Petsmart 2000 Annual Report Download - page 24

Loss on disposal of subsidiary in fiscal 1999 was approximately $45.7 million, including approximately $31.1
million of loss and transaction related expenses on the sale of the C ompany’ s UK subsidiary, and approximately
$14.6 million of loss from operations in the UK during 1999.
The C ompany’ s operating income decreased to $41.1 million for 1999 from $57.3 million for 1998,
excluding the $1.8 million of merger and restructuring benefit recorded in 1998. This decrease was primarily due
to the loss on disposal of subsidiary and operational losses of the UK, offset in part by increased gross profit and
decreased preopening expenses as described above.
Interest income decreased slightly to $2.9 million for 1999 from $3.1 million for 1998, principally due to the
decrease in average cash balances available to invest during fiscal 1999, primarily due to stock repurchase,
equity investment in PETsMART.com, and increased capital expenditures for information systems, offset by
proceeds from the sale of the UK subsidiary. Interest expense decreased to $21.7 million for 1999 from $23.1
million for 1998. Excluding the UK segment’ s interest expense from fiscal 1998, interest expense on a
comparable basis was $21.4 million for fiscal 1998.
Equity loss in PETsMART.com, in which the Company has a 49.6% equity investment, represents the
Company’ s proportionate share of loss from PETsMART.com, which began operations in June 1999. The
Company’ s portion of PETsMART.com’ s losses from the date operations began through the end of fiscal 1999
was approximately $29.1 million.
For fiscal 1999, the $25.1 million income tax provision resulted in a reported effective rate of 368%. Losses
from the Company’ s equity investment in PETsMART.com are excluded from the Company’ s consolidated
income tax return. Also, the loss on the sale of the UK subsidiary is not deductible for tax purposes until a capital
gain is recognized to offset the capital loss. Excluding the tax benefit of $4.8 million realized from the operating
loss on the UK in 1999, the tax provision then becomes $29.9 million or 43.1% of pretax income before losses
from the UK subsidiary and the equity investment in PETsMART.com. The 1998 effective tax rate was 40.0%.
The increase in the adjusted 1999 effective tax rate is principally due to a higher effective tax rate on Canadian
income and other foreign tax rate adjustments, net of accrual adjustment.
In April 1998, the AICPA issued Statement of Position 98-5, “Reporting on the Costs of Start-up Activities”
(“SOP-98-5”). SOP 98-5 is effective for financial statements for fiscal years beginning after December 15,
1998. Under the provisions of SOP 98- 5, costs of start- up activities, including organization
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costs, should be expensed as incurred. The Company adopted SOP 98-5 at the beginning of the first quarter of
fiscal 1999. Prior to its adoption of SOP 98- 5, the Company expensed its store preopening costs in the month in
which the store opened. The charge against earnings during the first quarter of fiscal 1999 related to this change
in accounting principle was $0.9 million, before taxes, and was recorded as a cumulative effect of a change in
accounting principle.
As a result of the foregoing, the Company reported a net loss of $32.4 million (or $0.28 per share — basic)
for fiscal 1999 compared to net income $23.3 million (or $0.20 per share — basic) for fiscal 1998.
The following table summarizes the earnings per share impact of the Company’ s electronic commerce
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