UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_________________
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
_________________
Commission file number: 0-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0479906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9125 Rehco Road, San Diego, California 92121
(Address of principal executive office) (Zip Code)
(619) 453-7845
(Registrant's telephone number, including area code)
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 the number of shares of each of the registrant's classes of
common stock, as of the latest practicable date.)
Title Date Outstanding
----- ---- -----------
Common Stock, $0.0001 Par Value December 11, 1998 21,074,305
PETCO Animal Supplies, Inc.
Form 10-Q
For the Quarter Ended October 31, 1998
Index
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 31, 1998
and October 31, 1998 3
Consolidated Statements of Operations for the thirteen
and thirty-nine weeks ended November 1, 1997,
and October 31, 1998 4
Consolidated Statements of Cash Flows for the thirty-nine
weeks ended November 1, 1997, and October 31, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE> 3
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<S> <C> <C>
January 31, October 31,
1998 1998
----------- -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 3,354 $ 3,001
Receivables 10,879 11,811
Inventories 96,873 111,721
Deferred tax assets 8,354 8,354
Other 4,942 6,653
------- -------
Total current assets 124,402 141,540
Fixed assets, net 147,429 188,003
Goodwill 39,348 37,268
Deferred tax assets 17,885 23,524
Other assets 6,131 8,945
------- -------
$335,195 $399,280
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,794 $ 65,393
Accrued expenses 21,558 27,483
Accrued salaries and employee benefits 9,242 10,002
Current portion of long-term debt 3,375 3,375
Current portion of capital lease and
other obligations 5,073 7,014
------ ------
Total current liabilities 91,042 113,267
Long-term debt, excluding current portion 26,625 76,125
Capital lease and other obligations,
excluding current portion 11,369 16,321
Accrued store closing costs 11,189 7,321
Deferred rent 8,913 10,169
Stockholders' equity:
Common stock, $0.0001 par value, 100,000
shares authorized, 21,060 and
21,074 shares issued and outstanding,
respectively 2 2
Additional paid-in capital 270,755 270,952
Accumulated deficit (84,700) (94,877)
------- -------
Total stockholders' equity 186,057 176,077
------- -------
$335,195 $399,280
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
<S> <C> <C> <C> <C>
Thirteen weeks ended Thirty-nine weeks ended
---------------------- -----------------------
November 1, October 31, November 1, October 31,
1997 1998 1997 1998
---------- ---------- ---------- ----------
Net sales $ 191,775 $ 204,785 $ 538,143 $ 598,399
Cost of sales and
occupancy costs 141,554 152,830 401,433 451,426
---------- ---------- ---------- ----------
Gross profit 50,221 51,955 136,710 146,973
Selling, general, and
administrative expenses 52,714 47,145 129,942 135,297
Merger and business integration
costs 22,496 5,629 31,937 22,963
---------- ---------- ---------- ----------
Operating loss (24,989) (819) (25,169) (11,287)
Interest expense, net 882 1,983 2,056 4,529
---------- ---------- ---------- ----------
Loss before income taxes (25,871) (2,802) (27,225) (15,816)
Income tax benefit (8,858) (953) (8,698) (5,639)
---------- ---------- ---------- ----------
Net loss $ (17,013) $ (1,849) $ (18,527) $ (10,177)
========== ========== ========== ==========
Basic and diluted loss per
Common share $ (0.81) $ (0.09) $ (0.90) $ (0.48)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<S> <C> <C>
Thirty-nine weeks ended
-------------------------
November 1, October 31,
1997 1998
----------- -----------
Cash flows from operating activities:
Net loss $(18,527) $(10,177)
Depreciation and amortization 17,877 22,296
Deferred taxes (10,096) (5,639)
Loss on retirement of fixed assets 5,908 3,833
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (5,175) (932)
Inventories (10,112) (14,848)
Other current assets (1,626) (1,711)
Other assets (112) (3,290)
Accounts payable 6,965 13,599
Accrued expenses 8,935 5,925
Accrued salaries and employee benefits (1,362) 760
Accrued store closing costs 1,150 (3,868)
Deferred rent 754 1,256
------- -------
Net cash provided by (used in)
operating activities (5,421) 7,204
------- -------
Cash flows from investing activities:
Additions to fixed assets (37,930) (52,516)
Net cash invested in acquisition of businesses (6,028) --
------- -------
Net cash used in investing activities (43,958) (52,516)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt agreements 12,641 52,875
Repayment of long-term debt agreements (1,385) (3,375)
Repayment of capital lease and other obligations (5,306) (4,738)
Proceeds from the issuance of common stock 2,329 197
------- -------
Net cash provided by financing activities 8,279 44,959
------- -------
Net decrease in cash and cash equivalents (41,100) (353)
Cash and cash equivalents at beginning of year 44,338 3,354
Beginning cash and cash equivalents of immaterial
pooling of interests 590 --
------- -------
Cash and cash equivalents at end of period $ 3,828 $ 3,001
======= =======
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE> 6
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 1 - General
- ----------------
In the opinion of management of Petco Animal Supplies, Inc. (the "Company"
or "PETCO"), the unaudited consolidated financial statements presented
herein contain all adjustments, consisting of normal recurring adjustments,
necessary to present the financial position, results of operations and cash
flows as of October 31, 1998, and for the periods ended November 1, 1997,
and October 31, 1998. Certain prior year balances have been reclassified
to conform to current year presentation. Because of the seasonal nature of
the Company's business, the results of operations for the thirteen and
thirty-nine weeks ended November 1, 1997 and October 31, 1998, are not
necessarily indicative of the results to be expected for the full year.
The Company's fiscal year ends on the Saturday closest to January 31,
resulting in years of either 52 or 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. For example, references to fiscal 1997 refer to the
fiscal year beginning on February 2, 1997, and ending on January 31, 1998.
For further information, refer to the consolidated financial statements and
footnotes thereto for fiscal 1997 included in the Company's Form 10-K
Annual Report (File No. 0-23574) filed with the Securities and Exchange
Commission on April 30, 1998.
Note 2 - Business Combinations
- ------------------------------
The Company acquired all of the outstanding equity securities of a retailer
with four pet food and supply stores operated under the tradename Super
Pets in August 1997, a retailer with nine pet food and supply stores
operated under the tradename Paws in October 1997, a retailer with five pet
food and supply stores operated under the tradename The PetCare Company in
October 1997, and a retailer with four pet food and supply stores operated
under the tradename Pet Food Savemart in October 1997, in exchange for an
aggregate 613 shares of common stock. These acquisitions were accounted
for as poolings of interests with their financial positions and results of
operations included in the accompanying consolidated financial statements
from the beginning of the period in which each immaterial pooling was
completed. Previously reported financial statements have not been restated
to include the results of these acquisitions as revenues and results of
operations prior to the acquisition were not material to the consolidated
financial position or results of operations of the Company.
The Company acquired all of the outstanding equity securities of a retailer
with eighty-two pet food and supply stores operated under the tradename
PetCare ("PetCare") in November 1997, in exchange for 1,543 shares of
common stock. This transaction has been accounted for as a pooling of
interests, and accordingly, the consolidated financial statements for the
periods presented have been restated to include the accounts of PetCare.
The Company recorded merger and business integration costs of $5,629 and
$22,963 during the thirteen and thirty-nine weeks ended October 31, 1998,
and $22,496 and $31,937 during the thirteen and thirty-nine weeks ended
November 1, 1997, respectively. These costs related to acquisitions made
in fiscal 1997 and fiscal 1996 and include transaction costs, costs
attributable to lease cancellation and closure of duplicate or inadequate
facilities and activities, facility conversion costs, cancellation of
certain contractual obligations and other integration costs. In addition,
the Company recorded charges reflected in selling, general and
administrative expenses of $10,957 during the third quarter of 1997 related
to the acquisition of PetCare.
<PAGE> 7
Note 3 - Net Loss Per Share
- ---------------------------
The consolidated financial statements are presented in accordance with SFAS
No. 128, "Earnings per Share." Basic net loss per common share is computed
using the weighted average number of common shares outstanding during the
period. Diluted net loss per common share incorporates the incremental
shares issuable upon the assumed exercise of stock options. All prior
period net loss per common share information is presented in accordance
with SFAS No. 128.
Net loss and weighted average common shares used to compute loss per share,
basic and diluted, are presented below:
<TABLE>
<S> <C> <C> <C> <C>
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------- -----------------------
November 1, October 31, November 1, October 31,
1997 1998 1997 1998
----------- ---------- ---------- -----------
Net loss $(17,013) $ (1,849) $(18,527) $(10,177)
Common shares, basic 20,959 21,074 20,520 21,073
Dilutive effect of stock options -- -- -- --
------- ------- ------- -------
Common shares, diluted 20,959 21,074 20,520 21,073
======= ======= ======= =======
</TABLE>
Dilutive effect of stock options of 1 and 141 shares was not included in
computing diluted loss per share for the thirteen weeks and thirty-nine
weeks ended October 31, 1998, respectively, because the effect would have
been antidilutive.
Dilutive effect of stock options of 667 and 617 shares was not included in
computing diluted loss per share for the thirteen weeks and thirty-nine
weeks ended November 1, 1997, respectively, because the effect would have
been antidilutive.
Note 4 - Contingencies
- ----------------------
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United
States District Court for the Southern District of California between
August and November, 1998. These cases have recently been consolidated and
will be administered as one case. The plaintiffs purport to represent a
class of all persons who purchased the Company's common stock between
January 30, 1997 and February 23, 1998. The complaints allege that the
defendants violated various federal securities laws through material
misrepresentations and omissions during the class period, and seek
unspecified monetary damages. These matters have been tendered to the
Company's insurance carrier. While the Company believes the allegations
contained in these lawsuits are without merit, the claims have not
progressed sufficiently for the Company to estimate a range of possible
exposure, if any. The Company and its officers intend to defend themselves
vigorously.
<PAGE> 8
ITEM 2. 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, remodeled, and relocated traditional stores into superstores,
collectively referred to as conversions, and has closed underperforming
stores. At October 31, 1998, the Company operated 467 stores, including
407 superstores, in 36 states and the District of Columbia. At November 1,
1997, the Company operated 451 stores, including 383 superstore, in 33
states and the District of Columbia.
The Company plans to open approximately 40 superstores this year, including
the conversion of existing traditional stores into superstore formats. The
timing of new superstore openings and related preopening expenses, as well
as the amount of revenue contributed by new and existing superstores, may
cause the Company's quarterly results of operations to fluctuate. Increased
payroll, advertising and other store-level expenses as a percentage of sales
in new stores should contribute to lower store operating margins. In addition,
the Company charges preopening costs associated with each new superstore to
operations as incurred. Therefore, the Company expects that the opening of a
large number of new superstores in a given quarter may adversely impact its
quarterly results of operations for that quarter.
In August 1997, the Company acquired a retailer that operated four pet food
and supply stores under the tradename Super Pets located in Southern
California. In October 1997, the Company acquired a retailer that operated
nine pet food and supply stores under the tradename Paws located in
Pennsylvania and New Jersey, a retailer that operated five pet food and
supply stores under the tradename The PetCare Company located in Southern
California, and a retailer that operated four pet food and supply stores
under the tradename Pet Food Savemart located in Kansas and Missouri.
These acquisitions were accounted for as immaterial poolings of interests
with their financial positions and results of operations included in the
accompanying consolidated financial statements from the beginning of the
period in which each pooling was completed.
In November 1997, the Company acquired a retailer that operated eighty-two
stores under the tradename PetCare located in ten midwestern and southern
states. This transaction was accounted for as a pooling of interests, and
accordingly, the consolidated financial statements for the prior periods
presented have been restated to include the accounts of PetCare.
Results of Operations
- ---------------------
Third Quarter 1998 Compared to Third Quarter 1997
- -------------------------------------------------
Net sales increased 6.8% to $204.8 million for the thirteen weeks ended
October 31, 1998 ("third quarter 1998") from $191.8 million for the
thirteen weeks ended November 1, 1997 ("third quarter 1997"). The increase
in net sales in third quarter 1998 resulted primarily from the addition of
38 superstores, including the conversion of 8 traditional stores into
superstores, partially offset by the closing of 14 stores, and a comparable
store net sales increase of 5.0%. The comparable store net sales increase
was attributable to maturing superstores, increased advertising, and
merchandising efforts in existing stores. The increase in comparable store
net sales accounted for approximately $7.4 million, or 57%, of the net
sales increase. The net increase in the Company's store base accounted for
approximately $5.6 million, or 43%, of the net sales increase.
<PAGE> 9
Gross profit, defined as net sales less cost of sales including store
occupancy costs, increased to $52.0 million in third quarter 1998 from
$50.2 million in third quarter 1997. As a percentage of sales, gross
profit decreased to 25.4% in third quarter 1998 from 26.2% in third quarter
1997. Initial cost of sales decreased from the prior year through greater
purchasing leverage. However, increased distribution costs resulting from
the investment in two new central distribution centers and lower leverage
of store occupancy costs, particularly in the acquired stores during the
conversion process, resulted in this overall decline.
Selling, general and administrative expenses decreased $5.6 million to
$47.1 million in third quarter 1998 from $52.7 million in third quarter
1997. As a percentage of net sales, these expenses decreased to 23.0% in
third quarter 1998 from 27.5% in third quarter 1997. Included in selling,
general and administrative expenses in the third quarter 1998 is a $1.4
million charge for severance and legal costs related to the Company's
management realignment. Included in selling, general and administrative
expenses in the third quarter 1997 is an $11.0 million charge related to
the acquisition of PetCare. Excluding these charges, selling, general and
administrative expenses increased to 22.3% of net sales in third quarter
1998 from 21.7% in third quarter 1997, primarily due to increased personnel
and related costs associated with new store openings and acquisitions.
Merger and business integration costs of $5.6 million were recorded in
third quarter 1998 in connection with the conversion activities of the
stores acquired in the last half of fiscal 1997. Merger and business
integration costs of $22.5 million were recorded in third quarter 1997 in
connection with the acquisition and conversion activities of the stores
acquired in fiscal 1997 and fiscal 1996.
Operating loss in third quarter 1998 was $0.8 million compared to an
operating loss of $25.0 million in third quarter 1997. Excluding merger
and business integration costs and other charges, the Company would have
reported operating income of $6.2 million, or 3.0% of net sales, in third
quarter 1998, and $8.5 million, or 4.4% of net sales, in third quarter
1997.
Net interest expense was $2.0 million for third quarter 1998, compared to
net interest expense of $0.9 million for third quarter 1997. Increased
borrowings in third quarter 1998 led to the increase in interest expense.
Income tax benefit was $1.0 million in third quarter 1998, compared to
income tax benefit of $8.9 million in third quarter 1997. Income tax
benefit reflects the Federal and state tax benefits of the loss before
income taxes, net of the effect of non-deductible expenses.
Net loss was $1.8 million for third quarter 1998 compared with a net loss
of $17.0 million for third quarter 1997. Excluding merger and business
integration costs, other charges and related tax benefits, net earnings for
third quarter 1998 would have been $2.5 million, or $0.12 per diluted
share, compared to $4.5 million, or $0.21 per diluted share in third
quarter 1997.
<PAGE> 10
Thirty-nine Weeks Ended October 31, 1998 Compared to Thirty-nine Weeks
- ----------------------------------------------------------------------
Ended November 1, 1997
- ----------------------
Net sales increased 11.2% to $598.4 million for the thirty-nine weeks ended
October 31, 1998, from $538.1 million for the thirty-nine weeks ended
November 1, 1997. The increase in net sales resulted primarily from the
addition of 38 superstores, including the conversion of 8 traditional
stores into superstores, partially offset by the closing of 14 stores in
the past year, and a comparable store net sales increase of 5.4%. The
comparable store net sales increase was attributable to maturing
superstores, increased advertising, and merchandising efforts in existing
stores. The net increase in the Company's store base accounted for
approximately $36.6 million, or 61%, of the net sales increase. The
increase in comparable store net sales accounted for approximately $23.7
million, or 39%, of the net sales increase.
Gross profit increased $10.3 million to $147.0 million for the thirty-nine
weeks ended October 31, 1998, from $136.7 million for the same period last
year. As a percentage of net sales, gross profit decreased to 24.6% for
the thirty-nine weeks ended October 31, 1998, from 25.4% for the same
period last year. This decrease reflects lower gross margins generated
from sales in the stores acquired in the last half of fiscal 1997, which
were undergoing conversions to PETCO's assortment and selling through non-
continuing inventory at reduced gross margins. Also, increased
distribution costs resulting from the investment in two new central
distribution centers and lower leverage of store occupancy costs,
particularly in the acquired stores during the conversion process,
contributed to this decline.
Selling, general and administrative expenses increased $5.4 million to
$135.3 million for the thirty-nine weeks ended October 31, 1998, compared
to $129.9 million for the same period last year. Selling, general and
administrative expenses increased primarily as a result of higher personnel
and related costs associated with new store openings and acquisitions. As
a percentage of net sales, these expenses decreased to 22.6% for the
thirty-nine weeks ended October 31, 1998, from 24.1% in the prior year
period. Included in selling, general and administrative expenses are a
$1.4 million charge in the third quarter 1998 for severance and legal costs
related to the Company's management realignment, as well as a $4.5 million
charge in the second quarter 1998 related to the write-off of assets in
connection with the relocation of the Company's main distribution center
and the replacement of point-of-sale equipment in a chain-wide conversion
of this equipment and other assets. Included in selling, general and
administrative expenses in the third quarter 1997 is an $11.0 million
charge related to the acquisition of PetCare. Excluding these charges,
selling, general and administrative expenses decreased to 21.6% of net
sales in the thirty-nine weeks ended October 31, 1998, from 22.1% in the
prior year period. This decrease resulted primarily from increased
leverage of general and administrative expenses.
Merger and business integration costs of $23.0 million were recorded in the
thirty-nine weeks ended October 31, 1998, in connection with the conversion
activities of the stores acquired in the last half of fiscal 1997. Merger
and business integration costs of $31.9 million were recorded in the
thirty-nine weeks ended November 1, 1997, in connection with acquisition
and conversion activities of the stores acquired in fiscal 1997 and fiscal
1996.
Operating loss was $11.3 million for the thirty-nine weeks ended October
31, 1998, compared to an operating loss of $25.2 million for the same
period last year. Operating income, excluding merger and business
integration costs and other charges, on a comparable basis, decreased to
$17.6 million for the thirty-nine weeks ended October 31, 1998, from $17.7
million for the same period last year. Operating income, excluding merger
and business integration costs and other charges, on a comparable basis,
decreased to 2.9% of net sales for the thirty-nine weeks ended October 31,
1998, from 3.3% for the same period last year.
<PAGE> 11
Net interest expense was $4.5 million for the thirty-nine weeks ended
October 31, 1998. Net interest expense for the thirty-nine weeks ended
November 1, 1997, was $2.1 million. Increased borrowings in fiscal 1998
led to the increase in interest expense.
Income tax benefit was $5.6 million in the thirty-nine weeks ended October
31, 1998, compared to income tax benefit of $8.7 million for the same
period last year. Income tax benefit reflects the Federal and state tax
benefits of the loss before income taxes, net of the effect of non-
deductible expenses.
Net loss was $10.2 million for the thirty-nine weeks ended October 31,
1998, compared to a net loss of $18.5 million for the same period of the
prior year. Net earnings, excluding merger and business integration costs,
other charges and related tax benefits, on a comparable basis, decreased to
$7.8 million, or $0.37 per diluted share, for the thirty-nine weeks ended
October 31, 1998, compared to $9.3 million, or $0.44 per diluted share, for
the thirty-nine weeks ended November 1, 1997.
Year 2000 Issues
- ----------------
In 1997, the Company implemented a comprehensive risk-based program to
assure that both its information technology ("IT") and non-IT systems are
Year 2000 compliant. The Company's compliance program includes various
initiatives, including conducting an inventory and identification of all
Year 2000-sensitive components of the Company's IT and non-IT systems
(including hardware, software, security, and telecommunications),
requesting compliance status statements from the Company's business
partners, suppliers and vendors, and testing of new and existing systems.
The inventory and identification of Year 2000 IT issues is now largely
complete. Many Year 2000 IT issues have been or are expected to be
resolved through hardware and software updates and upgrades undertaken for
other reasons. As part of the Company's ongoing IT upgrade plans, the
Company recently completed the conversion of its store point of sale
systems to a Year 2000 compliant version at a cost of approximately $20
million, which has been capitalized and will be depreciated over the
components' estimated useful lives. This conversion, although not
undertaken specifically for Year 2000 purposes, was accelerated in order to
achieve Year 2000 compliance in this critical area. With respect to non-IT
systems, the Company has nearly completed the inventory and assessment of
its embedded systems contained in the corporate offices, distribution
centers and store locations. This assessment is focusing principally on
the Company's telecommunications system hardware and software and security
systems. The amount of other expenditures for updates and upgrades that
relate specifically to Year 2000 compliance is not separable from the
total, but is not believed to be a material amount. The remaining Year
2000 compliance activities are expected to be substantially completed by
mid-1999.
For certain of the Company's key suppliers, such as pet food suppliers, the
disruption of product deliveries would have a material adverse impact on
the Company's results of operations. The Company is actively extending its
relationships with these suppliers to include joint Year 2000 risk
assessments, remedial actions, and contingency plans in the event of non-
compliance. Contingency plans may include backup manual ordering
procedures and inventory buildup by the Company prior to December 31, 1999.
Any additional inventory buildup by the Company would generate unfavorable
cash flows and inventory valuation exposures of uncertain amount and
duration.
<PAGE> 12
The Company does not expect the cost of its Year 2000 compliance program to
be material to its business, results of operations, or financial condition.
There can be no assurance, however, that the Company's assessment of the
impact of Year 2000 is complete and that further analysis and study, as
well as the testing and implementation of planned solutions, will not
reveal the need for additional remedial work. The Company is potentially
vulnerable to mistakes made by key suppliers of products and services in
their advice to the Company with respect to their Year 2000 readiness, as
well as to operational difficulties in the Company's corporate offices,
distribution centers or store locations, the financial magnitude of which
cannot currently be estimated.
The foregoing statements as to the Company's Year 2000 efforts are forward
looking and are made in reliance on the safe harbor provisions discussed
under the caption "Certain Cautionary Statements," below.
New Accounting Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130") and No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. SFAS 131 establishes standards for the manner in
which public business enterprises report information about operating
segments. SFAS 130 and SFAS 131 are effective in fiscal 1998 for the
Company and only require additional informational disclosure, if
applicable.
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 October 31, 1998, total assets were $399.3 million, $141.5 million of
which were current assets. Net cash provided by operating activities was
$7.2 million for the thirty-nine weeks ended October 31, 1998, compared
with net cash used in operating activities of $5.4 million for the prior
year period. 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
also used cash for a limited partnership interest with a Canadian company
that currently operates four pet superstores in western Canada, with plans
to open three additional stores.
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 $52.5 million for the thirty-nine weeks
ended October 31, 1998, and $44.0 million for the prior year period.
The Company also finances some of its purchases of equipment and fixtures
through capital lease and other obligations. Purchases of $11.6 and $0.7
million of fixed assets were financed in this manner during the thirty-nine
weeks ended October 31, 1998, and November 1, 1997, respectively. The
Company believes that 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.
<PAGE> 13
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 $45.0
million in the thirty-nine weeks ended October 31, 1998, and $8.3 million
in the prior year period. Cash flows from financing activities were used
to finance the acquisition of related businesses and fund the Company's
expansion program and working capital requirements.
The Company has a credit facility with a syndicate of banks with a
commitment of up to $110.0 million that expires January 30, 2003. The
credit facility provides for $80.0 million in revolving loans and a $30.0
million term loan. Borrowings under the credit facility are unsecured and
bear interest, at the Company's option, at the agent bank's corporate base
rate or LIBOR plus 0.50% to 1.50%, based on the Company's leverage ratio at
the time. The credit agreement contains certain affirmative and negative
covenants related to indebtedness, interest and fixed charges coverage, and
consolidated net worth. As of October 31, 1998, the Company had $27.1
million of revolving loans available under the credit facility.
As of January 31, 1998, the Company had available net operating loss
carryforwards of $39.2 million for federal income tax purposes, which begin
expiring in 2004, and $36.4 million for state income tax purposes, which
begin expiring in 1998.
The Company anticipates that funds generated by operations, funds available
under the 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 the
next twelve months.
Certain Cautionary Statements
- -----------------------------
Certain statements in this Quarterly Report on Form 10 - Q, including, but
not limited to, Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, Section 21E of the Securities Act of 1934, as amended, and the
Private Securities Litigation Reform Act of 1995, that are not historical
facts but rather reflect current expectations concerning future results and
events. The words "believes," "expects," "intends," "plans,"
"anticipates," "likely," "will," and similar expressions identify such
forward-looking statements. These forward-looking statements are subject
to risks, uncertainties, and other factors, some of which are beyond the
Company's control that could cause actual results to differ materially from
those forecast or anticipated in such forward-looking statements. These
factors include, but are not limited to, the Company's expansion plans, the
integration of operations as a result of acquisitions, reliance on vendors
and product lines and exclusive distribution arrangements, competition,
performance of new superstores and their future operating results,
quarterly and seasonal fluctuations, dependence on senior management, and
possible volatility of stock price. These factors are discussed in greater
detail under the caption "Certain Cautionary Statements" in PETCO's Annual
Report on Form 10-K for the year ended January 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
<PAGE> 14
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United
States District Court for the Southern District of California between
August and November, 1998. These cases have recently been consolidated and
will be administered as one case. The plaintiffs purport to represent a
class of all persons who purchased the Company's common stock between
January 30, 1997 and February 23, 1998. The complaints allege that the
defendants violated various federal securities laws through material
misrepresentations and omissions during the class period, and seek
unspecified monetary damages. The Company believes the allegations
contained in these lawsuits are without merit. The Company and its
officers intend to defend themselves vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
(a) 27.1 Financial Data Schedule (filed electronically only)
2. Reports on Form 8-K
(a) The Company filed a report on Form 8-K on September 22,
1998, relating to the Company's Shareholder Rights Plan.
<PAGE> 15
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
------------------
James M. Myers
Senior Vice President and
Chief Financial Officer
Date: December 15, 1998
[ARTICLE] 5
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 9-MOS 9-MOS
[FISCAL-YEAR-END] JAN-31-1998 JAN-30-1999
[PERIOD-END] NOV-01-1997 OCT-31-1998
[CASH] 3,828 3,001
[SECURITIES] 0 0
[RECEIVABLES] 13,210 11,811
[ALLOWANCES] 0 0
[INVENTORY] 98,993 111,721
[CURRENT-ASSETS] 118,897 141,540
[PP&E] 132,092 188,003
[DEPRECIATION] 0 0
[TOTAL-ASSETS] 323,134 399,280
[CURRENT-LIABILITIES] 111,819 113,267
[BONDS] 0 0
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 2 2
[OTHER-SE] 180,565 176,075
[TOTAL-LIABILITY-AND-EQUITY] 323,134 399,280
[SALES] 538,143 598,399
[TOTAL-REVENUES] 538,143 598,399
[CGS] 401,433 451,426
[TOTAL-COSTS] 401,433 451,426
[OTHER-EXPENSES] 161,879 158,260
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 2,056 4,529
[INCOME-PRETAX] (27,225) (15,816)
[INCOME-TAX] (8,698) (5,639)
[INCOME-CONTINUING] 0 0
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] (18,527) (10,177)
[EPS-PRIMARY] (0.90) (0.48)
[EPS-DILUTED] (0.90) (0.48)
</TABLE>
