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 August 1, 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 September 11, 1998 21,074,278
<PAGE> 2
PETCO Animal Supplies, Inc.
Form 10-Q
For the Quarter Ended August 1, 1998
Index
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 31, 1998
and August 1, 1998 3
Consolidated Statements of Operations for the thirteen and
twenty-six week ended August 2, 1997 and August 1, 1998 4
Consolidated Statements of Cash Flows for the twenty-six
weeks ended August 2, 1997 and August 1, 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 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE> 3
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<S> <C> <C>
January 31, August 1,
1998 1998
----------- -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 3,354 $ 3,669
Receivables 10,879 13,293
Inventories 96,873 104,489
Deferred tax assets 8,354 8,354
Other 4,942 4,532
----------- -----------
Total current assets 124,402 134,337
Fixed assets, net 147,429 172,017
Goodwill 39,348 38,038
Deferred tax assets 17,885 22,571
Other assets 6,131 8,478
----------- -----------
$335,195 $375,441
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,794 $ 54,372
Accrued expenses 21,558 25,860
Accrued salaries and employee benefits 9,242 7,975
Current portion of long-term debt 3,375 3,375
Current portion of capital lease and
other obligations 5,073 4,615
----------- -----------
Total current liabilities 91,042 96,197
Long-term debt, excluding current portion 26,625 72,875
Capital lease and other obligations,
excluding current portion 11,369 8,724
Accrued store closing costs 11,189 9,971
Deferred rent 8,913 9,751
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 270,755 270,949
Accumulated deficit (84,700) (93,028)
----------- -----------
Total stockholders' equity 186,057 177,923
----------- -----------
$335,195 $375,441
=========== ===========
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 Twenty-six weeks ended
--------------------- ----------------------
August 2, August 1, August 2, August 1,
1997 1998 1997 1998
--------- --------- --------- ---------
Net sales $ 175,460 $ 197,318 $ 346,369 $ 393,614
Cost of sales and
occupancy costs 130,371 148,975 259,879 298,596
--------- --------- --------- ---------
Gross profit 45,089 48,343 86,490 95,018
Selling, general, and
administrative
expenses 38,531 47,524 77,228 88,152
Merger and business
integration costs 9,441 10,949 9,441 17,334
--------- --------- --------- ---------
Operating loss ( 2,883) (10,130) (179) (10,468)
Interest expense, net 651 1,424 1,173 2,546
--------- --------- --------- ---------
Loss before
income taxes (3,534) (11,554) (1,352) (13,014)
Income taxes (benefit) (722) (4,293) 162 (4,686)
--------- --------- --------- ---------
Net loss $ (2,812) $ (7,261) $ (1,514) $ (8,328)
========= ========= ========= =========
Basic and diluted loss per
Common share $ (0.14) $ (0.34) $ (0.07) $ (0.40)
========= ========= ========= =========
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>
Twenty-six weeks ended
----------------------
August 2, August 1,
1997 1998
---------- ----------
Cash flows from operating activities:
Net loss $ (1,513) $ (8,328)
Depreciation and amortization 11,426 14,303
Deferred taxes (1,353) (4,686)
Loss on retirement of fixed assets 1,008 1,837
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (3,616) (2,414)
Inventories (15,249) (7,616)
Other assets (853) (2,305)
Accounts payable 465 2,578
Accrued expenses 1,431 4,302
Accrued salaries and employee benefits 115 (1,267)
Accrued store closing costs 134 (1,218)
Deferred rent 743 838
---------- ----------
Net cash used in operating activities (7,262) (3,976)
---------- ----------
Cash flows from investing activities:
Additions to fixed assets (25,332) (39,050)
Net cash invested in acquisitions of businesses (6,028) --
---------- ----------
Net cash used in investing activities (31,360) (39,050)
---------- ----------
Cash flows from financing activities:
Borrowings under long-term debt agreements 3,800 48,500
Repayment of long-term debt agreements -- (2,250)
Repayment of capital lease and other obligations (2,948) (3,103)
Proceeds from the issuance of common stock 1,704 194
---------- ----------
Net cash provided by financing activities 2,556 43,341
---------- ----------
Net increase (decrease) in cash and cash equivalents(36,066) 315
Cash and cash equivalents at beginning of year 44,338 3,354
Beginning cash and cash equivalents of immaterial
pooling of interests 408 --
---------- ----------
Cash and cash equivalents at end of period $ 8,680 $ 3,669
========== ==========
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 contain all
adjustments, consisting of normal recurring adjustments, necessary to
present the financial position, results of operations and cash flows as of
August 1, 1998, and for the periods ended August 2, 1997 and August 1,
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 twenty-six weeks
ended August 2, 1997 and August 1, 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 - Acquisitions
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
prior year have been restated to include the accounts of PetCare.
A reconciliation reflecting the combination of the previously reported
results of the Company with the results of PetCare follows:
<TABLE>
<S> <C> <C>
Net Earnings
Net Sales (Loss)
------------ ------------
Thirteen weeks ended August 2, 1997:
PETCO, as previously reported $ 148,871 $ (1,862)
PetCare 26,589 (949)
------------ ------------
Combined $ 175,460 $ (2,811)
============ ============
Twenty-six weeks ended August 2, 1997:
PETCO, as previously reported $ 292,292 $ 475
PetCare 54,077 (1,988)
------------ ------------
Combined $ 346,369 $ (1,513)
============ ============
</TABLE>
In July 1997, 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. This acquisition was accounted for as a pooling of
interests with its financial position and results of operations and cash
flows included in the accompanying consolidated financial statements from
the beginning of the period in which this immaterial pooling was completed.
Previously reported financial statements have not been restated to include
results of this acquisition as revenues and results of operations prior to the
acquisition were not material to the consolidated financial results of the
Company.
<PAGE> 7
The Company recorded merger and business integration costs of $10.9 million
and $17.3 million during the thirteen and twenty-six weeks ended August 1,
1998 and $9.4 million during the thirteen and twenty-six weeks ended August
2, 1997. These costs followed the acquisitions 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.
Note 3 - Net Earnings (Loss) Per Share
The consolidated financial statements are presented in accordance with SFAS
No. 128, "Earnings per Share." Basic net earnings (loss) per common share
are computed using the weighted average number of common shares outstanding
during the period. Diluted net earnings (loss) per common share
incorporate the incremental shares issuable upon the assumed exercise of
stock options. All prior period net earnings (loss) per common share
information is presented in accordance with SFAS No. 128.
Net earnings (loss) and weighted average common shares used to compute net
earnings (loss) per share, basic and diluted, are presented below:
<TABLE>
<S> <C> <C> <C> <C>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- -----------------------
August 2, August 1, August 2, August 1,
1997 1998 1997 1998
--------- --------- --------- ---------
Net earnings (loss) $ (2,811) $ (7,261) $ (1,513) $ (8,328)
Common shares, basic 20,445 21,073 20,301 21,072
Dilutive effect of
stock options -- -- -- --
-------- --------- --------- ---------
Common shares, diluted 20,445 21,073 20,301 21,072
======== ========= ========= =========
</TABLE>
Dilutive effect of stock options of 182 and 194 shares was not included in
computing diluted earnings (loss) per share for the thirteen weeks and
twenty-six weeks ended August 1, 1998, respectively, because the effect
would have been antidilutive.
Dilutive effect of stock options of 514 and 469 shares was not included in
computing diluted earnings (loss) per share for the thirteen weeks and
twenty-six weeks ended August 2, 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
two virtually identical class action lawsuits filed in the United States
District Court for the Southern District of California on August 19, 1998
and August 26, 1998. 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 and 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 August 1, 1998, the Company operated 461 stores, including 399
superstores, in 33 states and the District of Columbia. At August 2, 1997,
the Company operated 427 stores, of which 365 were superstores.
As a result of the Company's plan to open approximately 40 superstores this
year, including conversions of existing traditional stores into superstore
formats, the timing of new superstore openings and related preopening
expenses and the amount of revenue contributed by new and existing
superstores may cause the Company's quarterly results of operations to
fluctuate. As the Company proceeds with the conversion of acquired stores
to the PETCO format, the Company anticipates this conversion process will
impact sales and operating expense relationships with adverse effects early
in the process followed by benefits to such relationships as converted
stores become supported by full marketing efforts. Increased payroll,
advertising and other store level expenses as a percentage of sales in new
stores should also contribute to lower store operating margins. In
addition, 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.
<PAGE> 9
Results of Operations
Second Quarter 1998 Compared to Second Quarter 1997
Net sales increased 12.4% to $197.3 million for the thirteen weeks ended
August 1, 1998 ("second quarter 1998") from $175.5 million for the
thirteen weeks ended August 2, 1997 ("second quarter 1997"). The increase
in net sales in second quarter 1998 resulted primarily from the addition of
43 superstores, including the conversion of five traditional stores into
superstores, the acquisition of seven traditional stores, the closing of
eleven stores, 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 $13.9 million, or 64% of the net sales increase, and $7.9
million, or 36% of the net sales increase, was attributable to the increase
in comparable store net sales.
Gross profit, defined as net sales less cost of sales including occupancy
costs, increased $3.2 million to $48.3 million in second quarter 1998 from
$45.1 million in second quarter 1997. As a percentage of sales, gross
profit decreased to 24.5% in second quarter 1998 from 25.7% in second
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 increased $9.0 million to
$47.5 million in second quarter 1998 from $38.5 million in second quarter
1997. Selling, general, and administrative expenses increased partly as a
result of higher personnel and related costs associated with new store
openings and acquisitions. As a percentage of net sales, these expenses
increased to 24.1% in second quarter 1998 from 21.9% in second quarter
1997. Included in selling, general and administrative expenses in the
second quarter 1998 is a $4.5 million charge related to the write-off of
assets in connection with the relocation of the Company's main distribution
center, as well as the replacement of point-of-sale equipment in a chain-
wide conversion of this equipment and other assets. Excluding this charge,
selling, general and administrative expenses decreased to 21.8% of net
sales in second quarter 1998 from 21.9% in second quarter 1997.
Merger and business integration costs of $10.9 million were recorded in
second 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 $9.4 million were recorded in second quarter 1997 in
connection with the acquisition and conversion activities of the stores
acquired in fiscal 1997 and fiscal 1996.
Operating loss in second quarter 1998 was $10.1 million compared to an
operating loss of $2.9 million in second quarter 1997. Excluding merger and
business integration costs and other charges, the Company would have
reported operating income of 2.7% of net sales in second quarter 1998 and
3.7% of net sales in second quarter 1997.
Net interest expense was $1.4 million for second quarter 1998 compared to
net interest expense of $0.7 million for second quarter 1997. Increased
borrowings in second quarter 1998 led to the increase in interest expense.
Income tax benefit was $4.3 million in second quarter 1998, compared to
income tax benefit of $0.7 million in second 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.
<PAGE> 10
Net loss was $7.3 million for second quarter 1998 compared with a net loss
of $2.8 million for second quarter 1997. Excluding merger and business
integration costs, other charges and related tax benefits, net earnings for
second quarter 1998 would have been $2.3 million, or $0.11 per diluted
share, compared to $3.5 million, or $0.17 per diluted share in second
quarter 1997.
Twenty-six Weeks Ended August 1, 1998 Compared to Twenty-six Weeks Ended
August 2, 1997
Net sales increased 13.6% to $393.6 million for the twenty-six weeks ended
August 1, 1998 from $346.4 million for the twenty-six weeks ended August 2,
1997. The increase in net sales resulted primarily from the addition of 43
superstores, including the conversion of five traditional stores into
superstores, the acquisition of seven traditional stores, the closing of
eleven stores in the past year, and a comparable store net sales increase
of 5.6%. 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 $31.3 million, or 66% of the net sales
increase, and $15.9 million, or 34% of the net sales increase, was
attributable to the increase in comparable store net sales.
Gross profit increased $8.5 million to $95.0 million for the twenty-six
weeks ended August 1, 1998 from $86.5 million for the same period last
year. As a percentage of net sales, gross profit decreased to 24.1% for the
twenty-six weeks ended August 1, 1998 from 25.0% 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 occupancy costs, particularly in the acquired stores
during the conversion process, contributed to this decline.
Selling, general and administrative expenses increased $11.0 million to
$88.2 million for the twenty-six weeks ended August 1, 1998 compared to
$77.2 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 increased to 22.4% for the twenty-
six weeks ended August 1, 1998 from 22.3% in the prior year period.
Included in selling, general and administrative expenses is 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,
as well as the replacement of point-of-sale equipment in a chain-wide
conversion of this equipment and other assets. Excluding this charge,
selling, general and administrative expenses decreased to 21.3% of net
sales in the twenty-six weeks ended August 1, 1998 from 22.3% in the prior
year period. This decrease resulted primarily from increased leverage of
general and administrative expense.
Merger and business integration costs of $17.3 million were recorded in the
twenty-six weeks ended August 1, 1998 in connection with the conversion
activities of the stores acquired in the last half of fiscal 1997. Merger
and business integration costs of $9.4 million were recorded in the twenty-
six weeks ended August 2, 1997 in connection with acquisition and
conversion activities of the stores acquired in fiscal 1997 and fiscal 1996.
Operating loss was $10.5 million for the twenty-six weeks ended August 1,
1998, compared to an operating loss of $0.2 million in the prior year.
Operating income, excluding merger and business integration costs and other
charges, on a comparable basis, increased to $11.3 million for the twenty-
six weeks ended August 1, 1998 from $9.2 million for the same period last
year. Operating income, excluding merger and business integration costs
and other charges, on a comparable basis, increased to 2.9% of net sales
for the twenty-six weeks ended August 1, 1998 from 2.7% for the same period
last year.
<PAGE> 11
Net interest expense was $2.5 million for the twenty-six weeks ended August
1, 1998. Net interest expense for the twenty-six weeks ended August 2, 1997
was $1.2 million. Increased borrowings in fiscal 1998 led to the increase in
interest expense.
Income tax benefit was $4.7 million in the twenty-six weeks ended August
1, 1998 compared to income taxes of $0.2 million in the prior 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 $8.3 million for the twenty-six weeks ended August 1, 1998
compared to a net loss of $1.5 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, increased 8.2% to
$5.3 million, or $0.25 per share, for the twenty-six weeks ended August 1,
1998 compared to $4.9 million, or $0.23 per share, for the twenty-six weeks
ended August 2, 1997.
Year 2000 Issues
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. In 1997,
the Company developed a compliance program to deal with the Year 2000
problem to assure that its systems are Year 2000 compliant. The Company's
compliance program includes various initiatives which are in progress,
including conducting an inventory and identification of all Year 2000-
sensitive components of the Company's systems (including hardware, software
and telecommunications), requesting compliance status statements from the
Company's business partners, suppliers and vendors, and testing all new and
existing systems. Year 2000 compliance activities are expected to be
completed in 1999. The Company does not expect that the cost of its Year
2000 compliance program will be material to its business, results of
operations, or financial condition.
There can be no assurance, however, that the initiatives put in place to
address the Year 2000 problem will identify and remove all potential
operational impacts. While significant economic detriment from Year 2000
issues is not expected, there can be no assurance that there will not be
operational difficulties in the Company's stores, warehouses or corporate
offices, the financial magnitude of which is not currently estimable.
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 require only additional informational disclosure, if
applicable.
<PAGE> 12
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 August 1, 1998, total assets were $375.4 million, $134.3 million of
which were current assets. Net cash used in operating activities was $4.0
million for the twenty-six weeks ended August 1, 1998 and $7.3 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 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 $39.1 million for twenty-six weeks ended
August 1, 1998 and $31.4 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 $0.5 million of
fixed assets were financed in this manner during the twenty-six weeks ended
August 2, 1997. 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.
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 $43.3
million in the twenty-six weeks ended August 1, 1998 and $2.6 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 August 1, 1998, the Company had $31.5
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.
<PAGE> 13
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 certain 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
two virtually identical class action lawsuits filed in the United States
District Court for the Southern District of California on August 19, 1998
and August 26, 1998. 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 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on
June 18, 1998.
(c) The matters voted upon at the meeting and the votes cast
with respect thereto were as follows:
1. Election of directors.
<TABLE>
<S> <C> <C> <C> <C>
Votes Cast Votes Broker
Nominee for Director For Withheld Abstentions Non-Votes
- -------------------- ---------- -------- ----------- ---------
Brian K. Devine 17,564,004 266,561 -- --
Peter M. Starrett 17,564,455 266,110 -- --
</TABLE>
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 no reports on Form 8-K during the
thirteen weeks ended August 1, 1998.
<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 - Finance
and Chief Accounting Officer
Date: September 15, 1998
[ARTICLE] 5
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 6-MOS 6-MOS
[FISCAL-YEAR-END] JAN-31-1998 JAN-30-1999
[PERIOD-END] AUG-2-1997 AUG-1-1998
[CASH] 8,680 3,669
[SECURITIES] 0 0
[RECEIVABLES] 11,497 13,293
[ALLOWANCES] 0 0
[INVENTORY] 99,270 104,489
[CURRENT-ASSETS] 122,937 134,337
[PP&E] 126,724 172,017
[DEPRECIATION] 0 0
[TOTAL-ASSETS] 313,030 375,441
[CURRENT-LIABILITIES] 85,924 96,197
[BONDS] 0 0
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 2 2
[OTHER-SE] 196,780 177,921
[TOTAL-LIABILITY-AND-EQUITY] 313,030 375,441
[SALES] 346,369 393,614
[TOTAL-REVENUES] 346,369 393,614
[CGS] 259,879 298,596
[TOTAL-COSTS] 259,879 298,596
[OTHER-EXPENSES] 86,669 105,486
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 1,173 2,546
[INCOME-PRETAX] (1,352) (13,014)
[INCOME-TAX] 162 (4,686)
[INCOME-CONTINUING] 0 0
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] (1,514) (8,328)
[EPS-PRIMARY] (0.07) (0.40)
[EPS-DILUTED] (0.07) (0.40)
</TABLE>
