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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
September 29, 2001 0-20242
CENTRAL GARDEN & PET COMPANY
(Exact name of registrant as specified in its charter)
Delaware 68-0275553
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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3697 Mt. Diablo Boulevard, Lafayette, California 94549
(Address of principal executive offices) (Zip Code)
Telephone Number: (925) 283-4573
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
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(Title of Class)
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. Yes X . No___.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
At December 5, 2001, the aggregate market value of the registrant's Common
Stock and Class B Stock held by non-affiliates of the registrant was
approximately $127,415,000 and $446,000, respectively.
At December 5, 2001, the number of shares outstanding of registrant's
Common Stock was 16,790,623. In addition, on such date the registrant had
outstanding 1,655,462 shares of its Class B Stock which is convertible into
Common Stock on a share-for-share basis.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company's 2002 Annual Meeting of
Stockholders - Part III of this Form 10-K.
Central Garden & Pet Company
Index to Annual Report on Form 10-K
For the fiscal year ended September 29, 2001
Page
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PART I
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 12
Item 3. Legal Proceedings...................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders.................................... 15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 15
Item 6. Selected Financial Data................................................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.............................. 30
Item 8. Financial Statements and Supplementary Data............................................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 56
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 56
Item 11. Executive Compensation................................................................. 56
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 56
Item 13. Certain Relationships and Related Transactions......................................... 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 56
2
PART I
Item 1. Business
GENERAL
Overview
Central Garden & Pet Company offers a broad array of branded lawn and
garden and pet supply products, including Pennington(R), Four Paws(R),
Zodiac(R), Kaytee(R), Nylabone(R), All-Glass(R), Lofts(R), Max-Q(R), Norcal
Pottery(R), Matthews(R), Amdro(R), Image(R) and Grant's(R). Beginning in the
fiscal year ended September 29, 2001 ("fiscal 2001"), Central's operations were
grouped into two business segments, the lawn and garden products business
("Garden Products") and the pet products business ("Pet Products"). For fiscal
2001, Garden Products and Pet Products accounted for 57% and 43%, respectively,
of consolidated net sales before corporate eliminations. These businesses
accounted for income from operations before other charges and the allocation of
certain corporate costs and eliminations of $7.4 million and $34.9 million,
respectively, in fiscal 2001. These segments, their products, and the markets
they serve are described under the headings "The Garden Products Business" and
"The Pet Products Business" in this Part I.
Central was incorporated in Delaware in June 1992 and is the successor to a
California corporation which was incorporated in 1955. References to "we," "us,"
"our" or "Central" mean Central Garden & Pet Company and its subsidiaries and
divisions, and their predecessor companies and subsidiaries. Our principal
executive offices are located at 3697 Mt. Diablo Boulevard, Lafayette,
California 94549 and our telephone number is (925) 283-4573.
Recent Developments
Garden Products
During fiscal 2001, we intensified our focus on branded products and
continued to downsize our distribution operations to reflect the reduction in
business as a result of the termination on September 30, 2000 of our
distribution relationship with The Scotts Company ("Scotts").
Pet Products
On September 30, 2000, Central acquired All-Glass Aquarium Co., a leading
manufacturer and marketer of aquariums and related products. Based in Franklin,
Wisconsin, All-Glass had sales of approximately $61 million for the twelve
months ended September 30, 2000, with manufacturing facilities located in
Franklin and its Oceanic Systems subsidiary in Dallas, Texas. Its brands include
All-Glass Aquarium(R) and Oceanic Systems(R). During fiscal 2001, we integrated
the acquired All-Glass business with our existing Island aquarium business so
that we now offer a full line of aquariums.
In 2001, we received numerous awards for our new and innovative pet
products. In January 2001, the Pet Industry Distributors Association selected
our All-Glass Mini Bow 7 as the "Best New Aquarium Product," our Nylabone
Fold-away Pet Carriers as the "Best New Dog or Cat Product" and our Kaytee
Yogurt Dips as the "Best New Bird or Small Animal Product." In addition, The
American Pet Products Manufacturers Association named our All-Glass Mini Bow 5
as the "Best New Aquatic Product" and our Nylabone Fold-away Pet Carrier Display
Rack as the "Best POS Display."
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THE GARDEN PRODUCTS BUSINESS
Overview
Garden Products manufactures a broad array of proprietary branded lawn and
garden products, including Pennington(R), Amdro(R), Norcal Pottery(R), Lofts(R),
Matthews(R) and Grant's(R), and also performs logistics and sales activities for
a variety of other manufacturers of lawn and garden products. Garden Products
accounted for 57% of Central's consolidated net sales before corporate
eliminations in fiscal 2001, 66% in fiscal 2000 and 71% in fiscal 1999, and
before the allocation of certain corporate costs and eliminations accounted for
income from operations before other charges of $7.4 million in fiscal 2001,
$37.1 million in fiscal 2000, and $50.7 million in fiscal 1999.
Proprietary Branded Products
The principal lawn and garden product lines are the Pennington line of
grass seed, wild bird food and lawn care products, the Norcal Pottery line of
pottery products, the Amdro and Grant's line of ant control products, the
Matthews line of wooden garden products, and seven proprietary brands of
fertilizer.
Pennington. Pennington offers a broad range of seed products in the lawn
and garden, forage, and wild game and bird markets. Pennington is also a large
manufacturer of lawn and garden chemicals, fertilizers, soils and related
products. The Pennington line of grass seed and lawn and garden products
includes the trademarks Pennington Seed(R), Pennington(R), Penkoted(R), Max-Q,
ProCare(R), Green Charm(R), Lofts(R) and Rebel(R). Pennington products are
offered nationwide and include:
. Grass Seed. Pennington manufactures numerous varieties and blends of
cool and warm season turf grass for both the residential and
professional markets, as well as forage and wild game seed varieties
under the Pennington name and under private labels, including
Wal*Mart's Better Homes and Gardens(R) licensed program. The
Pennington grass seed manufacturing facilities are some of the largest
and most modern seed conditioning facilities in the industry.
Pennington has recently added Lofts(R) and Rebel(R) products to its
offerings under a license arrangement.
. Bird Seed Products. Pennington is one of the largest manufacturers of
wild bird feed including premium, specialty and gourmet mixes.
Pennington also manufactures liquid hummingbird food.
. Lawn and Garden Chemicals. Pennington manufactures a full line of lawn
and garden weed and insect control products, under the names
Eliminator(R), ProCare(R) and Pennington's Pride(R). Eliminator(R)
lawn and garden insecticides and herbicides are packaged exclusively
for Wal*Mart.
. Fertilizers and Soil Products. Pennington manufactures several lines
of lawn and garden fertilizers, including granular products and liquid
plant foods, under several brands, including Pennington(R) and other
private and controlled labels. In addition, Pennington's Earth Pak
division also offers a complete line of soil, mulch and rock products
under several brands, including Pennington and other private and
controlled labels.
Norcal Pottery. Norcal Pottery designs and procures pottery products from
across the United States and around the world. The products include terra cotta,
stoneware, ceramics and porcelain pots and are sold to chain store accounts,
independent retailers and landscapers nationwide.
AMBRANDS. AMBRANDS manufactures AMDRO(R) Fire Ant Bait, the leading fire
ant bait product available in the consumer market, and IMAGE(R) Consumer
Concentrate, a selective herbicide for the control of difficult weeds in
Southern turf, such as nutsedge, dollarweed, wild onion and garlic, Virginia
buttonweed and others. Both products are sold primarily in the Southern and
Southeastern markets and are carried by key retailers including Wal-Mart, Home
Depot, Ace and Lowe's.
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Grant's. Grant's manufactures ant baits, animal repellents and garden aid
products. The Grant's line of ant control products consists of Grant's ant baits
and granules. These products are sold nationwide through a network of lawn and
garden distributors.
Unicorn Laboratories. Unicorn serves the U.S. animal health and lawn and
garden industries as a private label and branded manufacturer of lawn, garden
and animal health chemical products.
Matthews Four Seasons. Matthews manufactures a complete line of wooden
garden products, including planters, barrel fountains, arbors and trellises.
Matthews also produces a cedar bird feeder line under the Kaytee(R) label.
Cedar Works. Pennington has an equity stake in Cedar Works, the largest
producer of wooden bird feeders in the country. Its brands include Country
Home(R), Nature's Market(R), Cedar Works(R), Harvest Landing(R) and The Address
of Distinction(R). Cedar Works also offers injection molded plastic bird feeders
and feeder accessories to complement its wooden feeder lines.
Fertilizers. Central has four proprietary brands of fertilizer-- Colorado's
Own(R)and Mountain States(R), which are manufactured by the Company, and
Easy-Gro(R)and Turf-Magic(R), which are supplied to Central by contract
manufacturers. In addition, Gro Tec, Inc., a subsidiary of Pennington, markets
fertilizers under Pennington(R), Pro Care(R), Green Charm(R)and other
proprietary brands.
Distributed Lawn and Garden Products
Garden Products also offers its customers a comprehensive selection of
other manufacturers' brand name lawn and garden products. In selecting which
products to distribute, Garden Products generally focuses on those lawn and
garden brand name products that are suited to distribution due to their
seasonality, variable sales movements, complexity to consumers and retailers,
handling and transportation difficulties, and which therefore generally require
value-added services. Garden Products does not carry live plants, power tools or
high priced items which are generally sourced directly from manufacturers.
Sales and Marketing
Garden Products' lawn and garden products are sold by approximately 175
sales personnel to a network of lawn and garden and hardware wholesale
distributors nationwide. Garden Products also employs approximately 250 sales
and marketing personnel to support its logistics and sales activities for a
variety of other manufacturers of lawn and garden products. Most products are
sold directly to retailers. Historically, Garden Products' sales have been
highly seasonal. Most retail sales of lawn and garden products occur on weekends
during the spring and fall.
Sales to mass merchandisers, warehouse-type clubs and home improvement
centers represent a significant portion of Garden Products' sales. Sales to
Wal*Mart represented approximately 31% of Garden Products' sales in fiscal 2001,
36% in fiscal 2000 and 32% in fiscal 1999. Sales to Home Depot represented
approximately 11% of Garden Products' sales in fiscal 2001, 7% in fiscal 2000
and 12% in fiscal 1999. Sales to Lowe's represented approximately 9% of Garden
Products' sales in fiscal 2001, 7% in fiscal 2000 and 8% in fiscal 1999.
Subsequent to the fiscal 2000 year end, Wal*Mart informed Garden Products
of a number of significant changes in its lawn and garden supplies purchasing
programs and procedures for fiscal 2001. These included Wal*Mart's decision to
purchase certain lawn and garden supplies directly from a number of
manufacturers whose supplies had previously been sold through Garden Products; a
change from "store door" deliveries of many of the lawn and garden supplies
formerly delivered by Garden Products to individual Wal*Mart stores to a new
procedure whereby Garden Products would ship these products to Wal*Mart
distribution centers; and Wal*Mart's decision not to have Garden Products
personnel perform lawn and garden supplies merchandising functions inside
Wal*Mart stores. As a result of these factors, and the closing of 13
distribution centers associated with the garden distribution downsizing, sales
by Garden Products of other manufacturers' lawn and garden products to Wal*Mart
in 2001 declined significantly.
5
Garden Products' current practice on product returns generally is to accept
and credit the return of unopened cases of products from customers where the
quantity is small, the product has been misshipped or the product is defective.
Garden Products has arrangements with its manufacturers and suppliers to stock
balance and/or credit it for a certain percentage of returned or defective
products.
Manufacturing
Garden Products currently operates 14 manufacturing facilities. In
addition, certain of its proprietary branded products are manufactured by
contract manufacturers. Garden Products also has a development team that is
responsible for developing new products within existing proprietary branded
product lines and the development of new proprietary branded product lines.
Pennington has seed processing facilities in Madison, Georgia; Greenfield,
Missouri; Roll, Arizona; El Centro, California; and Lebanon, Oregon to test,
process and package a full range of Pennington seed varieties. Pennington also
maintains observation nurseries at all manufacturing locations, enabling it to
track seed growth for Pennington quality prior to selection. Pennington's
fertilizer plant, Gro Tec(R), is located in Eatonton, Georgia. Pennington wild
bird feed is manufactured in Penn Pak facilities in Madison, Georgia;
Greenfield, Missouri; and Sidney, Nebraska. In addition, Pennington's Earth Pak
plant in Shady Dale, Georgia produces a variety of soil amendments, including
pine bark nuggets and potting soils used in landscaping. Pennington also
operates a fertilizer manufacturing facility in Longmont, Colorado.
Unicorn Laboratories, Inc. is located in Clearwater, Florida where it
manufactures and formulates a variety of lawn, garden and animal health
products. Grant's operates a manufacturing facility in San Leandro, California,
and Matthews operates a manufacturing facility in Stockton, California.
Purchasing
Most of the raw materials purchased by Garden Products are acquired from a
number of different suppliers; however, a number of items are purchased from
limited or single sources of supply, and disruption of these sources could have
a temporary adverse effect on product shipments and Garden Products' financial
results. Garden Products believes alternative sources could be obtained to
supply these materials, but a prolonged inability to obtain certain materials
could result in lost sales.
Pennington obtains grass seed from various sources, which it presently
considers to be adequate. No one source is considered to be essential to
Pennington or to Garden Products' business as a whole. Pennington has never
experienced a significant interruption of supply. The principal raw materials
required for Pennington's wild bird seed manufacturing operations are bulk
commodity grains, including millet, milo, wheat and sunflower seeds. Pennington
generally purchases these raw materials one to three months in advance. Raw
materials are generally purchased from large national commodity companies and
local grain cooperatives. In order to ensure an adequate supply of seed to
satisfy expected production volume, Pennington enters into contracts to purchase
grain and seed at future dates by fixing the quantity, and often the price, at
the commitment date.
The key ingredients in the Garden Products' fertilizer and insect and weed
control products are various commodity and specialty chemicals including
phosphates, urea, potash, herbicides, insecticides and fungicides. Garden
Products obtains its raw materials from various sources, which it presently
considers to be adequate. No one source is considered to be essential to any of
Garden Products' companies or to its business as a whole. Garden Products has
never experienced a significant interruption of supply.
Distribution
Garden Products currently operates 20 distribution centers throughout the
country. The primary distribution centers for Pennington's products are located
both near the point of manufacture and at strategically located warehousing
facilities. These facilities are located in Columbia, South Carolina; Cullman,
Alabama; Greenfield, Missouri; Madison, Georgia; Kenbridge, Virginia; Hammond,
Louisiana; Little Rock, Arkansas; Woburn, Massachusetts; and Laurel, Maryland.
In addition, Pennington uses other outside agents and distributors, including,
6
but not limited to, Excel Garden Products, Central's other garden sales and
logistics operations. Pennington's products are shipped by rail and truck. While
the majority of truck shipments are made by contract carriers, a portion is made
by Pennington's fleet of trucks.
Excel Garden Products operates distribution centers in Dallas, Texas;
Orlando, Florida; Portland, Oregon; Sacramento, California; Santa Fe Springs,
California; and Salt Lake City, Utah. Norcal Pottery operates distribution
centers in San Leandro, California; Richmond, California; Ontario, California;
Houston, Texas; and Algona, Washington.
Competition
The lawn and garden products industry is highly competitive. Garden
Products' lawn and garden products compete against national and regional
products and private label products produced by various suppliers. Our turf and
forage grass seed products compete principally against products by Barenburg,
J.R. Simplott, Scotts and numerous regional seed suppliers. Our wild bird seed
products compete principally against products by Audubon Park, Wagner, Red River
and Gutwein. Our fertilizers, pesticides and combination products compete
principally against products marketed by such companies as Scotts, Lebanon
Chemical Corp., United Industries Corporation, Vigoro/Pursell Industries and
Bayer/Pursell. Since its acquisition of the Ortho(R) line of lawn and garden
products from Pharmacia Corporation (formerly Monsanto) in 1999, Scotts'
dominant position in the lawn and garden industry has been a significant
competitive disadvantage for Garden Products' branded products. Garden Products
competes primarily on the basis of its strong brand names, quality, value,
service and price.
Garden Products also competes with a large number of smaller local and
regional distributors--with competition based on price, service and personal
relationships. In addition to competition from other distributors, Garden
Products also faces increased competition from manufacturers and suppliers which
distribute some percentage of their products directly to retailers, bypassing
distributors, or through a dual distribution system in which the manufacturer or
supplier competes with distributors for sales to certain accounts. Such
competition is typically based on service and price. The termination of the
distribution relationship with Scotts effective September 2000 is a significant
competitive disadvantage for Garden Products' distribution sales.
The Pet Products Business
Overview
Pet Products is a leading manufacturer of proprietary branded pet supply
products, including FourPaws(R), Zodiac(R), Kaytee(R), All-Glass Aquarium(R),
Oceanic Systems(R), Island Aquarium(R), Nylabone(R) and TFH(R), and also
performs logistics and sales activities for a variety of other manufacturers of
pet supply products. Pet Products accounted for 43% of Central's consolidated
net sales before corporate eliminations in fiscal 2001, 34% in fiscal 2000 and
29% in fiscal 1999, and before the allocation of certain corporate costs and
eliminations accounted for income from operations of $34.9 million in fiscal
2001, $32.3 million in fiscal 2000, and $25.3 million in fiscal 1999.
Proprietary Branded Pet Products
Pet Products' principal pet supply product lines include the Four Paws'
line of animal products, the TFH line of pet books and Nylabone premium dog
chews and pet carriers, the Kaytee line of bird and small animal food, the
Wellmark line of flea and tick products, and the All-Glass(R), Oceanic
Systems(R) and Island Aquarium(R) line of aquariums.
Four Paws. Four Paws is one of the largest producers of dog, cat, reptile
and small animal products in the United States, according to the 2000-01 Pet Age
Retailer Report. Four Paws products include Magic Coat(R) shampoos, Wee-Wee
Pads, a line of grooming supplies for dogs and cats, animal cages, tie out
cables, leashes, collars, and accessories, oral hygiene products and a complete
line of catnip products. Four Paws also offers a line of heating equipment and
bedding material for reptiles and a line of hard rubber toys called Rough &
Rugged. Four Paws products are distributed throughout the United States, Canada,
Europe and Asia.
7
TFH Publications. TFH is a producer of pet books and the manufacturer of
premium dog chews and edible bones under the brand names Nylabone(R),
Gumabone(R), Healthy Edibles(R) and Flexibone(R). TFH currently has over 1,200
titles in print and publishes a monthly magazine. TFH also offers a line of
premium dog houses, pet carriers and dog and cat toys under the Nylabone(R)
brand.
Kaytee. Kaytee is one of the nation's largest manufacturers of bird seed
for pet and wild birds, according to the 2000-01 Pet Age Retailer Report, as
well as a manufacturer of food and treats for small animals under the Kaytee(R)
brand. Kaytee also manufactures wild bird feed under the brand name Natures
Harvest(TM) for Kmart Corporation and under the PETsMART private label.
Wellmark. Wellmark is a leading manufacturer of flea, tick and pest
protection products for a diversified group of pest control markets, according
to the 2000-01 Pet Age Retailer Report. These products--which include on-animal
spot applications, sprays, shampoos and powders, collars, indoor foggers,
aerosols, concentrates and pump-sprays--are based on the active ingredient
methoprene. Wellmark owns the Zodiac(R) and Vet-Kem(R) trademarks in the United
States and Canada as well as those of Ovitrol(R), Siphotrol(R), Fleatrol(TM),
vIGRen(R), Petcor(R), Precor(R) and Natural Signature(R).
All-Glass Aquarium and Island Aquarium. All-Glass Aquarium and Island
Aquarium manufacture aquariums, terrariums, aquatic lighting systems, and
aquarium and terrarium furniture sold under the brand names All-Glass
Aquarium(R), Oceanic Systems(R) and Island(R) Aquarium.
Distributed Pet Supply Products
Pet Products also offers its customers a comprehensive selection of other
manufacturers' brand name pet supply products. Pet Products carries many of the
best-known brands in pet foods and supplies and combines these products into
single shipments, providing its pet supply customers a wide variety of products
on a cost-effective basis.
Sales and Marketing
Pet Products' branded products are sold nationwide through its own
distribution network, as well as independent distributors and directly to
retailers, including national specialty pet stores, mass merchants, bookstores
and independent pet retailers. Wellmark also sells products to the professional
pest control market and veterinarians. At September 29, 2001, Pet Products
employed approximately 125 branded products sales and marketing personnel. Pet
Products also focuses on selling pet supply products to a wide variety of
retailers, including independent, regional and national retail chains. Pet
Products employs approximately 100 sales and marketing personnel to support its
logistics and sales activities for a variety of other manufacturers of pet
supply products.
Sales to mass merchants and national specialty pet stores represent a
significant portion of Pet Products' sales. Sales to PETsMART represented 7% of
Pet Products' sales in fiscal 2001, 7% in fiscal 2000 and 6% in fiscal 1999.
Sales to Petco represented 6% of Pet Products' sales in fiscal 2001, 8% in
fiscal 2000 and 5% in fiscal 1999.
Manufacturing
Pet Products currently operates ten manufacturing facilities. In addition,
certain of its proprietary branded products are manufactured by contract
manufacturers. Pet Products also has development teams that are responsible for
developing new products within existing proprietary branded product lines and
the development of new proprietary branded product lines.
Four Paws operates manufacturing facilities in Hauppauge, New York. TFH's
book division and Nylabone manufacturing facilities are located in Neptune City,
New Jersey. Kaytee operates manufacturing facilities in Abilene, Kansas;
Chilton, Wisconsin; Cressona, Pennsylvania; and Rialto, California. Wellmark
operates a manufacturing and technology center in Dallas, Texas. All-Glass
Aquarium operates manufacturing facilities in Franklin, Wisconsin and Dallas,
Texas. Island Aquarium operates a manufacturing facility in Fontana, California.
8
Purchasing
Most of the raw materials purchased by Pet Products are acquired from a
number of different suppliers; however, some items, including the active
ingredient Methoprene, are purchased from limited or single sources of supply,
and disruption of these sources could have a temporary adverse effect on product
shipments and Pet Products' financial results. Pet Products believes alternative
sources could be obtained to supply these materials, but a prolonged delay in
obtaining certain materials could result in lost sales.
The principal raw materials required for Kaytee's bird seed manufacturing
operations are bulk commodity grains, including millet, milo, wheat and
sunflower seeds. Kaytee generally purchases these raw materials one to three
months in advance. Raw materials are generally purchased from large national
commodity companies and local grain cooperatives. In order to ensure an adequate
supply of seed to satisfy expected production volume, Kaytee enters into
contracts to purchase grain and seed at future dates by fixing the quantity, and
often the price, at the commitment date.
Distribution
Pet Products sells its products directly to retailers and a network of
distributors. Pet Products currently operates eight distribution centers
throughout the country. The facilities are located in Algona, Washington;
Denver, Colorado; Houston, Texas; Mahwah, New Jersey; Miami, Florida;
Sacramento, California; Santa Fe Springs, California; and Tampa, Florida. While
the majority of truck shipments are made by Pet Products' fleet of trucks, a
portion is made by common carriers.
Competition
The pet supply products industry is highly competitive. Our branded pet
products compete against national and regional products and private label
products produced by various suppliers. Our Four Paws and Wellmark branded
products compete principally against branded products marketed by such companies
as Hartz Mountain, Sargeant's and Eight in One. TFH Publications' pet books
compete principally against books published by Howell and Barrons, and Nylabone
products compete principally against products manufactured by Aspen/Booda and
Doskocil. Our Kaytee products compete principally against products marketed by
Hartz Mountain, Sun Seed, Audobon Park and Wagner. Our All-Glass Aquarium and
Island Aquarium branded products compete principally against Perfecto. Pet
Products competes primarily on the basis of its strong brand names, innovative
new products, quality, value, service and price.
Pet Products also competes with a large number of smaller local and
regional distributors--with competition based on price, service and personal
relationships. In addition to competition from other distributors, Pet Products
also faces increased competition from manufacturers and suppliers which
distribute some percentage of their products directly to retailers, bypassing
distributors, or through a dual distribution system in which the manufacturer or
supplier competes with distributors for sales to certain accounts. Such
competition is typically based on service and price.
Matters Relating to Central Generally
Significant Customers
Wal*Mart represented approximately 21% of Central's net sales in fiscal
2001, 25% in fiscal 2000 and 24% in fiscal 1999. Wal*Mart holds significant
positions in the retail lawn and garden and pet supplies markets. See "The
Garden Products Business - Sales and Marketing" above.
Patent and Other Proprietary Rights
Central's branded products companies hold numerous patents in the United
States and in other countries, and have many patent applications pending in the
United States and in other countries. Central considers the development of
patents through creative research and the maintenance of an active patent
program to be
9
advantageous in the conduct of its business, but does not regard the holding of
any particular patent as essential to its operations. Central grants licenses to
certain manufacturers on various terms and enters into cross-licensing
arrangements with other parties.
Employees
As of September 29, 2001, Central had approximately 4,200 employees of
which approximately 4,000 were full-time employees and 200 were temporary or
part-time employees. We hire substantial numbers of temporary employees for the
peak lawn and garden shipping season of February through June to meet the
increased demand experienced during the spring and summer months, including
merchandising in stores. All of our temporary employees are paid on an hourly
basis. Except for certain employees at TFH Publications, Inc. and a Kaytee
facility in Rialto, California, none of our employees is represented by a labor
union. We consider our relationships with our employees to be good.
Environmental Considerations
Many of the products that we manufacture or distribute are subject to
local, state, federal and foreign laws and regulations relating to environmental
matters. Such regulations are often complex and are subject to change. In the
United States, all products containing pesticides must be registered with the
United States Environmental Protection Agency ("USEPA") (and in many cases,
similar state and/or foreign agencies) before they can be sold. The inability to
obtain or the cancellation of any such registration could have an adverse effect
on our business. The severity of the effect would depend on which products were
involved, whether another product could be substituted and whether our
competitors were similarly affected. We attempt to anticipate regulatory
developments and maintain registrations of, and access to, substitute chemicals,
but there can be no assurance that we will continue to be able to avoid or
minimize these risks. Fertilizer and growing media products are also subject to
state and foreign labeling regulations. Grass seed is also subject to state,
federal and foreign labeling regulations.
The Food Quality Protection Act, enacted by the U.S. Congress in August
1996, establishes a standard for food-use pesticides, which is that a reasonable
certainty of no harm will result from the cumulative effect of pesticide
exposures. Under this Act, the USEPA is evaluating the cumulative risks from
dietary and non-dietary exposures to pesticides. The pesticides in our products,
which are also used on foods, will be evaluated by the USEPA as part of this
non-dietary exposure risk assessment. It is possible that the USEPA may decide
that a pesticide that we use in our products, would be limited or made
unavailable to us. We cannot predict the outcome or the severity of the effect
of the USEPA's evaluation. Management believes that we should be able to obtain
substitute ingredients if selected pesticides are limited or made unavailable,
but there can be no assurance that it will be able to do so for all products.
In addition, the use of certain pesticide and fertilizer products is
regulated by various local, state, federal and foreign environmental and public
health agencies. These regulations may include requirements that only certified
or professional users apply the product or that certain products be used only on
certain types of locations (such as "not for use on sod farms or golf courses"),
may require users to post notices on properties to which products have been or
will be applied, may require notification of individuals in the vicinity that
products will be applied in the future or may ban the use of certain
ingredients. We believe we are operating in substantial compliance with, or
taking action aimed at ensuring compliance with, these laws and regulations.
Compliance with these regulations and the obtaining of registrations does not
assure, however, that our products will not cause injury to the environment or
to people under all circumstances.
Environmental regulations may affect us by restricting the manufacturing or
use of our products or regulating their disposal. Regulatory or legislative
changes may cause future increases in our operating costs or otherwise affect
operations. Although we believe we are and have been in substantial compliance
with such regulations and have strict internal guidelines on the handling and
disposal of our products, there is no assurance that in the future we may not be
adversely affected by such regulations or incur increased operating costs in
complying with such regulations. However, neither the compliance with regulatory
requirements nor our environmental procedures can ensure that we will not be
subject to claims for personal injury, property damages or governmental
enforcement. For a discussion of potential environmental issues arising from a
fire in our Phoenix distribution facility, please see Item 3. Legal Proceedings.
10
Executive Officers
Certain information regarding the executive officers of the Company is set
forth below:
Name Age Position
---- --- --------
William E. Brown........... 60 Chairman of the Board and Chief Executive Officer
Glenn W. Novotny........... 54 President, Chief Operating Officer and Director
Lee D. Hines, Jr. ......... 55 Vice President, Chief Financial Officer, Secretary and Director
Brooks M. Pennington III... 47 Chief Executive Officer of Pennington Seed, Inc. and Director
William E. Brown has been Chairman and Chief Executive Officer of the
Company since 1980. From 1977 to 1980, Mr. Brown was Senior Vice President of
the Vivitar Corporation with responsibility for Finance, Operations, and
Research & Development. From 1972 to 1977, he was with McKesson Corporation
where he was responsible for its 200-site data processing organization. Prior to
joining McKesson Corporation, Mr. Brown spent the first 10 years of his business
career at McCormick, Inc. in manufacturing, engineering and data processing.
Glenn W. Novotny has been President of the Company since June 1990 and was
President of the predecessor Weyerhaeuser Garden Supply ("WGS") since 1988.
Prior thereto, he was with Weyerhaeuser Corporation for 20 years with a wide
range of managerial experience including manufacturing, accounting, strategic
planning, sales, general management and business turnarounds.
Lee D. Hines, Jr. has been the Chief Financial Officer and Secretary of the
Company since January 2000, a position he previously held from 1991 until 1993.
Mr. Hines began his business career with the Chase Manhattan Bank in New York as
a domestic and international lending officer and International Trade Specialist.
From 1978 to 1982, he served as Vice President Finance and Chief Financial
Officer of Vivitar Corporation. Following his tenure at Vivitar, Hines held the
position of Chief Financial Officer of Applause, Inc. until 1987. From 1988 to
1990, he served as President and Chief Executive Officer of International
Tropic-Cal, a designer, manufacturer and distributor of sunglasses and women's
hair accessories. From 1993 until January 2000, Mr. Hines was a self-employed
consultant.
Brooks M. Pennington III joined the Company in February 1998 when the
Company acquired Pennington. Mr. Pennington has been the President and Chief
Executive Officer of Pennington since June 1994.
11
Item 2. Properties
Central currently operates 24 manufacturing facilities totaling
approximately 2,979,000 square feet and 28 distribution facilities totaling
approximately 3,220,000 square feet. Most distribution centers consist of office
and warehouse space, and several large bays for loading and unloading. Each
distribution center provides warehouse, distribution, sales and support
functions for its geographic area under the supervision of a regional manager.
Central's executive offices are located in Lafayette, California.
The table below lists Garden Products' manufacturing and distribution
facilities:
Location Type of Facility Owned or Leased
--------------------- -------------------- -------------
Cullman, AL Distribution Owned
Little Rock, AR Distribution Owned
Roll, AZ Manufacturing Owned
El Centro, CA Manufacturing Owned
Ontario, CA Distribution Leased
Richmond, CA Distribution Leased
Sacramento, CA Distribution Leased
San Leandro, CA Manufacturing Leased
San Leandro, CA Distribution Leased
Santa Fe Springs, CA Distribution Leased
Stockton, CA Manufacturing Leased
Longmont, CO Manufacturing Owned
Clearwater, FL Manufacturing Leased
Orlando, FL Distribution Leased
Eatonton, GA Manufacturing Owned
Madison, GA (2) Manufacturing Owned
Madison, GA Distribution Owned
Shady Dale, GA Manufacturing Owned
Hammond, LA Distribution Owned
Woburn, MA Distribution Leased
Laurel, MD Distribution Leased
Greenfield, MO (2) Manufacturing Owned
Greenfield, MO Distribution Owned
Sidney, NE Manufacturing Owned
Lebanon, OR Manufacturing Owned
Portland, OR Distribution Leased
Columbia, SC Distribution Owned
Dallas, TX Distribution Leased
Houston, TX Distribution Leased
Salt Lake City, UT Distribution Leased
Kenbridge, VA Distribution Leased
Algona, WA Distribution Leased
The table below lists Pet Products' manufacturing and distribution
facilities:
Location Type of Facility Owned or Leased
--------------------- -------------------- ---------------
Fontana, CA Manufacturing Leased
Rialto, CA Manufacturing Owned
Sacramento, CA Distribution Leased
Santa Fe Springs, CA Distribution Leased
Denver, CO Distribution Leased
Miami, FL Distribution Leased
Tampa, FL Distribution Leased
Abilene, KS Manufacturing Owned
Mahwah, NJ Distribution Leased
12
Location Type of Facility Owned or Leased
--------------------- -------------------- ---------------
Neptune City, NJ Manufacturing Leased
Hauppauge, NY Manufacturing Owned
Cressona, PA Manufacturing Owned
Dallas, TX Manufacturing Leased
Dallas, TX Manufacturing Owned
Houston, TX Distribution Leased
Algona, WA Distribution Leased
Chilton, WI Manufacturing Owned
Franklin, WI Manufacturing Owned
Central's leases generally expire between 2002 and 2008. Substantially all
of the leases contain renewal provisions with automatic rent escalation clauses.
In addition to the facilities that are owned, Central's fixed assets are
comprised primarily of trucks and warehousing, transportation and computer
equipment.
Item 3. Legal Proceedings
TFH Litigation. In December 1997, the Company acquired all of the stock of
TFH Publications, Inc. In connection with the transaction, the Company made a
$10 million loan to the sellers, which was evidenced by a Promissory Note. In
September 1998, the prior owners of TFH brought suit against the Company and
certain executives of the Company for damages and relief from their obligations
under the Promissory Note, alleging, among other things, that the Company's
failure to properly supervise the TFH management team had jeopardized their
prospects of achieving certain earnouts. The Company believes that these
allegations are without merit. The Company counterclaimed against the prior
owners for enforcement of the Promissory Note, damages and other relief,
alleging, among other things, fraud, misrepresentation and breach of fiduciary
duty by the prior owners of TFH. These actions, Herbert R. Axelrod and Evelyn
Axelrod v. Central Garden & Pet Company; Glen S. Axelrod; Gary Hersch; William
E. Brown; Robert B. Jones; Glen Novotny; and Neill Hines, Docket No.
MON-L-5100-99, and TFH Publications, Inc. v. Herbert Axelrod et al., Docket No.
L-2127-99 (consolidated cases), are in the New Jersey Superior Court. The case
is currently in pretrial discovery and is scheduled for trial in June 2002.
During the course of discovery in this action, the Company has become aware
of certain information which suggests that prior to the acquisition of TFH by
the Company, certain records of TFH were prepared in an inaccurate manner which
resulted in underpayment of taxes by certain individuals. Those individuals
could be liable for back taxes, interest, and penalties. In addition, even
though all of the events occurred prior to the acquisition of TFH by the
Company, there is a possibility that TFH could be liable for penalties for
events which occurred under prior management. The Company believes that TFH has
strong defenses available to the assertion of any penalties against TFH. The
Company cannot predict whether TFH will be required to pay any such penalties.
In the event that TFH were required to pay penalties, the Company would seek
compensation from the prior owners.
In March 2001, the prior owners of TFH also brought a separate action in
federal court seeking to enforce what they alleged was an "arbitration award"
made by an accountant concerning the closing balance sheet of TFH. The prior
owners contended that the decisions by the accountant concerning the closing
balance sheet entitled them to additional monies under the purchase price
provisions of the Stock Purchase Agreement. The federal court held that the
accountant did not make any monetary award. The federal court entered a judgment
enforcing the decisions made by the accountant concerning the closing balance
sheet of TFH, but the court did not, and refused to, enter a monetary award. See
Evelyn M. Axelrod, et al. v. Central Garden & Pet Company, Civil Action No.
01-1262 (MLC) U.S.D.C. of New Jersey. The prior owners have argued in the
consolidated civil actions pending in the New Jersey Superior Court that the
judgment by the federal court entitles them to additional monies under the
purchase price provision of the Stock Purchase Agreement. The New Jersey
Superior Court has stated that it will not, at this time, enter a monetary
award, but that it, like the federal court, will confirm the decisions made by
the accountant concerning the closing balance sheet of TFH. The New Jersey
Superior Court has not yet issued a written Order on its rulings, but the
Company anticipates such an Order shortly. The Company believes that it has
defenses to the claims by the prior owner for additional monies under the
purchase price provisions of the Stock Purchase Agreement, and that the prior
owners' claims are subject to or will be offset by the Company's claims against
the prior owners.
13
The Company, based on consultation with legal counsel, does not believe
that the outcome of the above matters will have a material adverse impact on its
operations, financial position, or cash flows.
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 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 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 Scotts action, Central has filed its
answer and a counter complaint asserting various claims for breaches of
contracts. Scotts has filed a motion to dismiss one of Central's claims, and
that motion is still under submission by the court. Trial in the Scotts action
is currently scheduled to begin in March 2002.
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. Trial in the Pharmacia action is
scheduled to begin on January 22, 2002.
Central believes that the reconciliation of all accounts and claims with
Pharmacia and Scotts in the above cases and in the action described below will
in the aggregate, 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. 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 defendants have answered the
amended complaint, and trial is scheduled for July 15, 2002. 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 California federal action.
Phoenix Fire. On August 2, 2000, a fire destroyed Central's leased
warehouse space in Phoenix, Arizona, and an adjoining warehouse space leased by
a third party. The adjoining warehouse tenant has filed a lawsuit seeking to
recover for property damage from the fire. Local residents have also filed a
purported class action lawsuit alleging claims for bodily injury and property
damage as a result of the fire. The building owner and nearby businesses have
also presented claims for property damage and business interruption but have not
filed lawsuits. In addition, the
14
Arizona Department of Environmental Quality is monitoring the cleanup
operations and has asked Central, the building owner and the adjoining warehouse
tenant to assess whether the fire and fire suppression efforts may have caused
environmental impacts to soil, groundwater and/or surface water. The United
States Environmental Protection Agency has also requested information relating
to the fire. The overall amount of the damages to all parties caused by the
fire, and the overall amount of damages which Central may sustain as a result of
the fire, have not been quantified. At the time of the fire, Central maintained
property insurance covering losses to the leased premises, Central's inventory
and equipment, and loss of business income. Central also maintained insurance
providing $51 million of coverage (with no deductible) against third party
liability. Central believes that this insurance coverage will be available with
respect to third party claims against Central if parties other than Central are
not found responsible. The precise amount of the damages sustained in the fire,
the ultimate determination of the parties responsible and the availability of
insurance coverage are likely to depend on the outcome of complex litigation,
involving numerous claimants, defendants and insurance companies.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol CENT since the Company's initial public offering on July
15, 1993. The following table sets forth, for the periods indicated, the highest
and lowest closing sale prices for the Common Stock, as reported by the Nasdaq
National Market.
Fiscal 2000 High Low
---- ---
First Quarter ........................ 9.63 6.94
Second Quarter ....................... 11.69 8.25
Third Quarter ........................ 12.13 8.72
Fourth Quarter........................ 10.06 6.75
Fiscal 2001
First Quarter ........................ 9.19 6.63
Second Quarter ....................... 8.97 6.81
Third Quarter ........................ 10.00 6.48
Fourth Quarter ....................... 9.75 7.13
As of September 29, 2001, there were approximately 154 holders of record of
the Company's Common Stock and seven holders of record of the Company's Class B
Stock.
Central has not paid any cash dividends on its common stock in the past.
Central currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its common stock in the
foreseeable future. In addition, Central's line of credit restricts its ability
to pay dividends. See Note 5 of Notes to Consolidated Financial Statements.
15
Item 6. Selected Financial Data
The following selected income statement and balance sheet data of Central
as of and for the fiscal years ended September 27, 1997, September 26, 1998,
September 25, 1999, September 30, 2000 and September 29, 2001 have been derived
from our audited consolidated financial statements. The financial data set forth
below should be read in conjunction with the Consolidated Financial Statements
of the Company and related Notes thereto in "Item 8 - Financial Statements and
Supplementary Data" and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
Fiscal Year Ended
-----------------------------------------------------------------------------
September 27 September 26, September 25, September 30, September 29,
1997 1998 1999 2000 2001
-------------- -------------- -------------- --------------- ---------------
(in thousands, except per share data)
Income Statement Data:
Net sales (1)(2).................... $ 839,498 $ 1,293,330 $ 1,531,615 $ 1,350,878 $ 1,122,999
Cost of goods sold and occupancy.... 694,925 1,009,143 1,187,722 1,010,106 784,282
--------- ----------- ----------- ----------- -----------
Gross profit................... 144,573 284,187 343,893 340,772 338,717
Selling, general and administrative
expenses (2)..................... 109,160 213,114 286,471 298,839 328,226
Other charges....................... - 6,903 2,708 27,156 -
--------- ----------- ----------- ----------- ----------
Income from operations.............. 35,413 64,170 54,714 14,777 10,491
Interest expense - net.............. (6,554) (7,609) (12,087) (22,551) (23,083)
Other income........................ 1,509 1,534 1,106 1,176 1,631
--------- ----------- ----------- ----------- -----------
Income (loss) before income taxes... 30,368 58,095 43,733 (6,598) (10,961)
Income taxes........................ 12,765 24,402 19,243 5,215 (1,711)
--------- ----------- ----------- ----------- ------------
Net income (loss)................... $ 17,603 $ 33,693 $ 24,490 $ (11,813) $ (9,250)
========= =========== =========== ============ ============
Net income (loss) per common share:
Basic.......................... $ 1.11 $ 1.18 $ 0.90 $ (0.63) $ (0.50)
Diluted........................ $ 1.07 $ 1.15 $ 0.89 $ (0.63) $ (0.50)
Weighted average shares
outstanding:
Basic.......................... 15,832 28,502 27,328 18,786 18,402
Diluted........................ 19,970 33,007 27,437 18,786 18,402
September 27, September 26, September 25, September 30, September 29,
1997 1998 1999 2000 2001
-------------- --------------------------------------------- ---------------
Balance Sheet Data:
Working capital..................... $ 253,926 $ 277,713 $ 169,628 $ 121,128 $ 110,990
Total assets........................ 559,043 928,700 955,830 947,418 916,626
Short-term borrowings............... 72 8,095 97,368 134,516 126,475
Long-term borrowings................ 115,200 125,125 123,898 148,242 151,623
Shareholders' equity................ 281,807 588,774 495,727 463,947 455,315
- -----------------
(1) See Management's Discussion and Analysis of Financial Condition and Results
of Operations herein for a discussion of sales fluctuations related to
internal growth and business acquisitions for fiscal years 2001, 2000 and
1999.
(2) Reflects the reclassification of $2.9 million and $4.3 million for fiscal
1999 and 2000, respectively, related to volume-based rebate incentives
offset by certain shipping and handling billings.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
In fiscal 2000, Central's operations were grouped into three business
segments, the lawn and garden branded products business, the pet branded
products business and the distribution business. In fiscal 2001, Central
reorganized its garden and pet businesses. Under the reorganization, Central's
garden branded products and distribution businesses became one operating unit,
"Garden Products", while its pet branded products and distribution businesses
became another operating unit, "Pet Products". For fiscal 2001, Garden Products
and Pet Products accounted for approximately 57% and 43%, respectively, of
consolidated net sales before corporate eliminations. These businesses accounted
for income from operations before other charges and the allocation of certain
corporate costs and eliminations of $7.4 million and $34.9 million,
respectively, in fiscal 2001. The Company experienced a net loss of $9.3 million
and $11.8 million for fiscal 2001 and 2000, respectively.
One of the measures management uses to evaluate the performance of its
business segments is earnings before other charges, unusual items, interest,
taxes and amortization and depreciation (EBITDA - excluding other income, other
charges and unusual items), which represented income of $71.2 million and $79.3
million in fiscal 2001 and 2000, respectively.
The discussion below, and the following presentation, are intended to
assist the reader in understanding the results of our operations. This
presentation is not intended to replace net income (loss), cash flows or
financial position, as determined in accordance with accounting principles
generally accepted in the United States of America.
Fiscal 2001 Fiscal 2000
----------- -----------
(in thousands)
Net sales .............................................. $ 1,123.0 $ 1,350.9
========== ==========
Net loss ............................................... $ (9.3) $ (11.8)
Add: Other charges ............................... -- 27.2
Unusual items ............................... 32.3 11.3
Interest expense - net ...................... 23.1 22.6
Less: Other income ................................ (1.6) (1.2)
Income tax (benefit) expense ................ (1.7) 5.2
---------- ----------
EBIT (1) ............................................... 42.8 53.3
Add: Depreciation and amortization ............... 28.4 26.0
---------- ----------
EBITDA (2) .................................... $ 71.2 $ 79.3
========== ==========
- ----------
(1) Earnings before other charges, unusual items, interest and taxes.
(2) Earnings before other charges, unusual items, interest, taxes and
amortization and depreciation.
Shown below is a summary of these expenses, which the Company believes were
unusual in nature during fiscal 2001.
Pet Products Garden Products Corporate Company
------------ --------------- --------- -------
(in thousands)
Closed branches.......................... $ 274 $ 3,910 $ - $ 4,184
Personnel reductions..................... 1,088 2,970 450 4,508
Excess freight........................... - 2,063 - 2,063
Legal & professional..................... 597 - 11,875 12,472
Excess bad debt.......................... - 3,100 - 3,100
Pre-press publication & inventory
write-downs........................... 2,000 3,956 - 5,956
------ ------- ------- -------
$3,959 $15,999 $12,325 $32,283
====== ======= ======= =======
17
During the last two fiscal years, the Company has been adversely affected
by a number of events.
At the end of fiscal 1999, the Company's exclusive distribution agreement
for Solaris products ended. During fiscal 2000, Scotts began to distribute both
its Miracle Gro and Solaris products through a system that involved a
combination of distributors as well as direct sales to certain major retailers.
This change, compared with fiscal 1999, reduced revenue by approximately $176
million in fiscal 2000. Before the end of fiscal 2000, Scotts discontinued its
distribution relationship with the Company. As a consequence, sales volumes for
future periods were expected to significantly decline, which resulted in the
Company initiating a plan to close 13 distribution centers. The closures and the
related workforce reductions, employee benefit obligations and asset impairments
resulted in "other charges" for fiscal 2000 of $27.5 million. As a result, sales
of other companies' products by Garden Products in fiscal 2001 declined
approximately $275 million compared with fiscal 2000. Also in fiscal 2000, both
Scotts and Pharmacia initiated litigation against the Company arising out of the
prior distribution relationship, and the Company filed suit against Scotts and
Pharmacia for breach of contract and violations of the antitrust laws as
discussed above in "Item 3. Legal Proceedings."
In August 2000, a fire destroyed the Company's leased facility in Arizona
and an adjoining warehouse space leased by a third party. Various parties have
filed lawsuits, and both the Arizona Department of Environmental Quality and the
U.S. Environmental Protection Agency have requested information relating to the
fire. Lawyers and specialists representing several insurance companies have been
meeting since August 2000 to determine the extent of liability for the various
parties involved. At this time the precise amount of damages, the ultimate
determination of the parties responsible and the availability of insurance
coverage are likely to depend on the outcome of complex litigation.
Much of the discovery work on the above lawsuits and the other litigation
described above in "Item 3. Legal Proceedings" was conducted during fiscal 2001
and will continue into fiscal 2002. As a result of the litigation, the Company
incurred legal, accounting and other professional expenses of approximately
$12.4 million in fiscal 2001 and $3.8 million in fiscal 2000. The Company
believes that legal and professional fees for fiscal 2002 will approximate the
fiscal 2001 level and will decline significantly in subsequent years.
Despite downsizing, the distribution operations of our Garden Products
segment continued to adversely affect profitability in fiscal 2001. In
accordance with accounting principals generally accepted in the United States of
America, certain costs related to the 13 closed distribution centers were not
included as part of the $27.5 million of "other charges" recorded in fiscal
2000. These costs included wages and related benefits for those employees who
stayed on to either sell off certain of the remaining inventory or arrange to
ship inventory to other Central locations, or arrange to secure temporary
storage until the inventory could be moved to other Central locations. Likewise,
freight costs incurred to ship inventory from the closed locations to open
facilities were not included in the fiscal 2000 "other charges". These costs
were incurred and recorded in fiscal 2001.
The Company underestimated the costs the remaining distribution centers
would incur to service customers formerly serviced by the closed locations.
Since many of these customers were outside of the local area, most of the
product sold to them was shipped by common carrier. Additionally, assimilating
the extra inventory from the closed locations created inefficient warehouse
operations. With warehouse space severely limited because of the additional
inventory, picking, packing and shipping an order took significantly longer than
normal. To ship product timely under these conditions meant increasing the
amount of outside labor.
Also during the fourth quarter of fiscal 2001, two large customers of
Garden Products filed for bankruptcy.
During the last quarter of fiscal 2001, and continuing in the first quarter
of fiscal 2002, the Company further reduced personnel and related people costs
in both our businesses. The reductions in our Garden Products segment were
largely in the administrative areas where the Company consolidated certain
computer operations and administrative functions into one logistics operation.
Pet Products closed three smaller under performing distribution centers
during fiscal 2001 and a small manufacturing facility which produced nylon
collars and leashes. These products are now secured through outside vendors.
These closures resulted in additional facility and personnel costs being
incurred in fiscal 2001 which totaled $1.5 million. In addition, sales of TFH
pet books are declining due to, among other things, reduced floor
18
space allocated to books by the larger retailers in favor of other pet products
which turn faster than books. However, book production was not reduced to meet
the lower sales volume. On hand inventory of books included titles with little
current consumer appeal, and in certain cases large quantities of books remained
on hand, which had been produced in 1998 and prior. As a result, the Company
recorded a charge of $1.5 million to reduce the carrying value of book inventory
to its estimated realizable value. In addition, $0.5 million of pre-press
publication costs, which were being amortized over the anticipated useful life
of specific titles, were determined to be unrecoverable in light of the sales
decline and were written off.
In Garden Products, Pennington wrote-down its Bahia grass seed inventory as
a result of a significant decline in the market price for that particular
variety. In connection with the closure of 13 distribution centers in fiscal
2000, management evaluated the inventory remaining from such locations during
fiscal 2001 to determine its estimated realizable value. Due to the age of the
inventory which remained combined with the fact that more of this inventory
became obsolete due to packaging changes made by the manufacturer, a further
write-down was taken in fiscal 2001.
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
Fiscal Year Ended
----------------------------------------------
September 29, September 30, September 25,
2001 2000 1999
------------- ------------- -------------
Net sales ................................................... 100.0% 100.0% 100.0%
Cost of goods sold and occupancy ............................ 69.8 74.8 77.5
----- ----- -----
Gross profit ................................................ 30.2 25.2 22.5
Selling, general and administrative ......................... 29.2 22.1 18.7
Other charges ............................................... -- 2.0 0.2
----- ----- -----
Income from operations ...................................... 1.0 1.1 3.6
Interest expense, net ....................................... (2.1) (1.7) (0.8)
Other income ................................................ 0.1 0.1 0.1
Income tax expense (benefit) ................................ (0.2) 0.4 1.3
----- ----- -----
Net income (loss) ........................................... (0.8)% (0.9)% 1.6%
===== ===== =====
Fiscal 2001 Compared with Fiscal 2000
Net sales for fiscal 2001 decreased by 16.9% or $227.9 million to $1,123.0
million from $1,350.9 million for fiscal 2000. The decrease is due to a $243.1
million decrease in net sales of Garden Products offset in part by a sales
increase in Pet Products of $15.2 million. Adjusting for newly acquired
operations, the sales decrease in Garden Products was $252.8 million and in Pet
Products net sales would have resulted in a decrease of $32.7 million. The
decrease in Garden Products relates to the sales and logistics group, which was
expected after we closed 13 distribution centers in late fiscal 2000 as a result
of the termination of our distribution relationship with Scotts. The sales
decrease in our Pet Products business was attributable to the closure of three
pet distribution centers during fiscal 2000 and a modest decline in Kaytee sales
of wild birdseed. In fiscal 2001, Arch, a major pool chemical supplier, and Kal
Kan, a supplier of dog food, notified us that they each intend to terminate
their relationship with the Company and distribute their products directly to
retailers. In fiscal 2001, sales of Arch products were approximately $50.5
million. The gross profit associated with these sales in fiscal 2001 was
approximately $8.0 million. Sales of Kal Kan products to independent retailers
were approximately $8.5 million in fiscal 2001. The gross profit associated with
these sales in fiscal 2001 was estimated to be $0.9 million based on historical
customer profitability. In addition, the Kal Kan business lost includes
approximately $5.8 million of fees related to shipments to PETsMART. The loss of
the Kal Kan business contributed to the decision to close two smaller pet
distribution centers during the first quarter of fiscal 2002 with a third
facility closure planned for February 2002.
Gross profit decreased by $2.1 million or 0.6% from $340.8 million during
fiscal 2000 to $338.7 million for fiscal 2001. Adjusting for newly acquired
operations, gross profit would have decreased by 3.9% or $13.2 million.
19
The decrease in gross profit dollars relates principally to the sales and
logistics group within Garden Products, while Pet Products generated
approximately the same gross profit dollars as in fiscal 2000. Gross profit for
both segments was adversely affected by inventory and inventory related
write-downs in fiscal 2001. In Pet Products, TFH reduced the carrying value of
their book inventory by $1.5 million and wrote off $0.5 million of pre-press
publication costs. The inventory write-down is primarily the result of a
continuing sales decline in pet books which in turn has created excess and
obsolete book inventory. The decline in pet book sales relates principally to
reduced floor space allocated to books by the large retailers coupled with a
reduction in the number of titles they will carry. In Garden Products,
Pennington wrote-down its Bahia grass seed inventory by $1.7 million as a result
of a significant decline in the market price for that particular variety. In
connection with the closure of 13 distribution centers in fiscal 2000,
management, at the existing centers, evaluated the inventory at these facilities
to determine the amount of potential overstock and to assess how much inventory
could be moved to those locations which would remain open. This evaluation
resulted in a write-down of $7.5 million in fiscal 2000 to adjust the inventory
to its estimated realizable value. Due to the age of the inventory which
remained combined with the fact that more of this inventory became obsolete due
to packaging changes made by the manufacturer, management's evaluation of its
estimated realizable value resulted in a further write-down of $2.2 million in
fiscal 2001.
Gross profit as a percentage of sales increased to 30.2% during fiscal 2001
from 25.2% for fiscal 2000. The percentage improvement is principally due to a
reduction in sales of other companies' products within Garden Products, which
accounted for a significantly lower percentage of total sales. Sales of other
companies' products result in lower gross margins compared to sales of Central's
own proprietary branded products. Overall, Garden Products' gross profit
improved from 25.2% in fiscal 2000 to 27.0% in fiscal 2001.
Selling, general and administrative expenses increased by $29.4 million or
9.8% from $298.8 million during fiscal 2000 to $328.2 million in fiscal 2001. Of
the $29.4 million increase, approximately $17.8 million was attributable to
newly acquired businesses. As a percentage of net sales, selling, general and
administrative expenses increased from 22.1% during fiscal 2000 to 29.2% for
fiscal 2001.
Selling and delivery expenses decreased by $9.2 million, which was net of a
$10.0 million increase related to newly acquired operations, from $146.7 million
in fiscal 2000 to $137.5 million in fiscal 2001. The decrease in selling and
delivery expenses related to existing business in fiscal 2001 relates
principally to a sales decline in Garden Products compared with fiscal 2000 of
$243.1 million offset by increased freight costs. Included in fiscal 2001
selling and delivery expense was approximately $2.1 million attributable to the
closure of three Pet Products branches during fiscal 2001 and increased freight
costs to service out of market customers transferred from Garden Products 13
distribution centers closed in fiscal 2000.
Facilities expense decreased by $0.6 million from $14.4 million in fiscal
2000 to $13.8 million in fiscal 2001. Included in fiscal 2001 is approximately
$0.5 million related to newly acquired businesses.
Warehouse and administrative expenses increased $39.2 million to $176.9 million
in fiscal 2001 from $137.7 million in fiscal 2000. Of the $39.2 million
increase, approximately $7.3 million related to newly acquired businesses. Of
the $31.9 million increase from existing operations, approximately $4.0 million
was attributable to Pet Products, $17.5 million to Garden Products and $10.4
million to corporate. The increase of $31.9 million compared with fiscal 2000
related principally to 1) additional bad debt provisions of $4.5 million, of
which $3.1 million relates to two large Garden Products' customers who went
bankrupt or ceased operations during the last month of fiscal 2001; 2) increased
legal and professional fees of $5.4 million, which included in fiscal 2001
approximately $12.4 million associated with the fire at our Arizona warehouse
and the litigation work related to the Scotts and T.F.H. lawsuits; 3) an
increase in general and medical insurance of $2.4 million; 4) increased
depreciation and goodwill amortization of $2.4 million; 5) as a result of the
closure of Garden Products' and Pet Products' locations, there has been a
significant decrease in both sales and inventory levels, which resulted in an
$11.5 million increase in the amount of purchasing, merchandise handling and
storage costs charged to warehouse and administration expense, and not included
as inventory costs, compared to the prior year; 6) increased information systems
costs of $0.9 million - primarily new systems being implemented to centralize
sales, marketing, inventory and financial data; 7) an increase in personnel and
other professional costs for research and development of $0.6 million; and 8)
increases in office rents and general increases in normal operating expenses of
$4.2 million.
20
Net interest expense for the fiscal year ended September 29, 2001 increased
by $0.5 million to $23.1 million from $22.6 million for the fiscal year ended
September 30, 2000. The increase is due to new long term borrowings resulting
principally from the businesses acquired, offset by lower average short-term
interest rates.
Average short-term borrowings for the fiscal year ended September 29, 2001
were $160.3 million compared with $159.2 million for the fiscal year ended
September 30, 2000. The average short-term interest rates for the fiscal years
ended September 29, 2001 and September 30, 2000 were 7.5% and 9.0%,
respectively.
During fiscal 2001, the Company recognized a tax benefit of $1.7 million on
a pre-tax loss of $11.0 million. The tax benefit was affected by certain
goodwill amortization which is not deductible for income tax purposes.
Fiscal 2000 Compared with Fiscal 1999
Net sales for fiscal 2000 decreased by 11.8% or $180.7 million to $1,350.9
million from $1,531.6 million for fiscal 1999. The decrease was due to a $218.7
million decrease in Garden Products' sales ($261.1 million attributable to
reduced sales of other companies' products, primarily sales of Solaris'
products, which was partially offset by $12.7 million in sales of existing
branded product offerings and $29.7 million in sales attributable to 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) being partially offset by a $38.0 million increase in Pet Products
sales.
Gross profit decreased by $3.1 million or 0.9% from $343.9 million during
fiscal 1999 to $340.8 million for fiscal 2000. Gross profit as a percentage of
net sales increased from 22.5% for fiscal 1999 to 25.2% for fiscal 2000. The
decrease in gross profit dollars was principally related to a $13.9 million
decrease in Garden Products' gross profit partially offset by a $10.8 million
increase in Pet Products' gross profit. As a result of resizing our lawn and
garden distribution operations, the carrying value of inventory at the
distribution centers to be closed was evaluated to determine what products could
be moved to the locations remaining open, how much of it would represent
significant overstock and what products would have to be liquidated at the
individual distribution centers. This evaluation resulted in a write-down of
lawn and garden inventory of $7.5 million to adjust such inventory to its
estimated realizable value. This write-down resulted in an increase in cost of
goods sold and occupancy of $2.6 million in fiscal 2000 compared with the
inventory write-down of $4.9 million recorded in fiscal 1999. The increase in
gross profit as a percentage of net sales was primarily driven by an increase in
Garden Products resulting from a larger proportion of higher margin branded
product sales relative to total sales due to the reduction in sales of low
margin Solaris products principally to retailers' distribution centers. Pet
Products' gross profit percentage remained relatively constant.
Selling, general and administrative expenses increased $12.4 million, or
4.3% from $286.4 million during fiscal 1999 to $298.8 million for fiscal 2000.
Of the $12.4 million increase, approximately $8.3 million was attributed to
newly acquired businesses. As a percentage of net sales, selling, general and
administrative expenses increased from 18.7% during fiscal 1999 to 22.1% for
fiscal 2000. Selling and delivery expenses increased by $1.6 million from $145.1
million in fiscal 1999 to $146.7 million in fiscal 2000. Of this increase, $3.7
million related to newly acquired businesses. These increases were offset by a
decrease from existing operations of $2.1 million primarily attributable to a
$6.7 million decrease in lawn and garden distribution operations resulting from
lower sales, offset by a $4.6 million increase principally related to Pennington
as a result of increased coop and media advertising, and expanded use of common
freight carriers coupled with increased fuel costs. Facilities expense totaled
$14.4 million in both fiscal 1999 and 2000. This results from an increase in
costs associated with newly acquired businesses of $0.3 million, offset by a
reduction in costs associated with existing operations of $0.3 million. The
decrease in existing operations related principally to lawn and garden
distribution operations resulting from certain facilities which were closed
during fiscal 1999. Warehouse and administrative expense increased $10.7 million
from $127.0 million in fiscal 1999 to $137.7 million in fiscal 2000. Of this
increase, $4.3 million related to newly acquired businesses. The increase from
existing operations, $6.4 million, related principally to increases in legal and
professional fees of $5.3 million related to our strategic planning and
evaluation process, increases in corporate personnel and related travel of $0.7
million and $0.4 million in additional corporate office space costs.
In September 2000, the Company recorded $27.5 million of charges resulting
from workforce reductions, employee benefit obligations, facility closures, and
asset impairments that were necessary due to the termination of
21
the Company's distribution arrangement with Scotts and other anticipated sales
decreases in Garden Products. These charges were offset by the reversal of $0.3
million of certain exit-related costs recorded in connection with the fiscal
1998 restructuring plan for which the Company was no longer obligated.
As a result of the fiscal 2000, and anticipated future, sales decreases in
Garden Products, the Company initiated a plan to close 13 distribution centers
and reduce its workforce which was completed in fiscal 2001. In connection with
this plan, the Company recorded a severance charge of $1.1 million associated
with the termination of 309 employees, primarily in the sales force and
distribution centers. Severance of $0.7 million was paid to 196 employees
terminated during fiscal 2000, with the balance expected to be paid to employees
who will be terminated in fiscal 2001. In connection with the facilities
closures, $3.6 million was accrued for estimated lease costs, and $0.2 million
for estimated property tax and facilities maintenance costs, that the Company is
obligated to pay for periods subsequent to closure. The Company also recorded an
$0.8 million impairment charge to reduce certain facility assets to their
estimated fair value based on an independent appraisal, and an $0.8 million
provision for estimated uncollectible receivables from customers of the closed
facilities.
In addition, as a direct result of the termination of the distribution
relationship with Scotts, the Company recorded a charge of $4.7 million as the
Company became obligated to make cash payments which were guaranteed to certain
employees in the event of such termination. These payments were paid during
fiscal 2001.
As a result of the events described above, management reevaluated the
recoverability of certain intangible assets in Garden Products. Based on an
evaluation of estimated future cash flows associated with affected facilities,
the Company determined that goodwill and certain trademarks were impaired, and
accordingly recorded charges of $15.7 million and $0.6 million, respectively, to
reduce those assets to estimated fair values.
Net interest expense for the fiscal year ended September 30, 2000 increased
by $10.5 million to $22.6 million from $12.1 million for the fiscal year ended
September 25, 1999. The increase is due to higher average outstanding short-term
debt resulting principally from the Company's stock repurchase program and the
businesses acquired. During the fiscal year ended September 30, 2000, the
Company repurchased 2,890,900 shares of its stock for a total cost of
approximately $21.7 million, primarily through the use of its revolving credit
facility.
Average short-term borrowings for the fiscal year ended September 30, 2000
were $159.2 million compared with $65.8 million for the fiscal year ended
September 25, 1999. The average short-term interest rates for the fiscal years
ended September 30, 2000 and September 25, 1999 were 9.0% and 7.5%,
respectively.
During fiscal 2000 the Company recognized tax expense of $5.2 million on a
pre-tax loss of $6.6 million primarily as the result of non-deductible charges,
primarily goodwill amortization and impairment charges, recorded during the
year.
New Accounting Pronouncements
See Note 1, "Organization and Significant Accounting Policies" in the
accompanying consolidated financial statements.
Inflation
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation, the Company believes that the effects of inflation on its operations
have been immaterial.
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
22
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, inventory levels remain relatively
constant while accounts receivable peak and short-term borrowings start to
decline as cash collections are received during the peak selling season. During
the fourth fiscal quarter, inventory levels are at their lowest, and accounts
receivable and payables are substantially reduced through conversion of
receivables to cash. As a result of the termination of the Solaris agreement 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.
The Company's businesses service two broad markets: lawn and garden and pet
supplies. The pet supplies businesses involve products that have a year round
selling cycle with very little change quarter to quarter. As a result, it is not
necessary to carry large quantities of inventory to meet peak demands.
Additionally, this level sales cycle eliminates the need for manufacturers to
give extended credit terms to either distributors or retailers. On the other
hand, the Garden Products' businesses are highly seasonal with approximately 66%
of their aggregate 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.
The Company generated cash from operating activities of $38.8 million
during fiscal 2001, which declined from $40.1 million during fiscal 2000,
primarily due to the decline in sales volume during the year. Net cash used in
investing activities of $32.2 million resulted from acquisitions of new
companies and the acquisition of office and warehouse equipment, including
computer hardware and software. Net cash used in financing activities of $4.0
million consisted principally of net repayments of $9.8 million under the
Company's lines of credit and payments of $12.8 million related to long-term
debt, partially offset by $18.0 million in new long-term borrowings.
The Company has a $200.0 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 September 29,
2001, the Company had $83.1 million of outstanding borrowings, and had $16.8
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. The Company's Pennington
subsidiary also has a $85.0 million line of credit. At September 29, 2001, there
were $31.6 million of outstanding borrowings and $53.4 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.
The Company All-Glass Aquarium subsidiary also has a $10.0 million line of
credit. As of September 29, 2001, there were $4.6 million of borrowings and $5.4
million of available borrowing capacity under this line. Interest related to
this line is based on a rate equal to the prime rate less 0.5% (6% at September
29, 2001).
Excluding the potential impact of any adverse consequences associated with legal
matters discussed below and in more detail in "Item 3. 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
$15.0 million for the next 12 months.
The Company is involved in a number of lawsuits, several of which could
result in substantial monetary judgments. This litigation includes three
significant cases between the Company and Scotts and Pharmacia which
23
are currently set for trial on January 2002, March 2002 and July 2002,
respectively. Depending on how and when these lawsuits are resolved, these
lawsuits could result in substantial changes to the Company's liquidity position
- - either favorable or unfavorable. The Company is currently exploring a number
of possible ways to enhance its liquidity, including, among other things,
additional debt financing by the Company or one or more of its subsidiaries
and/or an equity offering.
In November 1996, the Company issued $115 million of 6% subordinated
convertible notes. The principal amount of the notes will become due on November
15, 2003, unless converted into common stock by the holders or redeemed by the
Company prior to maturity.
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.
Additionally, the Company's business has historically been highly seasonal. In
fiscal 2001, approximately 66% of Garden Products' sales occurred in the first
six months of the calendar year. Substantially all of Garden Products' operating
income is typically generated in this period which has historically offset the
operating losses incurred during the first fiscal quarter of the year.
Risk Factors Relating to Forward-Looking Statements
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. These forward looking statements include information regarding
future financial results, the estimated effect of the termination of the Solaris
Agreement and future acquisition activity. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of factors both in and out of our control, including the risks faced by
us described below and elsewhere in this Form 10-K.
You should carefully consider the risks described below. We have separated
the risks into three groups:
. risks that relate to Central generally;
. risks that relate to Garden Products; and
. risks that relate to Pet Products.
In addition, the risks described below are not the only ones facing us. We have
only described the risks we consider to be the most material. However, there may
be additional risks that are viewed by us as not material or are not presently
known to us.
If any of the events described below were to occur, our business,
prospects, financial condition, results of operations and/or cash flows could be
materially adversely affected. When we say below that something could or will
have a material adverse effect on us, we mean that it could or will have one or
more of these effects. In any such case, the price of our common stock could
decline, and you could lose all or part of your investment in our company.
24
Risks Relating to Central Generally
Our quarterly operating results are susceptible to fluctuations, which could
cause our stock price to decline.
We expect to continue to experience variability in our net sales and net
income on a quarterly basis. Factors that may contribute to this variability
include:
. weather conditions and seasonality during peak gardening seasons;
. shifts in demand for lawn and garden products;
. shifts in demand for pet products;
. changes in product mix, service levels and pricing by us and our
competitors;
. the effect of acquisitions;
. economic stability of retail customers; and
. the extent of lost business from the termination of distribution
relationships, such as with Scotts, and our ability to offset the loss
of gross profit as a result of the terminations through expense
reductions and other business growth.
In addition, because our distribution businesses operate on relatively low
margins, our operating results in any quarterly period could be affected
significantly by slight variations in revenues or operating costs. For the same
reason, our quarterly results also may be vulnerable to problems in areas such
as collectibility of accounts receivable, inventory control and competitive
price pressures. The market price of our common stock could be subject to
significant fluctuations in response to these variations in quarterly operating
results and other factors.
Because of intense competition, Central's distribution related sales generate
low margins.
The lawn and garden and pet supply distribution industries in which we
operate are characterized by relatively low profit margins. As a result,
Central's success is highly dependent upon effective cost and management
controls and differentiating its services from those of its competitors. The
wholesale lawn and garden and pet supply distribution businesses are highly
competitive, with many companies competing principally on the basis of price and
service. In addition to competition from other distributors, Central also
competes with manufacturers and suppliers that elect to distribute certain of
their products directly to retailers, including Central's major customers, and
private label product suppliers. For example, beginning in fiscal 2000, Scotts
began to distribute Ortho(R), Roundup(R) and Miracle-Gro(R) directly to certain
retailers. Similarly, in 2001, Arch Pool Chemicals and Kal Kan Foods notified
Central that they intend to terminate their distribution relationships with
Central and distribute their products directly to retailers. There can be no
assurance that Central will not encounter increased competition in the future or
will not lose business from major manufacturers that elect to sell their
products directly to retailers, either of which could adversely affect our
operations and financial results.
Our ability to grow will depend upon internal expansion and acquisitions.
As part of our growth strategy, we aggressively pursue the acquisition of
other companies, assets and product lines that either complement or expand our
existing business. Acquisitions involve a number of special risks, including the
diversion of management's attention to the assimilation of the operations and
personnel of the acquired companies, adverse short-term effects on our operating
results, integration of financial reporting systems and the amortization of
acquired intangible assets. Since 1993, Central has completed over 29
acquisitions. There can be no assurance that we can successfully integrate
acquired businesses or that such businesses will enhance our business. We have
also had preliminary acquisition discussions with, or have evaluated the
potential acquisition of, numerous other companies over the last several years.
We are unable to predict the likelihood of a material acquisition being
25
completed in the future. We may seek to finance any such acquisition through
additional debt or equity financings, which could result in dilution and
additional risk for the holders of our common stock.
We anticipate that one or more potential acquisition opportunities,
including those that would be material, may become available in the near future.
If and when appropriate acquisition opportunities become available, we intend to
pursue them actively. No assurance can be given that any acquisition by us will
or will not occur, that if an acquisition does occur that it will not materially
and adversely affect us or that any such acquisition will be successful in
enhancing our business. Our future results of operations will also depend in
part on our ability to successfully expand internally by increasing the number
of new product lines, and to manage any future growth. No assurance can be given
that we will be able to obtain or integrate additional product lines or manage
any future growth successfully.
Our success is dependent upon retaining key personnel.
Our future performance is substantially dependent upon the continued
services of William E. Brown, our Chairman and Chief Executive Officer, Glenn W.
Novotny, our President and Chief Operating Officer, and Brooks M. Pennington
III, the President of Pennington. The loss of the services of any of these
persons could have a material adverse effect upon us. In addition, our future
performance depends on our ability to attract and retain skilled employees.
There can be no assurance that we will be able to retain our existing personnel
or attract additional qualified employees in the future.
The holders of our Class B stock, through their voting power, can greatly
influence control of the Company.
As of December 5, 2001, William E. Brown, our Chairman and Chief Executive
Officer, controls approximately 47.9% of the voting power of our capital stock
and, therefore, can effectively control all matters requiring stockholder
approval, including the power to elect all of our directors. Holders of Class B
stock are entitled to the lesser of ten votes per share or 49% of the total
votes cast. Holders of common stock are entitled to one vote for each share
owned. The holders of Class B stock have 49% of the combined voting power,
subject to the aforementioned voting restrictions. Holders of Class B stock are
likely to be able to elect all of our directors, control our management and
policies and determine the outcome of any matter submitted to a vote of our
stockholders except to the extent that a class vote of the common stock is
required by applicable law. The disproportionate voting rights of the common
stock and Class B stock could have an adverse effect on the market price of the
common stock. Such disproportionate voting rights may make us a less attractive
target for a takeover than we otherwise might be, or render more difficult or
discourage a merger proposal, a tender offer or a proxy contest, even if such
actions were favored by our common stockholders. Accordingly, such
disproportionate voting rights may deprive holders of common stock of an
opportunity to sell their shares at a premium over prevailing market prices,
since takeover bids frequently involve purchases of stock directly from
stockholders at such a premium price.
The products that we manufacture and distribute may subject us to environmental
considerations.
Many of the products that we manufacture and distribute are subject to
regulation by federal, state and local authorities. Such regulations are often
complex and are subject to change. Environmental regulations may affect us by
restricting the manufacturing or use of our products or regulating their
disposal. Regulatory or legislative changes may cause future increases in our
operating costs or otherwise affect operations. Although we believe we are and
have been in substantial compliance with such regulations and has strict
internal guidelines on the handling and disposal of our products, there is no
assurance that in the future we may not be adversely affected by such
regulations or incur increased operating costs in complying with such
regulations. However, neither the compliance with regulatory requirements nor
our environmental procedures can ensure that we will not be subject to claims
for personal injury, property damages or governmental enforcement.
The products that we manufacture could expose us to product liability claims.
Our business exposes us to potential product liability risks, which are
inherent in the manufacture and distribution of certain of our products.
Although we generally seek to insure against such risks, there can be no
assurance that such coverage is adequate or that we will be able to maintain
such insurance on acceptable terms. A
26
successful product liability claim in excess of our insurance coverage could
have a material adverse effect on us and could prevent us from obtaining
adequate product liability insurance in the future on commercially reasonable
terms.
We have pending litigation which could adversely impact our operating results.
We are a party to certain legal proceedings including the litigation
between us and Scotts and Pharmacia arising out of disputes regarding the
termination of the Solaris Agreement and litigation arising from a fire which
destroyed our Phoenix, Arizona facility. We are currently unable to determine
the total expense or possible loss, if any, that may ultimately be incurred in
the resolution of these proceedings. Regardless of the ultimate outcome of these
proceedings, they could result in significant diversion of time by our
management. The results of these proceedings, including any potential
settlements, are uncertain and we cannot assure you that the outcome of these
disputes will not adversely affect our operating results. Among the proceedings
in which we are involved are three significant cases between us and Scotts and
Pharmacia which are currently set for trial on January 2002, March 2002 and July
2002, respectively. Depending on how and when these lawsuits are resolved, these
lawsuits could result in substantial changes to the Company's liquidity position
- - either favorable or unfavorable. For more information on our pending
litigation, please see "Item 3. Legal Proceedings."
Risks Relating to Garden Products
Adverse weather during the peak gardening season can hurt Garden Products' and
our net sales.
Because demand for lawn and garden products is significantly influenced by
weather, particularly weekend weather during the peak gardening season, our
results of operations could be adversely affected by certain weather patterns
such as unseasonably cool or warm temperatures, water shortages or floods.
During the last several years, our results of operations were negatively
affected by severe weather conditions in some parts of the country.
Additionally, our business is highly seasonal, with approximately 66% of Garden
Products' sales in fiscal 2001 occurring during the second and third quarters of
the fiscal year. Historically, substantially all of Garden Products' operating
income is generated in this period.
An increase in market prices for seeds and grains used to produce bird seed and
grass seed or a decrease in demand for bird seed or grass seed could have a
negative impact on our operating income.
Garden Products' financial results depend to a large extent on the cost of
raw materials and the ability of Garden Products to pass along to its customers
increases in these costs. In particular, our Pennington subsidiary is exposed to
fluctuation in market prices for commodity seeds and grains, used to produce
bird seed and grass seed. Historically, market prices for commodity seeds and
grains have fluctuated in response to a number of factors, including changes in
United States government farm support programs, changes in international
agricultural and trading policies and weather conditions during the growing and
harvesting seasons. For example, a significant rise in the white millet
acquisition cost in late 2000 and 2001 had a negative impact on profitability of
bird feed products in fiscal 2001, although we do not believe this will be a
long-term problem. In the event of any increases in raw materials costs, Garden
Products would be required to increase sales prices for its products in order to
avoid margin deterioration. We cannot assure you as to the timing or extent of
Garden Products' ability to implement future price adjustments in the event of
increased raw material costs or as to whether any price increases implemented by
Garden Products may affect the volumes of future shipments.
In fiscal 2001, Garden Products was adversely affected by a worldwide
oversupply of certain grass seeds brought on by a combination of weather issues,
generally poor economic conditions in agriculture, and diseases, like hoof and
mouth and mad cow, that reduce demand for seed. If the oversupply extends into
fiscal 2002, our operating results would suffer.
To protect against changes in market prices, we generally enter into
purchase contracts for grains, bird seed and grass seed to cover up to
approximately one-third of the purchase requirements for a selling season. Since
we hedge only a portion of our purchase requirements, if market prices for
grains increase, our cost of production would increase. In contrast, if market
prices for grains decrease because of a lack of demand, we may end up purchasing
grains and seeds pursuant to the purchase contracts at prices above market.
27
Garden Products depends on a few customers, including Wal*Mart, Lowes and Home
Depot, for a significant portion of its net sales.
Garden Products' largest customer is Wal*Mart, which accounted for
approximately 31%, 36% and 32% of its net sales for fiscal 2001, fiscal 2000 and
fiscal 1999, respectively. Garden Products' second largest customer is Home
Depot, which accounted for approximately 11%, 7% and 12% of its net sales for
fiscal 2001, fiscal 2000 and fiscal 1999, respectively. Sales to Lowe's
accounted for approximately 9%, 7% and 8% of its net sales for fiscal 2001,
fiscal 2000 and fiscal 1999, respectively. The market share of these three
retailers in the lawn and garden industry has increased during the last several
years.
During fiscal 2000, Wal*Mart began to have certain products delivered to
its internal distribution centers rather than directly to stores, which
adversely affected our revenue from these products. Subsequent to the fiscal
2000 year end, Wal*Mart informed Central of a number of significant changes in
its lawn and garden supplies purchasing programs and procedures for the coming
year. These include Wal*Mart's decision to purchase certain lawn and garden
supplies directly from a number of manufacturers whose lawn and garden supplies
had previously been sold through Central; a change from "store door" deliveries
of many of the lawn and garden supplies formerly delivered by Central to
individual Wal*Mart stores to a new procedure whereby Central will ship these
products to Wal*Mart distribution centers; and Wal*Mart's decision not to have
Central personnel perform lawn and garden supplies merchandising functions
inside Wal*Mart stores. As a result of these factors, and the closing of 13
distribution centers associated with the Garden Products restructuring, Garden
Product's sales of lawn and garden supplies to Wal*Mart in 2001 declined
significantly. The distribution facility closures coupled with the absence of
our distributing Scotts products in 2001 has also adversely impacted other
customer relationships.
The loss of, or significant adverse change in, the relationship between us
and Wal*Mart, Home Depot or Lowe's could cause our net sales and income from
operations to decline. The loss of or reduction in orders from any significant
customer, losses arising from customer disputes regarding shipments, fees,
merchandise condition or related matters, or our inability to collect accounts
receivable from any major customer could reduce our income from operations.
Our net sales and operating income from distributing other company's garden
products decreased significantly in fiscal 2001 due to the termination of our
distribution relationship with Scotts and may continue to decrease in the
future.
From October 1, 1995 to September 30, 1999, we distributed Solaris product
nationwide, pursuant to an exclusive distribution agreement. Sales of products
purchased from Solaris, previously our largest supplier, accounted for
approximately 37% of Garden Product's net sales and 27% of Central's net sales
during fiscal 1999. In January 1999, Pharmacia 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 Corporation (formerly known as Monsanto Company) 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. Due to
the termination of the Scotts' distribution relationship, we took actions to
downsize our lawn and garden distribution operations to reflect anticipated
business levels for the fiscal year 2001. As a result, we recorded charges of
$27.5 million in the fiscal year ending September 30, 2000. We cannot assure you
that our lawn and garden distribution operations will be able to operate
profitably at the reduced revenue levels forecasted for fiscal 2002. If our
current downsizing efforts are not successful, we may be forced to record
additional charges in fiscal 2002, which would decrease our operating results
further.
28
The sale of the Solaris business by Pharmacia, the expiration of the
Solaris Agreement and termination of the Scotts distribution relationship
subject our 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. 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, in the aggregate, the
reconciliation of all accounts and claims with Pharmacia and Scotts, as
described above in "Item 3. Legal Proceedings," 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.
The loss of the Arch Pool Chemicals' business may necessitate the closure of
additional garden distribution centers.
In 2001, Arch Pool Chemicals notified Garden Products that it will
discontinue its distribution relationship with several of our Garden Product and
deliver its product directly to retailers. For fiscal 2001, the revenue
attributable to the affected products was approximately $50.5 million. The gross
profit associated with these sales in fiscal 2001 was approximately $8.0
million. If we are unable to offset the loss of gross profit as a result of the
termination through expense reductions and other business growth, our operating
income would be adversely impacted and we may be required to close additional
underutilized garden distribution centers.
Risks Relating to Pet Products
Pet Products depends on a few customers, including PETsMART and Petco, for a
significant portion of its net sales.
Pet Products' largest customer is PETsMART, which accounted for
approximately 7%, 7% and 6% of Pet Products' net sales for fiscal 2001, fiscal
2000 and fiscal 1999, respectively. Pet Products' second largest customer is
Petco, which accounted for approximately 6%, 8% and 5% of Pet Products' net
sales for fiscal 2001, fiscal 2000 and 1999, respectively. The loss of, or
significant adverse change in, the relationship between Pet Products and
PETsMART or Petco could have a material adverse effect on Pet Products' business
and financial results. The loss of or reduction in orders from any significant
customer, losses arising from customer disputes regarding shipments, fees,
merchandise condition or related matters, or Pet Products' inability to collect
accounts receivable from any major customer could have a material adverse impact
on our business and financial results.
An increase in market prices for grains could have a negative impact on our
operating income.
Pet Products' financial results depend to a large extent on the cost of raw
materials and the ability of Pet Products to pass along to its customers
increases in these costs. In particular, our Kaytee subsidiary is exposed to
fluctuation in market prices for commodity grains. Historically, market prices
for commodity grains have fluctuated in response to a number of factors,
including changes in United States government farm support programs, changes in
international agricultural and trading policies and weather conditions during
the growing and harvesting seasons. In the event of any increases in raw
materials costs, Pet Products would be required to increase sales prices for its
products in order to avoid margin deterioration. There can be no assurance as to
the timing or extent of Pet Products' ability to implement future price
adjustments in the event of increased raw material costs or as to whether any
price increases implemented by Pet Products may affect the volumes of future
shipments.
To protect against changes in market prices, we generally enter into
purchase contracts for grains and bird seed to cover up to approximately
one-third of the purchase requirements for a selling season. Since we hedge only
a portion of our purchase requirements, if market prices for grains increase,
our cost of production would increase.
29
The majority of our pet supply distribution sales are made to independent pet
retailers, whose market share has been eroded by the growth of national
specialty pet stores.
Historically, a majority of our pet supply distribution sales have been
made to independent pet retailers. In recent years, these independent pet
retailers have experienced severe competition from and a loss of market share to
national specialty pet retailers, like PETsMART and Petco, and mass merchants,
like Wal*Mart, Kmart and Target. The future success of our pet supply
distribution business will depend on our ability to offer competitive costs and
value-added services to independent pet dealers and to increase sales to
national specialty pet retailers and mass merchants. If independent pet
retailers continue to lose market share to national specialty pet retailers and
we are unable to expand our business with these pet retailers, Pet Product's net
sales will decline and our operating income will suffer.
The loss of the Kal Kan dog food business may necessitate the closure of certain
pet distribution centers.
Central entered into a Master Services Agreement in May 2000 pursuant to
which Kal Kan Foods, Inc. granted Central exclusive nationwide distribution
rights for certain of its pet food products. Under the agreement, Central's
duties included providing account servicing support to Kal Kan in its
direct-sell program to PETsMART as well as the right to distribute the same
products on a buy-sell basis to independent pet supply retailers throughout the
United States, with certain exceptions. Effective November 2001, Kal Kan
terminated its distribution relationship with Pet Products. The gross profit
associated with these sales in fiscal 2001 was approximately $6.7 million. The
loss of the Kal Kan business contributed to the decision to close two smaller
pet branches during the first quarter of fiscal 2002 with a third facility
closure planned for February 2002. If we are unable to offset the loss of gross
profit as a result of the termination through expense reductions and other
business growth, our operating income would be adversely impacted and we may be
required to close additional underutilized pet distribution centers.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Central is exposed to market risks, which include changes in U.S. interest
rates and commodity prices and, to a lesser extent, foreign exchange rates.
Central does not engage in financial transactions for trading or speculative
purposes.
Interest Rate Risk. The interest payable on Central's bank lines of credit
is based on variable interest rates and therefore affected by changes in market
interest rates. If interest rates on existing variable rate debt had changed by
10% compared to actual rates, interest expense would have increased or decreased
by approximately $1.4 million and $1.5 million for the years ended September 29,
2001 and September 30, 2000, respectively. In addition, Central has fixed income
investments consisting of cash equivalents and short-term investments in
marketable debt securities, which are also affected by changes in market
interest rates. Central does not use derivative financial instruments in its
investment portfolio.
Commodity Prices. Central is exposed to fluctuation in market prices for
grains and grass seed. To mitigate risk associated with increases in market
prices and commodity availability, Central enters into contracts for grains,
bird seed and grass seed purchases. Such contracts are primarily entered into to
ensure commodity availability to the Company in the future. As of September 29,
2001, the Company had entered into fixed seed purchase commitments for fiscal
2002 totaling approximately $37.8 million. A 10% change in the market price for
grain and grass seed would result in an additional pretax gain or loss of $3.8
million related to the contracts outstanding as of September 29, 2001. As of
September 30, 2000, the Company had entered into fixed seed purchase commitments
for fiscal 2001 totaling approximately $85.1 million. A 10% change in the market
price for grain and grass seed would have resulted in an additional pretax gain
or loss of $8.5 million related to the contracts outstanding as of September 30,
2000.
Foreign Currency Risks. Central has minimal sales outside of the United
States and, therefore, has only minimal exposure to foreign currency exchange
risks. Purchases made from foreign vendors are primarily made in U.S. dollars
and, therefore, the Company has only minimal exposure to foreign currency
exchange risk. Central does not hedge against foreign currency risks and
believes that foreign currency exchange risk is immaterial.
30
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Central Garden & Pet Company
Independent Auditors' Report ..................................................................... 32
Consolidated Balance Sheets, September 29, 2001 and September 30, 2000 ........................... 33
Consolidated Statements of Income for Fiscal Years Ended September 29, 2001, September 30, 2000
and September 25, 1999 ........................................................................... 34
Consolidated Statements of Shareholders' Equity for Fiscal Years Ended September 29, 2001
September 30, 2000 and September 25, 1999 ........................................................ 35
Consolidated Statements of Cash Flows for Fiscal Years Ended September 29, 2001,
September 30, 2000 and September 25, 1999 ........................................................ 36
Notes to Consolidated Financial Statements for Fiscal Years Ended September 29, 2001,
September 30, 2000 and September 25, 1999 ........................................................ 37
31
INDEPENDENT AUDITORS' REPORT
Board of Directors
Central Garden & Pet Company
Lafayette, California
We have audited the accompanying consolidated balance sheets of Central
Garden & Pet Company and subsidiaries (the "Company") as of September 29, 2001
and September 30, 2000, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the fiscal years in the
three-year period ended September 29, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Central Garden & Pet Company
and subsidiaries as of September 29, 2001 and September 30, 2000, and the
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended September 29, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
December 7, 2001
San Francisco, California
32
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED BALANCE SHEETS
September 29, September 30,
2001 2000
------------- -------------
(dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 8,292 $ 5,685
Accounts receivable, less allowance for doubtful
accounts of $14,464 and $8,050 ............................. 141,791 151,190
Inventories ................................................... 217,902 242,617
Prepaid expenses and other assets ............................. 35,776 20,658
--------- ---------
Total current assets ..................................... 403,761 420,150
Land, buildings, improvements and equipment:
Land .......................................................... 4,977 5,194
Buildings and improvements .................................... 60,421 56,554
Transportation equipment ...................................... 5,753 6,138
Machinery and warehouse equipment ............................. 65,966 59,325
Office furniture and equipment ................................ 32,845 31,335
--------- ---------
Total .................................................... 169,962 158,546
Less accumulated depreciation and amortization ................ 61,164 46,806
--------- ---------
Land, buildings, improvements and
equipment--net ....................................... 108,798 111,740
Goodwill .......................................................... 371,987 382,294
Other assets ...................................................... 32,080 33,234
--------- ---------
Total .................................................... $ 916,626 $ 947,418
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................. $ 119,423 $ 129,239
Accounts payable .............................................. 127,884 121,705
Accrued expenses .............................................. 38,412 42,801
Current portion of long-term debt ............................. 7,052 5,277
--------- ---------
Total current liabilities ................................ 292,771 299,022
Long-term debt .................................................... 151,623 148,242
Deferred income taxes and other long-term obligations ............. 16,917 36,207
Commitments and contingencies ..................................... -- --
Shareholders' equity:
Class B stock ................................................. 16 16
Common stock .................................................. 305 304
Additional paid-in capital .................................... 526,410 525,793
Retained earnings ............................................. 73,411 82,661
Treasury stock ................................................ (144,827) (144,827)
--------- ---------
Total shareholders' equity ............................... 455,315 463,947
--------- ---------
Total .................................................... $ 916,626 $ 947,418
========= =========
See notes to consolidated financial statements.
33
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
-----------------------------------------------------
September 29, September 30, September 25,
2001 2000 1999
------------- ------------- -------------
(in thousands, except per share amounts)
Net sales .................................. $ 1,122,999 $1,350,878 $1,531,615
Cost of goods sold and occupancy ........... 784,282 1,010,106 1,187,722
----------- ---------- ----------
Gross profit ........................... 338,717 340,772 343,893
Selling, general and administrative
expenses ............................... 328,226 298,839 286,471
Other charges .............................. -- 27,156 2,708
----------- ---------- ----------
Income from operations ................. 10,491 14,777 54,714
Interest expense ........................... (23,247) (23,140) (12,680)
Interest income ............................ 164 589 593
Other income ............................... 1,631 1,176 1,106
----------- ---------- ----------
Income (loss) before income taxes ...... (10,961) (6,598) 43,733
Income taxes ............................... (1,711) 5,215 19,243
----------- ---------- ----------
Net income (loss) .......................... $ (9,250) $ (11,813) $ 24,490
=========== ========== ==========
Net income (loss) per common share:
Basic .................................. $ (0.50) $ (0.63) $ 0.90
=========== ========== ==========
Diluted ................................ $ (0.50) $ (0.63) $ 0.89
=========== ========== ==========
Weighted average shares outstanding:
Basic .................................. 18,402 18,786 27,328
=========== ========== ==========
Diluted .................................. 18,402 18,786 27,437
=========== ========== ==========
See notes to consolidated financial statements.
34
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Restricted
Class B Stock Common Stock Additional Stock
------------------- ---------------------- Paid-in Retained Deferred
Shares Amount Shares Amount Capital Earnings Compensation
------ ------ ------ ------ ----------- -------- ------------
(in thousands, except share amounts)
Balance, September 26, 1998 ...... 1,661,762 $16 29,718,530 $298 $519,933 $69,984 $(39)
Amortization, restricted stock
deferred compensation .......... 39
Tax benefit from exercise of
stock options .................. 120
Conversion of Class B stock
into common stock .............. (843) 843
Issuance of common stock ......... 463,992 4 4,005
Treasury stock purchases .........
Net income ....................... 24,490
--------- --- ---------- ---- -------- ------- ----
Balance, September 25, 1999 ...... 1,660,919 16 30,183,365 302 524,058 94,474 --
Tax benefit from exercise of
stock options ................... 14
Conversion of Class B stock
into common stock .............. (3,157) -- 3,157 --
Issuance of common stock ......... 230,899 2 1,721
Treasury stock purchases..........
Net income (loss) ................ (11,813)
--------- --- ---------- ---- -------- ------- ----
Balance, September 30, 2000 ...... 1,657,762 16 30,417,421 304 525,793 82,661 --
Tax benefit from exercise of
stock options ................... 95
Conversion of Class B stock
into common stock .............. (2,300) -- 2,300 --
Issuance of common stock ......... 112,752 1 522
Net income (loss) ................ (9,250)
--------- --- ---------- ---- -------- ------- ----
Balance, September 29, 2001 ...... 1,655,462 $16 30,532,473 $305 $526,410 $73,411 $ --
========= === ========== ==== ======== ======= ====
Treasury Stock
---------------------
Shares Amount Total
------ ------ -----
Balance, September 26, 1998 ...... (72,000) $ (1,418) $ 588,774
Amortization, restricted stock
deferred compensation .......... 39
Tax benefit from exercise of
stock options .................. 120
Conversion of Class B stock
into common stock .............. --
Issuance of common stock ......... 4,009
Treasury stock purchases ......... (10,779,350) (121,705) (121,705)
Net income ....................... 24,490
----------- --------- ---------
Balance, September 25, 1999 ...... (10,851,350) (123,123) 495,727
Tax benefit from exercise of
stock options ................... 14
Conversion of Class B stock
into common stock .............. --
Issuance of common stock ......... 1,723
Treasury stock purchases ......... (2,890,900) (21,704) (21,704)
Net income (loss) ................ (11,813)
----------- --------- ---------
Balance, September 30, 2000 ...... (13,742,250) (144,827) 463,947
Tax benefit from exercise of
stock options ................... 95
Conversion of Class B stock
into common stock .............. --
Issuance of common stock ......... 523
Net income (loss) ................ (9,250)
----------- --------- ---------
Balance, September 29, 2001 ...... (13,742,250) $(144,827) $ 455,315
=========== ========= =========
See notes to consolidated financial statements.
35
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
-------------------------------------------
September 29, September 30, September 25,
2001 2000 1999
------------- ------------- -------------
(in thousands)
Cash flows from operating activities:
Net income (loss) ............................................................ $ (9,250) $ (11,813) $ 24,490
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization .............................................. 28,362 26,035 20,492
Goodwill impairment charge ................................................. -- 15,739 --
Deferred income taxes ...................................................... 8,787 (6,338) (1,104)
Loss on sale of land, building and improvements ............................ 312 883 118
Changes in assets and liabilities:
Receivables ............................................................. 13,099 6,712 (5,882)
Inventories ............................................................. 29,015 12,519 (20,001)
Prepaid expenses and other assets ....................................... (19,106) (6,265) 16,008
Accounts payable ........................................................ 4,900 4,024 33,896
Accrued expenses ........................................................ 5,606 965 (6,364)
Other long-term obligations ............................................. (22,911) (2,385) 1,960
--------- --------- ---------
Net cash provided by operating activities ............................. 38,814 40,076 63,613
--------- --------- ---------
Cash flows from investing activities:
Additions to land, buildings, improvements and equipment ..................... (13,888) (16,663) (18,640)
Payments to acquire companies, net of cash acquired .......................... (18,277) (34,406) (14,091)
--------- --------- ---------
Net cash used by investing activities ................................. (32,165) (51,069) (32,731)
--------- --------- ---------
Cash flows from financing activities:
Borrowings (repayments) under lines of credit, net ........................... (9,816) 29,869 87,398
Payments on long-term debt ................................................... (12,844) (1,237) (1,366)
Proceeds from issuance of long-term debt ..................................... 18,000 -- --
Payments to reacquire stock .................................................. -- (21,704) (121,705)
Proceeds from issuance of stock .............................................. 618 1,733 2,480
--------- --------- ---------
Net cash provided (used) by financing activities ...................... (4,042) 8,661 (33,193)
--------- --------- ---------
Net increase (decrease) in cash ................................................. 2,607 (2,332) (2,311)
Cash at beginning of year ....................................................... 5,685 8,017 10,328
--------- --------- ---------
Cash at end of year ............................................................. $ 8,292 $ 5,685 $ 8,017
========= ========= =========
Supplemental information:
Cash paid for interest ....................................................... $ 21,626 $ 22,822 $ 11,275
Cash paid for income taxes ................................................... 5,402 12,509 10,678
Assets (excluding cash) acquired through purchase of subsidiaries ............ 8,282 43,225 4,907
Liabilities assumed through purchase of subsidiaries ......................... 5 38,288 2,756
Inventory returned to manufacturer ........................................... -- 75,887 --
See notes to consolidated financial statements.
36
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended September 29, 2001,
September 30, 2000 and September 25, 1999
1. Organization and Significant Accounting Policies
Organization -- Central Garden & Pet Company, a Delaware corporation, and
subsidiaries (the "Company" or "Central"), is a national manufacturer, supplier
and merchandiser of lawn and garden and pet supply products. The Company offers
an array of proprietary branded lawn and garden and pet supply products.
Basis of Consolidation and Presentation -- The consolidated financial
statements include the accounts of the Company. The Company's shares of the
earnings of its minority interest in equity-method investees has been recorded
under the caption "Other income." All significant intercompany balances and
transactions have been eliminated.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires that management make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period including accounts
receivable and inventory valuation and goodwill lives. Actual results could
differ from those estimates.
Revenue Recognition -- Sales are recorded, net of estimated returns,
discounts and volume-based rebate incentives, when merchandise is shipped, title
passes to the customer and the Company has no further obligations to provide
services related to such merchandise. The Company's current practice on product
returns generally is to accept and credit the return of unopened cases of
products from customers where the quantity is small, where the product has been
misshipped or the product is defective. Sales also include amounts billed
directly to customers related to shipping and handling.
Cost of goods sold and occupancy consist of costs to acquire or manufacture
inventory, certain indirect purchasing, merchandise handling and storage costs,
as well as allocations of certain facility costs, including rent, payroll,
property taxes, security, utilities, insurance and maintenance.
Advertising Costs -- The Company expenses the costs of advertising as
incurred. Advertising expenses were $14.9 million, $16.7 million and $14.6
million in fiscal 2001, 2000 and 1999, respectively.
Income Taxes are accounted for under the liability method in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting
for Income Taxes. Deferred income taxes result primarily from bad debt
allowances, inventory write-downs, depreciation and nondeductible reserves.
Cash and cash equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less at the date of acquisition.
Inventories, which primarily consist of garden products and pet supplies
finished goods are stated at the lower of FIFO cost or market. Cost includes
certain indirect purchasing, merchandise handling and storage costs including
certain salary and data processing costs incurred to acquire or manufacture
inventory, costs to unload, process and put away shipments received in order to
prepare them to be picked for orders, and certain overhead costs. The amounts of
such costs capitalized to inventory are computed based on an estimate of costs
related to the procurement and processing of inventory to prepare it for sale
compared to total product purchases.
Long-lived assets -- The Company reviews its long-lived assets for
potential impairment based on a review of projected undiscounted cash flows
associated with these assets. Long-lived assets are included in impairment
37
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
evaluations when events and circumstances exist that indicate the carrying
amount of those assets may not be recoverable. Measurement of impairment losses
for long-lived assets that the Company expects to hold and use is based on the
estimated fair value of the assets.
Land, buildings, improvements and equipment are stated at cost.
Depreciation is computed by the straight-line method over thirty years for
buildings. Improvements are amortized on a straight-line basis over the shorter
of the useful life of the asset or the terms of the related leases. Depreciation
on equipment is computed by the straight-line and accelerated methods over the
estimated useful lives of 3 to 10 years.
Goodwill is amortized using the straight-line method over periods ranging
from 20 to 40 years. Accumulated amortization totaled $43.9 million and $32.1
million at September 29, 2001 and September 30, 2000, respectively. The carrying
amounts of intangible assets and goodwill are reviewed if facts and
circumstances suggest that they may be impaired. If this review indicates that
the carrying amounts of intangible assets and goodwill will not be recoverable,
as determined based on the estimated undiscounted cash flows of the entity
acquired over the remaining amortization period, the carrying amounts of the
intangible assets and goodwill are reduced by the estimated shortfall of cash
flows. In addition, intangible assets and goodwill associated with assets
acquired in a purchase business combination are included in impairment
evaluations when events and circumstances exist that indicate the carrying
amount of those assets may not be recoverable.
Fair Value of Financial Instruments -- At September 29, 2001 and September
30, 2000, the carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and non convertible debt approximates its fair value. The fair
value of the Company's convertible subordinated notes was $97.2 million and
$67.8 million at September 29, 2001 and September 30, 2000, respectively, which
was determined by comparison to quoted market prices.
Derivative Financial Instruments -- The Company generally does not enter
into derivative financial instruments. Prior to October 1, 2002, at which time
the Company adopted SFAS 133 (see below), subsidiaries of the Company had
entered into interest rate swap agreements to hedge certain interest rate risks
which were accounted for using the settlement basis of accounting. Premiums paid
on such interest rate swap agreements were deferred and amortized to interest
expense over the life of the underlying hedged instrument, or immediately if the
underlying hedged instrument was settled. As interest rates change, the
differential between the interest rate received and the interest rate paid under
the interest rate swap arrangements was reflected in interest expense quarterly.
As of October 1, 2000, the Company has accounted for any remaining interest rate
swap agreements in accordance with the provisions of SFAS 133, as amended.
Purchase commitments -- Seed production and purchase agreements obligate
the Company to make future purchases based on estimated yields. These contracts
vary in their terms, a portion of which have fixed prices or quantities. At
September 29, 2001, estimated annual seed purchase commitments were $37.8
million for fiscal 2002, $25.7 million for fiscal 2003 and $15.1 million for
fiscal 2004.
Comprehensive income -- SFAS No. 130 requires an enterprise report, by
major components and as a single total, the change in its net assets, during the
period from non-owner sources. The Company does not have any items of Other
Comprehensive Income, as defined by SFAS No. 130, and thus Net Income is equal
to Comprehensive Income.
Reclassifications -- Certain 1999 and 2000 balances have been reclassified
to conform with the 2001 presentation, including $2.9 million and $4.3 million
for fiscal 1999 and 2000, respectively, related to volume-based rebate
incentives offset by certain shipping and handling billings.
New Accounting Pronouncements -- 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 standard
38
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
establishes 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 a material impact on the
financial position or results of operations of the Company because the Company,
with the exception of minimal interest rate swaps, did not have derivative
instruments which require valuation in the financial statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 142 addresses the
initial recognition and measurement of intangible assets acquired outside of a
business combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. The Company intends to early adopt SFAS No. 142 for its
fiscal year beginning September 30, 2001. Upon adoption of SFAS No. 142, the
Company will stop the amortization of goodwill with a net carrying value of
$372.0 million at September 29, 2001 and annual amortization of $11.6 million
that resulted from business combinations initiated prior to the adoption of
SFAS No. 141. The Company will evaluate such goodwill under the SFAS No. 142
transitional impairment test and has not yet determined whether or not there is
an impairment loss. Any transitional impairment loss will be recognized as a
change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," and in October 2001 issued SFAS No. 144, "Accounting
for the Impairment of Disposal of Long-Lived Assets." These Statements will be
effective for the Company's fiscal year 2003. The Company has not determined the
impact, if any, that these Statements will have on its consolidated financial
statements.
2. Other Charges
Activity in fiscal 2001, 2000 and 1999 related to other charges was as
follows (in millions):
Cash Non Cash
----------------------- -------------
Asset
Exit Carrying
Related Value
Severance and Other Adjustments Total
---------- ----------- ------------- -------
Reserve balance September 26, 1998 .............................. $ 0.0 $ 0.9 $ 0.0 $ 0.9
Fiscal 1999 other charges ....................................... 0.6 0.4 1.7 2.7
Severance paid .................................................. (0.2) (0.2)
Costs paid ...................................................... (0.3) (0.3)
Assets carrying value adjustments ............................... (1.7) (1.7)
------ ------ ------ ------
Reserve balance September 25, 1999 .............................. 0.4 1.0 0.0 1.4
Fiscal 2000 other charges ....................................... 1.1 8.2 17.9 27.2
Severance paid .................................................. (1.1) (1.1)
Costs paid ...................................................... (0.1) (0.1)
Assets carrying value adjustments ............................... (17.9) (17.9)
------ ------ ------ ------
Reserve balance September 30, 2000 .............................. 0.4 9.1 0.0 9.5
Severance paid .................................................. (0.4) (0.4)
Costs paid ...................................................... (8.8) (8.8)
------ ------ ------ ------
Reserve balance September 29, 2001 .............................. $ 0.0 $ 0.3 $ 0.0 $ 0.3
====== ====== ====== ======
39
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The remaining balances for severance and exit-related and other costs are
included in "Accounts payable" and "Accrued expenses" as of September 30, 2000
and September 25, 1999 and in "Accrued expenses" for exit-related and other
costs as of September 29, 2001.
Fiscal 2000
In September 2000, the Company recorded $27.5 million of charges resulting
from workforce reductions, employee benefit obligations, facility closures, and
asset impairments that were necessary due to the termination of the Company's
distribution arrangement with Scotts and other anticipated sales decreases in
the Garden Products business. These charges were offset by the reversal of $0.3
million of certain exit-related costs recorded in connection with the fiscal
1998 restructuring plan for which the Company was no longer obligated.
As a result of the fiscal 2000 and anticipated future distribution related
sales decreases in the Garden Products segment, the Company initiated a plan to
close 13 distribution centers and reduce its workforce which was completed in
fiscal 2001. In connection with this plan, the Company recorded a severance
charge of $1.1 million associated with the termination of 309 employees,
primarily in the sales force and distribution centers. Severance of $0.7 million
was paid to 196 employees terminated during fiscal 2000, with the balance paid
to employees who were terminated in fiscal 2001. In connection with the
facilities closures, $3.6 million was accrued for estimated lease costs, and
$0.2 million for estimated property tax and facilities maintenance costs, that
the Company is obligated to pay for periods subsequent to closure. The Company
completed the facility closures in fiscal 2001. The Company also recorded an
$0.8 million impairment charge to reduce certain facility assets to their
estimated fair value based on an independent appraisal, and an $0.8 million
provision for estimated uncollectible receivables from customers of the closed
facilities.
In addition, as a direct result of the termination of the distribution
relationship with Scotts, the Company recorded a charge of $4.7 million as the
Company became obligated to make cash payments which were guaranteed to certain
employees in the event of such termination. These payments were made during
fiscal 2001.
As a result of the events described above, management reevaluated the
recoverability of the intangible assets in the Garden Products segment. Based on
an evaluation of estimated future cash flows associated with affected
facilities, the Company determined that goodwill and certain trademarks were
impaired, and accordingly recorded charges of $15.7 million and $0.6 million,
respectively, to reduce those assets to estimated fair values.
As of September 29, 2001, remaining reserve balances related to "Other
Charges" recorded in fiscal 2000 represent amounts to be paid in fiscal 2002 for
facility exit-related obligations. As of September 30, 2000, reserve balances
totaling $9.5 million were included in the Consolidated Balance Sheet within the
category "accounts payable" and "accrued expenses", comprised of $0.2 million
associated with "Other Charges" recorded in the year ended September 26, 1998;
$0.4 million associated with "Other Charges" recorded in the year ended
September 25, 1999; and $8.9 million associated with "Other Charges" recorded in
the year ended September 30, 2000. With respect to each of these amounts: (1)
the reserve balance of $0.2 million associated with the fiscal 1998 charges was
the net result of severance payments of $1.0 million made to 168 terminated
employees, all of which was paid in 1998, exit-related and other costs totaling
$3.9 million (principally lease payments), of which $3.2 million was paid in
1998, $0.3 million was paid in 1999 and $0.1 million paid in 2000, and $0.3
million of reserves which were reversed in fiscal 2000 that were no longer
required related to costs associated with these exit activities. The remainder
of the costs associated with this reserve were incurred in the first quarter of
2001; (2) the reserve balance of $0.4 million associated with the fiscal 1999
charges was the net result of severance payments of $0.6 million made to 113
terminated employees. Of the $0.6 million of severance, $0.2 million was paid in
1999 and $0.4 million was paid in 2000. The remaining exit costs associated with
this plan were incurred during fiscal 2001; and (3) the reserve balance of $8.9
million associated with the fiscal 2000 charges associated with severance
payments of $0.4 million made in fiscal 2001 and the exit-related costs of $8.5
million, of which $8.2 million were paid during fiscal year 2001.
40
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal 1999
In September 1999, the Company recorded other charges totaling $2.7 million
associated with the expiration of the Solaris Agreement, workforce reductions,
facility closures.
Of the $2.7 million charge, the Company established a $0.1 million reserve
for estimated non-collectible amounts due from distributors involved in the
Solaris program, and a $0.1 million charge for post-closure facility lease
obligations of the Company's facility which warehoused only inventory received
under the Solaris Agreement which was closed upon termination of the Solaris
Agreement.
The Company initiated a plan for closure of three distribution centers as
well as a workforce reduction which was expected to be completed by the end of
the second quarter of fiscal 2000. Also included in the $2.7 million charge is
$1.6 million related to such closures and workforce reductions in the former
distribution segment. As part of this plan, the Company recorded a severance
charge of $0.6 million for workforce reductions. The severance charge relates to
the termination of 113 employees, primarily in the sales force and distribution
centers and associated back-office functions. Severance for 51 employees was
paid during fiscal 1999. Also related to such closures, a charge of $0.4 million
was recorded for other exit-related costs, consisting primarily of lease costs,
property and other facility costs required to be paid subsequent to the
termination of operations. In addition, $0.3 million was required to write off
the carrying value of certain facility assets which will no longer be used and
are expected to be disposed of during the first half of fiscal 2000. $0.9
million of the $1.6 million of other charges related to these closures and
workforce reductions recorded in September 1999 is included in accrued expenses
as of September 25, 1999. These costs were paid primarily in fiscal 2000, with
certain lease obligations paid in fiscal 2001.
The Company initiated a plan to dispose of a building and certain facility
assets in the Garden Products segment which have not operated at the level of
profitability required by the Company. Also included in the $2.7 million charge
is $1.2 million required to reduce the $3.0 million carrying value of the
building which was being held for disposal during fiscal 2001 to its estimated
net realizable value in accordance with SFAS No. 121. The charge was based on
the comparison of the net carrying cost of this facility and assets compared
with current market values, less costs to sell. The operations of this facility
are included in the Company's operations for fiscal 2001, and resulted in a
pretax loss of approximately $0.2 million.
3. Acquisitions
Fiscal 2001
In October 2000, the Company's Pennington subsidiary acquired the Rebel and
Lofts lines of grass seed ("Lofts and Rebel") from KRB Seed Company, LLC
("KRB"), for approximately $8 million in cash. Lofts and Rebel represented a
portion of a business which KRB acquired out of bankruptcy. The purchase price
approximated the fair market value of the tangible assets acquired. The Company
also signed perpetual licensing agreements under which the Company will make
royalty payments to KRB 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 results of operations
associated with this acquisition have been included in the Company's results of
operations since October 2000. Sales of approximately $16 million attributable
to Lofts and Rebel were included in net sales for fiscal 2001. Operating
information prior to acquisition by the Company is not available and,
accordingly, has not been reflected in the following unaudited pro forma results
of operations for fiscal 2000.
41
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal 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.
In March 2000, Central acquired the AMDRO(R) and IMAGE(R) consumer product
lines from American Cyanamid, the agricultural products division of American
Home Products Corporation for approximately $28 million. The purchase price
exceeded the fair market value of net assets acquired by approximately $27
million, which was recorded as goodwill and is being amortized on a straight
line basis over 20 years.
In March 2000, Central's Norcal Pottery Products, Inc. subsidiary
("Norcal") acquired White's Pottery, L.P., an importer and distributor of terra
cotta pottery products for approximately $2 million. The purchase price exceeded
the fair market value of net assets acquired by approximately $1 million, which
was recorded as goodwill and is being amortized on a straight line basis over 20
years.
In January 2000, Central's Pennington subsidiary acquired Unicorn
Laboratories. Unicorn serves the U.S. animal health and lawn and garden
industries as a private label and branded manufacturer of lawn, garden and
animal health chemical products for approximately $15 million. The purchase
price exceeded the fair market value of net assets acquired by approximately $14
million, which was recorded as goodwill and is being amortized on a straight
line basis over 40 years.
In January 2000, Central's Pennington subsidiary acquired an equity stake
in Cedar Works, a manufacturer of bird feeders for approximately $6 million. The
purchase price exceeded the fair market value of net assets acquired by
approximately $4 million, which was recorded as goodwill and is being amortized
on a straight line basis over 40 years.
Fiscal 1999
In January 1999, the Company acquired Norcal Pottery Products, Inc., an
importer and distributor of lawn and garden pottery products. Under the terms of
the agreement, the Company paid approximately $14 million in cash and 115,634
shares of common stock at a value of approximately $2 million. The purchase
price exceeded the fair market value of net assets acquired by approximately $14
million, which was recorded as goodwill and is being amortized on a
straight-line basis over 40 years.
The fiscal 2001, 2000 and 1999 acquisitions have been accounted for under
the purchase method and have been included in the Company's consolidated
statements of income from date of acquisition. The value of stock issued in
relation to the above acquisitions has been determined by using the average
daily closing market price of the Company's stock prior to the closing of such
acquisitions as required under the acquisition agreements.
42
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Pro Forma Results of Operations -- The following table summarizes
on a pro forma basis the combined results of operations of the Company and its
subsidiaries for fiscal year 2000 as if the fiscal year 2000 acquisitions were
made on September 26, 1999. The pro forma results of operations also reflect pro
forma adjustments for the amortization of goodwill and additional interest
expense which would have been incurred. Although this pro forma combined
information includes the results of operations of the acquisitions, it does not
necessarily reflect the results of operations that would have occurred had the
acquisitions been managed by the Company prior to their acquisition.
(unaudited) (in thousands, except per share amounts) Fiscal Year Ended
September 30,
2000
-----------
Net sales .................................................... $ 1,420,637
Gross profit ................................................. 359,688
Income from operations ....................................... 22,878
Income before taxes .......................................... (2,266)
Net income ................................................... (9,213)
Net income per share:
Basic .................................................... (0.49)
Diluted .................................................. (0.49)
Weighted average common shares outstanding:
Basic .................................................... 18,786
Diluted .................................................. 18,786
4. Concentration of Credit Risk and Significant Customers and Suppliers
Customer Concentration -- Approximately 46%, 48% and 49% of the Company's
net sales for fiscal years 2001, 2000 and 1999, respectively, were derived from
sales to the Company's top ten customers. The Company's largest customer
accounted for approximately 21%, 25% and 24% of the Company's net sales for
fiscal years 2001, 2000 and 1999, respectively. The Company's second largest
customer accounted for approximately 7%, 5% and 9% of the Company's net sales
for fiscal years 2001, 2000 and 1999, respectively. The Company's third largest
customer accounted for approximately 6%, 5% and 6% of the Company's net sales
for fiscal years 2001, 2000 and 1999. The loss of, or significant adverse change
in, the relationship between the Company and these three customers could have a
material adverse effect on the Company's business and financial results. The
loss of or reduction in orders from any significant customer, losses arising
from customer disputes regarding shipments, fees, merchandise condition or
related matters, or the Company's inability to collect accounts receivable from
any major customer could have a material adverse impact on the Company's
business and financial results. As of September 29, 2001 and September 30, 2000,
accounts receivable from the Company's top ten customers comprised 47% and 31%,
respectively, of the Company's total accounts receivable, including 15% and 10%
from the Company's largest customer.
Supplier Concentration -- While the Company purchases products from over
1,000 different manufacturers and suppliers, approximately 15%, 19% and 40% of
the Company's net sales in fiscal years 2001, 2000 and 1999, respectively, were
derived from products purchased from the Company's five largest suppliers. The
Company believes that approximately 27% of the Company's net sales during fiscal
year 1999 were derived from sales of products purchased from Solaris. As
discussed in Note 7, the Solaris Agreement expired on September 30, 1999. The
Company believes that approximately 14% of the Company's net sales during fiscal
year 2000 were derived from sales of products purchased from Scotts. Scotts
discontinued its distribution relationship with the Company as of September 30,
2000.
43
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Notes Payable
The Company has a line of credit providing for aggregate borrowings of up
to $200 million which expires on July 12, 2002. The available amount under the
line of credit fluctuates based upon a specific asset-borrowing base. At
September 29, 2001 and September 30, 2000, balances of $83.1 million and $114.5
million, respectively, were outstanding under this agreement, bearing interest
at a rate based on the prime rate (7.1% at September 29, 2001 and 9.5% at
September 30, 2000) or LIBOR plus 2% at the Company's option. Available
borrowing capacity at September 29, 2001 and September 30, 2000 was $16.8
million and $5.1 million, respectively. This line is secured by substantially
all of the Company's assets, and contains certain financial covenants requiring
maintenance of minimum levels of net worth and working capital, places a ceiling
on the Company's treasury stock purchases and does not allow the Company to pay
dividends. The line also requires the lender's prior written consent to any
acquisition of a business.
The Company also has available through its Pennington subsidiary an $85
million line of credit as of September 29, 2001, which increased from $60
million in fiscal 2000, and expires on September 30, 2003. As of September 29,
2001 and September 30, 2000, the Company had $31.6 million and $10 million,
respectively, of borrowings under this line of credit facility. Available
borrowing capacity at September 29, 2001 and September 30, 2000 was $53.4
million and $50.0 million, respectively. 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 line of credit contains certain restrictive financial covenants.
The Company also has available through its All-Glass Aquarium subsidiary a
$10 million line of credit, which expires on September 30, 2005. As of September
29, 2001, the Company had $4.6 million of borrowings under this line of credit
facility. Available borrowing capacity at September 29, 2001 was $5.4 million.
Interest related to this line is based on a rate equal to the prime rate less
.5%. The line of credit is secured by a General Business Security Agreement and
contains certain restrictive financial covenants.
44
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt
Long-term debt consists of the following:
September 29, September 30,
2001 2000
------------- -------------
(in thousands)
Convertible subordinated notes, interest at 6% payable semi-annually, principal
due 2003; convertible at the option of the holder into shares of common
stock of the Company, at any time prior to redemption or maturity, at a
conversion price of $28.00 per share (equal to a conversion rate of 35.7143
shares per $1,000 principal amount of notes) ...................................... $115,000 $115,000
Promissory note, interest at 7% with annual principal and interest payments of
$5,550,289 through 2004 ........................................................... 14,566 18,800
Note payable to bank, interest at floating rates; payable in monthly principal
payments of $60,000 plus interest with unpaid balance due
September 30, 2005 ................................................................ 13,775 --
Industrial development revenue bonds due in semi-annual sinking fund
Installments beginning 2003; bearing interest at floating rates, secured
by letter of credit collateralized by Plant and equipment ......................... 4,390 4,390
Note payable to bank, interest at floating rates; payable in monthly principal
payments of $58,000 plus interest with unpaid balance due
September 30, 2005 ................................................................ 2,800 --
Industrial development revenue bonds due in annual sinking fund installments
of $305,000 to $310,000 through July 2010, bearing interest at floating
rates, secured by an unconditional letter of credit ............................... 2,780 3,085
Mortgage note payable, interest at floating rates; payable in monthly
principal and interest installments of $60,000 with unpaid balance due 2004........ -- 2,610
Note payable to bank, interest at floating rates; payable in monthly principal
installments of $100,000 plus interest with unpaid balance due 2002 ............... -- 2,000
Mortgage note payable to bank, interest based on a formula (4.1% at September
29, 2001), principal and interest due in monthly installments through
March 2012 ........................................................................ 1,520 1,615
Industrial development revenue bonds due in annual sinking fund installments
of $300,000 through December 2005, bearing interest at floating rates,
secured by an unconditional letter of credit ...................................... 1,500 1,830
Mortgage note payable to bank, interest at floating rates; payable in monthly
principal and interest installments of $6,250 with unpaid balance due 2004 ........ -- 1,431
Industrial development revenue bonds due in annual sinking fund installments
ranging from $130,000 to $195,000 through July 2005, bearing interest at
floating rates, secured by an unconditional letter of credit ...................... 715 910
Mortgage note payable to bank, interest based on a formula (4.1% at September
29, 2001), principal and interest due in monthly installments through
December 2019 ..................................................................... 969 994
Industrial development revenue bonds due in quarterly sinking fund
installments of $30,000, with a final principal installment of $90,000 due
March 2004, bearing interest at floating rates, secured by an
unconditional letter of credit .................................................... 350 480
Other notes payable .................................................................... 310 374
-------- --------
Total ............................................................................. 158,675 153,519
Less current portion of long-term debt ................................................. 7,052 5,277
-------- --------
Total ........................................................................ $151,623 $148,242
======== ========
45
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principal repayments on long-term debt are scheduled as follows:
(in thousands)
Fiscal year:
2002.................................................. $ 7,052
2003.................................................. 7,519
2004.................................................. 122,954
2005.................................................. 13,514
2006.................................................. 1,071
Thereafter............................................ 6,565
----------
Total.......................................... $ 158,675
==========
7. Commitments and Contingencies
The Company has operating lease agreements principally for office and
warehouse facilities and equipment. Such leases have remaining terms, inclusive
of renewal options, of 1 to 8 years. Rental expense was $19,933,000, $23,433,000
and $20,477,000 for fiscal years 2001, 2000 and 1999, respectively.
Certain facility leases have renewal options and provide for additional
rent based upon increases in the Consumer Price Index.
Aggregate minimum annual payments on non-cancelable operating leases at
September 29, 2001 are as follows:
(in thousands)
Fiscal year:
2002................................................. $ 17,503
2003................................................. 11,653
2004................................................. 9,295
2005................................................. 6,849
2006................................................. 3,435
Thereafter........................................... 1,694
----------
Total......................................... $ 50,429
==========
The Solaris Agreement -- The Company entered into an agreement effective
October 1, 1995 with The Solaris Group ("Solaris"), a strategic business unit of
Monsanto Company (subsequently renamed Pharmacia Corporation), the manufacturer
of Ortho(R), Round-up(R) and Green Sweep(R) lawn and garden products (the
"Solaris Agreement"). Under the Solaris Agreement, which had a four year term,
the Company, 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. However, Solaris continued to negotiate its sales prices directly
with its direct sales accounts. The Solaris Agreement provided for the Company
to be reimbursed for costs incurred in connection with services provided to
Solaris' direct sales accounts and to receive payments based on the growth of
sales of Solaris products. The Company was also entitled to share with Solaris
in the economic benefits of certain cost reductions, to the extent achieved.
In January 1999, Pharmacia sold its Solaris lawn and garden business
exclusive of its Roundup(R) herbicide products for consumer use to The Scotts
Company ("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.
46
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Due to the termination of the Scotts' distribution relationship, the
Company took actions to downsize its lawn and garden distribution operations to
reflect anticipated business levels for the fiscal year 2001. As a result, the
Company recorded charges of $27.5 million in the fiscal year ending September
30, 2000. See Note 2, "Other Charges."
The sale of the Solaris business by Pharmacia, the expiration of the
Solaris Agreement and termination of the Scotts distribution relationship
subject our 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. 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, in the aggregate, 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 Central's results of
operations, financial position and/or cash flows.
In December 1997, the Company acquired all of the stock of TFH
Publications, Inc. In connection with the transaction, the Company made a $10
million loan to the sellers, which was evidenced by a Promissory Note. In
September 1998, the prior owners of TFH brought suit against the Company and
certain executives of the Company for damages and relief from their obligations
under the Promissory Note, alleging, among other things, that the Company's
failure to properly supervise the TFH management team had jeopardized their
prospects of achieving certain earnouts. The Company believes that these
allegations are without merit. The Company counterclaimed against the prior
owners for enforcement of the Promissory Note, damages and other relief,
alleging, among other things, fraud, misrepresentation and breach of fiduciary
duty by the prior owners of TFH. These actions, Herbert R. Axelrod and Evelyn
Axelrod v. Central Garden & Pet Company; Glen S. Axelrod; Gary Hersch; William
E. Brown; Robert B. Jones; Glen Novotny; and Neill Hines, Docket No.
MON-L-5100-99, and TFH Publications, Inc. v. Herbert Axelrod et al., Docket No.
L-2127-99 (consolidated cases), are in the New Jersey Superior Court. The case
is currently in pretrial discovery and is scheduled for trial in June 2002.
During the course of discovery in this action, the Company has become aware
of certain information which suggests that prior to the acquisition of TFH by
the Company, certain records of TFH were prepared in an inaccurate manner which
resulted in underpayment of taxes by certain individuals. Those individuals
could be liable for back taxes, interest, and penalties. In addition, even
though all of the events occurred prior to the acquisition of TFH by the
Company, there is a possibility that TFH could be liable for penalties for
events which occurred under prior management. The Company believes that TFH has
strong defenses available to the assertion of any penalties against TFH. The
Company cannot predict whether TFH will be required to pay any such penalties.
In the event that TFH were required to pay penalties, the Company would seek
compensation from the prior owners.
In March 2001, the prior owners of TFH also brought a separate action in
federal court seeking to enforce what they alleged was an "arbitration award"
made by an accountant concerning the closing balance sheet of TFH. The prior
owners contended that the decisions by the accountant concerning the closing
balance sheet entitled them to additional monies under the purchase price
provisions of the Stock Purchase Agreement. The federal court held that
47
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the accountant did not make any monetary award. The federal court entered a
judgment enforcing the decisions made by the accountant concerning the closing
balance sheet of TFH, but the court did not, and refused to, enter a monetary
award. See Evelyn M. Axelrod, et al. v. Central Garden & Pet Company, Civil
Action No. 01-1262 (MLC) U.S.D.C. of New Jersey. The prior owners have argued in
the consolidated civil actions pending in the New Jersey Superior Court that the
judgment by the federal court entitles them to additional monies under the
purchase price provision of the Stock Purchase Agreement. The New Jersey
Superior Court has stated that it will not, at this time, enter a monetary
award, but that it, like the federal court, will confirm the decisions made by
the accountant concerning the closing balance sheet of TFH. The New Jersey
Superior Court has not yet issued a written Order on its rulings, but the
Company anticipates such an Order shortly. The Company believes that it has
defenses to the claims by the prior owner for additional monies under the
purchase price provisions of the Stock Purchase Agreement, and that the prior
owners' claims are subject to or will be offset by the Company's claims against
the prior owners.
The Company, based on consultation with legal counsel, does not believe
that the outcome of the above matters will have a material adverse impact on its
operations, financial position, or cash flows.
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 has filed a lawsuit seeking to recover for property
damage from the fire. Local residents have also filed a purported class action
lawsuit alleging claims for bodily injury and property damage as a result of the
fire. The building owner and nearby businesses have also presented claims for
property damage and business interruption but have not filed lawsuits. In
addition, the Arizona Department of Environmental Quality is monitoring the
cleanup operations and has asked the Company, the building owner and the
adjoining warehouse tenant to assess 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
requested information relating to the 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.
8. Income Taxes
The provision for income taxes consists of the following:
Fiscal Year Ended
----------------------------------------------
September 29, September 30, September 25,
2001 2000 1999
------------- ------------- -------------
Current: (in thousands)
Federal............................. $ (9,151) $ 9,544 $ 16,796
State............................... (1,347) 2,009 3,551
----------- ---------- ----------
Total............................ (10,498) 11,553 20,347
Deferred ................................ 8,787 (6,338) (1,104)
---------- ---------- ----------
Total............................ $ (1,711) $ 5,215 $ 19,243
=========== ========== ==========
48
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
Fiscal Year Ended
---------------------------------------------
September 29, September 30, September 25,
2001 2000 1999
------------- ------------- -------------
Statutory rate.................................. 35% 35% 35%
State income taxes, net of federal benefit...... 1.8 (8.5) 5
Nondeductible expenses, primarily goodwill...... (20.4) (103.5) 5
Other........................................... (0.9) (1.0) (1)
------- ------- ---
Effective tax rate.............................. 15.5% (78.0)% 44%
====== ======= ==
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The tax effect of temporary differences and
carryforwards which give rise to deferred tax assets and liabilities are as
follows:
September 29, 2001 September 30, 2000
---------------------- ----------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- --------- -----------
Current: (in thousands)
Allowance for doubtful accounts receivable..... $4,364 $1,910
Inventory write-downs.......................... 5,906 7,852
Prepaid expenses............................... $1,942 $1,364
Nondeductible reserves......................... 1,548 4,750
State taxes.................................... 1,616 258
Other.......................................... 565 1,102
------- ------- ------- -------
Current 12,383 3,558 15,614 1,622
Noncurrent:
Depreciation and amortization.................. 15,927 11,106
Joint venture income........................... 416 634
Net operating loss............................. 213
Other.......................................... 490 386
------- ------- ------- -------
Noncurrent.......................................... 703 16,343 - 12,126
------- ------- ------- -------
Total...................................... $13,086 $19,901 $15,614 $13,748
======= ======= ======= =======
As of September 29, 2001, the Company had a state net operating loss
carryforward of approximately $2.4 million which expires in 2010.
9. Shareholders' Equity
At September 29, 2001, there were 80,000,000 shares of common stock ($0.01
par value) authorized, of which 16,790,223 were outstanding.
At September 29, 2001, there were 3,000,000 shares of Class B stock ($0.01
par value) authorized, of which 1,655,462 were outstanding. The voting powers,
preferences and relative rights of the Class B stock are identical to common
stock in all respects except that (i) the holders of common stock are entitled
to one vote per share and the holders of Class B stock are entitled to the
lesser of ten votes per share or 49% of the total votes cast, (ii) stock
dividends on common stock may be paid only in shares of common stock and stock
dividends on Class B stock may be paid only in shares of Class B stock and (iii)
shares of Class B stock have certain conversion rights and are subject to
certain restrictions on ownership and transfer. Each share of Class B stock is
convertible into one share of
49
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock, at the option of the holder. Additional shares of Class B stock
may only be issued with majority approval of the holders of the common stock and
Class B stock, voting as separate classes.
At September 29, 2001, there were 1,000,000 shares of preferred stock
($0.01 par value) authorized, of which none were outstanding.
In August 1998, the Company's Board of Directors authorized a program for
the Company to repurchase up to $25 million of common shares. In several
subsequent authorizations, the Company's Board of Directors increased such
authorization up to $155 million of common shares as of December 1, 1999. As of
September 29, 2001, the Company had repurchased approximately 13.7 million
shares of its common stock for an aggregate price of approximately $143.8
million under this program.
In 1993, the Company adopted the Omnibus Equity Incentive Plan (the "Plan")
which, through September 29, 2001, has provided for the grant of options to key
employees and consultants of the Company for the purchase of up to an aggregate
of 4.8 million shares of common stock of the Company. The Plan is administered
by the Compensation Committee of the Board of Directors, comprised of outside
independent directors only, who determine individual awards to be granted,
vesting and exercise of share conditions.
In 1996, the Company adopted the Nonemployee Director Stock Option Plan
(the "Director Plan") which provides for the grant of options to nonemployee
directors of the Company. In June 2001, the Board of Directors of the Company
conditionally amended the Director Plan, subject to shareholder approval at the
2002 Annual Meeting, to increase the number of shares authorized for issuance
under the Director Plan to 200,000 shares and to revise the annual awards to
provide for an option to purchase $100,000 of the Company's common stock and a
restricted stock grant for $10,000 of the Company's common stock. In June 2001,
the Board also granted each nonemployee director an option to purchase 7,000
shares of the Company's common stock and a restricted stock grant for 1,000
shares of common stock outside the Director Plan.
The Company sponsors several 401(k) plans which cover substantially all
employees. The Company accrued contributions of $860,000, $1,030,000 and
$987,000 for fiscal years 2001, 2000 and 1999, respectively.
From 1997 until 2001, the Company maintained an employee discount stock
purchase plan for eligible employees. Under such plan, participants could use up
to 15% of their annual compensation up to certain dollar limitations, whichever
was higher, to purchase, through payroll deductions, the Company's common stock
at the end of six-month periods ending June 30 and December 31 of each plan year
for 85% of the lower of the beginning or ending stock price for the applicable
six-month period of each plan year. The remaining shares authorized under the
plan were issued to employees during 2001, and the Company does not currently
expect to authorize additional shares under the plan.
Additional Stock Plan Information - The Company continues to account for
its stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, Accounting for Stock Issued to Employees,
and its related interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net earnings and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1997. These
calculations require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life of
four years from date of grant; stock volatility, 55% in fiscal 2001, 57% in
fiscal 2000 and 64% in fiscal 1999; risk free interest rates, 3.98% in fiscal
2001, 5.29% in fiscal 2000 and 4.6% in fiscal 1999; and no dividends during the
expected term.
50
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of the
fiscal 2001, fiscal 2000, fiscal 1999, fiscal 1998 and fiscal 1997 awards had
been amortized to expense in the consolidated financial statements over the
vesting period of the awards, pro forma net earnings would have been as follows:
Fiscal Year Ended
---------------------------------------------
September 29, September 30, September 25,
2001 2000 1999
------------- ------------- -------------
As reported:
Net (loss) earnings (in thousands)........... $ (9,250) $(11,813) $24,490
Net (loss) earnings per common share:
Basic.................................... $ (0.50) $ (0.63) $ 0.90
Diluted.................................. $ (0.50) $ (0.63) $ 0.89
Pro forma:
Net (loss) earnings (in thousands)........... $(13,094) $(16,067) $20,849
Net earnings (loss) per common share:
Basic.................................... $ (0.71) $ (0.86) $ 0.76
Diluted.................................. $ (0.71) $ (0.86) $ 0.76
However, the impact of outstanding non-vested stock options granted prior
to fiscal 1997 has been excluded from the pro forma calculation; accordingly,
the fiscal 2001, fiscal 2000 and fiscal 1999 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation will
apply to all stock options.
Option activity under the Plan, Director Plan and to nonemployee directors
outside the Director Plan is as follows:
Weighted
Number of Average
Options Exercise Price
--------- --------------
Balance at September 26, 1998 ............................. 2,115,553 $ 17.83
Granted (weighted average fair value of $7.26) ............ 1,929,224 13.45
Exercised ................................................. (159,867) 4.36
Cancelled ................................................. (974,915) 22.85
---------
Balance at September 25, 1999 ............................. 2,909,995 14.35
Granted (weighted average fair value of $3.90) ............ 493,170 8.21
Exercised ................................................. (48,617) 4.86
Cancelled ................................................. (194,600) 14.14
----------
Balance at September 30, 2000 ............................. 3,159,948 13.55
Granted (weighted average fair value of $2.95) ............ 576,750 6.85
Exercised ................................................. (40,939) 2.75
Cancelled ................................................. (801,200) 13.15
---------
Balance at September 29, 2001 ............................. 2,894,559 12.48
=========
Exercisable at September 25, 1999 ......................... 467,651 15.04
=========
Exercisable at September 30, 2000 ......................... 836,579 15.20
=========
Exercisable at September 29, 2001 ......................... 1,391,644 15.03
=========
51
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options Outstanding Options Exercisable
September 29, 2001 September 29, 2001
----------------------------------------------- -------------------------------------------
Weighted
Average Weighted
Number of Remaining Average Number of Weighted
Range of Options Contractual Exercise Options Average
Exercise Prices Outstanding Life (Years) Price Exercisable Exercise Price
--------------- ----------- ------------ -------- ----------- --------------
$1.30 - $4.99 56,331 2.0 $ 2.19 46,384 $ 2.38
5.00 - 9.99 1,003,170 2.4 7.46 5,000 6.81
10.00 - 14.99 1,198,800 1.0 13.57 887,450 13.40
15.00 - 19.99 303,784 1.6 16.44 187,810 16.76
20.00 - 24.99 300,000 1.2 21.13 240,000 21.13
25.00 - 33.94 32,474 0.7 27.48 25,000 26.50
--------- ---------
$1.30 - $33.94 2,894,559 1.6 $12.47 1,391,644 $15.03
========= =========
10. Earnings Per-Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per-share (EPS) computations:
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 29, 2001 September 30, 2000 September 25, 1999
---------------------------- ---------------------------- --------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
-------- ------ ----- -------- ------ ----- -------- ------ -----
(dollars and shares in thousands)
Basic EPS:
Net income (loss)
available to
common stock......... $(9,250) 18,402 $(0.50) $(11,813) 18,786 $(0.63) $24,490 27,328 $0.90
Effect of dilutive
securities:
Options to purchase
common stock......... 109
Diluted EPS:
Net income (loss)
attributed to
common shareholders..
------- ------ -------- ------ ------- ------
$(9,250) 18,402 $(0.50) $(11,813) 18,786 $(0.63) $24,490 27,437 $0.89
======= ====== ====== ======== ====== ====== ======= ====== =====
52
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Quarterly Financial Data - unaudited (dollars and shares in thousands)
Fiscal 2001
------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Sales (1) .................................... $ 212,058 $ 322,807 $ 341,866 $ 246,268
Gross profit (1) ............................. 64,780 97,484 103,385 73,068
Net income (loss) ............................ (4,452) 2,694 7,664 (15,156)
Net income (loss) per common share:
Basic ..................................... $ (0.24) $ 0.15 $ 0.42 $ (0.82)
Diluted ................................... $ (0.24) $ 0.15 $ 0.38 $ (0.82)
Weighted average shares outstanding:
Basic ..................................... 18,334 18,405 18,433 18,443
Diluted ................................... 18,334 18,465 22,598 18,443
Fiscal 2000
------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Sales (1) .................................... $ 217,842 $ 381,591 $ 451,378 $ 300,067
Gross profit (1) ............................. 57,479 97,425 112,322 73,546
Net income (loss) ............................ (6,475) 12,095 12,875 (30,308)
Net income (loss) per common share:
Basic ..................................... $ (0.33) $ 0.65 $ 0.69 $ (1.63)
Diluted ................................... $ (0.33) $ 0.58 $ 0.61 $ (1.63)
Weighted average shares outstanding:
Basic ..................................... 19,389 18,572 18,640 18,543
Diluted ................................... 19,389 22,769 22,850 18,543
- ---------
(1) Reflects the reclassification of $1.2 million for each of the first three
quarters of fiscal 2001 and $1.3 million, $1.4 million, $1.0 million and
$0.6 million for the first, second, third and fourth quarters of fiscal
2000, respectively, attributable to the net effect of reclassifying certain
shipping and handling billings and volume-based rebate incentives. See Note
1.
12. Transactions with Related Parties
The Company leased certain warehouse facilities and equipment from related
entities which had been controlled by the Company's principal shareholder.
Rental expense under these leases totaled $99,000 annually in fiscal year 1999.
During fiscal year 1999, the Company's principal shareholder disposed of these
assets.
During fiscal 2001, 2000 and 1999, subsidiaries of the Company purchased
$2.1 million, $1.9 million and $1.5 million, respectively, of products from Bio
Plus, Inc., a company that produces granular peanut hulls. As of September 29,
2001, the Company owed Bio Plus, Inc. $20,721 for such purchases. Such amounts
were included in accounts payable as of that date. A director and executive
officer of the Company is a minority shareholder and a director of Bio Plus,
Inc.
53
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Business Segment Data
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision making group is comprised of the Chief Executive Officer and the lead
executives of each of the Company's operating segments. The lead executive for
each operating segment is also a member of a Strategy Board that manages the
profitability of each respective segment's various product lines and business.
The operating segments are managed separately because each segment represents a
strategic business unit that offers different products or services. The chief
operating decision making group evaluates performance based on profit or loss
from operations The Company's Corporate division is included in the presentation
of reportable segment information since certain revenues and expenses of this
division are not allocated separately to the three operating segments. Segment
assets exclude cash equivalents, short-term investments, deferred taxes and
goodwill.
Effective September 30, 2000, Scotts discontinued its distribution
relationship with the Company, which significantly impacted the Company's
distribution businesses. In December 2000, the Company cancelled the proposed
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.
The Garden Products segment consists of Pennington Seed, Matthews Four
Seasons, Grant's, Norcal Pottery and AMBRANDS. Products manufactured or designed
and sourced are products found typically in the lawn and garden sections of mass
merchandisers, warehouse-type clubs, home improvement centers and nurseries and
include grass seed, bird seed, clay pottery, outdoor wooden planters and
trellises, ant control and animal repellents. These products are sold directly
to retailers and to distributors. The Garden Products segment is also a national
distributor of lawn and garden products. This segment also operates 20
distribution centers across the United States. Their products are sold to
independent retailers, national retail chains, grocery stores and mass
merchants.
The Pet Products segment consists of Four Paws Products, TFH Publications,
Wellmark, Kaytee, Island Aquarium and All-Glass Aquarium. These companies are
engaged in the manufacturing, delivery and sale of pet supplies, books and food
principally to independent pet distributors and retailers, national specialty
pet stores, mass merchants and bookstores. The Pet Products segment is also a
national distributor of pet supply products. This segment also operates 10
distribution centers across the United States. Their products are sold to
independent retailers, national retail chains, grocery stores and mass
merchants.
The Corporate division includes expenses associated with corporate
functions and projects, certain employee benefits and nonoperating items such as
interest income, interest expense, goodwill amortization, intersegment
eliminations, and net other charges of $27.2 million associated with Garden
Products for fiscal 2000 and $2.7 million associated with Garden Products for
fiscal 1999.
54
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial information relating to the Company's business segments, based
upon the new reportable segments, for each of the three most recent fiscal years
is presented in the table below.
2001 2000 1999
---------- ---------- ----------
(in thousands)
Net sales
Garden Products ....................................... $ 676,773 $ 923,742 $1,129,544
Pet Products .......................................... 519,147 484,959 457,331
Corporate, eliminations and all other ................. (72,921) (57,823) (55,260)
---------- ---------- ----------
Total net sales .......................................... $1,122,999 $1,350,878 $1,531,615
========== ========== ==========
Intersegment sales
Garden Products ....................................... $ 29,787 $ 33,630 $ 20,679
Pet Products .......................................... 43,134 24,193 34,581
Corporate, eliminations and all other ................. (72,921) (57,823) (55,260)
---------- ---------- ----------
Total intersegment sales ................................. $ 0 $ 0 $ 0
========== ========== ==========
Income (loss) from operations before other charges
Garden Products ....................................... $ 7,436 $ 37,097 $ 50,744
Pet Products .......................................... 34,865 32,305 25,286
Corporate, eliminations and all other ................. (31,810) (27,469) (18,608)
---------- ---------- ----------
Total income from operations before other charges ........ 10,491 41,933 57,422
Other charges ............................................ 27,156 2,708
Interest expense ...................................... (23,247) (23,140) (12,680)
Interest income ....................................... 164 589 593
Other income .......................................... 1,631 1,176 1,106
Income taxes .......................................... 1,711 (5,215) (19,243)
---------- ---------- ----------
Net income (loss) ........................................ $ (9,250) $ (11,813) $ 24,490
========== ========== ==========
Assets
Garden Products ....................................... $ 289,701 $ 306,805 $ 396,213
Pet Products .......................................... 221,977 246,978 197,396
Corporate, eliminations and all other ................. 404,948 393,635 362,221
---------- ---------- ----------
Total assets ............................................. $ 916,626 $ 947,418 $ 955,830
========== ========== ==========
Depreciation and amortization
Garden Products ....................................... $ 6,185 $ 6,410 $ 4,845
Pet Products .......................................... 10,758 8,002 5,921
Corporate, eliminations and all other ................. 11,419 11,623 9,726
---------- ---------- ----------
Total depreciation and amortization ...................... $ 28,362 $ 26,035 $ 20,492
========== ========== ==========
Expenditures for long-lived assets
Garden Products ....................................... $ 5,111 $ 6,261 $ 4,219
Pet Products .......................................... 7,206 8,246 13,515
Corporate, eliminations and all other ................. 1,571 2,156 906
---------- ---------- ----------
Total expenditures for long-lived assets ................. $ 13,888 $ 16,663 $ 18,640
========== ========== ==========
55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from
Central's Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance." See also Item 1 above.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from
Central's Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders
under the caption "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from
Central's Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders
under the caption "Ownership of Management and Principal Stockholders."
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from
Central's Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders
under the captions "Compensation Committee Interlocks and Insider Participation"
and "Transactions with the Company."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements of the Company are included in
Part II, Item 8:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
56
(2) Supplementary Consolidated Financial Statement Schedule as of and for
the fiscal years ended September 29, 2001, September 30, 2000 and September 25,
1999:
Independent Auditors' Report on Supplementary Consolidated Financial
Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because of the absence of conditions under
which they are required or because the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits:
See attached Exhibit Index.
(b) The Company did not file any reports on Form 8-K during the fourth quarter
of fiscal 2001.
57
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 20, 2001
CENTRAL GARDEN & PET COMPANY
By /s/ William E. Brown
-----------------------------------------
William E. Brown
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Signature Capacity Date
--------- -------- ----
/s/ William E. Brown Chairman and Chief Executive December 20, 2001
- ---------------------------------------
William E. Brown Officer (Principal Executive Officer)
/s/ Lee D. Hines, Jr. Director, Vice President and December 20, 2001
- ---------------------------------------
Lee D. Hines, Jr. Chief Financial Officer
(Principal Financial Officer)
/s/ Robert B. Jones Vice President December 20, 2001
- ---------------------------------------
Robert B. Jones (Principal Accounting Officer)
/s/ Glenn W. Novotny Director December 20, 2001
- ---------------------------------------
Glenn W. Novotny
/s/ John B. Balousek Director December 20, 2001
- ---------------------------------------
John B. Balousek
/s/ Daniel P. Hogan, Jr. Director December 20, 2001
- ---------------------------------------
Daniel P. Hogan, Jr.
/s/ Brooks M. Pennington, III Director December 20, 2001
- ---------------------------------------
Brooks M. Pennington, III
/s/ Bruce A. Westphal Director December 20, 2001
- ---------------------------------------
Bruce A. Westphal
58
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Central Garden & Pet Company:
We have audited the accompanying consolidated balance sheets of Central
Garden & Pet Company and subsidiaries (the "Company") as of September 29, 2001
and September 30, 2000 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the fiscal years in the
three-year period ended September 29, 2001, and have issued our report thereon
dated December 7, 2001; such report is included elsewhere in this Form 10-K. Our
audits also included the supplementary consolidated financial statement schedule
of the Company listed in Item 14(a)(2). This supplementary consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such supplementary consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
San Francisco, California
December 7, 2001
59
SCHEDULE II
CENTRAL GARDEN & PET COMPANY
VALUATION AND QUALIFYING ACCOUNTS
As of and for the Fiscal Years Ended September 29, 2001,
September 30, 2000 and September 25, 1999
Column A Column B Column C Column D Column E
- --------------------------------------------------- ----------- --------------------- ----------- -----------
Additions
---------------------
Balances Charged Charged
at to to Balances
Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
----------- ----------- --------- ---------- ----------- -----------
AMOUNTS DEDUCTED FROM ASSETS TO
WHICH THEY APPLY:
Year ended September 25, 1999
Allowance for doubtful accounts receivable ........ 6,458 4,909 - 5,224 6,143
Year ended September 30, 2000
Allowance for doubtful accounts receivable ........ 6,143 3,572 314 1,979 8,050
Year ended September 29, 2001
Allowance for doubtful accounts receivable ........ 8,050 9,302 - 2,888 14,464
60
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated
by reference into this Form 10-K:
Exhibit
Number Exhibit
------ -------
3.1 Third Amended and Restated Certificate of Incorporation (Incorporated
by reference from Exhibit 3.1 to Registration Statement No.
33-98544).
3.1.1 Certificate of Amendment of Third Amended and Restated Certificate of
Incorporation (Incorporated by reference from Exhibit 3.1.1 to
Registration Statement No. 333-46437).
3.2 Copy of Registrant's Bylaws (Incorporated by reference from Exhibit
3.2 to Registration Statement No. 33-48070).
4.1 Specimen Common Stock Certificate (Incorporated by reference from
Exhibit 4.1 to Registration Statement No. 33-48070).
4.2 Indenture dated as of November 15, 1996 between the Company and
Chemical Trust Company of California, as Trustee, including the form
of Notes (Incorporated by reference from Exhibit 4.2 to Registration
Statement No. 333-21603).
10.1 Supplementary Retirement Benefit Agreement for Key Employees
between Central Garden & Pet Supply Company and Glenn W. Novotny
dated as of July 1, 1991 (Incorporated by reference from Exhibit
10.12 to Registration Statement No. 33-48070).
10.2 Form of Indemnification Agreement between Registrant and Executive
Officers and Directors (Incorporated by reference from Exhibit 10.18
to Registration Statement No. 33-48070).
10.3 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 December 17, 1997 (Incorporated by
reference from Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 27, 1998).
10.4 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 (Incorporated by
reference from Exhibit 10.6.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 24, 2000).
10.5 Intercreditor Agreement between Congress Financial Corporation
(Western) and Monsanto Corporation dated as of January 28, 1994
(Incorporated by reference to Exhibit 10.32.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 26, 1993).
10.6 Master Agreement by and between The Solaris Group, a Strategic
Business Unit of Monsanto Company, and the Company dated July 21,
1995 (Incorporated by reference to Exhibit 10.66 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 25, 1995).
10.7 Exclusive Agency and Distributor Agreement by and between The Solaris
Group and the Company dated July 21, 1995 (Incorporated by reference
to Exhibit 10.68 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 25, 1995).
10.8 Compensation Agreement by and between The Solaris Group and Central
Garden & Pet Company dated July 21, 1995 (Incorporated by reference
to Exhibit 10.69 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 25, 1995).
10.9 Amended and Restated Asset Purchase Agreement among Novartis Inc. and
the Company dated as of February 3, 1997, as amended by Amendment
No. 1 thereto, dated as of April 22, 1997, and Amendment No. 2
thereto, dated as of May 23, 1997 (Incorporated by reference to
Exhibit 1.2 to the Company's Report on Form 8-K dated May 26, 1997).
61
Exhibit
Number Exhibit
------- -------
10.10 Stock Purchase Agreement dated as of December 5, 1997 among the
Company and the shareholders of T.F.H. Publications, Inc.
(Incorporated by reference to Exhibit 1.2 to the Company's Report on
Form 8-K/A dated December 18, 1997)
10.11 1993 Omnibus Equity Incentive Plan, as amended (Incorporated by
reference to Exhibits 4.1 to the Company's Registration Statements
Nos. 33-7236, 33-89216, 333-1238 and 333-41931).
10.12 Nonemployee Director Equity Incentive Plan, as amended June 8, 2001.
10.13 Employment Agreement dated as of February 27, 1998 between Pennington
Seed, Inc. of Delaware and Brooks Pennington III (Incorporated by
reference from Exhibit 10.20 to the Company's Form 10-K/A for the
fiscal year ended September 26, 1998).
12 Statement re Computation of Ratios of Earnings to Fixed Charges
21 List of Subsidiaries
23 Independent Auditors' Consent
- --------------------
62