Petsmart 2001 Annual Report Download - page 22

realized from the operating loss on the U.K. in Ñscal 1999, the tax provision becomes $29.9 million or 43.1% of
pretax income before losses from the U.K. subsidiary and the equity investment in PETsMART.com. The
1998 eÅective tax rate was 40.0%. The increase in the adjusted 1999 eÅective tax rate is principally due to a
higher eÅective tax rate on Canadian income and other foreign tax rate adjustments, net of accrual
adjustments.
In April 1998, the 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, the Company reported a net loss of $32.4 million (or $0.28 per share) for
Ñscal 1999 compared to net income of $23.3 million (or $0.20 per share) for Ñscal 1998.
Liquidity and Capital Resources
The Company has Ñnanced its operations and expansion program to date principally through cash Öows
from operations, the sale of equity and debt securities, lease Ñnancing and borrowings under its credit facility.
Additional sources of Ñnancing have included vendor terms on inventory purchases.
In November 1997, $200 million of 6∂% Subordinated Convertible Notes (the ""Notes'') were issued by
the Company and sold to ""qualiÑed institutional buyers'' as deÑned 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 Ñling. The net proceeds to PETsMART from
the sale of the Notes were approximately $193.3 million.
The Company consummated a sale of its U.K. subsidiary with an unrelated third party on December 15,
1999. This transaction provided the Company with cash proceeds before transaction costs of approximately
$48.9 million, less debt of approximately $7.0 million.
On April 13, 2000, the Company's Board of Directors approved the purchase of $25 million of its
Common Stock or its Notes annually for each of the next three Ñscal years. The Company's policy on the
purchase of Common Stock or Notes is to make market purchases when the price is advantageous and as cash
Öow allows, to maintain appropriate liquidity. During Ñscal 2000, approximately $2.3 million (before
commissions) was used to purchase 800,000 shares of the Company's Common Stock at an average price of
$2.92 and approximately $13.6 million was used to purchase $18.8 million at face value of its Notes. During
Ñscal 1999, approximately $25.0 million (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.
Cash provided by operations was $110.7 million for Ñscal 2000, compared to cash used in operations of
$13.2 million for the prior year. Merchandise accounts payable leveraging (the percentage of merchandise
inventory Ñnanced by vendor credit terms, e.g., accounts payable divided by merchandise inventories)
increased to 41.9% at January 28, 2001, compared to 38.2% at January 30, 2000. Inventory balances were
approximately $322.5 million at January 28, 2001, and $377.3 million at January 30, 2000. Average North
American store inventory, which excludes the inventory of PETsMART Direct, decreased 22.9%, to $560,000
per store at January 28, 2001, from $726,000 at January 30, 2000. This decrease reÖected a planned reduction
of the weeks of supply of consumables product and favorable eÇciencies gained in stores served by the forward
distribution centers in Ennis, Texas; Gahanna, Ohio; and Hagerstown, Maryland. At January 28, 2001, total
assets were $782.1 million, of which $430.3 million were current assets, and cash and cash equivalents were
$43.8 million.
The Company has used cash in investing activities since inception to purchase leaseholds, Ñxtures and
equipment for new stores and, to a lesser extent, to purchase equipment and computer software in support of
its systems initiatives. The Company used cash during Ñscal 2000 of $2.9 million and $21.3 million to invest in
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