<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
--------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 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 December 6, 1999 21,107,102
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PETCO ANIMAL SUPPLIES, INC.
FORM 10-Q
For the Quarter Ended October 30, 1999
INDEX
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 30, 1999
and October 30, 1999 3
Consolidated Statements of Operations for the thirteen and
thirty-nine weeks ended October 31, 1998 and October 30, 1999 4
Consolidated Statements of Cash Flows for the thirty-nine
weeks ended October 31, 1998 and October 30, 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 14
Part II Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
January 30, October 30,
1999 1999
----------- -----------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,324 $ 5,504
Receivables 7,638 12,493
Inventories 104,789 118,706
Deferred tax assets 16,769 9,238
Other 5,993 6,258
------- -------
Total current assets 137,513 152,199
Fixed assets, net 187,510 192,033
Goodwill 37,804 37,080
Deferred tax assets 9,681 9,681
Investment in affiliates 3,862 20,266
Other assets 10,765 13,116
------- -------
$387,135 $424,375
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,099 $ 42,343
Accrued expenses 23,783 28,257
Accrued salaries and employee benefits 9,792 15,890
Current portion of long-term debt 4,500 7,300
Current portion of capital lease and
other obligations 9,023 7,690
------- -------
Total current liabilities 98,197 101,480
Long-term debt, excluding current portion 65,375 92,700
Capital lease and other obligations,
excluding current portion 20,982 14,737
Accrued store closing costs 7,005 5,423
Deferred rent and other liabilities 11,735 13,332
Stockholders' equity:
Common stock, $0.0001 par value, 100,000
shares authorized, 21,074 and
21,107 shares issued and outstanding,
respectively 2 2
Additional paid-in capital 270,916 271,206
Accumulated deficit (87,077) (74,505)
------- -------
Total stockholders' equity 183,841 196,703
------- -------
$387,135 $424,375
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
----------------------- -----------------------
October 31, October 30, October 31, October 30,
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $204,785 $249,007 $598,399 $714,848
Cost of sales and
occupancy costs 152,830 181,369 451,426 526,208
------- ------- ------- -------
Gross profit 51,955 67,638 146,973 188,640
Selling, general and
administrative expenses 47,145 56,251 135,297 160,552
Merger and business
integration costs 5,629 -- 22,963 --
------- -------- ------- -------
Operating income (loss) (819) 11,387 (11,287) 28,088
Interest expense, net 1,983 2,545 4,529 6,547
------- ------- ------- -------
Earnings (loss) before
internet operations and
equity in loss of
unconsolidated affiliates
and income taxes (2,802) 8,842 (15,816) 21,541
Internet operations and equity
in loss of unconsolidated
affiliates -- (761) -- (761)
------- ------- ------- -------
Earnings (loss) before
income taxes (2,802) 8,081 (15,816) 20,780
Income taxes (benefit) (953) 3,192 (5,639) 8,208
------- ------- ------- -------
Net earnings (loss) $ (1,849) $ 4,889 $(10,177) $ 12,572
======= ======= ======= =======
Basic earnings (loss) per
common share $ (0.09) $ 0.23 $ (0.48) $ 0.60
======= ======= ======= =======
Diluted earnings (loss) per
common share $ (0.09) $ 0.23 $ (0.48) $ 0.59
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<CAPTION>
Thirty-nine weeks ended
-----------------------
October 31, October 30,
1998 1999
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss) $(10,177) $ 12,572
Depreciation and amortization 22,296 29,274
Deferred tax assets (5,639) 7,531
Equity in loss of unconsolidated affiliates -- 761
Loss on retirement of fixed assets 1,743 30
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (932) (4,855)
Inventories (14,848) (13,767)
Other assets (89) (1,666)
Accounts payable 13,599 (8,756)
Accrued expenses 5,925 4,174
Accrued salaries and employee benefits 760 6,098
Accrued store closing costs (1,778) (1,566)
Deferred rent 1,256 561
------- -------
Net cash provided by
operating activities 12,116 30,391
------- -------
Cash flows from investing activities:
Additions to fixed assets (52,551) (30,526)
Investment in affiliates -- (15,870)
Net cash invested in acquisitions of businesses (1,813) (2,830)
Change in other assets (3,064) (822)
------- -------
Net cash used in investing activities (57,428) (50,048)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt agreements 52,875 32,375
Repayment of long-term debt agreements (3,375) (2,250)
Repayment of capital lease and other obligations (4,738) (7,578)
Proceeds from the issuance of common stock 197 290
Net cash provided by financing activities 44,959 22,837
------- -------
Net increase (decrease) in cash and cash equivalents (353) 3,180
Cash and cash equivalents at beginning of year 3,354 2,324
------- -------
Cash and cash equivalents at end of period $ 3,001 $ 5,504
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
5
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PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 - GENERAL
In the opinion of management of Petco Animal Supplies, Inc. (the "Company" or
"PETCO"), the unaudited consolidated financial statements presented herein
contain all adjustments, consisting of normal recurring adjustments, necessary
to present the financial position, results of operations and cash flows as of
October 30, 1999, and for the periods ended October 31, 1998 and October 30,
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 thirty-nine weeks ended October 31,
1998 and October 30, 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 $5,629 and $22,963
during the thirteen and thirty-nine weeks ended October 31, 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 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 records its
proportionate share of earnings or loss with a lag of one month. The Company
recorded $761 for internet operations and equity in loss of unconsolidated
affiliates for the third quarter of fiscal 1999. The Company also provides
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
thirty-nine weeks ended October 30, 1999, the Company also increased its
investment by $6,015 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
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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 Thirty-nine Weeks Ended
------------------------ -------------------------
October 31, October 30, October 31, October 30,
1998 1999 1998 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (1,849) $ 4,889 $(10,177) $ 12,572
====== ====== ====== ======
Common shares, basic 21,074 21,106 21,073 21,090
Dilutive effect
of stock options -- 260 -- 234
------ ------ ------ ------
Common shares, diluted 21,074 21,366 21,073 21,324
====== ====== ====== ======
</TABLE>
Shares of 1 and 141 issuable upon the assumed exercise of stock options were not
included in computing diluted loss per share for the thirteen weeks and
thirty-nine weeks ended October 31, 1998, respectively, because the effect would
have been antidilutive. 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 2,074 and 1,607 for the thirteen and thirty-nine
weeks ended October 31, 1998, respectively, and 1,564 and 1,655 for the thirteen
and thirty-nine weeks ended October 30, 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> 8
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
October 30, 1999, the Company operated 494 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
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
Net sales increased 21.6% to $249.0 million for the thirteen weeks ended October
30, 1999 ("third quarter 1999") from $204.8 million for the thirteen weeks ended
October 31, 1998 ("third quarter 1998"). The increase in net sales in third
quarter 1999 resulted primarily from the comparable store net sales increase of
13.2% and the addition of 54 superstores, partially offset by the closing of 27
stores, of which 10 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 $26.5 million, or 60.0%, of the net sales
increase. The net increase in the Company's store base accounted for
approximately $17.7 million, or 40.0%, of the net sales increase.
Gross profit, defined as net sales less cost of sales including store occupancy
costs, increased to $67.6 million in third quarter 1999 from $52.0 million in
third quarter 1998. As a percentage of sales, gross profit increased 180 basis
points to 27.2% in third quarter 1999 from 25.4% in third quarter 1998. Improved
execution in inventory management resulted in a favorable adjustment to the
shrinkage accrual, which contributed 60 basis points of the increase. The
remaining gross profit improvement was achieved from the continuing favorable
shift in sales mix from lower margin premium pet food sales into higher margin
supplies categories, greater purchasing leverage, particularly in acquired
stores that had not yet realized the full benefit of the Company's buying
efficiencies and sales mix in the prior period and increased leverage of
occupancy costs.
Selling, general and administrative expenses increased to $56.3 million in third
quarter 1999 from $47.1 million in third quarter 1998. As a percentage of net
sales, these expenses decreased to 22.6% in third quarter 1999 from 23.0% in
third quarter 1998. Included in selling, general and administrative expense in
the third quarter 1998 is a $1.4 million charge for severance and legal costs
related to the Company's management realignment. Excluding this charge, selling,
general and administrative expenses increased to 22.6% of net sales in third
quarter 1999 from 22.3% in third quarter 1998. The increase was due primarily to
the accrual for management bonuses based on improved financial performance.
Merger and business integration costs of $5.6 million were recorded in third
quarter 1998 in connection with the acquisition and conversion activities of the
stores acquired in prior years.
Operating income in third quarter 1999 was $11.4 million, or 4.6% of net sales,
compared with an operating loss of $0.8 million in third quarter 1998. Excluding
merger and business integration costs and other charges in the prior year, the
Company would have reported operating income of $6.2 million, or 3.0% of net
sales, in third quarter 1998.
8
<PAGE> 9
Net interest expense was $2.5 million for third quarter 1999, compared with net
interest expense of $2.0 million for third quarter 1998. Higher debt levels in
third quarter 1999 compared with third quarter 1998 led to the increase in
interest expense.
The Company recorded a loss of $0.8 million for internet operations and equity
in loss of unconsolidated affiliates in third quarter 1999.
Income tax expense was $3.2 million in third quarter 1999, compared with income
tax benefit of $1.0 million in third 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 $4.9 million, or $0.23 per diluted share, for third quarter
1999, compared with a net loss of $1.8 million, or $0.09 per diluted share, for
third quarter 1998.
Net earnings excluding internet operations and equity in loss of unconsolidated
affiliates, and related tax benefits, were $5.3 million, or $0.25 per diluted
share, for third quarter 1999, compared with net earnings, excluding merger and
business integration costs and other charges, and related tax benefits, in third
quarter 1998 of $2.5 million, or $0.12 per diluted share.
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 COMPARED WITH THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1998
Net sales increased 19.5% to $714.8 million for the thirty-nine weeks ended
October 30, 1999 from $598.4 million for the thirty-nine weeks ended October 31,
1998. The increase in net sales resulted primarily from the comparable store net
sales increase of 11.5% and the addition of 54 superstores, partially offset by
the closing of 27 stores, of which 10 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 $71.1 million, or 61.1%, of the net
sales increase. The net increase in the Company's store base accounted for
approximately $45.3 million, or 38.9%, of the net sales increase.
Gross profit, defined as net sales less cost of sales including store occupancy
costs, increased to $188.6 million for the thirty-nine weeks ended October 30,
1999 from $147.0 million for the same period last year. As a percentage of net
sales, gross profit increased 180 basis points to 26.4% for the thirty-nine
weeks ended October 30, 1999 from 24.6% 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
non-continuing inventories at reduced gross margins in prior year, a continuing
favorable shift in sales mix from lower margin premium pet food sales into
higher margin supplies categories and increased leverage of occupancy costs.
9
<PAGE> 10
Selling, general and administrative expenses increased to $160.6 million for the
thirty-nine weeks ended October 30, 1999 from $135.3 million for the same period
last year. As a percentage of net sales, these expenses decreased to 22.5% for
the thirty-nine weeks ended October 30, 1999 from 22.6% in the prior year
period. Included in selling, general and administrative expense for the
thirty-nine weeks ended October 31, 1998 are a $1.4 million charge in the third
quarter 1998 for severance and legal costs related to the Company's management
realignment, a $4.5 million charge in the second quarter 1998 related to the
write-off of assets in connection with the relocation of the Company's main
distribution center and the replacement of point-of-sale equipment in a
chain-wide conversion of this equipment and other assets. Excluding these
charges, selling, general and administrative expenses increased to 22.5% of net
sales for the thirty-nine weeks ended October 30, 1999 from 21.6% 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 and increased
personnel and related costs associated with decentralization of field staff.
Merger and business integration costs of $23.0 million were recorded in the
thirty-nine weeks ended October 31, 1998 in connection with the acquisition and
conversion activities of the stores acquired in prior years.
Operating income for the thirty-nine weeks ended October 30, 1999 was $28.1
million, or 3.9% of net sales, compared with an operating loss of $11.3 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
$17.6 million, or 2.9% of net sales, in the thirty-nine weeks ended October 31,
1998.
Net interest expense was $6.5 million for the thirty-nine weeks ended October
30, 1999, compared with net interest expense of $4.5 million for the same period
last year. Higher debt levels in the thirty-nine weeks ended October 30, 1999,
compared with the prior year led to the increase in interest expense.
The Company recorded a loss of $0.8 million for internet operations and equity
in loss of unconsolidated affiliates for the thirty-nine weeks ended October 30,
1999.
Income tax expense was $8.2 million for the thirty-nine weeks ended October 30,
1999, compared with income tax benefit of $5.6 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 $12.6 million, or $0.59 per diluted share, for the thirty-nine
weeks ended October 30, 1999, compared with a net loss of $10.2 million, or
$0.48 per diluted share, in the prior year.
Net earnings excluding internet operations and equity in loss of unconsolidated
affiliates, and related tax benefits, were $13.0 million, or $0.61 per diluted
share, for the thirty-nine weeks ended October 30, 1999, compared with net
earnings, excluding merger and business integration costs and other charges, and
related tax benefits, for the thirty-nine weeks ended October 31, 1998 of $7.8
million, or $0.37 per diluted share.
10
<PAGE> 11
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 substantially complete. The Company has obtained compliance
certifications from its major partners, suppliers and vendors. The remediation
and testing of new and existing IT and non-IT systems is substantially complete,
and additional procedures will be conducted as necessary. Company policy
requires that all new software and software upgrades be certified as Year 2000
compliant before installation. Furthermore, the Company has arranged to have
appropriate information systems staff available on Saturday, January 1, 2000,
and in the following days, in order to quickly remediate any Year 2000 problems
that may arise.
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.
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 has extended its relationships with
these suppliers to include joint Year 2000 risk assessments, remedial actions,
testing and contingency plans in the event of non-compliance. Contingency plans
included backup manual ordering procedures and the consideration of inventory
buildup by the Company prior to December 31, 1999. The Company has selectively
accumulated safety stocks of products supplied by certain vendors, particularly
overseas vendors that may be especially vulnerable to Year 2000 disruptions. Any
additional inventory buildup by the Company may generate unfavorable cash flows
and inventory valuation exposures of uncertain amount and duration.
11
<PAGE> 12
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.
However, the failure to correct a material Year 2000 problem could result in an
interruption in, or the failure of, normal business activities or operations of
the Company. Such failures could have a material adverse effect on the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting primarily from
uncertainty of the Year 2000 readiness of third-party vendors and suppliers, the
Company is unable at this time to determine whether the consequences of any Year
2000 failures will have a material impact on the Company. The Company is
dependent on a large number of vendors and suppliers to timely deliver a wide
range of goods and services at numerous locations. These vendors and suppliers,
in turn, rely on many sub-tier vendors and suppliers. The Company's ability to
influence these third parties and to assess their Year 2000 risks is limited.
The Company therefore believes that this extended supply chain presents the area
of greatest risk of Year 2000 noncompliance.
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 October 30,
1999, total assets were $424.4 million, $152.2 million of which were current
assets. Net cash provided by operating activities was $30.4 million for the
thirty-nine weeks ended October 30, 1999, compared with $12.1 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 $4.9
million in the thirty-nine weeks ended October 30, 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 thirty-nine weeks ended
October 30, 1999 the Company invested $15.9 million in affiliates. The
affiliates included Petopia.com, a startup e-commerce destination 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 $50.0 million for the thirty-nine weeks ended
October 30, 1999, and $57.4 million for the prior year period.
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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 thirty-nine week periods ended October 30,
1999, and October 31, 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
$22.8 million for the thirty-nine weeks ended October 30, 1999, and $45.0
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.
The Company was in full compliance with all such covenants at October 30, 1999.
As of October 30, 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.
13
<PAGE> 14
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 October 30, 1999, the Company had $100.0 million in debt under the credit
facility. The average debt outstanding for the last four quarters was $86.2
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 October 30, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in routine litigation and proceedings
in the ordinary course of its business. Except as disclosed in the Company's
Form 10-Q for the quarter ended July 31, 1999, the Company is not currently
involved in any other pending litigation matters, which the Company believes
would have a material adverse effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the thirteen weeks
ended October 30, 1999.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
------------------
James M. Myers
Senior Vice President and
Chief Financial Officer
Date: December 10, 1999
15
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