Petsmart 2003 Annual Report Download - page 41

Structured Lease Facilities
We previously entered into lease agreements for certain stores as part of a structured lease Ñnancing. The
structured lease Ñnancing facilities provided a special purpose entity, not aÇliated with us, with the necessary
Ñnancing to complete the acquisition and construction of new stores. Once construction was completed, another
special purpose entity, also not aÇliated with us, leased the completed stores to us for a four-year term. After the
four-year term expired, we were required to pay the balance of the Ñnancing, provide for the sale of the properties to
a third party, or pay a guaranteed residual amount. The special purpose entity was created speciÑcally to hold the
properties, which consisted of two land parcels and seven stores. It engaged in no other business activity.
In April 2003, we made the decision to purchase the two land parcels, and based on appraisals, we recorded a
$1.7 million loss in the consolidated Ñnancial statements for 2003. During 2003, we completed this transaction and
no further loss was recorded in the consolidated Ñnancial statements. In June 2003, the seven stores under the
structured leasing facility were sold to a third party by the special purpose entity lessor. The buyer of the properties
paid all principal amounts owing on the Ñnancing, and we paid all accrued interest of approximately $2.2 million.
We recorded no material gain or loss in this transaction. We immediately entered into lease agreements for the
seven stores with the third party buyer. Based on the lease terms, the lease agreements for six of the seven buildings
resulted in capital lease treatment under SFAS No. 13, ""Accounting for Leases.'' As a result, we recognized capital
lease assets and related obligations of approximately $10.7 million upon execution of the lease agreements. One of
the buildings and the related land for all seven stores are classiÑed as operating leases. These transactions have
eliminated any arrangements between special purpose entities and us.
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 over half our stores, under the name BanÑeld, The Pet
Hospital. 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 1, 2004, we owned approximately 15% of the voting stock, and
approximately 32% 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 $10.5 million, $8.3 million, and $6.7 million
during 2003, 2002, and 2001 respectively. Licensing fees receivable from MMI totaled $4.4 million and $2.9 million
at February 1, 2004, and February 2, 2003, respectively, and were included in receivables in the accompanying
consolidated balance sheets.
Credit Facility
At our option, on November 21, 2003, we amended our credit facility to reduce the available commitment to
$125.0 million, extend the maturity by two years to April 30, 2008, and amended certain covenants. The credit
facility permits us to pay dividends, so long as we are not in default or the payment of dividends would not result in
default. The credit facility is secured by substantially all our personal property assets and certain real property. We
pay a fee to the lenders each quarter at an annual rate of 0.25% of the unused amount of the credit facility. As of
February 1, 2004, we had no borrowings outstanding under the credit facility; however, we issue letters of credit for
guarantees provided for insurance programs, capital lease agreements, and utilities.
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.
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