UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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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 April 29, 2000
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
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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 May 25, 2000 21,107,616
PETCO ANIMAL SUPPLIES, INC.
FORM 10-Q
For the Quarter Ended April 29, 2000
INDEX
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 29, 2000
and April 29, 2000 3
Consolidated Statements of Earnings for the thirteen
weeks ended May 1, 1999 and April 29, 2000 4
Consolidated Statements of Cash Flows for the thirteen
weeks ended May 1, 1999 and April 29, 2000 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 11
Part II Other Information
Item 1. Legal Proceedings 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
January 29, April 29,
2000 2000
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 36,059 $ 22,359
Receivables 8,721 8,619
Inventories 116,913 113,187
Deferred tax assets 18,686 11,614
Other 4,844 5,137
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Total current assets 185,223 160,916
Fixed assets, net 192,403 190,673
Goodwill 36,362 45,795
Investment in affiliates 26,360 32,903
Other assets 13,546 13,186
------- -------
$453,894 $443,473
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52,147 $ 41,401
Accrued expenses 31,929 31,309
Accrued salaries and employee benefits 15,285 14,428
Current portion of long-term debt 9,125 9,125
Current portion of capital lease and
other obligations 7,854 7,429
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Total current liabilities 116,340 103,692
Long-term debt, excluding current portion 89,050 87,225
Capital lease and other obligations,
excluding current portion 12,436 10,857
Accrued store closing costs 5,378 4,627
Deferred tax liability 7,083 7,083
Deferred rent and other liabilities 17,717 17,718
Stockholders' equity:
Common stock, $0.0001 par value, 100,000
shares authorized, 21,107 and 21,107
shares issued and outstanding,
respectively 2 2
Additional paid-in capital 271,208 271,208
Accumulated deficit (65,320) (58,939)
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Total stockholders' equity 205,890 212,271
------- -------
$453,894 $443,473
======= =======
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited, in thousands, except per share data)
Thirteen weeks ended
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May 1, April 29,
1999 2000
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Net sales $229,657 $265,166
Cost of sales and occupancy costs 170,535 191,900
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Gross profit 59,122 73,266
Selling, general and administrative expenses 51,310 61,719
------- -------
Operating income 7,812 11,547
Interest expense, net 1,924 2,380
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Earnings before internet operations and
equity in loss of unconsolidated
affiliates and income taxes 5,888 9,167
Internet operations and equity in loss
of unconsolidated affiliates -- 4,895
------- -------
Earnings before income taxes 5,888 14,062
Income taxes 2,326 7,681
------- -------
Net earnings $ 3,562 $ 6,381
======= =======
Earnings per common share, basic and diluted $ 0.17 $ 0.30
======= =======
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Thirteen weeks ended
----------------------
May 1, April 29,
1999 2000
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Cash flows from operating activities:
Net earnings $ 3,562 $ 6,381
Depreciation and amortization 9,044 10,184
Deferred tax assets 2,098 7,072
Internet operations and
equity in loss of unconsolidated affiliates -- (3,916)
Deferred revenue recognized -- (292)
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (1,929) 102
Inventories (1,559) 6,126
Other assets 379 (39)
Accounts payable (5,369) (10,746)
Accrued expenses 153 (1,923)
Accrued salaries and employee benefits 2,097 (857)
Accrued store closing costs 181 (498)
Deferred rent 217 293
------- -------
Net cash provided by operating activities 8,874 11,887
------- -------
Cash flows from investing activities:
Additions to fixed assets (11,174) (6,628)
Investment in affiliates (1,983) (2,626)
Net cash invested in acquisitions of businesses (40) (12,507)
Change in other assets -- 3
------- -------
Net cash used in investing activities (13,197) (21,758)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt agreements 10,000 --
Repayment of long-term debt agreements (1,125) (1,825)
Repayment of capital lease and other obligations (2,563) (2,004)
------- -------
Net cash provided by (used in)
financing activities 6,312 (3,829)
------- -------
Net increase (decrease) in cash and cash equivalents 1,989 (13,700)
Cash and cash equivalents at beginning of year 2,324 36,059
------- -------
Cash and cash equivalents at end of period $ 4,313 $ 22,359
======= =======
See accompanying notes to consolidated financial statements.
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
April 29, 2000, and for the periods ended May 1, 1999 and April 29, 2000.
Because of the seasonal nature of the Company's business, the results of
operations for the thirteen weeks ended May 1, 1999 and April 29, 2000 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 1999 refer to the fiscal year beginning on
January 31, 1999, and ending on January 29, 2000. For further information, refer
to the consolidated financial statements and footnotes thereto for fiscal 1999
included in the Company's Form 10-K Annual Report (File No. 000-23574) filed
with the Securities and Exchange Commission on April 13, 2000.
Note 2 - Business Combinations
During first quarter 2000, the Company completed the acquisition of a retailer
with six pet food and supply stores operating under the tradename Premium Pet in
a transaction accounted for as a purchase. The aggregate fair value of assets
acquired and the net cash invested in this business was $12,507. The excess of
the aggregate cost over the fair value of net assets acquired was $9,332, which
was recorded as goodwill and is being amortized over fifteen years.
Note 3 - Investment in Affiliates
During fiscal 1999, the Company acquired an equity interest in Petopia.com, an
e-commerce destination for the sale of pet food and supplies. At April 29, 2000,
the Company owned 8,177 shares of Petopia.com preferred stock, representing an
ownership interest of 17.6%, and warrants to purchase additional 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 recognized $5,383 in equity in losses for the first quarter
of fiscal 2000. The Company also provides certain marketing and fulfillment
services to Petopia.com according to the terms of a strategic alliance
agreement, under which the Company earned $10,278 in the first quarter. Of the
$10,278 earned in the quarter, $9,299 was taxable non-cash revenue attributable
to receiving all remaining Series C preferred shares to be earned under the
strategic alliance agreement. These items are reflected as Internet operations
and equity in loss of unconsolidated affiliates in the accompanying statements
of earnings. The Company does not recognize any tax benefit for its share of the
losses of Petopia.com, which impacts the effective tax rate. The Company's
effective tax rate before Internet operations and equity in loss of
unconsolidated affiliates was 39.5%. For the first quarter of fiscal 2000, the
Company recognized income from Internet operations and equity in loss of
unconsolidated affiliates, net of related tax effects, of $835, or $0.04 per
diluted share.
The Company has a 64% 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 as
it does not exercise control over the LP 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 fiscal year ended January 29, 2000 or for
the fiscal quarter ended April 29, 2000. The Company's investment in the LP at
January 29, 2000 and April 29, 2000 was $12,415 and $15,041, respectively.
Note 4 - Net Earnings Per Share
Basic net earnings per common share are computed using the weighted average
number of common shares outstanding during the period. Diluted net earnings per
common share incorporates the incremental shares issuable upon the assumed
exercise of stock options.
Net earnings and weighted average common shares used to compute net earnings per
share, basic and diluted, are presented below:
Thirteen Weeks Ended
----------------------
May 1, April 29,
1999 2000
---------- ----------
Net earnings $ 3,562 $ 6,381
====== ======
Common shares, basic 21,074 21,107
Dilutive effect of stock options 67 237
------ ------
Common shares, diluted 21,141 21,344
====== ======
Options to purchase common shares that were outstanding but were not included in
the computation of diluted net earnings per share because the options' exercise
price was greater than the average market price of the common shares were 2,309
and 2,317 for the thirteen weeks ended May 1, 1999, and April 29, 2000,
respectively.
Note 5 -- Subsequent Event -- Merger Agreement
On May 17, 2000 the Company entered into an Agreement and Plan of Merger with BD
Recapitalization Corp., a Delaware corporation owned by Leonard Green &
Partners, L.P. and Texas Pacific Group, Inc. According to the terms of the
merger agreement, BD Recapitalization Corp. will be merged with and into the
Company, with the Company as the surviving corporation. Under the terms of the
merger agreement, each issued and outstanding share of the Company's common
stock, par value $0.0001 per share ("Company Common Stock"), other than (i)
certain shares of Company Common Stock retained by certain members of the
Company's management, (ii) treasury shares and shares of Company Common Stock
owned by BD Recapitalization Corp. or by any of the Company's subsidiaries and
(iii) shares held by dissenting stockholders in accordance with Delaware law,
will be converted into the right to receive $22.00 in cash.
Completion of the transaction is subject to various conditions, including
stockholder approval, receipt of regulatory approvals and the completion of
financing. The Company currently anticipates completing the transaction in the
fall of 2000.
Note 6 - 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 are being administered as one case under
a consolidated amended complaint. 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 amended complaint alleges that the defendants violated
various federal securities laws and published materially misleading financial
results which had the effect of artificially increasing the price of the
Company's stock. The amended complaint seeks unspecified monetary damages. The
defendants have filed a motion to dismiss the amended complaint, which is
currently scheduled to be heard on July 10, 2000. 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.
As a result of the proposed merger described in Note 5, the Company, its
directors and certain of its officers have been named as defendants in several
substantially similar class action lawsuits filed in various jurisdictions
during May 2000. The plaintiffs purport to represent a class of all persons
whose stock will be purchased in connection with the merger. While the
allegations contained in each complaint are not identical, the complaints
generally assert that the $22.00 per share price to be paid to stockholders is
inadequate and does not reflect the value of the assets and future prospects of
the Company. The complaints also generally allege that the defendants engaged in
self-dealing without regard to conflicts of interest and that the defendants
breached their fiduciary duties in approving the merger agreement. The
complaints seek remedies including unspecified monetary damages, attorneys' fees
and injunctive relief that would, if granted, prevent the completion of the
merger. The Company believes the allegations contained in these lawsuits are
without merit. While the Company, its directors and officers intend to defend
themselves vigorously, there can be no assurance that the complaints will be
successfully defended. The inability of the Company to resolve the claims that
are the basis for the lawsuits or to prevail in any related litigation could
result in the Company being required to pay substantial monetary damages for
which the Company may not be adequately insured, which could have a material
adverse effect on the Company's business, financial position and results of
operations. Regardless of whether the merger is consummated or the outcome of
the lawsuits, the Company may incur significant related expenses and costs that
could have an adverse effect on the Company's business and operations.
Furthermore, the cases could involve a substantial diversion of the time of some
members of management. Accordingly, the Company is unable to estimate the impact
of any potential liabilities associated with the complaints.
From time to time the Company is involved in routine litigation and proceedings
in the ordinary course of its business. 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 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
April 29, 2000, the Company operated 503 stores in 39 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
First Quarter 2000 Compared with First Quarter 1999
Net sales increased 15.5% to $265.2 million for the thirteen weeks ended April
29, 2000 ("first quarter 2000") from $229.7 million for the thirteen weeks ended
May 1, 1999 ("first quarter 1999"). The increase in net sales in first quarter
2000 resulted primarily from the comparable store net sales increase of 8.5% and
the addition of 48 superstores, partially offset by the closing of 27 stores, of
which 11 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 $19.2 million, or 54.1%, of the net sales
increase. The net increase in the Company's store base accounted for
approximately $16.3 million, or 45.9%, of the net sales increase. During the
first quarter 2000, Iams brand pet food broadened its distribution beyond
specialty stores into supermarkets, mass merchants and club stores. Iams brand
pet food sales represented approximately 8% of the Company's net sales in fiscal
1999. The broadening of distribution of Iams brand pet food negatively impacted
comparable store sales during the latter half of first quarter 2000 and the
Company expects this development will result in lower increases in comparable
store sales than achieved in the first quarter 2000, a trend that is expected to
continue through the remainder of fiscal 2000.
Gross profit, defined as net sales less cost of sales including store occupancy
costs, increased to $73.3 million in first quarter 2000 from $59.1 million in
first quarter 1999. As a percentage of sales, gross profit increased 190 basis
points to 27.6% in first quarter 2000 from 25.7% in first quarter 1999. The
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, and increased leverage of occupancy
costs. The wider availability of Iams brand pet food accelerated the favorable
shift in sales mix later in the first quarter 2000, contributing to the gross
margin rate improvement.
Selling, general and administrative expenses increased to $61.7 million in first
quarter 2000 from $51.3 million in first quarter 1999. The increase was due
primarily to increased personnel and related costs associated with supporting
increased sales and new store openings. As a percentage of net sales, these
expenses increased to 23.3% in first quarter 2000 from 22.3% in first quarter
1999. The increase was due primarily to personnel costs related to the Company's
training and customer satisfaction initiatives and the accrual for management
bonuses based on improved financial performance.
Operating income in first quarter 2000 increased to $11.5 million, or 4.3% of
net sales, from $7.8 million, or 3.4% of net sales, in first quarter 1999.
Net interest expense was $2.4 million for first quarter 2000, compared with net
interest expense of $1.9 million for first quarter 1999. Higher debt levels and
increased interest rates in first quarter 2000 compared with first quarter 1999
led to the increase in interest expense.
The Company recorded income of $4.9 million for Internet operations and equity
in loss of unconsolidated affiliates in first quarter 2000. This primarily
non-cash income consists of $10.3 million earned by the Company for its support
of Petopia.com principally under the terms of its alliance agreement, partially
offset by $5.4 million of equity in the losses of Petopia.com. Income earned
under the strategic alliance agreement will be substantially less in future
periods as the Company has earned all shares of Series C preferred stock
available under the terms of the agreement.
Income taxes were $7.7 million in first quarter 2000, compared with $2.3 million
in first quarter 1999. The Company has not recognized any tax benefit for its
equity in the losses of Petopia.com, which impacts the effective tax rate in
first quarter fiscal 2000. The Company's effective tax rate before Internet
operations and equity in loss of unconsolidated affiliates was 39.5% in first
quarter fiscal 2000.
Net earnings increased to $6.4 million, or $0.30 per diluted share, for first
quarter 2000, from $3.6 million, or $0.17 per diluted share, for first quarter
1999.
Net earnings, excluding internet operations and equity in loss of unconsolidated
affiliates, and related tax effects, were $5.5 million, or $0.26 per diluted
share, for first quarter 2000, compared with net earnings of $3.6 million, or
$0.17 per diluted share, in first quarter 1999.
Year 2000 Issues
In late 1999, the Company completed its remediation and testing of systems. As a
result of the Company's planning and implementation efforts, the Company
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. Expenditures undertaken
solely to make the Company Year 2000 compliant were not material to the
Company's consolidated financial position or results of operations. The Company
is not aware of any material problems resulting from Year 2000 issues, either
with its internal systems or the systems and services of third parties. The
Company will continue to monitor its mission critical computer applications and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
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 April 29,
2000, total assets were $443.5 million, $160.9 million of which were current
assets. Net cash provided by operating activities was $11.9 million for the
thirteen weeks ended April 29, 2000, compared with $8.9 million for the prior
year period. The Company's sales are substantially on a cash basis. Therefore,
cash flow generated from operating stores provides a significant source of
liquidity to the Company. The principal use of operating cash is for the
purchase of merchandise inventories. A portion of the Company's inventory
purchases is financed through vendor credit terms.
The Company uses cash in investing activities to 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 thirteen weeks ended April
29, 2000 the Company invested $2.6 million in 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 $21.8 million for the
thirteen weeks ended April 29, 2000, and $13.2 million for the prior year
period.
During first quarter 2000, the Company completed the acquisition of a retailer
of pet food and supplies in a purchase transaction. The net cash invested in the
acquisition of this business was $12.5 million.
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 thirteen week periods ended April 29, 2000,
and May 1, 1999. 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 used in financing activities were $3.8
million in the thirteen weeks ended April 29, 2000. Cash flows provided by
financing activities were $6.3 million in the thirteen weeks ended May 1, 1999.
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 at various dates 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 April 29, 2000. As
of April 29, 2000, the Company had $50.0 million of revolving loans available
under the credit facility.
As of January 29, 2000, the Company had available net operating loss
carryforwards of $47.9 million for federal income tax purposes, which begin
expiring in 2012, and $24.0 million for state income tax purposes, which began
expiring in 2005.
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.
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 April 29, 2000, the Company had $96.4 million in debt under the credit
facility. The average debt outstanding for the last four quarters was $95.3
million. Based on this average debt level, a hypothetical 10% adverse change in
LIBOR rates would increase net interest expense by approximately $0.6 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 April 29, 2000.
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 are being administered as one case under
a consolidated amended complaint. 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 amended complaint alleges that the defendants violated
various federal securities laws and published materially misleading financial
results which had the effect of artificially increasing the price of the
Company's stock. The amended complaint seeks unspecified monetary damages. The
defendants have filed a motion to dismiss the amended complaint, which is
currently scheduled to be heard on July 10, 2000. 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.
As a result of the proposed merger, the Company, its directors and certain of
its officers have been named as defendants in several substantially similar
class action lawsuits filed in various jurisdictions during May 2000. The
plaintiffs purport to represent a class of all persons whose stock will be
purchased in connection with the merger. While the allegations contained in each
complaint are not identical, the complaints generally assert that the $22.00 per
share price to be paid to stockholders is inadequate and does not reflect the
value of the assets and future prospects of the Company. The complaints also
generally allege that the defendants engaged in self-dealing without regard to
conflicts of interest and that the defendants breached their fiduciary duties in
approving the merger agreement. The complaints seek remedies including
unspecified monetary damages, attorneys' fees and injunctive relief that would,
if granted, prevent the completion of the merger. The Company believes the
allegations contained in these lawsuits are without merit. While the Company,
its directors and officers intend to defend themselves vigorously, there can be
no assurance that the complaints will be successfully defended. The inability of
the Company to resolve the claims that are the basis for the lawsuits or to
prevail in any related litigation could result in the Company being required to
pay substantial monetary damages for which the Company may not be adequately
insured, which could have a material adverse effect on the Company's business,
financial position and results of operations. Regardless of whether the merger
is consummated or the outcome of the lawsuits, the Company may incur significant
related expenses and costs that could have an adverse effect on the Company's
business and operations. Furthermore, the cases could involve a substantial
diversion of the time of some members of management. Accordingly, the Company is
unable to estimate the impact of any potential liabilities associated with the
complaints.
From time to time the Company is involved in routine litigation and proceedings
in the ordinary course of its business. 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 5. Other Information
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 Exchange Act of 1933, as amended,
Section 21E of the Securities Exchange 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 29, 2000.
Certain Risks Associated with the Merger
On May 17, 2000 the Company entered into an Agreement and Plan of Merger with BD
Recapitalization Corp., a Delaware Corporation owned by Leonard Green &
Partners, L.P. and Texas Pacific Group, Inc. According to the terms of the
merger agreement, BD Recapitalization Corp. will be merged with and into the
Company, with the Company as the surviving corporation. Under the terms of the
merger agreement, each issued and outstanding share of the Company's common
stock, par value $0.0001 per share ("Company Common Stock"), other than (i)
certain shares of Company Common Stock retained by certain members of the
Company's management, (ii) treasury shares and shares of Company Common Stock
owned by BD Recapitalization Corp. or by any of the Company's subsidiaries and
(iii) shares held by dissenting stockholders in accordance with Delaware law,
will be converted into the right to receive $22.00 in cash.
Completion of the transaction is subject to various conditions, including
stockholder approval, receipt of regulatory approvals, and completion of
financing. Although BD Recapitalization Corp. has obtained binding commitments
for the required financing, these commitments also contain a variety of
conditions. There can be no assurance that the merger will be consummated.
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 April 29, 2000. The Company filed a report on
Form 8-K in connection with the Agreement and Plan of Merger
on May 19, 2000.
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: June 7, 2000
