Petsmart 2001 Annual Report Download - page 20

The Company's operating income decreased $21.5 million to $20.6 million for Ñscal 2000 from $42.1
million for Ñscal 1999. Excluding a $45.7 million loss on disposal of subsidiary in Ñscal 1999, operating income
decreased $67.2 million from Ñscal 1999 to Ñscal 2000. This decrease from Ñscal 1999 to Ñscal 2000 was the
result of the increased cost of sales, store operating expenses, and general and administrative expenses
described above.
Interest income decreased slightly to $2.8 million for Ñscal 2000 from $2.9 million for Ñscal 1999. Interest
expense increased to $23.4 million for Ñscal 2000 from $22.8 million for Ñscal 1999. The increase in interest
expense was a direct result of higher average interest rates of 9.08% compared to 8.39% and higher average
amounts outstanding of $26.3 million compared to $5.3 million on the Company's line of credit during Ñscal
2000 and Ñscal 1999, respectively. The increase in interest expense on the line of credit was partially oÅset by a
reduction in the amount of Subordinated Convertible Notes outstanding as a result of the debt repurchases of
$18.8 million made during Ñscal 2000.
The equity loss in PETsMART.com, in which the Company had an equity investment of approximately
46% until December 20, 2000, when a controlling interest in PETsMART.com was acquired, represents the
Company's proportionate share of PETsMART.com's net losses for the period January 31, 2000 to December
20, 2000. The amount of equity loss in PETsMART.com recognized during Ñscal 2000 was $33.1 million. The
Company's portion of PETsMART.com's net losses from February 25, 1999, inception date, through the end
of Ñscal 1999 was approximately $29.1 million.
For Ñscal 2000, the $0.9 million income tax expense represents an eÅective rate of 2.6%. The Company's
eÅective tax rate diÅers from the expected U.S. Federal income tax rate due principally to the non-deductible
losses generated by PETsMART.com and other permanent diÅerences. Excluding the eÅects of non-
deductible losses generated by PETsMART.com, the Company's annual eÅective tax rate for Ñscal 2000 was
43.6%, compared to 43.1% for Ñscal 1999, excluding the U.K. losses.
Minority interest in subsidiary represents the recognition of the 18.3% minority interest in the pre-tax loss
of PETsMART.com for the period December 20, 2000 to January 28, 2001.
As a result of the foregoing explanations, the Company reported a loss before extraordinary item of $33.7
million (or $0.30 per share) for Ñscal 2000 compared to a loss before cumulative eÅect of a change in
accounting principle of $31.9 million (or $0.28 per share) for Ñscal 1999.
During Ñscal 2000, the Company repurchased and retired at face value $18.8 million of its 6∂%
Subordinated Convertible Notes due 2004 at a discount from par. The Company recognized an extraordinary
gain during Ñscal 2000 of approximately $2.8 million, net of unamortized deferred Ñnancing costs of $0.4
million and related income taxes of approximately $1.9 million.
In April 1998, the American Institute of CertiÑed Public Accountants (""AICPA'') issued Statement of
Position 98-5, ""Reporting on the Costs of Start-up Activities'' (""SOP 98-5''), which requires costs of start-up
activities, including organization costs, to be expensed as incurred. The Company adopted SOP 98-5 at the
beginning of the Ñrst quarter of Ñscal 1999, which resulted in a charge against earnings of $0.9 million, before
taxes, and was recorded as a cumulative eÅect of a change in accounting principle. Prior to its adoption of
SOP 98-5, the Company expensed its store preopening costs in the month in which the store opened.
As a result of the foregoing explanations, the Company reported a net loss of $30.9 million (or $0.28 per
share) for Ñscal 2000 compared to a net loss of $32.4 million (or $0.28 per share) for Ñscal 1999.
Fiscal 1999 Compared to Fiscal 1998
Net sales were approximately $2.1 billion for Ñscal 1999, unchanged from Ñscal 1998. The Ñscal 1999
results exclude sales from the U.K. subsidiary entirely, which was sold in December 1999, and represented
$0.2 billion in 1998. The 1999 results also exclude sales from the United States veterinary clinics after the
clinics were sold to MMI in July 1999. On a comparable basis, excluding the U.K. and veterinary sales from
Ñscal 1999 and Ñscal 1998, net sales increased 12.6% from approximately $1.9 billion in 1998. Comparable
North American store sales increased 4.6% for the period. During Ñscal 1999, the Company opened 58 new
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