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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 27, 2003

 

or

 

¨ TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 0-20242

 


 

CENTRAL GARDEN & PET COMPANY

 


 

Delaware   68-0275553
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

3697 Mt. Diablo Blvd., Suite 310, Lafayette, California 94549

(Address of principle executive offices)

 

(925) 283-4573

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    x  Yes    ¨  No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock Outstanding as of January 30, 2004

  

18,322,518

    

Class B Stock Outstanding as of January 30, 2004

  

1,654,462

    

 



Table of Contents
PART I. FINANCIAL INFORMATION

Item 1.

  

Financial Statements

   3
    

Condensed Consolidated Balance Sheets September 28, 2003 and December 27, 2003

   3
     Condensed Consolidated Statements of Operations Three Months Ended December 28, 2002 and December 27, 2003    4
     Condensed Consolidated Statements of Cash Flows Three Months Ended December 28, 2002 and December 27, 2003    5

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   13

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   16

Item 4.

  

Controls and Procedures

   16
PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

   16

Item 2.

  

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

   16

Item 3.

  

Defaults Upon Senior Securities

   16

Item 4.

  

Submission of Matters to a Vote of Security Holders

   17

Item 5.

  

Other Information

   17

Item 6.

  

Exhibits and Reports on Form 8-K

   17

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.

 

This quarterly report contains “forward-looking” statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in these forward-looking statements due to the factors listed below, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2003, and from time to time in our filings with the Securities and Exchange Commission. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

     September 27,
2003


    December 27,
2003


 
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 77,604     $ 65,265  

Restricted investments

     —         15,052  

Accounts receivable (less allowance for doubtful accounts of $6,575 and $5,864)

     146,075       113,839  

Inventories

     217,156       243,911  

Prepaid expenses and other assets

     15,222       17,601  
    


 


Total current assets

     456,057       455,668  

Land, buildings, improvements and equipment—net

     101,538       101,873  

Goodwill

     222,780       222,780  

Deferred income taxes and other assets

     48,723       51,481  
    


 


Total

   $ 829,098     $ 831,802  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 105,103     $ 105,112  

Accrued expenses

     47,061       47,556  

Current portion of long-term debt

     1,028       1,028  
    


 


Total current liabilities

     153,192       153,696  

Long-term debt

     249,225       249,782  

Other long-term obligations

     1,585       1,570  

Shareholders’ equity:

                

Class B stock, $.01 par value: 1,654,462 shares outstanding at September 27, 2003 and December 27, 2003

     16       16  

Common stock, $.01 par value: 31,909,919 and 32,039,368 issued and 18,167,669 and 18,297,118 outstanding at September 27, 2003 and December 27, 2003

     319       320  

Additional paid-in capital

     545,228       547,530  

Retained earnings

     24,360       23,715  

Treasury stock

     (144,827 )     (144,827 )
    


 


Total shareholders’ equity

     425,096       426,754  
    


 


Total

   $ 829,098     $ 831,802  
    


 


 

See notes to condensed consolidated financial statements.

 

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CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended

 
     December 28,
2002


    December 27,
2003


 

Net sales

   $ 211,936     $ 222,350  

Cost of goods sold and occupancy

     150,718       160,279  
    


 


Gross profit

     61,218       62,071  

Selling, general and administrative expenses

     59,254       58,511  
    


 


Income from operations

     1,964       3,560  

Interest expense

     (2,843 )     (4,105 )

Interest income

     26       199  

Other expense

     (341 )     (715 )
    


 


Loss before income taxes

     (1,194 )     (1,061 )

Income taxes

     (477 )     (416 )
    


 


Net loss

   $ (717 )   $ (645 )
    


 


Basic and diluted loss per common equivalent share

   $ (0.04 )   $ (0.03 )
    


 


Basic and diluted weighted average shares used in the computation of loss per share

     19,060       19,877  
    


 


 

See notes to condensed consolidated financial statements.

 

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CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended

 
     December 28,
2002


    December 27,
2003


 

Cash flows from operating activities:

                

Net loss

   $ (717 )   $ (645 )

Adjustments to reconcile net loss to net cash provided by operating activities:

                

Depreciation and amortization

     4,501       4,617  

Change in assets and liabilities:

                

Receivables

     25,141       32,236  

Inventories

     (31,730 )     (26,755 )

Prepaid expenses and other assets

     7,441       (4,015 )

Accounts payable

     (1,020 )     9  

Accrued expenses

     (3,350 )     495  

Other long-term obligations

     47       (15 )
    


 


Net cash provided by operating activities

     313       5,927  

Cash flows used in investing activities:

                

Additions to land, buildings, improvements and equipment

     (2,467 )     (4,550 )

Restricted investments

     —         (15,052 )
    


 


Net cash used in investing activities

     (2,467 )     (19,602 )

Cash flows from financing activities:

                

Borrowings under lines of credit, net

     4,674       —    

Repayments of long-term debt

     (739 )     (250 )

Proceeds from issuance of common stock

     2,125       1,586  
    


 


Net cash provided by financing activities

     6,060       1,336  

Net increase (decrease) in cash and cash equivalents

     3,906       (12,339 )

Cash and cash equivalents at beginning of period

     10,884       77,604  
    


 


Cash and cash equivalents at end of period

   $ 14,790     $ 65,265  
    


 


Supplemental information:

                

Cash paid for interest

   $ 1,125     $ 653  
    


 


Cash paid (refunds received) for income taxes—net

   $ (8,319 )   $ (798 )
    


 


 

See notes to condensed consolidated financial statements.

 

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CENTRAL GARDEN & PET COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended December 27, 2003

(unaudited)

 

1. Basis of Presentation

 

The condensed consolidated balance sheet of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of December 27, 2003, the condensed consolidated statements of operations for the three months ended December 28, 2002 and December 27, 2003 and the condensed consolidated statements of cash flows for the three months ended December 28, 2002 and December 27, 2003 have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods mentioned above, have been made.

 

Due to the seasonal nature of the Company’s business, the results of operations for the three months ended December 27, 2003 are not indicative of the operating results that may be expected for the fiscal year ending September 25, 2004. It is suggested that these interim financial statements be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2003 Annual Report on Form 10-K which has previously been filed with the Securities and Exchange Commission.

 

2. Stock Plan Information

 

The Company has various non-qualified stock-based compensation programs, which include stock options and restricted stock awards.

 

The Company has various stock option plans that provide for the granting of stock options to officers, key employees and directors. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby the options are granted at market price, and therefore no compensation costs are recognized. As required by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” the Company has provided fair value based pro-forma disclosures in its interim financial statements.

 

If compensation expense for the Company’s various stock option plans had been determined based upon the projected fair values at the grant dates for awards under those plans in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s pro-forma net earnings, basic and diluted earnings per common share would have been as follows:

 

     Three Months Ended

 
     December 28,
2002


    December 27,
2003


 
     (in thousands)  

Net loss, as reported

   $ (717 )   $ (645 )

Deduct: Total stock-based employee compensation expense determined under fair value based method for awards, net of related tax effects

     (458 )     (323 )
    


 


Pro forma net loss

   $ (1,175 )   $ (968 )
    


 


Net loss per common equivalent share:

                

Basic and diluted – as reported

   $ (0.04 )   $ (0.03 )

Basic and diluted – pro forma

   $ (0.06 )   $ (0.05 )

 

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3. Earnings Per Share

 

Options to purchase 2,418,547 and 2,348,741 shares of common stock at prices ranging from $1.30 to $33.94 per share were outstanding during the three-month periods ended December 27, 2003 and December 28, 2002, respectively, but were not included in the computation of diluted earnings per share because the assumed exercise would have been anti-dilutive in each period. Shares of common stock from the assumed conversion of the company’s previously outstanding convertible securities totaling 4,107,143 were also not included in the computation of diluted earnings per share for the three-month period ended December 28, 2002 because the assumed conversion would have been anti-dilutive.

 

4. Segment Information

 

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.

 

     Three Months Ended

 
     December 28,
2002


    December 27,
2003


 
     (in thousands)  

Net sales

                

Garden Products

   $ 93,248     $ 92,831  

Pet Products

     118,688       129,519  
    


 


Total net sales

   $ 211,936     $ 222,350  
    


 


Income (loss) from operations:

                

Garden Products

   $ (3,221 )   $ (2,910 )

Pet Products

     9,873       10,865  

Corporate

     (4,688 )     (4,395 )
    


 


Total income from operations

     1,964       3,560  
    


 


Interest expense – net

     (2,817 )     (3,906 )

Other expense

     (341 )     (715 )

Income taxes

     (477 )     (416 )
    


 


Net loss

   $ (717 )   $ (645 )
    


 


Depreciation and amortization:

                

Garden Products

   $ 1,331     $ 1,389  

Pet Products

     3,045       3,066  

Corporate

     125       162  
    


 


Total depreciation and amortization

   $ 4,501     $ 4,617  
    


 


     September 27,
2003


    December 27,
2003


 
     (in thousands)  

Assets:

                

Garden Products

   $ 281,679     $ 288,833  

Pet Products

     208,703       205,302  

Corporate

     338,716       337,667  
    


 


Total assets

   $ 829,098     $ 831,802  
    


 


Goodwill (included in corporate assets):

                

Garden Products

   $ 105,681     $ 105,681  

Pet Products

     117,099       117,099  
    


 


Total goodwill

   $ 222,780     $ 222,780  
    


 


 

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5. Contingencies

 

Central does not believe that the outcome of the following legal proceedings will have a material adverse effect on its results of operations, liquidity or financial position taken as a whole. However, because these proceedings may raise complex factual and legal issues and are subject to uncertainties, Central cannot predict with assurance the outcome of these proceedings. Accordingly, adverse settlements or resolutions may occur and negatively impact earnings in the quarter of settlement or resolution.

 

TFH Litigation. In December 1997, Central acquired all of the stock of TFH Publications, Inc. (“TFH”). In connection with the transaction, Central made a $10 million loan to the sellers, which was evidenced by a Promissory Note. In September 1998, the prior owners of TFH brought suit against Central and certain executives of Central for damages and relief from their obligations under the Promissory Note, alleging, among other things, that Central’s failure to properly supervise the TFH management team had jeopardized their prospects of achieving certain earnouts. Central believes that these allegations are without merit. Central counterclaimed against the prior owners for enforcement of the Promissory Note, rescission and/or damages and other relief, alleging, among other things, fraud, misrepresentation and breach of fiduciary duty by the prior owners of TFH. These actions, Herbert R. Axelrod and Evelyn Axelrod v. Central Garden & Pet Company; Glen S. Axelrod; Gary Hersch; William E. Brown; Robert B. Jones; Glenn 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.

 

During the course of discovery in this action, Central has become aware of certain information which shows that prior to the acquisition of TFH by Central, certain records of TFH were prepared in an inaccurate manner which, among other things, resulted in underpayment of taxes by certain individuals. Those individuals could be liable for back taxes, interest, and penalties. In addition, even though all of the events occurred prior to the acquisition of TFH by Central, there is a possibility that TFH could be liable for penalties for events which occurred under prior management. Central believes that TFH has strong defenses available to the assertion of any penalties against TFH. Central cannot predict whether TFH will be required to pay any such penalties. In the event that TFH were required to pay penalties, Central would seek compensation from the prior owners.

 

Scotts Litigation. On June 30, 2000, The Scotts Company filed suit against Central to collect the purchase price of certain lawn and garden products previously sold to Central. See The Scotts Company v. Central Garden & Pet Company, Docket No. C2 00-755 (U.S. Dist Ct. N.D. Ohio). Central filed its answer and a counter complaint asserting various claims for breaches of contracts.

 

In April 2002, trial occurred on the claims and counterclaims of the parties (excluding one oral contract claim that was severed from the remainder of the case). The net verdict was in favor of Scotts in the amount of $10.4 million which had previously been recorded as an obligation by the Company. Scotts and Central filed post-trial motions. In a March 20, 2003 order, the district court denied Scotts’ motion for attorneys’ fees, granted Scotts’ motion to set aside $750,000 of the jury amount awarded to Central, denied Central’s motion for a new trial, granted Central’s motion for prejudgment interest, and granted in part and denied in part Scotts’ motion for prejudgment interest. The court directed each party to re-determine the amount of their respective interest claims in light of the Court’s ruling and to submit their respective determinations. On July 11, 2003, the Court issued an order resolving the remaining prejudgment interest issues and directing the parties to submit calculations in accordance with its decision. Pursuant to this order, the Court awarded prejudgment interest to Scotts in the net amount of $2.8 million. On October 3, 2003, Central and Scotts settled the oral contract claim that had previously been severed from the remainder of the case. Pursuant to the settlement, Scotts reduced the judgment amount by $300,000. Central and Scotts have each filed notices of appeal from different aspects of the prior judgment and post-judgment orders. In connection with the appeal, Central has paid approximately $15 million into an escrow account which is reported as restricted investments on our balance sheet.

 

On July 7, 2000, Central filed suit against Scotts and Pharmacia Corporation (formerly know as Monsanto Company) seeking damages and injunctive relief for, among other things, violations of the antitrust laws. See Central Garden & Pet Company, v. The Scotts Company, and Pharmacia Corporation, formerly known as Monsanto Company, Docket No. C 00 2465, (U.S. Dist Ct. N.D. Cal.). Pursuant to a settlement reached with Pharmacia, Central and Pharmacia agreed that all antitrust claims against Pharmacia and Monsanto would be resolved, and the federal action has been dismissed as to Pharmacia and Monsanto. In May 2002, Scotts filed a motion for summary judgment in the federal action based on res judicata. The court granted the res judicata motion. Central has appealed the judgment entered pursuant to the court’s order. On January 15, 2004, the Ninth Circuit Court of Appeals affirmed the judgment.

 

Phoenix Fire. On August 2, 2000, a fire destroyed Central’s leased warehouse space in Phoenix, Arizona, and an adjoining warehouse space leased by a third party. On July 31, 2001, the adjoining warehouse tenant filed a lawsuit against Central and other parties in the Superior Court of Arizona, Maricopa County, seeking to recover $47 million for property damage from the fire. See Cardinal Health Inc., et al. v. Central Garden & Pet Company, et al., Civil Case No. CV2001-013152. Local residents also filed a purported class action lawsuit alleging claims for bodily injury and property damage as a result of the fire. This lawsuit has now been settled as to all parties, subject to Court approval. As part of the settlement, Central’s liability insurers will pay $8 million on behalf

 

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of Central, once the settlement becomes final in 2004. The building owner and several nearby businesses have also filed lawsuits for property damage and business interruption, which are being coordinated with the remaining tenant lawsuit. Each of these lawsuits is currently pending in the Superior Court of Arizona, Maricopa County. The Arizona Department of Environmental Quality, after monitoring the cleanup operations and asking Central, the building owner and the adjoining warehouse tenant to assess whether the fire and fire suppression efforts may have caused environmental impacts to soil, groundwater and/or surface water, has now issued a letter stating that Central need take no further action at the site with respect to environmental issues. In early 2001, the EPA requested information relating to the fire. On July 17, 2002, the EPA informed Central that it intended to file a civil administrative complaint seeking penalties of up to $350,000 for certain alleged post-fire reporting violations. Central and the EPA have settled those allegations for $65,000. The overall amount of the damages to all parties caused by the fire, and the overall amount of damages which Central may sustain as a result of the fire, have not been quantified. At the time of the fire, Central maintained property insurance covering losses to the leased premises, Central’s inventory and equipment, and loss of business income. Central also maintained insurance providing $51 million of coverage (with no deductible) against third party liability. Central believes that this insurance coverage will be available with respect to third party claims against Central if parties other than Central are not found responsible. The precise amount of the damages sustained in the fire, the ultimate determination of the parties responsible and the availability of insurance coverage are likely to depend on the outcome of complex litigation, involving numerous claimants, defendants and insurance companies.

 

6. Consolidating Condensed Financial Information of Guarantor Subsidiaries

 

Certain wholly owned subsidiaries of the Company (as listed below, collectively the “Guarantor Subsidiaries”) have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the Company’s $150,000,000 9-1/8% Senior Subordinated Notes (the “Notes”) issued on January 30, 2003. Certain subsidiaries and operating divisions are not guarantors of the Notes and have been included in the financial results of the Parent in the information below. Those subsidiaries that are guarantors of the Notes are as follows:

 

Four Paws Products Ltd.

Grant Laboratories, Inc.

Kaytee Products, Incorporated

Matthews Redwood & Nursery Supply, Inc.

Pennington Seed, Inc. (including Phaeton Corporation (dba Unicorn Labs), Seeds West, Inc., All-Glass Aquarium Co., Inc.

(including Oceanic Systems, Inc.))

T.F.H. Publications, Inc.

Wellmark International

Norcal Pottery Products, Inc.

Pennington Seed, Inc. of Nebraska

Gro Tec, Inc.

 

In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying unaudited consolidating condensed financial statements based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X.

 

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CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

 

    

Three Months Ended December 27, 2003

(in thousands)


 
     Parent

    Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Net sales

   $ 77,313     $ 161,211     $ (16,174 )   $ 222,350  

Cost of goods sold and occupancy

     57,270       119,006       (15,997 )     160,279  
    


 


 


 


Gross profit

     20,043       42,205       (177 )     62,071  

Selling, general and administrative expenses

     21,984       36,527       —         58,511  
    


 


 


 


Income (loss) from operations

     (1,941 )     5,678       (177 )     3,560  

Interest – net

     (4,024 )     118       —         (3,906 )

Other expense

     (564 )     (151 )     —         (715 )
    


 


 


 


Income (loss) before income taxes

     (6,529 )     5,645       (177 )     (1,061 )

Income taxes

     2,561       (2,214 )     69       416  
    


 


 


 


Net income (loss)

     (3,968 )     3,431       (108 )     (645 )

Equity in undistributed income of guarantor subsidiaries

     3,323       —         (3,323 )     —    
    


 


 


 


Net income (loss)

   $ (645 )   $ 3,431     $ (3,431 )   $ (645 )
    


 


 


 


 

    

Three Months Ended December 28, 2002

(in thousands)


 
     Parent

    Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Net sales

   $ 71,551     $ 153,658     $ (13,273 )   $ 211,936  

Cost of goods sold and occupancy

     52,451       111,788       (13,521 )     150,718  
    


 


 


 


Gross profit

     19,100       41,870       248       61,218  

Selling, general and administrative expenses

     21,520       37,734       —         59,254  
    


 


 


 


Income (loss) from operations

     (2,420 )     4,136       248       1,964  

Interest – net

     (2,425 )     (392 )     —         (2,817 )

Other income (expense)

     (638 )     297       —         (341 )
    


 


 


 


Income (loss) before income taxes

     (5,483 )     4,041       248       (1,194 )

Income taxes

     2,193       (1,617 )     (99 )     477  
    


 


 


 


Net income (loss)

     (3,290 )     2,424       149       (717 )

Equity in undistributed income of guarantor subsidiaries

     2,573       —         (2,573 )     —    
    


 


 


 


Net income (loss)

   $ (717 )   $ 2,424     $ (2,424 )   $ (717 )
    


 


 


 


 

 

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CONSOLIDATING CONDENSED BALANCE SHEET

 

    

December 27, 2003

(in thousands)


     Parent

   Guarantor
Subsidiaries


   Eliminations

    Consolidated

ASSETS                             

Cash and cash equivalents

   $ 62,732    $ 2,533    $ —       $ 65,265

Restricted investments

     15,052      —        —         15,052

Accounts receivable

     36,510      88,706      (11,377 )     113,839

Inventories

     69,466      174,445      —         243,911

Prepaid expenses and other assets

     11,762      5,839      —         17,601
    

  

  


 

Total current assets

     195,522      271,523      (11,377 )     455,668

Land, buildings, improvements and equipment, net

     10,065      91,808      —         101,873

Goodwill

     222,780      —        —         222,780

Investment in Guarantors

     280,632      —        (280,632 )     —  

Deferred income taxes and other assets

     50,751      730      —         51,481
    

  

  


 

Total

   $ 759,750    $ 364,061    $ (292,009 )   $ 831,802
    

  

  


 

LIABILITIES                             

Accounts payable

   $ 59,517    $ 56,972    $ (11,377 )   $ 105,112

Accrued expenses and other current liabilities

     23,705      24,879      —         48,584
    

  

  


 

Total current liabilities

     83,222      81,851      (11,377 )     153,696

Long-term debt

     249,757      25      —         249,782

Other long-term obligations

     17      1,553      —         1,570

Equity

     426,754      280,632      (280,632 )     426,754
    

  

  


 

Total

   $ 759,750    $ 364,061    $ (292,009 )   $ 831,802
    

  

  


 

 

CONSOLIDATING CONDENSED BALANCE SHEET

 

    

September 27, 2003

(in thousands)


     Parent

   Guarantor
Subsidiaries


   Eliminations

    Consolidated

ASSETS                             

Cash and cash equivalents

   $ 76,354    $ 1,250    $ —       $ 77,604

Accounts receivable

     43,209      113,415      (10,549 )     146,075

Inventories

     55,718      161,438      —         217,156

Prepaid expenses and other assets

     10,198      5,024      —         15,222
    

  

  


 

Total current assets

     185,479      281,127      (10,549 )     456,057

Land, buildings, improvements and equipment, net

     10,092      91,446      —         101,538

Goodwill

     222,780      —        —         222,780

Investment in Guarantors

     281,522      —        (281,522 )     —  

Deferred income taxes and other assets

     47,607      1,116      —         48,723
    

  

  


 

Total

   $ 747,480    $ 373,689    $ (292,071 )   $ 829,098
    

  

  


 

LIABILITIES                             

Accounts payable

   $ 53,024    $ 62,628    $ (10,549 )   $ 105,103

Accrued expenses and other current liabilities

     20,131      27,958      —         48,089
    

  

  


 

Total current liabilities

     73,155      90,586      (10,549 )     153,192

Long-term debt

     249,200      25      —         249,225

Other long-term obligations

     29      1,556      —         1,585

Equity

     425,096      281,522      (281,522 )     425,096
    

  

  


 

Total

   $ 747,480    $ 373,689    $ (292,071 )   $ 829,098
    

  

  


 

 

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CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

 

    

Three Months Ended December 27, 2003

(in thousands)


 
     Parent

    Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Net cash provided (used) by operating activities

   $ 162     $ 9,196     $ (3,431 )   $ 5,927  

Expenditures for land, buildings, improvements and equipment

     (958 )     (3,592 )     —         (4,550 )

Investments

     (15,052 )     —                 (15,052 )

Investment in guarantor subsidiaries

     890       (4,321 )     3,431       —    
    


 


 


 


Net cash provided (used) by investing activities

     (15,120 )     (7,913 )     3,431       (19,602 )
    


 


 


 


Payments on long-term debt

     (250 )     —         —         (250 )

Proceeds from issuance of stock

     1,586       —         —         1,586  
    


 


 


 


Net cash provided by financing activities

     1,336       —         —         1,336  
    


 


 


 


Net increase (decrease) in cash and cash equivalents

     (13,622 )     1,283       —         (12,339 )

Cash and cash equivalents at beginning of period

     76,354       1,250       —         77,604  
    


 


 


 


Cash and cash equivalents at end of period

   $ 62,732     $ 2,533     $ —       $ 65,265  
    


 


 


 


    

Three Months Ended December 28, 2002

(in thousands)


 
     Parent

    Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Net cash provided (used) by operating activities

   $ 3,471     $ (3,158 )   $ —       $ 313  

Expenditures for land, buildings, improvements and equipment

     (218 )     (2,249 )     —         (2,467 )

Investment in guarantor subsidiaries

     1,813       (1,813 )     —         —    
    


 


 


 


Net cash provided (used) by investing activities

     1,595       (4,062 )     —         (2,467 )
    


 


 


 


Borrowings (repayments) under lines of credit, net

     (4,193 )     8,867       —         4,674  

Payments on long-term debt

     —         (739 )     —         (739 )

Proceeds from issuance of stock

     2,125       —         —         2,125  
    


 


 


 


Net cash provided (used) by financing activities

     (2,068 )     8,128       —         6,060  
    


 


 


 


Net increase in cash and cash equivalents

     2,998       908       —         3,906  

Cash and cash equivalents at beginning of period

     10,080       804       —         10,884  
    


 


 


 


Cash and cash equivalents at end of period

   $ 13,078     $ 1,712     $ —       $ 14,790  
    


 


 


 


 

7. Subsequent Events

 

In January 2004, the Company acquired substantially all of the assets of Kent Marine, Inc. Kent Marine markets and sells premium aquarium supplies domestically and internationally primarily under the brand name “Kent Marine.” Kent Marine is a leading supplier of saltwater aquarium supplements and conditioners with annual sales of approximately $7 million.

 

In January 2004, the Company announced it has agreed to acquire substantially all of the assets of New England Pottery, Inc. The purchase price is approximately $69 million. New England Pottery, Inc. markets and sells decorative pottery and seasonal Christmas products. Its proprietary brand names include “New England Pottery” and “GKI/Bethlehem Lighting.” Annual sales are approximately $75 million. Consummation of the acquisition is expected to occur in February 2004. We anticipate drawing down on our $100 million credit facility in the second quarter of fiscal year 2004 to partly fund our acquisition of New England Pottery, Inc.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Central Garden & Pet Company is a leading innovator, marketer and producer of quality branded products for the pet and lawn and garden supplies markets. We are one of the largest companies in the fragmented, $7.5 billion U.S. pet supplies industry and in the $51.9 billion U.S. lawn and garden supplies industry. Our pet products include pet bird, small animal and wild bird food, aquarium products, flea, tick, mosquito and other insect control products, edible bones, cages, carriers, pet books, and other dog, cat, reptile and small animal products. These products are sold under a number of brand names, including Kaytee, All-Glass Aquarium, Oceanic, Zodiac, Pre-Strike, Altosid, Nylabone, TFH and Four Paws. Our lawn and garden products include grass seed, wild bird food, weed and insect control products, decorative outdoor patio products and ant control products. These products are sold under a number of brand names, including Pennington, Norcal Pottery, Lilly Miller, Matthews Four Seasons, AMDRO and Grant’s. In fiscal 2003, our consolidated net sales were $1.15 billion, of which our pet products segment, or Pet Products, accounted for $501.7 million and our lawn and garden products segment, or Garden Products, accounted for $643.3 million. In fiscal 2003, our income from operations was $72.3 million, of which Pet Products accounted for $52.7 million and Garden Products accounted for $39.3 million, before corporate expenses and eliminations of $19.7 million.

 

Central was incorporated in Delaware in June 1992 and is the successor to a California corporation which was incorporated in 1955. References to “we,” “us,” “our,” or “Central” mean Central Garden & Pet Company and its subsidiaries and divisions, and their predecessor companies and subsidiaries.

 

Background

 

During the past several years, we have transitioned our company to a leading marketer and producer of branded products from a traditional pet and lawn and garden supplies distributor. We initiated this transition because we recognized the opportunity to build a portfolio of leading brands and improve profitability by capitalizing on our knowledge of the pet and lawn and garden supplies sectors, our strong relationships with retailers, and our nationwide sales and logistics network. Our goal was to diversify our business and improve operating margins by establishing a portfolio of leading brands. Since 1997, we have acquired numerous branded products companies and product lines, including Wellmark and Four Paws in fiscal 1997; Kaytee Products, TFH and Pennington Seed in fiscal 1998; Norcal Pottery in fiscal 1999; AMDRO and All-Glass Aquarium in fiscal 2000; Lilly Miller in fiscal 2001; and Alaska Fish Fertilizer in fiscal 2002.

 

While expanding our branded products business, we experienced adverse events in our distribution business. From 1995 to 1999, we were the master distributor of Round Up and Ortho. In January 1999, The Scotts Company, one of our largest distribution suppliers at the time, acquired Ortho and became the marketing agent for Round Up. In July 2000, Scotts terminated its relationship with us. Subsequently, we downsized our distribution operations and integrated these sales and logistics networks into our pet and lawn and garden products businesses to allow us to focus resources and provide strategic sales support for our brands.

 

Virtually all of our sales before fiscal 1997 were from distributing other manufacturers’ products. Since then, our branded product sales have grown to approximately $863 million, or approximately 75% of total sales, in fiscal 2003. During this same period, our sales of other manufacturers’ products have declined to approximately $282 million, or approximately 25% of total sales, and our gross profit margins have improved from 13.6% in fiscal 1996 to 29.1% in fiscal 2003.

 

Recent Developments

 

In January 2004, the Company acquired substantially all of the assets of Kent Marine, Inc. Kent Marine markets and sells premium aquarium supplies domestically and internationally primarily under the brand name “Kent Marine.” Kent Marine is a leading supplier of saltwater aquarium supplements and conditioners with annual sales of approximately $7 million.

 

In January 2004, the Company announced it has agreed to acquire substantially all of the assets of New England Pottery, Inc. The purchase price is approximately $69 million. New England Pottery, Inc. markets and sells decorative pottery and seasonal Christmas products. Its proprietary brand names include “New England Pottery” and “GKI/Bethlehem Lighting.” Annual sales are approximately $75 million. Consummation of the acquisition is expected to occur in February. We anticipate drawing down on our $100 million credit facility in the second quarter of fiscal year 2004 to partly fund our acquisition of New England Pottery, Inc.

 

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Three Months Ended December 27, 2003

Compared with Three Months Ended December 28, 2002

 

Net sales for the three months ended December 27, 2003 increased $10.4 million, or 4.9%, to $222.3 million from $211.9 million for the three months ended December 28, 2002 as both branded product sales and sales of other manufacturers’ products increased. Net sales increased $10.8 million, or 9.1%, in Pet Products and decreased $0.4 million, or 0.4%, in Garden Products. Our branded product sales increased $6.0 million in Pet Products, due primarily to increased sales of aquariums, while Garden branded product sales remained relatively flat.

 

Gross profit for the quarter ended December 27, 2003 increased $0.9 million, or 1.5%, to $62.1 million from $61.2 million for the quarter ended December 28, 2002. Pet Product’s gross profit dollars increased as a result increased sales in the quarter, while Garden Products remained flat. Gross profit as a percentage of net sales decreased from 28.9% for the quarter ended December 28, 2002 to 27.9% for the quarter ended December 27, 2003. Pet branded product margins were negatively impacted due primarily to product mix shifts in the quarter led by stronger than anticipated sales of aquarium kits with introductory pricing and competitive pricing on some of our wild bird feed products. A delay in higher-margin grass seed shipments to key retailers as they continue to move more of their purchases from December to January and February also contributed to the margin decline.

 

Selling, general and administrative expenses decreased $0.7 million, or 1.2%, from $59.2 million for the quarter ended December 28, 2002 to $58.5 million in the current quarter. As a percentage of net sales, selling, general and administrative expenses decreased from 27.9% for the quarter ended December 28, 2002 to 26.3% for the quarter ended December 27, 2003. The decrease in selling, general and administrative expenses as a percentage of net sales was due to decreased warehouse and administrative expenses partially offset by increased selling and delivery expenses.

 

Selling and delivery expenses increased $0.4 million, or 1.4%, from $28.0 million for the quarter ended December 28, 2002 to $28.4 million for the current quarter. Increased selling and delivery expenses resulted from increased sales, partially offset by decreased marketing costs.

 

Facilities expense remained flat at $2.5 million for the quarters ended December 27, 2003 and December 28, 2002.

 

Warehouse and administrative expenses decreased $1.1 million, or 3.8%, from $28.7 million for the quarter ended December 28, 2002 to $27.6 million for the quarter ended December 27, 2003. The decrease was due primarily to increased purchasing, merchandise handling and storage costs included as inventory costs as a result of the increase in both sales and inventory levels.

 

Net interest expense for the quarter ended December 27, 2003 increased by $1.1 million, or 39.3%, to $3.9 million from $2.8 million for the quarter ended December 28, 2002. The increase was due to both a higher average interest rate associated with the placement in January 2003 of our $150 million 9 1/8% Senior Subordinated Notes and a higher average debt balance in the current year quarter. The average interest rate for the quarters ended December 27, 2003 and December 28, 2002 was approximately 6.6% and 5.4%, respectively. The average debt balance for the quarters ended December 27, 2003 and December 28, 2002 was approximately $250 million and $208 million, respectively.

 

Other expense increased $0.4 million to $0.7 million for the quarter ended December 27, 2003 from $0.3 million for the quarter ended December 28, 2002. Other expense represents losses from equity method investments. The losses booked in the first quarter of the fiscal year are principally due to the seasonality of the invested businesses. The increased loss in the current fiscal year is attributed to a new equity method investment made in the fourth quarter of fiscal year 2003.

 

The Company’s effective income tax rate for the quarter ended December 27, 2003 was 39.2% compared with 40.0% for the quarter ended December 28, 2002.

 

Liquidity and Capital Resources

 

We have financed our growth through a combination of bank borrowings, supplier credit, internally generated funds and sales of equity and debt securities to the public.

 

Historically, our business has been seasonal and our working capital requirements and capital resources tracked closely to this seasonal pattern. During the first fiscal quarter, accounts receivable reach their lowest level while inventory, accounts payable and short-term borrowings begin to increase. During the second fiscal quarter, receivables, accounts payable and short-term borrowings begin to increase, reflecting the build-up of inventory and related payables in anticipation of the peak lawn and garden selling season. During the third fiscal quarter, inventory levels remain relatively constant while accounts receivable peak and short-term borrowings start to decline as cash collections are received during the peak selling season. During the fourth fiscal quarter, inventory levels are at

 

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their lowest, and accounts receivable and payables are substantially reduced through conversion of receivables to cash. As a result of the reduction in sales of garden products manufactured by other parties as a percentage of overall sales, this seasonal pattern has become somewhat less significant.

 

We service two broad markets: pet supplies and lawn and garden supplies. Our pet supplies businesses involve products that have a year round selling cycle with very little change quarter to quarter. As a result, it is not necessary to carry large quantities of inventory to meet peak demands. Additionally, this level sales cycle eliminates the need for manufacturers to give extended credit terms to either distributors or retailers. On the other hand, our lawn and garden businesses are highly seasonal with approximately 65% of Garden Products’ aggregate sales occurring during the second and third fiscal 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.

 

Cash provided by operating activities increased $5.6 million from $0.3 million for the three months ended December 28, 2002 to $5.9 million for the three months ended December 27, 2003. This increase was primarily attributable to increased receivable collections and a decreased inventory build-up during the quarter as compared to the prior year quarter, partially offset by large tax refund amounts received in the prior year quarter and not in the current year quarter. Net cash used in investing activities increased $17.1 million primarily as a result of $15.1 million paid into an escrow account in connection with an appeal in the Scotts litigation. This amount is classified as restricted investments on the balance sheet. Net cash provided by financing activities decreased $4.7 million due to amounts drawn down on the company’s line of credit in the prior year.

 

At December 27, 2003, our total debt was $250.8 million versus $216.8 million at December 28, 2002. Net debt, total debt less cash and cash equivalents, was $185.5 million at December 27, 2003 versus $202.0 million at December 28, 2002.

 

     Quarter Ended

 
     December 28,
2002


    December 27,
2003


 
     (in thousands)  

Notes payable

   $ 64,649     $ —    

Current portion of long-term debt

     122,593       1,028  

Long-term debt

     29,592       249,782  
    


 


Total debt

     216,834       250,810  

Less cash and cash equivalents

     (14,790 )     (65,265 )
    


 


Net debt

   $ 202,044     $ 185,545  
    


 


 

In January 2003, we issued $150 million of 9 1/8% senior subordinated notes due 2013. The net proceeds of approximately $144 million were used to redeem $115 million of 6% subordinated convertible notes due November 2003. We used the balance of the net proceeds, combined with additional borrowings under our prior line of credit with Congress Financial Corporation (Western), to repay the outstanding borrowings under our Pennington credit facility and two senior secured term loans of All-Glass. In conjunction with these repayments, we terminated the Pennington and All-Glass credit facilities.

 

In May 2003, we closed a $200 million senior secured credit facility consisting of a five-year $100 million revolving credit facility and a six-year $100 million term loan. Interest on the term loan initially was based on a rate equal to LIBOR plus 2.75% or the prime rate plus 1.25%, at our option. In October 2003, the facility was amended to reduce the pricing on the term loan by 0.50% to LIBOR + 2.25% or the prime rate plus 0.75%, at our option. Interest on the revolving credit facility is based on a rate equal to prime plus a margin which fluctuates from 0.25% to 1.25% or LIBOR plus a margin which fluctuates from 1.75% to 2.75%, determined quarterly based on consolidated total debt to consolidated EBITDA for the most recent trailing 12-month period. This facility is secured by essentially all of our assets, contains certain financial covenants requiring maintenance of minimum levels of interest coverage and tangible net worth and maximum levels of senior debt to EBITDA and total debt to EBITDA, and restricts our ability to make treasury stock purchases and pay dividends. We were in compliance with all financial covenants as of December 27, 2003. This facility also requires the lenders’ prior written consent to any material investments in or acquisitions of a business. The $200 million senior secured credit facility replaced our $175 million asset-based revolving credit facility. A portion of the net proceeds from the $100 million term loan were used to retire the outstanding debt under the asset-based revolving credit facility. The remaining net proceeds were used to retire other existing debt and, along with the amounts available under the $100 million revolving credit facility, will provide capital for general corporate purposes, acquisitions and investments. No balances were outstanding at December 27, 2003 under the $100 million revolving credit facility and the remaining available borrowing capacity at December 27, 2003 was $94.8 million. The $5.2 million difference represents outstanding letters of credit. We anticipate drawing down on the $100 million credit facility in the second quarter of fiscal year 2004 to partly find our acquisition of New England Pottery, Inc.

 

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In October 2003, we entered into a $75 million pay-floating interest rate swap effectively converting half of our $150 million fixed rate 9 1/8 percent senior subordinated notes to a floating rate of LIBOR + 4.04%.

 

As a result of these refinancings, we have increased our financial flexibility by replacing our long-term debt, putting in place a layer of medium-term capital and increased our access to additional lenders. We believe that this increased financial flexibility will allow us to more effectively pursue growth opportunities and potential acquisitions on a prudent basis.

 

In November 2003, we deposited approximately $15 million into an escrow account in connection with an appeal in the Scotts litigation. The use of this cash is restricted from general corporate purposes and is reflected as a Restricted Investment on our balance sheet at December 27, 2003. See Note 5 – “Contingencies” to the unaudited financial statements in Part I - Item 1 of this report.

 

We believe that cash flows from operating activities, funds available under our credit facility, and arrangements with suppliers will be adequate to fund our presently anticipated working capital requirements for the foreseeable future. We anticipate that our capital expenditures will not exceed $15 million for the next 12 months.

 

As part of our growth strategy, we have engaged in acquisition discussions with a number of companies in the past, and we anticipate that we will continue to evaluate potential acquisition candidates. If one or more potential acquisition opportunities, including those that would be material, become available in the near future, we may require additional external capital. In addition, such acquisitions would subject us to the general risks associated with acquiring companies, particularly if the acquisitions are relatively large.

 

Weather and Seasonality

 

Historically, the Company’s sales of lawn and garden products have been influenced by weather and climate conditions in the markets it serves. Additionally, Garden Products’ business has been highly seasonal. In fiscal 2003, 65% of Garden Products net sales and 59% of our total net sales occurred in the Company’s second and third fiscal quarters. Substantially all of Garden Products’ operating income is typically generated in this period, which has historically offset the operating loss incurred during the first fiscal quarter of the year.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company believes there has been no material change in its exposure to market risk from that discussed in the Company’s fiscal 2003 Annual Report filed on Form 10-K.

 

Item 4. Controls and Procedures

 

(a) Our Chief Executive Officer and Chief Financial Officer have reviewed, as of the end of the period covered by this report, the “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) that ensure that information relating to the company required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported in a timely and proper manner. Based upon this review, we believe that there are adequate controls and procedures in place to ensure that information relating to the company that is required to be disclosed by us in the reports that we file or submit under the Exchange Act is properly disclosed as required by the Exchange Act and related regulations.

 

(b) Changes in internal controls. There were no significant changes in our internal controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

For information on our material legal proceedings, you should read note 5 “Contingencies” to the unaudited financial statements in Part I – Item 1 of this report.

 

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

Not applicable

 

Item 3. Defaults Upon Senior Securities

 

Not applicable

 

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Item 4. Submission of Matters to a Vote of Security Holders

 

Not applicable

 

Item 5. Other Information

 

Not applicable

 

Item 6. Exhibits and Reports on Form 8-K

 

  (a) Exhibits

 

  10.2.1 First Amendment to Credit Agreement dated October 27, 2003, between Central Garden & Pet Company and Canadian Imperial Bank of Commerce et al.

 

  31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

  31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

  32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.

 

  32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

  (b) There were no reports on Form 8-K filed during the quarter ended December 27, 2003.

 

The following current report on Form 8-K was furnished during the quarter ended December 27, 2003:

 

  a. Form 8-K filed November 20, 2003 relating to our press release announcing our financial results for the quarter and full year ended September 27, 2003.

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.

 

CENTRAL GARDEN & PET COMPANY


Registrant

Dated: February 10, 2004

/s/    GLENN W. NOVOTNY        


Glenn W. Novotny

President and Chief Executive Officer

/s/    STUART W. BOOTH        


Stuart W. Booth

Vice President and Chief Financial Officer

 

18