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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 25, 2004

 

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.)

 

1340 Treat Blvd., Suite 600, Walnut Creek, California 94597

(Address of principle executive offices)

 

(925) 948-4000

(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 December 31, 2004   19,136,470
Class B Stock Outstanding as of December 31, 2004     1,654,462

 



Table of Contents
    

PART I. FINANCIAL INFORMATION

 

    

Item 1.

  

Financial Statements

   3
    

Condensed Consolidated Balance Sheets September 25, 2004 and December 25, 2004

   3
    

Condensed Consolidated Statements of Operations Three Months Ended December 27, 2003 and December 25, 2004

   4
    

Condensed Consolidated Statements of Cash Flows Three Months Ended December 27, 2003 and December 25, 2004

   5

Item 2.

  

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

   14

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   17

Item 4.

  

Controls and Procedures

   18
     PART II. OTHER INFORMATION     

Item 1.

  

Legal Proceedings

   18

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   18

Item 3.

  

Defaults Upon Senior Securities

   18

Item 4.

  

Submission of Matters to a Vote of Security Holders

   18

Item 5.

  

Other Information

   18

Item 6.

  

Exhibits

   18

 

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

 

This Form 10-Q includes “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries and economies in which we operate and other information that is not historical information. When used in this Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-Q are set forth in our Form 10-K for the fiscal year ended September 25, 2004, including the factors described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors.” If any of these risks or uncertainties materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances. Presently known risk factors include, but are not limited to, the following factors:

 

    consolidation trends in the retail industry;

 

    dependence on a few customers for a significant portion of each of our businesses;

 

    uncertainty of our product innovations and marketing successes;

 

    fluctuations in market prices for seeds and grains;

 

    competition in our industries;

 

    risks associated with our acquisition strategy;

 

    adverse weather during the peak gardening season;

 

    seasonality and fluctuations in our operating results and cash flows;

 

    dependence upon our key executive officers;

 

    potential environmental liabilities and product liability claims;

 

    pending litigation and claims;

 

    costs and risks associated with Section 404 compliance.

 

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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 25,
2004


    December 25,
2004


 
ASSETS                 

Current assets:

                

Cash and equivalents

   $ 12,221     $ 14,100  

Restricted investments

     14,936       15,066  

Accounts receivable (less allowance for doubtful accounts of $12,348 and $9,375)

     183,979       143,656  

Inventories

     237,913       288,192  

Prepaid expenses and other

     15,811       18,718  
    


 


Total current assets

     464,860       479,732  

Land, buildings, improvements and equipment—net

     105,612       106,893  

Goodwill

     338,384       340,088  

Deferred income taxes and other assets

     51,341       50,292  
    


 


Total

   $ 960,197     $ 977,005  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 105,933     $ 119,018  

Accrued expenses

     64,948       69,448  

Current portion of long-term debt

     1,025       1,025  
    


 


Total current liabilities

     171,906       189,491  

Long-term debt

     304,775       294,296  

Other long-term obligations

     3,720       3,967  

Convertible redeemable preferred stock

     3,000       3,000  

Shareholders’ equity:

                

Class B stock, $.01 par value: 1,654,462 shares outstanding

     16       16  

Common stock, $.01 par value: 32,515,220 and 32,888,327 shares issued and 18,772,970 and 19,133,118 shares outstanding at September 25, 2004 and December 25, 2004

     325       329  

Additional paid-in capital

     555,436       563,640  

Retained earnings

     65,710       68,226  

Deferred compensation

     —         (3,261 )

Treasury stock

     (144,827 )     (145,355 )

Accumulated other comprehensive income

     136       2,656  
    


 


Total shareholders’ equity

     476,796       486,251  
    


 


Total

   $ 960,197     $ 977,005  
    


 


 

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 27,
2003


    December 25,
2004


 

Net sales

   $ 222,350     $ 265,576  

Cost of goods sold and occupancy

     160,279       179,535  
    


 


Gross profit

     62,071       86,041  

Selling, general and administrative expenses

     58,511       76,525  
    


 


Income from operations

     3,560       9,516  

Interest expense

     (4,105 )     (5,298 )

Interest income

     199       103  

Other expense

     (715 )     (320 )
    


 


Income (loss) before income taxes

     (1,061 )     4,001  

Income taxes

     (416 )     1,485  
    


 


Net income (loss)

   $ (645 )   $ 2,516  
    


 


Income (loss) per common share:

                

Basic

   $ (0.03 )   $ 0.12  
    


 


Diluted

   $ (0.03 )   $ 0.12  
    


 


Weighted average shares used in the computation of income per common share:

                

Basic

     19,877       20,539  

Diluted

     19,877       21,264  

 

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 27,
2003


    December 25,
2004


 

Cash flows from operating activities:

                

Net income (loss)

   $ (645 )   $ 2,516  

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

                

Depreciation and amortization

     4,617       4,479  

Amortization of deferred compensation

     —         235  

Change in assets and liabilities:

                

Receivables

     32,236       40,323  

Inventories

     (26,755 )     (50,279 )

Prepaid expenses and other assets

     (4,015 )     (2,316 )

Accounts payable

     9       13,085  

Accrued expenses

     495       6,883  

Other long-term obligations

     (15 )     247  
    


 


Net cash provided by operating activities

     5,927       15,173  
    


 


Cash flows used in investing activities:

                

Additions to land, buildings, improvements and equipment

     (4,550 )     (5,563 )

Restricted investments

     (15,052 )     (130 )
    


 


Net cash used in investing activities

     (19,602 )     (5,693 )
    


 


Cash flows from financing activities:

                

Repayments on revolving line of credit

     —         (63,000 )

Borrowings on revolving line of credit

     —         53,000  

Repayments of long-term debt

     (250 )     (250 )

Proceeds from issuance of stock

     1,586       2,329  

Treasury stock repurchases

     —         (528 )
    


 


Net cash provided by (used in) financing activities

     1,336       (8,449 )
    


 


Effect of exchange rate changes on cash and equivalents

     —         848  
    


 


Net increase (decrease) in cash and equivalents

     (12,339 )     1,879  

Cash and equivalents at beginning of period

     77,604       12,221  
    


 


Cash and equivalents at end of period

   $ 65,265     $ 14,100  
    


 


Supplemental information:

                

Cash paid for interest

   $ 653     $ 1,576  
    


 


Cash refunds received for income taxes—net

   $ (798 )   $ (778 )
    


 


 

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 25, 2004

(unaudited)

 

1. Basis of Presentation

 

The condensed consolidated balance sheet of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of December 25, 2004, and the condensed consolidated statements of operations and of cash flows for the three months ended December 27, 2003 and December 25, 2004 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.

 

For the Company’s foreign business in the UK, the local currency is the functional currency. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Comprehensive income was $5.0 million for the period ended December 25, 2004 and includes net earnings of $2.5 million and foreign currency translation adjustments of $2.5 million that are excluded from net earnings but reported in accumulated other comprehensive income, a separate component of shareholders’ equity. Deferred taxes are not provided on translation gains and losses, because the Company expects earnings of its foreign subsidiary to be permanently reinvested. Transaction gains and losses are included in results of operations.

 

Due to the seasonal nature of the Company’s garden business, the results of operations for the three months ended December 25, 2004 and December 27, 2003 are not indicative of the operating results that may be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2004 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 provide for stock option grants and restricted stock awards. Stock options may be granted 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 Statement of Financial Accounting Standards No. 148 (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 27,
2003


    December 25,
2004


 
     (in thousands)  

Net income (loss), as reported

   $ (645 )   $ 2,516  

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

     (323 )     (356 )
    


 


Pro forma net income (loss)

   $ (968 )   $ 2,160  
    


 


Net income (loss) per common equivalent share:

                

Basic – as reported

   $ (0.03 )   $ 0.12  

Basic – pro forma

   $ (0.05 )   $ 0.11  

Diluted – as reported

   $ (0.03 )   $ 0.12  

Diluted – pro forma

   $ (0.05 )   $ 0.10  

 

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On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. The statement supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires all entities to recognize compensation expense in an amount equal to the fair-value of share-based payments. Upon adoption, after June 15, 2005, all employee stock option awards will be recognized as an expense in the Company’s statement of operations, typically, over the related vesting period of the options. SFAS No. 123R requires use of fair value to measure share-based awards issued to employees, computed at the date of grant. Additionally, SFAS No. 123R requires companies to record compensation expense for the unvested portion of previously granted awards as they continue to vest, as calculated previously and included in the companies prior period pro forma disclosures under SFAS No. 123.

 

The Company will adopt SFAS No. 123R beginning with our fiscal 2005 fourth quarter, as required, and will adopt the standard using the modified prospective method requiring the company to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards outstanding as of the date of adoption.

 

3. Earnings Per Share

 

The following is a reconciliation of the numerators and denominators of the basic and diluted per-share computations for income from continuing operations:

 

    

Three Months Ended

December 25, 2004


     Income

   Shares

   Per Share

     (in thousands, except per share amounts)

Basic EPS:

                  

Net income

   $ 2,516    20,539    $ 0.12

Effect of dilutive securities:

                  

Options to purchase common stock

          572      —  

Restricted Shares

          67       

Convertible preferred stock

          86      —  
    

  
  

Diluted EPS:

                  

Net income attributable to common shareholders

   $ 2,516    21,264    $ 0.12
    

  
  

 

Options to purchase 2,118,666 shares of common stock at prices ranging from $7.54 to $38.75 per share were outstanding at December 25, 2004. For the three month period ended December 25, 2004, options to purchase 438,225 shares of common stock were outstanding but were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

 

Shares of common stock from the assumed conversion of the Company’s convertible preferred stock totaling 86,404 were included in the computation of diluted EPS for the three month period ended December 25, 2004.

 

Options to purchase 2,418,547 shares of common stock at prices ranging from $1.30 to $33.94 per share were outstanding during the three-month period ended December 27, 2003, but were not included in the computation of diluted earnings per share because the assumed exercise would have been anti-dilutive in the period.

 

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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 27,
2003


    December 25,
2004


 
     (in thousands)  

Net sales:

                

Garden Products

   $ 92,831     $ 108,817  

Pet Products

     129,519       156,759  
    


 


Total net sales

   $ 222,350     $ 265,576  
    


 


Income (loss) from operations:

                

Garden Products

   $ (2,910 )   $ (811 )

Pet Products

     10,865       18,097  

Corporate

     (4,395 )     (7,770 )
    


 


Total income from operations

     3,560       9,516  
    


 


Interest expense—net

     (3,906 )     (5,195 )

Other income

     (715 )     320  

Income taxes

     (416 )     (1,485 )
    


 


Net income (loss)

   $ (645 )   $ 2,516  
    


 


Depreciation and amortization:

                

Garden Products

   $ 1,389     $ 1,457  

Pet Products

     3,066       2,788  

Corporate

     162       234  
    


 


Total depreciation and amortization

   $ 4,617     $ 4,479  
    


 


    

September 25,

2004


    December 25,
2004


 
     (in thousands)  

Assets:

                

Garden Products

   $ 330,362     $ 332,938  

Pet Products

     245,212       248,828  

Corporate

     384,623       395,239  
    


 


Total assets

   $ 960,197     $ 977,005  
    


 


Goodwill (included in corporate assets):

                

Garden Products

   $ 165,506     $ 165,506  

Pet Products

     172,878       174,582  
    


 


Total goodwill

   $ 338,384     $ 340,088  
    


 


 

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 or cash flows 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 (the “Axelrod Loan”), 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,

 

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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. The Court has scheduled the trial to begin in April 2005.

 

During the course of discovery in this action, Central became 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.

 

On April 12, 2004, one of the former owners of TFH, Herbert Axelrod, was indicted by a federal grand jury. The two-count federal indictment, which is based on actions taken by Herbert Axelrod before Central acquired TFH, charges Herbert Axelrod with conspiracy to defraud the United States Internal Revenue Service and aiding and abetting the filing of false tax returns by a former Vice President of TFH. In April 2004, Herbert Axelrod failed to appear for his arraignment, and a federal warrant was issued for his arrest. Subsequently, Herbert Axelrod was arrested in Germany and extradited to the United States. In December 2004, Herbert Axelrod pled guilty to a criminal charge of aiding and abetting the filing of a false income tax return. Herbert Axelrod is currently being held in jail pending sentencing, which is scheduled for March 14, 2005. Central has information that Herbert Axelrod has liquidated and transferred assets out of the United States. The status of Herbert Axelrod and his assets has raised questions, which cannot presently be answered, about Central’s ability to collect on any of its claims against Herbert Axelrod or the Axelrod Loan. Central intends to continue pursuing its claims against Mr. Axelrod. If Central is unsuccessful in its claims against Mr. Axelrod regarding the Axelrod Loan or is unable to collect any judgment awarded, Central would be required to write-off the Axelrod Loan, which would result in a non-cash charge against its future earnings. The Axelrod Loan is currently carried on the financial statements of Central as an “Other Asset” in the amount of $10.2 million.

 

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 appealed different aspects of the prior judgment and post-judgment orders but no date has yet been set for oral argument. In connection with the appeal, Central has paid approximately $15 million into an escrow account, which is reported as restricted investments in the accompanying balance sheets as of September 25 and December 25, 2004.

 

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 class action lawsuit has now been settled as to all parties, and has received Court approval. As part of the settlement, Central’s liability insurers paid $7,825,000 on behalf of Central in May 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. Four of the business interruption lawsuits have been settled for amounts totaling approximately $680,000, paid by Central’s insurers. 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

 

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$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. Shareholders’ Equity

 

As of December 25, 2004, the Company had entered into Restricted Stock Award Agreements with several employees. The agreements granted restricted stock awards for 100,000 shares of the Company’s common stock and generally vest over five to seven years from the dates of grant. The Company recorded the fair value of the restricted stock awards of $3.5 million as deferred compensation, a separate component of shareholders’ equity, and is amortizing that amount on a straight-line basis over the vesting periods. The value of the restricted stock awards was based on the closing market price of the Company’s common stock on the dates the awards were granted. The 100,000 restricted shares have been included in the calculation of diluted earnings per share for the period ended December 25, 2004.

 

7. 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:

 

CGP Acquisition I, LLC

Four Paws Products Ltd.

Grant Laboratories, Inc.

Kaytee Products, Incorporated

Matthews Redwood & Nursery Supply, Inc.

New England Pottery LLC

Norcal Pottery Products, Inc.

Pennington Seed, Inc. (including Phaeton Corporation (dba Unicorn Labs), Pennington Seed, Inc. of Nebraska, Gro Tec, Inc.,

        Seeds West, Inc., All-Glass Aquarium Co., Inc. (including Oceanic Systems, Inc.))

T.F.H. Publications, Inc.

Wellmark International

 

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In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying unaudited condensed consolidating 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.

 

    

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended December 25, 2004

(in thousands)

(unaudited)


 
     Parent

   

Guarantor

Subsidiaries


    Eliminations

    Consolidated

 

Net sales

   $ 92,263     $ 191,586     $ (18,273 )   $ 265,576  

Cost of products sold and occupancy

     65,897       131,911       (18,273 )     179,535  
    


 


 


 


Gross profit

     26,366       59,675       —         86,041  

Selling, general and administrative expenses

     25,798       50,727       —         76,525  
    


 


 


 


Income from operations

     568       8,948       —         9,516  

Interest – net

     (5,309 )     114       —         (5,195 )

Other income (expense)

     (405 )     85       —         (320 )
    


 


 


 


Income (loss) before income taxes

     (5,146 )     9,147       —         4,001  

Income taxes

     1,966       (3,451 )     —         (1,485 )
    


 


 


 


Net income (loss)

     (3,180 )     5,696       —         2,516  

Equity in undistributed income of guarantor subsidiaries

     5,706       —         (5,706 )     —    
    


 


 


 


Net income (loss)

   $ 2,526     $ 5,696     $ (5,706 )   $ 2,516  
    


 


 


 


    

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended December 27, 2003

(in thousands)

(unaudited)


 
     Parent

   

Guarantor

Subsidiaries


    Eliminations

    Consolidated

 

Net sales

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

Cost of products 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 )
    


 


 


 


 

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CONSOLIDATING CONDENSED BALANCE SHEET

December 25, 2004

(in thousands)

(unaudited)


     Parent

   Guarantor
Subsidiaries


   Eliminations

    Consolidated

ASSETS                             

Cash and equivalents

   $ 7,360    $ 6,740    $ —       $ 14,100

Restricted investments

     15,066      —        —         15,066

Accounts receivable

     46,363      110,683      (13,390 )     143,656

Inventories

     83,034      205,158      —         288,192

Prepaid expenses and other

     10,625      8,093      —         18,718
    

  

  


 

Total current assets

     162,448      330,674      (13,390 )     479,732

Land, buildings, improvements and equipment, net

     10,605      96,288      —         106,893

Goodwill

     340,088      —        —         340,088

Investment in Guarantors

     316,520      —        (316,520 )     —  

Deferred income taxes and other assets

     48,855      17,974      (16,537 )     50,292
    

  

  


 

Total

   $ 878,516    $ 444,936    $ (346,447 )   $ 977,005
    

  

  


 

LIABILITIES                             

Accounts payable

   $ 65,985    $ 66,423    $ (13,390 )   $ 119,018

Accrued expenses and other current liabilities

     28,043      42,430      —         70,473
    

  

  


 

Total current liabilities

     94,028      108,853      (13,390 )     189,491

Long-term debt

     294,296      —        —         294,296

Other long-term obligations

     941      19,563      (16,537 )     3,967

Convertible redeemable preferred stock

     3,000      —        —         3,000

Shareholders’ equity

     486,251      316,520      (316,520 )     486,251
    

  

  


 

Total

   $ 878,516    $ 444,936    $ (346,447 )   $ 977,005
    

  

  


 

    

CONSOLIDATING CONDENSED BALANCE SHEET

September 27, 2004

(in thousands)

(unaudited)


     Parent

   Guarantor
Subsidiaries


   Eliminations

    Consolidated

ASSETS                             

Cash and equivalents

   $ 5,028    $ 7,193    $ —       $ 12,221

Restricted investments

     14,936      —        —         14,936

Accounts receivable

     50,540      146,388      (12,949 )     183,979

Inventories

     67,420      170,493      —         237,913

Prepaid expenses and other

     8,291      7,520      —         15,811
    

  

  


 

Total current assets

     146,215      331,594      (12,949 )     464,860

Land, buildings, improvements and equipment, net

     10,376      95,236      —         105,612

Goodwill

     338,384      —        —         338,384

Investment in Guarantors

     319,403      —        (319,403 )     —  

Deferred income taxes and other assets

     49,735      18,143      (16,537 )     51,341
    

  

  


 

Total

   $ 864,113    $ 444,973    $ (348,889 )   $ 960,197
    

  

  


 

LIABILITIES                             

Accounts payable

   $ 56,360    $ 62,522    $ (12,949 )   $ 105,933

Accrued expenses and other current liabilities

     22,364      43,609      —         65,973
    

  

  


 

Total current liabilities

     78,724      106,131      (12,949 )     171,906

Long-term debt

     304,775      —        —         304,775

Other long-term obligations

     818      19,439      (16,537 )     3,720

Convertible redeemable preferred stock

     3,000      —        —         3,000

Shareholders’ equity

     476,796      319,403      (319,403 )     476,796
    

  

  


 

Total

   $ 864,113    $ 444,973    $ (348,889 )   $ 960,197
    

  

  


 

 

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CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Three Months Ended December 25, 2004

(in thousands)

(unaudited)


 
     Parent

   

Guarantor

Subsidiaries


    Eliminations

    Consolidated

 

Net cash provided (used) by operating activities

   $ 8,381     $ 12,498     $ (5,706 )   $ 15,173  

Expenditures for land, buildings, improvements and equipment

     (1,191 )     (4,372 )     —         (5,563 )

Restricted investments

     (130 )     —         —         (130 )

Investment in guarantor subsidiaries

     5,393       (11,099 )     5,706       —    
    


 


 


 


Net cash provided (used) by investing activities

     4,072       (15,471 )     5,706       (5,693 )
    


 


 


 


Repayments under lines of credit, net

     (10,000 )     —         —         (10,000 )

Payments on long-term debt

     (250 )     —         —         (250 )

Proceeds from issuance of stock

     2,329       —         —         2,329  

Payments to reacquire stock

     (528 )     —         —         (528 )
    


 


 


 


Net cash provided (used) by financing activities

     (8,449 )     —         —         (8,449 )
    


 


 


 


Effect of exchange rates on cash

     (1,672 )     2,520               848  

Net increase (decrease) in cash and equivalents

     2,332       (453 )     —         1,879  

Cash and equivalents at beginning of period

     5,028       7,193       —         12,221  
    


 


 


 


Cash and equivalents at end of period

   $ 7,360     $ 6,740     $ —       $ 14,100  
    


 


 


 


    

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Three Months Ended December 27, 2003

(in thousands)

(unaudited)


 
     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 (used) by financing activities

     1,336       —         —         1,336  
    


 


 


 


Net increase (decrease) in cash and equivalents

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

Cash and equivalents at beginning of period

     76,354       1,250       —         77,604  
    


 


 


 


Cash and equivalents at end of period

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


 


 


 


 

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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 $50 billion U.S. lawn and garden and related supplies industry. Our pet products include pet bird and small animal 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, Four Paws, Kent Marine, Interpet and Energy Savers Unlimited. Our lawn and garden products include grass seed, wild bird food, weed and insect control products, decorative outdoor patio products, Christmas products and lighting and ant control products. These products are sold under a number of brand names, including Pennington, Norcal Pottery, New England Pottery, GKI/Bethlehem Lighting, Lilly Miller, Matthews Four Seasons, AMDRO and Grant’s. In fiscal 2004, consolidated net sales were $1.27 billion, of which our pet products segment, or Pet Products, accounted for $568.9 million and our lawn and garden products segment, or Garden Products, accounted for $697.5 million. In fiscal 2004, income from operations was $82.1 million, of which Pet Products accounted for $61.4 million and Garden Products accounted for $42.9 million, before corporate expenses and eliminations of $22.2 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

 

We transitioned our company to a leading marketer and producer of branded products from a traditional pet and lawn and garden supplies distributor. We made 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; Alaska Fish Fertilizer in fiscal 2002; and Kent Marine, New England Pottery, Interpet, KRB Seed Company, (dba Budd’s Seed), and Energy Savers Unlimited in fiscal 2004.

 

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 $959 million, or approximately 76% of total sales, in fiscal 2004. During this same period, our sales of other manufacturers’ products have declined to approximately 24% of total sales, and our gross profit margins have improved from 13.6% in fiscal 1996 to 30.3% in fiscal 2004.

 

Recent Developments

 

Universal Shelf Registration Statement

 

In January 2005, we filed a $300 million universal shelf registration statement on Form S-3 with the SEC, which was declared effective on February 2, 2005. The filing provides that we may offer and sell in one or more offerings up to $300 million of any combination of the following securities: debt securities, subsidiary guarantees of debt securities, common stock, preferred stock, debt warrants and equity warrants. While we have no imminent intentions to draw upon this capacity, it is designed to give us maximum flexibility to pursue our strategic growth objectives utilizing any type of financial instrument if necessary.

 

New Accounting Pronouncements

 

Accounting for Stock-Based Compensation

 

We currently measure compensation expense for our employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and provide pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring

 

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compensation expense. We have elected to follow APB Opinion No. 25 because the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, when the exercise price of our employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. The statement supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires all entities to recognize compensation expense in an amount equal to the fair-value of share-based payments. Upon adoption, after June 15, 2005, all employee stock option awards will be recognized as an expense in the Company’s statement of operations, typically, over the related vesting period of the options. SFAS No. 123R requires use of fair value to measure share-based awards issued to employees, computed at the date of grant. Additionally, SFAS No. 123R requires companies to record compensation expense for the unvested portion of previously granted awards as they continue to vest, as calculated previously and included in the companies prior period pro forma disclosures under SFAS No. 123.

 

We will adopt SFAS No. 123R beginning with our fiscal 2005 fourth quarter, as required, and will adopt the standard using the modified prospective method requiring us to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards outstanding as of the date of adoption.

 

We will recognize substantially more compensation expense in future periods as a result of adopting SFAS No. 123R and expensing the calculated fair value of employee stock options. Based on employee stock options outstanding at December 25, 2004, we will record additional compensation expense of approximately $0.8 million, impacting fully diluted earnings per share by approximately $0.03, in the fourth quarter of the fiscal year ending September 24, 2005, and $0.08 per share for the fiscal year ending in 2006.

 

Critical Accounting Policies, Estimates and Judgments

 

There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended September 25, 2004.

 

Results of Operations

 

Three Months Ended December 25, 2004

Compared with Three Months Ended December 27, 2003

 

Net sales for the three months ended December 25, 2004 increased $43.2 million, or 19.4%, to $265.6 million from $222.4 million for the three months ended December 27, 2003. Pet Products’ net sales increased $27.2 million, or 21.0%, to $156.8 million for the three months ended December 25, 2004 from $129.6 in the comparable fiscal 2003 period. Garden Products’ net sales increased $16.0 million, or 17.2%, to $108.8 million for the three months ended December 25, 2004 from $92.8 million in the comparable fiscal 2003 period. Our branded product sales increased $38.4 million and sales of other manufacturers’ products increased $4.8 million. Our Pet Products’ branded product sales increased $22.6 million of which approximately $15 million related to our recent acquisitions of Kent Marine, Interpet and ESU and approximately $8 million related to increased organic brand sales. Our Garden Products’ branded product sales increased $15.8 million due primarily to the sales from New England Pottery, which was acquired in February 2004.

 

Gross profit for the three months ended December 25, 2004 increased $23.9 million, or 38.6%, to $ 86.0 million from $62.1 million for the three months ended December 27, 2003. Gross profit increased $9.7 million in Garden Products and $14.2 million in Pet Products. Gross profit as a percentage of net sales increased to 32.4% for the three months ended December 25, 2004, from 27.9% for the three months ended December 27, 2003, as both Garden Products’ and Pet Products’ margins improved. The margin improvements were due primarily to the contributions from our fiscal year 2004 acquisitions of approximately $13 million, increased grass seed margins of approximately $2 million resulting from focusing on higher profit product and the resulting flow through of our organic sales increase.

 

Selling, general and administrative expenses increased $18.0 million, or 30.8%, from $58.5 million for the three months ended December 27, 2003 to $76.5 million for the three months ended December 25, 2004. As a percentage of net sales, selling, general and administrative expenses increased to 28.8% for the three months ended December 25, 2004, compared to 26.3% in the comparable prior year period.

 

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Table of Contents

Selling and delivery expenses increased $9.0 million, or 31.7%, from $28.4 million for the three months ended December 27, 2003 to $37.4 million for the three months ended December 25, 2004. The increase was primarily attributable to the quarter’s increased revenues and approximately $1 million from increased fuel costs.

 

Facilities expense increased $0.3 million to $2.8 million for the three months ended December 25, 2004 from $2.5 million for the three months ended December 27, 2003. The increase was primarily related to our fiscal 2004 acquisitions.

 

Warehouse and administrative expenses increased $8.7 million, or 31.5%, from $27.6 million for the three months ended December 27, 2003 to $36.3 million for the three months ended December 25, 2004. Approximately $4 million of the increase was due to our recent acquisitions, approximately $1 million from employee compensation, including increased headcount, and approximately $1 million to increased professional fees for projects, including Sarbanes-Oxley compliance.

 

Net interest expense for the three months ended December 25, 2004 increased $1.3 million, or 33.3%, to $5.2 million from $3.9 million for the three months ended December 27, 2003. The increase was due primarily to an approximately $50 million increased average total long-term debt balance during the fiscal 2005 quarter as compared to the prior year quarter, due to fiscal 2004 acquisitions that were made subsequent to the first quarter of fiscal 2004, and the changes in interest rates on our floating rate debt.

 

Other expense decreased $0.4 million to $0.3 million for the quarter ended December 25, 2004 from $0.7 million for the quarter ended December 27, 2003. Other expense represents losses from equity method investments. Losses booked in the first quarter of the fiscal year from these investments are principally due to the seasonality of the businesses.

 

Our effective income tax rate for the quarter ended December 25, 2004 was 37.1% compared with 39.2% for the quarter ended December 27, 2003. The decreased rate reflects estimated state tax decreases and the impact of non-US tax rates at our U.K. based subsidiary.

 

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 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 sell 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 us to give extended credit terms to either our distributor or retailer customers. On the other hand, our lawn and garden businesses are highly seasonal with approximately 63% of Garden Products’ aggregate sales occurring during the second and third fiscal quarters. For many manufacturers of garden products, this seasonality requires them to deliver large quantities of their product well ahead of the peak selling periods. To encourage distributors to carry large amounts of inventory, it has been industry practice for manufacturers to give extended credit terms and/or promotional discounts.

 

The primary sources of cash and equivalents for the three months ended December 25, 2004 were $15.2 million in cash generated by operating activities partially offset by cash used in investing activities of $5.7 million and cash used in financing activities of $8.4 million. Net cash used in investing activities decreased $13.9 million from the prior year quarter due to $15 million paid into an escrow account in the fiscal quarter ended December 27, 2003, which is classified as restricted investments on the balance sheet, in connection with our appeal in the Scotts litigation. Financing activities provided net cash of $1.3 million in the prior year quarter but used cash of $8.4 million for the three months ended December 25, 2004, a decrease of $9.7 million primarily due to $10 million repayment on our revolving line of credit.

 

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At December 25, 2004, our total debt was $295.3 million versus $250.8 million at December 27, 2003, due to borrowings on our line of credit to finance our acquisitions in fiscal 2004 subsequent to the first quarter.

 

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. In April 2004, we amended the facility to increase the maximum amount available under the revolving credit portion by $25 million to $125 million and to include the option to borrow in Euros, Canadian Dollars and Pounds Sterling. In December 2004, we amended the facility to reduce the applicable interest rates on our term loan and revolver by 0.50%. Interest on the term loan is based on a rate equal to LIBOR + 1.75% or the prime rate plus 0.25%, 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 0.75% or LIBOR plus a margin which fluctuates from 1.25% to 2.25%, 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 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 25, 2004. This facility also requires the lenders’ prior written consent to any material investments in or acquisitions of a business. The balance outstanding at December 25, 2004 under the $125 million revolving credit facility was $45.0 million, and the remaining available borrowing capacity was $73.3 million, with $6.7 million outstanding under certain letters of credit.

 

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 % senior subordinated notes to a floating rate of LIBOR + 4.04%.

 

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. See Note 5 – “Contingencies” to our unaudited condensed consolidated financial statements.

 

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 $20 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.

 

Off-Balance Sheet Arrangements

 

There have been no material changes to the information provided in our Annual Report on Form 10-K for the fiscal year ended September 25, 2004 regarding off-balance sheet arrangements.

 

Contractual Obligations

 

There have been no material changes outside the ordinary course of business in our contractual obligations set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended September 25, 2004.

 

Weather and Seasonality

 

Historically, our sales of lawn and garden products have been influenced by weather and climate conditions in the markets we serve. Additionally, Garden Products’ business has been highly seasonal. In fiscal 2004, 63% of Garden Products’ net sales and 58% of our total net sales occurred in the Company’s second and third fiscal quarters. Substantially all of Garden Products’ operating income is typically generated in this period, which has historically offset the operating loss incurred during the first fiscal quarter of the year.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We believe there has been no material change in our exposure to market risk from that discussed in our fiscal 2004 Annual Report filed on Form 10-K.

 

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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-15(e) and 15d-15(e)) 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 the controls and procedures in place are effective 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 condensed consolidated financial statements in Part I – Item 1 of this report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

Period


  

Total Number of

Shares Purchased


   

Average Price Paid

Per Share


  

Total Number of

Shares Purchased As

Part of Publicly

Announced Plans or

Programs


  

Maximum Number of

Shares that May Yet

be Purchased Under

the Plans
or Programs


09/26/04 – 10/30/04

   —         —      —      —  

10/31/04 – 11/27/04

   —         —      —      —  

11/28/04 – 12/25/05

   12,959 (1)   $ 40.73    —      —  

Total

   12,959 (1)   $ 40.73         —  

(1) Represents a stock-for-stock exchange where an optionee delivered previously owned shares to satisfy the exercise price of options.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable

 

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

 

Not applicable

 

Item 5. Other Information

 

Not applicable

 

Item 6. Exhibits

 

10.2.5   Fifth Amendment to Credit Agreement dated December 17, 2004, between Central Garden & Pet Company and Canadian Imperial Bank of Commerce et al.
10.6.1*  

Form of Nonstatutory Stock Option Agreement for Nonemployee Director Equity Incentive Plan.

10.6.2*  

Form of Restricted Stock Agreement for Nonemployee Director Equity Incentive Plan.

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.

 

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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.


* Management contract or compensatory plan or arrangement.

 

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SIGNATURES

 

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

 

CENTRAL GARDEN & PET COMPANY
Registrant

Dated: February 3, 2005

/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

 

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