAGEMENT
GENERAL
The only current executive officer or director of PFW who will serve as an
executive officer or director of Petco following the Effective Time is Marvin W.
Goldstein, who will serve as a Senior Vice President of Petco in charge of
Petco's Midwest Region for a period commencing on the Closing Date and ending on
March 31, 1997. See "The Merger and Related Transactions -- Related Agreements;
Interests of Certain Persons in the Merger -- Employment, Consulting, Severance
and Non-Competition Agreements."
Mr. Goldstein, 53, was elected Chairman of the Board, President and Chief
Executive Officer of PFW in July 1995. From 1988 until 1989, Mr. Goldstein
served as Executive Vice President of Merchandising of the Department Store
Division of Dayton Hudson Corporation, at which time he became President and
Chief Operating Officer of such Division. In 1990, Mr. Goldstein was elected
Chairman, President and Chief Executive Officer of the Department Store Division
and in 1992 was elected President and Chief Operating Officer of the Department
Store Division, a position he held until September 1994.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid by PFW to Mr. Goldstein for the fiscal year ended February 3,
1996 (the only completed fiscal year during which he was employed by PFW).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
FISCAL YEAR AWARDS
COMPENSATION ------------
------------------------------ NUMBER OF
OTHER SECURITIES
NAME AND FISCAL ANNUAL UNDERLYING
PRINCIPAL POSITION(S) YEAR SALARY BONUS COMPENSATION OPTIONS
- ----------------------------------------------- ------ ------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Marvin W. Goldstein............................ 1995 $63,462 $ 0 $0 400,000
Chairman, President and Chief Executive
Officer
</TABLE>
The following table sets forth certain summary information concerning
individual grants of stock options made by PFW during the fiscal year ended
February 3, 1996 to Mr. Goldstein.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE OR
UNDERLYING OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED IN FISCAL 1995 PER SHARE DATE
- ----------------------------------- -------------------- -------------------- ---------------- ----------
<S> <C> <C> <C> <C>
Marvin W. Goldstein................ 100,000(1) 13.0% $ 4.00 7/18/01
300,000(1) 39.1 4.00 7/18/01
</TABLE>
- ---------------
(1) Such options became exercisable as to 25% of the total number of shares
immediately, 25% on July 19, 1996, and will become exercisable as to the
balance on July 19, 1997.
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<PAGE> 84
Mr. Goldstein did not exercise any stock options during fiscal 1995. The
following table sets forth at February 3, 1996 the number of options and value
of unexercised options held by Mr. Goldstein.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marvin W. Goldstein.......................... 100,000 300,000 0 0
</TABLE>
- ---------------
(1) The value of each option is equal to the difference between the fair market
value per share of PFW Common Stock and the option exercise price per share
multiplied by the number of shares subject to the option. The assumed fair
market value of a share of PFW Common Stock as of the end of PFW's 1995
fiscal year is $3.75, based on the last sale price for PFW Common Stock on
February 2, 1996, as reported by The Nasdaq National Market.
EMPLOYMENT AGREEMENT
PFW has an employment agreement with Mr. Goldstein which provides that PFW
may terminate his employment with or without cause with 30 days' notice. Mr.
Goldstein may terminate the agreement with or without cause and with or without
notice, although he has agreed to use his best efforts to provide 30 days'
notice. The agreement contains a noncompete obligation which remains in effect
for a period of 12 months after termination of employment. Mr. Goldstein's
current annual base salary is $125,000. Upon termination by PFW without cause,
Mr. Goldstein would be entitled to receive severance payments for 12 months
equal to his base compensation at the time of termination. See "The Merger and
Related Transactions -- Related Agreements; Interests of Certain Persons in The
Merger -- Employment, Consulting, Severance and Non-Competition Agreements."
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<PAGE> 85
PETCO PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Petco with
respect to beneficial ownership of the Petco Common Stock as of October 15,
1996, by (i) each stockholder who is known by Petco to own beneficially more
than 5% of the Petco Common Stock; (ii) the Chief Executive Officer and the four
other most highly compensated executive officers of Petco; (iii) each director;
and (iv) all executive officers and directors of Petco as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)(2)
------------------------------------------------------
PERCENT OF TOTAL PERCENT OF TOTAL
NUMBERS OF OUTSTANDING PRIOR OUTSTANDING AFTER
BENEFICIAL OWNERS SHARES TO THE MERGER THE MERGER
- ------------------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Janus Capital Corporation(3)..................... 2,338,088 14.3% 12.8%
Putnam Investments, Inc.(4)...................... 1,654,758 10.1 9.1
Brian K. Devine.................................. 240,521 1.5 1.3
Andrew G. Galef(5)............................... 132,944 * *
William M. Woodard............................... 47,296 * *
Larry D. Asselin................................. 37,366 * *
Richard C. St. Peter............................. 28,577 * *
Peter M. Starrett(6)............................. 9,336 * *
James M. Myers................................... 7,410 * *
C. Hunter Boll................................... -- -- --
Shahan D. Soghikian.............................. -- -- --
All directors and executive officers as a group
(9 persons).................................... 503,500 3.0 2.7
</TABLE>
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Commission.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
16,318,253 shares outstanding on October 15, 1996 and on 18,206,118 shares
estimated to be outstanding after the Merger, in each case, adjusted as
required by rules promulgated by the Commission.
(2) Includes the following shares which are issuable upon the exercise of
outstanding stock options which are exercisable within 60 days ("Option
Shares"): Mr. Devine -- 209,326 Option Shares; Mr. Galef -- 6,000 Option
Shares; Mr. Woodard -- 44,866 Option Shares; Mr. Asselin -- 35,866 Option
Shares; Mr. St. Peter -- 28,577 Option Shares; Mr. Starrett -- 7,500 Option
Shares; and Mr. Myers -- 6,960 Option Shares.
(3) The address for Janus Capital Corporation is 100 Fillmore Street, Suite 300,
Denver, Colorado 80206. The information is presented as of March 31, 1996
and is determined through filings reflected in The Nasdaq Stock Market
Corporate Record for Petco.
(4) The address for Putnam Investments, Inc. is One Post Office Square, Boston,
Massachusetts 02109. The information is presented as of September 30, 1996
and is determined through Schedule 13G filings.
(5) Includes (i) 22,618 shares of Petco Common Stock held by Andrew G. Galef
Living Trust, (ii) 6,456 shares of Petco Common Stock held by Bronya Galef,
Mr. Galef's wife, and (iii) 351 shares of Petco Common Stock held by AGC
Family Partnership. Mr. Galef disclaims beneficial ownership of such shares.
(6) Includes 336 shares of Petco Common Stock held by Grant Starrett, Mr.
Starrett's son.
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<PAGE> 86
PFW PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to PFW with
respect to beneficial ownership of the PFW Common Stock as of October 15, 1996,
by (i) each stockholder who is known by PFW to own beneficially more than 5% of
the PFW Common Stock; (ii) the Chief Executive Officer and the four other most
highly compensated executive officers of PFW; (iii) each director; and (iv) all
executive officers and directors of PFW as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)(2)
------------------------------------------------------------------------------
PERCENT OF TOTAL
PERCENT OF TOTAL PETCO COMMON
PFW COMMON SHARES OF PETCO STOCK
NUMBER OF SHARES STOCK OUTSTANDING COMMON STOCK OUTSTANDING
OF PFW COMMON PRIOR BENEFICIALLY OWNED AFTER
BENEFICIAL OWNERS STOCK TO THE MERGER AFTER THE MERGER(3) THE MERGER(4)
- ----------------------------- ---------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Gordon F. Stofer(5).......... 782,856 8.3% 156,571 *
3800 West 80th Street, #1400
Minneapolis, MN 55431
Cherry Tree Ventures IV...... 771,428 8.2 154,286 *
3800 West 80th Street, #1400
Minneapolis, MN 55431
George E. Kline(6)........... 307,141 3.2 61,428 *
4750 IDS Center
Minneapolis, MN 55402
Marvin W. Goldstein (7)...... 234,429 2.4 46,886 *
600 South Highway 169
St. Louis Park, MN 55426
Roe H. Hatlen(8)............. 102,855 1.1 20,571 *
10260 Viking Drive
Eden Prairie, MN 55344
Paul D. Finkelstein(9)....... 34,999 * 7,000 *
7201 Metro Boulevard
Minneapolis, MN 55439
Reid Johnson(10)............. 28,428 * 5,686 *
9166 Breckenridge Lane
Eden Prairie, MN 55347
Stanley Goldberg............. 15,713 * 3,141 *
9959 Valley View Road
Eden Prairie, MN 55344
All directors and current
executive officers as a
group (11 persons)(11)..... 1,570,019 16.6 314,004 1.7%
</TABLE>
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Commission.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
9,439,324 shares of PFW Common Stock outstanding on October 15, 1996 and on
18,206,118 shares of Petco Common Stock estimated to be outstanding after
the Merger, in each case, adjusted as required by rules promulgated by the
Commission.
(2) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of October 15, 1996 or within 60 days
of such date, are treated as outstanding when determining the percent of
the class owned by such individual and when determining the percent owned
by the group.
(3) Calculated by multiplying the number of shares of PFW Common Stock
beneficially owned on such date by an assumed exchange ratio of 0.2, based
on the assumption that the Petco Stock Price on
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<PAGE> 87
October 15, 1996 equaled the Petco Common Stock price on such date, and
rounded down to the nearest whole share.
(4) Based on 16,318,253 shares of Petco Common Stock outstanding as of October
15, 1996 plus 1,887,865 shares estimated to be issued in the Merger
assuming no exercise of PFW Options or PFW Warrants during the period from
the Record Date through the Effective Time and without giving effect to
shares to be issued in connection with the termination of PFW's Employee
Stock Purchase Plan.
(5) Includes 771,428 shares held by Cherry Tree Ventures IV and 11,428 shares
issuable pursuant to currently exercisable stock options. Mr. Stofer is a
general partner of CTV Partners IV, which is the general partner of Cherry
Tree Ventures IV. Mr. Stofer disclaims beneficial ownership of the shares
held by Cherry Tree Ventures IV.
(6) Includes 252,856 shares held by the Venture Management Profit Sharing
Trust, of which Mr. Kline is sole trustee, and 11,428 shares issuable
pursuant to currently exercisable stock options.
(7) Includes 200,000 shares issuable pursuant to currently exercisable options.
(8) Includes 57,142 shares held by Eventyr Investments Ltd. Partnership, and
15,713 shares issuable pursuant to currently exercisable stock options. Mr.
Hatlen is the general partner of Eventyr Investments Ltd. Partnership.
(9) Includes 24,999 shares issuable pursuant to currently exercisable stock
options.
(10) Includes 27,857 shares issuable pursuant to currently exercisable stock
options and 571 shares owned by Mr. Johnson's spouse.
(11) Includes 370,601 shares issuable pursuant to currently exercisable stock
options.
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<PAGE> 88
DESCRIPTION OF PETCO CAPITAL STOCK
The authorized capital stock of Petco consists of 100,000,000 shares of
Petco Common Stock and 2,000,000 shares of preferred stock, $.0001 par value.
COMMON STOCK
At October 15, 1996, there were 16,318,253 shares of Petco Common Stock
outstanding, held by 381 stockholders of record. Holders of shares of Petco
Common Stock are entitled to one vote per share on matters to be voted upon by
the stockholders, and, subject to the prior rights of the holders of preferred
stock, to receive dividends when and as declared by the Petco Board of Directors
with funds legally available therefor and to share ratably in the assets of
Petco legally available for distribution to the stockholders in the event of
liquidation or dissolution, after payment of all debts and other liabilities.
Holders of Petco Common Stock are not entitled to preemptive rights and have no
subscription, redemption or conversion privileges. The Petco Common Stock does
not have cumulative voting rights, which means the holder or holders of more
than one-half of the shares voting for the election of directors can elect all
of the directors then being elected. All of the outstanding shares of Petco
Common Stock are fully paid and nonassessable. The rights, preferences and
privileges of holders of Petco Common Stock are subject to the rights of the
holders of shares of any series of preferred stock which Petco may issue in the
future.
PREFERRED STOCK
There are no shares of preferred stock outstanding. However, the Petco
Board has the authority, without further stockholder approval, to issue shares
of preferred stock in one or more series and to determine the dividend rights,
any conversion rights or rights of exchange, voting rights, rights and terms of
redemption (including sinking fund provisions), liquidation preferences and any
other rights, preferences, privileges and restrictions of any series of
preferred stock, and the number of shares constituting such series and the
designation thereof.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of Petco, making removal of the present
management of Petco more difficult, or resulting in restrictions upon the
payment of dividends and other distributions to the holders of Petco Common
Stock.
BUSINESS COMBINATIONS; CERTAIN CHARTER AND BYLAW PROVISIONS
Section 203 of the Delaware Law prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless upon closing of such
transaction the interested stockholder owned 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, or unless the
business combination is, or the transaction in which such person became an
interested stockholder was, approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or, in the case of
affiliates and associates of the issuer, did own within the last three years)
15% or more of the corporation's voting stock. Pursuant to Section 203(b)(3) of
the Delaware Law, the stockholders of Petco immediately prior to Petco's initial
public offering amended the Petco Certificate to provide that Petco elects not
to be governed by the provisions of Section 203. Such amendment, however, does
not apply to any " business combination" between Petco and any person who became
an "interested stockholder" prior to the adoption of such amendment in March
1994.
The Petco Certificate and Bylaws contain provisions prohibiting stockholder
action by written consent by the stockholders; limiting the right to call
stockholder meetings to the Chairman of the Board, the President, the Secretary
or the Board of Directors; and prohibiting the stockholders from removing
directors from office except for cause and reserving to the directors the
exclusive right to change the number of directors or to fill vacancies on the
Board. The Petco Certificate also provides for the Petco Board to be divided
into three classes
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<PAGE> 89
of directors serving staggered three-year terms. As a result, approximately
one-third of the Petco Board will be elected each year.
The purpose and intended effect of the above described provisions in the
Petco Certificate and Bylaws are to enhance the continuity and stability of
Petco's management by making it more difficult for stockholders to remove or
change the incumbent members of the Board of Directors. Such provisions could
also render Petco more difficult to be acquired pursuant to an unfriendly
acquisition by an outsider by making it more difficult for such person to obtain
control of Petco and replace current management without the approval of the
Board of Directors.
Petco has included in the Petco Certificate and Bylaws provisions to (i)
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the Delaware
Law and (ii) indemnify its directors and officers to the fullest extent
permitted by Section 145 of the Delaware Law, including circumstances in which
indemnification is otherwise discretionary. Petco believes that these provisions
are necessary to attract and retain qualified persons as directors and officers.
Petco has also entered into indemnification agreements with certain officers and
directors.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is the transfer agent and registrar
for the Petco Common Stock.
For additional matters related to the Petco Common Stock, including
provisions that may have the effect of delaying or preventing a change in
control or management of Petco, see "Comparison of Rights of Stockholders of
Petco and PFW."
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<PAGE> 90
COMPARISON OF RIGHTS OF STOCKHOLDERS OF PETCO AND PFW
Upon consummation of the Merger, holders of PFW Common Stock will receive
shares of Petco Common Stock. Set forth below is a summary of (i) the material
features of the PFW Common Stock and the Petco Common Stock, and (ii) the
material differences between the rights of the holders of PFW Common Stock and
Petco Common Stock. These summaries are qualified in their entirety by reference
to the charter documents and other instruments of PFW and Petco that create the
rights of the security holders.
PETCO
The Petco Certificate authorizes Petco to issue 100,000,000 shares of Petco
Common Stock and 2,000,000 shares of preferred stock, $.0001 par value. As of
October 15, 1996, 16,318,253 shares of Petco Common Stock were issued and
outstanding and no shares of preferred stock were issued and outstanding.
Holders of Petco Common Stock are entitled to one vote, in person or by
proxy, for each share of Petco Common Stock held of record in the stockholder's
name on the books of Petco as of the record date on any matter submitted to a
vote of stockholders. The Petco Certificate does not provide for cumulative
voting in the election of directors. Each share of Petco Common Stock has the
same rights, privileges and preferences as every other share and will share
equally in Petco's net assets upon liquidation or dissolution. Petco Common
Stock has no preemptive, conversion or redemption rights or sinking fund
provisions, and all of the issued and outstanding shares of Petco Common Stock
are fully paid and nonassessable.
The Board of Directors of Petco, without stockholder approval, may
authorize one or more classes of preferred stock with preferences or voting
rights that may adversely affect the rights of holders of the Petco Common
Stock. Although it is not possible to state the actual effect any issuance of
preferred stock might have upon the rights of holders of Petco Common Stock, the
issuance of preferred stock might (i) restrict dividends on Petco Common Stock
if preferred stock dividends have not been paid; (ii) dilute the voting power
and equity interest of holders of Petco Common Stock to the extent that any
preferred stock series has voting rights or is convertible into Petco Common
Stock; or (iii) prevent current holders of Petco Common Stock from participating
in Petco's assets upon liquidation until any liquidation preferences granted to
the holders of the preferred stock are satisfied. In addition, the issuance of
preferred stock may, under certain circumstances, have the effect of
discouraging an attempt to change control of Petco by, for example, creating
voting impediments to the approval of mergers or other similar transactions
involving Petco. The Petco Board of Directors does not presently intend to issue
any preferred stock.
Stockholders are entitled to dividends when, as and if declared by the
Petco Board of Directors out of funds legally available therefor (and after
satisfaction of the prior rights of holders of outstanding preferred stock, if
any), subject to certain restrictions on payment of dividends imposed by the
Delaware Law. Petco has never paid a cash dividend on the Petco Common Stock and
does not intend to pay dividends in the foreseeable future. Petco's present
intention is to retain all future earnings for use in its business. See
"-- Dividends and Repurchases of Stock."
PFW
PFW's authorized capital stock consists of 11,428,571 shares of PFW Common
Stock, of which 9,439,324 shares were outstanding as of October 15, 1996, and
5,000,000 shares undesignated as to class or series, of which no shares were
issued and outstanding as of such date. Holders of PFW Common Stock have no
preemptive, subscription, redemption or conversion rights. Cumulative voting for
directors is not permitted. The holders of PFW Common Stock are entitled to one
vote per share on all matters submitted to a vote of stockholders. All shares of
PFW Common Stock are entitled to share equally in dividends from sources legally
available therefor, when, as and if declared by the PFW Board of Directors and,
upon liquidation or dissolution of PFW whether voluntary or involuntary, to
share equally in the assets of PFW available for distribution to stockholders.
PFW has never paid a cash dividend on the PFW Common Stock and does not intend
to pay dividends in the foreseeable future. PFW's present intention is to retain
all future earnings for use in its business. All shares of PFW Common Stock
presently outstanding are fully paid and nonassessable. The PFW Board of
Directors is authorized to issue additional shares of PFW Common Stock, but not
to exceed the
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<PAGE> 91
amount authorized by the PFW Articles of Incorporation (the "PFW Articles"), and
to issue options and warrants for the purchase of such shares, on such terms and
conditions and for such consideration as the PFW Board may deem appropriate
without further stockholder action.
COMPARISON OF PFW COMMON STOCK AND PETCO COMMON STOCK
As a result of the Merger, holders of PFW Common Stock will become holders
of Petco Common Stock. Such persons will have different rights as stockholders
of Petco than they had as stockholders of PFW. These differences are due to (i)
differences in the respective charters and bylaws of PFW and Petco, and (ii)
differences between the corporate laws of Delaware, where Petco is incorporated
and by whose laws it is governed, and the corporate laws of Minnesota, where PFW
is incorporated and by whose laws it is governed.
The following is a summary of certain significant differences between the
charter documents of PFW and Petco and between the laws of Minnesota and
Delaware. This summary is complete in all material respects.
MEETINGS OF STOCKHOLDERS
Minnesota Law provides that meetings of stockholders may be called by: (i)
the chief executive officer; (ii) the chief financial officer; (iii) two or more
directors; (iv) stockholders holding 20% or more of the voting power of all
shares entitled to vote (except that the voting power needed to demand a meeting
to directly or indirectly effect a business combination is 25%); or (v) any
other person authorized in the articles or bylaws. The PFW Bylaws provide that
meetings of stockholders may be called only by the parties listed in items (i)
through (iv) above. Delaware Law provides that meetings of stockholders may be
called only by the directors or by any other person as may be authorized by the
corporation's certificate of incorporation or bylaws. The Petco Certificate and
Bylaws provide that special meetings of stockholders may be called only by the
Petco Board of Directors, the Chairman, the President or the Secretary. No other
person shall be entitled to call special meetings.
ACTION WITHOUT MEETINGS OF STOCKHOLDERS
The PFW Bylaws provide that any action which might be taken at a meeting of
the stockholders may be taken without a meeting if done in writing and signed by
all of the stockholders entitled to vote on that action.
The Petco Certificate provides that any action that may be taken at an
annual or special meeting of stockholders may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called in
accordance with Delaware Law, and may not be taken by written consent of
stockholders without a meeting.
DIVIDENDS AND REPURCHASES OF STOCK
The PFW Board of Directors, under Minnesota Law, may declare dividends
without stockholder approval so long as the corporation will be able to pay its
debts in the ordinary course of business after making the distribution. Delaware
Law permits a corporation, in general, to declare and pay dividends out of
surplus or out of net profits for the current and/or preceding fiscal year, and,
in general, to redeem or repurchase shares of its stock if the capital of the
corporation is not impaired and such redemption or repurchase will not impair
the capital of the corporation. The directors of a Delaware corporation may be
jointly and severally liable to the corporation for a willful or negligent
violation of such provisions of Delaware Law.
INSPECTION RIGHTS
Under Minnesota Law, a stockholder has an "absolute right," upon written
demand, to examine the following corporate documents: (i) the share register;
(ii) records of all proceedings of stockholders for the last three years; (iii)
records of all proceedings of the board for the last three years; (iv) the
corporation's articles and all amendments currently in effect; (v) the
corporation's bylaws and all amendments currently in effect; (vi) certain
financial statements and the financial statement for the most recent interim
period prepared in the course of operation of the corporation for distribution
to the stockholders or to a governmental
81
<PAGE> 92
agency as a matter of public record; (vii) reports made to stockholders
generally within the last three years; (viii) a statement of the names and usual
business addresses of its directors and principal officers; (ix) voting trust
agreements; (x) stockholder control agreements; and (xi) a copy of agreements,
contracts, or other arrangements or portions of them fixing the rights of a
class or series of securities issued by the company. Under Delaware Law,
stockholders, upon the demonstration of a proper purpose, have the right to
inspect a corporation's stock ledger, stockholder list, and other books and
records.
AMENDMENTS TO CHARTER
Minnesota Law provides that the PFW Articles may be amended by the holders
of a majority of the voting power of the shares present at a meeting of
stockholders, unless a greater proportion is required by such Articles. The PFW
Articles do not require a greater proportion. Under Delaware Law, charter
amendments require the approval of the directors and the vote of the holders of
a majority of the outstanding stock and a majority of each class of stock
outstanding and entitled to vote thereon as a class, unless the certificate of
incorporation requires a greater proportion. The Petco Certificate does not
require a greater proportion.
AMENDMENT OF BYLAWS
The PFW Bylaws provide that such Bylaws may be amended by the PFW Board,
subject to the power of PFW stockholders to change or repeal such Bylaws. The
PFW Bylaws provide that the PFW Board shall not make or alter any Bylaws fixing
a quorum for meetings of stockholders, prescribing procedures for removing
directors or filling vacancies on the PFW Board, or fixing the number of
directors or their classifications, qualifications or terms of office. Under
Delaware Law, the power to adopt, amend or repeal bylaws lies in stockholders
entitled to vote; provided, however, that any corporation may, in its
certificate of incorporation, confer the power to adopt, amend or repeal bylaws
upon the directors. The Petco Certificate provides that the Petco Board has the
power to amend the Petco Bylaws, and that Petco stockholders may not amend the
Petco Bylaws except upon the affirmative vote of not less than 66 2/3% of the
total voting power of all outstanding securities of Petco then entitled to vote
generally in the election of directors, voting together as a single class.
PREEMPTIVE RIGHTS
The PFW Articles and the Petco Certificate deny preemptive rights to
stockholders of PFW and Petco, respectively.
DIRECTORS
Under Minnesota Law and the governing documents of PFW, directors hold
office until the next annual meeting of stockholders or the election and
qualification of their successors.
The Petco Certificate provides that directors shall be divided into three
classes, consisting as nearly as possible of one-third of the total number of
directors constituting the entire Board, the members of each class to serve for
a term of three years. The Petco Certificate further provides that any increase
or decrease in the number of directors be apportioned among the classes so as to
maintain, as nearly as possible, an equal number of directors in each class. A
vacancy on the Petco Board requires the majority vote of the remaining directors
to fill such vacancy.
The Petco Certificate and Bylaw provisions with respect to the Petco Board
were designed to ensure continuity of the Petco Board to promote the long-term
goals of and orderly changes in control of the Petco Board. These provisions
could, however, operate to discourage or prevent takeovers, including mergers,
tender offers or proxy contests, or changes in the management of Petco which are
proposed to be effected without approval of the Petco Board, whether or not such
takeover or change in control is detrimental to Petco or its stockholders. Such
provisions could delay stockholders who are not in agreement with the policies
of the Petco Board from removing a majority of the Petco Board for two years,
unless such stockholders could show cause to justify such removal.
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<PAGE> 93
PERSONAL LIABILITY OF DIRECTORS
Article Nine of the Petco Certificate, in conjunction with Delaware Law,
will limit or eliminate a director's personal liability to the corporation or
its stockholders for breach of fiduciary duty. Such provision will not, however,
limit or eliminate a director's liability for: (i) a breach of the director's
duty of loyalty; (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) under Section 174 of
the Delaware Law; or (iv) any transaction from which the director derived an
improper personal benefit.
Minnesota Law generally permits a Minnesota corporation's articles to
eliminate or limit a director's personal liability to the corporation or its
stockholders for monetary damages for breaches of a director's duty as a
director. However, the articles cannot deprive the corporation or its
stockholders of the right to enjoin transactions which violate a director's duty
of care. Moreover, the articles cannot limit liability for any breach of the
director's duty of loyalty, for transactions resulting in an improper personal
benefit to the director or for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law. In addition,
liability for illegal dividends, stock repurchases or other distributions to
stockholders or for violations of Minnesota's securities statutes cannot be
limited. The PFW Articles provide that PFW directors shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty, except for liability (i) for breach of a director's duty of
loyalty; (ii) for acts or omissions not in good faith which involve intentional
misconduct or a knowing violation of law; (iii) under Sections 302A.559 or
80A.23 of the Minnesota Law; or (iv) for any transaction from which a director
derives an improper personal benefit.
INDEMNIFICATION
Article Nine of the PFW Bylaws provides for mandatory indemnification of
directors, officers and employees of PFW to the full extent permitted by
Minnesota Law. Minnesota Law provides for mandatory indemnification of a person
acting in an official capacity on behalf of the corporation (including a
director, officer, employee or agent) if such person acted in good faith,
received no improper personal benefit, acted in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful.
Delaware Law permits, but does not require, a corporation to indemnify
officers, directors, employees or agents and expressly provides that the
indemnification provided for under Delaware Law shall not be deemed exclusive of
any indemnification right under any bylaw, vote of stockholders or disinterested
directors, or otherwise. Delaware Law permits indemnification against expenses
and certain other liabilities arising out of legal actions brought or threatened
against such persons for their conduct on behalf of Petco, provided that each
such person acted in good faith and in a manner that he or she reasonably
believed was in or not opposed to Petco's best interests and in the case of a
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. Delaware Law does not allow indemnification of directors in the case
of an action by or in the right of Petco (including stockholder derivative
suits) unless the directors successfully defend the action or indemnification is
ordered by the court.
The Petco Bylaws provide for mandatory indemnification of each person who
was or is a party or is threatened to be made a party to any action by reason of
the fact that he or she is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other entity,
against expenses incurred in connection with the defense or settlement of such
action if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of PFW and
Petco, PFW and Petco have been advised that in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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<PAGE> 94
CONTROL SHARE ACQUISITIONS
PFW is subject to the Minnesota Control Share Acquisition Act ("MCSAA").
The MCSAA provides that any person (an "acquiring person") proposing to make a
"control share acquisition" must disclose certain information to the target
corporation, and the target corporation's stockholders must thereafter approve
the control share acquisition or certain of the shares acquired in the control
share acquisition shall not have voting rights and shall be subject to
redemption by the target corporation for a specified period of time at the
market value of such shares. A "control share acquisition" is an acquisition of
shares of an issuing public corporation which results in the acquiring person
having voting power that exceeds one of the following thresholds: (i) at least
20% but less than 33 1/3%; (ii) at least 33 1/3% but less than or equal to 50%;
and (iii) over 50%. The definition of a "control share acquisition" specifically
excludes acquisitions of shares from the corporation issuing such shares, and
acquisitions pursuant to plans of merger or exchange which are approved by the
stockholders of the corporation. The MCSAA applies to a control share
acquisition with respect to an issuing public corporation unless otherwise
expressly provided in the issuing public corporation's articles of incorporation
or in bylaws approved by the stockholders. The PFW Articles do not provide that
the MCSAA will not apply to PFW. There are no provisions of Delaware Law which
are analogous to the MCSAA.
BUSINESS COMBINATIONS
Minnesota Law provides that PFW may not engage in any "business
combination" with any "interested stockholder" or affiliate or associate of an
interested stockholder for a period of four years after the interested
stockholder's "share acquisition date" unless either the business combination or
the acquisition of shares by the interested stockholder on his or her share
acquisition date is approved by a disinterested committee of the PFW Board
before such interested stockholder's share acquisition date. The Delaware
Business Combination Act ("DBCA") restricts publicly-held corporations from
engaging in any "business combination" with any "interested stockholder" or
affiliate or associate of an "interested stockholder" for a period of three
years after the date on which such person becomes an "interested stockholder"
unless (i) prior to such date the board of directors approved the "business
combination" or transaction making the stockholder "interested," (ii) upon
consummation of such transaction the "interested stockholder" owned at least 85%
of the outstanding voting stock, or (iii) the "business combination" is approved
by the board and by the two-thirds vote of the shares (exclusive of the shares
held by the "interested stockholder") at a meeting. The Petco Certificate
provides that Petco elects not to be governed by the DBCA.
For purposes of Minnesota Law, an "interested stockholder" is a 10% or more
beneficial owner of voting shares of such corporation, or a person who is an
associate or affiliate of the corporation and who at any time within the four
year period preceding the date in question was a 10% or more beneficial owner of
voting shares of such corporation. An "interested stockholder" under the DBCA is
a beneficial owner of 15% or more of the outstanding voting stock or a person
who was at any time within the preceding three years such a holder.
RIGHTS OF DISSENTING STOCKHOLDERS
Under Section 302A.473 of the Minnesota Law, if a corporation calls a
stockholders meeting to approve a merger to which such corporation is a party,
the sale of substantially all of the assets of the corporation, or in certain
other circumstances, the notice of the meeting must inform each stockholder of
the right to dissent from such action and must include a copy of Section
302A.471 and Section 302A.473 of the Minnesota Law and a brief description of
the procedure to be followed under such sections. A stockholder who wishes to
exercise dissenters' rights in such circumstances is entitled to demand the fair
value of the shares owned by such stockholder.
Under Delaware Law, stockholders have the right, in some circumstances, to
dissent from mergers and consolidations by demanding payment in cash for their
shares equal to the fair value (excluding any appreciation or depreciation as a
consequence or in expectation of the transaction), as determined by agreement
with the corporations or by an independent appraiser appointed by a court in an
action timely brought by the dissenters. No appraisal rights exist, however, for
shares listed on a national securities exchange or held of record by more than
2,000 stockholders unless the certificate of incorporation provides otherwise or
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<PAGE> 95
the stockholders receive anything other than: (i) shares of stock of the
corporation surviving or resulting from such merger or consolidation; (ii)
shares of stock of any other corporation which at the effective date of the
merger or consolidation will be either listed on a national securities exchange
or held of record by more than 2,000 stockholders; (iii) cash in lieu of
fractional shares of the corporation described in the foregoing clauses (i) and
(ii); or (iv) any combination of (i), (ii) or (iii).
LEGAL MATTERS
The validity of the shares of Petco Common Stock offered hereby will be
passed upon for Petco by Latham & Watkins, San Diego, California. Certain legal
matters in connection with the Merger will be passed upon for PFW by Fredrikson
& Byron, P.A., Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of Petco as of January 28, 1995 and
February 3, 1996, and for each of the years in the three-year period ended
February 3, 1996, included herein and elsewhere in the Registration Statement
have been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of PFW as of January 28, 1995 and February 3,
1996, and for the years then ended, included in this Proxy Statement/Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
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<PAGE> 96
PETCO ANIMAL SUPPLIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets
as of January 28, 1995 and February 3, 1996......................................... F-3
Consolidated Statements of Operations
for each of the years in the three-year period ended February 3, 1996............... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the years in the three-year period ended February 3, 1996............... F-5
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended February 3, 1996............... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Petco Animal Supplies, Inc.:
We have audited the accompanying consolidated balance sheets of Petco
Animal Supplies, Inc. and subsidiary as of January 28, 1995 and February 3, 1996
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
February 3, 1996. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Petco Animal
Supplies, Inc. and subsidiary as of January 28, 1995 and February 3, 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended February 3, 1996, in conformity with generally
accepted accounting principles.
San Diego, California KPMG Peat Marwick LLP
October 17, 1996
F-2
<PAGE> 98
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
ASSETS
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 7,136 $ 9,834
Receivables......................................................... 3,075 4,545
Inventories......................................................... 33,380 45,363
Other............................................................... 1,128 718
------- -------
Total current assets........................................ 44,719 60,460
Fixed assets (note 4):
Equipment........................................................... 14,349 19,444
Furniture and fixtures.............................................. 12,346 21,367
Leasehold improvements.............................................. 17,244 37,407
------- -------
43,939 78,218
Less accumulated depreciation and amortization...................... 15,268 20,277
------- -------
28,671 57,941
Goodwill.............................................................. 4,709 31,767
Deferred tax assets................................................... 623 10,521
Other assets.......................................................... 1,128 1,426
------- -------
$ 79,850 $ 162,115
======= =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable.................................................... $ 16,050 $ 25,592
Accrued expenses.................................................... 8,855 12,521
Accrued salaries and employee benefits.............................. 4,615 5,186
Revolving credit facility (note 3).................................. -- --
Current portion of capital lease and other obligations (note 4)..... 1,016 2,747
------- -------
Total current liabilities................................... 30,536 46,046
Capital lease and other obligations, excluding current portion (note
4).................................................................. 4,200 11,522
Accrued store closing costs, excluding current portion................ 954 4,804
Deferred rent......................................................... 2,812 3,463
Stockholders' equity (note 5):
Preferred stock, $.0001 par value, 2,000,000 shares authorized, no
shares issued and outstanding.................................... -- --
Common Stock, $.0001 par value, 20,000,000 shares authorized,
9,760,828 and 13,381,673 shares issued and outstanding........... 1 1
Additional paid-in capital.......................................... 84,465 131,407
Accumulated deficit................................................. (43,118) (35,128)
------- -------
Total stockholders' equity.................................. 41,348 96,280
Commitments and contingencies (notes 3, 4, 5, and 9)..................
------- -------
$ 79,850 $ 162,115
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 99
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................................. $ 160,841 $ 205,178 $ 293,631
Cost of sales and occupancy costs......................... 120,574 153,607 224,540
-------- --------
Gross profit.................................... 40,267 51,571 69,091
Selling, general and administrative expenses.............. 35,969 44,128 70,808
-------- --------
Operating income (loss)......................... 4,298 7,443 (1,717)
Interest income........................................... 1 427 1,081
Interest expense-primarily to related parties (note 7).... (5,105) (1,147) (836)
-------- --------
Earnings (loss) before income taxes............. (806) 6,723 (1,472)
Income taxes (benefit) (note 6)........................... 51 1,969 (9,785)
-------- --------
Net earnings (loss)............................. $ (857) $ 4,754 $ 8,313
======== ========
Net earnings (loss) per common and common equivalent
share................................................... $ -- $ .57 $ .67
Weighted average number of common and common equivalent
shares outstanding...................................... -- 8,340,803 12,430,720
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 100
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
SENIOR PREFERRED JUNIOR PREFERRED
STOCK STOCK COMMON STOCK ADDITIONAL TOTAL
----------------- ------------------ ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT)
------- ------- -------- ------- ---------- ------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January
30, 1993............ 52,100 $ 5,210 108,378 $ 3,000 8,152 $ -- $ 2,908 $ (46,822) $ (35,704)
Restatement for
pooling of interests
(note 2)............ -- -- -- -- 645,527 -- 28 206 234
------- ------- -------- ------- --------- --- -------- -------- --------
Balances at January
30, 1993............ 52,100 5,210 108,378 3,000 653,679 -- 2,936 (46,616) (35,470)
Issuance of stock for
services (note 5)... 1,200 120 -- -- -- -- -- -- 120
Sale of Common
Stock............... -- -- -- -- 9 -- 60 -- 60
Retirement of stock... -- -- -- -- (9) -- (5) -- (5)
Distributions to
shareholders........ -- -- -- -- -- -- -- (29) (29)
Net loss.............. -- -- -- -- -- -- -- (857) (857)
------- ------- -------- ------- --------- --- -------- -------- --------
Balances at January
29, 1994............ 53,300 5,330 108,378 3,000 653,679 -- 2,991 (47,502) (36,181)
Issuance of stock for
services (note 5)... 200 20 -- -- -- -- -- -- 20
Exchange of
subordinated debt
and preferred stock
for
Common Stock........ (53,500) (5,350) (108,378) (3,000) 4,607,144 -- 39,771 -- 31,421
Sale of Common
Stock............... -- -- -- -- 4,500,005 1 41,703 -- 41,704
Distributions to
shareholders........ -- -- -- -- -- -- -- (370) (370)
Net earnings.......... -- -- -- -- -- -- -- 4,754 4,754
------- ------- -------- ------- --------- --- -------- -------- --------
Balances at January
28, 1995............ -- -- -- -- 9,760,828 1 84,465 (43,118) 41,348
Sale of Common
Stock............... -- -- -- -- 3,615,012 -- 46,882 -- 46,882
Exercise of options... -- -- -- -- 5,833 -- 60 -- 60
Distributions to
shareholders........ -- -- -- -- -- -- -- (323) (323)
Net earnings.......... -- -- -- -- -- -- -- 8,313 8,313
------- ------- -------- ------- --------- --- -------- -------- --------
Balances at February
3, 1996............. -- $ -- -- $ -- 13,381,673 $ 1 $131,407 $ (35,128) $ 96,280
======= ======= ======== ======= ========= === ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 101
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................. $ (857) $ 4,754 $ 8,313
Depreciation and amortization........................................ 4,646 4,582 7,876
Deferred taxes....................................................... -- (623) (11,215)
Loss on retirement of fixed assets................................... 30 229 3,568
Interest paid through the issuance of subordinated debt.............. 3,742 -- --
Other................................................................ 392 56 --
Changes in assets and liabilities, net of effects of acquisitions:
Receivables....................................................... (527) (1,435) (1,253)
Inventories....................................................... (5,023) (10,852) (7,130)
Other assets...................................................... (265) 379 342
Accounts payable.................................................. 4,000 5,851 6,288
Accrued expenses.................................................. 1,540 3,697 1,228
Accrued interest.................................................. 366 634 --
Accrued salaries and employee benefits............................ 731 1,112 524
Deferred rent..................................................... 502 719 650
Accrued store closing costs....................................... (461) (862) 3,952
------- -------- --------
Net cash provided by operating activities.................... 8,816 8,241 13,143
------- -------- --------
Cash flows from investing activities:
Additions to fixed assets............................................ (7,124) (15,491) (26,229)
Net cash invested in acquisitions of businesses...................... -- (3,705) (30,373)
Other................................................................ -- (14) (107)
------- -------- --------
Net cash used in investing activities........................ (7,124) (19,210) (56,709)
------- -------- --------
Cash flows from financing activities:
Net repayments under revolving agreements............................ (684) (3,271) --
Additional borrowings................................................ (183) 553 959
Repayment of capital lease and other obligations..................... (863) (878) (1,303)
Repayment of subordinated debt....................................... -- (20,000) --
Proceeds from issuance of Common Stock............................... 60 41,704 46,942
Distributions to shareholders........................................ (29) (370) (323)
Retirement of Common Stock........................................... (5) --
Other................................................................ -- -- (11)
------- -------- --------
Net cash provided by (used in) financing activities.......... (1,704) 17,738 46,264
------- -------- --------
Net increase in cash and cash equivalents.............................. (12) 6,769 2,698
Cash and cash equivalents at beginning of year......................... 379 367 7,136
------- -------- --------
Cash and cash equivalents at end of year............................... $ 367 7,136 9,834
======= ======== ========
Supplemental cash flow disclosures:
Interest paid on debt................................................ $ 633 $ 389 $ 799
Income taxes paid.................................................... $ 28 $ 440 $ 1,417
Supplemental disclosure of noncash financing activities:
Additions to capital lease and other obligations..................... $ 1,206 $ 3,301 $ 9,424
Subordinated debt, and related accrued interest, and all preferred stock with a combined carrying value of
$39,771 were exchanged for Common Stock during the year ended January 28, 1995 (note 5).
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 102
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business:
PETCO Animal Supplies, Inc., (the Company) a Delaware corporation, is a
national specialty retailer of premium pet food and supplies with stores in
fifteen states and the District of Columbia.
(b) Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
(c) Fiscal Year:
The Company's fiscal year ends on the Saturday closest to January 31,
resulting in years of either 52 or 53 weeks. The years ended January 29, 1994
and January 28, 1995 consisted of 52 weeks, and the year ended February 3, 1996
consisted of 53 weeks. All references to a fiscal year refer to the fiscal year
ending on the Saturday closest to January 31 of the following year.
(d) Cash Equivalents:
The Company considers all liquid investments with maturities of three
months or less to be cash equivalents.
(e) Inventories:
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
(f) Pre-opening Costs:
Costs incurred in connection with opening new stores are expensed as
incurred.
(g) Fixed Assets:
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three to seven years. Equipment under capital leases is stated at the present
value of minimum lease payments at the inception of the lease. Amortization is
computed using the straight-line method over the lesser of the lease term or the
estimated useful lives of the assets, generally five to ten years.
(h) Goodwill:
Goodwill represents the excess of the cost over the fair market value of
net assets acquired by the Company. Goodwill is amortized straight-line over
fifteen years. The Company continually reviews goodwill to assess recoverability
from future undiscounted cash flows. Accumulated amortization at January 28,
1995 and February 3, 1996 was $80 and $844, respectively.
(i) Other Assets:
Other assets consist primarily of lease deposits, non-compete agreements
and debt issuance costs. Non-compete agreements are amortized over the periods
of the agreements, generally three to ten years. Debt issuance costs are
amortized to interest expense using the effective interest method over the life
of the related
F-7
<PAGE> 103
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
debt, generally two to ten years. Accumulated amortization for intangible other
assets at January 28, 1995 and February 3, 1996 was $18 and $49, respectively.
(j) Fair Value of Financial Instruments:
Because of their short maturities, the carrying amounts for cash and cash
equivalents, receivables, accounts payable, accrued expenses, and accrued
salaries and employee benefits approximate fair value. The carrying amounts for
capital leases and other obligations approximate fair value as the interest
rates are substantially similar to rates which could be obtained currently for
similar instruments.
(k) Store Closing Costs:
Management continually reviews the ability of stores to provide positive
contributions to the Company's results. Costs associated with closing stores,
consisting primarily of lease obligations and provisions to reduce assets to net
realizable value, are charged to operations upon the decision to close a store.
(l) Income Taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
(m) Net Earnings (Loss) Per Common and Common Equivalent Share:
Net earnings (loss) per common and common equivalent share were computed
using the weighted average number of common and common equivalent shares (if
dilutive) outstanding during the period. Due to differences in capital
structure, net earnings per common and common equivalent share information for
the year ended January 29, 1994 is not comparable, and accordingly, not
presented.
(n) Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reported period.
(o) Reclassifications:
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
2. ACQUISITIONS
During fiscal 1995, the Company completed six acquisitions of retailers of
premium pet food and supplies. All of these acquisitions were accounted for as
purchases. The aggregate fair market value of assets acquired was $37,673 and
assumed liabilities were $7,300 with $30,373 of net cash invested in the
acquisition of these businesses. The excess of the aggregate cost over the fair
market value of net assets acquired was $27,822 which has been recorded as
goodwill and is being amortized over fifteen years.
F-8
<PAGE> 104
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During fiscal 1994, the Company acquired a retailer of premium pet food and
supplies in a purchase transaction with the fair market value of assets acquired
of $5,274 and assumed liabilities of $1,569 with $3,705 of net cash invested in
the acquisition. The excess of the cost over the fair market value of net assets
acquired was $4,789, which has been recorded as goodwill and is being amortized
over fifteen years.
The consolidated financial statements include the operating results from
the closing date for each respective acquisition.
The following summary presents pro forma consolidated results of operations
as if the acquisitions had occurred at the beginning of fiscal 1994 and 1995,
and includes adjustments for estimated amounts of goodwill amortization,
reductions in selling, general and administrative and interest expense and
income tax effects.
The pro forma results are for illustrative purposes only and do not purport
to be indicative of the actual results which would have occurred had the
transactions been completed as of the beginning of the periods, nor are they
indicative of results of operations which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 28, 1995 FEBRUARY 3, 1996
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Net sales..................................... $261,848 $335,443
Net earnings.................................. 4,923 8,164
Net earnings per common share................. $ 0.59 $ 0.66
</TABLE>
In July, 1996, the Company completed the acquisition of a specialty
retailer of eight pet food and supply stores in New York, New Jersey and
Connecticut operating under the trade name Pet Nosh. The Company exchanged
645,553 of its common shares for all of the Pet Nosh outstanding equity
securities. The transaction was accounted for as a pooling of interests. The
Company's financial statements for the twenty-six weeks ended August 3, 1996
reflected and gave effect to the transaction. The financial position and results
of operations of the Company and Pet Nosh have been combined and restated for
all previous periods to give effect to the merger and are presented as such in
these consolidated financial statements.
A reconciliation to amounts previously reported follows:
<TABLE>
<CAPTION>
PETCO PET NOSH COMBINED
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Fiscal year ended February 3, 1996
Net sales................................................ $ 270,681 $ 22,950 $293,631
Net earnings (loss)...................................... 8,413 (100) 8,313
Fiscal year ended January 28, 1995
Net sales................................................ 188,578 16,600 205,178
Net earnings (loss)...................................... 4,520 234 4,754
Fiscal year ended January 29, 1994
Net sales................................................ 148,464 12,377 160,841
Net earnings (loss)...................................... (940) 83 (857)
</TABLE>
3. REVOLVING CREDIT FACILITY
The Company has a Revolving Credit Facility with a commitment of up to
$25,000 that expires June 2, 1997. Borrowings under the Revolving Credit
Facility are unsecured and bear interest, at the Company's option, at either the
bank's reference rate or LIBOR plus 1.0%.
F-9
<PAGE> 105
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At February 3, 1996, $430 of letters of credit secured insurance programs.
No amounts were drawn on the letters of credit at February 3, 1996.
4. LEASE COMMITMENTS AND OTHER OBLIGATIONS
The Company finances certain fixed assets under capital leases and other
obligations. There are approximately $5,400 and $14,800 in fixed assets financed
through capital lease and other obligations at January 28, 1995 and February 3,
1996, respectively. Accumulated amortization related to these financed assets
was approximately $900 and $2,100 at January 28, 1995 and February 3, 1996,
respectively.
The Company leases warehouse and store facilities under operating leases.
These operating leases generally have terms from three to ten years. Certain
store leases include additional contingent rental payments ranging from 2% to 6%
of store revenues above defined levels. Contingent rentals incurred during
fiscal years 1993, 1994, and 1995 were $12, $26, and $52, respectively.
At February 3, 1996, the present value of future minimum payments for
capital lease and other obligations, and minimum lease payments under
noncancellable operating leases follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
AND OTHER OPERATING
YEARS OBLIGATIONS LEASES
---------------------------------------------------- -------------- ---------
<S> <C> <C>
1996................................................ $ 3,908 $ 38,580
1997................................................ 3,543 36,694
1998................................................ 3,140 33,118
1999................................................ 2,526 30,521
2000................................................ 1,677 28,538
Thereafter.......................................... 3,100 152,775
------- --------
Total minimum payments.............................. 17,894 $ 320,226
========
Less amount representing interest................... 3,625
-------
Present value of net minimum capital lease and other
obligations payments.............................. 14,269
Less current portion of capital lease and other
obligations....................................... 2,747
-------
Capital lease and other obligations................. $ 11,522
=======
</TABLE>
Rent expense under operating leases for fiscal years 1993, 1994, and 1995
was approximately $17,441, $22,144, and $30,086, respectively.
5. EQUITY
(a) Senior Preferred Stock:
The Company designated 60,000 shares of the authorized 2,000,000 shares of
preferred stock as Senior Preferred Stock with a par value of $.0001 and
liquidation value of $100 per share. Senior Preferred Stock in the amount of
1,200 and 200 shares were issued for management services (Note 7) during fiscal
years 1993 and 1994, respectively.
Concurrent with the initial public offering in March 1994, all outstanding
shares of the Senior Preferred Stock were exchanged for 630,182 shares of Common
Stock. In March 1996, the Board of Directors authorized the removal of the
designation of Senior Preferred Stock.
F-10
<PAGE> 106
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) Junior Preferred Stock:
The Company designated 108,378 shares of the authorized 2,000,000 shares of
preferred stock as Junior Preferred Stock with a par value of $.0001 and
liquidation value of $100 per share. The fair market value at issuance of the
Junior Preferred Stock was $3,000.
Concurrent with the initial public offering in March 1994, all outstanding
shares of Junior Preferred Stock were exchanged for 1,245,352 shares of Common
Stock. In March 1996, the Board of Directors authorized the removal of the
designation of Junior Preferred Stock.
(c) Common Stock:
In January 1994, the Board of Directors approved an increase in the number
of authorized shares to 20,000,000 and a one-for-one thousand reverse stock
split of the Common Stock. These items were approved by the Company's
shareholders in March 1994. In March 1996, the Board of Directors approved a
three-for-two stock split of the Common Stock to be effective on April 15, 1996
to all stockholders of record on April 1, 1996. All references to common share
information in the accompanying consolidated financial statements and notes
reflect recognition of these stock splits.
In March 1994, the Company completed an initial public offering of
4,500,000 common shares with net proceeds of $41,674. Concurrent with the
initial public offering, remaining subordinated debt, and related accrued
interest, and all preferred stock with a combined carrying value of $39,771 were
exchanged for 4,607,144 shares of Common Stock.
In May 1995, the Company completed a second public offering of 5,422,500
common shares. The Company sold 3,615,000 common shares and 1,807,500 common
shares were sold by selling stockholders. Net proceeds to the Company from this
offering were $46,807.
(d) Stock Option Plan:
In February 1994, the Company's stockholders approved the 1994 Stock Option
Plan ("Company Plan") which provides for the granting of stock options, stock
appreciation rights or restricted stock with respect to shares of Common Stock
to executives and other key employees. Stock options may be granted in the form
of incentive stock options or non-statutory stock options and are exercisable
for up to ten years following the date of grant. Stock option exercise prices
must be equal to or greater than the fair market value of the Common Stock on
the grant date. In June 1995, the Company's stockholders approved an amendment
to the Company Plan to increase the number of shares available for issuance
under the plan for each of the next five fiscal years by 2.0% of the number of
shares of Common Stock issued and outstanding as of the end of the immediately
preceding fiscal year.
In February 1994, the Company's stockholders approved the Directors 1994
Stock Option Plan ("Directors Plan") that provides for the granting of stock
options to directors with respect to shares of Common Stock. Stock option
exercise prices must be equal to the fair market value of the Common Stock on
the grant date. In June 1995, the Company's stockholders approved an amendment
to the Directors Plan to increase the number of shares available for issuance
under the plan for each of the next five fiscal years by 0.1% of the number of
shares of Common Stock issued and outstanding as of the end of the immediately
preceding fiscal year.
F-11
<PAGE> 107
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information regarding the stock option plans follows:
<TABLE>
<CAPTION>
COMPANY PLAN DIRECTORS PLAN
------------------------- -------------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Outstanding at January 29, 1994.... -- -- -- --
Granted............................ 563,409 $8.83-$10.33 4,500 $10.33
Cancelled.......................... (14,964) $8.83-$10.33 -- --
-------- ---------- -------- ----------
Outstanding at January 28, 1995.... 548,445 $10.33 4,500 $10.33
Granted............................ 155,505 $12.33-$18.33 6,000 $12.33
Exercised.......................... (5,833) $10.33 -- --
Cancelled.......................... (7,680) $10.33-$12.33 -- --
-------- ---------- -------- ----------
Outstanding at February 3, 1996.... 690,437 $10.33-$18.33 10,500 $10.33-$12.33
======== ========
---------- ----------
Exercisable at February 3, 1996.... 336,392 $10.33 10,500 $10.33-$12.33
-------- ---------- -------- ----------
Available for grant at February 3,
1996............................. 765,831 39,736
-------- --------
</TABLE>
In March 1996, options for 324,930 shares were granted under the Company
Plan which vest in March 1999 and are exercisable at $23.17 per share, and
options for 3,000 shares were granted under the Directors Plan that were
immediately exercisable at $23.17 per share.
6. INCOME TAXES
The provision for income taxes (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................. 36 $ 2,172 $ 1,146
State................................... 15 420 284
--- ------ --------
51 2,592 1,430
--- ------ --------
Deferred:
Federal................................. -- (520) (10,813)
State................................... -- (103) (402)
--- ------ --------
-- (623) (11,215)
--- ------ --------
Income taxes (benefit).................... $51 $ 1,969 $ (9,785)
=== ====== ========
</TABLE>
F-12
<PAGE> 108
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of income taxes at the federal statutory rate of 34% with
the provision for income taxes (benefit) follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at federal statutory rate.... $-- $ 2,286 $ (500)
Restructured debt carrying value
adjustment.............................. -- (55) --
State taxes, net federal tax benefit...... 15 277 (78)
Change in valuation allowance............. -- (153) (9,427)
Other..................................... 36 (386) 220
--- ------ -------
$51 $ 1,969 $(9,785)
=== ====== =======
</TABLE>
The sources of significant temporary differences which gave rise to the
deferred tax provision and their effects follow:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Inventory............................................. $(290) $ (240)
Deferred rent......................................... (255) (245)
Depreciation.......................................... 115 580
Accrued fringes....................................... (75) (105)
Intangibles........................................... 255 245
Store closing costs................................... (210) (955)
Fixed assets.......................................... -- (1,410)
Benefit of net operating loss carryforwards........... -- 1,863
Other................................................. (10) (204)
Change in valuation allowance......................... (153) (9,427)
Prior year adjustments................................ -- (1,317)
----- --------
$(623) $ (11,215)
===== ========
</TABLE>
F-13
<PAGE> 109
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets follow:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Inventory............................................. $ 1,250 $ 1,490
Deferred rent......................................... 1,240 1,485
Depreciation.......................................... 670 90
Accrued fringes....................................... 635 740
Intangibles........................................... 620 375
Store closing costs................................... 540 1,495
Fixed assets.......................................... -- 1,410
Net operating loss carryforwards...................... 4,900 3,037
Other................................................. 195 399
------- -------
Total deferred tax assets............................. 10,050 10,521
Valuation allowance................................... (9,427) --
------- -------
Net deferred tax assets............................... $ 623 $10,521
======= =======
</TABLE>
Following the resolution of the Internal Revenue Service examination of
certain of the Company's federal income tax returns during the year ended
February 3, 1996, the valuation allowance was reduced by $9,427 and income taxes
provided in prior years adjusted. The Company believes that it is more likely
than not that the benefit of net deferred tax assets will be realized on future
tax returns.
At February 3, 1996, the Company has available net operating loss
carryforwards of $8,500 for federal income tax purposes, which begin expiring in
2004, and $1,800 for California income tax purposes, which begin expiring in
1996.
7. RELATED PARTY TRANSACTIONS
The Company recognized interest expense on subordinated debt obligations to
stockholders in the amounts of $4,243 and $683 during fiscal years 1993 and
1994, respectively.
The Company had a guaranteed management fee agreement through March 1994.
In accordance with the terms of this agreement, two stockholders received
payments in cash and Senior Preferred Stock resulting in the recognition of $240
and $40 of expense during fiscal years 1993 and 1994, respectively.
8. EMPLOYEE BENEFIT PLAN
Effective January 1, 1992, the Company established a savings plan under
Section 401(k) of the Internal Revenue Code. Employees who have attained age 21
and completed one year of service are eligible to participate. Eligible
employees may contribute from 1% to 15% of the annual compensation subject to
limitations. Effective January 1, 1996, the Company adopted a matching provision
for 25% of the first 4% of compensation that is contributed by all participating
employees. Previously, there was no matching provision.
9. COMMITMENTS AND CONTINGENCIES
Because of the nature of its activities, the Company is subject to legal
actions which arise out of the normal course of business. In the opinion of
management, based in part upon the advice of outside counsel, the
F-14
<PAGE> 110
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ultimate disposition of these matters will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
10. SUBSEQUENT EVENTS
In May 1996, the Company completed a public offering of 5,335,000 common
shares. The Company sold 2,892,758 common shares and 2,442,242 common shares
were sold by selling stockholders. Net proceeds to the Company from this
offering were $78,633.
In October, 1996, the Company entered into a definitive agreement to merge
with Pet Food Warehouse, Inc. in exchange for approximately 1.9 million shares
of the Company's common stock. The transaction is subject to certain closing
conditions, including a majority vote by Pet Food Warehouse, Inc. shareholders
and customary regulatory approvals. Pet Food Warehouse, Inc. operates 28 pet
food and supply stores in the Upper Midwest area with locations in Minnesota,
Wisconsin, North Dakota, South Dakota and Iowa.
F-15
<PAGE> 111
PET FOOD WAREHOUSE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants.............................................. F-17
Balance Sheets as of January 28, 1995, February 3, 1996 and August 3, 1996
(unaudited)......................................................................... F-18
Statements of Operations for the years ended January 28, 1995 and February 3, 1996 and
the twenty-six weeks ended July 29, 1995 (unaudited) and August 3, 1996
(unaudited)......................................................................... F-19
Statements of Changes in Stockholders' Equity for the years ended January 28, 1995 and
February 3, 1996 and the twenty-six weeks ended August 3, 1996 (unaudited).......... F-20
Statements of Cash Flows for the years ended January 28, 1995 and February 3, 1996 and
the twenty-six weeks ended July 29, 1995 (unaudited) and August 3, 1996
(unaudited)......................................................................... F-21
Notes to Financial Statements......................................................... F-22
</TABLE>
F-16
<PAGE> 112
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pet Food Warehouse, Inc.:
We have audited the accompanying balance sheets of Pet Food Warehouse, Inc.
(a Minnesota corporation) as of January 28, 1995 and February 3, 1996 and the
related statements of operations, changes in stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pet Food Warehouse, Inc. as
of January 28, 1995 and February 3, 1996 and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 15, 1996
F-17
<PAGE> 113
PET FOOD WAREHOUSE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 3,
JANUARY 28, FEBRUARY 3, 1996
1995 1996 (UNAUDITED)
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 9,462 $ 5,103 $ 5,399
Accounts receivable, less allowances of $68, $145 and
$141................................................ 784 664 789
Inventories, net....................................... 5,421 6,319 6,922
Current maturities of notes receivable................. 282 145 93
Prepaid expenses and other............................. 433 572 923
------- ------- -------
Total current assets........................... 16,382 12,803 14,126
PROPERTY AND EQUIPMENT, net.............................. 8,606 8,468 8,492
------- ------- -------
OTHER ASSETS:
Notes receivable....................................... 365 96 68
Other.................................................. 73 76 137
------- ------- -------
Total other assets............................. 438 172 205
------- ------- -------
$25,426 $ 21,443 $22,823
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 1,119 $ 1,114 $ 1,431
Current maturities of capital lease obligations........ 86 149 154
Accrued liabilities--
Payroll and related expenses........................ 457 664 814
Sales taxes......................................... 289 345 379
Other............................................... 533 987 1,151
------- ------- -------
Total current liabilities...................... 2,484 3,259 3,929
CAPITAL LEASE OBLIGATIONS, less current maturities....... 294 349 270
DEFERRED RENT CREDITS AND OTHER.......................... 962 1,200 1,279
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 3, 7 and 11)
STOCKHOLDERS' EQUITY:
Undesignated stock, $0.01 par value; 5,000 shares
authorized; none issued and outstanding............. -- -- --
Common stock, $0.01 par value; 11,429 shares
authorized; 9,328, 9,342 and 9,394 issued and
outstanding, respectively........................... 93 93 94
Additional paid-in capital............................. 25,537 25,579 25,682
Accumulated deficit.................................... (3,944) (9,037) (8,431)
------- ------- -------
Total stockholders' equity..................... 21,686 16,635 17,345
------- ------- -------
$25,426 $ 21,443 $22,823
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE> 114
PET FOOD WAREHOUSE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE TWENTY-SIX WEEKS
FOR THE YEARS ENDED ENDED
--------------------------- ---------------------------
JANUARY 28, FEBRUARY 3, JULY 29, AUGUST 3,
1995 1996 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES.................................... $36,285 $61,095 $26,767 $31,903
COST OF SALES................................ 28,052 46,747 20,971 23,630
------- -------
GROSS PROFIT................................. 8,233 14,348 5,796 8,273
------- -------
OPERATING EXPENSES:
Store operating expenses................... 7,271 11,659 5,511 5,896
Preopening expenses........................ 1,053 789 401 241
General and administrative................. 2,673 3,884 1,923 1,641
------- -------
Total operating expenses........... 10,997 16,332 7,835 7,778
------- -------
Income (loss) from operations...... (2,764) (1,984) (2,039) 495
LOSS ON DISPOSAL OF STORES (Note 3).......... -- (3,500) -- --
INTEREST INCOME, net......................... 570 391 239 111
------- -------
Income (loss) before income
taxes............................ (2,194) (5,093) (1,800) 606
INCOME TAXES (Note 8)........................ -- -- -- --
------- -------
Net income (loss).................. $(2,194) $(5,093) $(1,800) $ 606
======= =======
NET INCOME (LOSS) PER SHARE.................. $ (0.24) $ (0.55) $ (0.19) $ 0.06
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING... 9,001 9,330 9,328 9,422
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 115
PET FOOD WAREHOUSE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER OF ADDITIONAL
SHARES PAID-IN ACCUMULATED
ISSUED AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, January 29, 1994............. 4,866 $ 49 $ 7,195 $(1,750) $ 5,494
Common stock issued upon:
Public offering, net of offering
costs of $1,699................ 3,469 34 16,478 -- 16,512
Exercise of warrants............. 965 10 1,747 -- 1,757
Exercise of stock options........ 21 -- 89 -- 89
Employee stock purchase plan..... 7 -- 28 -- 28
Net loss............................ -- -- -- (2,194) (2,194)
----- --- ------- ------- -------
BALANCE, January 28, 1995............. 9,328 93 25,537 (3,944) 21,686
Common stock issued for employee
stock purchase plan.............. 14 -- 42 -- 42
Net loss............................ -- -- -- (5,093) (5,093)
----- --- ------- ------- -------
BALANCE, February 3, 1996............. 9,342 93 25,579 (9,037) 16,635
Exercise of stock options........... 40 1 69 -- 70
Common stock issued for employee
stock purchase plan.............. 12 -- 34 -- 34
Net income.......................... -- -- -- 606 606
----- --- ------- ------- -------
BALANCE, August 3, 1996 (unaudited)... 9,394 $ 94 $ 25,682 $(8,431) $17,345
===== === ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 116
PET FOOD WAREHOUSE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX
FOR THE YEARS ENDED WEEKS ENDED
------------------------- -----------------------
JANUARY 28, FEBRUARY 3, JULY 29, AUGUST 3,
1995 1996 1995 1996
----------- ----------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................. $(2,194) $(5,093) $(1,800) $ 606
Adjustments to reconcile net income (loss) to
net cash (used for) provided by operating
activities, net of disposal of stores
Depreciation and amortization.............. 728 1,262 610 628
Loss on disposal of stores (Note 3)........ -- 3,500 -- --
Loss on sale of property and equipment..... -- 35 -- 13
Change in operating assets and liabilities:
Accounts receivable...................... (504) 120 200 (125)
Inventories.............................. (2,945) (3,187) (1,178) (603)
Prepaid expenses and other............... 12 (155) (175) (422)
Accounts payable......................... (20) (5) (12) 317
Accrued liabilities...................... 738 603 862 348
Deferred rent credits and other.......... 661 287 111 79
------- ------- ------- ------
Net cash (used for) provided by
operating activities................ (3,524) (2,633) (1,382) 841
------- ------- ------- ------
INVESTING ACTIVITIES:
Payments (advances) to related and other
parties.................................... (478) 331 29 79
Proceeds from disposal of stores (Note 3)..... -- 2,426 -- --
Purchase of property and equipment, net....... (6,607) (4,643) (1,862) (654)
------- ------- ------- ------
Net cash used for investing
activities.......................... (7,085) (1,886) (1,833) (575)
------- ------- ------- ------
FINANCING ACTIVITIES:
Net proceeds from sale of stock............... 16,629 42 -- 34
Net proceeds from exercise of stock options... -- -- -- 70
Net proceeds from exercise of warrants........ 1,757 -- -- --
Additional borrowings......................... 110 218 -- --
Payments of obligations....................... (121) (100) (54) (74)
------- ------- ------- ------
Net cash provided by (used for)
financing activities................ 18,375 160 (54) 30
------- ------- ------- ------
Net change in cash and cash
equivalents......................... 7,766 (4,359) (3,269) 296
CASH AND CASH EQUIVALENTS, beginning of year.... 1,696 9,462 9,462 5,103
------- ------- ------- ------
CASH AND CASH EQUIVALENTS, end of year.......... $ 9,462 $ 5,103 $ 6,193 $5,399
======= ======= ======= ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for--
Taxes...................................... $ -- $ -- $ -- $ --
Interest................................... 40 36 22 39
======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 117
PET FOOD WAREHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 3, 1996 AND JANUARY 28, 1995
(INFORMATION AS OF AND FOR THE TWENTY-SIX WEEKS ENDED
AUGUST 3, 1996 AND JULY 29, 1995 IS UNAUDITED)
1. NATURE OF BUSINESS AND BACKGROUND:
Pet Food Warehouse, Inc. (the Company) is an operator of warehouse
superstores specializing in pet food, supplies and services in the Upper
Midwest. At January 28, 1995, February 3, 1996 and August 3, 1996, the Company
operated 21, 22 and 25 stores, respectively. The Company opened ten stores and
closed nine stores (see Note 3) during the year ended February 3, 1996. The
Company's eight warehouse superstores in the Minneapolis/Saint Paul metropolitan
area generated 52% of the Company's sales for the year ended February 3, 1996.
The Company has a 52-/53-week fiscal year which ends on the Saturday closest to
January 31. The year ended February 3, 1996 consisted of 53 weeks.
In February 1994, the Company completed a public offering of 3,468,670
shares of common stock, including the underwriters' overallotment and the
exercise of warrants for 964,556 shares of common stock, whereby the Company
received net proceeds of approximately $18.3 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
original maturities of three months or less and are recorded at lower of cost or
market. At January 28, 1995, February 3, 1996 and August 3, 1996, certain
marketable securities, consisting of a money market fund, government securities
fund and commercial paper carried at market value, were recorded as cash
equivalents in the accompanying balance sheets.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method and includes certain purchasing and
merchandise handling costs.
Property and Equipment
Property and equipment, including assets under capital leases, are stated
at cost. Expenditures for maintenance and repairs are charged to expense as
incurred, whereas expenditures for renewals and betterments are capitalized.
Depreciation, which includes the amortization of assets under capital leases, is
computed using the straight-line method over estimated useful lives of 5 to 15
years. Leasehold improvements are amortized over estimated useful lives of the
improvement or lease term, whichever is shorter. Construction in process
consists of direct costs of land, leaseholds and equipment which will be placed
in service as new stores open.
Deferred Rent Credits and Other
Rent expense is reflected on a straight-line basis over the terms of
leases. Deferred rent credits, including rent concessions payable, are deferred
and recognized over the terms of the leases and are reflected in the
accompanying balance sheets.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to nondeductible operating expenses recorded for financial
reporting purposes, net operating loss amounts which may be used to offset
future taxable income, and differences between the bases of equipment for
financial and income tax reporting. The
F-22
<PAGE> 118
PET FOOD WAREHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
deferred taxes represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Store Preopening Costs
Store preopening costs, including certain payroll, advertising and
supplies, are charged to expense at the time each new warehouse superstore
opens.
Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock and dilutive common stock equivalents resulting
from the assumed exercise of stock options and warrants using the treasury stock
method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Ultimate results could differ from those
estimates.
Recently Issued Accounting Standards
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement 121), issued in March 1995, and effective for fiscal years beginning
after December 15, 1995, requires recognition of impairment losses on long-lived
assets and certain intangible assets to be disposed of. As of February 3, 1996
and August 3, 1996, there were no impairment losses, as defined, of the Company
and, accordingly, Statement 121 is not expected to have a material impact on the
Company when it is adopted.
3. DISPOSITION OF STORES:
In November 1995, the Company exited the Michigan/Ohio market. Accordingly,
the Company sold certain assets of its eight retail locations in Michigan and
Ohio (the MI/OH stores) for $2,426,000 in cash to SuperPetz, Inc. pursuant to an
Asset Purchase Agreement and Addendum (the Agreements). The Agreements provided
for the purchase of certain assets used in the operation of the MI/OH stores and
the assumption of certain liabilities. The decision to exit the Michigan/Ohio
market resulted in a loss on the sale of these stores of $3,500,000
(approximately $0.38 per share) in the fourth quarter of the year ended February
3, 1996. The loss includes estimates for, among other things, rent concessions
and the loss on disposal of inventory and property and equipment. Pursuant to
the Agreements, if SuperPetz, Inc. defaults under the sublease arrangements, the
Company is contingently liable for amounts owing under the lease agreements. Had
the sale of the MI/OH stores occurred at the beginning of the years ended
February 3, 1996 and January 28, 1995 and the twenty-six weeks ended July 29,
1995, the selected unaudited pro forma results would have been as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3, JULY 29,
1995 1996 1995
----------- ----------- --------
<S> <C> <C> <C>
Revenues................................... $33,160 $52,960 $ 22,322
Operating loss............................. (1,152) (47) (707)
Net income (loss).......................... (532) 419 (423)
Net income (loss) per common share......... $ (0.06) $ 0.05 $ (0.04)
</TABLE>
F-23
<PAGE> 119
PET FOOD WAREHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3, AUGUST 3,
1995 1996 1996
----------- ----------- ---------
<S> <C> <C> <C>
Store equipment................................ $ 4,548 $ 5,110 $ 5,922
Data processing equipment...................... 1,710 1,988 2,114
Leasehold improvements......................... 3,025 2,052 2,439
------- ------- -------
9,283 9,150 10,475
Less-Accumulated depreciation and
amortization................................. (1,163) (1,819) (2,434)
------- ------- -------
8,120 7,331 8,041
Construction in process........................ 486 1,137 451
------- ------- -------
$ 8,606 $ 8,468 $ 8,492
======= ======= =======
</TABLE>
Assets included in property and equipment which are subject to capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3, AUGUST 3,
1995 1996 1996
----------- ----------- ---------
<S> <C> <C> <C>
Cost........................................... $ 389 $ 642 $ 642
Less-Accumulated amortization.................. (83) (139) (220)
----- ----- -----
$ 306 $ 503 $ 422
===== ===== =====
</TABLE>
5. NOTES PAYABLE:
The Company has a revolving credit facility (the Facility) from a bank in
an amount equal to the lesser of the Company's borrowing base, as defined, or
$2,000,000. Interest on outstanding balances is payable at the bank's reference
rate, plus 1%. The Facility, which is collateralized by the Company's
inventories, accounts receivable and certain marketable securities, expires May
31, 1996. There were no borrowings under the Facility in 1996 and 1995. The
Facility expired May 31, 1996. Effective May 31, 1996, the Company obtained a
new three-year credit facility, which provides for a line equal to the lesser of
the Company's borrowing base, as defined, or $10,000,000. The credit facility
will accrue interest on the outstanding balance at an index rate (30-day
high-grade unsecured commercial paper) plus 3.0% and is collateralized by the
Company's inventories, receivables, investments and general intangibles. The
Company will pay a facility fee of 0.375% per annum. The facility fee will not
be applicable on the committed amount in excess of $5,000,000 until outstanding
borrowings exceed $5,000,000 for the first time and thereafter, such fee will
not be applicable on the committed amount in excess of $7,500,000 until
outstanding borrowings exceed $7,500,000 for the first time. There were no
amounts outstanding against this credit facility at August 3, 1996.
F-24
<PAGE> 120
PET FOOD WAREHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL LEASE OBLIGATIONS:
Capital lease obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3, AUGUST 3,
1995 1996 1996
----------- ----------- ---------
<S> <C> <C> <C>
Capital leases, payable in monthly installments
including imputed interest at 5.0% to 11.0%,
through 1999................................. $ 467 $ 561 $ 470
Less-Imputed interest.......................... (87) (63) (46)
----- ----- -----
380 498 424
Less-Current maturities........................ (86) (149) (154)
----- ----- -----
$ 294 $ 349 $ 270
===== ===== =====
</TABLE>
The capital leases are collateralized by certain equipment. Aggregate
future maturities, less imputed interest, of the capital leases consist of the
following as of February 3, 1996 (in thousands):
<TABLE>
<S> <C>
1997.................................................................. $149
1998.................................................................. 161
1999.................................................................. 163
2000.................................................................. 25
----
$498
====
</TABLE>
7. OPERATING LEASE COMMITMENTS:
The Company leases all its retail store locations, office facilities and
certain office equipment under operating leases expiring through January 2011.
The operating leases require base monthly rents plus executory costs (such as
real estate taxes, insurance and maintenance). Certain retail store location
leases provide for additional contingent rentals based upon a percentage of
sales at each respective location. The Company has not incurred any material
contingent rentals to date. Rent expense (including executory costs) under the
operating leases was approximately $2,761,000 for the year ended January 28,
1995, $5,108,000 for the year ended February 3, 1996, $2,487,000 for the
twenty-six weeks ended July 29, 1995 and $2,507,000 for the twenty-six weeks
ended August 3, 1996.
Future minimum lease payments for operating leases, excluding executory
costs, consist of the following as of February 3, 1996 (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 3,590
1998............................................................... 3,766
1999............................................................... 3,723
2000............................................................... 3,726
2001............................................................... 3,684
Thereafter......................................................... 26,346
-------
$44,835
=======
</TABLE>
Certain operating leases provide for renewal options for periods from 2 to
15 years at their fair rental value at the time of renewal. It is expected that
in the normal course of business, operating leases will generally be renewed or
replaced by other leases.
8. INCOME TAXES:
At February 3, 1996, the Company had federal net operating loss
carryforwards of approximately $9,065,000 expiring in 2008 through 2011. The
utilization of a portion of these net operating loss carryforwards may be
subject to Internal Revenue Code Section 382.
F-25
<PAGE> 121
PET FOOD WAREHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences giving rise to the deferred items
are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1996 1996
----------- -----------
<S> <C> <C>
Depreciation............................................ $ 176 $ 665
Other................................................... -- 9
------- -------
Total deferred liabilities.................... 176 674
------- -------
Payroll and related expenses accrual.................... 52 108
Rent accrual............................................ 59 234
Net operating loss carryforward......................... 1,608 3,627
Bad debt reserve........................................ 27 37
Other................................................... 92 341
------- -------
Total deferred assets......................... 1,838 4,347
------- -------
Valuation allowance..................................... (1,662) (3,673)
------- -------
Net deferred liability.................................. $ -- $ --
======= =======
</TABLE>
The Company has established a valuation allowance for the value of the loss
carryforwards and other deferred tax assets since there is no assurance that
they will be realized.
9. STOCK OPTIONS AND WARRANTS:
The Company has an employee stock purchase plan (the Stock Purchase Plan)
intended to qualify under Section 423 of the Internal Revenue Code of 1986. The
Stock Purchase Plan allows employees working more than 20 hours per week to
purchase common stock of the Company, at 85% of the stock's price, as defined,
in amounts ranging from 1% to 10% of the employee's compensation, subject to
certain limitations. During fiscal year ended February 3, 1996, 13,738 shares of
common stock were purchased under this plan.
The Company has two employee stock option plans: the 1993 Stock Option Plan
(the 1993 Plan) and the Nonqualified Stock Option Agreement (the Nonqualified
Plan). At February 3, 1996, the number of common shares issuable under these
plans is 1,228,572 and 85,714, respectively. The 1993 Plan provides for
incentive and nonqualified stock options that become exercisable over various
periods at their fair market values as of the grant date, and expire five or six
years after the date of grant. The Nonqualified Plan options vest over a
three-year period beginning on the first grant date anniversary and expire in
February 1999.
F-26
<PAGE> 122
PET FOOD WAREHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Information with respect to stock options is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------- OPTION
NONQUALIFIED PRICE PER
1993 PLAN PLAN SHARE
--------- ------------ -----------
<S> <C> <C> <C>
Balance, January 29, 1994.............................. 278,576 85,714 $1.75-$9.19
Granted.............................................. 254,885 -- 4.00-5.88
Exercised............................................ (21,428) -- 4.16
Forfeited............................................ (22,220) -- 5.01-7.06
------- ------ -----------
Balance, January 28, 1995.............................. 489,813 85,714 1.75-9.19
Granted.............................................. 767,492 -- 3.25-5.38
Forfeited............................................ (295,541) -- 3.63-5.92
------- ------ -----------
Balance, February 3, 1996.............................. 961,764 85,714 $1.75-$9.19
======= ====== ===========
Options exercisable at February 3, 1996................ 300,610 85,714 $1.75-$9.19
======= ====== ===========
Shares available for future grants at February 3,
1996................................................. 266,808 --
======= ======
</TABLE>
In 1995, the board of directors and shareholders increased the number of
shares available for issuance under the 1993 Plan by 575,000 shares.
In connection with the Company's public offering, completed in February
1994, the Company received net proceeds of $1,757,000 from the exercise of
964,556 warrants with exercise prices ranging from $1.75 to $2.10 per share. In
addition, the Company sold to the underwriters, for nominal consideration,
warrants to purchase 100,000 shares of the common stock at $5.78 per share in
connection with the public offering. These warrants are exercisable for a period
of four years after February 16, 1995.
10. NOTES RECEIVABLE:
Notes receivable from related and other parties are as follows (in
thousands):
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3, AUGUST 3,
1995 1996 1996
----------- ----------- ---------
<S> <C> <C> <C>
Former officer, interest at 7 1/2%, collateralized by interest
in option agreement, due February 1, 1997.................... $ 105 $ 105 $ 50
Stockholder, interest at 6%, partially collateralized by common
stock of the Company, due April 5, 1998...................... 52 55 56
Stockholder, interest at 6%, unsecured, due July 8, 1998....... 17 18 18
Other parties, interest at 8%, unsecured, periodic payments to
December 1, 1997 and February 1, 1998........................ 473 113 87
----- -----
647 291 211
Less -- Reserve for uncollectible notes........................ -- (50) (50)
Less -- Current maturities..................................... (282) (145) (93)
----- -----
$ 365 $ 96 $ 68
===== =====
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is not a party to any legal proceedings other than various
claims and lawsuits arising in the normal course of business. Management
believes that the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
F-27
<PAGE> 123
PET FOOD WAREHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Employment Agreements
For the year ended February 3, 1996, general and administrative expenses
included approximately $395,000 in separation expenses associated with the
resignation of two officers of the Company. All amounts owing pursuant to the
employment agreements between the Company and the two officers have been
reflected in accrued payroll and related expenses in the accompanying balance
sheet.
The Company currently has an employment agreement with the Company's new
president. As of February 3, 1996, the total future minimum commitment under
this agreement is approximately $140,000.
Business Considerations
The Company opened ten warehouse superstores during the year and plans to
continue to open a significant number of new stores. The success of the
Company's future expansion depends upon various factors, including the
availability of additional financing.
The Company receives products at its warehouse superstores from a number of
distributors and manufacturers. During the year ended February 3, 1996, the
Company purchased approximately 69% of its merchandise from five suppliers. The
Company believes its vendor relationships are satisfactory and has established
alternative supply relationships with other vendors which may be used if a
vendor discontinued selling to the Company.
The pet food and supply industry is highly competitive. The Company
competes with a variety of supermarkets, warehouse clubs and mass merchandisers.
The Company also faces competition from smaller pet store chains, independent
pet supply stores, veterinarians, and other regional medium-size pet food and
supply stores. In addition, a national pet supply superstore chain has recently
announced plans to open several locations in the Minneapolis/Saint Paul
metropolitan area in 1996.
F-28
<PAGE> 124
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PETCO ANIMAL SUPPLIES, INC.,
PASI ACQUISITION CORP.
AND
PET FOOD WAREHOUSE, INC.
DATED AS OF OCTOBER 3, 1996
<PAGE> 125
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I. THE MERGER........................................................... A-1
SECTION 1.01. The Merger............................................ A-1
SECTION 1.02. Closing............................................... A-1
SECTION 1.03. Effective Time........................................ A-1
SECTION 1.04. Effect of the Merger.................................. A-1
SECTION 1.05. Articles of Incorporation and By-Laws................. A-2
SECTION 1.06. Directors and Officers................................ A-2
SECTION 1.07. Effect on Capital Stock............................... A-2
SECTION 1.08. Exchange of Certificates.............................. A-4
SECTION 1.09. Stock Transfer Books.................................. A-5
SECTION 1.10. No Further Ownership Rights in Company Common Stock... A-5
SECTION 1.11. Lost, Stolen or Destroyed Certificates................ A-6
SECTION 1.12. Tax and Accounting Consequences....................... A-6
SECTION 1.13. Taking of Necessary Action; Further Action............ A-6
SECTION 1.14. Material Adverse Effect............................... A-6
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ A-6
SECTION 2.01. Organization.......................................... A-6
SECTION 2.02. Capitalization........................................ A-7
SECTION 2.03. Subsidiaries.......................................... A-7
SECTION 2.04. Authorization......................................... A-7
SECTION 2.05. Commission Filings.................................... A-7
SECTION 2.06. No Conflict or Violation.............................. A-8
SECTION 2.07. Compliance with Law................................... A-8
SECTION 2.08. Consents and Approvals................................ A-8
SECTION 2.09. Absence of Certain Changes or Events.................. A-8
SECTION 2.10. Title to Assets, Etc. ................................ A-10
SECTION 2.11. Condition of Tangible Assets.......................... A-10
SECTION 2.12. Contracts and Commitments............................. A-11
SECTION 2.13. Suppliers............................................. A-11
SECTION 2.14. Financial Statements.................................. A-11
SECTION 2.15. Litigation............................................ A-11
SECTION 2.16. Labor Matters......................................... A-12
SECTION 2.17. Liabilities........................................... A-12
SECTION 2.18. Transactions with Certain Persons..................... A-12
SECTION 2.19. Severance Arrangements................................ A-12
SECTION 2.20. Insurance............................................. A-12
SECTION 2.21. Payments.............................................. A-12
SECTION 2.22. No Other Agreements to Sell the Assets or the
Company............................................. A-13
SECTION 2.23. Proprietary Rights.................................... A-13
SECTION 2.24. Benefit Plans......................................... A-13
SECTION 2.25. Tax Matters........................................... A-14
SECTION 2.26. Compliance With Environmental Laws.................... A-15
SECTION 2.27. No Brokers............................................ A-15
SECTION 2.28. Pooling Matters....................................... A-16
SECTION 2.29. Material Misstatements Or Omissions................... A-16
SECTION 2.30. Definition of Company Knowledge....................... A-16
</TABLE>
i
<PAGE> 126
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.............. A-16
SECTION 3.01. Organization.......................................... A-16
SECTION 3.02. Capitalization........................................ A-16
SECTION 3.03. Authorization......................................... A-17
SECTION 3.04. No Conflict or Violation.............................. A-17
SECTION 3.05. Compliance with Law................................... A-17
SECTION 3.06. Consents and Approvals................................ A-17
SECTION 3.07. Litigation............................................ A-17
SECTION 3.08. Labor Matters......................................... A-18
SECTION 3.09. Payments.............................................. A-18
SECTION 3.10. No Brokers............................................ A-18
SECTION 3.11. Ownership of Merger Sub; No Prior Activities.......... A-18
SECTION 3.12. Parent Common Stock................................... A-18
SECTION 3.13. Commission Filings.................................... A-19
SECTION 3.14. Transaction with Certain Persons...................... A-19
SECTION 3.15. Tax Matters........................................... A-19
ARTICLE IV. CONDUCT OF BUSINESS PENDING THE MERGER............................... A-19
SECTION 4.01. No Solicitation....................................... A-19
SECTION 4.02. Notification of Certain Matters....................... A-20
SECTION 4.03. Access to Information and Facilities.................. A-20
SECTION 4.04. Conduct of Business of the Company Pending the
Merger.............................................. A-20
SECTION 4.05. Conduct of Business of Parent Pending the Merger...... A-21
ARTICLE V. ADDITIONAL AGREEMENTS................................................ A-22
SECTION 5.01. Proxy Statement/Prospectus; Registration Statement.... A-22
SECTION 5.02. Stockholders Meeting.................................. A-22
SECTION 5.03. Agreements with Respect to Affiliates................. A-23
SECTION 5.04. Further Action/Tax Treatment.......................... A-23
SECTION 5.05. Listing of Parent Shares.............................. A-23
SECTION 5.06. Conveyance Taxes...................................... A-23
SECTION 5.07. Pooling Accounting Treatment.......................... A-23
SECTION 5.08. Directors' and Officers' Indemnification.............. A-24
SECTION 5.09. Continuation of Indemnification....................... A-24
SECTION 5.10. Expectation Date...................................... A-24
ARTICLE VI. CONDITIONS TO THE COMPANY'S OBLIGATIONS.............................. A-24
SECTION 6.01. Effectiveness of the Registration Statement........... A-24
SECTION 6.02. Stockholder Approval.................................. A-25
SECTION 6.03. Listing............................................... A-25
SECTION 6.04. HSR Act............................................... A-25
SECTION 6.05. Representations, Warranties and Covenants............. A-25
SECTION 6.06. Consents.............................................. A-25
SECTION 6.07. No Proceedings, Litigation or Laws.................... A-25
SECTION 6.08. Certificates.......................................... A-25
SECTION 6.09. Opinion of Counsel.................................... A-25
SECTION 6.10. Report of Accountant.................................. A-25
SECTION 6.12. Fairness Opinion...................................... A-25
SECTION 6.13. Comfort Letter........................................ A-26
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE VII. CONDITIONS TO PARENT'S AND MERGER SUB'S OBLIGATIONS.................. A-26
SECTION 7.01. Effectiveness of the Registration Statement........... A-26
SECTION 7.02. Stockholder Approval.................................. A-26
SECTION 7.03. Listing............................................... A-26
SECTION 7.04. HSR Act............................................... A-26
SECTION 7.05. Representations, Warranties and Covenants............. A-26
SECTION 7.06. Consents.............................................. A-26
SECTION 7.07. No Proceedings, Litigation or Laws.................... A-26
SECTION 7.08. Certificates.......................................... A-26
SECTION 7.09. Opinion of Counsel.................................... A-27
SECTION 7.10. Pooling Letter of Accountant.......................... A-27
SECTION 7.11. Affiliate Agreements.................................. A-27
SECTION 7.12. Covenants Not to Compete/Employment Matters........... A-27
SECTION 7.13. Material Changes...................................... A-27
SECTION 7.14. Due Diligence Review.................................. A-27
SECTION 7.15. Dissenters' Rights.................................... A-27
SECTION 7.16. Fairness Opinion...................................... A-27
SECTION 7.17. Comfort Letter........................................ A-27
ARTICLE VIII. TERMINATION.......................................................... A-27
SECTION 8.01. Termination........................................... A-27
SECTION 8.02. Effect of Termination................................. A-28
SECTION 8.03. Fees and Expenses..................................... A-28
ARTICLE IX. GENERAL PROVISIONS................................................... A-29
SECTION 9.01. Effectiveness of Representations, Warranties and
Agreements.......................................... A-29
SECTION 9.02. Assignment............................................ A-30
SECTION 9.03. Notices............................................... A-30
SECTION 9.04. Choice of Law......................................... A-31
SECTION 9.05. Entire Agreement; Amendments and Waivers.............. A-31
SECTION 9.06. Multiple Counterparts................................. A-31
SECTION 9.07. Invalidity............................................ A-31
SECTION 9.08. Titles................................................ A-31
SECTION 9.09. Public Statements and Press Releases.................. A-31
SECTION 9.10. Confidential Information.............................. A-31
SECTION 9.11. Cumulative Remedies................................... A-32
SECTION 9.12. Consent to Jurisdiction............................... A-32
SECTION 9.13. Arbitration........................................... A-32
SECTION 9.14. Attorneys' Fees....................................... A-32
EXHIBIT A -- OPINION OF LATHAM & WATKINS
EXHIBIT B -- OPINION OF FREDRIKSON & BYRON
EXHIBIT C -- COVENANT NOT TO COMPETE
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of October 3, 1996 (the
"Agreement"), by and among PETCO ANIMAL SUPPLIES, INC., a Delaware corporation
("Parent"), PASI ACQUISITION CORP., a Minnesota corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and PET FOOD WAREHOUSE, INC., a Minnesota
corporation (the "Company").
WITNESSETH:
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
each determined that it is advisable and in the best interests of their
respective stockholders for Parent to enter into a business combination with the
Company upon the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance of such combination, the Boards of Directors of
Parent, Merger Sub and the Company have each approved the merger (the "Merger")
of Merger Sub with and into the Company in accordance with the applicable
provisions of the Minnesota Business Corporation Act (the "MBCA") and upon the
terms and subject to the conditions set forth herein;
WHEREAS, execution of this Agreement, and the acquisition of all of the
outstanding shares of the Company, has been approved by a committee of the
disinterested directors of the Company for the purposes of MBCA 302A.673;
WHEREAS, Parent, Merger Sub and the Company intend, by approving
resolutions authorizing this Agreement, to adopt this Agreement as a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and the regulations promulgated thereunder;
and
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:
ARTICLE I.
THE MERGER
SECTION 1.01. The Merger. Subject to the terms and conditions of this
Agreement and the MBCA, at the Effective Time (as defined in Section 1.03
hereof), Merger Sub shall be merged with and into the Company, the separate
corporate existence of Merger Sub shall cease, and the Company shall continue as
the surviving corporation. The Company will then be merged into Parent in a
merger qualifying under Section 368(a)(1)(A) of the Code. The Company as the
surviving corporation after the Merger is hereinafter referred to as the
"Surviving Corporation."
SECTION 1.02. Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at the
offices of Latham & Watkins, 701 "B" Street, Suite 2100, San Diego, California,
as soon as practicable following the satisfaction or waiver of all conditions
set forth in Articles VI and VII hereof, but in no event later than January 31,
1997 (the "Closing Date").
SECTION 1.03. Effective Time. If all of the conditions to the Merger set
forth in Articles VI and VII shall have been satisfied or waived in accordance
herewith and this Agreement shall not have been terminated pursuant to Section
8.01, the parties hereto shall cause the Merger to be consummated by filing
articles of merger as contemplated by the MBCA (the "Articles of Merger"),
together with any required related certificates, with the Secretary of State of
Minnesota in such form as required by, and executed in accordance with the
relevant provisions of, the MBCA on the Closing Date (the time of such filing
being the "Effective Time").
SECTION 1.04. Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement, the Articles of Merger and
the applicable provisions of the MBCA. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all of the property,
rights,
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privileges, powers and franchises of the Company and Merger Sub shall vest in
the Surviving Corporation, and all of the debts, liabilities and duties of the
Company and Merger Sub shall become the debts, liabilities and duties of the
Surviving Corporation.
SECTION 1.05. Articles of Incorporation and By-Laws. Unless otherwise
determined by Parent prior to the Effective Time, at the Effective Time the
Articles of Incorporation of the Company, as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended as provided by the MBCA and such Articles
of Incorporation, and the By-Laws of the Company, as in effect immediately prior
to the Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by the MBCA, the Articles of Incorporation of the
Surviving Corporation and such By-Laws.
SECTION 1.06. Directors and Officers. The directors of Merger Sub
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and By-Laws of the Surviving Corporation, and the officers of
Merger Sub immediately prior to the Effective Time shall be the initial officers
of the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.
SECTION 1.07. Effect on Capital Stock. At the Effective Time, by virtue
of the Merger and without any action on the part of the Parent, Merger Sub, the
Company or the holders of any of the following securities:
(a) Conversion of Securities. Each share (a "Share") of common stock, $.01
par value, of the Company ("Company Common Stock") issued and outstanding
immediately prior to the Effective Time (excluding any Shares to be canceled
pursuant to Section 1.07(b) hereof) shall be converted, subject to Section
1.07(e), into the right to receive that fraction of a validly issued, fully paid
and nonassessable share ("Parent Share") of Parent common stock, $.0001 par
value ("Parent Common Stock"), equal to (i) 0.2173913 Parent Shares if the
average of the closing prices for Parent Common Stock quoted on The Nasdaq
National Market as published by Nasdaq with respect to the ten (10) trading days
immediately preceding the Closing Date (the "Parent Stock Price") is less than
or equal to $23.00, (ii) the quotient of (A) $5.00 divided by (B) the Parent
Stock Price of the Parent if the Parent Stock Price is greater than $23.00 and
less than $25.00 or (iii) 0.2 Parent Shares if the Parent Stock Price is greater
than or equal to $25.00 subject to adjustment for any split, combination or
reclassification of any Parent Common Stock or the authorization of any issuance
of any other securities in respect of, in lieu of or in substitution for shares
of Parent Common Stock.
(b) Cancellation. Each Share owned by Parent, Merger Sub or any direct or
indirect wholly owned subsidiary of the Company or Parent immediately prior to
the Effective Time shall, by virtue of the Merger and without any action on the
part of the holder thereof, cease to be outstanding, be canceled and retired
without payment of any consideration therefor and cease to exist.
(c) Assumption of Stock Options.
(i) At the Effective Time, each outstanding option to purchase Company
Common Stock (a "Stock Option") granted under the 1993 Stock Option Plan
and the Non-Qualified Stock Option Agreement (the "Company Stock Option
Plans"), whether vested or unvested, shall be deemed assumed by Parent and
deemed to constitute an option to acquire, on the same terms and conditions
as were applicable under such Stock Option prior to the Effective Time, the
number (rounded to the nearest whole number) of Parent Shares as the holder
of such Stock Option would have been entitled to receive pursuant to the
Merger had such holder exercised such option in full immediately prior to
the Effective Time (not taking into account whether or not such option was
in fact exercisable), at a price per Parent Share equal to (x) the
aggregate exercise price for Company Common Stock otherwise purchasable
pursuant to such Stock Option divided by (y) the number of Parent Shares
deemed purchasable pursuant to such Stock Option.
(ii) As soon as practicable after the Effective Time, Parent shall
deliver to each holder of an outstanding Stock Option an appropriate notice
setting forth such holder's rights pursuant thereto, and
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such Stock Option shall continue in effect on the same terms and conditions
(including antidilution provisions); provided, however, that Parent shall
have no obligation under the Company Stock Option Plan to purchase any
Stock Option upon a Change in Control (as such term is defined in the
aforesaid plan) occurring as a result of or in connection with the Merger.
(iii) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of Parent Shares for delivery pursuant to the
terms set forth in this Section 1.07(c).
(iv) Subject to any applicable limitations under the Securities Act of
1933, as amended (the "Securities Act"), Parent shall file a Registration
Statement on Form S-8 (or any successor form), effective as soon as
practicable following the Effective Time, with respect to the shares of
Parent Common Stock issuable upon exercise of the Stock Options, and shall
use all reasonable efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus
or prospectuses contained therein) for so long as such options shall remain
outstanding.
(d) Assumption of Warrants.
(i) At the Effective Time, each outstanding Common Stock Purchase
Warrant to purchase Company Common Stock (a "Warrant") which is set forth
on the Company Disclosure Schedule, whether exercisable or unexercisable,
shall be deemed assumed by Parent and deemed to constitute a warrant to
acquire, on the same terms and conditions as were applicable under such
Warrant prior to the Effective Time, the number (rounded to the nearest
whole number) of Parent Shares as the holder of such Warrant would have
been entitled to receive pursuant to the Merger had such holder exercised
such Warrant in full immediately prior to the Effective Time (not taking
into account whether or not such Warrant was in fact exercisable), at a
price per Parent Share equal to (x) the aggregate exercise price for
Company Common Stock otherwise purchasable pursuant to such Warrant divided
by (y) the number of Parent Shares deemed purchasable pursuant to such
Warrant.
(ii) As soon as practicable after the Effective Time, Parent shall
deliver to each holder of an outstanding Warrant an appropriate notice
setting forth such holder's rights pursuant thereto, and such Warrant shall
continue in effect on the same terms and conditions (including antidilution
provisions); provided, however, that Parent shall have no obligation under
the Warrant to purchase any Warrant upon a change in control occurring as a
result of or in connection with the Merger.
(iii) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of Parent Shares for delivery pursuant to the
terms set forth in this Section 1.07(d).
(e) Stock Purchase Plan.
(i) In the event the Closing Date is before December 31, 1996, the
Company shall terminate the Company's 1994 Employee Stock Purchase Plan
(the "Plan") as of the Closing Date. To the extent of the accumulated
payroll deductions made as of the Closing Date all outstanding Purchase
Options granted thereunder shall be deemed exercised in full on the Closing
Date and shall be deemed to constitute a right to receive on the Closing
Date, the number (rounded to the nearest whole number) of Parent Shares as
the holder of such Purchase Option would have been entitled to receive
pursuant to the Merger had such holder exercised such option in full
immediately prior to the Effective Time as adjusted pursuant to Section
1.07.
(ii) In the event that the Closing Date is after December 31, 1996,
the Company shall continue the Plan only with respect to completion of the
current Phase ending on December 31, 1996, and the exercise of Purchase
Options thereunder. Participants in the Plan shall convert shares of
Company Common Stock received upon exercise of Purchase Options under terms
of the Plan pursuant to the terms set forth in this Section 1.07.
(f) Capital Stock of Merger Sub. Each share of common stock, $.01 par
value, of Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged for one validly issued, fully paid
and nonassessable share of common stock, $.01 par value, of the Surviving
Corporation.
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(g) Fractional Shares. No certificates or scrip representing less than one
Parent Share shall be issued upon the surrender for exchange of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Shares of Company Common Stock (the "Certificates"). In lieu of any
such fractional share, each holder of Shares who would otherwise have been
entitled to a fraction of a Parent Share upon surrender of Certificates for
exchange shall be paid upon such surrender cash (without interest) in an amount
equal to such holder's proportionate interest in the proceeds from the sale or
sales in the open market by the Exchange Agent (as hereinafter defined), on
behalf of all such holders, of the aggregate fractional Parent Shares issued
pursuant to this Section 1.07(g). As soon as practicable following the Effective
Time, the Exchange Agent shall determine the excess of (i) the number of full
Parent Shares delivered to the Exchange Agent by Parent over (ii) the aggregate
number of full Parent Shares to be distributed to holders of Company Common
Stock (such excess being herein called the "Excess Shares"), and the Exchange
Agent, as agent for the former holders of Company Common Stock, shall sell the
Excess Shares at the prevailing prices on The Nasdaq National Market. Parent
shall pay all commissions, transfer taxes and other out-of-pocket transaction
costs, including the expenses and compensation of the Exchange Agent, incurred
in connection with such sale of Excess Shares. Until the proceeds of such sale
have been distributed to the former stockholders of the Company, the Exchange
Agent will hold such proceeds in trust for such former stockholders. As soon as
practicable after the determination of the amount of cash to be paid to former
stockholders of the Company in lieu of any fractional interests, the Exchange
Agent shall make available in accordance with this Agreement such amounts to
such former stockholders.
(h) Dissenting Shares.
(i) Notwithstanding any provision of this Agreement to the contrary,
shares of Company Common Stock that are outstanding immediately prior to
the Effective Time and which are held by shareholders who shall have not
voted in favor of the Merger or consented thereto in writing and who shall
have exercised dissenters' rights for such Company Common Stock in
accordance with Section 302A.473 of the MBCA and who, as of the Effective
Time, have not effectively withdrawn or lost such dissenters' rights
(collectively, the "Dissenting Shares"), shall not be converted into or
represent the right to receive the Parent Shares, but the holder thereof
shall only be entitled to such rights as are granted by the MBCA. All
Dissenting Shares held by shareholders who shall have failed to perfect or
who effectively shall have withdrawn or lost their dissenters' rights shall
thereupon be deemed to have been converted into and to have become
exchangeable for, as of the later of the Effective Time or the occurrence
of such event, the right to receive the Parent Shares, without any interest
thereon, upon surrender, in the manner provided in Section 1.07(a) of the
certificate or certificates that formerly evidenced such Company Common
Stock.
(ii) The Company shall give Parent (1) prompt notice of any demands
for fair value of Company Common Stock received by the Company, withdrawals
of such demands, and any other instruments served pursuant to the MBCA and
received by the Company and (2) the opportunity to direct all negotiations
and proceedings with respect to demands for fair value under the MBCA. The
Company shall not, except with the prior written consent to Parent, make
any payment with respect to any demands for the fair value of Shares or
offer to settle or settle any such demands other than by operation of law
or pursuant to a final order of a court of competent jurisdiction.
SECTION 1.08. Exchange of Certificates.
(a) Exchange Agent. Parent shall supply, or shall cause to be supplied, to
or for the account of American Stock Transfer & Trust Company, or such other
bank or trust company as shall be mutually designated by the Company and Parent
(the "Exchange Agent"), in trust for the benefit of the holders of Company
Common Stock for exchange in accordance with this Section 1.08 through the
Exchange Agent, certificates evidencing the Parent Shares issuable pursuant to
Section 1.07 hereof in exchange for outstanding Shares.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Parent will cause the Exchange Agent to mail to each holder of
record of Certificates (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon
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proper delivery of the Certificates to the Exchange Agent and shall be in such
form and have such other provisions as customary), and (ii) instructions to
effect the surrender of the Certificates in exchange for the certificates
evidencing Parent Shares. Upon surrender of a Certificate for cancellation to
the Exchange Agent together with such letter of transmittal, duly executed, and
such other customary documents as may be required pursuant to such instructions,
the holder of such Certificate shall be entitled to receive in exchange therefor
(A) certificates evidencing that number of whole Parent Shares which such holder
has the right to receive in accordance with Section 1.07(a) hereof in respect of
the Shares formerly evidenced by such Certificate, (B) any dividends or other
distributions to which such holder is entitled pursuant to Section 1.08(c), and
(C) cash in respect of fractional shares as provided in Section 1.07(g) (the
Parent Shares, dividends, distributions and cash being, collectively, the
"Merger Consideration"), and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of Shares which is not
registered in the transfer records of the Company as of the Effective Time,
Parent Shares, dividends and distributions may be issued and paid in accordance
with this Article I to a transferee if the Certificate evidencing such Shares is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer pursuant to this Section 1.08(b) and by
evidence that any applicable stock transfer taxes have been paid. Until so
surrendered, each outstanding Certificate that, prior to the Effective Time,
represented Shares of the Company Common Stock will be deemed from and after the
Effective Time, for all corporate purposes, other than the payment of dividends
and subject to Section 1.07(g), to evidence the ownership of the number of full
Parent Shares into which such shares of the Company Common Stock shall have been
so converted.
(c) Distributions With Respect to Unexchanged Parent Shares. No dividends
or other distributions declared or made after the Effective Time with respect to
Parent Shares with a record date after the Closing Date shall be paid to the
holder of any unsurrendered Certificate with respect to the Parent Shares they
are entitled to receive until the holder of such Certificate shall surrender
such Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole Parent Shares issued in exchange therefor, without interest,
at the time of such surrender, the amount of dividends or other distributions
with a record date after the Closing Date theretofore paid with respect to such
whole Parent Shares.
(d) Transfers of Ownership. If any certificate for Parent Shares is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it will be a condition of the issuance thereof
that the Certificate so surrendered will be properly endorsed and otherwise in
proper form for transfer and that the person requesting such exchange will have
paid to Parent or any agent designated by it any transfer or other taxes
required by reason of the issuance of a certificate for Parent Shares in any
name other than that of the registered holder of the certificate surrendered, or
established to the satisfaction of Parent or any agent designated by it that
such tax has been paid or is not payable.
(e) No Liability. Neither Parent, Merger Sub nor the Company shall be
liable to any holder of Company Common Stock for any Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
(f) Withholding Rights. Parent or the Exchange Agent shall be entitled to
deduct and withhold from the Merger Consideration otherwise payable pursuant to
this Agreement to any holder of Company Common Stock such amounts as Parent or
the Exchange Agent is required to deduct and withhold with respect to the making
of such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by Parent or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the Shares in respect of which such deduction
and withholding was made by Parent or the Exchange Agent.
SECTION 1.09. Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed, and there shall be no further
registration of transfers of the Company Common Stock thereafter on the records
of the Company.
SECTION 1.10. No Further Ownership Rights in Company Common Stock. The
Merger Consideration delivered upon surrender for exchange of Shares in
accordance with the terms hereof shall be deemed to have
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been issued in full satisfaction of all rights pertaining to such Shares, and
there shall be no further registration of transfers on the records of the
Surviving Corporation of Shares which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
SECTION 1.11. Lost, Stolen or Destroyed Certificates. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such Parent Shares as
may be required pursuant to Section 1.07 hereof; provided, however, that Parent
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificates to deliver a
bond in such sum as it may reasonably direct as indemnity against any claim that
may be made against Parent or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
SECTION 1.12. Tax and Accounting Consequences. It is intended by the
parties hereto that the Merger shall (i) constitute a reorganization within the
meaning of Section 368 of the Code and (ii) qualify for accounting treatment as
a pooling of interests. The parties hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
SECTION 1.13. Taking of Necessary Action; Further Action. Each of Parent,
Merger Sub and the Company will take all such reasonable and lawful action as
may be necessary or appropriate in order to effectuate the Merger in accordance
with this Agreement as promptly as possible. If, at any time after the Effective
Time, any such further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, power
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub immediately prior to the Effective Time are fully
authorized in the name of their respective corporations or otherwise to take,
and will take, all such lawful and necessary action.
SECTION 1.14. Material Adverse Effect. When used in connection with the
Company or any of its subsidiaries or Parent or any of its subsidiaries, as the
case may be, the term "Material Adverse Effect" means any change, effect or
circumstance that, individually or when taken together with all other such
changes, effects or circumstances that have occurred prior to the date of
determination of the occurrence of the Material Adverse Effect and subsequent to
the date of this Agreement, is or is reasonably likely to be materially adverse
to the business, assets (including intangible assets), financial condition or
results of operations of the Company and its subsidiaries or Parent and its
subsidiaries, as the case may be, in each case taken as a whole; provided,
however, changes relating to the pet supply industry in general shall not be
considered a Material Adverse Effect).
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub that,
except as set forth in the written disclosure schedule previously delivered (or,
to the extent set forth below, to be delivered) by the Company to Parent (the
"Company Disclosure Schedule"):
SECTION 2.01. Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Minnesota.
The Company is duly qualified to do business as a corporation and is in good
standing in each jurisdiction where the character of its properties owned or
leased or the nature of its activities make such qualification necessary, except
where the failure to be so qualified or in good standing would not have a
Material Adverse Effect on the business or financial condition of the Company.
Copies of the Articles of Incorporation and By-Laws of the Company, and all
amendments thereto, heretofore delivered to Parent are accurate and complete as
of the date hereof. The Company Disclosure Schedule contains a true, correct and
complete list of all jurisdictions in which the Company is qualified to do
business as a foreign corporation.
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SECTION 2.02. Capitalization. The authorized capital stock of the Company
consists of 11,428,571 shares of Common Stock, $.01 par value, of which
9,439,324 are issued and outstanding as of the date hereof, and 5,000,000 shares
are undesignated as to class or series, of which no shares are issued and
outstanding as of the date hereof. Except as set forth on the Company Disclosure
Schedule, there are no outstanding contracts, options, warrants, convertible
securities, or other rights to subscribe for, to purchase, or contracts or other
obligations to issue or grant any rights to acquire, any equity securities of
the Company or any of its subsidiaries, or to restructure or recapitalize the
Company or any of its subsidiaries. Except as set forth on the Company
Disclosure Schedule, there are no outstanding contracts of the Company or any
subsidiary of the Company to repurchase, redeem or otherwise acquire any equity
securities of the Company or any such subsidiary. All outstanding equity
securities of the Company and each subsidiary are duly authorized, validly
issued, fully paid and nonassessable and were issued in conformity with
applicable laws. Except as set forth on the Company Disclosure Schedule, as of
the Closing Date, no options, warrants, convertible securities or rights or
contracts will be exercisable or exchangeable for, convertible into, or
otherwise give its holder any right to acquire shares of capital stock of the
Company.
SECTION 2.03. Subsidiaries. The Company Disclosure Schedule sets forth a
complete and accurate list of all of the Company's subsidiaries, all of which
are, directly or indirectly, wholly-owned by the Company. All references herein
to the Company, unless the context indicates otherwise, shall be deemed to mean
the Company and its subsidiaries. The Company Disclosure Schedule also contains
the jurisdiction of incorporation of each of the subsidiaries, each jurisdiction
in which such subsidiary is qualified to do business and the number of shares of
such subsidiary outstanding. The outstanding shares of such subsidiaries have
been duly and validly authorized and issued, are fully paid and nonassessable
and were issued in conformity with applicable laws, and the outstanding shares
owned by the Company are owned free and clear of any encumbrances. There are no
subscriptions, options, warrants, calls, commitments or other rights of any kind
outstanding for the purchase of, nor any securities convertible or exchangeable
for, any securities of any of the subsidiaries. Each of the subsidiaries is a
corporation duly organized, validly existing and in good standing under the
jurisdiction of its incorporation, with corporate power to own its properties
and conduct its business as now being conducted and is duly qualified and in
good standing to transact business in each jurisdiction (listed on the Company
Disclosure Schedule) where, by virtue of its business carried on or properties
owned, it is required to be so qualified and where the failure to be so
qualified would have a Material Adverse Effect on the business or financial
condition of the Company.
SECTION 2.04. Authorization. The Company has all requisite power and
authority, and has taken all corporate action necessary (other than with respect
to the approval and adoption of this Agreement by the stockholders of the
Company in accordance with applicable state law and the Company's Articles of
Incorporation and By-Laws), to execute and deliver this Agreement, to consummate
the transactions contemplated hereby and to perform its obligations hereunder.
The execution and delivery of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby have been duly approved
by a committee of disinterested directors as required by Section 302A.673 of the
MBCA and the Board of Directors of the Company. No other proceedings, corporate
or otherwise, on the part of the Company are necessary to authorize this
Agreement and the transactions contemplated hereby (other than with respect to
the approval and adoption of this Agreement by the stockholders of the Company
in accordance with applicable state law and the Company's Articles of
Incorporation and By-Laws). This Agreement has been duly executed and delivered
by the Company and is a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
SECTION 2.05. Commission Filings. The Company has filed all reports,
registration statements and other filings, together with any amendments required
to be made with respect thereto, that it has been required to file with the
Securities and Exchange Commission (the "Commission") under the Securities Act
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
reports, registration statements and other filings filed by the Company,
together with any amendments thereto, are referred to in this Agreement as the
"Company Commission Filings." As of the respective times such documents were
filed or, as applicable, became effective, the Company Commission Filings
complied as to form and content, in all material respects, with the requirements
of the Securities Act and the Exchange Act, as the case may be, and the rules
and
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regulations promulgated thereunder, and did not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
SECTION 2.06. No Conflict or Violation. To the best of the Company's
knowledge, neither the execution, delivery or performance of this Agreement nor
the consummation of the transactions contemplated hereby, nor compliance by the
Company with any of the provisions hereof, will result in (a) a violation of or
a conflict with any provision of the Articles of Incorporation or By-Laws of the
Company, (b) a breach of, or a default under, any term or provision of any
contract, agreement, indebtedness, lease, encumbrance, commitment, license,
franchise, permit, authorization or concession to which the Company is a party
or by which the Company's assets are bound, which breach or default would have a
Material Adverse Effect on the business or financial condition of the Company or
its ability to consummate the transactions contemplated hereby, (c) a violation
by the Company of any statute, rule, regulation, ordinance, code, order,
judgment, ruling, writ, injunction, decree or award, which violation would have
a Material Adverse Effect on the business or financial condition of the Company
or its ability to consummate the transactions contemplated hereby, or (d) an
imposition of any material encumbrance, restriction or charge on the business of
the Company or on any of the Company's assets.
SECTION 2.07. Compliance with Law. To the best of the Company's
knowledge, the Company and the conduct of its business have not violated and are
in compliance with all laws, statutes, ordinances, regulations, rules and orders
of any foreign, federal, state or local government and any other governmental
department or agency, and any judgment, decision, decree or order of any court
or governmental agency, department or authority, including without limitation
Environmental Laws (as defined in Section 2.26 hereof), relating to the business
or operations of the Company, except where the violation or failure to comply,
individually or in the aggregate, would not have a Material Adverse Effect on
the business or financial condition of the Company. To the best of the Company's
knowledge, the Company and the conduct of its business are in conformity with
all energy, public utility, zoning, building and health codes, regulations and
ordinances, OSHA and Environmental Laws and all other foreign, federal, state,
and local governmental and regulatory requirements, except where any
nonconformity would not have a Material Adverse Effect on the business or
financial condition of the Company. The Company has received no notice to the
effect that, or otherwise been advised that, the Company is not in compliance
with any such statutes, regulations, rules, judgments, decrees, orders,
ordinances or other laws, and the Company has no reason to anticipate that any
existing circumstances are likely to result in violations of any of the
foregoing which failure or violation could, in any one case or in the aggregate,
have a Material Adverse Effect on the business or financial condition of the
Company.
SECTION 2.08. Consents and Approvals. No consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority, or any other person or entity, is required to be made
or obtained by the Company in connection with the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby, other than (a) compliance with any applicable requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and the expiration or early termination of the applicable waiting
period thereunder, (b) in connection with or in compliance with the provisions
of the Securities Act and the Exchange Act, (c) compliance with the rules and
regulations of the National Association of Securities Dealers, Inc. (the
"NASD"), (d) compliance with the securities laws of various states and (e) any
other filings and approvals expressly contemplated by this Agreement.
SECTION 2.09. Absence of Certain Changes or Events. Except as set forth
on the Company Disclosure Schedule or as disclosed in the Company Commission
Filings, since the most recent financial statements dated September 13, 1996
included in the Company Commission Filings, there has not been any:
(a) material change in the Company's condition (financial or otherwise),
assets, liabilities, working capital, reserves, earnings, business or prospects,
except for changes contemplated hereby or changes which have not, individually
or in the aggregate, have a Material Adverse Effect on the Company.
(b) (i) except for normal periodic increases in the ordinary course of
business consistent with past practice, increase in the compensation payable or
to become payable by the Company to any of its officers,
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employees or agents (collectively, "Personnel") whose total compensation for
services rendered to the Company is currently at an annual rate of more than
$30,000, (ii) any bonus, incentive compensation, service award or other like
benefit granted, made or accrued, contingently or otherwise, for or to the
credit of any of the Personnel, (iii) any employee welfare, pension, retirement,
profit-sharing or similar payment or arrangement made or agreed to by the
Company for any Personnel except pursuant to the existing plans and arrangements
described in the Company Disclosure Schedule or (iv) any new employment
agreement to which the Company is a party;
(c) addition to or modification of the employee benefit plans, arrangements
or practices described in the Company Disclosure Schedule affecting Personnel
other than contributions made for 1996 in accordance with the normal practices
of the Company;
(d) sale, assignment or transfer of any of the assets of the Company,
material singly or in the aggregate, other than in the ordinary course;
(e) cancellation of any indebtedness or waiver of any rights of substantial
value to the Company, whether or not in the ordinary course of business;
(f) material amendment, cancellation or termination of any contract,
license or other instrument material to the Company;
(g) capital expenditure or the execution of any lease or any incurring of
liability therefor by the Company, involving payments in excess of $50,000 in
the aggregate;
(h) failure to repay any material obligation of the Company, except in the
ordinary course of business or where such failure would not have a Material
Adverse Effect on the business or financial condition of the Company;
(i) failure to operate the business of the Company in the ordinary course
so as to use reasonable efforts to preserve the business intact, to keep
available to Parent the services of the Personnel, and to preserve for Parent
the goodwill of the Company's suppliers, customers and others having business
relations with it except where such failure would not have a Material Adverse
Effect on the business or financial condition of the Company;
(j) change in accounting methods or practices by the Company affecting its
assets, liabilities or business;
(k) revaluation by the Company of any of its assets, including without
limitation, writing off notes or accounts receivable;
(l) damage, destruction or loss (whether or not covered by insurance) which
damage, destruction or loss has a Material Adverse Effect on the properties,
business or prospects of the Company;
(m) mortgage, pledge or other encumbrance of any assets of the Company,
material singly or in the aggregate, except purchase money mortgages arising in
the ordinary course of business;
(n) declaration, setting aside or payment of dividends or distributions in
respect of any capital stock of the Company or any redemption, purchase or other
acquisition of any of the Company's equity securities;
(o) issuance by the Company of, or commitment of the Company to issue, any
shares of stock or other equity securities or obligations or securities
convertible into or exchangeable for shares of stock or other equity securities;
(p) indebtedness incurred by the Company for borrowed money or any
commitment to borrow money entered into by the Company, or any loans made or
agreed to be made by the Company;
(q) liabilities involving $50,000 or more except in the ordinary course of
business and consistent with past practice, or increase or change in any
assumptions underlying or methods of calculating any bad debt, contingency or
other reserves;
(r) payment, discharge or satisfaction of any liabilities other than the
payment, discharge or satisfaction (i) in the ordinary course of business and
consistent with past practice of liabilities reflected or reserved
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against in the Company's most recent balance sheet heretofore delivered to
Parent or incurred in the ordinary course of business and consistent with past
practice since the date of such balance sheet and (ii) of other liabilities
involving $50,000 or less in the aggregate;
(s) agreement by the Company to do any of the foregoing; or
(t) other event or condition of any character which in any one case or in
the aggregate will have a Material Adverse Effect, or any event or condition
known to the Company (other than matters of general public knowledge relating to
general economic conditions or the Company's industry as a whole) which it is
reasonable to expect will, in any one case or in the aggregate, will have a
Material Adverse Effect in the future, the condition (financial or otherwise),
assets, liabilities, working capital, reserves, earnings, business or prospects
of the Company.
SECTION 2.10. Title to Assets, Etc. The Company has good and marketable
title to the assets (the "Assets") reflected on its audited balance sheet
disclosed in the Company Commission Filings, or acquired thereafter (except for
properties or assets sold or otherwise disposed of in the ordinary course of
business since the date of such balance sheet) which includes each asset the
absence or unavailability of which would have a Material Adverse Effect, subject
only to (a) statutory Liens arising or incurred in the ordinary course of
business with respect to which the underlying obligations are not delinquent,
(b) with respect to personal property, the rights of customers of the Company
with respect to inventory or work progress under orders or contracts entered
into by the Company in the ordinary course of business, (c) Liens reflected on
the Company's audited financial statements disclosed in the Company Commission
Filings, (d) Liens for taxes not yet delinquent and (e) defects in title that
would not have a Material Adverse Effect. The term "Lien" as used in this
Agreement means any mortgage, pledge, security interest, encumbrance, lien,
claim or change of any kind. The Company has in all material respects performed
all the obligations required to be performed by it with respect to all Assets
leased by it through the date hereof, except where the failure to perform would
not have a Material Adverse Effect on the business or financial condition of the
Company. To the best of the Company's knowledge, the Company enjoys peaceful and
undisturbed possession of all offices, manufacturing facilities, stores,
warehouses, improvements, administrative buildings and real property and related
facilities owned, leased or operated by the Company, if any, (collectively,
"Facilities"), and to the best of the Company's knowledge such Facilities are
not subject to any encumbrances, encroachments, building or use restrictions,
exceptions, reservations or limitations which in any material respect interfere
with or impair the present and continued use thereof in the usual and normal
conduct of the business of the Company. There are no pending or, to the best of
the Company's knowledge, threatened condemnation proceedings relating to any of
the Company's Facilities. The real property improvements (including leasehold
improvements), equipment and other tangible assets owned or used by the Company
at its Facilities are insured and to the best of the Company's knowledge are
structurally sound with no known material defects. To the best of the Company's
knowledge, none of said improvements, equipment and other assets is subject to
any commitment or other arrangement for their sale or use by any affiliate of
the Company or third parties. The Company has not depreciated any of the Assets
in any other manner inconsistent with applicable Internal Revenue Service
guidelines, if any.
SECTION 2.11. Condition of Tangible Assets. To the best of the Company's
knowledge, the Company's Facilities and fixtures and equipment are in good
operating condition and repair (except for ordinary wear and tear and any defect
the cost of repairing which would not be material), are sufficient for the
operation of the Company's business as presently conducted and are in conformity
in all material respects with all applicable laws, ordinances, orders,
regulations and other requirements (including applicable zoning, environmental,
motor vehicle safety or standards, occupational safety and health laws and
regulations) relating thereto currently in effect, except where the failure to
conform would not have a Material Adverse Effect on the business or financial
condition of the Company.
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SECTION 2.12. Contracts and Commitments. Except as set forth on the
Company Disclosure Schedule, the Company is not a party to any written or oral:
(a) commitment, contract, note, loan, evidence of indebtedness, purchase
order or letter of credit involving any obligation or liability on the part of
the Company of more than $100,000 and not cancelable (without liability) within
thirty days;
(b) lease of real property (the Company Disclosure Schedule indicates with
respect to each lease listed on the Company Disclosure Schedule the term, annual
rent, renewal options and number of square feet leased);
(c) lease of personal property involving any annual expense in excess of
$100,000 and not cancelable (without liability) within thirty days (the Company
Disclosure Schedule indicates with respect to each lease listed on the Company
Disclosure Schedule a general description of the leased items, term, annual rent
and renewal options);
(d) contracts and commitments not otherwise described above or listed on
the Company Disclosure Schedule (including purchase orders, franchise agreements
and undertakings or commitments to any governmental or regulatory authority)
relating to the business of the Company and otherwise materially affecting the
Company's business under contracts not in the ordinary course of business;
(e) material governmental or regulatory licenses or permits required to
conduct the business of the Company as presently conducted;
(f) contracts or agreements containing covenants limiting the freedom of
the Company to engage in any line of business or compete with any person; or
(g) employment contracts, including without limitation, contracts to employ
executive officers and other contracts with officers or directors of the
Company.
The Company is not (and, to the best knowledge of the Company, no other
party is) in material breach or violation of, or default under any of the
contracts or other instruments, obligations, evidences of indebtedness or
commitments described in (a)-(g) above, the breach or violation of which would
have a Material Adverse Effect on the business or financial condition of the
Company.
SECTION 2.13. Suppliers. The Company Disclosure Schedule contains a
complete and accurate list of the twenty-five largest suppliers of the Company
in terms of purchases during the Company's last fiscal year, showing the
approximate total purchases by the Company from each such supplier during such
fiscal year. There has been no material adverse change in the business
relationship of the Company with any supplier named on the Company Disclosure
Schedule which has a Material Adverse Effect on the Company.
SECTION 2.14. Financial Statements. The Company has heretofore delivered
to Parent the Company's audited financial statements for the fiscal year ended
February 3, 1996. Such financial statements and all subsequent interim financial
statements provided by the Company to Parent (a) will be in accordance with the
books and records of the Company, (b) will have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods covered thereby and (c) will fairly and accurately present the results
of operations for the periods then ended subject only to the Company's normal
year-end adjustments with respect to any interim financial statements.
SECTION 2.15. Litigation. Except as set forth on the Company Disclosure
Schedule, there is no action, order, writ, injunction, judgment or decree
outstanding or any claim, suit, litigation, proceeding, labor dispute, arbitral
action, governmental audit or investigation (collectively, "Actions") pending
or, to the best of the Company's knowledge, threatened or anticipated against,
related to or affecting the Company, any officers or directors of the Company as
such, or any stockholder of the Company in such stockholder's capacity as a
stockholder of the Company, (a) seeking to delay, limit or enjoin the
transactions contemplated by this Agreement, (b) that involve the risk of
criminal liability, or (c) in which the Company is a plaintiff, including any
derivative suits brought by or on behalf of the Company. The Company is not in
default with respect to or
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subject to any judgment, order, writ, injunction or decree of any court or
governmental agency, and there are no unsatisfied judgments against the Company.
SECTION 2.16. Labor Matters. The Company is not a party to any labor
agreement with respect to its employees with any labor organization, union,
group or association and there are no employee unions (nor any other similar
labor or employee organizations) under local statutes, custom or practice. In
the last five years, the Company has not experienced any attempt by organized
labor or its representatives to make the Company conform to demands of organized
labor relating to its employees or to enter into a binding agreement with
organized labor that would cover the employees of the Company. There is no labor
strike or labor disturbance pending or, to the best of the Company's knowledge,
threatened against the Company nor is any grievance currently being asserted,
and in the past five years the Company has not experienced a work stoppage or
other labor difficulty. To the best of the Company's knowledge, the Company is
in compliance in all material respects with all applicable laws respecting
employment practices, employee documentation, terms and conditions of employment
and wages and hours and is not and has not engaged in any unfair labor practice.
There is no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any other domestic or
foreign governmental agency arising out of the Company's activities, and to the
best of the Company's knowledge, there are no facts or information which would
give rise thereto.
SECTION 2.17. Liabilities. To the best of the Company's knowledge, the
Company has no liabilities or obligations (absolute, accrued, contingent or
otherwise) except (a) liabilities which are reflected and reserved against on
the Company's most recent balance sheet heretofore delivered to Parent, (b)
liabilities incurred in the ordinary course of business and consistent with past
practice since the date of such balance sheet, and (c) liabilities arising under
contracts, letters of credit, purchase orders, licenses, permits, purchase
agreements and other agreements, business arrangements and commitments described
in the Company Disclosure Schedule or which are of the type described in Section
2.12 but which because of the dollar amount or other qualifications are not
required to be listed on the Company Disclosure Schedule.
SECTION 2.18. Transactions with Certain Persons. Except as set forth on
the Company Disclosure Schedule, no officer, director or employee of the Company
nor any member of any such person's immediate family is presently, or within the
past five years has been, a party to any transaction with the Company relating
to the Company's business, including without limitation, any contract, agreement
or other arrangement (a) providing for the furnishing of services by, (b)
providing for the rental of real or personal property from, or (c) otherwise
requiring payments to (other than for services as officers, directors or
employees of the Company) any such person or corporation, partnership, trust or
other entity in which any such person has an interest as a stockholder, officer,
director, trustee or partner.
SECTION 2.19. Severance Arrangements. The Company has not entered into
any severance or similar arrangement in respect of any present or former
Personnel that will result in any obligation (absolute or contingent) of Parent
or the Company to make any payment to any present or former Personnel following
termination of employment, except as set forth on the Company Disclosure
Schedule.
SECTION 2.20. Insurance. The Company has maintained policies of fire,
liability, title, worker's compensation, product liability on its business,
property or Personnel. Such insurance provides, and during such period provided,
coverage to the extent and in the manner required by law and by any and all
contracts to which the Company is a party. The Company is not in default under
any of such policies or binders, and the Company has not failed to give any
notice or to present any claim under any such policy or binder in a due and
timely fashion. No insurer has advised the Company that it intends to reduce
coverage, increase premiums or fail to renew any existing policy or binder.
There are no outstanding unresolved claims under any such policies or binders.
To the best of the Company's knowledge, all policies and binders provide
sufficient coverage for the risks insured against, are in full force and effect
on the date hereof and shall be kept in full force and effect through the
Closing Date.
SECTION 2.21. Payments. To the best of the Company's knowledge, the
Company has not, directly or indirectly, paid or delivered any fee, commission
or other sum of money or item or property, however characterized, to any finder,
agent, government official or other party, in the United States or any other
country, which is in any manner related to the business or operations of the
Company and which is, or may be
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with the passage of time or discovery, illegal under any federal, state or local
laws of the United States (including without limitation the U.S. Foreign Corrupt
Practices' Act) or any other country having jurisdiction; and the Company has
not participated, directly or indirectly, in any boycotts or other similar
practices affecting any of its actual or potential customers.
SECTION 2.22. No Other Agreements to Sell the Assets or the Company. To
the best of the Company's knowledge, neither the Company nor any of its
officers, directors or affiliates have any commitment or legal obligation,
absolute or contingent, to any other person or firm other than Parent to sell,
assign, transfer or effect a sale of any of the Company's assets (other than
inventory in the ordinary course of business), to consummate an Alternative
Transaction, to effect any merger, consolidation, liquidation, dissolution or
other reorganization of the Company, or to enter into any agreement or cause the
entering into of an agreement with respect to any of the foregoing.
SECTION 2.23. Proprietary Rights.
(a) Proprietary Rights. The Company Disclosure Schedule lists all of the
Company's federal, state and foreign registrations of trademarks and of other
marks, trade names or other trade rights, and all pending applications for any
such registrations and all of the Company's patents and copyrights and all
pending applications therefor, in which the Company has any interest whatsoever,
whether or not registered and that are used by or on behalf of the Company in
connection with its business (collectively, "Proprietary Rights"). The Company
has no patents, or pending patents. The Proprietary Rights listed on the Company
Disclosure Schedule are all those used by the Company in connection with its
business.
(b) Royalties and Licenses. To the best of the Company's knowledge, no
person has a right to receive a royalty or similar payment in respect of any
Proprietary Rights whether or not pursuant to any contractual arrangements
entered into by the Company. The Company has no licenses granted, sold or
otherwise transferred by or to it nor other agreements to which it is a party,
relating in whole or in part to any of the Proprietary Rights.
(c) Ownership and Protection of Proprietary Rights. To the best of the
Company's knowledge, the Company owns and has the sole right to use each of the
Proprietary Rights. Except as set forth on the Company Disclosure Schedule and
except for applications pending, all of the trademarks listed on the Company
Disclosure Schedule have been duly issued and except as set forth on the Company
Disclosure Schedule, all of the other Proprietary Rights exist, are registered
and are subsisting. To the best of the Company's knowledge, none of the
Proprietary Rights is involved in any pending or threatened litigation. The
Company has received no notice of invalidity or infringement of any rights of
others with respect to such trademarks. The Company has taken all reasonable and
prudent steps to protect the Proprietary Rights from infringement by any other
firm, corporation, association or person. To the best of the Company's
knowledge, no other firm, corporation, association or person (i) has the right
to use any such trademarks on the goods on which they are now being used in the
Company's market area either in identical form or in such near resemblance
thereto as to be likely, when applied to the goods of any such firm,
corporation, association or person, to cause confusion with the trademarks or to
cause a mistake or to deceive, (ii) has notified the Company that it is claiming
any ownership of or right to use such Proprietary Rights, or (iii) is infringing
upon any such Proprietary Rights in any way. To the best of the Company's
knowledge, the Company's use of the Proprietary Rights is not infringing upon or
otherwise violating the rights of any third party in or to such Proprietary
Rights, and no proceedings have been instituted against or notices received by
the Company that are presently outstanding alleging that the Company's use of
the Proprietary Rights infringes upon or otherwise violates any rights of a
third party in or to such Proprietary Rights. To the best of the Company's
knowledge, all of the Proprietary Rights are valid and enforceable rights of the
Company in the Company's market area and will not cease to be valid and in full
force and effect by reason of the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated by this
Agreement.
SECTION 2.24. Benefit Plans.
(a) With respect to each employee benefit plan ("Benefit Plan"), as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), maintained by the Company or
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any of its subsidiaries covering any employee of the Company or any of its
subsidiaries, the Company has made available to Parent, where applicable, a
true, correct and complete copy of (i) the most recent annual report (Form 5500)
filed with the Internal Revenue Service, (ii) such Benefit Plan, (iii) each
trust agreement and group annuity contract, if any, relating to such Benefit
Plan, and (iv) the most recent actuarial report or valuation relating to a
Benefit Plan subject to Title IV of ERISA. Set forth on the Company Disclosure
Schedule is a list of each such Benefit Plan.
(b) With respect to all Benefit Plans maintained or contributed to by the
Company or any of its subsidiaries, individually and in the aggregate, there
exists no material condition or set of circumstances in connection with which
the Company or any of its subsidiaries would be subject to any material
liability (except liability for benefits claims and funding obligations payable
in the ordinary course) under ERISA, the Code or any other applicable law.
(c) Except as set forth on the Company Disclosure Schedule, with respect to
all Benefit Plans maintained by the Company or any of its subsidiaries,
individually and in the aggregate, there are no material funded benefit
obligations for which contributions have not been made or properly accrued and
there are no material unfunded obligations which have not been accounted for by
reserves.
(d) All Benefit Plans maintained by the Company or any of its subsidiaries
have been operated in compliance in all material respects with the applicable
provisions of ERISA and the Code and all reports and returns required to be
filed thereunder have been duly and timely filed. To the best of the Company's
knowledge, no prohibited transactions within the meaning of Title I of ERISA or
Section 4975(c)(1) of the Code have occurred with respect to said plans. Except
as set forth on the Company Disclosure Schedule, neither the Company nor any of
its subsidiaries is a party or has contributed to any Multiemployer Plan as
defined in Section 3(37) of ERISA. Each of the Company and its subsidiaries has
complied in all material respects with the continuation of coverage and
notification requirements of the Consolidated Omnibus Budget Reconciliation Act
of 1985 and former Section 162(k) and Section 4980B of the Code and Sections 601
through 608 of ERISA.
SECTION 2.25. Tax Matters.
(a) Filing of Tax Returns. The Company (and any affiliated group of which
the Company is now or has been a member) has timely filed with the appropriate
taxing authorities all returns (including without limitation information returns
and other material information) in respect of taxes required to be filed through
the date hereof and will timely file any such returns required to be filed on or
prior to the Closing Date. To the best of the Company's knowledge, the returns
and other information filed are complete and accurate in all material respects.
Neither the Company, nor any group of which the Company is now or was a member,
has requested any extension of time within which to file returns (including
without limitation information returns) in respect of any taxes, which returns
have not been filed. The Company has delivered to Parent complete and accurate
copies of the Company's federal, state and local tax returns for the past three
years.
(b) Payment of Taxes. To the best of the Company's knowledge, all taxes in
respect of periods beginning before the Closing Date have been timely paid, or
will be timely paid, or an adequate reserve has been established therefor, as
set forth on the Company Disclosure Schedule or the Company's financial
statements heretofore delivered to Parent, and the Company does not have any
material liability for taxes in excess of the amounts so paid or reserves so
established.
(c) Audits, Investigations or Claims. To the best of the Company's
knowledge, except as set forth on the Company Disclosure Schedule, the
consolidated federal income tax returns of the Company have not been examined by
the Internal Revenue Service for all periods to and including those set forth on
the Company Disclosure Schedule, and except to the extent shown therein, no
material deficiencies for taxes, have been claimed, proposed or assessed by any
taxing or other governmental authority against the Company. To the best of the
Company's knowledge, except as set forth on the Company Disclosure Schedule,
there are no pending or threatened audits, investigations or claims for or
relating to any material additional liability in respect of taxes, and there are
no matters under discussion with any governmental authorities with respect to
taxes that in the reasonable judgment of the Company, or its attorneys or
accountants, is likely to result in a material
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additional liability for taxes. Audits of federal, state, and local returns for
taxes by the relevant taxing authorities have been completed for each period set
forth on the Company Disclosure Schedule and, except as set forth on the Company
Disclosure Schedule, the Company has not been notified that any taxing authority
intends to audit a return for any period. Except as set forth on the Company
Disclosure Schedule, to the best of the Company's knowledge, no extension of a
statute of limitations relating to taxes is in effect with respect to the
Company.
(d) Lien. To the best of the Company's knowledge, there are no liens for
taxes (other than for current taxes not yet due and payable) on the Company's
assets.
(e) Foreign Person. The Company is not a person other than a United States
person within the meaning of the Code.
SECTION 2.26. Compliance With Environmental Laws.
(a) Environmental Matters. To the best of the Company's knowledge, without
inquiry, and except for actions which have not and will not have, individually
or in the aggregate, a Material Adverse Effect, neither the Company nor any
Subsidiary has taken any action or failed to take any action with respect to
their respective businesses, assets or the real property presently or formerly
used in connection therewith that might result in (i) actual or threatened
violation of or noncompliance with any Environmental Law or Regulation, or (ii)
actual or threatened personal injury or property damage or contamination of any
kind. The Company has delivered to Parent true and complete copies of all
reports, studies or tests in the possession of or initiated by the Company that
pertain to Hazardous Substances or other environmental concerns regarding the
Company's or any Subsidiary's business, assets or any real property used in
connection therewith. To the best of the Company's knowledge, without inquiry
with respect to the real property presently or formerly used in connection with
the Company or any Subsidiary's business and assets, (i) no above-ground or
underground storage tanks for Hazardous Substances are or were present on such
real property or any improvements or structures thereon, (ii) such real property
is not listed on the federal CERCLIS or on any local, state or federal list of
hazardous waste sites, (iii) no Lien in favor or any governmental authority in
respect to a release or threatened release of any Hazardous Substance has been
filed or attached to such real property, (iv) no Hazardous Substances have been
generated or are being used or stored on such real property except in compliance
with applicable Environmental Laws or Regulations, subject to instances of
noncompliance which have not and will not have, individually or in the
aggregate, a Material Adverse Effect, (v) neither the Company, any Subsidiary
nor any other person has caused or is causing any releases or threatened
releases of Hazardous Substances near, on, to, from or under such real property,
and (vi) any Hazardous Substances that have been generated by the Company or any
Subsidiary on any of such real property have been transported offsite and have
been treated or disposed of in compliance with applicable Environmental Laws and
Regulations. For purposes of this Section "Environmental Laws or Regulations"
means and includes any one or more of the following: the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA") as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), 42 U.S.C.
sec. 9601 et seq.; the Federal Resource Conservation and Recovery Act of 1976
("RCRA"), 42 U.S.C. sec. 6921 et seq.; the Clean Water Act, 33 U.S.C. sec. 1321
et seq.; the Clean Air Act, 42 U.S.C. sec. 7401 et seq.; any other federal,
state, county, municipal, local or other statute, law, ordinance or regulation
that relates to or deals with Hazardous Substances, or the environment or human
health associated with the environment; and all regulations promulgated by a
regulatory body pursuant to any of the foregoing statutes, laws, regulations, or
ordinances. For purposes of this Section, "Hazardous Substance" means asbestos,
urea formaldehyde, polychlorinated biphenyls, nuclear fuel or materials,
chemical waste, radioactive materials, explosives, known carcinogens, petroleum
products, pesticides, fertilizers, or other substance that is dangerous, toxic,
or hazardous or, that is a pollutant, contaminant, chemical, material or
substance defined as hazardous or as a pollutant or contaminant in, or the use,
transportation, storage, release or disposal of which is regulated by, any
Environmental Laws or Regulations.
SECTION 2.27. No Brokers. Except as set forth on the Company Disclosure
Schedule, neither the Company nor any of its officers, directors, employees,
stockholders or affiliates has employed or made any agreement with any broker,
finder or similar agent or any person or firm which will result in the
obligation of
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Parent or any of its affiliates to pay any finder's fee, brokerage fees or
commission or similar payment in connection with the transactions contemplated
hereby.
SECTION 2.28. Pooling Matters. Neither the Company nor any of its
affiliates has, to the Company's knowledge and based upon consultation with its
independent accountants, taken or agreed to take any action that to the
Company's knowledge could reasonably be expected to affect the ability of Parent
to account for the business combination to be effected by the Merger as a
pooling of interests. The failure of this representation to be true and correct,
shall, if the Merger is not able to be accounted for as a pooling of interests,
constitute a breach of this Agreement by the Company for the purposes of Section
8.01(h).
SECTION 2.29. Material Misstatements Or Omissions. No representations or
warranties by the Company in this Agreement, nor any document, exhibit,
statement, certificate or schedule heretofore or hereinafter furnished to Parent
pursuant hereto, or in connection with the transactions contemplated hereby,
including without limitation the Company Disclosure Schedule, contains or will
contain any untrue statement of a material fact, or omits or will omit to state
any material fact necessary to make the material statements or facts contained
therein not misleading.
SECTION 2.30. Definition of Company Knowledge. As used in this Agreement,
the phrase "to the knowledge of the Company" or "to the best of knowledge of the
Company" or "to the best of the Company's knowledge" (or words of similar
import) means the knowledge or the best knowledge of those individuals
identified in the Company Disclosure Schedule, and includes any fact, matter or
circumstances which any of such individuals, as an ordinary and prudent business
person employed in the same capacity in the same type and size of business as
the Company, should have known.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby, jointly and severally, represent and warrant
to the Company that, except as set forth in the written disclosure schedule
previously delivered (or, to the extent set forth below, to be delivered) by
Parent to the Company (the "Parent Disclosure Schedule"):
SECTION 3.01. Organization. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and Minnesota, respectively. Each of Parent and Merger
Sub is duly qualified to do business as a corporation and is in good standing in
each jurisdiction where the character of its properties owned or leased or the
nature of its activities make such qualification necessary, except where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect on the business or financial condition of Parent. Copies of the
Certificate of Incorporation and Bylaws of Parent and Articles of Incorporation
and Bylaws of Merger Sub as delivered to the Company are accurate and complete
as of the date hereof.
SECTION 3.02. Capitalization. The authorized capital stock of Parent
consists of 100,000,000 shares of Parent Common Stock, of which 16,318,878 are
issued and outstanding as of the date hereof, and 2,000,000 shares of preferred
stock, $.0001 par value, of which no shares are issued and outstanding as of the
date hereof. Except as set forth on the Parent Disclosure Schedule, there are no
outstanding contracts, options, warrants, convertible securities, or other
rights to subscribe for, to purchase, or contracts or other obligations to issue
or grant any rights to acquire, any equity securities of Parent or any of its
subsidiaries, or to restructure or recapitalize Parent or any of its
subsidiaries. Except as set forth on the Parent Disclosure Schedule, there are
no outstanding contracts of Parent or any subsidiary of Parent to repurchase,
redeem or otherwise acquire any equity securities of Parent or any such
subsidiary. All outstanding equity securities of Parent and each subsidiary are
duly authorized, validly issued, fully paid and nonassessable and were issued in
conformity with applicable laws. Except as set forth on the Parent Disclosure
Schedule, as of the Closing Date, no options, warrants, convertible securities
or rights or contracts will be exercisable or exchangeable for, convertible
into, or otherwise give its holder any right to acquire shares of capital stock
of Parent.
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SECTION 3.03. Authorization. Each of Parent and Merger Sub has all
requisite corporate power and authority, and has taken all corporate action
necessary, to execute and deliver this Agreement, to consummate the transactions
contemplated hereby and to perform its obligations hereunder. The execution and
delivery of this Agreement by Parent and Merger Sub and the consummation by them
of the transactions contemplated hereby have been duly approved by the Boards of
Directors of Parent and Merger Sub. No other corporate proceedings on the part
of Parent or Merger Sub are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Parent and Merger Sub and is a legal, valid and binding obligation
of Parent and Merger Sub, enforceable against them in accordance with its terms.
SECTION 3.04. No Conflict or Violation. To the best of Parent's and
Merger Sub's knowledge, neither the execution, delivery or performance of this
Agreement nor the consummation of the transactions contemplated hereby, nor
compliance by Parent or Merger Sub with any of the provisions hereof, will
result in (a) a violation of or a conflict with any provision of the Certificate
of Incorporation or Bylaws of Parent or the Articles of Incorporation and Bylaws
of Merger Sub, (b) a breach of, or a default under, any term or provision of any
contract, agreement, indebtedness, lease, encumbrance, commitment, license,
franchise, permit, authorization or concession to which Parent or Merger Sub is
a party or by which its assets are bound, which breach or default would have a
Material Adverse Effect on the business or financial condition of Parent or its
ability to consummate the transactions contemplated hereby, (c) a violation by
Parent or Merger Sub of any statute, rule, regulation, ordinance, code, order,
judgment, ruling, writ, injunction, decree or award, which violation would have
a Material Adverse Effect on the business or financial condition of Parent or
its ability to consummate the transactions contemplated hereby, or (d) an
imposition of any material encumbrance, restriction or charge on the business of
Parent or Merger Sub or on any of its assets.
SECTION 3.05. Compliance with Law. Each of Parent and Merger Sub and the
conduct of their respective businesses have not violated and are in compliance
with all laws, statutes, ordinances, regulations, rules and orders of any
foreign, federal, state or local government and any other governmental
department or agency, and any judgment, decision, decree or order of any court
or governmental agency, department or authority, including without limitation
Environmental Laws, relating to the business or operations of Parent or Merger
Sub, except where the violation or failure to comply, individually or in the
aggregate, would not have a Material Adverse Effect on the business or financial
condition of Parent. Each of Parent and Merger Sub and the conduct of their
respective businesses are in conformity with all energy, public utility, zoning,
building and health codes, regulations and ordinances, OSHA and Environmental
Laws and all other foreign, federal, state, and local governmental and
regulatory requirements, except where any nonconformity would not have a
Material Adverse Effect on the business or financial condition of Parent.
Neither Parent nor Merger Sub has received any notice to the effect that, or
otherwise been advised that, Parent or Merger Sub is not in compliance with any
such statutes, regulations, rules, judgments, decrees, orders, ordinances or
other laws, and neither Parent nor Merger Sub has any reason to anticipate that
any existing circumstances are likely to result in violations of any of the
foregoing which failure or violation could, in any one case or in the aggregate,
have a Material Adverse Effect on the business or financial condition of Parent.
SECTION 3.06. Consents and Approvals. No consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority, or any other person or entity, is required to be made
or obtained by Parent or Merger Sub in connection with the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby, other than (a) the filing of a pre-merger notification and
report form under the HSR Act, and the expiration or early termination of the
applicable waiting period thereunder, (b) in connection with or in compliance
with the provisions of the Securities Act, the Exchange Act, the DGCL, the MBCA,
the Bylaws of the NASD and the "blue sky" laws of various states, and (c) any
other filings and approvals expressly contemplated by this Agreement.
SECTION 3.07. Litigation. Except as set forth on the Parent Disclosure
Schedule, there are no Actions pending or, to the best of Parent's and Merger
Sub's knowledge, threatened or anticipated against, related to or affecting
Parent or Merger Sub, any officers or directors of Parent or Merger Sub as such,
or any stockholder of Parent or Merger Sub in such stockholder's capacity as a
stockholder of Parent or Merger Sub, (a) seeking to delay, limit or enjoin the
transactions contemplated by this Agreement, (b) that involve the
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risk of criminal liability, or (c) in which Parent or Merger Sub is a plaintiff,
including any derivative suits brought by or on behalf of Parent or Merger Sub.
Neither Parent nor Merger Sub is in default with respect to or subject to any
judgment, order, writ, injunction or decree of any court or governmental agency,
and there are no unsatisfied judgments against Parent or Merger Sub.
SECTION 3.08. Labor Matters. Neither Parent nor Merger Sub is a party to
any labor agreement with respect to its employees with any labor organization,
union, group or association and there are no employee unions (nor any other
similar labor or employee organizations) under local statutes, custom or
practice. In the last five years, neither Parent nor Merger Sub has experienced
any attempt by organized labor or its representatives to make Parent or Merger
Sub conform to demands of organized labor relating to its employees or to enter
into a binding agreement with organized labor that would cover the employees of
Parent or Merger Sub. There is no labor strike or labor disturbance pending or,
to the best of Parent's and Merger Sub's knowledge, threatened against Parent or
Merger Sub nor is any grievance currently being asserted, and in the past five
years neither Parent nor Merger Sub has experienced a work stoppage or other
labor difficulty. To the best of Parent's and Merger Sub's knowledge, each of
Parent and Merger Sub is in compliance in all material respects with all
applicable laws respecting employment practices, employee documentation, terms
and conditions of employment and wages and hours and is not and has not engaged
in any unfair labor practice. There is no unfair labor practice charge or
complaint against Parent or Merger Sub pending before the National Labor
Relations Board or any other domestic or foreign governmental agency arising out
of the activities or Parent or Merger Sub, and to the best of Parent's and
Merger Sub's knowledge, there are no facts or information which would give rise
thereto.
SECTION 3.09. Payments. Neither Parent nor Merger Sub has, directly or
indirectly, paid or delivered any fee, commission or other sum of money or item
or property, however characterized, to any finder, agent, government official or
other party, in the United States or any other country, which is in any manner
related to the business or operations of Parent or Merger Sub and which is, or
may be with the passage of time or discovery, illegal under any federal, state
or local laws of the United States (including without limitation the U.S.
Foreign Corrupt Practices' Act) or any other country having jurisdiction; and
neither Parent nor Merger Sub has participated, directly or indirectly, in any
boycotts or other similar practices affecting any of its actual or potential
customers.
SECTION 3.10. No Brokers. Neither Parent, Merger Sub nor any of their
respective officers, directors, employees, stockholders or affiliates has
employed or made any agreement with any broker, finder or similar agent or any
person or firm which will result in the obligation of the Company or any of its
affiliates to pay any finder's fee, brokerage fees or commission or similar
payment in connection with the transactions contemplated hereby.
SECTION 3.11. Ownership of Merger Sub; No Prior Activities.
(a) Merger Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Agreement.
(b) As of the date hereof and the Effective Time, except for obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated by this Agreement and except for this Agreement
and any other agreement or arrangements contemplated by this Agreement, Merger
Sub has not and will not have incurred, directly or indirectly, through any
subsidiary or affiliate, any obligations or liabilities or engaged in any
business activities of any type or kind whatsoever or entered into any
agreements or arrangements with any person.
(c) All of the outstanding shares of capital stock of the Merger Sub have
been validly issued and fully paid and nonassessable owned solely by Parent.
SECTION 3.12. Parent Common Stock. At the Effective Time, the Parent
Common Stock to be issued in the Merger will be duly authorized, validly issued,
fully paid and nonassessable and will be issued in conformity with applicable
laws free and clear of all liens, encumbrances and claims except those created
by the holders thereof. No preemptive rights or similar rights of any security
holders of the Parent exist with
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respect to the issuance of the Parent Common Stock. The certificates evidencing
the Parent Common Stock will comply as to form with all applicable provisions of
the laws of the state of Delaware.
SECTION 3.13. Commission Filings. The Parent has filed all reports,
registration statements and other filings, together with any amendments required
to be made with respect thereto, that it has been required to file with the
Securities and Exchange Commission (the "Commission") under the Securities Act
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
reports, registration statements and other filings filed by Parent, together
with any amendments thereto, are referred to in this Agreement as the "Parent
Commission Filings." As of the respective times such documents were filed or, as
applicable, became effective, the Parent Commission Filings complied as to form
and content, in all material respects, with the requirements of the Securities
Act and the Exchange Act, as the case may be, and the rules and regulations
promulgated thereunder, and did not contain any untrue statement of a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
SECTION 3.14. Transaction with Certain Persons. Except as set forth on
the Parent's Disclosure Schedule, or in the Parent Commission Filings, no
officer, director or employee of the Company nor any member of any such person's
immediate family is presently, or within the past three years has been, a party
to any transaction with the Parent or its Subsidiaries relating to the Company's
business, including without limitation, any contract, agreement or other
arrangement (a) providing for the furnishing of services by, (b) providing for
the rental of real or personal property for, or (c) otherwise requiring payments
to (other than for services as officers, directors or employees of the Parent)
any such person or corporation, partnership, trust or other entity in which any
such person has an interest as a stockholder, officer, director, trustee or
partner.
SECTION 3.15. Tax Matters. Neither Parent nor, to the knowledge of
Parent, any of its affiliates has taken or agreed to take any action that would
prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code.
ARTICLE IV.
CONDUCT OF BUSINESS PENDING THE MERGER
From the date hereof through the Effective Time or the earlier termination
of this Agreement, the parties hereto each covenant as follows:
SECTION 4.01. No Solicitation.
(a) The Company shall not, directly or indirectly, through any officer,
director, employee, representative or agent of the Company or any of its
subsidiaries, and shall cause each of their respective stockholders or
representatives (including without limitation investment bankers, attorneys and
accountants), not to, directly or indirectly, enter into, solicit, initiate or
continue any discussions or negotiations with, or encourage or respond to any
inquiries or proposals by, or participate in any negotiations with, or provide
any information to, or otherwise cooperate in any other way with, any
corporation, partnership, person or other entity or group, other than Parent and
its representatives, concerning any sale of any shares of capital stock of the
Company, or any merger, consolidation, liquidation, dissolution or similar
transaction involving the Company (each such transaction being referred to
herein as a "Proposed Acquisition Transaction"). Neither the Company nor any of
its subsidiaries shall, directly or indirectly, through any officer, director,
employee, representative, agent or otherwise, solicit, initiate or encourage the
submission of any proposal or offer from any person (including, without
limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act) or
entity relating to any Proposed Acquisition Transaction or participate in any
negotiations regarding, or furnish to any other person any information with
respect to the Company or any of its subsidiaries for the purposes of, or
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other person to seek or effect a
Proposed Acquisition Transaction; provided, however, that nothing contained in
this Section 4.01 shall prohibit the Board of Directors of the Company from (i)
furnishing information to, or entering into discussions or negotiations with,
any person or entity that makes an unsolicited, bona fide proposal to acquire
the Company pursuant to a merger, consolidation, share exchange, business
combination,
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tender or exchange offer or other similar transaction or to acquire a
substantial portion of the assets of the Company if, and only to the extent
that, (A) the Board of Directors of the Company determines, which determination
is supported by a written legal opinion from counsel for the Company reasonably
acceptable to Parent in good faith that such action is necessary for the Board
of Directors of the Company to comply with its fiduciary duties to the
shareholders of the Company under applicable law and (B) prior to furnishing
such information to, or entering into discussions or negotiations with, such
person or entity, the Company (1) provides written notice to Parent to the
effect that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity, (2) receives from such person or
entity an executed agreement to the effect that such person or entity will not
disclose any confidential information of the Company and (3) subject to the
terms of any confidentiality agreement to which the Company is a part on the
date hereof, keeps Parent informed of the status (but not the terms) of any such
discussions or negotiations, (ii) complying with Rule 14e-2 promulgated under
the Exchange Act with regard to a tender or exchange offer or (iii) failing to
make or withdrawing or modifying its recommendation to the Company shareholders
following the making of a proposal that constitutes, or may reasonably be
expected to lead to, a Proposed Acquisition Transaction if the Board of
Directors of the Company determines, which determination is supported by a
written legal opinion from counsel for the Company reasonably acceptable to
Parent, in good faith that such action is necessary for the Board of Directors
of the Company to comply with its fiduciary duties to the shareholders of the
Company under applicable law. The Company hereby represents that it is not now
engaged in discussions or negotiations with any party other than Parent with
respect to any of the foregoing.
(b) The Company will promptly notify Parent if any discussions or
negotiations are sought to be initiated, any inquiry or proposal is made, or any
information is requested with respect to any Proposed Acquisition Transaction
and notify Parent of the terms of any proposal which it may receive in respect
of any such Proposed Acquisition Transaction, including without limitation the
identity of the prospective purchaser or soliciting party.
SECTION 4.02. Notification of Certain Matters. The Company shall give
prompt notice to Parent of (a) the occurrence, or failure to occur, of any event
which occurrence or failure would be likely to cause any representation or
warranty contained in this Agreement or in any exhibit or schedule hereto to be
untrue or inaccurate in any material respect and (b) any material failure of the
Company or any of its affiliates, or of any of their respective representatives,
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it under this Agreement or any exhibit or schedule hereto;
provided, however, that such disclosure shall not be deemed to cure any breach
of a representation, warranty, covenant or agreement or to satisfy any
condition.
SECTION 4.03. Access to Information and Facilities. The Company shall,
and shall cause its respective officers, directors, employees and agents to,
afford the representatives of Parent and its affiliates reasonable access during
normal business hours upon prior notice and appointment to the officers,
employees, agents, attorneys, accountants, properties, books and records and
contracts of the Company, and shall furnish Parent and its representatives all
operating and other data and information as Parent or its affiliates, through
their respective representatives, may reasonably request. The Company shall also
grant access to Parent and its representatives to the Company's Facilities for
the purpose of undertaking minor construction and wiring necessary to convert
the Facilities to stores operated by Parent no earlier than two business days
prior to Closing. Parent shall afford Dain Bosworth Incorporated ("DBI") such
information as shall be reasonably and customarily requested by DBI in order to
render its fairness opinion to the Company as required by Section 6.12 of this
Agreement.
SECTION 4.04. Conduct of Business of the Company Pending the Merger. The
Company shall, except as contemplated by this Agreement, or as consented to by
Parent in writing which consent will not be unreasonably withheld, operate its
business in the ordinary course of such business and substantially in accordance
with past practice and will not take any action inconsistent with this Agreement
or with the consummation of the Merger. Without limiting the generality of the
foregoing, Parent shall be able to reasonably approve in advance any pricing or
advertising of the Company, including instore signage and
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promotional materials, and the Company shall not, except as specifically
contemplated by this Agreement and as disclosed in the Company Disclosure
Schedule:
(a) amend its charter or By-Laws;
(b) issue, grant sell or pledge or agree or propose to issue, grant, sell
or pledge any shares of, or rights or securities of any kind to acquire any
shares of, its capital stock;
(c) declare, set aside or pay any dividend or other distribution or payment
in cash, securities or property;
(d) make any direct or indirect redemption, retirement, purchase or other
acquisition of any of its capital stock;
(e) split, combine or reclassify its outstanding shares of capital stock;
(f) enter into, extend, materially modify, terminate or renew any contract,
except in the ordinary course of the Company's business;
(g) sell, assign, transfer, convey, lease, mortgage, pledge or otherwise
dispose of or encumber any of its assets, or any interests therein, except in
the ordinary course of the Company's business and, without limiting the
generality of the foregoing, the Company will produce, maintain and sell
inventory consistent with the Company's past practices;
(h) incur any obligations or liability for long-term interest bearing
indebtedness or, except in the ordinary course of the Company's business, incur
any other obligation or liability with respect to such business;
(i) take any action with respect to the grant of any bonus, severance or
termination pay (otherwise than pursuant to policies or agreements of the
Company in effect on the date hereof that are described in the Company
Disclosure Schedule) or with respect to any increase of benefits payable under
its severance or termination pay policies or agreements in effect on the date
hereof or increase in any manner the compensation or fringe benefits of any
employee or pay any benefit;
(j) make any change in its key management structure with respect to its
business, including without limitation the hiring of additional officers or the
termination of existing officers other than for cause;
(k) except in the ordinary course of the Company's business, adopt, enter
into or amend any Benefit Plan, agreement (including without limitation any
collective bargaining or employment agreement), trust, fund or other arrangement
for the benefit or welfare of any employee;
(l) acquire by merger or consolidation with, or merge or consolidate with,
or purchase substantially all of the assets of, or otherwise acquire any
material assets or business of any corporation, partnership, association or
other business organization or division thereof;
(m) willingly allow or permit to be done, any act by which any of its
insurance policies may be suspended, impaired or canceled;
(n) fail to pay its accounts payable and any debts owed or obligations due
to it, or pay or discharge when due any liabilities, in the ordinary course of
the Company's business;
(o) subject to the Company's past practices, fail to maintain its assets in
substantially their current state of repair, excepting normal wear and tear or
fail to replace consistent with the Company's past practice inoperable, worn-out
or obsolete or destroyed assets;
(p) fail to comply in any material respect with all applicable laws;
(q) intentionally do any other act which would cause any representation or
warranty of the Company in this Agreement to be or become untrue in any material
respect; or
(r) enter into any agreement, or otherwise become obligated, to do any
action prohibited hereunder.
SECTION 4.05. Conduct of Business of Parent Pending the Merger. Except as
provided in this Agreement, neither Parent nor Merger Sub shall, without the
Company's prior written consent, which consent
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shall not be unreasonably withheld, (a) declare, set aside or pay any cash
dividend in respect of any of its capital stock; (b) amend its Certificate of
Incorporation or By-Laws in any manner which would adversely affect the Company;
or (c) authorize or propose any of the foregoing, or enter into any contract,
agreement, commitment or arrangement contemplating any of the foregoing.
ARTICLE V.
ADDITIONAL AGREEMENTS
SECTION 5.01. Proxy Statement/Prospectus; Registration Statement.
(a) Proxy Statement/Prospectus; Registration Statement. As soon as
practicable after the execution of this Agreement, the Company and Parent shall
prepare and file with the Commission a combined proxy and Registration Statement
on Form S-4 (or on such other form as shall be appropriate (the "Form S-4")
which shall constitute the Proxy Statement/Prospectus and the Registration
Statement of Parent relating to the adoption of this Agreement and approval of
the transactions contemplated by the stockholders of the Company and with
respect to the registration of the Parent Common Stock to be issued in
connection with the Merger. The Company and Parent shall use all reasonable
efforts to cause the Registration Statement to become effective as soon
thereafter as practicable. The Proxy Statement/Prospectus shall include the
recommendation of the Board of Directors of the Company in favor of the Merger,
subject to the last sentence of Section 5.02 hereof.
(b) Information Supplied by the Company. None of the information supplied
or to be supplied by the Company specifically for inclusion or incorporation by
reference in (i) the Form S-4 will, at the time the Form S-4 becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they are
made, not misleading, and (ii) the Proxy Statement will, at the date it is first
mailed to the Company's shareholders and at the time of the meeting of the
Company's shareholders held to vote on approval of this Agreement, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The Proxy
Statement will comply as to form in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder, except that no
representation is made by the Company with respect to statements made or
incorporated by reference therein based on information supplied by Parent or
Merger Sub specifically for inclusion or incorporation by reference in the Proxy
Statement.
(c) Information Supplied by Parent. None of the information supplied or to
be supplied by Parent specifically for inclusion or incorporation by reference
in (i) the Form S-4 will, at the time the Form S-4 becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading, and (ii) the Proxy Statement will, at the date it is first mailed to
the Company's shareholders and at the time of the meeting of the Company's
shareholders and at the time of the meeting of the Company's shareholders held
to vote on approval of this Agreement, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4 will
comply as to form in all material respects with the requirements of the
Securities Act and the rules and regulations thereunder, except that no
representation is made by Parent or Merger Sub with respect to statements made
or incorporated by reference therein based on information supplied by the
Company specifically for inclusion or incorporation by reference in the Form
S-4.
SECTION 5.02. Stockholders Meeting. The Company shall call and hold a
stockholders meeting for the purpose of voting on the approval of the Merger as
soon as practicable after the date on which the Registration Statement becomes
effective. Unless otherwise required under the applicable fiduciary duties of
the directors of the Company, as determined by such directors in good faith
after consultation with and based upon the advice of independent legal counsel,
the Company shall solicit from its stockholders proxies in favor of
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adoption of this Agreement and approval of the transactions contemplated hereby,
and shall take all other action necessary or advisable to secure the vote or
consent of stockholders to obtain such approval.
SECTION 5.03. Agreements with Respect to Affiliates. The Company shall
deliver to Parent, prior to the date the Registration Statement becomes
effective under the Securities Act, a letter (the "Affiliate Letter")
identifying all persons who are, at the time of the Company's stockholders
meeting, "affiliates" of the Company for purposes of Rule 145 under the
Securities Act ("Rule 145"). The Company shall use its best efforts to cause
each person who is identified as an "affiliate" in the Affiliate Letter to
deliver to Parent, prior to the Effective Time, a written agreement (an
"Affiliate Agreement") in connection with restrictions on affiliates under Rule
145 and pooling of interests accounting treatment, in a form mutually agreeable
to the Company and Parent. The Affiliate Agreement shall include, among other
things, a representation to the effect that any stock option agreements
providing for the immediate vesting of options upon a change in control were
entered into in the ordinary course of business and not in contemplation of the
Merger.
SECTION 5.04. Further Action/Tax Treatment.
(a) Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use all reasonable efforts to take or cause to be taken,
all actions and to do, or cause to be done, all other things necessary, proper
or advisable to consummate and make effective as soon as practicable the
transactions contemplated by this Agreement, to obtain in a timely manner all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings, and otherwise to satisfy or cause to be satisfied all
conditions precedent to its obligations under this Agreement. The foregoing
covenant shall not include any obligation by Parent to agree to divest, abandon,
license or take similar action with respect to any assets (tangible or
intangible) of Parent or the Company. Parent and the Company agree that the
transaction as set forth in this agreement qualifies as a tax-free
reorganization under Section 368 of the Code and that each of Parent and the
Company shall use its best efforts to cause the Merger to qualify, and will not
(both before and after consummation of the Merger) take any actions which to its
knowledge could reasonably be expected to prevent the Merger from qualifying, as
a reorganization under the provisions of Section 368 of the Code.
(b) Anything in this Agreement to the contrary notwithstanding, this
Agreement shall not constitute an agreement to assign any contract, lease,
license, sales order, purchase order or any claim or right or any benefit
arising thereunder or resulting therefrom if an attempted assignment thereof,
without the consent of a third party thereto, would constitute a breach thereof
or in any way materially adversely affects the rights of Parent thereunder. If
such consent is not obtained, or if an attempted assignment thereof would be
ineffective or would affect the rights thereunder so that Parent would not
receive all such rights, the Company will cooperate with Parent, in all
reasonable respects, to provide to Parent the benefits under any such contract,
lease, license, sales order, purchase order, claim or right including without
limitation enforcement for the benefit of Parent of any and all rights of the
Company against a third party thereto arising out of the breach or cancellation
by such third party or otherwise.
SECTION 5.05. Listing of Parent Shares. Parent shall use all reasonable
efforts to cause the Parent Shares to be issued in the Merger to be listed, upon
official notice of issuance, on The Nasdaq National Market.
SECTION 5.06. Conveyance Taxes. Parent and the Company shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications, or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes which become
payable in connection with the transactions contemplated hereby that are
required or permitted to be filed at or prior to the Effective Time.
SECTION 5.07. Pooling Accounting Treatment. Each of Parent and the
Company agrees not to take any action that to its knowledge could reasonably be
expected to adversely affect the ability of Parent to treat the Merger as a
pooling of interests.
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SECTION 5.08. Directors' and Officers' Indemnification.
(a) From and after the Effective Time, Parent shall cause the Surviving
Corporation to keep in effect the provisions in its Bylaws with respect to
exculpation of director and officer liability and indemnification set forth in
the Bylaws of the Company in effect on the date of this Agreement to the fullest
extent permitted under the MBCA, which provisions shall not be amended, repealed
or otherwise modified except as required by applicable law or except to make
changes permitted by law that would enlarge the exculpation or rights of
indemnification thereunder; provided, however, nothing under this Section 5.08
or in Section 5.09 below shall prevent the Surviving Corporation from merging
into Parent subsequent to the Merger so long as following such merger the
exculpation of director and officer liability and indemnification provided the
former directors and officers of the Company shall be the same standards of
exculpation of director and officer liability and indemnification as that
applying to the directors and officers of the Parent.
(b) From and after the Effective Time, Parent hereby agrees to guarantee
and to cause the Surviving Corporation to perform all of its obligations under
the Bylaws of the Company and under the MBCA with respect to indemnification.
(c) From and after the Effective Time, Parent shall cause the Surviving
Corporation to reimburse all expenses, including reasonable attorneys' fees and
to the extent permitted by applicable law, Parent shall advance expenses
incurred by any person required to enforce the indemnity and other obligations
of the Surviving Corporation and the Company prior to the Merger under this
Section 5.08 if such person is entitled to reimbursements or advancements under
the Bylaws, the MBCA or any indemnification agreement.
(d) The rights under this Section 5.08 shall be in addition to any other
rights under Minnesota law or otherwise. This Section 5.08 shall survive the
consummation of the Merger.
SECTION 5.09. Continuation of Indemnification. On or prior to Closing,
the Parent will purchase tail coverage at a cost not to exceed $75,000 under the
Company's existing directors and officers liability insurance policy affording
coverage for a period of thirty-six (36) months to the Company's directors and
officer for periods prior to Closing. From and after Closing, the Parent and the
Surviving Corporation will indemnify (and, to the extent permitted by Minnesota
Statutes, advance expenses to) the officers and directors of the Company who
served in such capacity prior to the Effective Time for any and all claims
related to matters occurring prior to the Effective Time to the same extent that
such persons are entitled to indemnity and under Minnesota law and the Company's
Articles of Incorporation and Bylaws in effect immediately prior to the
Effective Time.
SECTION 5.10. Expectation Date. The Company, Parent and Merger Sub agree
to extend their best reasonable efforts to complete the transactions described
in this Agreement by January 2, 1997 (the "Expectation Date").
In the event that the merger has not closed prior to or on the Expectation
Date and the Company shall have received the necessary approval of its
shareholders and all required approvals under the HSR Act on or before December
20, 1996, then no later than May 2, 1997 the Parent will publish stub period
financial statements (reflecting a 30-day period of combined operations)
sufficient to terminate the lock-up of the Company's affiliates required to
qualify the Merger for pooling treatment.
ARTICLE VI.
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligations of the Company to consummate the transactions provided for
hereby are subject, in the discretion of the Company, to the satisfaction, on or
prior to the Closing Date, of each of the following conditions, any of which may
be waived by them:
SECTION 6.01. Effectiveness of the Registration Statement. The
Registration Statement shall have been declared effective by the Commission
under the Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and no
proceedings for
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that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the Commission.
SECTION 6.02. Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by the requisite vote of the stockholders of the
Company.
SECTION 6.03. Listing. The shares of Parent Common Stock issuable in the
Merger shall have been authorized for listing on The Nasdaq National Market upon
official notice of issuance.
SECTION 6.04. HSR Act. All waiting periods applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated.
SECTION 6.05. Representations, Warranties and Covenants. All
representations and warranties of Parent and Merger Sub contained in this
Agreement shall be true and correct in all respects at and as of the date of
this Agreement and at and as of the Closing Date, except for such circumstances
which, taken as a whole, would not have a Material Adverse Effect on Parent or
Merger Sub and except as and to the extent that the facts and conditions upon
which such representations and warranties are based are expressly required or
permitted to be changed by the terms hereof, and Parent and Merger Sub shall
have performed and satisfied all material agreements and covenants required
hereby to be performed by them on or prior to the Closing Date.
SECTION 6.06. Consents. All permits and waivers necessary to the
consummation of the transactions contemplated hereby, including all required
third party consents (to the extent not waived) shall have been obtained.
SECTION 6.07. No Proceedings, Litigation or Laws. No action by any
governmental authority or other person shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated hereby
and which could reasonably be expected to (a) materially affect the right or
ability of Parent to operate the Company's business after the Merger, or (b)
materially damage the Company if the transactions contemplated hereunder are
consummated.
SECTION 6.08. Certificates. Parent shall have delivered to the Company
such certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VI as may be reasonably requested by the
Company.
SECTION 6.09. Opinion of Counsel. Parent shall have delivered to the
Company an opinion of counsel to Parent and Merger Sub, containing the opinions
set forth on Exhibit A hereto.
SECTION 6.10. Report of Accountant. The Company shall have received a
report from Arthur Andersen, LLP, their independent public accountants, to the
effect that the Company qualifies to be a party to a pooling-of-interests
transaction in accordance with Accounting Principals Board Opinion No. 16.
SECTION 6.11. Tax Opinion. Since the date of this Agreement, there shall
not have been any change in the facts, circumstances or applicable Federal tax
laws that would prevent the Company from receiving an opinion, dated on or prior
to the time that the Form S-4 shall have become effective under the Securities
Act, or that would cause the withdrawal of such opinion on or before the Closing
Date, of Fredrikson & Byron, P.A. Counsel to the Company, to the effect that,
subject to customary conditions and representations of the Company, Parent and
Merger Sub, (i) the Merger will be treated for Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, (ii) Parent,
Merger Sub and the Company will each be a party to that reorganization within
the meaning of Section 368(b) of the Code, (iii) no income, gain or loss will be
recognized for Federal income tax purposes by either the Company or Parent as a
result of the consummation of the Merger and (iv) no income, gain or loss will
be recognized for Federal income tax purposes by shareholders of the Company
upon the exchange in the Merger shares solely for shares of Parent Common Stock
(except to the extent of any cash received in lieu of fractional shares).
SECTION 6.12. Fairness Opinion. On the Closing Date, the Company shall
have received from DBI, an update, dated as of the Closing Date, to the fairness
opinion provided to the Company by DBI, on the date of this Agreement, which
shall state that the Merger is fair, from a financial point of view, to the
Company's
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shareholders. Since the date of this Agreement, there shall not have been any
change in the facts or circumstances that would prevent the Company from
receiving an opinion dated on the date the Proxy Statement is mailed to Company
shareholders and on the Closing Date, that would cause the withdrawal of such
opinion on such dates, of the Company's financial advisor, to the effect that
the Merger is fair, from a financial point of view, to the Company's
shareholders.
SECTION 6.13. Comfort Letter. On the date of the Proxy
Statement/Prospectus constituting a part of the Registration Statement, the
Parent shall have received a comfort letter (in form and substance as is
customary in a registered public offering) from KPMG Peat Marwick LLP,
independent certified public accountants, dated as of such date, in connection
with such accountants' review of certain data and information contained in the
Registration Statement and the Proxy Statement/Prospectus.
ARTICLE VII.
CONDITIONS TO PARENT'S AND MERGER SUB'S OBLIGATIONS
The obligations of Parent and Merger Sub to consummate the transactions
provided for hereby are subject, in the discretion of Parent and Merger Sub, to
the satisfaction, on or prior to the Closing Date, of each of the following
conditions, any of which may be waived by them:
SECTION 7.01. Effectiveness of the Registration Statement. The
Registration Statement shall have been declared effective by the Commission
under the Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and no
proceedings for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the Commission.
SECTION 7.02. Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by the requisite vote of the stockholders of the
Company.
SECTION 7.03. Listing. The shares of Parent Common Stock issuable in the
Merger shall have been authorized for listing on The Nasdaq National Market upon
official notice of issuance.
SECTION 7.04. HSR Act. All waiting periods applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated.
SECTION 7.05. Representations, Warranties and Covenants. All
representations and warranties of the Company contained in this Agreement shall
be true and correct in all respects at and as of the date of this Agreement and
at and as of the Closing Date, except for such circumstances which, taken as a
whole, would not have a Material Adverse Effect on the Company and except as and
to the extent that the facts and conditions upon which such representations and
warranties are based are expressly required or permitted to be changed by the
terms hereof, and the Company shall have performed and satisfied all material
agreements and covenants required hereby to be performed by it on or prior to
the Closing Date.
SECTION 7.06. Consents. All permits and waivers necessary to the
consummation of the transactions contemplated hereby and for the ownership of
the Company's business by Parent, including all required third party consents
(to the extent not waived) shall have been obtained.
SECTION 7.07. No Proceedings, Litigation or Laws. No action by any
governmental authority or other person shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated hereby
and which could reasonably be expected to (a) materially affect the right or
ability of Parent to operate the Company's business after the Merger, or (b)
materially damage the Company if the transactions contemplated hereunder are
consummated.
SECTION 7.08. Certificates. The Company shall have delivered to Parent
such certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VII as may be reasonably requested by
Parent.
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SECTION 7.09. Opinion of Counsel. The Company shall have delivered to
Parent an opinion of counsel to the Company, containing the opinions set forth
on Exhibit B hereto.
SECTION 7.10. Pooling Letter of Accountant. Parent shall have received a
pooling letter from KPMG Peat Marwick LLP, independent certified public
accountants, to the effect that the Merger qualifies for pooling of interests
accounting treatment if consummated in accordance with this Agreement.
SECTION 7.11. Affiliate Agreements. Parent shall have received from each
person who is identified in the Affiliate Letter as an "affiliate" of the
Company, an Affiliate Agreement and each such Affiliate Agreement shall be in
full force and effect.
SECTION 7.12. Covenants Not to Compete/Employment Matters. Parent shall
have received from Marvin Goldstein, an executed Covenant Not to Compete in the
form attached hereto as Exhibit C, and such Covenant Not to Compete shall be in
full force and effect. The Company shall have entered into employment and
severance arrangements with its employees substantially as set forth on Schedule
7.12 hereof.
SECTION 7.13. Material Changes. Since the date of this Agreement, there
shall not have been any material adverse change with respect to the business or
financial condition of the Company.
SECTION 7.14. Due Diligence Review. In the reasonable discretion of
Parent, Parent shall be satisfied on the basis of a good faith diligence review
of the Company's books and records, financial statements, and other records and
accounts of the Company's business that there has been no material breach of the
representations and warranties or the pre-closing covenants of the Company made
pursuant to this Agreement. This condition shall be deemed fulfilled unless
written notice of nonfulfillment is delivered by Parent to the Company within
four weeks following the date of this Agreement.
SECTION 7.15. Dissenters' Rights. Holders of at least 92.5% of shares of
Company Common Stock shall not have exercised dissenters' rights to become
Dissenting Shares in accordance with Section 302A.473 of the MBCA or Section
1.07(g) of this Agreement.
SECTION 7.16. Fairness Opinion. On the Closing Date, the Parent shall
have received from PaineWebber Incorporated, an update, dated as of the Closing
Date, to the fairness opinion provided to the Parent by PaineWebber
Incorporated, on the date of this Agreement, which shall state that the Merger
is fair, from a financial point of view, to the Parent's shareholders. Since the
date of this Agreement, there shall not have been any change in the facts or
circumstances that would prevent the Parent from receiving an opinion dated on
the date the Proxy Statement is mailed to Parent's shareholders and on the
Closing Date, that would cause the withdrawal of such opinion on such dates, of
the Parent's financial advisor, to the effect that the merger is fair, from a
financial point of view, to the Parent's shareholders.
SECTION 7.17. Comfort Letter. On the date of the Proxy
Statement/Prospectus constituting a part of the Registration Statement, the
Company shall have received a comfort letter (in form and substance as is
customary in a registered public offering) from Arthur Andersen, LLP,
independent certified public accountants, dated as of such date, in connection
with such accountants' review of certain data and information contained in the
Registration Statement and the Proxy Statement/Prospectus.
ARTICLE VIII.
TERMINATION
SECTION 8.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time as follows:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent and the Company; or
(b) by either Parent or the Company if the Merger shall not have been
consummated on or prior to January 31, 1997 (provided that the right to
terminate this Agreement under this Section 8.01(b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has been
the cause of or resulted in the failure of the Merger to occur on or before such
date); or
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(c) by either Parent or the Company if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued a nonappealable final order, decree or ruling or taken any other action
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Merger (provided that the right to terminate this Agreement under this
Section 8.01(c) shall not be available to any party who has not complied with
its obligations under Section 5.04 and such noncompliance materially contributed
to the issuance of any such order, decree or ruling or the taking of such
action); or
(d) by either Parent or the Company, if the requisite vote of the
stockholders of the Company shall not have been obtained pursuant to Section
5.02 hereof; or
(e) by either Parent or the Company, if (i) under the applicable fiduciary
duties of the directors of the Company, as determined by such directors in good
faith after consultation with and based upon the advice of independent legal
counsel, the Board of Directors of the Company shall withdraw, modify or change
its approval or recommendation of this Agreement or the Merger in a manner
adverse to Parent or shall have resolved to do so; (ii) the Board of Directors
of the Company shall have recommended to the stockholders of the Company an
Alternative Transaction (as defined in Section 8.03(c)); or (iii) a tender offer
or exchange offer for 25% or more of the outstanding shares of Company Common
Stock is commenced (other than by Parent or an affiliate of Parent) and the
Board of Directors of the Company recommends that the stockholders of the
Company tender their shares in such tender or exchange offer; or
(f) by either Parent or the Company, if under the applicable fiduciary
duties of the directors of Parent, as determined by such directors in good faith
after consultation with and based upon the advice of independent legal counsel,
the Board of Directors of Parent shall withdraw, modify or change its approval
of this Agreement or the Merger in a manner adverse to the Company or shall have
resolved to do so; or
(g) by Parent, if any person (or group of persons) other than Parent or its
affiliates is or becomes the beneficial owner of 25% or more of the outstanding
Shares; provided, however, that Parent shall not have the right to terminate
this Agreement pursuant to this clause (g) by reason of the ownership of Shares
by any person listed under the caption "Principal Shareholders and Management
Shareholders" in the Company's proxy statement dated May 17, 1996 in amount not
exceeding the amount of Shares indicated therein as being owned by such person;
or
(h) by Parent, if there is a material breach of any representation or
warranty set forth herein or any covenant or agreement to be complied with or
performed by the Company pursuant to the terms of this Agreement or the material
failure of a condition set forth in Article VII to be satisfied (and such
condition is not waived in writing by Parent) on or prior to the Closing Date,
or the occurrence of any event which results or would result in the failure of a
condition set forth in Article VII to be satisfied on or prior to the Closing
Date; provided that Parent may not terminate this Agreement prior to the Closing
Date if the Company has not had an adequate notice and opportunity to cure such
breach or failure; or
(i) by the Company, if there is a material breach of any representation or
warranty set forth herein or of any covenant or agreement to be complied with or
performed by Parent or Merger Sub pursuant to the terms of this Agreement or the
failure of a condition set forth in Article VI to be satisfied (and such
condition is not waived in writing by the Company) on or prior to the Closing
Date, or the occurrence of any event which results or would result in the
failure of a condition set forth in Article VI to be satisfied on or prior to
the Closing Date; provided that the Company may not terminate this Agreement
prior to the Closing Date if Parent has not had an adequate notice and
opportunity to cure such breach or failure.
SECTION 8.02. Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 8.01, this Agreement shall forthwith become
void and there shall be no liability on the part of any party hereto or any of
its affiliates, directors, officers or stockholders except (a) as set forth in
Section 8.03 and Section 9.01 hereof, and (b) nothing herein shall relieve any
party from liability for any breach hereof.
SECTION 8.03. Fees and Expenses.
(a) Except as set forth in this Section 8.03, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses,
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whether or not the Merger is consummated; provided, however, that Parent and the
Company shall share equally all printing and filing fees and expenses, other
than attorneys', auditors' and representatives' fees, incurred in connection
with the printing and filing of the Proxy Statement/Prospectus (including any
preliminary materials related thereto) and the Registration Statement (including
financial statements and exhibits) and any amendments or supplements thereto.
The Company represents and warrants to Parent that with respect to the
transactions contemplated by this Agreement the fees of its investment banker,
legal counsel, auditors shall be in accordance with terms of the written fee
agreements of which copies have been delivered to Parent; provided, however, in
no event shall (i) the fees of DBI exceed $750,000 or (ii) the fees of the
Company's counsel exceed $175,000.
(b) Subject to Section 8.03(d) below, the Company shall pay Parent a fee of
$1,700,000 (the "Fee"), plus actual, documented and reasonable out-of-pocket
expenses of Parent relating to the transactions contemplated by this Agreement
in an aggregate amount not to exceed $450,000 (including, but not limited to,
fees and expenses of Parent's legal counsel and accountants), upon the first to
occur of any of the following events:
(i) the termination of this Agreement by Parent or the Company
pursuant to Section 8.01(d); or
(ii) the termination of this Agreement by Parent or the Company
pursuant to Section 8.01(e); or
(iii) the termination of this Agreement by Parent pursuant to Section
8.01(g);
(iv) the termination of this Agreement by Parent pursuant to Section
8.01(h); or
(v) the termination of this Agreement by the Company in the event of
the non-satisfaction of the condition described in Section 6.12 hereof.
(c) As used herein, "Alternative Transaction" means any of (i) a
transaction pursuant to which any person (or group of persons) other than Parent
or its affiliates (a "Third Party") acquires or would acquire more than 25% of
the outstanding Shares, whether from the Company or pursuant to a tender offer
or exchange offer or otherwise, (ii) a merger or other business combination
involving the Company pursuant to which any Third Party acquires more than 25%
of the outstanding equity securities of the Company or the entity surviving such
merger or business combination, or (iii) any other transaction pursuant to which
any Third Party acquires or would acquire control of assets (including for this
purpose the outstanding equity securities of subsidiaries of the Company, and
the entity surviving any merger or business combination including any of them)
of the Company, or any of its subsidiaries having a fair market value (as
determined by the Board of Directors of the Company in good faith) equal to more
than 25% of the fair market value of all the assets of the Company and its
subsidiaries, taken as a whole, immediately prior to such transaction; provided,
however, that the term Alternative Transaction shall not include any acquisition
of securities by a broker-dealer in connection with a bona fide public offering
of such securities.
(d) The Fee and related expenses payable pursuant to Section 8.03(b) hereof
shall be paid within five business days after the first to occur of any of the
events described in Section 8.03(b), provided, however, in no event will the
Company be required to pay the Fee and related expenses to Parent under Section
8.03(b), (i), (iii), (iv) or (v) unless and until the Company also consummates
an Alternative Transaction within one year from the date of termination of this
Agreement; provided, further, that in no event shall the Company be required to
pay such Fee and expenses to Parent if, immediately prior to the termination of
this Agreement, Parent or Merger Sub was in material breach of its obligations
under this Agreement.
ARTICLE IX.
GENERAL PROVISIONS
SECTION 9.01. Effectiveness of Representations, Warranties and
Agreements. Except as otherwise provided in this Section 9.01, the
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers or directors, whether prior to or after the
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execution of this Agreement. The representations, warranties and agreements in
this Agreement shall terminate at the Effective Time or upon the termination of
this Agreement pursuant to Section 8.01, as the case may be, except that the
agreements set forth in Section 8.03 shall survive termination indefinitely.
This Section 9.01 shall not limit any agreement or covenant of the parties under
Sections 1.07(c)(iv), 5.08, 5.09, 7.12 and 9.10 except as set forth therein.
SECTION 9.02. Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by any party without the prior written
consent of the other parties; except that Parent may, with the Company's
consent, which consent shall not be unreasonably withheld, assign all such
rights to any lender as collateral security and assign all such rights and
obligations to a wholly-owned subsidiary (or a partnership controlled by Parent)
or subsidiaries of Parent. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and no other person shall have any right,
benefit or obligation under this Agreement as a third party beneficiary or
otherwise. In the event of any such assignment, Parent shall not be released
from any of its obligations or liabilities pursuant to this Agreement and any
document executed in connection herewith and shall remain primarily liable for
all such obligations and liabilities.
SECTION 9.03. Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given when received if
personally delivered; when transmitted if transmitted by telecopy, electronic or
digital transmission method; the day after it is sent, if sent for next day
delivery to a domestic address by recognized overnight delivery service (e.g.,
Federal Express); and upon receipt, if sent by certified or registered mail,
return receipt requested. In each case notice shall be sent to:
If to the Company, addressed to:
Pet Food Warehouse, Inc.
Interchange Tower, Ste. 701
600 South Highway 169
St. Louis Park, MN 55426
Attention: Marvin Goldstein
With a copy to:
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402
Attention: Timothy Heaney, Esq.
If to Parent or Merger Sub, addressed to:
Petco Animal Supplies, Inc.
9125 Rehco Road
San Diego, California 92121
Attention: Richard C. St. Peter
With a copy to:
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Attention: Thomas A. Edwards, Esq.
and to such other places and with such other copies as either party may
designate as to itself by written notice to the others.
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SECTION 9.04. Choice of Law. This Agreement shall be construed,
interpreted and the rights of the parties determined in accordance with the laws
of the State of Minnesota, except with respect to matters of law concerning the
internal corporate affairs of any corporate entity which is a party to or the
subject of this Agreement, and as to those matters the law of the jurisdiction
under which the respective entity derives its powers shall govern.
SECTION 9.05. Entire Agreement; Amendments and Waivers. This Agreement,
together with all exhibits and schedules hereto (including the Disclosure
Schedules), constitutes the entire agreement among the parties pertaining to the
subject matter hereof and supersedes all prior agreements, understandings,
negotiations and discussions, whether oral or written, of the parties. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto. No amendment, supplement, modification or waiver
of this Agreement shall be binding unless executed in writing by the party to be
bound thereby. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.
SECTION 9.06. Multiple Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
SECTION 9.07. Invalidity. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
SECTION 9.08. Titles. The titles, captions or headings of the Articles
and Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
SECTION 9.09. Public Statements and Press Releases. The parties hereto
covenant and agree that, except as provided for hereinbelow, each will not from
and after the date hereof make, issue or release any public announcement, press
release, statement or acknowledgment of the existence of, or reveal publicly the
terms, conditions and status of, the transactions provided for herein, without
the prior written consent of the other party as to the content and time of
release of and the media in which such statement or announcement is to be made;
provided, however, that in the case of announcements, statements,
acknowledgments or revelations which either party is required by law to make,
issue or release, the making, issuing or releasing of any such announcement,
statement, acknowledgment or revelation by the party so required to do so by law
shall not constitute a breach of this Agreement.
SECTION 9.10. Confidential Information.
(a) No Disclosure. The parties acknowledge that the transaction described
herein is of a confidential nature and shall not be disclosed except to
consultants, advisors and affiliates, or as required by law, until such time as
the parties make a public announcement regarding the transaction as provided in
Section 9.09 hereof.
(b) Preservation of Confidentiality. In connection with the negotiation of
this Agreement, the preparation for the consummation of the transactions
contemplated hereby, and the performance of obligations hereunder, Parent
acknowledges that it will have access to confidential information relating to
the Company, including technical, manufacturing or marketing information, ideas,
methods, developments, inventions, improvements, business plans, trade secrets,
scientific or statistical data, diagrams, drawings, specifications or other
proprietary information relating thereto, together with all analyses,
compilations, studies or other documents, records or data prepared by the
Company or its representatives which contain or otherwise reflect or are
generated from such information ("Confidential Information"). The term
"Confidential Information" does not include information received by Parent in
connection with the transactions contemplated hereby which (i) is or becomes
generally available to the public other than as a result of a disclosure by
Parent or its representatives, (ii) was within Parent's possession prior to its
being furnished to Parent by or on behalf of the Company in connection with the
transactions contemplated hereby, provided that
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the source of such information was not known by Parent to be bound by a
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to the Company or any other person with respect to
such information or (iii) becomes available to Parent on a non-confidential
basis from a source other than the Company or any of its representatives,
provided that such source is not bound by a confidentiality agreement with or
other contractual, legal or fiduciary obligation of confidentiality to the
Company or any other person with respect to such information.
(c) Parent shall treat all Confidential Information as confidential,
preserve the confidentiality thereof and not disclose any Confidential
Information, except to its representatives and affiliates in connection with the
transactions contemplated hereby who shall require access thereto on a
need-to-know basis for the purpose of the transactions contemplated by this
Agreement. Parent shall use all reasonable efforts to cause its representatives
to treat all Confidential Information as confidential, preserve the
confidentiality thereof and not disclose any Confidential Information. Parent
shall be responsible for any breach of this Agreement by any of its
representatives. If, however, Confidential Information is disclosed, in addition
to any of its other obligations hereunder, Parent shall immediately notify the
Company in writing and take all reasonable steps required to prevent further
disclosure. This section shall survive the termination of this Agreement for
whatever reason for a period of time of three years from the date of this
Agreement. The Parent understands that the Company will not have an adequate
remedy at law for a breach or threatened breach of this Agreement by the Parent
of the terms of this Section, and Parent agrees that if there is any such breach
or threatened breach, the Company may, in addition to any other legal or
equitable remedies available to it, obtain an injunction or restraining order to
enjoin Parent from such breach or threatened breach of this Section.
(d) Until the Effective Time or the termination of this Agreement, all
Confidential Information shall remain the property of the party who originally
possessed such information. In the event of the termination of this Agreement
for any reason whatsoever, Parent shall, and shall cause its representatives and
affiliates to, return to the Company all Confidential Information (including all
copies, summaries and extracts thereof) furnished to Parent by the Company in
connection with the transactions contemplated hereby.
SECTION 9.11. Cumulative Remedies. All rights and remedies of either
party hereto are cumulative of each other and of every other right or remedy
such party may otherwise have at law or in equity, and the exercise of one or
more rights or remedies shall not prejudice or impair the concurrent or
subsequent exercise of other rights or remedies.
SECTION 9.12. Consent to Jurisdiction. Each party hereto irrevocably and
unconditionally (a) agrees that any suit, action or other legal proceeding
arising out of this Agreement may be brought in the United States District Court
for the Northern District of Illinois or, if such court does not have
jurisdiction or will not accept jurisdiction, in any court of general
jurisdiction in Cook County, Illinois, (b) consents to the jurisdiction or any
such court in any such suit, action or proceeding; and (c) waives any objection
which such party may have to the laying of venue of any such suit, action or
proceeding in any such court.
SECTION 9.13. Arbitration. In the event that there shall be a dispute
among the parties arising out of or relating to this Agreement including any
claims of misrepresentation or fraud, including fraud in the inducement, the
parties agree that such dispute shall be resolved by final and binding
arbitration in Chicago, Illinois, administered by the American Arbitration
Association ("AAA"), in accordance with AAA's commercial rules then in effect or
such other procedures as the parties may agree to prior to the Effective Time.
Depositions may be taken and other discovery may be obtained during such
arbitration proceedings to the same extent as authorized in civil judicial
proceedings. Any award issued as a result of such arbitration shall be final and
binding between the parties thereto, and shall be enforceable by any court
having jurisdiction over the party against whom enforcement is sought. The fees
and expenses of such arbitration (including reasonable attorneys' fees) or any
action to enforce an arbitration award shall be paid by the party that does not
prevail in such arbitration.
SECTION 9.14. Attorneys' Fees. If any party to this Agreement brings an
action to enforce its rights under this Agreement, the prevailing party shall be
entitled to recover its costs and expenses, including without limitation
reasonable attorneys' fees, incurred in connection with such action, including
any appeal of such action, which shall be set by the arbitration judge.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their respective behalf, by their respective officers thereunto
duly authorized, all as of the day and year first above written.
<TABLE>
<S> <C>
PETCO ANIMAL SUPPLIES, INC. PET FOOD WAREHOUSE, INC.
By: /s/ RICHARD C. ST. PETER By: /s/ MARVIN W. GOLDSTEIN
- -------------------------------------------- ----------------------------------------
Richard C. St. Peter Marvin W. Goldstein
Executive Vice President and Chairman and Chief Executive Officer
Chief Financial Officer
PASI ACQUISITION CORP.
By: /s/ RICHARD C. ST. PETER
- --------------------------------------------
Richard C. St. Peter
Executive Vice President and
Chief Financial Officer
</TABLE>
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APPENDIX B
[Dain Bosworth Incorporated Letterhead]
October 3, 1996
The Board of Directors
Pet Food Warehouse, Inc.
Interchange Tower, Suite 701
600 South Highway 169
St. Louis Park, MN 55426
Gentlemen:
You have requested our opinion, as of the date hereof, as to the fairness,
from a financial point of view, to the common stock shareholders of Pet Food
Warehouse, Inc. a Minnesota corporation ("PFWA" or the "Company") of the terms
of the proposed merger (the "Merger") of the Company with and into Petco Animal
Supplies, Inc. ("PETC"). The terms of the Merger are set forth in the Agreement
and Plan of Merger dated October 3, 1996, (the "Agreement") and include the
subsequent conversion of each share of PFWA common stock into .200 shares of
fully registered and tradable PETC common stock, subject to adjustment as
provided in the Agreement (the "Exchange Ratio"). Outstanding options to acquire
shares of PFWA common stock will be converted into options to acquire shares of
PETC common stock, adjusted for the Exchange Ratio. Based upon the 10 day moving
average closing price indicated for PETC common stock as of October 2, 1996 of
$27.70 per share, and an Exchange Ratio of .200 shares, each shareholder of PFWA
common stock would receive $5.54 in PETC common stock for each share of PFWA
common stock held.
Pursuant to the Agreement, each share of the Company common stock shall be
converted into the right to receive that fraction of a share of PETC common
stock equal to the Exchange Ratio which shall be calculated as follows: 1) if
the Closing Market Value (as defined in the Agreement) is greater than or equal
to $25.00, the Exchange Ratio will be .200; 2) if the Closing Market Value is
less than $25.00 and greater than or equal to $23.00, the Exchange Ratio will be
the quotient of A) $5.00 divided by B) the Closing Market Value, rounded to the
nearest one-one thousandth of a share; and 3) if the Closing Market Value is
less than $23.00, the Exchange Ratio will be .217. We have assumed, with your
consent, that the Merger will qualify for pooling-of-interests accounting
treatment and as a tax free transaction for the shareholders of the Company.
Dain Bosworth Incorporated ("Dain Bosworth"), as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements, and valuations for estate, corporate, and other
purposes. Dain Bosworth is familiar with the Company having provided certain
investment banking services to the Company from time to time including a public
offering of the Company's common stock on February 16, 1994. In connection with
the public offering, Dain Bosworth received warrants to purchase 60,000 shares
of PFWA common stock at an exercise price of $5.775 per share expiring February
24, 1999. Also, Dain Bosworth has from time to time issued research reports and
recommendations on the common stock of PFWA and, in the ordinary course of
business, Dain Bosworth may periodically have positions in the common stock of
the Company and PETC.
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In connection with this opinion, we have, among other things, reviewed
certain publicly available information regarding the Company and PETC and other
financial and operating information supplied to us by the Company, including
certain historical audited financial statements, and certain interim unaudited
financial statements and certain financial projections relating to the Company
and PETC. We have visited the corporate offices of the Company and have held
discussions with members of the senior management of both companies. In
addition, we made inquiries of the management of PFWA and PETC regarding the
past and current business operations, financial condition, future prospects for
the companies, and the joint prospects of the combined company. We have reviewed
the Agreement and selected other documents connected with the Merger. We have
analyzed the historical reported market prices and trading activity of the
common stock of PFWA and PETC, as well as the Company's historical and projected
revenue, earnings, and capitalization. We have compared financial and stock
market information on PFWA and PETC to similar information for certain publicly
traded companies. We have also reviewed, to the extent publicly available, the
terms of selected relevant mergers and acquisitions and performed other studies
and analyses as we considered appropriate.
In conducting our review and in rendering our opinion, we have assumed and
relied upon the accuracy and completeness of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independent verification of such information, and we have further relied
upon the assurances of management of PFWA and PETC that they are not aware of
any facts that would make such information inaccurate or misleading. It is
understood that we were retained by the Board of Directors of PFWA, and that the
Board of Directors has not looked to us for independent verification with
respect to the financial and other information provided to us or publicly
available, including the projections provided to us by PFWA and PETC. With
respect to the financial projections for PFWA and PETC, we have assumed that
such projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the respective management teams
as to the future financial performance of PFWA and PETC, and that PFWA and PETC
will perform substantially in accordance with such projections. Also, we did not
make an independent appraisal of the assets or liabilities of PFWA or PETC, and
we do not express an opinion regarding the liquidation values or solvency of
either company separately or the combined companies following the Merger. Our
opinion as expressed herein is limited to the fairness to PFWA, from a financial
point of view, of the consideration to be received by the Company in connection
with the Merger, and it does not address the Company's underlying business
decision to proceed with the Merger. Our opinion is based upon general market,
economic, financial, monetary and other conditions as they exist and can be
evaluated, and the information available to us, as of the date hereof.
Based upon the foregoing, and other matters that we considered relevant, it
is our opinion that, as of the date hereof, the consideration to be received
pursuant to the terms of the Merger is fair to the common shareholders of PFWA
from a financial point of view.
Very truly yours,
DAIN BOSWORTH INCORPORATED
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APPENDIX C
MINNESOTA BUSINESS CORPORATION ACT
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new
class or series with similar or different voting rights; except that an
amendment to the articles of an issuing public corporation that provides
that section 302A.671 does not apply to a control share acquisition does
not give rise to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
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SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by
the shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the shareholder
and must not vote the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertified shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
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(2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivision 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions,ws 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the share, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS, FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
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(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
Laws 1981, c. 270, sec. 81, eff. July 1, 1981. Amended by laws 1987, c. 104,
secs. 30 to 33; Laws 1993, c. 17, secs. 41, 42.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information contained in the Proxy Statement/Prospectus under the
caption "Description of Petco Capital Stock -- Business Combinations; Certain
Charter and Bylaw Provisions" is incorporated herein by reference.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 3, 1996, by and among Petco, PASI
Acquisition Corp. and Pet Food Warehouse, Inc. (filed as Appendix A to the Proxy
Statement/Prospectus).(1)
3.1 Amended and Restated Certificate of Incorporation, as amended.(1)
3.2 Amended and Restated Bylaws.(2)
4.1 Form of Common Stock Certificate.(2)
5.1 Opinion of Latham & Watkins.(3)
8.1 Opinion of Fredrikson & Byron, P.A.(3)
10.1 Employment Letter Agreement, dated October 3, 1996, by and between Petco and Marvin
W. Goldstein.(1)
10.2 Form of Affiliate Agreement by and between Petco and affiliates of Pet Food
Warehouse, Inc.(1)
10.3 Stockholder's Agreement entered into as of April 19, 1991 between Petco and the
stockholders identified therein.(2)
10.4 Common Stock Subscription Agreements, dated April 19, 1991, between Petco and
various stockholders identified therein.(2)
10.5 Preferred Stock Subscription Agreements, dated April 19, 1991, between Petco and
various stockholders identified therein.(2)
10.6 Term Loan Agreement, dated January 29, 1996, between Petco and Union Bank.(4)
10.7 Revolving Loan Agreement, dated May 10, 1995, between Petco and Union Bank.(4)
10.8 Distribution Center Lease, dated March 24, 1994, between Petco and The Principal
Mutual Life Insurance Company for 10401 Seventh Street, Rancho Cucamonga,
California.(5)
10.9 Distribution Center Lease, dated August 12, 1994, between Petco and John Kaiseratt
for 515 113th Street, Arlington, Texas.(5)
10.10 Distribution Center Lease, dated September 24, 1991, between Petco and
S-H-Eddy-Souther #238 Partners for 11006 N.E. 37th Circle, Vancouver,
Washington.(2)
10.11 Distribution Center Lease, dated August 3, 1992, between Petco and Isaac Heller for
2-A Corn Road, Dayton, New Jersey.(2)
10.12 Distribution Center Lease, dated October 25, 1995, between Petco and Stockton 215
Venture for 8616 Elder Creek Road, Sacramento, California.(4)
10.13 Executive Management Agreement, as amended, dated July 20, 1988, between Petco and
the Spectrum Group.(2)
10.14 The 1994 Stock Option and Restricted Stock Plan for Executive and Key Employees of
Petco Animal Supplies, Inc., as amended.(6)
10.15 Employment Agreement, dated March 17, 1996, between Petco and Brian K. Devine.(4)
10.16 Petco Animal Supplies, Inc. 401(k) Plan.(2)
</TABLE>
II-1
<PAGE> 168
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------
<S> <C>
10.17 Master Equipment Lease Agreement, dated October 19, 1992, between Petco and Sanwa
Business Credit Corporation.(2)
10.18 Master Equipment Lease Agreement, dated September 21, 1994, between Petco and
General Electric Credit Corporation.(5)
10.19 Master Equipment Lease Agreement, dated March 10, 1995, between Petco and KeyCorp
Leasing Ltd.(4)
10.20 Master Lease Agreement, dated December 27, 1995, between Petco and Newcourt
Financial USA, Inc.(4)
10.21 Master Lease Agreement, dated September 28, 1995, between Petco and USL Capital
Corporation.(4)
10.22 Master Equipment Lease Agreement, dated November 15, 1995, between Petco and Fleet
Credit Corporation.(4)
10.23 Petco Animal Supplies, Inc. Group Benefit Plan, dated July 29, 1991, as amended.(4)
10.24 First Amendment to Stockholders' Agreement, dated as of March 1994.(5)
10.25 Petco Animal Supplies, Inc. Directors' 1994 Stock Option Plan, as amended.(4)
10.26 Form of Indemnification Agreement between Petco and certain officers and
directors.(2)
10.27 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option Agreement.(2)
10.28 Form of Petco Animal Supplies, Inc. Incentive Stock Option Agreement.(2)
10.29 Form of Petco Animal Supplies, Inc. Restricted Stock Agreement.(2)
10.30 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option Agreement (Directors'
1994 Stock Option Plan).(2)
10.31 Agreement for Purchase of Assets, dated June 16, 1995, between Petco and Pet Metro,
Inc.(7)
10.32 Stock Purchase Agreement, dated October 28, 1995, among Petco, New England Serum
Company, Inc., Andrew S. Katz, The Andrew S. Katz Family Trust, The Debra E. Katz
Family Trust and Just for Pets Superstores, Inc.(8)
10.33 Stock Purchase Agreement, dated October 29, 1995, among Petco, Peter Chernis,
Edward Field, Jeffrey Ross, Bryan Shlager, Paul Sudman and Pet Supply Depot,
Inc.(8)
21.1 Subsidiaries.(1)
23.1 Consent of KPMG Peat Marwick LLP.(1)
23.2 Consent of Arthur Andersen LLP.(1)
23.3 Consent of Dain Bosworth Incorporated.(1)
23.4 Consent of Latham & Watkins (contained in Exhibit 5.1).(3)
23.5 Consent of Fredrikson & Byron, P.A. (contained in Exhibit 8.1).(3)
24.1 Power of Attorney (contained on signature page).(1)
27.1 Financial Data Schedule.(1)
99.1 Form of Pet Food Warehouse, Inc. proxy card.(1)
</TABLE>
- ---------------
(1) Filed herewith.
(2) Filed as an exhibit to Petco's Registration Statement on Form S-1 dated
January 13, 1994, File No. 33-77094, including Amendment No. 1 thereto dated
February 24, 1994 and Amendment No. 2 thereto dated March 11, 1994.
(3) To be filed by amendment.
(4) Filed as an exhibit to Petco's Registration Statement on Form S-3 dated
April 4, 1996, File No. 333-3156, including Amendment No. 1 thereto dated
April 24, 1996.
II-2
<PAGE> 169
(5) Filed as an exhibit to Petco's Registration Statement on Form S-1 dated
March 31, 1995, File No. 33-90804, including Amendment No. 1 thereto dated
April 27, 1995
(6) Filed as an exhibit to Petco's Proxy Statement dated May 24, 1996 relating
to the 1996 Annual Meeting of Stockholders of Petco.
(7) Filed as an exhibit to Petco's Current Report on Form 8-K dated August 23,
1995.
(8) Filed as an exhibit to Petco's Current Report on Form 8-K dated November 15,
1995, as amended.
(b) FINANCIAL STATEMENT SCHEDULES.
All required information is set forth in the financial statements included
in the Proxy Statement/Prospectus constituting part of this Registration
Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
provided, however, that the undertakings set forth in paragraphs (1)(i) and
(1)(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 or 15(d) of the Exchange Act that are incorporated
by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE> 170
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the
Registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to the immediately preceding paragraph; or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the Registration Statement and will not be used until such
amendment is effective, and that for the purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 171
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on the 23rd day of October, 1996.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ BRIAN K. DEVINE
------------------------------------
Brian K. Devine
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose signature appears below hereby authorizes
Brian K. Devine and Richard C. St. Peter, and either of them, with full power of
substitution and resubstitution, as his true and lawful attorneys-in-fact, for
him in any and all capacities, to sign any amendments (including post-effective
amendments or supplements) to this Registration Statement and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Commission.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<S> <C> <C>
/s/ BRIAN K. DEVINE Chairman, President and Chief October 23, 1996
- --------------------------------------------- Executive Officer (Principal
Brian K. Devine Executive Officer)
/s/ RICHARD C. ST. PETER Executive Vice President, October 23, 1996
- --------------------------------------------- Chief Financial Officer and
Richard C. St. Peter Secretary (Principal
Financial Officer)
/s/ JAMES M. MYERS Senior Vice President, Finance October 23, 1996
- --------------------------------------------- (Principal Accounting
James M. Myers Officer)
/s/ C. HUNTER BOLL Director October 23, 1996
- ---------------------------------------------
C. Hunter Boll
/s/ ANDREW G. GALEF Director October 23, 1996
- ---------------------------------------------
Andrew G. Galef
/s/ SHAHAN D. SOGHIKIAN Director October 23, 1996
- ---------------------------------------------
Shahan D. Soghikian
/s/ PETER M. STARRETT Director October 23, 1996
- ---------------------------------------------
Peter M. Starrett
</TABLE>
II-5
<PAGE> 172
EXHIBIT INDEX
The following exhibits are filed as part of this Registration Statement on
Form S-4 or are incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT PAGE
- ------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of October 3, 1996, by and among Petco,
PASI Acquisition Corp. and Pet Food Warehouse, Inc. (filed as Appendix A to
the Proxy Statement/Prospectus).(1)...........................................
3.1 Amended and Restated Certificate of Incorporation, as amended.(1).............
3.2 Amended and Restated Bylaws.(2)...............................................
4.1 Form of Common Stock Certificate.(2)..........................................
5.1 Opinion of Latham & Watkins.(3)...............................................
8.1 Opinion of Fredrikson & Byron, P.A.(3)........................................
10.1 Employment Letter Agreement, dated October 3, 1996, by and between Petco and
Marvin W. Goldstein.(1).......................................................
10.2 Form of Affiliate Agreement by and between Petco and affiliates of Pet Food
Warehouse, Inc.(1)............................................................
10.3 Stockholder's Agreement entered into as of April 19, 1991 between Petco and
the stockholders identified therein.(2).......................................
10.4 Common Stock Subscription Agreements, dated April 19, 1991, between Petco and
various stockholders identified therein.(2)...................................
10.5 Preferred Stock Subscription Agreements, dated April 19, 1991, between Petco
and various stockholders identified therein.(2)...............................
10.6 Term Loan Agreement, dated January 29, 1996, between Petco and Union
Bank.(4)......................................................................
10.7 Revolving Loan Agreement, dated May 10, 1995, between Petco and Union
Bank.(4)......................................................................
10.8 Distribution Center Lease, dated March 24, 1994, between Petco and The
Principal Mutual Life Insurance Company for 10401 Seventh Street, Rancho
Cucamonga, California.(5).....................................................
10.9 Distribution Center Lease, dated August 12, 1994, between Petco and John
Kaiseratt for 515 113th Street, Arlington, Texas.(5)..........................
10.10 Distribution Center Lease, dated September 24, 1991, between Petco and
S-H-Eddy-Souther #238 Partners for 11006 N.E. 37th Circle, Vancouver,
Washington.(2)................................................................
10.11 Distribution Center Lease, dated August 3, 1992, between Petco and Isaac
Heller for 2-A Corn Road, Dayton, New Jersey.(2)..............................
10.12 Distribution Center Lease, dated October 25, 1995, between Petco and Stockton
215 Venture for 8616 Elder Creek Road, Sacramento, California.(4).............
10.13 Executive Management Agreement, as amended, dated July 20, 1988, between Petco
and the Spectrum Group.(2)....................................................
10.14 The 1994 Stock Option and Restricted Stock Plan for Executive and Key
Employees of Petco Animal Supplies, Inc., as amended.(6)......................
10.15 Employment Agreement, dated March 17, 1996, between Petco and Brian K.
Devine.(4)....................................................................
10.16 Petco Animal Supplies, Inc. 401(k) Plan.(2)...................................
10.17 Master Equipment Lease Agreement, dated October 19, 1992, between Petco and
Sanwa Business Credit Corporation.(2).........................................
10.18 Master Equipment Lease Agreement, dated September 21, 1994, between Petco and
General Electric Credit Corporation.(5).......................................
10.19 Master Equipment Lease Agreement, dated March 10, 1995, between Petco and
KeyCorp Leasing Ltd.(4).......................................................
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT PAGE
- ------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
10.20 Master Lease Agreement, dated December 27, 1995, between Petco and Newcourt
Financial USA, Inc. (4).......................................................
10.21 Master Lease Agreement, dated September 28, 1995, between Petco and USL
Capital Corporation. (4)......................................................
10.22 Master Equipment Lease Agreement, dated November 15, 1995, between Petco and
Fleet Credit Corporation. (4).................................................
10.23 Petco Animal Supplies, Inc. Group Benefit Plan, dated July 29, 1991, as
amended.(4)...................................................................
10.24 First Amendment to Stockholders' Agreement, dated as of March 1994.(5)........
10.25 Petco Animal Supplies, Inc. Directors' 1994 Stock Option Plan, as
amended.(4)...................................................................
10.26 Form of Indemnification Agreement between Petco and certain officers and
directors.(2).................................................................
10.27 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option Agreement.(2)...
10.28 Form of Petco Animal Supplies, Inc. Incentive Stock Option Agreement.(2)
10.29 Form of Petco Animal Supplies, Inc. Restricted Stock Agreement.(2)............
10.30 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option Agreement
(Directors' 1994 Stock Option Plan).(2).......................................
10.31 Agreement for Purchase of Assets, dated June 16, 1995, between Petco and Pet
Metro, Inc.(7)................................................................
10.32 Stock Purchase Agreement, dated October 28, 1995, among Petco, New England
Serum Company, Inc., Andrew S. Katz, The Andrew S. Katz Family Trust, The
Debra E. Katz Family Trust and Just for Pets Superstores, Inc.(8).............
10.33 Stock Purchase Agreement, dated October 29, 1995, among Petco, Peter Chernis,
Edward Field, Jeffrey Ross, Bryan Shlager, Paul Sudman and Pet Supply Depot,
Inc.(8).......................................................................
21.1 Subsidiaries.(1)..............................................................
23.1 Consent of KPMG Peat Marwick LLP.(1)..........................................
23.2 Consent of Arthur Andersen LLP.(1)............................................
23.3 Consent of Dain Bosworth Incorporated.(1).....................................
23.4 Consent of Latham & Watkins (contained in Exhibit 5.1).(3)....................
23.5 Consent of Fredrikson & Byron, P.A. (contained in Exhibit 8.1).(3)............
24.1 Power of Attorney (contained on signature page).(1)...........................
27.1 Financial Data Schedule.(1)...................................................
99.1 Form of Pet Food Warehouse, Inc. proxy card.(1)...............................
</TABLE>
- ---------------
(1) Filed herewith.
(2) Filed as an exhibit to Petco's Registration Statement on Form S-1 dated
January 13, 1994, File No. 33-77094, including Amendment No. 1 thereto dated
February 24, 1994 and Amendment No. 2 thereto dated March 11, 1994.
(3) To be filed by amendment.
(4) Filed as an exhibit to Petco's Registration Statement on Form S-3 dated
April 4, 1996, File No. 333-3156, including Amendment No. 1 thereto dated
April 24, 1996.
(5) Filed as an exhibit to Petco's Registration Statement on Form S-1 dated
March 31, 1995, File No. 33-90804, including Amendment No. 1 thereto dated
April 27, 1995
(6) Filed as an exhibit to Petco's Proxy Statement dated May 24, 1996 relating
to the 1996 Annual Meeting of Stockholders of Petco.
(7) Filed as an exhibit to Petco's Current Report on Form 8-K dated August 23,
1995.
(8) Filed as an exhibit to Petco's Current Report on Form 8-K dated November 15,
1995, as amended.
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PETCO ANIMAL SUPPLIES, INC.
PETCO ANIMAL SUPPLIES, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
1. The Corporation's original Certificate of Incorporation was filed on
April 9, 1991 under the name PASI SHELL COMPANY.
2. That by action taken at a special meeting of the Board of Directors
on January 11, 1994, resolutions were duly adopted setting forth a proposed
amendment and restatement of the Certificate of Incorporation of the Corporation
which was filed in the office of the Secretary of State of the State of Delaware
on April 9, 1991 and which was amended and restated pursuant to that certain
Amended and Restated Certificate of Incorporation filed in the office of the
Secretary of State of the State of Delaware on April 19, 1991, declaring said
amendment and restatement to be advisable and directing its officers to submit
said amendment and restatement to the stockholders of the Corporation for
consideration thereof. The resolution setting forth the proposed amendment and
restatement is as follows:
"THEREFORE, BE IT RESOLVED, that the Amended and Restated Certificate of
Incorporation of the Corporation is hereby amended to read in its entirety
as follows, subject to the required consent of the stockholders of the
corporation:
FIRST: The name of the Corporation (hereinafter the "Corporation") is
PETCO ANIMAL SUPPLIES, INC.
SECOND: The address, including street, number, city and county, of the
registered office of the Corporation in the State of Delaware is 32
Loockerman Square, Suite L-100, City of Dover, County of Kent; and the
name of the registered agent of the Corporation in the State of Delaware
is The Prentice-Hall Corporation System, Inc.
<PAGE> 2
THIRD: The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall have
authority to issue shall be (i) twenty million (20,000,000) shares of Common
Stock with a par value of $.0001 per share, and (ii) two million (2,000,000)
shares of Preferred Stock with a par value of $.0001 per share.
Additional series of Preferred Stock may be issued from time to time in
one or more series, each of such series to have such terms as stated in the
resolution or resolutions providing for the establishment of such series
adopted by the Board of Directors of the Corporation as hereinafter provided.
Except as otherwise expressly stated in the resolution or resolutions providing
for the establishment of a series of Preferred Stock, any shares of Preferred
Stock which may be redeemed, purchased or acquired by the Corporation may be
reissued except as otherwise expressly provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of stock
for the purpose of voting by classes unless expressly provided in the
resolution or resolutions providing for the establishment thereof.
Authority is hereby expressly granted to the Board of Directors of the
Corporation to issue, from time to time, shares of Preferred Stock in one or
more series, and, in connection with the establishment of any such series by
resolution or resolutions, to determine and fix such voting powers, full or
limited, or no voting powers, and such other powers, designations, preferences
and relative, participating, optional and other rights, and the qualifications,
limitations and restrictions thereof, including, without limitation, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
as shall be stated in such resolution or resolutions, all to the fullest extent
permitted by the Delaware General Corporation Law. Without limiting the
generality of the foregoing, the resolution or resolutions providing for the
establishment of any series of Preferred Stock may, to the extent permitted by
law, provide that such series shall be superior to, rank equally with or be
junior to the Preferred Stock of any other series. Except as otherwise
expressly provided in the resolution or resolutions providing for the
establishment of any series of Preferred Stock, no vote of the holders of
shares of Preferred Stock or Common Stock shall be a prerequisite to the
issuance of any shares of any series of the Preferred Stock authorized by and
complying with the conditions of this Amended and Restated Certificate of
Incorporation.
Upon the filing in the Office of the Secretary of State of the State of
Delaware of the Amended and Restated Certificate of Incorporation of the
Corporation whereby this Article FOURTH is amended to read as set forth herein,
each one thousand (1,000) issued and outstanding shares of Common Stock of the
Corporation shall thereby and thereupon be combined into one (1) share of
validly issued, fully paid and nonassessable share of Common Stock of the
Corporation without further action on the part of any person. No scrip or
fractional shares will be issued by reason of this amendment.
2
<PAGE> 3
FIFTH: The name and the mailing address of the incorporator are as follows:
NAME MAILING ADDRESS
---- ---------------
Daniel Howard 701 "B" Street, Suite 2100
San Diego, California 92101
SIXTH: 1. The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of not less than 5 nor
more than 15 directors, the exact number of directors to be determined from time
to time solely by resolution adopted by the affirmative vote of a majority of
the entire Board of Directors.
2. The directors shall be divided into three classes, designated Class I, Class
II and Class III. Each class shall consist, as nearly as may be possible, of
one-third of the total number of directors constituting the entire Board of
Directors. Each director shall serve for a term ending on the date of the third
annual meeting of stockholders next following the annual meeting at which such
director was elected, provided that directors initially designated as Class I
directors shall serve for a term ending on the date of the 1995 annual meeting,
directors initially designated as Class II directors shall serve for a term
ending on the date of the 1996 annual meeting, and directors initially
designated as Class III directors shall serve for a term ending on the date of
the 1997 annual meeting. Notwithstanding the foregoing, each director shall hold
office until such director's successor shall have been duly elected and
qualified or until such director's earlier death, resignation or removal. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, but in no event will a decrease in the number of
directors shorten the term of any incumbent director. Vacancies on the Board of
Directors resulting from death, resignation, removal or otherwise and newly
created directorships resulting from any increase in the number of directors may
be filled solely by a majority of the directors then in office (although less
than a quorum) or by a sole remaining director, and each director so elected
shall hold office for a term that shall coincide with the remaining term of the
class to which such director shall have been elected. Whenever the holders of
one or more classes or series of Preferred Stock shall have the right, voting
separately as a class or series, to elect directors, the nomination, election,
term of office, filling of vacancies, removal and other features of such
directorships shall not be governed by this ARTICLE SIXTH unless otherwise
provided for in the certificate of designation for such classes or series.
3. No director may be removed from office by the stockholders except for cause
with the affirmative vote of the holders of not less than a majority of the
total voting power of all outstanding securities of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class.
SEVENTH: The Corporation is to have perpetual existence.
3
<PAGE> 4
EIGHTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation and for the
further definition of the powers of the Corporation and its directors
and stockholders:
1. The Board of Directors shall have the power to adopt, amend or
repeal the by-laws of the Corporation.
The stockholders may adopt, amend or repeal the by-laws only with
the affirmative vote of the holders of not less than 66 2/3% of the
total voting power of all outstanding securities of the Corporation then
entitled to vote generally in the election of directors, voting together
as a single class.
2. Elections of directors need not be by written ballot unless the
by-laws of the Corporation so provide.
3. Any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called in
accordance with Delaware Law, and may not be taken by written consent of
stockholders without a meeting.
4. Special meetings of stockholders may be called by the Board of
Directors, the Chairman of the Board of Directors, the President or the
Secretary of the Corporation and may not be called by any other person.
Notwithstanding the foregoing, whenever holders of one or more classes
or series of Preferred Stock shall have the right, voting separately as
a class or series, to elect directors, such holders may call special
meetings of such holders pursuant to the certificate of designation for
such classes or series.
NINTH: No director of this Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the Law, (iii) under
Section 174 of the General Corporation law of Delaware, or (iv) for any
transaction from which the director derived an improper personal
benefit.
TENTH: The Corporation expressly elects not to be governed by Section
203 of the Delaware General Corporation Law."
3. That thereafter, by written consent of a majority of the issued and
outstanding shares of stock of the Corporation in accordance with Section 228
of the General Corporation Law of the State of Delaware, a majority of the
shares of the Corporation were voted in favor of the amendment.
4
<PAGE> 5
4. That said Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
5. That the capital of the Corporation will not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, PETCO ANIMAL SUPPLIES, INC. has caused this Certificate
to be signed by Richard St. Peter, its Senior Vice President and James M. Myers,
its Assistant Secretary, this 12th day of March, 1994.
PETCO ANIMAL SUPPLIES, INC.
a Delaware corporation
By: /s/ Richard St. Peter
----------------------------
Name: Richard St. Peter
Title: Sr. Vice President
ATTEST
/s/ James M. Myers
- ------------------------------
Name: James M. Myers
Title: Assistant Secretary
<PAGE> 6
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PETCO ANIMAL SUPPLIES, INC.
Petco Animal Supplies, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: That at a meeting of the Board of Directors of this Corporation,
resolutions were duly adopted setting forth a proposed amendment of the Amended
and Restated Certificate of Incorporation of this Corporation, declaring said
amendment to be advisable and seeking the consent of a majority of the
stockholders of this Corporation to said amendment. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the Amended and Restated Certificate of Incorporation of
this corporation be amended by changing the first paragraph of Article
FOURTH in its entirety so that, as amended, said paragraph shall be and
read as follows:
FOURTH: The total number of shares of stock which the
Corporation shall have authority to issue shall be (i) one
hundred million (100,000,000) shares of Common Stock with a par
value of $.0001 per share, and (ii) two million (2,000,000)
shares of Preferred Stock with a par value of $.0001 par share.
SECOND: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
THIRD: That said amendment shall be executed, acknowledged, filed and
recorded in accordance with Section 103 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, said Petco Animal Supplies, Inc. has caused this
certificate to be signed by Brian K. Devine, its President, and Richard C. St.
peter, its Secretary, this 21st day of August, 1996.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ Brian K. Devine
------------------------------
Brian K. Devine
President
ATTEST: /s/ Richard C. St. Peter
------------------------------
Richard C. St. Peter
Secretary
<PAGE> 1
Exhibit 10.1
PETCO ANIMAL SUPPLIES, INC.
9125 Rehco Road
San Diego, California 92121
October 3, 1996
Marvin Goldstein
Pet Food Warehouse, Inc.
Interchange Tower, Suite 701
600 South Highway 169
St. Louis Park, MN 55426
Re: Employment Arrangements
-----------------------
Dear Mr. Goldstein:
This letter will confirm our understanding regarding certain employment
and transition issues regarding your employment as it relates to the
acquisition of Pet Food Warehouse, Inc. ("PFW") by Petco Animal Supplies, Inc.
("Petco") pursuant to the Agreement and Plan of Merger (the "Merger Agreement")
dated October 3, 1996.
Specifically our agreement is as follows:
1. You have agreed to:
(a) publicly endorse the Merger consistent with your fiduciary
obligations;
(b) facilitate and aid in the transition and integration of PFW and
Petco from the date hereof through March 31, 1997; and
(c) use your best efforts to meet previously stated financial and
growth goals.
2. You will be employed by Petco following the Merger as a Senior Vice
President in charge of Petco's Midwest Region through March 31, 1997 (unless
you terminate earlier, foregoing any future employment benefits) on
substantially the same terms included in your existing Employment Agreement
with PFW. Effective January 1, 1997 your annual salary rate will be increased
to $200,000 per year with Petco. You will be eligible for a $25,000 integration
bonus based on achieving certain integration performance goals to be mutually
agreed to between you and Petco's Chairman. You will report directly to Petco's
Chairman. You will remain eligible for any performance bonus payable with
respect to 1996 pursuant to your PFW Employment Agreement. Your existing PFW
stock options will be converted into Petco stock options in accordance with the
terms of the Merger Agreement. Exercisability shall be as determined with the
terms of the Stock Option Agreements currently in effect.
<PAGE> 2
3. Petco will honor your existing severance arrangements with PFW
which allows for a $125,000 lump sum payment upon the termination of your
employment with Petco and for the continuation of certain other benefits for a
one-year period. You will not be entitled to any additional severance payments
or benefits from Petco.
4. Following termination of your employment with Petco, you and Petco
will enter into a six-month Consulting Agreement paying you $50,000 for
consulting services rendered during such six-month period. You agree not to
compete with Petco during this six-month period.
5. You will enter into the Covenant Not to Compete prior to the merger
which is set forth as Exhibit "C" to the Merger Agreement, which shall begin at
the earlier of (i) the termination of your consulting period or (ii) October 1,
1997.
6. On the date hereof you will execute the Affiliate Letter in the
form attached hereto.
7. The parties all agree that in the event any item pursuant to this
agreement shall cause the Merger not to be treated as a "pooling of interests"
as required by the Merger Agreement such provision shall be of no force and
effect. However the parties will use their best efforts to restructure such
provisions to provide to the affected parties as nearly the same economic
effect as is possible as will still permit the Merger to be treated as a
pooling of interests.
If the foregoing comports with your understanding of our agreement
please execute in the space below where upon this will become a binding
agreement among us.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ RICHARD C. ST. PETER
----------------------------
Richard C. St. Peter
Executive Vice President and
Chief Financial Officer
Accepted and agreed to this
3rd day of October, 1996
PET FOOD WAREHOUSE, INC.
By: /s/ MARVIN W. GOLDSTEIN
-------------------------
Marvin W. Goldstein
Chairman and Chief Executive Officer
/s/ MARVIN W. GOLDSTEIN
- ------------------------------
Marvin Goldstein
2
<PAGE> 1
Exhibit 10.2
_________________, 1996
Petco Animal Supplies, Inc.
9125 Rehco Road
San Diego, California 92121
Gentlemen:
Reference is made to the Agreement and Plan of Merger, dated as of
October 3, 1996 (together with any amendments thereto, the "Merger Agreement")
by and among Petco Animal Supplies, Inc., a Delaware corporation ("Parent"),
PASI Acquisition Corp., a Minnesota corporation and a wholly-owned subsidiary of
Parent ("Merger Sub") and Pet Food Warehouse, Inc., a Minnesota corporation
(the "Company"), pursuant to which Merger Sub will be merged with and into the
Company (the "Merger"), with the Company continuing as the surviving
corporation (the "Surviving Corporation"). This letter consists of the
undertakings contemplated by Section 5.03 of the Merger Agreement and is
designed to assure (i) compliance with Rule 145 ("Rule 145") under the
Securities Act of 1933, as amended (the "Act"), and (ii) that the Merger will
be treated as a pooling of interests for accounting purposes.
1. Compliance with Rule 145. I represent, warrant and covenant
as follows:
(a) I understand that I may be deemed to be an "affiliate" of the
Company, as such term is defined for purposes of Rule 145, and that the
transferability of the shares of common stock, par value $.0001 per share, of
Parent (the "Parent Common Stock"), which I will receive upon the consummation
of the Merger in exchange for my shares of common stock, par value $.01 per
share, of the Company (the "Company Common Stock"), is therefore subject to the
provisions of Rule 145. Nothing herein shall be construed as an admission that I
am an affiliate.
(b) Appendix A attached hereto sets forth all shares of Company
Common Stock and Parent Common Stock owned by me, including all Company Common
Stock as to which I have sole or shared voting or investment power and all
rights, options and warrants to acquire Company Common Stock owned or held by
me.
(c) I will not sell, exchange, transfer, pledge, dispose or
otherwise reduce my risk relative to any of the shares of Parent Common Stock
received by me in the Merger, except pursuant to an effective registration
statement or in compliance with Rule 145 or another exemption from the
registration requirements of the Act.
(d) I understand that Parent will impose stop transfer instructions
with respect to the Parent Common Stock to be received by me upon consummation
of the Merger and that a restrictive legend will be placed on certificates
delivered to me evidencing such Parent Common Stock in substantially the
following form:
<PAGE> 2
"This certificate and the shares represented hereby
have been issued pursuant to a transaction governed by
Rule 145 ("Rule 145") promulgated under the Securities
Act of 1933, as amended (the "Act"), and may not be sold
or otherwise disposed of unless registered under the Act
pursuant to a Registration Statement in effect at the time
or unless the proposed sale or disposition can be made in
compliance with Rule 145 or without registration in
reliance on another exemption therefrom."
2. Pooling of Interest Accounting. I represent, warrant and
covenant as follows:
(a) For the period from thirty (30) days prior to the effective
date of the Merger until after such time as results covering at least thirty
(30) days of combined post-closing operations of Parent and the Surviving
Corporation have been, within the meaning of Accounting Series Release No. 135,
as amended, of the Securities and Exchange Commission (the "Commission"), filed
by Parent with the Commission or published by Parent in an Annual Report on
Form 10-K, a Quarterly Report on Form 10-Q, a Current Report on Form 8-K, a
quarterly earnings report, a press release or other public issuance which
includes combined sales and income of Parent and the Surviving Corporation, I
will not sell, exchange, transfer, pledge, dispose or otherwise reduce my risk
relative to any of the shares of Parent Common Stock received by me in the
Merger.
(b) I agree not to take any action that to my knowledge could
reasonably be expected to adversely affect the ability of Parent to treat the
Merger as a pooling of interests.
3. Miscellaneous. I hereby represent, warrant and covenant
as follows:
(a) I have full power and authority to execute this letter, to make
the representations, warranties and covenants herein contained and to perform
my obligations hereunder.
(b) I understand the requirements of this letter and the
limitations imposed upon the sale, pledge, transfer or other disposition of the
Parent Common Stock.
(c) The receipt of this letter by Parent is an inducement to
Parent's obligation to consummate the Merger under the Merger Agreement.
(d) Any stock option agreements or other agreements to which I am a
party which provide for the immediate vesting of options upon a change in
control were entered into in the ordinary course of business and not in
contemplation of the Merger.
(e) All of the above representations are true, correct and complete
on the date hereof and will continue to be true, correct and complete through
and including the time of the transaction. If any of the representations in
this letter cease to be true at any time prior to the time of the transaction,
I will so notify you immediately in writing (and in any event before the time
of the transaction).
Very truly yours,
-2-
<PAGE> 3
In consideration for receiving this letter from the above-signed
shareholder of the Company (the "Shareholder"), Parent hereby agrees that it
will not terminate the Shareholder's employment with Parent, except for "Cause"
as referenced in paragraph 1(a) of the Shareholder's existing Retention
Agreement, on or before February 10, 1997.
PETCO ANIMAL SUPPLIES, INC.
By: __________________________
Name: ________________________
Title: _______________________
-3-
<PAGE> 1
Exhibit 21.1
PETCO ANIMAL SUPPLIES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
<S> <C>
International Pet Supplies and Distribution, Inc. California
Pet Nosh Consolidated Co., Inc. New York
PASI Acquisition Corp. Minnesota
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Petco Animal Supplies, Inc.:
We consent to the use of our reports included herein and to the reference
to our firm under the headings "Experts," "Merger Agreement," "Other Matters
Related to the Merger," "Merger Agreement -- Conditions to the Merger" and
"Accounting Treatment" in the Prospectus.
KPMG Peat Marwick LLP
San Diego, California
October 22, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 15, 1996 and to all references to our firm included in this
Petco Animal Supplies, Inc. Registration Statement on Form S-4 pertaining to
Petco Animal Supplies, Inc. merger with Pet Food Warehouse, Inc.
Arthur Andersen LLP
Minneapolis, MN
October 23, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT
We hereby consent to the use of our opinion to the Board of Directors of
Pet Food Warehouse, Inc. included as Appendix B to the Proxy
Statement/Prospectus which forms a part of the Registration Statement on Form
S-4 of Petco Animal Supplies, Inc. relating to the proposed merger of Pet Food
Warehouse, Inc. with and into Petco Animal Supplies, Inc., and to the reference
to such opinion in such Proxy Statement/ Prospectus. In giving such consent, we
do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder, nor do we
thereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
DAIN BOSWORTH INCORPORATED
October 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> AUG-03-1996
<CASH> 52,232
<SECURITIES> 0
<RECEIVABLES> 4,526
<ALLOWANCES> 0
<INVENTORY> 54,699
<CURRENT-ASSETS> 112,450
<PP&E> 71,610
<DEPRECIATION> 0
<TOTAL-ASSETS> 236,628
<CURRENT-LIABILITIES> 45,647
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 169,224
<TOTAL-LIABILITY-AND-EQUITY> 236,628
<SALES> 197,272
<TOTAL-REVENUES> 197,272
<CGS> 147,764
<TOTAL-COSTS> 147,764
<OTHER-EXPENSES> 57,732
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> (8,312)
<INCOME-TAX> (2,395)
<INCOME-CONTINUING> (5,917)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,917)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PET FOOD WAREHOUSE, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON , 1996
The undersigned hereby appoints Marvin W. Goldstein and Sharon K. Link, and
each of them, as proxies, each with the power to appoint his or her substitute,
and hereby authorizes either of them to act and to vote at the Special Meeting
of Stockholders of Pet Food Warehouse, Inc. ("PFW"), to be held on ,
1996, and at any adjournments or postponements thereof, as indicated upon all
matters referred to on this proxy card and described in the accompanying Proxy
Statement/Prospectus.
THE BOARD OF DIRECTORS OF PFW RECOMMENDS A VOTE "FOR" PROPOSAL 1.
1. Approval and adoption of the Agreement and Plan of Merger, dated as of
October 3, 1996, by and among PFW, Petco Animal Supplies Inc. ("Petco") and PASI
Acquisition Corp., a wholly owned subsidiary of Petco ("Merger Sub"), and the
transactions contemplated thereby, pursuant to which Merger Sub will be merged
with and into PFW, with the result that Merger Sub will cease to exist and PFW
will become a wholly owned subsidiary of Petco.
/ /FOR / /AGAINST / /ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting.
Shares represented by all properly executed proxies will be voted in
accordance with instructions appearing on this proxy card and in the discretion
of the proxy holders as to any other matters which may properly come before the
meeting. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES WILL BE VOTED "FOR"
PROPOSAL 1.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting and the accompanying Proxy Statement/Prospectus.
Dated: , 1996
--------------------------------------
(Signature)
--------------------------------------
(Signature)
Please sign as name(s) appears on this
proxy card, and date this proxy card.
If a joint account, each joint owner
must sign. If signing for a
corporation or partnership as agent,
attorney or fiduciary, indicate the
capacity in which you are signing.
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE.
2
