UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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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 (I.R.S. Employer
of incorporation or organization) Identification No.)
3697 Mt. Diablo Blvd., Suite 310, Lafayette, California 94549
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(Address of principle executive offices)
(925) 283-4573
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [_] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of March 31, 2001 16,759,866
Class B Stock Outstanding as of March 31, 2001 1,656,462
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-----------------------------
1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 and March 31, 2001
Consolidated Statements of Cash Flows
Six Months Ended March 25, 2000 and March 31, 2001
Consolidated Statements of Income
Three and Six Months Ended March 25, 2000 and March 31, 2001
Notes to Consolidated Financial Statements
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
--------------------------
1. Legal Proceedings
2. Changes in Securities and Use of Proceeds
3. Defaults Upon Senior Securities
4. Submission of Matter to a Vote of Securities Holders
5. Other Information
6. Exhibits and Reports on Form 8-K
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This quarterly report contains "forward-looking" statements based on current
expectations that involve risks and uncertainties. Actual results and the timing
of certain events may differ significantly from those projected in these
forward-looking statements due to the factors listed below, under "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors Relating to Forward-Looking Statements" in our Annual Report on Form
10-K for the fiscal year ended September 30, 2000, and from time to time in our
filings with the Securities and Exchange Commission. These risks and
uncertainties include the final resolution of all issues between the Company and
Pharmacia Corporation (formerly known as Monsanto Company) under the Solaris
Agreement; the resolution of the pending litigation among the Company, Pharmacia
and The Scotts Company; the success of and the costs associated with the
realignment of the Company's lawn and garden distribution operations; any
liabilities to which the Company may become subject as a result of the August 2,
2000 fire at its Phoenix distribution center; and the impact of any other
outstanding or potential litigation.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Central Garden & Pet Company
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
(unaudited)
September 30, March 31,
2000 2001
------------- ------------
ASSETS
Current assets:
Cash & cash equivalents $ 5,685 $ 5,312
Accounts receivable (less allowance for doubtful
accounts of $8,050 and $11,194) 151,190 193,647
Inventories 242,617 264,354
Prepaid expenses and other assets 20,658 21,510
------------- ------------
Total current assets 420,150 484,823
Land, buildings, improvements and equipment - net 111,740 109,997
Goodwill 382,294 378,676
Other assets 33,234 33,924
------------- ------------
Total $ 947,418 $ 1,007,420
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 129,239 $ 192,576
Accounts payable 121,705 144,599
Accrued expenses 42,801 33,415
Current portion of long-term debt 5,277 5,412
------------- ------------
Total current liabilities 299,022 376,002
Long-term debt 148,242 154,969
Deferred income taxes and other long-term obligations 36,207 13,821
Shareholders' Equity:
Class B stock, $.01 par value: 1,657,762 and 1,656,462 shares
outstanding at September 30, 2000 and March 31, 2001 16 16
Common stock, $.01 par value: 30,417,421 and 30,502,116 issued
and 16,675,171 and 16,759,866 outstanding at September 30, 2000
and March 31, 2001 304 305
Additional paid-in capital 525,793 526,231
Retained earnings 82,661 80,903
Treasury stock (144,827) (144,827)
------------- ------------
Total shareholders' equity 463,947 462,628
------------- ------------
Total $ 947,418 $ 1,007,420
============= ============
Central Garden & Pet Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended
---------------------------------------------------
March 25, March 31,
2000 2001
------------------- ------------------
Cash flows from operating activities:
Net income (loss) $ 5,620 $ (1,758)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 11,409 15,589
Change in assets and liabilities:
Receivables (89,173) (38,757)
Inventories 16,765 (17,437)
Prepaid expenses and other assets (2,434) (7,906)
Accounts payable 19,838 22,889
Accrued expenses (2,111) 614
Other long-term obligations 0 (9,641)
------------------- ------------------
Net cash used in operating activities (40,086) (36,407)
Cash flows from investing activities:
Additions to land, buildings, improvements and equipment (7,756) (3,582)
Payments to acquire companies, net of cash acquired (26,240) (18,277)
------------------- ------------------
Net cash used in investing activities (33,996) (21,859)
Cash flows from financing activities:
Borrowings under lines of credit, net 94,294 63,337
Repayments of long-term debt (1,266) (5,883)
Proceeds from issuance of common stock - net 564 439
Payments to reacquire common stock (18,595) 0
------------------- ------------------
Net cash provided by financing activities 74,997 57,893
Net increase (decrease) in cash 915 (373)
Cash at beginning of period 8,017 5,685
------------------- ------------------
Cash at end of period $ 8,932 $ 5,312
=================== ==================
Central Garden & Pet Company
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
Three Months Ended
-----------------------------------------------------
March 25, March 31,
2000 2001
----------------- ------------------
Net sales $ 382,944 $ 324,061
Cost of goods sold and occupancy 284,166 225,323
----------------- ------------------
Gross profit 98,778 98,738
Selling, general and
administrative expenses 71,468 87,727
----------------- ------------------
Income from operations 27,310 11,011
Interest expense (6,139) (6,406)
Interest income 171 36
Other income 256 443
----------------- ------------------
Income before income taxes 21,598 5,084
Income taxes 9,503 2,390
----------------- ------------------
Net income $ 12,095 $ 2,694
================= ==================
Basic earnings per common share $ 0.65 $ 0.15
================= ==================
Weighted average shares outstanding 18,572 18,405
================= ==================
Diluted earnings per common share $ 0.58 $ 0.15
================= ==================
Weighted average shares outstanding 22,769 18,465
================= ==================
Central Garden & Pet Company
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
Six Months Ended
-----------------------------------------------------
March 25, March 31,
2000 2001
----------------- ------------------
Net sales $ 602,061 $ 537,320
Cost of goods sold and occupancy 444,529 372,601
----------------- ------------------
Gross profit 157,532 164,719
Selling, general and
administrative expenses 137,069 155,974
----------------- ------------------
Income from operations 20,463 8,745
Interest expense (10,867) (12,376)
Interest income 589 85
Other income (expense) (150) 535
----------------- ------------------
Income (loss) before income taxes 10,035 (3,011)
Income taxes 4,415 (1,253)
----------------- ------------------
Net income (loss) $ 5,620 $ (1,758)
================= ==================
Basic earnings (loss) per common share $ 0.30 $ (0.10)
================= ==================
Weighted average shares outstanding 18,981 18,387
================= ==================
Diluted earnings (loss) per common share $ 0.29 $ (0.10)
================= ==================
Weighted average shares outstanding 19,064 18,387
================= ==================
Central Garden & Pet Company
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended March 31, 2001
(unaudited)
1. Basis of Presentation
---------------------
The condensed consolidated balance sheet as of March 31, 2001, the
consolidated Statements of income for both the three and six months ended
March 25, 2000 and March 31, 2001 and the consolidated statements of cash
flows for the six months ended March 25, 2000 and March 31, 2001 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 March 31, 2001 are not
indicative of the operating results that may be expected for the year
ending September 29, 2001.
It is suggested that these interim financial statements be read in
conjunction with the annual audited financial statements, accounting
policies and financial notes thereto, included in the Company's 2000 Annual
Report on Form 10-K which has previously been filed with the Securities and
Exchange Commission.
2. New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998 and
amended by SFAS Nos. 137 and 138, issued in June 2000. The new standards
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities. Under the standard, certain contracts that were not
formerly considered derivatives may now meet the definition of a
derivative. The Company adopted the standard effective October 1, 2000. The
adoption of SFAS No. 133, as amended by SFAS Nos. 137 and 138, did not have
an impact on the financial position or results of operations of the
Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", which provides the SEC staff's views on selected revenue
recognition issues. In March 2000, the SEC released SAB 101A, which delayed
for one quarter the implementation date of SAB 101 for registrants with
fiscal years beginning between December 16, 1999 and March 15, 2000. In
June 2000, the SEC released SAB 101B, which delayed the implementation date
of SAB 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company is evaluating what impact,
if any, SAB 101 will have on the Company's income statement presentation,
however, the Company does not believe it will have any impact on its
financial position or results of operations.
3. Recent Acquisition
------------------
In October 2000, the Company's Pennington subsidiary acquired the Rebel and
Lofts line of grass seed from KRB Seed Company, LLC, for approximately $8
million in cash which approximated the fair market value of the assets
acquired, and signed perpetual licensing agreements under which the Company
will make royalty payments to KRB Seed Company, LLC over the term of the
licensing agreements. The acquisition was accounted for under the purchase
method. Royalty payments will be recorded as expense as they are incurred.
The operations of this business have been included in the Company's results
of operations since October 2000.
In September 2000, Central's Pennington subsidiary acquired All-Glass
Aquarium Co., Inc., a leading manufacturer and marketer of aquariums and
related products, based in Franklin, Wisconsin and its Oceanic Systems
subsidiary in Dallas, Texas for approximately $10 million, which was
recorded as a liability in the Consolidated Balance Sheet as of September
30, 2000, and was subsequently paid during the three months ended December
30, 2000. The operations of this business have been included in the
Company's results of operations since October 1, 2000.
4. Earnings Per Share
------------------
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 Six Months Ended
March 31, 2001 March 31, 2001
--------------------------- ---------------------------
Income Shares Per Share Loss Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Net Income (loss) $ 2,694 18,405 $ 0.15 $(1,758) 18,387 $ (0.10)
Effect of dilutive securities:
Options to purchase common stock 60
Diluted EPS:
Net income (loss) attributable
to common shareholders $ 2,694 18,465 $ 0.15 $(1,758) 18,387 $ (0.10)
Three Months Ended Six Months Ended
March 25, 2000 March 25, 2000
--------------------------- ---------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Net Income $12,095 18,572 $ 0.65 $ 5,620 18,981 $ 0.30
Effect of dilutive securities:
Options to purchase common stock 89 83
Convertible notes 1,042 4,107
Diluted EPS:
Net income attributable to
common shareholders $13,137 22,769 $ 0.58 $ 5,620 19,064 $ 0.29
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
31, 2001 and the six month period ended March 25, 2000 because the assumed
conversion would have been anti-dilutive.
For the six month periods ended March 31, 2001 options to purchase
3,155,559 shares of common stock were outstanding but were not included in
the computation of diluted earnings per share because the effect would be
anti dilutive in loss periods. For the three month period ended March 31,
2001 options to purchase 3,018,128 shares of common stock were outstanding
but were not included in the computation of diluted earnings per share
because the options exercise price was greater than the average market
price of the common shares and therefore, the effect would be anti
dilutive. For the three and six month periods ended March 25, 2000, options
to purchase 3,227,648 and 3,233,648 shares of common stock were outstanding
but were not included in the computation of diluted earnings per share
because the options exercise price was greater than the average market
price of the common shares and therefore, the effect would be anti
dilutive.
5. Segment Information
------------------------
In December 2000, the Company cancelled the spin-off of its garden
distribution business and adopted a plan to reorganize its garden and pet
businesses. Under the reorganization plan, the Company's garden products
and distribution businesses became one operating unit and its pet products
and distribution businesses became another operating unit.
Consistent with the above changes, management has determined that the
reportable segments of the Company are Garden Products and Pet Products,
based on the level at which the chief operating decision making group
reviews the results of operations to make decisions regarding performance
assessment and resource allocation. This represents a change in the
segments reported in the Company's fiscal 2000 Annual Report filed on Form
10-K. Segment information, based upon the new reportable segments, for the
three and six month periods ended March 31, 2001 and March 25, 2000 and
segment assets as of September 30, 2000 and March 31, 2000 is set forth
below (dollars in thousands):
Three Months Ended
-----------------------------
March 25, March 31,
2000 2001
------------ ------------
Net sales
Pet Products $ 120,895 $ 129,146
Garden Products 281,843 212,762
Intersegment eliminations (19,794) (17,847)
------------ ------------
Total net sales $ 382,944 $ 324,061
------------ ------------
Intersegment sales
Pet Products $ 5,810 $ 9,487
Garden Products 13,984 8,360
------------ ------------
Total intersegment sales $ 19,794 $ 17,847
------------ ------------
Income (loss) from operations
Pet Products $ 10,730 $ 8,804
Garden Products 24,256 10,535
Corporate (7,676) (8,328)
------------ ------------
Total income from operations 27,310 11,011
------------ ------------
Interest expense - net (5,968) (6,370)
Other income 256 443
Income taxes 9,503 2,390
------------ ------------
Net income $ 12,095 $ 2,694
============ ============
Six Months Ended
-----------------------------
March 25, March 31,
2000 2001
------------ ------------
Net sales
Pet Products $ 238,006 $ 262,433
Garden Products 393,019 305,701
Intersegment eliminations (28,964) (30,814)
------------ ------------
Total net sales $ 602,061 $ 537,320
------------ ------------
Intersegment sales
Pet Products $ 11,360 $ 19,851
Garden Products 17,604 10,963
------------ ------------
Total intersegment sales $ 28,964 $ 30,814
------------ ------------
Income (loss) from operations
Pet Products $ 15,120 $ 14,845
Garden Products 19,002 7,077
Corporate (13,659) (13,177)
------------ ------------
Total income from operations 20,463 8,745
------------ ------------
Interest expense - net (10,278) (12,291)
Other income (expense) (150) 535
Income taxes 4,415 (1,253)
------------ ------------
Net income (loss) $ 5,620 $ (1,758)
============ ============
September 30, March 31,
2000 2001
------------- ------------
Assets
Pet Products $ 173,843 $ 165,401
Garden Products 340,311 390,812
Corporate 433,264 451,207
------------ ------------
Total assets $ 947,418 $ 1,007,420
============ ============
6. Other Charges
---------------
Activity affecting the reserve balances associated with Other Charges
recorded in fiscal 2000 and prior years is as follows (in millions):
Severance Exit Related
and Other Total
------------------------- --------
Balance September 30, 2000 $ 0.4 $ 9.1 $ 9.5
Costs incurred and paid (1.6) (1.6)
------------------------- --------
Balance December 30, 2000 $ 0.4 $ 7.5 $ 7.9
Costs incurred and paid (1.9) (1.9)
------------------------- --------
Balance March 31, 2001 $ 0.4 $ 5.6 $ 6.0
========================= ========
Remaining reserve balances totaling $6.0 million are included in the
Condensed Consolidated Balance Sheet within the categories "accounts
payable" and "accrued expenses", comprised of $0.4 million associated with
charges recorded in the year ended September 25, 1999 and $5.6 million
associated with charges recorded in the year ended September 30, 2000.
Costs paid during the three and six months ended March 31, 2001 relate to
facility closure costs and lease terminations associated with the charges
recorded in the years ended September 26, 1998 and September 30, 2000. The
remaining exit costs are expected to be incurred and paid during fiscal
2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Central was incorporated in Delaware in June 1992 and is the successor to a
California corporation which was incorporated in 1955. References to "we," "us,"
or "Central" means Central Garden & Pet Company and its subsidiaries and
divisions, and their predecessor companies and subsidiaries.
Recent developments:
In December 2000 the Company announced that it would cancel the proposed
spin-off of its garden distribution business and would reorganize its garden and
pet businesses.
With the termination of the Company's distribution arrangement with The Scotts
Company and other anticipated sales decreases in the garden distribution
business, we believed that we could not economically support a national garden
distribution infrastructure. Additionally, we believe that the move toward
direct sales to retailers by manufacturers will increase in the future. Given
this, the Company commenced integrating garden distribution into our garden
products business. We believe this move offers us the best opportunity to
utilize our sales force and distribution know-how to provide logistics and sales
support for both our proprietary brands and consumer recognized products to
create a more profitable segment. This integration also applies to our pet
distribution business. This part of our business will continue to support our
partner suppliers but will increase its focus on expanding sales of our
proprietary pet products. This use of distribution as an integral support
function for proprietary brands has been used very successfully by our
Pennington subsidiary. This reorganization represents a change in the segments
reported from those reported in the Company's fiscal 2000 Annual Report filed on
Form 10K.
Developments affecting Garden Products:
Expiration of the Solaris Agreement and Termination of our Distribution
Relationship with Scotts
From October 1, 1995 to September 30, 1999, Garden Products distributed Solaris
products nationwide, pursuant to an exclusive distribution agreement (the
"Solaris Agreement"). Management believes that the relationship with Solaris
embodied in the Solaris Agreement had a substantial positive impact on our
results of operations. In January 1999, Pharmacia Corporation (formerly known as
Monsanto Company) sold its Solaris lawn and garden business exclusive of its
Roundup(R) herbicide products for consumer use to Scotts and entered into a
separate, long-term, exclusive agreement pursuant to which Pharmacia continues
to make Roundup herbicide products for consumer use and Scotts markets the
products. Beginning October 1, 1999, Scotts began to distribute Ortho(R) and
Roundup(R) products through a system that involved a combination of
distributors, of which we were the largest, as well as through direct sales by
Scotts to certain major retailers. In addition, Scotts began to sell
Miracle-Gro(R) directly to certain retailers.
Effective September 30, 2000, Scotts discontinued its distribution relationship
with Central. The affected products included Scotts(R), Ortho(R) and
Miracle-Gro(R) products and consumer Roundup(R) products manufactured by
Pharmacia for which Scotts acts as Pharmacia's exclusive sales agent. For
Central's fiscal year ended September 30, 2000, the revenue attributable to the
affected products was approximately $176 million. The gross profit associated
with these sales in fiscal 2000 was estimated to be $27 million based on
historical customer profitability. We expect this loss of gross profit to be
partially offset in fiscal 2001 with expense reductions.
Due to the termination of the Scotts distribution relationship and anticipated
sales declines, we have taken actions to downsize our lawn and garden
distribution operations to reflect anticipated business levels for the fiscal
year 2001. As a result, we have recorded charges of $27.5 million in the fiscal
year ending September 30, 2000 as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Fiscal 2000
Compared with Fiscal 1999" in the Company's fiscal 2000 annual report filed on
Form 10-K.
The sale of the Solaris business by Pharmacia, the expiration of the Solaris
Agreement and termination of the Scotts distribution relationship subject our
distribution business to significant uncertainties. These include the resolution
of all payments due between us and Pharmacia under the Solaris Agreement, such
as the amounts receivable from Pharmacia for cost reimbursements and payments
for cost reductions; the amounts payable to Pharmacia for inventory; and
responsibility for obsolete inventory and for non-payment by Solaris' sub-
agents. Scotts and Pharmacia have each initiated litigation against Central
arising out of the prior distribution relationship. In addition, Central has
filed suit against Scotts and Pharmacia seeking damages and injunctive relief as
well as restitution for, among other things, breach of contract and violations
of the antitrust laws by Scotts and Pharmacia. Each of these cases is in its
early stage. For this reason and because of the uncertainties inherent in
complex litigation, it is not currently possible to make an assessment of the
potential impact, losses or gains that may arise out of these cases individually
or collectively. Central believes that the reconciliation of all accounts and
claims with Pharmacia and Scotts will not result in additional charges to
Central. Further, Central believes it has substantial counterclaims and rights
of offset against both Scotts and Pharmacia, as well as meritorious defenses,
and intends to vigorously contest both suits. However, there can be no assurance
that the resolution of this litigation will not have a material adverse effect
on its results of operations, financial position and/or cash flows.
Three Months Ended March 31, 2001
Compared with Three Months Ended March 25, 2000
Net sales for the three months ended March 31, 2001 decreased by 15.4%, or $58.9
million, to $324.1 million from $382.9 million for the three months ended March
25, 2000. Of the decrease in net sales, approximately $79.7 million relates to
the closure of distribution centers of the sales and logistics units of both of
the Company's business segments offset in part by an increase of $27.5 million
related to newly acquired operations. The balance of the sales decrease, $6.7
million, relates principally to our pet products segment which was adversely
impacted by a decline in methoprene sales and a delay in the ordering pattern of
mosquito control chemicals due to a late spring in their major markets.
Gross profit remained virtually unchanged between quarters, but declined
slightly in our garden products segment due to a combination of reductions in
its sales and logistics support unit offset by increases from our propriety
brands and newly acquired operations. The slight decline in garden products was
offset by a slight increase in our pet products segment primarily as a result of
newly acquired businesses. Gross profit as a percentage of net sales increased
from 25.8% for the 2000 quarter to 30.5% for the quarter ended March 31, 2001,
principally due to increases in sales of higher margin proprietary products in
both segments coupled with a substantial reduction of lower margin non Central
distribution sales.
Selling, general and administrative expenses increased 22.8%, or $16.3 million,
from $71.4 million during the quarter ended March 25, 2000 to $87.7 million for
the comparable 2001 quarter. As a percentage of net sales, selling, general and
administrative increased from 18.7% during the three months ended March 25, 2000
to 27.1% for the three months ended March 31, 2001. Selling and delivery
expenses increased approximately $.4 million from $36.3 million for the quarter
ended March 25, 2000 to $36.7 million for the quarter ended March 31, 2001. Of
this increase, approximately $3.5 million related to newly acquired operations,
$3.2 million from existing operations principally related to higher fuel costs
and increased usage of common freight carriers in our garden products segment,
largely offset by $6.3 million related to reductions associated with the recent
closures of thirteen garden distribution branches. Facilities expense decreased
by $.4 million from $3.4 million during the quarter ended March 25, 2000 to $3.0
million for the comparable 2001 period. Of the decrease, approximately $1.1
million related to reductions in connection with the closure of the garden
distribution branches offset in part by $.2 million of expense related to newly
acquired operations and $.5 million associated with our ongoing distribution
operations attributable to increased rent on a new facility and increased
utility costs within our garden products segment. Warehouse and administrative
expenses increased $16.3 million from $31.7 million during the quarter ended
March 25, 2000 to $48.0 million for the similar 2001 period. Of the $16.3
million increase, approximately $2.3 million related to newly acquired
businesses in both the garden products and pet products segments. Of the
remaining increase, (1) approximately $1.4 million related to additional labor
and freight costs to relocate inventory from our closed garden branches to
continuing branches and outside storage locations, (2) $1.8 million legal and
professional fees related principally to certain ongoing litigation, (3) $3.5
million related to receivables still remaining at our closed garden branches,
(4) $.7 million related to costs associated with the fire at our Arizona
facility, (5) $.9 million related to product research and increased information
systems expense, (6) $2.6 million related to increased personnel costs, (7) $2.0
million related to increased depreciation and amortization partially due to
reclassifying all of the current quarter depreciation to warehouse and
administrative expense and (8) approximately $2.1 million related to the
significant reduction in inventory levels resulting in an increase in the amount
of purchasing, merchandise handling and storage costs charged to expense and not
included in inventory costs compared to the prior year. These expense increases
were offset in part by a net reduction of approximately $1.0 million related to
the closure of the garden distribution branches.
Net interest expense for the quarter ended March 31, 2001 increased by $.4
million to $6.4 million from $6.0 million for the quarter ended March 25, 2000,
primarily due to the increase in long term debt associated with the
acquisitions of Amdro and All Glass.
The Company's effective income tax rate for the quarter ended March 31, 2001 was
47% compared with 44% for the comparable 2000 quarter. The increase in the
effective rate results principally from non-deductible goodwill expense being a
higher percentage of taxable income than was the case in the quarter ended March
25, 2000.
Six Months Ended March 31, 2001
Compared with Six Months Ended March 25, 2000
Net sales for the six months ended March 31, 2001 decreased by 10.8%, or $64.7
million, to $537.3 million from $602.1 million for the six months ended March
25, 2000. The Company's Garden Products segment had a decrease in sales for the
six month period ended March 31, 2001 of $92.8 million excluding new
acquisitions, of which, approximately $91.2 million relates to the closure of
distribution centers of the sales and logistics units of both of the Company's
business segments. The Company's Pet Products segment incurred a decrease in
sales for the six month period of $21.1 million, excluding new acquisitions.
These decreases were offset by sales from the Company's newly acquired business
of approximately $49.2 million for the six month period ended March 31, 2001.
Gross profit as a percentage of revenues increased to 30.7% for the six month
period ended March 31, 2001 compared to 26.2% for the comparable period ended
March 25, 2000. The increase in gross profit as a percentage of net sales
relates principally to increases in sales of higher margin proprietary products
in both segments coupled with a substantial reduction of lower margin non
Central distribution sales.
Selling, general and administrative expenses increased 13.8%, or $18.9 million,
from $137.1 million during the six month period ended March 25, 2000 to $156.0
million for the comparable 2001 period. As a percentage of net sales, selling,
general and administrative expenses increased from 22.8% during the six months
ended March 25, 2000 to 29.0% for the similar 2001 period. Selling and delivery
expenses decreased approximately $2.1 million from $68.4 million for the six
months ended March 25, 2000 to $66.3 million for the comparable 2001 period. The
expense reduction in this category was totally attributable to reductions
related to the thirteen garden branches closed earlier this fiscal year.
Facilities expense decreased 15.5%, or $.9 million, from $6.6 million during the
first half of 2000 to $5.7 million for the similar 2001 period. The decrease in
facility costs is attributable to reductions in lease costs related to the
closed garden branches offset in part by facilities costs related to newly
acquired businesses. Warehouse and administrative expenses increased $21.9
million from $62.1 million during the six months ended March 25, 2000 to $84.0
million for the six months ended March 31, 2001. Of the $21.9 million increase
approximately $4.8 million related to newly acquired operations. The largest
portions of the increase in warehouse and administrative costs occurred during
the quarter ended March 31, 2001. The reasons for that increase are detailed in
the section dealing with the comparison of the quarters ended in March. The
remaining increase related to the quarter ended December 30, 2000 was associated
with increased personnel costs, increased information system costs and higher
costs relative to inventory levels required to support remaining operations.
Net interest expense for the six months ended March 31, 2001 increased by $2.0
million to $12.3 million from $10.3 million for the comparable period ended
March 25, 2000, primarily due to the increase in long term debt associated
with the acquisitions of Amdro and All Glass.
The Company's effective income tax rate for the six months ended March 31, 2001
was 42% compared with 44% for the comparable 2000 quarter. The decrease is
primarily attributable an increase in the effective rate principally from non-
deductible goodwill expense being a higher percentage of taxable income compared
to the 2000 period offset by a net tax benefit incurred in the first three
months of the six month period ended March 31, 2001.
Liquidity and Capital Resources
The Company has financed its growth through a combination of bank
borrowings, supplier credit, internally generated funds and sales of securities
to the public. The Company received net proceeds (after offering expenses) of
approximately $431.0 million from its five public offerings of common stock in
July 1993, November 1995, July 1996, August 1997 and January 1998. In November
1996, the Company completed the sale of $115 million 6% subordinated convertible
notes generating approximately $112 million net of underwriting commissions.
Historically, the Company's business has been highly seasonal and its
working capital requirements and capital resources tracked closely to this
seasonal pattern. During the first fiscal quarter accounts receivable reach
their lowest level while inventory, accounts payable and short-term borrowings
begin to increase. Since the Company's short-term credit line fluctuates based
upon a specified asset borrowing base, this quarter is typically the period when
the asset borrowing base is at its lowest and consequently the Company's ability
to borrow is at its lowest. During the second fiscal quarter, receivables,
accounts payable and short-term borrowings begin to increase, reflecting the
build-up of inventory and related payables in anticipation of the peak selling
season. During the third fiscal quarter, principally due to the Solaris
Agreement for the period between October 1, 1995 and September 30, 1999,
inventory levels remained relatively constant while accounts receivable peaked
and short-term borrowings started to decline as cash collections were received
during the peak- selling season. During the fourth fiscal quarter, inventory
levels were at their lowest, and accounts receivable and payables were
substantially reduced through conversion of receivables to cash. As a result of
the termination of the Solaris agreement effective September 30, 1999, the
ending of the Company's distribution relationship with the Scotts company
effective September 30, 2000, and the associated reduction in Garden Products
sales as a percentage of overall sales, this seasonal pattern is expected to be
less significant in the future.
The Company's businesses service two broad markets: lawn and garden and pet
supplies. Pet Products primarily deals with products that have a year round
selling cycle with very little change quarter to quarter. As a result, it is not
necessary to carry large quantities of inventory to meet peak demands.
Additionally, this level sales cycle eliminates the need for manufacturers to
give extended credit terms to either distributors or retailers. On the other
hand, Garden Products is highly seasonal with approximately two-thirds of its
sales occurring during the fiscal second and third quarters. For many
manufacturers of garden products this seasonality requires them to move large
quantities of their products well ahead of the peak selling period. To encourage
distributors to carry large amounts of inventory, industry practice has been for
manufacturers to give extended credit terms and/or promotional discounts.
Cash used in operating activities was $36.4 million during the six
months ended March 31, 2001, a decrease of $3.7 million from the $40.1 million
used in operating activities for the comparable 2000 period. The decrease is
primarily attributable to increased efforts in collecting accounts receivable as
compared to the 2000 period.
Cash used in investing activities of $21.9 million resulted from the payment of
amounts due related to the acquisitions of All-Glass Aquarium and the Lofts and
Rebel lines of products by the Company's Pennington Subsidiary, as well as the
acquisition of office and warehouse equipment, including computer hardware and
software.
Cash generated from financing activities of $57.9 million consisted principally
of net borrowings of $63.3 million under the Company's lines of credit,
partially offset by $5.9 million in repayments of long term debt.
The Company has a $200 million line of credit with Congress Financial
Corporation (Western). The available amount under the line of credit fluctuates
based upon a specific asset-borrowing base. The line of credit bears interest at
a rate either equal to the prime rate or LIBOR plus 2% at the Company's option,
and is secured by substantially all of the Company's assets. At March 31, 2001,
the Company had $116.6 million of outstanding borrowings, and had $20.8 million
of available borrowing capacity under this line. The Company's line of credit
contains certain financial covenants such as minimum net worth and minimum
working capital requirements. The line also requires the lender's prior written
consent to any acquisition of a business. On December 12, 2000, the agreement
was amended and extended to July 12, 2002. In connection with the acquisition of
one company in fiscal 1998, the Company assumed a $60.0 million line of credit.
On January 13, 2001, this line was increased from $60.0 million to $75.0
million. On March 1, 2001 the line was further increased from $75.0 million to
$85.0 million. At March 31, 2001, there were $71.0 million of outstanding
borrowings and $14.0 million of available borrowing capacity under this line.
Interest related to this line is based on a rate either equal to the prime rate
or LIBOR plus .875% at the Company's option.
Excluding the potential impact of any adverse consequences associated with
legal matters discussed in "Part II - Item 1. Legal Proceedings", the Company
believes that cash flows from operating activities, funds available under its
lines of credit, and arrangements with suppliers will be adequate to fund its
presently anticipated working capital requirements for the foreseeable future.
The Company anticipates that its capital expenditures will not exceed $18.0
million for the next 12 months.
As part of its growth strategy, the Company has engaged in acquisition
discussions with a number of companies in the past and it anticipates it will
continue to evaluate potential acquisition candidates. If one or more potential
acquisition opportunities, including those that would be material, become
available in the near future, the Company may require additional external
capital. In addition, such acquisitions would subject the Company to the general
risks associated with acquiring companies, particularly if the acquisitions are
relatively large.
Weather and Seasonality
Historically, the Company's sales of lawn and garden products have been
influenced by weather and climate conditions in the markets it serves. During
the last several years, the Company's results of operations were negatively
affected by severe weather conditions in many parts of the country.
Additionally, the Company's business has been highly seasonal. In fiscal 2000,
approximately 62% of the Company's sales occurred in the first six months of the
calendar year, the Company's second and third fiscal quarters. Substantially all
of the Company's operating income has been typically generated in this period
which has historically offset the operating losses incurred during the first
fiscal quarter of the year. As a result of the termination of the distribution
relationship with Scotts in September 2000, and the associated reduction in
Garden Products sales as a percentage of overall sales, this seasonal pattern is
expected to be less significant in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes there has been no material change in its exposure to market
risk from that discussed in the Company's fiscal 2000 Annual Report filed on
Form 10-K.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1. Legal Proceedings
Scotts and Pharmacia Litigation. On June 30, 2000, The Scotts Company filed
suit against Central to collect the purchase price of certain lawn and garden
products previously sold to Central. Scotts has filed an amended complaint
seeking $23 million for such products. Central has 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, 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 Pharamacia which expired in September 19999, 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 filed motions in both the Scotts
and Pharmacia actions to have those cases dismissed or stayed. Central's motion
in the Scotts' action has been denied. In the Pharmacia action, the court denied
Central's motion to stay but granted Central's request that Scotts be joined as
a party. On January 18, 2001, Pharmacia Corporation filed an Amended Petition
adding Scotts to the Pharmacia action. On January 29, 2001, Central filed its
Answer, including affirmative defenses, to the Amended Petition as well as
Counter/Cross claims against Pharmacia and Scotts. Pharmacia and Scotts have
filed responses to Central's counter and cross-claims. In addition, they filed a
motion to stay claims other than claims arising under the alliance agreement
between Central and Pharmacia. The Court granted this motion, thereby requiring
that claims against Scotts or Pharmacia arising from non-alliance matters be
litigated in the Ohio and California's federal actions, as appropriate.
Central believes that the reconciliation of all accounts and claims with
Pharmacia and Scotts will not result in additional charges to Central. Further,
Central believes it has substantial counterclaims and rights of offset against
both Scotts and Pharmacia, as well as meritorious defenses, and intends to
vigorously contest both suits. However, Central cannot assure you that the
resolution of this litigation will not have a material adverse effect on its
results of operations, financial position and/or cash flows.
On July 7, 2000, Central filed suit against Scotts and Pharmacia seeking
damages and injunctive relief as well as restitution for, among other things,
breach of contract and violations of the antitrust laws by Scotts and Pharmacia.
This action, Central Garden & Pet Company, a Delaware Corporation v. The Scotts
---------------------------------------------------- ----------
Company, an Ohio corporation; and Pharmacia Corporation, formerly known as
- --------------------------------------------------------------------------
Monsanto Company, a Delaware corporation, Docket No. C 00 2465, is in the United
- ----------------------------------------
States District Court for the Northern District of California. On October 26,
2000, the federal district court issued an order denying, for the most part,
Pharmacia's motion to dismiss Central's federal antitrust claims. Central was
given leave to file an amended federal complaint to clarify certain of its
allegations. Central filed a first amended complaint on November 14, 2000. The
federal district court's October 26 order also ruled that it did not have
jurisdiction over Central's state law claims and that such claims should be
adjudicated in a state court. On October 31, 2000, Central filed an action
entitled Central Garden & Pet Company v. The Scotts Company and Pharmacia
---------------------------- --------------------------------
Corporation, Docket No. C00-04586 in Contra Costa Superior Court asserting
- -----------
various state law claims, including the claims previously asserted in the
federal action. On December 4, 2000, Pharmacia and Scotts filed a joint Motion
to Stay. The state court has stayed the California action while the contract
claims between and among the parties are litigated in the Ohio and Missouri
actions and the antitrust claims are litigated in the federal California action.
Phoenix Fire. On August 2, 2000, a fire destroyed the Company's leased warehouse
space in Phoenix, Arizona, and an adjoining warehouse space leased by a third
party. The adjoining warehouse tenant, the building owner, and nearby businesses
have presented claims for property damage and business interruption. Local
residents have filed a purported class action lawsuit alleging claims for bodily
injury and property damage as a result of the fire. In addition, the Arizona
Department of Environmental Quality is monitoring the cleanup operations, and
the Company, the building owner and the adjoining warehouse tenant have
submitted a plan and are currently assessing whether the fire and fire
suppression efforts may have caused environmental impacts to soil, groundwater
and/or surface water. The United States Environmental Protection Agency has also
sent the Company a request for information regarding the Phoenix fire. The
overall amount of the damages to all parties caused by the fire, and the overall
amount of damages which the Company may sustain as a result of the fire, have
not been quantified. At the time of the fire, the Company maintained property
insurance covering losses to the leased premises, the Company's inventory and
equipment, and loss of business income. The Company also maintained insurance
providing $51 million of coverage (with no deductible) against third party
liability. The Company believes that this insurance coverage will be available
with respect to third party claims against the Company if parties other than the
Company are not found responsible. The precise amount of the damages sustained
in the fire, the ultimate determination of the parties responsible and the
availability of insurance coverage are likely to depend on the outcome of
complex litigation, involving numerous claimants, defendants and insurance
companies.
For a discussion of other pending legal proceedings, please see Central's Annual
Report on Form 10-K for the year ended September 30, 2000.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matter to a Vote of Securities Holders
(a) The annual meeting of shareholders was held on February 12, 2001.
(b) The following directors were elected at the meeting
William E. Brown
Glenn W. Novotny
Brooks M. Pennington III
Lee D. Hines, Jr.
Daniel P. Hogan, Jr.
Bruce A. Westphal
Set forth below is a tabulation with respect to the matter voted
on at the meeting:
Against or
For Withheld
---------- ----------
William E. Brown
Common 14,005,407 497,775
Class B 1,604,659 -0-
Glenn W. Novotny
Common 14,015,446 487,736
Class B 1,604,659 -0-
Brooks M. Pennington III
Common 14,011,697 491,485
Class B 1,604,659 -0-
Lee D. Hines, Jr.
Common 14,015,836 487,346
Class B 1,604,659 -0-
Daniel P. Hogan, Jr.
Common 14,020,236 482,946
Class B 1,604,659 -0-
Bruce Westphal
Common 14,020,136 483,046
Class B 1,604,659 -0-
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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: May 14, 2001
/s/ Lee D. Hines, Jr.
---------------------------------------------
Lee D. Hines, Jr., Vice President and
Chief Financial Officer