Petsmart 2007 Annual Report Download - page 42

In June 2007, we entered into a new master operating agreement with MMIH that has an initial 15-year term
and was retroactive to February 2007. The new agreement includes a change to the calculation of license fees
charged to MMIH and a provision for MMIH to pay their portion of utilities costs.
We recognized license fees, utilities and other cost reimbursements of $32.9 million and $21.4 million during
2007 and 2006, respectively. Receivables from MMIH totaled $4.5 million and $6.9 million at February 3, 2008 and
January 28, 2007, respectively, and were included in the receivables in the accompanying Consolidated Balance
Sheets.
The master operating agreement also includes a provision for the sharing of profits on the sales of therapeutic
pet foods sold in all stores with an operating Banfield hospital.
Credit Facility
In August 2007, we replaced our existing $125.0 million credit facility with a $350.0 million five-year
revolving credit facility which expires on August 15, 2012. Borrowings under the credit facility are subject to a
borrowing base and bear interest, at our option, at a bank’s prime rate plus 0% to 0.25% or LIBOR plus 0.875% to
1.25%. We are subject to fees payable to lenders each quarter at an annual rate of 0.20% of the unused amount of the
credit facility. The credit facility also gives us the ability to issue letters of credit, which reduce the amount available
under the credit facility. Letter of credit issuances under the credit facility are subject to interest payable to the
lenders and bear interest of 0.875% to 1.25% for standby letters of credit or 0.438% to 0.625% for commercial
letters of credit. In August 2007, we borrowed $100.0 million under the credit facility to fund a portion of our
$225.0 million ASR. The remaining portion of the ASR was funded using existing cash and cash equivalents.
As of February 3, 2008, we had $30.0 million in borrowings and $70.4 million in stand-by letter of credit
issuances under our $350.0 million five-year revolving credit facility.
We also have a $70.0 million stand-alone letter of credit facility that expires on June 30, 2009. We are subject
to fees payable to the lenders each quarter at an annual rate of 0.20% of the average daily face amount of the letters
of credit outstanding during the preceding calendar quarter. In addition, we are required to maintain a deposit with
the lenders equal to the amount of outstanding letters of credit or, in the case of auction rate securities, must have an
amount on deposit, which, when multiplied by the advance rate of 85%, is equal to the amount of outstanding letters
of credit under this stand-alone letter of credit facility. As of February 3, 2008, we had no outstanding letters of
credit under this stand-alone letter of credit facility and had no restricted cash and short-term investments on deposit
with the lenders in connection with this facility.
We issue letters of credit for guarantees provided for insurance programs, capital lease agreements and
utilities.
The credit facility and letter of credit facility permit the payment of dividends, so long as we are not in default
and the payment of dividends would not result in default of the credit facility and stand-alone letter of credit facility.
As of February 3, 2008, we were in compliance with the terms and covenants of our credit facility and letter of credit
facility. The credit facility and letter of credit facility are secured by substantially all our personal property assets,
our subsidiaries and certain real property.
Seasonality and Inflation
Our business is subject to seasonal fluctuations. We typically realize a higher portion of our net sales and
operating profits during the fourth quarter. As a result of this seasonality, we believe that quarter-to-quarter
comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied
upon as indicators of future performance. Controllable expenses could fluctuate from quarter-to-quarter in a fiscal
year. Sales of certain products and services are seasonal. Because our stores typically draw customers from a large
trade area, sales may be impacted by adverse weather or travel conditions, which are more prevalent during certain
seasons of the year. As a result of our expansion plans, the timing of new store openings and related preopening
costs, the amount of revenue contributed by new and existing stores and the timing and estimated obligations of
store closures, our quarterly results of operations may fluctuate. Finally, because new stores tend to experience
higher payroll, advertising and other store level expenses as a percentage of sales than mature stores, new store
36