UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
--------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
-----------------
Commission file number: 000-23574
PETCO ANIMAL SUPPLIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0479906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9125 Rehco Road, San Diego, California 92121
(Address of principal executive office) (Zip Code)
(858) 453-7845
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
(Indicate the number of shares of each of the registrant's classes of
common stock, as of the latest practicable date.)
Title Date Outstanding
----- ---- -----------
Common Stock, $0.0001 Par Value August 28, 2000 21,108,396
<PAGE>
PETCO ANIMAL SUPPLIES, INC.
FORM 10-Q
For the Quarter Ended July 29, 2000
INDEX
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 29, 2000
and July 29, 2000 3
Consolidated Statements of Earnings for the thirteen and
twenty-six weeks ended July 31, 1999 and July 29, 2000 4
Consolidated Statements of Cash Flows for the twenty-six
weeks ended July 31, 1999 and July 29, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
January 29, July 29,
2000 2000
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 36,059 $ 31,411
Receivables 8,721 9,465
Inventories 116,913 110,439
Deferred tax assets 18,686 10,097
Other 4,844 5,846
------- -------
Total current assets 185,223 167,258
Fixed assets, net 192,403 192,885
Goodwill 36,362 45,270
Investment in affiliates 26,360 33,127
Other assets 13,546 13,363
------- -------
$453,894 $451,903
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52,147 $ 44,096
Accrued expenses 31,929 37,182
Accrued salaries and employee benefits 15,285 16,304
Current portion of long-term debt 9,125 9,125
Current portion of capital lease and
other obligations 7,854 7,202
------- -------
Total current liabilities 116,340 113,909
Long-term debt, excluding current portion 89,050 85,400
Capital lease and other obligations,
excluding current portion 12,436 9,087
Accrued store closing costs 5,378 4,071
Deferred tax liability 7,083 7,083
Deferred rent and other liabilities 17,717 17,372
Stockholders' equity:
Common stock, $0.0001 par value,
100,000 shares authorized, 21,107 and
21,108 shares issued and outstanding,
respectively 2 2
Additional paid-in capital 271,208 271,224
Accumulated deficit (65,320) (56,245)
------- -------
Total stockholders' equity 205,890 214,981
------- -------
$453,894 $451,903
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited, in thousands, except per share data)
Thirteen weeks ended Twenty-six weeks ended
----------------------------------------------
July 31, July 29, July 31, July 29,
1999 2000 1999 2000
---------- ---------- ---------- ----------
Net sales $236,184 $262,719 $465,841 $527,885
Cost of sales and
occupancy costs 174,304 189,348 344,839 381,248
------- ------- ------- -------
Gross profit 61,880 73,371 121,002 146,637
Selling, general and
administrative expenses 52,991 61,280 104,301 122,999
------- ------- ------- -------
Operating income 8,889 12,091 16,701 23,638
Interest expense, net 2,078 2,362 4,002 4,742
------- ------- ------- -------
Earnings before internet
operations and equity
in loss of unconsolidated
affiliates and income taxes 6,811 9,729 12,699 18,896
Internet operations and equity
in loss of unconsolidated
affiliates -- (2,992) -- 1,903
------- ------- ------- -------
Earnings before income taxes 6,811 6,737 12,699 20,799
Income taxes 2,690 4,043 5,016 11,724
------- ------- ------- -------
Net earnings $ 4,121 $ 2,694 $ 7,683 $ 9,075
======= ======= ======= =======
Earnings per common share:
Basic $ 0.20 $ 0.13 $ 0.36 $ 0.43
======= ======= ======= =======
Diluted $ 0.19 $ 0.12 $ 0.36 $ 0.42
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Twenty-six weeks ended
-----------------------
July 31, July 29,
1999 2000
----------- -----------
Cash flows from operating activities:
Net earnings $ 7,683 $ 9,075
Depreciation and amortization 19,359 20,797
Deferred tax assets 4,553 8,589
Internet operations and
equity in loss of unconsolidated affiliates -- (419)
Deferred revenue recognized -- (584)
Loss on retirement of fixed assets 30 --
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (4,091) (744)
Inventories 391 8,874
Other assets (950) (878)
Accounts payable (9,063) (8,051)
Accrued expenses 1,259 3,468
Accrued salaries and employee benefits 608 1,019
Accrued store closing costs (1,781) (1,054)
Deferred rent and other liabilities 269 239
------- -------
Net cash provided by operating activities 18,267 40,331
------- -------
Cash flows from investing activities:
Additions to fixed assets (20,548) (18,342)
Investment in affiliates (11,310) (6,348)
Net cash invested in acquisitions of businesses (90) (12,507)
Change in other assets (823) (147)
------- -------
Net cash used in investing activities (32,771) (37,344)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt agreements 32,375 --
Repayment of long-term debt agreements (2,250) (3,650)
Repayment of capital lease and other obligations (4,284) (4,001)
Proceeds from the issuance of common stock 280 16
------- -------
Net cash provided by (used in)
financing activities 26,121 (7,635)
------- -------
Net increase (decrease) in cash and cash equivalents 11,617 (4,648)
Cash and cash equivalents at beginning of year 2,324 36,059
------- -------
Cash and cash equivalents at end of period $ 13,941 $ 31,411
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 1 - General
In the opinion of management of Petco Animal Supplies, Inc. (the "Company" or
"PETCO"), the unaudited consolidated financial statements presented herein
contain all adjustments, consisting of normal recurring adjustments, necessary
to present the financial position, results of operations and cash flows as of
July 29, 2000, and for the periods ended July 31, 1999 and July 29, 2000.
Because of the seasonal nature of the Company's business, the results of
operations for the thirteen and twenty-six weeks ended July 31, 1999 and July
29, 2000 are not necessarily indicative of the results to be expected for the
full year. The Company's fiscal year ends on the Saturday closest to January 31,
resulting in years of either 52 or 53 weeks. All references to a fiscal year
refer to the fiscal year ending on the Saturday closest to January 31 of the
following year. For example, references to fiscal 1999 refer to the fiscal year
beginning on January 31, 1999, and ending on January 29, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto for fiscal 1999 included in the Company's Form 10-K Annual Report and
Form 10-K/A (File No. 000-23574) filed with the Securities and Exchange
Commission on April 13, 2000 and May 30, 2000, respectively.
Note 2 - Business Combinations
During the first quarter of fiscal 2000 ("first quarter 2000"), the Company
completed the acquisition of a retailer with six pet food and supply stores
operating under the tradename Premium Pet in a transaction accounted for as a
purchase. The aggregate fair value of assets acquired and the net cash invested
in this business was $12,507. The excess of the aggregate cost over the fair
value of net assets acquired was $9,332, which was recorded as goodwill in first
quarter 2000 and is being amortized over fifteen years.
Note 3 - Investment in Affiliates
During fiscal 1999, the Company acquired an equity interest in Petopia.com, an
e-commerce destination for the sale of pet food and supplies. At July 29, 2000,
the Company owned 8,177 shares of Petopia.com preferred stock, representing an
ownership interest of 17.6%, and warrants to purchase additional preferred
shares. The Company accounts for its investment in Petopia.com using the equity
method and records its proportionate share of earnings or loss. Because the
financial statements of Petopia.com are recorded on a calendar year basis, the
Company records its proportionate share of earnings or loss with a lag of one
month. The Company recognized $3,498 in equity in losses for the second quarter
of fiscal 2000 ("second quarter 2000") and $8,881 for the 26 weeks ended July
29, 2000. The Company also provides certain marketing and fulfillment services
to Petopia.com according to the terms of a strategic alliance agreement, under
which the Company earned $506 in second quarter 2000 and $10,784 in the
twenty-six weeks ended July 29, 2000. Of the $10,784 earned in the twenty-six
weeks ended July 29, 2000, $9,299 was taxable non-cash revenue attributable to
receiving, in first quarter 2000, all remaining Series C preferred shares to be
earned under the strategic alliance agreement. These items are reflected as
Internet operations and equity in loss of unconsolidated affiliates in the
accompanying statements of earnings. The Company does not recognize any tax
benefit for its share of the losses of Petopia.com, which impacts the effective
tax rate. The Company's effective tax rate before Internet operations and equity
in loss of unconsolidated affiliates was 39.5%. The Company recognized Internet
operations expense and equity in loss of unconsolidated affiliates, net of
related tax effects, of $3,191, or $0.15 per diluted share for second quarter
2000, and $2,356, or $0.11 per diluted share for the twenty-six weeks ended July
29, 2000.
The Company has a 69% limited partner interest in a limited partnership (the
"LP") which operates retail pet food and supply stores in Canada. Pursuant to
the terms of an option agreement, the Company may increase its interest in the
LP. The Company accounts for its investment in the LP using the equity method as
it does not exercise control over the LP and records its proportionate share of
earnings or loss according to the partnership agreement. The Company did not
record any earnings or loss for the fiscal year ended January 29, 2000 or for
the twenty-six weeks ended July 29, 2000. The Company's investment in the LP at
January 29, 2000 and July 29, 2000 was $12,415 and $18,759, respectively.
Note 4 - Net Earnings Per Share
Basic net earnings per common share are computed using the weighted average
number of common shares outstanding during the period. Diluted net earnings per
common share incorporates the incremental shares issuable upon the assumed
exercise of stock options.
Net earnings and weighted average common shares used to compute net earnings per
share, basic and diluted, are presented below:
Thirteen Weeks Ended Twenty-six Weeks Ended
July 31, July 29, July 31, July 29,
1999 2000 1999 2000
----------- ----------- ----------- -----------
Net earnings $ 4,121 $ 2,694 $ 7,683 $ 9,075
====== ====== ====== ======
Common shares, basic 21,090 21,108 21,082 21,108
Dilutive effect
of stock options 407 667 221 453
------ ------ ------ ------
Common shares, diluted 21,497 21,775 21,303 21,561
====== ====== ====== ======
Options to purchase common shares that were outstanding but were not included in
the computation of diluted net earnings per share because the options' exercise
price was greater than the average market price of the common shares were 1,502
and 829 for the thirteen weeks ended July 31, 1999, and July 29, 2000,
respectively, and 1,781 and 1,524 for the twenty-six weeks ended July 31, 1999,
and July 29, 2000, respectively.
Note 5 -- Merger Agreement
On May 17, 2000, the Company entered into an Agreement and Plan of Merger with
BD Recapitalization Corp., a Delaware corporation organized by Leonard Green &
Partners, L.P. and Texas Pacific Group. According to the terms of the merger
agreement, BD Recapitalization Corp. will be merged with and into the Company,
with the Company as the surviving corporation. In the merger, each issued and
outstanding share of the Company's common stock, par value $0.0001 per share,
will be canceled and converted automatically into the right to receive $22.00 in
cash, without interest or any other payment thereon, with the following
exceptions: certain shares of PETCO common stock will be retained by members of
PETCO's management and other PETCO employees; treasury shares and shares of
PETCO common stock owned by BD Recapitalization Corp. or by any of PETCO's
subsidiaries will be canceled; and shares held by dissenting stockholders will
be subject to appraisal in accordance with Delaware law.
Completion of the merger is subject to various conditions, including stockholder
approval and completion of financing. Although binding commitments for the
required financing have been obtained, these commitments also contain a variety
of conditions. The Company currently anticipates completing the merger in the
fall of 2000. There can be no assurance, however, that the merger will be
completed.
Note 6 - Contingencies
The Company and certain of its officers have been named as defendants in several
virtually identical class action lawsuits filed in the United States District
Court for the Southern District of California between August and November, 1998.
These cases have been consolidated and are being administered as one case under
a consolidated amended complaint. The plaintiffs purport to represent a class of
all persons who purchased the Company's common stock between January 30, 1997
and July 10, 1998. The amended complaint alleges that the defendants violated
various federal securities laws by publishing materially misleading financial
results and making other material misrepresentations which had the effect of
artificially increasing the price of the Company's stock. The amended complaint
seeks unspecified monetary damages. The defendants have filed a motion to
dismiss the amended complaint, which is currently scheduled to be heard on
November 13, 2000. These matters have been tendered to the Company's insurance
carrier. While the Company believes the allegations contained in these lawsuits
are without merit, the claims have not progressed sufficiently for the Company
to estimate a range of possible exposure, if any. The Company and its officers
intend to defend themselves vigorously.
As a result of the proposed merger described in Note 5, the Company, its
directors and one of its officers, and Leonard Green & Partners, L.P. and Texas
Pacific Group have been named as defendants in several substantially similar
class action lawsuits filed in various jurisdictions during May 2000. The
plaintiffs purport to represent a class of all persons whose stock will be
purchased in connection with the merger. While the allegations contained in each
complaint are not identical, the complaints generally assert that the $22.00 per
share price to be paid to stockholders in connection with the merger is
inadequate and does not reflect the value of the assets and future prospects of
the Company. The complaints also generally allege that the director defendants
engaged in self-dealing and that the director defendants breached their
fiduciary duties in approving the merger agreement. The complaints seek remedies
including unspecified monetary damages, attorneys' fees and injunctive relief
that would, if granted, prevent the completion of the merger. The Company
believes the allegations contained in these lawsuits are without merit. These
matters have been tendered to the Company's insurance carrier. While the
Company, its directors and officer intend to defend themselves vigorously, there
can be no assurance given as to the outcome of the various lawsuits that have
been filed. The inability of the Company to resolve the claims that are the
basis for the lawsuits or to prevail in any related litigation could result in
the Company being required to pay substantial monetary damages for which the
Company may not be adequately insured, which could have a material adverse
effect on the Company's business, financial position and results of operations.
Regardless of whether the merger is consummated or the outcome of the lawsuits,
the Company may incur significant related expenses and costs that could have an
adverse effect on the Company's business and operations. Furthermore, the cases
could involve a substantial diversion of the time of some members of management.
Accordingly, the Company is unable to estimate the impact of any potential
liabilities associated with the complaints.
From time to time the Company is involved in routine litigation and proceedings
in the ordinary course of its business. The Company is not currently involved in
any other pending litigation matters that the Company believes would have a
material adverse effect on the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
PETCO is a leading specialty retailer of premium pet food and supplies. As of
July 29, 2000, the Company operated 509 stores in 40 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.
On May 17, 2000, PETCO entered into an Agreement and Plan of Merger with BD
Recapitalization Corp., a Delaware corporation organized by Leonard Green &
Partners, L.P. and Texas Pacific Group. According to the terms of the merger
agreement, BD Recapitalization Corp. will be merged with and into PETCO, with
PETCO as the surviving corporation. In the merger, each issued and outstanding
share of PETCO common stock will be canceled and converted automatically into
the right to receive $22.00 in cash, without interest or any other payment
thereon, with the following exceptions: certain shares of PETCO common stock
will be retained by members of PETCO's management and other PETCO employees;
treasury shares and shares of PETCO common stock owned by BD Recapitalization
Corp. or by any of PETCO's subsidiaries will be canceled; and shares held by
dissenting stockholders will be subject to appraisal in accordance with Delaware
law.
Completion of the merger is subject to various conditions, including stockholder
approval and completion of financing. Although binding commitments for the
required financing have been obtained, these commitments also contain a variety
of conditions. The Company currently anticipates completing the merger in the
fall of 2000. There can be no assurance, however, that the merger will be
completed.
Results of Operations
Second Quarter 2000 Compared with Second Quarter 1999
Net sales increased 11.2% to $262.7 million for the thirteen weeks ended July
29, 2000 ("second quarter 2000") from $236.2 million for the thirteen weeks
ended July 31, 1999 ("second quarter 1999"). The increase in net sales in second
quarter 2000 resulted primarily from the comparable store net sales increase of
5.0% and the addition of 50 superstores, partially offset by the closing of 26
stores, of which 12 were relocated. The comparable store net sales increase was
attributable to maturing superstores, increased marketing and merchandising
efforts and increased customer traffic. The increase in comparable store net
sales accounted for approximately $11.5 million, or 43.4%, of the net sales
increase. The net increase in the Company's store base accounted for
approximately $15.0 million, or 56.6%, of the net sales increase. During the
thirteen weeks ended April 29, 2000 ("first quarter 2000"), Iams brand pet food
broadened its distribution beyond specialty stores into supermarkets, mass
merchants and club stores. Iams brand pet food sales represented approximately
8% of the Company's net sales in fiscal 1999. The broadening of distribution of
Iams brand pet food negatively impacted comparable store net sales during second
quarter 2000, a trend that is expected to continue through the remainder of
fiscal 2000.
Gross profit, defined as net sales less cost of sales including store occupancy
costs, increased to $73.4 million in second quarter 2000 from $61.9 million in
second quarter 1999. As a percentage of net sales, gross profit increased 170
basis points to 27.9% in second quarter 2000 from 26.2% in second quarter 1999.
The gross profit increase resulted from the continuing shift in sales mix from
lower margin premium pet food sales into higher margin supplies categories,
greater purchasing leverage, and increased leverage of occupancy costs. The
wider availability of Iams brand pet food accelerated the shift in sales mix in
second quarter 2000, contributing to the gross margin rate increase.
Selling, general and administrative expenses increased to $61.3 million in
second quarter 2000 from $53.0 million in second quarter 1999. The increase was
due primarily to increased personnel and related costs associated with
supporting increased sales and new store openings. As a percentage of net sales,
these expenses increased to 23.3% in second quarter 2000 from 22.4% in second
quarter 1999. The increase was due primarily to personnel costs related to the
Company's training and customer satisfaction initiatives and the accrual for
management bonuses based on improved financial performance.
Operating income in second quarter 2000 increased to $12.1 million, or 4.6% of
net sales, from $8.9 million, or 3.8% of net sales, in second quarter 1999.
Net interest expense was $2.4 million for second quarter 2000, compared with net
interest expense of $2.1 million for second quarter 1999. Higher debt levels and
increased interest rates in second quarter 2000 compared with second quarter
1999 led to the increase in interest expense.
The Company recorded losses of $3.0 million for Internet operations and equity
in loss of unconsolidated affiliates in second quarter 2000. This primarily
non-cash loss consists of $3.5 million of equity in the losses of Petopia.com,
partially offset by $0.5 million earned by the Company for its support of
Petopia.com principally under the terms of its strategic alliance agreement.
Income taxes were $4.0 million in second quarter 2000, compared with $2.7
million in second quarter 1999. The Company has not recognized any tax benefit
for its equity in the losses of Petopia.com, which impacts the effective tax
rate in second quarter 2000. The Company's effective tax rate before Internet
operations and equity in loss of unconsolidated affiliates was 39.5% in second
quarter 2000.
Net earnings decreased to $2.7 million, or $0.12 per diluted share, for second
quarter 2000, from $4.1 million, or $0.19 per diluted share, for second quarter
1999.
Net earnings, excluding internet operations and equity in loss of unconsolidated
affiliates, and related tax effects, were $5.9 million, or $0.27 per diluted
share, for second quarter 2000, compared with net earnings of $4.1 million, or
$0.19 per diluted share, in second quarter 1999.
Twenty-six Weeks Ended July 29, 2000 Compared with Twenty-six Weeks Ended July
31, 1999
Net sales increased 13.3% to $527.9 million for the twenty-six weeks ended July
29, 2000 from $465.8 million for the twenty-six weeks ended July 31, 1999. The
increase in net sales resulted primarily from the comparable store net sales
increase of 6.7% and the addition of 50 superstores, partially offset by the
closing of 26 stores, of which 12 were relocated. The comparable store net sales
increase was attributable to maturing superstores, increased marketing and
merchandising efforts and increased customer traffic. The increase in comparable
store net sales accounted for approximately $30.7 million, or 49.5%, of the net
sales increase. The net increase in the Company's store base accounted for
approximately $31.4 million, or 50.5%, of the net sales increase. During first
quarter 2000, Iams brand pet food broadened its distribution beyond specialty
stores into supermarkets, mass merchants and club stores. Iams brand pet food
sales represented approximately 8% of the Company's net sales in fiscal 1999.
The broadening of distribution of Iams brand pet food negatively impacted
comparable store sales during the twenty-six weeks ended July 29, 2000, a trend
that is expected to continue through the remainder of fiscal 2000.
Gross profit increased to $146.6 million for the twenty-six weeks ended July 29,
2000 from $121.0 million for the same period last year. As a percentage of net
sales, gross profit increased 180 basis points to 27.8% for the twenty-six weeks
ended July 29, 2000 from 26.0% for the same period last year. The gross profit
increase resulted from the continuing shift in sales mix from lower margin
premium pet food sales into higher margin supplies categories, greater
purchasing leverage, and increased leverage of occupancy costs. The wider
availability of Iams brand pet food accelerated the shift in sales mix in the
twenty-six weeks ended July 29, 2000, contributing to the gross margin rate
increase.
Selling, general and administrative expenses increased to $123.0 million for the
twenty-six weeks ended July 29, 2000 from $104.3 million for the same period
last year. The increase was due primarily to increased personnel and related
costs associated with supporting increased sales and new store openings. As a
percentage of net sales, these expenses increased to 23.3% for the twenty-six
weeks ended July 29, 2000 from 22.4% in the prior year period. The increase was
due primarily to personnel costs related to the Company's training and customer
satisfaction initiatives and the accrual for management bonuses based on
improved financial performance.
Operating income for the twenty-six weeks ended July 29, 2000 increased to $23.6
million, or 4.5% of net sales, from $16.7 million, or 3.6% of net sales, for the
twenty-six weeks ended July 31, 1999.
Net interest expense was $4.7 million for the twenty-six weeks ended July 29,
2000, compared with net interest expense of $4.0 million for the same period
last year. Higher debt levels and increased interest rates for the twenty-six
weeks ended July 29, 2000 compared with the prior year led to the increase in
interest expense.
The Company recorded income of $1.9 million for Internet operations and equity
in loss of unconsolidated affiliates for the twenty-six weeks ended July 29,
2000. This primarily non-cash income consists of $10.8 million earned by the
Company for its support of Petopia.com principally under the terms of its
strategic alliance agreement, partially offset by $8.9 million of equity in the
losses of Petopia.com. Income earned under the strategic alliance agreement will
be substantially less in future periods as the Company has earned all shares of
Series C preferred stock available under the terms of the agreement.
Income taxes were $11.7 million for the twenty-six weeks ended July 29, 2000,
compared with $5.0 million in the prior year. The Company has not recognized any
tax benefit for its equity in the losses of Petopia.com, which impacts the
effective tax rate for the twenty-six weeks ended July 29, 2000. The Company's
effective tax rate before Internet operations and equity in loss of
unconsolidated affiliates was 39.5% for the twenty-six weeks ended July 29,
2000.
Net earnings increased to $9.1 million, or $0.42 per diluted share, for the
twenty-six weeks ended July 29, 2000, from $7.7 million, or $0.36 per diluted
share, in the prior year.
Net earnings, excluding internet operations and equity in loss of unconsolidated
affiliates, and related tax effects, were $11.4 million, or $0.53 per diluted
share, for the twenty-six weeks ended July 29, 2000, compared with net earnings
of $7.7 million, or $0.36 per diluted share, for the twenty-six weeks ended July
31, 1999.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"(the "Statement").
The Statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. The Statement also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Statement, as amended, is
effective for fiscal years beginning after June 15, 2000 and is not expected to
have a material impact on the Company's consolidated financial statements.
Liquidity and Capital Resources
The Company has financed its operations and expansion program through internal
cash flow, external borrowings and the sale of equity securities. At July 29,
2000, total assets were $451.9 million, $167.3 million of which were current
assets. Net cash provided by operating activities was $40.3 million for the
twenty-six weeks ended July 29, 2000, compared with $18.3 million for the prior
year period. The Company's sales are substantially on a cash basis. Therefore,
cash flow generated from operating stores provides a significant source of
liquidity to the Company. The principal use of operating cash is for the
purchase of merchandise inventories. A portion of the Company's inventory
purchases is financed through vendor credit terms.
The Company uses cash in investing activities to purchase fixed assets for new
stores, to acquire stores and, to a lesser extent, to purchase warehouse and
office fixtures, equipment and computer hardware and software in support of its
distribution and administrative functions. During the twenty-six weeks ended
July 29, 2000, the Company invested $6.3 million in a limited partnership that
operates retail pet food and supply stores in Canada, with plans to open
additional stores. During the twenty-six weeks ended July 31, 1999 the Company
invested $11.3 million in affiliates, including the limited partnership and
Petopia.com, an e-commerce destination for the sales of pet food and supplies.
Cash used in investing activities was $37.3 million for the twenty-six weeks
ended July 29, 2000, and $32.8 million for the prior year period.
During first quarter 2000, the Company completed the acquisition of a retailer
of pet food and supplies in a purchase transaction. The net cash invested in the
acquisition of this business was $12.5 million.
The Company also finances some of its purchases of equipment and fixtures
through capital lease and other obligations. No purchases of fixed assets were
financed in this manner during the twenty-six week periods ended July 29, 2000,
and July 31, 1999. The Company believes that additional sources of capital lease
and other obligation financing are available on a cost-effective basis and may
use them, as necessary, in connection with its expansion program.
The Company's primary long-term capital requirement is funding for the opening
or acquisition of superstores. Cash flows used in financing activities were $7.6
million in the twenty-six weeks ended July 29, 2000. Cash flows provided by
financing activities were $26.1 million in the twenty-six weeks ended July 31,
1999. Cash flows from and used in financing activities were provided by
borrowings under long-term debt agreements, net of repayments under long-term
debt and other obligations. Cash flows from financing activities were used to
fund the Company's expansion program, investment in affiliates and working
capital requirements.
The Company has a credit facility with a syndicate of banks with a commitment of
up to $150.0 million that expires at various dates between July 15, 2004 and
July 15, 2006. The credit facility provides for $100.0 million in term loans and
$50.0 million in revolving loans. Borrowings under the credit facility are
secured by substantially all of the assets of the Company and bear interest, at
the Company's option, at the agent bank's corporate base rate plus up to 0.50%,
or LIBOR plus 1.00% to 3.25%, based on the Company's leverage ratio at the time.
The credit agreement contains certain affirmative and negative covenants related
to indebtedness, interest and fixed charges coverage and consolidated net worth.
The Company was in full compliance with all such covenants at July 29, 2000. As
of July 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 the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Company's operations result primarily from changes
in short-term interest rates as the Company's credit facility utilizes a
portfolio of short-term LIBOR contracts. LIBOR contracts are fixed rate
instruments for a period of between one and six months, at the Company's
discretion. The Company's portfolio of LIBOR contracts vary in length and
interest rate, such that adverse changes in short-term interest rates could
affect the Company's overall borrowing rate when contracts are renewed. The
lengths of contracts within the portfolio are adjusted to balance the Company's
working capital requirements, fixed asset purchases and general corporate
purposes. The Company continuously evaluates the portfolio with respect to total
debt, including an assessment of the current and future economic environment.
As of July 29, 2000, the Company had $94.5 million in debt under the credit
facility. The average debt outstanding for the last four quarters was $97.4
million. Based on this average debt level, a hypothetical 10% adverse change in
LIBOR rates would increase net interest expense by approximately $0.7 million on
an annual basis, and likewise would decrease earnings and cash flows. The
Company cannot predict market fluctuations in interest rates and their impact on
debt, nor can there be any assurance that long-term fixed-rate debt will be
available at favorable rates, if at all. Consequently, future results may differ
materially from the estimated results due to adverse changes in interest rates
or debt availability.
The Company did not have any material foreign currency or other significant
market risk or any derivative financial instruments at July 29, 2000.
Part II. Other Information
Item 1. Legal Proceedings
The Company and certain of its officers have been named as defendants in several
virtually identical class action lawsuits filed in the United States District
Court for the Southern District of California between August and November, 1998.
These cases have been consolidated and are being administered as one case under
a consolidated amended complaint. The plaintiffs purport to represent a class of
all persons who purchased the Company's common stock between January 30, 1997
and July 10, 1998. The amended complaint alleges that the defendants violated
various federal securities laws by publishing materially misleading financial
results and making other material misrepresentations which had the effect of
artificially increasing the price of the Company's stock. The amended complaint
seeks unspecified monetary damages. The defendants have filed a motion to
dismiss the amended complaint, which is currently scheduled to be heard on
November 13, 2000. These matters have been tendered to the Company's insurance
carrier. While the Company believes the allegations contained in these lawsuits
are without merit, the claims have not progressed sufficiently for the Company
to estimate a range of possible exposure, if any. The Company and its officers
intend to defend themselves vigorously.
As a result of the proposed merger, the Company, its directors and one of its
officers, and Leonard Green & Partners, L.P. and Texas Pacific Group have been
named as defendants in several substantially similar class action lawsuits filed
in various jurisdictions during May 2000. The plaintiffs purport to represent a
class of all persons whose stock will be purchased in connection with the
merger. While the allegations contained in each complaint are not identical, the
complaints generally assert that the $22.00 per share price to be paid to
stockholders in connection with the merger is inadequate and does not reflect
the value of the assets and future prospects of the Company. The complaints also
generally allege that the director defendants engaged in self-dealing and that
the director defendants breached their fiduciary duties in approving the merger
agreement. The complaints seek remedies including unspecified monetary damages,
attorneys' fees and injunctive relief that would, if granted, prevent the
completion of the merger. The Company believes the allegations contained in
these lawsuits are without merit. These matters have been tendered to the
Company's insurance carrier. While the Company, its directors and officer intend
to defend themselves vigorously, there can be no assurance given as to the
outcome of the various lawsuits that have been filed. The inability of the
Company to resolve the claims that are the basis for the lawsuits or to prevail
in any related litigation could result in the Company being required to pay
substantial monetary damages for which the Company may not be adequately
insured, which could have a material adverse effect on the Company's business,
financial position and results of operations. Regardless of whether the merger
is consummated or the outcome of the lawsuits, the Company may incur significant
related expenses and costs that could have an adverse effect on the Company's
business and operations. Furthermore, the cases could involve a substantial
diversion of the time of some members of management. Accordingly, the Company is
unable to estimate the impact of any potential liabilities associated with the
complaints.
From time to time the Company is involved in routine litigation and proceedings
in the ordinary course of its business. The Company is not currently involved in
any other pending litigation matters that the Company believes would have a
material adverse effect on the Company.
Item 5. Other Information
Certain Cautionary Statements
Certain statements in this Quarterly Report on Form 10 - Q, including, but not
limited to, Part I, Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, Section
21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, that are not historical facts but
rather reflect current expectations concerning future results and events. The
words "believes," "expects," "intends," "plans," "anticipates," "likely," "will"
and similar expressions identify such forward-looking statements. These
forward-looking statements are subject to risks, uncertainties and other
factors, some of which are beyond the Company's control, that could cause actual
results to differ materially from those forecast or anticipated in such
forward-looking statements. These factors include, but are not limited to, the
Company's expansion plans, the integration of operations as a result of
acquisitions, reliance on vendors and product lines and exclusive distribution
arrangements, competition, performance of new superstores and their future
operating results, performance of affiliates and their future operating results,
quarterly and seasonal fluctuations, dependence on senior management and
possible volatility of stock price. These factors are discussed generally in
greater detail under the caption "Certain Cautionary Statements" in PETCO's
Annual Report on Form 10-K for the year ended January 29, 2000.
Certain Risks Associated with the Merger
On May 17, 2000, the Company entered into an Agreement and Plan of Merger with
BD Recapitalization Corp., a Delaware corporation organized by Leonard Green &
Partners, L.P. and Texas Pacific Group. According to the terms of the merger
agreement, BD Recapitalization Corp. will be merged with and into the Company,
with the Company as the surviving corporation. In the merger, each issued and
outstanding share of the Company's common stock, par value $0.0001 per share,
will be canceled and converted automatically into the right to receive $22.00 in
cash, without interest or any other payment thereon, with the following
exceptions: certain shares of PETCO common stock will be retained by members of
PETCO's management and other PETCO employees; treasury shares and shares of
PETCO common stock owned by BD Recapitalization Corp. or by any of PETCO's
subsidiaries will be canceled; and shares held by dissenting stockholders will
be subject to appraisal in accordance with Delaware law.
Completion of the merger is subject to various conditions, including stockholder
approval and completion of financing. Although binding commitments for the
required financing have been obtained, these commitments also contain a variety
of conditions. The Company currently anticipates completing the merger in the
fall of 2000. There can be no assurance, however, that the merger will be
completed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
On May 19, 2000, the Company filed a report on Form 8-K in
connection with the Agreement and Plan of Merger.
On August 22, 2000, the Company filed a report on Form 8-K in
connection with its financial results for the second quarter
and six month period ended July 29, 2000.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
----------------------------
James M. Myers
Senior Vice President and
Chief Financial Officer
Date: September 6, 2000
<PAGE>
