Petsmart 2002 Annual Report Download - page 35

$0.7 million for other asset write downs. We also recorded cash proceeds of $17.0 million associated with a
vendor resolution, totaling net charges of $12.8 million. These charges represented 0.5% of sales. As a result of
our adoption of SFAS No. 145 in 2002, we reclassiÑed the gain on early extinguishment of debt of $1.2 million
and $4.7 million for 2001 and 2000, respectively, to general and administrative expenses. The reclassiÑcation
of $4.7 million in 2000 represented 0.2% of sales. Excluding the net charges in 2001 and the reclassiÑcation of
the gain, general and administrative expenses increased primarily due to increased personnel training expenses,
increased group medical expenses, and higher bonus accruals related to our performance for 2001. Excluding
the net charges, general and administrative expenses related to our catalog and Internet businesses increased
primarily due to additional expenses from PETsMART.com, which were not included on a consolidated basis
through December 20, 2000.
Interest Expense
Interest expense increased to $27.4 million in 2001, from $23.4 million for 2000, primarily due to
unamortized bank fees that were written-oÅ when we entered into a new credit agreement on April 30, 2001,
as well as higher interest as a result of additional capital leases entered into in 2001. Those increases were
partially oÅset by a reduction in the amount of our Notes outstanding as a result of debt repurchases of
$7.8 million made during 2001.
Equity Loss in PETsMART.com and Minority Interest
From January 31, 2000 through December 20, 2000, we had a 46.3% equity investment in
PETsMART.com and recognized an equity loss of $33.1 million. In December 2000, we acquired a controlling
interest in PETsMART.com of approximately 81.7% and accounted for the results of operations of
PETsMART.com under the consolidation method of accounting for all subsequent periods.
Minority interest in subsidiary loss of $2.3 million represents the recognition of our minority interest in
the pre-tax loss of PETsMART.com for 2001, compared with $0.3 million from December 20, 2000 through
January 28, 2001.
Income Tax Expense
In 2001, the $8.0 million income tax expense includes a tax beneÑt of $10.3 million associated with the
June 2001 increase in ownership of PETsMART.com, and tax expense of $18.3 million for the 2001 results, or
an eÅective rate of 40.4%. Our 2000 eÅective tax rate diÅered from the expected United States 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, our annual
eÅective tax rate for 2000 was 41.2%. EÅective for 2001, losses from PETsMART.com are included in our
consolidated federal income tax return.
Liquidity and Capital Resources
Cash Flow and Balance Sheet Data
Cash provided by operations increased $32.8 million to $222.8 million in 2002, compared with
$190.0 million in 2001. The increase was driven by higher net income and depreciation and amortization, and
was partially oÅset by decreases in changes in assets and liabilities.
Merchandise accounts payable leveraging (the percentage of merchandise inventory Ñnanced by vendor
credit terms, i.e., accounts payable divided by merchandise inventory), increased to 39.7% as of February 2,
2003, compared with 34.4% as of February 3, 2002. Inventory balances were $257.1 million as of February 2,
2003, and $271.3 million as of February 3, 2002. Average retail store inventory, which represents total ending
inventory divided by the open stores at the end of the period, decreased to approximately $0.44 million per
store as of February 2, 2003, compared with approximately $0.49 million per store as of February 3, 2002.
Decreases over the prior year reÖect favorable eÇciencies gained in stores served by forward distribution
centers as well as lower inventory levels in stores with our new store format. With the opening of our sixth
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