Petsmart 2012 Annual Report Download - page 40

32
Our master operating agreement with Banfield also includes a provision for the sharing of profits on the sale of therapeutic
pet foods sold in all stores with an operating Banfield hospital. The net sales and gross profit on the sale of therapeutic pet food
are not material to our consolidated financial statements.
Credit Facilities
On March 23, 2012, we entered into a new $100.0 million revolving credit facility agreement, or “Revolving Credit Facility,”
which replaced our former revolving credit facility agreement, or “Former Revolving Credit Facility.” The Revolving Credit
Facility expires on March 23, 2017. Borrowings under this Revolving Credit Facility are subject to a borrowing base and bear
interest, at our option, at LIBOR plus 1.25% or Base Rate plus 0.25%. The Base Rate is defined as the highest of the following
rates: the Federal Funds Rate plus 0.5%, the Adjusted LIBOR plus 1.0%, or the Prime Rate.
We are subject to fees payable each month at an annual rate of 0.20% of the unused amount of the Revolving Credit Facility.
The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available under the
Revolving Credit Facility. Letter of credit issuances under the Revolving Credit Facility are subject to interest payable and bear
interest of 0.625% for standby letters of credit and commercial letters of credit.
As of February 3, 2013, we had no borrowings and $17.9 million in stand-by letter of credit issuances under our Revolving
Credit Facility. As of January 29, 2012, we had no borrowings under our Former Revolving Credit Facility and $24.4 million in
stand-by letter of credit issuances.
On March 23, 2012, we also entered into a new $100.0 million stand-alone letter of credit facility agreement, or “Stand-alone
Letter of Credit Facility,” which replaced our former stand-alone letter of credit facility, or “Former Stand-alone Letter of Credit
Facility.” The Stand-alone Letter of Credit Facility expires on March 23, 2017. We are subject to fees payable each month at an
annual rate of 0.175% of the average daily face amount of the letters of credit outstanding during the preceding month. In addition,
we are required to maintain a cash deposit with the lender equal to 103% of the amount of outstanding letters of credit.
As of February 3, 2013, we had $69.8 million in outstanding letters of credit, issued for guarantees provided for insurance
programs, under our Stand-alone Letter of Credit Facility and $71.9 million in restricted cash on deposit with the lender. As of
January 29, 2012, we had $70.2 million in outstanding letters of credit, issued for guarantees provided for insurance programs,
under our Former Stand-alone Letter of Credit Facility and $70.2 million in restricted cash on deposit with the Former Stand-
alone Letter of Credit Facility lender.
Our Revolving Credit Facility and Stand-alone Letter of Credit Facility permit the payment of dividends if we are not in
default and payment conditions as defined in the agreement are satisfied. As of February 3, 2013, we were in compliance with the
terms and covenants of our Revolving Credit Facility and Stand-alone Letter of Credit Facility. The Revolving Credit Facility and
Stand-alone Letter of Credit Facility are secured by substantially all our financial assets.
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 due to increased holiday traffic. 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. Because our stores typically draw customers from a large trade area, sales also 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 and PetsHotel openings and related preopening costs, the amount of revenue contributed by new and existing
stores and PetsHotels and the timing and estimated obligations of store closures, our quarterly results of operations may fluctuate.
Controllable expenses could fluctuate from quarter-to-quarter in a year. 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 openings will also
contribute to lower store operating margins until these stores become established.
While we have experienced inflationary pressure in recent years, we have been able to largely mitigate the effect by increasing
retail prices accordingly. Although neither inflation nor deflation has had a material impact on net operating results, we can make
no assurance that our business will not be affected by inflation or deflation in the future.
Impact of Federal Health Care Reform Legislation
In March 2010, the President of the United States signed into law the Patient Protection and Affordable Care Act, as amended
by the Health Care and Education Reconciliation Act of 2010, or "the Acts." Uncertainty still exists regarding the magnitude of
the impact of the Acts on our consolidated financial statements. The extent of the impact will not be known until we make final