Petsmart 2000 Annual Report Download - page 26

were 2.7% of sales for fiscal 1998.
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The C ompany’ s operating income increased to $57.3 million for 1998 from $37.7 million for 1997,
excluding the $1.8 million of merger and restructuring benefit recorded in 1998 and the $73.5 million of merger
and restructuring costs recorded in 1997. Excluding the merger and restructuring benefit and costs, operating
income as a percentage of net sales increased from 2.1% for 1997 to 2.7% for 1998.
Interest income increased to $3.1 million for 1998 from $0.2 million for 1997, principally due to the increase
in average cash balances from the note offering completed in November 1997, as well as the planned reduction
in per- store inventories during 1998. Interest expense increased to $23.1 million for 1998 from $13.9 million for
1997. The increase in interest expense in 1998 was also primarily related to the note offering completed in
November 1997.
For fiscal 1998, income taxes were provided at an annual effective rate of 40.0%. This reflects an increase
over historical levels due to changes in foreign tax rates and mix of foreign and domestic taxable income or loss.
The C ompany’ s income tax provision for 1997 reflects the effects of the nondeductibility of certain of the costs
associated with the merger and restructuring charges recorded. Additionally, the statutory reduction in the UK
corporate tax rate enacted during second quarter 1997 required a $0.6 million charge to reflect the decrease in
the deferred tax asset due to the rate reduction. After excluding the effects of these items, the Company’ s
effective income tax rate from operations was 38.5% for fiscal 1997.
As a result of the foregoing, the Company reported net income of $23.3 million (or $0.20 per share) for
fiscal 1998 compared to a net loss, before cumulative effect of a change in accounting principle of $31.8 million
(or $0.28 per share) for fiscal 1997. Excluding the 1997 merger and restructuring charges and the related tax
benefits, and the cumulative effect of a change in accounting principle, net income for fiscal 1997, on a
comparable basis, was $15.5 million (or $0.13 per share).
Liquidity and Capital Re s ource s
The Company has financed its operations and expansion program to date principally through cash flows from
operations, the sale of equity and debt securities, lease financing and borrowings under its credit facility.
Additional sources of financing have included vendor terms on inventory purchases.
In November 1997, $200 million of 6 3/4% Subordinated C onvertible N otes (the “Notes”) were issued by
the C ompany and sold to “qualified institutional buyers” as defined in Rule 144A of the Securities Act of 1933,
as amended (the “Securities Act”) in transactions exempt from registration under the Securities Act, and in sales
outside the United States within the meaning of Regulation S under the Securities Act. In April 1998, the Notes
were registered publicly through an S- 3 filing. The net proceeds to PETsMART from the sale of the Notes were
approximately $193.3 million.
During fiscal 1999, approximately $25,000,000 (before commissions) in cash was used to repurchase
5,550,000 shares of the Company’ s Common Stock, at an average price of $4.50.
The Company consummated a sale of its UK subsidiary with an unrelated third party on December 15,
1999. This transaction provided the Company cash proceeds before transaction costs of approximately $48.9
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