Petsmart 2003 Annual Report Download - page 27

Our international operations may result in additional market risks, which may harm our business.
We entered the Canadian market in 1996, and operated 21 stores in Canada as of February 1, 2004. As these
operations grow, they may require greater management and Ñnancial resources. International operations require the
integration of personnel with varying cultural and business backgrounds and an understanding of the relevant
diÅerences in the legal and regulatory environments. Our results may be increasingly aÅected by the risks of our
international activities, including:
‚ Fluctuations in currency exchange rates;
‚ Changes in international staÇng and employment issues;
‚ TariÅ and other trade barriers;
‚ The burden of complying with foreign laws, including tax laws; and
‚ Political and economic instability and developments.
Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue.
We and MMI, the third party operator of BanÑeld, The Pet Hospital, are subject to laws governing the
operation of veterinary hospitals. MMI Holdings, Inc., or MMIH, is the parent company of MMI. Statutes and
regulations in various states and Canadian provinces regulating the ownership of veterinary practices, or the
operation of veterinary hospitals in retail stores, may impact our ability and MMI's ability to operate veterinary
hospitals within our facilities. A determination that we or MMI are in violation of any of these applicable statutes
and regulations could require us or MMI to restructure our operations to comply or render us or MMI unable to
operate veterinary hospitals in a given location. We recorded $10.5 million and $8.3 million from MMI during 2003
and 2002, respectively, 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. If MMIH or MMI were to experience Ñnancial
or other operating diÇculties that would force it to limit its operations, or if MMIH were to cease operating the
veterinary hospitals in our stores, our business may be harmed, both directly and due to a decrease in customer
traÇc. There can be no assurance that we could contract with another third party to operate the veterinary hospitals
on favorable terms, if at all, or that we could successfully operate the veterinary hospitals ourselves. For a further
discussion of our relationship with MMI, please see ""Management's Discussion and Analysis of Financial Condition
and Results of Operations Ì Related Party Transactions.''
Our business would be harmed if we were unable to raise any needed additional capital on acceptable terms.
We anticipate that our existing capital resources and cash Öows from operations will enable us to maintain our
currently planned operations for the foreseeable future. If, however, we are unable to generate and maintain positive
operating cash Öows and operating income in the future, we may need additional funding. We may also choose to
raise additional capital due to market conditions or strategic considerations even if we believe that we have suÇcient
funds for our current or future operating plans. Our current credit facility is secured by substantially all of our
personal property assets, our subsidiaries, and certain real property. This could limit our ability to obtain, or obtain
on favorable terms, additional Ñnancing and may make more costly additional debt Ñnancing outside our credit
facility. If additional capital were needed, our inability to raise capital on favorable terms would harm our business
and Ñnancial condition. In addition, to the extent that we raise additional capital through the sale of equity or debt
securities convertible into equity, the issuance of these securities could result in dilution to our stockholders.
A determination that we are in violation of any government regulations could require us to restructure our
operations to comply in a given government jurisdiction and could harm our business.
Various state and local regulations govern the transportation, handling, and sale of small pets. These laws vary
from state to state and are enforced by the courts and by regulatory authorities with broad discretion. In addition,
the operation of veterinary hospitals are subject to federal, state and local statutes and regulations such as the use,
management, transport, and disposal of medical materials and biohazardous materials. While we seek to structure
our operations to comply with the laws and regulations of each jurisdiction in which we operate, there can be no
assurance that, given varying and uncertain interpretations of these laws, we would be found to be in compliance in
all jurisdictions. A determination that we are in violation of applicable laws could require us to restructure our
operations to comply with such requirements and/or incur Ñnes or sanctions, which could harm our business.
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