UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number:
January 29, 2000 0-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 33-047990
- ------------------------------------ ------------------------------------
(Sate or Other Jurisdiction (I.R.S. Employer Identification No.)
Of Incorporation or Organization)
9125 Rehco Road, San Diego, California 92121
(Address, Including Zip Code, of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(858) 453-7845
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $. 0001 par value
-------------------------------
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: |X|
As of April 7, 2000, there were outstanding 21,107,299 shares of the
Registrant's Common Stock, $0.0001 par value. As of that date, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
approximately $253,947,191.
Documents Incorporated By Reference: The information called for by Part
III is incorporated by reference from the Proxy Statement relating to the 2000
Annual Meeting of Stockholders of the Registrant.
PART I
ITEM 1. BUSINESS
PETCO Animal Supplies, Inc. ("PETCO" or the "Company") is a leading
specialty retailer of premium pet food and supplies. As of January 29, 2000, the
Company operated 490 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.
The Company's expansion strategy is to open and acquire superstores,
including relocations, expansions or remodels of existing, smaller format stores
into superstores (collectively referred to herein as "conversions"), and to
close underperforming stores. During fiscal 1999, the Company opened or acquired
42 stores, including the conversion of 10 stores into superstores, and closed 18
stores.
Unless otherwise indicated, all references in this Annual Report to a
fiscal year refer to the fiscal year ending on the Saturday closest to January
31 of the following year. For example, references to fiscal 1999 refer to the
fiscal year beginning on January 31, 1999 and ending on January 29, 2000.
The Pet Food, Supply and Services Industry
General. In 1998, retail sales in the United States of pet food, supplies,
small animals (excluding dogs and cats) and services were estimated at $22
billion. Pet food accounted for the majority of this market with an estimated
$11 billion in sales, pet supply and small animal sales were estimated at $5
billion, while sales of pet services, which include veterinary services,
obedience training and grooming services, were estimated at $6 billion.
According to recent estimates, approximately 60 million households in the United
States, or over half of all U.S. households, owned at least one pet and over
half of pet-owning households owned more than one pet.
Pet Food. Historically, the pet food industry has been dominated by
national supermarket brands such as Alpo, Kal Kan and Purina, which are
primarily sold through grocery stores, convenience stores and mass merchants. In
recent years, supermarkets' share of total pet food sales has steadily decreased
as a result of competition from superstores, warehouse clubs, mass merchandisers
and specialty pet stores as well as the growing proportion of premium pet food
sales. Premium pet food brands such as Science Diet, Nutro, Eukanuba and Iams,
which offer higher levels of nutrition than non-premium brands, account for
approximately 30% of the total pet food market according to recent estimates.
Science Diet, Nutro and Eukanuba currently are not sold through supermarkets,
warehouse clubs and mass merchandisers due to manufacturers' restrictions but
are sold primarily through superstores like PETCO, specialty pet stores,
veterinarians and farm and feed stores.
Pet Supplies. The market for pet supplies consists of items such as collars
and leashes, cages and habitats, toys, treats, aquatic supplies, pet carriers,
vitamins and supplements and grooming and veterinary products. The channels of
distribution for pet supplies are highly fragmented with products sold by many
types of retailers, including supermarkets, discounters and other mass
merchandisers, specialty pet stores, direct mail and veterinarians. Superstores
such as PETCO, with wide assortments of pet supplies and higher levels of
customer service, represent a growing channel for sales of pet supplies.
Small Animals. The market for small animals (other than dogs and cats)
includes sales of fish, birds, reptiles, rabbits, hamsters, mice and other small
pets. Because of the overpopulation of dogs and cats and the controversial
practices of some breeders, the Company has elected to limit its selection of
animals to birds, fish, reptiles and other small animals. PETCO does, however,
participate in pet adoption programs for dogs and cats, which are administered
through local animal welfare programs.
Pet Services. The market for pet services includes veterinary services,
obedience training and grooming services. The Company offers a range of
veterinary services at only a selected number of stores. Limited veterinary
services such as routine vaccinations are offered at a number of stores. The
Company does offer obedience training in most of its stores and offers grooming
in many of its stores. Although such services do not generate a significant
portion of the Company's revenues, the Company believes that offering selected
pet services does create increased customer traffic in the Company's stores.
Business Strategy
PETCO's strategy is to be the leading category-dominant national chain of
community pet food and supply superstores by offering its customers a complete
assortment of pet-related products at competitive prices, with superior levels
of customer service at convenient locations. The key components of PETCO's
strategy are:
Superstore Expansion. The Company believes that opportunities for
additional superstores exist in both new and existing markets. The Company
intends to continue to increase the number of superstores it operates by opening
and acquiring superstores in new and existing markets.
Acquisitions. A significant part of the Company's expansion strategy has
been to capitalize on the consolidation of the fragmented pet food and supply
industry. Generally, the Company has acquired established and well-located
stores or chains of stores that are similar in size and format to the Company's
existing superstores. Consistent with this strategy, the Company has completed
21 acquisitions, representing 216 stores located in 28 states, since the
Company's initial public offering in March 1994. The Company believes that there
may be further opportunistic acquisition opportunities that would allow the
Company to attract new customers, enter new markets and leverage operating
costs.
Complete Merchandise Assortment. PETCO's prototype 15,000 square foot
superstores carry a complete merchandise assortment of more than 10,000 active
SKUs of high quality pet-related products. PETCO's products include premium pet
food, fish, birds, reptiles and other small animals and related food and
supplies, collars and leashes, grooming products, toys, pet carriers, cat
furniture, dog houses, vitamins, treats and veterinary supplies.
Competitive Prices. PETCO's pricing strategy is to offer everyday low
prices on all food items which are important in attracting and retaining
customers. The Company believes in offering value to customers through fair
prices coupled with a complete merchandise assortment and superior customer
service.
Superior Customer Service. Providing knowledgeable and friendly customer
service is a key aspect of PETCO's business strategy. PETCO seeks store managers
and sales associates who are pet owners and enthusiasts themselves as they are
better able to assist customers with their needs. PETCO provides comprehensive
training to its personnel, and the Company believes that this enables it to
attract and retain highly motivated, well-qualified store managers and sales
associates committed to providing superior levels of customer service.
Convenient Store Locations. PETCO's stores are located in high-traffic
retail areas with ample parking, often in community shopping centers anchored by
a large supermarket. The Company selects sites which are characterized by weekly
or more frequent shopping patterns. All stores offer extended shopping hours and
typically are open seven days a week.
Enjoyable Shopping Experience. PETCO's stores are attractively designed to
create a fun and exciting shopping environment for customers and their pets. The
Company's stores are brightly illuminated with colorful fixtures and graphics
and feature prominent and attractive signage. Stores typically feature an
assortment of aquatics, reptiles, birds and small animals. Birds and other
animals are available for demonstration by PETCO employees and for handling by
customers. Many of the Company's stores also contain a glassed-in grooming area
that allows customers to observe the grooming process while they shop.
Innovative Community Programs. PETCO's long-standing neighborhood marketing
programs are designed to introduce consumers to its stores and maintain
long-term customer and community relationships. Due to the large numbers of dogs
and cats available at local animal shelters, PETCO's long-standing corporate
policy has been to encourage its customers to adopt these pets from animal
shelters. On designated days, in cooperation with animal welfare organizations,
the Company offers pet adoption services at its stores. The Company's other
community programs include in-store vaccination clinics, programs with local
pet-related charities, a product sample program to introduce consumers and their
pets to premium food and supplies and a preferred customer program. In addition,
the Company maintains referral programs and other relationships with local
breeders and veterinarians.
Internet Investment. The Company has a strategic alliance with and an
investment in Petopia.com, a comprehensive pet commerce destination on the
Internet. The relationship provides PETCO customers with content, commerce and
community via the Internet, while enabling Petopia.com to benefit from PETCO's
industry leadership position, strong customer base and supplier relationships.
PETCO also provides order fulfillment services to Petopia.com at its three
central distribution centers. PETCO customers can shop on-line by visiting
PETCO's Petopia at www.petco.com.
Merchandising
Complete Merchandise Assortment. PETCO stores offer the pet owner one of
the most complete and exciting assortments of pet products and services
available in the marketplace. PETCO's products and services generally fall into
five main categories.
Pet Food. PETCO offers a complete assortment of leading name brand
premium food for dogs and cats, such as Nutro, Science Diet, Eukanuba and
Iams, as well as selected mass brand foods. Due to manufacturers'
restrictions, Nutro, Science Diet and Eukanuba are sold exclusively through
specialty pet stores and veterinarians. The Company also offers private
label and exclusive label brands of premium dog and cat food. In addition
to food for dogs and cats, the Company features a variety of treats and
rawhide chew items. The Company also sells an extensive variety of foods
for fish, birds, reptiles and small animals.
Pet Supplies. PETCO's broad assortment of supplies for dogs and cats
includes many private label items and offers collars and leashes, grooming
products, toys, pet carriers, cat furniture, dog houses, vitamins, treats
and veterinary supplies. The Company also offers broad lines of supplies
for other pets, including aquariums, terrariums, bird cages and supplies
for small animals.
Small Animals. PETCO superstores feature specialty departments which
stock a large assortment of fish, domestically bred birds, reptiles and
other small pets. The stores' animal selection typically includes
cockatiels, parakeets and finches in the bird category; iguanas, turtles
and snakes in the reptile category; and hamsters, rats and mice in the
small animal category. The Company's superstores normally carry both fresh
and saltwater fish. The Company believes that its interactive small animal
displays add excitement to shopping at PETCO.
Grooming and Other Services. Professional grooming is available at many
of the Company's superstores. Grooming services are typically performed in
glass-walled stations in the stores to increase customer awareness and
confidence in the service. In addition, the Company offers vaccinations and
obedience training.
Novelty Items. PETCO carries a variety of novelty items, including pet
apparel, calendars and other pet-related merchandise. In addition, the
Company features a variety of seasonal and holiday pet items.
Competitive Prices. PETCO's pricing strategy is to offer everyday low
prices on all food items which are important in attracting and retaining
customers. The Company believes in offering value to customers through fair
prices coupled with a complete merchandise assortment. PETCO's large buying
volume and sophisticated distribution network allows it to compete effectively
on price. PETCO's price guarantee program offers to match all competitors'
advertised prices.
Store Development
PETCO plans to open superstores in the future and expects that these will
be the Company's current prototype superstores which average approximately
15,000 square feet. These prototype superstores offer a complete merchandise
assortment and, in addition, carry fish, birds, reptiles and other small
animals, and grooming services.
The Company intends to continue to increase the number of superstores it
operates by opening and acquiring superstores in new and existing markets and
converting existing stores into superstores. Although the Company plans to open
superstores in the future, it will continue to operate profitable and
well-situated stores with other formats.
PETCO attempts to obtain convenient, high-traffic stores located in prime
community shopping centers. The Company undertakes substantial market research
prior to entering new markets. Key factors in market and site selection include
high visibility, easy access, ample parking, population, demographics and the
number and location of competitors.
In fiscal 1999, the Company opened or acquired 42 stores, including the
conversion of 10 stores into superstores, and closed 18 stores.
Purchasing and Distribution
The Company's centralized purchasing and distribution system minimizes the
delivered cost of merchandise and maximizes the in-stock position of its stores.
PETCO purchases most of its merchandise directly from specialty suppliers
and manufacturers of national brands. The Company purchases the majority of its
pet food products from three vendors; The Iams Company, Hill's Pet Products,
Inc. (which produces Science Diet), and Nutro, Inc., the first of which supplied
products that accounted for more than 10% and less than 15% of the Company's
sales in fiscal 1999. While the Company does not maintain long-term supply
contracts with any of its vendors, PETCO believes that it enjoys a favorable and
stable relationship with each of these vendors.
PETCO currently operates three central and five regional distribution
centers. The central distribution centers are located in Mira Loma, California;
Dayton, New Jersey; and Joliet, Illinois. Bulk items for all stores are either
shipped to regional distribution centers for redistribution or are sent directly
to store locations. Manufacturers ship non-bulk supplies to the central
distribution facilities which the Company then distributes either to regional
centers or directly to store locations. Management believes that its centralized
distribution system enables its stores to maximize selling space by reducing
necessary levels of safety stock carried in each store. PETCO also provides
order fulfillment services to Petopia.com at its three central distribution
centers.
Competition
The pet food and supply business is highly competitive. This competition
can be categorized into three different segments: (i) mass merchants, including
supermarkets, (ii) single store and conventional pet shops and (iii) specialty
pet supply chains. Many of the premium pet food brands offered by the Company,
such as Nutro, Science Diet, and Eukanuba, are not available to grocery stores
or other mass merchants due to manufacturers' restrictions. The Company believes
that the principal competitive factors influencing the Company's business are
product selection and quality, convenient store locations, customer service and
price. The Company believes that PETCO competes effectively within its various
geographic areas; however, some of the Company's competitors are much larger in
terms of sales volume and have access to greater capital and management
resources than the Company.
One of the Company's premium pet food vendors, The Iams Company, was
purchased by Procter & Gamble in fiscal 1999. Through the end of fiscal 1999,
Iams brand pet food was not widely available in supermarkets or mass merchants.
In fiscal 2000, Procter & Gamble widened the distribution of Iams to
supermarkets and mass merchants across the country. The Eukanuba brand of pet
food, which is also manufactured by The Iams Company, remains not available to
grocery stores or other mass merchants.
The pet food and supply industry has been characterized in recent years by
the consolidation of a number of pet supply chains. This consolidation has been
accomplished through the acquisition of independent pet stores by larger
specialty pet supply chains and the acquisition of these larger chains by
similar competitors. The Company believes this consolidation trend may have a
positive impact on industry conditions as store capacity may be rationalized,
both in existing and in new units.
The pet food and supply industry has recently seen the growth of several
e-commerce retailers on the Internet. Sales of pet food and supplies via the
Internet have not been significant to date. However, some e-commerce retailers
have substantial financial and technical resources and some e-commerce retailers
have strong alliances with established Internet partners. There can be no
assurance that in the future the Company will not face greater competition from
e-commerce retailers or from land-based national or regional retailers.
Trademarks and Licenses
The Company has registered numerous service marks and trademarks with the
United States Patent and Trademark Office. The Company believes the PETCO
trademark has become an important component in its merchandising and marketing
strategy. The Company believes it has all licenses necessary to conduct its
business.
Regulation
The transportation and sale of small animals is governed by various state
and local regulations. To date, these regulations have not had a material effect
on the Company's business or operations. The Company's fish and small animal
buyers and real estate department are responsible for compliance with such
regulations. Prior to the opening of each store, the Company's fish and small
animal buyers and real estate department review the regulations of the relevant
state and local governments. The Company's fish and small animal buyers and real
estate department then ensure ongoing compliance by keeping abreast of industry
publications and maintaining contacts with the Company's fish and small animal
suppliers and the appropriate regulatory agency within each such state and local
government.
Employees
As of January 29, 2000, the Company employed approximately 10,200
associates, of whom approximately 5,000 were employed full-time. Approximately
92% of the Company's employees were employed in stores or in direct field
supervision, approximately 4% in distribution centers and approximately 4% in
the National Support Center in San Diego. Management believes its labor
relations are generally good.
Certain Cautionary Statements
Certain statements in this Annual Report, including, but not limited to,
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the
Securities Act of 1934, as amended, and the Private Securities Litigation Reform
Act of 1995, that are not historical facts but rather reflect current
expectations concerning future results and events. The words "believes,"
"expects," "intends," "plans," "anticipates," "likely," "will," and similar
expressions identify such forward-looking statements. These forward-looking
statements are subject to risks, uncertainties, and other factors, some of which
are beyond the Company's control, that could cause actual results to differ
materially from those forecast or anticipated in such forward-looking
statements. Such risks, uncertainties and other factors include, but are not
limited to, the following:
Expansion Plans. The Company's continued growth depends, to a significant
degree, on its ability to open and operate new superstores on a profitable basis
and to increase sales in existing stores. The Company's performance is also
dependent upon a number of other factors, including its ability to locate and
obtain favorable superstore sites and negotiate acceptable lease terms, to
obtain and distribute adequate product supplies to its stores, to hire and train
employees and to upgrade its management information and other operating systems
to control the anticipated growth and expanded operations. There can be no
assurance that the Company will achieve its planned expansion or that such
expansion will be profitable. The Company has previously opened stores in new
markets and plans to open additional stores in new markets. The performance of
new or existing stores may be adversely affected by regional economic
conditions. The Company's expansion strategy could have the effect of drawing
customers from its existing stores. In addition, average store contribution and
operating margins may be adversely affected in the near term due to the level of
preopening expenses and lower anticipated sales volumes of its immature stores.
The Company's existing Senior Credit Facility (the "Credit Facility") contains
certain covenants which may restrict or impair the Company's growth plans.
Management continues to evaluate the Company's long-term distribution needs to
accommodate store and sales growth beyond fiscal 2000. Either the Company's
failure to expand its distribution facilities in accordance with its growth
plans or difficulties incurred in operating its distribution facilities could
adversely affect the Company's ability to deliver merchandise to its stores in a
timely fashion.
Integration of Operations as the Result of Acquisitions. Operations of
acquired companies must be integrated and combined efficiently for the Company
to realize the anticipated benefits of its acquisitions. There can be no
assurance that the integration process has been successful or that the
anticipated benefits of these acquisitions will be fully realized. For example,
in fiscal 1998 the Company experienced disappointing results from some of the
stores it acquired in fiscal 1997. The dedication of management resources to
acquisitions may detract attention from the day-to-day business of the Company.
The difficulties of integration are increased by the necessity of coordinating
geographically separated organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures and accounting
and computer systems. There can be no assurance that the Company will achieve
expected expense reductions with the acquired companies, that there will not be
substantial costs associated with any such reductions, that such reductions will
not result in a decrease in revenues or that there will not be other material
adverse effects of these integration efforts. Such effects could materially
reduce the short-term earnings of the Company. In fiscal 1997 and 1998, merger
and business integration costs of $38.7 million and $23.0 million, respectively,
were recorded by the Company in connection with acquisition activities. These
costs include transaction costs, costs attributable to lease cancellation and
closure of duplicate or inadequate facilities and activities, reformatting,
facility conversion and other integration costs, severance, and other costs. The
Company recorded no merger and business integration costs in fiscal 1999. The
Company acquired two stores during fiscal 1999 in a purchase transaction,
without incurring charges for merger and business acquisition costs. However,
the Company may make additional acquisitions in the future, which may result in
additional costs. Acquisitions require significant financial and management
resources both at the time of the transaction and during the process of
integrating the newly acquired business into the Company's operations. The
Company's operating results could be adversely affected if the Company is unable
to successfully integrate such new companies into its operations. Future
acquisitions by the Company could also result in potentially dilutive issuances
of securities, additional debt and contingent liabilities, and amortization
expenses related to goodwill and other intangible assets, which could materially
adversely affect the Company's profitability.
Reliance on Vendors and Product Lines and Exclusive Distribution
Arrangements. The Company purchases significant amounts of products from three
key vendors, The Iams Company, Hill's Pet Products, Inc. (which produces Science
Diet), and Nutro, Inc., the first of which supplied products that accounted for
more than 10% and less than 15% of the Company's sales in fiscal 1999. The
Company does not maintain long-term supply contracts with any of its vendors and
the loss of any of these vendors or other significant vendors of premium pet
food or pet supplies offered by the Company could have a material adverse effect
on the Company. In addition, it could materially adversely affect the Company if
any premium pet food manufacturers were to make premium pet food products widely
available in supermarkets or through other mass merchants, or if the premium
brands currently available to such supermarkets and mass merchants were to
increase their market share at the expense of the premium brands sold only
through specialty pet food and supply retailers. The Company's principal vendors
currently provide the Company with certain incentives such as volume purchasing,
trade discounts, cooperative advertising and market development funds. A
reduction or discontinuance of these incentives could also have a material
adverse effect on the Company.
One of the Company's primary premium pet food vendors, The Iams Company,
was purchased by Procter & Gamble in fiscal 1999. Through the end of fiscal
1999, the premium pet food brands that the Company purchases from The Iams
Company, Hill's Pet Products, Inc. (which produces Science Diet), and Nutro,
Inc., were not widely available in supermarkets or mass merchants. In fiscal
2000, Procter & Gamble widened the distribution of the Iams brand to
supermarkets and mass merchants across the country. The Eukanuba brand of pet
food, which is also manufactured by The Iams Company, remains not available to
grocery stores or other mass merchants. This change in the distribution of one
of the Company's most important products could have a material adverse effect on
the Company.
Competition. The pet food and supply retailing industry is highly
competitive. The Company competes with a number of pet superstore chains,
smaller pet store chains and independent pet stores. The Company also competes
with supermarkets and other mass merchants (see "Reliance on Vendors and Product
Lines and Exclusive Distribution Arrangements," above). In addition, several pet
food and supply e-commerce retailers commenced business in fiscal 1999 with
plans to gain substantial market share. Many of the Company's competitors are
larger and have significantly greater resources than the Company. If any of the
Company's major competitors seek to gain or retain market share by reducing
prices or by introducing additional products, the Company may be required to
reduce its prices on key items in order to remain competitive, which may have
the affect of reducing its profitability. There is no assurance that in the
future the Company will not face greater competition from e-commerce retailers
or other land-based national, regional and local retailers.
Performance of New Superstores; Future Operating Results. The Company has
recently opened and acquired superstores in new markets and plans to open and
acquire additional superstores in other new markets. There can be no assurance
that these stores will be profitable in the near term or that profitability, if
achieved, will be sustained. In addition, there can be no assurance that the
Company's existing stores will maintain their profitability or that new stores
will generate sales levels necessary to achieve store-level profitability, much
less profitability comparable to that of existing stores. The Company's
comparable store net sales increases were 11.5%, 6.4%, and 11.1% for fiscal
1997, 1998 and 1999, respectively. The Company anticipates that its rate of
comparable stores sales growth may be lower in future periods than the growth
rates previously experienced due to maturation of the existing store base, the
effects of opening additional stores in existing markets, and the wider
availability of certain premium pet foods. Due in part to the effect of the
timing of store openings and acquisitions, changes in sales growth rates and the
changing competitive environment, period-to-period comparisons of financial
results may not be meaningful and the results of operations for historical
periods may not be indicative of future results.
Quarterly and Seasonal Fluctuations. The timing of new store openings,
related preopening expenses and the amount of revenue contributed by new and
existing stores may cause the Company's quarterly results of operations to
fluctuate. The Company's business is also subject to seasonal fluctuation.
Historically, the Company has realized a higher portion of its net sales during
the month of December than during the other months of the year.
Dependence on Senior Management. The Company is dependent upon the efforts
of its principal executive officers. In particular, the Company is dependent
upon the management and leadership of Brian K. Devine, Chairman, President and
Chief Executive Officer. The loss of Mr. Devine or certain of the Company's
other principal executive officers could materially adversely effect the
Company's business. The Company has entered into an employment agreement with
Mr. Devine which provides for an indefinite term and which may be terminated by
Mr. Devine on 90 days notice. The Company has obtained a key man insurance
policy on the life of Mr. Devine in the amount of $1.0 million, of which the
Company is the sole beneficiary. The Company's success will depend on its
ability to retain its current management and to attract and retain qualified
personnel in the future.
Possible Volatility of Stock Price. Since the initial public offering of
the Company's common stock in March 1994, the market value of the common stock
has been subject to significant fluctuations. The market price of the common
stock may continue to be subject to significant fluctuations in response to
operating results and other factors. In the past, the market price of the
Company's stock has responded to changes in outside analysts' expectations,
stock market movements relating to retailers particularly, and to general stock
market fluctuations. In addition, the stock market in recent years has
experienced price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies. These fluctuations,
as well as general economic and market conditions, may adversely affect the
market price of the common stock. The Company is currently involved in
stockholder class action litigation precipitated by a sudden drop in the price
of the Company's common stock. See "Legal Proceedings." Management believes that
future fluctuations in the market value of the Company's common stock may
trigger further litigation. Defending the Company in such stockholder class
action litigation is costly, and the outcome is unpredictable.
Readers are cautioned not to place undue reliance on forward-looking
statements which reflect management's view only as of the date of this Annual
Report. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 2. PROPERTIES
The Company leases substantially all of its store and warehouse locations.
Original lease terms for the Company's 490 stores generally range from five to
twenty years, many of which contain renewal options. Leases on 112 stores expire
within the next three years, with leases on 74 of these stores containing
renewal options.
The table below shows the location and number of the Company's stores as of
January 29, 2000.
Location Stores
-------- ------
Alabama 2
Arizona 13
Arkansas 3
California 131
Colorado 10
Connecticut 13
Delaware 1
District of Columbia 1
Idaho 2
Illinois 41
Indiana 5
Iowa 6
Kansas 9
Kentucky 1
Louisiana 1
Maine 1
Maryland 7
Massachusetts 21
Michigan 7
Minnesota 18
Missouri 11
Montana 1
Nebraska 6
Nevada 6
New Hampshire 6
New Jersey 14
New Mexico 1
New York 21
North Dakota 2
Ohio 3
Oregon 13
Pennsylvania 16
Rhode Island 1
South Dakota 1
Tennessee 6
Texas 43
Utah 2
Virginia 9
Washington 26
Wisconsin 9
----
490
====
The Company's headquarters, located in San Diego, California, occupy
approximately 70,000 square feet of office space which is financed under an
obligation which expires February 2006. The Company's five regional distribution
centers collectively occupy over 200,000 square feet of space in Stockton,
California; Portland, Oregon; New Hope, Minnesota; Mansfield, Massachusetts; and
Garland, Texas under leases which expire in April 2001, February 2002, September
2002, December 2003, and August 2004, respectively. The Company's three central
distribution centers collectively occupy approximately 800,000 square feet of
space in Dayton, New Jersey; Joliet, Illinois; and Mira Loma, California under
leases which expire in June 2002, April 2005, and September 2005, respectively.
Each of the distribution center leases contains a renewal option.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United States
District Court for the Southern District of California between August and
November, 1998. These cases have 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.
In addition, the Company is involved in routine litigation arising in the
ordinary course of its business. While the results of such litigation cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended January 29, 2000.
ITEM 4.1. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Brian K. Devine 58 Chairman, President and Chief Executive Officer
Bruce C. Hall 55 Executive Vice President - Operations
Janet D. Mitchell 44 Senior Vice President - Human Resources and
Administration
James M. Myers 42 Senior Vice President and
Chief Financial Officer
William M. Woodard 51 Senior Vice President - Business Development
BRIAN K. DEVINE, Chairman, President and Chief Executive Officer, joined
the Company in August 1990 and has served as Chairman since January 1994. Prior
to joining the Company, Mr. Devine was President of Krause's Sofa Factory, a
furniture retailer and manufacturer, from 1988 to 1989. From 1970 until 1988,
Mr. Devine held various positions with Toys 'R' Us, a retailer of children's
toys, including Senior Vice President, Director of Stores; and Senior Vice
President, Growth, Development and Operations. Mr. Devine graduated from
Georgetown University with a degree in economics.
BRUCE C. HALL, Executive Vice President, Operations, joined the Company in
April 1997. Mr. Hall spent 34 years from 1963 to 1997 with Toys 'R' Us, a
retailer of children's toys, where he progressively advanced from field
operations through a number of positions, including Senior Vice President of
Operations.
JANET D. MITCHELL, Senior Vice President, Human Resources and
Administration, joined the Company in February 1989. From 1989 to 1998, Ms.
Mitchell served as Vice President, Human Resources. From 1981 to 1989, Ms.
Mitchell held various management positions in human resources with the Southland
Corporation's 7-Eleven division. From 1978 to 1981, Ms. Mitchell held various
positions with the El Torito Restaurant chain. Ms. Mitchell received a
bachelor's degree from California State University, San Diego.
JAMES M. MYERS, Senior Vice President and Chief Financial Officer, joined
the Company in May 1990. From 1996 to 1998, Mr. Myers served as Senior Vice
President, Finance and prior to that as Vice President, Finance and as Vice
President and Controller of the Company. From 1980 to 1990, Mr. Myers held
various positions at the accounting firm KPMG LLP, including Senior Audit
Manager. Mr. Myers is a CPA and received an accounting degree from John Carroll
University.
WILLIAM M. WOODARD, Senior Vice President, Business Development, joined the
Company in January 1991. From 1991 to 1999, Mr. Woodard served as Senior Vice
President, Store Operations. From 1987 to 1990, Mr. Woodard was Vice President,
Director of Marketing at J. M. Jones, Inc., a wholesale division of SuperValu
Stores, Inc. From 1970 to 1987, Mr. Woodard was employed by Safeway Stores,
Inc., a grocery retailer, in a number of positions including Retail Operations
Manager and Marketing Operations Manager. Mr. Woodard holds an administrative
management degree from North Texas State University and an MBA in marketing from
the University of Southern California.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.0001 par value, is quoted on the Nasdaq
National Market under the symbol "PETC." Public trading of the common stock
commenced on March 17, 1994. The following table sets forth for the periods
indicated the high and low reported sale prices per share for the common stock
as reported by the Nasdaq National Market:
High Low
---- ---
Fiscal 1998
First Quarter $25.00 $13.13
Second Quarter 21.13 9.75
Third Quarter 10.63 5.38
Fourth Quarter 11.25 7.75
Fiscal 1999
First Quarter $13.50 $ 6.50
Second Quarter 18.38 12.44
Third Quarter 16.50 9.63
Fourth Quarter 15.50 9.38
On April 7, 2000, there were 660 stockholders of record of the Company's
common stock.
The Company has never paid cash dividends on its common stock. The Company
currently anticipates that it will retain all available funds for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share and operating data)
The following table sets forth selected consolidated financial and
operating data for the Company for the five fiscal years ended January 29, 2000.
The selected consolidated financial data presented below under the caption
"Income Statement Data" for the five-year period ended January 29, 2000 is
derived from the audited consolidated financial statements of the Company and
its subsidiaries. The selected consolidated financial data presented below under
the caption "Balance Sheet Data" as of February 3, 1996 is derived from the
unaudited consolidated financial statements of the Company and its subsidiaries
as restated to reflect the poolings of interests during the years ended February
1, 1997 and January 31, 1998. The selected consolidated financial data presented
below under the caption "Balance Sheet Data" as of February 1, 1997, January 31,
1998, January 30, 1999, and January 29, 2000 is derived from the audited
consolidated financial statements of the Company and its subsidiaries. The
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements as of January 29, 2000 and for each of the
years in the three-year period ended January 29, 2000 and the independent
auditors' report thereon, included and incorporated by reference elsewhere in
this Annual Report.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $443,585 $600,637 $749,789 $839,622 $990,289
Cost of sales and occupancy costs 337,873 446,315 553,566 624,818 720,711
------- ------- ------- ------- -------
Gross profit 105,712 154,322 196,223 214,804 269,578
Selling, general and administrative expenses 101,760 132,745 173,667 187,938 220,800
Merger and business integration costs 9,196 37,208 38,693 22,963 --
------- ------- ------- ------- -------
Operating income (loss) (5,244) (15,631) (16,137) 3,903 48,778
Loss on disposal of stores 3,500 -- -- -- --
Interest expense, net 71 600 2,530 6,718 8,936
------- ------- ------- ------- -------
Earnings (loss) before Internet operations
and equity in loss of unconsolidated
affiliates and income taxes (8,815) (16,231) (18,667) (2,815) 39,842
Internet operations and equity in loss of
unconsolidated affiliates -- -- -- -- (1,254)
------- ------- ------- ------- -------
Earnings (loss) before income taxes (8,815) (16,231) (18,667) (2,815) 38,588
Income taxes (benefit) (1) (14,601) (4,075) (5,486) (438) 16,831
------- ------- ------- ------- -------
Net earnings (loss) $ 5,786 $(12,156) $(13,181) $ (2,377) $ 21,757
======= ======= ======= ======= =======
Operating earnings per common share, basic (2) -- -- -- -- $ 1.14
Operating earnings per common share, diluted (2) -- -- -- -- $ 1.13
Net earnings (loss) per common share, basic $0.36 $(0.63) $(0.64) $(0.11) $ 1.03
Net earnings (loss) per common share, diluted $0.35 $(0.63) $(0.64) $(0.11) $ 1.02
Weighted average common shares outstanding, basic 16,147 19,426 20,646 21,073 21,094
Weighted average common shares outstanding, diluted 16,427 19,426 20,646 21,073 21,338
Operating Data:
Total stores open end of period 353 413 457 476 490
Aggregate gross square footage 3,169,472 4,435,019 5,299,535 5,637,708 6,075,030
Average net sales per store (3) $1,183,000 $1,438,000 $1,696,000 $1,811,000 $2,042,000
Average net sales per gross square foot (4) $ 168 $ 162 $ 158 $ 157 $ 168
Percentage increase in comparable store net sales 16.5% 16.1% 11.5% 6.4% 11.1%
Balance Sheet Data:
Working capital $ 29,064 $ 59,928 $ 33,360 $ 39,316 $ 68,883
Total assets 214,498 312,617 335,195 387,135 453,894
Long-term debt, excluding current portion -- -- 26,625 65,375 89,050
Capital lease and other obligations, excluding
current portion 13,334 15,581 11,369 20,982 12,436
Total stockholders' equity 130,040 196,499 186,057 183,841 205,890
</TABLE>
- --------------
(1) Includes $11.8 million benefit from previously unrecognized deferred tax
assets in fiscal 1995.
(2) Operating earnings exclude Internet operations and equity in loss of
unconsolidated affiliates and $1.1 million of related tax effects.
(3) Calculated using net sales divided by the number of stores open, weighted
by the number of months stores are open during the period.
(4) Calculated using net sales divided by gross square footage of stores open,
weighted by the number of months stores are open during the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
At January 29, 2000, the Company operated 490 stores in 39 states and the
District of Columbia. PETCO plans to open superstores in the future and follows
a strategy of converting and expanding its existing smaller format stores to the
superstore format. As a result of this strategy, the Company has opened and
acquired superstores, has expanded and relocated smaller format stores into
superstores and has closed underperforming stores. As a result of the Company's
store expansion strategy, operating results may reflect lower average store
contribution and operating margins due to increased store preopening expenses
and lower anticipated sales volumes of immature stores.
During fiscal 1997 the Company completed four acquisitions of retailers of
pet food and supplies, operating 22 stores which were accounted for as
immaterial poolings of interests. The Company also acquired a retailer that
operated 82 pet food and supply stores under the trade name PetCare located in
10 Midwestern and Southern states which was accounted for as a pooling of
interests.
During fiscal 1998 the Company completed two acquisitions of retailers of
pet food and supplies operating four stores in transactions accounted for as
purchases.
During fiscal 1999 the Company completed one acquisition of a retailer of
pet food and supplies operating two stores in a transaction accounted for as a
purchase.
All results of operations have been restated to reflect the poolings of
interests and to reflect the purchase transactions from their respective
acquisition dates. Results of operations from immaterial poolings are reflected
from the beginning of the period from which these acquisitions were consummated.
(See footnote 2 to the consolidated financial statements).
Results of Operations
The following table sets forth certain items expressed as a percentage of
net sales for the periods indicated. As a result of operational and strategic
changes, period-to-period comparisons of financial results may not be meaningful
and the results of operations for historical periods may not be indicative of
future results.
<TABLE>
<CAPTION>
Jan. 31, Jan. 30, Jan. 29,
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy costs 73.8 74.4 72.8
----- ----- -----
Gross profit 26.2 25.6 27.2
Selling, general and administrative expenses 23.2 22.4 22.3
Merger and business integration costs 5.2 2.7 --
----- ----- -----
Operating income (loss) (2.2) 0.5 4.9
Interest expense, net 0.3 0.8 0.9
----- ----- -----
Earnings (loss) before internet operations
and equity in loss of unconsolidated
affiliates and income taxes (2.5) (0.3) 4.0
Internet operations and equity in loss of
unconsolidated affiliates -- -- (0.1)
----- ----- -----
Earnings (loss) before income taxes (2.5) (0.3) 3.9
Income taxes (benefit) (0.7) (0.0) 1.7
----- ----- -----
Net earnings (loss) (1.8) (0.3) 2.2
===== ===== =====
</TABLE>
Fiscal Year Ended January 29, 2000 Compared with Fiscal Year Ended January 30,
1999
Net sales increased 17.9% to $990.3 million in fiscal 1999 from $839.6
million in fiscal 1998. The increase in net sales in fiscal 1999 resulted
primarily from the addition of 42 stores, including the conversion of 10 stores
into superstores, the closing of 18 stores, and a comparable store net sales
increase of 11.1%. 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 $91.2 million, or 60.5%, of the net sales increase, and $59.5
million, or 39.5% of the net sales increase, was attributable to the net
increase in the Company's store base.
Gross profit, defined as net sales less the cost of sales including store
occupancy costs, increased $54.8 million, or 25.5%, to $269.6 million in fiscal
1999 from $214.8 million in fiscal 1998. Gross profit as a percentage of net
sales increased to 27.2% in fiscal 1999 from 25.6% in fiscal 1998. The majority
of this increase in gross margin is due to the continuing shift in the sales mix
from lower-margin pet food sales to higher-margin categories such as companion
animals, toys and supplies. Also, the fiscal 1998 gross margin was adversely
affected by increased distribution costs resulting from the investment in two
new central distribution centers and lower leverage of store occupancy costs in
the acquired stores during the conversion process.
Selling, general and administrative expenses increased $32.9 million, or
17.5%, to $220.8 million in fiscal 1999 from $187.9 million in fiscal 1998. 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 decreased to 22.3% in fiscal 1999 from 22.4% in fiscal
1998. Included in selling, general and administrative expenses in fiscal 1998
are a $1.4 million charge for severance and legal costs related to the Company's
management realignment and a $4.5 million charge related to the write-off of
assets in connection with the relocation of the Company's main distribution
center and the replacement of point-of-sale equipment in a chain-wide conversion
of this equipment and other assets. Excluding these charges, selling, general
and administrative expenses were 21.7% in fiscal 1998, compared with 22.3% in
1999. The increase in 1999 was primarily due to increased personnel and related
costs associated with decentralization of field staff, depreciation and
maintenance of the Company's investments in infrastructure in the prior year,
and the accrual for management bonuses based on improved financial performance.
Merger and business integration costs of $23.0 million were recorded in
fiscal 1998 in connection with the conversion activities of the stores acquired
in the last half of fiscal 1997. These costs consisted of $0.5 million of
transaction costs, $2.0 million of costs attributable to lease cancellations and
closure of duplicate or inadequate facilities and activities, $19.1 million of
reformatting, facility conversion and other integration costs and $1.4 million
of severance and other costs.
Operating income was $48.8 million in fiscal 1999 compared with operating
income of $3.9 million in fiscal 1998. Excluding merger and business integration
costs and other charges, on a comparable basis, the Company would have reported
operating income of $32.8 million or 3.9% of net sales in fiscal 1998, compared
with operating income of $48.8 million, or 4.9% of net sales in fiscal 1999.
Internet operations and equity in loss of unconsolidated affiliates was
$1.3 million in fiscal 1999. This consists of $4.0 million of equity in the
losses of Petopia.com, partially offset by $2.7 million earned by the Company
for its support of Petopia.com under the terms of its alliance agreement.
Net interest expense was $8.9 million in fiscal 1999 compared with net
interest expense of $6.7 million in fiscal 1998. Increased borrowings in fiscal
1999 led to the increase in interest expense.
Income taxes were $16.8 million in fiscal 1999 compared with income tax
benefit of $0.4 million in fiscal 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. The Company has not recognized any tax benefit for its
equity share of the losses in Petopia.com, which impacts the effective tax rate
in fiscal 1999. The Company's effective tax rate before Internet operations and
equity in loss of unconsolidated affiliates was 39.5% in fiscal 1999.
Net earnings were $21.8 million, or $1.02 per diluted share, in fiscal
1999, compared with net loss of $2.4 million, or $0.11 per diluted share, in
fiscal 1998. Net earnings, excluding Internet operations and equity in loss of
unconsolidated affiliates, and related tax effects, increased to $24.1 million,
or $1.13 per diluted share, compared with net earnings in the prior year,
excluding merger and business integration costs and related charges and tax
benefits of $15.6 million, or $0.74 per diluted share.
Fiscal Year Ended January 30, 1999 Compared with Fiscal Year Ended January 31,
1998
Net sales increased 12.0% to $839.6 million in fiscal 1998 from $749.8
million in fiscal 1997. The increase in net sales in fiscal 1998 resulted
primarily from the addition of 40 stores, including the conversion of 9 stores
into superstores, the closing of 12 stores, and a comparable store net sales
increase of 6.4%. The comparable store net sales increase was attributable to
maturing superstores, increased advertising and merchandising efforts in
existing stores. The net increase in the Company's store base accounted for
approximately $48.0 million, or 53.5% of the net sales increase, and $41.8
million, or 46.5% of the net sales increase, was attributable to the increase in
comparable store net sales.
Gross profit increased $18.6 million, or 9.5%, to $214.8 million in fiscal
1998 from $196.2 million in fiscal 1997. Gross profit as a percentage of net
sales decreased to 25.6% in fiscal 1998 from 26.2% in fiscal 1997. This decrease
reflects lower gross margins generated from sales in the stores acquired in the
last half of fiscal 1997, which were undergoing conversions to PETCO's
assortment and selling through non-continuing inventory at reduced gross
margins. Also, increased distribution costs resulting from the investment in two
new central distribution centers and lower leverage of store occupancy costs,
particularly in the acquired stores during the conversion process, contributed
to this decline.
Selling, general and administrative expenses increased $14.2 million, or
8.2%, to $187.9 million in fiscal 1998 from $173.7 million in fiscal 1997.
Selling, general and administrative expenses increased primarily as a result of
higher personnel and related costs associated with new store openings and
acquisitions. As a percentage of net sales, these expenses decreased to 22.4% in
fiscal 1998 from 23.2% in fiscal 1997. Included in selling, general and
administrative expenses in fiscal 1998 are a $1.4 million charge for severance
and legal costs related to the Company's management realignment and a $4.5
million charge related to the write-off of assets in connection with the
relocation of the Company's main distribution center and the replacement of
point-of-sale equipment in a chain-wide conversion of this equipment and other
assets. Selling, general and administrative expenses in fiscal 1997 included
charges of $11.0 million related to the acquisition of PetCare. Excluding these
charges, these expenses were unchanged at 21.7% in both fiscal 1998 and fiscal
1997.
Merger and business integration costs of $23.0 million were recorded in
fiscal 1998 in connection with the conversion activities of the stores acquired
in the last half of fiscal 1997. These costs consisted of $0.5 million of
transaction costs, $2.0 million of costs attributable to lease cancellations and
closure of duplicate or inadequate facilities and activities, $19.1 million of
reformatting, facility conversion and other integration costs and $1.4 million
of severance and other costs. In fiscal 1997, merger and business integration
costs of $38.7 million were recorded in connection with acquisition activities.
These costs consisted of $4.5 million of transaction costs, $17.8 million of
costs attributable to lease cancellations and closure of duplicate or inadequate
facilities and activities, $12.2 million of reformatting, facility conversion
and other integration costs and $4.2 million of severance and other costs.
Operating income was $3.9 million in fiscal 1998 compared with an operating
loss of $16.1 million in fiscal 1997. Excluding merger and business integration
costs and other charges, on a comparable basis, the Company would have reported
operating income of $32.8 million or 3.9% of net sales in fiscal 1998 and $33.6
million or 4.5% of net sales in fiscal 1997.
Net interest expense was $6.7 million in fiscal 1998 compared with net
interest expense of $2.5 million in fiscal 1997. Increased borrowings in fiscal
1998 led to the increase in interest expense.
Income tax benefit was $0.4 million in fiscal 1998 compared with income tax
benefit of $5.5 million in fiscal 1997. Income tax benefit reflects the Federal
and state tax benefits of the loss before income taxes, net of the effect of
non-deductible expenses.
Net loss was $2.4 million in fiscal 1998 compared with net loss of $13.2
million in fiscal 1997. Excluding merger and business integration costs and
related charges and tax benefits, net earnings for fiscal 1998 would have been
$15.6 million, or $0.74 per diluted share, compared with $18.6 million, or $0.88
per diluted share in fiscal 1997.
Quarterly Data
The following tables set forth the unaudited quarterly results of
operations for fiscal 1998 and fiscal 1999. This information includes all
adjustments management considers necessary for fair presentation of such data.
The results of operations for historical periods are not necessarily indicative
of results for any future period. The Company expects quarterly results of
operations to fluctuate depending on the timing and amount of revenue
contributed by new stores.
The Company believes that its business is moderately seasonal, with net
sales and earnings generally higher in the fourth fiscal quarter due to year-end
holiday purchases.
<TABLE>
<CAPTION>
Fiscal Quarter Ended
-------------------------------------------
May 2, Aug. 1, Oct. 31, Jan. 30,
Fiscal 1998 1998 1998 1998 1999
- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 196,296 $ 197,318 $ 204,785 $ 241,223
Gross profit 46,676 48,343 51,955 67,830
Operating income (loss) (338) (10,130) (819) 15,190
Net earnings (loss) (1,068) (7,261) (1,849) 7,801
Net earnings (loss) per share, basic and diluted $ (0.05) $ (0.34) $ (0.09) $ 0.37
Stores open at end of period 458 461 467 476
Aggregate gross square footage 5,328,996 5,420,586 5,602,596 5,637,708
Percentage increase in comparable store net sales 5.7% 5.4% 5.0% 8.7%
Fiscal Quarter Ended
-------------------------------------------
May 1, Jul. 31, Oct. 30, Jan. 29,
Fiscal 1999 1999 1999 1999 2000
- ----------- --------- --------- --------- ---------
Net sales $ 229,657 $ 236,184 $ 249,007 $ 275,441
Gross profit 59,122 61,880 67,638 80,938
Operating income 7,812 8,889 11,387 20,690
Net earnings 3,562 4,121 4,889 9,185
Operating earnings 3,562 4,121 5,349 11,072
Operating earnings per share, basic (1) $ 0.17 $ 0.20 $ 0.25 $ 0.52
Operating earnings per share, diluted (1) $ 0.17 $ 0.19 $ 0.25 $ 0.52
Net earnings per share, basic $ 0.17 $ 0.20 $ 0.23 $ 0.44
Net earnings per share, diluted $ 0.17 $ 0.19 $ 0.23 $ 0.43
Stores open at end of period 482 485 494 490
Aggregate gross square footage 5,773,881 5,889,004 6,068,222 6,075,030
Percentage increase in comparable store net sales 10.9% 12.1% 13.2% 8.5%
</TABLE>
(1) Operating earnings exclude Internet operations and equity in loss of
unconsolidated affiliates, net of tax effects.
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. 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. 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 change from calendar year 1999 to 2000 passed without any Year 2000
problems for the Company. The potential does exist, however, for Year 2000
problems to arise at various dates in the future. The Company continues to
monitor the issue. 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, and to
operational difficulties in the Company's corporate offices, distribution
centers or store locations. The financial magnitude of these risks cannot
currently be estimated.
The foregoing statements as to the Company's Year 2000 efforts are forward
looking and, along with all other forward-looking statements herein, are made in
reliance on the safe harbor provisions discussed under the caption "Certain
Cautionary Statements" in Item 1, above.
New Accounting Standards
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"(the "Statement").
The Statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. The Statement also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Statement, 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
January 29, 2000, total assets were $453.9 million, $185.2 million of which were
current assets. Net cash provided by operating activities was $14.5 million,
$27.9 million and $77.1 million for fiscal 1997, 1998 and 1999, respectively.
The Company's sales are substantially on a cash basis. Therefore, cash flow
generated from operating stores provides a significant source of liquidity to
the Company. The principal use of operating cash is for the purchase of
merchandise inventories. A portion of the Company's inventory purchases is
financed through vendor credit terms.
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 fiscal 1999 the Company
invested $18.5 million in affiliates. The affiliates include Petopia.com, an
e-commerce destination for the sales of pet food and supplies, and a limited
partnership that operates retail pet food and supply stores in Canada. During
fiscal 1998 the Company invested $4.9 million in the limited partnership and
made loans of $6.5 million to a limited partner in the limited partnership. Cash
used in investing activities was $69.5 million, $62.3 million and $62.3 million
for fiscal 1997, 1998 and 1999, respectively.
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 fiscal 1999. Purchases of $1.3 million and $20.3
million of fixed assets were financed in this manner during fiscal 1997 and
1998, respectively. The Company believes additional sources of capital lease and
other obligation financing are available on a cost-effective basis and plans to
use them, as necessary, in connection with its expansion program.
During fiscal 1996, the Company completed two acquisitions of retailers of
pet food and supplies in purchase transactions. The aggregate fair value of
assets acquired was $14.4 million and assumed liabilities were $1.4 million with
$13.0 million of net cash invested in the acquisition of these businesses, of
which $6.0 was expended in fiscal 1997.
During fiscal 1998, the Company completed two acquisitions of retailers of
pet food and supplies in purchase transactions. The aggregate fair value of
assets acquired and the net cash invested in the acquisition of these businesses
was $2.1 million, of which $0.3 million was expended in fiscal 1999.
During fiscal 1999, the Company completed the acquisition of a retailer of
pet food and supplies in a purchase transaction. The aggregate fair value of
assets acquired and the net cash invested in the acquisition of this business
was $2.6 million.
The Company's primary long-term capital requirement is funding for the
opening or acquisition of superstores. Cash flows provided by financing
activities were $13.5 million, $33.3 million and $18.9 million in fiscal 1997,
1998 and 1999, respectively. In fiscal 1997, 1998, and 1999, net proceeds of
$2.4 million, $0.1 million, and $0.3 million, respectively, were generated from
sales of common stock. Remaining cash flows provided by financing activities
were borrowings under long-term debt agreements, net of repayment of long-term
debt agreements and other obligations. Cash flows from financing activities were
used to 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 January 29, 2000.
As of January 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 begin
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 fiscal 2000.
Inflation
Although the Company cannot accurately anticipate the effect of inflation
on its operations, it does not believe that inflation has had, or is likely in
the foreseeable future to have, a material impact on its net sales or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in short-term interest rates as the Company's credit facility utilizes a
portfolio of short-term LIBOR contracts. LIBOR contracts are fixed rate
instruments for a period of between one and six months, at the Company's
discretion. The Company's portfolio of LIBOR contracts vary in length and
interest rate, such that adverse changes in short-term interest rates could
affect the Company's overall borrowing rate when contracts are renewed. The
lengths of contracts within the portfolio are adjusted to balance the Company's
working capital requirements, fixed asset purchases and general corporate
purposes. The Company continuously evaluates the portfolio with respect to total
debt, including an assessment of the current and future economic environment.
As of January 29, 2000, the Company had $98.2 million in debt under the
credit facility. The average debt outstanding for the fiscal year was $92.2
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 exchange or other significant
market risk or any derivative financial instruments at January 29, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements required by this Item are set forth
at the pages indicated in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K, except information concerning the executive
officers of the Company which is set forth in Item 4.1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 Annual Meeting of Stockholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Page
Independent Auditors' Report 23
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of
this Annual Report.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Petco Animal Supplies, Inc.:
We have audited the accompanying consolidated balance sheets of Petco Animal
Supplies, Inc. and subsidiaries as of January 30,1999 and January 29, 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended January 29,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Petco Animal
Supplies, Inc. and subsidiaries as of January 30, 1999 and January 29, 2000 and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 29, 2000, in conformity with generally
accepted accounting principles.
KPMG LLP
San Diego, California
March 7, 2000
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
January 30, January 29,
1999 2000
----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,324 $ 36,059
Receivables 7,638 8,721
Inventories 104,789 116,913
Deferred tax assets (note 7) 16,769 18,686
Other 5,993 4,844
-------- --------
Total current assets 137,513 185,223
Fixed assets (note 5):
Equipment 76,992 96,324
Furniture and fixtures 58,963 62,901
Leasehold improvements 123,761 134,429
-------- --------
259,716 293,654
Less accumulated depreciation and amortization (72,206) (101,251)
-------- --------
187,510 192,403
Goodwill 37,804 36,362
Deferred tax assets (note 7) 9,681 --
Investment in affiliates (note 3) 3,862 26,360
Other assets 10,765 13,546
-------- --------
$ 387,135 $ 453,894
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,099 $ 52,147
Accrued expenses 23,783 31,929
Accrued salaries and employee benefits 9,792 15,285
Current portion of long-term debt (note 4) 4,500 9,125
Current portion of capital lease and other
obligations (note 5) 9,023 7,854
-------- --------
Total current liabilities 98,197 116,340
Long-term debt, excluding current portion (note 4) 65,375 89,050
Capital lease and other obligations, excluding current
portion (note 5) 20,982 12,436
Accrued store closing costs 7,005 5,378
Deferred tax liability (note 7) -- 7,083
Deferred rent and other liabilities 11,735 17,717
Stockholders' equity (note 6):
Common stock, $.0001 par value, 100,000 shares
authorized, 21,074 and 21,107 shares issued
and outstanding, respectively 2 2
Additional paid-in capital 270,916 271,208
Accumulated deficit (87,077) (65,320)
-------- --------
Total stockholders' equity 183,841 205,890
Commitments and contingencies (notes 5, 6, and 9)
-------- ---------
$ 387,135 $ 453,894
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------
January 31, January 30, January 29,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 749,789 $ 839,622 $ 990,289
Cost of sales and occupancy costs 553,566 624,818 720,711
--------- --------- ---------
Gross profit 196,223 214,804 269,578
Selling, general and administrative expenses 173,667 187,938 220,800
Merger and business integration costs (note 2) 38,693 22,963 --
--------- --------- ---------
Operating income (loss) (16,137) 3,903 48,778
Interest income (588) (176) (863)
Interest expense 3,118 6,894 9,799
--------- --------- ---------
Earnings (loss) before Internet
operations and equity in loss of
unconsolidated affiliates
and income taxes (18,667) (2,815) 39,842
Internet operations and equity in loss
of unconsolidated affiliates (note 3) -- -- (1,254)
--------- --------- ---------
Earnings (loss) before income taxes (18,667) (2,815) 38,588
Income taxes (benefit) (note 7) (5,486) (438) 16,831
--------- --------- ---------
Net earnings (loss) $ (13,181) $ (2,377) $ 21,757
========= ========= =========
Earnings (loss) per common share:
Basic $ (0.64) $ (0.11) $ 1.03
========= ========= =========
Diluted $ (0.64) $ (0.11) $ 1.02
========= ========= =========
Weighted average common shares:
Basic 20,646 21,073 21,094
Diluted 20,646 21,073 21,338
</TABLE>
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
-------------------
Shares Amount Capital Deficit Equity
------------------- ---------- ----------- ------------
Balances at
February 1, 1997 20,153 $ 2 $265,971 $(69,474) $196,499
Beginning balance of
immaterial poolings
of interests (note 2) 613 -- 2,311 (2,045) 266
Exercise of options 293 -- 2,449 -- 2,449
Issuance of stock
for services 1 -- 24 -- 24
Net loss -- -- -- (13,181) (13,181)
-------- ----- ------- ------- -------
Balances at
January 31, 1998 21,060 $ 2 $270,755 $(84,700) $186,057
Exercise of options 13 -- 143 -- 143
Issuance of stock
for services 1 -- 18 -- 18
Net loss -- -- -- ( 2,377) ( 2,377)
-------- ----- ------- ------- -------
Balances at
January 30, 1999 21,074 $ 2 $270,916 $(87,077) $183,841
Exercise of options 33 -- 292 -- 292
Net earnings -- -- -- 21,757 21,757
-------- ----- ------- -------- -------
Balances at
January 29, 2000 21,107 $ 2 $271,208 $(65,320) $205,890
======== ===== ======= ======= =======
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
January 31, January 30, January 29,
1998 1999 2000
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings (loss) $(13,181) $ (2,377) $ 21,757
Depreciation and amortization 24,289 30,382 39,280
Deferred taxes (5,391) (211) 14,847
Equity in loss of unconsolidated affiliates -- -- 1,254
Loss on retirement of fixed assets 5,908 1,743 30
Issuance of stock for services 24 18 --
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (2,845) 3,241 (1,083)
Inventories (7,992) (7,916) (11,975)
Other assets (3,378) (767) (784)
Accounts payable 12,667 (695) 1,048
Accrued expenses 567 2,225 6,937
Accrued salaries and employee benefits 145 550 5,493
Accrued store closing costs 2,489 (1,069) (1,544)
Deferred rent 1,170 2,822 1,856
------- ------- -------
Net cash provided by operating activities 14,472 27,946 77,116
------- ------- -------
Cash flows from investing activities:
Additions to fixed assets (59,633) (51,689) (40,050)
Investment in affiliates -- (4,879) (18,459)
Net cash invested in acquisitions of businesses (6,028) (1,813) (2,927)
Loan to affiliate -- (6,545) --
Change in other assets (3,869) 2,622 (822)
------- ------- -------
Net cash used in investing activities (69,530) (62,304) (62,258)
------- ------- --------
Cash flows from financing activities:
Borrowings under long-term debt agreements 28,591 43,250 32,375
Repayment of long-term debt agreements (10,335) (3,375) (4,075)
Repayment of capital lease and other obligations (7,221) (6,690) (9,715)
Proceeds from the issuance of common stock 2,449 143 292
------- ------- -------
Net cash provided by financing activities 13,484 33,328 18,877
------- ------- -------
Net increase (decrease) in cash and cash equivalents (41,574) (1,030) 33,735
Cash and cash equivalents at beginning of year 44,338 3,354 2,324
Beginning cash and cash equivalents of immaterial
poolings of interests 590 -- --
------- ------- -------
Cash and cash equivalents at end of year $ 3,354 $ 2,324 $ 36,059
======= ======= =======
Supplemental cash flow disclosures:
Interest paid on debt $ 3,105 $ 5,684 $ 9,481
Income taxes paid $ 920 $ 141 $ 1,101
Supplemental disclosure of noncash financing
activities:
Additions to capital leases $ 1,268 $ 20,253 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. Summary of Significant Accounting Policies
(a) Description of Business:
PETCO Animal Supplies, Inc., (the Company or PETCO) a Delaware corporation,
is a national specialty retailer of premium pet food and supplies with stores in
39 states and the District of Columbia.
(b) Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments in affiliates are accounted for
on the equity method. All significant intercompany accounts and transactions
have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(c) Fiscal Year:
The Company's fiscal year ends on the Saturday closest to January 31,
resulting in years of either 52 or 53 weeks. All fiscal years presented herein
consisted of 52 weeks. All references to a fiscal year refer to the fiscal year
ending on the Saturday closest to January 31 of the following year.
(d) Cash Equivalents:
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
(e) Inventories:
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
(f) Pre-opening Costs:
Costs incurred in connection with opening new stores are expensed as
incurred.
(g) Fixed Assets:
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three to ten years. Equipment under capital leases is stated at the present
value of minimum lease payments at the inception of the lease. Amortization is
computed using the straight-line method over the lesser of the lease term or the
estimated useful lives of the assets, generally five to fifteen years.
(h) Goodwill and Long-Lived Assets:
Costs in excess of net assets of acquired businesses is amortized on the
straight-line method over 15 years. The carrying value of goodwill is reviewed
on a periodic basis for recoverability based on expectations for future
undiscounted cash flows from the related operations. Should the review indicate
that goodwill is not recoverable, the Company adjusts the goodwill to the extent
carrying value exceeds the fair value of the goodwill. Accumulated amortization
at January 30, 1999 and January 29, 2000 was $9,569 and $12,790, respectively.
In addition, the Company periodically assesses long-lived assets for
impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," based on expectations of
future undiscounted cash flows from the related operations, and when
circumstances dictate, adjusts the asset to the extent carrying value exceeds
the fair value of the asset. These factors, along with management's plans with
respect to the operations, are considered in assessing the recoverability of
goodwill, other purchased intangibles and property and equipment.
(i) Other Assets:
The Company has a secured loan to another limited partner in a limited
partnership which operates retail pet food and supply stores in Canada. The loan
bears interest at 7.5% and matures on October 1, 2003. The loan balance at
January 30, 1999 and January 29, 2000 was $6,545, and is included in other
assets on the accompanying balance sheet.
The remainder of other assets consists primarily of lease deposits,
non-compete agreements, debt issuance costs and prepaid expenses. Non-compete
agreements are amortized using the straight-line method over the periods of the
agreements, generally five to seven years. Debt issuance costs are amortized to
interest expense using the effective interest method over the life of the
related debt, generally five years. Accumulated amortization for intangible
other assets at January 30, 1999 and January 29, 2000 was $802 and $1,580,
respectively.
(j) Store Closing Costs:
Management continually reviews the ability of stores to provide positive
contributions to the Company's results. The Company charges costs associated
with store closures, consisting primarily of lease obligations, to operations
upon commitment to close a store within the next 12 months.
(k) Income Taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
(l) Fair Value of Financial Instruments:
Because of their short maturities, the carrying amounts for cash and cash
equivalents, receivables, accounts payable, accrued expenses, and accrued
salaries and employee benefits approximate fair value. The carrying amounts for
long-term debt, other obligations and loan to affiliate approximate fair value
as the interest rates and terms are substantially similar to those that could be
obtained currently for similar instruments.
(m) Stock Options:
The Company accounts for stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," which recognizes compensation expense on the
grant date if the current market price of the stock exceeds the exercise price.
In 1996, the Company elected to adopt the disclosure provisions of Statement of
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
(n) Earnings (Loss) Per Share:
The consolidated financial statements are presented in accordance with SFAS
No. 128, "Earnings per Share." Basic net earnings (loss) per common share is
computed using the weighted average number of common shares outstanding during
the period. Diluted net earnings per common share incorporates the incremental
shares issuable upon the assumed exercise of stock options.
Dilutive effect of stock options of 581 and 84 shares were not included in
computing diluted loss per share for fiscal years 1997 and 1998, respectively,
because the effect would have been antidilutive. In addition, 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 942, 1,995 and 1,621 for the fiscal years 1997, 1998 and 1999,
respectively.
(o) Comprehensive Income:
SFAS No. 130, "Reporting Comprehensive Income" requires that certain items
of comprehensive income other than net earnings or loss be reported in the
financial statements. For the three years ended January 29, 2000, the Company's
comprehensive income (loss) equaled net earnings (loss).
(p) Segment Reporting:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires annual and interim reporting for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. An operating segment is defined as a
component of an enterprise that engages in business activities from which it may
earn revenues and incur expenses, and about which separate financial information
is regularly evaluated by the chief operating decision maker in deciding how to
allocate resources. All of the Company's stores are aggregated into one
reportable segment given the similarities of economic characteristics between
the operations represented by the stores and the common nature of the products,
customers and methods of distribution.
(q) Reclassifications:
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
2. Business Combinations
The Company acquired all of the outstanding equity securities of a retailer
with four pet food and supply stores operated under the tradename Super Pets in
August 1997, a retailer with nine pet food and supply stores operated under the
tradename Paws in October 1997, a retailer with five pet food and supply stores
operated under the tradename The PetCare Company in October 1997, and a retailer
with four pet food and supply stores operated under the tradename Pet Food
Savemart in October 1997, in exchange for an aggregate 613 shares of common
stock. These acquisitions were accounted for as poolings of interests with their
financial positions and results of operations included in the accompanying
consolidated financial statements from the beginning of the period in which each
immaterial pooling was completed. Previously reported financial statements have
not been restated to include the results of these acquisitions as revenues and
results of operations prior to the acquisition were not material to the
consolidated financial position or results of operations of the Company.
The Company acquired all of the outstanding equity securities of a retailer
with eighty-two pet food and supply stores operated under the tradename PetCare
("PetCare") in November 1997, in exchange for 1,543 shares of common stock. This
transaction has been accounted for as a pooling of interests, and accordingly,
the consolidated financial statements for the periods presented have previously
been restated to include the accounts of PetCare.
During fiscal 1998, the Company completed two acquisitions of retailers of
pet food and supplies in transactions accounted for as purchases. The aggregate
fair value of assets acquired and the net cash invested in these businesses was
$2,088, of which $275 was expended in fiscal 1999. The excess of the aggregate
cost over the fair value of net assets acquired was $1,814, which was recorded
as goodwill and is being amortized over fifteen years.
During fiscal 1999, the Company completed one acquisition of a retailer of
pet food and supplies in a transaction accounted for as a purchase. The
aggregate fair value of assets acquired and the net cash invested in this
business was $2,616. The excess of the aggregate cost over the fair value of net
assets acquired was $1,468, which was recorded as goodwill and is being
amortized over fifteen years.
The consolidated financial statements include the operating results from
the closing date for each respective purchase acquisition. The purchase
acquisitions during fiscal years 1998 and 1999 did not materially affect results
of operations and accordingly, pro-forma results are not presented.
In fiscal 1997, merger and business integration costs of $38,693 were
recorded in connection with acquisition activities. These costs consisted of
$4,470 of transaction costs, $17,790 of costs attributable to lease
cancellations and closure of duplicate or inadequate facilities and activities,
$12,216 of reformatting, facility conversion and other integration costs and
$4,217 of severance and other costs.
In fiscal 1998, merger and business integration costs of $22,963 were
recorded related to fiscal 1997 acquisition activity. These costs consisted of
$522 of transaction costs, $1,995 of costs attributable to lease cancellations
and closure of duplicate or inadequate facilities and activities, $19,088 of
reformatting, facility conversion and other integration costs and $1,358 of
severance and other costs.
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 January 29,
2000, the Company owned 4,335 shares of Petopia.com preferred stock,
representing an ownership interest of 10.0%, 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 $4,021 in equity in losses for fiscal
1999. 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 may earn an additional 3,843 Series C preferred shares.
Including these shares, the Company's ownership interest would have been 17.4%
at January 29, 2000, prior to the exercise of any warrants granted to the
Company. The Company earned $2,767 from Petopia.com, primarily under the terms
of the agreement in fiscal 1999. These items are reflected as Internet
operations and equity in loss of unconsolidated affiliates in the accompanying
statements of operations.
The Company has a 60% 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 years ended January 30, 1999 and
January 29, 2000. The Company's investment in the LP at January 30, 1999 and
January 29, 2000 was $5,862 and $12,415, respectively.
4. Long-Term Debt
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 effective interest rate of these borrowings at January 29, 2000 was 8.18% to
9.74%. The credit agreement contains certain affirmative and negative covenants
related to indebtedness, interest and fixed charges coverage, and consolidated
net worth.
Long-term debt consists of:
January 30, January 29,
1999 2000
----------- -----------
Revolving loans $43,250 $ --
Term loan 26,625 98,175
------ ------
69,875 98,175
Less current portion 4,500 9,125
------ ------
$65,375 $89,050
====== ======
Annual maturities of long-term debt for the next five fiscal years are as
follows: $9,125, $8,425, $10,675, $11,800 and $15,525.
5. Lease Commitments and Other Obligations
The Company finances certain fixed assets under capital leases. There are
approximately $42,753 and $37,272 in fixed assets financed through capital
leases at January 30, 1999 and January 29, 2000, respectively. Accumulated
amortization related to these financed assets was approximately $12,866 and
$16,690 at January 30, 1999 and January 29, 2000, respectively.
The Company leases warehouse and store facilities and equipment under
operating leases. These operating leases generally have terms from three to ten
years. Certain store leases include additional contingent rental payments
ranging from 2% to 6% of store revenues above defined levels. Contingent rentals
during fiscal years 1997, 1998, and 1999 were $33, $44 and $68, respectively.
At January 29, 2000, the present value of future minimum payments for
capital lease and other obligations, and minimum lease payments under
noncancelable operating leases were as follows:
Capital Leases
and Other Operating
Years Obligations Leases
----- ------------- -----------
2000 $ 9,246 $ 97,211
2001 7,036 96,270
2002 4,409 87,356
2003 314 81,952
2004 276 73,397
Thereafter 2,021 319,772
------ -------
Total minimum payments 23,302 $755,958
=======
Less amount representing interest 3,012
------
Present value of net minimum capital
lease and other obligations payments 20,290
Less current portion of capital lease
and other obligations 7,854
------
Capital lease and other obligations $12,436
======
Rent expense under operating leases for fiscal years 1997, 1998, and 1999
was approximately $70,506, $79,672, and $89,352, respectively.
6. Equity
(a) Common Stock:
The authorized number of shares is 100,000.
(b) Stock Options:
In February 1994, the Company's stockholders approved the 1994 Stock Option
Plan ("1994 Company Plan") which provides for the granting of stock options,
stock appreciation rights or restricted stock with respect to shares of common
stock to executives and other key employees. Stock options may be granted in the
form of incentive stock options or non-statutory stock options and are
exercisable for up to ten years following the date of grant. Stock option
exercise prices must be equal to or greater than the fair market value of the
common stock on the grant date. In June 1996, the Company's stockholders
approved an amendment to the 1994 Company Plan to increase the number of shares
available for issuance under the plan for each of the next five fiscal years by
3.0% of the number of shares of common stock issued and outstanding as of the
end of the immediately preceding fiscal year.
In February 1994, the Company's stockholders approved the Directors 1994
Stock Option Plan ("Directors Plan") which provides for the granting of common
stock options to directors. Stock option exercise prices must be equal to the
fair market value of the common stock on the grant date. In June 1995, the
Company's stockholders approved an amendment to the Directors Plan to increase
the number of shares available for issuance under the plan for each of the next
five fiscal years by 0.1% of the number of shares of common stock issued and
outstanding as of the end of the immediately preceding fiscal year.
In 1996, the Company assumed an employee stock option plan ("1993 Company
Plan") from Pet Food Warehouse which provided for the granting of incentive and
nonqualified stock options with exercise prices equal to their fair market
values on their grant dates that become exercisable over various periods and
expire five or six years after the date of grant. The common shares and exercise
prices under this plan were adjusted based on the common share conversion rate
per the merger agreement with Pet Food Warehouse. No further grants will be made
under this plan.
In 1997, the Company assumed an employee stock option plan ("1989 Company
Plan") from PetCare which provided for the granting of incentive and
non-qualified stock options with exercise prices equal to their fair market
values on their grant dates that became exercisable over various periods and
expire up to ten years after the date of grant. The common shares and exercise
prices under this plan were adjusted in accordance with the terms of the merger
agreement with PetCare. No further grants will be made under this plan.
Information regarding the stock option plans follows:
<TABLE>
<CAPTION>
1994 Company Plan 1993 Company Plan
-------------------------------- --------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
February 1, 1997 926 $10.33-$23.17 $ 14.77 209 $14.95-$42.27 $ 19.52
Granted 645 $22.50-$30.31 $ 23.17 -- $ -- $ --
Exercised (164) $ 10.33 $ 10.33 (75) $15.24-$27.21 $ 20.11
Cancelled (85) $10.33-$23.17 $ 20.52 (13) $14.95-$42.27 $ 23.71
----- -----
Outstanding at
January 31, 1998 1,322 $10.33-$30.31 $ 18.89 121 $14.95-$27.73 $ 18.74
Granted 715 $17.44-$18.44 $ 17.47 -- $ -- $ --
Exercised (4) $10.33-$12.33 $ 12.23 (1) $18.40-$20.70 $ 18.67
Cancelled (170) $10.33-$23.17 $ 19.74 (4) $14.95-$24.73 $ 20.53
----- -----
Outstanding at
January 30, 1999 1,863 $10.33-$30.31 $ 18.28 116 $14.95-$27.73 $ 18.67
Granted 649 $ 7.31-$15.50 $ 7.43 -- $ -- $ --
Exercised (12) $10.33-$12.33 $ 10.77 -- $ -- $ --
Cancelled (211) $ 7.31-$27.50 $ 13.81 (4) $14.95-$27.21 $ 23.67
----- -----
Outstanding at
January 29, 2000 2,289 $ 7.31-$30.31 $ 15.66 112 $14.95-$27.73 $ 18.49
===== =====
Exercisable at
January 31, 1998 372 $10.33-$30.25 $ 12.55 111 $14.95-$27.73 $ 18.63
Exercisable at
January 30, 1999 512 $10.33-$30.31 $ 12.88 112 $14.95-$27.73 $ 18.65
Exercisable at
January 29, 2000 742 $10.33-$30.31 $ 16.27 112 $14.95-$27.73 $ 18.49
Available for grant at
January 29, 2000 1,067 --
</TABLE>
<TABLE>
<CAPTION>
Directors' Plan 1989 Company Plan
-------------------------------- --------------------------------
Weighted Weighted
Average Average
Option Price Exercise Option Price Exercise
Shares Per Share Price Shares Per Share Price
------ ------------ -------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
February 1, 1997 14 $10.33-$31.67 $ 15.96 188 $ 7.70-$11.54 $ 9.40
Granted 12 $21.38-$22.50 $ 21.67 -- $ 11.54 $ 11.54
Exercised -- $ -- $ -- (134) $ 7.70-$11.54 $ 9.61
Cancelled -- $ -- $ -- -- $ -- $ --
----- -----
Outstanding at
January 31, 1998 26 $10.33-$31.67 $ 18.64 54 $ 7.70-$11.54 $ 8.89
Granted 35 $ 4.78-$17.44 $ 8.60 -- $ -- $ --
Exercised -- $ -- $ -- (13) $ 11.54 $ 11.54
Cancelled -- $ -- $ -- (2) $ 11.54 $ 11.54
----- -----
Outstanding at
January 30, 1999 61 $ 4.78-$31.67 $ 13.02 39 $ 7.70-$11.54 $ 7.87
Granted 50 $ 6.22-$14.03 $ 9.12 -- $ -- $ --
Exercised -- $ -- $ -- (21) $ 7.70 $ 7.70
Cancelled -- $ -- $ -- -- $ -- $ --
----- -----
Outstanding at
January 29, 2000 111 $ 4.78-$31.67 $ 11.26 18 $ 7.70-$11.54 $ 8.06
===== =====
Exercisable at
January 31, 1998 26 $10.33-$31.67 $ 18.64 54 $ 7.70-$11.54 $ 8.89
Exercisable at
January 30, 1999 61 $ 4.78-$31.67 $ 13.02 39 $ 7.70-$11.54 $ 7.87
Exercisable at
January 29, 2000 111 $ 4.78-$31.67 $ 11.26 18 $ 7.70-$11.54 $ 8.06
Available for grant at
January 29, 2000 22 --
</TABLE>
In March 2000, options for 737 shares were granted under the 1994 Company
Plan which vest in March 2003 and are exercisable at $12.44 per share. In
February and March 2000, options for 15 shares were granted under the Directors
Plan that were immediately exercisable at a range of $10.20 to $12.44 per share.
(c) Accounting for Stock Options:
The Company accounts for stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, under
which no compensation expense was recognized. Had compensation costs for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans, consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and loss per share would have been increased by $3,850, or
$0.18 per share, during 1997, the Company's net loss and loss per share would
have been increased by $3,749, or $0.18 per share, during 1998, and the
Company's net earnings and earnings per share would have been decreased by
$3,521, or $0.17 per share, during 1999. The pro forma change in net earnings
(loss) reflects only options granted since 1995. Therefore, the full impact of
calculating compensation costs for stock options under SFAS No. 123 is not
reflected in the pro forma change in net earnings (loss) amounts presented above
because compensation cost is reflected over the options vesting period of three
years and compensation cost for options granted prior to January 1, 1995 is not
considered. The weighted average fair value of the options granted during 1997,
1998 and 1999 were estimated as $11.65, $9.46 and $4.48 on the date of grant
using the Black-Scholes option pricing model with the following assumptions: no
dividend yield, volatility of 47.5%, 59.0% and 62.1%, risk-free interest rate of
6.0%, 5.0% and 6.0% for 1997, 1998 and 1999, respectively, and an expected life
of five years for all grants.
The following table summarizes information about the options outstanding
under all stock option plans at January 29, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
---------- ----------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.78-$10.33 940 7.35 $ 8.36 400 $ 9.78
$10.63-$17.44 716 7.53 $ 16.37 156 $ 12.87
$17.54-$21.38 126 3.13 $ 18.63 115 $ 18.64
$22.50-$31.67 748 6.80 $ 23.23 312 $ 23.95
--------- --------
2,530 7.03 $ 15.53 983 $ 15.81
========= ========
</TABLE>
(d) Stockholder Rights Agreement:
On September 10, 1998, the Board of Directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of the
Company's common stock, which Rights expire on September 22, 2008. Each Right
entitles a stockholder to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock of the Company, at the price of $75.00 per
one one-hundredth of a preferred share, subject to adjustment, or, under certain
circumstances, shares of common stock of the Company or a successor company
which at the time of such transaction would have a market value equal to two
times the exercise price of the Right. The Rights would become exercisable for
all other persons only if a person acquires or announces a tender offer to
acquire beneficial ownership of 15% or more of the Company's common stock. Each
share of Series A Junior Participating Preferred Stock will be entitled to
certain minimum dividends and an aggregate dividend of 100 times the dividend
declared per common share, if any. The Rights have no voting privileges and the
Board of Directors may terminate the Stockholder Rights Agreement at any time or
redeem outstanding Rights at a price of $0.01 per Right at any time prior to a
person acquiring beneficial ownership of 15% or more of the Company's
outstanding common stock.
7. Income Taxes
Income taxes (benefit) consists of the following:
Years Ended
----------------------------------------
January 31, January 30, January 29,
1998 1999 2000
----------- ----------- -----------
Current:
Federal $ 416 $ 64 $ 991
State (370) (423) 993
Foreign -- 132 --
------- ------- -------
46 (227) 1,984
------- ------- -------
Deferred:
Federal (4,290) (876) 12,945
State (1,242) 665 1,902
Foreign -- -- --
------- ------- -------
(5,532) (211) 14,847
------- ------- -------
Income taxes (benefit) $ (5,486) $ (438) $ 16,831
======= ======= =======
A reconciliation of income taxes at the federal statutory rate of 34% for
the fiscal years ended January 31, 1998 and January 30, 1999 and 35% for the
fiscal year ended January 29, 2000 with the provision for income taxes (benefit)
follows:
Years Ended
----------------------------------------
January 31, January 30, January 29,
1998 1999 2000
----------- ----------- -----------
Income taxes at federal
statutory rate $ (6,347) $ (957) $ 13,506
Non-deductible expenses 1,489 286 463
State taxes, net of federal
tax benefit (1,064) 160 1,882
Foreign taxes, net of federal
tax benefit -- 87 --
Change in valuation allowance -- -- 1,600
Other 436 (14) (620)
------- ------- -------
$ (5,486) $ (438) $ 16,831
======= ======= =======
The sources of significant temporary differences which gave rise to the
deferred tax provision and their effects follow:
Years Ended
----------------------------------------
January 31, January 30, January 29,
1998 1999 2000
----------- ----------- -----------
Inventory $ (1,216) $ 2,693 $ 26
Deferred rent (588) (779) (779)
Depreciation 1,611 4,220 7,808
Accrued fringes (699) 204 (680)
Intangibles 1,771 686 (221)
Store closing costs (1,941) 1,840 974
Fixed assets 1,128 1,571 24
Other assets (2,358) 1,450 (970)
Benefit of net operating
loss carryforwards (3,929) (12,482) 9,093
Change in valuation allowance -- -- 1,600
Other 689 386 (2,028)
------- ------- -------
$ (5,532) $ (211) $ 14,847
======= ======= =======
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets follow:
January 30, January 29,
1999 2000
----------- -----------
Deferred tax assets:
Inventory $ 3,556 $ 3,530
Deferred rent 4,191 4,970
Accrued fringes 1,901 2,581
Store closing costs 3,656 2,682
Fixed assets 29 5
Other assets 908 1,878
Net operating loss carryforwards 27,104 18,011
Other -- 1,323
------ ------
Total deferred tax assets 41,345 34,980
Valuation allowance (4,900) (6,500)
------ ------
Net deferred tax assets 36,445 28,480
------ ------
Deferred tax liabilities:
Depreciation (7,386) (15,194)
Intangibles (1,904) (1,683)
Other (705) --
------ ------
Total deferred tax liabilities (9,995) (16,877)
------ ------
Net deferred tax assets $26,450 $11,603
====== ======
The valuation allowance of $4,900 at January 30, 1999 and $6,500 at January
29, 2000 relates primarily to net operating loss carryforwards of PetCare, with
the increase in the valuation allowance at January 29, 2000 relating to the
Company's equity share in the losses of Petopia.com. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods for which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net of
the valuation allowance.
At January 29, 2000, the Company has available net loss carryforwards of
$47,869 for federal income tax purposes, which begin expiring in 2012, and
$24,002 for state income tax purposes, which begin expiring in 2005.
8. Employee Savings Plan
The Company has employee savings plans which permit eligible participants
to make contributions by salary reduction pursuant to either section 401(k) of
the Internal Revenue Code or under the Company's non-qualified deferred
compensation plan. The Company matches 50% of the first 6% of compensation that
is contributed by each participating employee to the plans. In connection with
the required match, the Company's contributions to the plans were $199 in 1997,
$532 in 1998 and $873 in 1999.
9. Commitments and Contingencies
The Company and certain of its officers have been named as defendants in
several virtually identical class action lawsuits filed in the United States
District Court for the Southern District of California between August and
November, 1998. These cases have 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.
In addition, the Company is involved in routine litigation arising in the
ordinary course of its business. While the results of such litigation cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
EXHIBIT INDEX
Number Document
- ------ --------
3.1 Amended and Restated Certificate of Incorporation, as
amended. (1)
3.2 Amended and Restated By-Laws. (2)
4.1 Form of Common Stock Certificate. (2)
4.2 Stockholder Rights Agreement. (3)
10.1 Amended and Restated Credit Agreement, dated July 15, 1999 between the
Company and Union Bank, as Syndicating Agent. (4)
10.2 Distribution Center Lease, dated July 1, 1997 between the Company and
Knickerbocker Industrial Properties East LP for 152 Dayton Jamesburg
Road, South Brunswick, New Jersey. (5)
10.3 Distribution Center Lease, dated February 20, 1998 between the Company
and Industrial Developments International, Inc. for 3801 Rock Creek
Boulevard, Joliet, Illinois. (5)
10.4 Distribution Center Lease, dated November 24, 1997 between the Company
and Opus West Corporation for 4345 Parkhurst Street, Mira Loma,
California. (5)
10.5 Master Equipment Lease Agreement, dated March 10, 1995, between the
Company and KeyCorp Leasing Ltd. (6)
10.6 Master Equipment Lease Agreement, dated November 15, 1995, between the
Company and Fleet Credit Corporation. (6)
10.7 Master Equipment Lease Agreement, dated September 15, 1998, between the
Company and IBM Leasing. (7)
10.8 Master Equipment Lease Agreement, dated January 25, 1999, between the
Company and Matrix funding. (7)
10.9 Master Lease Agreement, dated December 27, 1995, between the Company
and Newcourt Financial USA, Inc. (6)
10.10 Master Lease Agreement, dated September 28, 1995, between the Company
and USL Capital Corporation. (6)
10.11 Employment Agreement, dated March 17, 1996, between the Company and
Brian K. Devine. (6)
10.12 Form of Indemnification Agreement between the Company and certain
officers and directors. (2)
10.13 Form of Retention Agreement for executive officers. (5)
10.14 Form of Retention Agreement for non-executive officers. (5)
10.15 Petco Animal Supplies 401(k) Plan. (2)
10.16 The 1994 Stock Option and Restricted Stock Plan for Executive and Key
Employees of Petco Animal Supplies, Inc., as amended and restated on
March 18, 1998. (7)
10.17 Petco Animal Supplies, Inc. Group Benefit Plan, dated July 29, 1991,
as amended. (6)
10.18 Petco Animal Supplies, Inc. Directors' 1994 Stock Option Plan, as
amended. (6)
10.19 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option
Agreement. (2)
10.20 Form of Petco Animal Supplies, Inc. Incentive Stock Option
Agreement. (2)
10.21 Form of Petco Animal Supplies, Inc. Restricted Stock Agreement. (2)
10.22 Form of Petco Animal Supplies, Inc. Nonstatutory Stock Option Agreement
(Directors' 1994 Stock Option Plan). (2)
10.23 The Pet Food Warehouse, Inc. 1993 Stock Option Plan (8)
10.24 Pet Food Warehouse, Inc. Amendment to 1993 Stock Option Plan. (9)
10.25 The PetCare Plus, Inc. 1989 Stock Option Plan (the "1989 Stock Option
Plan"). (10)
10.26 Form of Incentive Stock Option Agreement under the 1989 Stock Option
Plan. (10)
10.27 Form of Nonqualified Stock Option Agreement under the 1989 Stock Option
Plan. (10)
21.1 Subsidiaries of the registrant. (4)
23.1 Consent of KPMG LLP. (4)
27.1 Financial Data Schedule. (4)
- -------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-4
dated October 23, 1996, File No. 333-14699, including Amendment No. 1
thereto dated November 20, 1996.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
dated January 13, 1994, File No. 33-77094, including Amendment No. 1
thereto dated February 24, 1994 and Amendment No. 2 thereto dated March
11, 1994.
(3) Filed as an exhibit to the Company's Report on 8-K dated September 22, 1998,
File No. 000-23574.
(4) Filed herewith.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
April 30, 1998.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated April 4, 1996, File No. 333-3156, including Amendment No. 1 thereto
dated April 24, 1996.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
April 29, 1999.
(8) Filed as an exhibit to Pet Food Warehouse, Inc.'s Registration Statement on
Form SB-2 dated July 6, 1993, File No.33-65734C, including Amendment No. 1
thereto, dated effective August 13, 1993, Post-Effective Amendment No. 1
thereto, dated January 7, 1994, Post-Effective Amendment No. 2 thereto,
dated February 1, 1994, and Post-Effective Amendment No. 3 thereto, dated
February 10, 1994.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated February 26, 1997, File No. 333-14699.
(10)Filed as an exhibit to the Company's Registration Statement on Form S-8
dated March 20, 1998, File No. 333-48311.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 12th day of
April, 2000.
PETCO ANIMAL SUPPLIES, INC.
By: /s/BRIAN K. DEVINE
--------------------------
Brian K. Devine
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/BRIAN K. DEVINE Chairman of the Board, President April 12, 2000
- -----------------------
Brian K. Devine and Chief Executive Officer
(Principal Executive Officer)
/s/JAMES M. MYERS Senior Vice President and April 12, 2000
- -----------------------
James M. Myers Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ANDREW G. GALEF Director April 12, 2000
- -----------------------
Andrew G. Galef
/s/RICHARD J. LYNCH Director April 12, 2000
- -----------------------
Richard J. Lynch
/s/JAMES F. McCANN Director April 12, 2000
- -----------------------
James F. McCann
/s/PETER M. STARRETT Director April 12, 2000
- -----------------------
Peter M. Starrett
Exhibit 10.1
AMENDED AND RESTATED CREDIT AGREEMENT
===============================================
PETCO ANIMAL SUPPLIES, INC.
BORROWER
THE BANKS NAMED HEREIN
LENDERS
AND
UNION BANK OF CALIFORNIA, N.A.
Administrative Agent, Arranger and
Syndication Agent
===============================================
Dated as of July 15, 1999
TABLE OF CONTENTS
SCHEDULE 1 - LENDERS AND APPLICABLE LENDING OFFICES
SCHEDULE 2 - SUBSIDIARIES
SCHEDULE 3 - DEBT
SCHEDULE 4 - EXISTING LOANS, ADVANCES AND GUARANTIES
SCHEDULE 5 - CERTAIN EXISTING INVESTMENTS IN PETCETERA L.P.
SCHEDULE 6 - CERTAIN LIENS
SCHEDULE 7 - LITIGATION
EXHIBIT A-1 - FORM OF REVOLVING NOTE
EXHIBIT A-2 - FORM OF FACILITY A TERM NOTE
EXHIBIT A-3 - FORM OF FACILITY B TERM NOTE
EXHIBIT B - COMPLIANCE CERTIFICATE
EXHIBIT C - ASSIGNMENT AGREEMENT
EXHIBIT D - LEVERAGE RATIO LEVEL CERTIFICATE
EXHIBIT E - FORMS OF LETTER OF CREDIT REQUESTS
EXHIBIT F - FORM OF NOTICE OF BORROWING
EXHIBIT G - FORM OF NOTICE OF BORROWING (CONVERSIONS)
EXHIBIT H - FORM OF NOTICE OF BORROWING (CONTINUATIONS)
EXHIBIT I - FORM OF JOINING LENDER AGREEMENT
AMENDED AND RESTATED CREDIT AGREEMENT
This Agreement, dated as of July 15, 1999, is among PETCO ANIMAL
SUPPLIES, INC., a Delaware corporation (the "Borrower"), the financial
institutions party hereto (together with their respective successors and
permitted assigns, the "Lenders") and UNION BANK OF CALIFORNIA, N.A. ("UBOC"),
as Agent for the Lenders. The parties hereto agree as follows:
RECITALS
--------
WHEREAS, UBOC, certain lenders and the Borrower are parties to that
Credit Agreement dated as of January 30, 1998, as amended (the "Prior Loan
Agreement"); and
WHEREAS, the Lenders have agreed, on the terms and conditions herein
set forth, to extend term and revolving credit to the Borrower for the purposes
set forth below, including for the purpose of refinancing amounts outstanding
under the Prior Loan Agreement;
WHEREAS, the Lenders have agreed, on the terms and conditions herein
set forth, to issue letters of credit for the Borrower's account as a revolving
commitment subfacility for the purposes of supporting purchases of inventory by
the Borrower and of providing support for lease and insurance obligations of the
Borrower;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
-----------
As used in this Agreement:
"Acquisition" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (i) acquires any going business in the pet
food and supply business or related fields or all or substantially all of the
assets of any firm, corporation or division thereof in the pet food and supply
business or related fields, whether through purchase of assets, merger or
otherwise or (ii) directly or indirectly acquires (in one transaction or as the
most recent transaction in a series of transactions) at least a majority (in
number of votes) of the securities of a corporation in the pet food and supply
business or related fields which have ordinary voting power for the election of
directors (other than securities having such power only by reason of the
happening of a contingency) or a majority (by percentage or voting power) of the
outstanding partnership interests of a partnership (or limited liability company
interests in a limited liability company) in the pet food and supply business or
related fields.
"Acquisition Documents" means the purchase agreement, together with all
schedules and exhibits referenced therein and the legal opinions delivered in
connection therewith in connection with any Acquisition.
"Advance" means a borrowing, or a continuation or conversion of a
borrowing pursuant to Section 2.7 hereof, consisting of Loans of the same Type
and, in the case of a LIBOR Loan, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management or policies of the controlled Person, whether through ownership of
stock, by contract or otherwise. A Person having 10% or more of the voting
capital stock of another Person shall be deemed to have control of such Person.
"Agent" means UBOC in its capacity as administrative agent for the
Lenders pursuant to Article 10, and not in its individual capacity as a Lender,
and any successor Agent appointed pursuant to Article 10.
"Aggregate Available Commitment" means the aggregate of the Available
Commitments of all the Lenders.
"Aggregate Commitment" means the aggregate of the Facility A Term
Commitments, Facility B Term Commitments and Revolving Commitments of all the
Lenders.
"Aggregate Revolving Commitment" means the aggregate of the Revolving
Commitments of all the Lenders.
"Agreement" means this Amended and Restated Credit Agreement, as it may
be amended or modified and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
that used in preparing the financial statements referred to in Section 5.6
(except for changes concurred on by the Borrower's independent public
accountants and the Required Lenders).
"Applicable Lending Office" means for any Lender, its offices for LIBOR
Loans and Base Rate Loans, specified in Schedule 1 or in the Assignment and
Acceptance or Joining Lender Agreement pursuant to which it became a party
hereto, as the case may be, any of which offices may, upon 10 days' prior
written notice to the Agent and the Borrower, be changed by such Lender.
"Applicable Margin" means the Revolving/Term A Applicable Margin or the
Term B Applicable Margin, as appropriate.
"Approved Fund" means, with respect to any Lender that is an investment
fund that invests in commercial loans, any other investment fund that invests in
commercial loans and is managed or advised by the same investment advisor as
such Lender or by an Affiliate of such investment advisor or such Lender.
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Assignment and Acceptance" means an Assignment and Acceptance in the
form of Exhibit C hereto.
"Authorized Officer" means any of the chief executive officer, chief
financial officer, any senior vice president (specifically authorized by the
Borrower) or the treasury manager of the Borrower, acting singly.
"Available Commitment" means, with respect to each Lender having a
Revolving Commitment, the amount by which (i) the Revolving Commitment of each
Lender on such date exceeds (ii) the sum of (a) the aggregate principal sum of
such Lender's Revolving Loans outstanding, (b) such Lender's Revolving
Commitment Percentage of the aggregate Letter of Credit Amount of all Letters of
Credit outstanding and (c) such Lender's Revolving Commitment Percentage of the
aggregate amount of unreimbursed drawings under all Letters of Credit on such
date.
"Base Rate" means, for any day, a rate per annum equal to (i) the
Corporate Base Rate for such day plus (ii) the Revolving/Term A Applicable
Margin or the Term B Applicable Margin (as appropriate), in each case changing
when and as the Corporate Base Rate changes.
"Base Rate Loan" means a Loan when it bears interest at the Base Rate.
"Borrower" means Petco Animal Supplies, Inc., a Delaware corporation,
and its successors and assigns.
"Borrowing Date" means a date on which a Revolving Loan is made
hereunder.
"Business Day" means any day (i) other than a Saturday, Sunday or other
day on which commercial banks are authorized or required by law to close in Los
Angeles, California and (ii) if the applicable Business Day relates to a LIBOR
Loan, on which dealings are carried on in the London interbank market.
"Capital Expenditures" means, for any period, for any person or entity,
the aggregate of all expenditures which are made during such period (whether
paid in cash or accrued as liabilities), by such person or entity, for property,
plant or equipment and which would be reflected as additions to property, plant
or equipment on a balance sheet of such person or entity prepared in accordance
with Agreement Accounting Principles (including, without limitation, all such
property held under Capitalized Leases).
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
"Capitalized Rent Expense Ratio" means for the Borrower and its
Subsidiaries on a consolidated basis, determined as of the end of each fiscal
quarter for the period of four fiscal quarters then ended, the ratio of (i) the
sum of Funded Debt plus eight times the Rent Expense for such period to (ii) the
sum of Funded Debt plus eight times the Rent Expense for such period plus the
stockholders' equity of the Borrower and its Subsidiaries at such time.
"Closing Date" means the date on which all the conditions precedent set
forth in Section 4.1 shall have been satisfied.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Collateral means all of the property (tangible or intangible)
purported to be subject to the lien or security interest purported to be created
by any mortgage, deed of trust, security agreement, pledge agreement, assignment
or other security document heretofore or hereafter executed by the Borrower as
security for all or part of the Obligations.
"Collateral Documents": the Security Agreement, all Form UCC-1
Financing Statements and amendments thereto and any other document encumbering
the Collateral or evidencing or perfecting a security interest therein for
the benefit of the Lenders executed by the Borrower.
"Commitment" means, for each Lender, its Revolving Commitment, its
Facility A Term Commitment and its Facility B Term Commitment, as applicable.
"Compliance Certificate" has the meaning set forth in Section 6.1(v).
"Consideration" means, with respect to any Acquisition, the aggregate
consideration, in whatever form (including, without limitation, cash payments,
the principal amount of promissory notes and Debt assumed, the aggregate amounts
payable to acquire, extend and exercise any option, the aggregate amount payable
under non-compete agreements and management agreements and the fair market value
of other property delivered) paid, delivered or assumed by the Borrower and its
Subsidiaries for such Acquisition and the expenses associated therewith,
including all brokerage commissions, legal fees and similar expenses.
Notwithstanding anything herein to the contrary, no Acquisition involving the
assumption of Debt by the Borrower or its Subsidiaries shall be permitted if
such assumption would violate the terms of this Agreement.
"Consolidated Fixed Charges" means, for the Borrower and its
Subsidiaries, on a consolidated basis, for any period of four consecutive fiscal
quarters, the sum (without duplication) of (i) Interest Expense for such period,
(ii) cash dividends and distributions paid with respect to the capital stock of
the Borrower or its Subsidiaries during such period (other than dividends and
distributions paid by its Subsidiaries to the Borrower), (iii) the aggregate
principal amount of all scheduled payments of Debt (including the principal
portion of rentals under Capitalized Leases) required to be made during such
period, (iv) all income taxes required to be paid during such period and (v)
Rent Expenses during such period.
"Consolidated Net Worth" means with respect to the Borrower and its
Subsidiaries, the excess of total assets over total liabilities, all to be
determined on a consolidated basis in accordance with Agreement Accounting
Principles.
"Control" means the power to direct or cause the direction of the
management or policies of a person, whether through rights of ownership under
voting securities, under contract or otherwise, and "Controlling" and
"Controlled" shall have meanings correlative thereto.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower or any of its Subsidiaries, are
treated as a single employer under Section 414 of the Code.
"Conversion/Continuation Notice" is the notice referred to in Section
2.7.
"Corporate Base Rate" means a fluctuating interest rate per annum, as
in effect from time to time, at all times equal to the higher of the following:
(i) the sum of the Federal Funds Effective Rate in effect from time to time plus
0.50% per annum; and (ii) the annual rate of interest announced from time to
time by UBOC as its corporate reference rate (which is a rate set by UBOC based
upon various factors, including, without limitation, general market conditions,
which is used as a reference point for pricing certain loans and UBOC may price
its loans at, above or below such rate).
"Debt" of any Person means (i) all indebtedness of such Person for
borrowed money or for the deferred purchase price of property or services, (ii)
all obligations of such Person evidenced by notes, bonds, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional-sale or other title-retention agreement with respect to property
acquired by such Person, (iv) all obligations of such Person as lessee under
leases that have been or should be, in accordance with Agreement Accounting
Principles, recorded as Capitalized Leases, (v) all obligations of such Person
under direct or indirect guaranties in respect of, and obligations (contingent
or otherwise) to purchase or otherwise acquire, or otherwise to secure a credit
against loss in respect of, indebtedness or obligations of others of the kinds
referred to in clause (i), (ii), (iii) or (iv) above and (vi) liabilities in
respect of unfunded vested benefits under plans covered by Title IV of ERISA.
"Default" means any Event of Default and any default, event or
condition that would, with the giving of any requisite notice and the passage of
any requisite period of time, constitute an Event of Default.
"Drawing Lender" has the meaning set forth in Section 2.2(iii).
"EBITDA" means for any period, for the fiscal quarter most recently
ended and the immediately preceding three fiscal quarters, Net Income after
eliminating extraordinary gains and losses, plus (i) provisions for income
taxes, (ii) depreciation and amortization and (iii) Interest Expense.
"EBITDAR" means for any period, for the fiscal quarter most recently
ended and the immediately preceding three fiscal quarters, (i) EBITDA plus (ii)
Rent Expenses.
"E-Commerce Investment" means an investment in a Person the primary
business of which is the development, formation, operation and marketing of a
business the purpose of which is selling pet food and pet supplies to consumers
over the internet; provided that for purposes of this definition, "investment"
shall not include investments in the form of services performed, or other
in-kind benefits conferred, on such Person by the Borrower or a Subsidiary in
connection with such investment.
"Eligible Institution" means (i) a commercial bank organized under the
laws of the United States, or any State thereof, and having total assets in
excess of $250,000,000; (ii) a commercial bank organized under the laws of any
other country which is a member of the Organization for Economic Cooperation and
Development, or a political subdivision of any such country, and having total
assets in excess of $250,000,000, provided that such bank is acting through a
branch or agency located in the United States; (iii) an insurance company or
other financial institution or an investment fund that is engaged in making,
purchasing or otherwise investing in commercial loans in the ordinary course of
its business and having total assets in excess of $250,000,000; (iv) any Lender;
(v) any Affiliate of an existing Lender or any Approved Fund of an existing
Lender; and (vi) any other Person approved by the Agent and, in the absence of
any Default, the Borrower.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"Eurocurrency Liabilities" has the meaning set forth in Regulation D of
the Board of Governors of the Federal Reserve System.
"Event of Default" has the meaning set forth in Article 7.
"Facility A Reduction Installment" is defined in Section 2.4(iv).
"Facility A Term Commitment" means, for each Lender having a Facility A
Term Commitment, the obligation of such Lender to make a Facility A Term Loan in
the amount set forth opposite its name on Schedule 1 hereto or as set forth in
any Assignment and Acceptance relating to any assignment that has become
effective pursuant to Section 12.3, as such amount may be modified from time to
time pursuant to the terms hereof.
"Facility A Term Lenders" means each Lender having a Facility A Term
Commitment or Facility A Term Loans.
"Facility A Term Loan" is defined in Section 2.4(i).
"Facility A Term Note" means a promissory note, in substantially the
form of Exhibit A-2 hereto, duly executed by the Borrower and payable to the
order of each Lender having a Facility A Term Commitment in the amount of such
Lender's Facility A Term Commitment.
"Facility A Termination Date" means July 15, 2004.
"Facility B Reduction Installment" is defined in Section 2.5(iv).
"Facility B Term Commitment" means, for each Lender having a Facility B
Term Commitment, the obligation of such Lender to make a Facility B Term Loan in
the amount set forth opposite its name on Schedule 1 hereto or as set forth in
any Assignment and Acceptance relating to any assignment that has become
effective pursuant to Section 12.3, as such amount may be modified from time to
time pursuant to the terms hereof.
"Facility B Term Lenders" means each Lender having a Facility B Term
Commitment or Facility B Term Loans.
"Facility B Term Loan" is defined in Section 2.5(i).
"Facility B Term Note" means a promissory note, in substantially the
form of Exhibit A-3 hereto, duly executed by the Borrower and payable to the
order of each Lender having a Facility B Term Commitment in the amount of such
Lender's Facility B Term Commitment.
"Facility B Termination Date" means July 15, 2006.
"Facility Reduction Installment" means a Facility A Reduction
Installment or a Facility B Reduction Installment, as applicable.
"Facility Usage Amount" means an amount equal to the sum of (i) the
aggregate principal amount of all Revolving Loans outstanding, (ii) the
aggregate Letter of Credit Amount of all Letters of Credit outstanding and (iii)
the aggregate amount of unreimbursed drawings under all Letters of Credit.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10:00 a.m., Los
Angeles time, on such day on such transactions received by the Agent from three
Federal funds brokers of recognized standing selected by the Agent in its sole
discretion.
"Foreign Subsidiary" means any Subsidiary other than one which is
formed under the laws of the United States or any state thereof.
"Funded Debt" means the sum of the outstanding principal balance of all
Debt of the Borrower and its Subsidiaries described in clauses (i), (ii), (iii)
and (iv) of the definition of "Debt" set forth herein.
"Governmental Person" means, whether domestic or foreign, any national,
federal, state or local government, any political subdivision thereof or any
governmental, quasi-governmental, judicial, public or regulatory
instrumentality, authority, body or entity, including the Federal Deposit
Insurance Corporation, the Comptroller of the Currency, the Board of Governors
of the Federal Reserve System, any central bank and any comparable authority.
"Governmental Rule" means any treaty, law, rule, regulation, ordinance,
order, code, judgment, decree, directive, interpretation, request, guideline,
policy or similar form of decision of any Governmental Person.
"Guaranties" means, collectively, (i) each Guarantee and Amended and
Restated Guarantee dated as of even date herewith executed by a Guarantor and
(ii) each other guarantee executed by a Guarantor pursuant to Section 6.27, in
each case in favor of the Agent, for the benefit of the Lenders, and in form and
substance satisfactory to the Agent, as it may be amended, modified or restated
from time to time.
"Guarantor Collateral" means all of the property (tangible or
intangible) purported to be subject to the lien or security interest purported
to be created by any mortgage, deed of trust, security agreement, pledge
agreement, assignment or other security document heretofore or hereafter
executed by any Guarantor as security for a Guarantee.
"Guarantor Collateral Documents" means each Guarantor Security
Agreement, all Form UCC-1 Financing Statements and amendments thereto and any
other document encumbering the Guarantor Collateral or evidencing or perfecting
a security interest therein for the benefit of the Lenders executed by any
Guarantor.
"Guarantor Security Agreement" means each security agreement, in form
and substance satisfactory to the Agent, made by a Guarantor in favor of the
Agent, for the benefit of the Lenders, as it may be amended or modified from
time to time in accordance with the terms hereof.
"Guarantors" means each Subsidiary of the Borrower now or hereafter
formed or acquired which has executed and delivered a Guarantee pursuant to
Section 6.27.
"Hedge Agreement" means any interest rate protection agreement,
interest rate future, interest rate option, interest rate swap, interest rate
cap or other interest rate hedge or arrangement entered with any Lender or any
Affiliate of a Lender under which the Borrower is party or is beneficiary.
"Interest Expense" means as of any date, for the fiscal quarter most
recently ended and the immediately preceding three fiscal quarters, the sum of
(i) the amount of all interest on Funded Debt which was paid, payable and/or
accrued for such period (without duplication of previous amounts) and (ii) all
commitment, letter of credit or line of credit fees paid, payable and/or accrued
for such period (without duplication of previous amounts) to any lender in
exchange for such lender's commitment to lend.
"Interest Period" means, with respect to a LIBOR Loan, a period of one,
two, three or six months, commencing on a Business Day selected by the Borrower
pursuant to this Agreement. Such Interest Period shall end on (but exclude) the
day which corresponds numerically to such date one, two or three or six months
thereafter, provided, however, that if there is no such numerically
corresponding day in such next, second or third or sixth succeeding month, such
Interest Period shall end on the last Business Day of such next, second or third
or sixth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day, provided, however, that if said next succeeding
Business Day falls in a new calendar month, such Interest Period shall end on
the immediately preceding Business Day. No Interest Period with respect to
Revolving Loans may end after the Revolving Termination Date. No Interest Period
with respect to Facility A Term Loans may end after the Facility A Termination
Date. No Interest Period with respect to Facility B Term Loans may end after the
Facility B Termination Date.
"Joining Lender" has the meaning set forth in Section 12.4(i).
"Joining Lender Agreement" means a Joining Lender Agreement in the form
of Exhibit I.
"Lenders" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"Letter of Credit" shall have the meaning set forth in Section 2.1.
"Letter of Credit Amount" means the stated maximum amount available to
be drawn under a particular Letter of Credit, as such amount may be reduced or
reinstated from time to time in accordance with the terms of such Letter of
Credit.
"Letter of Credit Request" means a request by the Borrower for the
issuance of a Letter of Credit, on the Agent's standard form of standby or
commercial letter of credit application and agreement, the current form of which
is attached hereto as Exhibit E, and containing terms and conditions
satisfactory to the Agent in its sole discretion.
"Leverage Ratio Level" means the Revolving/Term A Leverage Ratio Level
or the Term B Leverage Ratio Level, as applicable.
"Leverage Ratio Level Certificate" is defined in Section 2.8.
"LIBOR" means, for any Interest Period for any LIBOR Loan, the interest
rate per annum obtained by dividing (a) the average of the respective rates per
annum at which deposits in United States dollars are offered to the Agent in
London, England in the London interbank market at 11:00 a.m., London time, two
Business Days before the first day of such Interest Period in an amount
substantially equal to the amount of such Loan and for a period equal to such
Interest Period by (b) a percentage equal to 100% minus the LIBOR Reserve
Percentage for such Interest Period.
"LIBOR Loan" means a Loan when it bears interest at the LIBOR Rate.
"LIBOR Rate" means, with respect to a LIBOR Loan for the relevant
Interest Period, the sum of (i) LIBOR applicable to such Interest Period, plus
(ii) the following margin, as appropriate: (x) for Revolving Loans and Facility
A Term Loans, the Revolving/Term A Applicable Margin and (y) for Facility B Term
Loans, the Term B Applicable Margin. The LIBOR Rate shall be rounded to the next
higher multiple of 1/100 of 1% if the rate is not such a multiple.
"LIBOR Reserve Percentage" means, for any Interest Period for any LIBOR
Loan, the reserve percentage applicable two Business Days before the first day
of such Interest Period under regulations issued from time to time by the Board
of Governors of the Federal Reserve System for determining the maximum reserve
requirements (including any emergency, supplemental or other marginal reserve
requirement) for any Lender with respect to liabilities or assets consisting of
or including Eurocurrency Liabilities (or with respect to any other category of
liabilities that includes deposits by reference to which the interest rate on
such LIBOR Loan is determined) having a term equal to such Interest Period.
"Lien" means any lien, security interest or other charge or encumbrance
of any kind, or any other type of preferential arrangement, including the lien
or retained title of a conditional vendor and any easement, right of way or
other encumbrance on title to real property.
"Loan" means, with respect to a Lender, a Facility A Term Loan, a
Facility B Term Loan or a Revolving Loan, as applicable.
"Loan Documents" means this Agreement, any Letter of Credit Requests,
the Letters of Credit, the Notes, the Guaranties, the Collateral Documents, the
Guarantor Collateral Documents, any Hedge Agreement and any other agreement or
document executed by the Borrower or any Guarantor in connection herewith,
including but not limited to UCC-1 Financing Statements, as such agreements and
documents may be amended, supplemented and otherwise modified from time to time
in accordance with the terms hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise) or results of operations
of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the
Borrower to perform its obligations under the Loan Documents or (iii) the
validity or enforceability of any of the Loan Documents or the rights or
remedies of the Agent or the Lenders thereunder.
"Maximum Aggregate Commitment" means an Aggregate Commitment of
------------------------------
$175,000,000.
"Multiemployer Plan" means a Plan that is a "multiemployer plan" as
defined in Section 3(37) or 4001(i)(3) of the Borrower's ERISA Plan.
"Net Income" means for the Borrower and its Subsidiaries on a
consolidated basis, net income as determined in accordance with Agreement
Accounting Principles.
"Net Proceeds" means, with respect to any asset disposition or issuance
of equity or debt securities of the Borrower or any of its Subsidiaries, the net
amount equal to the aggregate amount received in cash in connection with such
asset disposition or issuance of equity or debt securities minus federal, state
and local taxes and other expenses including legal, accounting, brokerage,
advertising, underwriting and closing costs incurred and paid in connection with
such asset disposition or issuance of equity or debt securities and taxes
reasonably estimated to be actually payable as a result of such asset
disposition or issuance of equity or debt securities.
"Notes" means, collectively, the Revolving Notes, the Facility A Term
Notes and the Facility B Term Notes.
"Notice of Assignment" is defined in Section 12.3(ii).
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Notes, the obligation to reimburse drawings under Letters of
Credit (including the contingent obligation to reimburse any drawings under
outstanding Letters of Credit), all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower or any
Guarantor to the Lenders or to any Lender, the Agent or any indemnified party
hereunder arising under the Loan Documents.
"Participants" is defined in Section 12.2(i).
"Payment Date" means the last day of each January, April, July and
October in each calendar year.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Person" means any natural person, corporation, firm, limited liability
company, joint venture, partnership, association, enterprise, trust or other
entity or organization, or any government or political subdivision or any
agency, department or instrumentality thereof.
"Petcetera L.P." means Canadian Petcetera Limited Partnership, a
Canadian limited partnership.
"Plan" means an employee pension benefit plan which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code maintained by or contributed to by the Borrower or any member of the
Controlled Group.
"Prior Loan Agreement" is defined in the first Recital.
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned,
leased or operated by such Person.
"Purchasers" is defined in Section 12.3(i).
"Registered Loans" is defined in Section 3.2(b).
"Registered Notes" is defined in Section 3.2(b).
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
"Rent Expense" means, for the Borrower and its Subsidiaries, on a
consolidated basis, for any period of four consecutive fiscal quarters, rent
expenses under operating leases of real, personal or mixed property.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Single
Employer Plan, excluding, however, such events as to which the PBGC by
regulation waived the requirement of Section 4043(a) of ERISA that it be
notified within 30 days of the occurrence of such event, provided, however, that
a failure to meet the minimum funding standard of Section 412 of the Code and of
Section 302 of ERISA shall be a Reportable Event regardless of the issuance of
any such waiver of the notice requirement in accordance with either Section
4043(a) of ERISA or Section 412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least
66-2/3% of the Aggregate Commitment (or, if any Commitment has been terminated,
with respect to such Commitment, Lenders in the aggregate holding at least
66-2/3% of the aggregate unpaid principal amount of the outstanding Loans made
under such Commitment).
"Required Facility A Term Lenders" means Facility A Term Lenders in the
aggregate having at least 66-2/3% of the aggregate Facility A Term Commitments
(or, if any such Commitment has been terminated, with respect to such
Commitment, Facility A Term Lenders in the aggregate holding at least 66-2/3% of
the aggregate unpaid principal amount of the outstanding Facility A Term Loans
made under such Commitment).
"Required Facility B Term Lenders" means Facility B Term Lenders in the
aggregate having at least 66-2/3% of the aggregate Facility B Term Commitments
(or, if any such Commitment has been terminated, with respect to such
Commitment, Facility B Term Lenders in the aggregate holding at least 66-2/3% of
the aggregate unpaid principal amount of the outstanding Facility B Term Loans
made under such Commitment).
"Required Revolving Lenders" means Revolving Lenders in the aggregate
having at least 66-2/3% of the aggregate Revolving Commitments (or, if any such
Commitment has been terminated, with respect to such Commitment, Revolving
Lenders in the aggregate holding at least 66-2/3% of the aggregate unpaid
principal amount of the outstanding Revolving Loans made under such Commitment).
"Revolving Commitment" means, for each Lender having a Revolving
Commitment, the obligation of such Lender to make Revolving Loans not exceeding
the amount set forth opposite its name on Schedule 1 hereto or as set forth in
any Assignment and Acceptance relating to any assignment that has become
effective pursuant to Section 12.3, as such amount may be modified from time to
time pursuant to the terms hereof.
"Revolving Commitment Percentage" means, as to each Lender having a
Revolving Commitment at any time, the percentage of the Aggregate Revolving
Commitment then constituted by such Lender's Revolving Commitment.
"Revolving Lender" means a Lender having a Revolving Commitment or
Revolving Loans outstanding.
"Revolving Loan" is defined in Section 2.1(i).
"Revolving Note" means a promissory note, in substantially the form of
Exhibit A-1 hereto, duly executed by the Borrower and payable to the order of
the Lender having a Revolving Commitment in the aggregate amount of such
Lender's Revolving Commitment.
"Revolving/Term A Applicable Margin" means, with respect to Revolving
Loans and Facility A Term Loans, for each LIBOR Loan and for each Base Rate Loan
as set forth below:
Revolving/Term A LIBOR Base
Leverage Ratio Level Margin Rate Margin
-------------------- ------ -----------
5 2.000% 0.500%
4 1.750% 0.250%
3 1.625% 0.125%
2 1.375% 0%
1 1.000% 0%
"Revolving/Term A Leverage Ratio Level": if the Total Debt Ratio shall
be less than or equal to 0.75:1.00, the Revolving/Term A Leverage Ratio Level
shall be 1; if the Total Debt Ratio shall be greater than 0.75:1.00 and less
than or equal to 1:00:1.00, the Revolving/Term A Leverage Ratio Level shall be
2; if the Total Debt Ratio shall be greater than 1.00:1.00 and less than or
equal to 1.50:1.00, the Revolving/Term A Leverage Ratio Level shall be 3; if the
Total Debt Ratio shall be greater than 1.50:1.00 and less than or equal to
2.00:1.00, the Revolving/Term A Leverage Ratio Level shall be 4; and if the
Total Debt Ratio shall be greater than 2.00:1.00, the Revolving/Term A Leverage
Ratio Level shall be 5.
"Revolving Termination Date" means July 15, 2004.
"SEC" means the United States Securities and Exchange Commission.
"SEC Report" means a Current Report on Form 8-K pursuant to the
Securities Exchange Act of 1934.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Security Agreement" means the Security Agreement dated as of even date
herewith, in form and substance satisfactory to the Agent, made by the Borrower
in favor of the Agent, for the benefit of the Lenders, as it may be amended or
modified from time to time in accordance with the terms hereof.
"Single Employer Plan" means a Plan other than a Multiemployer Plan.
"Solvent" means when used with respect to any Person, that:
(i) the present fair salable value of such Person's assets is in excess
of the total amount of the probable liability on such Person's liabilities;
(ii) such Person is able to pay its debts as they become due; and
(iii) such Person does not have unreasonably small capital to carry on
such Person's business as theretofore operated and all businesses in which such
Person is about to engage.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, limited liability company, association, joint venture or
similar business organization in which such Person or any Subsidiary of such
Person is a general partner or managing member thereof, or holds a similar
function therein. Unless otherwise expressly provided, all references herein to
a "Subsidiary" shall mean a Subsidiary of the Borrower.
"Tax Compliance Certificate" is defined in Section 2.16 hereof.
"Taxes" is defined in Section 3.2.
"Tax Register" is defined in Section 12.6(b).
"Term B Applicable Margin": with respect to Facility B Term Loans,
for each LIBOR Loan and for each Base Rate Loan as set forth below:
Facility B LIBOR Base
Leverage Ratio Level Margin Rate Margin
-------------------- ------ -----------
2 3.250% 1.750%
1 3.000% 1.500%
"Term B Leverage Ratio Level": if the Total Debt Ratio shall be less
than or equal to 1.50:1.00, the Term B Leverage Ratio Level shall be 1; and if
the Total Debt Ratio shall be greater than 1.50:1.00, the Term B Leverage Ratio
Level shall be 2.
"Total Debt Ratio" means for the Borrower and its Subsidiaries on a
consolidated basis, determined as of the end of each fiscal quarter for the
period of four fiscal quarters then ended, the ratio of Funded Debt (including
obligations under Capitalized Leases) outstanding at such time to EBITDA.
"Transferee" is defined in Section 12.5.
"Type" means, with respect to a Loan, its nature as a Base Rate Loan or
a LIBOR Loan.
"UBOC" means Union Bank of California, N.A. in its individual capacity,
and its successors.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all nonforfeitable benefits under all Single Employer Plans exceeds the
fair market value of all such Plan assets allocable to such benefits, all
determined in accordance with the respective most recent valuations for such
Plans.
"U.S. Person" means a citizen or resident of the United States, a
corporation, a partnership or other entity created or organized in or under any
laws of the United States or any State thereof, or any estate or trust that is
subject to Federal income taxation regardless of the source of its income.
"Yukon Subsidiary" means 17187 Yukon, a corporation formed under the
laws of the Territory of Yukon, Canada, and a Subsidiary of the Borrower.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms.
ARTICLE 2
THE CREDIT
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2.1 Revolving Loans.
---------------
(i) Each Lender having a Revolving Commitment severally agrees, on the
terms and conditions set forth in this Agreement, to make loans on a revolving
credit basis (each a "Revolving Loan," and, collectively, the "Revolving Loans")
to the Borrower from time to time and to participate in standby and/or
commercial letters of credit issued for the account of the Borrower pursuant to
Section 2.2 from time to time (each a "Letter of Credit" and, collectively, the
"Letters of Credit"), from and including the Closing Date to but excluding the
Revolving Termination Date in an amount not to exceed the amount of its
Revolving Commitment. The sum of (a) the aggregate principal amount of all
Revolving Loans outstanding, (b) the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and (c) the aggregate amount of unreimbursed
drawings under all Letters of Credit shall not exceed, at any time, the amount
of the Aggregate Revolving Commitment. Further, the sum of (A) the aggregate
Letter of Credit Amount of all Letters of Credit outstanding and (B) the
aggregate amount of unreimbursed drawings under all Letters of Credit shall not
exceed $10,000,000 at any time. Within the limit of each Lender's Revolving
Commitment, the Borrower may borrow, have Letters of Credit issued and/or
renewed for the Borrower's account, prepay Revolving Loans, reborrow and have
additional Letters of Credit issued for the Borrower's account.
(ii) The principal amount of each Lender's Revolving Loan and
participation in a Letter of Credit shall be in an amount equal to the product
of (a) such Lender's Revolving Commitment Percentage (expressed as a fraction)
and (b) the total amount of the Revolving Loan or Revolving Loans or Letters of
Credit requested; provided that in no event shall any Lender be obligated to
make a Revolving Loan if after giving effect to such Revolving Loan such
Lender's Revolving Loans, the Revolving Commitment Percentage of the aggregate
Letter of Credit Amount of all Letters of Credit outstanding and the Revolving
Commitment Percentage of the aggregate amount of unreimbursed drawings under all
Letters of Credit outstanding would exceed its Revolving Commitment or if the
amount of such requested Loan is in excess of such Lender's Available
Commitment.
(iii) The Revolving Loans made by each Lender to the Borrower shall be
evidenced by a Revolving Note, with appropriate insertions therein as to payee,
date and principal amount, payable to the order of such Lender and representing
the obligation of the Borrower to pay the aggregate unpaid principal amount of
all Revolving Loans made by such Lender to the Borrower, with interest thereon
as prescribed in Sections 2.8 and 2.9. Each such Lender is hereby authorized
(but not required) to record the date and amount of each payment or prepayment
of principal of its Revolving Loans made to the Borrower, each continuation
thereof, each conversion of all or a portion thereof to another Type and, in the
case of LIBOR Loans, the length of each Interest Period with respect thereto, in
the books and records of such Lender, and any such recordation shall constitute
prima facie evidence of the accuracy of the information so recorded. The failure
of any Lender to make any such recordation or notation in the books and records
of such Lender (or any error in such recordation or notation) shall not affect
the obligations of the Borrower hereunder or under the Revolving Notes. Each
Revolving Note shall (a) be dated the Closing Date, (b) provide for the payment
of interest in accordance with Sections 2.8 and 2.9 and (c) be stated to be
payable on the Revolving Termination Date.
(iv) The Borrower shall give the Agent irrevocable written notice
substantially in the form of Exhibit F attached hereto (which notice must be
received by the Agent prior to 10:30 a.m., Los Angeles time, on the proposed
Borrowing Date or, if all or any part of the Revolving Loans are requested to be
made as LIBOR Loans, three Business Days prior to each proposed Borrowing Date)
requesting that the Lenders having a Revolving Commitment make the Revolving
Loans on the proposed Borrowing Date and specifying (a) the aggregate amount of
Revolving Loans requested to be made (which must be in an aggregate amount equal
to at least $1,000,000 or an integral multiple of $500,000), (b) subject to
Section 2.6, whether the Revolving Loans are to be LIBOR Loans, Base Rate Loans
or a combination thereof and (c) if the Revolving Loans are to be entirely or
partly LIBOR Loans, the respective amounts of each such Type of Revolving Loan
and the respective lengths of the Interest Periods therefor. On receipt of such
notice, the Agent shall promptly notify each such Lender thereof not later than
11:00 a.m., Los Angeles time, on the date of receipt of such notice. On the
proposed Borrowing Date, not later than 1:00 p.m., Los Angeles time, each such
Lender shall make available to the Agent at its office specified in Section 13.1
such Lender's Revolving Commitment Percentage of the aggregate borrowing amount
(as determined in accordance with Section 2.1(ii)) in immediately available
funds. Not later than 1:30 p.m., Los Angeles time, on the date of such Loans and
upon fulfillment of the applicable conditions set forth in Section 4, the Agent
shall make such Revolving Loans available to the Borrower in immediately
available funds. Each notice pursuant to this Section 2.1(iv) shall be
irrevocable and binding on the Borrower. The Agent may, in the absence of
notification from any Lender having a Revolving Commitment that such Lender has
not made its pro rata share available to the Agent, on such date, credit the
account of the Borrower on the books of such office of the Agent with the
aggregate amount of such Revolving Loans.
(v) At the Borrower's option and upon at least five Business Days'
prior irrevocable written notice to the Agent, with such notice specifying the
amount and the date of such reduction, the Borrower may permanently reduce the
Aggregate Revolving Commitment in whole at any time or in part from time to
time; provided, however, that each partial reduction of the Aggregate Revolving
Commitment shall be in an aggregate amount equal to at least $1,000,000 or an
integral multiple of $1,000,000. The Agent shall promptly notify each Lender
having a Revolving Commitment (by telecopy or by telephone) of such requested
Aggregate Revolving Commitment reduction.
Reductions of the Aggregate Revolving Commitment pursuant to this
Section 2.1(v) shall automatically effect a reduction of the Revolving
Commitment of each such Lender to an amount equal to the product of (a) the
Aggregate Revolving Commitment of all Lenders, as reduced pursuant to this
Section 2.1(v) and (b) the Revolving Commitment Percentage of such Lender, in
each case determined immediately prior to such reduction of the Aggregate
Revolving Commitment on such date.
Upon each reduction of the Aggregate Revolving Commitment, the Borrower
shall (a) pay the unused commitment fee, payable pursuant to Section 2.3,
accrued on the amount of the Aggregate Revolving Commitment so reduced through
the date of such reduction, (b) prepay the amount, if any, by which the sum of
(1) the aggregate unpaid principal amount of the Revolving Loans, (2) the
aggregate Letter of Credit Amount of all Letters of Credit outstanding and (3)
the aggregate amount of unreimbursed drawings under all Letters of Credit
exceeds the amount of the Aggregate Revolving Commitment as so reduced, together
with accrued interest on the amount being prepaid to the date of such prepayment
(or, with respect to outstanding Letters of Credit, make a cash collateral
deposit in an amount equal to such excess to the extent such excess is not
corrected by the foregoing prepayment) and (c) compensate such Lenders for their
funding costs, if any, in accordance with Section 3.1.
2.2 Issuance of Letters of Credit.
-----------------------------
(i) The Borrower shall be entitled to request the issuance of standby
and/or commercial Letters of Credit from time to time from and including the
Closing Date to but excluding the date which is seven Business Days prior to the
Revolving Termination Date by giving the Agent (a) a standby Letter of Credit
Request at least three Business Days before the requested date of issuance of
such standby Letter of Credit and (b) a commercial Letter of Credit Request no
later than the requested date of issuance of such commercial Letter of Credit
(provided that such Letter of Credit Request is received by the Agent no later
than 10:00 a.m., Los Angeles time and any Letter of Credit Request received
after such time shall be deemed to have been received on the next Business Day)
(which date of issuance shall be a Business Day). All letters of credit
outstanding on the Closing Date which were issued under the Prior Loan Agreement
shall be deemed to have been issued hereunder on and as of the Closing Date and
shall be subject to the terms and conditions hereof. No Letter of Credit shall
have an expiration date more than one year from its date of issuance or after
the Revolving Termination Date. The aggregate Letter of Credit Amounts under all
outstanding Letters of Credit and the aggregate amount of unreimbursed drawings
under Letters of Credit shall reduce, dollar for dollar, the Aggregate Available
Commitment. The sum of (a) the aggregate Letter of Credit Amount of all Letters
of Credit outstanding and (b) the aggregate amount of unreimbursed drawings
under all Letters of Credit shall not at any time exceed $10,000,000. In
addition, the sum of (i) the aggregate principal amount of all Revolving Loans
outstanding, (ii) the aggregate Letter of Credit Amount of all Letters of Credit
outstanding and (iii) the aggregate amount of unreimbursed drawings under all
Letters of Credit shall not exceed, at any time, the Aggregate Revolving
Commitment. Any Letter of Credit Request received by the Agent later than 10:00
a.m., Los Angeles time, shall be deemed to have been received on the next
Business Day. Each Letter of Credit Request shall be made in writing, shall be
signed by an Authorized Officer, shall be irrevocable and shall be effective
upon receipt by the Agent. Provided that a valid Letter of Credit Request has
been received by the Agent and upon fulfillment of the other applicable
conditions set forth in Section 4.3, the Agent will issue the requested Letter
of Credit from its office specified in Section 13.1.
Commercial Letters of Credit shall be used only for the purpose of
supporting purchases of inventory by the Borrower and standby Letters of Credit
shall be used solely to provide support for leasing (including Capitalized
Leases) and insurance obligations of the Borrower.
(ii) Immediately upon the issuance of each Letter of Credit, the Agent
shall be deemed to have sold and transferred to each Lender, and each Lender
shall be deemed to have purchased and received from the Agent, in each case
irrevocably and without any further action by any party, an undivided interest
and participation in such Letter of Credit, each drawing thereunder and the
obligations of the Borrower under this Agreement in respect thereof in an amount
equal to the product of (a) such Lender's Revolving Commitment Percentage and
(b) the maximum amount available to be drawn under such Letter of Credit
(assuming compliance with all conditions to drawing). The Agent shall advise
each Lender having a Revolving Commitment of the issuance of each Letter of
Credit, the Letter of Credit Amount of such Letter of Credit, any change in the
face amount or expiration date of such Letter of Credit, the cancellation or
other termination of such Letter of Credit and any drawing under such Letter of
Credit.
(iii) The payment by the Agent of a draft drawn under any Letter of Credit
shall first be made from any cash collateral deposit held by the Agent with
respect to such Letter of Credit. After any such cash collateral deposit has
been applied, the payment by the Agent of a draft drawn under any Letter of
Credit shall constitute for all purposes of this Agreement the making by the
Agent in its individual capacity as a Lender hereunder (in such capacity, the
"Drawing Lender") of a Revolving Loan bearing interest at the Base Rate in the
amount of such payment (but without any requirement of compliance with the
conditions set forth in Section 4.3). In the event that any such Loan by the
Drawing Lender resulting from a drawing under any Letter of Credit is not repaid
by the Borrower by 10:00 a.m., Los Angeles time, on the day of payment of such
drawing, the Agent shall promptly notify each other Lender having a Revolving
Commitment. Each such Lender shall, on the day of such notification (or if such
notification is not given by 11:00 a.m., Los Angeles time, on such day, then on
the next succeeding Business Day), make a Revolving Loan bearing interest at the
Base Rate, which shall be used to repay the applicable portion of the Revolving
Loan of the Drawing Lender with respect to such Letter of Credit drawing, in an
amount equal to the amount of such Lender's participation in such drawing for
application to repay the Drawing Lender (but without any requirement of
compliance with the applicable conditions set forth in Section 4.3) and shall
deliver to the Agent for the account of the Drawing Lender, on the day of such
notification (or if such notification is not given by 11:00 a.m., Los Angeles
time, on such day, then on the next succeeding Business Day) and in immediately
available funds, the amount of such Revolving Loans. In the event that any
Lender fails to make available to the Agent for the account of the Drawing
Lender the amount of such Revolving Loan, the Drawing Lender shall be entitled
to recover such amount on demand from such Lender together with interest thereon
at the Federal Funds Effective Rate for each day such amount remains
outstanding.
(iv) The obligations of the Borrower with respect to any Letter of
Credit, any Letter of Credit Request and any other agreement or instrument
relating to any Letter of Credit and any Revolving Loan made under Section
2.2(iii) shall be absolute, unconditional and irrevocable and shall be paid
strictly in accordance with the terms of the aforementioned documents under all
circumstances, including the following:
(a) any lack of validity or enforceability of any Letter of
Credit, this Agreement or any other Loan Document;
(b) the existence of any claim, setoff, defense or other right
that the Borrower may have at any time against any beneficiary or transferee of
any Letter of Credit (or any Person for whom any such beneficiary or transferee
may be acting), the Agent, any Lender (other than the defense of payment to a
Lender in accordance with the terms of this Agreement) or any other Person,
whether in connection with this Agreement, any other Loan Document, the
transactions contemplated hereby or thereby or any unrelated transaction;
(c) any statement or other document presented under any Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in any
respect, or any statement therein being untrue or inaccurate in any respect
whatsoever;
(d) payment by the Agent under any Letter of Credit against
presentation of a draft or certificate that does not comply on its face with the
terms of such Letter of Credit;
(e) any exchange, release or nonperfection of any collateral,
or any release, amendment or waiver of or consent to departure from any
Guarantee, other Loan Document or other guarantee, for any of the Obligations of
the Borrower in respect of the Letters of Credit; and
(f) any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing.
(v) The Borrower shall pay to the Agent with respect to each Letter of
Credit issued hereunder, the following fees:
(a) for each commercial Letter of Credit for the period from
and including the day such commercial Letter of Credit is issued to but
excluding the day such commercial Letter of Credit expires, the letter of credit
fees payable to the Agent for the benefit of the Lenders shall be as set forth
on the Agent's published Schedule of Fees: Trade Services; provided that,
notwithstanding anything to the contrary in such Schedule, (A) issuance fees
shall be equal to the greater of (x) the product of (i) 0.125% and (ii) the
Letter of Credit Amount of such Letter of Credit to be issued or (y) $100 (such
issuance fee to be payable on the date such Letter of Credit is issued) and (B)
negotiation fees shall be equal to the greater of (x) the product of (i) 0.125%
and (ii) the Letter of Credit Amount of such Letter of Credit (or portion
thereof) to be negotiated or (y) $100 (such negotiation fee to be payable on the
date such Letter of Credit (or portion thereof) is negotiated);
(b) for each commercial Letter of Credit, a fronting fee to
the Agent for its benefit alone equal to (x) $100, if the commercial Letter of
Credit Amount is less than $500,000 or (y) 0.125% of the Letter of Credit
Amount, if the commercial Letter of Credit Amount is equal to or more than
$500,000 (such fee to be payable on the date of issuance);
(c) for each standby Letter of Credit, for the period from and
including the day such standby Letter of Credit is issued to but excluding the
day such standby Letter of Credit expires, a letter of credit fee to the Agent
for the benefit of the Lenders equal to the Revolving/Term A Applicable Margin
(then in effect for LIBOR Loans), multiplied by the Letter of Credit Amount
(such fee to be payable on the date of issuance);
(d) for each standby Letter of Credit, a fronting fee to the
Agent for its benefit alone equal to 0.15% of the Letter of Credit Amount (such
fee to be payable on date of issuance); and
(e) from time to time, such additional fees and charges
(including cable charges) as are generally associated with letters of credit, in
accordance with the Agent's standard internal charge guidelines and the related
Letter of Credit Request.
(vi) The Borrower agrees to the provisions in the Letter of Credit
Request forms; provided, however, that the terms of the Loan Documents shall
take precedence if there is any inconsistency between the terms of the Loan
Documents and the terms of said form.
(vii) The Borrower assumes all risks of the acts or omissions of any
beneficiary or transferee of any Letter of Credit with respect to its use of
such Letter of Credit. Neither the Agent nor any Lender nor any of their
respective officers or directors shall be liable or responsible for (i) the use
that may be made of any Letter of Credit or any acts or omissions of any
beneficiary or transferee in connection therewith; (ii) the validity,
sufficiency or genuineness of documents, or of any endorsement thereof, even if
such documents should prove to be in any or all respects invalid, insufficient,
fraudulent or forged; (iii) in the absence of any gross negligence or willful
misconduct by the Agent, payment by the Agent against presentation of documents
that do not comply with the terms of any Letter of Credit, including failure of
any documents to bear any reference or adequate reference to any Letter of
Credit; or (iv) any other circumstance whatsoever in making or failing to make
payment under any Letter of Credit. In furtherance and not in limitation of the
foregoing, the Agent may accept any document that appears on its face to be in
order, without responsibility for further investigation, regardless of any
notice or information to the contrary.
2.3 Fees. The Borrower agrees to pay to the Lenders an unused
commitment fee to be shared among Lenders on the basis of their respective
Revolving Commitment Percentages with respect to the Revolving Commitments for
the period from and including the Closing Date to but excluding the Revolving
Termination Date, computed at the applicable percentage, as follows, of the
daily amount of the Aggregate Available Commitment from time to time in effect:
(a) if the Facility Usage Amount equals or exceeds 50% of the Aggregate
Revolving Commitment, 0.25% per annum, (b) if the Facility Usage Amount is less
than 50% of the Aggregate Revolving Commitment, but exceeds 25% of the Aggregate
Revolving Commitment, 0.375% per annum or (C) if the Facility Usage Amount
equals or is less than 25% of the Aggregate Revolving Commitment, 0.50% per
annum. Such fee shall be payable quarterly in arrears on each Payment Date and
on the Revolving Termination Date, commencing on the first such date to occur
after the Closing Date.
2.4 Facility A Term Loans.
---------------------
(i) Subject to the terms and conditions hereof, each Lender
having a Facility A Term Commitment severally agrees to make a term loan (a
"Facility A Term Loan") to the Borrower on the Closing Date in a principal
amount equal to the amount of the Facility A Term Commitment of such Lender. Any
Facility A Term Loan repaid or prepaid may not be reborrowed.
(ii) The Facility A Term Loan made by each Lender shall be
evidenced by a Facility A Term Note, with appropriate insertions therein as to
payee, date and principal amount, payable to the order of such Lender and
representing the obligation of the Borrower to pay the aggregate unpaid
principal amount of the Facility A Term Loan made by such Lender to the
Borrower, with interest thereon as prescribed in Sections 2.8 and 2.9. Each such
Lender is hereby authorized (but not required) to record the date and amount of
each payment or prepayment of principal of its Facility A Term Loan made to the
Borrower, each continuation thereof, each conversion of all or a portion thereof
to another Type and, in the case of LIBOR Loans, the length of each Interest
Period with respect thereto, in the books and records of such Lender, and any
such recordation shall constitute prima facie evidence of the accuracy of the
information so recorded. The failure of any Lender to make any such recordation
or notation in the books and records of such Lender (or any error in such
recordation or notation) shall not affect the obligations of the Borrower
hereunder or under the Facility A Term Notes. Each Facility A Term Note shall
(a) be dated the Closing Date, (b) provide for the payment of interest in
accordance with Sections 2.8 and 2.9 and (c) be stated to be payable in
installments of principal in accordance with, and subject to the provisions of,
Section 2.4(iv).
(iii) The Borrower shall give the Agent irrevocable written
notice substantially in the form of Exhibit F hereto (which notice must be
received by the Agent prior to 10:00 a.m., Los Angeles time, one Business Day
prior to the Closing Date) requesting that the Lenders having a Facility A Term
Commitment make the Facility A Term Loans in accordance with their respective
Facility A Term Commitments on the Closing Date. Upon receipt of such notice,
the Agent shall promptly notify each such Lender thereof not later than 11:00
a.m., Los Angeles time, on the date of receipt of such notice. Not later than
1:00 p.m., Los Angeles time, on the Closing Date each such Lender shall make
available to the Agent at its office specified in Section 13.1 the amount of
such Lender's aggregate Facility A Term Commitment in immediately available
funds. The notice pursuant to this Section shall be irrevocable and binding on
the Borrower. The Agent may, in the absence of notification from any Lender
having a Facility A Term Commitment that such Lender has not made its pro rata
share available to the Agent, on such date, credit the account of the Borrower
on the books of such office or the Agent with the aggregate amount of such
Facility A Term Loans.
(iv) On each reduction date set forth in this Section, the
Borrower shall on a pro rata basis repay the principal of the Facility A Term
Notes in an aggregate amount equal to the amount set forth below (subject to
Sections 2.17 and 2.18) (each such amount a "Facility A Reduction Installment"):
October 30, 1999, January 29, 2000,
April 29, 2000 and July 29, 2000 $1,687,500.00
October 28, 2000,
February 3, 2001, May 5, 2001
and August 4, 2001 $1,687,500.00
November 3, 2001,
February 2, 2002, May 4, 2002
and August 3, 2002 $2,250,000.00
November 2, 2002,
February 1, 2003, May 3, 2003
and August 2, 2003 $2,812,500.00
November 1, 2003
January 31, 2004 and May 1, 2004 $2,812,500.00
; provided, that the final Facility A Reduction Installment paid shall be in an
amount equal to all amounts owed by the Borrower on the Facility A Term Notes.
All outstanding Facility A Term Loans shall be due and payable, to the
extent not previously paid in accordance with the terms hereof, on the Facility
A Termination Date.
2.5 Facility B Term Loans.
---------------------
(i) Subject to the terms and conditions hereof, each Lender
having a Facility B Term Commitment severally agrees to make a term loan (a
"Facility B Term Loan") to the Borrower on the Closing Date in a principal
amount equal to the amount of the Facility B Term Commitment of such Lender. Any
Facility B Term Loan repaid or prepaid may not be reborrowed.
(ii) The Facility B Term Loan made by each Lender shall be
evidenced by a Facility B Term Note, with appropriate insertions therein as to
payee, date and principal amount, payable to the order of such Lender and
representing the obligation of the Borrower to pay the aggregate unpaid
principal amount of the Facility B Term Loan made by such Lender to the
Borrower, with interest thereon as prescribed in Sections 2.8 and 2.9. Each such
Lender is hereby authorized (but not required) to record the date and amount of
each payment or prepayment of principal of its Facility B Term Loan made to the
Borrower, each continuation thereof, each conversion of all or a portion thereof
to another Type and, in the case of LIBOR Loans, the length of each Interest
Period with respect thereto, in the books and records of such Lender, and any
such recordation shall constitute prima facie evidence of the accuracy of the
information so recorded. The failure of any Lender to make any such recordation
or notation in the books and records of such Lender (or any error in such
recordation or notation) shall not affect the obligations of the Borrower
hereunder or under the Facility B Term Notes. Each Facility B Term Note shall
(a) be dated the Closing Date, (b) provide for the payment of interest in
accordance with Sections 2.8 and 2.9 and (c) be stated to be payable in
installments of principal in accordance with, and subject to the provisions of,
Section 2.5(iv).
(iii) The Borrower shall give the Agent irrevocable written
notice substantially in the form of Exhibit F hereto (which notice must be
received by the Agent prior to 10:00 a.m., Los Angeles time, one Business Day
prior to the Closing Date) requesting that the Lenders having a Facility B Term
Commitment make the Facility B Term Loans in accordance with their respective
Facility B Term Commitments on the Closing Date. Upon receipt of such notice,
the Agent shall promptly notify each such Lender thereof not later than 11:00
a.m., Los Angeles time, on the date of receipt of such notice. Not later than
1:00 p.m., Los Angeles time, on the Closing Date each such Lender shall make
available to the Agent at its office specified in Section 13.1 the amount of
such Lender's aggregate Facility B Term Commitment in immediately available
funds. The notice pursuant to this Section shall be irrevocable and binding on
the Borrower. The Agent may, in the absence of notification from any Lender
having a Facility B Term Commitment that such Lender has not made its pro rata
share available to the Agent, on such date, credit the account of the Borrower
on the books of such office or the Agent with the aggregate amount of such
Facility B Term Loans.
(iv) On each reduction date set forth in this Section, the
Borrower shall on a pro rata basis repay the principal of the Facility B Term
Notes in an aggregate amount equal to the amount set forth below (subject to
Sections 2.17 and 2.18) (each such amount a "Facility B Reduction Installment"):
October 30, 1999, January 29, 2000,
April 29, 2000 and July 29, 2000 $137,500.00
October 28, 2000,
February 3, 2001, May 5, 2001
and August 4, 2001 $137,500.00
November 3, 2001,
February 2, 2002, May 4, 2002
and August 3, 2002 $137,500.00
November 2, 2002,
February 1, 2003, May 3, 2003
and August 2, 2003 $137,500.00
November 1, 2003,
January 31, 2004, May 1, 2004
and July 31, 2004 $137,500.00
October 30, 2004,
January 29, 2005, April 30, 2005
and July 30, 2005 $4,812,500.00
October 29, 2005
January 28, 2006 and April 29, 2006 $8,250,000.00
; provided, that the final Facility B Reduction Installment paid shall be in an
amount equal to all amounts owed by the Borrower on the Facility B Term Notes.
All outstanding Facility B Term Loans shall be due and payable, to the
extent not previously paid in accordance with the terms hereof, on the Facility
B Termination Date.
2.6 Types of Loans. The Loans may from time to time be (i) LIBOR Loans,
--------------
(ii) Base Rate Loans or (iii) a combination thereof, as determined by the
Borrower and notified to the Agent in accordance with Section 2.7.
Notwithstanding the foregoing, the initial Loans made on the Closing Date shall
be made as Base Rate Loans and shall be subject to conversion to LIBOR Loans
pursuant to Section 2.7. Each Lender may make or maintain its Loans to the
Borrower by or through any Applicable Lending Office. At no time shall more than
ten Advances be outstanding.
2.7 Voluntary Conversion of Advances. The Borrower may on any Business
--------------------------------
Day, upon written notice (substantially in the form of Exhibit G attached
hereto, in the case of a conversion, and substantially in the form of Exhibit H
attached hereto, in the case of a continuation) given to the Agent not later
than 12:00 noon, Los Angeles time, on the third Business Day before the date of
the proposed conversion and/or continuation and subject to the provisions of
Section 2.6, convert and/or continue any Advance (or portion thereof) into an
Advance of another Type or of the same Type; provided, however, that with
respect to a conversion from a LIBOR Loan into a Base Rate Loan or a
continuation of a LIBOR Loan, any such conversion and/or continuation shall be
made on, and only on, the last day of the Interest Period for such Loan. Each
such notice of a conversion and/or continuation shall, within the restrictions
specified above, specify (i) the Loan to be converted or continued, (ii) the
type of Loan into which such Loan is to be converted (if applicable) and (iii)
the requested date for such conversion and/or continuation. Upon receipt of any
such notice the Agent shall promptly notify each Lender thereof. Any part of
outstanding LIBOR Loans and Base Rate Loans may be converted as provided herein,
provided (a) no Revolving Loan may be converted into a LIBOR Loan after the date
that is one month prior to the Revolving Termination Date, (b) no Facility A
Term Loan may be converted into a LIBOR Loan after the date that is one month
prior to the Facility A Termination Date, (c) no Facility B Term Loan may be
converted into a LIBOR Loan after the date that is one month prior to the
Facility B Termination Date and (d) the Borrower shall not have the right to
continue or convert to a LIBOR Loan if a Default shall have occurred and be
continuing. However, if the Borrower shall fail to give any required notices
described above in this Section or if such continuation is not permitted
pursuant to the preceding sentence, such Loans shall be automatically converted
to Base Rate Loans on the last day of such then-expiring Interest Period.
2.8 Interest. A Base Rate Loan shall bear interest on the outstanding
--------
principal amount thereof, for each day from and including the date such Loan is
made or is converted from a LIBOR Loan into a Base Rate Loan pursuant to Section
2.7 to (but not including) the date it becomes due or is converted into a LIBOR
Loan pursuant to Section 2.7 hereof, at a rate per annum equal to the Base Rate
for such day. Changes in the rate of interest on any Loan maintained as a Base
Rate Loan will take effect simultaneously with each change in the Corporate Base
Rate. Each LIBOR Loan shall bear interest from and including the first day of
the Interest Period applicable thereto to (but not including) the last day of
such Interest Period at the LIBOR Rate determined as applicable to such LIBOR
Loan.
For purposes of determining the Applicable Margin for all Loans,
interest rates on the Loans shall be calculated on the basis of the Total Debt
Ratio set forth in the most recent certificate of an Authorized Officer of the
Borrower delivered pursuant to Section 6.1(v) (a "Leverage Ratio Level
Certificate"). For accrued and unpaid interest only (no changes being made for
interest payments previously made), changes in interest rates on the Loans
attributable to changes in the Applicable Margin caused by changes in the
applicable Leverage Ratio Level shall be calculated upon the delivery of a
Leverage Ratio Level Certificate and such change shall be effective (y) in the
case of a Base Rate Loan, on the day subsequent to the delivery of the Leverage
Ratio Level Certificate and (z) in the case of a LIBOR Loan, from the first day
of the Interest Period applicable to such LIBOR Loans subsequent to the delivery
of the Leverage Ratio Level Certificate. If, for any reason, the Borrower shall
fail to deliver a Leverage Ratio Level Certificate when due in accordance with
Section 6.1(v), and such failure shall continue for a period of twenty days, the
Revolving/Term A Leverage Ratio Level shall be deemed to be Level 5 and the Term
B Leverage Ratio Level shall be deemed to be Level 2, in each case retroactive
to the date on which the Borrower should have delivered such Leverage Ratio
Level Certificate and shall continue until a Leverage Ratio Level Certificate
indicating a different Revolving/Term A Leverage Ratio Level or Term B Leverage
Ratio Level (as applicable) is delivered to the Agent. Notwithstanding the
foregoing, for the period from the Closing Date until five Business Days after
the Agent has received the Borrower's quarterly financial statements and
Compliance Certificate for the fiscal period ended October 30, 1999, (i) the
Revolving/Term A Applicable Margin shall be that applicable to Revolving/Term A
Leverage Ratio Level 5 and (ii) the Term B Applicable Margin shall be that
applicable to Term B Leverage Ratio Level 2.
2.9 Rates Applicable After Default. Notwithstanding anything to the
--------------------------------
contrary contained in Section 2.6 or 2.7, during the continuance of an Event of
Default no Loan may be made as, converted into or continued as a LIBOR Loan.
During the continuance of an Event of Default each Loan shall bear interest at a
rate per annum equal to the Base Rate otherwise applicable to the Base Rate Loan
plus 3% per annum. All such interest shall be payable on demand of the Agent.
2.10 Method of Payment. All payments of the Obligations hereunder shall
-----------------
be made, without setoff, deduction, or counterclaim, in immediately available
funds to the Agent at the Agent's address specified pursuant to Article 13, or
at any other Applicable Lending Office of the Agent specified in writing by the
Agent to the Borrower, by 12:00 noon, Los Angeles time, on the date when due and
shall be applied ratably by the Agent among the Lenders. Each payment delivered
to the Agent for the account of any Lender shall be delivered promptly by the
Agent to such Lender in the same type of funds that the Agent received at its
address specified pursuant to Article 13 or at any Applicable Lending Office
specified in a notice received by the Agent from such Lender. The Agent is
hereby authorized (but not obligated) to charge the account of the Borrower
maintained with UBOC for each payment of principal, interest and fees as it
becomes due hereunder.
2.11 Telephonic Notices. The Borrower hereby authorizes the Lenders and
------------------
the Agent to convert or continue Loans and effect selections of Types of Loans
based on telephonic notices made by any person or persons the Agent or any
Lender in good faith believes to be acting on behalf of the Borrower. The
Borrower agrees to deliver promptly to the Agent a written confirmation, if such
confirmation is requested by the Agent or any Lender, of each telephonic notice
signed by an Authorized Officer. If the written confirmation differs in any
material respect from the action taken by the Agent and the Lenders, the records
of the Agent and the Lenders shall govern absent manifest error.
2.12 Interest Payment Dates; Interest and Fee Basis. Interest accrued
----------------------
on each Base Rate Loan shall be payable on each Payment Date, commencing with
the first such date to occur after the date hereof, on any date on which a Base
Rate Loan is prepaid, whether due to acceleration or otherwise, and at maturity.
Interest accrued on that portion of the outstanding principal amount of any Base
Rate Loan converted into a LIBOR Loan on a day other than a Payment Date shall
be payable on the date of conversion. Interest accrued on each LIBOR Loan shall
be payable on the last day of its applicable Interest Period, on any date on
which the LIBOR Loan is prepaid, whether by acceleration or otherwise, and at
maturity. Interest accrued on each LIBOR Loan having an Interest Period longer
than three months shall also be payable on the last day of each three-month
interval during such Interest Period.
Interest on Loans and commitment fees shall be calculated for actual
days elapsed on the basis of a 360-day year. Interest shall be payable for the
day a Loan is made but not for the day of any payment on the amount paid if
payment is received prior to 12:00 noon, Los Angeles time, at the place of
payment. Whenever any payment to be made hereunder shall be stated to be due on
a day that is not a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest; provided, however, that, if
such extension would cause any payment of interest on or principal of any LIBOR
Loan to be made in the next following calendar month, then such payment shall
instead be made on the next preceding Business Day, and such shortened time
shall in such case be used in the computation of payment of interest. Each
determination by the Lender of an interest rate hereunder shall be conclusive
and binding for all purposes, absent manifest error.
2.13 Notification of Loan, Interest Rates, Prepayments and Commitment
------------------------------------------------------------------
Reductions. Promptly after receipt thereof, the Agent will notify each Lender of
- ----------
the contents of a borrowing notice, Conversion/Continuation Notice and repayment
notice received by it hereunder. The Agent will notify each Lender of the
interest rate applicable to each LIBOR Loan promptly upon determination of such
interest rate and will give each Lender prompt notice of each change in the
Corporate Base Rate.
Each determination of an interest rate by the Agent pursuant to any
provision of this Agreement shall be conclusive and binding on the Borrower and
the Lenders in the absence of manifest error.
2.14 Applicable Lending Offices. Each Lender may book its Loans at any
--------------------------
Applicable Lending Office selected by such Lender and may change its Applicable
Lending Office from time to time. All terms of this Agreement shall apply to any
such Applicable Lending Office and the Notes shall be deemed held by each Lender
for the benefit of such Applicable Lending Office. Each Lender may, by written
or telex notice to the Agent and the Borrower, designate an Applicable Lending
Office through which the Loans will be made by it and for whose account Loan
payments are to be made.
2.15 Non-Receipt of Funds by the Agent. Unless the Borrower or a
-----------------------------------
Lender, as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (i) in the case of a Lender, the
proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption. If
such Lender or the Borrower, as the case may be, has not in fact made such
payment to the Agent, the recipient of such payment shall, on demand by the
Agent, repay to the Agent the amount so made available together with interest
thereon in respect of each day during the period commencing on the date such
amount was so made available by the Agent until the date the Agent recovers such
amount at a rate per annum equal to (a) in the case of payment by a Lender, the
Federal Funds Effective Rate for such day or (b) in the case of payment by the
Borrower, the interest rate applicable to the relevant Loan.
2.16 Withholding Tax Exemption. At least five Business Days prior to
--------------------------
the first date on which interest or fees are payable hereunder for the account
of any Lender, each Lender that is not incorporated under the laws of the United
States of America, or a state thereof, agrees that it will deliver to each of
the Borrower and the Agent two duly completed copies of the following, as
applicable, in each case certifying that such Lender is entitled to receive
payments under this Agreement and the Notes without deduction or withholding of
any United States federal income taxes: (i) United States Internal Revenue
Service Form W-9, W-8BEN or W-8ECI (as applicable to it), or (ii) in the case of
a Lender that is claiming an exemption from United States withholding tax under
Section 871(h) or 881(c) of the Code with respect to payments of "portfolio
interest", (A) an Internal Revenue Service Form W-8 or successor applicable form
and (ii) a certificate of such Lender (a "Tax Compliance Certificate") to the
effect that (1) such Lender is not (x) a "bank" for purposes of Section 881(c)
of the Code, (y) a 10% shareholder (within the meaning of Section 871(h)(3)(B)
of the Code) of the Borrower or any Subsidiary or (z) a controlled foreign
corporation related to the Borrower or any Subsidiary (within the meaning of
Section 864(d)(4) of the Code) and (2) such Lender is entitled to receive
payments under this Agreement without deduction or withholding of any United
States federal income taxes. Each Lender which so delivers a Form W-9, W-8BEN,
W-8ECI or Tax Compliance Certificate further undertakes to deliver to each of
the Borrower and the Agent two additional copies of such form (or a successor
form), or a new Tax Compliance Certificate, as applicable, on or before the date
that such form expires or becomes obsolete or after the occurrence of any event
requiring a change in the most recent forms or certificate so delivered by it,
and such amendments thereto or extensions or renewals thereof as may be
reasonably requested by the Borrower or the Agent, in each case certifying that
such Lender is entitled to receive payments under this Agreement and the Note
without deduction or withholding of any United States federal income taxes,
unless an event (including without limitation any change in treaty, law or
regulation) has occurred prior to the date on which any such delivery would
otherwise be required which renders all such forms or such Certificate
inapplicable or which would prevent such Lender from duly completing and
delivering any such form or Certificate with respect to it and such Lender
advises the Borrower and the Agent that it is not capable of receiving payments
without any deduction or withholding of United States federal income tax.
2.17 Optional Prepayments. The Borrower may on the last day of any
---------------------
Interest Period with respect thereto, in the case of LIBOR Loans, or at any time
and from time to time, in the case of Base Rate Loans, prepay the Loans, in
whole or in part, without premium or penalty, upon at least three Business Days'
irrevocable written notice, in the case of LIBOR Loans, and upon at least one
Business Day's irrevocable written notice, in the case of Base Rate Loans, from
the Borrower to the Agent, specifying the date and amount of prepayment and
whether the prepayment is of LIBOR Loans, Base Rate Loans or a combination
thereof, and, if a combination thereof, the amount allocable to each. Upon
receipt of any such notice from the Borrower, the Agent shall promptly notify
each Lender thereof. If any such notice is given, the amount specified in such
notice shall be due and payable by the Borrower on the date specified therein,
together with accrued interest to such date on the amount prepaid. Partial
prepayments of Loans shall be in an aggregate principal amount of $1,000,000 or
an integral multiple thereof. Partial prepayments of Facility A Term Loans made
on a day other than a day specified in Section 2.4(iv) or any payment made on
such day in excess of the Facility A Reduction Installment specified therein
shall be applied pro rata to each Facility A Reduction Installment remaining as
of the date of such prepayment or payment. Partial prepayments of Facility B
Term Loans made on a day other than a day specified in Section 2.5(iv) or any
payment made on such day in excess of the Facility B Reduction Installment
specified therein shall be applied pro rata to each Facility B Reduction
Installment remaining as of the date of such prepayment or payment.
2.18 Mandatory Prepayments. On the day of receipt by the Borrower or
----------------------
any Subsidiary of any Net Proceeds (a) with respect to an asset disposition
where the Net Proceeds from such asset disposition, plus the Net Proceeds from
all prior asset dispositions consummated on or after the Closing Date exceeds
$5,000,000 in the aggregate or (b) with respect to an issuance of equity or debt
securities of the Borrower or any of its Subsidiaries, the Borrower shall prepay
the Loans with 75% of Net Proceeds from such issuance of equity and such asset
disposition and 100% of the Net Proceeds from such issuance of debt securities
as follows: Prepayment shall first be applied to each Facility A Reduction
Installment and Facility B Reduction Installment, pro rata based on the
aggregate outstanding principal amount of Facility A Term Loans and Facility B
Term Loans, (such prepayment to be applied to any Reduction Installment on a pro
rata basis) and, when the Facility A Term Loans and the Facility B Term Loans
are paid in full, shall be applied to outstanding Revolving Loans.
Nothwithstanding the foregoing, the $5,000,000 threshold referred to above with
respect to asset dispositions shall not apply during any period in which an
Event of Default has occurred and is continuing. Prepayments of Revolving Loans
with Net Proceeds from asset dispositions shall also result in a permanent
reduction of the Aggregate Revolving Commitment by an amount equal to such
prepayment amounts. The Borrower agrees to give the Agent at least seven
Business Days' irrevocable written notice of any prepayment under this Section
2.18. Upon receipt of any such notice from the Borrower, the Agent shall
promptly notify each Lender thereof. If, within five Business Days' after
receipt by the Facility B Term Lenders of such notice, the Agent shall have
received written notice from the Required Facility B Term Lenders that such
Lenders decline to receive their share of such prepayment, then, notwithstanding
any provision herein to the contrary, amounts which would have otherwise been
applied to the Facility B Term Loans under this Section 2.18 shall instead be
applied to the Facility A Term Loans.
2.19 Commitment Obligations. Neither the Agent nor any Lender shall be
----------------------
responsible for the obligation or Available Commitment of any other Lender
hereunder, nor will the failure of any Lender to comply with the terms of this
Agreement relieve any other Lender or the Borrower of its obligations under this
Agreement and the Notes. Nothing herein shall be deemed to relieve any Lender
from its obligation to fulfill its Commitments hereunder or to prejudice any
rights which the Borrower may have against any Lender as a result of any default
by such Lender hereunder.
2.20 Commitment Termination. The Revolving Commitment of each Lender
----------------------
and the Aggregate Revolving Commitment shall terminate on the Revolving
Termination Date.
2.21 Required Payments. The outstanding Revolving Loans and all other
-----------------
unpaid Obligations with respect thereto shall be paid in full by the Borrower on
the Revolving Termination Date. The outstanding Facility A Term Loans and all
other unpaid Obligations with respect thereto shall be paid in full by the
Borrower on the Facility A Termination Date. The outstanding Facility B Term
Loans and all other unpaid Obligations with respect thereto shall be paid in
full by the Borrower on the Facility B Termination Date.
ARTICLE 3
CHANGE IN CIRCUMSTANCES
3.1 Yield Protection.
----------------
(i) If any repayment of principal of, or conversion of, any LIBOR Loan
is made other than on the last day of an Interest Period therefor, as a result
of a prepayment, payment or conversion, or an acceleration of the maturity of
the Loan pursuant to Section 8, or for any other reason, or if the Borrower
shall fail to borrow a LIBOR Loan after requesting one, then the Borrower shall,
upon demand by the Agent pay to the Lenders any amounts required to compensate
them for any additional losses, costs or expenses that they may reasonably incur
as a result of such repayment, conversion or failure to borrow, including any
loss (including loss of anticipated profits), cost or expense incurred by reason
of the liquidation or reemployment of deposits or other funds acquired by a
Lender to fund or maintain such LIBOR Loan.
(ii) If, due to either (a) the introduction of or any change in or in
the interpretation of any Governmental Rule or (b) the compliance by the Lenders
with any Governmental Rule (whether or not having the force of law), there is
any increase in the cost to the Lenders of agreeing to make, making, funding or
maintaining any LIBOR Loan, then the Borrower shall from time to time, upon
written demand by the Agent, pay to the Agent additional amounts sufficient to
compensate the Lenders for such increased cost. A certificate as to the amount
of such increased cost, submitted to the Borrower by the Agent, shall be
conclusive and binding for all purposes, absent manifest error.
(iii) Notwithstanding any other provision of this Agreement, if the
introduction of or any change in or in the interpretation of any Governmental
Rule makes it unlawful, or any Governmental Person asserts that it is unlawful,
for any Lender to perform its obligations hereunder to make LIBOR Loans or to
continue to fund or maintain LIBOR Loans hereunder, then, on notice thereof and
demand therefor by the Agent to the Borrower, (a) the obligation of such Lender
to make LIBOR Loans and to convert Base Rate Loans into LIBOR Loans shall
terminate and (b) the Borrower shall forthwith prepay in full all LIBOR Loans
then outstanding, together with interest accrued thereon, unless the Borrower,
within five Business Days of such notice and demand, converts all LIBOR Loans
then outstanding into Base Rate Loans in accordance with Section 2.7.
(iv) If, (A) with respect to any LIBOR Loan, the Agent notifies the
Borrower that LIBOR for such Loan will not adequately reflect the cost to one or
more Lenders (as determined by such Lender(s) in good faith on the basis of
market conditions then in effect) of making, funding or maintaining such Loan or
(B) with respect to any LIBOR Loan requested by the Borrower, the Agent notifies
the Borrower that by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining LIBOR, then (a) in
the case of (A) above, such Loan will automatically, on the last day of the then
existing Interest Period therefor, convert into a Base Rate Loan and (b) in
either case, the obligation of the affected Lender (or each Lender, in the case
of (B)) to make, or to convert Base Rate Loans into LIBOR Loans shall be
suspended until the Agent notifies the Borrower that the circumstances causing
such suspension no longer exist.
(v) If either (a) the introduction of or any change in or in the
interpretation of any Governmental Rule regarding capital adequacy or (b) the
compliance by the Lenders with any such Governmental Rule (whether or not having
the force of law), affects the amount of capital required or expected to be
maintained by any Lender or any corporation controlling any Lender, and such
Lender (taking into consideration such Lender's or such corporations's policies
with respect to capital adequacy) determines that the amount of capital
maintained by such Lender or such corporation which is attributable to or based
upon the Loans, the Letters of Credit, the Commitments or this Agreement must be
increased as a consequence of such introduction or change then the Borrower
shall from time to time, upon written demand by the Agent, pay to the Agent
additional amounts sufficient to compensate such Lender or such corporation for
the increased cost to such Lender or corporation of such increased capital. A
certificate as to the amount of such increased cost, submitted to the Borrower
by the Agent, shall be conclusive and binding for all purposes, absent manifest
error.
3.2 Taxes. (a) All payments by or on behalf of the Borrower hereunder
shall be made without set-off or counterclaim and in such amounts as may be
necessary in order that all such payments (after deduction or withholding for or
on account of any present or future taxes, levies, imposts, duties or other
charges of whatsoever nature imposed by any Governmental Person, other than any
tax on or measured by the overall net income of the Agent or a Lender pursuant
to the income tax laws of the United States, the jurisdiction where the Agent's
or such Lender's principal office is located or any political subdivision
thereof (collectively, the "Taxes")) shall not be less than the amounts
otherwise specified to be paid hereunder. A certificate as to any additional
amounts payable to the Agent or a Lender hereunder submitted to the Borrower by
the Agent shall show in reasonable detail the amount payable to the Agent or a
Lender and the calculations used to determine in good faith such amount and
shall be conclusive absent manifest error. Any amounts payable by the Borrower
hereunder with respect to past payments shall be due within ten days following
receipt by the Borrower of such certificate from the Agent; and such amounts
payable with respect to future payments shall be due concurrently with such
future payments. With respect to each deduction or withholding for or on account
of any Taxes, the Borrower shall promptly furnish to the Agent such
certificates, receipts and other documents as may be required (in the reasonable
judgment of the Agent) to establish any tax credit to which a Lender may be
entitled. The agreements and obligations of the Borrower under this paragraph
shall survive the payment in full of the Loans.
(b) Notwithstanding any provision in this Agreement to the contrary,
any Lender that is not a U.S. Person and is not a "bank" within the meaning of
Section 881(c)(3)(A) of the Code (a "Portfolio Debt Lender") shall request the
Borrower (through the Agent), and the Borrower agrees thereupon, to record on
the Tax Register any Loans held by such Lender under this Agreement. Loans
recorded on the Tax Register ("Registered Loans") may not be evidenced by
promissory notes other than Registered Notes as defined below and, upon the
registration of any Loan, any promissory note (other than a Registered Note)
evidencing the same shall be null and void and shall be returned to the
Borrower. The Borrower agrees to execute and deliver to each Lender that is the
holder of Registered Loans a Revolving Note, Facility A Term Note or Facility B
Term Note, as applicable, in registered form to evidence each such Registered
Loan (i.e., containing the optional registered note language as indicated in
Exhibits A-1, A-2 and A-3 hereto, as applicable) and registered as provided in
Section 9.6(h) (a "Registered Note"). A Loan once recorded on the Tax Register
may not be removed from the Tax Register so long as it remains outstanding and a
Registered Note may not be exchanged for a promissory note that is not a
Registered Note. Notwithstanding the foregoing, a Lender which is a holder of
Registered Loans may transfer such Registered Loans to any Lender permitted by
this Agreement (whether or not such Lender is a Portfolio Debt Lender), although
the Loans so transferred shall remain Registered Loans and the Notes evidencing
such Loans shall remain Registered Notes.
ARTICLE 4
CONDITIONS PRECEDENT
--------------------
4.1 Initial Loan or Letter of Credit. The Lenders shall not be required
--------------------------------
to make their initial Loans or participate in the initial Letter of Credit
hereunder, or refinance the loans and letters of credit under the Existing Loan
Agreement, unless the Borrower has furnished to the Agent (except as otherwise
permitted by Section 4.4):
(i) this Agreement, the Notes and the Collateral Documents,
duly executed by the Borrower;
(ii) the Guaranties and the Guarantor Collateral Documents,
duly executed by each Guarantor;
(iii) the formation and governance documents of the Borrower and
each Guarantor certified by the Secretary of State (or similar governmental
official) of the relevant jurisdiction of formation;
(iv) Resolutions of the Board of Directors (or other governing
body, as applicable) of the Borrower and each Guarantor approving the execution,
delivery and performance by the Borrower and each Guarantor, of the Loan
Documents to which the Borrower and each Guarantor is a party, certified by the
Secretary (or other authorized officer, as applicable) of the Borrower and each
Guarantor to be true and correct and in full force and effect;
(v) an Incumbency Certificate of the Borrower and each
Guarantor;
(vi) evidence that all amounts outstanding under the Prior Loan
Agreement have been paid in full or refinanced under this Agreement;
(vii) all fees and expenses to be paid on the Closing Date;
(viii)a copy of the limited partnership agreement of Petcetera
L.P., certified by an Authorized Officer of the Borrower to be a true and
correct copy thereof with no amendments thereto, and to be in full force
and effect;
(ix) evidence that the insurance required by Section 6.6 is in
full force and effect, together with appropriate evidence showing the Agent as
an additional named insured or loss payee, as appropriate, all in form and
substance reasonably satisfactory to the Agent;
(x) no statute, rule, regulation, order, decree or preliminary
or permanent injunction of any court or administrative agency or, to the best
knowledge of the Borrower, any such action threatened by any Person, shall be in
effect that prohibits the Lenders from consummating the transactions
contemplated by this Agreement and the other Loan Documents;
(xi) the executed legal opinion of Latham & Watkins, counsel to
the Borrower and the Guarantors, in form and substance reasonably acceptable to
the Agent;
(xii)good-standing certificates with respect to the Borrower
and each Subsidiary, each dated a recent date, of the Secretary of State (or
similar governmental official) of each jurisdiction in which such Person is
formed;
(xiii)original certificates representing all outstanding shares
of stock of each Subsidiary which is a corporation, together with an undated
stock power for each of such certificates, duly executed in blank by an
authorized officer of the Borrower;
(xiv)copies of the Borrower's consolidated audited financial
statements for the period ending January 30, 1999, together with any management
letter prepared by the accountants and unaudited financial statements for the
period ending May 1, 1999;
(xv) evidence satisfactory to the Agent that there shall have
been no material adverse change to the syndication markets for credit facilities
similar to this Agreement and there shall not have occurred and be continuing a
material disruption of or material adverse change in financial, banking or
capital markets which would have an adverse effect on such syndication market,
as determined by the Agent in its sole discretion; and
(xvi) such other documents, instruments and opinions as the
Agent or its counsel may have reasonably requested.
4.2 All Loans. The Lenders shall not be required to make any Loan
---------
(including the initial Loan) hereunder unless the Borrower has furnished to the
Agent:
(i) a duly completed certificate executed by an Authorized
Officer of the Borrower certifying that:
(a) there exists no Default or Event of Default;
(b) the representations and warranties contained in
Article 5 hereof are true and correct as of the borrowing date except
to the extent any such representation or warranty is stated to relate
solely to an earlier date, in which case such representation or
warranty shall be true and correct on and as of such earlier date; and
(c) no event has occurred, or condition exists, which
could have a Material Adverse Effect.
(ii) in the case where Loan proceeds are to be used for an
Acquisition and such Acquisition will result in the Borrower being required to
file an SEC Report, executed copies of each of the Acquisition Documents,
certified by an Authorized Officer, together with the other documents required
by Section 6.14;
(iii)in the case where Loan proceeds are to be used for an
Acquisition, evidence satisfactory to the Agent that the Acquisition
contemplated by the relevant Acquisition Documents will immediately be
consummated upon the funding of the Loan; and
(iv) such other documents as the Agent or its counsel may have
reasonably requested.
4.3 All Letters of Credit. The Agent shall not be required to issue any
---------------------
Letter of Credit and the Lenders shall not be required to participate in any
Letter of Credit (including the initial Letter of Credit) hereunder unless the
Borrower has furnished to the Agent:
(i) a completed Letter of Credit Request with regard to each
such Letter of Credit;
(ii) all fees to be paid to the Agent in connection with each
Letter of Credit shall have been paid; and
(iii) such other documents as the Agent, any Lender or its
respective counsel may have reasonably requested.
Any Letter of Credit Request delivered to the Agent shall be deemed a
representation and warranty to the Agent and the Lenders that:
(i) there exists no Default or Event of Default;
(ii) the representations and warranties contained in Article 5
hereof are true and correct as of the issuance date of each Letter of Credit
except to the extent any such representation or warranty is stated to relate
solely to an earlier date, in which case such representation or warranty shall
be true and correct on and as of such earlier date; and
(iii) no event has occurred, or condition exists, which could
have a Material Adverse Effect.
4.4 Post-Closing Conditions. On or before the date which is 90 days
------------------------
after the Closing Date, the Borrower agrees to deliver the following to the
Agent:
(i) a Guarantee and Guarantor Security Agreement, in form and substance
satisfactory to the Agent, duly executed by the Yukon Subsidiary, along with (A)
evidence that such agreements have been duly authorized and (B) such other
documents, instruments, agreements, filings and other actions as the Agent may
request to create a perfected security interest in the property owned by such
Subsidiary;
(ii) original certificates representing 60% of the outstanding shares
of stock of the Yukon Subsidiary, along with such other documents, instruments,
agreements, filings and other actions as the Agent may request to create a
perfected security interest in such stock;
(iii) the executed legal opinion of local counsel to the Yukon
Subsidiary in form and substance, and from a firm of attorneys, reasonably
acceptable to the Agent; and
(iv) evidence acceptable to the Agent that all Liens not permitted by
Section 6.22 shall have been terminated or released, as appropriate, including
but not limited to those Liens referred to on Schedule 6 (provided that the
Borrower shall not be obligated to obtain the termination or release of any such
Lien if (A) the Borrower has been unable to do so on a best effort basis and (B)
the Agent has determined in its reasonable discretion that the value of any
property subject to all such unreleased or unterminated Liens does not exceed
$2,000,000 in the aggregate).
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to the Lenders that:
5.1 Authorization. The execution, delivery and performance by the
-------------
Borrower and each Subsidiary of the Loan Documents to which the Borrower or such
Subsidiary, as applicable, is a party are within the Borrower's or such
Subsidiary's corporate or partnership powers, as applicable, have been duly
authorized by all necessary corporate or partnership action and do not
contravene any applicable law, rule, regulation or order or any contractual
restriction binding on or affecting the Borrower or its Subsidiaries.
5.2 Governmental Action. No authorization, approval or other action by,
-------------------
or notice to or filing with, any Governmental Person is required for the due
execution, delivery and performance by the Borrower or its Subsidiaries of the
Loan Documents to which the Borrower or its Subsidiaries is a party.
5.3 Enforceability. Each Loan Document to which the Borrower or any
--------------
Subsidiary is a party is the legal, valid and binding obligation of the Borrower
or such Subsidiary, as applicable, enforceable against the Borrower or such
Subsidiary, as applicable, in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally.
5.4 Use of Proceeds. The Borrower will use the proceeds of the Facility
---------------
A Term Loans and the Facility B Term Loans solely for the repayment of amounts
outstanding under the Prior Loan Agreement and to refinance costs incurred in
connection with certain acquisitions and conversions of stores. The Borrower
will use the proceeds of the Revolving Loans solely (i) to make permitted
Acquisitions, (ii) to make permitted Capital Expenditures, (iii) for working
capital purposes and (iv) for general corporate purposes (including but not
limited to the investments contemplated by Sections 6.29 and 6.30). The Borrower
will use the Letters of Credit solely for the purposes set forth in Section
2.2(i). No action has been taken or is currently planned by the Borrower, or any
agent acting on its behalf, which would cause this Agreement or the Notes to
violate Regulation U or any other regulation of the Board of Governors of the
Federal Reserve System or to violate the Securities and Exchange Act of 1934, in
each case as in effect now or as the same may hereafter be in effect. The
Borrower is not engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock as one of its important activities and none
of the proceeds of the Loans or Letters of Credit will be used directly or
indirectly for such purpose.
5.5 Litigation. Except as set forth on Schedule 7, there is no
----------
litigation, tax claim, proceeding, arbitration or dispute pending, or, to the
best knowledge of the Borrower, threatened against or affecting the Borrower,
any Subsidiary, or the Property of the Borrower or any Subsidiary, an adverse
determination in which could have a Material Adverse Effect.
5.6 Financial Statements. The consolidated financial statements of the
--------------------
Borrower dated January 30, 1999, copies of which have been delivered to the
Lenders, fairly and accurately reflect the financial condition of the Borrower
and its Subsidiaries as of such date, and since such date there has been no
Material Adverse Effect.
5.7 Taxes. The Borrower and each Subsidiary has filed all tax returns
-----
and reports required to be filed and has paid all applicable federal, state and
local franchise and income taxes which are due and payable.
5.8 Subsidiaries. Schedule 2 hereto contains an accurate list of (i)
------------
all of the presently existing Subsidiaries of the Borrower, setting forth their
respective jurisdictions of incorporation or organization and the percentage of
their respective capital stock or ownership interests owned by the Borrower or
other Subsidiaries, and (ii) all shareholder agreements, management agreements
and similar agreements executed in connection therewith. All of the issued and
outstanding shares of capital stock of such Subsidiaries have been duly
authorized and issued and are fully paid and non-assessable.
5.9 ERISA. The Unfunded Liabilities do not in the aggregate exceed
-----
$1,000,000. Each Single Employer Plan complies in all material respects with all
applicable requirements of law and regulations, except to the extent that the
failure to comply therewith does not have a Material Adverse Effect. No
Reportable Event has occurred with respect to any Single Employer Plan, except
to the extent that such Reportable Event has no Material Adverse Effect. Neither
the Borrower nor any Subsidiary (a) is a party to any Multiemployer Plan or (b)
has withdrawn from any Multiemployer Plan, except to the extent such actions do
not have a Material Adverse Effect.
5.10 Accuracy of Information. No information, exhibit or report
-------------------------
furnished by the Borrower or any of its Subsidiaries to the Agent or to any
Lender in connection with the negotiation of, or compliance with, the Loan
Documents contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained therein not
misleading in any material respect.
5.11 Organization and Existence. The Borrower and each Subsidiary is
---------------------------
duly organized, validly existing and in good standing under the laws of its
jurisdiction of formation and it has the corporate or partnership power and
authority, as applicable, and the legal right, to own and operate its Properties
and to conduct the business in which it is currently engaged and in which it
proposes to be engaged after the Closing Date and is duly qualified as a foreign
entity and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of Property or the conduct of its business
requires such qualification except to the extent that the failure to comply
thereunder could not, in the aggregate, reasonably be expected to have a
Material Adverse Effect and is in compliance with all Requirements of Law except
to the extent that the failure to comply therewith could not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
5.12 Consents. No consent or authorization of, or filing with or other
--------
act by or in respect of, any Governmental Authority, or any other Person is
required in connection with the Loans hereunder or with the execution, delivery,
performance, validity or enforceability of this Agreement, the Notes or the
other Loan Documents. The execution, delivery and performance of this Agreement,
the Notes and the other Loan Documents, the Loans, the Letters of Credit and the
use of the proceeds thereof will not violate any Governmental Rule or
contractual obligation of the Borrower or any of its Subsidiaries which could be
reasonably expected to have a Material Adverse Effect and will not result in, or
require, the creation or imposition of any Lien on any of its or their
respective Properties or revenues pursuant to any such Governmental Rule or
contractual obligation, except pursuant to the Loan Documents or otherwise as
permitted hereunder, which Lien could reasonably be expected to have a Material
Adverse Effect.
5.13 Intellectual Property. The Borrower and each of its Subsidiaries
----------------------
owns, or is licensed to use, all trademarks, tradenames, patents, copyrights,
material permits, licenses or other intangibles necessary for the conduct of its
business as currently conducted, except to the extent that the failure to own or
license such property could not reasonably be expected to have a Material
Adverse Effect.
5.14 Default. There exists no Default or Event of Default.
-------
5.15 Nature of Business. Neither the Borrower nor any of its
--------------------
Subsidiaries is engaged in any material business other than the ownership and
operation of pet food and supply retail stores and the manufacture or
procurement of pet food and supplies.
5.16 Ranking of Loans. This Agreement and the other Loan Documents to
----------------
which the Borrower is a party, when executed, and the Loans, when borrowed are
and will be the direct and general obligations of the Borrower. The Borrower's
obligations hereunder and thereunder will rank at least pari passu in priority
of payment with all other senior Debt, except to the extent otherwise permitted
hereunder.
5.17 Compliance with Laws. The Borrower and each of its Subsidiaries is
--------------------
in compliance with all Governmental Rules except to the extent that the failure
to comply therewith could not, in the aggregate, reasonably be expected to have
a Material Adverse Effect.
5.18 Investment Company Acts; Other Regulations. Neither the
----------------------------------------------
Borrower nor any of its Subsidiaries is an "investment company," or a company
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, as amended.
5.19 Environmental Matters. The Borrower and its Subsidiaries are in
----------------------
compliance in all material respects with all applicable environmental laws, and
there is no contamination at, under or about any of their respective Properties,
or violation of any environmental law with respect to any of their respective
Properties or the business conducted at any of their respective Properties which
involves a matter or matters which has caused or is reasonably likely to cause a
Material Adverse Effect.
5.20 Title. Except for assets which may have been disposed of in the
-----
ordinary course of business, the Borrower and each Subsidiary has good and
marketable title to all of the property reflected in its financial statements
delivered to the Lenders, to all property acquired by the Borrower or any
Subsidiary since the date of said financial statements and to all property
necessary for the conduct of its business, free and clear of all Liens,
encumbrances, security interests and adverse claims except those permitted by
Section 6.22 hereof.
5.21 Solvency. Immediately prior to and upon execution of this
--------
Agreement and the funding of the Loans and the issuance of any Letters of
Credit, the Borrower was, is and will be Solvent.
5.22 Year 2000. The Borrower has implemented a plan to address Year
---------
2000 problems that might occur in the Borrower's or any Subsidiary's computer
hardware, software, operating systems, telecommunications, building systems, and
data exchange with its critical vendors and customers. The Borrower has
allocated adequate staff and financial resources and will be Year 2000 Compliant
for all mission-critical systems of it or its Subsidiaries by the earlier of
such date as the Borrower has appointed in its Year 2000 remediation plan, or
midnight, Pacific Coast Time, December 31, 1999, except where the failure to be
Year 2000 Compliant could not reasonably be expected to have a Material Adverse
Effect. "Year 2000 Compliant" means the state and point in time when the
Borrower's and each Subsidiary's information processing, financial and business
operations, systems and technologies (collectively, "Technologies") will
accurately process date/time data (including without limitation calculating,
comparing and sequencing) from, into and between the years 1999 and 2000, for
its own account and when used in combination with the Technologies of third
parties. Upon request, the Borrower will provide to the Agent evidence of the
Borrower's and each Subsidiary's compliance with the terms of this Section.
ARTICLE 6
COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1 Financial Reporting. The Borrower will maintain, for itself
-------------------
and each Subsidiary, a system of accounting established and administered in
accordance with Agreement Accounting Principles, and furnish to the Lenders:
(i)As soon as available and in any event within 45 days after the
end of each quarterly fiscal period of each fiscal year of the
Borrower (except the last fiscal quarter), consolidated
statements of income, retained earnings and cash flow of the
Borrower and its consolidated Subsidiaries for such period and
for the period from the beginning of the respective fiscal
year to the end of such period, and the related consolidated
balance sheets of the Borrower and its consolidated
Subsidiaries as at the end of such period, setting forth in
each case in comparative form the corresponding consolidated
figures for the corresponding period in the preceding fiscal
year, accompanied by a certificate of an Authorized Officer of
the Borrower, which certificate shall state that those
consolidated financial statements fairly present the
consolidated financial condition and results of operations of
the Borrower and its consolidated Subsidiaries, in each case
in accordance with Agreement Accounting Principles,
consistently applied, as at the end of, and for, such period
(subject to normally recurring audit adjustments).
(ii) As soon as available and in any event within 90 days after the
end of each fiscal year of the Borrower, consolidated
statements of income, retained earnings and cash flow of the
Borrower and its consolidated Subsidiaries for such fiscal
year and the related consolidated balance sheets of the
Borrower and its consolidated Subsidiaries as at the end of
such fiscal year, setting forth in each case in comparative
form the corresponding consolidated figures for the preceding
fiscal year, and accompanied, in the case of those
consolidated statements and balance sheet of the Borrower, by
a unqualified opinion of independent certified public
accountants of recognized national standing, which opinion
shall state that those consolidated financial statements
fairly present the consolidated financial condition and
results of operations of the Borrower and its consolidated
Subsidiaries as at the end of, and for, such fiscal year in
accordance with Agreement Accounting Principles, consistently
applied.
(iii) Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular
reports or statutory statements which the Borrower or any of
its Subsidiaries files with the SEC or any insurance or
regulatory agency.
(iv) As soon as available, but in any event no later than 45 days
subsequent to the beginning of each fiscal year of the
Borrower, based on the best information then currently
available, a copy of the plan and forecast (including a
projected consolidated balance sheet, income statement, funds
flow statement and a budget for Capital Expenditures),
prepared on a quarterly format basis, of the Borrower and its
Subsidiaries for such fiscal year.
(v)Together with the financial statements required in Section
6.1(i) and (ii) (commencing with the fiscal period ending July
31, 1999), a compliance certificate in substantially the form
of Exhibit B hereto (a "Compliance Certificate") signed by an
Authorized Officer showing the calculations necessary to
determine compliance with this Agreement and stating that no
Default or Event of Default exists, or if any Default or Event
of Default exists, stating the nature and status thereof.
(vi) As soon as possible, but in any event within 45 days after the
end of each quarter (except the last fiscal quarter, in which
case within 90 days after the end of such quarter), a Leverage
Ratio Level Certificate in substantially the form of Exhibit D
hereto signed by an Authorized Officer.
(vii) As soon as possible and in any event within 10 days after the
Borrower knows that any Reportable Event has occurred with
respect to any Single Employer Plan, a statement, signed by an
Authorized Officer, describing said Reportable Event and the
action which the Borrower proposes to take with respect
thereto.
(viii) As soon as possible and in any event within 10 days after
receipt by the Borrower, a copy of (a) any notice or claim to
the effect that the Borrower or any of its Subsidiaries is or
may be liable to any Person as a result of the release by the
Borrower, any of its Subsidiaries, or any other Person of any
toxic or hazardous waste or substance into the environment,
and (b) any notice alleging any violation of any federal,
state or local environmental, health or safety law or
regulation by the Borrower or any of its Subsidiaries, which,
in either case, could have a Material Adverse Effect.
(ix) Promptly upon the furnishing thereof to the shareholders of
the Borrower, copies of all financial statements, reports and
proxy statements so furnished.
(x) Such other information (including non-financial information)
as the Agent may from time to time reasonably request.
6.2 Use of Proceeds. The Borrower will use the proceeds of the Facility
---------------
A Term Loans and the Facility B Term Loans solely for the repayment of amounts
outstanding under the Prior Loan Agreement and to refinance costs incurred in
connection with certain acquisitions and conversion of stores, and the proceeds
of the Revolving Loans solely (i) to make permitted Acquisitions, (ii) to make
permitted Capital Expenditures, (iii) for working capital purposes and (iv) for
general corporate purposes (including but not limited to the investments
contemplated by Sections 6.29 and 6.30). The Borrower will use the Letters of
Credit only for the purposes specified in Section 2.2(i). The Borrower will not,
nor will it permit any Subsidiary to, use any of the proceeds of the Loans to
purchase or carry any "margin stock" (as defined in Regulation U).
6.3 Notice of Default. The Borrower will, and will cause each
-------------------
Subsidiary to, give prompt (but in any case, within 5 Business Days) notice in
writing to the Lenders of the occurrence of any Default or Event of Default and
of any other development, financial or otherwise, which could have a Material
Adverse Effect.
6.4 Conduct of Business. The Borrower will, and will cause each
---------------------
Subsidiary to, carry on and conduct its business in the pet food and supply
business and related fields and to do all things necessary to remain in good
standing in its jurisdiction of organization and maintain all requisite
authority to conduct its business in each jurisdiction in which its business is
conducted. The Borrower shall not, and shall not permit any of its Subsidiaries
to, make any material change in the nature of its business as presently
conducted; provided that the foregoing shall not be construed as a limitation on
Acquisitions permitted hereunder.
6.5 Records. The Borrower will, and will cause each Subsidiary to, keep
-------
adequate records and books of account, in which full and correct entries shall
be made in accordance with Agreement Accounting Principles of all financial
transactions of the Borrower, its Subsidiaries, their respective assets and
their respective business.
6.6 Insurance. The Borrower will, and will cause each Subsidiary to,
---------
maintain insurance on all their Property in such amounts and covering such risks
as is consistent with sound business practice, and the Borrower will furnish to
any Lender upon request full information as to the insurance carried.
6.7 Compliance with Laws. The Borrower will, and will cause each
----------------------
Subsidiary to, comply in all material respects with all applicable laws, rules,
regulations and orders, such compliance to include, without limitation, paying
before the same become delinquent, all taxes, assessments and governmental
charges imposed upon it or upon its property, except such taxes, assessments and
governmental charges as are being contested in good faith by appropriate
proceedings and as to which appropriate reserves are maintained.
6.8 Maintenance of Properties. The Borrower will, and will cause each
-------------------------
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its Property in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times.
6.9 Inspection. At any reasonable time and from time to time upon
----------
reasonable notice, the Borrower will, and will cause each Subsidiary to, permit
the Agent, by its respective representatives and agents, to inspect any of the
Property, corporate books and financial records of the Borrower and each
Subsidiary, to examine and make copies of the books of accounts and other
financial records of the Borrower and each Subsidiary, and to discuss the
affairs, finances and accounts of the Borrower and each Subsidiary with, and to
be advised as to the same by, their respective officers at such reasonable times
and intervals as the Lenders may designate.
6.10 Debt. The Borrower will not, nor will it permit any Subsidiary
----
to, create, incur or suffer to exist any Debt, except:
(i) Debt of the Borrower and the Subsidiaries under the Loan
Documents;
(ii) Debt in existence on the date hereof, as set forth on Schedule 3;
(iii) trade Debt incurred to acquire goods, supplies, and services and
incurred in the ordinary course of business;
(iv) Debt of any wholly-owned Subsidiary to the Borrower or another
wholly-owned Subsidiary, or Debt of the Borrower to any wholly-owned Subsidiary;
and
(v) Debt secured by Liens permitted pursuant to Section 6.22.
6.11 Merger. The Borrower will not, nor will it permit any Subsidiary
------
to, enter into any merger, consolidation or amalgamation, or liquidate, wind up
or dissolve itself (or suffer any liquidation or dissolution), or convey, sell,
lease, assign, transfer or otherwise dispose of, all or substantially all of its
property, business or assets; provided that the Borrower may merge or
consolidate with another Person if (i) the Borrower is the surviving
corporation, (ii) the Borrower will at all times be in pro forma compliance with
all provisions of this Agreement subsequent to such merger or consolidation as
long as any Loans or any Commitment is outstanding and (iii) the Borrower has
filed the SEC Report (if required to do so by law).
6.12 Sale of Assets. The Borrower will not, nor will it permit any
---------------
Subsidiary to, lease, sell or otherwise dispose of its Property, to any other
Person except for (i) sales of inventory in the ordinary course of business and
(ii) leases, sales or other dispositions of its Property that, together with all
other Property of the Borrower and its Subsidiaries previously leased, sold or
disposed of (other than inventory in the ordinary course of business) as
permitted by this Section during the term of this Agreement do not require the
Borrower to file an SEC Report; provided that the foregoing shall not be
construed as prohibiting a transfer of assets from a Subsidiary to the Borrower
or the merger of a Subsidiary into the Borrower.
6.13 Sale of Accounts. The Borrower will not, nor will it permit any
----------------
Subsidiary to, sell or otherwise dispose of any notes receivable or accounts
receivable, with or without recourse, except the Borrower or any Subsidiary may
assign accounts receivable (previously expensed by the Borrower as bad debts)
for collection, with or without recourse.
6.14 Acquisitions. The Borrower will not, nor will it permit any
------------
Subsidiary to, enter into any agreement, contract, binding commitment or other
arrangement providing for any Acquisition, or take any action to solicit the
tender of securities or proxies in respect thereof in order to effect any
Acquisition, unless:
(i) the Person to be (or whose assets are to be) acquired does not
oppose such Acquisition and the line or lines of business of the Person to be
acquired are substantially the same as one or more line or lines of business
conducted by the Borrower and its Subsidiaries,
(ii) no Default or Event of Default shall have occurred and be continuing
either immediately prior to or immediately after giving effect to such
Acquisition,
(iii) if any Acquisition would require the Borrower to file an SEC Report,
the Borrower shall have furnished to the Agent (A) pro forma historical
financial statements as of the end of the most recently completed fiscal year of
the Borrower and most recent interim fiscal quarter, if applicable, giving
effect to such Acquisition and (B) a Compliance Certificate prepared on a
historical pro forma basis giving effect to such Acquisition, which certificate
shall demonstrate that no Default or Event of Default would exist immediately
after giving effect thereto (provided, however, that in each case if such
information is not then available for such periods with respect to Borrower, any
Subsidiary or the Person being acquired (or from whom assets are being
acquired), then such statements may be based instead upon reasonable estimates
made by Borrower as to the financial performance of such Persons for such
periods) and
(iv) the Person acquired shall be a Subsidiary, or be merged into the
Borrower or a Subsidiary, immediately upon consummation of the Acquisition (or
if assets are being acquired, the acquiror shall be the Borrower or a
Subsidiary).
6.15 Affiliates. The Borrower will not, and will not permit any
----------
Subsidiary to, enter into any transaction (including, without limitation, the
purchase or sale of any Property or service) with, or make any payment or
transfer to, any Affiliate except in the ordinary course of business and
pursuant to the reasonable requirements of the Borrower's or such Subsidiary's
business and upon fair and reasonable terms no less favorable to the Borrower or
such Subsidiary than the Borrower or such Subsidiary would obtain in a
comparable arms-length transaction; provided that the foregoing shall not be
construed as prohibiting a transfer of assets from a Subsidiary to the Borrower
or the merger of a Subsidiary into the Borrower.
6.16 ERISA. The Borrower will not, and will not permit any
-----
Subsidiary to, become a party to any Multiemployer Plan.
6.17 Capital Expenditures. The Borrower will not, and will not permit
---------------------
any Subsidiary to, make or commit to make (by way of the acquisition of
securities of a person or entity or otherwise) any Capital Expenditure, except
for Capital Expenditures not exceeding $55,000,000 in the aggregate in any
fiscal year, and with respect to fiscal year 2000 and each fiscal year
thereafter, an additional aggregate amount equal to the amount (if any) by which
the actual Capital Expenditures in the immediately preceding fiscal year were
less than those permitted hereunder for such fiscal year. Notwithstanding the
foregoing, any Capital Expenditure made by a Person which is the subject of an
Acquisition by the Borrower, prior to such Acquisition, shall not be included in
determining compliance by the Borrower and its Subsidiaries with this Section.
6.18 Total Debt Ratio. The Borrower and its Subsidiaries on a
------------------
consolidated basis shall not permit, as of the end of each fiscal quarter for
the four consecutive fiscal quarters then ended, the Total Debt Ratio to be
greater than (i) 2.50:1.00 with respect to any such four consecutive fiscal
quarters ending prior to February 2, 2002 and (ii) 2.25:1.00 with respect to any
such four consecutive fiscal quarters ending on or after February 2, 2002.
6.19 Payment of Obligations. The Borrower and each Subsidiary will pay
----------------------
and discharge promptly all taxes, assessments and other governmental charges and
claims levied or imposed upon it or its Property, or any part thereof, provided,
however, that the Borrower and its Subsidiaries shall have the right in good
faith to contest any such taxes, assessments, charges or claims and, pending the
outcome of such contest, to delay or refuse payment thereof provided that
adequately funded reserves are established by it to pay and discharge any such
taxes assessments, charges and claims.
6.20 Consolidated Net Worth. The Borrower and its Subsidiaries shall at
----------------------
all times maintain Consolidated Net Worth, determined as of the end of each
fiscal quarter, of not less than $160,000,000 plus 50% of cumulative Net Income
for the period commencing on May 2, 1999 through the end of such fiscal quarter
plus 75% of any Net Proceeds obtained from any public equity offering. (In the
event that the Borrower and its Subsidiaries have a consolidated net loss for
any fiscal quarter, Net Income for purposes of this Section shall be deemed zero
for such fiscal quarter).
6.21 Restricted Junior Payments. The Borrower shall not and shall not
---------------------------
permit any Subsidiaries to declare or pay any dividends (other than dividends
payable solely in common stock of the Borrower or its Subsidiaries and other
than dividends payable by its Subsidiaries to the Borrower) on any shares of any
class of capital stock of Borrower or its Subsidiaries or any warrants or
options to purchase any such stock, whether now or hereafter outstanding.
6.22 Encumbrances and Liens. The Borrower will not, and will not permit
----------------------
any Subsidiary to, create, assume or suffer to exist any Lien (other than for
taxes not delinquent and for taxes being contested in good faith) on Property of
any kind, whether real, personal or mixed, now owned or hereafter acquired, or
upon the income or profits thereof, except for (i) minor encumbrances and
easements on real property which do not materially affect its market value; (ii)
future purchase money security interests encumbering only the property
purchased; (iii) statutory liens of bankers, carriers, warehousemen, mechanics,
materialmen, and other similar Liens imposed by law, which are incurred in the
ordinary course of business for sums not more than 30 days delinquent or which
are being contested in good faith by appropriate proceedings; (iv) deposits made
in the ordinary course of business to secure liability to insurance carriers;
(v) attachment and judgment Liens securing claims less than $1,000,000 in the
aggregate (excluding for purposes of said calculation any such Liens for which
execution has been stayed, payment is covered in full by insurance, or the
Borrower is prosecuting an appeal in good faith by appropriate proceedings); and
(vi) monetary obligations of the Borrower under any leasing or similar
arrangement which, in accordance with Agreement Accounting Principles, is
classified as a Capitalized Lease. Notwithstanding the foregoing: (i) the
Borrower shall not (and shall not permit any Subsidiary to) at any time encumber
any real property with a purchase money security interest if (A) immediately
after giving effect to such encumbrances, the purchase money Debt secured by
said encumbrance will exceed 75% of the fair market value of the Property
encumbered by the encumbrance or (B) immediately after giving effect to such
encumbrance, the aggregate Debt of the Borrower secured by purchase money
security interests in real property will exceed 5% of total assets of the
Borrower and its Subsidiaries on a consolidated basis; and (ii) the Borrower
shall not at any time encumber its Property with an additional Lien or
encumbrance if, immediately after giving effect to such encumbrance, the
Borrower would be required to file an SEC Report.
6.23 Loans, Advances and Guaranties. Except as permitted by Section
---------------------------------
6.29 or 6.30 or set forth on Schedule 4, the Borrower will not, and will not
permit any Subsidiary to, except in the ordinary course of business as currently
conducted and subject to Section 6.28, make any loans or advances, become a
guarantor or surety, pledge its credit or properties in any manner or extend
credit; provided that the foregoing shall not be construed as a limitation on
guaranties or any Liens permitted hereunder.
6.24 Investments. Except as permitted by Section 6.14, 6.29 or 6.30,
-----------
the Borrower will not, and will not permit any Subsidiary to, purchase the Debt
or equity of another Person except for:
(i) certificates of deposit, time deposits, Eurodollar time deposits,
repurchase agreements, reverse repurchase agreements, or bankers' acceptances,
having in each case a maturity date of not more than twelve months from the date
of acquisition by the Borrower, issued by a Lender or any U.S. commercial bank
or any branch or agency of a non-U.S. bank licensed to conduct business in the
U.S. having combined capital and surplus or not less than $50,000,000 whose
short term securities are rated at least "A" by Standard & Poor's Corporation
(or the equivalent rating provided by any of Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch Investors Services, Inc.);
(ii) interest bearing or discounted obligations of the United States
Government, any agency thereof (including without limitation the Federal Home
Loan Mortgage Corporation, the Government National Mortgage Association, the
Federal National Mortgage Association and the Federal Farm Credit System) or any
entities or pools of mortgages or other instruments formed by the United States
Government or any such agencies, and in any case only if such obligation has a
maturity date not more than twelve months from the date of acquisition by the
Borrower;
(iii) obligations issued by states and local governments or their agencies,
instrumentalities, authorities or subdivisions, if such issuer has received a
rating of at least "A" by Standard & Poor's Corporation (or the equivalent
rating provided by any of Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch Investors Services, Inc.), and in any case only if such
obligation has a maturity date of not more than twelve months from the date of
acquisition by the Borrower;
(iv) commercial paper of an issuer rated at least "A" by Standard & Poor's
Corporation (or the equivalent rating provided by any of Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Services,
Inc.), and in any case only if such obligation has a maturity date not more than
twelve months from the date of acquisition by the Borrower; or
(v) investments in money market funds including short-term adjustable rate
money market funds.
6.25 Minimum Fixed Charge Coverage Ratio. The Borrower and its
---------------------------------------
Subsidiaries on a consolidated basis shall at all times maintain a ratio,
determined as of the end of each fiscal quarter, for the four consecutive fiscal
quarters then ended, of EBITDAR to Consolidated Fixed Charges of not less than
1.25:1.0.
6.26 Capitalized Rent Expense Ratio. The Borrower and its Subsidiaries
------------------------------
on a consolidated basis shall not permit, as of the end of each fiscal quarter
for the four consecutive fiscal quarters then ended, the Capitalized Rent
Expense Ratio to be greater than 0.85:1:00.
6.27 Guaranties, Etc. The Borrower will cause each of its Subsidiaries
----------------
hereafter formed or acquired to deliver to the Agent promptly upon the formation
or acquisition thereof each of the following: (i) a Guarantee in form and
substance satisfactory to the Agent, guaranteeing the Obligations on
substantially the same terms as the other Guarantors, (ii) a Guarantor Security
Agreement, in form and substance satisfactory to the Agent, granting to the
Agent, for the benefit of the Lenders, security interests in the property of
such Subsidiary on substantially the same terms as the other Guarantors, (iii)
appropriate UCC-1 Financing Statements and Lien searches requested by the Agent
indicating the Lenders' first priority Lien on such property, (iv) the stock
certificates representing the issued and outstanding shares of stock of such
Subsidiaries, together with undated stock powers executed in blank (or, in the
case of limited liability company or partnership Subsidiaries, such filings,
notices or other actions as the Agent may reasonably request with respect to
perfecting a first-priority security interest therein), (v) a favorable written
opinion of counsel satisfactory to the Agent as to such matters relating thereto
as any Lender through the Agent may reasonably request, in form and substance
satisfactory to the Agent, (vi) certified copies of the organizational
documents, resolutions and incumbency certificates of such Subsidiaries, in each
case in form and substance satisfactory to the Agent and (vii) such other
agreements, instruments, approvals or other documents as any Lender through the
Agent may reasonably request. Notwithstanding the foregoing, with respect to
Foreign Subsidiaries the Borrower shall be required to pledge to the Agent, for
the benefit of the Lenders, only such of its equity interests therein as will
not cause the Borrower to incur material adverse tax consequences under U.S tax
law as a result of such pledge.
6.28 Lease Obligations. The Borrower shall not and shall not permit any
-----------------
of its Subsidiaries to, create, incur, guaranty or suffer to exist, any
obligations as lessee for the payment of lease expenses for any real or personal
property under leases or arrangements to lease (collectively, "Lease
Obligations"), other than rental expense with respect to Capitalized Lease
obligations and long-term operating leases.
6.29 Petcetera L.P. Investment. Except as set forth on Schedule 4 or 5,
-------------------------
the Borrower will not, and will not permit any Subsidiary to, make or commit to
make any investment in Petcetera L.P. (whether in the form of equity, advances,
loans, extensions of credit, guaranties, the pledging of collateral, capital
contributions, purchase of debt or otherwise) except for investments not
exceeding $10,000,000 in the aggregate in any fiscal year, and with respect to
fiscal year 2000 and each fiscal year thereafter, an additional aggregate amount
equal to the amount (if any) by which the actual investment in the immediately
preceding fiscal year was less than the investment permitted hereunder for such
fiscal year.
6.30 E-Commerce Investment. The Borrower will not, and will not permit
---------------------
any Subsidiary to, make or commit to make any E-Commerce Investment (whether in
the form of equity, loans, extensions of credit, guaranties, capital
contributions, purchase of debt or otherwise) except for investments not
exceeding (i) $10,000,000 in the aggregate in fiscal year 1999, (ii) $5,000,000
in the aggregate in fiscal year 2000 and, with respect to fiscal year 2000, an
additional aggregate amount equal to the amount (if any) by which the actual
investment in fiscal year 1999 was less than the investment permitted under
clause (i) for such fiscal year and (iii) if the actual investment in fiscal
year 2000 was less than the investment permitted under clause (ii) for such
fiscal year, an aggregate amount for fiscal year 2001 equal to the difference
between such actual investment and such permitted amount.
ARTICLE 7
DEFAULTS
--------
The occurrence of any one or more of the following events shall
constitute an "Event of Default":
7.1 Payment Defaults. The Borrower shall fail to pay when due any
-----------------
payment of principal of any Loan, or the Borrower shall fail to pay within 3
days of the date when due any reimbursement obligation (with respect to a
drawing under a Letter of Credit) or interest or other charge or fee required
under the terms of this Agreement or the other Loan Documents.
7.2 Representations and Warranties. Any representation or warranty made
------------------------------
by the Borrower or any Guarantor under any Loan Document shall prove to have
been incorrect or misleading in any material respect when made.
7.3 Other Loan Document Defaults. The Borrower or any Guarantor shall
-----------------------------
fail to perform (a) any obligation set forth in subsections 4.4, 6.1, 6.3, 6.10,
6.11, 6.12, 6.13, 6.14, 6.17, 6.18, 6.21, 6.22, 6.23, 6.24, 6.25, 6.26, 6.28,
6.29 or 6.30 of the Agreement; (b) any obligation set forth in subsections 6.2
or 6.20 of the Agreement and such failure shall continue for 14 days following
the occurrence thereof; or (c) any other obligation contained in the Agreement
or the other Loan Documents, and such failure shall continue for 30 days after
written notice thereof from the Lenders.
7.4 Bankruptcy. (i) The Borrower or any Guarantor shall fail to pay its
----------
Debts generally as they become due or shall file any petition or action for
relief under any bankruptcy, insolvency, reorganization, moratorium, creditor
composition law, or any other law for the relief of or relating to debtors; (ii)
an involuntary petition under any bankruptcy law shall be filed against the
Borrower or any Guarantor and shall not be dismissed or discharged within 60
days of filing; or (iii) a custodian, receiver, trustee, assignee for the
benefit or creditors, or other similar official, shall be appointed to take
possession, custody or control of the properties of the Borrower or any
Guarantor and not be dismissed or discharged with 60 days of appointment.
7.5 Other Agreements. The Borrower or any Guarantor shall fail to pay
-----------------
when due principal or interest payments required under the terms of any bonds,
notes, debentures or other agreements evidencing, in the aggregate, at least
$10,000,000 of indebtedness (excluding, for purposes of this calculation,
payments required under this Agreement or any of the other Loan Documents) and
such non-payment shall continue beyond any period of grace provided with respect
thereto, or the Borrower or any Guarantor shall default in the observance or
performance of any other agreement contained in any such bonds, notes,
debentures or other agreements evidencing indebtedness, and the effect of such
failure or default is to cause the indebtedness evidenced thereby to become due
prior to its stated date of maturity.
7.6 ERISA. Any Governmental Person shall take any action under ERISA,
-----
with respect to any Plan, that could have a Material Adverse Effect or that the
unfunded liabilities exceed $1,000,000.
7.7 Judgments. A final judgment or order for the payment of money in
---------
excess of $10,000,000 (exclusive of amounts covered by insurance) shall be
rendered against the Borrower or any Guarantor and the same shall remain
undischarged for a period of 30 days during which execution shall not be
effectively stayed, or any judgment, writ, warrant of attachment, or execution
or similar process, shall be issued or levied against a substantial part of the
Borrower's or any Guarantor's property and such judgment, writ, warrant of
attachment, or execution or similar process, shall not be released, stayed,
vacated, bonded or otherwise dismissed within 20 days after its issue or levy.
7.8 Loan Documents. The Guaranties or any other Loan Document shall
---------------
fail to remain in full force or effect or any action shall be taken by the
Borrower or any Guarantor to discontinue or to assert the invalidity or
unenforceability of any Guarantee or any other Loan Document, or any Guarantor
denies that it has any further liability under any Guarantee or any other Loan
Document to which it is a party, or gives notice to such effect.
ARTICLE 8
ACCELERATION, WAIVERS AND AMENDMENTS
------------------------------------
8.1 Acceleration. If any Event of Default described in Section 7.4
------------
occurs with respect to the Borrower, the obligations of the Lenders to make
Loans and issue and participate in Letters of Credit hereunder shall
automatically terminate and the Obligations shall immediately become due and
payable without any election or action on the part of the Agent or any Lender.
If any other Event of Default occurs, the Required Lenders may terminate or
suspend the obligations of the Lenders to make Loans and issue and participate
in Letters of Credit hereunder, or declare the Obligations to be due and
payable, or both, whereupon the Obligations shall become immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which the Borrower hereby expressly waives.
8.2 Cash Collateral. To the extent that any Letters of Credit are
----------------
outstanding at the time of any Event of Default, the Borrower shall deliver to
the Agent, for the benefit of the Lenders, a cash collateral deposit in an
amount equal to the aggregate Letter of Credit Amount for all Letters of Credit
then outstanding.
8.3 Additional Remedies. The rights, powers and remedies given to the
-------------------
Agent and the Lenders hereunder shall be cumulative and not alternative and
shall be in addition to all rights, powers and remedies given to the Agent and
the Lenders by law against the Borrower or any other Person, including but not
limited to any Lender's right of setoff or banker's lien.
8.4 Amendments. Subject to the provisions of this Article 8, the
----------
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or waiving any
Default hereunder; provided, however, that no such supplemental agreement shall,
without the consent of each Lender affected thereby:
(i) Extend the final maturity of any Loan or Note or forgive all
or any portion of the principal amount thereof, or reduce the
rate or extend the time of payment of interest or fees thereon
or waive any payment of interest or fees thereon owed to such
Lender.
(ii) Reduce the percentage specified in the definition of Required
Lenders.
(iii)Increase the amount of the Commitment of any Lender (other than as
contemplated by Section 12.4) hereunder or permit the Borrower to
assign its rights under this Agreement.
(iv) Amend this Section 8.4.
(v) Release any guarantor of the Obligations or modify any guaranty
in any material respect.
(vi) Release any substantial amount of collateral securing the
Obligations;
provided, further, that no such supplemental agreement shall,
- -------- -------
(A) without the consent of the Required Revolving Lenders, modify or
waive any provision of Section 2.18 regarding application of
prepayments in a manner which would adversely affect any Revolving
Lender; or
(B) without the consent of each Revolving Lender, reduce the percentage
specified in the definition of Required Revolving Lenders; or
(C) without the consent of the Required Facility A Term Lenders, modify
or waive any provision of Section 2.18 regarding application of
prepayments in a manner which would adversely affect any Facility A
Term Lender; or
(D) without the consent of each Facility A Term Lender, (y) modify or
waive any provision of Section 2.4(iv) or (z) reduce the percentage
specified in the definition of Required Facility A Term Lenders; or
(E) without the consent of the Required Facility B Term Lenders, (x)
modify or waive any provision of Section 2.18 regarding application of
prepayments in a manner which would adversely affect any Facility B
Term Lender, (y) modify or waive any provision of Section 2.5(iv) or
(z) reduce the percentage specified in the definition of Required
Facility B Term Lenders.
No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fees for its own account without obtaining the consent of any other party
to this Agreement.
8.5 Preservation of Rights. No delay or omission of the Lenders or the
----------------------
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to Section 8.4, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid in
full.
ARTICLE 9
GENERAL PROVISIONS
------------------
9.1 Survival of Representations. All representations and warranties of
---------------------------
the Borrower contained in this Agreement shall survive delivery of the Notes and
the making of the Loans and issuance of the Letters of Credit herein
contemplated.
9.2 Governmental Regulation. Anything contained in this Agreement
-----------------------
to the contrary notwithstanding, no Lender shall be obligated to extend credit
to the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3 Headings. Section headings in the Loan Documents are for and
--------
convenience of reference only, shall not govern the interpretation of any of the
provisions of the Loan Documents.
9.4 Entire Agreement. The Loan Documents embody the entire agreement
-----------------
and understanding among the Borrower, the Agent and the Lenders and supersede
all prior agreements and understandings among the Borrower, the Agent and the
Lenders relating to the subject matter thereof.
9.5 Several Obligations; Benefits of this Agreement. The respective
--------------------
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any of
its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Agreement shall not be construed so as to confer any
right or benefit upon any Person other than the parties to this Agreement and
their respective successors and assigns.
9.6 Expenses; Indemnification. The Borrower shall reimburse the Agent
--------------------------
for any costs, internal charges and out-of-pocket expenses paid or incurred by
the Agent in connection with the negotiation and documentation of this
Agreement. The Borrower shall also reimburse the Agent and each Lender for any
costs, internal charges and out-of-pocket expenses (including reasonable
attorneys' fees and time charges of attorneys for the Agent and each Lender)
paid or incurred by the Agent or any Lender in connection with the collection
and enforcement of the Loan Documents. The Borrower further agrees to indemnify
the Agent and each Lender, its directors, officers and employees against all
losses, claims, damages, penalties, judgments, liabilities and expenses
(including, without limitation, all expenses of litigation or preparation
therefor whether or not the Agent or any Lender is a party thereto) which any of
them may pay or incur arising out of or relating to this Agreement, the other
Loan Documents, the transactions contemplated hereby or the direct or indirect
application or proposed application of the proceeds of any Loan or Letter of
Credit hereunder, provided that no Person shall have the right to be indemnified
hereunder for such Person's own gross negligence or willful misconduct as
determined by a court of competent jurisdiction.
9.7 Numbers of Documents. All statements, notices, closing documents,
--------------------
and requests hereunder shall be furnished to the Agent with sufficient
counterparts so that the Agent may furnish one to each of the Lenders.
9.8 Accounting. Except as provided to the contrary herein, all
----------
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles; provided that, if the Borrower notifies the Agent that the Borrower
wishes to amend any covenant contained in Article 6 to eliminate the effect of
any change after the date hereof in Agreement Accounting Principles (which, for
purposes of this proviso shall include the generally accepted application or
interpretation thereof) on the operation of such covenants (or if the Agent
notifies the Borrower that the Required Lenders wish to amend any such covenant
for such purpose), then the Borrower's compliance with such covenant shall be
determined on the basis of Agreement Accounting Principles in effect immediately
before the relevant change in Agreement Accounting Principles became effective,
until either such notice is withdrawn or such covenant is amended in a manner
satisfactory to the Borrower and the Required Lenders.
9.9 Severability of Provisions. Any provision in any Loan Document that
--------------------------
is held to be inoperative, unenforceable, or invalid in any jurisdiction shall,
as to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other jurisdiction, and to
this end the provisions of all Loan Documents are declared to be severable.
9.10 Nonliability of Lenders. The relationship between the Borrower and
-----------------------
the Lenders and the Agent shall be solely that of borrower and lender. Neither
the Agent nor any Lender shall have any fiduciary responsibilities to the
Borrower. Neither the Agent nor any Lender undertakes any responsibility to the
Borrower to review or inform the Borrower of any matter in connection with any
phase of the Borrower's business or operations.
9.11 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
-------------
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF CALIFORNIA, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
9.12 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS
-----------------------
TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR CALIFORNIA
STATE COURT SITTING IN LOS ANGELES IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT
ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED
IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER
HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A
COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT
THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER
IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER
AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED
TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN LOS
ANGELES, CALIFORNIA.
9.13 WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER
---------------------
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
9.14 Confidentiality. The Lenders shall take normal and reasonable
---------------
precautions to maintain the confidentiality of all non-public information
obtained pursuant to the requirements of this Agreement which has been
identified as such by the Borrower but may, in any event, make disclosures (i)
reasonably required by any bona fide transferee, assignee or participant in
connection with the contemplated transfer or assignment of any of the
Commitments or Loans or participations therein or participations in Letters of
Credit or (ii) as required or requested by any governmental agency or
representative thereof or as required pursuant to any legal process or (iii) to
its attorneys and accountants or (iv) as required by law or (v) in connection
with litigation involving any Lender or (vi) to any direct or indirect
contractual counterparty in respect of a Hedge Agreement, or such contractual
counterparty's professional advisor (so long as such contractual counterparty or
professional advisor to such contractual counterparty agrees to be bound by the
provisions of this Section 9.14).
9.15 Relationship with Prior Loan Agreement. This Agreement amends and
--------------------------------------
restates in its entirety the Prior Loan Agreement. This Agreement renews and
continues the Prior Loan Agreement without any novation, discharge or
satisfaction of the underlying obligations or indebtedness (or any collateral
security therefor), all of which obligations, indebtedness and security remain
outstanding under this Agreement and the Notes. Notwithstanding anything herein
to the contrary, (a) interest and other obligations under the Prior Loan
Agreement accrued and payable prior to the date of amendment and restatement
hereof but remaining unpaid shall not be discharged and shall be due and payable
in accordance with the terms of the Prior Loan Agreement, (b) interest and other
obligations under the Prior Loan Agreement accrued and payable on or after the
date of amendment and restatement hereof shall be due and payable in accordance
with the terms of this Agreement and (c) Letters of Credit outstanding under the
Prior Loan Agreement shall be deemed, on and after the Closing Date, to be
outstanding under this Agreement.
ARTICLE 10
THE AGENT
---------
10.1 Appointment. UBOC is hereby appointed Agent hereunder and under
-----------
each other Loan Document, and each of the Lenders irrevocably authorizes the
Agent to act as the agent of such Lender. The Agent agrees to act as such upon
the express conditions contained in this Article 10. The Agent shall not have a
fiduciary relationship in respect of the Borrower or any Lender by reason of
this Agreement.
10.2 Powers. The Agent shall have and may exercise such powers under
------
the Loan Documents as are specifically delegated to the Agent by the terms of
each thereof, together with such powers as are reasonably incidental thereto.
The Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder except any action specifically provided by
the Loan Documents to be taken by the Agent.
10.3 General Immunity. Neither the Agent nor any of its directors,
-----------------
officers, agents or employees shall be liable to the Borrower or any Lender for
any action taken or omitted to be taken by it or them hereunder or under any
other Loan Document or in connection herewith or therewith except for its or
their own gross negligence or willful misconduct.
10.4 No Responsibility for Loans, Recitals, etc. Neither the Agent nor
-------------------------------------------
any of its directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into, or verify (i) any statement, warranty
or representation made in connection with any Loan Document or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (iii) the satisfaction of any condition specified in Article 4 except
receipt of items required to be delivered to the Agent; or (iv) the validity,
effectiveness or genuineness of any Loan Document or any other instrument or
writing furnished in connection therewith. The Agent shall have no duty to
disclose to the Lenders information that is not required to be furnished by the
Borrower to the Agent at such time, but is voluntarily furnished by the Borrower
to the Agent (either in its capacity as Agent or in its individual capacity).
10.5 Action on Instructions of Lenders. The Agent shall in all cases be
---------------------------------
fully protected in acting, or in refraining from acting, hereunder and under any
other Loan Document in accordance with written instructions signed by the
Required Lenders, and such instructions and any action taken or failure to act
pursuant thereto shall be binding on all of the Lenders and on all holders of
Notes. The Agent shall be fully justified in failing or refusing to take any
action hereunder and under any other Loan Document unless it shall first be
indemnified to its satisfaction by the Lenders pro rata against any and all
liability, cost and expense that it may incur by reason of taking or continuing
to take any such action.
10.6 Employment of Agents and Counsel. The Agent may execute any of its
--------------------------------
duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.
10.7 Reliance on Documents; Counsel. The Agent shall be entitled to
--------------------------------
rely upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
10.8 Agent's Reimbursement and Indemnification. The Lenders agree to
-------------------------------------------
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (i) for any expenses incurred by the Agent on behalf of the Lenders,
in connection with the preparation, execution, delivery, administration and
enforcement of the Loan Documents and (ii) for any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Agent in any way relating to or arising out
of the Loan Documents or any other document delivered in connection therewith or
the transactions contemplated thereby, or the enforcement of any of the terms
thereof or of any such other documents, provided that no Lender shall be liable
for any of the foregoing to the extent they arise from the gross negligence or
willful misconduct of the Agent. The obligations of the Lenders under this
Section 10.8 shall survive payment of the Obligations and termination of this
Agreement.
10.9 Rights as a Lender. In the event the Agent is a Lender, the Agent
------------------
shall have the same rights and powers hereunder and under any other Loan
Document as any Lender and may exercise the same as though it were not the
Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a
Lender, unless the context otherwise indicates, include the Agent in its
individual capacity. The Agent may accept deposits from, lend money to, and
generally engage in any kind of trust, debt, equity or other transaction, in
addition to those contemplated by this Agreement or any other Loan Document,
with the Borrower or any of its Subsidiaries in which the Borrower or such
Subsidiary is not restricted hereby from engaging with any other Person. The
Agent shall, as long as it shall be the Agent, retain at least a 20% interest in
the Aggregate Commitment (or, with respect to any Commitment which has
terminated, in the Loans outstanding thereunder).
10.10 Lender Credit Decision. Each Lender acknowledges that it has,
-----------------------
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
10.11 Successor Agent. The Agent may resign at any time by giving
----------------
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. Upon any such resignation, the Required Lenders shall have
the right to appoint, with the consent (which shall not be unreasonably
withheld) of the Borrower, if no Default has occurred and is continuing, on
behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent
shall have been so appointed by the Required Lenders within thirty days after
the resigning Agent's giving notice of its intention to resign, then the
resigning Agent may appoint, on behalf of the Borrower and the Lenders, a
successor Agent. If the Agent has resigned and no successor Agent has been
appointed, the Lenders may perform all the duties of the Agent hereunder and the
Borrower shall make all payments in respect of the Obligations to the applicable
Lender and for all other purposes shall deal directly with the Lenders. No
successor Agent shall be deemed to be appointed hereunder until such successor
Agent has accepted the appointment. Any such successor Agent shall be a
commercial bank having capital and retained earnings of at least $50,000,000.
Upon the acceptance of any appointment as Agent hereunder by a successor Agent,
such successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the resigning Agent. Upon the
effectiveness of the resignation of the Agent, the resigning Agent shall be
discharged from its duties and obligations hereunder and under the Loan
Documents. After the effectiveness of the resignation of an Agent, the
provisions of this Article 10 shall continue in effect for the benefit of such
Agent in respect of any actions taken or omitted to be taken by it while it was
acting as the Agent hereunder and under the other Loan Documents.
ARTICLE 11
SETOFF; RATABLE PAYMENTS
------------------------
11.1 Setoff. Upon the occurrence and during the continuance of any
------
Event of Default, the Lenders are hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by any Lender to or for the credit
or the account of the Borrower against any and all obligations of the Borrower
now or hereafter existing under the Loan Documents, irrespective of whether or
not any Lender shall have made any demand under this Agreement and although such
obligations may be unmatured. The Agent agrees to notify the Borrower promptly
after any such setoff and application; provided, however, that the failure to
give such notice shall not affect the validity of such setoff and application.
The rights of the Lenders under this Section are in addition to other rights and
remedies (including other rights of setoff) that the Lenders may have.
11.2 Ratable Payments. If any Lender, whether by setoff or otherwise,
----------------
has payment made to it upon its Loans (other than payments received pursuant to
Section 2.18, 3.1 or 3.2) in a greater proportion than that received by any
other Lender, such Lender agrees, promptly upon demand, to purchase a portion of
the Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made.
ARTICLE 12
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS;
--------------------------------------------------
JOINING LENDERS
---------------
12.1 Successors and Assigns. The terms and provisions of the Loan
------------------------
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents and (ii) any assignment by any Lender must be made in compliance
with Section 12.3. Notwithstanding clause (ii) of this Section, any Lender may
at any time, without the consent of the Borrower or the Agent, assign all or any
portion of its rights under this Agreement and its Notes to a Federal Reserve
Bank; provided, however, that no such assignment shall release the transferor
Lender from its obligations hereunder. The Agent may treat the payee of any Note
as the owner thereof for all purposes hereof unless and until such payee
complies with Section 12.3 in the case of an assignment thereof or, in the case
of any other transfer, a written notice of the transfer is filed with the Agent.
Any assignee or transferee of a Note and each Joining Lender agrees by
acceptance thereof to be bound by all the terms and provisions of the Loan
Documents. Any request, authority or consent of any Person, who at the time of
making such request or giving such authority or consent is the holder of any
Note, shall be conclusive and binding on any subsequent holder, transferee or
assignee of such Note or of any Note or Notes issued in exchange therefor.
12.2 Participations.
--------------
(i) Permitted Participants; Effect. Any Lender may, in the
ordinary course of its business and in accordance with applicable law,
at any time sell to one or more banks or other entities
("Participants") participating interests in any Loan owing to such
Lender, any Note held by such Lender, any Commitment of such Lender or
any other interest of such Lender under the Loan Documents. In the
event of any such sale by a Lender of participating interests to a
Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations, such
Lender shall remain the holder of any such Note for all purposes under
the Loan Documents, all amounts payable by the Borrower under this
Agreement shall be determined as if such Lender had not sold such
participating interests, and the Borrower and the Agent shall continue
to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under the Loan Documents.
(ii) Voting Rights. Each Lender shall retain the sole right to
approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents other
than any amendment, modification or waiver with respect to any Loan or
Commitment in which such Participant has an interest which forgives
principal, interest or fees or reduces the interest rate or fees
payable with respect to any such Loan or Commitment, postpones any date
fixed for any regularly-scheduled payment of principal of, or interest
or fees on, any such Loan or Commitment, or releases any guarantor of
any such Loan or any substantial amount of collateral securing any such
Loan.
(iii) Benefit of Setoff. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in
Section 11.1 in respect of its participating interest in amounts owing
under the Loan Documents to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under the
Loan Documents, provided that each Lender shall retain the right of
setoff provided in Section 11.1 with respect to the amount of
participating interests sold to each Participant. The Lenders agree to
share with each Participant, and each Participant, by exercising the
right of setoff provided in Section 11.1, agrees to share with each
Lender, any amount received pursuant to the exercise of its right of
setoff, such amounts to be shared in accordance with Section 11.2 as if
each Participant were a Lender.
12.3 Assignments.
-----------
(i) Permitted Assignments. Any Lender may, in the ordinary
course of its business and in accordance with applicable law, at any
time assign to one or more Eligible Institutions ("Purchasers") all or
any part of its rights and obligations under the Loan Documents,
provided, however, such assignments must be in a minimum amount at
least equal to $5,000,000 (or such lesser amount as shall equal all of
such Lender's interest in the Commitment (and/ or outstanding Loans
under such Commitment) being assigned); provided, however, that if such
Purchaser is a Lender or an Affiliate or an Approved Fund thereof, no
minimum amount shall be applicable. Such assignment shall be
substantially in the form of Exhibit C hereto or in such other form as
may be agreed to by the parties thereto. The consent of the Borrower
and the Agent shall be required prior to an assignment becoming
effective with respect to a Purchaser which is not a Lender or an
Affiliate or an Approved Fund thereof; provided, however, that if a
Default has occurred and is continuing, the consent of the Borrower
shall not be required. Such consents shall not be unreasonably
withheld.
(ii) Effect; Effective Date. Upon (i) delivery to the Agent of
a notice of assignment, substantially in the form attached as Exhibit I
to Exhibit C hereto (a "Notice of Assignment"), together with any
consents required by Section 12.3(i), and (ii) payment of a $3,000 fee
to the Agent for processing such assignment, such assignment shall
become effective on the effective date specified in such Notice of
Assignment. The Notice of Assignment shall contain a representation by
the Purchaser to the effect that it is an Eligible Institution. On and
after the effective date of such assignment, such Purchaser shall for
all purposes be a Lender party to this Agreement and any other Loan
Document executed by the Lenders and shall have all the rights and
obligations of a Lender under the Loan Documents, to the same extent as
if it were an original party hereto, and no further consent or action
by the Borrower, the Lenders or the Agent shall be required to release
the transferor Lender with respect to the percentage of the Aggregate
Commitment and Loans assigned to such Purchaser. Upon the consummation
of any assignment to a Purchaser pursuant to this Section 12.3(ii), the
transferor Lender, the Agent and the Borrower shall make appropriate
arrangements so that replacement Notes are issued to such transferor
Lender and new Notes or, as appropriate, replacement Notes, are issued
to such Purchaser, in each case in principal amounts reflecting their
Commitment, as adjusted pursuant to such assignment.
12.4 Joining Lenders.
---------------
(i) Permitted Joining Lenders. At the request of the Borrower,
one or more Eligible Institutions approved by the Agent (each, a
"Joining Lender") shall become Lenders hereunder pursuant to a Joining
Lender Agreement executed by each such Joining Lender and the Borrower
and delivered to the Agent; provided, that (A) any such Joining Lender
must have an Aggregate Commitment of at least $5,000,000 and (B) the
addition of such Joining Lender's Commitment or Commitments will not
cause the Maximum Aggregate Commitment to be exceeded.
(ii) Effect; Effective Date. Upon delivery to the Agent of a
Joining Lender Agreement executed by a Joining Lender, the Agent and
the Borrower, such agreement shall become effective on the effective
date specified in such Joining Lender Agreement. The Joining Lender
Agreement shall contain a representation by the Joining Lender to the
effect that it is an Eligible Institution. On and after the effective
date of such Joining Lender Agreement, such Joining Lender shall for
all purposes be a Lender party to this Agreement and any other Loan
Document executed by the Lenders and shall have all the rights and
obligations of a Lender under the Loan Documents, to the same extent as
if it were an original party hereto. Upon the addition of any Joining
Lender pursuant to this Section 12.4(ii), (A) the Borrower shall issue
appropriate Note(s) to such Joining Lender to reflect its Commitment(s)
and (B) the Agent shall forward to each Lender and the Borrower an
updated Schedule 1.
12.5 Dissemination of Information. The Borrower authorizes each Lender
----------------------------
and the Agent to disclose to any Participant, Joining Lender or Purchaser or any
other Person acquiring an interest in the Loan Documents by operation of law
(each a "Transferee") and any prospective Transferee any and all information in
such Lender's possession concerning the creditworthiness of the Borrower and its
Subsidiaries, provided that each prospective Transferee shall execute and
deliver to the Agent a confidentiality agreement (in form and substance
reasonably satisfactory to the Borrower and the Agent).
12.6 Tax Treatment. (a) If any interest in any Loan Document is
--------------
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of Sections 2.16 and 3.2.
(b) The Borrower shall maintain, or cause to be maintained, a register
(the "Tax Register") that, at the request of the Borrower (which request is
hereby made), shall be kept by the Agent on behalf of the Borrower at the
address to which notices to the Agent are to be sent hereunder, on which it
enters the name of such Lender as the registered owner of each Registered Loan
held by such Lender. A Registered Loan (and the Registered Note evidencing the
same) may be assigned or otherwise transferred in whole or in part only by
registration of such assignment or transfer on the Tax Register. Any assignment
or transfer of all or part of a Registered Loan (and the Registered Note
evidencing the same) may be effected by registration of such assignment or
transfer on the Tax Register, together with the surrender of the Registered Note
evidencing the same duly endorsed by (or accompanied by a written instrument of
assignment or transfer duly executed by) the holder of such Registered Note,
whereupon one or more new Registered Notes in the same aggregate principal
amount shall be issued to the designated assignee(s) or transferee(s). The Tax
Register shall be available for inspection by the Borrower or any Lender at any
reasonable time and from time to time upon reasonable prior notice.
ARTICLE 13
NOTICES
-------
13.1 Giving Notice. Except as otherwise permitted by Section 2.7 with
-------------
respect to notices regarding conversion or continuation of Advances, all notices
and other communications provided to any party hereto under this Agreement or
any other Loan Document shall be in writing or by facsimile and addressed or
delivered to the Borrower and the Agent at their respective addresses set forth
below its signature hereto and to each Lender at its address set forth on
Schedule 1 hereto or at such other address as may be designated by such party in
a notice to the other parties. Any notice, if mailed and properly addressed with
postage prepaid, shall be deemed given when received; any notice, if transmitted
by facsimile, shall be deemed given when transmitted (answerback confirmed in
the case of telexes).
13.2 Change of Address. The Borrower, the Agent and any Lender may each
-----------------
change the address for service of notice upon it by a notice in writing to the
other parties hereto.
ARTICLE 14
COUNTERPARTS
------------
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Agreement by signing any such counterpart. This
Agreement shall be effective when it has been executed by the Borrower, the
Agent and the Lenders and each party has notified the Agent by telecopier or
telephone, that it has taken such action.
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Agreement as of the date first above written.
PETCO ANIMAL SUPPLIES, INC.
By:/s/James M. Myers
-----------------------------
Print Name: James M. Myers
Title: Senior Vice President and
Chief Financial Officer
9125 Rehco Road
San Diego, California 92121
Attention: James M. Myers
Senior Vice President and
Chief Financial Officer
Telecopier: (619) 638-2154
UNION BANK OF CALIFORNIA, N.A.,
as Agent and a Lender
By: /s/ Myra Juetten
-----------------------------
Print Name: Myra Juetten
Title: Vice President
By: /s/ Bruce Breslau
-----------------------------
Print Name: Bruce Breslau
Title: Regional Vice President
530 "B" Street, 4th Floor
San Diego, California 92101-4407
Attention: Bruce A. Breslau
Regional Vice President
Telecopier: (619) 230-3766
FLEET NATIONAL BANK,
as a Lender
By: /s/ Christopher J. Kampe
------------------------------
Print Name: Christopher J. Kampe
Title: Vice President
FLOATING RATE PORTFOLIO,
as a Lender
By: INVESCO Senior Secured
Management, Inc.,
as Attorney in Fact
By: /s/ Anne M. McCarthy
-------------------------
Print Name: Anne M. McCarthy
Title: Authorized Signatory
THE ING CAPITAL SENIOR SECURED HIGH
INCOME FUND, L.P.,
as a Lender
By: ING Capital Advisors, LLC,
as Investment Advisor
By: /s/ Michael J. Campbell
---------------------------
Print Name: Michael J. Campbell
Title: Senior Vice President &
Portfolio Manager
KZH ING-2 LLC,
as a Lender
By: /s/ Virginia Conway
-----------------------------
Print Name: Virginia Conway
Title: Authorized Agent
KZH ING-3 LLC,
as a Lender
By: /s/ Virginia Conway
------------------------------
Print Name: Virginia Conway
Title: Authorized Agent
LASALLE BANK NATIONAL ASSOCIATION,
as a Lender
By: /s/ Carol Morse
-----------------------------
Print Name: Carol Morse
Title: 1st Vice President
LONGLANE MASTER TRUST IV,
as a Lender
By: BankBoston, N.A.,
as Trust Administrator
By: /s/ Kevin Kearns
--------------------------
Print Name: Kevin Kearns
Title: Managing Director
U.S. BANK NATIONAL ASSOCIATION,
as a Lender
By: /s/ Janet Jordan
--------------------------
Print Name: Janet E. Jordan
Title: Vice President
SCHEDULE 1
LENDERS AND APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
Facility A Facility B
Lender & Applicable Revolving Term Term
Lending Office Commitment Commitment Commitment
------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Union Bank of California, N.A. $18,421,052.63 $16,578,947.37 $30,000,000
530 "B" Street
4th Floor,
San Diego, CA 92101
Attn: Bruce A. Breslau
Fax: (619) 230-3766
Fleet National Bank $5,263,157.89 $4,736,842.11 $ 0
One Federal Street
Boston, MA 02110
MA OF DO7I
Attn: Christopher Kampe
Fax: (617) 346-0689
Floating Rate Portfolio $0 $0 $5,000,000
c/o INVESCO Senior
Secured Management,
Inc.
1166 Avenue of the
Americas
27th Floor
New York, NY 10036-2789
Attn: Anne McCarthy
Fax: (212) 278-9619
The ING Capital Senior $0 $0 $3,000,000
Secured High Income
Fund, L.P.
c/o ING Capital
Advisors, LLC
333 S. Grand Avenue
Suite 4250
Los Angeles, CA 90071
Attn: Steve Gorski
Fax: (213) 346-3995
KZH ING-2 LLC $0 $0 $10,000,000
c/o The Chase Manhattan
Bank
450 West 33rd Street
15th Floor
New York, NY 10001
Attn: Virginia Conway
Fax: (212) 946-7776
KZH ING-3 LLC $0 $0 $2,000,000
c/o The Chase Manhattan
Bank
450 West 33rd Street
15th Floor
New York, NY 10001
Attn: Virginia Conway
Fax: (212) 946-7776
LaSalle Bank National Association $13,157,894.74 $11,842,105.26 $ 0
135 S. LaSalle Street
Suite 218
Chicago, IL 60603
Attn: Carol Morse
Fax: (312) 904-6469
LongLane Master Trust IV $0 $0 $5,000,000
c/o BankBoston, N.A., as
Trust Administrator
100 Federal Street
Mail Stop 01-12-08
Boston, MA 02110
Attn: Matthew Rose
Fax: (617) 434-5617
U.S. Bank National Association $13,157,894.74 $11,842,105.26 $ 0
555 SW Oak Street, PL-4
Portland, OR 97204
Attn: Janet E. Jordan
Fax: (503) 275-5428
</TABLE>
SCHEDULE 2
SUBSIDIARIES
(See Section 5.8)
Jurisdiction
Investment Owned Percent of
In By Ownership Organization
- ---------- ----- --------- ------------
International Borrower 100% California
Pet Supplies
and
Distribution,
Inc.
Pet Concepts Borrower 100% California
International
Pet Nosh, Borrower 100% New York
Consolidated
Co., Inc.
Petco Borrower 100% California
Southwest, Inc.
Petco Borrower 1%* California
Southwest, L.P.
PM Management Borrower 100% California
Incorporated
17187 Yukon Borrower 100% Yukon
Territory, Canada
* The Borrower has 1% ownership of Petco Southwest, L.P. as general partner.
Petco Southwest, Inc. has 99% percent ownership as limited partner.
Shareholder Agreements and/or Management Agreements
None
SCHEDULE 3
DEBT
None
Exhibit 21.1
PETCO ANIMAL SUPPLIES, INC.
SUBSIDIARIES
Name Jurisdiction of Organization
---- ----------------------------
International Pet Supplies and Distribution, Inc. California
Pet Nosh Consolidated Co., Inc. New York
Petco Southwest, Inc. California
Pet Concepts International California
PM Management Incorporated California
Petco Southwest, L.P. California
17187 Yukon, Inc. Canada
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Petco Animal Supplies, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-17903, 333-39295, 333-51661 and 333-45889) on Form S-3, (Nos. 33-82302,
33-95352, 333-04442, 333-26301, and 333-48311) on Form S-8 and (No. 333-14699)
on Post-Effective Amendment No. 1 on Form S-8 to Form S-4 of Petco Animal
Supplies, Inc. of our report dated March 7, 2000, relating to the consolidated
balance sheets of Petco Animal Supplies, Inc. and subsidiaries as of January 30,
1999 and January 29, 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended January 29, 2000, which report appears in the January
29, 2000, annual report on Form 10-K of Petco Animal Supplies, Inc.
KPMG LLP
San Diego, California
April 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JAN-29-2000
<CASH> 36,059
<SECURITIES> 0
<RECEIVABLES> 8,721
<ALLOWANCES> 0
<INVENTORY> 116,913
<CURRENT-ASSETS> 185,223
<PP&E> 192,403
<DEPRECIATION> 0
<TOTAL-ASSETS> 453,894
<CURRENT-LIABILITIES> 116,340
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 205,888
<TOTAL-LIABILITY-AND-EQUITY> 453,894
<SALES> 990,289
<TOTAL-REVENUES> 990,289
<CGS> 720,711
<TOTAL-COSTS> 720,711
<OTHER-EXPENSES> 220,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,936
<INCOME-PRETAX> 38,588
<INCOME-TAX> 16,831
<INCOME-CONTINUING> 21,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,757
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.02
</TABLE>
