UNITED STATES
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:
January 30, 1999 0-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 33-0479906
(State or Other Jurisdiction (I.R.S. Employer
Of Incorporation or Organization) Identification No.)
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 23, 1999, there were outstanding 21,074,305 shares of the
Registrant's Common Stock, $0.0001 par value. As of that date, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $259,087,055.
Documents Incorporated By Reference: The information called for by Part III
is incorporated by reference from the Proxy Statement relating to the 1999
Annual Meeting of Stockholders of the Registrant.
<PAGE> 1
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 January 30,
1999, the Company operated 476 stores in 37 states and the District of
Columbia. PETCO's strategy is to be 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.
Over the last few years, PETCO has expanded its store format from smaller,
traditional stores to the current superstore format. At the end of fiscal
1998, superstore square footage represented over 95% of the Company's total
square footage. 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 1998, the
Company opened or acquired 40 stores and closed 21 stores. 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 1998 refer to the fiscal
year beginning on February 1, 1998 and ending on January 30, 1999.
THE PET FOOD, SUPPLY AND SERVICES INDUSTRY
GENERAL. In 1997, retail sales in the United States of pet food, supplies,
small animals (excluding dogs and cats) and services were estimated at $21
billion. Pet food accounted for the majority of this market with an
estimated $10 billion in sales, pet supply and small animal sales were
estimated at $5 billion, while sales of pet services, which include
veterinary services, obedience training and grooming services, were
estimated at $6 billion. According to recent estimates, approximately 60
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.
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. In recent years, supermarkets' share of total pet food sales has
steadily decreased as a result of competition from superstores, warehouse
clubs, mass merchandisers and specialty pet stores as well as the growing
proportion of premium pet food sales. Premium pet food brands such as
Science Diet, Nutro and IAMS, which offer higher levels of nutrition than
non-premium brands, account for more than 25% of the total pet food market
according to recent estimates. These premium pet foods currently are not
sold through supermarkets, warehouse clubs and mass merchandisers due to
manufacturers' restrictions but are sold primarily through superstores like
PETCO, specialty pet stores, veterinarians and farm and feed stores.
<PAGE> 2
PET SUPPLIES. The market for pet supplies consists of items such as
collars and leashes, cages and habitats, toys, treats, aquatic supplies,
pet carriers, vitamins and supplements and grooming and veterinary
products. The channels of distribution for pet supplies are highly
fragmented with products sold by many types of retailers, including
supermarkets, discounters and other mass merchandisers, specialty pet
stores, direct mail and veterinarians. Superstores such as PETCO, with
wide assortments of pet supplies and higher levels of customer service,
represent a growing channel for sales of pet supplies.
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
controversial 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.
PET SERVICES. The market for pet services includes veterinary services,
obedience training and grooming services. The Company offers a range of
veterinary services at only a selected number of stores. Limited veterinary
services such as routine vaccinations are offered at a number of stores.
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 be 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.
ACQUISITIONS. A significant part of the Company's expansion strategy has
been to capitalize on the consolidation of the fragmented pet food and
supply industry. Generally, the Company has acquired established and well-
located stores or chains of stores that are similar in size and format to
the Company's existing superstores. Consistent with this strategy, the
Company has completed 19 acquisitions, representing 208 stores located in
28 states, since the Company's initial public offering in March 1994. The
Company believes that there may be further acquisition opportunities that
would allow the Company to attract new customers, enter new markets and
leverage operating costs.
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. 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.
<PAGE> 3
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 in offering value to customers through fair
prices coupled with a complete merchandise assortment.
SUPERIOR CUSTOMER SERVICE. Providing knowledgeable and friendly customer
service is a key aspect of PETCO's business strategy. PETCO seeks store
managers and sales associates who are pet owners and enthusiasts themselves
as they are better able to assist customers with their needs. PETCO
provides comprehensive training to 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 typically are open seven days a week.
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 stores are brightly illuminated with colorful fixtures
and graphics and feature prominent and attractive signage. Stores typically
feature an assortment of aquatics, 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 stores also contain a
glassed-in grooming area that allows customers to observe the grooming
process while they shop.
INNOVATIVE COMMUNITY PROGRAMS. PETCO's long-standing neighborhood
marketing programs are 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. 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, Nutro, and Science Diet, as well as
selected mass brand foods. Due to manufacturers' restrictions, premium
brands are sold exclusively through specialty pet stores and veterinarians.
The Company also offers a PetGold Masters(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.
<PAGE> 4
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, terrariums, 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.
The Company's superstores normally carry both fresh and saltwater fish. The
Company believes that its interactive small animal displays add excitement
to shopping at PETCO.
GROOMING AND OTHER SERVICES. Professional grooming is available at many of
the Company's superstores. Grooming services are typically 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 pet
apparel, calendars and 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 in offering value to customers through fair
prices coupled with a complete merchandise assortment. PETCO's large buying
volume and sophisticated distribution network allows it to compete
effectively on price. PETCO's price guarantee program offers to match all
competitors' advertised prices.
STORE DEVELOPMENT
Over the last few years, PETCO has expanded its store format from smaller,
traditional stores to the current superstore format. At the end of fiscal
1998, superstore square footage represented over 95% of the Company's total
square footage. PETCO plans 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. These prototype superstores offer
our complete merchandise assortment and, in addition, carry fish, birds,
reptiles and other small animals, and grooming services.
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 existing stores into superstores. Although the Company plans
to open superstores in the future, it will continue to operate profitable
and well-situated stores with other formats.
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.
In fiscal 1998, the Company opened or acquired 40 stores, including the
conversion of 9 stores into superstores, and closed 12 stores.
<PAGE> 5
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.
PETCO purchases most of its merchandise directly from specialty suppliers and
manufacturers of national brands. The Company purchases the majority of its
pet food products from three vendors; Iams, Nutro, and Science Diet, the first
of which supplied products that accounted for more than 10% and less than 15%
of the Company's sales in fiscal 1998. While the Company does not maintain
long-term supply contracts with any of its vendors, PETCO believes that it
enjoys a favorable and stable relationship with each of these vendors.
PETCO currently operates three central and five regional distribution
centers. The central distribution centers are located in Mira Loma,
California; Dayton, New Jersey; and Joliet, Illinois. 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 central distribution facilities 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 three different segments: (i) mass merchants,
including supermarkets, (ii) single store and conventional pet shops and
(iii) specialty pet supply chains. Many of the premium pet food brands
offered by the Company, such as Iams, 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. 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 has been characterized in recent years by
the consolidation of a number of pet supply chains. This consolidation has
been accomplished through the acquisition of independent pet stores by
larger specialty pet supply 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 numerous service marks and trademarks with the
United States Patent and Trademark Office. 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.
<PAGE> 6
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 January 30, 1999, the Company employed approximately 9,300
associates, of whom approximately 4,500 were employed full-time.
Approximately 92% of the Company's employees were employed in stores or in
direct field supervision, approximately 4% 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, including, but not limited to,
Item 7 - "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. Such risks, uncertainties
and other factors include, but are not limited to, the following:
<PAGE> 7
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 previously opened stores in new markets and
plans to open additional stores in new markets. The performance of new or
existing 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 Senior Credit Facility (the "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 accommodate store and sales growth beyond
fiscal 1999. 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. Operations of
acquired companies must be integrated and combined efficiently for the
Company to realize the anticipated benefits of its acquisitions. There can
be no assurance that the integration process has been successful or that
the anticipated benefits of these acquisitions will be fully realized. For
example, in fiscal 1998 the Company experienced disappointing results from
some of the stores it acquired in fiscal 1997. The dedication of management
resources to acquisitions may detract attention from the day-to-day
business of the Company. The difficulties of integration are increased by
the necessity of coordinating geographically separated organizations,
integrating personnel with disparate business backgrounds and combining
different corporate cultures and accounting and computer systems. There can
be no assurance that the Company will achieve expected 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 1996, 1997 and 1998, merger
and business integration costs of $37.2 million, $38.7 million, and $23.0
million, respectively, were recorded by the Company in connection with
acquisition activities. These costs include transaction costs, costs
attributable to lease cancellation and closure of duplicate or inadequate
facilities and activities, reformatting, facility conversion and other
integration costs, severance, and other costs. The Company may make
additional acquisitions in the future, which may result in additional costs.
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,
additional debt and contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, which could materially adversely
affect the Company's profitability.
<PAGE> 8
RELIANCE ON VENDORS AND PRODUCT LINES AND EXCLUSIVE DISTRIBUTION
ARRANGEMENTS. The Company purchases significant amounts of products from
three key vendors, Iams, Nutro, and Science Diet, the first of which
supplied products that accounted for more than 10% and less than 15% of the
Company's sales in fiscal 1998. 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 widely
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 effect on the Company.
COMPETITION. The pet food and supply retailing industry is highly
competitive. The Company competes with a number of pet superstore chains,
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 net sales increases were
16.1%, 11.5%, and 6.4% for fiscal 1996, 1997 and 1998, respectively. The
Company anticipates that its rate of comparable stores sales growth may be
lower in future periods than the growth rates previously experienced due to
maturation of the existing store base and the effects of opening additional
stores in existing markets. 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 seasonal
fluctuation. Historically, the Company has realized a higher portion of its
net sales during the month of December than during the other months of the
year.
<PAGE> 9
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 the past, the market
price of the Company's stock has responded to changes in outside analysts'
expectations, stock market movements relating to retailers particularly,
and to general stock market fluctuations. 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. The
Company is currently involved in stockholder class action litigation
precipitated by a sudden drop in the price of the Company's common stock.
See "Legal Proceedings." Management believes that future fluctuations in
the market value of the Company's common stock may trigger further
litigation. Defending the Company in such stockholder class action
litigation is costly, and the outcome is unpredictable.
Readers are cautioned not to place undue reliance on forward-looking
statements which reflect management's view only as of the date of this
Annual Report. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
<PAGE> 10
ITEM 2. PROPERTIES
The Company leases substantially all of its store and warehouse locations.
Original lease terms for the Company's 476 stores generally range from five
to twenty years, many of which contain renewal options. Leases on 124
stores expire within the next three years, with leases on 85 of these
stores containing renewal options.
The table below shows the location and number of the Company's stores as of
January 30, 1999.
<TABLE>
Location Stores
- - ------------------ ------
<S> <C>
Alabama 2
Arizona 13
Arkansas 2
California 133
Colorado 8
Connecticut 12
Delaware 1
District of Columbia 1
Idaho 2
Illinois 46
Indiana 2
Iowa 6
Kansas 8
Kentucky 1
Louisiana 1
Maryland 7
Massachusetts 18
Michigan 7
Minnesota 18
Missouri 13
Montana 1
Nebraska 5
Nevada 5
New Hampshire 4
New Jersey 14
New Mexico 1
New York 16
North Dakota 2
Ohio 3
Oregon 13
Pennsylvania 18
Rhode Island 1
South Dakota 1
Tennessee 5
Texas 41
Virginia 9
Washington 27
Wisconsin 9
---
476
===
</TABLE>
<PAGE> 11
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 200,000 square feet of space
in Arlington, Texas; Stockton, California; Portland, Oregon; New Hope,
Minnesota; and Mansfield, Massachusetts under leases which expire in August
1999, April 2001, February 2002, September 2002, and December 2003,
respectively. The Company's three central distribution centers collectively
occupy approximately 800,000 square feet of space in Dayton, New Jersey;
Joliet, Illinois; and Mira Loma, California under leases which expire in
June 2002, April 2005, and September 2005, respectively. Each of the
distribution center leases contains a renewal option.
ITEM 3. 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 July 10, 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.
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 January 30, 1999.
ITEM 4.1. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
Name Age Position
- - -------------------- --- -----------------------------------------------
<S> <C> <C>
Brian K. Devine 57 Chairman, President and Chief Executive Officer
Bruce C. Hall 54 Executive Vice President - Operations
Janet D. Mitchell 43 Senior Vice President - Human Resources and
Administration
James M. Myers 41 Senior Vice President and
Chief Financial Officer
William M. Woodard 50 Senior Vice President - Store Operations
</TABLE>
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.
<PAGE> 12
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.
JANET D. MITCHELL, Senior Vice President, Human Resources and
Administration, joined the Company in February 1989. From 1981 to 1989, Ms.
Mitchell held various management positions in human resources with the
Southland Corporation's 7-Eleven division. From 1978 to 1981, Ms. Mitchell
held various positions with the El Torito Restaurant chain. Ms. Mitchell
received a bachelor's degree from California State University, San Diego.
JAMES M. MYERS, Senior Vice President and Chief Financial Officer, joined
the Company in May 1990. From 1996 to 1998, Mr. Myers served as Senior Vice
President, Finance and prior to that as Vice President, Finance and 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.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.0001 par value, is quoted on the Nasdaq
National Market under the symbol "PETC." Public trading of the common stock
commenced on March 17, 1994. 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:
<TABLE>
High Low
------ ------
FISCAL 1997
<S> <C> <C>
First Quarter $28.25 $19.00
Second Quarter 30.75 19.63
Third Quarter 33.00 26.25
Fourth Quarter 31.13 19.50
FISCAL 1998
First Quarter $25.00 $13.13
Second Quarter 21.13 9.75
Third Quarter 10.63 5.38
Fourth Quarter 11.25 7.75
</TABLE>
On April 23, 1999, there were 782 stockholders of record of the Company's
common stock.
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.
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share and operating data)
The following table sets forth selected consolidated financial and
operating data for the Company for the five-year period ended January 30,
1999. The selected consolidated financial data presented below under the
caption "Income Statement Data" for the year ended 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 years ended February 1, 1997 and January 31, 1998. The selected
consolidated financial data presented below under the caption "Income
Statement Data" for the four-year period ended January 30, 1999 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 28, 1995 and February
3, 1996 is derived from the unaudited consolidated financial statements of
the Company and its subsidiaries as restated to reflect the poolings of
interests during the years ended February 1, 1997 and January 31, 1998. The
selected consolidated financial data presented below under the caption
"Balance Sheet Data" as of February 1, 1997, January 31, 1998 and January
30, 1999 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 January 30, 1999 and for each of the years in
the three-year period ended January 30, 1999 and the independent auditors'
report thereon, included and incorporated by reference elsewhere in this
Annual Report.
<TABLE>
Historical
-----------------------------------------------------
Fiscal Year Ended
-----------------------------------------------------
Jan. 28, Feb 3, Feb. 1, Jan. 31, Jan. 30,
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $313,809 $443,585 $600,637 $749,789 $839,622
Cost of sales and occupancy costs 234,400 337,873 446,315 553,566 624,818
-------- -------- -------- -------- --------
Gross profit 79,409 105,712 154,322 196,223 214,804
Selling, general and
administrative expenses 75,416 101,760 132,745 173,667 187,938
Merger and business integration costs -- 9,196 37,208 38,693 22,963
-------- -------- -------- -------- --------
Operating income (loss) 3,993 (5,244) (15,631) (16,137) 3,903
Loss on disposal of stores -- 3,500 -- -- --
Interest expense, net 1,080 71 600 2,530 6,718
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes 2,913 (8,815) (16,231) (18,667) (2,815)
Income taxes (benefit) (1) 1,969 (14,601) (4,075) (5,486) (438)
-------- -------- -------- -------- --------
Net earnings (loss) $ 944 $ 5,786 $(12,156) $(13,181) $ (2,377)
======== ======== ======== ======== ========
Net earnings (loss) per
common share, basic $0.08 $0.36 $(0.63) $(0.64) $(0.11)
Net earnings (loss) per
common share, diluted $0.08 $0.35 $(0.63) $(0.64) $(0.11)
Weighted average common
shares outstanding, basic 11,373 16,147 19,426 20,646 21,073
Weighted average common
shares outstanding, diluted 11,390 16,427 19,426 20,646 21,073
OPERATING DATA:
Total stores open end of period 288 353 413 457 476
Aggregate gross square footage 2,047,078 3,169,472 4,435,019 5,299,535 5,637,708
Average net sales per store (2) $ 974,000 $1,183,000 $1,438,000 $1,696,000 $1,811,000
Average net sales per
gross square foot (3) $ 153 $ 168 $ 162 $ 158 $ 157
Percentage increase in
comparable store net sales 18.5% 16.5% 16.1% 11.5% 6.4%
BALANCE SHEET DATA:
Working capital $ 31,918 $ 29,064 $ 59,928 $ 33,360 $ 39,316
Total assets 126,918 214,498 312,617 335,195 387,135
Long-term debt,
excluding current portion -- -- -- 26,625 65,375
Capital lease and other obligations,
excluding current portion 5,779 13,334 15,581 11,369 20,982
Total stockholders' equity 48,397 130,040 196,499 186,057 183,841
</TABLE>
- - --------------------
(1) Includes $11.8 million benefit from previously unrecognized deferred
tax assets in fiscal 1995.
(2) Calculated using net sales divided by the number of stores open,
weighted by the number of months stores are open during the period.
(3) Calculated using net sales divided by gross square footage of stores
open, weighted by the number of months stores are open during the period.
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Over the past few years, PETCO has expanded its store format from smaller,
traditional stores to the current superstore format. At the end of fiscal
1998, superstore square footage represented over 95% of the Company's total
square footage. PETCO plans to open superstores in the future and follows a
strategy of converting and expanding its existing store base to conform to
the superstore format. As a result of this strategy, the Company has opened
and acquired superstores, has expanded and relocated smaller stores into
superstores and has closed underperforming stores. 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 1996 the Company completed two acquisitions of retailers of
pet food and supplies which were accounted for as purchases. The Company
also acquired three retailers of pet food and supplies which operated under
the trade names Pet Nosh, with eight stores in the New York area, PETS USA
with four stores in Colorado, and Pet Food Warehouse with 32 stores in the
Upper Midwestern states. These acquisitions were accounted for as poolings
of interests.
During fiscal 1997 the Company completed four acquisitions of retailers of
pet food and supplies, operating 22 stores which were accounted for as
immaterial poolings of interests. The Company also acquired a retailer that
operated 82 pet food and supply stores under the trade name PetCare located
in 10 Midwestern and Southern states which was accounted for as a pooling
of interests.
During fiscal 1998 the Company completed two acquisitions of retailers of
pet food and supplies operating four stores in transactions accounted for
as purchases.
All results of operations have been restated to reflect the poolings of
interests and to reflect the purchase transactions from their respective
acquisition dates. Results of operations from immaterial poolings are
reflected from the beginning of the period from which these acquisitions
were consummated. (See footnote 2 to the consolidated financial
statements).
At January 30, 1999, the Company operated 476 stores in 37 states and the
District of Columbia.
<PAGE> 15
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>
Feb. 1, Jan. 31, Jan. 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy costs 74.3 73.8 74.4
----- ----- -----
Gross profit 25.7 26.2 25.6
Selling, general and administrative expenses 22.1 23.2 22.4
Merger and business integration costs 6 .2 5.2 2.7
----- ----- -----
Operating income (loss) (2.6) (2.2) 0.5
Interest expense, net 0.1 0.3 0.8
----- ----- -----
Earnings (loss) before income taxes (2.7) (2.5) (0.3)
Income taxes (benefit) (0.7) (0.7) (0.0)
----- ----- -----
Net earnings (loss) (2.0) (1.8) (0.3)
===== ===== =====
</TABLE>
FISCAL YEAR ENDED JANUARY 30, 1999 COMPARED WITH FISCAL YEAR ENDED JANUARY
31, 1998
NET SALES increased 12.0% to $839.6 million in fiscal 1998 from $749.8
million in fiscal 1997. The increase in net sales in fiscal 1998 resulted
primarily from the addition of 40 stores, including the conversion of 9
stores into superstores, the closing of 12 stores, and a comparable store
net sales increase of 6.4%. 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 $48.0 million, or 53.5% of the net
sales increase, and $41.8 million, or 46.5% 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 $18.6 million, or 9.5%, to $214.8 million in
fiscal 1998 from $196.2 million in fiscal 1997. Gross profit as a
percentage of net sales decreased to 25.6% in fiscal 1998 from 26.2% in
fiscal 1997. 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 $14.2 million, or
8.2%, to $187.9 million in fiscal 1998 from $173.7 million in fiscal 1997.
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 22.4% in fiscal 1998 from 23.2% in fiscal 1997. Included in
selling, general and administrative expenses in fiscal 1998 are a $1.4
million charge for severance and legal costs related to the Company's
management realignment and a $4.5 million charge 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. Selling, general
and administrative expenses in fiscal 1997 included charges of $11.0
million related to the acquisition of PetCare. Excluding these charges,
these expenses were unchanged at 21.7% in both fiscal 1998 and fiscal 1997.
<PAGE> 16
MERGER AND BUSINESS INTEGRATION COSTS of $23.0 million were recorded in
fiscal 1998 in connection with the conversion activities of the stores
acquired in the last half of fiscal 1997. These costs consisted of $0.5
million of transaction costs, $2.0 million of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $19.1 million of reformatting, facility conversion and other
integration costs and $1.4 million of severance and other costs. In fiscal
1997, merger and business integration costs of $38.7 million were recorded
in connection with acquisition activities. These costs consisted of $4.5
million of transaction costs, $17.8 million of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $12.2 million of reformatting, facility conversion and other
integration costs and $4.2 million of severance and other costs.
OPERATING INCOME was $3.9 million in fiscal 1998 compared with an operating
loss of $16.1 million in fiscal 1997. Excluding merger and business
integration costs and other charges, on a comparable basis, the Company
would have reported operating income of $32.8 million or 3.9% of net sales
in fiscal 1998 and $33.6 million or 4.5% of net sales in fiscal 1997.
NET INTEREST EXPENSE was $6.7 million in fiscal 1998 compared with net
interest expense of $2.5 million in fiscal 1997. Increased borrowings in
fiscal 1998 led to the increase in interest expense.
INCOME TAX BENEFIT was $0.4 million in fiscal 1998 compared with income tax
benefit of $5.5 million in fiscal 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 $2.4 million in fiscal 1998 compared with net loss of $13.2
million in fiscal 1997. Excluding merger and business integration costs and
related charges and tax benefits, net earnings for fiscal 1998 would have
been $15.6 million, or $0.74 per diluted share, compared with $18.6
million, or $0.88 per diluted share in fiscal 1997.
FISCAL YEAR ENDED JANUARY 31, 1998 COMPARED WITH FISCAL YEAR ENDED FEBRUARY
1, 1997
NET SALES increased 24.8% to $749.8 million in fiscal 1997 from $600.6
million in fiscal 1996. The increase in net sales in fiscal 1997 resulted
primarily from the addition of 64 stores, including the conversion of 10
stores into superstores, the closing of 10 stores, and a comparable store
net sales increase of 11.5%. 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 $103.2 million, or 69.2%
of the net sales increase, and $46.0 million, or 30.8% 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 $41.9 million, or 27.2%, to $196.2 million in
fiscal 1997 from $154.3 million in fiscal 1996. Gross profit as a
percentage of net sales increased to 26.2% in fiscal 1997 from 25.7% in
fiscal 1996. This increase reflected greater purchasing leverage during the
period.
<PAGE> 17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $41.0 million, or
30.9%, to $173.7 million in fiscal 1997 from $132.7 million in fiscal 1996.
Selling, general and administrative expenses increased primarily as a
result of higher personnel and related costs associated with new store
openings. Selling, general and administrative expenses in fiscal 1997
included charges of $11.0 million related to the acquisition of PetCare.
Excluding these charges, these expenses decreased as a percentage of net
sales to 21.7% in fiscal 1997 from 22.1% in fiscal 1996 due to net sales
increasing at a greater rate than related expenses.
MERGER AND BUSINESS INTEGRATION COSTS of $37.2 million were recorded in
fiscal 1996 following acquisition activities. These costs 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. In fiscal
1997, merger and business integration costs of $38.7 million were recorded
following acquisition activities. These costs consisted of $4.5 million of
transaction costs, $17.8 million of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $12.2 million of reformatting, facility conversion and other
integration costs and $4.2 million of severance and other costs.
OPERATING LOSS of $16.1 million was incurred in fiscal 1997 compared with
operating loss of $15.6 million in fiscal 1996. Excluding merger and
business integration costs and the $11.0 million in charges related to the
PetCare acquisition, the Company would have reported operating income of
4.5% of net sales in fiscal 1997 and 3.6% in fiscal 1996.
NET INTEREST EXPENSE was $2.5 million in fiscal 1997 compared with net
interest expense of $0.6 million in fiscal 1996. Increased borrowings in
fiscal 1997 led to the increase in interest expense.
INCOME TAX BENEFIT was $5.5 million in fiscal 1997 compared with income tax
benefit of $4.1 million in fiscal 1996. 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 $13.2 million in fiscal 1997 compared with net loss of $12.2
million in fiscal 1996. Excluding merger and business integration costs and
related charges and tax benefits, net earnings for fiscal 1997 would have
been $18.6 million, or $0.88 per diluted share, compared with $12.6
million, or $0.63 per diluted share in fiscal 1996.
QUARTERLY DATA
The following tables set forth the unaudited quarterly results of
operations for fiscal 1997 and fiscal 1998. 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.
<PAGE> 18
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>
Fiscal Quarter Ended
------------------------------------------
May 3, Aug. 2, Nov. 1, Jan. 31,
Fiscal 1997 1997 1997 1997 1998
- - ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 170,909 $ 175,460 $ 191,775 $ 211,645
Gross profit 41,401 45,089 50,221 59,512
Operating income (loss) 2,704 (2,884) (24,989) 9,032
Net earnings (loss) 1,297 (2,811) (17,013) 5,346
Net earnings (loss) per share,
basic and diluted $ 0.06 $ (0.14) $ (0.81) $ 0.25
Stores open at end of period 420 427 451 457
Aggregate gross square footage 4,564,145 4,759,811 5,132,350 5,299,535
Percentage increase in
comparable store net sales 14.0% 12.4% 10.2% 10.2%
</TABLE>
<TABLE>
Fiscal Quarter Ended
------------------------------------------
May 2, Aug. 1, Oct. 31, Jan. 30,
Fiscal 1998 1998 1998 1998 1999
- - ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 196,296 $ 197,318 $ 204,785 $ 241,223
Gross profit 46,676 48,343 51,955 67,830
Operating income (loss) (338) (10,130) (819) 15,190
Net earnings (loss) (1,068) (7,261) (1,849) 7,801
Net earnings (loss) per share,
basic and diluted $ (0.05) $ (0.34) $ (0.09) $ 0.37
Stores open at end of period 458 461 467 476
Aggregate gross square footage 5,328,996 5,420,586 5,602,596 5,637,708
Percentage increase in
comparable store net sales 5.7% 5.4% 5.0% 8.7%
</TABLE>
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 and non-IT issues is now
largely complete. Many Year 2000 IT issues have been resolved through
hardware and software updates and upgrades undertaken for other reasons. As
part of the Company's ongoing IT upgrade plans, in fiscal 1998 the Company
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.
<PAGE> 19
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, which are expected to be substantially
completed by mid-1999, 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.
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. The
Company is also potentially vulnerable to operational difficulties in the
Company's corporate offices, distribution centers or store locations,
including the risk of power and water outages and the potential failure of
credit card and check authorization systems. The financial magnitude of these
risks cannot currently be estimated.
The foregoing statements as to the Company's Year 2000 efforts are forward
looking and, along with all other forward-looking statements herein, are
made in reliance on the safe harbor provisions discussed under the caption
"Certain Cautionary Statements" in Item 1, above.
NEW ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"(the
"Statement"). The Statement establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet
as either an asset or liability measured at its fair value. The Statement
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
The Statement is effective for fiscal years beginning after June 15, 1999
and is not expected to have a material impact on the Company's consolidated
financial statements.
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 January 30, 1999, total assets were $387.1 million, $137.5 million of
which were current assets. Net cash provided by (used in) operating
activities was $(0.6) million, $14.5 million, and $27.9 million for fiscal
1996, 1997 and 1998, 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.
<PAGE> 20
The Company uses cash in investing activities primarily to acquire stores,
purchase fixed assets for new and converted stores and, to a lesser extent,
to purchase warehouse and office fixtures, equipment and computer hardware
and software in support of its distribution and administrative functions.
During fiscal 1998 the Company invested $4.9 million in a limited
partnership that operates retail pet food and supply stores in Canada and
made loans of $6.5 million to a limited partner in the limited partnership.
Cash used in investing activities was $51.6 million, $69.5 million and
$62.3 million for fiscal 1996, 1997 and 1998, respectively.
The Company also finances some of its purchases of equipment and fixtures
through capital lease and other obligations. Purchases of $8.0 million,
$1.3 million and $20.3 million of fixed assets were financed in this manner
during fiscal 1996, 1997 and 1998, 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 1996, the Company completed two acquisitions of retailers of
pet food and supplies in purchase transactions. The aggregate fair 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, of which $6.0 million was expended in fiscal 1997.
During fiscal 1998, the Company completed two acquisitions of retailers of
pet food and supplies in purchase transactions. The aggregate fair value of
assets acquired and the net cash invested in the acquisition of these
businesses was $1.8 million.
The Company's primary long-term capital requirement is funding for the
opening or acquisition of superstores and conversion of existing stores
into superstores. Cash flows provided by financing activities were $79.4
million, $13.5 million and $33.3 million in fiscal 1996, 1997 and 1998,
respectively. In fiscal 1996, 1997, and 1998, net proceeds of $79.4
million, $2.4 million, and $0.1 million, respectively, were generated from
sales of common stock. Remaining cash flows provided by financing
activities were borrowings under long-term debt agreements, net of
repayment of long-term debt agreements and other obligations. 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 January 30, 1999, the Company had $36.8
million of revolving loans available under the credit facility.
As of January 30, 1999, the Company had available net operating loss
carryforwards of $71.2 million for federal income tax purposes, which begin
expiring in 2004, and $35.5 million for state income tax purposes, which
begin expiring in 1999.
<PAGE> 21
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 fiscal
1999.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in short-term interest rates as the Company's unsecured credit
facility utilizes a portfolio of short-term LIBOR contracts. LIBOR
contracts are fixed rate instruments for a period of between one and six
months, at the Company's discretion. The Company's portfolio of LIBOR
contracts vary in length and interest rate, such that adverse changes in
short-term interest rates could affect the Company's overall borrowing rate
when contracts are renewed. The lengths of contracts within the portfolio
are adjusted to balance the Company's working capital requirements, fixed
asset purchases and general corporate purposes. The Company continuously
evaluates the portfolio with respect to total debt, including an assessment
of the current and future economic environment.
As of January 30, 1999, the Company had $69.9 million in debt under the
credit facility. The average debt outstanding for the fiscal year was $60.4
million. Based on this average debt level, a hypothetical 10% adverse
change in LIBOR rates would increase net interest expense by approximately
$0.3 million on an annual basis, and likewise would decrease our earnings
and cash flows. The Company cannot predict market fluctuations in interest
rates and their impact on debt, nor can there be any assurance that long-
term fixed-rate debt will be available at favorable rates, if at all.
Consequently, future results may differ materially from the estimated
adverse changes in interest rates or debt availability.
The Company did not have any material foreign exchange or other significant
market risk or any derivative financial instruments at January 30, 1999.
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.
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's Proxy Statement relating to
the 1999 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 1999 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 1999 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 1999 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 Auditors' Reports 23
Consolidated Balance Sheets 25
Consolidated Statements of Operations 26
Consolidated Statements of Stockholders' Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 29
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of
this Annual Report.
<PAGE> 23
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 January 31, 1998 and January
30, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended January 30, 1999. 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 PetCare Plus,
Inc., which statements reflect total revenues constituting 17 percent for
the year ended January 25, 1997, of the related consolidated total. 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 PetCare Plus, 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 January 31, 1998 and January 30, 1999, and the
results of their operations and their cash flows for each of the years in
the three-year period ended January 30, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
San Diego, California
March 17, 1999
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
PetCare Plus, Inc.:
We have audited the accompanying balance sheets of PetCare Plus, Inc. as of
January 25, 1997 and the related statements of operations, redeemable
convertible preferred stock and stockholder's equity and cash flows for the
years ended January 25, 1997 and January 27, 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 a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PetCare Plus, Inc. as
of January 25, 1997, and the results of its operations and its cash flows
for the years ended January 25, 1997 and January 27, 1996 in conformity
with generally accepted accounting principles.
Chicago, Illinois PricewaterhouseCoopers LLP
April 16, 1997, except as to the
information presented in Note 4,
for which the date is June 10, 1997
<PAGE> 25
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,354 $ 2,324
Receivables 10,879 7,638
Inventories 96,873 104,789
Deferred tax assets (note 6) 8,354 16,769
Other 4,942 5,993
----------- -----------
Total current assets 124,402 137,513
Fixed assets (note 4):
Equipment 51,525 76,992
Furniture and fixtures 50,575 58,963
Leasehold improvements 100,151 123,761
----------- -----------
202,251 259,716
Less accumulated depreciation and amortization (54,822) (72,206)
----------- -----------
147,429 187,510
Goodwill 39,348 37,804
Deferred tax assets (note 6) 17,885 9,681
Other assets 6,131 14,627
$ 335,195 $ 387,135
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,794 $ 51,099
Accrued expenses 21,558 23,783
Accrued salaries and employee benefits 9,242 9,792
Current portion of long-term debt (note 3) 3,375 4,500
Current portion of capital lease and other
obligations (note 4) 5,073 9,023
----------- -----------
Total current liabilities 91,042 98,197
Long-term debt, excluding current portion (note 3) 26,625 65,375
Capital lease and other obligations, excluding current
portion (note 4) 11,369 20,982
Accrued store closing costs 11,189 7,005
Deferred rent 8,913 11,735
Stockholders' equity (note 5):
Common stock, $.0001 par value, 100,000 shares
authorized, 21,060 and 21,074 shares issued
and outstanding, respectively 2 2
Additional paid-in capital 270,755 270,916
Accumulated deficit (84,700) (87,077)
----------- -----------
Total stockholders' equity 186,057 183,841
Commitments and contingencies (notes 4, 5, and 8)
----------- -----------
$ 335,195 $ 387,135
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 26
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Net sales $ 600,637 $ 749,789 $ 839,622
Cost of sales and occupancy costs 446,315 553,566 624,818
---------- ---------- ----------
Gross profit 154,322 196,223 214,804
Selling, general and
administrative expenses 132,745 173,667 187,938
Merger and business
integration costs (note 2) 37,208 38,693 22,963
---------- ---------- ----------
Operating income (loss) (15,631) (16,137) 3,903
Interest income (2,179) (588) (176)
Interest expense 2,779 3,118 6,894
---------- ---------- ----------
Earnings (loss) before income taxes (16,231) (18,667) (2,815)
Income tax benefit (note 6) (4,075) (5,486) (438)
---------- ---------- ----------
Net earnings (loss) $ (12,156) $ (13,181) $ (2,377)
========== ========== ==========
Net earnings (loss) per common share,
basic and diluted $ (0.63) $ (0.64) $ (0.11)
========== ========== ==========
Basic and diluted weighted
average common shares 19,426 20,646 21,073
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 27
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Additional Total
--------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at
February 3, 1996 17,186 $ 1 $186,587 $(56,549) $130,039
Sale of common stock 2,897 1 78,698 -- 78,699
Cash in lieu of
fractional shares -- -- (5) -- (5)
Exercise of options 69 -- 670 -- 670
Issuance of stock
for services 1 -- 21 -- 21
Distributions to
shareholders (note 2) -- -- -- (769) (769)
Net loss -- -- -- (12,156) (12,156)
------ ------ -------- -------- --------
Balances at
February 1, 1997 20,153 $ 2 $265,971 $(69,474) $196,499
Beginning balance of
immaterial poolings
of interests (note 2) 613 -- 2,311 (2,045) 266
Exercise of options 293 -- 2,449 -- 2,449
Issuance of stock
for services 1 -- 24 -- 24
Net loss -- -- -- (13,181) (13,181)
------ ------ -------- -------- --------
Balances at
January 31, 1998 21,060 $ 2 $270,755 $(84,700) $186,057
Exercise of options 13 -- 143 -- 143
Issuance of stock
for services 1 -- 18 -- 18
Net loss -- -- -- ( 2,377) ( 2,377)
------ ------ -------- -------- --------
Balances at
January 30, 1999 21,074 $ 2 $270,916 $(87,077) $183,841
====== ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 28
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
-----------------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(12,156) $(13,181) $ (2,377)
Depreciation and amortization 18,089 24,289 30,382
Provision for deferred taxes (5,204) (5,391) (211)
Loss on retirement of fixed assets 4,712 5,908 1,743
Issuance of stock for services 21 24 18
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (2,348) (2,845) 3,241
Inventories (15,342) (7,992) (7,916)
Other assets (2,765) (3,378) (767)
Accounts payable 3,112 12,667 (695)
Accrued expenses 2,592 567 2,225
Accrued salaries and employee benefits 3,238 145 550
Accrued store closing costs 3,887 2,489 (1,069)
Deferred rent 1,540 1,170 2,822
-------- -------- --------
Net cash provided by (used in) operating
activities (624) 14,472 27,946
-------- -------- --------
Cash flows from investing activities:
Additions to fixed assets (46,246) (59,633) (51,689)
Investment in limited partnership -- -- (4,879)
Net cash invested in acquisitions of businesses (7,021) (6,028) (1,813)
Loan to affiliate -- -- (6,545)
Change in other assets -- (3,869) 2,622
Proceeds from sale of fixed assets 1,626 -- --
-------- -------- --------
Net cash used in investing activities (51,641) (69,530) (62,304)
-------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt agreements 5,450 28,591 43,250
Repayment of long-term debt agreements -- (10,335) (3,375)
Repayment of capital lease and other obligations (4,626) (7,221) (6,690)
Proceeds from the issuance of common stock 79,363 2,449 143
Distributions to shareholders (769) -- --
-------- -------- --------
Net cash provided by financing activities 79,418 13,484 33,328
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 27,153 (41,574) (1,030)
Cash and cash equivalents at beginning of year 17,185 44,338 3,354
Beginning cash and cash equivalents of immaterial
poolings of interests -- 590 --
-------- -------- --------
Cash and cash equivalents at end of year $ 44,338 $ 3,354 $ 2,324
======== ======== ========
Supplemental cash flow disclosures:
Interest paid on debt $ 2,792 $ 3,105 $ 6,662
Income taxes paid $ 1,854 $ 920 $ 141
Supplemental disclosure of noncash financing
activities:
Additions to capital leases $ 8,015 $ 1,268 $ 20,253
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 29
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per 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 37 states and the District of Columbia.
(b) BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
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 and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(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. All fiscal years presented
herein consisted of 52 weeks. All references to a fiscal year refer to the
fiscal year ending on the Saturday closest to January 31 of the following
year.
(d) CASH EQUIVALENTS:
The Company considers all liquid investments with original maturities
of three months or less to be cash equivalents.
(e) INVENTORIES:
Inventories are stated at the lower of cost, determined by the first-
in, first-out method, or market.
(f) PRE-OPENING COSTS:
Costs incurred in connection with opening new stores are expensed as
incurred.
(g) FIXED ASSETS:
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets,
generally three to 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 fifteen years.
(h) GOODWILL:
Goodwill represents the excess of the cost over the fair value of net
assets acquired by the Company. Goodwill is amortized using the straight-
line method over fifteen years. The Company continually reviews goodwill to
assess recoverability from future undiscounted cash flows. Accumulated
amortization at January 31, 1998 and January 30, 1999 was $6,483 and
$9,569, respectively.
<PAGE> 30
(i) OTHER ASSETS:
During 1998, the Company acquired a 47% limited partner interest in a
limited partnership (the "LP") which operates retail pet food and supply
stores in Canada. Pursuant to the terms of an option agreement, the Company
may increase its interest in the LP. The Company accounts for its
investment in the LP using the equity method and records its proportionate
share of earnings or loss according to the partnership agreement. The
Company did not record any earnings or loss for the year ended January 30,
1999. The Company's investment in the LP at January 30, 1999 was $5,862 and
is included in other assets on the accompanying consolidated balance sheet.
During 1998, the Company made a secured loan to another limited
partner in the LP. The loan bears interest at 7.5% and matures on October
1, 2003. The loan balance at January 30, 1999 was $6,545 and is included in
other assets on the accompanying balance sheet.
The remainder of other assets consists primarily of lease deposits,
non-compete agreements, debt issuance costs and prepaid expenses. Non-
compete agreements are amortized using the straight-line method 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 January 31, 1998 and January
30, 1999 was $177 and $802, respectively.
(j) 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, are charged to
operations upon the decision to close a store.
(k) 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.
(l) 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 long-term debt, other obligations and loan to affiliate
approximate fair value as the interest rates are substantially similar to
rates which could be obtained currently for similar instruments.
(m) IMPAIRMENT OF LONG-LIVED ASSETS:
The Company periodically assesses the impairment of long-lived assets
based on expectations of future undiscounted cash flows from the related
operations, and when circumstances dictate, adjusts the asset to the extent
carrying value exceeds the fair 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.
<PAGE> 31
(n) STOCK OPTIONS:
The Company accounts for stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," which recognizes compensation
expense on the grant date if the current market price of the stock exceeds
the exercise price. In 1996, the Company elected to adopt the disclosure
provisions of Statement of Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation."
(o) 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 is computed using the weighted average number of common shares
outstanding during the period. Diluted net earnings (loss) per common share
incorporates the incremental shares issuable upon the assumed exercise of
stock options.
Dilutive effect of stock options of 561, 581 and 84 shares were not
included in computing diluted loss per share for fiscal years 1996, 1997
and 1998, respectively, because the effect would have been antidilutive.
(p) COMPREHENSIVE INCOME:
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that certain items of comprehensive income
other than net earnings or loss be reported in the financial statements.
For the three years ended January 30, 1999, the Company's comprehensive
income (loss) equaled net loss.
(q) SEGMENT REPORTING:
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas and
major customers. An operating segment is defined as a component of an
enterprise that engages in business activities from which it may earn
revenues and incur expenses, and about which separate financial information
is regularly evaluated by the chief operating decision maker in deciding
how to allocate resources. All of the Company's stores are aggregated into
one reportable segment given the similarities of economic characteristics
between the operations represented by the stores and the common nature of
the products, customers and methods of distribution.
(r) RECLASSIFICATIONS:
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
2. BUSINESS COMBINATIONS
The Company acquired all of the outstanding equity securities of a retailer
with eight pet food and supply stores operated under the tradename Pet Nosh
in July 1996, a retailer with four pet food and supply stores operated
under the tradename PETS USA in October 1996, and a retailer with thirty-
two pet food and supply stores operated under the tradename Pet Food
Warehouse in December 1996, in exchange for an aggregate 2,929 shares of
common stock in transactions accounted for as poolings of interests. All
prior period financial statements have previously been restated for these
acquisitions.
<PAGE> 32
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 previously been restated to include the accounts of
PetCare.
During fiscal 1996, the Company completed two acquisitions of retailers of
pet food and supplies in transactions accounted for as purchases. The
aggregate fair 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 in fiscal 1997. The excess of the
aggregate cost over the fair value of net assets acquired was $11,293 which
was recorded as goodwill and is being amortized over fifteen years.
During fiscal 1998, the Company completed two acquisitions fo retailers of
pet food and supplies in transactions accounted for as purchases. The
aggregate fair value of assets acquired and the net cash invested in these
businesses was $1,813. The excess of the aggregate cost over the fair value
of net assets acquired was $1,539, which was 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 purchase
acquisitions during fiscal years 1996 and 1998 did not materially affect
results of operations and accordingly, pro-forma results are not presented.
In fiscal 1996, merger and business integration costs of $37,208 were
recorded in connection with acquisition activities. These costs 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.
In fiscal 1997, merger and business integration costs of $38,693 were
recorded in connection with acquisition activities. These costs consisted
of $4,470 of transaction costs, $17,790 of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $12,216 of reformatting, facility conversion and other
integration costs and $4,217 of severance and other costs.
In fiscal 1998, merger and business integration costs of $22,963 were
recorded related to fiscal 1997 acquisition activity. These costs consisted
of $522 of transaction costs, $1,995 of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and
activities, $19,088 of reformatting, facility conversion and other
integration costs and $1,358 of severance and other costs.
Distributions to shareholders reflected in the accompanying Consolidated
Statement of Stockholders' Equity reflect activities of the pooled
companies.
<PAGE> 33
3. LONG-TERM DEBT
On January 30, 1998, the Company agreed to a five year credit facility with
a syndicate of banks which provides for borrowings up to $110,000. The
credit facility provides $80,000 in revolving loans and $30,000 for a 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
effective interest rate of these borrowings at January 30, 1999 was 6.57%
to 6.75%. The credit agreement contains certain affirmative and negative
covenants related to indebtedness, interest and fixed charges coverage, and
consolidated net worth.
<TABLE>
Long-term debt consists of:
January 31, January 30,
1998 1999
---------- ----------
<S> <C> <C>
Revolving loans $ -- $43,250
Term loan 30,000 26,625
------- -------
30,000 69,875
Less current portion 3,375 4,500
------- -------
$26,625 $65,375
========= =========
</TABLE>
Annual maturities of long-term debt for the next four fiscal years are as
follows: $4,500, $7,125, $7,500 and $7,500.
4. LEASE COMMITMENTS AND OTHER OBLIGATIONS
The Company finances certain fixed assets under capital leases. There are
approximately $22,500 and $42,753 in fixed assets financed through capital
leases at January 31, 1998 and January 30, 1999, respectively. Accumulated
amortization related to these financed assets was approximately $7,500 and
$16,389 at January 31, 1998 and January 30, 1999, respectively.
The Company leases warehouse and store facilities and equipment 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 during fiscal years 1996, 1997, and 1998 were $24, $33
and $44, respectively.
At January 30, 1999, the present value of future minimum payments for
capital lease and other obligations, and minimum lease payments under
noncancelable operating leases were as follows:
<TABLE>
Capital Leases
and Other Operating
Years Obligations Leases
----- -------------- ---------
<C> <C> <C>
1999 $11,073 $ 86,198
2000 9,097 83,935
2001 7,386 79,144
2002 4,913 70,043
2003 314 64,347
Thereafter 2,315 282,977
------- --------
Total minimum payments 35,098 $666,644
========
Less amount representing interest 5,093
-------
Present value of net minimum capital
lease and other obligations payments 30,005
Less current portion of capital lease
and other obligations 9,023
-------
Capital lease and other obligations $20,982
=======
</TABLE>
Rent expense under operating leases for fiscal years 1996, 1997, and 1998
was approximately $55,023, $70,506, and $79,672, respectively.
<PAGE> 34
5. EQUITY
(a) COMMON STOCK:
All references to common share information in the accompanying
consolidated financial statements and notes reflect recognition of an April
15, 1996, three for two stock split. In June 1996, the Company's
stockholders approved an increase in the number of authorized shares to
100,000.
In 1996, the Company sold 2,897 common shares for net proceeds to the
Company of $78,699.
(b) STOCK OPTIONS:
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 common stock options to directors. 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.
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 and exercise prices under this plan were adjusted 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 1997, the Company assumed an employee stock option plan ("1989
Company Plan") from PetCare which provided for the granting of incentive
and non-qualified stock options with exercise prices equal to their fair
market values on their grant dates that became exercisable over various
periods and expire up to ten years after the date of grant. The common
shares and exercise prices under this plan were adjusted in accordance with
the terms of the merger agreement with PetCare. No further grants will be
made under this plan.
<PAGE> 35
Information regarding the stock option plans follows:
<TABLE>
1994 Company Plan 1993 Company Plan
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
February 3, 1996 690 $10.33-$18.33 $ 12.58 209 $ 8.05-$42.27 $ 19.73
Granted 333 $ 23.17 $ 23.17 41 $18.40-$23.58 $ 18.51
Exercised (50) $ 10.33 $ 10.33 -- $16.68-$19.12 $ 17.50
Cancelled (47) $10.33-$23.17 $ 20.52 (41) $ 8.05-$23.58 $ 19.13
----- -----
Outstanding at
February 1, 1997 926 $10.33-$23.17 $ 14.77 209 $14.95-$42.27 $ 19.52
Granted 645 $22.50-$30.31 $ 23.17 -- -- $ --
Exercised (164) $ 10.33 $ 10.33 (75) $15.24-$27.21 $ 20.11
Cancelled (85) $10.33-$23.17 $ 20.52 (13) $14.95-$42.27 $ 23.71
----- -----
Outstanding at
January 31, 1998 1,322 $10.33-$30.31 $ 18.89 121 $14.95-$27.73 $ 18.74
Granted 715 $17.44-$18.44 $ 17.47 -- -- $ --
Exercised (4) $10.33-$12.33 $ 12.23 (1) $18.40-$20.70 $ 18.67
Cancelled (170) $10.33-$23.17 $ 19.74 (4) $14.95-$24.73 $ 20.53
----- -----
Outstanding at
January 30, 1999 1,863 $10.33-$30.31 $ 18.28 116 $14.95-$27.73 $ 18.67
===== =====
Exercisable at
February 1, 1997 383 $ 10.33 $ 10.33 182 $14.95-$42.27 $ 19.40
Exercisable at
January 31, 1998 372 $10.33-$30.25 $ 12.55 111 $14.95-$27.73 $ 18.63
Exercisable at
January 30, 1999 512 $10.33-$30.31 $ 12.88 112 $14.95-$27.73 $ 18.65
Available for grant at
January 30, 1999 871 --
</TABLE>
<TABLE>
Directors' Plan 1989 Company Plan
------------------------------------ ------------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
February 3, 1996 11 $10.33-$12.33 $ 11.47 183 $ 7.70-$11.54 $ 9.34
Granted 3 $ 31.67 $ 31.67 5 $ 11.54 $ 11.54
Exercised -- $ -- $ -- -- $ -- $ --
Cancelled -- $ -- $ -- -- $ -- $ --
----- -----
Outstanding at
February 1, 1997 14 $10.33-$31.67 $ 15.96 188 $ 7.70-$11.54 $ 9.40
Granted 12 $21.38-$22.50 $ 21.67 -- $ 11.54 $ 11.54
Exercised -- $ -- $ -- (134) $ 7.70-$11.54 $ 9.61
Cancelled -- $ -- $ -- -- $ -- $ --
----- -----
Outstanding at
January 31, 1998 26 $10.33-$31.67 $ 18.64 54 $ 7.70-$11.54 $ 8.89
Granted 35 $ 4.78-$17.44 $ 8.60 -- $ -- $ --
Exercised -- $ -- $ -- (13) $ 11.54 $ 11.54
Cancelled -- $ -- $ -- (2) $ 11.54 $ 11.54
----- -----
Outstanding at
January 30, 1999 61 $ 4.78-$31.67 $ 13.02 39 $ 7.70-$11.54 $ 7.87
===== =====
Exercisable at
February 1, 1997 14 $10.33-$31.67 $ 15.96 107 $ 7.70-$11.54 $ 8.22
Exercisable at
January 31, 1998 26 $10.33-$31.67 $ 18.64 54 $ 7.70-$11.54 $ 8.89
Exercisable at
January 30, 1999 61 $ 4.78-$31.67 $ 13.02 39 $ 7.70-$11.54 $ 7.87
Available for grant at
January 30, 1999 50 --
</TABLE>
In March 1999, options for 637 shares were granted under the 1994 Company
Plan which vest in March 2002 and are exercisable at $7.31 per share. In
February and March 1999, options for 20 shares were granted under the
Directors Plan that were immediately exercisable at a range of $6.22 to
$7.31 per share.
<PAGE> 36
(c) ACCOUNTING FOR STOCK OPTIONS:
The Company accounts for stock option plans under APB 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 SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and loss per share would have been
increased by $2,340, or $0.12 per share, during 1996, the Company's net
loss and loss per share would have been increased by $3,850, or $0.18 per
share, during 1997, and the Company's net loss and loss per share would
have been increased by $3,749, or $0.18 per share, during 1998. The pro
forma change in net earnings (loss) reflects only options granted since
1995. 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 1996, 1997 and
1998 were estimated as $12.01, $11.65 and $9.46 on the date of grant using
the Black-Scholes option pricing model with the following assumptions: no
dividend yield, volatility of 52.7%, 47.5% and 59.0%, risk-free interest
rate of 6.5%, 6.0% and 5.0% for 1996, 1997 and 1998, respectively, 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 January 30, 1999:
<TABLE>
Options Outstanding Options Exercisable
--------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- - ----------- ---------- ------------ -------- ----------- ---------
<C> <C> <C> <C> <C> <C>
$ 4.78-$12.33 522 5.57 $ 10.46 521 $ 10.46
$14.95-$17.44 639 9.00 $ 17.41 19 $ 16.50
$17.54-$21.38 127 4.12 $ 18.63 110 $ 18.65
$22.50-$31.67 791 7.78 $ 23.22 74 $ 26.72
--------- -----------
2,079 7.38 $ 17.95 724 $ 13.51
========= ===========
</TABLE>
(d) STOCKHOLDER RIGHTS AGREEMENT:
On September 10, 1998, the Board of Directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of the
Company's common stock, which Rights expire on September 22, 2008. Each Right
entitles a stockholder to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock of the Company, at the price of $75.00
per one one-hundredth of a preferred share, subject to adjustment, or, under
certain circumstances, shares of common stock of the Company or a successor
company which at the time of such transaction would have a market value equal
to two times the exercise price of the Right. The Rights would become
exercisable for all other persons only if a person acquires or announces a
tender offer to acquire beneficial ownership of 15% or more of the Company's
common stock. Each share of Series A Junior Participating Preferred Stock
will be entitled to certain minimum dividends and an aggregate dividend of
100 times the dividend declared per common share, if any. The Rights have no
voting privileges and the Board of Directors may terminate the Stockholder
Rights Agreement at any time or redeem outstanding Rights at a price of $0.01
per Right at any time prior to a person acquiring beneficial ownership of 15%
or more of the Company's outstanding common stock.
<PAGE> 37
6. INCOME TAXES
Income taxes (benefit) consists of the following:
<TABLE>
Years Ended
---------------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 958 $ 416 $ 64
State 171 (370) (423)
Foreign -- -- 132
-------- -------- --------
1,129 46 (227)
-------- -------- --------
Deferred:
Federal (5,186) (4,290) (876)
State (18) (1,242) 665
Foreign -- -- --
-------- -------- --------
(5,204) (5,532) (211)
-------- -------- --------
Income taxes (benefit) $ (4,075) $ (5,486) $ (438)
======== ======== ========
</TABLE>
A reconciliation of income taxes at the federal statutory rate of 34% with
the provision for income taxes (benefit) follows:
<TABLE>
Years Ended
---------------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at federal
statutory rate $ (5,518) $ (6,347) $ (957)
Non-deductible expenses 1,323 1,489 286
State taxes, net of federal
tax benefit 101 (1,064) 160
Foreign taxes, net of federal
tax benefit -- -- 87
Other 19 436 (14)
-------- -------- --------
$ (4,075) $ (5,486) $ (438)
======== ======== ========
</TABLE>
The sources of significant temporary differences which gave rise to the
deferred tax provision and their effects follow:
<TABLE>
Years Ended
---------------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Inventory $ (2,891) $ (1,216) $ 2,693
Deferred rent (1,072) (588) (779)
Depreciation 1,424 1,611 4,220
Accrued fringes (96) (699) 204
Intangibles (178) 1,771 686
Store closing costs (1,833) (1,941) 1,840
Fixed assets (1,318) 1,128 1,571
Other assets -- (2,358) 1,450
Benefit of net operating
loss carryforwards 943 (3,929) (12,482)
Other (183) 689 386
-------- -------- --------
$ (5,204) $ (5,532) $ (211)
======== ======== ========
</TABLE>
<PAGE> 38
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets follow:
<TABLE>
Years Ended
--------------------------
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventory $ 6,249 $ 3,556
Deferred rent 3,412 4,191
Accrued fringes 2,105 1,901
Store closing costs 5,496 3,656
Fixed assets 1,600 29
Other assets 2,358 908
Net operating loss carryforwards 14,622 27,104
------- -------
Total deferred tax assets 35,842 41,345
Valuation allowance (4,900) (4,900)
------- -------
Net deferred tax assets 30,942 36,445
------- -------
Deferred tax liabilities:
Depreciation (3,166) (7,386)
Intangibles (1,218) (1,904)
Other (319) (705)
------- -------
Total deferred tax liabilities (4,703) (9,995)
------- -------
Net deferred tax assets $26,239 $26,450
======= =======
</TABLE>
The valuation allowance of $4,900 at January 31, 1998 and January 30, 1999
relates to net operating loss carryforwards of PetCare. 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
for 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, net of the valuation allowance.
At January 30, 1999, the Company has available net loss carryforwards of
$71,155 for federal income tax purposes, which begin expiring in 2004, and
$35,513 for state income tax purposes, which begin expiring in 1999.
7. 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 April 1, 1997, the Company
adopted a matching provision for 50% of the first 3% of compensation that
is contributed by each participating employee. Effective July 1, 1998, the
Company adopted a matching provision for 50% of the first 6% of
compensation that is contributed by each participating employee. In
connection with the required match, the Company's contribution to the plan
was $58 in 1996, $199 in 1997 and $532 in 1998.
<PAGE> 39
8. COMMITMENTS AND 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 July 10, 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> 40
EXHIBIT INDEX
Number Document
- - ------ -------------------------------------------------------
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)
4.2 Stockholder Rights Agreement. (3)
10.1 Credit Agreement, dated January 30, 1998 between the
Company and Union Bank, as Syndicating Agent. (4)
10.2 First Amendment to Credit Agreement, dated February 26,
1998, between the Company and Union Bank.(5)
10.3 Second Amendment to Credit Agreement, dated October 30,
1998, between the Company and Union Bank.(5)
10.4 Third Amendment to Credit Agreement, dated March 31,
1999, between the Company and Union Bank.(5)
10.5 Term loan Agreement, dated January 29, 1996, between
the Company and Union Bank. (6)
10.6 First Amendment to Term loan Agreement, dated April 24,
1997, between the Company and Union Bank.(7)
10.7 Distribution Center Lease, dated March 24, 1994, between
the Company and The Principal Mutual Life Insurance
Company for 10401 Seventh Street, Rancho Cucamonga,
California. (8)
10.8 Distribution Center Lease, dated July 1, 1997 between
the Company and Knickerbocker Industrial Properties East
LP for 152 Dayton Jamesburg Road, South Brunswick, New
Jersey. (4)
10.9 Distribution Center Lease, dated February 20, 1998
between the Company and Industrial Developments
International, Inc. for 3801 Rock Creek Boulevard,
Joliet, Illinois. (4)
10.10 Distribution Center Lease, dated November 24, 1997
between the Company and Opus West Corporation for 4345
Parkhurst Street, Mira Loma, California. (4)
10.11 Master Equipment Lease Agreement, dated October 19,
1992, between the Company and Sanwa Business Credit
Corporation. (2)
10.12 Master Equipment Lease Agreement, dated September 21,
1994, between the Company and General Electric Credit
Corporation. (8)
10.13 Master Equipment Lease Agreement, dated March 10, 1995,
between the Company and KeyCorp Leasing Ltd. (6)
10.14 Master Equipment Lease Agreement, dated November 15,
1995, between the Company and Fleet Credit
Corporation. (6)
10.15 Master Equipment Lease Agreement, dated September 15,
1998, between the Company and IBM Leasing. (5)
10.16 Master Equipment Lease Agreement, dated January 25,
1999, between the Company and Matrix funding. (5)
10.17 Master Lease Agreement, dated December 27, 1995, between
the Company and Newcourt Financial USA, Inc. (6)
10.18 Master Lease Agreement, dated September 28, 1995, between
the Company and USL Capital Corporation. (6)
10.19 Employment Letter Agreement, dated October 3, 1996, by
and between Petco and Marvin W. Goldstein. (1)
10.20 Employment Agreement, dated March 17, 1996, between the
Company and Brian K. Devine. (6)
10.21 Form of Indemnification Agreement between the Company
and certain officers and directors. (2)
10.22 Form of Retention Agreement for executive officers. (4)
10.23 Form of Retention Agreement for non-executive officers. (4)
10.24 Petco Animal Supplies 401(k) Plan. (2)
10.25 The 1994 Stock Option and Restricted Stock Plan for
Executive and Key Employees of Petco Animal Supplies,
Inc., as amended and restated on March 18, 1998. (5)
10.26 Petco Animal Supplies, Inc. Group Benefit Plan, dated
July 29, 1991, as amended. (6)
<PAGE> 41
10.27 Petco Animal Supplies, Inc. Directors' 1994 Stock Option
Plan, as amended. (6)
10.28 Form of Petco Animal Supplies, Inc. Nonstatutory Stock
Option Agreement. (2)
10.29 Form of Petco Animal Supplies, Inc. Incentive Stock Option
Agreement. (2)
10.30 Form of Petco Animal Supplies, Inc. Restricted Stock
Agreement. (2)
10.31 Form of Petco Animal Supplies, Inc. Nonstatutory Stock
Option Agreement (Directors' 1994 Stock Option Plan). (2)
10.32 The Pet Food Warehouse, Inc. 1993 Stock Option Plan (9)
10.33 Pet Food Warehouse, Inc. Amendment to 1993 Stock Option
Plan. (10)
10.34 The PetCare Plus, Inc. 1989 Stock Option Plan (the "1989
Stock Option Plan"). (11)
10.35 Form of Incentive Stock Option Agreement under the 1989
Stock Option Plan. (11)
10.36 Form of Nonqualified Stock Option Agreement under the 1989
Stock Option Plan. (11)
21.1 Subsidiaries of the registrant. (5)
23.1 Consent of KPMG LLP. (5)
23.2 Consent of PricewaterhouseCoopers LLP. (5)
27.1 Financial Data Schedule. (5)
_____________
(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 Report on 8-K dated September 22,
1998, File No. 000-23574.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
April 30, 1998.
(5) Filed herewith.
(6) 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.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
April 30, 1997.
(8) 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.
(9) Filed as an exhibit to Pet Food Warehouse, Inc.'s Registration
Statement on Form SB-2 dated July 6, 1993, File No. 33-65734C,
including Amendment No. 1 thereto, dated effective August 13, 1993,
Post-Effective Amendment No. 1 thereto, dated January 7, 1994, Post-
Effective Amendment No. 2 thereto, dated February 1, 1994, and Post-
Effective Amendment No. 3 thereto, dated February 10, 1994.
(10)Filed as an exhibit to the Company's Registration Statement on Form S-8
dated February 26, 1997, File No. 333-14699.
(11)Filed as an exhibit to the Company's Registration Statement on Form S-8
dated March 20, 1998, File No. 333-48311.
<PAGE> 42
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
29th day of April, 1999.
PETCO ANIMAL SUPPLIES, INC.
By: /s/BRIAN K. DEVINE
----------------------------------
Brian K. Devine
Chairman of the Board, 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 29, 1999
- - ------------------------ and Chief Executive Officer
Brian K. Devine (Principal Executive Officer)
/s/JAMES M. MYERS Senior Vice President and April 29, 1999
- - ------------------------ Chief Financial Officer
James M. Myers (Principal Financial and
Accounting Officer)
/s/ANDREW G. GALEF Director April 29, 1999
- - ------------------------
Andrew G. Galef
/s/RICHARD J. LYNCH Director April 29, 1999
- - ------------------------
Richard J. Lynch
/s/JAMES F. McCANN Director April 29, 1999
- - ------------------------
James F. McCann
/s/PETER M. STARRETT Director April 29, 1999
- - ------------------------
Peter M. Starrett
EXHIBIT 10.2
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this "Amendment"), dated as
of February 26, 1998, is entered into among PETCO ANIMAL SUPPLIES, INC., a
Delaware corporation (the "Borrower"), UNION BANK OF CALIFORNIA, N.A., as
the sole lender party to the Credit Agreement referred to below (the
"Lender") and UNION BANK OF CALIFORNIA, N.A., as administrative agent,
arranger and syndication agent for the lender(s) from time to time party to
the Credit Agreement (the "Agent").
RECITALS
A. The Borrower, the Lender and the Agent previously entered into
that certain Credit Agreement dated as of January 30, 1998, (the "Credit
Agreement"). Capitalized terms used herein and not defined shall have the
meanings assigned to them in the Credit Agreement.
B. The Borrower, the Lender and the Agent desire to amend the
Credit Agreement, among other things, to modify a provision therein
relating to certain restrictions on "Capital Expenditures" and to
incorporate certain forms relating to loans.
Accordingly, the parties hereto agree as follows:
AGREEMENT
Section 1. Amendments to the Credit Agreement. The Credit Agreement
shall be amended as follows:
A. Section 6.17 of the Credit Agreement is, effective as of the date
first set forth above, amended in its entirety to read as follows:
"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 1998, $65,000,000 in the aggregate, (ii) in fiscal year
1999, $55,000,000 in the aggregate, (iii) in fiscal year 2000,
$55,000,000 in the aggregate, (iv) in fiscal year 2001, $55,000,000 in
the aggregate and (v) in fiscal year 2002, $55,000,000 in the
aggregate, and with respect to each fiscal year specified in clauses
(ii), (iii), (iv) and (v) above, an additional aggregate amount equal
<PAGE> 2
to the amount (if any) by which the actual Capital Expenditures in the
immediately preceding fiscal year were less than those permitted under
clauses (i), (ii), (iii) and (iv) above, as applicable.
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."
B. The first two sentences of Section 2.6 of the Credit Agreement
are, effective as of the date first set forth above, amended in their
entirety to read as follows:
"The Borrower may on any Business Day, upon written notice
(substantially in the form of Exhibit G attached hereto, in the case
of a conversion, and substantially in the form of Exhibit H attached
hereto, in the case of a continuation) 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/or continuation and subject to
the provisions of Section 2.5, convert and/or continue any Advance
into an Advance of another Type or of the same Type; provided,
however, that with respect to a conversion from a LIBOR Loan into a
Base Rate Loan or a continuation of a LIBOR Loan, any such conversion
and/or continuation shall be made on, and only on, the last day of the
Interest Period for such Loan. Each such notice of a conversion
and/or continuation shall, within the restrictions specified above,
specify (i) the Loan to be converted or continued, (ii) the type of
Loan into which such Loan is to be converted (if applicable) and (iii)
the requested date for such conversion and/or continuation."
C. Two new exhibits, Exhibit G and Exhibit H shall be appended to the
Credit Agreement in substantially the same forms of Exhibit G and Exhibit H
attached hereto.
Section 1. Conditions Precedent to Effectiveness of This Amendment.
This Amendment shall become effective as of the date first set forth above
upon receipt by the Agent of the following, each in form and substance
satisfactory to the Agent:
(a) this Amendment executed by the Borrower, the Agent and the
Lender; and
(b) a Consent and Acknowledgement executed by each Guarantor.
Section 2. Representations and Warranties. The Borrower represents
and warrants to the Agent and the Lender (and for the benefit of any other
lender from time to time party to the Credit Agreement) as follows:
(a) the execution, delivery and performance of this Amendment
<PAGE> 3
have been duly authorized and approved by all necessary action;
(b) this Amendment constitutes 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;
(c) the representations and warranties contained in Article 5 of
the Credit Agreement are true and correct on and as of the date hereof as
though made on and as of the date hereof, 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
(d) no Event of Default, and no event which, with the giving of
notice or lapse of time or both, would constitute an Event of Default has
occurred and is continuing.
Section 3. Miscellaneous.
(a) Except as expressly set forth herein, all provisions of the
Credit Agreement and the other Loan Documents shall continue in full force
and effect except that each reference to "the Credit Agreement" or words of
like import in any Loan Document shall mean and be a reference to the
Credit Agreement, as amended hereby.
(b) This Amendment may be executed in any number of counterparts
and by different parties hereto on separate counterparts, each of which
counterparts so executed and delivered shall be deemed to be an original,
and all of which counterparts, taken together, shall constitute but one and
the same Amendment.
(c) This Amendment and the rights and obligations of the parties
under this Amendment shall be governed by, and construed and interpreted in
accordance with, the law of the State of California.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective duly authorized representatives as of
the date first above written.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
-----------------------------------
Name: James M. Myers
--------------------------------
Title: Senior Vice President - Finance
-------------------------------
UNION BANK OF CALIFORNIA, N.A.,
as Agent and as the Lender
By: /s/ Myra Juetten
---------------------------------
Name: Myra Juetten
-------------------------------
Title: Vice President
------------------------------
EXHIBIT 10.3
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement (this "Amendment"), dated as
of October 30, 1998, is entered into among PETCO ANIMAL SUPPLIES, INC., a
Delaware corporation (the "Borrower"), the Lenders referred to below, and
UNION BANK OF CALIFORNIA, N.A., as administrative agent, arranger and
syndication agent such Lenders (the "Agent").
RECITALS
A. The Borrower, the financial institutions party thereto (the
"Lenders") and the Agent previously entered into that certain Credit
Agreement dated as of January 30, 1998, as amended by a First Amendment to
Credit Agreement dated as of February 16, 1998 (as so amended, the "Credit
Agreement"). Capitalized terms used herein and not defined shall have the
meanings assigned to them in the Credit Agreement.
B. The Borrower has requested that the Lenders and the Agent amend
the Credit Agreement to change the Capital Expenditures covenant, alter the
investments permitted to be made by the Borrower and make certain other
changes as set forth below. The Lenders and the Agent have agreed to such
changes, subject to the terms and conditions set forth herein.
Accordingly, the parties hereto agree as follows:
AGREEMENT
Section 1. Amendments to the Credit Agreement. The Credit Agreement
shall be amended as follows:
(a) In Article 1 of the Credit Agreement, the following new
definition is added in appropriate alphabetical order:
"Petcetera L.P." means Canadian Petcetera Limited Partnership, a
Canadian limited partnership.
(b) The following sentence is added to the end of the definition of
"Subsidiary" contained in Article 1: "Notwithstanding the foregoing,
Petcetera L.P. shall not be considered to be a Subsidiary of the Borrower
for purposes of this Agreement."
(c) Section 6.17 of the Credit Agreement is, effective as of the date
first set forth above, amended in its entirety to read as follows:
"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
<PAGE> 2
Capital Expenditure, except for Capital Expenditures not exceeding (i)
in fiscal year 1998, $73,000,000 in the aggregate, (ii) in fiscal year
1999, $35,000,000 in the aggregate, (iii) in fiscal year 2000,
$55,000,000 in the aggregate, (iv) in fiscal year 2001, $55,000,000 in
the aggregate and (v) in fiscal year 2002, $55,000,000 in the
aggregate, and with respect to each fiscal year specified in clauses
(ii), (iii), (iv) and (v) above, an additional aggregate amount equal
to the amount (if any) by which the actual Capital Expenditures in the
immediately preceding fiscal year were less than those permitted under
clauses (i), (ii), (iii) and (iv) above, as applicable.
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."
(d) Section 6.23 of the Credit Agreement is, effective as of the date
first set forth above, amended in its entirety to read as follows:
"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 and subject to Section 6.28, 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.
Notwithstanding the foregoing, the Borrower may (i) make loans
and advances to or on behalf of Canadian Petcetera Warehouse Inc.
(collectively, the "Petcetera Loans") in an aggregate principal amount
not to exceed $7,000,000, (ii) make loans (collectively, "OHR Loans")
to O'Neill Hotels and Resorts in an aggregate principal amount not to
exceed $7,000,000 (provided that interest on the OHR Loans is prepaid
as follows (the "Mandatory Interest Prepayments"): (x) in the amount
of at least $620,000 within three Business Days of the making of any
OHR Loans and (y) in an additional amount, by February 1, 1999, such
that the total amount of Mandatory Interest Prepayments made on or
before such date shall be at least $1,240,000) and (iii) make equity
investments as a limited partner in Petcetera L.P.; provided that the
aggregate principal amount of Petcetera Loans, plus OHR Loans (less
any such prepayments of interest) plus the amount of any equity
investments under clause (iii) shall not exceed an aggregate amount of
$12,000,000 (or, for the period from the making of the first OHR Loans
to the date which is three Business Days after the making of the first
OHR Loans, $14,000,000) at any time. The Borrower shall give the
<PAGE> 3
Agent written and telephonic notice of the making of any OHR Loans
within one Business Day of the making of any such loans. The Borrower
shall cause each Mandatory Interest Prepayment to be wire transferred
directly to the Agent and immediately used to prepay Revolving Loans."
(e) Section 6.28 of the Credit Agreement is, effective as of the date
first set forth above, amended in its entirety to read as follows:
"6.28 Lease Obligations. The Borrower shall not and shall not
permit any of its Subsidiaries to, create, incur, guaranty or suffer
to exist, any obligations as lessee for the payment of lease expenses
for any real or personal property under leases or arrangements to
lease (collectively, "Lease Obligations"), other than rental expense
with respect to Capitalized Lease obligations and long-term operating
leases. Notwithstanding the foregoing, the Borrower shall not and
shall not permit any of its Subsidiaries to, create, incur, guaranty
or suffer to exist any Lease Obligations in Canada without the prior
written consent of the Lenders, except for those in existence on July
31, 1998 and disclosed to the Agent in writing."
Section 2. Conditions Precedent to Effectiveness of This Amendment.
This Amendment shall become effective as of the date first set forth above
upon receipt by the Agent of the following, each in form and substance
satisfactory to the Agent:
(a) this Amendment executed by the Borrower, the Agent and the
Required Lenders; and
(b) a Consent and Acknowledgement executed by each Guarantor.
Section 3. Representations and Warranties. The Borrower represents
and warrants to the Agent and the Lenders (and for the benefit of any other
lender from time to time party to the Credit Agreement) as follows:
(a) the execution, delivery and performance of this Amendment
have been duly authorized and approved by all necessary action;
(b) this Amendment constitutes 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;
(c) the representations and warranties contained in Article 5 of
the Credit Agreement are true and correct on and as of the date hereof as
though made on and as of the date hereof, except to the extent any such
<PAGE> 4
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
(d) no Event of Default, and no event which, with the giving of
notice or lapse of time or both, would constitute an Event of Default has
occurred and is continuing.
Section 4. Miscellaneous.
(a) Except as expressly set forth herein, all provisions of the
Credit Agreement and the other Loan Documents shall continue in full force
and effect except that each reference to "the Credit Agreement" or words of
like import in any Loan Document shall mean and be a reference to the
Credit Agreement, as amended hereby.
(b) This Amendment may be executed in any number of counterparts
and by different parties hereto on separate counterparts, each of which
counterparts so executed and delivered shall be deemed to be an original,
and all of which counterparts, taken together, shall constitute but one and
the same Amendment.
(c) This Amendment and the rights and obligations of the parties
under this Amendment shall be governed by, and construed and interpreted in
accordance with, the law of the State of California.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective duly authorized representatives as of
the date first above written.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
-----------------------------------
Name: James M. Myers
--------------------------------
Title: Senior Vice President - Finance
-------------------------------
UNION BANK OF CALIFORNIA, N.A.,
as Agent and as a Lender
By: /s/ Myra Juetten
-----------------------------------
Name: Myra Juetten
--------------------------------
Title: Vice President
-------------------------------
U.S. NATIONAL BANK OF OREGON
By: /s/ Janet Jordan
-----------------------------------
Name: Janet Jordan
--------------------------------
Title: Vice President
-------------------------------
<PAGE> 6
LASALLE NATIONAL BANK
By: /s/ Carol Morse
-----------------------------------
Name: Carol Morse
--------------------------------
Title: First Vice President
-------------------------------
CREDIT LYONNAIS
By:
-----------------------------------
Name:
--------------------------------
Title:
-------------------------------
CALIFORNIA UNITED BANK
By: /s/ Brent Wiblin
-----------------------------------
Name: Brent Wiblin
--------------------------------
Title: First Vice President
-------------------------------
SUMITOMO BANK OF CALIFORNIA
By:
-----------------------------------
Name:
--------------------------------
Title:
-------------------------------
EXHIBIT 10.4
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement (this "Amendment"), dated as
of March 31, 1999, is entered into among PETCO ANIMAL SUPPLIES, INC., a
Delaware corporation (the "Borrower"), the Lenders referred to below, and
UNION BANK OF CALIFORNIA, N.A., as administrative agent, arranger and
syndication agent for such Lenders (the "Agent").
RECITALS
A. The Borrower, the financial institutions party thereto (the
"Lenders") and the Agent previously entered into that certain Credit
Agreement dated as of January 30, 1998, as amended by a First Amendment to
Credit Agreement dated as of February 26, 1998 and a Second Amendment to
Credit Agreement dated as of October 30, 1998 (as so amended, the "Credit
Agreement"). Capitalized terms used herein and not defined shall have the
meanings assigned to them in the Credit Agreement.
B. The Borrower has requested that the Lenders and the Agent amend
the Credit Agreement to permit certain additional investments. The Lenders
and the Agent have agreed to such changes, subject to the terms and
conditions set forth herein.
Accordingly, the parties hereto agree as follows:
AGREEMENT
Section 1. Amendment to the Credit Agreement. The Credit Agreement
shall be amended as follows:
(a) Section 6.23 of the Credit Agreement is, effective as of the date
first set forth above, amended in its entirety to read as follows:
"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 and subject to Section 6.28, 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.
<PAGE> 2
Notwithstanding the foregoing, the Borrower may (i) make loans
(collectively, "OHR Loans") to O'Neill Hotels and Resorts in an
aggregate principal amount not to exceed $7,000,000 and (ii) make
equity investments as a limited partner in Petcetera L.P.; provided
that the aggregate principal amount of OHR Loans (less any prepayments
of interest) plus the amount of any equity investments under clause
(ii) shall not exceed an aggregate amount of $14,000,000 at any time."
Section 2. Conditions Precedent to Effectiveness of This Amendment.
This Amendment shall become effective as of the date first set forth above
upon receipt by the Agent of the following, each in form and substance
satisfactory to the Agent:
(a) this Amendment executed by the Borrower, the Agent and the
Required Lenders; and
(b) a Consent and Acknowledgement executed by each Guarantor.
Section 3. Representations and Warranties. The Borrower represents
and warrants to the Agent and the Lenders (and for the benefit of any other
lender from time to time party to the Credit Agreement) as follows:
(a) the execution, delivery and performance of this Amendment
have been duly authorized and approved by all necessary action;
(b) this Amendment constitutes 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;
(c) the representations and warranties contained in Article 5 of
the Credit Agreement are true and correct on and as of the date hereof as
though made on and as of the date hereof, 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
(d) no Event of Default, and no event which, with the giving of
notice or lapse of time or both, would constitute an Event of Default has
occurred and is continuing.
<PAGE> 3
Section 4. Miscellaneous.
(a) Except as expressly set forth herein, all provisions of the
Credit Agreement and the other Loan Documents shall continue in full force
and effect except that each reference to "the Credit Agreement" or words of
like import in any Loan Document shall mean and be a reference to the
Credit Agreement, as amended hereby.
(b) This Amendment may be executed in any number of counterparts
and by different parties hereto on separate counterparts, each of which
counterparts so executed and delivered shall be deemed to be an original,
and all of which counterparts, taken together, shall constitute but one and
the same Amendment.
(c) This Amendment and the rights and obligations of the parties
under this Amendment shall be governed by, and construed and interpreted in
accordance with, the law of the State of California.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective duly authorized representatives as of
the date first above written.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
-----------------------------------
Name: James M. Myers
--------------------------------
Title: Senior Vice President and
-------------------------------
Chief Financial Officer
UNION BANK OF CALIFORNIA, N.A.,
as Agent and as a Lender
By: /s/ Myra Juetten
-----------------------------------
Name: Myra Juetten
--------------------------------
Title: Vice President
-------------------------------
U.S. NATIONAL BANK OF OREGON
By: /s/ Janet Jordan
-----------------------------------
Name: Janet Jordan
--------------------------------
Title: Vice President
-------------------------------
LASALLE NATIONAL BANK
By: /s/ Carol Morse
-----------------------------------
Name: Carol Morse
--------------------------------
Title: First Vice President
-------------------------------
<PAGE> 5
CREDIT LYONNAIS LOS ANGELES BRANCH
By: /s/ Dianne M. Scott
-----------------------------------
Name: Dianne M. Scott
--------------------------------
Title: First Vice President and Manager
-------------------------------
PACIFIC CENTURY BANK, N.A. (formerly known
as California United Bank)
By: /s/ Bill Phillips
-----------------------------------
Name: Bill Phillips
--------------------------------
Title: AVP
-------------------------------
CALIFORNIA BANK AND TRUST (formerly known as
Sumitomo Bank of California)
By:
-----------------------------------
Name:
--------------------------------
Title:
-------------------------------
EXHIBIT 10.15
IBM CREDIT CORPORATION
INSTALLMENT PAYMENT MASTER AGREEMENT
Thank you for doing business with us. We are committed to providing you
with the highest quality financial offerings. If, at any time, you have
any questions or problems, please let us know.
This Installment Payment Master Agreement (called the "Agreement") covers
the terms and conditions under which we finance various charges.
This Agreement has four parts:
Part 1 - Definitions;
Part 2 - Our Offerings;
Part 3 - Payment; and
Part 4 - General.
The specific amount financed, the interest rate charged, and the period
over which the amount is financed are together referred to as an
Installment Payment Transaction (called the "Transaction"). Each
Transaction is listed as a separate line item on a Supplement to this
Agreement. A Supplement may contain additional terms for its Transactions.
You agree to those terms by signing the Supplement. Each Transaction is
contingent upon a review of your credit by us.
This Agreement and its applicable Supplements are the complete agreement
regarding the Transactions and replace any prior oral or written
communications between both parties.
By signing below, both parties agree to the terms of this Agreement. Once
signed, any reproduction of this Agreement or a Supplement made by reliable
means (for example, photocopy or facsimile) is considered an original.
Agreed to: Agreed to:
Petco Animal Supplies Inc IBM Credit Corporation
Stamford, Connecticut 06904-2399
By /s/James M. Myers By
------------------------ ---------------------------
Authorized Signature Authorized Signature
Name (type or print): James M. Myers Name (type or print):
Date: 9/15/98 Date:
Customer number: 7083749 Agreement number: 7116026
IBM Office number: PAH
Customer Address: IBM Office address:
9125 Rehco Rd. 4800 FALLS OF THE NEUSE RD
San Diego, CA 92121-2270 RALEIGH NC 27609-5491
<PAGE> 2
IBM CREDIT CORPORATION
INSTALLMENT PAYMENT MASTER AGREEMENT
Part I - Definitions
1.1 Definitions
Addition is any Machine or Program associated with a Machine previously
financed under this Agreement.
Customer-set-up Machine is an IBM Machine that you set up according to IBM
instructions.
Date of Installation is the following:
1. for a Machine -
a. the business day after the day IBM installs it
or, if you defer installation, makes it
available to you for installation; or
b. the second business day after the end of the
standard transit allowance period for a
Customer-set-up Machine or a non-IBM Machine.
2. for a Program, the latest of -
a. the day after its testing period ends;
b. 10 days after IBM ships it; or
c. the day you are authorized to make an
Additional License Copy or a copy of a
Distributed Feature.
Machine is a machine, its features, conversions, upgrades, elements, or
accessories, or any combination of them. We use the terms "IBM Machine"
and "non-IBM Machine" if applicable.
Modification is any IBM field installable upgrade, feature or accessory
added to any Machine.
Planning Date is the date stated in the Supplement that financing for each
Transaction is scheduled to begin. For a Machine, it is the estimated date
the Machine will be put into service. For a Program, it is the estimated
Date of Installation. For all other financed charges, it is the date you
choose for the financing to begin.
Product is a Machine or a Program.
Program is all the following, including features and any whole or partial
copies:
1. machine-readable instructions;
2. a collection of machine-readable data, such as a
data base; and
3. related materials, including documentation and
listings, in any form.
Service is assistance or use of a resource (such as a network).
Term is the number of payment periods stated in the Supplement. The Term
of a Transaction begins on the date interest starts. It ends on the last
day of the last payment period. If you prepay a Transaction, its Term ends
when you complete the prepayment.
You and Your refer to you, the Customer. You must be a commercial business.
We, Us and Our refer to:
1. IBM Credit Corporation (IBM Credit), a wholly
owned subsidiary of International Business
Machines Corporation (IBM)-
2. a partnership in which IBM Credit is a partner, or
3. a business enterprise for which IBM Credit is an
agent.
IBM Credit will remain as the active manager for all matters under this
Agreement.
<PAGE> 3
IBM CREDIT CORPORATION
INSTALLMENT PAYMENT MASTER AGREEMENT
Part 2 - Our Offerings
2.1 Machines
We finance charges for Machines you purchase from IBM or us. For a Machine
we finance, you agree to:
1. keep the Machine free from encumbrances of any
kind, except those established by us
under this Agreement, or by you with our prior
written consent;
2. promptly pay all taxes, interest, and other
charges associated with the Machine, excluding
taxes based on our net income; and
3. keep the Machine in good operating condition.
2.2 Modifications and Additions
We finance charges for Modifications and Additions you purchase from IBM or
us. For Modifications and Additions we finance, you agree to:
1. ensure that the Machine with which the
Modifications and Additions will be associated is
free from encumbrances of any kind, except those
established by us under this Agreement;
and
2. keep modified Machines and Additions to them in
accordance with the requirements of
Section 2.1.
We may offer to refinance a Machine when we finance a Modification to it.
Changes to the Annual Interest Rate, Payment Amount, and Term will then be
specified in a new Supplement.
2.3 Other Charges
We finance one-time charges for IBM Programs and Services. Your obligation
to make payments is not affected by the termination of any Service or
license for a Program, unless such termination occurs before the date
interest starts.
We may agree to finance other one-time charges associated with the
installation of-IBM Products.
2.4 Discounts, Allowances and Adjustments
The purchase price or one-time charge we finance is the same amount that
you would have paid IBM or us after all discounts and adjustments. If this
amount changes after you sign the Supplement and before the date interest
starts, we will adjust the Supplement accordingly and notify you.
<PAGE> 4
IBM CREDIT CORPORATION
INSTALLMENT PAYMENT MASTER AGREEMENT
Part 3 - Payment
3.1 Your Obligation to Pay
You will pay all amounts specified in the Supplement. Payment will be made
through the IBM Branch Office unless we notify you otherwise.
Your obligation to pay will continue regardless of any dispute you may have
with respect to the financed Products or Services.
3.2 Interest Commencement
Unless otherwise specified in the Supplement, interest starts on:
1. the date that payment of the purchase price or one
time charge is due for Products and
Services; or
2. the date we provide you the funding for all other
charges.
3.3 Invoicing
Payment Amounts for monthly payment periods are invoiced as of the first
day of each calendar month and are due on the first day of the following
month. When the interest commencement date is not the first day of the
calendar month or when the initial Term will not expire on the last day of
the calendar month, the applicable Payment Amount will be prorated on the
basis of a 30-day month. In these cases, the number of invoices will
exceed the number of payment periods specified in the Supplement.
Payment Amounts for all other payment periods (for example, annual) are
invoiced 30 calendar days before the end of their payment period and are
due on the day following the close of the respective payment period.
3.4 Rate Protection
The Supplement states a Planning Date for each Transaction, and one Quote
Validity Date for all Transaction rates on the Supplement. These rates are
not subject to change provided that:
1. the Supplement is signed and returned to us by the
Quote Validity Date; and
2. the Product is installed within the same calendar
month as its Planning Date.
3.5 Prepayment
We will not charge any loan origination fees. If you decide to prepay a
Transaction, you agree to pay us a prepayment fee for our unrecovered
administrative expense and changes in funding costs. The Supplement
describes how the prepayment fee is determined. You may prepay any
Transaction by paying all outstanding amounts due plus the remaining
principal balance and any prepayment fee. If you prepay a Transaction for
a Machine, you must also prepay any Transaction for related non-IBM
charges.
3.6 Delinquent Payments
If you do not make a payment by its due date, you agree to pay us, on
demand, an additional 2% per month late charge or the maximum allowed by
law, whichever is less. The late charge will accrue on a cumulative basis
until the outstanding payments and late charges are paid.
<PAGE> 5
IBM CREDIT CORPORATION
INSTALLMENT PAYMENT MASTER AGREEMENT
Part 4 - General
4.1 Events of Default
You will be in default if:
1. you do not pay any amount within seven days after
its due date;
2. you fail to maintain insurance as required under
this Agreement;
3. you make any misrepresentation in a credit
application you give us;
4. you make an assignment for the benefit of
creditors, or you consent to the appointment of
a trustee or receiver, or either is appointed for
you or for a substantial part of your property
without your consent;
5. any petition or proceeding is filed by or against
you under any bankruptcy, insolvency, or
similar law;
6. you breach any other provision of this Agreement
and that breach continues for fifteen
days after you receive written notice from us; or
7. you make a bulk transfer subject to the
provisions of the Uniform Commercial Code or
otherwise dispose of substantial assets without
receiving equivalent value.
4.2 Remedies
If you are in default, we may do one or more of the following:
1. declare the Transaction and all associated
Transactions to be in default;
2. recover from you all amounts that are or will be
due;
3. repossess or render unusable any or all Machines,
Modifications, or Additions without
demand, notice, court order, or other process,
and retain all payments made as partial
compensation for their use and depreciation;
4. require you, at your expense, to assemble and
ship any Machine, Modification, or
Addition to a location we specify-, and
5. recover from you reasonable attorney's fees and
legal expenses incurred in exercising any
of our rights under this Agreement.
If we repossess a Modification, it is your responsibility to restore the,
remaining Machine to good working order. We have no liability for costs or
damages caused by the removal of such Modification or by your failure to
fulfill your responsibilities.
Upon repossession or return of a Machine, Modification or Addition, we will
dispose of it in a commercially reasonable manner. After deducting our
expenses for the repossession and disposition, we will apply the net
proceeds toward the amounts due. You will pay us any deficiency between
the net proceeds and the unpaid amounts due. We will pay to you any
excess net proceeds.
We may pursue any other remedy available at law or in equity.
4.3 Security Interest
We reserve a purchase money security interest in each Machine we finance,
its substitutions, replacements, accessions, Modifications, Additions and
any associated proceeds until we receive all amounts due. You will
cooperate with us to perfect our security interest.
You authorize us to act as your agent and attorney-in-fact for the limited
purpose of preparing executing in your name, and filing on your behalf,
financing statements or other document covering Machines, Modifications,
and Additions financed -by us.
Each Machine must be kept at the location specified in this Agreement,
where we may inspect it at any reasonable time. Each Machine will remain
personal property, and will not become a fixture to real property. Until
your financial obligation on a Transaction is satisfied, you may not modify
or otherwise dispose of the Machine, Modification, or Addition, in whole or
in part, without our prior written consent.
<PAGE> 6
IBM CREDIT CORPORATION
ADDENDUM INSTALLMENT PAYMENT MASTER AGREEMENT
Supplement No. ID0014924
Addendum No. Q01638873-03
October 1, 1998
We and PETCO ANIMAL SUPPLIES INC (You) agree that for the purposes of
the referenced Supplement only, the Installment Payment Master
Agreement between the parties is hereby modified as follows:
In the Introductory Section, in line 13 after "item" add "which
represents the Financing of all of the Machines, identified by
model and type and the related items as described in such line
item."
In Section 2.2 Modifications and Additions, delete the last two
sentences.
In Section 3.5 Prepayment, delete the last sentence and replace
with "If you prepay any Transaction specified on the Supplement as
Option I, you must also prepay any Transaction specified on the
Supplement as Option T."
In Section 4.2 Remedies in line 1, delete "associated".
In Section 4.3 Security Interest at the beginning of the Section
add the following new paragraph:
Lessee grants to Lessor a security interest in all of Lessee's
right, title and interest in and to, whether now owned or
hereafter acquired or existing, the following (Collateral): (a)
all equipment financed hereunder and specified on the invoices
attached to the Supplement, all parts thereof, accessions thereto
and documents therefor (including all hardware and all other
information processing equipment of every type and description)
(Machines) and, all proceeds of all of the foregoing Collateral
and, to the extent not otherwise included, all payments under
insurance or and indemnity, warranty or guaranty, payable by
reason of loss or damage to or otherwise with respect to any of
the foregoing Collateral.
In Section 4.4 Insurance, in line 5 delete "If a Machine,
Modification or Additions suffers a Loss" and replace with "In the
event Machine Losses suffered under each Transaction represent
more than 5% of the total number of Machines that comprise such
Transaction."
<PAGE> 7
In Section 4.5 Assignment and Relocation, in line 2 delete
"relocate". - in line 3 after consent, add the following new
sentence: "With prompt notification, you may relocate any Machine
under each Transaction provided the number of Machines relocated
under each Transaction does not represent more than 5% of the
total number of Machines that comprise such Transaction. Any
relocation of Machines which will cause the total number of
Machines relocated to exceed 5% of the total number of Machines
that comprise such Transaction, requires our prior written consent."
Prepared by: D DRIVER
Accepted by:
IBM Credit Corporation PETCO ANIMAL SUPPLIES INC
By /s/ Dorothy O. Brown By /s/ John D. Morberg
--------------------------- ----------------------------
Authorized Signature Authorized Signature
Dorothy O. Brown 11/12/98 John D. Morberg
--------------------------- ----------------------------
Name (Type or Print) Date Name (Type or Print) Date
EXHIBIT 10.16
M A T R I X
F U N D I N G C O R P O R A T I O N
6975 Union Park Center, Second Floor
Midvale, Utah 84047
MASTER LEASE AGREEMENT NO. R0758
This Master Lease Agreement is made this 25th day of January, 1999 between
MATRIX FUNDING CORPORATION, with its principal office at 6975 Union Park
Center, Second Floor, Midvale, UT 84047 (the "Lessor"), and PETCO ANIMAL
SUPPLIES, INC., with its principal office at 9125 Rehco Road, San Diego, CA
92121 (the "Lessee").
1. LEASE:
Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor,
the property (together with all attachments, replacements, parts,
substitutions, additions, repairs, accessions and accessories, incorporated
therein and/or affixed thereto) (collectively, the "Property") described in
any Lease Schedule ("Schedule") executed and delivered by Lessor and Lessee
in connection with this Master Lease Agreement. Each Schedule shall
incorporate by reference the terms and conditions of this Master Lease
Agreement, and together with the Acceptance Certificate (as defined herein)
and Master Progress Funding Agreement, if applicable, shall constitute a
separate "Lease". In the event of conflict between the provisions of this
Master Lease Agreement and any Schedule, the provisions of the Schedule
shall govern.
2. ADDITIONAL DEFINITIONS:
(a) Except as otherwise provided in Section 6(a) hereof, "Acceptance Date"
means, as to the Property designated on any Schedule, the date Lessee
accepts the Property as set forth in any acceptance certificate signed by
the Lessee which is acceptable to Lessor (the "Acceptance Certificate").
If Lessee fails to sign and deliver an Acceptance Certificate, then except
as otherwise provided in Section 6(a) hereof, the Acceptance Date shall be
a date determined by Lessor which shall be no sooner than the date Lessee
receives substantially all of the Property.
(b) "Commencement Date" means, as to the Property designated on any
Schedule, where the Acceptance Date for such Schedule falls on the first
day of a calendar quarter, that date, and, in any other case, the first day
of the calendar quarter following the calendar quarter in which such
Acceptance Date falls.
3. TERM OF LEASE:
The term of any Lease, as to all Property designated on the applicable
Schedule, shall commence on the Acceptance Date for such Property, and
shall continue for an "Initial Period" ending that number of months from
the Commencement Date as specified in the Schedule. Thereafter, Lessee
shall have options to purchase or return the Property or to extend the
Lease, all as provided in Section 18(m) of this Agreement.
4. RENT AND PAYMENT:
Lessee shall pay as rent for use of the Property, aggregate rentals equal
to the sum of all the Monthly Rentals (defined in the Schedule) and other
payments due under the Lease for the entire Initial Period. The Monthly
Rental shall begin on the Acceptance Date and shall be due and payable by
Lessee in advance on the first day of each month throughout the Initial
Period. If the Acceptance Date does not fall on the first day of a
calendar quarter, then the first rental payment shall be calculated by
multiplying the number of days from and including the Acceptance Date to
the Commencement Date by a daily rental equal to one thirtieth (1/30) of
the Monthly Rental, and shall be due and payable on the Acceptance Date.
Lessee shall pay all rentals to Lessor, or its assigns, at Lessor's address
set forth above (or as otherwise directed in writing by Lessor, or its
assigns), without notice or demand. LESSEE SHALL NOT ABATE, SET OFF OR
DEDUCT ANY AMOUNT OR DAMAGES FROM OR REDUCE ANY MONTHLY RENTAL OR OTHER
PAYMENT DUE FOR ANY REASON. THIS LEASE IS NON-CANCELABLE FOR THE ENTIRE
TERM OF THE INITIAL PERIOD AND ANY EXTENSION PERIODS.
<PAGE> 2
If any rental or other payment due under any Lease shall be unpaid after
its due date, Lessee will pay on demand, as a late charge, but not as
interest, the greater of twenty-five dollars ($25) or five percent (5%) of
any such unpaid amount but in no event to exceed maximum lawful charges.
If late charges are assessed by a lending institution due to any late
payment by Lessee, Lessee agrees to pay such late charges or to reimburse
Lessor for their payment.
5. TAXES:
Lessee shall pay to Lessor when due all taxes, fees, assessments and
charges paid, payable or required to be collected by Lessor, however
designated, which are levied or based on the Monthly Rental or other
payment due under the Lease, or on the possession, use, operation, lease,
rental, sale, purchase, control or value of the Property, including without
limitation, registration and license fees and assessments, state and local
privilege or excise taxes, documentary stamp taxes or assessments, sales
and use taxes, personal and other property taxes, and taxes or charges
based on gross revenue, but excluding taxes based on Lessor's net income
(collectively, "taxes"). Lessor shall invoice Lessee for all taxes in
advance of their payment due date, and Lessee shall promptly remit to
Lessor all taxes upon receipt of an invoice from Lessor. Lessee shall pay
all penalties and interest resulting from its failure to timely remit all
taxes to Lessor when invoiced by Lessor. Lessor shall file all required
sales and use tax and personal property tax returns and reports concerning
the Property with all applicable governmental agencies.
6. USE; ALTERATIONS AND ATTACHMENTS:
(a) After Lessee receives and inspects any Property and is satisfied that
the Property is satisfactory, Lessee shall execute and deliver to Lessor an
Acceptance Certificate in form provided by Lessor; provided, however, that
Lessee's failure to execute and deliver an Acceptance Certificate for any
Property shall not affect the validity and enforceability of the Lease with
respect to the Property. If Lessee has signed and delivered a Master
Progress Funding Agreement, Lessor may, in its sole discretion, at any time
by written notice to Lessee, declare all prior Authorizations signed in
connection with the Master Progress Funding Agreement to be and constitute
the "Acceptance Certificate" for all purposes under the Lease, and the
Acceptance Date of the Lease shall be the date determined by Lessor in its
sole discretion which shall not be earlier than the date of the last
Authorization.
(b) Lessee shall at all times keep the Property in its sole possession and
control. The Property shall not be moved from the location stated in the
Schedule without the prior written consent of Lessor.
(c) Lessee shall cause the Property to be installed, used, operated and, at
the termination of the Lease, removed (i) in accordance with any applicable
manufacturer's manuals or instructions; (ii) by competent and duly
qualified personnel only; and (iii) in accordance with applicable
governmental regulations.
(d) Lessee may not make alterations or attachments to the Property without
first obtaining the written consent of Lessor. Any such alterations or
attachments shall be made at Lessee's expense and shall not interfere with
the normal and satisfactory operation or maintenance of the Property. The
manufacturer may incorporate engineering changes or make temporary
alterations to the Property upon request of Lessee. Unless Lessor shall
otherwise agree in writing, all such alterations and attachments shall be
and become the property of Lessor upon their attachment to the Property or,
at the option of Lessor, shall be removed by Lessee at the termination of
the Lease as to such Property and the Property restored at Lessee's expense
to its original condition, reasonable wear and tear only excepted.
(e) The Property is and shall remain personal property during the term of
the Lease notwithstanding that any portion thereof may in any manner become
affixed, attached to or located on real property or any building or
improvement thereon. Lessee shall not permit the Property to become an
accession to other goods or a fixture to or part of any real property.
Lessee will obtain and deliver to Lessor a waiver of liens, in form
satisfactory to Lessor, from all persons not a party hereto who might
secure an interest, lien or other claim in the Property.
(f) In the event the Property includes software (including all
documentation, later versions, updates, modifications) (herein "Software"),
the following shall apply: (i) Lessee shall possess and use the Software in
accordance with the terms and conditions of any license agreement
("License") entered into with the owner/vendor of such Software (at
<PAGE> 3
Lessor's request, Lessee shall provide a complete copy of the License to
Lessor); (ii) as due consideration for Lessor's payment of the Software
price and for providing the Software to Lessee at a lease rate (as opposed
to a debt rate), Lessee agrees that Lessor is leasing (and not financing)
the Software to Lessee; (iii) except as otherwise specifically provided
herein, the Software shall be deemed Property for all purposes under the
Lease.
(g) Lessee shall comply with all applicable laws, regulations,
requirements, rules and orders, all manufacturer's instructions and
warranty requirements, and with the conditions and requirements of all
policies of insurance with respect to the Property and the Lease.
(h) The Property is leased solely for commercial or business purposes.
7. MAINTENANCE AND REPAIRS; RETURN OF PROPERTY:
(a) During the continuance of each Lease, Lessee shall, at its expense, and
in accordance with all manufacturer maintenance specifications, (i) keep
the Property in good repair, condition and working order; (ii) make all
necessary adjustments, repairs and replacements; (iii) furnish all required
parts, mechanisms, devices and servicing; and (iv) not use or permit the
Property to be used for any purpose for which, in the opinion of the
manufacturer, the Property is not designed or reasonably suitable. Such
parts, mechanisms and devices shall immediately become a part of the
Property for all purposes hereunder and title thereto shall vest in Lessor.
If the manufacturer does not provide maintenance specifications, Lessee
shall perform all maintenance in accordance with industry standards for
like Property.
(b) During the continuance of each Lease, Lessee shall, at its own expense,
enter into and maintain in force a contract with the manufacturer or other
qualified maintenance organization satisfactory to Lessor for maintenance
of each item of Property. Such contract as to each item shall commence
upon the Acceptance Date. Lessee shall furnish Lessor with a copy of such
contract upon demand.
(c) Lessee shall pay all shipping and delivery charges and other expenses
incurred in connection with the Property. Upon default, or at the
expiration or earlier termination of any Lease, Lessee shall, at its own
expense, assemble, prepare for shipment and promptly return the Property
to Lessor at the location within the Continental United States designated
by Lessor. Upon such return, the Property shall be in the same operating
order, repair, condition and appearance as on the Acceptance Date, except
for reasonable wear and tear from proper use thereof, and shall include all
engineering changes theretofore prescribed by the manufacturer. Lessee
shall provide maintenance certificates or qualification letters and/or
arrange for and pay all costs which are necessary for the manufacturer to
accept the Property under contract maintenance at its then standard rates
("recertification"). The term of the Lease shall continue upon the same
terms and conditions until such recertification has been obtained. With
regard to Software, at the expiration or earlier termination of any Lease
Lessee shall (i) delete from its systems all Software then installed, (ii)
destroy all copies or duplicates of the Software which were not returned to
Lessor, and (iii) cease using the Software altogether. Upon its receipt
from Lessee, Lessor shall be responsible to return the Software to the
owner/vendor so that Lessee shall not be in breach of any software license.
8. OWNERSHIP AND INSPECTION:
(a) The Property shall at all times be the property of Lessor or its
assigns, and Lessee shall have no right, title or interest therein except
as to the use thereof subject to the terms and conditions of the Lease.
For purposes of the foregoing, Lessee transfers to Lessor all right, title
and interest (including all ownership interest) which Lessee may have in
and to the Property. Lessor may affix (or require Lessee to affix) tags,
decals or plates to the Property indicating Lessor's ownership, and Lessee
shall not permit their removal or concealment. Lessee shall not permit the
name of any person or entity other than Lessor or its assigns to be placed
on the Property as a designation that might be interpreted as a claim of
ownership or security interest.
(b) LESSEE SHALL KEEP THE PROPERTY AND LESSEE'S INTEREST UNDER ANY LEASE
FREE AND CLEAR OF ALL LIENS AND ENCUMBRANCES, EXCEPT THOSE PERMITTED IN
WRITING BY LESSOR OR ITS ASSIGNS.
(c) Lessor, its assigns and their agents shall have free access to the
Property at all reasonable times during normal business hours for the
purpose of inspecting the Property and for any other purpose contemplated
in the Lease.
<PAGE> 4
(d) Lessee shall immediately notify Lessor in writing of all details
concerning any damage or loss to the Property, including without
limitation, any damage or loss arising from the alleged or apparent
improper manufacture, functioning or operation of the Property.
9. WARRANTIES:
(a) Lessee acknowledges that Lessor is not the manufacturer of the Property
nor the manufacturer's agent nor a dealer therein. The Property is of a
size, design, capacity, description and manufacture selected by the Lessee.
Lessee is satisfied that the Property is suitable and fit for its purposes.
LESSEE AGREES THAT LESSOR HAS NOT MADE AND DOES NOT MAKE ANY WARRANTY OR
REPRESENTATION WHATSOEVER, EXPRESS OR IMPLIED, AS TO THE PROPERTY,
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OR REPRESENTATION AS TO: (i)
THE DESCRIPTION, CONDITION, DESIGN, QUALITY OR PERFORMANCE OF THE PROPERTY
OR QUALITY OR CAPACITY OF MATERIALS OR WORKMANSHIP IN THE PROPERTY; (ii)
ITS MERCHANTABILITY OR FITNESS OR SUITABILITY FOR A PARTICULAR PURPOSE
WHETHER OR NOT DISCLOSED TO LESSOR; AND (iii) DELIVERY OF THE PROPERTY FREE
OF THE RIGHTFUL CLAIM OF ANY PERSON BY WAY OF INFRINGEMENT OR THE LIKE.
LESSOR EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES. Lessor shall not be liable
to Lessee for any loss, damage or expense of any kind or nature caused,
directly or indirectly, by the Property or the use, possession or
maintenance thereof, or the repair, service or adjustment thereof, or by
any delay or failure to provide any such maintenance, repair, service or
adjustment, or by any interruption of service or loss of use thereof or for
any loss of business howsoever caused.
(b) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE LEASE, LESSOR
SHALL NOT, UNDER ANY CIRCUMSTANCES, BE LIABLE TO LESSEE OR ANY THIRD PARTY,
FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL OR EXEMPLARY DAMAGES ARISING OUT OF
OR RELATED TO THE TRANSACTION CONTEMPLATED HEREUNDER, WHETHER IN AN ACTION
BASED ON CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY) OR ANY
OTHER LEGAL THEORY, INCLUDING WITHOUT LIMITATION, LOSS OF ANTICIPATED
PROFITS, OR BENEFITS OF USE OR LOSS OF BUSINESS, EVEN IF LESSOR IS APPRISED
OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING.
IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF ANY
LEASE WHICH PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF
WARRANTIES OR EXCLUSION OF DAMAGES, IS INTENDED BY THE PARTIES TO BE
SEVERABLE FROM ANY OTHER PROVISION AND IS A SEPARABLE AND INDEPENDENT
ELEMENT OF RISK ALLOCATION AND IS INTENDED TO BE ENFORCED AS SUCH.
(c) Lessor assigns to Lessee all assignable warranties on the Property,
including without limitation any warranties described in Lessor's purchase
contract, which assignment shall be effective only (i) during the Initial
Period and any extensions thereof, and (ii) so long as no Event of Default
exists.
10. NET LEASE; LESSEE'S OBLIGATIONS ABSOLUTE AND UNCONDITIONAL:
This Agreement is a "net lease" and, as between Lessor and Lessee, Lessee
shall be responsible for and shall indemnify Lessor against, all costs,
expenses and claims of every nature whatsoever arising out of or in
connection with or related to the Lease or the Property.
Lessee agrees that its obligation to pay Monthly Rental and other
obligations under the Lease shall be irrevocable, independent, absolute and
unconditional and shall not be subject to any abatement, reduction,
recoupment, defense, offset or counterclaim otherwise available to Lessee;
nor, except as otherwise expressly provided herein or as agreed to by
Lessor in writing, shall this Agreement terminate for any reason whatsoever
prior to the end of the Initial Period.
11. ASSIGNMENT BY LESSOR:
Lessor may assign or transfer its rights and interests in the Lease and
Property to another party ("Lessor's Assignee") either outright or as
security for loans. Upon notice of any such assignment and instructions
from Lessor, Lessee shall pay its Monthly Rental and other payments and
<PAGE> 5
perform its other obligations under the Lease to the Lessor's Assignee (or
to another party designated by Lessor's Assignee). Upon any such sale or
assignment, LESSEE'S OBLIGATIONS TO LESSOR'S ASSIGNEE UNDER THE ASSIGNED
SCHEDULE SHALL BE ABSOLUTE AND UNCONDITIONAL AND LESSEE WILL NOT ASSERT
AGAINST LESSOR'S ASSIGNEE ANY CLAIM, DEFENSE, OFFSET OR COUNTERCLAIM WHICH
LESSEE MIGHT HAVE AGAINST LESSOR. Lessor's Assignee shall have all of the
rights but none of the obligations of Lessor under the assigned Lease, and
after such assignment Lessor shall continue to be responsible for all of
Lessor's obligations under the Lease.
Upon any such assignment, Lessee agrees to execute and deliver to Lessor:
(i) estoppel certificates, acknowledgments of assignment and other
documents requested by Lessor which acknowledge the assignment and affirm
provisions of the Lease, and (ii) UCC-1 financing statements or
precautionary filings as requested.
Only one executed counterpart of any Schedule shall be marked "Original";
any other executed counterparts shall be marked "Duplicate Original" or
"Counterpart". No security interest in any Schedule may be created through
the transfer and possession of any counterpart other than the "Original".
12. RISK OF LOSS ON LESSEE:
From the earlier of the date the supplier ships the Property to Lessee or
the date Lessor confirms Lessee's purchase order or contract to supplier
until the date the Property is returned to Lessor as provided in the Lease,
Lessee hereby assumes and shall bear all risk of loss for theft, damage or
destruction to the Property, howsoever caused. NO SUCH LOSS OR DAMAGE
SHALL IMPAIR ANY OBLIGATION OF LESSEE UNDER THIS LEASE WHICH SHALL CONTINUE
IN FULL FORCE AND EFFECT.
In the event of damage or loss to the Property (or any part thereof) and
irrespective of payment from any insurance coverage maintained by Lessee,
but applying full credit therefore, Lessee shall at the option of Lessor,
(a) place the Property in good repair, condition and working order; or (b)
replace the Property (or any part thereof) with like property of equal or
greater value, in good repair, condition and working order and transfer
clear title to such replacement property to Lessor whereupon such
replacement property shall be deemed the Property for all purposes under
the Lease; or (c) pay to Lessor the total rent due and owing at the time of
such payment plus an amount calculated by Lessor which is equal to the
Casualty Loss Value specified in the Casualty Loss Schedule attached to the
applicable Schedule.
13. INSURANCE:
Lessee shall obtain and maintain for the entire term of this Lease, at its
own expense (as primary insurance for Lessor and Lessee), property damage
and liability insurance and insurance against loss or damage to the
Property including without limitation loss by fire (including so-called
extended coverage), theft, collision and such other risks of loss as are
customarily insured against on the type of Property leased under any Lease
and by businesses in which Lessee is engaged, in such amounts, in such form
and with such insurers as shall be satisfactory to Lessor; provided,
however, that the amount of insurance against loss or damage to the
Property shall be equal to or greater than the Casualty Loss Value of such
items of Property as specified in the Casualty Loss Schedule attached to
the Schedule. Each insurance policy will name Lessee as insured and Lessor
and its assignees as additional insureds and loss payees thereof as their
interests may appear, shall contain cross-liability endorsements and shall
contain a clause requiring the insurer to give Lessor and its assignees at
least 30 days prior written notice of any material alteration in the terms
of such policy or of the cancellation thereof. Lessee shall furnish to
Lessor a certificate of insurance or other evidence satisfactory to Lessor
that such insurance coverage is in effect; provided, however, that Lessor
shall be under no duty either to ascertain the existence of or to examine
such insurance policy or to advise Lessee in the event such insurance
coverage shall not comply with the requirements hereof. All insurance
covering loss or damage to the Property shall contain a breach of warranty
clause satisfactory to Lessor.
14. INDEMNIFICATION:
Except for the gross negligence or willful misconduct of Lessor, Lessee
shall indemnify and hold Lessor harmless from and against any and all
claims, (including without limitation negligence, tort and strict
liability), damages, judgments, suits and legal proceedings, and any and
all costs and expenses in connection therewith (including attorney's fees
incurred by Lessor either in enforcing this indemnity or in defending
against such claims), arising out of or in any manner connected with or
<PAGE> 6
resulting from the Lease or the Property, including, without limitation the
manufacture, purchase, financing, ownership, rejection, non-delivery,
transportation, delivery, possession, use, operation, maintenance,
condition, lease, return, storage or disposition thereof; including without
limitation (a) claims for injury to or death of persons and for damage to
property; (b) claims relating to patent, copyright, or trademark
infringement, (c) claims relating to latent or other defects in the
Property whether or not discoverable by Lessor and (d) claims for wrongful,
negligent or improper act or misuse by Lessor. Lessee agrees to give
Lessor prompt notice of any such claim or liability. For purposes of this
paragraph and any Lease, the term "Lessor" shall include Lessor, its
successors and assigns, shareholders, directors, officers, representatives
and agents, and the provisions of this paragraph shall survive expiration
of any Lease with respect to events occurring prior thereto.
Upon request of Lessor, Lessee shall assume the defense of all demands,
claims, or actions, suits and all proceedings against Lessor for which
indemnity is provided and shall allow Lessor to participate in the defense
thereof. Lessor shall be subrogated to all rights of Lessee for any matter
which Lessor has assumed obligation hereunder, and may settle any such
demand, claim, or action without Lessee's prior consent, and without
prejudice to Lessor's right to indemnification hereunder.
15. EVENTS OF DEFAULT:
An "Event of Default" shall occur under any Lease if Lessee:
(a) fails to pay any Monthly Rental or other payment required under the
Lease when the same becomes due and payable and such failure continues for
ten (10) days after its due date.
(b) attempts to or does, remove, sell, assign, transfer, encumber, sublet
or part with possession of any one or more items of the Property or any
interest under any Lease, except as expressly permitted herein, or permits
a judgment or other claim to become a lien upon any or all of Lessee's
assets or upon the Property;
(c) permits any item of Property to become subject to any levy, seizure,
attachment, assignment or execution; or Lessee abandons any item of
Property;
(d) or any guarantor, fails to observe or perform any of its covenants and
obligations required to be observed or performed under the Lease and such
failure continues uncured for ten (10) days after occurrence thereof.
(e) or any guarantor, breaches any of its representations and warranties
made under any Lease, or if any such representations or warranties shall be
false or misleading in any material respect.
(f) or any guarantor, shall (i) be adjudicated insolvent or a bankrupt, or
cease, be unable, or admit in writing its inability, to pay its debts as
they mature, or make a general assignment for the benefit of creditors or
enter into any composition or arrangement with creditors; (ii) apply for or
consent to the appointment of a receiver, trustee or liquidator of it or of
a substantial part of its property, or authorize such application or
consent, or proceedings seeking such appointment shall be instituted
against it without such authorization, consent or application and shall
continue undismissed for a period of 60 days; (iii) authorize or file a
voluntary petition in bankruptcy or apply for or consent to the application
of any bankruptcy, reorganization in bankruptcy, arrangement, readjustment
of debt, insolvency, dissolution, moratorium or other similar law of any
jurisdiction, or authorize such application or consent; or proceedings to
such end shall be instituted against it without such authorization,
application or consent and such proceeding instituted against it shall
continue undismissed for a period of 60 days;
(g) or any guarantor, shall suffer an adverse change in its financial
condition after the date hereof as determined by Lessor in its sole
discretion, or there shall occur a substantial change in ownership of the
outstanding stock of Lessee or a substantial change in control of its board
of directors.
(h) shall be in default under any other Schedule or agreement executed with
Lessor; or shall fail to sign and deliver to Lessor any document requested
by Lessor in connection with any Lease or shall fail to do any thing
determined by Lessor to be necessary or desirable to effectuate the
transaction contemplated by the Lease or to protect Lessor's rights and
interests in the Lease and Property; or shall fail to provide financial
statements to Lessor as provided in Section 18(g) hereof.
<PAGE> 7
16. REMEDIES:
Upon the occurrence of any Event of Default and at any time thereafter,
Lessor may, with or without giving notice to Lessee or canceling the Lease,
do any one or more of the following:
(a) enforce this Agreement according to its terms;
(b) advance funds on Lessee's behalf to cure the Event of Default,
whereupon Lessee shall immediately reimburse Lessor therefor, together with
late charges accrued thereon;
(c) refuse to deliver the Property to Lessee;
(d) upon notice to Lessee, cancel this Master Lease Agreement and any or
all Schedules executed pursuant thereto;
(e) if Lessor determines, in its sole discretion, not to take possession of
the Property, Lessor shall continue to be the owner of the Property and
may, but is not obligated to, dispose of the Property by sale or otherwise,
all of which determinations may be made by Lessor in its sole discretion
and for its own account;
(f) declare immediately due and payable all amounts due or to become due
hereunder for the full term of the Lease (including any renewal or purchase
options which Lessee has contracted to pay);
(g) with or without terminating the Lease, recover the Casualty Loss Value
of the Property as of the rent payment date immediately preceding the date
of default together with all costs and expenses incurred by Lessor in the
repossession, recovery, storage, repair, sale, re-lease or other
disposition of the Property, including without limitation, reasonable
attorneys' fees and costs incurred in connection therewith or otherwise
resulting or arising from Lessee's default, and any indemnity if then
determinable, plus interest on all of the above until paid (before and
after judgment) at the lesser of the rate of eighteen percent (18%) per
annum or the highest rate permitted by law (collectively, "Lessor's
Damages");
(h) without notice to Lessee, repossess the Property wherever found, with
or without legal process, and for this purpose Lessor and/or its agents or
assigns may enter upon any premises of or under the control or jurisdiction
of Lessee or any agent of Lessee, without liability for suit, action or
other proceeding by Lessee (any damages occasioned by such repossession
being hereby expressly waived by Lessee) and remove the Property therefrom;
Lessee further agrees on demand, to assemble the Property and make it
available to Lessor at a place to be designated by Lessor;
(i) in its sole discretion, re-lease or sell any or all of the Property at
a public or private sale on such terms and notice as Lessor shall deem
reasonable (such sale may, at Lessor's sole option, be conducted at
Lessee's premises), and recover from Lessee liquidated damages for the loss
of a bargain and not as a penalty an amount equal to the Lessor's Damages.
(j) if Lessee breaches any of its obligations under Section 7(c) of this
Agreement, Lessee shall be liable to Lessor for additional damages in an
amount not less than two (2) times the original cost paid by Lessor for the
Software, and at Lessor's option, Lessor shall be entitled to injunctive
relief.
(k) exercise any other right or remedy which may be available to it under
the Uniform Commercial Code or any other applicable law;
(l) a cancellation hereunder shall occur only upon notice by Lessor and
only as to such items of Property as Lessor specifically elects to cancel
and this Lease shall continue in full force and effect as to the remaining
items, if any;
In the event Lessor in good faith believes the Property to be in danger of
misuse, abuse or confiscation or to be in any other way threatened; or
believes in good faith that the Property is no longer sufficient or has
declined or may decline in value; or believes in good faith for any other
reason that the prospect of payment or performance has become impaired,
Lessor shall have the right, in its sole discretion, to either require
additional collateral or declare the entire indebtedness under any Lease
immediately due and payable.
<PAGE> 8
Lessor may exercise any and all rights and remedies available at law or in
equity, including those available under the Uniform Commercial Code. The
rights and remedies afforded Lessor hereunder shall not be deemed to be
exclusive, but shall be in addition to any rights or remedies provided by
law. Lessor's failure promptly to enforce any right or remedy hereunder
shall not operate as a waiver of such right or remedy, and Lessor's waiver
of any default shall not constitute a waiver of any subsequent or other
default. Lessor may accept late payments or partial payments of amounts
due under the Lease and may delay enforcing any of Lessor's rights or
remedies hereunder without losing or waiving any of Lessor's rights or
remedies under the Lease.
17. LESSEE'S REPRESENTATIONS AND WARRANTIES:
Lessee represents and warrants as follows:
(a) If Lessee is a corporation, duly organized and validly existing in good
standing under the laws of the jurisdiction of its incorporation, duly
qualified to do business in each jurisdiction where any Property is, or is
to be located, and has full corporate power and authority to hold property
under lease and to enter into and perform its obligations under any Lease;
the execution, delivery and performance by Lessee of any Lease has been
duly authorized by all necessary corporate action on the part of Lessee,
and is not inconsistent with its Articles of Incorporation or By-Laws or
other governing instruments.
(b) If Lessee is a partnership, duly organized by written partnership
agreement and validly existing in accordance with the laws of the
jurisdiction of its organization, duly qualified to do business in each
jurisdiction where the Property is, or is to be located, and has full power
and authority to hold property under lease and to enter into and perform
its obligations under any Lease; the execution, delivery and performance by
Lessee of any Lease has been duly authorized by all necessary action on the
part of the Lessee, and is not inconsistent with its partnership agreement
or other governing instruments. Upon request, Lessee will deliver to
Lessor certified copies of its partnership agreement and other governing
instruments and original certificate of partners and other instruments
deemed necessary or desirable by Lessor. To the extent required by
applicable law, Lessee has filed and published its fictitious business name
certificate.
(c) The execution, delivery and performance by Lessee of any Lease does not
violate any law or governmental rule, regulation, or order applicable to
Lessee, does not and will not contravene any provision, or constitute a
default under any indenture, mortgage, contract, or other instrument to
which it is bound and, upon execution and delivery of each Lease, will
constitute a legal, valid and binding agreement of Lessee, enforceable in
accordance with its terms.
(d) No action, including any permits or consents, in respect of or by any
state, federal or other governmental authority or agency is required with
respect to the execution, delivery and performance by Lessee of any Lease.
(e) All computer hardware and software that is utilized by Lessee in the
operation of its businesses is and will be "Year 2000 Compliant" in that it
is and will be capable of accepting, processing and printing date data
between and within the twentieth and twenty-first centuries, and neither
the performance nor functionality of any computer hardware or software is
affected by dates prior to, during, or after the Year 2000. Upon request,
Lessee shall provide written assurances to Lessor that its hardware and
software are "Year 2000 Compliant".
18. GENERAL:
(a) Entire Agreement. Each Schedule shall incorporate the terms and
conditions of this Master Lease Agreement and, together with the
Acceptance Certificate (as defined herein) and Master Progress Funding
Agreement (and Authorizations thereunder), if applicable, and any
amendments to any of the foregoing documents, shall supersede all prior
agreements and constitute the entire understanding and agreement between
the Lessor and Lessee with regard to the subject matter hereof and thereof,
and there is no understanding or agreement, oral or written, which is not
set forth herein or therein.
(b) Time Is of the Essence; Provisions Severable. Time is of the essence
with respect to any Lease. The provisions contained in any agreement shall
be deemed to be independent and severable. The invalidity or partial
invalidity of any one provision or portion of the Lease under the laws of
any jurisdiction shall not affect the validity or enforceability of any
other provisions of the Lease. The captions and headings set forth herein
are for convenience of reference only and shall not define or limit any of
the terms hereof.
<PAGE> 9
(c) Notices. Notices or demands required to be given hereunder shall be in
writing and addressed to the other party at the address herein or such
other address provided by written notice hereunder and shall be effective
(i) upon the next business day if sent by guaranteed overnight express
service (such as Federal Express); (ii) on the same day if personally
delivered; or (iii) three days after mailing if sent by certified or
registered U.S. mail, postage prepaid.
(d) Governing Law; Waiver of Trial by Jury. THIS LEASE SHALL IN ALL
RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF UTAH, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE. LESSEE AGREES TO SUBMIT TO THE JURISDICTION OF THE STATE
AND/OR FEDERAL COURTS IN THE STATE OF UTAH IN ALL MATTERS RELATING TO THE
LEASE, THE PROPERTY AND THE CONDUCT OF THE RELATIONSHIP BETWEEN LESSOR AND
LESSEE. THIS LEASE WAS EXECUTED IN THE STATE OF UTAH (BY THE LESSOR HAVING
COUNTERSIGNED IT IN UTAH) AND IS TO BE PERFORMED IN THE STATE OF UTAH (BY
REASON OF ONE OR MORE PAYMENTS REQUIRED TO BE MADE TO LESSOR IN UTAH).
LESSOR AND LESSEE HEREBY WAIVE THE RIGHT TO TRIAL BY JURY OF ANY MATTERS
ARISING OUT OF THE LEASE OR PROPERTY OR THE CONDUCT OF THE RELATIONSHIP
BETWEEN LESSOR AND LESSEE.
(e) Binding Effect; Survivability. The provisions of each Lease shall
inure to the benefit of and shall bind Lessor and Lessee and their
respective permitted successors and assigns. All representations,
warranties, covenants and indemnities of Lessee made or agreed to in the
Lease or in any certificates delivered in connection therewith shall
survive the expiration, termination or cancellation of the Lease for any
reason.
(f) Further Assurances; Financing Statements. Lessee will cooperate with
Lessor in protecting Lessor's interests in the Property, the Lease and the
amounts due under the Lease, including, without limitation, the execution
and delivery of Uniform Commercial Code statements and filings and other
documents requested by Lessor. Lessee shall pay all costs of filing any
financing, continuation or termination statements with respect to the
Property and Lease, including without limitation, any intangibles tax,
documentary stamp tax or other similar tax or charge relating thereto and
of all UCC or other lien searches deemed necessary or advisable by Lessor.
Lessee will do whatever may be necessary or advisable to have a statement
of the interest of Lessor in the Property noted on any certificate of title
relating to the Property and will deposit said certificate with Lessor.
Lessee will execute and deliver to Lessor such other documents and written
assurances and take such further action as Lessor may request to more fully
carry out the implementation, effectuation, confirmation and perfection of
the Lease and any rights of Lessor thereunder. Lessee grants to Lessor a
security interest in all deposits and other property transferred or pledged
to Lessor to secure the payment and performance of all of Lessee's
obligations under the Lease.
(g) Financial Statements. Lessee shall provide to Lessor a copy of its
annual audited financial statements within 90 days after its fiscal year
end, and a copy of its quarterly unaudited financial statements within 45
days after the end of each fiscal quarter.
(h) Provisional Security Interest. In the event a court of competent
jurisdiction or other governing authority shall determine that the Lease
is not a "true lease" or is a lease intended as security or that Lessor (or
its assigns) does not hold legal title to or is not the owner of the
Property, then the Lease shall be deemed to be a security agreement with
Lessee, as debtor, having granted to Lessor, as secured party, a security
interest in the Property effective the date of the Lease, and the Property
shall secure, in addition to the indebtedness set forth herein, any other
indebtedness owing by Lessee to Lessor. In such case, Lessor shall have
all of the rights, privileges and remedies of a secured party under the
Utah Uniform Commercial Code.
(i) Change in Lessee's Name or Address. Lessee shall not change its name
or address from that set forth above, unless it shall have given Lessor or
its assigns no less than 30 days' prior written notice.
(j) Covenant of Quiet Possession. Lessor agrees that so long as no Event
of Default has occurred and is continuing, Lessee shall be entitled to
quietly possess the Property subject to and in accordance with the terms
and conditions of this Agreement.
(k) Lessor's Right to Perform for Lessee. If Lessee fails to perform or
comply with any of its agreements contained herein, Lessor may perform or
comply with such agreements and the amount of any payments and expenses of
<PAGE> 10
Lessor incurred in connection with such performance or compliance
(including attorneys' fees), together with interest thereon at the lesser
of the rate of eighteen percent (18%) per annum, or the highest rate
permitted by law shall be deemed additional rent payable by Lessee upon
demand.
(l) Attorneys' Fees. Lessee shall reimburse Lessor for all charges, costs,
expenses and attorneys' fees incurred by Lessor (a) in defending or
protecting its interest in the Property; (b) in the execution, delivery,
administration, amendment and enforcement of the Lease or the collection of
any rent or other payments due under the Lease; and (c) in any lawsuit or
other legal or arbitration/mediation proceeding to which the Lease gives
rise, including without limitation, actions in tort.
(m) Lessee's Options at End of Initial Period. At the end of the Initial
Period of any Lease, or upon any expiration of any renewal or extension
thereof as provided for in option (2) herein or otherwise, Lessee shall,
provided at least one hundred eighty (180) days prior written notice is
received by Lessor from Lessee via certified mail, do one of the following:
(1) purchase the Property for a price to be determined by Lessor and
Lessee, (2) extend the Lease for six (6) additional months at the rate
specified on the respective Schedule, or (3) return the Property to Lessor
at Lessee's expense to a destination within the continental United States
specified by Lessor and terminate the Schedule; provided, however, that for
option (3) to apply, all accrued but unpaid late charges, interest, taxes,
penalties, and any and all other sums due and owing under the Schedule must
first be paid in full, the provisions of Sections 6(c) and (d) and 7(c)
hereof must be specifically complied with, and Lessee must enter into a new
Schedule with Lessor to lease Property which replaces the Property listed
on the old Schedule. With respect to options (1) and (3), each party shall
have the right in its absolute and sole discretion to accept or reject any
terms of purchase or of any new Schedule, as applicable. In the event
Lessor and Lessee have not agreed to either option (1) or (3) by the end of
the Initial Period or any renewal or extension period then in effect, or if
Lessee fails to give written notice of its option via certified mail at
least one hundred eighty (180) days prior to the termination of the Initial
Period or any renewal or extension period then in effect, then option (2)
shall apply at the end of the Initial Period or any renewal or extension
period then in effect.
(n) Amendment and Modification. The Lease may not be amended or modified
except by a writing signed by a duly authorized representative of each
party, but no such amendment or modification needs further consideration to
be binding. Notwithstanding the foregoing, Lessee authorizes Lessor to
amend any Schedule to identify more accurately the Property (including,
without limitation, supplying serial numbers or other identifying data),
and such amendment shall be binding on Lessor and Lessee unless Lessee
objects thereto within 10 days after receiving notice of the amendment from
Lessor.
19. WAIVERS:
To the extent permitted by applicable law, Lessee hereby waives any and all
rights and remedies conferred upon a Lessee by Sections 2A-508 through 2A-
522 of the Uniform Commercial Code, including but not limited to Lessee's
rights to: (i) cancel the Lease; (ii) repudiate the Lease; (iii) reject the
Property; (iv) revoke acceptance of the Property; (v) recover damages from
Lessor for any breaches or warranty or for any other reason; (vi) claim,
grant or permit a security interest in the Property in Lessee's possession
or control for any reason; (vii) deduct all or any part of any claimed
damages resulting from Lessor's default, if any, under the Lease; (viii)
"cover" by making any purchase or lease of or contract to purchase or lease
Property in substitution for those due from Lessor; (ix) recover any
general, special, incidental or consequential damages, for any reason
whatsoever; and (x) commence legal action against Lessor for specific
performance, replevin, detinue, sequestration, claim and deliver or the
like for any Property identified to the Lease. To the extent permitted by
applicable law, Lessee also hereby waives any rights now or hereafter
conferred by statute or otherwise which may require Lessor to sell, lease
or otherwise use any Property in mitigation of Lessor's damages as set for
in Section 16 hereof or which may otherwise limit or modify any of Lessor's
rights or remedies in that section.
No waiver or modification by Lessor of any of the terms and conditions
hereof shall be effective unless in writing signed by an officer of Lessor.
20. ASSIGNMENT BY LESSEE:
LESSEE MAY NOT ASSIGN THIS AGREEMENT OR ANY OF ITS RIGHTS HEREUNDER OR
SUBLEASE THE PROPERTY WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. NO
PERMITTED ASSIGNMENT OR SUBLEASE SHALL RELIEVE LESSEE OF ANY OF ITS
<PAGE> 11
OBLIGATIONS HEREUNDER.
BY INITIALING THIS SECTION, LESSEE ACKNOWLEDGES THAT IT HAS READ THE ABOVE
PARAGRAPH UNDER SECTIONS 18, 19 AND 20, AND FULLY UNDERSTANDS THEIR CONTENT
AND AGREES TO THEIR PROVISIONS.
Initialed
--------
21. POWER OF ATTORNEY. LESSEE HEREBY AUTHORIZES AND APPOINTS LESSOR AND
LESSOR'S AGENTS AND ASSIGNS AS LESSEE'S ATTORNEY-IN-FACT TO COMPLETE,
EXECUTE, FILE AND AMEND ON LESSEE'S BEHALF UCC FINANCING STATEMENTS,
PRECAUTIONARY OR OTHERWISE, IN CONNECTION WITH THE PROPERTY AND LEASE AND
TO CONFORM THE DESCRIPTION OF THE PROPERTY (INCLUDING SERIAL NUMBERS) IN
ANY SUCH FINANCING STATEMENTS OR OTHER DOCUMENTATION.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement on the
day and year first above written.
LESSOR: LESSEE:
MATRIX FUNDING CORPORATION PETCO ANIMAL SUPPLIES, INC.
BY: /s/ Sherrie Copier BY: /s/ John D. Morberg
----------------------- ------------------------
TITLE: Assistant Vice President TITLE: Vice President and Controller
<PAGE> 12
CERTIFICATE OF INCUMBENCY
The undersigned, does hereby certify that he/she is the ASSISTANT SECRETARY
of Petco Animal Supplies, Inc., a corporation duly organized, existing in
good standing under the laws of the state of its incorporation, and qualified
to do business in all states where it is now conducting business (hereinafter
"Corporation"), and further certifies as follows:
1. That the individuals whose names appear below are duly elected officers
of the Corporation, elected, qualified and acting in the offices set forth
beside their names.
2. That pursuant to the Corporation's By-Laws and/or Resolutions, as
amended, the following persons have been properly designated and appointed
to the offices indicated and that said persons continue to hold such
offices at this time.
NAME OFFICE SPECIMEN SIGNATURE
John D. Morberg Vice President and Controller /s/ John D. Morberg
- - --------------------- ----------------------------- -------------------
Brian K. Devine Chairman, President and CEO /s/ Brian K. Devine
- - --------------------- ----------------------------- -------------------
3. That the persons designated to serve in the above entitled capacities
have been given sufficient authority to act on behalf of and to bind the
Corporation, and that each document executed before, after or on the date
of this Certificate, by any one or more of the above persons will
constitute a legally binding and enforceable obligation of the Corporation,
and the Corporation has authorized and approved the same.
4. That this Certificate shall be in full force and effect until revoked in
writing by the Secretary, Assistant Secretary or by any other duly
authorized officer of the Corporation.
5. That pursuant to the Corporation's By-Laws and/or Resolutions, as
amended, the undersigned has the power and authority to execute this
Certificate on behalf of the Corporation.
IN WITNESS WHEREOF, I have affixed my name and set the seal of the
Corporation this 26th day of January, 1999.
/s/ Diane L. Stewart
- - --------------------
Signature
Assistant Secretary
- - --------------------
Title
(Corporate Seal)
EXHIBIT 10.25
1994 STOCK OPTION AND RESTRICTED STOCK PLAN
FOR EXECUTIVE AND KEY EMPLOYEES
OF
PETCO ANIMAL SUPPLIES, INC.
(amended and restated as of March 18, 1998)
Petco Animal Supplies, Inc., a corporation organized under the laws of the
State of Delaware, hereby adopts this Stock Option and Restricted Stock
Plan for Executive and Key Employees of Petco Animal Supplies, Inc. The
purposes of this Plan are as follows:
(1) To further the growth, development and financial success of the
Company by providing additional incentives to certain of its executive and
other key Employees who have been or will be given responsibility for the
management or administration of the Company's business affairs, by
assisting them to become owners of the Company's Common Stock and thus to
benefit directly from its growth, development and financial success.
(2) To enable the Company to obtain and retain the services of the type of
professional, technical and managerial employees considered essential to
the long-range success of the Company by providing and offering them an
opportunity to become owners of the Company's Common Stock under restricted
stock and options, including options that are intended to qualify as
"incentive stock options" under Section 422 of the Code.
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the
meaning specified below unless the context clearly indicates to the
contrary. The masculine pronoun shall include the feminine and neuter and
the singular shall include the plural, where the context so indicates.
Section 1.1 - Additional Option
"Additional Option" shall mean 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.
Section 1.2 - Additional Option Feature
"Additional Option Feature" shall mean a feature of an Option that provides
for the automatic grant of an Additional Option in accordance with the
provisions described in Article XI.
<PAGE> 2
Section 1.3 - Board
"Board" shall mean the Board of Directors of the Company.
Section 1.4 - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.5 - Committee
"Committee" shall mean the Stock Option Committee of the Board, appointed
as provided in Section 9.1.
Section 1.6 - Company
"Company" shall mean Petco Animal Supplies, Inc., a Delaware corporation.
In addition, "Company" shall mean any corporation assuming, or issuing new
employee stock options in substitution for, Incentive Stock Options,
outstanding under the Plan, in a transaction to which Section 424(a) of the
Code applies.
Section 1.7 - Consultant
"Consultant" means any person retained, hired or employed by the Company to
provide advisory or other services to the Company, a Parent Corporation or
a Subsidiary, either on a full-time or part-time basis, concurrently upon a
Termination of Employment of such person.
Section 1.8 - Director
"Director" shall mean a member of the Board.
Section 1.9 - Employee
"Employee" shall mean any employee (as defined in accordance with the
regulations and revenue rulings then applicable under Section 3401(c) of
the Code) of the Company, or of any corporation which is then a Parent
Corporation or a Subsidiary, whether such employee is so employed at the
time this Plan is adopted or becomes so employed subsequent to the adoption
of this Plan.
Section 1.10 - Exchange Act
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
Section 1.11 - Incentive Stock Option
"Incentive Stock Option" shall mean an Option which qualifies under Section
422 of the Code and which is designated as an Incentive Stock Option by the
Committee.
<PAGE> 3
Section 1.12 - Non-Qualified Option
"Non-Qualified Option" shall mean an Option which is not an Incentive Stock
Option and which is designated as a Non-Qualified Option by the Committee.
Section 1.13 - Officer
"Officer" shall mean an officer of the Company, as defined in Rule 16a-1(f)
under the Exchange Act, as such Rule may be amended in the future.
Section 1.14 - Option
"Option" shall mean an option to purchase Common Stock of the Company,
granted under the Plan. "Options" includes both Incentive Stock Options
and Non-Qualified Options.
Section 1.15 - Optionee
"Optionee" shall mean an Employee or Consultant to whom an option is or was
granted under the Plan.
Section 1.16 - Parent Corporation
"Parent Corporation" shall mean any corporation in an unbroken chain of
corporations ending with the Company if each of the corporations other than
the Company then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in
such chain.
Section 1.17 - Plan
"Plan" shall mean this 1994 Stock Option and Restricted Stock Plan for
Executive and Key Employees of Petco Animal Supplies, Inc.
Section 1.18 - Restricted Stock
"Restricted Stock" shall mean shares of the Company's Common Stock issued
pursuant to Article VII of the Plan.
Section 1.19 - Restricted Stockholder
"Restricted Stockholder" shall mean an Employee to whom Restricted Stock
has been issued under the Plan.
Section 1.20 - Rule 16b-3
"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as
such Rule may be amended in the future.
<PAGE> 4
Section 1.21 - Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.22 - Securities Act
"Securities Act" shall mean the Securities Act of 1933, as amended.
Section 1.23 - Stock Appreciation Rights
"Stock Appreciation Rights" shall mean a stock appreciation right granted
under the Plan.
Section 1.24 - Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain then owns stock possessing
50% or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
Section 1.25 - Termination of Consultancy
"Termination of Consultancy" shall mean, as to a Consultant, the time when
the consultancy relationship between the Employee and the Company, a Parent
Corporation or a Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by expiration
or non-renewal of contractual agreement, resignation, discharge, death or
retirement. The Committee, in its absolute discretion, shall determine the
effect of all other matters and questions relating to Termination of
Consultancy.
Section 1.26 - Termination of Employment
"Termination of Employment" shall mean, as to an Optionee, the holder of a
Stock Appreciation Right or a Restricted Stockholder, the time when the
employee-employer relationship between the Employee and the Company, a
Parent Corporation or a Subsidiary is terminated for any reason, with or
without cause, including, but not by way of limitation, a termination by
resignation, discharge, death or retirement, but excluding terminations
where there is a simultaneous reemployment by the Company, a Parent
Corporation or a Subsidiary. The Committee, in its absolute discretion,
shall determine the effect of all other matters and questions relating to
Termination of Employment, including, but not by way of limitation, the
question of whether a Termination of Employment resulted from a discharge
for good cause, and all questions of whether particular leaves of absence
constitute Terminations of Employment; provided, however, that, with
respect to Incentive Stock Options, a leave of absence shall constitute a
Termination of Employment if, and to the extent that, such leave of absence
interrupts employment for the purposes of Section 422(a)(2) of the Code and
the then applicable regulations and revenue rulings under said Section.
<PAGE> 5
ARTICLE II
SHARES SUBJECT TO PLAN
Section 2.1 - Shares Subject to Plan
For each of the five fiscal years from and including the fiscal year ended
February 1, 1997, a number of shares of the Company's Common Stock, par
value $.0001 per share, equal to the amount of 3.0% of the total number of
issued and outstanding shares of Common Stock as of the last day of the
immediately preceding fiscal year (the "3.0% Limit") shall become available
for issuance under the Plan. In addition, (i) any shares of the Company's
Common Stock remaining from the 847,500 shares initially reserved in
January 1994 for issuance under the Plan but which have not been issued;
(ii) any shares of Common Stock relating to awards granted at any time
under the Plan which have expired or have been cancelled, including but not
limited to shares of Common Stock covered by Options which have expired or
which have been cancelled without having been exercised and shares of
Restricted Stock forfeited to the Company; (iii) any shares of Common Stock
which are exchanged by an Optionee as full or partial payment to the
Company in connection with the exercise of an Option awarded under the
Plan; and (iv) any unused portion of the 3.0% Limit for any fiscal year,
shall be added to the aggregate number of shares of Common Stock available
for issuance in each fiscal year under the Plan. To the extent that a
Stock Appreciation Right shall have been exercised for cash, the number of
shares subject to the related Option, or portion thereof, may again be
optioned hereunder. The number of shares of Common Stock which may be
issued upon exercise of Options and Stock Appreciation Rights or as
Restricted Stock granted to any single Employee shall not exceed 750,000.
In no event, except as subject to adjustment as provided in Section 2.2,
shall more than three million shares of Common Stock be cumulatively
available for issuance pursuant to the exercise of Options awarded under
the Plan which qualify as "incentive stock options" under the Code.
Section 2.2 - Changes in Company's Shares
In the event that the outstanding shares of Common Stock of the Company are
hereafter changed into or exchanged for a different number or kind of
shares or other securities of the Company, or of another corporation, by
reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend or combination of shares,
appropriate adjustments shall be made by the Committee in the number and
kind of shares for the purchase of which Options may be granted and in the
number and kind of shares of Restricted Stock that may be issued, including
adjustments of the limitations in Section 2.1 on the maximum number and
kind of shares which may be issued on exercise of Options or as Restricted
Stock.
<PAGE> 6
ARTICLE III
GRANTING OF OPTIONS
Section 3.1 - Eligibility
Any executive or other key Employee of the Company or of any corporation
which is then a Parent Corporation or a Subsidiary shall be eligible to be
granted Options, except as provided in Section 3.2. However, no option
shall be granted to any Employee who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company, any
Parent Corporation or any Subsidiary.
Section 3.2 - Qualification of Incentive Stock Options
No Incentive Stock Option shall be granted unless such Option, when
granted, qualifies as an "incentive stock option" under Section 422 of the
Code.
Section 3.3 - Granting of Options
(a) The Committee shall from time to time, in its absolute discretion:
(i) Determine which Employees are executive or other key Employees and
select from among the executive or other key Employees (including those to
whom Options and/or Stock Appreciation Rights have been previously granted
and/or Restricted Stock has previously been issued under the Plan) such of
them as in its opinion should be granted Options; and
(ii) Determine the number of shares to be subject to such Options granted
to such selected executive or other key Employees, and determine whether
such Options are to be Incentive Stock Options or Non-Qualified Options;
and
(iii) Determine the terms and conditions of such Options, consistent with
the Plan.
(b) Upon the selection of an executive or other key Employee to be granted
an Option, the Committee shall instruct the Secretary to issue such Option
and may impose such conditions on the grant of such Option as it deems
appropriate. Without limiting the generality of the preceding sentence,
the Committee may, in its discretion and on such terms as it deems
appropriate, require as a condition on the grant of an Option to an
Employee that the Employee surrender for cancellation some or all of the
unexercised Options which have been previously granted to him. An Option
the grant of which is conditioned upon such surrender may have an option
price lower (or higher) than the option price of the surrendered Option,
may cover the same (or a lesser or greater) number of shares as the
surrendered Option, may contain such other terms as the Committee deems
appropriate and shall be exercisable in accordance with its terms, without
regard to the number of shares, price, option period or any other term or
condition of the surrendered Option. Without limiting the generality of
the preceding sentence, the Committee may, in its discretion and on such
terms as it deems appropriate, require as a condition on the issuance of
Restricted Stock to an Employee that the Employee surrender for
cancellation some or all of the Restricted Stock that has been previously
granted to him.
<PAGE> 7
ARTICLE IV
TERMS OF OPTIONS
Section 4.1 - Option Agreement
Each Option shall be evidenced by a written Stock Option Agreement, which
shall be executed by the Optionee and an authorized Officer of the Company
and which shall contain such terms and conditions as the Committee shall
determine, consistent with the Plan. Stock Option Agreements evidencing
Incentive Stock Options shall contain such terms and conditions as may be
necessary to qualify such Options as "incentive stock options" under
Section 422 of the Code.
Section 4.2 - Option Price
(a) The price of the shares subject to each Option shall be set by the
Committee; provided, however, that the price per share shall be not less
than 100% of the fair market value of such shares on the date such Option
is granted; provided, further, that, in the case of an Incentive Stock
Option, the price per share shall not be less than 110% of the fair market
value of such shares on the date such Option is granted in the case of an
individual then owning (within the meaning of Section 424(d) of the Code)
more than 10% of the total combined voting power of all classes of stock of
the Company, any Subsidiary or any Parent Corporation.
(b) For purposes of the Plan, the fair market value of a share of the
Company's Common Stock as of a given date shall be: (i) the closing price
of a share of the Company's Common Stock on the principal exchange on which
shares of the Company's Common Stock are then trading, if any, on the
trading day previous to such date, or, if shares were not traded on the
trading day previous to such date, then on the next preceding trading day
during which a sale occurred; or (ii) if such Common Stock is not traded on
an exchange but is quoted on NASDAQ or a successor quotation system, (1)
the last sales price (if the Company's Common Stock is then listed as a
National Market Issue under the NASD National Market System) or (2) the
mean between the closing representative bid and asked prices (in all other
cases) for the Company's Common Stock on the trading day previous to such
date as reported by NASDAQ or such successor quotation system; or (iii) if
such Common Stock is not publicly traded on an exchange and not quoted on
NASDAQ or a successor quotation system, the mean between the closing bid
and asked prices for the Company's Common Stock, on the day previous to
such date, as determined in good faith by the Committee; or (iv) if the
Company's Common Stock is not publicly traded, the fair market value
established by the Committee acting in good faith; provided, however, that
the fair market value of the shares of the Company's Common Stock granted
concurrent with the closing of the Company's initial public offering shall
be deemed to be the initial public offering price of the shares of Common
Stock sold in such initial public offering.
Section 4.3 - Commencement of Exercisability
(a) Except as the Committee may otherwise provide, no Option may be
exercised in whole or in part during the first six months after such Option
is granted.
(b) Subject to the provisions of Sections 4.3(a), 4.3(c), and 10.3,
Options shall become exercisable at such times and in such installments
<PAGE> 8
(which may be cumulative) as the Committee shall provide in the terms of
each individual Option; provided, however, that by a resolution adopted
after an Option is granted the Committee may, on such terms and conditions
as it may determine to be appropriate and subject to Sections 4.3(a),
4.3(c), and 10.3, accelerate the time at which such Option or any portion
thereof may be exercised.
(c) No portion of an Option which is unexercisable at the later to occur
of (i) Termination of Employment, or (ii) Termination of Consultancy, shall
thereafter become exercisable.
(d) To the extent that the aggregate fair market value of stock with
respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year
(under the Plan and all other incentive stock option plans of the Company,
any Subsidiary and any Parent Corporation) exceeds $100,000, such options
shall be taxed as Non-Qualified Options. The rule set forth in the
preceding sentence shall be applied by taking options into account in the
order in which they were granted. For purposes of this Section 4.3(d), the
fair market value of stock shall be determined as of the time that the
option with respect to such stock is granted.
Section 4.4 - Expiration of Options
(a) No Option may be exercised to any extent by anyone after the first to
occur of the following events:
(i) The expiration of ten years from the date the Option was granted; or
(ii) With respect to an Incentive Stock Option in the case of an Optionee
owning (within the meaning of Section 424(d) of the Code), at the time the
Incentive Stock Option was granted, more than 10% of the total combined
voting power of all classes of stock of the Company, any Subsidiary or any
Parent Corporation, the expiration of five years from the date the
Incentive Stock Option was granted; or
(iii) Except in the case of any Optionee who is disabled (within the
meaning of Section 22(e)(3) of the Code), the expiration of three months
from the date of the later to occur of (i) the Optionee's Termination of
Employment for any reason, or (ii) the Optionee's Termination of
Consultancy for any reason, other than such Optionee's death unless the
Optionee dies within said three-month period; or
(iv) In the case of an Optionee who is disabled (within the meaning of
Section 22(e)(3) of the Code), the expiration of one year from the later to
occur of (i) the date of the Optionee's Termination of Employment for any
reason, or (ii) the date of Optionee's Termination of Consultancy for any
reason, other than such Optionee's death unless the Optionee dies within
said one-year period; or
(v) The expiration of one year from the date of the Optionee's death.
(b) Subject to the provisions of Section 4.4(a), the Committee shall
provide, in the terms of each individual Option, when such Option expires
and becomes unexercisable; and (without limiting the generality of the 3
<PAGE> 9
foregoing) the Committee may provide in the terms of individual Options
that said Options expire immediately upon a Termination of Employment or a
Termination of Consultancy for any reason.
Section 4.5 - Consideration
In consideration of the granting of an Option, the Optionee shall agree, in
the written Stock Option Agreement, to remain in the employ of the Company,
a Parent Corporation or a Subsidiary for a period of at least one year
after the Option is granted. Nothing in this Plan or in any Stock Option
Agreement hereunder shall confer upon any Optionee any right to continue in
the employ of the Company, any Parent Corporation or any Subsidiary or
shall interfere with or restrict in any way the rights of the Company, its
Parent Corporations and its Subsidiaries, which are hereby expressly
reserved, to discharge any Optionee at any time for any reason whatsoever,
with or without cause.
Section 4.6 - Adjustments in Outstanding Options
In the event that the outstanding shares of the stock subject to Options
are changed into or exchanged for a different number or kind of shares of
the Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split-up, stock
dividend or combination of shares, the Committee shall make an appropriate
and equitable adjustment in the number and kind of shares as to which all
outstanding Options, or portions thereof then unexercised, shall be
exercisable, to the end that after such event the Optionee's proportionate
interest shall be maintained as before the occurrence of such event. Such
adjustment in an outstanding Option shall be made without change in the
total price applicable to the Option or the unexercised portion of the
Option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices) and with any necessary
corresponding adjustment in Option price per share; provided, however,
that, in the case of Incentive Stock Options, each such adjustment shall be
made in such manner as not to constitute a "modification" within the
meaning of Section 424(h)(3) of the Code. Any such adjustment made by the
Committee shall be final and binding upon all Optionees, the Company and
all other interested persons.
Section 4.7 - Merger, Consolidation, Acquisition, Liquidation or
Dissolution
Notwithstanding the provisions of Section 4.6, in its absolute discretion,
and on such terms and conditions as it deems appropriate, the Committee may
provide by the terms of any Option that such Option cannot be exercised
after the merger or consolidation of the Company with or into another
corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or 80% or more of the Company's
then outstanding voting stock or the liquidation or dissolution of the
Company; and if the Committee so provides, it may, in its absolute
discretion and on such terms and conditions as it deems appropriate, also
provide, either by the terms of such Option or by a resolution adopted
prior to the occurrence of such merger, consolidation, acquisition,
liquidation or dissolution, that, for some period of time prior to such
event, such Option shall be exercisable as to all shares covered thereby,
notwithstanding anything to the contrary in Section 4.3(a), Section 4.3(b)
and/or any installment provisions of such Option.
<PAGE> 10
ARTICLE V
EXERCISE OF OPTIONS
Section 5.1 - Person Eligible to Exercise
During the lifetime of the Optionee, only he may exercise an Option (or any
portion thereof) granted to him. After the death of the Optionee, any
exercisable portion of an Option may, prior to the time when such portion
becomes unexercisable under the Plan or the applicable Stock Option
Agreement, be exercised by his personal representative or by any person
empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution.
Section 5.2 - Partial Exercise
At any time and from time to time prior to the time when any exercisable
Option or exercisable portion thereof becomes unexercisable under the Plan
or the applicable Stock Option Agreement, such Option or portion thereof
may be exercised in whole or in part; provided, however, that the Company
shall not be required to issue fractional shares and the Committee may, by
the terms of the Option, require any partial exercise to be with respect to
a specified minimum number of shares.
Section 5.3 - Manner of Exercise
An exercisable Option, or any exercisable portion thereof, may be exercised
solely by delivery to the Secretary or his office of all of the following
prior to the time when such Option or such portion becomes unexercisable
under the Plan or the applicable Stock Option Agreement:
(a) Notice in writing signed by the Optionee or other person then entitled
to exercise such Option or portion, stating that such Option or portion is
exercised, such notice complying with all applicable rules established by
the Committee; and
(b) (i) Full payment (in cash or by check) for the shares with respect to
which such Option or portion is thereby exercised; or
(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
(iii) With the consent of the Committee, a full recourse promissory note
bearing interest (at no less than such rate as shall then preclude the
imputation of interest under the Code or any successor provision) and
payable upon such terms as may be prescribed by the Committee. The
Committee may also prescribe the form of such note and the security to be
given for such note. No Option may, however, be exercised by delivery of a
promissory note or by a loan from the Company when or where such loan or
other extension of credit is prohibited by law; or
<PAGE> 11
(iv) With the consent of the Committee, any combination of the
consideration provided in the foregoing subsections (i), (ii) and (iii);
and
(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;
(d) Such representations and documents as the Committee, in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee may, in its absolute
discretion, also take whatever additional actions it deems appropriate to
effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer orders to transfer agents and
registrars; and
(e) In the event that the Option or portion thereof shall be exercised
pursuant to Section 5.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
Option or portion thereof.
Section 5.4 - Conditions to Issuance of Stock Certificates
The shares of stock issuable and deliverable upon the exercise of an
Option, or any portion thereof, may be either previously authorized but
unissued shares or issued shares which have then been reacquired by the
Company. The Company shall not be required to issue or deliver any
certificate or certificates for shares of stock purchased upon the exercise
of any Option or portion thereof prior to fulfillment of all of the
following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed; and
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body, which the Committee shall, in its absolute discretion,
deem necessary or advisable; and
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) 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; and
(e) The lapse of such reasonable period of time following the exercise of
the Option as the Committee may establish from time to time for reasons of
administrative convenience.
<PAGE> 12
Section 5.5 - Rights as Shareholders
The holders of Options shall not be, nor have any of the rights or
privileges of, shareholders of the Company in respect of any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to
such holders.
Section 5.6 - Transfer Restrictions
Unless otherwise approved in writing by the Committee, no shares acquired
upon exercise of any Option by any Officer may be sold, assigned, pledged,
encumbered or otherwise transferred until at least six months have elapsed
from (but excluding) the date that such Option was granted. The Committee,
in its absolute discretion, may impose such other restrictions on the
transferability of the shares purchasable upon the exercise of an Option as
it deems appropriate. Any such other restriction shall be set forth in the
respective Stock Option Agreement and may be referred to on the
certificates evidencing such shares. The Committee may require the
Employee to give the Company prompt notice of any disposition of shares of
stock, acquired by exercise of an Incentive Stock Option, within two years
from the date of granting such Option or one year after the transfer of
such shares to such Employee. The Committee may direct that the
certificates evidencing shares acquired by exercise of an Incentive Stock
Option refer to such requirement to give prompt notice of disposition.
ARTICLE VI
STOCK APPRECIATION RIGHTS
Section 6.1 - Grant of Stock Appreciation Rights
A Stock Appreciation Right may be granted to any Employee who receives a
grant of an Option under the Plan. A Stock Appreciation Right may be
granted in connection and simultaneously with the grant of an Option or
with respect to a previously granted Option. A Stock Appreciation Right
shall be subject to such terms and conditions not inconsistent with the
Plan as the Committee shall impose, including the following:
(a) A Stock Appreciation Right shall be related to a particular Option and
shall be exercisable only to the extent the related Option is exercisable.
(b) A Stock Appreciation Right shall be granted to the Optionee to the
maximum extent of 100% of the number of shares subject to the
simultaneously or previously granted Option.
(c) A Stock Appreciation Right shall entitle the Optionee (or other person
entitled to exercise the Option pursuant to Section 5.1) to surrender
unexercised a portion of the Option to which the Stock Appreciation Right
relates to the Company and to receive from the Company in exchange therefor
an amount, payable in shares of the Company's Common Stock (valued pursuant
to Section 4.2(b)), or, in the discretion of the Committee, in cash,
determined by multiplying the lesser of (i) the difference obtained by
<PAGE> 13
subtracting the Option exercise price per share of the Company's Common
Stock subject to the related Option from the fair market value (as
determined under Section 4.2(b)) of a share of the Company's Common Stock
on the date of exercise of the Stock Appreciation Right or (ii) two times
the Option exercise price per share of the Company's Common Stock subject
to the related Option, by the number of shares of the Company's Common
Stock subject to the related Option with respect to which the Stock
Appreciation Right shall have been exercised.
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.
ARTICLE VII
ISSUANCE OF RESTRICTED STOCK
Section 7.1 - Eligibility
Any executive or other key Employee of the Company or of any corporation
which is then a Parent Corporation or a Subsidiary, shall be eligible to be
issued Restricted Stock.
Section 7.2 - Issuance of Restricted Stock
(a) The Committee shall from time to time, in its absolute discretion:
(i) Determine which Employees are executive or key Employees and select
from among the executive or key Employees (including those to whom Options
and/or Stock Appreciation Rights have been previously granted and/or
Restricted Stock has been previously issued) such of them as in its opinion
should be issued Restricted Stock; and
(ii) Determine the number of shares of Restricted Stock to be issued to
such selected executive or key Employees; and
(iii) Determine the terms and conditions applicable to such Restricted
Stock, consistent with the Plan.
(b) Shares issued as Restricted Stock may be either previously authorized
but unissued shares or issued shares that have been reacquired by the
Company. Legal consideration, but no other cash payment, shall be required
for each issuance of Restricted Stock.
(c) Upon the selection of an executive or key Employee to be issued
Restricted Stock, the Committee shall instruct the Secretary to issue such
Restricted Stock and may impose such conditions on the issuance of such
Restricted Stock as it deems appropriate.
<PAGE> 14
ARTICLE VIII
TERMS OF RESTRICTED STOCK
Section 8.1 - Restricted Stock Agreement
Restricted Stock shall be issued only pursuant to a written Restricted
Stock Agreement, which shall be executed by the Restricted Stockholder and
an authorized Officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with the Plan.
Section 8.2 - Consideration
As partial consideration for the issuance of the Restricted Stock, the
Restricted Stockholder shall agree, in the written Restricted Stock
Agreement, to remain in the employ of the Company, a Parent Corporation or
a Subsidiary for a period at least one year after the Restricted Stock is
issued. Nothing in this Plan or in any Restricted Stock Agreement
hereunder shall confer upon any Restricted Stockholder any right to
continue in the employ of the Company, any Parent Corporation or any
Subsidiary or shall interfere with or restrict in any way the rights of the
Company, its Parent Corporations and its Subsidiaries, which are hereby
expressly reserved, to terminate or discharge any Restricted Stockholder at
any time for any reason whatsoever, with or without cause.
Section 8.3 - Rights as Shareholders
Upon delivery of the shares of Restricted Stock to the escrow holder
pursuant to Section 8.7, the Restricted Stockholder shall have all the
rights of a stockholder with respect to said shares, subject to the
restrictions in his Restricted Stock Agreement, including the right to vote
the shares and to receive all dividends or other distributions paid or made
with respect to the shares.
Section 8.4 - Restrictions
All shares of Restricted Stock issued under this Plan (including any shares
received by Restricted Stockholders as a result of stock dividends, stock
splits or any other forms of recapitalization) shall be subject to such
restrictions as the Committee shall provide in the terms of each individual
Restricted Stock Agreement; provided, however, that by a resolution adopted
after the Restricted Stock is issued, the Committee may, on such terms and
conditions as it may determine to be appropriate and subject to Section
10.3, remove any or all of the restrictions imposed by the terms of the
Restricted Stock Agreement. All restrictions imposed pursuant to this
Section 8.4 shall expire within ten years of the date of issuance.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire.
<PAGE> 15
Section 8.5 - Forfeiture of Restricted Stock
The Committee shall provide in the terms of each individual Restricted
Stock Agreement that the Restricted Stock then subject to restrictions
under the Restricted Stock Agreement be forfeited by the Restricted
Stockholder back to the Company immediately upon the later to occur of (i)
a Termination of Employment for any reason, or (ii) a Termination of
Consultancy for any reason; provided, however, that provision may be made
that no such forfeiture shall occur in the event of a Termination of
Employment or Termination of Consultancy because of the Employee's normal
retirement, death, total disability or early retirement with the consent of
the Board.
Section 8.6 - Merger, Consolidation, Acquisition, Liquidation or
Dissolution
Upon the merger or consolidation of the Company with or into another
corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or 80% or more of the Company's
then outstanding voting stock or the liquidation of the Company, the
Committee may determine, at its sole discretion, that the restrictions
imposed under the Restricted Stock Agreement upon some or all shares of
Restricted Stock shall immediately expire and/or that some or all of such
shares shall cease to be subject to forfeiture under Section 8.5.
Section 8.7 - Escrow
The Secretary or such other escrow holder as the Committee may appoint
shall retain physical custody of the certificates representing Restricted
Stock until all of the restrictions imposed under the Restricted Stock
Agreement expire or shall have been removed; provided, however, that in no
event shall any Restricted Stockholder retain physical custody of any
certificates representing Restricted Stock issued to him.
Section 8.8 - Legend
In order to enforce the restrictions imposed upon shares of Restricted
Stock hereunder, the Committee shall cause a legend or legends to be placed
on certificates representing all shares of Restricted Stock that are still
subject to restrictions under Restricted Stock Agreements, which legend or
legends shall make appropriate reference to the conditions imposed thereby.
ARTICLE IX
ADMINISTRATION
Section 9.1 - Stock Option Committee
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.
Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering
written notice to the Board. Vacancies in the Committee shall be filled by
the Board.
<PAGE> 16
Section 9.2 - Duties and Powers of Committee
It shall be the duty of the Committee to conduct the general administration
of the Plan in accordance with its provisions. The Committee shall have
the power to interpret the terms of the Plan, the Options, the Stock
Appreciation Rights and the Restricted Stock and to adopt such rules for
the administration, interpretation and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules. Any
such interpretations and rules in regard to Incentive Stock Options shall
be consistent with the basic purpose of the Plan to grant "incentive stock
options" within the meaning of Section 422 of the Code. The Board shall
have no right to exercise any of the rights or duties of the Committee
under the Plan.
Section 9.3 - Majority Rule
The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
Section 9.4 - Compensation; Professional Assistance; Good Faith Actions
Members of the Committee shall receive such compensation for their services
as members as may be determined by the Board. All expenses and liabilities
incurred by members of the Committee in connection with the administration
of the Plan shall be borne by the Company. The Committee may employ
attorneys, consultants, accountants, appraisers, brokers or other persons.
The Committee, the Company and its Officers and Directors shall be entitled
to rely upon the advice, opinions or valuations of any such persons. All
actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all Optionees, all
Restricted Stockholders, the Company and all other interested persons. No
member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the
Plan, the Options, the Stock Appreciation Rights or the Restricted Stock
and all members of the Committee shall be fully protected by the Company in
respect to any such action, determination or interpretation.
ARTICLE X
OTHER PROVISIONS
Section 10.1 - Options, Stock Appreciation Rights and Restricted Stock Not
Transferable
No Option, Stock Appreciation Right, Restricted Stock or interest or right
therein or part thereof shall be liable for the debts, contracts or
engagements of the Optionee, the holder of the Stock Appreciation Right,
the Restricted Stockholder or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be
voluntary or involuntary or by operation of law by judgment, levy,
attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null
and void and of no effect; provided, however, that nothing in this Section
10.1 shall prevent transfers by will or by the applicable laws of descent
and distribution.
<PAGE> 17
Section 10.2 - Amendment, Suspension or Termination of the Plan
The Plan, including without limitation any agreement, instrument or
document executed pursuant to the Plan, may be wholly or partially amended
or otherwise modified, suspended or terminated at any time or from time to
time by the Committee. However, without approval of the Company's
shareholders given within 12 months before or after the action by the
Committee, no action of the Committee may increase any limit imposed in
Section 2.1 on the maximum number of shares which may be issued on exercise
of Options or Stock Appreciation Rights or as Restricted Stock, materially
modify the eligibility requirements of Section 3.1, reduce the minimum
Option price requirements of Section 4.2(a) or extend the limit imposed in
this Section 10.2 on the period during which Options or Stock Appreciation
Rights may be granted or Restricted Shares may be issued, or amend or
modify the Plan in a manner requiring shareholder approval under Rule 16b-
3. Neither the amendment, suspension nor termination of the Plan shall,
without the consent of the holder of the Option or Stock Appreciation
Rights or the Restricted Stockholder, impair any rights or obligations
under any Option or Stock Appreciation Rights theretofore granted or under
any Restricted Stock theretofore issued, as the case may be. No Option or
Stock Appreciation Rights may be granted and no Restricted Stock may be
issued, during any period of suspension nor after termination of the Plan,
and in no event may any Option or Stock Appreciation Rights be granted or
may any Restricted Stock be issued, under this Plan after the first to
occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by the
Board; or
(b) The expiration of ten years from the date the Plan is approved by the
Company's shareholders under Section 10.3.
Section 10.3 - Approval of Plan by Shareholders
This Plan will be submitted for the approval of the Company's shareholders
within 12 months after the date of the Board's initial adoption of the
Plan. Options and Stock Appreciation Rights may be granted and Restricted
Stock may be issued prior to such shareholder approval; provided, however,
that such Options and Stock Appreciation Rights shall not be exercisable
prior to the time when the Plan is approved by the shareholders; provided,
further, that if such approval has not been obtained at the end of said 12-
month period, all Options and Stock Appreciation Rights previously granted
and all Restricted Stock previously issued under the Plan shall thereupon
be cancelled and become null and void. The Company shall take such actions
with respect to the Plan as may be necessary to satisfy the requirements of
Rule 16b-3(b).
<PAGE> 18
Section 10.4 - Effect of Plan Upon Other Option and Compensation Plans
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Parent Corporation or any
Subsidiary. Nothing in this Plan shall be construed to limit the right of
the Company, any Parent Corporation or any Subsidiary (a) to establish any
other forms of incentives or compensation for employees of the Company, any
Parent Corporation or any Subsidiary or (b) to grant or assume options or
stock appreciation rights or to issue restricted stock otherwise than under
this Plan in connection with any proper corporate purpose, including, but
not by way of limitation, the grant or assumption of options or stock
appreciation rights or the issuance of restricted stock in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of
the business, stock or assets of any corporation, firm or association.
Section 10.5 - Titles
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of the Plan.
Section 10.6 - Conformity to Securities Laws
The Plan is intended to conform to the extent necessary with all provisions
of the Securities Act and the Exchange Act and any and all regulations and
rules promulgated by the Securities and Exchange Commission thereunder,
including without limitation Rule 16b-3. Notwithstanding anything herein
to the contrary, the Plan shall be administered, and Options and Stock
Appreciation Rights shall be granted and may be exercised and Restricted
Stock may be issued, only in such a manner as to conform to such laws,
rules and regulations. To the extent permitted by applicable law, the
Plan, Options and Stock Appreciation Rights granted and Restricted Stock
issued hereunder shall be deemed amended to the extent necessary to conform
to such laws, rules and regulations.
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
<PAGE> 19
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.
EXHIBIT 21.1
PETCO ANIMAL SUPPLIES, INC.
SUBSIDIARIES
Name Jurisdiction of Organization
---- ----------------------------
International Pet Supplies and Distribution, Inc. California
Pet Nosh Consolidated Co., Inc. New York
Petco Southwest, Inc. California
Pet Concepts International California
PM Management Incorporated California
Petco Southwest, L.P. California
EXHIBIT 23.1
The Board of Directors
Petco Animal Supplies, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 333-51661 and 333-45889) on Form S-3, (Nos. 33-82302, 33-95352, 333-
04442, 333-26301, and 333-48311) 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 17, 1999, relating to the consolidated
balance sheets of Petco Animal Supplies, Inc. and subsidiaries as of
January 31, 1998 and January 30, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the years in the three-year period ended January 30, 1999, which report
appears in the January 30, 1999, annual report on Form 10-K of Petco Animal
Supplies, Inc.
KPMG LLP
San Diego, California
April 28, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Petco Animal Supplies, Inc. on Form S-3 (File No. 333-45889) and Form
S-8 (File No. 333-48311) of our report dated April 16, 1997, on our audits
of the financial statements of PetCare Plus, Inc. (which are included in
the restated pooled financial statements of Petco Animal Supplies, Inc.) as
of January 25, 1997 and for the years ended January 25, 1997 and January
27, 1996, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
April 28, 1999
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