SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number:
February 1, 1997 0-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 33-0479906
(Sate or Other Jurisdiction (I.R.S. Employer Identification No.)
Of Incorporation or Organization)
9125 Rehco Road
San Diego, California 92121
(Address, Including Zip Code, of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(619) 453-7845
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-
K is not contained herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment
to this Form 10-K:
As of April 21, 1997, there were outstanding 18,618,988 shares of the
Registrant's Common
Stock, $.0001 par value. As of that date, the aggregate market value of the
voting stock held by non-
affiliates of the Registrant was approximately $406,031,428.
Documents Incorporated By Reference: The information called for by Part III
is incorporated by
reference from the Proxy Statement relating to the 1997 Annual Meeting of
Stockholders of the Registrant
PART I
ITEM 1. BUSINESS
PETCO Animal Supplies, Inc. ("PETCO" or the "Company") is a leading
specialty retailer of premium pet food and supplies. As of February 1,
1997, the Company operated 336 stores, including 278 superstores, in 21
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. The Company 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.
The Company's expansion strategy is to open and acquire superstores,
including relocations, expansions or remodels of existing traditional
stores into superstores (collectively referred to herein as "conversions"),
and to close underperforming stores. In fiscal 1996, the Company opened or
acquired 82 superstores, including 24 conversions, closed eight stores and
merged with companies with 30 superstores. Unless otherwise indicated, all
references in this Annual Report to a fiscal year refer to the fiscal year
ending on the Saturday closest to January 31 of the following year. For
example, references to fiscal 1996 refer to the fiscal year beginning on
February 4, 1996 and ending on February 1, 1997.
The Pet Food, Supply and Services Industry
General. In 1995, retail sales in the United States of pet food,
supplies and small animals (excluding dogs and cats) were estimated at $13
billion. Pet food accounted for the majority of this market with an
estimated $9.3 billion in sales, while pet supply and small animal sales
were estimated at $3.7 billion. In addition, sales of pet services, which
include veterinary services, obedience training and grooming services, were
estimated at $4 billion in 1995. In 1995, an estimated 58 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. The Company 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 the 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 are estimated to have increased at a compound annual growth rate
of approximately 18% in recent years and now account for an estimated 25%
of the total pet food market. The Company 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 capitalize on these trends.
Pet Supplies. The Company 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. The
Company 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. The Company 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, the Company 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 animal welfare programs. The
Company purchases small animals only through domestic breeders.
Pet Services. The market for pet services includes veterinary services,
obedience training and grooming services. The Company offers only limited
veterinary services such as routine vaccinations because it believes that a
broader offering of such services would cause it to lose significant
referral business from veterinarians in the community. The Company does
offer obedience training in most of its stores and offers grooming in many
of its stores. Although such services do not generate a significant
portion of the Company's revenues, the Company believes that offering
selected pet services does create increased customer traffic in the
Company'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. The Company believes that opportunities for
additional superstores exist in both new and existing markets. The Company
intends to continue to increase the number of superstores it operates by
opening and acquiring superstores in new and existing markets and
converting traditional stores into superstores.
Acquisitions. A significant part of the Company's expansion strategy is
to capitalize on the consolidation of the fragmented pet food and supply
industry. The Company believes that there are acquisition opportunities
which would allow the Company to attract new customers in existing markets,
enter new markets and leverage operating costs. Generally, the Company
seeks to acquire established and well-located stores or chains of stores
which are similar in size and format to the Company's existing superstores.
Consistent with this strategy, the Company has completed 12 acquisitions,
representing 100 stores located in 16 states, since the Company's initial
public offering in March 1994.
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 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. The Company believes that offering competitive prices on food
items increases customer traffic and generates sales of high-margin
supplies.
Superior Customer Service. Providing knowledgeable and friendly
customer service is a key aspect of PETCO's business strategy, which the
Company 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 the Company 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. The Company 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,
the Company's superstore format offers the Company 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. The Company'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 small animals. Birds and other animals are available for
demonstration by PETCO employees and for handling by customers. Many of
the Company's superstores also contain a glassed-in grooming area that
allows customers to observe the grooming process while they shop. The
Company 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 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 animal welfare organizations, the Company offers pet
adoption services at its stores. The Company'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, the Company maintains referral programs and other relationships
with local breeders and veterinarians.
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 as well as selected mass brand foods. Due to
manufacturers' restrictions, premium brands are not currently sold
through supermarkets, warehouse clubs, or mass merchants, but are sold
exclusively through specialty pet stores and veterinarians. The Company
also offers a PetGold(R) private label brand of premium dog and cat
food. In addition to food for dogs and cats, the Company features a
variety of treats and rawhide chew items. The Company also sells an
extensive variety of food for fish, birds, reptiles and small animals.
Pet Supplies. PETCO's broad assortment of supplies for dogs and cats
includes many private label items and offers collars and leashes,
grooming products, toys, pet carriers, cat furniture, dog houses,
vitamins, treats and veterinary supplies. The Company 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 which
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 handling by customers. The Company
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 the Company'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, the Company 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, the Company 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. The Company 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. The Company modifies
its pricing policies by regional or local markets and is able to institute
overnight price changes, as necessary, to meet market competition. PETCO's
price guarantee program offers to match all competitors advertised prices.
Marketing and Advertising. PETCO's advertising program utilizes a
multimedia approach to attract new customers and 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. The
Company'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 local humane societies,
PETCO holds adopt-a-pet events in 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-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 the Company and to maintain
long-term customer relationships. The Company 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. The
Company 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
The Company utilizes both superstore and traditional store formats. The
Company plans only to open superstores in the future and expects that these
will be the Company's current prototype superstores which average
approximately 15,000 square feet. All of the Company's superstores offer
fish, aquarium systems, reptiles and other small animals, and many of the
superstores offer birds and grooming services. Overall, the Company's
superstores average approximately 13,000 square feet in size. The
Company's traditional stores average approximately 3,500 square feet in
size and generally do not sell fish, birds, reptiles or small animals.
The Company's experience indicates that its superstore format achieves
increased customer traffic, sales volume and profitability compared to its
traditional stores. As a result, the Company intends to continue to
increase the number of superstores it operates by opening and acquiring
superstores in new and existing markets and converting traditional stores
into superstores.
Although the Company does not plan to open any new traditional stores in
the future, it will continue to operate profitable and well-situated
traditional stores until such time as they may be converted into
superstores.
In fiscal 1996, the Company opened or acquired 82 superstores, including
24 conversions, closed eight stores and merged with companies with 30
superstores. The table below sets forth the number of each type of store
the Company operated at the end of each fiscal year indicated.
Traditional
Superstores Stores Total Stores
Fiscal 1992 37 161 198
Fiscal 1993 76 132 208
Fiscal 1994 132 107 239
Fiscal 1995 207 79 286
Fiscal 1996 278 58 336
PETCO attempts to obtain convenient, high-traffic stores located in
prime community shopping centers. The Company undertakes substantial
market research prior to entering new markets. Key factors in market and
site selection include high visibility, easy access, ample parking,
population, demographics and the number and location of competitors.
Purchasing and Distribution
The Company's centralized purchasing and distribution system minimizes
the delivered cost of merchandise and maximizes the in-stock position of
its stores. The Company 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
the Company 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. The Company
anticipates that it will continue to recognize benefits through these
discounts especially as sales volume increases via store expansion. In
addition, the Company 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 purchases most of its merchandise directly from approximately 550
specialty suppliers and manufacturers of national brands. The Company
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 the
Company's sales in fiscal 1996. While the Company does not maintain long-
term supply contacts with any of its vendors, PETCO believes that it enjoys
a favorable and stable relationship with each of these vendors.
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 the Company then distributes either to regional centers or
directly to store locations. 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.
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. Many of the premium pet food brands offered by the Company, such
as Iams, Nature's Recipe, Nutro and Science Diet, are not available to
grocery stores or other mass merchants due to manufacturers' restrictions.
The Company believes that the principal competitive factors influencing the
Company's business are product selection and quality, convenient store
locations, customer service and price. Based on total sales, the Company
is one of the largest specialty premium pet food and supply retailers in
the United States. The Company believes that PETCO competes effectively
within its various geographic areas; however, some of the Company's
competitors are much larger in terms of sales volume and have access to
greater capital and management resources than the Company.
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. The Company
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 the
Company. 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. The Company
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. There can be no assurance that in the future the Company will
not face greater competition from other national or regional retailers.
Trademarks and Licenses
The Company has registered several service marks and trademarks with the
United States Patent and Trademark Office, including PETCO(R), Advantage
Pet Products(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), Where the Pets Go(TM) and Your Pet's Second Best Friend(R). The
Company believes the PETCO trademark has become an important component in
its merchandising and marketing strategy. The Company 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 the Company's business or operations. The Company's
fish and small animal buyers and real estate department are responsible for
compliance with such regulations. Prior to the opening of each store, the
Company's fish and small animal buyers and real estate department review
the regulations of the relevant state and local governments. The Company's
fish and small animal buyers and real estate department then ensure ongoing
compliance by keeping abreast of industry publications and maintaining
contacts with the Company's fish and small animal suppliers and the
appropriate regulatory agency within each such state and local government.
Employees
As of February 1, 1997, the Company employed approximately 5,700
associates, of whom approximately 2,800 were employed full-time.
Approximately 93% of the Company's employees were employed in stores or in
direct field supervision, approximately 3% in distribution centers and
approximately 4% in the corporate office in San Diego. Management believes
its labor relations are generally good.
Certain Cautionary Statements
Certain statements in this Annual Report 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 facts which may
cause the actual results of the Company 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:
Expansion Plans. The Company'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. The Company'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. There can be no assurance
that the Company will achieve its planned expansion or that such expansion
will be profitable. The Company 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. The
Company'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. The Company's existing revolving credit facility (the
"Revolving Credit Facility") contains certain covenants which may restrict
or impair the Company's growth plans. Management continues to evaluate the
Company's long-term distribution needs to increase product handling
capacity to accommodate store and sales growth beyond fiscal 1997. Either
the Company's failure to expand its distribution facilities in accordance
with its growth plans or difficulties incurred in operating its
distribution facilities could adversely affect the Company's ability to
deliver merchandise to its stores in a timely fashion.
Integration of Operations as the Result of Acquisitions. If the Company
is to realize the anticipated benefits of its past acquisitions, the
operations of the acquired companies must be integrated and combined
efficiently. The process of rationalizing stores, supply and distribution
channels, computer and accounting systems and other aspects of operations,
while managing a larger and geographically expanded entity, presents a
significant challenge to the Company's management. There can be no
assurance that the integration process will be successful or that the
anticipated benefits of these acquisitions will be fully realized. The
dedication of management resources to integration efforts may detract
attention from the day-to-day business of the 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 the Company will be able to achieve any
expense reductions with the acquired companies, that there will not be
substantial costs associated with any such reductions, that such reductions
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 Company. In fiscal 1995
and 1996, merger and nonrecurring charges of $9.2 million and $37.2
million, respectively, were recorded by the Company following acquisition
activities, including transaction costs, costs attributable to lease
cancellation and closure of duplicate or inadequate facilities and
activities, reformatting, facility conversion and other integration costs,
write-downs of certain assets and severance and other costs. There can be
no assurance that the Company will not incur additional charges in
subsequent periods to reflect costs associated with its previous
acquisitions. In addition, the Company may make additional acquisitions in
the future, which may result in additional charges. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired
business into the Company's operations. The Company's operating results
could be adversely affected if the Company is unable to successfully
integrate such new companies into its operations. Future acquisitions by
the Company could also result in potentially dilutive issuances of
securities, incurrence of additional debt and contingent liabilities, and
amortization expenses related to goodwill and other intangible assets,
which could materially adversely affect the Company's profitability.
Reliance on Vendors and Product Lines and Exclusive Distribution
Arrangements. The Company 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 the Company's sales in fiscal 1996. The Company 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 the Company could have a material adverse effect on
the Company. In addition, it would materially adversely affect the Company
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. The
Company's principal vendors currently provide the Company 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 affect on the Company.
Competition. The pet food and supply retailing industry is highly
competitive. The Company competes with a number of pet supply warehouse
stores, smaller pet store chains and independent pet stores. The Company
also competes with supermarkets and other mass merchants. Many of the
Company's competitors are larger and have significantly greater resources
than the Company. If any of the Company's major competitors seek to gain
or retain market share by reducing prices, the Company may be required to
reduce its prices on key items in order to remain competitive, which may
have the affect of reducing its profitability. There is no assurance that
in the future the Company will not face greater competition from other
national, regional and local retailers.
Performance of New Superstores; Future Operating Results. The Company
has recently opened and acquired superstores in new markets and plans to
open and acquire additional superstores in other new markets. There can be
no assurance that these stores will be profitable in the near term or that
profitability, if achieved, will be sustained. In addition, there can be
no assurance that the Company's existing stores will maintain their
profitability or that new stores will generate sales levels necessary to
achieve store-level profitability, much less profitability comparable to
that of existing stores. The Company's comparable store sales were 18.5%,
16.5%, and 16.1% for fiscal 1994, 1995 and 1996, respectively. The Company
anticipates that its rate of comparable stores sales growth may be lower in
future periods than the growth rate previously experienced due to
maturation of the existing store base and the effects of opening additional
stores in existing markets. As a result of the Company's rapid expansion,
the Company expects its average store contribution and operating margins to
be lower in the near term due to the level of preopening expenses and the
lower anticipated sales volume of its immature stores. In addition,
certain costs, such as those related to occupancy, are expected to be
higher in some of the new geographic markets that the Company has recently
entered. Finally, due in part to recent acquisitions, 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.
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 the Company's quarterly results of operations
to fluctuate. The Company's business is also subject to some seasonal
fluctuation. Historically, the Company has realized a higher portion of
its net sales during the month of December than during the others months of
the year.
Dependence on Senior Management. The Company is dependent upon the
efforts of its principal executive officers. In particular, the Company 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 the Company's other principal executive officers could materially
adversely effect the Company's business. The Company 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. The Company
has obtained a key man insurance policy on the life of Mr. Devine in the
amount of $1.0 million, of which the Company is the sole beneficiary. The
Company'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. Since the initial public offering
of the Company's Common Stock in March 1994, the market value of the Common
Stock has been subject to significant fluctuations. The market price of
the Common Stock may continue to be subject to significant fluctuations in
response to operating results and other factors. In addition, the stock
market in recent years has experienced price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance
of companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Common Stock.
ITEM 2. PROPERTIES
The Company leases all of its store and warehouse locations. Original
lease terms for the Company's 336 stores generally range from five to ten
years, many of which contain renewal options. Leases on 123 stores expire
within the next three years, with leases on 78 of these stores containing
renewal options.
The table below shows the location and number of the Company's stores as
of February 1, 1997.
Traditional
Location Superstores Stores Total Stores
Arizona 11 -- 11
California 92 43 135
Colorado 4 -- 4
Connecticut 9 -- 9
District of Columbia 1 -- 1
Iowa 5 -- 5
Maryland 6 -- 6
Massachusetts 15 3 18
Minnesota 17 -- 17
New Hampshire 3 -- 3
New Jersey 12 -- 12
New York 13 1 14
Nevada 3 -- 3
North Dakota 2 -- 2
Oregon 8 2 10
Pennsylvania 9 -- 9
Rhode Island 1 -- 1
South Dakota 1 -- 1
Texas 37 -- 37
Virginia 7 1 8
Washington 15 8 23
Wisconsin 7 -- 7
278 58 336
The Company'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. The Company's five regional
distribution centers collectively occupy over 190,000 square feet of space
in Arlington, Texas; Stockton, California; Portland, Oregon; Mansfield,
Massachusetts; and Dayton, New Jersey under leases which expire in August
1999, December 2000, January 2002, December 1998, and August 1997,
respectively. The Company'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. The Company expects to add additional
capacity in fiscal 1997, at an estimated cost of approximately $3.0
million, to accommodate the Company's current expansion plans.
ITEM 3. 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 the Company's management, are not individually or in the
aggregate material to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended February 1, 1997.
ITEM 4.1. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
Brian K. Devine 55 Chairman, President and Chief Executive Officer
Bruce C. Hall 52 Executive Vice President - Operations
Richard C. St. Peter 48 Executive Vice President - Administration and
Chief Financial Officer
Larry D. Asselin 49 Senior Vice President - Merchandising and
Distribution
James M. Myers 39 Senior Vice President - Finance
William M. Woodard 48 Senior Vice President - Store Operations
BRIAN K. DEVINE, Chairman, President and Chief Executive Officer joined
the Company in August 1990 and has served as Chairman since January 1994.
Prior to joining the Company, Mr. Devine was President of Krause's Sofa
Factory, a furniture retailer and manufacturer, from 1988 to 1989. From
1970 until 1988, Mr. Devine held various positions with Toys 'R' Us, a
retailer of children's toys, including Senior Vice President, Director of
Stores; and Senior Vice President, Growth, Development and Operations. Mr.
Devine graduated from Georgetown University with a degree in economics.
BRUCE C. HALL, Executive Vice President, Operations, joined the Company
in April 1997. Mr. Hall spent his entire career of 34 years from 1963 to
1997 with Toys 'R' Us, a retailer of children's toys, where he
progressively advanced from field operations through a number of positions
and most recently served as Senior Vice President of Operations.
RICHARD C. ST. PETER, Executive Vice President, Administration and Chief
Financial Officer, joined the Company in September 1990. From 1986 to
1990, Mr. St. Peter was Vice President and Chief Financial Officer at Stor,
a furniture retailer. From 1982 to 1986, Mr. St. Peter held various
positions at W.R. Grace's Home Centers, which operated 90 retail stores,
including Vice President and Chief Financial Officer. From 1980 to 1982,
Mr. St. Peter was Controller at Smart & Final, a 120-store grocery
retailer. From 1971 to 1980, Mr. St. Peter was employed by Alpha Beta, a
grocery retailer and a division of American Stores, where he held a number
of positions including Controller. Mr. St. Peter received a bachelor's
degree from California State University at Long Beach and an MBA from the
University of Southern California.
LARRY D. ASSELIN, Senior Vice President, Merchandising and Distribution,
joined the Company in April 1991. Prior to that time, beginning in 1987,
Mr. Asselin was Vice President and General Merchandising Manager at
Oshman's, a sporting goods retailer. From 1969 to 1987, Mr. Asselin was in
various positions including Division Merchandising Manager at Foley's
Department Stores, a division of Federated Department Stores. Mr. Asselin
received a marketing degree from the University of Arkansas.
JAMES M. MYERS, Senior Vice President, Finance joined the Company in May
1990. From 1994 to 1996, Mr. Myers served as Vice President, Finance and
prior to that as Vice President and Controller of the Company. From 1980
to 1990, Mr. Myers held various positions at the accounting firm KPMG Peat
Marwick LLP, including Senior Audit Manager. Mr. Myers is a CPA and
received an accounting degree from John Carroll University.
WILLIAM M. WOODARD, Senior Vice President, Store Operations, joined the
Company in January 1991. From 1987 to 1990, Mr. Woodard was Vice
President, Director of Marketing at J. M. Jones, Inc., a wholesale division
of SuperValu Stores, Inc. From 1970 to 1987, Mr. Woodard was employed by
Safeway Stores, Inc., a grocery retailer, in a number of positions
including Retail Operations Manager and Marketing Operations Manager. Mr.
Woodard holds an administrative management degree from North Texas State
University and an MBA in marketing from the University of Southern
California.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $.0001 par value (the "Common Stock"), is
quoted on The Nasdaq National Market under the symbol "PETC." The Common
Stock was initially offered to the public on March 17, 1994 at $10.33 per
share. The following table sets forth for the periods indicated the high
and low reported sale prices per share for the Common Stock as reported by
The Nasdaq National Market. The table reflects the three-for-two split of
the Common Stock effected in the form of a stock dividend on April 15,
1996.
High Low
Fiscal 1995
First Quarter $15.33 $11.33
Second Quarter 15.67 12.33
Third Quarter 18.00 14.33
Fourth Quarter 22.83 16.33
Fiscal 1996
First Quarter $32.67 $20.50
Second Quarter 29.25 21.63
Third Quarter 29.00 21.50
Fourth Quarter 26.00 18.75
The number of stockholders of record of Common Stock on April 21, 1997
was 598.
The Company has never paid cash dividends on its Common Stock. The
Company currently anticipates that it will retain all available funds for
use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except share, store and square foot data)
The following table sets forth selected consolidated financial and
operating data for the Company for the five-year period ended February 1,
1997. The selected consolidated financial data presented below under the
caption "Income Statement Data" for the two-year period ended January 29,
1994 is derived from the unaudited consolidated financial statements of the
Company and its subsidiaries as restated to reflect the poolings of
interests during the year ended February 1, 1997. The selected
consolidated financial data presented below under the caption "Income
Statement Data" for the three-year period ended February 1, 1997 is derived
from the audited consolidated financial statements of the Company and its
subsidiaries. The selected consolidated financial data presented below
under the caption "Balance Sheet Data" as of January 30, 1993, January 29,
1994 and January 28, 1995 is derived from the unaudited consolidated
financial statements of the Company and its subsidiaries as restated to
reflect the poolings of interests during the year ended February 1, 1997.
The selected consolidated financial data presented below under the caption
"Balance Sheet Data" as of February 3, 1996 and February 1, 1997 is derived
from the audited consolidated financial statements of the Company and its
subsidiaries. The financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial
Statements as of February 1, 1997 and for each of the years in the three-
year period ended February 1, 1997 and the independent auditors' report
thereon, included and incorporated by reference elsewhere in this Annual
Report.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Historical
Fiscal Year Ended x
Jan.30, Jan. 29, Jan. 28, Feb. 3, Feb. 1,
1993 1994 1995 1996 1997 x
Income Statement Data:
Net sales $136,339 $179,786 $ 243,839 $ 358,951 $ 500,036
Cost of sales and occupancy costs(1) 99,610 135,224 183,262 274,102 371,420
Gross profit 36,729 44,562 60,577 84,849 128,616
Selling, general and administrative expenses 31,590 41,854 55,672 78,751 107,228
Merger and nonrecurring charges -- -- -- 9,196 37,208
Operating income (loss) 5,139 2,708 4,905 (3,098) (15,820)
Loss on disposal of stores -- -- -- 3,500 --
Interest expense (income), net 4,394 5,070 170 (605) (387)
Earnings (loss) before income taxes 745 (2,362) 4,735 (5,993) (15,433)
Income taxes (benefit) (2) 97 42 1,969 (13,458) (3,748)
Net earnings (loss) $ 648 $ (2,404)$ 2,766 $ 7,465 $ (11,685)
Net earnings (loss) per share (3) $0.27 $0.51 $(0.65)
Weighted average common shares outstanding 10,293,005 14,715,615 17,882,376
Operating Data:
Superstores open end of period 37 76 132 207 278
Traditional stores open end of period 161 132 107 79 58
Total stores open end of period 198 208 239 286 336
Aggregate gross square footage 865,000 1,124,000 1,683,000 2,662,000 3,308,000
Average net sales per store (4) $689,000 $849,000 $1,054,000 $ 1,349,000 $ 1,656,000
Average net sales per gross square foot (5) $ 158 $ 166 $ 157 $ 173 $ 163
Percentage increase in comparable store net sales 2.1% 15.0% 18.5% 16.5% 16.1%
Balance Sheet Data:
Working capital $ 5,372 $ 4,399 $ 28,100 $ 24,908 $ 53,790
Total assets 38,505 50,391 106,055 188,602 280,348
Current portion of capital lease and
other obligations 5,889 5,059 1,102 2,897 4,575
Capital lease and other obligations, excluding
current portion 47,076 50,092 4,494 11,873 14,102
Total stockholders' equity (deficit) (31,094) (30,360) 63,567 117,697 184,624
______________
(1) Includes $4.3 million of charges from the write-down of fixed assets and related costs with respect to
the Company's central distribution facility in fiscal 1995.
(2) Includes $11.1 million benefit from previously unrecognized deferred tax assets in fiscal 1995.
(3) Due to differences in capital structure, the Company's net earnings per share information prior to
fiscal 1994 is not comparable and, accordingly, is not presented.
(4) Calculated using net sales divided by the number of stores open, weighted by the number of months stores
are open during the period.
(5) Calculated using net sales divided by gross square footage of stores open, weighted by the number of
months stores are open during the period.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company 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, the Company has opened and acquired superstores, has
expanded and relocated traditional stores into superstores and has closed
underperforming stores. At February 1, 1997, the Company operated 336
stores, including 278 superstores, in 21 states and the District of
Columbia. PETCO's experience has indicated that its superstore format
achieves increased customer traffic, sales volume and profitability as
compared to its traditional store format. The Company seeks to open
superstores in high-traffic retail areas with ample parking, typically in
community shopping centers anchored by a large supermarket. PETCO has
increased its prototype superstore size to 15,000 square feet over the past
few years, and has expanded the merchandise assortment to more than 10,000
active SKUs of high quality pet-related products. This merchandise
assortment features higher-margin fish, reptiles, birds and other small
animals and related supplies. As a result of the Company's store expansion
strategy, operating results may reflect lower average store contribution
and operating margins due to increased store preopening expenses and lower
anticipated sales volumes of immature stores.
During fiscal 1995 and 1996, the Company completed six and two
acquisitions of retailers of premium pet food and supplies, respectively,
which were accounted for as purchases.
In July 1996, the Company acquired a retailer that operated eight pet
food and supply stores under the trade name Pet Nosh located in New York,
New Jersey and Connecticut.
In October 1996, the Company acquired a retailer that operated four pet
food and supply stores under the trade name PETS USA located in Colorado.
In December 1996, the Company acquired a retailer that operated 32 pet
food and supply stores under the trade name Pet Food Warehouse located in
Minnesota, Iowa, Wisconsin, North Dakota and South Dakota.
These three acquisitions have been accounted for as poolings of
interests and accordingly, the consolidated financial statements for the
periods presented have been restated to include the accounts of Pet Nosh,
PETS USA and Pet Food Warehouse.
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>
<S> <C> <C> <C>
Jan. 28, Feb. 3, Feb. 1,
1995 1996 1997 x
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy costs 75.2 76.4 74.3
Gross profit 24.8 23.6 25.7
Selling, general and administrative expenses 22.8 21.9 21.4
Merger and nonrecurring charges -- 2.6 7.5
Operating income (loss) 2.0 (0.9) (3.2)
Loss on disposal of stores -- 1.0 --
Interest expense (income), net 0.1 (0.2) (0.1)
Earnings (loss) before income taxes 1.9 (1.7) (3.1)
Income taxes (benefit) 0.8 (3.8) (0.8)
Net earnings (loss) 1.1 2.1 (2.3)
</TABLE>
Fiscal Year Ended February 1, 1997 Compared to Fiscal Year Ended February
3, 1996
Net Sales increased 39.3% to $500.0 million in fiscal 1996 from $359.0
million in fiscal 1995. The increase in net sales in fiscal 1996 resulted
primarily from the addition of 82 superstores, including the conversion of
24 traditional stores into superstores, partially offset by the closing of
eight stores, and a comparable store net sales increase of 16.1%. The
comparable store net sales increase was attributable to maturing
superstores, increased advertising and expanded merchandise assortments in
existing stores. The net increase in the Company's store base accounted
for approximately $99.9 million, or 70.9% of the net sales increase, and
$41.1 million, or 29.1% of the net sales increase, was attributable to the
increase in comparable store net sales.
Gross profit, defined as net sales less the cost of sales including
store occupancy costs, increased $43.8 million, or 51.7%, to $128.6 million
in fiscal 1996 from $84.8 million in fiscal 1995. Gross profit as a
percentage of net sales increased to 25.7% in fiscal 1996 from 23.6% in
fiscal 1995. This increase reflects a better sales mix, increased
occupancy leverage and lowered distribution expenses related to the more
efficient operation of the Company's central distribution facility during
the current period. In addition, charges of $4.3 million were recorded
during the third quarter of fiscal 1995 from the write-down of fixed assets
and related costs with respect to the Company's central distribution
facility. Excluding these charges, gross profit as a percentage of net
sales in fiscal 1995 would have been 24.8%.
Selling, general and administrative expenses increased $28.4 million, or
36.0%, to $107.2 million in fiscal 1996 from $78.8 million in fiscal 1995.
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 21.4%
in fiscal 1996 from 21.9% in fiscal 1995 due to net sales increasing at a
greater rate than related expenses.
Merger and nonrecurring charges of $9.2 million were recorded in fiscal
1995 following acquisition activities. These charges 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. In
fiscal 1996, merger and nonrecurring charges of $37.2 million were recorded
following acquisition activities. These charges consisted of $7.2 million
of transaction costs, $22.2 million of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $3.8 million of reformatting, facility conversion and other
integration costs and $4.0 million of severance and other costs. The
Company expects to incur an additional $6.0-$8.0 million in merger and
nonrecurring charges for continuing integration efforts in fiscal 1997 from
reformatting, facility conversion costs and other integration costs.
Operating loss of $15.8 million was incurred in fiscal 1996 compared to
operating loss of $3.1 million in fiscal 1995. Excluding merger and
nonrecurring charges and the $4.3 million write-down of fixed assets in
1995, operating income would have increased to 4.3% of net sales in fiscal
1996 from 2.9% in fiscal 1995.
Net interest income was $0.4 million in fiscal 1996 compared to net
interest income of $0.6 million in fiscal 1995. Interest income was
produced by the short-term investment of the proceeds from public stock
offerings.
Income tax benefit was $3.7 million in fiscal 1996 compared to income
tax benefit of $13.5 million in fiscal 1995. In fiscal 1995, an income tax
benefit of $11.1 million from previously unrecognized deferred tax assets
was recognized.
Net loss was $11.7 million in fiscal 1996 compared to net earnings of
$7.5 million in fiscal 1995. Excluding merger and nonrecurring charges,
the $4.3 million write-down of fixed assets, the $3.5 million loss on
disposal of stores, and their related tax benefits, and recognition of
$11.1 million from previously unrecognized deferred tax assets in fiscal
1995, net earnings for the fiscal 1996 would have been $13.2 million, or
$0.74 per share, compared to $6.4 million, or $0.44 per share in fiscal
1995.
Fiscal Year Ended February 3, 1996 Compared to Fiscal Year Ended January
28, 1995
Net Sales increased 47.3% to $359.0 million in fiscal 1995 from $243.8
million in fiscal 1994. The increase in net sales in fiscal 1995 resulted
primarily from the addition of 79 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 the Company's store base accounted
for approximately $84.7 million, or 73.5% of the net sales increase, and
$30.5 million, or 26.5% of the net sales increase, was attributable to the
increase in comparable store net sales.
Gross profit increased $24.2 million, or 39.9%, to $84.8 million in
fiscal 1995 from $60.6 million in fiscal 1994. Gross profit as a
percentage of net sales decreased to 23.6% in fiscal 1995 from 24.8% 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 the Company's central distribution
facility. These charges resulted from the Company's decision to replace
certain hardware and software in this facility which did not produce the
planned benefits. Excluding these charges, gross profit as a percentage of
net sales in fiscal 1995 would have remained constant with fiscal 1994 at
24.8%.
Selling, general and administrative expenses increased $23.1 million, or
41.5%, to $78.8 million in fiscal 1995 from $55.7 million in fiscal 1994.
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 21.9%
in fiscal 1995 from 22.8% in fiscal 1994 due to net sales increasing at a
greater rate than related expenses.
Merger and nonrecurring charges of $9.2 million were recorded in fiscal
1995 following acquisition activities. These charges 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.
Operating loss of $3.1 million was incurred in fiscal 1995 compared to
operating income of $4.9 million in fiscal 1994. Excluding the merger and
nonrecurring charges and the $4.3 million write-down of fixed assets in
1995, operating income would have increased to 2.9% of net sales in fiscal
1995 from 2.0% in fiscal 1994.
Loss on disposal of stores of $3.5 million was recognized in fiscal 1995
on the sale of eight Pet Food Warehouse stores in Michigan and Ohio.
Net interest income was $0.6 million in fiscal 1995 compared to net
interest expense of $0.2 million in fiscal 1994. Interest income was
produced by the short-term investment of the proceeds from public stock
offerings.
Income tax benefit was $13.5 million in fiscal 1995, due primarily to
recognition of an income tax benefit of $11.1 million from previously
unrecognized deferred tax assets in fiscal 1995, compared to income taxes
of $2.0 million in fiscal 1994.
Net earnings increased to $7.5 million in fiscal 1995 from $2.8 million
in fiscal 1994. Excluding merger and nonrecurring charges, the $4.3
million write-down of fixed assets, the $3.5 million loss on disposal of
stores, and their related tax benefits, and the recognition of $11.1
million from previously unrecognized deferred tax assets in fiscal 1995,
net earnings for fiscal 1995 would have been $6.4 million, or $0.44 per
share, compared to $2.8 million, or $0.27 per share in the prior year.
Quarterly Data
The following tables set forth the unaudited quarterly results of
operations for fiscal 1995 and fiscal 1996. This information includes all
adjustments management considers necessary for fair presentation of such
data. The results of operations for historical periods are not necessarily
indicative of results for any future period. The Company expects quarterly
results of operations to fluctuate depending on the timing and amount of
revenue contributed by new stores.
The Company 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.
<TABLE>
<S> <C> <C> <C> <C>
Fiscal Quarter Ended x
Apr. 29, Jul. 29, Oct. 28, Feb. 3,
Fiscal 1995 1995 1995 1995 1996 x
Net sales $ 73,391 $ 77,820 $ 87,669 $120,071
Gross profit 16,975 18,808 16,944 32,122
Operating income (loss) 796 1,253 (11,745) 6,598
Net earnings 306 885 4,300 1,974
Net earnings per share $ 0.03 $ 0.06 $ 0.27 $ 0.13
Stores open at end of period 240 246 258 286
Aggregate gross square footage 1,763,000 1,909,000 2,206,000 2,662,000
Percentage increase in comparable store net sales 16.3% 13.7% 14.6% 20.4%
Fiscal Quarter Ended x
May 4, Aug. 3, Nov. 2, Feb. 1,
Fiscal 1996 1996 1996 1996 1997 x
Net sales $111,102 $120,585 $125,812 $142,537
Gross profit 27,164 31,227 32,970 37,255
Operating income (loss) 2,726 (10,320) 2,177 (10,403)
Net earnings (loss) 1,533 (6,739) 1,278 (7,757)
Net earnings (loss) per share $ 0.10 $ (0.36) $ 0.07 $ (0.42)
Stores open at end of period 299 301 315 336
Aggregate gross square footage 2,974,000 3,063,000 3,341,000 3,808,000
Percentage increase in comparable store net sales 18.2% 18.3% 17.0% 12.6%
</TABLE>
Liquidity and Capital Resources
The Company has financed its operations and expansion program through
internal cash flow, external borrowings and the sale of equity securities.
At February 1, 1997, total assets were $280.3 million, $120.6 million of
which were current assets. Net cash provided by (used in) operating
activities was $4.9 million, $11.1 million, and $(2.0) million for fiscal
1994, 1995 and 1996, respectively. The Company's sales are substantially
on a cash basis, therefore, cash flow generated from operating stores
provides a significant source of liquidity to the Company. The principal
use of operating cash is for the purchase of merchandise inventories. A
portion of the Company's inventory purchases is financed through vendor
credit terms.
The Company 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.
Cash used in investing activities was $26.5 million, $58.6 million and
$45.6 million for fiscal 1994, 1995 and 1996, respectively.
The Company also finances some of its purchases of equipment and
fixtures through capital lease and other obligations. Purchases of $3.4
million, $9.6 million and $7.7 million of fixed assets were financed in
this manner during fiscal 1994, 1995 and 1996, respectively. The Company
believes additional sources of capital lease and other obligation financing
are available on a cost-effective basis and plans to use them, as
necessary, in connection with its expansion program.
During fiscal 1994, the Company acquired a retailer of premium pet food
and supplies in a purchase transaction 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. During fiscal 1995, the
Company completed six acquisitions of retailers of premium pet food and
supplies in purchase transactions. The aggregate fair market value of
assets acquired was $38.8 million and assumed liabilities were $8.4
million, with $30.4 million of net cash invested in the acquisition of
these businesses. During fiscal 1996, the Company completed two
acquisitions of retailers of premium pet food and supplies in purchase
transactions. The aggregate fair market value of assets acquired was $14.4
million and assumed liabilities were $1.4 million, with $13.0 million of
net cash invested in the acquisition of these businesses.
The Company's primary long-term capital requirement is funding for the
opening or acquisition of superstores and conversion of traditional stores
into superstores. Cash flows provided by financing activities were $36.3
million, $46.4 million and $74.8 million in fiscal 1994, 1995 and 1996,
respectively. In fiscal 1994, net proceeds of $58.2 million from public
offerings 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 and 1996, net proceeds of $46.8 and $78.6 million,
respectively, from public offerings were used to finance the acquisition of
related businesses and fund the Company's expansion program and working
capital requirements.
The Company has a Revolving Credit Facility with a commitment of up to
$40.0 million that expires December 6, 1998. Borrowings under this
facility are unsecured and bear interest, at the Company's option, at
either the bank's reference rate or LIBOR plus 0.375% based on the
Company's leverage ratio at February 1, 1997. The Revolving Credit
Facility contains certain affirmative and negative covenants related to
debt, interest and fixed charges coverage and consolidated net worth.
As of February 1, 1997, the Company had available net operating loss
carryforwards of $14.9 million for federal income tax purposes, which begin
expiring in 2004, and $8.9 million for state income tax purposes, which
begin expiring in 1997.
The Company anticipates that funds generated by operations, funds
available under the Revolving Credit Facility and currently available
vendor financing and capital lease and other obligation financing will be
sufficient to finance its continued operations and planned store openings
at least through fiscal 1997.
Inflation
Although the Company 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements required by this Item are set
forth at the pages indicated in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K, except information concerning the executive
officers of the Company which is set forth in Item 4.1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Page
Independent Auditor's Reports 25
Consolidated Balance Sheets 27
Consolidated Statements of Operations 28
Consolidated Statements of Stockholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 10, 1997, regarding the merger of the Company with
Pet Food Warehouse, Inc. (includes pro forma financial information).
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Annual Report.
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 subsidiaries as of February 3, 1996 and
February 1, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended February 1, 1997. 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 did not audit the financial statements
of Pet Food Warehouse, Inc., which statements reflect total assets
constituting 11 percent at February 3, 1996, and total revenues
constituting 15 percent and 17 percent for the years ended January 28, 1995
and February 3, 1996, respectively, of the related consolidated totals.
Those financial statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Pet Food Warehouse, Inc., is based solely on the report of the
other auditors.
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, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Petco Animal
Supplies, Inc. and subsidiaries as of February 3, 1996 and February 1,
1997, and the results of their operations and their cash flows for each of
the years in the three-year period ended February 1, 1997 in conformity
with generally accepted accounting principles.
San Diego, California KPMG Peat Marwick LLP
March 24, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pet Food Warehouse, Inc.:
We have audited the balance sheet of Pet Food Warehouse, Inc. (a
Minnesota corporation) as of February 3, 1996 and the related statements of
operations, changes in stockholders' equity and cash flows for the years
ended January 28, 1995 and February 3, 1996. 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 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 February 3, 1996 and the results of its operations
and its cash flows for the years ended January 28, 1995 and February 3,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 15, 1996
PETCO ANIMAL SUPPLIES, INC.
<TABLE>
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
ASSETS
February 3, February 1,
1996 1997
Current assets:
Cash and cash equivalents $ 15,740 $ 42,932
Receivables 5,224 7,212
Inventories 52,075 68,498
Other 1,435 1,976
Total current assets 74,474 120,618
Fixed assets (note 4):
Equipment 21,449 38,942
Furniture and fixtures 26,639 27,533
Leasehold improvements 40,652 60,356
88,740 126,831
Less accumulated depreciation and amortization 22,212 30,457
66,528 96,374
Goodwill 31,767 42,408
Deferred tax assets (note 6) 14,194 19,071
Other assets 1,639 1,877
$ 188,602 $ 280,348
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,888 $ 36,090
Accrued expenses 13,923 17,067
Accrued salaries and employee benefits 5,858 9,096
Revolving credit facility (note 3) -- --
Current portion of capital lease and other
obligations (note 4) 2,897 4,575
Total current liabilities 49,566 66,828
Capital lease and other obligations, excluding current
portion (note 4) 11,873 14,102
Accrued store closing costs 4,804 8,691
Deferred rent 4,662 6,103
Stockholders' equity (note 5):
Preferred stock, $.0001 par value, 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common Stock, $.0001 par value, 100,000,000 shares
authorized, 15,643,534 and 18,609,978 shares issued
and outstanding, respectively 1 2
Additional paid-in capital 157,386 236,766
Accumulated deficit (39,690) (52,144)
Total stockholders' equity 117,697 184,624
Commitments and contingencies (notes 3, 4, 5, 7 and 10)
x
$ 188,602 $ 280,348
</TABLE>
See accompanying notes to consolidated financial statements
PETCO ANIMAL SUPPLIES, INC.
<TABLE>
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Net sales $ 243,839 $ 358,951 $ 500,036
Cost of sales and occupancy costs 183,262 274,102 371,420
Gross profit 60,577 84,849 128,616
Selling, general and administrative expenses 55,672 78,751 107,228
Merger and nonrecurring charges (note 2) -- 9,196 37,208
Operating income (loss) 4,905 (3,098) (15,820)
Loss on disposal of stores (note 7) -- 3,500 --
Interest income (1,037) (1,513) (2,175)
Interest expense 1,207 908 1,788
Earnings (loss) before income taxes 4,735 (5,993) (15,433)
Income taxes (benefit) (note 6) 1,969 (13,458) (3,748)
Net earnings (loss) $ 2,766 $ 7,465 $ (11,685)
Net earnings (loss) per common and common
equivalent share $ 0.27 $ 0.51 $ (0.65)
Weighted average number of common and common
equivalent shares outstanding 10,293,005 14,715,615 17,882,376
</TABLE>
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <S> <C> <C> <C>
Senior Junior Additional Total
Preferred Stock Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity x
Balances at
January 29, 1994 53,300 $5,330 108,378 $3,000 8,143 $ -- $ 2,903 $ (47,762) $(36,529)
Restatement for
poolings of
interests (note 2) -- -- -- -- 1,934,305 -- 7,635 (1,466) 6,169
Balances at
January 29, 1994 53,300 $5,330 108,378 $3,000 1,942,448 $ -- $ 10,538 $ (49,228) $(30,360)
Issuance of stock
for services 200 20 -- -- -- -- -- -- 20
Exchange of sub-
ordinated 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 -- -- -- -- 5,255,657 1 58,243 -- 58,244
Exercise of warrants -- -- -- -- 209,686 -- 1,757 -- 1,757
Exercise of options -- -- -- -- 4,658 -- 89 -- 89
Distributions to
shareholders -- -- -- -- -- -- -- (370) (370)
Net earnings -- -- -- -- -- -- -- 2,766 2,766
Balances at
January 28, 1995 -- -- -- -- 12,019,593 $ 1 $110,398 $ (46,832) $ 63,567
Sale of Common Stock -- -- -- -- 3,618,108 -- 46,936 -- 46,936
Exercise of options -- -- -- -- 5,833 -- 60 -- 60
Distributions to
shareholders -- -- -- -- -- -- (8) (323) (331)
Net earnings -- -- -- -- -- -- -- 7,465 7,465
Balances at
February 3, 1996 -- -- -- -- 15,643,534 $ 1 $157,386 $ (39,690) $117,697
Issuance of stock
for services -- -- -- -- 897 -- 21 -- 21
Sale of Common Stock -- -- -- -- 2,896,966 1 78,694 -- 78,695
Cash in lieu of
fractional shares -- -- -- -- (169) -- (5) -- (5)
Exercise of options -- -- -- -- 68,750 -- 670 -- 670
Distributions to
shareholders -- -- -- -- -- -- -- (769) (769)
Net loss -- -- -- -- -- -- -- (11,685) (11,685)
Balances at
February 1, 1997 -- -- -- -- 18,609,978 $ 2 $236,766 $ (52,144) $184,624
</TABLE>
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
<TABLE>
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Cash flows from operating activities:
Net earnings (loss) $ 2,766 $ 7,465 $(11,685)
Depreciation and amortization 5,361 9,194 15,359
Deferred taxes (623) (14,888) (4,877)
Loss on retirement of fixed assets 285 3,603 4,712
Loss on disposal of stores -- 3,500 --
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (1,946) (1,138) (1,970)
Inventories (14,016) (10,366) (14,380)
Other assets 363 192 (2,626)
Accounts payable 5,938 6,306 3,174
Accrued expenses 4,900 409 1,759
Accrued salaries and employee benefits 1,128 719 3,238
Accrued store closing costs (662) 5,179 3,887
Deferred rent 1,380 937 1,441
Net cash provided by (used in) operating
activities 4,874 11,112 (1,968)
Cash flows from investing activities:
Additions to fixed assets (22,248) (30,872) (40,220)
Net cash invested in acquisitions of businesses (3,705) (30,373) (7,021)
Proceeds from sale of fixed assets -- -- 1,626
Proceeds from disposal of stores -- 2,426 --
Other (512) 224 --
Net cash used in investing activities (26,465) (58,595) (45,615)
Cash flows from financing activities:
Net repayments under revolving agreements (3,271) -- --
Borrowings under other obligations 860 1,178 --
Repayment of capital lease and other obligations (1,042) (1,421) (3,837)
Repayment of subordinated debt (20,000) -- --
Proceeds from the issuance of common stock 60,110 46,996 79,381
Distributions to shareholders (370) (331) (769)
Net cash provided by financing activities 36,287 46,422 74,775
Net increase (decrease) in cash and cash equivalents 14,696 (1,061) 27,192
Cash and cash equivalents at beginning of year 2,105 16,801 15,740
Cash and cash equivalents at end of period $ 16,801 $ 15,740 $ 42,932
Supplemental cash flow disclosures:
Interest paid on debt $ 389 $ 834 $ 1,741
Income taxes paid $ 465 $ 1,436 $ 1,854
Supplemental disclosure of noncash financing
activities:
Additions to capital leases $ 3,411 $ 9,642 $ 7,744
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.
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 or PETCO) a Delaware
corporation, is a national specialty retailer of premium pet food and
supplies with stores in 21 states and the District of Columbia.
(b) Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. 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 28,
1995 and February 1, 1997 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) 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period.
(e) Cash Equivalents:
The Company considers all liquid investments with maturities of three
months or less to be cash equivalents.
(f) Inventories:
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
(g) Pre-opening Costs:
Costs incurred in connection with opening new stores are expensed as
incurred.
(h) 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 ten 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.
(i) 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 February 3, 1996 and February 1, 1997 was $844 and $2,579,
respectively.
(j) Other Assets:
Other assets consist primarily of lease deposits, non-compete agreements
and debt issuance costs. Non-compete agreements are amortized straight-
line over the periods of the agreements, generally five to seven years.
Debt issuance costs are amortized to interest expense using the effective
interest method over the life of the related debt, generally five years.
Accumulated amortization for intangible other assets at February 3, 1996
and February 1, 1997 was $66 and $114, respectively.
(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) 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.
(n) Impairment of Long-Lived Assets:
The Company periodically assesses the recoverability of assets based on
its expectations of future profitability and undiscounted cash flow of the
related operations, and when circumstances dictate, adjusts the carrying
value of the asset. These factors, along with management's plans with
respect to the operations, are considered in assessing the recoverability
of goodwill, other purchased intangibles and property and equipment.
(o) Stock Options:
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations
under which compensation expense would be recorded on the date of the grant
only if the current market price of the underlying stock exceeded the
exercise price. In 1996, the Company elected to adopt the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
(p) Net Earnings Per Common and Common Equivalent Share:
Net earnings 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.
(q) Reclassifications:
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
2. Business Combinations
In July 1996, the Company acquired all of the outstanding equity
securities of a retailer that operated stores under the trade name Pet Nosh
in exchange for 645,553 shares of common stock. Pet Nosh operated eight
pet food and supply stores located in New York, New Jersey and Connecticut.
In October 1996, the Company acquired all of the outstanding equity
securities of a retailer that operated stores under the trade name PETS USA
in exchange for 231,153 shares of common stock. PETS USA operated four pet
food and supply stores located in Colorado.
Pet Nosh and PETS USA are collectively referred to as the "Other Pooled
Companies."
In December 1996, the Company acquired all of the outstanding equity
securities of a retailer that operated stores under the trade name Pet Food
Warehouse ("Pet Food Warehouse") in exchange for 2,052,190 shares of common
stock. Pet Food Warehouse operated 32 pet food and supply stores located
in Minnesota, Iowa, Wisconsin, North Dakota and South Dakota.
The above transactions have been accounted for as poolings of interests
and accordingly, the consolidated financial statements for the periods
presented have been restated to include the accounts of Pet Food Warehouse
and the Other Pooled Companies. The Other Pooled Companies fiscal year
ends have been changed from December 31 to the Saturday closest to
January 31 to conform to the Company's year end. The effect of the change
in fiscal year ends was not material to the results of operations.
Net sales and net earnings (loss) of the separate companies for the
periods preceding the acquisitions were as follows:
<TABLE>
<S> <C> <S> <C> <C> <C>
Net Earnings
Net Sales (Loss) x
Year ended January 28, 1995:
PETCO, as previously reported $ 188,578 $ 4,520
Pet Food Warehouse 36,285 (2,194)
Other Pooled Companies 18,976 440
Combined $ 243,839 $ 2,766
Year ended February 3, 1996:
PETCO, as previously reported $ 270,681 $ 8,413
Pet Food Warehouse (1) 61,095 (1,419)
Other Pooled Companies 27,175 471
Combined $ 358,951 $ 7,465
Year ended February 1, 1997:
PETCO $ 423,454 $ (12,376)
Pet Food Warehouse 63,876 644
Other Pooled Companies 12,706 47
Combined $ 500,036 $ (11,685)
_______________
(1) In connection with the pooling of Pet Food Warehouse, an additional $3,674
of deferred tax assets were recognized.
</TABLE>
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.
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
$38,756 and assumed liabilities were $8,383 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
$28,905 which has been recorded as goodwill and is being amortized over
fifteen years.
During fiscal 1996, the Company completed two acquisitions of retailers
of premium pet food and supplies in transactions accounted for as
purchases. The aggregate fair market value of assets acquired was $14,433
and assumed liabilities were $1,384 with $13,049 of net cash invested in
the acquisition of these businesses of which $6,028 was expended subsequent
to fiscal year end. The excess of the aggregate cost over the fair market
value of net assets acquired was $11,293 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 purchase acquisition.
The following summary presents pro forma consolidated results of
operations as if the purchase acquisitions of fiscal 1994 and 1995 occurred
at the beginning of fiscal 1994 and 1995, and include adjustments for
estimated amounts of goodwill amortization, reductions in selling, general
and administrative and interest expense and income tax effects. The
purchase acquisitions during fiscal 1996 did not materially affect results
of operations and accordingly, pro forma results are not presented for
fiscal 1996.
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>
<S> <C> <C>
Year Ended Year Ended
January 28, 1995 February 3, 1996
(unaudited)
Net sales $ 300,509 $ 400,763
Net earnings 2,935 7,316
Net earnings per common share $ 0.29 $ 0.50
</TABLE>
In fiscal 1995, merger and nonrecurring charges of $9,196 were recorded
following acquisition activities. These charges 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.
In fiscal 1996, merger and nonrecurring charges of $37,208 were recorded
following acquisition activities. These charges consisted of $7,182 of
transaction costs, $22,224 of costs attributable to lease cancellations and
closure of duplicate or inadequate facilities and activities, $3,835 of
reformatting, facility conversion and other integration costs and $3,967 of
severance and other costs.
Distributions to shareholders reflected in the accompanying Consolidated
Statement of Stockholders' Equity reflect activities of the Other Pooled
Companies.
3. Revolving Credit Facility
The Company has a Revolving Credit Facility with a commitment of up to
$40,000 that expires December 6, 1998. 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 0.375% based on the
Company's leverage ratio at February 1, 1997.
At February 1, 1997, $573 of letters of credit secured insurance
programs. No amounts were drawn on the letters of credit at February 1,
1997.
4. Lease Commitments and Other Obligations
The Company finances certain fixed assets under capital leases. There
are approximately $15,400 and $23,200 in fixed assets financed through
capital leases at February 3, 1996 and February 1, 1997, respectively.
Accumulated amortization related to these financed assets was approximately
$2,200 and $4,600 at February 3, 1996 and February 1, 1997, respectively.
The Company leases warehouse and store facilities under operating
leases. These operating leases generally have terms from three to ten
years. Certain stores leases include additional contingent rental payments
ranging from 2% to 6% of store revenues above defined levels. Contingent
rentals incurred during fiscal years 1994, 1995, and 1996 were $31, $61 and
$24, respectively.
At February 1, 1997, the present value of future minimum payments for
capital lease and other obligations, and minimum lease payments under
noncancellable operating leases follows:
Capital Leases
and Other Operating
Years Obligations Leases x
1997 $ 5,847 $ 54,986
1998 5,167 52,580
1999 4,328 49,265
2000 3,012 47,306
2001 1,384 45,639
Thereafter 2,809 238,110
Total minimum payments 22,547 $487,886
Less amount representing interest 3,870
Present value of net minimum capital
lease and other obligations payments 18,677
Less current portion of capital lease
and other obligations 4,575
Capital lease and other obligations $14,102
Rent expense under operating leases for fiscal years 1994, 1995, and
1996 was approximately $24,305, $33,950, and $48,446, 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.
Concurrent with the initial public offering in March 1994, all
outstanding shares of the Senior Preferred Stock were exchanged for Common
Stock. In March 1996, the Board of Directors authorized the removal of the
designation of Senior Preferred Stock.
(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.
Concurrent with the initial public offering in March 1994, all
outstanding shares of Junior Preferred Stock were exchanged for Common
Stock. In March 1996, the Board of Directors authorized the removal of the
designation of Junior Preferred Stock.
(c) Common Stock:
In March 1996, the Board of Directors approved a three-for-two stock
split of the Common Stock effective on April 15, 1996. All references to
common share information in the accompanying consolidated financial
statements and notes reflect recognition of these stock splits. In June
1996, the Company's stockholders approved an increase in the number of
authorized shares to 100,000,000.
In 1994, the Company completed public offerings of 5,254,135 common
shares with net proceeds of $58,216. Concurrent with a 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 1995, the Company completed a 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.
In 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 $78,634.
In 1994, 1995 and 1996, Pet Food Warehouse sold 1,522, 3,108, and 4,208
common shares, respectively, under its employee stock purchase plan which
has been terminated.
(d) Stock Options:
In 1996, the Company assumed an employee stock option plan ("1993
Company Plan") from Pet Food Warehouse which provided for the granting of
incentive and nonqualified stock options with exercise prices equal to
their fair market values on their grant dates that become exercisable over
various periods and expire five or six years after the date of grant. The
common shares under this plan were adjusted to Company common shares based
on the common share conversion rate per the merger agreement with Pet Food
Warehouse. No future grants will be made under this plan.
In February 1994, the Company's stockholders approved the 1994 Stock
Option Plan ("1994 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 1996, the Company's stockholders approved an amendment to the 1994
Company Plan to increase the number of shares available for issuance under
the plan for each of the next five fiscal years by 3.0% 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") which 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.
Information regarding the stock option plans follows:
<TABLE>
<C> <C> <C> <C> <C> <C> <S>
1993 Company Plan 1994 Company Plan x
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price x
Outstanding at
January 29, 1994 60,581 $ 8.05-$42.27 $ 29.11 -- -- --
Granted 55,410 $18.40-$27.05 $ 19.11 563,409 $ 8.83-$10.33 $ 10.32
Exercised (4,658) $ 19.14 $ 19.14 -- -- --
Cancelled (4,830) $23.05-$32.48 $ 29.11 (14,964) $ 8.83-$10.33 $ 10.18
Outstanding at
January 28, 1995 106,503 $ 8.05-$42.27 $ 24.31 548,445 $ 10.33 $ 10.33
Granted 166,846 $14.95-$24.75 $ 18.08 155,505 $12.33-$18.33 $ 12.57
Exercised -- -- -- (5,833) $ 10.33 $ 10.33
Cancelled (64,248) $16.72-$27.23 $ 24.31 (7,680) $10.33-$12.33 $ 11.49
Outstanding at
February 3, 1996 209,101 $ 8.05-$42.27 $ 19.73 690,437 $10.33-$18.33 $ 12.58
Granted 40,931 $18.40-$23.58 $ 18.51 333,068 $ 23.17 $ 23.17
Exercised (190) $16.68-$19.12 $ 17.50 (49,926) $ 10.33 $ 10.33
Cancelled (41,136) $ 8.05-$23.58 $ 19.13 (47,473) $10.33-$23.17 $ 20.52
Outstanding at
February 1, 1997 208,706 $14.95-$42.27 $ 19.52 926,106 $10.33-$23.17 $ 14.77
Exercisable at
January 28, 1995 18,415 $ 8.05-$42.27 $ 26.32 245,175 $ 10.33 $ 10.33
Exercisable at
February 3, 1996 64,319 $ 8.05-$42.27 $ 23.69 336,392 $ 10.33 $ 10.33
Exercisable at
February 1, 1997 181,708 $14.95-$42.27 $ 19.40 382,731 $ 10.33 $ 10.33
Available for grant at
February 1, 1997 -- 678,657
Directors Plan x
Weighted
Average
Option Price Exercise
Shares Per Share Price x
Outstanding at
January 29, 1994 -- -- --
Granted 4,500 $ 10.33 $ 10.33
Exercised -- -- --
Cancelled -- -- --
Outstanding at
January 28, 1995 4,500 $ 10.33 $ 10.33
Granted 6,000 $ 12.33 $ 12.33
Exercised -- -- --
Cancelled -- -- --
Outstanding at
February 3, 1996 10,500 $10.33-$12.33 $ 11.47
Granted 3,000 $ 31.67 $ 31.67
Exercised -- -- --
Cancelled -- -- --
Outstanding at
February 1, 1997 13,500 $10.33-$31.67 $ 15.96
Exercisable at
January 28, 1995 4,500 $ 10.33 $ 10.33
Exercisable at
February 3, 1996 10,500 $10.33-$12.33 $ 11.47
Exercisable at
February 1, 1997 13,500 $10.33-$31.67 $ 15.96
Available for grant at
February 1, 1997 55,347
</TABLE>
Options were exercised under a Pet Food Warehouse plan not assumed by
the Company for an additional 18,634 common shares in 1996.
In March 1997, options for 598,660 shares were granted under the 1994
Company Plan which vest in March 2000 and are exercisable at $22.50 per
share, and options for 3,000 shares were granted under the Directors Plan
that were immediately exercisable at $22.50 per share.
(e) Accounting for Stock Options:
The Company accounts for stock option plans under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, under which no compensation expense was recognized. Had
compensation costs for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under these plans,
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
Company's net earnings and earnings per share would have been reduced by
approximately $740 or $0.05 per share during 1995, and the Company's net
loss and loss per share would have been increased by $1,836, or $0.10 per
share, during 1996. The pro forma change in net earnings (loss) reflects
only options granted in 1995 and 1996. Therefore, the full impact of
calculating compensation costs for stock options under SFAS No. 123 is not
reflected in the pro forma change in net earnings (loss) amounts presented
above because compensation cost is reflected over the options vesting
period of three years and compensation cost for options granted prior to
January 1, 1995 is not considered. The weighted average fair value of the
options granted during 1995 and 1996 were estimated as $9.43 and $12.25 on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, volatility of 66.0% and 52.7%,
risk-free interest rate of 6.5% for both years, and an expected life of
five years for all grants.
The following table summarizes information about the options outstanding
under all stock option plans at February 1, 1997:
<TABLE>
<C> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable x
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price x
$10-$20 767,434 6.4 $11.49 545,094 $11.72
$20-$30 375,704 9.0 $23.15 27,827 $23.25
$30-$45 5,174 8.2 $34.95 5,018 $35.02
1,148,312 577,939
</TABLE>
(f) Warrants:
In connection with Pet Food Warehouse's public offering completed in
1994, the Company received $1,757 from the exercise of warrants with
respect to 209,686 common shares. In addition, underwriters received, for
nominal consideration, warrants to purchase 21,738 common shares at $26.56
per share which are exercisable through February 24, 1999.
6. Income Taxes
Income taxes (benefit) consists of the following:
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Current:
Federal $2,140 $ 1,090 $ 958
State 452 340 171
2,592 1,430 1,129
Deferred:
Federal (520) (14,486) (4,934)
State (103) (402) 57
(623) (14,888) (4,877)
Income taxes (benefit) $1,969 $(13,458) $ (3,748)
A reconciliation of income taxes at the federal statutory rate of 34%
with the provision for income taxes (benefit) follows:
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Income taxes at federal
statutory rate $1,610 $ (2,038) $ (5,247)
Non-deductible expenses -- -- 1,316
Restructured debt carrying
value adjustment (55) -- --
State taxes, net of federal
tax benefit 230 (62) 150
Change in valuation
allowance 914 (11,809) --
Other (730) 451 33
$1,969 $(13,458) $ (3,748)
The sources of significant temporary differences which gave rise to the
deferred tax provision and their effects follow:
Years Ended x
January 28, February 3, February 1,
1995 1996 1997 x
Inventory $ (250) $ (240) $ (2,905)
Deferred rent (305) (420) (1,035)
Depreciation 236 1,069 1,843
Accrued fringes (93) (161) (343)
Intangibles 255 245 (178)
Store closing costs (210) (1,182) (1,833)
Fixed assets -- (1,410) (1,318)
Benefit of net operating
loss carryforwards (1,068) (156) 1,059
Other (102) (227) (167)
Change in valuation
allowance 914 (11,809) --
Prior year adjustments -- (597) --
$ (623) $(14,888) $ (4,877)
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:
Years Ended x
February 3, February 1,
1996 1997 x
Deferred tax liabilities:
Depreciation $ (575) $(2,418)
Deferred tax assets:
Inventory 1,490 4,395
Deferred rent 1,719 2,754
Accrued fringes 848 1,191
Intangibles 375 553
Store closing costs 1,722 3,555
Fixed assets 1,410 2,728
Net operating loss carryforwards 6,664 5,605
Other 541 708
Total deferred tax assets 14,769 21,489
Net deferred tax assets $14,194 $19,071
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 existing valuation allowance of $11,809 was
eliminated and income taxes provided in prior years adjusted. In assessing
the realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets
will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the periods
which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of these
deductible differences.
At February 1, 1997, the Company has available net loss carryforwards of
$14,884 for federal income tax purposes, which begin expiring in 2004, and
$8,922 for state income tax purposes, which begin expiring in 1997.
7. Disposal of Stores
In November 1995, Pet Food Warehouse sold certain assets of its eight
retail stores in Michigan and Ohio for $2,426 in cash pursuant to an Asset
Purchase Agreement and Addendum (the Agreements). The Agreements provided
for the sale of certain assets used in the operation of the Michigan and
Ohio stores and the assumption of certain liabilities by the buyer. The
sale of these assets resulted in a loss on the sale of stores of $3,500 in
the fourth quarter of fiscal 1995 from, among other things, rent
concessions and the loss on disposal of inventory and property and
equipment. Pursuant to the Agreements, if the buyer defaults under the
sublease arrangements, the Company is contingently liable for amounts owing
under the lease agreements.
8. Related Party Transactions
The Company recognized interest expense on subordinated debt obligations
to stockholders of $683 during fiscal 1994.
9. Employee Savings Plan
The Company has an employee savings plan which permits eligible
participants to make contributions by salary reduction pursuant to section
401(k) of the Internal Revenue Code. 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. In
connection with the required match, the Company's contribution to the plan
was $58 in 1996. Prior to 1996, there was no matching contribution.
10. 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 ultimate
disposition of these matters will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
EXHIBIT INDEX
<TABLE>
<C> <C>
Sequentially
Numbered
Number Document Page x
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. (1)
3.1 Amended and Restated Certificate of Incorporation, as
amended. (1)
3.2 Amended and Restated By-Laws. (2)
4.1 Form of Common Stock Certificate. (2)
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 the Company and the stockholders identified
therein. (2)
10.4 Common Stock Subscription Agreements, dated April 19, 1991,
between the Company and various stockholders identified
therein. (2)
10.5 Preferred Stock Subscription Agreements, dated April 19, 1991,
between the Company and various stockholders identified
therein. (2)
10.6 Term loan Agreement, dated January 29, 1996, between the
Company and Union Bank. (3)
10.7 First Amendment to Term loan Agreement, dated April 24, 1997,
between the Company and Union Bank.(4)
10.8 Revolving Loan Agreement, dated December 6, 1996, between
the Company and Union Bank. (4)
10.9 Distribution Center Lease, dated March 24, 1994, between the
Company and The Principal Mutual Life Insurance Company for
10401 Seventh Street, Rancho Cucamonga, California. (5)
10.10 Distribution Center Lease, dated August 12, 1994, between the
Company and John Kaiseratt for 515 113th Street, Arlington,
Texas. (5)
10.11 Distribution Center Lease, dated September 24, 1991, between
the Company and S-H-Eddy-Souther #238 Partners for 11006 N.E.
37th Circle, Vancouver, Washington. (2)
10.12 Distribution Center Lease, dated August 3, 1992, between the
Company and Isaac Heller for 2-A Corn Road, Dayton, New
Jersey. (2)
10.13 Distribution Center Lease, dated October 25, 1995, between the
Company and Stockton 215 Venture for 8616 Elder Creek Road,
Sacramento, California. (3)
10.14 Executive Management Agreement, as amended, dated July 20,
1988, between the Company and The Spectrum Group. (2)
10.15 The 1994 Stock Option and Restricted Stock Plan for Executive
and Key Employees of Petco Animal Supplies, Inc., as
amended. (6)
10.16 First Amendment to 1994 Stock Option and Restricted Stock
Plan for Executive and Key Employees of Petco Animal
Supplies, Inc. (4)
10.17 Employment Agreement, dated March 17, 1996, between the
Company and Brian K. Devine. (3)
10.18 Petco Animal Supplies 401(k) Plan. (2)
10.19 Master Equipment Lease Agreement, dated October 19, 1992,
between the Company and Sanwa Business Credit Corporation. (2)
10.20 Master Equipment Lease Agreement, dated September 21, 1994,
between the Company and General Electric Credit
Corporation. (5)
10.21 Master Equipment Lease Agreement, dated March 10, 1995,
between the Company and KeyCorp Leasing Ltd. (3)
10.22 Master Lease Agreement, dated December 27, 1995, between the
Company and Newcourt Financial USA, Inc. (3)
10.23 Master Lease Agreement, dated September 28, 1995, between the
Company and USL Capital Corporation. (3)
10.24 Master Equipment Lease Agreement, dated November 15, 1995,
between the Company and Fleet Credit Corporation. (3)
10.25 Petco Animal Supplies, Inc. Group Benefit Plan, dated July 29,
1991, as amended. (3)
10.26 First Amendment to Stockholders' Agreement, dated as of March
1994. (5)
10.27 Petco Animal Supplies, Inc. Directors' 1994 Stock Option Plan,
as amended. (3)
10.28 Form of Indemnification Agreement between the Company and
certain officers and directors. (2)
10.29 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option
Agreement. (2)
10.30 Form of Petco Animal Supplies, Inc. Incentive Stock Option
Agreement. (2)
10.31 Form of Petco Animal Supplies, Inc. Restricted Stock
Agreement. (2)
10.32 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option
Agreement (Directors' 1994 Stock Option Plan). (2)
10.33 Agreement for Purchase of Assets, dated June 16, 1995, between
the Company and Pet Metro, Inc. (7)
10.34 Stock Purchase Agreement, dated October 28, 1995, among the
Company, 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)
10.35 Stock Purchase Agreement, dated October 29, 1995, among the
Company, Peter Chernis, Edward Field, Jeffrey Ross, Bryan
Shlager, Paul Sudman and Pet Supply Depot, Inc. (8)
21.1 Subsidiaries of the registrant. (4)
23.1 Consent of KPMG Peat Marwick LLP. (4)
23.2 Consent of Arthur Andersen LLP. (4)
27.1 Financial Data Schedule. (4)
</TABLE>
_____________
(1) Filed as an exhibit to the Company's Registration Statement on Form S-4
dated October 23, 1996, File No. 333-14699, including Amendment No. 1
thereto dated November 20, 1996.
(2) Filed as an exhibit to the Company'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) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated April 4, 1996, File No. 333-3156, including Amendment No. 1
thereto dated April 24, 1996.
(4) Filed herewith.
(5) Filed as an exhibit to the Company'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 the Company's Proxy Statement dated May 24, 1996
relating to the 1996 Annual Meeting of Stockholders of Petco.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K dated
August 23, 1995.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 15, 1995, as amended.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
30th day of April, 1997.
PETCO ANIMAL SUPPLIES, INC.
By: BRIAN K. DEVINE x
Brian K. Devine
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/BRIAN K. DEVINE Chairman of the Board, President April 30, 1997
Brian K. Devine and Chief Executive Officer
(Principal Executive Officer)
/s/RICHARD C. ST. PETER Executive Vice President, Chief April 30, 1997
Richard C. St. Peter Financial Officer and Secretary
(Principal Financial Officer)
/s/JAMES M. MYERS Senior Vice President, Finance April 30, 1997
James M. Myers (Principal Accounting Officer)
/s/C. HUNTER BOLL Director April 30, 1997
C. Hunter Boll
/s/ANDREW G. GALEF Director April 30, 1997
Andrew G. Galef
/s/SHAHAN D. SOGHIKIAN Director April 30, 1997
Shahan D. Soghikian
/s/PETER M. STARRETT Director April 30, 1997
Peter M. Starrett
Exhibit 21.1
PETCO ANIMAL SUPPLIES, INC.
SUBSIDIARIES
<TABLE>
<S> <C>
Name Jurisdiction of Incorporation
International Pet Supplies and Distribution, Inc. California
Pet Nosh Consolidated Co., Inc. New York
</TABLE>
Exhibit 23.1
The Board of Directors
Petco Animal Supplies, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 33-82302, 33-95352 and 333-04442) on Form S-8 and (No. 333-14699) on
Post-Effective Amendment No. 1 on Form S-8 to Form S-4 of Petco Animal
Supplies, Inc. of our report dated March 24, 1997, relating to the
consolidated balance sheets of Petco Animal Supplies, Inc. and subsidiaries
as of February 3, 1996 and February 1, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the years in the three-year period ended February 1, 1997, which report
appears in the February 1, 1997, annual report on Form 10-K of Petco Animal
Supplies, Inc.
KPMG Peat Marwick LLP
San Diego, California
April 28, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of
our report dated March 15, 1996 on the financial statements of Pet Food
Warehouse, Inc. (which are included in the restated pooled financial
statements of Petco Animal Supplies, Inc.) in this Form 10-K of Petco
Animal Supplies, Inc. It should be noted that we have not audited any
financial statements of Pet Food Warehouse, Inc. subsequent to February 3,
1996 or performed any audit procedures subsequent to the date of our
report.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 42,932
<SECURITIES> 0
<RECEIVABLES> 7,212
<ALLOWANCES> 0
<INVENTORY> 68,498
<CURRENT-ASSETS> 120,618
<PP&E> 96,374
<DEPRECIATION> 0
<TOTAL-ASSETS> 280,348
<CURRENT-LIABILITIES> 66,828
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 184,624
<TOTAL-LIABILITY-AND-EQUITY> 280,348
<SALES> 500,036
<TOTAL-REVENUES> 500,036
<CGS> 371,420
<TOTAL-COSTS> 371,420
<OTHER-EXPENSES> 144,436
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (387)
<INCOME-PRETAX> (15,433)
<INCOME-TAX> (3,748)
<INCOME-CONTINUING> (11,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,685)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
Exhibit 10.7
FIRST AMENDMENT
TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "First Amendment") dated as of
April 24, 1997, is made and entered into by and between PETCO ANIMAL SUPPLIES,
INC., a Delaware corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A.
(successor in interest to Union Bank), a national banking association ("Bank").
RECITALS:
A. Borrower and Bank are parties to that certain Loan Agreement dated January
29, 1996 (the "Agreement"), pursuant to which Bank agreed to extend credit to
Borrower.
B. Borrower and Bank desire to amend the Agreement subject to the terms and
conditions of this First Amendment.
AGREEMENT:
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. Defined Terms. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the Agreement.
2. Amendments to the Agreement.
(a) Sections 4.6a Minimum Tangible Net Worth, 4.6b Minimum Net Worth, 4.7
Maximum Leverage, 4.8 Minimum Profitability and 4.9 Maximum Accounts Payable
Turndays are deleted in their entirety and replaced with the following:
4.6 Total Debt Ratio. Borrower and its Subsidiaries on a consolidated basis
shall not permit, as of the end of each fiscal quarter for the four consecutive
fiscal quarters then ended, the Total Debt Ratio to be greater than 3.0:1.0.
"Total Debt Ratio" means for Borrower and its Subsidiaries on a consolidated
basis, determined as of the end of each fiscal quarter for the period of four
fiscal quarters then ended, the ratio of Funded Debt (including obligations
under Capitalized Leases) outstanding at such time to EBITDA.
"Funded Debt" means the sum of the outstanding principal balance of all Debt of
Borrower and its Subsidiaries described in clauses (i), (ii), (iii) and (iv) of
the definition of "Debt" set forth herein.
"Debt" of any person or entity means (i) all indebtedness of such person or
entity for borrowed money or for the deferred purchase price of property or
services, (ii) all obligations of such person or entity evidenced by notes,
bonds, debentures or other similiar instruments, (iii) all indebtedness created
or arising under any conditional-sale or other title-retention agreement, with
respect to property acquired by such person or entity, (iv) all obligations of
such person or entity as lessee under leases that have been or should be, in
accordance with Agreement Accounting Principles, recorded as Capitalized
Leases,
(v) all obligations of such person or entity under direct or indirect
guaranties
in respect of, and obligations (contingent or otherwise) to purchase or
otherwise acquire, or otherwise to secure a credit against loss in respect of,
indebtedness or obligations of others of the kinds referred to in clause (I),
(ii), (iii), or (iv) above and (vi) liabilities in respect of unfunded vested
benefits under plans covered by Title IV of ERISA.
"Agreement Accounting Principles" means generally accepted accounting
principles
as in effect from time to time, applied in a manner consistent with that
used in
preparing the financial statements referred to in Section 4.5 (except for
changes concurred on by Borrower's independent public accountants).
"Capitalized Lease" of a Person means any lease of Property by such Person
as
lessee which would be capitalized on a balance sheet of such Person prepared in
accordance with Agreement Accounting Principles.
"EBITDA" means for any period, for the fiscal quarter most recently ended and
the immediately preceding three fiscal quarters, Net Income after eliminating
extraordinary gains and losses, plus (i) provisions for taxes, (ii)
depreciation
and amortization, (iii) Interest Expense and (iv) all non-cash Acquisition-
related costs (including charges related to fixed asset write-downs, lease
cancellations and Acquisition-specific non-cash charges; provided that with
regard to lease cancellations and other types of non-cash Acquisition costs,
Borrower may include initial non-cash reserves and deduct, in the following
quarters, any cash payments made on the related reserves).
"Net Income" means for Borrower and its Subsidiaries on a consolidated basis,
net income as determined in accordance with Agreement Accounting Principles.
"Interest Expense" means as of any date, for the fiscal quarter most recently
ended and the immediately preceding three fiscal quarters, the sum of (i) the
amount of all interest on Funded Debt which was paid, payable and/or accrued
for
such period (without duplication of previous amounts) and (ii) all commitment,
letter of credit or line of credit fees paid, payable and/or accrued for such
period (without duplication of previous amounts) to any lender in exchange for
such lender's commitment to lend.
"Acquisition" means any transaction, or any series of related transactions,
consummated on or after the date of this Agreement, by which Borrower
or any of
its Subsidiaries (i) acquires any going business in the pet food and supply
business or related fields or all or substantially all of the assets of any
firm, corporation or division therreof in the pet food and supply business or
related fields, whether through purchase of assets, merger or otherwise or (ii)
directly or indirectly acquires (in one transaction or as the most recent
transaction in a series of transactions) at least a majority (in number of
votes) of the securities of a corporation in the pet food and supply
business or
related fields which have ordinary voting power for the election of directors
(other than securities having such power only by reason of the happening of a
contingency) or a majority (by percentage or voting power) of the outstanding
partnership interests of a partnership in the pet food and supply business or
related fields.
"Person" means any natural person, corporation, firm, limited liability
company,
joint venture, partnership, association, enterprise, trust or other entity or
organization, or any government or political subdivision or any agency,
department or instrumentality thereof.
"Property" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned,
leased or
operated by such Person.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or
more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, association, joint venture or similar business
organization more than 50% of the ownership interests having ordinary voting
power of which shall at the time be so owned or controlled. Unless otherwise
expressly provided, all references herein to a "Subsidiary" shall mean a
Subsidiary of Borrower.
4.7 Consolidated Net Worth. Borrower and its Subsidiaries shall at all times
maintain Consolidated Net Worth , determined as of the end of each fiscal
quarter, of not less than $150,000,000 plus 50% of cumulative Net Income for
the
period commencing on August 3, 1996 through the end of such fiscal quarter plus
75% of any net proceeds obtained from any public equity offering. (In the
event
that Borrower and its Subsidiaries have a consolidated net loss for any fiscal
quarter, Net Income for purposes of this section shall be deemed zero for such
fiscal quarter).
"Consolidated Net Worth" means with respect to Borrower and its Subsidiaries,
the excess of total assets over total liabilities, all to be determined on a
consolidated basis in accordance with Agreement Accounting Principles.
4.8 Minimum Interest Coverage Ratio. Borrower shall maintain a ratio,
determined as of the end of each fiscal quarter, for the four consecutive
fiscal
quarters then ended, of EBITDA to Interest Expense of not less than 4.0:1.0.
4.9 Minimum Fixed Charge Coverage Ratio. Borrower shall at all times
maintain a
ratio, determined as of the end of each fiscal quarter, for the four
consecutive
fiscal quarters then ended, of EBITDA to Consolidated Fixed Charges of not less
than 2.0:1.0.
"Consolidated Fixed Charges" means, for Borrower and its Subsidiaries, on a
consolidated basis, for any period of four consecutive fiscal quarters, the sum
(without duplication) of (i) Interest Expense for such period, (ii) the
aggregate principal amount of all scheduled payments of Debt (including the
principal portion of rentals under Capitalized Leases) required to be made
during such period and (iii) all taxes required to be paid during such period.
(b) Section 4.10 Maximum Inventory Turndays is deleted in its entirety.
(c) Section 5.6 Payment of Dividends is deleted in its entirety.
(d) Section 5.9 Captial Expenditures is deleted in its entirety and
replaced with the following:
5.9 Capital Expenditures. Borrower will not, and will not permit any
Subsidiary
to, make or commit to make (by way of the acquisition of securities of a person
or entity or otherwise) any Capital Expenditure, except for Capital
Expenditures
not exceeding (i) in fiscal year 1996, $40,000,000 in the aggregate and (ii) in
fiscal year 1997, the sum of $50,000,000 in the aggregate, plus an aggregate
amount equal to the amount (if any) by which the actual Capital Expenditures in
1996 were less than those permitted under (i) hereof. Notwithstanding the
foregoing, any Capital Expenditure made by a Person which is the subject of an
Acquisition by Borrower, prior to such Acquisition, shall not be included in
determining compliance by Borrower and its Subsidiaries with this section.
"Capital Expenditures" means, for any period, for any person or entity, the
aggregate of all expenditures which are made during such period (whether
paid in
cash or accrued as liabilities), by such person or entity, for property, plant
or equipment and which would be reflected as additions to property, plant or
equipment on a balance sheet of such person or entity prepared in accordance
with Agreement Accounting Principles (including, without limitation, all such
property held under Capitalized Leases).
3. Effectiveness of the First Amendment. This First Amendment shall become
effective as of the date hereof when, and only when, Bank shall have received
all of the following, in form and substance satisfactory to Bank:
(a) The counterpart of this First Amendment, duly executed by Borrower;
(b) Such other documents, instruments or agreements as Bank may reasonably
deem necessary.
4. Ratification. Except as specifically amended hereinabove, the Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
5. Representations and Warranties. Borrower represents and warrants as
follows:
(a) Each of the representations and warranties contained in the Agreement,
as the same may be amended hereby, is hereby reaffirmed as of the date hereof,
each as if set forth herein;
(b) The execution, delivery and performance of the First Amendment and any
other instruments or documents in connection herewith are within Borrower's
power, have been duly authorized, are legal, valid and binding obligations of
Borrower, and are not in conflict with the terms of any charter, bylaw, or
other
organization papers of Borrower or with any law, indenture, agreement or
undertaking to which Borrower is a party or by which Borrower is bound or
affected; and
(c) No event has occurred and is continuing or would result from this First
Amendment which constitutes or would constitute an Event of Default under the
Agreement.
6. Governing Law. This First Amendment and all other instruments or documents
in connection herewith shall be governed by and construed according to the laws
of the State of California.
7. Counterparts. This First Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
PETCO ANIMAL SUPPLIES, INC. By: /s/ James M. Myers
Title: Senior Vice President - Finance
UNION BANK OF CALIFORNIA, N.A. By: /s/ Cary Moore
Title: Vice President
Exhibit 10.8
CREDIT AGREEMENT
This Agreement, dated as of December 6, 1996, is among PETCO
ANIMAL SUPPLIES, INC., a Delaware corporation (the "Borrower"),
the Lenders and UNION BANK OF CALIFORNIA, N.A. ("UBOC"), as
Agent. The parties hereto agree as follows:
RECITALS
WHEREAS, UBOC (as successor by merger to Union Bank) and the
Borrower are parties to that Loan Agreement dated as of May 10,
1995 (the "Prior Loan Agreement"); and
WHEREAS, the Lenders have agreed, on the terms and
conditions herein set forth, to extend credit to the Borrower for
the purposes of repaying all amounts under the Prior Loan
Agreement and making permitted acquisitions and capital
expenditures and for general working capital purposes;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the parties hereto hereby
agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement:
"Acquisition" means any transaction, or any series of
related transactions, consummated on or after the date of this
Agreement, by which the Borrower or any of its Subsidiaries (i)
acquires any going business in the pet food and supply business
or related fields or all or substantially all of the assets of
any firm, corporation or division thereof in the pet food and
supply business or related fields, whether through purchase of
assets, merger or otherwise or (ii) directly or indirectly
acquires (in one transaction or as the most recent transaction in
a series of transactions) at least a majority (in number of
votes) of the securities of a corporation in the pet food and
supply business or related fields which have ordinary voting
power for the election of directors (other than securities having
such power only by reason of the happening of a contingency) or a
majority (by percentage or voting power) of the outstanding
partnership interests of a partnership in the pet food and supply
business or related fields.
"Acquisition Documents" means the purchase agreement,
together with all schedules and exhibits referenced therein and
the legal opinions delivered in connection therewith in
connection with any Acquisition.
"Advance" means a borrowing hereunder consisting of the
aggregate amount of the several Loans made by the Lenders to the
Borrower of the same Type and, in the case of a LIBOR Loan, for
the same Interest Period.
"Affiliate" of any Person means any other Person directly or
indirectly controlling, controlled by or under common control
with such Person. A Person shall be deemed to control another
Person if the controlling Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management or policies of the controlled Person, whether through
ownership of stock, by contract or otherwise.
"Agent" means Union Bank of California, N.A. in its capacity
as administrative agent for the Lenders pursuant to Article 10,
and not in its individual capacity as a Lender, and any successor
Agent appointed pursuant to Article 10.
"Aggregate Available Commitment" means the aggregate of the
Available Commitments of all the Lenders.
"Aggregate Commitment" means the aggregate of the
Commitments of all the Lenders.
"Agreement" means this Credit Agreement, as it may be
amended or modified and in effect from time to time.
"Agreement Accounting Principles" means generally accepted
accounting principles as in effect from time to time, applied in
a manner consistent with that used in preparing the financial
statements referred to in Section 5.6 (except for changes
concurred on by the Borrower's independent public accountants and
the Required Lenders).
"Applicable Lending Office" means for any Lender, its
offices for LIBOR Loans and Base Rate Loans, specified in
Schedule 1 or in the Assignment and Acceptance pursuant to which
it became a party hereto, as the case may be, any of which
offices may, upon 10 days' prior written notice to the Agent and
the Borrower, be changed by such Lender.
"Applicable Margin": for each LIBOR Loan and for each Base
Rate Loan as set forth below:
LIBOR Base
Leverage Ratio Level Margin Rate Margin
1 .375% 0%
2 .50% 0%
3 .625% 0%
4 .75% 0%
5 1.00% 0%
"Article" means an article of this Agreement unless another
document is specifically referenced.
"Assignment and Acceptance" means an Assignment and
Acceptance in the form of Exhibit C hereto.
"Authorized Officer" means any of the chief executive
officer, chief financial officer or any senior vice president
(specifically authorized by the Borrower) of the Borrower, acting
singly.
"Available Commitment" means, with respect to each Lender,
the amount by which (i) the Commitment of each Lender on such
date exceeds (ii) the sum of (a) the aggregate principal sum of
such Lender's Loans outstanding, (b) such Lender's Commitment
Percentage of the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and (c) such Lender's Commitment
Percentage of the aggregate amount of unreimbursed drawings under
all Letters of Credit on such date.
"Base Rate" means, for any day, a rate per annum equal to
(i) the Corporate Base Rate for such day plus (ii) the Applicable
Margin, in each case changing when and as the Corporate Base Rate
changes.
"Base Rate Loan" means a Loan when it bears interest at the
Base Rate.
"Borrower" means Petco Animal Supplies, Inc., a Delaware
corporation, and its successors and assigns.
"Borrowing Date" means a date on which an Advance is made
hereunder.
"Business Day" means any day (a) other than a Saturday,
Sunday or other day on which commercial banks are authorized or
required by law to close in Los Angeles, California and (b) if
the applicable Business Day relates to a LIBOR Loan, on which
dealings are carried on in the London interbank market.
"Capital Expenditures" means, for any period, for any person
or entity, the aggregate of all expenditures which are made
during such period (whether paid in cash or accrued as
liabilities), by such person or entity, for property, plant or
equipment and which would be reflected as additions to property,
plant or equipment on a balance sheet of such person or entity
prepared in accordance with Agreement Accounting Principles
(including, without limitation, all such property held under
Capitalized Leases).
"Capitalized Lease" of a Person means any lease of Property
by such Person as lessee which would be capitalized on a balance
sheet of such Person prepared in accordance with Agreement
Accounting Principles.
"Closing Date" means the date on which all the conditions
precedent set forth in Section 4.1 shall have been satisfied.
"Code" means the Internal Revenue Code of 1986, as amended,
reformed or otherwise modified from time to time.
"Commitment" means, for each Lender, the obligation of such
Lender to make Loans not exceeding the amount set forth opposite
its name on Schedule 1 hereto or as set forth in any Assignment
and Acceptance relating to any assignment that has become
effective pursuant to Section 12.3, as such amount may be
modified from time to time pursuant to the terms hereof.
"Commitment Percentage" means as to any Lender at any time,
the percentage of the Aggregate Commitments then constituted by
such Lender's Commitments.
"Compliance Certificate" has the meaning set forth in
Section 6.1(v).
"Consideration" means, with respect to any Acquisition, the
aggregate consideration, in whatever form (including, without
limitation, cash payments, the principal amount of promissory
notes and Debt assumed, the aggregate amounts payable to acquire,
extend and exercise any option, the aggregate amount payable
under non-compete agreements and management agreements and the
fair market value of other property delivered) paid, delivered or
assumed by the Borrower and its Subsidiaries for such Acquisition
and the expenses associated therewith, including all brokerage
commissions, legal fees and similar expenses. Notwithstanding
anything herein to the contrary, no Acquisition involving the
assumption of Debt by the Borrower or its Subsidiaries shall be
permitted if such assumption would violate the terms of this
Agreement.
"Consolidated Fixed Charges" means, for the Borrower and its
Subsidiaries, on a consolidated basis, for any period of four
consecutive fiscal quarters, the sum (without duplication) of (i)
Interest Expense for such period, (ii) the aggregate principal
amount of all scheduled payments of Debt (including the principal
portion of rentals under Capitalized Leases) required to be made
during such period and (iii) all taxes required to be paid during
such period.
"Consolidated Net Worth" means with respect to the Borrower
and its Subsidiaries, the excess of total assets over total
liabilities, all to be determined on a consolidated basis in
accordance with Agreement Accounting Principles.
"Control" means the power to direct or cause the direction
of the management or policies of a person, whether through rights
of ownership under voting securities, under contract or
otherwise, and "Controlling" and "Controlled" shall have meanings
correlative thereto.
"Controlled Group" means all members of a controlled group
of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the
Borrower or any of its Subsidiaries, are treated as a single
employer under Section 414 of the Code.
"Conversion/Continuation Notice" is the notice referred to
in Section 2.12.
"Corporate Base Rate" means a rate per annum equal to the
corporate base rate of interest announced by UBOC from time to
time, changing when and as said corporate base rate changes.
"Debt" of any person or entity means (i) all indebtedness of
such person or entity for borrowed money or for the deferred
purchase price of property or services, (ii) all obligations of
such person or entity evidenced by notes, bonds, debentures or
other similar instruments, (iii) all indebtedness created or
arising under any conditional-sale or other title-retention
agreement with respect to property acquired by such person or
entity, (iv) all obligations of such person or entity as lessee
under leases that have been or should be, in accordance with
Agreement Accounting Principles, recorded as Capitalized Leases,
(v) all obligations of such person or entity under direct or
indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to
secure a credit against loss in respect of, indebtedness or
obligations of others of the kinds referred to in clause (i),
(ii), (iii) or (iv) above and (vi) liabilities in respect of
unfunded vested benefits under plans covered by Title IV of
ERISA.
"Default" means any Event of Default and any default, event
or condition that would, with the giving of any requisite notice
and the passage of any requisite period of time, constitute an
Event of Default.
"Drawing Lender" has the meaning set forth in Section
2.10(iii).
"EBITDA" means for any period, for the fiscal quarter most
recently ended and the immediately preceding three fiscal
quarters, Net Income after eliminating extraordinary gains and
losses, plus (i) provisions for taxes, (ii) depreciation and
amortization, (iii) Interest Expense and (iv) all non-cash
Acquisition-related costs (including charges related to fixed
asset write-downs, lease cancellations and Acquisition-specific
non-cash charges; provided that with regard to lease
cancellations and other types of non-cash Acquisition costs, the
Borrower may include initial non-cash reserves and deduct, in the
following quarters, any cash payments made on the related
reserves).
"Eligible Assignee" means (i) a commercial bank organized
under the laws of the United States, or any State thereof, and
having total assets in excess of $250,000,000; (ii) a commercial
bank organized under the laws of any other country which is a
member of the Organization for Economic Cooperation and
Development, or a political subdivision of any such country, and
having total assets in excess of $250,000,000, provided that such
bank is acting through a branch or agency located in the United
States; (iii) an insurance company or other financial institution
or an investment fund that is engaged in making, purchasing or
otherwise investing in commercial loans in the ordinary course of
its business and having total assets in excess of $250,000,000;
(iv) any Affiliate of an existing Lender; and (v) any other
Person approved by the Agent and, in the absence of any Default,
the Borrower.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any rule or regulation
issued thereunder.
"Eurocurrency Liabilities" has the meaning set forth in
Regulation D of the Board of Governors of the Federal Reserve
System.
"Event of Default" has the meaning set forth in Section 7.
"Facility Termination Date" means December 6, 1998.
"Federal Funds Effective Rate" means, for any day, an
interest rate per annum equal to the weighted average of the
rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such
day, as published for such day (or, if such day is not a Business
Day, for the immediately preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the
quotations at approximately 10 a.m., Los Angeles time, on such
day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its
sole discretion.
"Funded Debt" means the sum of the outstanding principal
balance of all Debt of the Borrower and its Subsidiaries
described in clauses (i), (ii), (iii) and (iv) of the definition
of "Debt" set forth herein.
"Governmental Person" means, whether domestic or foreign,
any national, federal, state or local government, any political
subdivision thereof or any governmental, quasi-governmental,
judicial, public or regulatory instrumentality, authority, body
or entity, including the Federal Deposit Insurance Corporation,
the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, any central bank and any comparable
authority.
"Governmental Rule" means any treaty, law, rule, regulation,
ordinance, order, code, judgment, decree, directive,
interpretation, request, guideline, policy or similar form of
decision of any Governmental Person.
"Guarantors" means International Pet Supplies and
Distribution, Inc., a California corporation, and Pet Nosh,
Consolidated Co., Inc., a New York corporation.
"Guaranties" means, collectively, each Guaranty dated as of
even date herewith executed by a Guarantor in favor of the Agent,
for the benefit of the Lenders, and in form and substance
satisfactory to the Agent, as it may be amended from time to
time.
"Interest Expense" means as of any date, for the fiscal
quarter most recently ended and the immediately preceding three
fiscal quarters, the sum of (i) the amount of all interest on
Funded Debt which was paid, payable and/or accrued for such
period (without duplication of previous amounts) and (ii) all
commitment, letter of credit or line of credit fees paid, payable
and/or accrued for such period (without duplication of previous
amounts) to any lender in exchange for such lender's commitment
to lend.
"Interest Period" means, with respect to a LIBOR Loan, a
period of one, two, three or six months, commencing on a Business
Day selected by the Borrower pursuant to this Agreement. Such
Interest Period shall end on (but exclude) the day which
corresponds numerically to such date one, two or three or six
months thereafter, provided, however, that if there is no such
numerically corresponding day in such next, second or third or
sixth succeeding month, such Interest Period shall end on the
last Business Day of such next, second or third or sixth
succeeding month. If an Interest Period would otherwise end on a
day which is not a Business Day, such Interest Period shall end
on the next succeeding Business Day, provided, however, that if
said next succeeding Business Day falls in a new calendar month,
such Interest Period shall end on the immediately preceding
Business Day. No Interest Period may end after the Facility
Termination Date.
"Lenders" means the lending institutions listed on the
signature pages of this Agreement and their respective successors
and assigns.
"Letter of Credit Amount" means the stated maximum amount
available to be drawn under a particular Letter of Credit, as
such amount may be reduced or reinstated from time to time in
accordance with the terms of such Letter of Credit.
"Letter of Credit Request" means a request by the Borrower
for the issuance of a Letter of Credit, on the Agent's standard
form of standby or commercial letter of credit application and
agreement, the current form of which is attached hereto as
Exhibit E, and containing terms and conditions satisfactory to
the Agent in its sole discretion.
"Letter of Credit" shall have the meaning set forth in
Section 2.1.
"Leverage Ratio Level": if the Total Debt Ratio shall be
less than or equal to 1.49:1.00, the Leverage Ratio Level shall
be 1; if the Total Debt Ratio shall be equal to or greater than
1.50:1.00 and equal to or less than 1.99:1.00, the Leverage Ratio
Level shall be 2; if the Total Debt Ratio shall be equal to or
greater than 2.00:1.00 and equal to or less than 2.49:1.00, the
Leverage Ratio Level shall be 3; if the Total Debt Ratio shall be
equal to or greater than 2.50:1.00 and equal to or less than
2.75:1.00, the Leverage Ratio Level shall be 4; and if the Total
Debt Ratio shall be equal to or greater than 2.76:1.00, the
Leverage Ratio Level shall be 5.
"Leverage Ratio Level Certificate" is defined in Section
2.13.
"LIBOR" means, for any Interest Period for any LIBOR Loan,
the interest rate per annum obtained by dividing (a) the average
of the respective rates per annum at which deposits in United
States dollars are offered to the Agent in London, England in the
London interbank market at 11 a.m., London time, two Business
Days before the first day of such Interest Period in an amount
substantially equal to the amount of such Loan and for a period
equal to such Interest Period by (b) a percentage equal to 100%
minus the LIBOR Reserve Percentage for such Interest Period.
"LIBOR Loan" means a Loan when it bears interest at the
LIBOR Rate.
"LIBOR Rate" means, with respect to a LIBOR Loan for the
relevant Interest Period, the sum of (i) LIBOR applicable to such
Interest Period, plus (ii) the Applicable Margin. The LIBOR Rate
shall be rounded to the next higher multiple of 1/100 of 1% if
the rate is not such a multiple.
"LIBOR Reserve Percentage" means, for any Interest Period
for any LIBOR Loan, the reserve percentage applicable two
Business Days before the first day of such Interest Period under
regulations issued from time to time by the Board of Governors of
the Federal Reserve System for determining the maximum reserve
requirements (including any emergency, supplemental or other
marginal reserve requirement) for the Bank with respect to
liabilities or assets consisting of or including Eurocurrency
Liabilities (or with respect to any other category of liabilities
that includes deposits by reference to which the interest rate on
such LIBOR Loan is determined) having a term equal to such
Interest Period.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential
arrangement, including the lien or retained title of a
conditional vendor and any easement, right of way or other
encumbrance on title to real property.
"Loan" means, with respect to a Lender, a LIBOR Loan or a
Base Rate Loan.
"Loan Documents" means this Agreement, any Letter of Credit
Requests, the Letters of Credit, the Notes and the Guaranties
executed by the Borrower or any Guarantor in connection herewith
and any other agreement executed by the Borrower or any Guarantor
in connection herewith, as such agreements and documents may be
amended, supplemented and otherwise modified from time to time in
accordance with the terms hereof.
"Material Adverse Effect" means a material adverse effect on
(i) the business, Property, condition (financial or otherwise) or
results of operations of the Borrower and its Subsidiaries taken
as a whole, (ii) the ability of the Borrower to perform its
obligations under the Loan Documents or (iii) the validity or
enforceability of any of the Loan Documents or the rights or
remedies of the Agent or the Lenders thereunder.
"Multiemployer Plan" means a Plan that is a "multiemployer
plan" as defined in Section 3(37) or 4001(i)(3) of the Borrower's
ERISA Plan.
"Net Income" means for the Borrower and its Subsidiaries on
a consolidated basis, net income as determined in accordance with
Agreement Accounting Principles.
"Note" means a promissory note, in substantially the form of
Exhibit A hereto, duly executed by the Borrower and payable to
the order of a Lender in the amount of its Commitment, including
any amendment, modification, renewal or replacement of such
promissory note.
"Notice of Assignment" is defined in Section 12.3(ii).
"Obligations" means all unpaid principal of and accrued and
unpaid interest on the Notes, the obligation to reimburse
drawings under Letters of Credit (including the contingent
obligation to reimburse any drawings under outstanding Letters of
Credit), all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower
to the Lenders or to any Lender, the Agent or any indemnified
party hereunder arising under the Loan Documents.
"Participants" is defined in Section 12.2(i).
"Payment Date" means the first day of each January, April,
July and October in each calendar year.
"PBGC" means the Pension Benefit Guaranty Corporation, or
any successor thereto.
"Person" means any natural person, corporation, firm,
limited liability company, joint venture, partnership,
association, enterprise, trust or other entity or organization,
or any government or political subdivision or any agency,
department or instrumentality thereof.
"Plan" means an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding
standards under Section 412 of the Code maintained by or
contributed to by the Borrower or any member of the Controlled
Group.
"Prior Loan Agreement" is defined in the first Recital.
"Property" of a Person means any and all property, whether
real, personal, tangible, intangible, or mixed, of such Person,
or other assets owned, leased or operated by such Person.
"Purchasers" is defined in Section 12.3(i).
"Regulation D" means Regulation D of the Board of Governors
of the Federal Reserve System as from time to time in effect and
any successor thereto or other regulation or official
interpretation of said Board of Governors relating to reserve
requirements applicable to member banks of the Federal Reserve
System.
"Regulation U" means Regulation U of the Board of Governors
of the Federal Reserve System as from time to time in effect and
any successor or other regulation or official interpretation of
said Board of Governors relating to the extension of credit by
banks for the purpose of purchasing or carrying margin stocks
applicable to member banks of the Federal Reserve System.
"Reportable Event" means a reportable event as defined in
Section 4043 of ERISA and the regulations issued under such
section, with respect to a Single Employer Plan, excluding,
however, such events as to which the PBGC by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified
within 30 days of the occurrence of such event, provided,
however, that a failure to meet the minimum funding standard of
Section 412 of the Code and of Section 302 of ERISA shall be a
Reportable Event regardless of the issuance of any such waiver of
the notice requirement in accordance with either Section 4043(a)
of ERISA or Section 412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at
least 76% of the Aggregate Commitment or, if the Aggregate
Commitment has been terminated, Lenders in the aggregate holding
at least 76% of the aggregate unpaid principal amount of the
outstanding Loans.
"SEC" means the United States Securities and Exchange
Commission.
"SEC Report" means a Current Report on Form 8-K pursuant to
the Securities Exchange Act of 1934.
"Section" means a numbered section of this Agreement, unless
another document is specifically referenced.
"Single Employer Plan" means a Plan other than a
Multiemployer Plan.
"Subsidiary" of a Person means (i) any corporation more than
50% of the outstanding securities having ordinary voting power of
which shall at the time be owned or controlled, directly or
indirectly, by such Person or by one or more of its Subsidiaries
or by such Person and one or more of its Subsidiaries, or (ii)
any partnership, association, joint venture or similar business
organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or
controlled. Unless otherwise expressly provided, all references
herein to a "Subsidiary" shall mean a Subsidiary of the Borrower.
"Taxes" is defined in Section 3.2.
"Total Debt Ratio" means for the Borrower and its
Subsidiaries on a consolidated basis, determined as of the end of
each fiscal quarter for the period of four fiscal quarters then
ended, the ratio of Funded Debt (including obligations under
Capitalized Leases) outstanding at such time to EBITDA.
"Transferee" is defined in Section 12.4.
"Type" means, with respect to a Loan, its nature as a Base
Rate Loan or a LIBOR Loan.
"UBOC" means Union Bank of California, N.A. in its
individual capacity, and its successors.
"Unfunded Liabilities" means the amount (if any) by which
the present value of all nonforfeitable benefits under all Single
Employer Plans exceeds the fair market value of all such Plan
assets allocable to such benefits, all determined in accordance
with the respective most recent valuations for such Plans.
The foregoing definitions shall be equally applicable to
both the singular and plural forms of the defined terms.
ARTICLE 2
THE CREDIT
2.1 Commitment. Each Lender severally agrees, on the terms and
conditions set forth in this Agreement, to make Loans on a
revolving credit basis to the Borrower from time to time and to
participate in standby and/or commercial letters of credit issued
for the account of the Borrower pursuant to Section 2.10 from
time to time (each a "Letter of Credit" and, collectively, the
"Letters of Credit"), from and including the Closing Date to but
excluding the Facility Termination Date in an amount not to
exceed the amount of its Commitment. The sum of (i) the
aggregate principal amount of all Loans outstanding, (ii) the
aggregate Letter of Credit Amount of all Letters of Credit
outstanding and (iii) the aggregate amount of unreimbursed
drawings under all Letters of Credit shall not exceed, at any
time, the amount of the Aggregate Commitment. Further, the sum
of (a) the aggregate Letter of Credit Amount of all Letters of
Credit outstanding and (b) the aggregate amount of unreimbursed
drawings under all Letters of Credit shall not exceed $3,500,000
at any time. Within the limit of each Lender's Commitment, the
Borrower may borrow, have Letters of Credit issued and/or renewed
for the Borrower's account, prepay Loans, reborrow and have
additional Letters of Credit issued for the Borrower's account.
2.2 Commitment Percentage. The principal amount of each
Lender's Loan and participation in a Letter of Credit shall be in
an amount equal to the product of (i) such Lender's Commitment
Percentage (expressed as a fraction) and (ii) the total amount of
the Loan or Loans or Letters of Credit requested; provided that
in no event shall any Lender be obligated to make a Loan if after
giving effect to such Loan such Lender's Loans, Commitment
Percentage of the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and Commitment Percentage of the
aggregate amount of unreimbursed drawings under all Letters of
Credit outstanding would exceed its Commitment or if the amount
of such requested Loan is in excess of such Lender's Available
Commitment.
2.3 Types of Loans. The Loans may from time to time be (i)
LIBOR Loans, (ii) Base Rate Loans or (iii) a combination thereof,
as determined by the Borrower and notified to the Agent in
accordance with Section 2.12. Notwithstanding the foregoing, the
initial Loans made on the Closing Date shall be made as Base Rate
Loans and shall be subject to conversion to LIBOR Loans pursuant
to Section 2.12. Each Lender may make or maintain its Loans to
the Borrower by or through any Applicable Lending Office. At no
time shall more than ten Advances be outstanding.
2.4 Notes. The Loans made by each Lender to the Borrower shall
be evidenced by a Note, with appropriate insertions therein as to
payee, date and principal amount, payable to the order of such
Lender and representing the obligation of the Borrower to pay the
aggregate unpaid principal amount of all Loans made by such
Lender to the Borrower, with interest thereon as prescribed in
Sections 2.13 and 2.14. Each Lender is hereby authorized (but
not required) to record the date and amount of each payment or
prepayment of principal of its Loans made to the Borrower, each
continuation thereof, each conversion of all or a portion thereof
to another Type and, in the case of LIBOR Loans, the length of
each Interest Period with respect thereto, in the books and
records of such Lender, and any such recordation shall constitute
prima facie evidence of the accuracy of the information so
recorded. The failure of any Lender to make any such recordation
or notation in the books and records of the Lender (or any error
in such recordation or notation) shall not affect the obligations
of the Borrower hereunder or under the Notes. Each Note shall
(i) be dated the Closing Date, (ii) provide for the payment of
interest in accordance with Sections 2.13 and 2.14 and (iii) be
stated to be payable on the Facility Termination Date.
2.5 Notice of Borrowing. The Borrower shall give the Agent
irrevocable written notice substantially in the form of Exhibit F
attached hereto (which notice must be received by the Agent prior
to 12:00 noon, Los Angeles time, on the proposed Borrowing Date
or, if all or any part of the Loans are requested to be made as
LIBOR Loans, three Business Days prior to each proposed Borrowing
Date) requesting that the Lenders make the Loans on the proposed
Borrowing Date and specifying (i) the aggregate amount of Loans
requested to be made (which must be in an aggregate amount equal
to at least $1,000,000 or an integral multiple of $1,000,000),
(ii) subject to Section 2.3, whether the Loans are to be LIBOR
Loans, Base Rate Loans or a combination thereof and (iii) if the
Loans are to be entirely or partly LIBOR Loans, the respective
amounts of each such Type of Loan and the respective lengths of
the Interest Periods therefor. On receipt of such notice, the
Agent shall promptly notify each Lender thereof not later than
10:30 a.m., Los Angeles time, on the date of receipt of such
notice. On the proposed Borrowing Date, not later than 1:00
p.m., Los Angeles time, each Lender shall make available to the
Agent at its office specified in Section 13.1 such Lender's
Commitment Percentage of the aggregate borrowing amount (as
determined in accordance with Section 2.2) in immediately
available funds. Not later than 1:30 p.m., Los Angeles time, on
the date of such Loans and upon fulfillment of the applicable
conditions set forth in Section 4, the Agent shall make such
Loans available to the Borrower in immediately available funds.
Each notice pursuant to this Section 2.5 shall be irrevocable and
binding on the Borrower. The Agent may, in the absence of
notification from any Lender that such Lender has not made its
pro rata share available to the Agent, on such date, credit the
account of the Borrower on the books of such office of the Agent
with the aggregate amount of Loans.
2.6 Commitment Reduction. At the Borrower's option and upon at
least five Business Days' prior irrevocable written notice to the
Agent, with such notice specifying the amount and the date of
such reduction, the Borrower may permanently reduce the Aggregate
Commitment in whole at any time or in part from time to time;
provided, however, that each partial reduction of the Aggregate
Commitment shall be in an aggregate amount equal to at least
$1,000,000 or an integral multiple of $1,000,000. The Agent
shall promptly notify each Lender (by telecopy or by telephone)
of such requested Commitment reduction.
Reductions of the Aggregate Commitment pursuant to this Section
2.6 shall automatically effect a reduction of the Commitment of
each Lender to an amount equal to the product of (i) the
Aggregate Commitment of all Lenders, as reduced pursuant to this
Section 2.6 and (ii) the Commitment Percentage of such Lender, in
each case determined immediately prior to such reduction of the
Aggregate Commitment on such date.
Upon each reduction of the Aggregate Commitment, the Borrower
shall (i) pay the unused commitment fee, payable pursuant to
Section 2.11(i), accrued on the amount of the Aggregate
Commitment so reduced through the date of such reduction, (ii)
prepay the amount, if any, by which the sum of (a) the aggregate
unpaid principal amount of the Loans, (b) the aggregate Letter of
Credit Amount of all Letters of Credit outstanding and (c) the
aggregate amount of unreimbursed drawings under all Letters of
Credit exceeds the amount of the Aggregate Commitment as so
reduced, together with accrued interest on the amount being
prepaid to the date of such prepayment (or, with respect to
outstanding Letters of Credit, make a cash collateral deposit in
an amount equal to such excess to the extent such excess is not
corrected by the foregoing prepayment) and (d) compensate the
Lenders for their funding costs, if any, in accordance with
Section 3.1.
2.7 Commitment Obligations. Neither the Agent nor any Lender
shall be responsible for the obligation or Available Commitment
of any other Lender hereunder, nor will the failure of any Lender
to comply with the terms of this Agreement relieve any other
Lender or the Borrower of its obligations under this Agreement
and the Notes. Nothing herein shall be deemed to relieve any
Lender from its obligation to fulfill its Commitments hereunder
or to prejudice any rights which the Borrower may have against
any Lender as a result of any default by such Lender hereunder.
2.8 Commitment Termination. The Commitment of each Lender and
the Aggregate Commitment shall terminate on the Facility
Termination Date.
2.9 Required Payments. The outstanding Loans and all other
unpaid Obligations shall be paid in full by the Borrower on the
Facility Termination Date.
2.10 Issuance of Letters of Credit.
(i) The Borrower shall be entitled to request the issuance of
standby and/or commercial Letters of Credit from time to time
from and including the Closing Date to but excluding the date
which is seven Business Days prior to the Facility Termination
Date by giving the Agent (a) a standby Letter of Credit Request
at least three Business Days before the requested date of
issuance of such standby Letter of Credit and (b) a commercial
Letter of Credit Request no later than the requested date of
issuance of such commercial Letter of Credit (provided that such
Letter of Credit Request is received by the Agent no later than
11:00 a.m., Los Angeles time and any Letter of Credit Request
received after such time shall be deemed to have been received on
the next Business Day) (which date of issuance shall be a
Business Day). All letters of credit outstanding on the Closing
Date which were issued under the Prior Loan Agreement shall be
deemed to have been issued hereunder on and as of the Closing
Date and shall be subject to the terms and conditions hereof. No
Letter of Credit shall have an expiration date more than one year
from its date of issuance. The aggregate Letter of Credit
Amounts under all outstanding Letters of Credit and the aggregate
amount of unreimbursed drawings under Letters of Credit shall
reduce, dollar for dollar, Aggregate Available Commitment. The
sum of (a) the aggregate Letter of Credit Amount of all Letters
of Credit outstanding and (b) the aggregate amount of
unreimbursed drawings under all Letters of Credit shall not at
any time exceed $3,500,000. In addition, the sum of (i) the
aggregate principal amount of all Loans outstanding, (ii) the
aggregate Letter of Credit Amount of all Letters of Credit
outstanding and (iii) the aggregate amount of unreimbursed
drawings under all Letters of Credit shall not exceed, at any
time, the Aggregate Commitment. Any Letter of Credit Request
received by the Agent later than 10:00 a.m., Los Angeles time,
shall be deemed to have been received on the next Business Day.
Each Letter of Credit Request shall be made in writing, shall be
signed by an Authorized Officer, shall be irrevocable and shall
be effective upon receipt by the Agent. Provided that a valid
Letter of Credit Request has been received by the Agent and upon
fulfillment of the other applicable conditions set forth in
Section 4.3, the Agent will issue the requested Letter of Credit
from its office specified in Section 13.1.
Commercial Letters of Credit shall be used only for the purpose
of supporting purchases of inventory by the Borrower and standby
Letters of Credit shall be used solely to provide support for
leasing (including Capitalized Leases) and insurance obligations
of the Borrower.
(ii) Immediately upon the issuance of each Letter of Credit, the
Agent shall be deemed to have sold and transferred to each
Lender, and each Lender shall be deemed to have purchased and
received from the Agent, in each case irrevocably and without any
further action by any party, an undivided interest and
participation in such Letter of Credit, each drawing thereunder
and the obligations of the Borrower under this Agreement in
respect thereof in an amount equal to the product of (i) such
Lender's Commitment Percentage and (ii) the maximum amount
available to be drawn under such Letter of Credit (assuming
compliance with all conditions to drawing). The Agent shall
promptly advise each Lender of the issuance of each Letter of
Credit, the Letter of Credit Amount of such Letter of Credit, any
change in the face amount or expiration date of such Letter of
Credit, the cancellation or other termination of such Letter of
Credit and any drawing under such Letter of Credit.
(iii) The payment by the Agent of a draft drawn under any
Letter of Credit shall first be made from any cash collateral
deposit held by the Agent with respect to such Letter of Credit.
After any such cash collateral deposit has been applied, the
payment by the Agent of a draft drawn under any Letter of Credit
shall constitute for all purposes of this Agreement the making by
the Agent in its individual capacity as a Lender hereunder (in
such capacity, the "Drawing Lender") of a Base Rate Loan in the
amount of such payment (but without any requirement of compliance
with the conditions set forth in Section 4.3). In the event that
any such Loan by the Drawing Lender resulting from a drawing
under any Letter of Credit is not repaid by the Borrower by 12:00
noon, Los Angeles time, on the day of payment of such drawing,
the Agent shall promptly notify each other Lender. Each Lender
shall, on the day of such notification (or if such notification
is not given by 1:00 p.m., Los Angeles time, on such day, then on
the next succeeding Business Day), make a Base Rate Loan, which
shall be used to repay the applicable portion of the Base Rate
Loan of the Drawing Lender with respect to such Letter of Credit
drawing, in an amount equal to the amount of such Lender's
participation in such drawing for application to repay the
Drawing Lender (but without any requirement of compliance with
the applicable conditions set forth in Section 4.3) and shall
deliver to the Agent for the account of the Drawing Lender, on
the day of such notification (or if such notification is not
given by 1:00 p.m., Los Angeles time, on such day, then on the
next succeeding Business Day) and in immediately available funds,
the amount of such Base Rate Loan. In the event that any Lender
fails to make available to the Agent for the account of the
Drawing Lender the amount of such Base Rate Loan, the Drawing
Lender shall be entitled to recover such amount on demand from
such Lender together with interest thereon at the Federal Funds
Effective Rate for each day such amount remains outstanding.
(iv) The obligations of the Borrower with respect to any Letter
of Credit, any Letter of Credit Request and any other agreement
or instrument relating to any Letter of Credit and any Base Rate
Loan made under Section 2.10(iii) shall be absolute,
unconditional and irrevocable and shall be paid strictly in
accordance with the terms of the aforementioned documents under
all circumstances, including the following:
(a) any lack of validity or enforceability of any Letter
of Credit, this Agreement or any other Loan Document;
(b) the existence of any claim, setoff, defense or other
right that the Borrower may have at any time against any
beneficiary or transferee of any Letter of Credit (or any Person
for whom any such beneficiary or transferee may be acting), the
Agent, any Lender (other than the defense of payment to a Lender
in accordance with the terms of this Agreement) or any other
Person, whether in connection with this Agreement, any other Loan
Document, the transactions contemplated hereby or thereby or any
unrelated transaction;
(c) any statement or other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect, or any statement therein being
untrue or inaccurate in any respect whatsoever;
(d) payment by the Agent under any Letter of Credit
against presentation of a draft or certificate that does not
comply on its face with the terms of such Letter of Credit;
(e) any exchange, release or nonperfection of any
collateral, or any release, amendment or waiver of or consent to
departure from any Guaranty, other Loan Document or other
guaranty, for any of the Obligations of the Borrower in respect
of the Letters of Credit; and
(f) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing.
(v) The Borrower shall pay to the Agent with respect to each
Letter of Credit issued hereunder, the following fees:
(a) for each commercial Letter of Credit for the period
from and including the day such commercial Letter of Credit is
issued to but excluding the day such commercial Letter of Credit
expires, a letter of credit fee to the Agent for the benefit of
the Lenders equal to the amount set forth on the Agent's
published Schedule of International Fees (such fee to be payable
on the date of issuance) except for payment fees, which shall be
equal to the greater of (x) the product of (i) .125% and (ii) the
Letter of Credit Amount of such Letter of Credit paid or (y) $100
(such payment fee to be payable on the date such Letter of Credit
is paid);
(b) for each commercial Letter of Credit, a fronting
fee to the Agent for its benefit alone equal to (x) $100, if the
commercial Letter of Credit Amount is less than $500,000 or (y)
.125% of the Letter of Credit Amount, if the commercial Letter of
Credit Amount is equal to or more than $500,000 (such fee to be
payable on the date of issuance);
(c) for each standby Letter of Credit, for the period
from and including the day such standby Letter of Credit is
issued to but excluding the day such standby Letter of Credit
expires, a letter of credit fee to the Agent for the benefit of
the Lenders equal to 1% per annum of the Letter of Credit Amount
(such fee to be payable on the date of issuance);
(d) for each standby Letter of Credit, a fronting fee
to the Agent for its benefit alone equal to .25% of the Letter of
Credit Amount (such fee to be payable on date of issuance); and
(e) from time to time, such additional fees and charges
(including cable charges) as are generally associated with
letters of credit, in accordance with the Agent's standard
internal charge guidelines and the related Letter of Credit
Request.
(vi) The Borrower agrees to the provisions in the Letter of
Credit Request form; provided, however, that the terms of the
Loan Documents shall take precedence if there is any
inconsistency between the terms of the Loan Documents and the
terms of said form.
(vii) The Borrower assumes all risks of the acts or
omissions of any beneficiary or transferee of any Letter of
Credit with respect to its use of such Letter of Credit. Neither
the Agent nor any Lender nor any of their respective officers or
directors shall be liable or responsible for (i) the use that may
be made of any Letter of Credit or any acts or omissions of any
beneficiary or transferee in connection therewith; (ii) the
validity, sufficiency or genuineness of documents, or of any
endorsement thereof, even if such documents should prove to be in
any or all respects invalid, insufficient, fraudulent or forged;
(iii) in the absence of any gross negligence or wilful misconduct
by the Agent, payment by the Agent against presentation of
documents that do not comply with the terms of any Letter of
Credit, including failure of any documents to bear any reference
or adequate reference to any Letter of Credit; or (iv) any other
circumstance whatsoever in making or failing to make payment
under any Letter of Credit. In furtherance and not in limitation
of the foregoing, the Agent may accept any document that appears
on its face to be in order, without responsibility for further
investigation, regardless of any notice or information to the
contrary.
2.11 Fees. The Borrower agrees to pay to the Lenders an unused
commitment fee to be shared among Lenders on the basis of their
respective Commitment Percentages with respect to the Commitments
for the period from and including the Closing Date to but
excluding the Facility Termination Date, computed at the
applicable percentage set forth below of the average daily
aggregate amount of the Aggregate Available Commitment from time
to time in effect, to be payable quarterly in arrears on each
Payment Date and on the Facility Termination Date, commencing on
the first such date to occur after the Closing Date.
Commitment
Leverage Ratio Level Fee
1 .125%
2 .175%
3 .250%
4 .375%
5 .500%
2.12 Voluntary Conversion of Advances. The Borrower may on any
Business Day, upon written notice given to the Agent not later
than 12:00 noon, Los Angeles time, on the third Business Day
before the date of the proposed conversion and subject to the
provisions of Section 3.1(c), convert any Advance into an Advance
of another Type; provided, however, that, with respect to a
conversion from a LIBOR Loan into a Base Rate Loan, any such
conversion shall be made on, and only on, the last day of the
Interest Period for such Loan. Each such notice of a conversion
shall, within the restrictions specified above, specify (a) the
Loan to be converted, (b) the type of Loan into which such Loan
is to be converted and (c) the requested date for such
conversion. Upon receipt of any such notice the Agent shall
promptly notify each Lender thereof. Any part of outstanding
LIBOR Loans and Base Rate Loans may be converted as provided
herein, provided (i) no Loan may be converted into a LIBOR Loan
after the date that is one month prior to the Facility
Termination Date and (ii) the Borrower shall not have the right
to continue or convert to a LIBOR Loan if a Default shall have
occurred and be continuing. However, if the Borrower shall fail
to give any required notices described above in this Section or
if such continuation is not permitted pursuant to the preceding
sentence, such Loans shall be automatically converted to Base
Rate Loans on the last day of such then-expiring Interest Period.
2.13 Interest. A Base Rate Loan shall bear interest on the
outstanding principal amount thereof, for each day from and
including the date such Loan is made or is converted from a LIBOR
Loan into a Base Rate Loan pursuant to Section 2.12 to (but not
including) the date it becomes due or is converted into a LIBOR
Loan pursuant to Section 2.12 hereof, at a rate per annum equal
to the Base Rate for such day. Changes in the rate of interest
on any Loan maintained as a Base Rate Loan will take effect
simultaneously with each change in the Corporate Base Rate. Each
LIBOR Loan shall bear interest from and including the first day
of the Interest Period applicable thereto to (but not including)
the last day of such Interest Period at the LIBOR Rate determined
as applicable to such LIBOR Loan.
For purposes of determining the Applicable Margin for all Loans,
interest rates on the Loans shall be calculated on the basis of
the Total Debt Ratio set forth in the most recent certificate of
an Authorized Officer of the Borrower delivered pursuant to
Section 6.1(v) (a "Leverage Ratio Level Certificate"). For
accrued and unpaid interest only (no changes being made for
interest payments previously made), changes in interest rates on
the Loans attributable to changes in the Applicable Margin caused
by changes in the applicable Leverage Ratio Level shall be
calculated upon the delivery of a Leverage Ratio Level
Certificate and such change shall be effective (y) in the case of
a Base Rate Loan, on the day subsequent to the delivery of the
Leverage Ratio Level Certificate and (z) in the case of a LIBOR
Loan, from the first day of the Interest Period applicable to
such LIBOR Loans subsequent to the delivery of the Leverage Ratio
Level Certificate. If, for any reason, the Borrower shall fail
to deliver a Leverage Ratio Level Certificate when due in
accordance with Section 6.1(v), and such failure shall continue
for a period of twenty days, the Leverage Ratio Level shall be
deemed to be Level 5, retroactive to the date on which the
Borrower should have delivered such Leverage Ratio Level
Certificate and shall continue until a Leverage Ratio Level
Certificate indicating a different Leverage Ratio Level is
delivered to the Agent.
2.14 Rates Applicable After Default. Notwithstanding anything
to the contrary contained in Section 2.3 or 2.12, during the
continuance of an Event of Default no Loan may be made as,
converted into or continued as a LIBOR Loan. During the
continuance of an Event of Default each Loan shall bear interest
at a rate per annum equal to the Base Rate otherwise applicable
to the Base Rate Loan plus 3% per annum. All such interest shall
be payable on demand of the Agent.
2.15 Method of Payment. All payments of the Obligations
hereunder shall be made, without setoff, deduction, or
counterclaim, in immediately available funds to the Agent at the
Agent's address specified pursuant to Article 13, or at any other
Applicable Lending Office of the Agent specified in writing by
the Agent to the Borrower, by 2:00 p.m., Los Angeles time, on the
date when due and shall be applied ratably by the Agent among the
Lenders. Each payment delivered to the Agent for the account of
any Lender shall be delivered promptly by the Agent to such
Lender in the same type of funds that the Agent received at its
address specified pursuant to Article 13 or at any Applicable
Lending Office specified in a notice received by the Agent from
such Lender. The Agent is hereby authorized (but not obligated)
to charge the account of the Borrower maintained with UBOC for
each payment of principal, interest and fees as it becomes due
hereunder.
2.16 Telephonic Notices. The Borrower hereby authorizes the
Lenders and the Agent to convert or continue Loans and effect
selections of Types of Loans based on telephonic notices made by
any person or persons the Agent or any Lender in good faith
believes to be acting on behalf of the Borrower. The Borrower
agrees to deliver promptly to the Agent a written confirmation,
if such confirmation is requested by the Agent or any Lender, of
each telephonic notice signed by an Authorized Officer. If the
written confirmation differs in any material respect from the
action taken by the Agent and the Lenders, the records of the
Agent and the Lenders shall govern absent manifest error.
2.17 Interest Payment Dates; Interest and Fee Basis. Interest
accrued on each Base Rate Loan shall be payable on each Payment
Date, commencing with the first such date to occur after the date
hereof, on any date on which a Base Rate Loan is prepaid, whether
due to acceleration or otherwise, and at maturity. Interest
accrued on that portion of the outstanding principal amount of
any Base Rate Loan converted into a LIBOR Loan on a day other
than a Payment Date shall be payable on the date of conversion.
Interest accrued on each LIBOR Loan shall be payable on the last
day of its applicable Interest Period, on any date on which the
LIBOR Loan is prepaid, whether by acceleration or otherwise, and
at maturity. Interest accrued on each LIBOR Loan having an
Interest Period longer than three months shall also be payable on
the last day of each three-month interval during such Interest
Period.
Interest on Loans and commitment fees shall be calculated for
actual days elapsed on the basis of a 360-day year. Interest
shall be payable for the day a Loan is made but not for the day
of any payment on the amount paid if payment is received prior to
2:00 p.m., Los Angeles time, at the place of payment. Whenever
any payment to be made hereunder shall be stated to be due on a
day that is not a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in
such case be included in the computation of payment of interest;
provided, however, that, if such extension would cause any
payment of interest on or principal of any LIBOR Loan to be made
in the next following calendar month, then such payment shall
instead be made on the next preceding Business Day, and such
shortened time shall in such case be used in the computation of
payment of interest. Each determination by the Bank of an
interest rate hereunder shall be conclusive and binding for all
purposes, absent manifest error.
2.18 Notification of Loan, Interest Rates, Prepayments and
Commitment Reductions. Promptly after receipt thereof, the Agent
will notify each Lender of the contents of a borrowing notice,
Conversion/Continuation Notice and repayment notice received by
it hereunder. The Agent will notify each Lender of the interest
rate applicable to each LIBOR Loan promptly upon determination of
such interest rate and will give each Lender prompt notice of
each change in the Corporate Base Rate.
Each determination of an interest rate by the Agent pursuant to
any provision of this Agreement shall be conclusive and binding
on the Borrower and the Lenders in the absence of manifest error.
2.19 Applicable Lending Offices. Each Lender may book its Loans
at any Applicable Lending Office selected by such Lender and may
change its Applicable Lending Office from time to time. All
terms of this Agreement shall apply to any such Applicable
Lending Office and the Note shall be deemed held by each Lender
for the benefit of such Applicable Lending Office. Each Lender
may, by written or telex notice to the Agent and the Borrower,
designate an Applicable Lending Office through which the Loans
will be made by it and for whose account Loan payments are to be
made.
2.20 Non-Receipt of Funds by the Agent. Unless the Borrower or
a Lender, as the case may be, notifies the Agent prior to the
date on which it is scheduled to make payment to the Agent of (i)
in the case of a Lender, the proceeds of a Loan or (ii) in the
case of the Borrower, a payment of principal, interest or fees to
the Agent for the account of the Lenders, that it does not intend
to make such payment, the Agent may assume that such payment has
been made. The Agent may, but shall not be obligated to, make
the amount of such payment available to the intended recipient in
reliance upon such assumption. If such Lender or the Borrower,
as the case may be, has not in fact made such payment to the
Agent, the recipient of such payment shall, on demand by the
Agent, repay to the Agent the amount so made available together
with interest thereon in respect of each day during the period
commencing on the date such amount was so made available by the
Agent until the date the Agent recovers such amount at a rate per
annum equal to (a) in the case of payment by a Lender, the
Federal Funds Effective Rate for such day or (b) in the case of
payment by the Borrower, the interest rate applicable to the
relevant Loan.
2.21 Withholding Tax Exemption. At least five Business Days
prior to the first date on which interest or fees are payable
hereunder for the account of any Lender, each Lender that is not
incorporated under the laws of the United States of America, or a
state thereof, agrees that it will deliver to each of the
Borrower and the Agent two duly completed copies of United States
Internal Revenue Service Form 1001 or 4224, certifying in either
case that such Lender is entitled to receive payments under this
Agreement and the Note without deduction or withholding of any
United States federal income taxes. Each Lender which so
delivers a Form 1001 or 4224 further undertakes to deliver to
each of the Borrower and the Agent two additional copies of such
form (or a successor form) on or before the date that such form
expires (currently, three successive calendar years for Form 1001
and one calendar year for Form 4224) or becomes obsolete or after
the occurrence of any event requiring a change in the most recent
forms so delivered by it, and such amendments thereto or
extensions or renewals thereof as may be reasonably requested by
the Borrower or the Agent, in each case certifying that such
Lender is entitled to receive payments under this Agreement and
the Note without deduction or withholding of any United States
federal income taxes, unless an event (including without
limitation any change in treaty, law or regulation) has occurred
prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would
prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender advises the Borrower and
the Agent that it is not capable of receiving payments without
any deduction or withholding of United States federal income tax.
2.22 Optional Prepayments. The Borrower may on the last day of
any Interest Period with respect thereto, in the case of LIBOR
Loans, or at any time and from time to time, in the case of Base
Rate Loans, prepay the Loans, in whole or in part, without
premium or penalty, upon at least three Business Days'
irrevocable written notice, in the case of LIBOR Loans, and upon
at least one Business Day's irrevocable written notice, in the
case of Base Rate Loans, from the Borrower to the Agent,
specifying the date and amount of prepayment and whether the
prepayment is of LIBOR Loans, Base Loans or a combination
thereof, and, if a combination thereof, the amount allocable to
each. Upon receipt of any such notice from the Borrower, the
Agent shall promptly notify each Lender thereof. If any such
notice is given, the amount specified in such notice shall be due
and payable by the Borrower on the date specified therein,
together with accrued interest to such date on the amount
prepaid. Partial prepayments of Loans shall be in an aggregate
principal amount of $1,000,000 or an integral multiple thereof.
ARTICLE 3
CHANGE IN CIRCUMSTANCES
3.1 Yield Protection.
(i) If any repayment of principal of, or conversion of,
any LIBOR Loan is made other than on the last day of an Interest
Period therefor, as a result of a prepayment, payment or
conversion, or an acceleration of the maturity of the Loan
pursuant to Section 8, or for any other reason, or if the
Borrower shall fail to borrow a LIBOR Loan after requesting one,
then the Borrower shall, upon demand by the Agent pay to the
Lenders any amounts required to compensate them for any
additional losses, costs or expenses that they may reasonably
incur as a result of such repayment, conversion or failure to
borrow, including any loss (including loss of anticipated
profits), cost or expense incurred by reason of the liquidation
or reemployment of deposits or other funds acquired by a Lender
to fund or maintain such LIBOR Loan.
(ii) If, due to either (a) the introduction of or any
change in or in the interpretation of any Governmental Rule or
(b) the compliance by the Lenders with any Governmental Rule
(whether or not having the force of law), there is any increase
in the cost to the Lenders of agreeing to make, making, funding
or maintaining any LIBOR Loan, then the Borrower shall from time
to time, upon written demand by the Agent, pay to the Agent
additional amounts sufficient to compensate the Lenders for such
increased cost. A certificate as to the amount of such increased
cost, submitted to the Borrower by the Agent, shall be conclusive
and binding for all purposes, absent manifest error.
(iii) Notwithstanding any other provision of this
Agreement, if the introduction of or any change in or in the
interpretation of any Governmental Rule makes it unlawful, or any
Governmental Person asserts that it is unlawful, for any Lender
to perform its obligations hereunder to make LIBOR Loans or to
continue to fund or maintain LIBOR Loans hereunder, then, on
notice thereof and demand therefor by the Agent to the Borrower,
(a) the obligation of such Lender to make LIBOR Loans and to
convert Base Rate Loans into LIBOR Loans shall terminate and (b)
the Borrower shall forthwith prepay in full all LIBOR Loans then
outstanding, together with interest accrued thereon, unless the
Borrower, within five Business Days of such notice and demand,
converts all LIBOR Loans then outstanding into Base Rate Loans in
accordance with Section 2.12.
(iv) If, with respect to any LIBOR Loan, the Agent
notifies the Borrower that LIBOR for such Loan will not
adequately reflect the cost to one or more Lenders (as determined
by such Lender(s) in good faith on the basis of market conditions
then in effect) of making, funding or maintaining such Loan, then
(a) such Loan will automatically, on the last day of the then
existing Interest Period therefor, convert into a Base Rate Loan
and (b) the obligation of the affected Lender to make, or to
convert Base Rate Loans into LIBOR Loans shall be suspended until
the Agent notifies the Borrower that the circumstances causing
such suspension no longer exist.
3.2 Taxes. All payments by or on behalf of the Borrower
hereunder shall be made without set-off or counterclaim and in
such amounts as may be necessary in order that all such payments
(after deduction or withholding for or on account of any present
or future taxes, levies, imposts, duties or other charges of
whatsoever nature imposed by any Governmental Person, other than
any tax on or measured by the overall net income of the Agent or
a Lender pursuant to the income tax laws of the United States,
the jurisdiction where the Agent's or such Lender's principal
office is located or any political subdivision thereof
(collectively, the "Taxes")) shall not be less than the amounts
otherwise specified to be paid hereunder. A certificate as to
any additional amounts payable to the Agent or a Lender hereunder
submitted to the Borrower by the Agent shall show in reasonable
detail the amount payable to the Agent or a Lender and the
calculations used to determine in good faith such amount and
shall be conclusive absent manifest error. Any amounts payable
by the Borrower hereunder with respect to past payments shall be
due within ten days following receipt by the Borrower of such
certificate from the Agent; and such amounts payable with respect
to future payments shall be due concurrently with such future
payments. With respect to each deduction or withholding for or
on account of any Taxes, the Borrower shall promptly furnish to
the Agent such certificates, receipts and other documents as may
be required (in the reasonable judgment of the Agent) to
establish any tax credit to which a Lender may be entitled. The
agreements and obligations of the Borrower under this paragraph
shall survive the payment in full of the Loans.
ARTICLE 4
CONDITIONS PRECEDENT
4.1 Initial Loan or Letter of Credit. The Lenders shall not be
required to make their initial Loans or participate in the
initial Letter of Credit hereunder unless the Borrower has
furnished to the Agent:
(i) this Agreement and the Notes, duly executed by the
Borrower;
(ii) the Guaranties, duly executed by each Guarantor;
(iii) Articles of Incorporation and Bylaws of the Borrower
and each Guarantor certified by the Secretary of State of the
relevant state of incorporation;
(iv) Resolutions of the Board of Directors of the Borrower
and of the executive officers of each Guarantor approving the
execution, delivery and performance by the Borrower and each
Guarantor, of the Loan Documents to which the Borrower and each
Guarantor is a party, certified by the Secretary of the Borrower
and each Guarantor to be true and correct and in full force and
effect;
(v) an Incumbency Certificate of the Borrower and each
Guarantor;
(vi) a favorable legal opinion (in form and substance
satisfactory to the Agent) of counsel to the Borrower and each
Guarantor;
(vii) evidence that all amounts outstanding under the Prior
Loan Agreement have been paid in full and that such agreement has
been terminated;
(viii) a duly completed Leverage Ratio Level Certificate in
substantially the form of Exhibit D hereto;
(ix) all fees and expenses to be paid on the Closing Date
(including, but not limited to, amounts due to UBOC in
reimbursement of costs and expenses under the Prior Loan
Agreement);
(x) no statute, rule, regulation, order, decree or
preliminary or permanent injunction of any court or
administrative agency or, to the best knowledge of the Borrower,
any such action threatened by any Person, shall be in effect that
prohibits the Lenders from consummating the transactions
contemplated by this Agreement and the other Loan Documents;
(xi) copies of the Borrower's consolidated audited
financial statements for the period ending February 3, 1996,
together with any management letter prepared by the accountants,
and unaudited financial statements for the period ending August
3, 1996;
(xii) evidence satisfactory to the Agent that there shall
have been no material adverse change to the syndication markets
for credit facilities similar to this Agreement and there shall
not have occurred and be continuing a material disruption of or
material adverse change in financial, banking or capital markets
which would have an adverse effect on such syndication market, as
determined by the Agent in its sole discretion; and
(xiii) such other documents, instruments and opinions as
the Agent or its counsel may have reasonably requested.
4.2 All Loans. The Lenders shall not be required to make any
Loan (including the initial Loan) hereunder unless the Borrower
has furnished to the Agent with sufficient copies for the
Lenders:
(i) a duly completed certificate executed by an
Authorized Officer of the Borrower certifying that:
(a) there exists no Default or Event of
Default;
(b) the representations and warranties
contained in Article 5 hereof are true and correct as of
the Borrowing Date except to the extent any such
representation or warranty is stated to relate solely to an
earlier date, in which case such representation or warranty
shall be true and correct on and as of such earlier date;
and
(c) no event has occurred, or condition
exists, which could have a Material Adverse Effect.
(ii) in the case where Loan proceeds are to be used for
an Acquisition and such Acquisition will result in the Borrower
being required to file an SEC Report, executed copies of each of
the Acquisition Documents, certified by an Authorized Officer,
together with the other documents required by Section 6.14;
(iii) in the case where Loan proceeds are to be used for
an Acquisition, evidence satisfactory to the Agent that the
Acquisition contemplated by the relevant Acquisition Documents
will immediately be consummated upon the funding of the Loan; and
(iv) such other documents as the Agent or its counsel
may have reasonably requested.
4.3 All Letters of Credit. The Agent shall not be required to
issue any Letter of Credit and the Lenders shall not be required
to participate in any Letter of Credit (including the initial
Letter of Credit) hereunder unless the Borrower has furnished to
the Agent with sufficient copies for the Lenders:
(i) a completed Letter of Credit Request with regard to
each such Letter of Credit;
(ii) all fees to be paid to the Agent in connection with
each Letter of Credit shall have been paid; and
(iii) such other documents as the Agent, any Lender or
its respective counsel may have reasonably requested.
Any Letter of Credit Request delivered to the Agent shall be
deemed a representation and warranty to the Agent and the Lenders
that:
(i) there exists no Default or Event of Default;
(ii) the representations and warranties contained in
Article 5 hereof are true and correct as of the issuance date of
each Letter of Credit except to the extent any such
representation or warranty is stated to relate solely to an
earlier date, in which case such representation or warranty shall
be true and correct on and as of such earlier date; and
(iii) no event has occurred, or condition exists, which
could have a Material Adverse Effect.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1 Authorization. The execution, delivery and performance by
the Borrower of the Loan Documents to which the Borrower is a
party are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action and do not
contravene any applicable law, rule, regulation or order or any
contractual restriction binding on or affecting the Borrower or
its Subsidiaries.
5.2 Governmental Action. No authorization, approval or other
action by, or notice to or filing with, any Governmental Person
is required for the due execution, delivery and performance by
the Borrower of the Loan Documents to which the Borrower is a
party.
5.3 Enforceability. Each Loan Document to which the Borrower
is a party is the legal, valid and binding obligation of the
Borrower, enforceable against the Borrower in accordance with its
terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally.
5.4 Use of Proceeds. The Borrower will use the proceeds of the
Loans solely for the (a) repayment of amounts outstanding under
the Prior Loan Agreement, (b) to make permitted Acquisitions, (c)
to make permitted Capital Expenditures and (d) for other general
working capital purposes. No action has been taken or is
currently planned by the Borrower, or any agent acting on its
behalf, which would cause this Agreement or the Notes to violate
Regulation U or any other regulation of the Board of Governors of
the Federal Reserve System or to violate the Securities and
Exchange Act of 1934, in each case as in effect now or as the
same may hereafter be in effect. The Borrower is not engaged in
the business of extending credit for the purpose of purchasing or
carrying margin stock as one of its important activities and none
of the proceeds of the Loans or Letters of Credit will be used
directly or indirectly for such purpose.
5.5 Litigation. There is no litigation, tax claim, proceeding,
arbitration or dispute pending, or, to the best knowledge of the
Borrower, threatened against or affecting the Borrower or its
Property, an adverse determination in which could have a Material
Adverse Effect.
5.6 Financial Statements. The consolidated financial
statements of the Borrower dated February 3, 1996 and August 3,
1996, copies of which have been delivered to the Lenders, fairly
and accurately reflect the financial condition of the Borrower
and its Subsidiaries as of such date, and since such date there
has been no Material Adverse Effect.
5.7 Taxes. The Borrower and each Subsidiary has filed all tax
returns and reports required to be filed and has paid all
applicable federal, state and local franchise and income taxes
which are due and payable.
5.8 Subsidiaries. Schedule 2 hereto contains an accurate list
of all of the presently existing Subsidiaries of the Borrower,
setting forth their respective jurisdictions of incorporation or
organization and the percentage of their respective capital stock
or ownership interests owned by the Borrower or other
Subsidiaries. All of the issued and outstanding shares of
capital stock of such Subsidiaries have been duly authorized and
issued and are fully paid and non-assessable.
5.9 ERISA. The Unfunded Liabilities do not in the aggregate
exceed $1,000,000. Each Single Employer Plan complies in all
material respects with all applicable requirements of law and
regulations, except to the extent that the failure to comply
therewith does not have a Material Adverse Effect. No Reportable
Event has occurred with respect to any Single Employer Plan,
except to the extent that such Reportable Event has no Material
Adverse Effect. Neither the Borrower nor any Subsidiary (a) is a
party to any Multiemployer Plan or (b) has withdrawn from any
Multiemployer Plan, except to the extent such actions do not have
a Material Adverse Effect.
5.10 Accuracy of Information. No information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Agent
or to any Lender in connection with the negotiation of, or
compliance with, the Loan Documents contained any material
misstatement of fact or omitted to state a material fact or any
fact necessary to make the statements contained therein not
misleading in any material respect.
5.11 Organization and Existence. The Borrower is duly
organized, validly existing and in good standing under the laws
of the State of Delaware and it has the corporate power and
authority, and the legal right, to own and operate its Properties
and to conduct the business in which it is currently engaged and
in which it proposes to be engaged after the Closing Date and is
duly qualified as a foreign entity and in good standing under the
laws of each jurisdiction where its ownership, lease or operation
of Property or the conduct of its business requires such
qualification except to the extent that the failure to comply
thereunder could not, in the aggregate, reasonably be expected to
have a Material Adverse Effect and is in compliance with all
Requirements of Law except to the extent that the failure to
comply therewith could not, in the aggregate, reasonably be
expected to have a Material Adverse Effect.
5.12 Consents. No consent or authorization of, or filing with
or other act by or in respect of, any Governmental Authority, or
any other Person is required in connection with the Loans
hereunder or with the execution, delivery, performance, validity
or enforceability of this Agreement, the Notes or the other Loan
Documents. The execution, delivery and performance of this
Agreement, the Notes and the other Loan Documents, the Loans, the
Letters of Credit and the use of the proceeds thereof will not
violate any Requirement of Law or contractual obligations of the
Borrower or any of its Subsidiaries which could be reasonably
expected to have a Material Adverse Effect and will not result
in, or require, the creation or imposition of any Lien on any of
its or their respective Properties or revenues pursuant to any
such Requirement of Law or contractual obligation, except
pursuant to the Loan Documents or otherwise as permitted
hereunder, which Lien could reasonably be expected to have a
Material Adverse Effect.
5.13 Intellectual Property. The Borrower and each of its
Subsidiaries owns, or is licensed to use, all trademarks,
tradenames, patents, copyrights, material permits, licenses or
other intangibles necessary for the conduct of its business as
currently conducted, except to the extent that the failure to own
or license such property could not reasonably be expected to have
a Material Adverse Effect.
5.14 Default. There exists no Default or Event of Default.
5.15 Nature of Business. Neither the Borrower nor any of its
Subsidiaries is engaged in any material business other than the
ownership and operation of pet food and supply retail stores and
the manufacture or procurement of pet food and supplies.
5.16 Ranking of Loans. This Agreement and the other Loan
Documents to which the Borrower is a party, when executed, and
the Loans, when borrowed are and will be the direct and general
obligations of the Borrower. The Borrower's obligations
hereunder and thereunder will rank at least pari passu in
priority of payment with all other senior Debt, except to the
extent otherwise permitted hereunder.
5.17 Compliance with Laws. The Borrower and each of its
Subsidiaries is in compliance with all Governmental Rules except
to the extent that the failure to comply therewith could not, in
the aggregate, reasonably be expected to have a Material Adverse
Effect.
5.18 Investment Company Acts; Other Regulations. Neither the
Borrower nor any of its Subsidiaries is an "investment company,"
or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
5.19 Environmental Matters. The Borrower and its Subsidiaries
are in compliance in all material respects with all applicable
environmental laws, and there is no contamination at, under or
about any of their respective Properties, or violation of any
environmental law with respect to any of their respective
Properties or the business conducted at any of their respective
Properties which involves a matter or matters which has caused or
reasonably likely to cause a Material Adverse Effect.
5.20 Title. Except for assets which may have been disposed of
in the ordinary course of business, the Borrower has good and
marketable title to all of the property reflected in its
financial statements delivered to the Lenders and to all property
acquired by the Borrower since the date of said financial
statements, free and clear of all Liens, encumbrances, security
interests and adverse claims except (a) those specifically
referred to in said financial statements, (b) those permitted by
Section 6.22 hereof and (c) those that could not, in the
aggregate, reasonably be expected to have a Material Adverse
Effect.
ARTICLE 6
COVENANTS
During the term of this Agreement, unless the Required Lenders
shall otherwise consent in writing:
6.1 Financial Reporting. The Borrower will maintain, for
itself and each Subsidiary, a system of accounting established
and administered in accordance with Agreement Accounting
Principles, and furnish to the Lenders:
(i) As soon as available and in any event within 45
days after the end of each quarterly fiscal period
of each fiscal year of the Borrower (except the
last fiscal quarter), consolidated statements of
income, retained earnings and cash flow of the
Borrower and its consolidated Subsidiaries for such
period and for the period from the beginning of the
respective fiscal year to the end of such period,
and the related consolidated balance sheets of the
Borrower and its consolidated Subsidiaries as at
the end of such period, setting forth in each case
in comparative form the corresponding consolidated
figures for the corresponding period in the
preceding fiscal year, accompanied by a certificate
of an Authorized Officer of the Borrower, which
certificate shall state that those consolidated
financial statements fairly present the
consolidated financial condition and results of
operations of the Borrower and its consolidated
Subsidiaries, in each case in accordance with
Agreement Accounting Principles, consistently
applied, as at the end of, and for, such period
(subject to normally recurring audit adjustments).
(ii) As soon as available and in any event within 90
days after the end of each fiscal year of the
Borrower consolidated statements of income,
retained earnings and cash flow of the Borrower and
its consolidated Subsidiaries for such fiscal year
and the related consolidated balance sheets of the
Borrower and its consolidated Subsidiaries as at
the end of such fiscal year, setting forth in each
case in comparative form the corresponding
consolidated figures for the preceding fiscal year,
and accompanied, in the case of those consolidated
statements and balance sheet of the Borrower, by a
unqualified opinion of independent certified public
accountants of recognized national standing, which
opinion shall state that those consolidated
financial statements fairly present the
consolidated financial condition and results of
operations of the Borrower and its consolidated
Subsidiaries as at the end of, and for, such fiscal
year in accordance with Agreement Accounting
Principles, consistently applied.
(iii) At any time that 50% or more of the Aggregate
Commitment has been utilized, as soon as available
and in any event within 30 days after the end of
each fiscal month (except the last fiscal month in
a fiscal year), consolidated statements of income
and cash flow of the Borrower and its Consolidated
Subsidiaries for such period and the related
consolidated balance sheets of the Borrower and its
Consolidated Subsidiaries as at the end of such
period, accompanied by a certificate of an
Authorized Officer of the Borrower, which
certificate shall state that those consolidated
financial statements fairly present the
consolidated financial condition and results of
operations of the Borrower and its Consolidated
Subsidiaries, in each case in accordance with
Agreement Accounting Principles, consistently
applied, as at the end of, and for, such period
(subject to normally recurring audit adjustments).
(iv) As soon as available, but in any event no later
than 45 days subsequent to the beginning of each
fiscal year of the Borrower, based on the best
information then currently available, a copy of the
plan and forecast (including a projected
consolidated balance sheet, income statement and
funds flow statement), prepared on a quarterly
format basis, of the Borrower and its Subsidiaries
for such fiscal year.
(v) Together with the financial statements required in
Section 6.1(i) and (ii), a compliance certificate
in substantially the form of Exhibit B hereto (a
"Compliance Certificate") signed by an Authorized
Officer showing the calculations necessary to
determine compliance with this Agreement and
stating that no Default or Event of Default exists,
or if any Default or Event of Default exists,
stating the nature and status thereof.
(vi) As soon as possible, but in any event within 45
days after the end of each quarter (except the last
fiscal quarter, in which case within 90 days after
the end of such quarter), a Leverage Ratio Level
Certificate in substantially the form of Exhibit D
hereto signed by an Authorized Officer.
(vii) As soon as possible and in any event within 10 days
after the Borrower knows that any Reportable Event
has occurred with respect to any Single Employer
Plan, a statement, signed by an Authorized Officer,
describing said Reportable Event and the action
which the Borrower proposes to take with respect
thereto.
(viii) As soon as possible and in any event within 10 days
after receipt by the Borrower, a copy of (a) any
notice or claim to the effect that the Borrower or
any of its Subsidiaries is or may be liable to any
Person as a result of the release by the Borrower,
any of its Subsidiaries, or any other Person of any
toxic or hazardous waste or substance into the
environment, and (b) any notice alleging any
violation of any federal, state or local
environmental, health or safety law or regulation
by the Borrower or any of its Subsidiaries, which,
in either case, could have a Material Adverse
Effect.
(ix) Promptly upon the furnishing thereof to the
shareholders of the Borrower, copies of all
financial statements, reports and proxy statements
so furnished.
(x) Promptly upon the filing thereof, copies of all
registration statements and annual, quarterly,
monthly or other regular reports or statutory
statements which the Borrower or any of its
Subsidiaries files with the SEC or any insurance or
regulatory agency.
(xi) Such other information (including non-financial
information) as the Agent may from time to time
reasonably request.
6.2 Use of Proceeds. The Borrower will use the proceeds of the
Loans (a) for the repayment of amounts outstanding under the
Prior Loan Agreement, (b) to make permitted Acquisitions, (c) to
make permitted Capital Expenditures and (d) for other general
working capital purposes. The Borrower will not, nor will it
permit any Subsidiary to, use any of the proceeds of the Loans to
purchase or carry any "margin stock" (as defined in Regulation
U).
6.3 Notice of Default. The Borrower will, and will cause each
Subsidiary to, give prompt (but in any case, within 5 Business
Days) notice in writing to the Lenders of the occurrence of any
Default or Event of Default and of any other development,
financial or otherwise, which could have a Material Adverse
Effect.
6.4 Conduct of Business. The Borrower will, and will cause
each Subsidiary to, carry on and conduct its business in the pet
food and supply business and related fields and to do all things
necessary to remain in good standing in its jurisdiction of
organization and maintain all requisite authority to conduct its
business in each jurisdiction in which its business is conducted.
The Borrower shall not, and shall not permit any of its
Subsidiaries to, make any material change in the nature of its
business as presently conducted; provided that the foregoing
shall not be construed as a limitation on Acquisitions permitted
hereunder.
6.5 Records. The Borrower will, and will cause each Subsidiary
to, keep adequate records and books of account, in which full and
correct entries shall be made in accordance with Agreement
Accounting Principles of all financial transactions of the
Borrower, its Subsidiaries, their respective assets and their
respective business.
6.6 Insurance. The Borrower will, and will cause each
Subsidiary to, maintain insurance on all their Property in such
amounts and covering such risks as is consistent with sound
business practice, and the Borrower will furnish to any Lender
upon request full information as to the insurance carried.
6.7 Compliance with Laws. The Borrower will, and will cause
each Subsidiary to, comply in all material respects with all
applicable laws, rules, regulations and orders, such compliance
to include, without limitation, paying before the same become
delinquent, all taxes, assessments and governmental charges
imposed upon it or upon its property, except such taxes,
assessments and governmental charges as are being contested in
good faith by appropriate proceedings and as to which appropriate
reserves are maintained.
6.8 Maintenance of Properties. The Borrower will, and will
cause each Subsidiary to, do all things necessary to maintain,
preserve, protect and keep its Property in good repair, working
order and condition, and make all necessary and proper repairs,
renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times.
6.9 Inspection. At any reasonable time and from time to time
upon reasonable notice, the Borrower will, and will cause each
Subsidiary to, permit the Agent, by its respective
representatives and agents, to inspect any of the Property,
corporate books and financial records of the Borrower and each
Subsidiary, to examine and make copies of the books of accounts
and other financial records of the Borrower and each Subsidiary,
and to discuss the affairs, finances and accounts of the Borrower
and each Subsidiary with, and to be advised as to the same by,
their respective officers at such reasonable times and intervals
as the Lenders may designate.
6.10 Debt. The Borrower will not, nor will it permit any
Subsidiary to, create, incur or suffer to exist any Debt, except:
(i) Debt of the Borrower under the Loan Documents;
(ii) Debt in existence on the date hereof, as set forth on
Schedule 3;
(iii) trade Debt incurred to acquire goods, supplies, and
services and incurred in the ordinary course of business;
(iv) Debt incurred to refinance all or a portion of the Loans
and/or Letters of Credit as long as all proceeds are used to
repay the Loans (or apply as cash collateral for outstanding
Letters of Credit), the Debt is not senior or pari passu in any
way to the Loans or the Letters of Credit remaining outstanding
and such Debt does not mature prior to the maturity of Loans
and/or Letters of Credit remaining outstanding; and
(v) Debt secured by Liens permitted pursuant to Section 6.22.
6.11 Merger. The Borrower will not, nor will it permit any
Subsidiary to, enter into any merger, consolidation or
amalgamation, or liquidate, wind up or dissolve itself (or suffer
any liquidation or dissolution), or convey, sell, lease, assign,
transfer or otherwise dispose of, all or substantially all of its
property, business or assets; provided that the Borrower may
merge or consolidate with another Person if (i) the Borrower is
the surviving corporation, (ii) the Borrower will be in pro forma
compliance with all provisions of this Agreement subsequent to
such merger or consolidation and (iii) the Borrower has filed the
SEC Report (if required to do so by law).
6.12 Sale of Assets. The Borrower will not, nor will it permit
any Subsidiary to, lease, sell or otherwise dispose of its
Property, to any other Person except for (i) sales of inventory
in the ordinary course of business and (ii) leases, sales or
other dispositions of its Property that, together with all other
Property of the Borrower and its Subsidiaries previously leased,
sold or disposed of (other than inventory in the ordinary course
of business) as permitted by this Section during the term of this
Agreement do not require the Borrower to file an SEC Report;
provided that the foregoing shall not be construed as prohibiting
a transfer of assets from a Subsidiary to the Borrower or the
merger of a Subsidiary into the Borrower.
6.13 Sale of Accounts. The Borrower will not, nor will it
permit any Subsidiary to, sell or otherwise dispose of any notes
receivable or accounts receivable, with or without recourse,
except the Borrower or any Subsidiary may assign accounts
receivable (previously expensed by the Borrower as bad debts) for
collection, with or without recourse.
6.14 Acquisitions. The Borrower will not, nor will it permit
any Subsidiary to, enter into any agreement, contract, binding
commitment or other arrangement providing for any Acquisition, or
take any action to solicit the tender of securities or proxies in
respect thereof in order to effect any Acquisition, unless:
(i) the Person to be (or whose assets are to be) acquired does
not oppose such Acquisition and the line or lines of business of
the Person to be acquired are substantially the same as one or
more line or lines of business conducted by the Borrower and its
Subsidiaries,
(ii) no Default or Event of Default shall have occurred
and be continuing either immediately prior to or immediately
after giving effect to such Acquisition,
(iii) if any Acquisition would require the Borrower to
file an SEC Report, the Borrower shall have furnished to the
Agent (A) pro forma historical financial statements as of the end
of the most recently completed fiscal year of the Borrower and
most recent interim fiscal quarter, if applicable, giving effect
to such Acquisition and (B) a Compliance Certificate prepared on
a historical pro forma basis giving effect to such Acquisition,
which certificate shall demonstrate that no Default or Event of
Default would exist immediately after giving effect thereto
(provided, however, that in each case if such information is not
then available for such periods with respect to Borrower, any
Subsidiary or the Person being acquired (or from whom assets are
being acquired), then such statements may be based instead upon
reasonable estimates made by Borrower as to the financial
performance of such Persons for such periods) and
(iv) the Person acquired shall be a Subsidiary, or be
merged into the Borrower or a Subsidiary, immediately upon
consummation of the Acquisition (or if assets are being acquired,
the acquiror shall be the Borrower or a Subsidiary).
6.15 Affiliates. The Borrower will not, and will not permit any
Subsidiary to, enter into any transaction (including, without
limitation, the purchase or sale of any Property or service)
with, or make any payment or transfer to, any Affiliate except in
the ordinary course of business and pursuant to the reasonable
requirements of the Borrower's or such Subsidiary's business and
upon fair and reasonable terms no less favorable to the Borrower
or such Subsidiary than the Borrower or such Subsidiary would
obtain in a comparable arms-length transaction; provided that the
foregoing shall not be construed as prohibiting a transfer of
assets from a Subsidiary to the Borrower or the merger of a
Subsidiary into the Borrower.
6.16 ERISA. The Borrower will not, and will not permit any
Subsidiary to, become a party to any Multiemployer Plan.
6.17 Capital Expenditures. The Borrower will not, and will not
permit any Subsidiary to, make or commit to make (by way of the
acquisition of securities of a person or entity or otherwise) any
Capital Expenditure, except for Capital Expenditures not
exceeding (i) in fiscal year 1996, $40,000,000 in the aggregate
and (ii) in fiscal year 1997, the sum of $50,000,000 in the
aggregate, plus an aggregate amount equal to the amount (if any)
by which the actual Capital Expenditures in 1996 were less than
those permitted under (i) hereof. Notwithstanding the foregoing,
any Capital Expenditure made by a Person which is the subject of
an Acquisition by the Borrower, prior to such Acquisition, shall
not be included in determining compliance by the Borrower and its
Subsidiaries with this Section.
6.18 Total Debt Ratio. The Borrower and its Subsidiaries on a
consolidated basis shall not permit, as of the end of each fiscal
quarter for the four consecutive fiscal quarters then ended, the
Total Debt Ratio to be greater than 3.0:1.0.
6.19 Payment of Obligations. The Borrower and each Subsidiary
will pay and discharge promptly all taxes, assessments and other
governmental charges and claims levied or imposed upon it or its
Property, or any part thereof, provided, however, that the
Borrower and its Subsidiaries shall have the right in good faith
to contest any such taxes, assessments, charges or claims and,
pending the outcome of such contest, to delay or refuse payment
thereof provided that adequately funded reserves are established
by it to pay and discharge any such taxes assessments, charges
and claims.
6.20 Consolidated Net Worth. The Borrower and its Subsidiaries
shall at all times maintain Consolidated Net Worth, determined as
of the end of each fiscal quarter, of not less than $150,000,000
plus 50% of cumulative Net Income for the period commencing on
August 3, 1996 through the end of such fiscal quarter plus 75% of
any net proceeds obtained from any public equity offering. (In
the event that the Borrower and its Subsidiaries have a
consolidated net loss for any fiscal quarter, Net Income for
purposes of this Section shall be deemed zero for such fiscal
quarter).
6.21 Minimum Interest Coverage Ratio. The Borrower shall
maintain a ratio, determined as of the end of each fiscal
quarter, for the four consecutive fiscal quarters then ended, of
EBITDA to Interest Expense of not less than 4.0:1.0.
6.22 Encumbrances and Liens. The Borrower will not create,
assume or suffer to exist any Lien (other than for taxes not
delinquent and for taxes and other items being contested in good
faith) on Property of any kind, whether real, personal or mixed,
now owned or hereafter acquired, or upon the income or profits
thereof, except for (i) minor encumbrances and easements on real
property which do not materially affect its market value, (ii)
existing Liens on the Borrower's personal property; (iii) future
purchase money security interests encumbering only the property
purchased; (iv) statutory liens of bankers, carriers,
warehousemen, mechanics, materialmen, and other similar Liens
imposed by law, which are incurred in the ordinary course of
business for sums not more than 30 days delinquent or which are
being contested in good faith by appropriate proceedings; (v)
deposits made in the ordinary course of business to secure
liability to insurance carriers; (vi) attachment and judgment
Liens securing claims less than $1,000,000 in the aggregate
(excluding for purposes of said calculation any such Liens for
which execution has been stayed, payment is covered in full by
insurance, or the Borrower is prosecuting an appeal in good faith
by appropriate proceedings); and (vii) monetary obligations of
the Borrower under any leasing or similar arrangement which, in
accordance with Agreement Accounting Principles, is classified as
a Capitalized Lease. Notwithstanding the foregoing: (i) the
Borrower shall not at any time encumber any real property with a
purchase money security interest if (A) immediately after giving
effect to such encumbrances, the purchase money Debt secured by
said encumbrance will exceed 75% of the fair market value of the
Property encumbered by the encumbrance or (B) immediately after
giving effect to such encumbrance, the aggregate Debt of the
Borrower secured by purchase money security interests in real
property will exceed 5% of total assets of the Borrower and its
Subsidiaries on a consolidated basis; and (ii) the Borrower shall
not at any time encumber its Property with an additional Lien or
encumbrance if, immediately after giving effect to such
encumbrance, the Borrower would be required to file an SEC
Report.
6.23 Loans, Advances and Guaranties. The Borrower will not, and
will not permit any Subsidiary to, except in the ordinary course
of business as currently conducted, make any loans or advances,
become a guarantor or surety, pledge its credit or properties in
any manner or extend credit; provided that the foregoing shall
not be construed as a limitation on guaranties or any Liens
permitted hereunder.
6.24 Investments. The Borrower will not purchase the Debt of
another Person or entity except for:
(i) certificates of deposit, time deposits, Eurodollar time
deposits, repurchase agreements, reverse repurchase agreements,
or bankers' acceptances, having in each case a maturity date of
not more than twelve months from the date of acquisition by the
Borrower, issued by a Lender or any U.S. commercial bank or any
branch or agency of a non-U.S. bank licensed to conduct business
in the U.S. having combined capital and surplus or not less than
$50,000,000 whose short term securities are rated at least "A" by
Standard & Poor's Corporation (or the equivalent rating provided
by any of Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch Investors Services, Inc.);
(ii) interest bearing or discounted obligations of the United
States Government, any agency thereof (including without
limitation the Federal Home Loan Mortgage Corporation, the
Government National Mortgage Association, the Federal National
Mortgage Association and the Federal Farm Credit System) or any
entities or pools of mortgages or other instruments formed by the
United States Government or any such agencies, and in any case
only if such obligation has a maturity date not more than twelve
months from the date of acquisition by the Borrower;
(iii) obligations issued by states and local governments
or their agencies, instrumentalities, authorities or
subdivisions, if such issuer has received a rating of at least
"A" by Standard & Poor's Corporation (or the equivalent rating
provided by any of Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. or Fitch Investors Services, Inc.), and in any
case only if such obligation has a maturity date of not more than
twelve months from the date of acquisition by Borrower;
(iv) commercial paper of an issuer rated at least "A" by
Standard & Poor's Corporation (or the equivalent rating provided
by any of Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch Investors Services, Inc.), and in any case
only if such obligation has a maturity date not more than twelve
months from the date of acquisition by Borrower;
(v) investments in money market funds including short-term
adjustable rate money market funds; or
(vi) inter-company Debt otherwise permitted by Section 6.10(iii)
hereof.
6.25 Minimum Fixed Charge Coverage Ratio. The Borrower shall at
all times maintain a ratio, determined as of the end of each
fiscal quarter, for the four consecutive fiscal quarters then
ended, of EBITDA to Consolidated Fixed Charges of not less than
2.0:1.0.
6.26 Guaranties, Etc. The Borrower will cause each of its
Subsidiaries hereafter formed or acquired to execute and deliver
to the Agent promptly upon the formation or acquisition thereof a
Guaranty in form and substance satisfactory to the Agent,
guaranteeing the Obligations on substantially the same terms as
the other Guarantors.
ARTICLE 7
DEFAULTS
The occurrence of any one or more of the following events shall
constitute an "Event of Default":
7.1 Payment Defaults. The Borrower shall fail to pay when due
any payment of principal of any Loan, or the Borrower shall fail
to pay within 3 days of the date when due any reimbursement
obligation (with respect to a drawing under a Letter of Credit)
or interest or other charge or fee required under the terms of
this Agreement or the other Loan Documents.
7.2 Representations and Warranties. Any representation or
warranty made by the Borrower or any Guarantor under any Loan
Document shall prove to have been incorrect or misleading in any
material respect when made.
7.3 Other Loan Document Defaults. The Borrower or any
Guarantor shall fail to perform (a) any obligation set forth in
subsections 6.1, 6.3, 6.10, 6.11, 6.12, 6.13, 6.14, 6.17, 6.18,
6.21, 6.22, 6.23, 6.24 or 6.25 of the Agreement; (b) any
obligation set forth in subsection 6.20 of the Agreement and such
failure shall continue for 14 days following the occurrence
thereof; or (c) any other obligation contained in the Agreement
or the other Loan Documents, and such failure shall continue for
30 days after written notice thereof from the Lenders.
7.4 Bankruptcy. (a) The Borrower or any Guarantor shall fail
to pay its Debts generally as they become due or shall file any
petition or action for relief under any bankruptcy, insolvency,
reorganization, moratorium, creditor composition law, or any
other law for the relief of or relating to debtors; (b) an
involuntary petition under any bankruptcy law shall be filed
against the Borrower or any Guarantor and shall not be dismissed
or discharged within 60 days of filing; or (c)a custodian,
receiver, trustee, assignee for the benefit or creditors, or
other similar official, shall be appointed to take possession,
custody or control of the properties of the Borrower or any
Guarantor and not be dismissed or discharged with 60 days of
appointment.
7.5 Other Agreements. The Borrower shall fail to pay when due
principal or interest payments required under the terms of any
bonds, notes, debentures or other agreements evidencing, in the
aggregate, at least $5,000,000 of indebtedness (excluding, for
purposes of this calculation, payments required under this
Agreement or any of the other Loan Documents) and such non-
payment shall continue beyond any period of grace provided with
respect thereto, or the Borrower shall default in the observance
or performance of any other agreement contained in any such
bonds, notes, debentures or other agreements evidencing
indebtedness, and the effect of such failure or default is to
cause the indebtedness evidenced thereby to become due prior to
its stated date of maturity.
7.6 ERISA. Any Governmental Person shall take any action under
ERISA, with respect to any Plan, that could have a Material
Adverse Effector that the unfunded liabilities exceed $1,000,000.
7.7 Judgments. A final judgment or order for the payment of
money in excess of $5,000,000 (exclusive of amounts covered by
insurance) shall be rendered against the Borrower or any
Guarantor and the same shall remain undischarged for a period of
30 days during which execution shall not be effectively stayed,
or any judgment, writ, warrant of attachment, or execution or
similar process, shall be issued or levied against a substantial
part of the Borrower's or any Guarantor's property and such
judgment, writ, warrant of attachment, or execution or similar
process, shall not be released, stayed, vacated, bonded or
otherwise dismissed within 20 days after its issue or levy.
7.8 Loan Documents. The Guaranties or any other Loan Document
shall fail to remain in full force or effect or any action shall
be taken by the Borrower or any Guarantor to discontinue or to
assert the invalidity or unenforceability of any Guaranty or any
other Loan Document, or any Guarantor denies that it has any
further liability under any Guaranty to which it is a party, or
gives notice to such effect.
ARTICLE 8
ACCELERATION, WAIVERS AND AMENDMENTS
8.1 Acceleration. If any Event of Default described in Section
7.4 occurs with respect to the Borrower, the obligations of the
Lenders to make Loans and issue and participate in Letters of
Credit hereunder shall automatically terminate and the
Obligations shall immediately become due and payable without any
election or action on the part of the Agent or any Lender. If
any other Event of Default occurs, the Required Lenders may
terminate or suspend the obligations of the Lenders to make Loans
and issue and participate in Letters of Credit hereunder, or
declare the Obligations to be due and payable, or both, whereupon
the Obligations shall become immediately due and payable, without
presentment, demand, protest or notice of any kind, all of which
the Borrower hereby expressly waives.
8.2 Cash Collateral. To the extent that any Letters of Credit
are outstanding at the time of any Event of Default, the Borrower
shall deliver to the Agent, for the benefit of the Lenders, a
cash collateral deposit in an amount equal to the aggregate
Letter of Credit Amount for all Letters of Credit then
outstanding.
8.3 Additional Remedies. The rights, powers and remedies given
to the Agent and the Lenders hereunder shall be cumulative and
not alternative and shall be in addition to all rights, powers
and remedies given to the Agent and the Lenders by law against
the Borrower or any other person, including but not limited to
any Lender's right of setoff or banker's lien.
8.4 Amendments. Subject to the provisions of this Article 8,
the Required Lenders (or the Agent with the consent in writing of
the Required Lenders) and the Borrower may enter into agreements
supplemental hereto for the purpose of adding or modifying any
provisions to the Loan Documents or changing in any manner the
rights of the Lenders or the Borrower hereunder or waiving any
Default hereunder; provided, however, that no such supplemental
agreement shall, without the consent of each Lender affected
thereby:
(i) Extend the maturity of any Loan or Note or forgive all or
any portion of the principal amount thereof, or
reduce the rate or extend the time of payment of
interest or fees thereon.
(ii) Reduce the percentage specified in the definition of
Required Lenders.
(iii) Increase the amount of the Commitment of any Lender
hereunder or permit the Borrower to assign its
rights under this Agreement.
(iv) Amend this Section 8.4.
(v) Release any guarantor of the Loans or modify any guaranty
in any material respect.
No amendment of any provision of this Agreement relating to the
Agent shall be effective without the written consent of the
Agent. The Agent may waive payment of the fees required under
Section 12.3(ii) without obtaining the consent of any other party
to this Agreement.
8.5 Preservation of Rights. No delay or omission of the
Lenders or the Agent to exercise any right under the Loan
Documents shall impair such right or be construed to be a waiver
of any Default or an acquiescence therein, and the making of a
Loan notwithstanding the existence of a Default or the inability
of the Borrower to satisfy the conditions precedent to such Loan
shall not constitute any waiver or acquiescence. Any single or
partial exercise of any such right shall not preclude other or
further exercise thereof or the exercise of any other right, and
no waiver, amendment or other variation of the terms, conditions
or provisions of the Loan Documents whatsoever shall be valid
unless in writing signed by the Lenders required pursuant to
Section 8.4, and then only to the extent in such writing
specifically set forth. All remedies contained in the Loan
Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have
been paid in full.
ARTICLE 9
GENERAL PROVISIONS
9.1 Survival of Representations. All representations and
warranties of the Borrower contained in this Agreement shall
survive delivery of the Notes and the making of the Loans and
issuance of the Letters of Credit herein contemplated.
9.2 Governmental Regulation. Anything contained in this
Agreement to the contrary notwithstanding, no Lender shall be
obligated to extend credit to the Borrower in violation of any
limitation or prohibition provided by any applicable statute or
regulation.
9.3 Headings. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the
interpretation of any of the provisions of the Loan Documents.
9.4 Entire Agreement. The Loan Documents embody the entire
agreement and understanding among the Borrower, the Agent and the
Lenders and supersede all prior agreements and understandings
among the Borrower, the Agent and the Lenders relating to the
subject matter thereof.
9.5 Several Obligations; Benefits of this Agreement. The
respective obligations of the Lenders hereunder are several and
not joint and no Lender shall be the partner or agent of any
other (except to the extent to which the Agent is authorized to
act as such). The failure of any Lender to perform any of its
obligations hereunder shall not relieve any other Lender from any
of its obligations hereunder. This Agreement shall not be
construed so as to confer any right or benefit upon any Person
other than the parties to this Agreement and their respective
successors and assigns.
9.6 Expenses; Indemnification. The Borrower shall reimburse
the Agent for any costs, internal charges and out-of-pocket
expenses (including reasonable attorneys' fees and time charges
of attorneys for the Agent, not to exceed, however, amounts set
forth in a letter to the Borrower by UBOC dated September 26,
1996) paid or incurred by the Agent in connection with the
negotiation and documentation of this Agreement. The Borrower
shall also reimburse the Agent and each Lender for any costs,
internal charges and out-of-pocket expenses (including reasonable
attorneys' fees and time charges of attorneys for the Agent and
each Lender) paid or incurred by the Agent or any Lender in
connection with the collection and enforcement of the Loan
Documents. The Borrower further agrees to indemnify the Agent
and each Lender, its directors, officers and employees against
all losses, claims, damages, penalties, judgments, liabilities
and expenses (including, without limitation, all expenses of
litigation or preparation therefor whether or not the Agent or
any Lender is a party thereto) which any of them may pay or incur
arising out of or relating to this Agreement, the other Loan
Documents, the transactions contemplated hereby or the direct or
indirect application or proposed application of the proceeds of
any Loan or Letter of Credit hereunder, provided that no Person
shall have the right to be indemnified hereunder for such
Person's own gross negligence or willful misconduct as determined
by a court of competent jurisdiction.
9.7 Numbers of Documents. All statements, notices, closing
documents, and requests hereunder shall be furnished to the Agent
with sufficient counterparts so that the Agent may furnish one to
each of the Lenders.
9.8 Accounting. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all
accounting determinations hereunder shall be made in accordance
with Agreement Accounting Principles; provided that, if the
Borrower notifies the Agent that the Borrower wishes to amend any
covenant contained in Article 6 to eliminate the effect of any
change after the date hereof in Agreement Accounting Principles
(which, for purposes of this proviso shall include the generally
accepted application or interpretation thereof) on the operation
of such covenants (or if the Agent notifies the Borrower that the
Required Lenders wish to amend any such covenant for such
purpose), then the Borrower's compliance with such covenant shall
be determined on the basis of Agreement Accounting Principles in
effect immediately before the relevant change in Agreement
Accounting Principles became effective, until either such notice
is withdrawn or such covenant is amended in a manner satisfactory
to the Borrower and the Required Lenders.
9.9 Severability of Provisions. Any provision in any Loan
Document that is held to be inoperative, unenforceable, or
invalid in any jurisdiction shall, as to that jurisdiction, be
inoperative, unenforceable, or invalid without affecting the
remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan
Documents are declared to be severable.
9.10 Nonliability of Lenders. The relationship between the
Borrower and the Lenders and the Agent shall be solely that of
borrower and lender. Neither the Agent nor any Lender shall have
any fiduciary responsibilities to the Borrower. Neither the
Agent nor any Lender undertakes any responsibility to the
Borrower to review or inform the Borrower of any matter in
connection with any phase of the Borrower's business or
operations.
9.11 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE
CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW
OF CONFLICTS) OF THE STATE OF CALIFORNIA, BUT GIVING EFFECT TO
FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
9.12 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES
FEDERAL OR CALIFORNIA STATE COURT SITTING IN LOS ANGELES IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN
DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL
CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION
IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT
IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT
OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE
BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL
PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY
AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT
IN LOS ANGELES, CALIFORNIA.
9.13 WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH
LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING
IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
9.14 Integration Clause. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the
entire agreement among the Agent, the Lenders and the Borrower
regarding the Loans and Letters of Credit and all prior
communications verbal or written between the Borrower and the
Agent or any Lender shall be of no further effect or evidentiary
value.
9.15 Confidentiality. The Lenders shall take normal and
reasonable precautions to maintain the confidentiality of all
non-public information obtained pursuant to the requirements of
this Agreement which has been identified as such by the Borrower
but may, in any event, make disclosures (i) reasonably required
by any bona fide transferee, assignee or participant in
connection with the contemplated transfer or assignment of any of
the Commitments or Loans or participations therein or
participations in Letters of Credit or (ii) as required or
requested by any governmental agency or representative thereof or
as required pursuant to any legal process or (iii) to its
attorneys and accountants or (iv) as required by law or (v) in
connection with litigation involving any Lender.
ARTICLE 10
THE AGENT
10.1 Appointment. UBOC is hereby appointed Agent hereunder and
under each other Loan Document, and each of the Lenders
irrevocably authorizes the Agent to act as the agent of such
Lender. The Agent agrees to act as such upon the express
conditions contained in this Article 10. The Agent shall not
have a fiduciary relationship in respect of the Borrower or any
Lender by reason of this Agreement.
10.2 Powers. The Agent shall have and may exercise such powers
under the Loan Documents as are specifically delegated to the
Agent by the terms of each thereof, together with such powers as
are reasonably incidental thereto. The Agent shall have no
implied duties to the Lenders, or any obligation to the Lenders
to take any action thereunder except any action specifically
provided by the Loan Documents to be taken by the Agent.
10.3 General Immunity. Neither the Agent nor any of its
directors, officers, agents or employees shall be liable to the
Borrower or any Lender for any action taken or omitted to be
taken by it or them hereunder or under any other Loan Document or
in connection herewith or therewith except for its or their own
gross negligence or willful misconduct.
10.4 No Responsibility for Loans, Recitals, etc. Neither the
Agent nor any of its directors, officers, agents or employees
shall be responsible for or have any duty to ascertain, inquire
into, or verify (i) any statement, warranty or representation
made in connection with any Loan Document or any borrowing
hereunder; (ii) the performance or observance of any of the
covenants or agreements of any obligor under any Loan Document,
including, without limitation, any agreement by an obligor to
furnish information directly to each Lender; (iii) the
satisfaction of any condition specified in Article 4 except
receipt of items required to be delivered to the Agent; or (iv)
the validity, effectiveness or genuineness of any Loan Document
or any other instrument or writing furnished in connection
therewith. The Agent shall have no duty to disclose to the
Lenders information that is not required to be furnished by the
Borrower to the Agent at such time, but is voluntarily furnished
by the Borrower to the Agent (either in its capacity as Agent or
in its individual capacity).
10.5 Action on Instructions of Lenders. The Agent shall in all
cases be fully protected in acting, or in refraining from acting,
hereunder and under any other Loan Document in accordance with
written instructions signed by the Required Lenders, and such
instructions and any action taken or failure to act pursuant
thereto shall be binding on all of the Lenders and on all holders
of Notes. The Agent shall be fully justified in failing or
refusing to take any action hereunder and under any other Loan
Document unless it shall first be indemnified to its satisfaction
by the Lenders pro rata against any and all liability, cost and
expense that it may incur by reason of taking or continuing to
take any such action.
10.6 Employment of Agents and Counsel. The Agent may execute
any of its duties as Agent hereunder and under any other Loan
Document by or through employees, agents, and attorneys-in-fact
and shall not be answerable to the Lenders, except as to money or
securities received by it or its authorized agents, for the
default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled
to advice of counsel concerning all matters pertaining to the
agency hereby created and its duties hereunder and under any
other Loan Document.
10.7 Reliance on Documents; Counsel. The Agent shall be
entitled to rely upon any Note, notice, consent, certificate,
affidavit, letter, telegram, statement, paper or document
believed by it to be genuine and correct and to have been signed
or sent by the proper person or persons, and, in respect to legal
matters, upon the opinion of counsel selected by the Agent, which
counsel may be employees of the Agent.
10.8 Agent's Reimbursement and Indemnification. The Lenders
agree to reimburse and indemnify the Agent ratably in proportion
to their respective Commitments (i) for any other expenses
incurred by the Agent on behalf of the Lenders, in connection
with the preparation, execution, delivery, administration and
enforcement of the Loan Documents and (ii) for any liabilities,
obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted
against the Agent in any way relating to or arising out of the
Loan Documents or any other document delivered in connection
therewith or the transactions contemplated thereby, or the
enforcement of any of the terms thereof or of any such other
documents, provided that no Lender shall be liable for any of the
foregoing to the extent they arise from the gross negligence or
willful misconduct of the Agent. The obligations of the Lenders
under this Section 10.8 shall survive payment of the Obligations
and termination of this Agreement.
10.9 Rights as a Lender. In the event the Agent is a Lender,
the Agent shall have the same rights and powers hereunder and
under any other Loan Document as any Lender and may exercise the
same as though it were not the Agent, and the term "Lender" or
"Lenders" shall, at any time when the Agent is a Lender, unless
the context otherwise indicates, include the Agent in its
individual capacity. The Agent may accept deposits from, lend
money to, and generally engage in any kind of trust, debt, equity
or other transaction, in addition to those contemplated by this
Agreement or any other Loan Document, with the Borrower or any of
its Subsidiaries in which the Borrower or such Subsidiary is not
restricted hereby from engaging with any other Person. The Agent
shall, as long as it shall be the Agent, retain at least a 25%
interest in the Commitment or, if the Commitment has been
terminated at least a 25% interest in Loans outstanding.
10.10 Lender Credit Decision. Each Lender acknowledges
that it has, independently and without reliance upon the Agent or
any other Lender and based on the financial statements prepared
by the Borrower and such other documents and information as it
has deemed appropriate, made its own credit analysis and decision
to enter into this Agreement and the other Loan Documents. Each
Lender also acknowledges that it will, independently and without
reliance upon the Agent or any other Lender and based on such
documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not
taking action under this Agreement and the other Loan Documents.
10.11 Successor Agent. The Agent may resign at any time
by giving written notice thereof to the Lenders and the Borrower,
such resignation to be effective upon the appointment of a
successor Agent or, if no successor Agent has been appointed,
forty-five days after the retiring Agent gives notice of its
intention to resign. Upon any such resignation, the Required
Lenders shall have the right to appoint, with the consent (which
shall not be unreasonably withheld) of the Borrower, if no
Default has occurred and is continuing, on behalf of the Borrower
and the Lenders, a successor Agent. If no successor Agent shall
have been so appointed by the Required Lenders within thirty days
after the resigning Agent's giving notice of its intention to
resign, then the resigning Agent may appoint, on behalf of the
Borrower and the Lenders, a successor Agent. If the Agent has
resigned and no successor Agent has been appointed, the Lenders
may perform all the duties of the Agent hereunder and the
Borrower shall make all payments in respect of the Obligations to
the applicable Lender and for all other purposes shall deal
directly with the Lenders. No successor Agent shall be deemed to
be appointed hereunder until such successor Agent has accepted
the appointment. Any such successor Agent shall be a commercial
bank having capital and retained earnings of at least
$50,000,000. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights,
powers, privileges and duties of the resigning Agent. Upon the
effectiveness of the resignation of the Agent, the resigning
Agent shall be discharged from its duties and obligations
hereunder and under the Loan Documents. After the effectiveness
of the resignation of an Agent, the provisions of this Article 10
shall continue in effect for the benefit of such Agent in respect
of any actions taken or omitted to be taken by it while it was
acting as the Agent hereunder and under the other Loan Documents.
ARTICLE 11
SETOFF; RATABLE PAYMENTS
11.1 Setoff. Upon the occurrence and during the continuance of
any Event of Default, the Lenders are hereby authorized at any
time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held
and other indebtedness at any time owing by any Lender to or for
the credit or the account of the Borrower against any and all
obligations of the Borrower now or hereafter existing under the
Loan Documents, irrespective of whether or not any Lender shall
have made any demand under this Agreement and although such
obligations may be unmatured. The Agent agrees to notify the
Borrower promptly after any such setoff and application;
provided, however, that the failure to give such notice shall not
affect the validity of such setoff and application. The rights
of the Lenders under this Section are in addition to other rights
and remedies (including other rights of setoff) that the Lenders
may have.
11.2 Ratable Payments. If any Lender, whether by setoff or
otherwise, has payment made to it upon its Loans (other than
payments received pursuant to Section 3.1 or 3.2) in a greater
proportion than that received by any other Lender, such Lender
agrees, promptly upon demand, to purchase a portion of the Loans
held by the other Lenders so that after such purchase each Lender
will hold its ratable proportion of Loans. If any Lender,
whether in connection with setoff or amounts which might be
subject to setoff or otherwise, receives collateral or other
protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to
take such action necessary such that all Lenders share in the
benefits of such collateral ratably in proportion to their Loans.
In case any such payment is disturbed by legal process, or
otherwise, appropriate further adjustments shall be made.
ARTICLE 12
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1 Successors and Assigns. The terms and provisions of the
Loan Documents shall be binding upon and inure to the benefit of
the Borrower and the Lenders and their respective successors and
assigns, except that (i) the Borrower shall not have the right to
assign its rights or obligations under the Loan Documents and
(ii) any assignment by any Lender must be made in compliance with
Section 12.3. Notwithstanding clause (ii) of this Section, any
Lender may at any time, without the consent of the Borrower or
the Agent, assign all or any portion of its rights under this
Agreement and its Notes to a Federal Reserve Bank; provided,
however, that no such assignment shall release the transferor
Lender from its obligations hereunder. The Agent may treat the
payee of any Note as the owner thereof for all purposes hereof
unless and until such payee complies with Section 12.3 in the
case of an assignment thereof or, in the case of any other
transfer, a written notice of the transfer is filed with the
Agent. Any assignee or transferee of a Note agrees by acceptance
thereof to be bound by all the terms and provisions of the Loan
Documents. Any request, authority or consent of any Person, who
at the time of making such request or giving such authority or
consent is the holder of any Note, shall be conclusive and
binding on any subsequent holder, transferee or assignee of such
Note or of any Note or Notes issued in exchange therefor.
12.2 Participations.
(i) Permitted Participants; Effect. Any Lender
may, in the ordinary course of its business and in
accordance with applicable law, at any time sell to one or
more banks or other entities ("Participants") participating
interests in any Loan owing to such Lender, any Note held
by such Lender, any Commitment of such Lender or any other
interest of such Lender under the Loan Documents. In the
event of any such sale by a Lender of participating
interests to a Participant, such Lender's obligations under
the Loan Documents shall remain unchanged, such Lender
shall remain solely responsible to the other parties hereto
for the performance of such obligations, such Lender shall
remain the holder of any such Note for all purposes under
the Loan Documents, all amounts payable by the Borrower
under this Agreement shall be determined as if such Lender
had not sold such participating interests, and the Borrower
and the Agent shall continue to deal solely and directly
with such Lender in connection with such Lender's rights
and obligations under the Loan Documents.
(ii) Voting Rights. Each Lender shall retain
the sole right to approve, without the consent of any
Participant, any amendment, modification or waiver of any
provision of the Loan Documents other than any amendment,
modification or waiver with respect to any Loan or
Commitment in which such Participant has an interest which
forgives principal, interest or fees or reduces the
interest rate or fees payable with respect to any such Loan
or Commitment, postpones any date fixed for any regularly-
scheduled payment of principal of, or interest or fees on,
any such Loan or Commitment, or releases any guarantor of
any such Loan or any substantial amount of Collateral
securing any such Loan.
(iii) Benefit of Setoff. The Borrower agrees that
each Participant shall be deemed to have the right of
setoff provided in Section 11.1 in respect of its
participating interest in amounts owing under the Loan
Documents to the same extent as if the amount of its
participating interest were owing directly to it as a
Lender under the Loan Documents, provided that each Lender
shall retain the right of setoff provided in Section 11.1
with respect to the amount of participating interests sold
to each Participant. The Lenders agree to share with each
Participant, and each Participant, by exercising the right
of setoff provided in Section 11.1, agrees to share with
each Lender, any amount received pursuant to the exercise
of its right of setoff, such amounts to be shared in
accordance with Section 11.2 as if each Participant were a
Lender.
12.3 Assignments.
(i) Permitted Assignments. Any Lender may, in
the ordinary course of its business and in accordance with
applicable law, at any time assign to one or more Eligible
Assignees ("Purchasers") all or any part of its rights and
obligations under the Loan Documents, provided, however,
such assignments must be in a minimum amount at least equal
to $5,000,000; provided, however, that if such Purchaser is
a Lender or an Affiliate thereof, no minimum amount shall
be applicable. Such assignment shall be substantially in
the form of Exhibit C hereto or in such other form as may
be agreed to by the parties thereto. The consent of the
Borrower and the Agent shall be required prior to an
assignment becoming effective with respect to a Purchaser
which is not a Lender or an Affiliate thereof; provided,
however, that if a Default has occurred and is continuing,
the consent of the Borrower shall not be required. Such
consent shall not be unreasonably withheld.
(ii) Effect; Effective Date. Upon (i) delivery
to the Agent of a notice of assignment, substantially in
the form attached as Exhibit I to Exhibit C hereto (a
"Notice of Assignment"), together with any consents
required by Section 12.3(i), and (ii) payment of a $2,500
fee to the Agent for processing such assignment, such
assignment shall become effective on the effective date
specified in such Notice of Assignment. The Notice of
Assignment shall contain a representation by the Purchaser
to the effect that it is an Eligible Assignee and that none
of the consideration used to make the purchase of the
Commitment and Loans under the applicable assignment
agreement are "plan assets" as defined under ERISA and that
the rights and interests of the Purchaser in and under the
Loan Documents will not be "plan assets" under ERISA. On
and after the effective date of such assignment, such
Purchaser shall for all purposes be a Lender party to this
Agreement and any other Loan Document executed by the
Lenders and shall have all the rights and obligations of a
Lender under the Loan Documents, to the same extent as if
it were an original party hereto, and no further consent or
action by the Borrower, the Lenders or the Agent shall be
required to release the transferor Lender with respect to
the percentage of the Aggregate Commitment and Loans
assigned to such Purchaser. Upon the consummation of any
assignment to a Purchaser pursuant to this Section
12.3(ii), the transferor Lender, the Agent and the Borrower
shall make appropriate arrangements so that replacement
Notes are issued to such transferor Lender and new Notes
or, as appropriate, replacement Notes, are issued to such
Purchaser, in each case in principal amounts reflecting
their Commitment, as adjusted pursuant to such assignment.
12.4 Dissemination of Information. The Borrower authorizes each
Lender to disclose to any Participant or Purchaser or any other
Person acquiring an interest in the Loan Documents by operation
of law (each a "Transferee") and any prospective Transferee any
and all information in such Lender's possession concerning the
creditworthiness of the Borrower and its Subsidiaries, provided
that each prospective Transferee shall execute and deliver to the
Agent a confidentiality agreement (in form and substance
reasonably satisfactory to the Borrower and the Agent).
12.5 Tax Treatment. If any interest in any Loan Document is
transferred to any Transferee which is organized under the laws
of any jurisdiction other than the United States or any State
thereof, the transferor Lender shall cause such Transferee,
concurrently with the effectiveness of such transfer, to comply
with the provisions of Section 2.21.
ARTICLE 13
NOTICES
13.1 Giving Notice. Except as otherwise permitted by Section
2.11 with respect to notices regarding conversion or continuation
of Advances, all notices and other communications provided to any
party hereto under this Agreement or any other Loan Document
shall be in writing or by facsimile and addressed or delivered to
the Borrower and the Agent at their respective addresses set
forth below its signature hereto and to each Lender at its
address set forth on Schedule 1 hereto or at such other address
as may be designated by such party in a notice to the other
parties. Any notice, if mailed and properly addressed with
postage prepaid, shall be deemed given when received; any notice,
if transmitted by facsimile, shall be deemed given when
transmitted (answerback confirmed in the case of telexes).
13.2 Change of Address. The Borrower, the Agent and any Lender
may each change the address for service of notice upon it by a
notice in writing to the other parties hereto.
ARTICLE 14
COUNTERPARTS
This Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing
any such counterpart. This Agreement shall be effective when it
has been executed by the Borrower, the Agent and the Lenders and
each party has notified the Agent by telex or telephone, that it
has taken such action.
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Agreement as of the date first above written.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
Print Name: James M. Myers
Title: Senior Vice President-
Finance
9125 Rehco Road
San Diego, California 92121
Attention: James M. Myers
Senior Vice President -
Finance
Telecopier: (619) 638-2154
UNION BANK OF CALIFORNIA, N.A.,
as Agent and Lender
By: /s/Patricia C. Rohling
Print Name: Patricia C. Rohling
Title: Senior Vice President
By: /s/ Kurt M. Hocker
Print Name: Kurt M. Hocker
Title: Assistant Vice President
445 So. Figueroa Street, 16th Floor
Los Angeles, California 90071-1655
Attention: Kurt M. Hocker
Assistant Vice President
Telecopier: (213) 236-7636
UNITED STATES NATIONAL BANK OF OREGON, as
Lender
By: /s/Janet Jordan
Print Name: Janet Jordan
Title: Vice President
Corporate Banking
111 Southwest 5th Pl. 4
Portland, Oregon 97204
Attention: Janet Jordan
Vice President
Telecopier: (503) 275-5428
SCHEDULE 1
LENDERS AND APPLICABLE LENDING OFFICES
Lender Commitment Applicable Lending Office
Union Bank of $30,000,000 445 So. Figueroa Street
California, N.A. 16th Floor
Agent and Lender Los Angeles, CA 90071-1655
Attention: Kurt Hocker
Assistant Vice
President
Telecopier: (213) 236-7636
United States $10,000,000 Corporate Banking
National Bank 111 Southwest 5th Pl.4
of Oregon Portland, Oregon 97204
Attention: Janet Jordan
Vice President
Telecopier: (503) 275-5428
SCHEDULE 2
SUBSIDIARIES
(See Section 5.8)
Jurisdiction
Investment Owned Amount of Percent of
In By Investment Ownership Organization
International Borrower $100 100% California
Pet Supplies
and
Distribution,
Inc.
Pet Nosh, Borrower $100 100% New York
Consolidated
Co., Inc.
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS 1
ARTICLE 2
THE CREDIT 12
2.1 Commitment 12
2.2 Commitment Percentage 12
2.3 Types of Loans 13
2.4 Notes 13
2.5 Notice of Borrowing 13
2.6 Commitment Reduction 14
2.7 Commitment Obligations 14
2.8 Commitment Termination 15
2.9 Required Payments 15
2.10 Issuance of Letters of Credit 15
2.11 Fees 19
2.12 Voluntary Conversion of Advances 19
2.13 Interest. 20
2.14 Rates Applicable After Default 20
2.15 Method of Payment 20
2.16 Telephonic Notices 21
2.17 Interest Payment Dates; Interest and Fee Basis 21
2.18 Notification of Loan, Interest Rates, Prepayments and
Commitment Reductions 22
2.19 Applicable Lending Offices 22
2.20 Non-Receipt of Funds by the Agent 22
2.21 Withholding Tax Exemption 22
2.22 Optional Prepayments 23
ARTICLE 3
CHANGE IN CIRCUMSTANCES 24
3.1 Yield Protection 24
3.2 Taxes 25
ARTICLE 4
CONDITIONS PRECEDENT 25
4.1 Initial Loan or Letter of Credit 25
4.2 All Loans 27
4.3 All Letters of Credit 27
ARTICLE 5
REPRESENTATIONS AND WARRANTIES 28
5.1 Authorization 28
5.2 Governmental Action 28
5.3 Enforceability 28
5.4 Use of Proceeds 28
5.5 Litigation 29
5.6 Financial Statements 29
5.7 Taxes 29
5.8 Subsidiaries 29
5.9 ERISA 29
5.10 Accuracy of Information 29
5.11 Organization and Existence 30
5.12 Consents 30
5.13 Intellectual Property 30
5.14 Default 30
5.15 Nature of Business 30
5.16 Ranking of Loans 31
5.17 Compliance with Laws 31
5.18 Investment Company Acts; Other Regulations 31
5.19 Environmental Matters 31
5.20 Title 31
ARTICLE 6
COVENANTS 31
6.1 Financial Reporting 32
6.2 Use of Proceeds 34
6.3 Notice of Default 34
6.4 Conduct of Business 34
6.5 Records 35
6.6 Insurance 35
6.7 Compliance with Laws 35
6.8 Maintenance of Properties 35
6.9 Inspection 35
6.10 Debt 35
6.11 Merger 36
6.12 Sale of Assets 36
6.13 Sale of Accounts 36
6.14 Acquisitions 36
6.15 Affiliates 37
6.16 ERISA 37
6.17 Capital Expenditures 37
6.18 Total Debt Ratio 38
6.19 Payment of Obligations 38
6.20 Consolidated Net Worth 38
6.21 Minimum Interest Coverage Ratio 38
6.22 Encumbrances and Liens 38
6.23 Loans, Advances and Guaranties 39
6.24 Investments 39
6.25 Minimum Fixed Charge Coverage Ratio 40
6.26 Guaranties, Etc 40
ARTICLE 7
DEFAULTS 40
7.1 Payment Defaults. 40
7.2 Representations and Warranties. 41
7.3 Other Loan Document Defaults. 41
7.4 Bankruptcy. 41
7.5 Other Agreements. 41
7.6 ERISA. 41
7.7 Judgments. 42
7.8 Loan Documents 42
ARTICLE 8
ACCELERATION, WAIVERS AND AMENDMENTS 42
8.1 Acceleration 42
8.2 Cash Collateral 42
8.3 Additional Remedies 42
8.4 Amendments 43
8.5 Preservation of Rights 43
ARTICLE 9
GENERAL PROVISIONS 44
9.1 Survival of Representations 44
9.2 Governmental Regulation 44
9.3 Headings 44
9.4 Entire Agreement 44
9.5 Several Obligations; Benefits of this Agreement 44
9.6 Expenses; Indemnification 44
9.7 Numbers of Documents 45
9.8 Accounting 45
9.9 Severability of Provisions 45
9.10 Nonliability of Lenders 45
9.11 CHOICE OF LAW 45
9.12 CONSENT TO JURISDICTION 46
9.13 WAIVER OF JURY TRIAL 46
9.14 Integration Clause 46
9.15 Confidentiality 46
ARTICLE 10
THE AGENT 47
10.1 Appointment 47
10.2 Powers 47
10.3 General Immunity 47
10.4 No Responsibility for Loans, Recitals, etc. 47
10.5 Action on Instructions of Lenders 47
10.6 Employment of Agents and Counsel 48
10.7 Reliance on Documents; Counsel 48
10.8 Agent's Reimbursement and Indemnification 48
10.9 Rights as a Lender 48
10.10 Lender Credit Decision 49
10.11 Successor Agent 49
ARTICLE 11
SETOFF; RATABLE PAYMENTS 50
11.1 Setoff 50
11.2 Ratable Payments 50
ARTICLE 12
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 50
12.1 Successors and Assigns 50
12.2 Participations 51
12.3 Assignments 52
12.4 Dissemination of Information 53
12.5 Tax Treatment 53
ARTICLE 13
NOTICES 53
13.1 Giving Notice 53
13.2 Change of Address 54
ARTICLE 14
COUNTERPARTS 54
SCHEDULE 1 - LENDERS AND APPLICABLE LENDING OFFICES
SCHEDULE 2 - SUBSIDIARIES
SCHEDULE 3 - DEBT
EXHIBIT A - FORM OF NOTE
EXHIBIT B - COMPLIANCE CERTIFICATE
EXHIBIT C - ASSIGNMENT AGREEMENT
EXHIBIT D - LEVERAGE RATIO LEVEL CERTIFICATE
EXHIBIT E - FORM OF LETTER OF CREDIT REQUEST
EXHIBIT F - FORM OF NOTICE OF BORROWING
$40,000,000
CREDIT AGREEMENT
===============================================
PETCO ANIMAL SUPPLIES, INC.
BORROWER
THE BANKS NAMED HEREIN
LENDERS
AND
UNION BANK OF CALIFORNIA, N.A.
Agent
===============================================
Dated as of December 6, 1996
Exhibit 10.16
FIRST AMENDMENT
TO
1994 STOCK OPTION AND RESTRICTED STOCK PLAN
FOR EXECUTIVE AND KEY EMPLOYEES OF
PETCO ANIMAL SUPPLIES, INC.
Pursuant to the authority reserved to the Stock Option and
Compensation Committee (the "Committee") of the Board of Directors of Petco
Animal Supplies, Inc. (the "Company") under Section 9.2 of the 1994 Stock
Option and Restricted Stock Plan for Executive and Key Employees of Petco
Animal Supplies, Inc. (the "Plan"), the Committee hereby amends the Plan as
follows:
1. Article I of the Plan is amended by the addition thereto of a new
Section 1.1, to read, in its entirety, as follows:
Section 1.1 -- Additional Option
"Additional Option" means an Option granted to an
Optionee to purchase a number of shares of Common Stock equal to the
number of shares of Common Stock tendered or relinquished by the
Optionee in payment of the exercise price upon exercise of an Option
and/or the number of shares of Common Stock tendered or relinquished
in payment of the amount to be withheld under applicable federal,
state and local income tax laws in connection with the exercise of an
Option as described in Article XI.
2. Article I of the Plan is amended by the addition thereto of a new
Section 1.2, to read, in its entirety, as follows:
Section 1.2 -- Additional Option Feature
"Additional Option Feature" means a feature of an Option
that provides for the automatic grant of an Additional Option in
accordance with the provisions described in Article XI.
3. Existing Sections 1.1 through 1.22, inclusive, of the Plan are
amended by redesignating such Sections as Sections 1.3 through 1.24.
4. Section 5.3(b)(ii) of the Plan is amended to read, in its
entirety, as follows:
(ii) With the consent of the Committee, (A) shares of
the Company's Common Stock owned by the Optionee duly endorsed for
transfer to the Company, or (B) shares of the Company's Common Stock
issuable to the Optionee upon exercise of the Option, with a fair
market value (as determined under Section 4.2(b)) on the date of
Option exercise equal to the aggregate Option price of the shares
with respect to which such Option or portion is thereby exercised; or
5. Section 5.3(c) of the Plan is amended to read, in its entirety,
as follows:
(c) The payment to the Company (or other employer
corporation) of all amounts which it is required to withhold under
federal, state or local law in connection with the exercise of the
Option; with the consent of the Committee, (i) shares of the
Company's Common Stock owned by the Optionee duly endorsed for
transfer, or (ii) shares of the Company's Common Stock issuable to
the Optionee upon exercise of the Option, valued at fair market value
(as determined under Section 4.2(b)) as of the date of Option
exercise, may be used to make all or part of such payment;
6. Section 5.4 of the Plan is amended by deleting it in its
entirety.
7. Sections 5.5 through 5.7, inclusive, of the Plan are amended by
redesignating such Sections as Sections 5.4 through 5.6.
8. Section 6.2 of the Plan is amended to read, in its entirety, as
follows:
Section 6.2 -- Exercise of Stock Appreciation Rights
Except in the case of death or disability (within the
meaning of Section 22(e)(3) of the Code) of the Optionee, no Stock
Appreciation Right shall be exercisable during the first six months
after a Stock Appreciation Right is granted with respect to an
outstanding Option.
9. The first sentence of Section 9.1 of the Plan is amended to
read, in its entirety, as follows:
The Stock Option Committee shall consist of two or more
Non-Employee Directors, appointed by and holding office at the
pleasure of the Board, each of whom is both a "non-employee director"
as defined by Rule 16b-3 and an "outside director" for purposes of
Section 162(m) of the Code.
10. The Plan is amended by the addition thereto after the end of
Article X of the following:
ARTICLE XI
Additional Options
Section 11.1 -- Additional Options
(a) The Committee may, at or after the date of grant of
an Option, grant Additional Options. Additional Options may be
granted with respect to any outstanding Option.
(b) If, with the consent of the Committee pursuant to
Section 5.3(b)(ii), an Optionee exercises an Option that has an
Additional Option Feature by tendering or relinquishing shares of
Common Stock and/or when shares of Common Stock are tendered or
relinquished in payment for the amount to be withheld under
applicable federal, state and local income tax laws (at withholding
rates not to exceed the Optionee's applicable marginal tax rates) in
connection with the exercise of an Option, the Optionee shall
automatically be granted an Additional Option. The Additional Option
shall be subject to the following provisions:
(i) The Additional Option shall cover the number
of shares of Common Stock equal to the sum of (A) the number of
shares of Common Stock tendered or relinquished as
consideration upon the exercise of the Option to which such
Additional Option Feature relates, and (B) the number of shares
of Common Stock tendered or relinquished in payment of the
amount to be withheld under applicable federal, state and local
income tax laws in connection with the exercise of the Option
to which such Additional Option Feature relates;
(ii) The Additional Option will have an Additional
Option Feature unless the Committee directs otherwise;
(iii) The Additional Option exercise price shall
be 100% of the fair market value per share (as determined under
Section 4.2(b)) on the date the Employee tenders or
relinquishes shares of Common Stock to exercise the Option that
has the Additional Option Feature and/or tenders or
relinquishes shares of Common Stock in payment of income tax
withholding on the exercise of an Option that has the
Additional Option Feature; and
(iv) The Additional Option shall have the same
termination date and other termination provisions as the
underlying Option that had the Additional Option Feature.
11. In all other respects the Plan shall remain in full force and
effect as originally adopted.
