UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1034
For the quarterly period ended June 24, 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 ____________________
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
________________________________________________________________________________
(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 June 24, 2000 16,981,755
Class B Stock Outstanding as of June 24, 2000 1,657,962
CENTRAL GARDEN & PET COMPANY FORM 10-Q
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
-----------------------------
1. Financial Statements
Condensed Consolidated Balance Sheets
September 25, 1999 and June 24, 2000
Consolidated Statements of Cash Flows
Nine Months Ended June 26, 1999 and June 24, 2000
Consolidated Statements of Income
Three and Nine Months Ended June 26, 1999 and June 24, 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 25, 1999, and from time to time in our
filings with the Securities and Exchange Commission. These risks and
uncertainties include, without limitation, the final accounting for all issues
between the Company and Pharmacia Corporation (formerly known as Monsanto
Company) under the Solaris Agreement, such as the amounts receivable from
Pharmacia Corporation for cost reimbursements, payments for cost reductions and
payments for services; the amounts payable to Pharmacia Corporation for
inventory; responsibility for obsolete inventory and for non-payment by Solaris'
direct sales accounts; costs associated with the realignment of the Company's
lawn and garden distribution operations to reflect anticipated business levels
for the fiscal year 2000 and beyond; and the impact of outstanding or potential
litigation.
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
September 25, June 24,
ASSETS 1999 2000
------------ ----------
Current Assets:
Cash & cash equivalents $ 8,017 $ 7,568
Accounts receivable (less allowance for doubtful
accounts of $6,484 and $6,810) 149,411 215,013
Inventories 240,207 254,979
Inventories held for return to manufacturer 75,887 -
Prepaid expenses and other assets 11,254 10,986
--------- ----------
Total current assets 484,776 488,546
Land, Buildings, Improvements and Equipment - net 94,179 94,891
Goodwill 346,488 385,479
Other Assets 30,387 39,930
--------- ----------
Total $ 955,830 $1,008,846
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 95,883 $ 162,318
Accounts payable 188,113 150,201
Accrued expenses 29,667 37,185
Current portion of long-term debt 1,485 5,659
-------- ---------
Total current liabilities 315,148 355,363
Long-Term Debt 123,898 138,050
Deferred Income Taxes and Other Long-Term
Obligations 21,057 18,736
Commitments and Contingencies --- ---
Shareholders' Equity:
Preferred stock, $.01 par value: 1,000 shares authorized, none
outstanding at September 25, 1999 or June 24, 2000 --- ---
Class B stock, $.01 par value: 1,660,919 shares outstanding
September 25, 1999 and 1,657,962 outstanding at June 24, 2000 16 16
Common stock, $.01 par value: 30,183,365 shares issued and 19,332,015
outstanding September 25, 1999; 30,341,505 issued and
16,981,755 outstanding at June 24, 2000 302 303
Additional paid-in capital 524,058 525,148
Retained earnings 94,474 112,948
Treasury Stock (123,123) (141,718)
-------- ---------
Total shareholders' equity 495,727 496,697
-------- ---------
Total $ 955,830 $1,008,846
======== =========
See notes to condensed consolidated financial statements
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
June 26, June 24,
1999 2000
-------- --------
Cash Flows From Operating Activities:
Net Income $ 28,798 $ 18,495
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 14,768 17,531
Change in assets and liabilities:
Receivables (82,252) (64,107)
Inventories (42,573) 64,502
Prepaid expenses and other assets 4,365 (5,376)
Accounts payable 108,593 (40,187)
Accrued expenses and other liabilities 20,127 5,087
-------- --------
Net cash provided by (used in) operating activities 51,826 (4,055)
Cash Flows From Investing Activities:
Additions to land, buildings, improvements and equipment (13,858) (9,964)
Payments to acquire companies, net of cash acquired (13,888) (34,745)
-------- --------
Net cash used in investing activities (27,746) (44,709)
Cash Flows From Financing Activities:
Proceeds from notes payable - net 51,991 66,435
Repayments of long-term debt (1,768) (616)
Proceeds from issuance of stock - net 1,611 1,091
Payments to reacquire stock (83,551) (18,595)
-------- --------
Net cash provided by (used in) financing activities (31,717) 48,315
Net Decrease in Cash (7,637) (449)
Cash at Beginning of Period 10,328 8,017
-------- --------
Cash at End of Period $ 2,691 $ 7,568
======== ========
Supplemental Information
Cash paid for interest $ 6,390 $ 13,319
Cash paid for income taxes 12,350 8,848
Assets (excluding cash) acquired through purchase
of subsidiaries 6,251 8,069
Liabilities assumed through the purchase of subsidiaries 3,274 21,306
See notes to condensed consolidated financial statements
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
June 26, June 24, June 26, June 24,
1999 2000 1999 2000
---------- ---------- -------- --------
Net sales $1,204,265 $1,055,337 $529,140 $453,803
Cost of goods sold and occupancy 937,907 783,583 421,522 339,055
---------- ---------- -------- --------
Gross profit 266,358 271,754 107,618 114,748
Selling, General and
Administrative Expenses 208,251 221,673 80,994 84,980
---------- ---------- -------- --------
Income from operations 58,107 50,081 26,624 29,768
Interest expense (8,901) (17,504) (3,116) (6,889)
Interest income 445 458 85 121
---------- ---------- -------- --------
Income before income taxes 49,651 33,035 23,593 23,000
Income taxes 20,853 14,540 9,909 10,125
---------- ---------- -------- --------
Net Income $ 28,798 $ 18,495 $ 13,684 $ 12,875
========== ========== ======== ========
Net Income per Share
Basic $0.99 $0.98 $0.50 $0.69
========== ========== ======== ========
Diluted $0.96 $0.94 $0.47 $0.61
========== ========== ======== ========
Weighted Average Shares Outstanding
Basic 28,980 18,867 27,239 18,640
Diluted 33,218 23,064 31,427 22,850
See notes to condensed consolidated financial statements
Central Garden & Pet Company
Notes to Condensed Consolidated Financial Statements
Three Months and Nine Months Ended June 24, 2000
(Unaudited)
1. Basis of Presentation
---------------------
The condensed consolidated balance sheet as of June 24, 2000, the
consolidated statements of income for both the three and nine months ended
June 24, 2000 and June 26, 1999 and the consolidated statements of cash
flows for the nine months ended June 24, 2000 and June 26, 1999 have been
prepared by the Company, without audit. The condensed consolidated balance
sheet as of September 25, 1999 has been derived from the audited financial
statements of the Company for the year ended September 25, 1999. 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 nine months ended June 24, 2000 are not
indicative of the operating results that may be expected for the year
ending September 30, 2000.
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 1999 Annual
Report which has previously been filed with the Securities and Exchange
Commission.
2. Share Repurchase Program
------------------------
On October 5, 1999, the Company's Board of Directors authorized the Company
to increase the share repurchase program up to a maximum of $155 million of
common shares. During the three month period ended December 25, 2000, the
Company repurchased 2,500,000 shares for a total of $18.6 million. No
additional share repurchases occurred during the period between December
26, 1999 and June 24, 2000.
3. Earnings Per Share
------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted per-share computations for income from continuing
operations (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
June 24, 2000 June 24, 2000
-------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Net income $12,875 18,640 $0.69 $18,495 18,867 $0.98
Effect of dilutive securities:
Options to purchase
common stock 103 90
Convertible notes 1,042 4,107 3,124 4,107
Diluted EPS:
Net income attributed
to common
shareholders $13,917 22,850 $0.61 $21,619 23,064 $0.94
Three Months Ended Nine Months Ended
June 26, 2000 June 26, 2000
-------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Net income $13,684 27,239 $0.50 $28,798 28,980 $0.99
Effect of dilutive securities:
Options to purchase
common stock 81 131
Convertible notes $ 1,079 4,107 $ 3,236 4,107
Diluted EPS:
Net income attributed
to common
shareholders $14,763 31,427 $0.47 $32,034 33,218 $0.96
4. Segment Information
-------------------
Management has determined that the reportable segments of the Company are
its Distribution, Pet Products and Garden Products segments, based on the
level at which the chief operating decision making group reviews the
results of operations in order to make decisions regarding performance
assessment and resource allocation. There has been no change in the
segments reported or the basis of measurement of segment profit or loss
from that which was reported in the Company's 1999 Form 10-K. Segment
information for the three month and nine month periods ended June 26, 1999
and June 24, 2000 and segment assets at September 25, 1999 and June 24,
2000 are set forth below (dollars in thousands):
Three Months Ended Nine Months Ended
June 26, 1999 June 24, 2000 June 26, 1999 June 24, 2000
Net sales
Distribution $356,820 $255,888 $ 766,506 $ 563,014
Garden Products 129,365 147,779 304,738 344,444
Pet Products 59,286 67,418 176,583 194,652
Corporate, eliminations
and all other (16,331) (17,282) (43,562) (46,773)
-------- -------- ---------- ----------
Total net sales $529,140 $453,803 $1,204,265 $1,055,337
======== ======== ========== ==========
Intersegment sales
Garden Products $ 5,976 $ 12,311 19,207 $ 29,915
Pet Products 11,861 6,391 25,917 17,752
Corporate, eliminations
and all other (1,506) (1,420) (1,562) (894)
-------- -------- ---------- ----------
Total intersegment sales $ 16,331 $ 17,282 $ 43,562 $ 46,773
======== ======== ========== ==========
Income (loss) from operations
Distribution $ 10,358 $ 8,813 $ 15,144 $ 6,453
Garden Products 14,772 17,851 36,680 42,571
Pet Products 6,284 8,853 20,958 24,175
Corporate, eliminations
and all other (4,790) (5,749) (14,675) (23,118)
-------- -------- ---------- ----------
Income from operations 26,624 29,768 58,107 50,081
Interest expense 3,031 6,768 8,456 17,046
Income taxes 9,909 10,125 20,853 14,540
-------- -------- ---------- ----------
Net income $ 13,684 $ 12,875 $ 28,798 $ 18,495
======== ======== ========== ==========
Depreciation and amortization
Distribution $ 812 $ 1,180 $ 2,464 $ 3,454
Garden Products 912 840 2,398 2,644
Pet Products 967 1,246 2,846 3,603
Corporate, eliminations
and all other 2,382 2,856 7,060 7,830
-------- -------- ---------- ----------
Total depreciation and
amortization $ 5,073 $ 6,122 $ 14,768 $ 17,531
======== ======== ========== ==========
Expenditures for long-lived
assets
Distribution $ 1,177 $ 871 $ 6,289 $ 3,717
Garden Products 30 915 1,874 2,748
Pet Products 1,469 422 4,964 3,499
Corporate, eliminations
and all other 0 0 731 0
-------- -------- ---------- ----------
Total expenditures for
long-lived assets $ 2,676 $ 2,208 $ 13,858 $ 9,964
======== ======== ========== ==========
September 25, 1999 June 24, 2000
------------------ -------------
Assets
Distribution $ 216,981 $ 171,291
Garden Products 179,953 245,280
Pet Products 99,583 116,772
Corporate, eliminations and all other 459,313 475,503
---------- ----------
Total assets $ 955,830 $1,008,846
========== ==========
5. Proposal to Spin Off Garden Distribution Business
-------------------------------------------------
On June 7, 2000, the Company filed with the Securities and Exchange
Commission ("SEC") a Form 10 which, when declared effective by the SEC,
would permit the Company to spin off its lawn and garden distribution
business to shareholders. On August 3, 2000, the Company announced that
it plans to withdraw the Form 10 filed on June 7 and refile within 30 to
60 days once the Form 10 has been updated to reflect the resizing of the
Company's lawn and garden distribution business. If the spin-off is
completed, the lawn and garden business would become a separate public
company while Central would continue to operate its existing lawn and
garden branded products business, as well as its branded pet products and
pet distribution businesses.
6. Recent Acquisition
------------------
On March 27, 2000, the Company acquired the AMDRO and IMAGE consumer
products lines from American Cyanamid, the agricultural products division
of American Home Products Corporation, for approximately $28 million
($8.0 million in cash and a $18.8 million term note). The acquisition was
accounted for under the purchase method, and the resulting goodwill will
be amortized on a straight-line basis over 20 years. The operations of
these entities have been included in the Company's results of operations
since March 27, 2000.
7. Other Charges
--------------
In September 1999, the Company recorded Other Charges totaling $7.6
million associated with the expiration of the Solaris Agreement,
workforce reductions and facility closures in the Company's Distribution
operations. During the nine months ended June 24, 2000, the Company
closed the three distribution centers identified in the September 2000
closure plan, completed the associated workforce reductions, and paid all
remaining severance amounts accrued as of September 25, 1999. $.5 million
is included in accrued expenses as of June 24, 2000 associated with lease
costs, property taxes and other facility costs
During the fourth quarter of fiscal 1998, the Company recorded other
charges totaling $11.0 million associated with facility closures costs
associated with professional and due diligence expenses principally
associated to a potential major acquisition that was not completed and
package and design costs incurred pursuant to a test program initiated
and completed in fiscal 1998. $0.5 million is remaining in accrued
expenses as of June 24, 2000 associated with lease costs, property taxes
and facility maintenance costs.
The remaining accruals will be required to be paid through the expiration
of the leases on these closed distribution centers.
8. New Accounting pronouncements
-----------------------------
In December 1999, the SEC released Staff Accounting Bulletin No. 101
("SAB 101"), which provides the staff's views in applying generally
accepted accounting principles to 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 may have on its
consolidated financial statements.
9. Subsequent Events
-----------------
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 believes that the reconciliation of all accounts will not result
in a balance due from Central to Pharmacia. 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.
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 July 19, 2000 the Company announced that Scotts intends to discontinue
its distribution relationship with Central after September 30, 2000. The
revenue and gross profit for the year ended September 2000 expected to be
lost in fiscal 2001 is estimated to be approximately $185 to $195 million
and $31 to $33 million respectively. The Company expects this loss of
gross profit to be significantly offset next year with expense reductions
and other business growth. As a result of this expected significant
reduction in volume, Central expects to record substantial one time
charges in the fiscal year ending September 30, 2000 associated with the
resizing of the Garden Distribution business.
On August 2, 2000, a fire of undetermined origin destroyed the Company's
Phoenix, Arizona lawn and garden distribution center. The fire also
destroyed a medical supply distribution center operated by a third party
which is located in an adjoining facility and caused the evacuation of
neighboring businesses and residences. The Phoenix facility is one of
Central's smallest distribution centers. The Company maintains insurance
coverage against property damage and third party liability which it
believes will be adequate to cover most or all of the losses or
liabilities to which it may become subject as a result of the fire.
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. Central's
operations are grouped into three business segments, the lawn and garden branded
products business ("Garden Products"), the distribution business
("Distribution") and the pet branded products business ("Pet Products").
Recent developments affecting the Distribution Segment:
From October 1, 1995 to September 30, 1999, Distribution distributed Solaris
product nationwide, pursuant to an exclusive distribution agreement. Management
believes that the relationship with Solaris embodied in the Solaris Agreement
had a substantial impact on our results of operations. Sales of products
purchased from Solaris, our largest supplier, accounted for approximately 43% of
Distribution's net sales and 27% of Central's net sales during fiscal 1999.
Under the Solaris Agreement, Distribution, in addition to serving as the master
agent and master distributor of Solaris products, provided a wide range of
value-added services including logistics, order processing and fulfillment,
inventory distribution and merchandising. As a result of the Solaris Agreement,
a majority of our sales of Solaris products were derived from servicing direct
sales accounts, rather than as a traditional distributor. Under the Solaris
Agreement, our inventories of Solaris product increased significantly, since we
not only carried inventories to support our own sales of Solaris products but
also certain inventory previously carried by Solaris as well as additional
inventories to support sales of Solaris products by our former network of
independent distributors.
In January 1999, Pharmacia Corporation sold its Solaris lawn and garden business
exclusive of its Roundup herbicide products for consumer use to The Scotts
Company ("Scotts") and entered into a separate, long-term, exclusive agreement
pursuant to which Pharmacia Corporation continues to make Roundup herbicide
products for consumer use and Scotts markets the products. Scotts has been for
many years a substantial supplier to us and, in connection with its direct
sales, a substantial purchaser of our services.
In the fall of 1999, Scotts altered its distribution systems for certain
products, including Ortho and Miracle-Gro products and Pharmacia Corporation's
consumer Roundup products for which Scotts acts as Pharmacia Corporation's
exclusive sales agent. Beginning October 1, 1999, Scotts began to distribute
Ortho and Roundup products through a system that involves 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
directly to certain retailers.
The business likely to be taken over in this fiscal year ending September 30,
2000 by Scotts is estimated to be approximately $200-250 million in sales. The
gross profit associated with these sales in fiscal 1999 was approximately $15-25
million. We expect this loss of gross profit to be partially offset this fiscal
year with expense reductions and other business growth. However, there is no
assurance that the business taken over by Scotts will not be greater than $200-
250 million, or that we will be successful in our attempts to reduce expenses
and generate new business.
In January 2000, we recorded the return of approximately $76.0 million of
inventory of Scotts products due to the changes in Scotts' distribution system
and offset the related payables by the same amount. Additionally, we have taken
actions to realign our lawn and garden distribution operations to reflect
anticipated business levels for fiscal 2000. The amount and profitability of
Distribution's business with Scotts in fiscal 2000 may be influenced by numerous
factors and is impossible to predict. Accordingly,
the actual results of our operations may differ significantly from the foregoing
estimates.
The sale of the Solaris business by Pharmacia Corporation and the expiration of
the Solaris Agreement subject our Distribution business to significant
uncertainties. These include the resolution of all payments due between us and
Pharmacia Corporation under the Solaris Agreement, such as the amounts
receivable from Pharmacia Corporation for cost reimbursements, payments for cost
reductions and payments for services; the amounts payable to Pharmacia
Corporation for inventory; and responsibility for obsolete inventory and for
non-payment by Solaris' sub-agents. The resolution of these uncertainties has
resulted in litigation (see Note 8 to the condensed financial statements) and
could have a material adverse effect on our results of operations, financial
position and/or cash flows.
On July 19, 2000, the Company announced that it had learned from Scotts that
Scotts intends to discontinue its distribution relationship with the Company
after September 30, 2000. The affected products would include Scotts(R),
Ortho(R), and Miracle-Gro(R) products manufactured by the Scotts Company and
consumer Roundup(R) products manufactured by Pharmacia Corporation for which
Scotts acts as Pharmacia's exclusive sales agent.
For the Company's current fiscal year ending September 30, 2000, the revenue
attributable to the affected products is estimated to be approximately $185-195
million. The gross profit associated with these sales in the current year is
estimated to be approximately $31-33 million (8-10% of estimated total gross
profit for the current year). The loss of the Scotts business, coupled with
other changes in service levels projected for fiscal year 2001, will
substantially reduce the Distribution segment's sales to Wal*Mart, its largest
customer.
The Company expects that it will take steps to realign its lawn and garden
distribution operations to reflect the reduced business levels which it
anticipates for the fiscal year 2001. As a result, the Company expects to record
substantial one-time charges in the fourth quarter of the fiscal year ending
September 2000.
As a result of the foregoing changes, the Company expects that its lawn and
garden distribution business will be substantially smaller in fiscal year 2001
than in prior years with attendant reductions in revenue, gross profit,
operating income, and assets employed.
Three Months Ended June 24, 2000
Compared with Three Months Ended June 26, 1999
Net sales for the three months ended June 24, 2000 decreased by 14.2% or $75.3
million to $453.8 million from $529.1 million for the quarter ended June 26,
1999. The $75.3 million decrease was primarily the net result of an $100.9
million decrease in Distribution sales (primarily attributable to reduced
Solaris sales) offset by a $18.4 million increase in Garden Products sales
($12.5 million attributable to the businesses acquired) together with a $8.1
million increase in Pet Products sales.
Gross profit increased by 6.6% or $7.1 million from $107.6 million during the
quarter ended June 26, 1999 to $114.7 million for the comparable 2000 period.
Gross profit as a percentage of net sales increased from 20.3% for the three
months ended June 26, 1999 to 25.3% for the three months ended June 24, 2000.
The increase in gross profit dollars was principally related to the increases in
Garden and Pet Products sales offset by a $3.0 million decrease in Distribution.
Excluding Distribution, gross profit dollars from existing operations increased
by $5.0 million. The increase in gross profit as a percentage of net sales is
primarily the result of an increase in Distribution gross profit percentage
combined with a larger proportion of higher margin branded product sales
relative to total sales. The increased Distribution gross profit percentage was
primarily the result of the reduction in sales of low margin
Solaris products principally to retailers' distribution centers. Garden and Pet
Products' gross profit percentages remained relatively constant.
Selling, general and administrative expenses increased 4.9% or $4.0 million from
$81.0 million during the quarter ended June 26, 1999 to $85.0 million for the
comparable 2000 period. As a percentage of net sales, selling, general and
administrative expenses increased from 15.3% during the quarter ended June 26,
1999 to 18.7% for the comparable 2000 period. The primary factors contributing
to the selling, general and administrative expenses increase in absolute dollars
were increases in expenses of (1) $2.8 million attributable to the businesses
acquired; (2) $1.2 million of professional fees incurred in relation to our
strategic planning and evaluation process, and (3) $1.4 million of increases in
operating expenses associated with the sales increases in both Garden and Pet
Products, offset in part by decreases in Distribution expenses.
Net interest expense for the quarter ended June 24, 2000 increased by $3.8
million to $6.8 million from $3.0 million for the quarter ended June 26, 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 June 24, 2000 were $199.1
million compared with $52.8 million for the quarter ended June 26, 1999. The
average short-term interest rates for the quarter ended June 24, 2000 and June
26, 1999 were 9.8% and 8.2%, respectively.
The Company's effective income tax rate for the quarter ended June 24, 2000 was
44% compared with 42% for the quarter ended June 26, 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 June 26,1999.
Nine Months Ended June 24, 2000
Compared with Nine Months Ended June 26, 1999
Net sales for the nine months ended June 24, 2000 decreased by 12.4% or $148.9
million to $1,055.3 million from $1,204.3 million for the nine months ended June
26, 1999. The $148.9 million decrease was primarily the net result of a $203.5
million decrease in Distribution sales (primarily attributable to reduced
Solaris sales) being partially offset by a $39.7 million increase in Garden
Products sales ($24.7 million attributable to the businesses acquired - Norcal
Pottery, acquired in January 1999; Unicorn Laboratories, acquired in December
1999; and the Amdro and Image product lines, acquired in March 2000), together
with a $18.1 million increase in Pet Products sales.
Gross profit increased by 2.0% or $5.4 million from $266.4 million during the
nine months ended June 26, 1999 to $271.8 million for the comparable 2000
period. Gross profit as a percentage of net sales increased from 22.1% for the
nine months ended June 26, 1999 to 25.8% for the nine months ended June 24,
2000. The increase in gross profit dollars was principally related to the
increases in Garden and Pet Products sales offset by a $7.0 million decrease in
Distribution. Excluding Distribution, gross profit dollars from existing
operations increased by $5.0 million. The increase in gross profit as a
percentage of net sales is primarily the result of an increase in Distribution
gross profit percentage combined with a larger proportion of higher margin
branded product sales relative to total sales. The increased Distribution gross
profit percentage was primarily the result of the reduction in sales of low
margin Solaris products principally to retailers' distribution centers. Garden
and Pet Products' gross profit percentages remained relatively constant.
Selling, general and administrative expenses increased 6.4% or $13.4 million
from $208.3 million during the nine months ended June 26, 1999 to $221.7 million
for the comparable 2000 period. As a percentage of net sales, selling, general
and administrative expenses increased from 17.3% during the nine months ended
June 26, 1999 to 21.0% for the comparable 2000 period.
The primary factors contributing to the selling, general and administrative
expenses increase in the nine months ended June 24, 2000 included: (1) $5.9
million attributable to the businesses acquired; (2) $4.8 million of
professional fees incurred in relation to our strategic planning and evaluation
process; (3) the short term effects of the end of the Solaris Alliance producing
a rapid decrease in Garden Distribution sales and related inventory levels
coupled with management's decision to defer certain cost reductions during the
first three fiscal quarters in order to maintain operational infrastructure for
the year 2000 garden season and flexibility for future strategic planning; and
(4) increases in operating expenses associated with the sales increases in both
Garden and Pet Products.
Net interest expense for the nine months ended June 24, 2000 increased by $8.6
million to $17.0 million from $8.4 million for the nine months ended June 26,
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. During the nine month period ended June 24, 2000, the
Company repurchased 2,500,000 shares of its stock for a total cost of
approximately $18.6 million, primarily through the use of its revolving credit
facility.
Average short-term borrowings for the nine months ended June 24, 2000 were
$176.0 million compared with $38.8 million for the nine months ended June 26,
1999. The average short-term interest rates for the nine months ended June 24,
2000 and June 26, 1999 were 8.7% and 7.7%, respectively.
The Company's effective income tax rate for the nine months ended June 24, 2000
was 44% compared with 42% for the nine months ended June 26, 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
nine months ended June 26, 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 have
remained 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 termination of the Solaris agreement and the associated
reduction in Garden Distribution 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. The pet supplies businesses basically deal 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, the Company's garden distribution business is highly seasonal
with approximately 70% 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 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.
For the nine months ended June 24, 2000, the Company used cash from operating
activities of $4.1 million primarily relating to the normal cycle of receivables
build up in Distribution and in Garden Products. Inventory levels declined
principally as a result of lower Distribution balances associated with lowered
sales levels in the current year, partially offset by increased inventory levels
at Garden and Pet Products consistent with their increased sales volumes.
Accounts payable did not increase at the same rate as inventory partially due to
favorable vendor payment terms for a fiscal 1999 program that was paid for in
fiscal 2000. In addition, the increased inventory at Garden Products had shorter
payment terms than were associated with comparable inventory increases within
the Distribution segment during prior periods. Net cash used in investing
activities of $44.7 million resulted from acquisitions of new companies and the
acquisition of office and warehouse equipment, including computer hardware and
software. Cash generated from financing activities of $48.3 million consisted
principally of borrowings of $66.4 million of short-term debt, partially offset
by payments of $18.6 million to acquire treasury shares.
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 June 24, 2000,
the Company had $131.7 million of outstanding borrowings, and had $50.7 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. In connection with the acquisition of
one company in fiscal 1998, the Company assumed a $60.0 million line of credit,
subsequently increased to $70 million, of which $39.3 million was available at
June 24, 2000. 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.
The Company believes that cash flow from operations, funds available under its
line 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 1999, approximately two-thirds of the Company's sales
occurred in the first six months of the calendar year. 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 forthcoming termination of the
distribution relationship with Scotts in September 2000, and the associated
reduction in Distribution sales as a percentage of overall sales, this seasonal
pattern is expected to be less significant in the future.
ITEM 3. Quantitative and Qualitative Disclosure 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 1999 Consolidated Financial
Statements.
CENTRAL GARDEN & PET COMPANY FORM 10-Q
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
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 believes that the reconciliation of all accounts will not result in a
balance due from Central to Pharmacia. 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.
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.
For a discussion of other pending legal proceedings, please see Central's Report
on Form 10-Q for the quarter ended March 25, 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
On August 2, 2000, a fire of undetermined origin destroyed the Company's
Phoenix, Arizona lawn and garden distribution center. The fire also
destroyed a medical supply distribution center operated by a third party
which is located in an adjoining facility and caused the evacuation of
neighboring businesses and residences. The Phoenix facility is one of
Central's smallest distribution centers. The Company maintains insurance
coverage against property damage and third party liability which it
believes will be adequate to cover most or all of the losses or
liabilities to which it may become subject as a result of the fire.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
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10.6.1 Amendment No. 8 to 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. and
Ezell Nursery Supply, Inc., dated May 12, 2000.*
27 Financial Data Schedule.
* Previously filed.
(b) The following reports on Form 8-K were filed during the quarter ended June
24, 2000.
(1) On March 31, 2000, the Company filed a report on Form 8-K,
dated March 29, 2000, announcing that it has acquired the
AMDRO(R) and IMAGE(R) product lines from American Cyanamid.
(2) On June 8, 2000, the Company filed a report on Form 8-K, dated
June 7, 2000, announcing that the Company has filed a Form 10
with the SEC which, when declared effective by the SEC, would
permit the Company to spin off its lawn and garden
distribution business to shareholders.
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
______________________________________________
Registrant
Dated: October 25, 2000
_____________________________________________
William E. Brown, Chairman of the Board and
Chief Executive Officer
/s/ Lee D. Hines, Jr.
----------------------------------------------
Lee D. Hines, Jr., Vice President and
Chief Financial Officer