UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
--------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
-----------------
Commission file number: 000-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0479906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9125 Rehco Road, San Diego, California 92121
(Address of principal executive office) (Zip Code)
(858) 453-7845
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
(Indicate the number of shares of each of the registrant's classes of common
stock, as of the latest practicable date.)
Title Date Outstanding
----- ---- -----------
Common Stock, $0.0001 Par Value September 13, 1999 21,105,803
<PAGE>
PETCO Animal Supplies, Inc.
Form 10-Q
For the Quarter Ended July 31, 1999
Index
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 30, 1999
and July 31, 1999 3
Consolidated Statements of Operations for the thirteen and
twenty-six weeks ended August 1, 1998 and July 31, 1999 4
Consolidated Statements of Cash Flows for the twenty-six
weeks ended August 1, 1998 and July 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II Other Information
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
January 30, July 31,
1999 1999
------------- -------------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,324 $ 13,941
Receivables 7,638 11,729
Inventories 104,789 104,398
Deferred tax assets 16,769 12,216
Other 5,993 5,899
------- -------
Total current assets 137,513 148,183
Fixed assets, net 187,510 190,418
Goodwill 37,804 36,316
Deferred tax assets 9,681 9,681
Investment in affiliates 3,862 18,492
Other assets 10,765 12,486
------- -------
$387,135 $415,576
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,099 $ 42,036
Accrued expenses 23,783 27,629
Accrued salaries and employee benefits 9,792 10,400
Current portion of long-term debt 4,500 7,300
Current portion of capital lease and
other obligations 9,023 8,475
------- -------
Total current liabilities 98,197 95,840
Long-term debt, excluding current portion 65,375 92,700
Capital lease and other obligations,
excluding current portion 20,982 17,246
Accrued store closing costs 7,005 4,946
Deferred rent and other liabilities 11,735 13,040
Stockholders' equity:
Common stock, $0.0001 par value, 100,000
shares authorized, 21,074 and 21,106
shares issued and outstanding,
respectively 2 2
Additional paid-in capital 270,916 271,196
Accumulated deficit (87,077) (79,394)
------- -------
Total stockholders' equity 183,841 191,804
------- -------
$387,135 $415,576
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
3
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<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
---------------------- ----------------------
August 1, July 31, August 1, July 31,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $197,318 $236,184 $393,614 $465,841
Cost of sales and
occupancy costs 148,975 174,304 298,596 344,839
------- ------- ------- -------
Gross profit 48,343 61,880 95,018 121,002
Selling, general and
administrative expenses 47,524 52,991 88,152 104,301
Merger and business
integration costs 10,949 -- 17,334 --
------- -------- ------- -------
Operating income (loss) (10,130) 8,889 (10,468) 16,701
Interest expense, net 1,424 2,078 2,546 4,002
------- ------- ------- -------
Earnings (loss) before
income taxes (11,554) 6,811 (13,014) 12,699
Income taxes (benefit) (4,293) 2,690 (4,686) 5,016
------- ------- ------- -------
Net earnings (loss) $ (7,261) $ 4,121 $ (8,328) $ 7,683
======= ======= ======= =======
Basic earnings (loss) per
common share $ (0.34) $ 0.20 $ (0.40) $ 0.36
======= ======= ======= =======
Diluted earnings (loss) per
common share $ (0.34) $ 0.19 $ (0.40) $ 0.36
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<CAPTION>
Twenty-six weeks ended
------------------------
August 1, July 31,
1998 1999
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss) $ (8,328) $ 7,683
Depreciation and amortization 14,303 19,359
Deferred tax assets (4,686) 4,553
Loss on retirement of fixed assets 1,837 30
Changes in assets and liabilities,
net of effects of purchase acquisitions:
Receivables (2,414) (4,091)
Inventories (7,616) 391
Other assets 197 (950)
Accounts payable 2,578 (9,063)
Accrued expenses 4,302 1,259
Accrued salaries and employee benefits (1,267) 608
Accrued store closing costs (1,218) (1,781)
Deferred rent 838 269
------- -------
Net cash provided by (used in)
operating activities (1,474) 18,267
------- -------
Cash flows from investing activities:
Additions to fixed assets (39,050) (20,548)
Investment in affiliates -- (11,310)
Net cash invested in acquisitions of businesses -- (90)
Change in other assets (2,502) (823)
------- -------
Net cash used in investing activities (41,552) (32,771)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt agreements 48,500 32,375
Repayment of long-term debt agreements (2,250) (2,250)
Repayment of capital lease and other obligations (3,103) (4,284)
Proceeds from the issuance of common stock 194 280
------- -------
Net cash provided by financing activities 43,341 26,121
------- -------
Net increase in cash and cash equivalents 315 11,617
Cash and cash equivalents at beginning of year 3,354 2,324
------- -------
Cash and cash equivalents at end of period $ 3,669 $ 13,941
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 - GENERAL
In the opinion of management of Petco Animal Supplies, Inc. (the "Company"
or "PETCO"), the unaudited consolidated financial statements presented herein
contain all adjustments, consisting of normal recurring adjustments, necessary
to present the financial position, results of operations and cash flows as of
July 31, 1999, and for the periods ended August 1, 1998 and July 31, 1999.
Certain prior year balances have been reclassified to conform to current year
presentation. Because of the seasonal nature of the Company's business, the
results of operations for the thirteen and twenty-six weeks ended August 1, 1998
and July 31, 1999 are not necessarily indicative of the results to be expected
for the full year. The Company's fiscal year ends on the Saturday closest to
January 31, resulting in years of either 52 or 53 weeks. All references to a
fiscal year refer to the fiscal year ending on the Saturday closest to January
31 of the following year. For example, references to fiscal 1998 refer to the
fiscal year beginning on February 1, 1998, and ending on January 30, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto for fiscal 1998 included in the Company's Form 10-K Annual
Report (File No. 000-23574) filed with the Securities and Exchange Commission on
April 30, 1999.
NOTE 2 - BUSINESS COMBINATIONS
The Company recorded merger and business integration costs of $10,949 and
$17,334 during the thirteen and twenty-six weeks ended August 1, 1998. These
costs, related to acquisitions in prior years, include transaction costs, costs
attributable to lease cancellation and closure of duplicate or inadequate
facilities and activities, facility conversion costs, cancellation of certain
contractual obligations and other integration costs.
Note 3 - Investment in Affiliates
In July 1999, the Company acquired an equity interest in Petopia.com, a
startup e-commerce destination on the internet for the sale of pet food and
supplies. The Company received 3,017 shares of Petopia.com Series C preferred
stock plus warrants to purchase an additional 5,120 Series C preferred shares.
The Company accounts for its investment in Petopia.com using the equity method
and records its proportionate share of earnings or loss. Because the financial
statements of Petopia.com are recorded on a calendar year basis, the Company
will record its proportionate share of earnings or loss with a lag of one month.
The Company did not record any earnings or loss for the second quarter of fiscal
1999. The Company will also provide certain marketing and fulfillment services
to Petopia.com, in exchange for up to 4,803 Series C preferred shares, according
to the terms of a strategic alliance agreement. The Company's investment in
Petopia.com is included in investment in affiliates on the accompanying
consolidated balance sheets. During the twenty-six weeks ended July 31, 1999,
the Company also increased its investment by $3,510 in a limited partnership
which operates retail pet food and supply stores in Canada, with plans to open
additional stores. This investment is included in investment in affiliates on
the accompanying consolidated balance sheets.
6
<PAGE>
NOTE 4 - NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per common share are computed using the weighted
average number of common shares outstanding during the period. Diluted net
earnings (loss) per common share incorporates the incremental shares issuable
upon the assumed exercise of stock options.
Net earnings (loss) and weighted average common shares used to compute net
earnings (loss) per share, basic and diluted, are presented below:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- ----------------------
August 1, July 31, August 1, July 31,
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (7,261) $ 4,121 $ (8,328) $ 7,683
====== ====== ====== ======
Common shares, basic 21,073 21,090 21,072 21,082
Dilutive effect of stock options -- 407 -- 221
------ ------ ------ ------
Common shares, diluted 21,073 21,497 21,072 21,303
====== ====== ====== ======
</TABLE>
Shares of 182 and 194 issuable upon the assumed exercise of stock options
were not included in computing diluted loss per share for the thirteen weeks and
twenty-six weeks ended August 1, 1998, respectively, because the effect would
have been antidilutive. Options to purchase common shares that were outstanding
but were not included in the computation of diluted net earnings (loss) per
share because the options' exercise price was greater than the average market
price of the common shares were 936 and 1,093 for the thirteen and twenty-six
weeks ended August 1, 1998, respectively, and 1,502 and 1,781 for the thirteen
and twenty-six weeks ended July 31, 1999, respectively.
NOTE 5 - 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 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.
The Company has been named as a defendant in a lawsuit filed by the United
States Equal Employment Opportunity Commission in the United States District
Court for the Northern District of California on June 2, 1999. The complaint
alleges that the Company violated Title VII of the Civil Rights Act of 1964, as
amended, and the Equal Pay Act, by payment of wages to employees of one sex at
rates less than the rates paid to employees of the opposite sex. The complaint
seeks unspecified monetary damages for the named employees and any other
similarly-situated employees. While the Company believes the allegations
contained in this lawsuit are without merit, the claim has not progressed
sufficiently for the Company to estimate a range of possible exposure, if any.
The Company intends to defend itself vigorously.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
PETCO is a leading specialty retailer of premium pet food and supplies. As
of July 31, 1999, the Company operated 485 stores in 38 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.
RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
Net sales increased 19.7% to $236.2 million for the thirteen weeks ended
July 31, 1999 ("second quarter 1999") from $197.3 million for the thirteen weeks
ended August 1, 1998 ("second quarter 1998"). The increase in net sales in
second quarter 1999 resulted primarily from the comparable store net sales
increase of 12.1% and the addition of 51 superstores, partially offset by the
closing of 27 stores, of which nine were relocated. The comparable store net
sales increase was attributable to maturing superstores, increased marketing and
merchandising efforts and increased customer traffic. The increase in comparable
store net sales accounted for approximately $23.5 million, or 60.4%, of the net
sales increase. The net increase in the Company's store base accounted for
approximately $15.4 million, or 39.6%, of the net sales increase.
Gross profit, defined as net sales less cost of sales including store
occupancy costs, increased to $61.9 million in second quarter 1999 from $48.3
million in second quarter 1998. As a percentage of sales, gross profit increased
to 26.2% in second quarter 1999 from 24.5% in second quarter 1998. Gross profit
increased from the prior year primarily through greater purchasing leverage,
particularly in acquired stores which were selling through non-continuing
inventories at reduced gross margins in prior year, and increased leverage of
occupancy costs.
Selling, general and administrative expenses increased to $53.0 million in
second quarter 1999 from $47.5 million in second quarter 1998. As a percentage
of net sales, these expenses decreased to 22.4% in second quarter 1999 from
24.1% in second quarter 1998. Included in selling, general and administrative
expense in the second quarter 1998 is a $4.5 million charge related to the
write-off of assets in connection with the relocation of the Company's main
distribution center, as well as the replacement of point-of-sale equipment in a
chain-wide conversion of this equipment and other assets. Excluding this charge,
selling, general and administrative expenses increased to 22.4% of net sales in
second quarter 1999 from 21.8% in second quarter 1998. The increase was due
primarily to the accrual for management bonuses based on improved financial
performance, depreciation and maintenance of the Company's investments in
infrastructure in the prior year, accelerated depreciation on store assets
related to planned store closures, and increased preopening expenses.
Merger and business integration costs of $10.9 million were recorded in
second quarter 1998 in connection with the acquisition and conversion activities
of the stores acquired in prior years.
Operating income in second quarter 1999 was $8.9 million, or 3.8% of net
sales, compared with an operating loss of $10.1 million in second quarter 1998.
Excluding merger and business integration costs and other charges in the prior
year, the Company would have reported operating income of $5.3 million, or 2.7%
of net sales, in second quarter 1998.
8
<PAGE>
Net interest expense was $2.1 million for second quarter 1999, compared
with net interest expense of $1.4 million for second quarter 1998. Increased
borrowings in second quarter 1999 led to the increase in interest expense.
Income tax expense was $2.7 million in second quarter 1999, compared with
income tax benefit of $4.3 million in second quarter 1998. 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 earnings were $4.1 million, or $0.19 per diluted share, for second
quarter 1999, compared with a net loss of $7.3 million, or $0.34 per diluted
share, for second quarter 1998. Excluding merger and business integration costs
and other charges, and related tax benefits, in the prior year, net earnings for
second quarter 1998 would have been $2.3 million, or $0.11 per diluted share.
TWENTY-SIX WEEKS ENDED JULY 31, 1999 COMPARED WITH TWENTY-SIX WEEKS ENDED
AUGUST 1, 1998
Net sales increased 18.3% to $465.8 million for the twenty-six weeks ended
July 31, 1999 from $393.6 million for the twenty-six weeks ended August 1, 1998.
The increase in net sales resulted primarily from the comparable store net sales
increase of 11.5% and the addition of 51 superstores, partially offset by the
closing of 27 stores, of which nine were relocated. The comparable store net
sales increase was attributable to maturing superstores, increased marketing and
merchandising efforts and increased customer traffic. The increase in comparable
store net sales accounted for approximately $44.7 million, or 61.9%, of the net
sales increase. The net increase in the Company's store base accounted for
approximately $27.5 million, or 38.1%, of the net sales increase.
Gross profit, defined as net sales less cost of sales including store
occupancy costs, increased to $121.0 million for the twenty-six weeks ended July
31, 1999 from $95.0 million for the same period last year. As a percentage of
net sales, gross profit increased to 26.0% for the twenty-six weeks ended July
31, 1999 from 24.1% for the same period last year. Gross profit increased from
the prior year primarily through greater purchasing leverage, particularly in
acquired stores which were selling through no continuing inventories at reduced
gross margins in prior year, and increased leverage of occupancy costs.
Selling, general and administrative expenses increased to $104.3 million
for the twenty-six weeks ended July 31, 1999 from $88.2 million for the same
period last year. As a percentage of net sales, these expenses were 22.4% for
the twenty-six weeks ended July 31, 1999, unchanged from the same period last
year. Included in selling, general and administrative expense for the twenty-six
weeks ended August 1, 1998 is a $4.5 million charge in the second quarter 1998
related to the write-off of assets in connection with the relocation of the
Company's main distribution center, as well as the replacement of point-of-sale
equipment in a chain-wide conversion of this equipment and other assets.
Excluding this charge, selling, general and administrative expenses increased to
22.4% of net sales for the twenty-six weeks ended July 31, 1999 from 21.3% for
the prior year period. The increase was due primarily to the accrual for
management bonuses based on improved financial performance, depreciation and
maintenance of the Company's investments in infrastructure in the prior year,
accelerated depreciation on store assets related to planned store closures,
increased personnel and related costs associated with decentralization of field
staff and increased preopening expenses.
Merger and business integration costs of $17.3 million were recorded in the
twenty-six weeks ended August 1, 1998 in connection with the acquisition and
conversion activities of the stores acquired in prior years.
9
<PAGE>
Operating income for the twenty-six weeks ended July 31, 1999 was $16.7
million, or 3.6% of net sales, compared with an operating loss of $10.5 million
in the prior year. Excluding merger and business integration costs and other
charges in the prior year, the Company would have reported operating income of
$11.3 million, or 2.9% of net sales, in the twenty-six weeks ended August 1,
1998.
Net interest expense was $4.0 million for the twenty-six weeks ended July
31, 1999, compared with net interest expense of $2.5 million for the same period
last year. Increased borrowings in fiscal 1999 led to the increase in interest
expense.
Income tax expense was $5.0 million for the twenty-six weeks ended July 31,
1999, compared with income tax benefit of $4.7 million in the prior year. Income
tax benefit reflects the Federal and state tax benefits of the loss before
income taxes, net of the effect of non-deductible expenses.
Net earnings were $7.7 million, or $0.36 per diluted share, for the
twenty-six weeks ended July 31, 1999, compared with a net loss of $8.3 million,
or $0.40 per diluted share, in the prior year. Excluding merger and business
integration costs and other charges, and related tax benefits, in the prior
year, net earnings for the twenty-six weeks ended August 1, 1998 would have been
$5.3 million, or $0.25 per diluted share.
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 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 completed the inventory and assessment of its
embedded systems contained in the corporate offices, distribution centers and
store locations. This assessment focused 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 remediation and testing of new and existing IT and non-IT
systems is nearly complete, and additional procedures will be conducted as
necessary.
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 will undergo continuous review and adjustment
throughout the remainder of 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.
10
<PAGE>
The Company does not expect the future 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," below.
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, as amended, is
effective for fiscal years beginning after June 15, 2000 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
July 31, 1999, total assets were $415.6 million, $148.2 million of which were
current assets. Net cash provided by operating activities was $18.3 million for
the twenty-six weeks ended July 31, 1999, compared with net cash used in
operating activities of $1.5 million for the prior year period. The Company's
sales are substantially on a cash basis. Therefore, cash flow generated from
operating stores provides a significant source of liquidity to the Company. The
Company's receivables increased $4.1 million in the twenty-six weeks ended July
31, 1999 due to seasonal fluctuations in vendor receivables. The principal use
of operating cash is for the purchase of merchandise inventories. A portion of
the Company's inventory purchases is financed through vendor credit terms.
The Company uses cash in investing activities to purchase fixed assets for
new stores, to acquire stores, and, to a lesser extent, to purchase warehouse
and office fixtures, equipment and computer hardware and software in support of
its distribution and administrative functions. During the twenty-six weeks ended
July 31, 1999 the Company invested $11.3 million in affiliates. The affiliates
included Petopia.com, a startup e-commerce destination on the internet for the
sale of pet food and supplies, and a limited partnership that operates retail
pet food and supply stores in Canada, with plans to open additional stores. Cash
used in investing activities was $32.8 million for the twenty-six weeks ended
July 31, 1999, and $41.6 million for the prior year period.
11
<PAGE>
The Company also finances some of its purchases of equipment and fixtures
through capital lease and other obligations. No purchases of fixed assets were
financed in this manner during the twenty-six week periods ended July 31, 1999,
and August 1, 1998. The Company believes that additional sources of capital
lease and other obligation financing are available on a cost-effective basis and
plans to use them, as necessary, in connection with its expansion program.
The Company's primary long-term capital requirement is funding for the
opening or acquisition of superstores. Cash flows provided by financing
activities were $26.1 million for the twenty-six weeks ended July 31, 1999, and
$43.3 million in the prior year period. Cash flows from financing activities
were provided by borrowings under long-term debt agreements, net of repayments
under long-term debt and other obligations. Cash flows from financing activities
were used to fund the Company's expansion program, investment in affiliates and
working capital requirements.
The Company has a credit facility with a syndicate of banks with a
commitment of up to $150.0 million that expires between July 15, 2004 and July
15, 2006. The credit facility provides for $100.0 million in term loans and
$50.0 million in revolving loans. Borrowings under the credit facility are
secured by substantially all of the assets of the Company and bear interest, at
the Company's option, at the agent bank's corporate base rate plus up to 0.50%,
or LIBOR plus 1.00% to 3.25%, 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 July 31, 1999, the Company had $50.0 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 began
expiring in 1999.
The Company anticipates that funds generated by operations, funds available
under the credit facility and currently available vendor financing and capital
lease and other obligation financing will be sufficient to finance its continued
operations and planned store openings at least through the next twelve months.
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Quarterly Report on Form 10 - Q, including, but
not limited to, Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, Section
21E of the Securities Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
current expectations concerning future results and events. The words "believes,"
"expects," "intends," "plans," "anticipates," "likely," "will," and similar
expressions identify such forward-looking statements. These forward-looking
statements are subject to risks, uncertainties, and other factors, some of which
are beyond the Company's control that could cause actual results to differ
materially from those forecast or anticipated in such forward-looking
statements. These factors include, but are not limited to, the Company's
expansion plans, the integration of operations as a result of acquisitions,
reliance on vendors and product lines and exclusive distribution arrangements,
competition, performance of new superstores and their future operating results,
performance of affiliates and their future operating results, quarterly and
seasonal fluctuations, dependence on senior management, and possible volatility
of stock price. These factors are discussed generally in greater detail under
the caption "Certain Cautionary Statements" in PETCO's Annual Report on Form
10-K for the year ended January 30, 1999.
12
<PAGE>
ITEM 3. 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 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 July 31, 1999, the Company had $100.0 million in debt under the
credit facility. The average debt outstanding for the last four quarters was
$80.7 million. Based on this average debt level, a hypothetical 50 basis point
adverse change in LIBOR rates would increase net interest expense by
approximately $0.4 million on an annual basis, and likewise would decrease
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 results
due to adverse changes in interest rates or debt availability.
The Company did not have any material foreign currency or other significant
market risk or any derivative financial instruments at July 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United States
District Court for the Southern District of California between August and
November, 1998. These cases have 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.
The Company has been named as a defendant in a lawsuit filed by the United
States Equal Employment Opportunity Commission in the United States District
Court for the Northern District of California on June 2, 1999. The complaint
alleges that the Company violated Title VII of the Civil Rights Act of 1964, as
amended, and the Equal Pay Act, by payment of wages to employees of one sex at
rates less than the rates paid to employees of the opposite sex. The complaint
seeks unspecified monetary damages for the named employees and any other
similarly-situated employees. While the Company believes the allegations
contained in this lawsuit are without merit, the claim has not progressed
sufficiently for the Company to estimate a range of possible exposure, if any.
The Company intends to defend itself vigorously.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 17, 1999.
(b)-(c) The matters voted on at the meeting and the votes cast with
respect thereto were as follows:
Election of Director.
<TABLE>
<CAPTION>
Nominee for Votes Cast Votes Broker
Director For Withheld Abstentions Non-Votes
--------------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Andrew G. Galef 18,861,302 48,074 -- --
</TABLE>
In addition to the election of Mr. Galef, whose term of
office expires in year 2002, the following Directors who
were not elected at the meeting have continuing terms of
office:
<TABLE>
<CAPTION>
Annual Meeting at
Name of Director Which Term Expires
---------------------- ------------------
<S> <C>
Richard J. Lynch, Jr. Year 2000
James F. McCann Year 2000
Brian K. Devine Year 2001
Peter M. Starrett Year 2001
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
(a) 27.1 Financial Data Schedule (filed electronically only)
2. Reports on Form 8-K
(a) The Company filed no reports on form 8-K during the thirteen
weeks ended July 31, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
------------------
James M. Myers
Senior Vice President and
Chief Financial Officer
Date: September 13, 1999
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JUL-31-1999
<CASH> 13,941
<SECURITIES> 0
<RECEIVABLES> 11,729
<ALLOWANCES> 0
<INVENTORY> 104,398
<CURRENT-ASSETS> 148,183
<PP&E> 190,418
<DEPRECIATION> 0
<TOTAL-ASSETS> 415,576
<CURRENT-LIABILITIES> 95,840
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 191,802
<TOTAL-LIABILITY-AND-EQUITY> 415,576
<SALES> 465,841
<TOTAL-REVENUES> 465,841
<CGS> 344,839
<TOTAL-COSTS> 344,839
<OTHER-EXPENSES> 104,301
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,002
<INCOME-PRETAX> 12,699
<INCOME-TAX> 5,016
<INCOME-CONTINUING> 7,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,683
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.36
</TABLE>
