-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WZSxPydk1ES2p8C7NrhnfSyVWipkgy9KWuC6m3ESGwyVma8r8dsh3crao+2KsgYo 44z9RllaMy9Y1WaKyKJqBQ== 0000888455-98-000031.txt : 19980615 0000888455-98-000031.hdr.sgml : 19980615 ACCESSION NUMBER: 0000888455-98-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980502 FILED AS OF DATE: 19980612 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PETCO ANIMAL SUPPLIES INC CENTRAL INDEX KEY: 0000888455 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 330479906 STATE OF INCORPORATION: DE FISCAL YEAR END: 0128 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23574 FILM NUMBER: 98647667 BUSINESS ADDRESS: STREET 1: 9125 REHCO RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194537845 MAIL ADDRESS: STREET 1: 9125 REHCO RD CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 ____________________ FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 2, 1998 ( ) 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: 0-23574 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) (619) 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 June 8, 1998 21,073,061 2 PETCO Animal Supplies, Inc. Form 10-Q For the Quarter Ended May 2, 1998 Index Part I Financial Information Page Item 1. Consolidated Financial Statements Consolidated Balance Sheets at January 31, 1998 and May 2, 1998 3 Consolidated Statements of Operations for the thirteen weeks ended May 3, 1997 and May 2, 1998 4 Consolidated Statements of Cash Flows for the thirteen weeks ended May 3, 1997 and May 2, 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 Part II Other Information Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 3 PETCO ANIMAL SUPPLIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) January 31, May 2, 1998 1998 ----------- ----------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 3,354 $ 2,904 Receivables 10,879 12,245 Inventories 96,873 92,818 Deferred tax assets 8,354 8,354 Other 4,942 5,674 ------- ------- Total current assets 124,402 121,995 Fixed assets, net 147,429 153,946 Goodwill 39,348 38,583 Deferred tax assets 17,885 18,277 Other assets 6,131 6,842 ------- ------- $335,195 $339,643 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 51,794 $ 41,336 Accrued expenses 21,558 23,035 Accrued salaries and employee benefits 9,242 8,916 Current portion of long-term debt 3,375 3,375 Current portion of capital lease and other obligations 5,073 4,937 ------ ------ Total current liabilities 91,042 81,599 Long-term debt, excluding current portion 26,625 43,000 Capital lease and other obligations, excluding current portion 11,369 10,017 Accrued store closing costs 11,189 10,580 Deferred rent 8,913 9,327 Stockholders' equity: Common stock, $0.0001 par value, 100,000 shares authorized, 21,060 and 21,073 shares issued and outstanding, respectively 2 2 Additional paid-in capital 270,755 270,886 Accumulated deficit (84,700) (85,768) ------- ------- Total stockholders' equity 186,057 185,120 ------- ------- $335,195 $339,643 ======= =======
See accompanying notes to consolidated financial statements 4 PETCO ANIMAL SUPPLIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data) Thirteen weeks ended ---------------------- May 3, May 2, 1997 1998 ---------------------- Net sales $ 170,908 $ 196,296 Cost of sales and occupancy costs 129,507 149,620 --------- --------- Gross profit 41,401 46,676 Selling, general, and administrative expenses 38,697 40,629 Merger and business integration costs -- 6,385 --------- --------- Operating income (loss) 2,704 (338) Interest expense, net 522 1,122 --------- --------- Earnings (loss) before income taxes 2,182 (1,460) Income taxes (benefit) 884 (392) --------- --------- Net earnings (loss) $ 1,298 $ (1,068) ========= ========= Basic and diluted earnings (loss) per common share $ 0.06 $ (0.05) ========= =========
See accompanying notes to consolidated financial statements. 5 PETCO ANIMAL SUPPLIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Thirteen weeks ended ------------------------ May 3, May 2, 1997 1998 ---------- ---------- Cash flows from operating activities: Net earnings(loss) $ 1,298 $ (1,068) Depreciation and amortization 5,450 6,984 Deferred taxes (708) (392) Loss on retirement of fixed assets 312 100 Changes in assets and liabilities, net of effects of purchase acquisitions: Receivables (1,926) (1,366) Inventories (8,507) 4,055 Other assets (68) (1,517) Accounts payable (2,151) (10,458) Accrued expenses (2,264) 1,477 Accrued salaries and employee benefits (541) (326) Accrued store closing costs 44 (609) Deferred rent 495 414 ------- ------- Net cash used in operating activities (8,566) (2,706) ------- ------- Cash flows from investing activities: Additions to fixed assets (12,349) (12,762) Net cash invested in acquisitions of businesses (6,028) -- ------- ------- Net cash used in investing activities (18,377) (12,762) ------- ------- Cash flows from financing activities: Borrowings under long-term debt agreements 4,000 17,500 Repayment of long-term debt agreements -- (1,125) Repayment of capital lease and other obligations (1,441) (1,488) Proceeds from the issuance of common stock 103 131 ------- ------- Net cash provided by financing activities 2,662 15,018 ------- ------- Net decrease in cash and cash equivalents (24,281) (450) Cash and cash equivalents at beginning of year 44,338 3,354 ------- ------- Cash and cash equivalents at end of period $ 20,057 $ 2,904 ======= =======
See accompanying notes to consolidated financial statements. 6 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 contain all adjustments, consisting of normal recurring adjustments, necessary to present the financial position, results of operations and cash flows as of May 2, 1998, and for the periods ended May 3, 1997 and May 2, 1998. Certain prior year balances have been reclassified to conform to current year presentation. Because of the seasonal nature of the Company's business, the results of operations for the thirteen weeks ended May 3, 1997 and May 2, 1998, 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 1997 refer to the fiscal year beginning on February 2, 1997 and ending on January 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto for fiscal 1997 included in the Company's Form 10-K Annual Report (File No. 0-23574) filed with the Securities and Exchange Commission on April 30, 1998. Note 2 - Acquisitions 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 prior year have been restated to include the accounts of PetCare. A reconciliation reflecting the combination of the previously reported results of the Company with the results of PetCare follows: Net Earnings Net Sales (Loss) ------------- ------------ Thirteen weeks ended May 3, 1997: PETCO, as previously reported $ 143,422 $ 2,338 PetCare 27,486 (1,040) --------- -------- Combined $ 170,908 $ 1,298 ========= ========
The Company recorded merger and business integration costs of $6.4 million during the thirteen weeks ended May 2, 1998. These costs include transaction costs, costs attributable to lease cancellation and closure of duplicate or inadequate facilities and activities, facility conversion costs, cancellation of certain contractual obligations and other integration costs. 7 Note 3 - Net 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 are computed using the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per common share incorporate the incremental shares issuable upon the assumed exercise of stock options. All prior period net earnings (loss) per common share information are presented in accordance with SFAS No. 128. Net earnings (loss) and weighted average common shares used to compute net earnings (loss) per share, basic and diluted, are presented below: Thirteen Weeks Ended ------------------------ May 3, May 2, 1997 1998 --------- --------- Net earnings (loss) $ 1,298 $ (1,068) Common shares, basic 20,157 21,072 Dilutive effect of stock options 538 -- ------- ------- Common shares, diluted 20,695 21,072 ======= =======
Dilutive effect of stock options of 248 shares were not included in computing diluted earnings (loss) per share for the thirteen weeks ended May 2, 1998 because the effect would have been antidilutive. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company currently utilizes both superstore and traditional store formats and follows a strategy of converting and expanding its store base from a traditional store format to a superstore format. As a result of this strategy, the Company has opened and acquired superstores, has expanded, remodeled, and relocated traditional stores into superstores, collectively referred to as conversions, and has closed underperforming stores. At May 2, 1998, the Company operated 458 stores, including 394 superstores, in 33 states and the District of Columbia. At May 3, 1997, the Company operated 420 stores, of which 354 were superstores. As a result of the Company's plan to open approximately 40 superstores this year, including conversions of existing traditional stores into superstore formats and excluding acquisitions, the timing of new superstore openings and related preopening expenses and the amount of revenue contributed by new and existing superstores may cause the Company's quarterly results of operations to fluctuate. As the Company proceeds with the conversion of acquired stores to the PETCO format, the Company anticipates this conversion process will impact sales and operating expense relationships with adverse effects early in the process followed by benefits to such relationships as converted stores become supported by full marketing efforts. Increased payroll, advertising and other store level expenses as a percentage of sales in new stores should also contribute to lower store operating margins. In addition, the Company charges preopening costs associated with each new superstore to earnings as incurred. Therefore, the Company expects that the opening of a large number of new superstores in a given 8 quarter may adversely impact its quarterly results of operations for that quarter. In August 1997, the Company acquired a retailer that operated four pet food and supply stores under the tradename Super Pets located in Southern California. In October 1997, the Company acquired a retailer that operated nine pet food and supply stores under the tradename Paws located in Pennsylvania and New Jersey, a retailer that operated five pet food and supply stores under the tradename The PetCare Company located in Southern California, and a retailer that operated four pet food and supply stores under the tradename Pet Food Savemart located in Kansas and Missouri. These acquisitions were accounted for as immaterial 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 pooling was completed. In November 1997, the Company acquired a retailer that operated eighty-two stores under the tradename PetCare located in ten midwestern and southern states. This transaction was accounted for as a pooling of interests, and accordingly, the consolidated financial statements for the prior periods presented have been restated to include the accounts of PetCare. Results of Operations First Quarter 1998 Compared to First Quarter 1997 Net sales increased 15% to $196.3 million for the thirteen weeks ended May 2, 1998 ("first quarter 1998") from $170.9 million for the thirteen weeks ended May 3, 1997 ("first quarter 1997"). The increase in net sales in first quarter 1998 resulted primarily from the addition of 50 superstores, including the conversion of eight traditional stores into superstores, the acquisition of seven traditional stores, the closing of 11 stores, and a comparable store net sales increase of 5.7%. 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 $17.3 million, or 68% of the net sales increase, and $8.1 million, or 32% of the net sales increase, was attributable to the increase in comparable store net sales. Gross profit, defined as net sales less cost of sales including occupancy costs, increased $5.3 million to $46.7 million in first quarter 1998 from $41.4 million in first quarter 1997. As a percentage of sales, gross profit decreased to 23.8% in first quarter 1998 from 24.2% in first quarter 1997. This decrease reflects lower gross margins generated from sales in the stores acquired in the last half of fiscal 1997, which are undergoing conversions to PETCO's assortment and selling through non-continuing inventory at reduced gross margins and increased distribution costs associated with increased throughput through the expanded distribution center network. Selling, general and administrative expenses increased $1.9 million to $40.6 million in first quarter 1998 from $38.7 million in first quarter 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 20.7% in first quarter 1998 from 22.6% in first quarter 1997 primarily due to net sales increasing at a 9 greater rate than related expenses and the reduction of these expenses in certain acquired stores. Merger and business integration costs of $6.4 million were recorded in first quarter 1998 in connection with the conversion activities of the stores acquired in the last half of fiscal 1997. There were no merger and business integration costs recorded in first quarter 1997. Operating loss in first quarter 1998 was $0.3 million compared to an operating income of $2.7 million in first quarter 1997. Excluding merger and business integration costs, the Company would have reported operating income of 3.1% of net sales in first quarter 1998 and 1.6% of net sales in first quarter 1997. Net interest expense was $1.1 million for first quarter 1998 compared to net interest expense of $0.5 million for first quarter 1997. Increased borrowings in first quarter 1998 led to the increase in interest expense. Income tax benefit was $0.4 million in first quarter 1998, compared to income taxes of $0.9 million in first quarter 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 $1.1 million for first quarter 1998 compared with a net income of $1.3 million for first quarter 1997. Excluding merger and business integration costs and related tax benefits, net earnings for first quarter 1998 would have been $3.0 million, or $0.14 per diluted share, compared to $1.3 million, or $0.06 per diluted share in first quarter 1997. Year 2000 Issues The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. In 1997, the Company developed a plan to deal with the Year 2000 problem to assure that its systems are Year 2000 compliant. In general, the Company expects to resolve Year 2000 issues through planned replacements or upgrades. The Company does not expect that the cost of its Year 2000 compliance program will be material to its business, results of operations, or financial condition. Although the impact on the Company caused by the failure of the Company's significant suppliers to achieve Year 2000 compliance in a timely or effective manner is uncertain, the Company's business and results of operations could be materially adversely affected by such failure. 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 May 2, 1998, total assets were $339.6 million, $122.0 million of which were current assets. Net cash used in operating activities was $2.7 million for first quarter 1998 and $8.6 million for first quarter 1997. 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. 10 The Company uses cash in investing activities to acquire stores, purchase fixed assets for new and converted 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. Cash used in investing activities was $12.8 million for first quarter 1998 and $18.4 million for first quarter 1997. The Company also finances some of its purchases of equipment and fixtures through capital lease and other obligations. Purchases of $0.4 million of fixed assets were financed in this manner during first quarter 1997. 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. The Company's primary long-term capital requirement is funding for the opening or acquisition of superstores and conversion of traditional stores into superstores. Cash flows provided by financing activities were $15.0 million in first quarter 1998 and $2.7 million in first quarter 1997. Cash flows from financing activities were used to finance the acquisition of related businesses and fund the Company's expansion program and working capital requirements. The Company has a credit facility with a syndicate of banks with a commitment of up to $110.0 million that expires January 30, 2003. The credit facility provides for $80.0 million in revolving loans and a $30.0 million term loan. Borrowings under the credit facility are unsecured and bear interest, at the Company's option, at the agent bank's corporate base rate or LIBOR plus 0.50% to 1.50%, based on the Company's leverage ratio at the time. The credit agreement contains certain affirmative and negative covenants related to indebtedness, interest and fixed charges coverage, and consolidated net worth. As of May 2, 1998, the Company had $62.5 million of revolving loans available under the credit facility. As of January 31, 1998, the Company had available net operating loss carryforwards of $39.2 million for federal income tax purposes, which begin expiring in 2004, and $36.4 million for state income tax purposes, which begin expiring in 1998. 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. 11 Certain Cautionary Statements Certain statements in this Quarterly Report on Form 10 - Q, including, but not limited to, Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that are not historical facts but rather reflect current expectations concerning future results and events. The words "believes," "expects," "intends," "plans," "anticipates," "likely," "will," and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and other factors, some of which are beyond the Company's control, that could cause actual results to differ materially from those forecast or anticipated in such forward- looking statements. These factors include, but are not limited to, the Company's expansion plans, the integration of operations as a result of acquisitions, reliance on vendors and product lines and exclusive distribution arrangements, competition, performance of new superstores and their future operating results, quarterly and seasonal fluctuations, dependence on senior management, and possible volatility of stock price. These factors are discussed in greater detail under the caption "Certain Cautionary Statements" in PETCO's Annual Report on Form 10-K for the year ended January 31, 1998. 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 1. Exhibits (a) 27.1 Financial Data Schedule (filed electronically only) 2. Reports on Form 8-K (a) The Company filed no reports on Form 8-K during the thirteen weeks ended May 2, 1998. 13 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 - Finance and Chief Accounting Officer Date: June 12, 1998 EX-27 2
5 3-MOS 3-MOS JAN-31-1998 JAN-30-1999 MAY-3-1997 MAY-2-1998 20,057 2,904 0 0 9,807 12,245 0 0 91,289 92,818 123,692 121,995 117,190 153,946 0 0 304,495 339,251 76,221 81,207 0 0 0 0 0 0 2 2 197,898 185,118 304,495 339,251 170,908 196,296 170,908 196,296 129,507 149,620 129,507 149,620 38,697 47,014 0 0 522 1,122 2,182 (1,460) 884 (392) 1,298 (1,068) 0 0 0 0 0 0 1,298 (1,068) 0.06 (0.05) 0.06 (0.05)
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