UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2000
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or
[_] TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0 - 20242
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CENTRAL GARDEN & PET COMPANY
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Delaware 68-0275553
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3697 Mt. Diablo Blvd., Suite 310, Lafayette, California 94549
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(Address of principle executive offices)
(925) 283-4573
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of December 30, 2000 16,678,272
Class B Stock Outstanding as of December 30, 2000 1,656,262
CENTRAL GARDEN & PET COMPANY FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-----------------------------
1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 and December 30, 2000
Consolidated Statements of Cash Flows
Three Months Ended December 25, 1999 and December 30, 2000
Consolidated Statements of Income
Three Months Ended December 25, 1999 and December 30, 2000
Notes to Consolidated Financial Statements
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
--------------------------
1. Legal Proceedings
2. Changes in Securities and Use of Proceeds
3. Defaults Upon Senior Securities
4. Submission of Matter to a Vote of Securities Holders
5. Other Information
6. Exhibits and Reports on Form 8-K
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This quarterly report contains "forward-looking" statements based on current
expectations that involve risks and uncertainties. Actual results and the timing
of certain events may differ significantly from those projected in these
forward-looking statements due to the factors listed below, under "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors Relating to Forward-Looking Statements" in our Annual Report on Form
10-K for the fiscal year ended September 30, 2000, and from time to time in our
filings with the Securities and Exchange Commission. These risks and
uncertainties include the final resolution of all issues between the Company
and Pharmacia Corporation (formerly known as Monsanto Company) under the Solaris
Agreement; the resolution of the pending litigation among the Company, Pharmacia
and The Scotts Company; the success of and the costs associated with the
realignment of the Company's lawn and garden distribution operations; any
liabilities to which the Company may become subject as a result of the August 2,
2000 fire at its Phoenix distribution center; and the impact of any other
outstanding or potential litigation.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Central Garden & Pet Company
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except shares)
(unaudited)
September 30, December 30,
2000 2000
------------- ------------
ASSETS
Current assets:
Cash & cash equivalents $ 5,685 $ 3,850
Accounts receivable (less allowance for doubtful
accounts of $8,050 and $7,994) 151,190 139,283
Inventories 242,617 280,149
Prepaid expenses and other assets 20,658 22,033
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Total current assets 420,150 445,315
Land, buildings, improvements and equipment - net 111,740 111,527
Goodwill 382,294 379,509
Other assets 33,234 35,864
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Total $ 947,418 $ 972,215
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 129,239 $ 161,787
Accounts payable 121,705 142,646
Accrued expenses 42,801 23,272
Current portion of long-term debt 5,277 4,947
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Total current liabilities 299,022 332,652
Long-term debt 148,242 160,915
Deferred income taxes and other long-term obligations 36,207 19,134
Shareholders' equity:
Class B stock, $.01 par value: 1,657,762 and 1,656,262 shares
outstanding at September 30, 2000 and December 30, 2000 16 16
Common stock, $.01 par value: 30,417,421 and 30,449,109 issued
and 16,675,171 and 16,678,272 outstanding at September 30, 2000
and December 30, 2000 304 304
Additional paid-in capital 525,793 525,812
Retained earnings 82,661 78,209
Treasury stock (144,827) (144,827)
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Total shareholders' equity 463,947 459,514
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Total $ 947,418 $ 972,215
============= ============
Central Garden & Pet Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
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December 25, December 30,
1999 2000
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Cash Flows From Operating Activities:
Net loss $ (6,475) $ (4,452)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,665 6,288
Change in assets and liabilities:
Receivables 37,834 15,607
Inventories (61,238) (33,232)
Prepaid expenses and other assets (1,094) (4,090)
Accounts payable 10,245 20,936
Accrued expenses (8,951) (9,529)
Other long-term obligations 0 (4,328)
------------------- ------------------
Net cash used in operating activities (24,014) (12,800)
Cash flows from investing activities:
Additions to land, buildings, improvements and equipment (4,789) (2,923)
Payments to acquire companies, net of cash acquired (21,000) (18,277)
------------------- ------------------
Net cash used in investing activities (25,789) (21,200)
Cash flows from financing activities:
Borrowings under lines of credit, net 69,929 32,548
Repayments of long-term debt (52) (402)
Proceeds from issuance of stock - net 25 19
Payments to reacquire stock (18,595) 0
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Net cash provided by financing activities 51,307 32,165
Net increase (decrease) in cash 1,504 (1,835)
Cash at beginning of period 8,017 5,685
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Cash at end of period $ 9,521 $ 3,850
=================== ==================
Central Garden & Pet Company
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
Three Months Ended
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December 25, December 30,
1999 2000
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Net sales $ 219,117 $ 213,259
Cost of goods sold and occupancy 160,363 147,278
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Gross profit 58,754 65,981
Selling, general and
administrative expenses 65,601 68,247
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Loss from operations (6,847) (2,266)
Interest expense (4,476) (5,970)
Interest income 166 49
Other income (expense) (406) 92
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Loss before income taxes (11,563) (8,095)
Income taxes (5,088) (3,643)
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Net loss $ (6,475) $ (4,452)
================= ==================
Basic and diluted loss per common share $ (0.33) $ (0.24)
================= ==================
Weighted average shares outstanding 19,389 18,334
================= ==================
Central Garden & Pet Company
Notes to Condensed Consolidated Financial Statements
Three Months Ended December 30, 2000
(unaudited)
1. Basis of Presentation
---------------------
The condensed consolidated balance sheet as of December 30, 2000, the
consolidated statements of income for both the three months ended December
30, 2000 and December 25, 1999 and the consolidated statements of cash
flows for the three months ended December 30, 2000 and December 25, 1999
have been prepared by the Company, without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) considered necessary to present fairly the financial position,
results of operations and cash flows of the Company for the periods
mentioned above, have been made.
Due to the seasonal nature of the Company's business, the results of
operations for the three months ended December 30, 2000 are not indicative
of the operating results that may be expected for the year ending September
29, 2001.
It is suggested that these interim financial statements be read in
conjunction with the annual audited financial statements, accounting
policies and financial notes thereto, included in the Company's 2000 Annual
Report on Form 10-K which has previously been filed with the Securities and
Exchange Commission.
2. New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998 and
amended by SFAS Nos. 137 and 138, issued in June 2000. The new standards
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities. Under the standard, certain contracts that were not
formerly considered derivatives may now meet the definition of a
derivative. The Company adopted the standard effective October 1, 2000. The
adoption of SFAS No. 133, as amended by SFAS Nos. 137 and 138, did not have
an impact on the financial position or results of operations of the Company
because the Company did not have derivative instruments which require
valuation in the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", which provides the SEC staff's views on selected revenue
recognition issues. In March 2000, the SEC released SAB 101A, which delayed
for one quarter the implementation date of SAB 101 for registrants with
fiscal years beginning between December 16, 1999 and March 15, 2000. In
June 2000, the SEC released SAB 101B, which delayed the implementation date
of SAB 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company is evaluating what impact,
if any, SAB 101 will have on the Company's income statement presentation,
however, the Company does not believe it will have any impact on its
financial position or results of operations.
3. Recent Acquisition
------------------
In October 2000, the Company's Pennington subsidiary acquired the Rebel and
Lofts line of grass seed from KRB Seed Company, LLC, for approximately $8
million in cash, and signed perpetual licensing agreements under which
the Company will make royalty payments to KRB Seed Company, LLC over the
term of the licensing agreements. The acquisition was accounted for under
the purchase method. Royalty payments will be recorded as expense as they
are incurred. The operations of this business have been included in the
Company's results of operations since October 2000.
In September 2000, Central's Pennington subsidiary acquired All-Glass
Aquarium Co., Inc., a leading manufacturer and marketer of aquariums and
related products, based in Franklin, Wisconsin and its Oceanic Systems
subsidiary in Dallas, Texas for approximately $10 million, which was
recorded as a liability in the Consolidated Balance Sheet as of September
30, 2000, and was subsequently paid during the three months ended December
30, 2000. The operations of this business have been included in the
Company's results of operations since October 1, 2000.
4. Earnings Per Share
------------------
Options to purchase 3,156,298 and 2,906,710 shares of common stock at
prices ranging from $1.30 to $33.94 per share were outstanding during
the three-month periods ended December 30, 2000 and December 25, 1999,
respectively, but were not included in the computation of diluted earnings
per share because the assumed exercise would have been anti-dilutive in
each period. Shares of common stock from the assumed conversion of the
Company's convertible securities totaling 4,107,143 were also not included
in the computation of diluted earnings per share for the three-month
periods ended December 30, 2000 and December 25, 1999 because the assumed
conversion would have been anti-dilutive.
5. Segment Information
-------------------
In December 2000, the Company cancelled the spin-off of its garden
distribution business and adopted a plan to reorganize its garden and pet
businesses. Under the reorganization plan, the Company's garden products
and distribution businesses became one operating unit and its pet products
and distribution businesses became another operating unit.
Consistent with the above changes, management has determined that the
reportable segments of the Company are Garden Products and Pet Products,
based on the level at which the chief operating decision making group
reviews the results of operations to make decisions regarding performance
assessment and resource allocation. This represents a change in the
segments reported in the Company's fiscal 2000 Annual Report filed on Form
10-K. Segment information, based upon the new reportable segments, for the
three month periods ended December 25, 1999 and December 30, 2000 and
segment assets at September 30, 2000 and December 30, 2000 is set forth
below (dollars in thousands):
December 25, December 30,
1999 2000
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Net sales
Pet Products $ 117,111 $ 133,287
Garden Products 111,176 92,939
Intersegment eliminations (9,170) (12,967)
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Total net sales $ 219,117 $ 213,259
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Intersegment sales
Pet Products $ 5,550 $ 10,364
Garden Products 3,620 2,603
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Total intersegment sales $ 9,170 $ 12,967
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Income (loss) from operations
Pet Products $ 4,390 $ 5,784
Garden Products (5,254) (3,381)
Corporate (5,983) (4,669)
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Total loss from operations (6,847) (2,266)
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Interest expense - net (4,310) (5,921)
Other income (expense) (406) 92
Income taxes (5,088) (3,643)
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Net loss $ (6,475) $ (4,452)
============ ============
Depreciation and amortization
Pet Products $ 1,662 $ 2,091
Garden Products 1,577 1,587
Corporate 2,426 2,610
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Total depreciation and amortization $ 5,665 $ 6,288
============ ============
Expenditures for long lived assets
Pet Products $ 2,389 $ 2,041
Garden Products 2,377 809
Corporate 23 73
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Total expenditures for long lived assets $ 4,789 $ 2,923
============ ============
September 30, December 30,
2000 2000
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Assets
Pet Products $ 173,843 $ 162,801
Garden Products 340,411 353,533
Corporate 433,264 455,880
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Total assets $ 947,418 $ 972,214
============ ============
6. Other Charges
---------------
Activity affecting the reserve balances associated with Other Charges
recorded in fiscal 2000 and prior years is as follows (in millions):
-------------------------
Severance Exit Related
and Other Total
------------------------- --------
Balance September 30, 2000 $ 0.4 $ 9.1 $ 9.5
Costs incurred and paid (1.6) (1.6)
------------------------- --------
Balance December 30, 2000 $ 0.4 $ 7.5 $ 7.9
========================= ========
Remaining reserve balances totaling $7.9 million are included in the
Condensed Consolidated Balance Sheet within the categories "accounts
payable" and "accrued expenses", comprised of $0.4 million associated with
charges recorded in the year ended September 25, 1999; and $7.5 million
associated with charges recorded in the year ended September 30, 2000. Cost
paid during the three months ended December 30, 2000 relate to facility
closure costs and lease terminations associated with the charges recorded
in the years ended September 26, 1998 and September 30, 2000. The remaining
exit costs are expected to be incurred and paid during fiscal 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Central was incorporated in Delaware in June 1992 and is the successor to a
California corporation which was incorporated in 1955. References to "we," "us,"
or "Central" means Central Garden & Pet Company and its subsidiaries and
divisions, and their predecessor companies and subsidiaries.
Recent developments:
In December 2000 the Company announced that it would cancel the proposed
spin-off of its garden distribution business and would reorganize its garden and
pet businesses.
With the termination of the Company's distribution arrangement with The Scotts
Company and other anticipated sales decreases in the garden distribution
business, we believed that we could not economically support a national garden
distribution infrastructure. Additionally, we believe that the move toward
direct sales to retailers by manufacturers will increase in the future. Given
this, the Company commenced integrating garden distribution into our garden
products business. We believe this move offers us the best opportunity to
utilize our sales force and distribution know-how to provide logistics and sales
support for both our proprietary brands and consumer recognized products to
create a more profitable segment. This integration also applies to our pet
distribution business. This part of our business will continue to support our
partner suppliers but will increase its focus on expanding sales of our
proprietary pet products. This use of distribution as an integral support
function for proprietary brands has been used very successfully by our
Pennington subsidiary. This reorganization represents a change in the segments
reported from those reported in the Company's fiscal 2000 Annual Report filed on
Form 10K.
Developments affecting Garden Products:
Expiration of the Solaris Agreement and Termination of our Distribution
Relationship with Scotts
From October 1, 1995 to September 30, 1999, Garden Products distributed Solaris
products nationwide, pursuant to an exclusive distribution agreement (the
"Solaris Agreement"). Management believes that the relationship with Solaris
embodied in the Solaris Agreement had a substantial positive impact on our
results of operations. In January 1999, Pharmacia Corporation (formerly known as
Monsanto Company) sold its Solaris lawn and garden business exclusive of its
Roundup(R) herbicide products for consumer use to Scotts and entered into a
separate, long-term, exclusive agreement pursuant to which Pharmacia continues
to make Roundup herbicide products for consumer use and Scotts markets the
products. Beginning October 1, 1999, Scotts began to distribute Ortho(R) and
Roundup(R) products through a system that involved a combination of
distributors, of which we were the largest, as well as through direct sales by
Scotts to certain major retailers. In addition, Scotts began to sell
Miracle-Gro(R) directly to certain retailers.
Effective September 30, 2000, Scotts discontinued its distribution relationship
with Central. The affected products included Scotts(R), Ortho(R) and
Miracle-Gro(R) products and consumer Roundup(R) products manufactured by
Pharmacia for which Scotts acts as Pharmacia's exclusive sales agent. For
Central's fiscal year ended September 30, 2000, the revenue attributable to the
affected products was approximately $176 million. The gross profit associated
with these sales in fiscal 2000 was estimated to be $27 million based on
historical customer profitability. We expect this loss of gross profit to be
partially offset in fiscal 2001 with expense reductions.
Due to the termination of the Scotts distribution relationship and anticipated
sales declines, we have taken actions to downsize our lawn and garden
distribution operations to reflect anticipated business levels for the fiscal
year 2001. As a result, we have recorded charges of $27.5 million in the fiscal
year ending September 30, 2000 as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Fiscal 2000
Compared with Fiscal 1999" in the Company's fiscal 2000 annual report filed on
Form 10-K.
The sale of the Solaris business by Pharmacia, the expiration of the Solaris
Agreement and termination of the Scotts distribution relationship subject our
distribution business to significant uncertainties. These include the resolution
of all payments due between us and Pharmacia under the Solaris Agreement, such
as the amounts receivable from Pharmacia for cost reimbursements and payments
for cost reductions; the amounts payable to Pharmacia for inventory; and
responsibility for obsolete inventory and for non-payment by Solaris' sub-
agents. Scotts and Pharmacia have each initiated litigation against Central
arising out of the prior distribution relationship. In addition, Central has
filed suit against Scotts and Pharmacia seeking damages and injunctive relief as
well as restitution for, among other things, breach of contract and violations
of the antitrust laws by Scotts and Pharmacia. Each of these cases is in its
early stage. For this reason and because of the uncertainties inherent in
complex litigation, it is not currently possible to make an assessment of the
potential impact, losses or gains that may arise out of these cases individually
or collectively. Central believes that the reconciliation of all accounts and
claims with Pharmacia and Scotts will not result in additional charges to
Central. Further, Central believes it has substantial counterclaims and rights
of offset against both Scotts and Pharmacia, as well as meritorious defenses,
and intends to vigorously contest both suits. However, there can be no assurance
that the resolution of this litigation will not have a material adverse effect
on its results of operations, financial position and/or cash flows.
Three Months Ended December 30, 2000
Compared with Three Months Ended December 25, 1999
Net sales for the three months ended December 30, 2000 decreased by 2.7% or
$5.8 million to $213.3 million from $219.1 million for the three months ended
December 25, 1999. Of the decrease in net sales approximately $17.2 million
relates to the Garden Products segment of which $13.9 million is attributable
to the closure of thirteen garden distribution branches commencing in October
2000, offset in part by an increase of $5.1 million related to operations newly
acquired. Net sales for the Pet Products segment increased by $11.4 million
including $14.9 million related operations acquired subsequent to October 1999.
Gross profit increased by 12.3% or $7.2 million from $58.8 million during the
quarter ended December 25, 1999 to $66.0 million for the comparable 2000 period.
Gross profit as a percentage of net sales increased from 26.8% for the 1999
quarter to 30.9% for the quarter ended December 20, 2000. The increase in gross
profit dollars relates principally to the newly acquired businesses in both
segments. The increase in gross profit as a percentage of net sales relates
principally to increases in Garden Products associated with an increasing
proportion of higher margin branded products coupled with a reduction in non
Central distribution sales.
Selling, general and administrative expenses increased 4.0% or $2.6 million from
$65.6 million during the 1999 quarter to $68.2 million for the comparable 2000
quarter. Of the $2.6 million increase, approximately $4.0 million was related to
newly acquired businesses offset by approximately $4.0 million attributable to
the garden distribution operations. As a percentage of net sales, selling,
general and administrative expenses increased from 29.9% during the three months
ended December 25, 1999 to 32.0% for the three months ended December 30, 2000.
Selling and delivery expenses decreased by $2.5 million from $31.2 million for
the three months ended December 25, 1999 to $28.7 million for the comparable
2000 period. Of this decrease, $3.6 million related to a reduction resulting
from recently closed garden distribution branches, offset in part by a $1.1
million increase related to newly acquired businesses. Facilities expense
decreased by $0.5 million from $3.2 million during the quarter ended December
25, 1999 to $2.7 million for the comparable 2000 period. The decrease results
from the closed garden distribution centers offset in part by a $0.1 million
increase related to newly acquired businesses. Warehouse and administrative
expenses increased $5.6 million from $31.2 million during the three months ended
December 25, 1999 to $36.8 million for the comparable 2000 quarter. Of the $5.6
million increase, approximately $2.5 million related to newly acquired
businesses. The increase from existing operations related principally to
increased personnel costs, increased information systems costs incurred to
convert certain distribution branches to a common computer system and higher
costs relative to inventory levels required to support remaining operations.
Net interest expense for the quarter ended December 30, 2000 increased by $1.6
million to $5.9 million from $4.3 million for the quarter ended December 25,
1999. The increase is due to higher average outstanding short-term debt
resulting principally from the Company's stock repurchase program and the
businesses acquired since October 1999.
Average short-term borrowings for the quarter ended December 30, 2000 were
$142.9 million compared with $138.5 million for the quarter ended December 25,
1999. The average short-term interest rates for the quarter ended December 30,
2000 and December 25, 1999 were 8.5% and 7.4%, respectively.
The Company's effective income tax rate for the quarter ended December 30, 2000
was 45% compared with 44% for the quarter ended December 25, 1999. The increase
in the effective tax rate results principally from non-deductible goodwill
expense being a higher percentage of taxable income than was the case in the
quarter ended December 25, 1999.
Liquidity and Capital Resources
The Company has financed its growth through a combination of bank
borrowings, supplier credit, internally generated funds and sales of securities
to the public. The Company received net proceeds (after offering expenses) of
approximately $431.0 million from its five public offerings of common stock in
July 1993, November 1995, July 1996, August 1997 and January 1998. In November
1996, the Company completed the sale of $115 million 6% subordinated convertible
notes generating approximately $112 million net of underwriting commissions.
Historically, the Company's business has been highly seasonal and its
working capital requirements and capital resources tracked closely to this
seasonal pattern. During the first fiscal quarter accounts receivable reach
their lowest level while inventory, accounts payable and short-term borrowings
begin to increase. Since the Company's short-term credit line fluctuates based
upon a specified asset borrowing base, this quarter is typically the period when
the asset borrowing base is at its lowest and consequently the Company's ability
to borrow is at its lowest. During the second fiscal quarter, receivables,
accounts payable and short-term borrowings begin to increase, reflecting the
build-up of inventory and related payables in anticipation of the peak selling
season. During the third fiscal quarter, principally due to the Solaris
Agreement for the period between October 1, 1995 and September 30, 1999,
inventory levels remained relatively constant while accounts receivable peaked
and short-term borrowings started to decline as cash collections were received
during the peak- selling season. During the fourth fiscal quarter, inventory
levels were at their lowest, and accounts receivable and payables were
substantially reduced through conversion of receivables to cash. As a result of
the termination of the Solaris agreement effective September 30, 1999, the
ending of the Company's distribution relationship with the Scotts company
effective September 30, 2000, and the associated reduction in Garden Products
sales as a percentage of overall sales, this seasonal pattern is expected to be
less significant in the future.
The Company's businesses service two broad markets: lawn and garden and pet
supplies. Pet Products primarily deals with products that have a year round
selling cycle with very little change quarter to quarter. As a result, it is not
necessary to carry large quantities of inventory to meet peak demands.
Additionally, this level sales cycle eliminates the need for manufacturers to
give extended credit terms to either distributors or retailers. On the other
hand, Garden Products is highly seasonal with approximately two-thirds of its
sales occurring during the fiscal second and third quarters. For many
manufacturers of garden products this seasonality requires them to move large
quantities of their products well ahead of the peak selling period. To encourage
distributors to carry large amounts of inventory, industry practice has been for
manufacturers to give extended credit terms and/or promotional discounts.
Cash used in operating activities was $12.8 million use during the three
months ended December 30, 2000, a decrease from a $24.0 million during the
quarter ended December 25, 1999, primarily due to lower use levels of inventory
build up in the fiscal 2001 quarter as a result of the termination of the Scotts
distribution relationship coupled with better terms on accounts payable
experienced in the current year period. Cash used in investing activities of
$21.2 million resulted from the payment of amounts due related to the
acquisitions of All-Glass Aquarium and the Lofts and Rebel line of products by
the Company's Pennington Subsidiary, as well as the acquisition of office and
warehouse equipment, including computer hardware and software. Cash generated
from financing activities of $32.2 million consisted
principally of net borrowings of $32.5 million under the Company's lines of
credit, partially offset by $0.4 million in repayments of long term debt.
The Company has a $200 million line of credit with Congress Financial
Corporation (Western). The available amount under the line of credit fluctuates
based upon a specific asset-borrowing base. The line of credit bears interest at
a rate either equal to the prime rate or LIBOR plus 2% at the Company's option,
and is secured by substantially all of the Company's assets. At December 30,
2000, the Company had $111.4 million of outstanding borrowings, and had $2.9
million of available borrowing capacity under this line. The Company's line of
credit contains certain financial covenants such as minimum net worth and
minimum working capital requirements. The line also requires the lender's prior
written consent to any acquisition of a business. On December 12, 2000, the
agreement was amended and extended to July 12, 2002. In connection with the
acquisition of one company in fiscal 1998, the Company assumed a $60.0 million
line of credit. At December 30, 2000, there were $47.9 million of outstanding
borrowings and $12.1 million of available borrowing capacity under this line.
Interest related to this line is based on a rate either equal to the prime rate
or LIBOR plus .875% at the Company's option. On January 13, 2001, this line was
increased from $60 to $75 million.
Excluding the potential impact of any adverse consequences associated with
legal matters discussed in "Part II - Item 1. Legal Proceedings", the Company
believes that cash flows from operating activities, funds available under its
lines of credit, and arrangements with suppliers will be adequate to fund its
presently anticipated working capital requirements for the foreseeable future.
The Company anticipates that its capital expenditures will not exceed $18.0
million for the next 12 months.
As part of its growth strategy, the Company has engaged in acquisition
discussions with a number of companies in the past and it anticipates it will
continue to evaluate potential acquisition candidates. If one or more potential
acquisition opportunities, including those that would be material, become
available in the near future, the Company may require additional external
capital. In addition, such acquisitions would subject the Company to the general
risks associated with acquiring companies, particularly if the acquisitions are
relatively large.
Weather and Seasonality
Historically, the Company's sales of lawn and garden products have been
influenced by weather and climate conditions in the markets it serves. During
the last several years, the Company's results of operations were negatively
affected by severe weather conditions in many parts of the country.
Additionally, the Company's business has been highly seasonal. In fiscal 2000,
approximately 62% of the Company's sales occurred in the first six months
of the calendar year, the Company's second and third fiscal quarters.
Substantially all of the Company's operating income has been typically generated
in this period which has historically offset the operating losses incurred
during the first fiscal quarter of the year. As a result of the termination of
the distribution relationship with Scotts in September 2000, and the associated
reduction in Garden Products sales as a percentage of overall sales, this
seasonal pattern is expected to be less significant in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes there has been no material change in its exposure to market
risk from that discussed in the Company's fiscal 2000 Annual Report filed on
Form 10-K.
CENTRAL GARDEN & PET COMPANY FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Scotts and Pharmacia Litigation. On June 30, 2000, The Scotts Company filed
suit against Central to collect the purchase price of certain lawn and garden
products previously sold to Central. Central has withheld payments to Scotts of
approximately $17 million on the basis of claims it has against Scotts --
including amounts due for services and goods previously supplied by Central and
not yet paid for by Scotts. This action, The Scotts Company v. Central Garden &
Pet Company, Docket No. C2 00-755, is in the United States District Court for
the Southern District of Ohio, Eastern Division. On July 3, 2000, Pharmacia
Corporation (formerly known as Monsanto Company) filed suit against Central
seeking an accounting and unspecified amounts allegedly due Pharmacia under the
four-year alliance agreement between Central and Pharmacia which expired in
September 1999, as well as damages for breach of contract. This action,
Pharmacia Corporation v. Central Garden & Pet Company, Docket No. 00CC-002253 Q
CV, is in the Circuit Court of St. Louis County, Missouri. Central has filed
motions in both the Scotts and Pharmacia actions to have those cases dismissed
or stayed. Central's motion in the Scotts action is still pending. In the
Pharmacia action, the court denied Central's motion to stay but granted
Central's request that Scotts be joined as a party. On January 18, 2001,
Pharmacia Corporation filed an Amended Petition adding Scotts to the Pharmacia
action. On January 29, 2001, Central filed its Answer, including affirmative
defenses, to the Amended Petition as well as Counter/Cross claims against
Pharmacia and Scotts. Pharmacia and Scotts have not filed their responses to the
Counter/Cross Claims.
Central believes that the reconciliation of all accounts and claims with
Pharmacia and Scotts will not result in additional charges to Central. Further,
Central believes it has substantial counterclaims and rights of offset against
both Scotts and Pharmacia, as well as meritorious defenses, and intends to
vigorously contest both suits. However, Central cannot assure you that the
resolution of this litigation will not have a material adverse effect on its
results of operations, financial position and/or cash flows.
On July 7, 2000, Central filed suit against Scotts and Pharmacia seeking
damages and injunctive relief as well as restitution for, among other things,
breach of contract and violations of the antitrust laws by Scotts and Pharmacia.
This action, Central Garden & Pet Company, a Delaware Corporation v. The Scotts
Company, an Ohio corporation; and Pharmacia Corporation, formerly known as
Monsanto Company, a Delaware corporation, Docket No. C 00 2465, is in the United
States District Court for the Northern District of California. On October 26,
2000, the federal district court issued an order denying, for the most part,
Pharmacia's motion to dismiss Central's federal antitrust claims. Central was
given leave to file an amended federal complaint to clarify certain of its
allegations. Central filed a first amended complaint on November 14, 2000. The
federal district court's October 26 order also ruled that it did not have
jurisdiction over Central's state law claims and that such claims should be
adjudicated in a state court. On October 31, 2000, Central filed an action
entitled Central Garden & Pet Company v. The Scotts Company and Pharmacia
Corporation, Docket No. C00-04586 in Contra Costa Superior Court asserting
various state law claims, including the claims previously asserted in the
federal action. On December 4, 2000, Pharmacia and Scotts filed a joint Motion
to Stay
the Contra Costa Action pending the completion of the actions in Ohio and St.
Louis. On January 29, 2001, the Court ordered the stay.
Phoenix Fire. On August 2, 2000, a fire destroyed the Company's leased warehouse
space in Phoenix, Arizona, and an adjoining warehouse space leased by a third
party. The adjoining warehouse tenant, the building owner, and nearby businesses
have presented claims for property damage and business interruption. Local
residents have filed a purported class action lawsuit alleging claims for bodily
injury and property damage as a result of the fire. In addition, the Arizona
Department of Environmental Quality is monitoring the cleanup operations and has
asked the Company, the building owner and the adjoining warehouse tenant to
submit a plan for assessing whether the fire and fire suppression efforts may
have caused environmental impacts to soil, groundwater and/or surface water. The
overall amount of the damages to all parties caused by the fire, and the overall
amount of damages which the Company may sustain as a result of the fire, have
not been quantified. At the time of the fire, the Company maintained property
insurance covering losses to the leased premises, the Company's inventory and
equipment, and loss of business income. The Company also maintained insurance
providing $51 million of coverage (with no deductible) against third party
liability. The Company believes that this insurance coverage will be available
with respect to third party claims against the Company if parties other than the
Company are not found responsible. The precise amount of the damages sustained
in the fire, the ultimate determination of the parties responsible and the
availability of insurance coverage are likely to depend on the outcome of
complex litigation, involving numerous claimants, defendants and insurance
companies.
For a discussion of other pending legal proceedings, please see Central's Annual
Report on Form 10-K for the year ended September 30, 2000.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matter to a Vote of Securities Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
- ------ -------
10.6 Second Amended and Restated Loan and Security Agreement by and
among Congress Financial Corporation (Western) and Central Garden
& Pet Company, Matthews Redwood and Nursery Supply, Inc., Four
Paws Products, Ltd., Ezell Nursery Supply, Inc., Kaytee Products
Incorporated, Norcal Pottery Products, Inc., TFH Publications,
Inc. and Wellmark International dated December 12, 2000.
(b) The following report on Form 8-K was filed during the quarter ended
December 30, 2000.
On December 21, 2000, the Company filed a report on Form 8-K, dated December 20,
2000, announcing that it would cancel the spin-off of its garden distribution
business and reorganize its garden and pet businesses.
CENTRAL GARDEN & PET COMPANY FORM 10-Q
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunder
duly authorized.
CENTRAL GARDEN & PET COMPANY
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Registrant
Dated: February 13, 2001
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William E. Brown, Chairman of the Board and
Chief Executive Officer
/s/ Lee D. Hines, Jr.
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Lee D. Hines, Jr., Vice President and
Chief Financial Officer