Petsmart 2002 Annual Report Download - page 38

""Consolidated Financial Statements,'' on January 17, 2003. FIN 46 requires that an entity holding a majority
of the ""variable interests'' of a ""variable interest entity'' must consolidate the operations of the variable
interest entity of which it is the primary beneÑciary. As currently constituted, our structured lease Ñnancing
facilities may involve a variable interest entity of which we are the primary beneÑciary. If so determined, we
would be required to consolidate the seven stores and two properties at the beginning of the third quarter of
2003, which would increase Ñxed assets and debt by $27.7 million, and also have an impact on depreciation
expense. However, we may be able to restructure these leases so as not to require consolidation. We are also
considering other options related to the disposition of these properties, and can provide no assurance that a loss
or impairment charge will not be incurred due to current real estate market conditions.
Related Party Transactions
We have an investment in MMI Holdings, Inc., or MMIH, a provider of veterinary and other pet related
services. MMIH, through a wholly owned subsidiary, Medical Management International, Inc., or MMI,
operates full-service veterinary hospitals and wellness hospitals inside approximately half our stores, under the
name BanÑeld, The Pet Hospital
TM
. Philip L. Francis, our Chairman and Chief Executive OÇcer, and
Robert F. Moran, our President and Chief Operating OÇcer, are members of the board of directors of
MMIH. Our investment consists of common and convertible preferred stock. As of February 2, 2003, we
owned approximately 15% of the voting stock, and approximately 31% of the combined voting and non-voting
stock of MMIH. We charge MMI licensing fees for the space used by the veterinary hospitals, and we treat
this income as a reduction of the retail stores' occupancy costs. We record occupancy costs as a component of
cost of sales in our consolidated Ñnancial statements. Licensing fees are determined by Ñxed costs per square
foot, adjusted for the number of days the hospitals are open and sales volumes achieved. We recognized
licensing fees of approximately $8.3 million and $6.7 million during 2002 and 2001, respectively. Licensing
fees receivable from MMI totaled $2.9 million and $2.2 million at February 2, 2003 and February 3, 2002,
respectively, and were included in receivables in the accompanying consolidated balance sheets.
Credit Facility
On April 30, 2001, we entered into a new credit arrangement with a group of lenders that provides for
borrowings of up to $250.0 million, including a sublimit of up to $150.0 million for letters of credit, which was
to expire on April 30, 2004. Borrowings and letter of credit issuances under the facility are subject to a
borrowing base and bear interest, at our option, at either the bank's prime rate or LIBOR, plus applicable
margins to be determined based on certain Ñnancial tests. Due to our desire for greater Öexibility in our
Ñnancial covenants and our historically limited use of the credit facility, we amended the credit facility on
June 20, 2002, to reduce the available commitment to $200.0 million, extend the maturity by two years to
April 30, 2006, and amend certain covenants. The credit facility restricts the payment of dividends. The
arrangement is secured by substantially all our personal property assets and certain real property. As of
February 2, 2003, we had no borrowings outstanding under the credit facility.
Seasonality and InÖation
Our business is subject to some seasonal Öuctuations and we typically realize a higher portion of our net
sales and operating proÑts during the fourth quarter. As a result of this seasonality, we believe that quarter-to-
quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot
be relied upon as indicators of future performance. In addition, sales of certain products and services designed
to address pet health needs are seasonal. Because our stores typically draw customers from a large trade area,
sales may also be impacted by adverse weather or travel conditions, which are more prevalent during certain
seasons of the year.
Our results of operations and Ñnancial position are presented based upon historical cost. Although we
cannot accurately anticipate the eÅect of inÖation on our operations, we do not believe inÖation is likely to
materially harm our net sales or results of operations.
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