UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 29, 2003
or
¨ |
TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission File Number: 0-20242
CENTRAL GARDEN & PET COMPANY
Delaware | 68-0275553 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3697 Mt. Diablo Blvd., Suite 310, Lafayette, California 94549
(Address of principle executive offices)
(925) 283-4573
(Registrant’s telephone number, including area code)
(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
Indicate by checkmarkcheck mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).x Yes ¨ YesxNo
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 | 17,676,290 | |
Class B Stock Outstanding as of | 1,655,462 |
PART I. | ||||
Item 1. | 2 | |||
2 | ||||
3 | ||||
4 | ||||
Item 2. | ||||
15 | ||||
Item 3. | 20 | |||
Item 4. | 20 | |||
PART II. OTHER INFORMATION | ||||
Item 1. | 21 | |||
Item 2. | 21 | |||
Item 3. | 21 | |||
Item 4. | 21 | |||
Item 5. | 22 | |||
Item 6. | 22 |
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”Factors Relating to Forward-Looking Statements” in our Annual Report on Form 10-K for the fiscal year ended September 28, 2002, and from time to time in our filings with the Securities and Exchange Commission. These risks and uncertainties include the final resolution of all pendingthe litigation between the Company 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.
1
PART I. FINANCIAL INFORMATION
CENTRAL GARDEN & PET COMPANY
(in thousands, except shares)share and per share amounts)
(unaudited)
September 28, 2002 | December 28, 2002 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash & cash equivalents | $ | 10,884 | $ | 14,790 | ||||
Accounts receivable (less allowance for doubtful accounts of $7,597 and $7,248) | 130,984 | 105,843 | ||||||
Inventories | 193,159 | 224,889 | ||||||
Prepaid expenses and other assets | 26,096 | 19,115 | ||||||
Total current assets | 361,123 | 364,637 | ||||||
Land, buildings, improvements and equipment—net | 100,864 | 99,060 | ||||||
Goodwill | 222,489 | 222,489 | ||||||
Deferred income taxes and other assets | 47,481 | 46,791 | ||||||
Total | $ | 731,957 | $ | 732,977 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable | $ | 59,975 | $ | 64,649 | ||||
Accounts payable | 96,796 | 95,776 | ||||||
Accrued expenses | 42,742 | 39,392 | ||||||
Current portion of long-term debt | 7,593 | 122,593 | ||||||
Total current liabilities | 207,106 | 322,410 | ||||||
Long-term debt | 145,331 | 29,592 | ||||||
Other long-term obligations | 2,012 | 2,059 | ||||||
Shareholders’ equity: | ||||||||
Class B stock, $.01 par value: 1,655,462 shares outstanding at September 28, 2002 and December 28, 2002 | 16 | 16 | ||||||
Common stock, $.01 par value: 31,008,198 and 31,209,373 issued and 17,265,948 and 17,467,123 outstanding at September 28, 2002 and December 28, 2002 | 310 | 312 | ||||||
Additional paid-in capital | 532,290 | 534,413 | ||||||
Retained deficit | (10,281 | ) | (10,998 | ) | ||||
Treasury stock | (144,827 | ) | (144,827 | ) | ||||
Total shareholders’ equity | 377,508 | 378,916 | ||||||
Total | $ | 731,957 | $ | 732,977 | ||||
September 28, 2002 | March 29, 2003 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash & cash equivalents | $ | 10,884 |
| $ | 7,007 |
| ||
Accounts receivable (less allowance for doubtful accounts of $7,597 and $8,016) |
| 130,984 |
|
| 200,954 |
| ||
Inventories |
| 193,159 |
|
| 231,438 |
| ||
Prepaid expenses and other assets |
| 26,096 |
|
| 13,926 |
| ||
Total current assets |
| 361,123 |
|
| 453,325 |
| ||
Land, buildings, improvements and equipment—net |
| 100,864 |
|
| 99,235 |
| ||
Goodwill |
| 222,489 |
|
| 222,489 |
| ||
Deferred income taxes and other assets |
| 47,481 |
|
| 50,447 |
| ||
Total | $ | 731,957 |
| $ | 825,496 |
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable | $ | 59,975 |
| $ | 81,747 |
| ||
Accounts payable |
| 96,796 |
|
| 129,848 |
| ||
Accrued expenses |
| 42,742 |
|
| 48,220 |
| ||
Current portion of long-term debt |
| 7,593 |
|
| 6,503 |
| ||
Total current liabilities |
| 207,106 |
|
| 266,318 |
| ||
Long-term debt |
| 145,331 |
|
| 160,922 |
| ||
Other long-term obligations |
| 2,012 |
|
| 2,128 |
| ||
Shareholders’ equity: | ||||||||
Class B stock, $.01 par value: 1,655,462 shares outstanding at September 28, 2002 and March 29, 2003 |
| 16 |
|
| 16 |
| ||
Common stock, $.01 par value: 31,008,198 and 31,416,240 issued and 17,265,948 and 17,673,990 outstanding at September 28, 2002 and March 29, 2003 |
| 310 |
|
| 314 |
| ||
Additional paid-in capital |
| 532,290 |
|
| 538,094 |
| ||
Retained earnings (deficit) |
| (10,281 | ) |
| 2,531 |
| ||
Treasury stock |
| (144,827 | ) |
| (144,827 | ) | ||
Total shareholders’ equity |
| 377,508 |
|
| 396,128 |
| ||
Total | $ | 731,957 |
| $ | 825,496 |
| ||
See notes to condensed consolidated financial statements.
2
CENTRAL GARDEN & PET COMPANY
(in thousands, except per share amounts)
(unaudited)
Three Months Ended | ||||||||
December 29, 2001 | December 28, 2002 | |||||||
Net sales | $ | 210,659 | $ | 211,936 | ||||
Cost of goods sold and occupancy | 149,157 | 150,718 | ||||||
Gross profit | 61,502 | 61,218 | ||||||
Selling, general and administrative expenses | 59,621 | 59,254 | ||||||
Income from operations | 1,881 | 1,964 | ||||||
Interest expense | (3,938 | ) | (2,843 | ) | ||||
Interest income | 27 | 26 | ||||||
Other income (expense) | (528 | ) | (341 | ) | ||||
Loss before income taxes and cumulative effect of accounting change | (2,558 | ) | (1,194 | ) | ||||
Income taxes | (1,049 | ) | (477 | ) | ||||
Loss before cumulative effect of accounting change | (1,509 | ) | (717 | ) | ||||
Cumulative effect of accounting change, net of tax (Note 5) | (112,237 | ) | — | |||||
Net loss | $ | (113,746 | ) | $ | (717 | ) | ||
Basic and diluted loss per common equivalent share: | ||||||||
Before cumulative effect of accounting change | $ | (0.08 | ) | $ | (0.04 | ) | ||
Cumulative effect of accounting change | (6.09 | ) | — | |||||
Basic and diluted loss per common equivalent share | $ | (6.17 | ) | $ | (0.04 | ) | ||
Basic and diluted weighted average shares used in the computation of loss per share | 18,446 | 19,060 | ||||||
Three Months Ended | Six Months Ended | |||||||||||||||
March 30, 2002 | March 29, 2003 | March 30, 2002 | March 29, 2003 | |||||||||||||
Net sales | $ | 290,693 |
| $ | 330,509 |
| $ | 501,352 |
| $ | 542,445 |
| ||||
Cost of goods sold and occupancy |
| 199,793 |
|
| 231,419 |
|
| 348,950 |
|
| 382,137 |
| ||||
Gross profit |
| 90,900 |
|
| 99,090 |
|
| 152,402 |
|
| 160,308 |
| ||||
Selling, general and administrative expenses |
| 69,589 |
|
| 70,916 |
|
| 129,210 |
|
| 130,170 |
| ||||
Income from operations |
| 21,311 |
|
| 28,174 |
|
| 23,192 |
|
| 30,138 |
| ||||
Interest expense |
| (3,682 | ) |
| (6,341 | ) |
| (7,620 | ) |
| (9,184 | ) | ||||
Interest income |
| 14 |
|
| 44 |
|
| 41 |
|
| 70 |
| ||||
Other income |
| 892 |
|
| 671 |
|
| 364 |
|
| 330 |
| ||||
Income before income taxes and cumulative effect of accounting change |
| 18,535 |
|
| 22,548 |
|
| 15,977 |
|
| 21,354 |
| ||||
Income taxes |
| 7,599 |
|
| 9,019 |
|
| 6,550 |
|
| 8,542 |
| ||||
Income before cumulative effect of accounting change |
| 10,936 |
|
| 13,529 |
|
| 9,427 |
|
| 12,812 |
| ||||
Cumulative effect of accounting change, net of tax (Note 7) |
| — |
|
| — |
|
| (112,237 | ) |
| — |
| ||||
Net income (loss) | $ | 10,936 |
| $ | 13,529 |
| $ | (102,810 | ) | $ | 12,812 |
| ||||
Basic income (loss) per common share: | ||||||||||||||||
Before cumulative effect of accounting change | $ | 0.59 |
| $ | 0.70 |
| $ | 0.51 |
| $ | 0.67 |
| ||||
Cumulative effect of accounting change |
| — |
|
| — |
|
| (6.08 | ) |
| — |
| ||||
Basic income (loss) per common share | $ | 0.59 |
| $ | 0.70 |
| $ | (5.57 | ) | $ | 0.67 |
| ||||
Diluted income (loss) per common share: | ||||||||||||||||
Before cumulative effect of accounting change | $ | 0.53 |
| $ | 0.68 |
| $ | 0.51 |
| $ | 0.64 |
| ||||
Cumulative effect of accounting change |
| — |
|
| — |
|
| (4.95 | ) |
| — |
| ||||
Diluted income (loss) per common share | $ | 0.53 |
| $ | 0.68 |
| $ | (4.44 | ) | $ | 0.64 |
| ||||
Weighted average shares used in the computation of income (loss) per share: | ||||||||||||||||
Basic |
| 18,469 |
|
| 19,234 |
|
| 18,458 |
|
| 19,147 |
| ||||
Diluted |
| 22,734 |
|
| 20,009 |
|
| 22,661 |
|
| 19,900 |
|
See notes to condensed consolidated financial statements.
3
CENTRAL GARDEN & PET COMPANY
(in thousands)
Three Months Ended | ||||||||
December 29, 2001 | December 28, 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (113,746 | ) | $ | (717 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 4,284 | 4,501 | ||||||
Cumulative effect of accounting change | 146,748 | — | ||||||
Deferred income taxes | (34,511 | ) | — | |||||
Change in assets and liabilities: | ||||||||
Receivables | 6,443 | 25,141 | ||||||
Inventories | (13,681 | ) | (31,730 | ) | ||||
Prepaid expenses and other assets | 2,972 | 7,441 | ||||||
Accounts payable | 6,208 | (1,020 | ) | |||||
Accrued expenses | (5,934 | ) | (3,350 | ) | ||||
Other long-term obligations | (133 | ) | 47 | |||||
Net cash provided by (used in) operating activities | (1,350 | ) | 313 | |||||
Cash flows from investing activities: | ||||||||
Additions to land, buildings, improvements and equipment | (1,920 | ) | (2,467 | ) | ||||
Net cash used in investing activities | (1,920 | ) | (2,467 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings under lines of credit, net | 747 | 4,674 | ||||||
Repayments of long-term debt | (77 | ) | (739 | ) | ||||
Proceeds from issuance of common stock—net | — | 2,125 | ||||||
Net cash provided by financing activities | 670 | 6,060 | ||||||
Net increase (decrease) in cash and cash equivalents | (2,600 | ) | 3,906 | |||||
Cash and cash equivalents at beginning of period | 8,292 | 10,884 | ||||||
Cash and cash equivalents at end of period | $ | 5,692 | $ | 14,790 | ||||
Supplemental information: | ||||||||
Cash paid for interest | $ | 2,335 | $ | 1,125 | ||||
Cash paid for taxes, net of refunds | $ | 48 | $ | (8,319 | ) | |||
Six Months Ended | ||||||||
March 30, 2002 | March 29, 2003 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (102,810 | ) | $ | 12,812 |
| ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization |
| 8,547 |
|
| 8,824 |
| ||
Cumulative effect of accounting change |
| 146,748 |
|
| — |
| ||
Deferred income taxes |
| (34,511 | ) |
| — |
| ||
Change in assets and liabilities: | ||||||||
Receivables |
| (50,847 | ) |
| (69,970 | ) | ||
Inventories |
| (391 | ) |
| (38,279 | ) | ||
Prepaid expenses and other assets |
| 13,998 |
|
| 16,309 |
| ||
Accounts payable |
| 5,496 |
|
| 33,052 |
| ||
Accrued expenses |
| 4,282 |
|
| 5,478 |
| ||
Other long-term obligations |
| (298 | ) |
| 116 |
| ||
Net cash used in operating activities |
| (9,786 | ) |
| (31,658 | ) | ||
Cash flows from investing activities: | ||||||||
Additions to land, buildings, improvements and equipment |
| (5,545 | ) |
| (6,810 | ) | ||
Net cash used in investing activities |
| (5,545 | ) |
| (6,810 | ) | ||
Cash flows from financing activities: | ||||||||
Borrowings under lines of credit, net |
| 14,837 |
|
| 21,772 |
| ||
Proceeds from issuance of long-term debt |
| 1,300 |
|
| 150,000 |
| ||
Repayments of long-term debt |
| (826 | ) |
| (135,499 | ) | ||
Deferred financing costs |
| — |
|
| (6,000 | ) | ||
Proceeds from issuance of common stock—net |
| 91 |
|
| 4,318 |
| ||
Net cash provided by financing activities |
| 15,402 |
|
| 34,591 |
| ||
Net increase (decrease) in cash and cash equivalents |
| 71 |
|
| (3,877 | ) | ||
Cash and cash equivalents at beginning of period |
| 8,292 |
|
| 10,884 |
| ||
Cash and cash equivalents at end of period | $ | 8,363 |
| $ | 7,007 |
| ||
Supplemental information: | ||||||||
Cash paid for interest | $ | 7,866 |
| $ | 7,546 |
| ||
Cash paid for taxes, net of refunds | $ | 2,539 |
| $ | 1,905 |
| ||
See notes to condensed consolidated financial statements.
4
CENTRAL GARDEN & PET COMPANY
Three and Six Months Ended December 28, 2002March 29, 2003
(unaudited)
1. Basis of Presentation
The condensed consolidated balance sheet as of December 28, 2002,March 29, 2003, the condensed consolidated statements of operations for the three and six months ended DecemberMarch 30, 2002 and March 29, 2001 and December 28, 20022003 and the condensed consolidated statements of cash flows for the threesix months ended DecemberMarch 30, 2002 and March 29, 2001 and December 28, 20022003 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 and six months ended December 28, 2002March 29, 2003 are not indicative of the operating results that may be expected for the year ending September 27, 2003. 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 2002 Annual Report on Form 10-K which has previously been filed with the Securities and Exchange Commission.
2. New Accounting Pronouncements
In June 2001,December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting StandardsStandard (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting requirements for retirement obligations associated with tangible long-lived assets. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the assets. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The Company has adopted SFAS No. 143 beginning September 29, 2002 (the first quarter of fiscal year 2003). The adoption of SFAS No. 143 did not have a material impact on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN No. 45). FIN No. 45 elaborates on the effectdisclosures to be made by a guarantor and clarifies that a guarantor is required to recognize, at the inception of the method used on reported results.guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The adoption of the disclosure and recognition and measurement provisions of SFASFIN No. 148 are45, effective beginning in the quarter ended MarchDecember 29, 2003 and are2002, did not expected to have a material impact on the Company’s financial position or resultsstatements.
3. Stock Plan Information
The Company has various non-qualified stock-based compensation programs, which include stock options and restricted stock awards.
The Company has various stock option plans that provide for the granting of operations.
If compensation expense for the Company’s various stock option plans had been determined based upon the projected fair values at the grant dates for awards under those plans in accordance with SFAS No. 123, the Company’s pro-forma net earnings, basic and diluted earnings per common share would have been as follows:
5
Three Months Ended | Six Months Ended | |||||||||||||||
March 30, 2002 | March 29, 2003 | March 30, 2002 | March 29, 2003 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income (loss), as reported | $ | 10,936 |
| $ | 13,529 |
| $ | (102,810 | ) | $ | 12,812 |
| ||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards, net of related tax effects |
| (654 | ) |
| (448 | ) |
| (1,095 | ) |
| (906 | ) | ||||
Pro forma net income (loss) | $ | 10,282 |
| $ | 13,081 |
| $ | (103,905 | ) | $ | 11,906 |
| ||||
Net income (loss) per common equivalent share: | ||||||||||||||||
Basic – as reported | $ | 0.59 |
| $ | 0.70 |
| $ | (5.57 | ) | $ | 0.67 |
| ||||
Basic – pro forma | $ | 0.56 |
| $ | 0.68 |
| $ | (5.63 | ) | $ | 0.62 |
| ||||
Diluted – as reported | $ | 0.53 |
| $ | 0.68 |
| $ | (4.44 | ) | $ | 0.64 |
| ||||
Diluted – pro forma | $ | 0.50 |
| $ | 0.65 |
| $ | (4.49 | ) | $ | 0.60 |
|
3.4. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted per-share computations for income (loss) from continuing operations:
Three Months Ended March 29, 2003 | Six Months Ended March 30, 2003 | |||||||||||||||
Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Basic EPS: | ||||||||||||||||
Net Income | $ | 13,529 | 19,234 | $ | 0.70 | $ | 12,812 | 19,147 | $ | 0.67 | ||||||
Effect of dilutive securities: | ||||||||||||||||
Options to purchase common stock | 775 |
| 0.02 | 753 |
| 0.03 | ||||||||||
Diluted EPS: | ||||||||||||||||
Net income attributable to common shareholders | $ | 13,529 | 20,009 | $ | 0.68 | $ | 12,812 | 19,900 | $ | 0.64 |
Three Months Ended March 29, 2002 | Six Months Ended March 30, 2002 | ||||||||||||||||||
Income | Shares | Per Share | Income | Shares | Per Share | ||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||
Basic EPS: | |||||||||||||||||||
Net Income (loss) | $ | 10,936 | 18,469 | $ | 0.59 |
| $ | (102,810 | ) | 18,458 | $ | (5.57 | ) | ||||||
Effect of dilutive securities: | |||||||||||||||||||
Options to purchase common stock | 158 |
| — |
| 96 | ||||||||||||||
Convertible notes |
| 1,084 | 4,107 |
| (0.06 | ) |
| 2,168 |
| 4,107 |
| — |
| ||||||
Diluted EPS: | |||||||||||||||||||
Net income (loss) attributable to common shareholders | $ | 12,020 | 22,734 | $ | 0.53 |
| $ | (100,642 | ) | 22,661 | $ | (4.44 | ) |
Shares of common stock from the assumed conversion of the Company’s convertible securities totaling 4,107,143 were not included in the computation of diluted EPS for the three and six-month periods ended March 29, 2003, because the assumed conversion would have been anti-dilutive. Shares of common stock from the assumed
6
conversion of the Company’s convertible securities totaling 4,107,143 were included in the computation of diluted EPS for the three and six-month periods ended March 30, 2002.
Options to purchase 2,348,7412,555,121 and 2,706,8593,329,829 shares of common stock at prices ranging from $1.30 to $33.94$30.00 per share were outstanding duringat March 29, 2003 and from $1.30 to $33.94 at March 30, 2002, respectively. For the three-monththree month periods ended December 28,March 29, 2003 and March 30, 2002, options to purchase 6,000 and December 29, 2001, respectively,1,521,690 shares of common stock were outstanding but were not included in the computation of diluted earnings per share because the assumedoption exercise prices were greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive in each period. Sharesbe anti-dilutive. For the six month periods ended March 29, 2003 and March 30, 2002, options to purchase 120,620 and 1,522,690 shares of common stock from the assumed conversion of the company’s convertible securities totaling 4,107,143 were alsooutstanding but were not included in the computation of diluted earnings per share for the three-month periods ended December 28, 2002 and December 29, 2001 because the assumed conversionoption exercise prices were greater than the average market price of the common shares and, therefore, the effect would have beenbe anti-dilutive.
4.5. Segment Information
Management has determined that the reportable segments of the Company are PetGarden Products and GardenPet 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.
Three Months Ended | ||||||||
December 29, 2001 | December 28, 2002 | |||||||
(in thousands) | ||||||||
Net Sales: | ||||||||
Pet Products | $ | 116,795 | $ | 118,688 | ||||
Garden Products | 93,864 | 93,248 | ||||||
Total net sales | $ | 210,659 | $ | 211,936 | ||||
Income (loss) from operations: | ||||||||
Pet Products | $ | 7,797 | $ | 9,873 | ||||
Garden Products | (1,534 | ) | (3,221 | ) | ||||
Corporate | (4,382 | ) | (4,688 | ) | ||||
Total income from operations | 1,881 | 1,964 | ||||||
Interest expense—net | (3,911 | ) | (2,817 | ) | ||||
Other income (expense) | (528 | ) | (341 | ) | ||||
Income taxes | (1,049 | ) | (477 | ) | ||||
Loss before cumulative effect of accounting change | (1,509 | ) | (717 | ) | ||||
Cumulative effect of accounting change, net of tax | (112,237 | ) | — | |||||
Net loss | $ | (113,746 | ) | $ | (717 | ) | ||
Depreciation and amortization: | ||||||||
Pet Products | $ | 2,733 | $ | 3,045 | ||||
Garden Products | 1,407 | 1,331 | ||||||
Corporate | 144 | 125 | ||||||
Total depreciation and amortization | $ | 4,284 | $ | 4,501 | ||||
September 28, 2002 | December 28, 2002 | |||||
(in thousands) | ||||||
Assets: | ||||||
Pet Products | $ | 201,051 | $ | 199,654 | ||
Garden Products | 254,903 | 264,145 | ||||
Corporate | 276,003 | 269,178 | ||||
Total assets | $ | 731,957 | $ | 732,977 | ||
Goodwill (included in corporate assets): | ||||||
Pet Products | $ | 117,099 | $ | 117,099 | ||
Garden Products | 105,390 | 105,390 | ||||
Total goodwill | $ | 222,489 | $ | 222,489 | ||
Three Months Ended | Six Months Ended | |||||||||||||||
March 30, 2002 | March 29, 2003 | March 30, 2002 | March 29, 2003 | |||||||||||||
(in thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Garden Products | $ | 173,053 |
| $ | 201,894 |
| $ | 266,917 |
| $ | 295,142 |
| ||||
Pet Products |
| 117,640 |
|
| 128,615 |
|
| 234,435 |
|
| 247,303 |
| ||||
Total net sales | $ | 290,693 |
| $ | 330,509 |
| $ | 501,352 |
| $ | 542,445 |
| ||||
Income (loss) from operations: | ||||||||||||||||
Garden Products | $ | 21,256 |
| $ | 23,887 |
| $ | 19,722 |
| $ | 20,666 |
| ||||
Pet Products |
| 10,460 |
|
| 13,043 |
|
| 18,257 |
|
| 22,916 |
| ||||
Corporate |
| (10,405 | ) |
| (8,756 | ) |
| (14,787 | ) |
| (13,444 | ) | ||||
Total income from operations |
| 21,311 |
|
| 28,174 |
|
| 23,192 |
|
| 30,138 |
| ||||
Interest expense—net |
| (3,668 | ) |
| (6,297 | ) |
| (7,579 | ) |
| (9,114 | ) | ||||
Other income |
| 892 |
|
| 671 |
|
| 364 |
|
| 330 |
| ||||
Income taxes |
| 7,599 |
|
| 9,019 |
|
| 6,550 |
|
| 8,542 |
| ||||
Income before cumulative effect of accounting change |
| 10,936 |
|
| 13,529 |
|
| 9,427 |
|
| 12,812 |
| ||||
Cumulative effect of accounting change, net of tax |
| — |
|
| — |
|
| (112,237 | ) |
| — |
| ||||
Net income (loss) | $ | 10,936 |
| $ | 13,529 |
| $ | (102,810 | ) | $ | 12,812 |
| ||||
Depreciation and amortization: | ||||||||||||||||
Garden Products | $ | 1,373 |
| $ | 1,319 |
| $ | 2,780 |
| $ | 2,650 |
| ||||
Pet Products |
| 2,750 |
|
| 2,877 |
|
| 5,483 |
|
| 5,922 |
| ||||
Corporate |
| 140 |
|
| 127 |
|
| 284 |
|
| 252 |
| ||||
Total depreciation and amortization | $ | 4,263 |
| $ | 4,323 |
| $ | 8,547 |
| $ | 8,824 |
| ||||
7
September 28, 2002 | March 29, 2003 | |||||
(in thousands) | ||||||
Assets: | ||||||
Garden Products | $ | 254,903 | $ | 357,264 | ||
Pet Products |
| 201,051 |
| 209,766 | ||
Corporate |
| 276,003 |
| 258,466 | ||
Total assets | $ | 731,957 | $ | 825,496 | ||
Goodwill (included in corporate assets): | ||||||
Garden Products | $ | 105,390 | $ | 105,390 | ||
Pet Products |
| 117,099 |
| 117,099 | ||
Total goodwill | $ | 222,489 | $ | 222,489 | ||
5.6. Consolidating Condensed Financial Information of Guarantor Subsidiaries
Certain wholly-owned subsidiaries of the Company (as listed below, collectively the “Guarantor Subsidiaries”) have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the Company’s $150,000,000 9 1/8% Senior Subordinated Notes (the “Notes”) issued on January 30, 2003. Certain subsidiaries and operating divisions are not guarantors of the Notes and have been included in the financial results of the Parent in the information below. Those subsidiaries that are guarantors of the Notes are as follows:
Four Paws Products Ltd.
Grant Laboratories, Inc.
Kaytee Products, Incorporated
Matthews Redwood & Nursery Supply, Inc.
Pennington Seed, Inc. (including Phaeton Corporation (dba Unicorn Labs), Seeds West, Inc., All-Glass
Aquarium Co., Inc. (including Oceanic Systems, Inc.))
T.F.H. Publications, Inc.
Wellmark International
Norcal Pottery Products, Inc.
Pennington Seed, Inc. of Nebraska
Gro Tec, Inc.
In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying unaudited consolidating condensed financial statements based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X.
8
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Three Months Ended March 29, 2003 (in thousands) (unaudited) | ||||||||||||||||
Parent | Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Net sales | $ | 102,906 |
| $ | 250,077 |
| $ | (22,474 | ) | $ | 330,509 |
| ||||
Cost of products sold and occupancy |
| 76,739 |
|
| 176,282 |
|
| (21,602 | ) |
| 231,419 |
| ||||
Gross profit |
| 26,167 |
|
| 73,795 |
|
| (872 | ) |
| 99,090 |
| ||||
Selling, general and administrative expenses |
| 26,330 |
|
| 44,586 |
|
| — |
|
| 70,916 |
| ||||
Income (loss) from operations |
| (163 | ) |
| 29,209 |
|
| (872 | ) |
| 28,174 |
| ||||
Interest – net |
| (5,867 | ) |
| (430 | ) |
| — |
|
| (6,297 | ) | ||||
Other income |
| 458 |
|
| 213 |
|
| — |
|
| 671 |
| ||||
Income (loss) before income taxes |
| (5,572 | ) |
| 28,992 |
|
| (872 | ) |
| 22,548 |
| ||||
Income taxes |
| 2,229 |
|
| (11,597 | ) |
| 349 |
|
| (9,019 | ) | ||||
Net income (loss) |
| (3,343 | ) |
| 17,395 |
|
| (523 | ) |
| 13,529 |
| ||||
Equity in undistributed income of guarantor subsidiaries |
| 16,872 |
|
| — |
|
| (16,872 | ) |
| — |
| ||||
Net income (loss) | $ | 13,529 |
| $ | 17,395 |
| $ | (17,395 | ) | $ | 13,529 |
| ||||
Three Months Ended March 30, 2002 (in thousands) (unaudited) | ||||||||||||||||
Parent | Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Net sales | $ | 101,503 |
| $ | 208,422 |
| $ | (19,232 | ) | $ | 290,693 |
| ||||
Cost of products sold and occupancy |
| 78,080 |
|
| 141,559 |
|
| (19,846 | ) |
| 199,793 |
| ||||
Gross profit |
| 23,423 |
|
| 66,863 |
|
| 614 |
|
| 90,900 |
| ||||
Selling, general and administrative expenses |
| 30,503 |
|
| 39,086 |
|
| — |
|
| 69,589 |
| ||||
Income (loss) from operations |
| (7,080 | ) |
| 27,777 |
|
| 614 |
|
| 21,311 |
| ||||
Interest – net |
| (2,971 | ) |
| (697 | ) |
| — |
|
| (3,668 | ) | ||||
Other income |
| 749 |
|
| 143 |
|
| — |
|
| 892 |
| ||||
Income (loss) before income taxes |
| (9,302 | ) |
| 27,223 |
|
| 614 |
|
| 18,535 |
| ||||
Income taxes |
| 3,536 |
|
| (10,889 | ) |
| (246 | ) |
| (7,599 | ) | ||||
Net income (loss) |
| (5,766 | ) |
| 16,334 |
|
| 368 |
|
| 10,936 |
| ||||
Equity in undistributed income of guarantor subsidiaries |
| 16,702 |
|
| — |
|
| (16,702 | ) |
| — |
| ||||
Net income (loss) | $ | 10,936 |
| $ | 16,334 |
| $ | (16,334 | ) | $ | 10,936 |
| ||||
9
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Six Months Ended March 29, 2003 (in thousands) (unaudited) | ||||||||||||||||
Parent | Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Net sales | $ | 174,457 |
| $ | 403,735 |
| $ | (35,747 | ) | $ | 542,445 |
| ||||
Cost of products sold and occupancy |
| 129,190 |
|
| 288,070 |
|
| (35,123 | ) |
| 382,137 |
| ||||
Gross profit |
| 45,267 |
|
| 115,665 |
|
| (624 | ) |
| 160,308 |
| ||||
Selling, general and administrative expenses |
| 47,850 |
|
| 82,320 |
|
| — |
|
| 130,170 |
| ||||
Income (loss) from operations |
| (2,583 | ) |
| 33,345 |
|
| (624 | ) |
| 30,138 |
| ||||
Interest – net |
| (8,292 | ) |
| (822 | ) |
| — |
|
| (9,114 | ) | ||||
Other income |
| (180 | ) |
| 510 |
|
| — |
|
| 330 |
| ||||
Income (loss) before income taxes |
| (11,055 | ) |
| 33,033 |
|
| (624 | ) |
| 21,354 |
| ||||
Income taxes |
| 4,422 |
|
| (13,214 | ) |
| 250 |
|
| (8,542 | ) | ||||
Net income (loss) |
| (6,633 | ) |
| 19,819 |
|
| (374 | ) |
| 12,812 |
| ||||
Equity in undistributed income of guarantor subsidiaries |
| 19,445 |
|
| — |
|
| (19,445 | ) |
| — |
| ||||
Net income (loss) | $ | 12,812 |
| $ | 19,819 |
| $ | (19,819 | ) | $ | 12,812 |
| ||||
Six Months Ended March 30, 2002 (in thousands) (unaudited) | ||||||||||||||||
Parent | Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Net sales | $ | 176,515 |
| $ | 356,903 |
| $ | (32,066 | ) | $ | 501,352 |
| ||||
Cost of products sold and occupancy |
| 134,097 |
|
| 246,788 |
|
| (31,935 | ) |
| 348,950 |
| ||||
Gross profit |
| 42,418 |
|
| 110,115 |
|
| (131 | ) |
| 152,402 |
| ||||
Selling, general and administrative expenses |
| 55,087 |
|
| 74,123 |
|
| — |
|
| 129,210 |
| ||||
Income (loss) from operations |
| (12,669 | ) |
| 35,992 |
|
| (131 | ) |
| 23,192 |
| ||||
Interest – net |
| (6,211 | ) |
| (1,368 | ) |
| — |
|
| (7,579 | ) | ||||
Other income |
| 221 |
|
| 143 |
|
| — |
|
| 364 |
| ||||
Income (loss) before income taxes and cumulative effect of accounting change |
| (18,659 | ) |
| 34,767 |
|
| (131 | ) |
| 15,977 |
| ||||
Income taxes |
| 7,305 |
|
| (13,907 | ) |
| 52 |
|
| (6,550 | ) | ||||
Income (loss) before cumulative effect of accounting change |
| (11,354 | ) |
| 20,860 |
|
| (79 | ) |
| 9,427 |
| ||||
Cumulative effect of accounting change, net of tax |
| (112,237 | ) |
| — |
|
| — |
|
| (112,237 | ) | ||||
Net income (loss) |
| (123,591 | ) |
| 20,860 |
|
| (79 | ) |
| (102,810 | ) | ||||
Equity in undistributed income of guarantor subsidiaries |
| 20,781 |
|
| — |
|
| (20,781 | ) |
| — |
| ||||
Net income (loss) | $ | (102,810 | ) | $ | 20,860 |
| $ | (20,860 | ) | $ | (102,810 | ) | ||||
10
CONSOLIDATING CONDENSED BALANCE SHEET
March 29, 2003 (in thousands) (unaudited) | |||||||||||||
Parent | Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||
ASSETS | |||||||||||||
Cash and equivalents | $ | 2,976 | $ | 4,031 | $ | — |
| $ | 7,007 | ||||
Accounts receivable |
| 58,962 |
| 156,774 |
| (14,782 | ) |
| 200,954 | ||||
Inventories |
| 68,218 |
| 163,220 |
| — |
|
| 231,438 | ||||
Prepaids and other assets |
| 9,826 |
| 4,100 |
| — |
|
| 13,926 | ||||
Total current assets |
| 139,982 |
| 328,125 |
| (14,782 | ) |
| 453,325 | ||||
Land, buildings, improvements and equipment, net |
| 11,076 |
| 88,159 |
| — |
|
| 99,235 | ||||
Goodwill |
| 222,489 |
| — |
| — |
|
| 222,489 | ||||
Investment in Guarantors |
| 316,946 |
| — |
| (316,946 | ) |
| — | ||||
Deferred income taxes and other assets |
| 38,804 |
| 11,643 |
| — |
|
| 50,447 | ||||
Total | $ | 729,297 | $ | 27,927 | $ | (331,728 | ) | $ | 825,496 | ||||
LIABILITIES | |||||||||||||
Notes payable | $ | 81,747 | $ | — | $ | — |
| $ | 81,747 | ||||
Accounts payable |
| 73,732 |
| 70,898 |
| (14,782 | ) |
| 129,848 | ||||
Accrued expenses and other liabilities |
| 27,490 |
| 27,233 |
| — |
|
| 54,723 | ||||
Total current liabilities |
| 182,969 |
| 98,131 |
| (14,782 | ) |
| 266,318 | ||||
Long-term debt |
| 150,200 |
| 10,722 |
| — |
|
| 160,922 | ||||
Deferred income taxes and other long-term obligations |
| — |
| 2,128 |
| — |
|
| 2,128 | ||||
Equity |
| 396,128 |
| 316,946 |
| (316,946 | ) |
| 396,128 | ||||
Total | $ | 729,297 | $ | 427,927 | $ | (331,728 | ) | $ | 825,496 | ||||
11
CONSOLIDATING CONDENSED BALANCE SHEET
September 28, 2002 (in thousands) (unaudited) | |||||||||||||
Parent | Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||
ASSETS | |||||||||||||
Cash and equivalents | $ | 10,080 | $ | 804 | $ | — |
| $ | 10,884 | ||||
Accounts receivable |
| 41,002 |
| 103,087 |
| (13,105 | ) |
| 130,984 | ||||
Inventories |
| 52,417 |
| 140,742 |
| — |
|
| 193,159 | ||||
Prepaids and other assets |
| 21,046 |
| 5,050 |
| — |
|
| 26,096 | ||||
Total current assets |
| 124,545 |
| 249,683 |
| (13,105 | ) |
| 361,123 | ||||
Land, buildings, improvements and equipment, net |
| 12,191 |
| 88,673 |
| — |
|
| 100,864 | ||||
Goodwill |
| 222,489 |
| — |
| — |
|
| 222,489 | ||||
Investment in Guarantors |
| 212,738 |
| — |
| (212,738 | ) |
| — | ||||
Deferred income taxes and other assets |
| 35,070 |
| 14,347 |
| (1,936 | ) |
| 47,481 | ||||
Total | $ | 607,033 | $ | 352,703 | $ | (227,779 | ) | $ | 731,957 | ||||
LIABILITIES | |||||||||||||
Notes payable | $ | 33,992 | $ | 25,983 | $ | — |
| $ | 59,975 | ||||
Accounts payable |
| 52,606 |
| 57,295 |
| (13,105 | ) |
| 96,796 | ||||
Accrued expenses and other liabilities |
| 22,437 |
| 27,898 |
| — |
|
| 50,335 | ||||
Total current liabilities |
| 109,035 |
| 111,176 |
| (13,105 | ) |
| 207,106 | ||||
Long-term debt |
| 120,387 |
| 24,944 |
| — |
|
| 145,331 | ||||
Deferred income taxes and other long-term obligations |
| 103 |
| 3,845 |
| (1,936 | ) |
| 2,012 | ||||
Equity |
| 377,508 |
| 212,738 |
| (212,738 | ) |
| 377,508 | ||||
Total | $ | 607,033 | $ | 352,703 | $ | (227,779 | ) | $ | 731,957 | ||||
12
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended March 29, 2003 (in thousands) (unaudited) | ||||||||||||||||
Parent | Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Net cash provided (used) by operating activities | $ | 4,015 |
| $ | (33,559 | ) | $ | (2,114 | ) | $ | (31,658 | ) | ||||
Expenditures for land, buildings, improvements and equipment |
| (841 | ) |
| (5,969 | ) |
| — |
|
| (6,810 | ) | ||||
Investment in guarantor |
| (86,503 | ) |
| 84,389 |
|
| 2,114 |
|
| — |
| ||||
Net cash provided (used) by investing activities |
| (87,344 | ) |
| 78,420 |
|
| 2,114 |
|
| (6,810 | ) | ||||
Borrowings (repayments) under lines of credit, net |
| 47,755 |
|
| (25,983 | ) |
| — |
|
| 21,772 |
| ||||
Proceeds from issuance of long-term debt |
| 150,000 |
|
| — |
|
| — |
|
| 150,000 |
| ||||
Payments on long-term debt |
| (119,848 | ) |
| (15,651 | ) |
| — |
|
| (135,499 | ) | ||||
Deferred financing costs |
| (6,000 | ) |
| (6,000 | ) | ||||||||||
Proceeds from issuance of stock |
| 4,318 |
|
| — |
|
| — |
|
| 4,318 |
| ||||
Net cash provided (used) by financing activities |
| 76,225 |
|
| (41,634 | ) |
| — |
|
| 34,591 |
| ||||
Net increase (decrease) in cash and cash equivalents |
| (7,104 | ) |
| 3,227 |
|
| — |
|
| (3,877 | ) | ||||
Cash and cash equivalents at beginning of period |
| 10,080 |
|
| 804 |
|
| — |
|
| 10,884 |
| ||||
Cash and cash equivalents at end of period | $ | 2,976 |
| $ | 4,031 |
| $ | — |
| $ | 7,007 |
| ||||
Six Months Ended March 30, 2002 (in thousands) (unaudited) | ||||||||||||||||
Parent | Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Net cash provided (used) by operating activities | $ | 11,306 |
| $ | (21,007 | ) | $ | (85 | ) | $ | (9,786 | ) | ||||
Expenditures for land, buildings, improvements and equipment |
| (775 | ) |
| (4,770 | ) |
| — |
|
| (5,545 | ) | ||||
Investment in guarantor |
| (14,002 | ) |
| 13,917 |
|
| 85 |
|
| — |
| ||||
Net cash provided (used) by investing activities |
| (14,777 | ) |
| 9,147 |
|
| 85 |
|
| (5,545 | ) | ||||
Borrowings under lines of credit, net |
| 2,474 |
|
| 12,363 |
|
| — |
|
| 14,837 |
| ||||
Proceeds from issuance of long-term debt |
| — |
|
| 1,300 |
|
| — |
|
| 1,300 |
| ||||
Payments on long-term debt |
| — |
|
| (826 | ) |
| — |
|
| (826 | ) | ||||
Proceeds from issuance of stock |
| 91 |
|
| — |
|
| — |
|
| 91 |
| ||||
Net cash provided by financing activities |
| 2,565 |
|
| 12,837 |
|
| — |
|
| 15,402 |
| ||||
Net increase (decrease) in cash and cash equivalents |
| (906 | ) |
| 977 |
|
| — |
|
| 71 |
| ||||
Cash and cash equivalents at beginning of period |
| 7,153 |
|
| 1,139 |
|
| — |
|
| 8,292 |
| ||||
Cash and cash equivalents at end of period | $ | 6,247 |
| $ | 2,116 |
| $ | — |
| $ | 8,363 |
| ||||
13
7. Cumulative Effect of Accounting Change—Change – Adoption of SFAS No. 142
During fiscal 2002, management completed its measurement of the goodwill impairment resulting from the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” The amount of goodwill impairment upon adoption is reflected as the cumulative effect of an accounting change as of September 30, 2001 in the accompanying condensed consolidated financial statements.
Goodwill balances within the Pet Products and Garden Products segments were tested for impairment as of September 30, 2001. Based on the analysis performed, the Company recorded a non-cash charge to write down goodwill in its Pet Products segment by $94.8 million ($70.1 million after tax) and in its Garden Products segment by $51.9 million ($42.1 million after tax).
As of June 30, 2002, the Company performed its annual goodwill impairment analysis. Based on the results of that analysis, no additional reduction of goodwill was required during fiscal year 2002.
6.8. Contingencies
TFH Litigation. In December 1997, Central acquired all of the stock of TFH Publications, Inc. (“TFH”). In connection with the transaction, Central made a $10 million loan to the sellers, which was evidenced by a Promissory Note. In September 1998, the prior owners of TFH brought suit against Central and certain executives of Central for damages and relief from their obligations under the Promissory Note, alleging, among other things, that Central’s failure to properly supervise the TFH management team had jeopardized their prospects of achieving certain earnouts. Central believes that these allegations are without merit. Central counterclaimed against the prior owners for enforcement of the Promissory Note, rescission and/or damages and other relief, alleging, among other things, fraud, misrepresentation and breach of fiduciary duty by the prior owners of TFH. These actions,Herbert R. Axelrod and Evelyn Axelrod v. Central Garden & Pet Company; Glenn S. Axelrod; Gary Hersch; William E. Brown; Robert B. Jones; Glen Novotny; and Neill Hines, Docket No. MON-L-5100-99, andTFH Publications, Inc. v. Herbert Axelrod et al., Docket No. L-2127-99 (consolidated cases), are in the New Jersey Superior Court. The case is currently in pretrial discovery and is scheduled for trial in the Spring of 2003.
During the course of discovery in this action, Central has become aware of certain information which shows that prior to the acquisition of TFH by Central, certain records of TFH were prepared in an inaccurate manner which, among other things, resulted in underpayment of taxes by certain individuals. Those individuals could be liable for back taxes, interest, and penalties. In addition, even though all of the events occurred prior to the acquisition of TFH by Central, there is a possibility that TFH could be liable for penalties for events which occurred under prior management. Central believes that TFH has strong defenses available to the assertion of any penalties against TFH. Central cannot predict whether TFH will be required to pay any such penalties. In the event that TFH were required to pay penalties, Central would seek compensation from the prior owners.
In March 2001, the prior owners of TFH also brought a separate action in federal court seeking to enforce what they alleged was an “arbitration award” made by an accountant concerning the closing balance sheet of TFH. The prior owners contended that the decisions by the accountant concerning the closing balance sheet entitled them to additional monies under the purchase price provisions of the Stock Purchase Agreement. The federal court held that the accountant did not make any monetary award. The federal court entered a judgment enforcing the decisions made by the accountant concerning the closing balance sheet of TFH, but the court did not, and refused to, enter a monetary award.See Evelyn M. Axelrod, et al. v. Central Garden & Pet Company, Civil Action No. 01-1262 (MLC) U.S.D.C. of New Jersey. The prior owners have argued in the consolidated civil actions pending in the New Jersey Superior Court that the judgment by the federal court entitles them to additional monies under the purchase price provision of the Stock Purchase Agreement. The New Jersey Superior Court has stated that it will not, at this time, enter a monetary award, but that it, like the federal court, will confirm the decisions made by the accountant concerning the closing balance sheet of TFH. Central believes that it has defenses to the claims by the prior owner for additional monies under the purchase price provisions of the Stock Purchase Agreement, and that the prior owners’ claims are subject to or will be offset by Central’s claims against the prior owners.
Central does not believe that the outcome of the above TFH matters will have a material adverse impact on its operations, financial position, or cash flows.
Scotts 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. Scotts filed an amended complaint seeking $23 million for such products. Central withheld payments to Scotts 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,SeeThe 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.(U.S. Dist Ct. N.D. Ohio). Central filed its answer and a counter complaint asserting various claims for breaches of contracts. Scotts filed a motion to dismiss certain of Central’s claims. On January 11, 2002, the court granted Scotts’ motion as to Central’s claim for breach of oral contract and promissory estoppel and denied the motion as to Central’s claim for fraud. Scotts subsequently filed a motion for summary adjudication of Central’s fraud claim. The court granted Scotts’ motion.
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On July 7, 2000, Central filed suit against Scotts and Pharmacia Corporation (formerly know as Monsanto Company) seeking damages and injunctive relief as well as restitution for, among other things, breach of contract and violations of the antitrust laws. 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 entitledSeeCentral Garden & Pet Company, v. The Scotts Company, and Pharmacia Corporation, formerly known as Monsanto Company,, Docket No. C00-04586 in Contra Costa Superior Court asserting various state law claims, including the claims previously asserted in the federal action. The state court subsequently stayed this action.C 00 2465, (U.S. Dist Ct. N.D. Cal.). Pursuant to a settlement reached with Pharmacia, Central and Pharmacia agreed that all claims and disputes arising from the alliance agreements and all antitrust claims against Pharmacia and Monsanto would be resolved, and the federal action has been dismissed as to Pharmacia and Monsanto. In April 2002, Scotts and Central filed cross-motions in the federal action for summary judgment on the antitrust claims. In May 2002, Scotts also filed a motion for summary judgment in the federal action based on res judicata. The court granted the res judicata motion, but did not rule on the antitrust motions, and vacated the trial date.motions. Central is appealing the judgment entered pursuant to the court’s order.
Central believesdoes not believe that the reconciliationoutcome of all accounts and claims in the above Scotts casesremaining matters will in the aggregate, not result in additional charges to Central. Further, Central believes it continues to have claims and rights of offset against Scotts and intends to continue to vigorously pursue its claims, including pursuit of post-trial remedies in connection with the suit filed by Scotts. However, Central cannot assure you that the resolution of this litigation will not have a material adverse effectimpact on its results of operations, financial position, and/or cash flows.
Phoenix Fire. On August 2, 2000, a fire destroyed Central’s leased warehouse space in Phoenix, Arizona, and an adjoining warehouse space leased by a third party. On July 31, 2001, the adjoining warehouse tenant filed a lawsuit against Central and other parties in the Superior Court of Arizona, Maricopa County, seeking to recover $47 million for property damage from the fire. SeeCardinal Health Inc., et al. v. Central Garden & Pet Company, et al., Civil Case No. CV2001-013152. Local residents have also filed a purported class action lawsuit alleging claims for bodily injury and property damage as a result of the fire. The building owner and several nearby businesses have also now filed lawsuits for property damage and business interruption, which we expect to be consolidated with the tenant and local resident lawsuits. Each of these lawsuits is currently pending in the Superior Court of Arizona, Maricopa County. The Arizona Department of Environmental Quality, after monitoring the cleanup operations and asking Central, the building owner and the adjoining warehouse tenant to assess whether the fire and fire suppression efforts may have caused environmental impacts to soil, groundwater and/or surface water, has now issued a letter stating that Central need take no further action at the site with respect to environmental issues. In early 2001, the EPA requested information relating to the fire. On July 17, 2002, the EPA informed
Central that it intended to file a civil administrative complaint seeking penalties of up to $350,000 for certain alleged post-fire reporting violations. Central and the EPA have recently agreed to a settlement regardingsettled those allegations.allegations for $65,000. The overall amount of the damages to all parties caused by the fire, and the overall amount of damages which Central may sustain as a result of the fire, have not been quantified. At the time of the fire, Central maintained property insurance covering losses to the leased premises, Central’s inventory and equipment, and loss of business income. Central also maintained insurance providing $51 million of coverage (with no deductible) against third party liability. Central believes that this insurance coverage will be available with respect to third party claims against Central if parties other than Central 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.
7. Subsequent Event
On January 30, 2003, the Company completed a private placement of $150,000,000 aggregate principal amount of 9 1/8% Senior Subordinated Notes due 2013. The net proceeds of the offering were approximately $144.0 million after deducting underwriting discounts and estimated offering expenses. The net proceeds will be used to redeem the Company’s outstanding convertible notes, including the payment of premium and accrued interest, repay outstanding amounts under two senior secured term loans and reduce a portion of the outstanding indebtedness under its senior credit facilities.
Item 2.Management’s2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Central Garden & Pet Company is a leading marketer and producer of quality branded products for the pet and lawn and garden supplies markets. We are one of the largest companies in the fragmented, $5.1 billion U.S. pet supplies industry and one of the largest companies in the $52.5 billion U.S. lawn and garden supplies industry. Our pet products include pet bird and small animal food, wild bird seed, aquarium products, flea, tick, mosquito and other insect control products, edible bones, cages, carriers, pet books, and other dog, cat, reptile and small animal products. These products are sold under a number of brand names, including Kaytee, All-Glass Aquarium, Zodiac, Nylabone, TFH and Four Paws. Our lawn and garden products include grass seed, wild bird seed, weed and insect control products, decorative outdoor patio products and ant control products. These products are sold under a number of brand names, including Pennington, Norcal Pottery, Matthews Four Seasons, AMDRO and Grant’s. In fiscal 2002, our consolidated net sales were $1.1 billion, of which our pet products segment, or Pet Products, accounted for $471.1 million and our lawn and garden products segment, or Garden Products, accounted for $606.7
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$606.7 million. Our income from operations was $52.8 million, of which Pet Products accounted for $43.4 million and Garden Products accounted for $37.3 million, before corporate expenses and eliminations of $27.9 million.
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,” “our,” or “Central” mean Central Garden & Pet Company and its subsidiaries and divisions, and their predecessor companies and subsidiaries.
Background
During the past several years, we have transitioned to a leading marketer and producer of branded products from a traditional pet and lawn and garden supplies distributor. We undertook this transition because we recognized the opportunity to build a portfolio of leading brands and improve profitability by capitalizing on our knowledge of the pet and lawn and garden supplies sectors, our strong relationships with retailers and our nationwide sales and logistics network. Our goal was to diversify our business and improve operating margins by establishing a portfolio of leading brands. Since 1997, we have acquired numerous branded products companies and product lines, including Wellmark and Four Paws in fiscal 1997; Kaytee Products, TFH and Pennington Seed in fiscal 1998; Norcal Pottery in fiscal 1999; and AMDRO and All-Glass Aquarium in fiscal 2000.
Virtually all of our sales before fiscal 1997 were from distributing other manufacturers’ products. Since then, our branded product sales have grown to approximately $800 million, or approximately 75% of total sales, in fiscal 2002. During this same period, sales of other manufacturers’ products have declined to approximately $250 million, or approximately 25% of total sales, and our gross profit margins improved from 13.6% in fiscal 1996 to 29.7% in fiscal 2002.
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,” “our,” or “Central” mean Central Garden & Pet Company and its subsidiaries and divisions, and their predecessor companies and subsidiaries.
Recent developments:Developments
In January 30, 2003 the Company completed a private placement of $150,000,000 aggregate principal amountwe issued $150 million of 9 1/8% Senior Subordinated Notes 1/8% senior subordinated notes due 2013. The net proceeds of the offeringapproximately $144 million were approximately $144.0 million after deducting underwriting discounts and estimated offering expenses. The net proceeds will be used to redeem the Company’s outstanding$115 million of 6% subordinated convertible notes includingdue November 2003. We used the paymentbalance of premiumthe net proceeds, combined with additional borrowings under the our line of credit with Congress Financial Corporation (Western), to repay the outstanding borrowings under our Pennington credit facility and accrued interest, repay outstanding amounts under two senior secured term loans of All-Glass. In conjunction with these repayments, we terminated the Pennington and reduce a portion of the outstanding indebtedness under its seniorAll-Glass credit facilities.
We are currently negotiating to replace our existing $175 million asset based credit facility with a new $200 million senior secured credit facility. We anticipate that this facility will consist of a five-year $100 million revolving credit facility and a six-year $100 million term loan and will result in slightly higher annual interest expense. We are refinancing to eliminate the restrictions of asset-based financing and to significantly increase our financial flexibility. We believe this increased financial flexibility will allow us to more effectively pursue growth opportunities and potential acquisitions. We expect the new facility to close in May.
Three Months Ended December 28, 2002March 29, 2003
Compared with Three Months Ended December 29, 2001March 30, 2002
Results for the firstsecond quarter of fiscal year 2003 reflectedcontinued to reflect our continuing transition to a leading marketer and producer of branded products from a distributor of the products of other manufacturers to a leading manufacturer and producer of brandedmanufacturers’ products. Net sales for the three months ended December 28, 2002March 29, 2003 increased by $1.3$39.8 million, or 0.6%13.7%, to $211.9$330.5 million from $210.6$290.7 million for the three months ended December 29, 2001.March 30, 2002. The increase in net sales was comprised of a $1.9an $11.0 million, or 9.3%, increase or 1.6%, in our
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Pet Products segment and a $0.6$28.8 million, decrease, or 0.7%16.7%, increase in Garden Products. The increase in Pet Products was due primarily to increased sales of our bird seed branded products. The increase in Garden Products segment. Pet Products’was due to increased grass seed, bird seed and chemical branded product sales increased while sales of other manufacturers’ products decreased. In Garden Products both branded product sales and sales of other manufacturers’ products decreased slightly. Garden Products’sales. Grass seed sales were adverselypositively impacted by a customer’s deferral of approximately $6.0 million of grass seed shipments which are now expected to be made in the secondcurrent quarter that were originally expected in the first quarter.
Gross profit decreased by $0.3for the three months ended March 29, 2003 increased $8.2 million, or 0.5%9.0%, to $99.1 million from $61.5$90.9 million during the quarter ended December 29, 2001 to $61.2 million for the current quarter. A decreaseMarch 30, 2002. Gross profit increased in gross profit in theboth Garden Products segment was only partially offset by an increase in theand Pet Products segment.as a result of the quarter’s increased sales. Gross profit as a percentage of net sales decreased from 29.2%31.3% the quarter ended March 30, 2002 to 30.0% for the 2001same quarter to 28.9% for the current quarter. The gross profit and gross profit percentage decreases werein 2003, primarily attributabledue to higher than normal grain prices caused by the drought in the Plains states last year. These higher expenses were only partially recovered through price increases for our wild and pet bird feed products, which were only partially recovered through price increases and a deferral of approximately $6.0 million in grass seed shipmentsnot fully implemented until March. We do not anticipate any substantial adverse impact from the first fiscal quarter of 2003 which are now expectedhigher grain prices in the second quarter.
Selling, general and administrative expenses decreased $0.3increased $1.3 million, or 0.6%1.9%, from $59.6$69.6 million for the quarter ended December 29, 2001March 30, 2002 to $59.3$70.9 million in the current quarter. As a percentage of net sales, selling, general and administrative expenses decreased from 28.3%23.9% for the quarter ended December 29, 2001March 30, 2002 to 28.0%21.5% for the quarter ended December 28, 2002.March 29, 2003. The decrease in selling, general and administrative expenses as a percentage of net sales was due to a decreasedecreases in facilities and warehouse and administrative expenses partially offset by an increasethe increases in selling and delivery expenses.
Selling and delivery expenses increased by $0.4$3.8 million, or 1.4%12.4%, from $27.6$30.7 million for the quarter ended December 29, 2001March 30, 2002 to $28.0$34.5 million for the current quarter. Increased revenues in both the Garden ProductsProduct and Pet Product segments increased approximately $0.9 million due to increasedselling and delivery expenses. The increase in Garden Products was partially offset by a decrease in expenses, for Pet Products.which approximated the revenue percentage increases.
Facilities expense decreased by $0.2$0.3 million, or 7.1%10.3%, from $2.8$2.9 million for the quarter ended December 29, 2001March 30, 2002 to $2.6 million for the current quarter. The decrease was related to facility shutdown costs in Pet Products incurred in the prior year quarter.
Warehouse and administrative expenses decreased $0.5$2.2 million, or 1.7%6.1%, from $29.2$36.0 million for the quarter ended December 29, 2001March 30, 2002 to $28.7$33.8 million for the quarter ended December 28, 2002.March 29, 2003. Warehouse and administrative expenses decreased $0.1 million in Garden Products and $0.7$1.0 million in Pet Products and $1.7 million at Corporate and were partially offset by a $0.5 million increase in Garden Products. The decrease was due primarily to reduced legal and litigation expenses in the current year quarter and increased purchasing, merchandise handling and storage costs included as inventory costs as a result of the increase in both sales and inventory levels. These decreases were partially offset by increased insurance costs.
Net interest expense for the quarter ended March 29, 2003 increased by $2.6 million, or 70.3%, to $6.3 million from $3.7 million for the quarter ended March 30, 2002. The increase is due to the higher interest expense associated with our $150 million senior subordinated notes offering in January 2003 and the redemption of our $115 million convertible subordinated notes due 2003. In connection with this refinancing, $1.4 million of nonrecurring additional interest was expensed in the second quarter of 2003. The higher interest expenses were partially offset by lower average short-term borrowings and lower average interest rates related to our lines of credit.
Other income decreased $0.2 million from $0.9 million for the quarter ended March 30, 2002 to $0.7 million for the quarter ended March 29, 2003, representing earnings from our equity method investments.
Our effective income tax rate for the quarter ended March 30, 2002 was 41.0% compared with 40.0% for the quarter ended March 29, 2003.
Six Months Ended March 29, 2003
Compared with Six Months Ended March 30, 2002
Net sales for the six months ended March 29, 2003 increased by $41.0 million, or 8.2%, to $542.4 million from $501.4 million for the six months ended March 30, 2002. The increase in net sales was comprised of a $12.9 million, or 5.5%, increase in Pet Products and a $28.2 million, or 10.6%, increase in Garden Products. The increase
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in Pet Products was due primarily to increased sales of bird seed branded products. The increase in Garden Products was due to increased grass seed, bird seed and chemical branded product sales.
Gross profit for the six months ended March 29, 2003 increased $7.9 million, or 5.2%, to $160.3 million from $152.4 million for the six months ended March 30, 2002. Gross profit increased in both Garden Products and Pet Products as a result of the increased sales in the second quarter of fiscal 2003. Gross profit as a percentage of net sales decreased from 30.4% for the comparable 2002 quarter to 29.6% for the current 2003 quarter, due to higher than normal grain prices caused by the drought in the Plains states last year. These higher expenses were only partially recovered through price increases for our wild and pet bird feed products, which were not fully implemented until March. We do not anticipate any substantial adverse impact from higher grain prices in the foreseeable future.
Selling, general and administrative expenses increased $1.0 million, or 0.7%, from $129.2 million for the six months ended March 30, 2002 to $130.2 million for the six months ended March 30, 2003. As a percentage of net sales, selling, general and administrative expenses decreased from 25.8% for the six months ended March 30, 2002 to 24.0% for the six months ended March 29, 2003. The decrease in selling, general and administrative expenses as a percentage of net sales was due to decreases in facilities and warehouse and administrative expenses partially offset by the increases in selling and delivery expenses attributable to the increased revenues.
Selling and delivery expenses increased by $4.2 million, or 7.2%, from $58.3 million for the six months ended March 30, 2002 to $62.5 million for the six months ended March 29, 2003. The increase in revenues in both Garden Products and Pet Products led to increased selling and delivery expenses, which approximated their revenue percentage increases.
Facilities expense decreased by $0.5 million, or 8.8%, from $5.7 million for the six months ended March 30, 2002 to $5.2 million for the six months ended March 29, 2003. The decrease was primarily related to facility shutdown costs in Pet Products incurred in the prior year period.
Warehouse and administrative expenses decreased $2.7 million, or 4.1%, from $65.2 million for the six months ended March 30, 2002 to $62.5 million for the six months ended March 29, 2003. Warehouse and administrative expenses decreased $1.7 million in Pet Products and $1.3 million at Corporate, partially offset by a $0.3 million increase at Corporate. The decreases in Garden Products andProducts. The decrease in Pet Products relate principallywas primarily due to lower costs relatedthe non-recurrence of litigation expenses incurred in the prior year. The decrease at Corporate was due to reduced warehouse operations from past distribution closureslegal and litigation expenses during the period partially offset by increased insurance costs. Increased Corporate administrative expenses, including increasedcosts and professional and consulting fees related to a possible acquisition and the adoption of SFAS No. 142, and increased business insurance premiums were partially offset by reduced litigation related expenses.fees.
Net interest expense for the quartersix months ended December 28, 2002 decreased by $1.1March 29, 2003 increased $1.5 million, or 28.2%20.3%, to $2.8$9.1 million from $3.9$7.6 million for the six months ended March 30, 2002. The increase is due to the higher interest expense associated with our $150 million senior subordinated notes offering in January 2003 and the redemption of our convertible subordinated notes. In connection with this refinancing, $1.4 million of nonrecurring additional interest was expensed in the second quarter ended December 29, 2001.of 2003. The decrease is attributablehigher interest expense due to our new capital structure and the one-time charge were partially offset by both lower average short-term borrowings and lower average interest rates. Average short-term borrowings forrates related to our lines of credit in the threefirst six months ended December 28, 2002 were approximately $58.1 millionof fiscal 2003 as compared with $117.3 million forto the threefirst six months ended December 29, 2001. The average short-term interest rates for quarter ended December 28, 2002 and December 29, 2001 were approximately 3.9% and 5.0%, respectively. As a result of our recent offering of $150 million of 9 1/8% senior subordinated notes due 2013, we expect that interest expense will increase approximately $1.5 million per quarter.fiscal 2002.
Other income and expense representsdecreased $0.1 million from $0.4 million for the six months ended March 30, 2002 to $0.3 million for the six months ended March 29, 2003. Both amounts represented earnings from equity method investments. The losses booked in the first quarter of the current and prior fiscal year are principally due to the seasonality of the invested businesses.
The Company’sOur effective income tax rate before the cumulative effect of accounting change for the quartersix months ended December 29, 2001March 30, 2002 was 41.0% compared with 40.0% for the quartersix months ended December 28, 2002.March 29, 2003.
The CompanyWe recorded a net lossincome for the quartersix months ended March 29, 2003 of $0.7$12.8 million compared with a net loss of $1.5$9.4 million, before the effect of adopting SFAS No. 142, in the prior year quarter. The Companysix month period. Substantially all of Garden Products’ operating income is typically reportsgenerated in our second and third fiscal quarters. As a result, the loss reported in the first quarter ending December, whichof fiscal year 2003 is generally more than offset by the slowest timeresults of the year for the garden industry.second quarter.
ForIn the first quarter ended December 29, 2001, the Companyof fiscal 2002, we reported a cumulative effect of accounting change charge in the amount of $112.2 million. In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 changes the
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accounting for goodwill and intangible assets with indefinite lives from an amortization method to an impairment approach. Other intangible assets will continue to be amortized over their estimated useful lives. Amortization of goodwill, including goodwill recorded in prior business combinations, ceased upon the adoption of the standard, which the Companywe adopted for the fiscal year beginning September 30, 2001. As required by SFAS No. 142, the Companywe performed itsour goodwill impairment analysis and recorded a non-cash charge to write down goodwill in itsour Garden Products segment by $51.9 million ($42.1 million after tax) and in itsour Pet Products segment by $94.8 million ($70.1 million after tax) in the quarter ended December 29, 2001.
Liquidity and Capital Resources
We have financed our growth through a combination of bank borrowings, supplier credit, internally generated funds public offeringsand sales of equity and debt securities and public and private offerings of debt securities.to the public.
Historically, our business has been seasonal and our 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 our 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, our 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 lawn and garden selling season. During the third fiscal quarter, inventory levels remain relatively constant while accounts receivable peak and short-term borrowings start to decline as cash collections are received during the peak selling season. During the fourth fiscal quarter, inventory levels are at their lowest, and accounts receivable and payables are substantially reduced through conversion of receivables to cash. As a result of the reduction in sales of products manufactured by other parties as a percentage of overall sales, this seasonal pattern has become somewhat less significant.
We service two broad markets: pet supplies and lawn and garden supplies. Our pet supplies businesses involve 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, our lawn and garden businesses are highly seasonal with approximately 64% of Garden Products’ aggregate sales occurring during the second and third fiscal quarters in fiscal year 2002. For many manufacturers of garden products, this seasonality requires them to move large quantities of their product well ahead of the peak selling periods. 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 generated fromused in operating activities increased $1.7$21.9 million to $0.3from $9.8 million for the quarter ended December 28,six months March 30, 2002 compared with a use of funds of $1.4$31.7 million for the quartersix months ended DecemberMarch 29, 2001.2003. The increase is primarily attributable to decreasedincreased inventory and accounts receivable levels lower interest expense, and refunds of tax payments partially offset by a decrease inincreased accounts payable resulting from the costs to support the increased revenues in the second quarter of fiscal 2003 and increased inventory levels as compared with each year end.expected revenues in the third quarter. Net cash used in investing activities increased $0.6$1.3 million primarily as a result of capital expenditures associated with the construction of a manufacturing facility. Net cash provided by financing activities increased $5.4$19.2 million due to our recent senior subordinated notes offering of $150 million, increased short-term borrowings to support our seasonal inventory levels, and proceeds from employee stock option exercises.exercises, partially offset by the retirement of our $115 million convertible subordinated notes, the repayment of the outstanding borrowings under our Pennington credit facility and two senior secured term loans.
At December 28, 2002,March 29, 2003, our total debt was $249.2 million versus $293.4 million at March 30, 2002.
In January 2003, we issued $150 million of 9 1/8% senior subordinated notes due 2013. The net proceeds of approximately $144 million were used to redeem $115 million of 6% subordinated convertible notes due November 2003. We used the balance of the net proceeds, combined with additional borrowings under the our line of credit with Congress Financial Corporation (Western), to repay the outstanding borrowings under our Pennington credit facility and two senior secured term loans of All-Glass. In conjunction with these repayments, we terminated the Pennington and All-Glass credit facilities. As a result of our private placement of $150 million of 9 1/8% senior subordinated notes due 2013, we estimate that our interest expense will increase approximately $6 million per year.
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At March 29, 2003, we had a $125.0$175.0 million line of credit with Congress Financial Corporation (Western). In January 2003, we increased the Congress Financial Corporation credit facility to $175.0 million., which expires on July 12, 2004. The available amount under the line of credit fluctuates based upon the value of assets eligible for inclusion in the borrowing base. The line of credit bears interest at a rate either equal to LIBOR plus 1.75% or the prime rate, at our option, and is secured by a significant amount of our assets. At December 28, 2002,March 29, 2003, we had $29.8$81.7 million of outstanding borrowings and $54.9$42.0 million of available borrowing capacity under this line. This line of credit contains certain financial covenants, such as minimum tangible net worth, EBITDA and EBITDAminimum working capital requirements. The line also requires the lender’s prior written consent to any acquisition of a business. OurWe terminated our Pennington subsidiary also had a $95.0 million line of credit. At December 28, 2002, there were $34.8 million of outstanding borrowings and $57.6 million of available borrowing capacity under this line. Interest related to this line was based on a rate either equal to LIBOR plus 1.375% or the prime rate, at our option. Our All-Glass Aquarium subsidiary also had a $10.0 million linecredit facilities in the second quarter of credit.fiscal 2003. As of December 28, 2002, there were no outstanding borrowings and $10.0 million of available borrowing capacity under this line. Interest related to this line was based on a rate equal to the prime rate less 0.5% (3.75% at December 28, 2002).
In November 1996, we issued $115 million of 6% subordinated convertible notes. The principal amount of the notes is due on November 15, 2003, unless converted into common stock by the holders or redeemed by us prior to maturity. As such, the notes were reclassified from long-term to short-term for the quarter ending December 28, 2002.
On January 30,March 29, 2003, we announced our intent to redeem the $115 million of subordinated convertible notes as of February 14, 2003 with a portion of the proceeds from our recently completed private placement of $150 million of 9 1/8% senior subordinated notes. The balance of the net proceeds, combined with additional borrowings under our line of credit facility, were used to repay all the outstanding borrowings under the Pennington credit facility and two senior secured term loans of All-Glass. In conjunction with these repayments, we terminatedhad not contributed the Pennington and All-Glass assets, which are substantive, to the Congress line.
We are currently in the market for a new $200 million senior secured credit facilities. Asfacility to replace our existing $175 million asset based credit facility. We anticipate that this facility will consist of a five-year $100 million revolving credit facility and six-year $100 million term B loan and will result in slightly higher annual interest expense. We are undertaking this refinancing to eliminate the restrictions of our asset-based facility and significantly increase our financial flexibility by putting in place a layer of permanent capital and increasing our access to additional pools of investor capital. We believe that this recapitalization, we estimate that our interest expenseincreased financial flexibility will increase approximately $5.8 million per year.allow us to more effectively pursue growth opportunities and potential acquisitions.
We believe that cash flows from operating activities, funds available under our Congresscredit facility, and arrangements with suppliers will be adequate to fund our presently anticipated working capital requirements for the foreseeable future. We anticipate that our capital expenditures will not exceed $20.0 million for the next 12 months, including approximately $8.0 million for the construction of a manufacturing facility scheduled for completion in the fall of 2003.
As part of our growth strategy, we have engaged in acquisition discussions with a number of companies in the past, and we anticipate that we 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, we may require additional external capital. In addition, such acquisitions would subject us 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. Additionally, the Garden Products’ business has been highly seasonal. In fiscal 2002, 64% of Garden Products net sales and 58% of our total net sales occurred in the Company’s second and third fiscal quarters. Substantially all of Garden Products’ operating income is typically generated in this period, which has historically offset the operating loss incurred during the first fiscal quarter of the year.
Item 3.Quantitative3. 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 2002 Annual Report filed on Form 10-K.
Item 4.Controls4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company’sour “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date within 90 days before the filing date of this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.
(b)Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date
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PART II. OTHER INFORMATION
Item 1.Legal1. Legal Proceedings
TFH Litigation. In December 1997, Central acquired all of the stock of TFH Publications, Inc. (“TFH”). In connection with the transaction, Central made a $10 million loanFor information on our material legal proceedings, you should read note 8 “Contingencies” to the sellers, which was evidenced by a Promissory Note. In September 1998, the prior ownersunaudited financial statements in Part I – Item 1 of TFH brought suit against Central and certain executives of Central for damages and relief from their obligations under the Promissory Note, alleging, among other things, that Central’s failure to properly supervise the TFH management team had jeopardized their prospects of achieving certain earnouts. Central believes that these allegations are without merit. Central counterclaimed against the prior owners for enforcement of the Promissory Note, rescission and/or damages and other relief, alleging, among other things, fraud, misrepresentation and breach of fiduciary duty by the prior owners of TFH. These actions,Herbert R. Axelrod and Evelyn Axelrod v. Central Garden & Pet Company; Glenn S. Axelrod; Gary Hersch; William E. Brown; Robert B. Jones; Glen Novotny; and Neill Hines, Docket No. MON-L-5100-99, andTFH Publications, Inc. v. Herbert Axelrod et al., Docket No. L-2127-99 (consolidated cases), are in the New Jersey Superior Court. The case is currently in pretrial discovery and is scheduled for trial in the spring of 2003.this report.
During the course of discovery in this action, Central has become aware of certain information which shows that prior to the acquisition of TFH by Central, certain records of TFH were prepared in an inaccurate manner
In January 2003, we issued $150 million of 9 1/8% senior subordinated notes due 2013, in a private placement pursuant to Rule 144A and Regulation S of the Securities Act of 1933. The net proceeds of $144 million were used to redeem $115 million of 6% subordinated convertible notes which were due in November 2003. The balance of the net proceeds, combined with additional borrowings under the our line of credit with Congress Financial Corporation (Western), were used to repay the outstanding borrowings under the Pennington credit facility and two senior secured term loans of All-Glass.
Not Applicable
(a) The annual meeting of shareholders was held on February 10, 2003.
(b) The following directors were elected at the meeting
William E. Brown
Glenn W. Novotny
Brooks M. Pennington III
John B. Balousek
David N. Chichester
Daniel P. Hogan, Jr.
Bruce A. Westphal
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Set forth below is the tabulation with respect to the matter voted on at the meeting:
For | Against or Withheld | |||
William E. Brown | ||||
Common | 13,356,100 | 2,305,555 | ||
Class B | 1,649,207 | 0 | ||
Glenn W. Novotny | ||||
Common | 13,356,081 | 2,305,574 | ||
Class B | 1,649,207 | 0 | ||
Brooks M. Pennington III | ||||
Common | 13,356,232 | 2,305,423 | ||
Class B | 1,649,207 | 0 | ||
John B. Balousek | ||||
Common | 15,335,922 | 325,733 | ||
Class B | 1,649,207 | 0 | ||
David N. Chichester | ||||
Common | 15,335,922 | 325,733 | ||
Class B | 1,649,207 | 0 | ||
Daniel P. Hogan, Jr. | ||||
Common | 15,335,522 | 326,133 | ||
Class B | 1,649,207 | 0 | ||
Bruce A. Westphal | ||||
Common | 15,335,922 | 325,733 | ||
Class B | 1,649,207 | 0 |
(c) | At the annual meeting, the shareholders voted to approve the adoption of our 2003 Omnibus Equity Incentive Plan pursuant to which an aggregate of 2,500,000 shares were authorized for issuance thereunder. |
Set forth below is the tabulation with respect to the amendment voted on at the meeting:
For | Against or Withheld | |||
Common | 4,584,928 | 7,331,832 | ||
Class B (weighted) | 13,920,326 | 0 |
Not Applicable
(a) Exhibits
10.8 | 2003 Omnibus Equity Incentive Plan | |
10.9 | Indenture dated January 30, 2003 between Central Garden & Pet Company, Wells Fargo and the subsidiary guarantors named therein (incorporated by reference from exhibit 4.1 to the Registration Statement on Form S-4, File No. 333-103835). | |
99.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. | |
99.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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(b) The following current report on Form 8-K was filed during the quarter ended December 28, 2002:
Form 8-K filed January 14, 2003 relating to our proposedproposal to offer in a private placement $150,000,000 aggregate principal amount of senior subordinated notes.
Form 8-K filed January 31, 2003 relating to the closing of our private placement of $150,000,000 aggregate principal amount of senior subordinated notes.
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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.
Dated: May 6, 2003
CENTRAL GARDEN & PET COMPANY Registrant |
/s/ WILLIAM E. BROWN | ||
William E. Brown Chairman of the Board and Chief Executive Officer |
/s/ STUART W. BOOTH | ||
Stuart W. Booth Vice President and Chief Financial Officer |
I, William E. Brown, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Central Garden & Pet Company; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–14 and 15d–14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 3,May 6, 2003
/s/ WILLIAM E. BROWN | ||
William E. Brown Chief Executive Officer (Principal Executive Officer) |
I, Stuart W. Booth, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Central Garden & Pet Company; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–14 and 15d–14) for the registrant and we have: |
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 3,May 6, 2003
/s/ STUART W. BOOTH | ||
Stuart W. Booth Chief Financial Officer (Principal Financial Officer) |
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