CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended September 29, 2007,
September 30, 2006 and September 24, 2005
1. Organization and Significant Accounting Policies
Organization
Central Garden & Pet Company (Central), a Delaware corporation, and subsidiaries (the
Company), is a leading marketer and producer of quality branded products for the pet and lawn and garden supplies markets.
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Central and all majority-owned subsidiaries. Minority interests in consolidated entities are recognized for the share of
assets, liabilities and operating results not owned by Central. Earnings from equity method investments are included in other income. All significant intercompany balances and transactions have been eliminated.
On January 3, 2007, the Company announced a stock dividend in the form of two shares of the Companys Class A common stock for each
outstanding share of the Companys common stock and Class B stock to stockholders of record as of January 14, 2007. On February 5, 2007, the Company distributed the related Class A shares to the stockholders. All share and per
share amounts in this Form 10-K have been retroactively adjusted to reflect the stock dividend for all periods presented
.
Minority Interest
Minority interest in the Companys consolidated financial statements represents the 20% interest not owned by Central in a consolidated subsidiary. Since the Company controls this subsidiary (effective
as of March 2006), its financial statements are fully consolidated with those of the Company, and the minority owners 20% share of the subsidiarys net assets and results of operations is reported as minority interest.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period including realization of accounts receivable and inventory and valuation of goodwill. Actual results could differ from those estimates.
Revenue Recognition
Sales are recognized when merchandise is shipped, risk of loss and title passes to the customer and the Company has no
further obligations to provide services related to such merchandise. Discounts, volume-based rebate incentives and most cooperative advertising amounts are recorded as a reduction of sales. The Companys current practice on product returns
generally is to accept and credit the return of unopened cases of products from customers where the quantity is small, where the product has been misshipped or the product is defective. Accruals for estimated returns are deducted from net sales at
the time of shipment. Sales also include shipping and handling costs billed directly to customers.
Cost of goods sold and occupancy
consists of cost of product, inbound freight charges, purchasing and receiving costs, certain indirect purchasing, merchandise handling and storage costs, internal transfer costs as well as allocations of overhead costs, including depreciation,
related to the Companys facilities. Cost of goods sold excludes substantially all shipping and handling and out-bound freight costs to customers, which are included in selling, general and administrative expenses as delivery expenses. The cost
of shipping and handling, including internal costs and payments to third parties, included in delivery expenses within selling, general and administrative expenses for the fiscal years ended September 29, 2007, September 30, 2006 and
September 24, 2005 was $64.0 million, $69.2 million and $60.3 million, respectively. Amounts billed to customers for shipping and handling costs are included in net sales.
47
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Advertising Costs
The Company expenses the costs of advertising as incurred.
Advertising expenses were $35.7 million, $35.2 million and $18.9 million million in fiscal 2007, 2006 and 2005, respectively.
401(k) Plans
The Company sponsors several 401(k) plans which cover substantially all employees. The Companys matching contributions expensed under these plans were $1,529,000, $1,173,000 and $992,000 for fiscal years
2007, 2006 and 2005, respectively.
Other income
consists principally of earnings from equity method investments.
Income taxes
are accounted for under the asset and liability method in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes result primarily from bad debt allowances, inventory and goodwill write-downs, depreciation and nondeductible reserves. The Company establishes a
valuation allowance for deferred tax assets when management believes it is more likely than not a deferred tax asset will not be realized. As of fiscal 2007 and 2006, the Company had valuation allowances related to state net operating losses of $6.0
million and $5.5 million, respectively. United States income taxes have not been provided on undistributed earnings (approximately $5.0 million at September 29, 2007) of the Companys foreign subsidiary since all such earnings are
considered indefinitely reinvested overseas.
Cash and cash equivalents
include all highly liquid debt instruments with a maturity
of three months or less at the date of purchase.
Inventories
, which primarily consist of garden products and pet supplies finished
goods, are stated at the lower of FIFO cost or market. Cost includes certain indirect purchasing, merchandise handling and storage costs including certain salary and data processing costs incurred to acquire or manufacture inventory, costs to
unload, process and put away shipments received in order to prepare them to be picked for orders, and certain other overhead costs. The amount of such costs capitalized to inventory is computed based on an estimate of costs related to the
procurement and processing of inventory to prepare it for sale compared to total product purchases.
Long-Lived Assets
The
Company reviews its long-lived assets for potential impairment based on projected undiscounted cash flows associated with these assets. Long-lived assets are evaluated for potential impairment evaluations when events and circumstances exist that
indicate the carrying amount of those assets may not be recoverable. Measurement of impairment losses for long-lived assets that the Company expects to hold and use is based on the estimated fair value of those assets.
Land, buildings, improvements and equipment
are stated at cost. Depreciation is computed by the straight-line method over thirty years for
buildings. Improvements are amortized on a straight-line basis over the shorter of the useful life of the asset or the terms of the related leases. Depreciation on equipment and capitalized software is computed by the straight-line and accelerated
methods over the estimated useful lives of 3 to 10 years.
Goodwill
is the excess of the purchase price paid over the fair value of
net assets acquired in business combinations accounted for under the purchase method. The Company performs an annual assessment, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting
unit below its carrying amount, for potential impairment through application of a fair-value-based test (see Note 5 Goodwill).
Investments
The Company owns membership interests (from 33% to 49%) in three unconsolidated companies. The Company accounts for its interest in these entities using the equity method. Equity income of
48
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
$2.4 million in fiscal 2007, $3.1 million in fiscal 2006 and $4.6 million in fiscal 2005 is included in other income. The Companys investment in
these entities was $10.5 million at September 29, 2007 and $11.4 million at September 30, 2006, which is greater than the Companys share of the underlying equity in net assets by approximately $1.0 million, which was attributable to
goodwill when the investments were made. On a combined basis, the assets, liabilities, revenues and expenses of these entities are not significant.
Accruals For Insurance
The Company maintains insurance for certain risks, including workers compensation, general liability and vehicle liability, and is self-insured for employee related health care benefits. The
Companys workers compensation, general liability and vehicle liability insurance policies include deductibles of $250,000 to $350,000 per occurrence. The Company maintains excess loss insurance that covers any health care costs in excess
of $150,000 per person per year. The Company accrues for the expected costs associated with these risks by considering historical claims experience, demographic factors, severity factors and other relevant information. Costs are recognized in the
period the claim is incurred, and the financial statement accruals include an estimate of claims incurred but not yet reported.
Fair
Value of Financial Instruments
At September 29, 2007 and September 30, 2006, the carrying amount of cash and cash equivalents, accounts receivable, accounts payable and floating rate debt approximates its fair value. The fair
value, determined by comparison to quoted market prices, of the Companys $150 million senior subordinated notes was $140.6 million at September 29, 2007 and $155.6 million at September 30, 2006.
Derivative Financial Instruments
The Company accounts for derivative instruments in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activity, which requires, among other things, that all derivatives be reported on the balance sheet at fair value. Changes in fair value are recognized in earnings, or are deferred, depending on the nature of
the underlying exposure being hedged and how effective the derivative is at offsetting a change in the underlying exposure. The Company does not enter into derivatives for trading or speculative purposes.
In October 2003, the Company entered into a $75 million pay-floating interest rate swap effectively converting 50% of its $150 million fixed rate 9-1/8%
senior subordinated notes to a floating rate of LIBOR + 4.04%. When it was entered into, the swap was designated as a hedge of the underlying specific interest rate exposure on the senior subordinated debt. The differential paid or received on the
swap is recognized in interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation. The unrealized loss was approximately $0.5 million for fiscal year 2007 and $1.2 million for fiscal year
2006, with corresponding adjustments made to the fair value of the related debt.
Stock-Based Compensation
Beginning in
fiscal 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, and began recording compensation expense associated with stock options and other forms of equity compensation in accordance with the accounting standard. The
Company elected to adopt the standard using the modified prospective transition method. Therefore, fiscal 2005 amounts have not been restated. Under this transition method, compensation cost associated with stock options recognized in fiscals 2007
and 2006 includes: (1) amortization related to the remaining unvested portion of all share-based payments granted prior to, but not vested as of September 24, 2005, based on the grant date fair value estimated in accordance with the
original pro forma footnote disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and (2) amortization related to all share-based payments granted subsequent to September 24, 2005, based on the
grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Accordingly, stock-based compensation expense is recognized over the service period of the employees using the straight-line attribution method. Total
compensation cost for the Companys share-based compensation plan in fiscal 2007 was $5.0 million ($3.1 million after tax) and in fiscal 2006 was $5.1 million ($3.1 million after tax).
49
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Prior to fiscal 2006, the Company accounted for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations and provided the required SFAS No. 123 pro forma disclosures. Accordingly, no related
compensation expense was recorded for awards granted with no intrinsic value.
Had compensation expense for the Companys various
stock option plans been determined based upon the projected fair values at the grant dates for awards under those plans in accordance with SFAS No. 123, the Companys pro forma net earnings, basic and diluted earnings per common share for
the fiscal year ended September 24, 2005 would have been as follows (in thousands, except per share amounts):
|
|
|
|
|
Net income, as reported
|
|
$
|
53,787
|
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards, net of related tax
effects
|
|
|
(1,862
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
51,925
|
|
|
|
|
|
|
Net income per common equivalent share:
|
|
|
|
|
Basic as reported
|
|
$
|
0.86
|
|
Basic pro forma
|
|
$
|
0.83
|
|
|
|
Diluted as reported
|
|
$
|
0.83
|
|
Diluted pro forma
|
|
$
|
0.80
|
|
Prior to fiscal 2006, the Company presented all tax benefits resulting from deductions relating to
the exercise of stock options as operating cash flows in the consolidated statement of cash flows. SFAS No. 123(R) requires, on a prospective basis, the benefits of tax deductions in excess of the compensation cost recognized for those options
to be classified as financing cash inflows rather than operating cash inflows.
Total Comprehensive Income
Total
comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded directly as an
element of shareholders equity, but are excluded from net income. Other comprehensive income is comprised of currency translation adjustments relating to the Companys foreign subsidiary whose functional currency is not the U.S. dollar.
Deferred taxes are not provided on translation gains and losses, because the Company expects earnings of its foreign subsidiary to be permanently reinvested.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies an option to report selected financial assets and liabilities at fair value. SFAS No. 159 requires companies to provide information to
assist financial statement users to understand the effect of a companys choice to use fair value on its earnings, as well as to display on the face of the balance sheet the fair value of assets and liabilities chosen by the company for fair
value accounting. Additionally, SFAS No. 159 establishes presentation and disclosure requirements designed to simplify comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS
No. 159 is effective for the Company in its fiscal year beginning September 28, 2008. The Company is currently evaluating the impact of SFAS No. 159 on its consolidated financial statements
.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also establishes a framework for measuring
50
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
fair value and provides for expanded disclosures about fair value measurements. SFAS No. 157 is effective for the Companys fiscal year beginning
September 28, 2008. The Company is currently evaluating the impact of SFAS No. 157 on its consolidated financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements when evaluating materiality The application of the guidance in SAB
No. 108 did not have a significant impact on the Companys consolidated financial statements.
In June 2006, the FASB issued FIN
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The standard also provides other guidance on income tax accounting matters, including derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Differences between the
amounts recognized in the balance sheet prior to the adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings. FIN 48 is effective for the Companys
fiscal year beginning September 30, 2007. The Company does not anticipate a material impact on its consolidated financial statements from the adoption of FIN 48.
2. Acquisitions
Fiscal 2006
The Company completed five acquisitions during the fiscal year ended September 30, 2006. With the exception of Farnam, pro forma results of
operations have not been presented for any of the acquisitions because the effects of these acquisitions were not material to Centrals operating results either individually or in the aggregate. The consolidated financial statements include the
effects of these acquired businesses from the dates of acquisition. The purchase accounting for these acquisitions has been completed and the purchase price allocations are summarized as follows (in thousands):
|
|
|
|
Net tangible assets acquired
|
|
$
|
93,428
|
Other intangible assets acquired
|
|
|
91,509
|
Goodwill
|
|
|
207,234
|
|
|
|
|
Total consideration paid (including transaction costs)
|
|
$
|
392,171
|
|
|
|
|
Total consideration paid includes amounts paid in fiscal 2007. Other intangible assets acquired
include marketing-related intangibles of $66.3 million, non-contractual customer related intangibles of $21.2 million and technology-based intangibles of $4.0 million.
Brief descriptions of the businesses acquired are as follows:
In April 2006, the Company acquired the rights to the Ironite
®
Products (Ironite) brand of natural soil supplements and the associated
intellectual property for approximately $6 million in cash. Ironite, a registered trademark since 1956, is a leading brand of environmentally-friendly soil supplements that promote healthy plant color and deeper root structures. The purchase price
exceeded the fair value of net assets acquired by approximately $3 million, which was recorded as goodwill.
51
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In March 2006, the Company increased its
equity interest in Tech Pac from 20% to 80%. The Company paid approximately $21 million in cash and deposited cash of approximately $16 million in an escrow account for possible contingent performance based payments over the next five years
(included in Other Assets in the consolidated balance sheet). The Company acquired its initial 20% interest in Tech Pac when it acquired Gulfstream Home & Garden, Inc. (which had a 20% interest in Tech Pac at the time of the acquisition) in
February 2005. Tech Pac is a leading supplier of insect control branded products in the lawn and garden market place. Tech Pacs leading brands include Sevin
®
, a broad-based
insecticide, Overn Out!
®
for fire ant control and RooTone
®
, a leading root stimulant for the gardening enthusiast. The
purchase price exceeded the fair value of the net tangible assets acquired by approximately $10 million.
In February 2006, the Company
acquired Farnam Companies, Inc. (Farnam) for an initial payment of approximately $287 million in cash, plus $4 million in cash for the purchase of related real property. An additional $15 million in cash was paid in fiscal 2007 primarily
for the final determination of Farnams net assets at closing. Farnam is a leading marketer and manufacturer of innovative health care products primarily for horses, household pets and livestock sold through over-the-counter and veterinary
channels. In addition to the internationally recognized Farnam umbrella brand, Farnams portfolio of industry leading brands includes Equicare, ComboCare, IverCare, and Repel-X for horses; D-Worm, BioSpot and Scratchex for household pets; and
Adams and Bite Free insect controls for home and yard care. The purchase price exceeded the fair value of net tangible and intangible assets acquired by approximately $181 million, which was recorded as goodwill.
The following table summarizes on a pro forma basis the unaudited consolidated results of operations of the Company as if the Farnam acquisition had
occurred at the beginning of the periods presented. The pro forma consolidated results of operations include adjustments to give effect to interest expense on acquisition-related debt and certain other purchase accounting adjustments. The pro forma
information is not necessarily indicative of the results of operations that would have occurred had the purchase been made at the beginning of the periods presented, nor of the future results of the combined operations (in thousands except per share
amounts):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
September 30,
2006
|
|
September 24,
2005
|
Net sales
|
|
$
|
1,675,278
|
|
$
|
1,544,846
|
Gross profit
|
|
|
562,144
|
|
|
525,053
|
Income from operations
|
|
|
140,746
|
|
|
116,986
|
Income before income taxes and minority interest
|
|
|
97,441
|
|
|
83,234
|
Net income
|
|
|
62,177
|
|
|
52,829
|
Net income per common equivalent share:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.92
|
|
$
|
0.85
|
Diluted
|
|
$
|
0.90
|
|
$
|
0.82
|
In February 2006, the Company acquired the
assets of Breeders Choice Pet Foods Inc. for approximately $25 million in cash. Breeders Choice is a leading branded marketer and manufacturer of ultra-premium all natural, healthy dog and cat food and treats sold exclusively in the pet
specialty channel under the brands AvoDerm
®
, Pinnacle
®
, Active Care
®
and Advanced Pet Diets
®
. The purchase price exceeded the fair value of net tangible and intangible assets acquired by approximately $9 million, which was recorded as goodwill.
In December 2005, the Company acquired certain intellectual property assets from Shirlo, Inc. for approximately $10 million in cash. The assets
acquired from Shirlo, Inc. include the companys exclusive marketing rights to etofenprox, an insect adulticide approved for on-animal use. The acquired assets were
52
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
integrated into the business of Wellmark International, a wholly owned subsidiary of the Company. The purchase price exceeded the fair value of net tangible
and intangible assets acquired by approximately $2 million, which was recorded as goodwill.
3. Concentration of Credit Risk and Significant Customers
and Suppliers
Customer Concentration
Approximately 41%, 40% and 42% of the Companys net sales for fiscal years
2007, 2006 and 2005, respectively, were derived from sales to the Companys top five customers. The Companys largest customer accounted for approximately 17%, 17% and 19% of the Companys net sales for fiscal years 2007, 2006 and
2005, respectively. The Companys second largest customer accounted for approximately 8% of the Companys net sales in each of the fiscal years 2007, 2006 and 2005. The Companys third largest customer accounted for approximately 6%,
7% and 7% of the Companys net sales in each of the fiscal years 2007, 2006 and 2005, respectively. The loss of, or significant adverse change in, the relationship between the Company and any of these three customers could have a material
adverse effect on the Companys business and financial results. The loss of or reduction in orders from any significant customer, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or the
Companys inability to collect accounts receivable from any major customer could also have a material adverse impact on the Companys business and financial results. As of September 29, 2007 and September 30, 2006, accounts
receivable from the Companys top ten customers comprised 49% and 45% of the Companys total accounts receivable, including 10% and 10% from the Companys largest customer, respectively.
Supplier Concentration
While the Company purchases products from many different manufacturers and suppliers, approximately 7%, 8% and 6% of
the Companys net sales in fiscal years 2007, 2006 and 2005, respectively, were derived from products purchased from the Companys five largest suppliers.
4. Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts are summarized
below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balances at
Beginning
of Period
|
|
Charged to
Costs and
Expenses
|
|
Write-Offs,
Less
Recoveries
|
|
|
Balances
at End of
Period
|
Year ended September 24, 2005
|
|
$
|
12,348
|
|
$
|
4,508
|
|
$
|
(5,144
|
)
|
|
$
|
11,712
|
Year ended September 30, 2006
|
|
|
11,712
|
|
|
4,438
|
|
|
(3,352
|
)
|
|
|
12,798
|
Year ended September 29, 2007
|
|
|
12,798
|
|
|
9,807
|
|
|
(8,802
|
)
|
|
|
13,803
|
5. Goodwill
Changes in the carrying amount of goodwill for the fiscal years ended September 29, 2007 and September 30, 2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Garden Products
Segment
|
|
Pet Products
Segment
|
|
Total
|
Balance as of September 24, 2005
|
|
$
|
169,456
|
|
$
|
195,391
|
|
$
|
364,847
|
Additions
|
|
|
3,370
|
|
|
188,594
|
|
|
191,964
|
Currency translation
|
|
|
|
|
|
1,009
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006
|
|
|
172,826
|
|
|
384,994
|
|
|
557,820
|
Additions
|
|
|
22,217
|
|
|
16,375
|
|
|
38,592
|
Currency translation
|
|
|
|
|
|
2,346
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 29, 2007
|
|
$
|
195,043
|
|
$
|
403,715
|
|
$
|
598,758
|
|
|
|
|
|
|
|
|
|
|
53
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Additions to goodwill include acquisitions, purchase price adjustments and reclassifications of
amounts upon finalization of purchase accounting. All goodwill is expected to be fully deductible for income tax purposes.
The Company
accounts for goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. As required by SFAS No. 142, the Company tests for goodwill annually (at the first day of the fourth quarter of the fiscal year) or
whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required two-step approach uses accounting judgments and estimates of future operating results.
Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment testing is done at a reporting unit level. An impairment loss generally is recognized when the carrying amount of the
reporting units net assets exceeds the estimated fair value of the reporting unit. The estimates and judgments that most significantly affect the fair value calculation are assumptions related to revenue growth, costs, compensation levels,
discount rate and private and public market trading multiples for similar entities.
6. Other Intangible Assets
The following table summarizes the components of gross and net acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
|
(in millions)
|
September 29, 2007
|
|
|
|
|
|
|
|
|
|
|
Marketing-related intangible assets amortizable
|
|
$
|
10.5
|
|
$
|
(1.9
|
)
|
|
$
|
8.6
|
Marketing-related intangible assets nonamortizable
|
|
|
58.9
|
|
|
|
|
|
|
58.9
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
69.4
|
|
|
(1.9
|
)
|
|
|
67.5
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related intangible assets amortizable
|
|
|
31.5
|
|
|
(3.8
|
)
|
|
|
27.7
|
Customer-related intangible assets nonamortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31.5
|
|
|
(3.8
|
)
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
Other acquired intangible assets amortizable
|
|
|
5.5
|
|
|
(0.4
|
)
|
|
|
5.1
|
Other acquired intangible assets nonamortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5.5
|
|
|
(0.4
|
)
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
106.4
|
|
$
|
(6.1
|
)
|
|
$
|
100.3
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
Marketing-related intangible assets amortizable
|
|
$
|
24.0
|
|
$
|
(1.4
|
)
|
|
$
|
22.6
|
Marketing-related intangible assets nonamortizable
|
|
|
32.7
|
|
|
|
|
|
|
32.7
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
56.7
|
|
|
(1.4
|
)
|
|
|
55.3
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related intangible assets amortizable
|
|
|
3.7
|
|
|
(0.5
|
)
|
|
|
3.2
|
Customer-related intangible assets nonamortizable
|
|
|
30.0
|
|
|
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33.7
|
|
|
(0.5
|
)
|
|
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
Other acquired intangible assets amortizable
|
|
|
11.0
|
|
|
(0.5
|
)
|
|
|
10.5
|
Other acquired intangible assets nonamortizable
|
|
|
11.5
|
|
|
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22.5
|
|
|
(0.5
|
)
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
112.9
|
|
$
|
(2.4
|
)
|
|
$
|
110.5
|
|
|
|
|
|
|
|
|
|
|
|
54
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Other intangible assets acquired include contract-based and technology-based intangible assets.
Certain adjustments to intangible assets were made during fiscal 2007 upon finalization of purchase accounting.
The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 1 to 25 years, over weighted average
lives of 13 years for marketing-related intangibles, 20 years for customer-related intangibles and nine years for other acquired intangibles. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five
years is estimated to be approximately $3 million per year from fiscal 2008 through fiscal 2012.
7. Long-Term Debt
On February 28, 2006, the Company arranged $650 million in senior secured credit facilities to finance the Farnam acquisition and to refinance the
existing $125 million revolving credit facility maturing in May 2008 and the existing $175 million term loan maturing in May 2009. The new credit facilities consist of a $350 million revolving credit facility maturing in February 2011 and a $300
million term loan maturing in September 2012. Interest on the revolving credit facility is based on a rate equal to prime plus a margin, which fluctuates from 0% to 0.375%, or LIBOR plus a margin, which fluctuates from 0.75% to 1.50%, determined
quarterly based on consolidated total debt to consolidated EBITDA for the most recent trailing 12-month period. Interest on the term loan is based on a rate equal to LIBOR plus a margin, which fluctuates from 1.50% to 1.75 % or the prime rate
plus a margin, which fluctuates from 0.50% to 0.75%, at the Companys option. The term loan is payable in quarterly installments of $750,000 with the balance payable in September 2012. These facilities are secured by substantially all of the
Companys assets and contain certain financial covenants which require the Company to maintain minimum levels of interest coverage and maximum levels of total debt to EBITDA and that restrict the Companys ability to repurchase its stock,
make investments in or acquisitions of other businesses and pay dividends above certain levels over the life of the facilities. In March 2007, the Company amended the maximum leverage and minimum interest coverage ratios in its credit agreement. In
August 2007, the Company further amended the maximum leverage and minimum interest coverage ratios, amended certain defined terms and amended certain negative covenants and other provisions of its credit agreement. In the August 2007 amendment, the
Company also made certain changes to the interest rate on loans to provide that the margin on loans increases when its leverage ratio exceeds 4.5 to 1.0. The Company was in compliance with all financial covenants as of September 29, 2007. There
was $164.0 million outstanding at September 29, 2007 under the $350 million revolving credit facility plus $16.6 million outstanding under certain letters of credit. The remaining potential available borrowing capacity was up to $169.4
million. The Companys borrowing capacity is also subject to compliance with the financial covenants in its credit agreement.
The
Company also has outstanding $150 million of 9-1/8% senior subordinated notes due 2013. In October 2003, the Company entered into a $75 million pay-floating interest rate swap effectively converting half of its $150 million fixed rate
9-1/8 % senior subordinated notes to a floating rate of LIBOR + 4.04%.
55
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 29,
2007
|
|
|
September 30,
2006
|
|
|
|
(in thousands)
|
|
Senior subordinated notes, interest at 9-1/8% payable semi-annually, principal due February 2013
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Term loan, interest at LIBOR + 1.50% or the prime rate plus 0.50%, quarterly principal payments of $750,000 remaining balance due September
2012
|
|
|
295,500
|
|
|
|
299,250
|
|
Revolving credit facility, interest at prime plus 0% to 0.25% or LIBOR + 0.75% to 1.375%, final maturity February 2011
|
|
|
164,000
|
|
|
|
119,000
|
|
Other notes payable
|
|
|
1,023
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
610,523
|
|
|
|
568,449
|
|
Less current portion
|
|
|
(3,352
|
)
|
|
|
(3,039
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
607,171
|
|
|
$
|
565,410
|
|
|
|
|
|
|
|
|
|
|
The scheduled principal repayments on long-term debt as of September 29, 2007 are as follows:
|
|
|
|
|
|
(in thousands)
|
Fiscal year:
|
|
|
|
2008
|
|
$
|
3,352
|
2009
|
|
|
3,351
|
2010
|
|
|
3,257
|
2011
|
|
|
167,060
|
2012
|
|
|
283,503
|
Thereafter
|
|
|
150,000
|
|
|
|
|
Total
|
|
$
|
610,523
|
|
|
|
|
8. Commitments and Contingencies
Commitments
Purchase
commitments
Production and purchase agreements (primarily for grass seed and grains) entered into in the ordinary course of business obligate the Company to make future purchases based on estimated yields. The terms of these contracts
vary and have fixed prices or quantities. At September 29, 2007, estimated annual purchase commitments were $110.5 million for fiscal 2008, $52.8 million for fiscal 2009, $35.0 million for fiscal 2010, $14.6 million for fiscal 2011 and $1.5
million for fiscal 2012.
Leases
The Company has operating lease agreements principally for office and warehouse facilities
and equipment. Such leases have remaining terms of 1 to 13 years. Rental expense was $28.1 million for fiscal years 2007 and 2006, and $24.4 million for fiscal year 2005.
Certain facility leases have renewal options and include escalation clauses. Minimum lease payments include scheduled rent increases pursuant to these
escalation provisions.
56
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Aggregate minimum annual payments on non-cancelable operating leases at September 29, 2007 are
as follows:
|
|
|
|
|
|
(in thousands)
|
Fiscal year:
|
|
|
|
2008
|
|
$
|
25,437
|
2009
|
|
|
20,724
|
2010
|
|
|
15,258
|
2011
|
|
|
9,411
|
2012
|
|
|
4,722
|
Thereafter
|
|
|
15,409
|
|
|
|
|
Total
|
|
$
|
90,961
|
|
|
|
|
Contingencies
The Company is a party to certain legal proceedings considered routine to normal operations. In the opinion of management, the ultimate resolution of all
such matters will not have a material adverse effect on operating results, financial condition or cash flows in the future.
9. Income Taxes
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
September 29,
2007
|
|
|
September 30,
2006
|
|
September 24,
2005
|
|
|
|
|
|
(in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,142
|
|
|
$
|
23,932
|
|
$
|
22,840
|
State
|
|
|
1,386
|
|
|
|
5,968
|
|
|
2,445
|
Foreign
|
|
|
(135
|
)
|
|
|
611
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,393
|
|
|
|
30,511
|
|
|
26,201
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
16,263
|
|
|
|
5,000
|
|
|
3,281
|
State
|
|
|
338
|
|
|
|
176
|
|
|
686
|
Foreign
|
|
|
5
|
|
|
|
104
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,606
|
|
|
|
5,280
|
|
|
4,057
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,999
|
|
|
$
|
35,791
|
|
$
|
30,258
|
|
|
|
|
|
|
|
|
|
|
|
57
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
A reconciliation of the statutory federal income tax rate to the Companys effective income tax
rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 29,
2007
|
|
|
September 30,
2006
|
|
|
September 24,
2005
|
|
Statutory federal income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
3.0
|
|
|
4.8
|
|
|
2.7
|
|
Permanent differences
|
|
0.1
|
|
|
(0.5
|
)
|
|
0.2
|
|
Foreign income taxes
|
|
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Adjustment of prior year accruals
|
|
0.1
|
|
|
(1.4
|
)
|
|
(1.7
|
)
|
Reversal of tax reserves
|
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
38.2
|
%
|
|
35.3
|
%
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the impact of temporary differences between asset and
liability amounts for financial reporting purposes and such amounts as determined based on existing tax laws. The tax effect of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2007
|
|
September 30, 2006
|
|
|
Deferred
Tax
Assets
|
|
|
Deferred
Tax
Liabilities
|
|
Deferred
Tax
Assets
|
|
|
Deferred
Tax
Liabilities
|
|
|
(in thousands)
|
Current:
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
4,582
|
|
|
$
|
|
|
$
|
4,346
|
|
|
$
|
|
Inventory write-downs
|
|
|
7,728
|
|
|
|
|
|
|
7,012
|
|
|
|
|
Prepaid expenses
|
|
|
|
|
|
|
1,335
|
|
|
|
|
|
|
1,413
|
Nondeductible reserves
|
|
|
3,261
|
|
|
|
|
|
|
3,792
|
|
|
|
|
State taxes
|
|
|
401
|
|
|
|
|
|
|
313
|
|
|
|
|
Other
|
|
|
2,797
|
|
|
|
|
|
|
3,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,769
|
|
|
|
1,335
|
|
|
19,282
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
44,441
|
|
|
|
|
|
|
27,384
|
Equity income
|
|
|
|
|
|
|
4,358
|
|
|
|
|
|
|
2,510
|
State net operating loss carryforward
|
|
|
6,418
|
|
|
|
|
|
|
5,463
|
|
|
|
|
Other
|
|
|
8,056
|
|
|
|
|
|
|
5,728
|
|
|
|
|
Valuation allowance
|
|
|
(6,011
|
)
|
|
|
|
|
|
(5,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,463
|
|
|
|
48,799
|
|
|
5,728
|
|
|
|
29,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,232
|
|
|
$
|
50,134
|
|
$
|
25,010
|
|
|
$
|
31,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys state tax net operating losses of $140.0 million expire at various times
between 2008 and 2028. In evaluating the Companys ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including past operating results, future taxable income, and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation allowance against any deferred tax assets. The Company has determined there will be insufficient future separate state taxable income for the parent company to absorb the
deferred tax assets associated with its separate company state net operating losses. Therefore, valuation allowances of $6.0 million and $5.5 million (net of federal impact) at September 29, 2007
58
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
and September 2006, respectively, have been provided to reduce state tax net operating loss carryforwards at the individual parent company level to amounts
considered recoverable. The Company has $1.1 million in federal capital losses which expire in 2008. These losses are expected to be utilized in full. The Company also has state income tax credits of $2.8 million, most of which may be carried
forward indefinitely.
10. Stock-Based Compensation
In February 2003, the Company adopted the 2003 Omnibus Equity Incentive Plan (the 2003 Plan) which provides for the grant of options and restricted stock to key employees, directors and consultants of the
Company up to an aggregate of 2.5 million shares of common stock of the Company. The 2003 Plan is administered by the Compensation Committee of the Board of Directors, which is comprised only of independent directors, and which must approve
individual awards to be granted, vesting and exercise of share conditions. The 2003 Plan replaced the 1993 Omnibus Equity Incentive Plan (the 1993 Plan) which, through January 2003, provided for the grant of options to key employees and
consultants of the Company for the purchase of up to an aggregate of 4.8 million shares of common stock of the Company. Upon adoption of the 2003 plan, the Company terminated the 1993 Plan, subject to the remaining outstanding option grants. In
February 2005, the Companys shareholders approved an amendment to the 2003 Plan to increase the number of shares authorized for issuance thereunder by 3.3 million shares, resulting in a total of 5.8 million shares authorized for
issuance under the 2003 Plan.
The Company adopted the Nonemployee Director Stock Option Plan (the Director Plan) which
provides for the grant of options to nonemployee directors of the Company. The Director Plan, as amended in 2001 and 2006, provides for the granting of options equal to $140,000 divided by the fair market value of the Companys common stock on
the date of each annual meeting of stockholders and a number of shares of restricted stock equal to $15,000 divided by such fair market value.
Stock Option Awards
The Company recognized share-based compensation expense of $5.0 million ($3.1 million after tax)
and $5.1 million ($3.1 million after tax) for the years ended September 29, 2007 and September 30, 2006, respectively, as a component of selling, general and administrative expenses. Share-based compensation expense in fiscal 2007 and 2006
consisted of $3.6 million ($2.2 million after tax) and $3.8 million ($2.3 million after tax) for stock options and $1.4 million ($0.9 million after tax) and $1.3 million ($0.8 million after tax) for restricted stock awards.
Stock options granted are generally exercisable with a 30 month cliff vesting and 42 month expiration, but are also granted with vesting increments of
20%, 25% or 33% per year beginning two, three or four years from the date of grant and expiring one year after the last increment has vested.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities are estimated based on the Companys implied historical volatility. The
expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free rates are based on U.S. Treasury yields, for notes with comparable terms as the option grants, in effect at the
time of the grant. For purposes of this valuation model, no dividends have been assumed.
The Companys calculations were made
using the Black-Scholes option pricing model with the following weighted average assumptions: expected life from the date of grant, 3.9 years in fiscal 2007, 4.3 years in fiscal 2006 and 3.3 years in fiscal 2005; stock price volatility, 28.3% in
fiscal 2007, 28.4% in fiscal 2006 and 31.0% in fiscal 2005; risk free interest rates, 4.6% in fiscal 2007, 4.4% in fiscal 2006 and 3.3% in fiscal 2005; and no dividends during the expected term.
59
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes option activity for the three fiscal years ended September 29,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
|
Weighted
Average Exercise
Price per Share
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at September 25, 2004
|
|
5,943
|
|
|
$
|
5.85
|
|
2 years
|
|
$
|
35,309
|
Granted
|
|
1,497
|
|
|
$
|
13.04
|
|
|
|
|
|
Exercised
|
|
(2,370
|
)
|
|
$
|
3.61
|
|
|
|
|
|
Cancelled or expired
|
|
(150
|
)
|
|
$
|
9.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 24, 2005
|
|
4,920
|
|
|
$
|
9.00
|
|
3 years
|
|
|
44,641
|
Granted
|
|
1,833
|
|
|
$
|
15.23
|
|
|
|
|
|
Exercised
|
|
(1,635
|
)
|
|
$
|
7.40
|
|
|
|
|
|
Cancelled or expired
|
|
(225
|
)
|
|
$
|
12.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006
|
|
4,893
|
|
|
$
|
11.70
|
|
4 years
|
|
|
57,239
|
Granted
|
|
1,059
|
|
|
$
|
13.85
|
|
|
|
|
|
Exercised
|
|
(896
|
)
|
|
$
|
8.08
|
|
|
|
|
|
Cancelled or expired
|
|
(332
|
)
|
|
$
|
11.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2007
|
|
4,724
|
|
|
$
|
12.89
|
|
3 years
|
|
$
|
60,910
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 24, 2005
|
|
963
|
|
|
$
|
6.85
|
|
1 year
|
|
$
|
6,587
|
Exercisable at September 30, 2006
|
|
819
|
|
|
$
|
8.69
|
|
1 year
|
|
$
|
7,121
|
Exercisable at September 29, 2007
|
|
978
|
|
|
$
|
12.40
|
|
1 year
|
|
$
|
12,123
|
The weighted average grant date fair value of options granted during the fiscal years ended
September 29, 2007, September 30, 2006 and September 24, 2005 was $4.12, $4.55 and $2.97, respectively. The total intrinsic value of options exercised during the fiscal years ended September 29, 2007, September 30,
2006 and September 24, 2005 was $5.5 million, $12.7 million and $25.7 million, respectively.
The following table summarizes the
changes in the Companys nonvested options during the fiscal year ended September 30, 2007:
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
|
Weighted Average
Grant Date
Fair Value per Share
|
Non vested at September 30, 2006
|
|
4,074
|
|
|
$
|
3.62
|
Granted
|
|
1,059
|
|
|
|
4.03
|
Vested
|
|
(1,130
|
)
|
|
|
3.00
|
Cancelled
|
|
(259
|
)
|
|
|
3.18
|
|
|
|
|
|
|
|
Non vested at September 29, 2007
|
|
3,744
|
|
|
|
3.96
|
|
|
|
|
|
|
|
As of September 29, 2007, there was $7.1 million of total unrecognized compensation cost
related to nonvested stock options, which is expected to be recognized over a remaining weighted average vesting period of two years.
Restricted Stock Awards
As of September 29, 2007 and September 30, 2006, there were 648,000 and 732,000
shares, respectively, of restricted stock awards outstanding. The awards generally vest in 20% or 25% increments, after a two or three year waiting period, over a six or seven year period of employment after the grant date.
60
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Restricted stock award activity during the three fiscal years ended September 29, 2007 is
summarized as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
|
Weighted Average
Grant Date
Fair Value per Share
|
Nonvested at September 25, 2004
|
|
75
|
|
|
$
|
10.41
|
Granted
|
|
349
|
|
|
$
|
12.69
|
Vested
|
|
(3
|
)
|
|
$
|
14.53
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 24, 2005
|
|
421
|
|
|
$
|
12.29
|
Granted
|
|
388
|
|
|
$
|
15.94
|
Vested
|
|
(22
|
)
|
|
$
|
11.35
|
Forfeited
|
|
(56
|
)
|
|
$
|
12.33
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006
|
|
731
|
|
|
$
|
14.24
|
Granted
|
|
23
|
|
|
$
|
15.60
|
Vested
|
|
(16
|
)
|
|
$
|
11.12
|
Forfeited
|
|
(90
|
)
|
|
$
|
10.78
|
|
|
|
|
|
|
|
Nonvested at September 29, 2007
|
|
648
|
|
|
$
|
14.84
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of restricted stock awards granted during the fiscal
years ended September 29, 2007, September 30, 2006 and September 24, 2005 was $15.60, $15.94 and $12.69, respectively.
As of September 29, 2007, there was $6.6 million of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of two years.
11. Shareholders Equity
At September 29,
2007, there were 80,000,000 shares of common stock ($0.01 par value) authorized, of which 22,297,985 were outstanding, and 100,000,000 shares of non-voting Class A common stock ($0.01 par value) authorized, 47,860,603 of which were outstanding.
The preferences and relative rights of the Class A common stock are identical to common stock in all respects except that the Class A common stock generally will have no voting rights unless otherwise required by Delaware law.
At September 29, 2007 and September 30, 2006, there were 3,000,000 shares of Class B stock ($0.01 par value) authorized, of which 1,652,262
were outstanding at September 29, 2007 and September 30, 2006. The voting powers, preferences and relative rights of the Class B stock are identical to common stock in all respects except that (i) the holders of common stock are
entitled to one vote per share and the holders of Class B stock are entitled to the lesser of ten votes per share or 49% of the total votes cast, (ii) stock dividends on common stock may be paid only in shares of common stock and stock
dividends on Class B stock may be paid only in shares of Class B stock and (iii) shares of Class B stock have certain conversion rights and are subject to certain restrictions on ownership and transfer. Each share of Class B stock is
convertible into one share of common stock, at the option of the holder. Additional shares of Class B stock may only be issued with majority approval of the holders of the common stock and Class B stock, voting as separate classes.
At September 29, 2007 and September 30, 2006, there were 1,000,000 shares of Series B preferred stock ($0.01 par value) authorized, of which 25
and 100 shares were outstanding at September 29, 2007 and September 30, 2006, respectively. The Series B preferred stock is entitled to receive dividends when and as declared by the Board of Directors, subject to the prior rights of
holders of all classes of stock at the time
61
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
outstanding having prior rights as to dividends. The 25 shares of Series B preferred stock outstanding at September 29, 2007 are convertible into
approximately 21,601 shares of the Companys common stock and 43,202 shares of the Companys Class A common stock at anytime. Each share of Series B preferred stock is entitled to a liquidation preference equal to the greater of
(i) $30,000 per share plus all declared but unpaid dividends on the Series B preferred stock or (ii) such amount per share as would have been payable with respect to such shares of Series B preferred stock had each share of the then
outstanding Series B preferred stock been converted to common stock immediately prior to such event whether or not the Series B preferred stock is then so convertible. Except as otherwise required by law, the holders of Series B preferred stock
shall not be entitled to vote. The Series B preferred stock is redeemable at the option of the holder starting on February 26, 2005 for a period extending until February 26, 2009 at a price equal to $30,000 per share. As a result, the
Series B preferred stock has been excluded from shareholders equity. The Series B preferred stock is not redeemable at the option of the Company.
Under the Companys stock repurchase program, the Company is authorized to repurchase up to $100 million of its common stock, in part, to minimize the dilutive impact of the Companys stock-based equity
compensation programs over time. As of September 29, 2007, the Company had repurchased approximately 240,000 shares of its common stock for an aggregate price of approximately $10 million under this repurchase program.
In March 2006, the Company issued 1,975,000 shares of common stock at an offering price per share of $53.50. The offering raised approximately $105
million in net proceeds.
In November 2006, holders of 75 shares of the Companys Series B convertible preferred stock converted their
shares to 64,803 shares of the Companys common stock. As of September 29, 2007, 25 shares of the Companys Series B convertible preferred stock remain outstanding.
On January 3, 2007, the Company declared a stock dividend on the Companys common stock and Class B stock to stockholders of record as of
January 14, 2007. The stock dividend was in the form of two shares of the Companys Class A common stock for each outstanding share of the Companys common stock and Class B stock. Class A common stock certificates were
distributed to stockholders on February 5, 2007.
12. Earnings per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 29, 2007
|
|
|
Fiscal Year Ended
September 30, 2006
|
|
|
Fiscal Year Ended
September 24, 2005
|
|
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
|
|
(in thousands, except per share amounts)
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
32,304
|
|
70,824
|
|
$
|
0.46
|
|
|
$
|
65,534
|
|
67,833
|
|
$
|
0.97
|
|
|
$
|
53,787
|
|
62,439
|
|
$
|
0.86
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
|
485
|
|
|
|
|
|
|
|
|
963
|
|
|
(0.02
|
)
|
|
|
|
|
1,551
|
|
|
(0.02
|
)
|
Restricted shares
|
|
|
|
|
676
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
(0.01
|
)
|
Convertible preferred stock
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
32,304
|
|
72,050
|
|
$
|
0.45
|
|
|
$
|
65,534
|
|
69,054
|
|
$
|
0.95
|
|
|
$
|
53,787
|
|
64,578
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Options to purchase 4,724,493 shares of common stock at prices ranging from $4.26 to $17.99 per share
were outstanding at September 29, 2007. Of these shares, 1,798,454 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 of including these options would be anti-dilutive. Options to purchase 4,894,083 shares of common stock at prices ranging from $4.26 to $17.99 per share were outstanding at September 30, 2006. Of these shares, 262,752 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 of including these options would be anti-dilutive. Options to
purchase 4,919,103 shares of common stock at prices ranging from $2.55 to $16.12 per share were outstanding at September 24, 2005. Of these shares, 107,190 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 of including these options would be anti-dilutive.
13. Quarterly Financial Data Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
|
|
(in thousands, except per share amounts)
|
|
Net sales
|
|
$
|
317,398
|
|
|
$
|
485,660
|
|
$
|
466,778
|
|
$
|
401,309
|
|
Gross profit
|
|
|
101,870
|
|
|
|
163,846
|
|
|
151,140
|
|
|
117,464
|
|
Net income (loss)
|
|
|
(2,966
|
)
|
|
|
21,450
|
|
|
15,515
|
|
|
(1,695
|
)
|
|
|
|
|
|
Net income (loss) per common equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.30
|
|
$
|
0.22
|
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.30
|
|
$
|
0.22
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
Weighted average common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71,241
|
|
|
|
71,422
|
|
|
70,910
|
|
|
71,131
|
|
Diluted
|
|
|
71,241
|
|
|
|
72,028
|
|
|
72,048
|
|
|
71,131
|
|
|
|
|
|
Fiscal 2006
|
|
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
(1)
|
|
|
|
(in thousands, except per share amounts)
|
|
Net sales
|
|
$
|
292,731
|
|
|
$
|
401,332
|
|
$
|
506,694
|
|
$
|
420,774
|
|
Gross profit
|
|
|
91,998
|
|
|
|
136,752
|
|
|
171,711
|
|
|
134,851
|
|
Net income
|
|
|
2,560
|
|
|
|
26,225
|
|
|
30,730
|
|
|
6,019
|
|
|
|
|
|
|
Net income per common equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.40
|
|
$
|
0.44
|
|
$
|
0.09
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.39
|
|
$
|
0.43
|
|
$
|
0.08
|
|
|
|
|
|
|
Weighted average common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
64,005
|
|
|
|
65,082
|
|
|
70,131
|
|
|
70,746
|
|
Diluted
|
|
|
65,478
|
|
|
|
67,245
|
|
|
72,198
|
|
|
71,733
|
|
(1)
|
Fiscal 2006 contains 53 weeks, with the extra week included in the fourth quarter. The fourth quarter of fiscal 2006 includes an income tax benefit of $1.5 million to adjust prior
year tax accruals.
|
63
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
14. Transactions with Related Parties
During fiscal 2007, 2006 and 2005, subsidiaries of the Company purchased approximately $1.5 million, $1.5 million and $1.7 million, respectively, of
products from Bio Plus, Inc., a company that produces granular peanut hulls. As of September 29, 2007 and September 30, 2006, the Company owed Bio Plus, Inc. approximately $88,000 and $52,000, respectively, for such purchases. Such amounts
were included in accounts payable as of that date. A director of the Company is a minority shareholder and a director of Bio Plus, Inc.
During fiscal 2007 and 2006, Tech Pac, a subsidiary of the Company, made purchases from Contract Packaging, Inc, (CPI), Tech Pacs principal supplier and a minority 20% shareholder. Tech Pacs total purchases from CPI
were approximately $39 million and $37 million for the years ended September 29, 2007 and September 30, 2006, respectively. Amounts due to and from CPI as of September 29, 2007 and September 30, 2006 were not material.
15. Business Segment Data
An
operating segment is defined as a portion of an enterprise engaged in business activities about which separate financial information is available and evaluated regularly by the chief operating decision-maker in determining how to allocate resources
and in assessing performance. The Companys chief operating decision-maker is its Chief Executive Officer. Operating segments are managed separately because each segment represents a strategic business that offers different products or
services. The Companys Chief Executive Officer evaluates performance based on profit or loss from operations. The Companys Corporate division is included in the following presentation since certain revenues and expenses of this division
are not allocated separately to the two operating segments. Segment assets exclude cash equivalents, short-term investments, deferred taxes and goodwill.
Management has determined that the Company has two operating segments which are also reportable segments based on the level at which the Chief Executive Officer reviews the results of operations to make decisions
regarding performance assessment and resource allocation. These operating segments are the Pet Products Group and the Garden Products Group. Substantially all of the Companys assets and operations relate to is business in the United States.
The Pet Products Group segment consists of Four Paws Products, TFH Publications, Kaytee, Aquatics, Interpet, Pets International,
Breeders Choice and Life Sciences. These businesses are engaged in the manufacturing, purchase, sale and delivery of internally and externally produced pet supplies, books and food principally to independent pet distributors, national and
regional retailer chains, grocery stores, mass merchants and bookstores. The Garden Products segment consists of Pennington Seed, Matthews Four Seasons, Grants, AMBRANDS, Lilly Miller, the Pottery Group, Gulfstream and GKI/Bethlehem Lighting.
Products manufactured, designed and sourced, or distributed are products found typically in the lawn and garden sections of mass merchandisers, warehouse-type clubs, home improvement centers and nurseries and include grass seed, bird feed, clay
pottery, outdoor wooden planters and trellises, herbicides and insecticides. These products are sold directly to national and regional retail chains, independent garden distributors, grocery stores, nurseries and garden supply retailers.
The Corporate division includes expenses associated with corporate functions and projects, certain employee benefits, goodwill, interest income,
interest expense and intersegment eliminations.
64
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Financial information relating to the Companys business segments for each of the three most
recent fiscal years is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 29,
2007
|
|
|
September 30,
2006
|
|
|
September 24,
2005
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pet Products
|
|
$
|
893,193
|
|
|
$
|
819,159
|
|
|
$
|
639,153
|
|
Garden Products
|
|
|
777,952
|
|
|
|
802,372
|
|
|
|
741,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,671,145
|
|
|
$
|
1,621,531
|
|
|
$
|
1,380,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pet Products
|
|
$
|
94,329
|
|
|
$
|
104,513
|
|
|
$
|
83,712
|
|
Garden Products
|
|
|
45,616
|
|
|
|
57,473
|
|
|
|
47,079
|
|
Corporate
|
|
|
(40,528
|
)
|
|
|
(25,184
|
)
|
|
|
(30,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
99,417
|
|
|
|
136,802
|
|
|
|
100,129
|
|
Interest expense
|
|
|
(49,685
|
)
|
|
|
(40,677
|
)
|
|
|
(23,125
|
)
|
Interest income
|
|
|
1,538
|
|
|
|
3,007
|
|
|
|
2,465
|
|
Other income
|
|
|
2,402
|
|
|
|
3,083
|
|
|
|
4,576
|
|
Income taxes
|
|
|
(19,999
|
)
|
|
|
(35,791
|
)
|
|
|
(30,258
|
)
|
Minority interest
|
|
|
(1,369
|
)
|
|
|
(890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,304
|
|
|
$
|
65,534
|
|
|
$
|
53,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pet Products
|
|
$
|
478,714
|
|
|
$
|
470,194
|
|
|
$
|
273,481
|
|
Garden Products
|
|
|
456,484
|
|
|
|
424,639
|
|
|
|
330,884
|
|
Corporate, eliminations and all other
|
|
|
711,624
|
|
|
|
638,990
|
|
|
|
451,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,646,822
|
|
|
$
|
1,533,823
|
|
|
$
|
1,056,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pet Products
|
|
$
|
18,227
|
|
|
$
|
16,312
|
|
|
$
|
12,120
|
|
Garden Products
|
|
|
7,757
|
|
|
|
6,095
|
|
|
|
6,663
|
|
Corporate
|
|
|
4,733
|
|
|
|
1,550
|
|
|
|
817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,717
|
|
|
$
|
23,957
|
|
|
$
|
19,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pet Products
|
|
$
|
17,498
|
|
|
$
|
16,433
|
|
|
$
|
11,518
|
|
Garden Products
|
|
|
20,533
|
|
|
|
12,457
|
|
|
|
4,534
|
|
Corporate
|
|
|
22,007
|
|
|
|
18,699
|
|
|
|
2,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,038
|
|
|
$
|
47,589
|
|
|
$
|
18,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest is associated with Garden Products.
16. Consolidating Condensed Financial Information of Guarantor Subsidiaries
Certain 100% 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 on the Companys $150,000,000 9-1/8% Senior Subordinated Notes (the Notes) issued
65
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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. These Non-Guarantor entities are not material to the Parent. Those subsidiaries that are guarantors of the Notes are as follows:
Farnam Companies, Inc. (including Thompsons Veterinary Supplies, Inc.)
Four Paws Products Ltd.
Grant Laboratories, Inc.
Gulfstream Home & Garden, Inc.
Interpet USA, LLC
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. and Cedar Works, LLC.)
Pets International, Ltd.
T.F.H. Publications, Inc.
Wellmark International (including B2E Corporation and B2E
Biotech LLC)
In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the
accompanying consolidating condensed financial statements based on the Companys understanding of the Securities and Exchange Commissions interpretation and application of Rule 3-10 of the Securities and Exchange Commissions
Regulation S-X.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 29,
2007
(in thousands)
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
499,083
|
|
|
$
|
1,282,781
|
|
|
$
|
(110,719
|
)
|
|
$
|
1,671,145
|
|
Cost of goods sold and occupancy
|
|
|
354,020
|
|
|
|
893,524
|
|
|
|
(110,719
|
)
|
|
|
1,136,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
145,063
|
|
|
|
389,257
|
|
|
|
|
|
|
|
534,320
|
|
Selling, general and administrative expenses
|
|
|
131,814
|
|
|
|
303,089
|
|
|
|
|
|
|
|
434,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
13,249
|
|
|
|
86,168
|
|
|
|
|
|
|
|
99,417
|
|
Interest net
|
|
|
(48,599
|
)
|
|
|
452
|
|
|
|
|
|
|
|
(48,147
|
)
|
Other income (expense)
|
|
|
(4,499
|
)
|
|
|
6,901
|
|
|
|
|
|
|
|
2,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
(39,849
|
)
|
|
|
93,521
|
|
|
|
|
|
|
|
53,672
|
|
Income taxes
|
|
|
15,794
|
|
|
|
(35,793
|
)
|
|
|
|
|
|
|
(19,999
|
)
|
Minority interest
|
|
|
(1,369
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before equity in undistributed income of guarantor subsidiaries
|
|
|
(25,424
|
)
|
|
|
57,728
|
|
|
|
|
|
|
|
32,304
|
|
Equity in undistributed income of guarantor subsidiaries
|
|
|
57,728
|
|
|
|
|
|
|
|
(57,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,304
|
|
|
$
|
57,728
|
|
|
$
|
(57,728
|
)
|
|
$
|
32,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 30,
2006
(in thousands)
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
495,431
|
|
|
$
|
1,234,061
|
|
|
$
|
(107,961
|
)
|
|
$
|
1,621,531
|
|
Cost of goods sold and occupancy
|
|
|
348,724
|
|
|
|
845,456
|
|
|
|
(107,961
|
)
|
|
|
1,086,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
146,707
|
|
|
|
388,605
|
|
|
|
|
|
|
|
535,312
|
|
Selling, general and administrative expenses
|
|
|
132,311
|
|
|
|
266,199
|
|
|
|
|
|
|
|
398,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,396
|
|
|
|
122,406
|
|
|
|
|
|
|
|
136,802
|
|
Interest net
|
|
|
(37,890
|
)
|
|
|
220
|
|
|
|
|
|
|
|
(37,670
|
)
|
Other income (expense)
|
|
|
(1,675
|
)
|
|
|
4,758
|
|
|
|
|
|
|
|
3,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
(25,169
|
)
|
|
|
127,384
|
|
|
|
|
|
|
|
102,215
|
|
Income taxes
|
|
|
9,249
|
|
|
|
(45,040
|
)
|
|
|
|
|
|
|
(35,791
|
)
|
Minority interest
|
|
|
(890
|
)
|
|
|
|
|
|
|
|
|
|
|
(890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before equity in undistributed income of guarantor subsidiaries
|
|
|
(16,810
|
)
|
|
|
82,344
|
|
|
|
|
|
|
|
65,534
|
|
Equity in undistributed income of guarantor subsidiaries
|
|
|
82,344
|
|
|
|
|
|
|
|
(82,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
65,534
|
|
|
$
|
82,344
|
|
|
$
|
(82,344
|
)
|
|
$
|
65,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 24,
2005
(in thousands)
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
449,562
|
|
|
$
|
1,019,165
|
|
|
$
|
(88,083
|
)
|
|
$
|
1,380,644
|
|
Cost of goods sold and occupancy
|
|
|
319,399
|
|
|
|
706,673
|
|
|
|
(88,083
|
)
|
|
|
937,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
130,163
|
|
|
|
312,492
|
|
|
|
|
|
|
|
442,655
|
|
Selling, general and administrative expenses
|
|
|
119,954
|
|
|
|
222,572
|
|
|
|
|
|
|
|
342,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10,209
|
|
|
|
89,920
|
|
|
|
|
|
|
|
100,129
|
|
Interest net
|
|
|
(20,931
|
)
|
|
|
271
|
|
|
|
|
|
|
|
(20,660
|
)
|
Other income
|
|
|
2,086
|
|
|
|
2,490
|
|
|
|
|
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(8,636
|
)
|
|
|
92,681
|
|
|
|
|
|
|
|
84,045
|
|
Income taxes
|
|
|
3,109
|
|
|
|
(33,182
|
)
|
|
|
(185
|
)
|
|
|
(30,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before equity in undistributed income of guarantor subsidiaries
|
|
|
(5,527
|
)
|
|
|
59,499
|
|
|
|
(185
|
)
|
|
|
53,787
|
|
Equity in undistributed income of guarantor subsidiaries
|
|
|
59,314
|
|
|
|
|
|
|
|
(59,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
53,787
|
|
|
$
|
59,499
|
|
|
$
|
(59,499
|
)
|
|
$
|
53,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING CONDENSED BALANCE SHEET
September 29, 2007
(in
thousands)
|
|
|
Unconsolidated
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
|
Consolidated
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,706
|
|
$
|
6,349
|
|
$
|
|
|
|
$
|
21,055
|
Accounts receivable, net
|
|
|
57,646
|
|
|
207,276
|
|
|
(17,493
|
)
|
|
|
247,429
|
Inventories
|
|
|
117,726
|
|
|
260,639
|
|
|
|
|
|
|
378,365
|
Prepaid expenses and other assets
|
|
|
17,904
|
|
|
20,755
|
|
|
|
|
|
|
38,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
207,982
|
|
|
495,019
|
|
|
(17,493
|
)
|
|
|
685,508
|
Land, buildings, improvements and equipment, net
|
|
|
52,486
|
|
|
149,123
|
|
|
|
|
|
|
201,609
|
Goodwill
|
|
|
598,758
|
|
|
|
|
|
|
|
|
|
598,758
|
Investment in guarantors
|
|
|
583,611
|
|
|
|
|
|
(583,611
|
)
|
|
|
|
Other assets
|
|
|
37,025
|
|
|
123,922
|
|
|
|
|
|
|
160,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,479,862
|
|
$
|
768,064
|
|
$
|
(601,104
|
)
|
|
$
|
1,646,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
59,047
|
|
$
|
94,418
|
|
$
|
(17,493
|
)
|
|
$
|
135,972
|
Accrued expenses and other liabilities
|
|
|
31,195
|
|
|
48,125
|
|
|
|
|
|
|
79,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
90,242
|
|
|
142,543
|
|
|
(17,493
|
)
|
|
|
215,292
|
Long-term debt
|
|
|
606,741
|
|
|
430
|
|
|
|
|
|
|
607,171
|
Other long-term obligations
|
|
|
3,322
|
|
|
41,480
|
|
|
|
|
|
|
44,802
|
Convertible redeemable preferred stock
|
|
|
750
|
|
|
|
|
|
|
|
|
|
750
|
Minority interest
|
|
|
1,834
|
|
|
|
|
|
|
|
|
|
1,834
|
Total shareholders equity
|
|
|
776,973
|
|
|
583,611
|
|
|
(583,611
|
)
|
|
|
776,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,479,862
|
|
$
|
768,064
|
|
$
|
(601,104
|
)
|
|
$
|
1,646,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING CONDENSED BALANCE SHEET
September 30, 2006
(in
thousands)
|
|
|
Unconsolidated
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
|
Consolidated
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,087
|
|
$
|
19,319
|
|
$
|
|
|
|
$
|
28,406
|
Accounts receivable, net
|
|
|
58,239
|
|
|
201,771
|
|
|
(20,838
|
)
|
|
|
239,172
|
Inventories
|
|
|
94,155
|
|
|
238,059
|
|
|
|
|
|
|
332,214
|
Prepaid expenses and other assets
|
|
|
18,084
|
|
|
16,826
|
|
|
|
|
|
|
34,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
179,565
|
|
|
475,975
|
|
|
(20,838
|
)
|
|
|
634,702
|
Land, buildings, improvements and equipment, net
|
|
|
32,366
|
|
|
130,238
|
|
|
|
|
|
|
162,604
|
Goodwill
|
|
|
557,820
|
|
|
|
|
|
|
|
|
|
557,820
|
Investment in guarantors
|
|
|
542,121
|
|
|
|
|
|
(542,121
|
)
|
|
|
|
Other assets
|
|
|
74,820
|
|
|
106,540
|
|
|
(2,663
|
)
|
|
|
178,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,386,692
|
|
$
|
712,753
|
|
$
|
(565,622
|
)
|
|
$
|
1,533,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
56,925
|
|
$
|
86,873
|
|
$
|
(20,838
|
)
|
|
$
|
122,960
|
Accrued expenses and other liabilities
|
|
|
30,219
|
|
|
54,125
|
|
|
|
|
|
|
84,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
87,144
|
|
|
140,998
|
|
|
(20,838
|
)
|
|
|
207,304
|
Long-term debt
|
|
|
565,250
|
|
|
160
|
|
|
|
|
|
|
565,410
|
Other long-term obligations
|
|
|
2,772
|
|
|
29,474
|
|
|
(2,663
|
)
|
|
|
29,583
|
Convertible redeemable preferred stock
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
3,000
|
Minority interest
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
1,167
|
Total shareholders equity
|
|
|
727,359
|
|
|
542,121
|
|
|
(542,121
|
)
|
|
|
727,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,386,692
|
|
$
|
712,753
|
|
$
|
(565,622
|
)
|
|
$
|
1,533,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 29, 2007
(in thousands)
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash provided (used) by operating activities
|
|
$
|
18,808
|
|
|
$
|
77,455
|
|
|
$
|
(57,728
|
)
|
|
$
|
38,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property
|
|
|
(23,574
|
)
|
|
|
(36,464
|
)
|
|
|
|
|
|
|
(60,038
|
)
|
Businesses acquired, net of cash acquired
|
|
|
(1,465
|
)
|
|
|
(32,539
|
)
|
|
|
|
|
|
|
(34,004
|
)
|
Collection of note
|
|
|
3,340
|
|
|
|
|
|
|
|
|
|
|
|
3,340
|
|
Issuance of note
|
|
|
|
|
|
|
(2,025
|
)
|
|
|
|
|
|
|
(2,025
|
)
|
Restricted investments
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
Investment in guarantor
|
|
|
(37,785
|
)
|
|
|
(19,943
|
)
|
|
|
57,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
(59,217
|
)
|
|
|
(90,971
|
)
|
|
|
57,728
|
|
|
|
(92,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on revolving line of credit
|
|
|
(967,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(967,000
|
)
|
Borrowings on revolving line of credit
|
|
|
1,012,000
|
|
|
|
|
|
|
|
|
|
|
|
1,012,000
|
|
Repayments of long-term debt
|
|
|
(3,411
|
)
|
|
|
447
|
|
|
|
|
|
|
|
(2,964
|
)
|
Proceeds from issuance of common stock
|
|
|
4,393
|
|
|
|
|
|
|
|
|
|
|
|
4,393
|
|
Excess tax benefits from stock-based awards
|
|
|
1,977
|
|
|
|
|
|
|
|
|
|
|
|
1,977
|
|
Distribution to minority interest
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
(800
|
)
|
Payment of financing costs
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
46,028
|
|
|
|
447
|
|
|
|
|
|
|
|
46,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,619
|
|
|
|
(12,970
|
)
|
|
|
|
|
|
|
(7,351
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
9,087
|
|
|
|
19,319
|
|
|
|
|
|
|
|
28,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
14,706
|
|
|
$
|
6,349
|
|
|
$
|
|
|
|
$
|
21,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 30, 2006
(in thousands)
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash provided (used) by operating activities
|
|
$
|
(86,263
|
)
|
|
$
|
263,773
|
|
|
$
|
(82,344
|
)
|
|
$
|
95,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property
|
|
|
(22,438
|
)
|
|
|
(25,151
|
)
|
|
|
|
|
|
|
(47,589
|
)
|
Businesses acquired, net of cash acquired
|
|
|
(68,089
|
)
|
|
|
(312,601
|
)
|
|
|
|
|
|
|
(380,690
|
)
|
Collection of note
|
|
|
16,058
|
|
|
|
|
|
|
|
|
|
|
|
16,058
|
|
Restricted investments
|
|
|
(15,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,500
|
)
|
Investment in guarantor
|
|
|
(169,598
|
)
|
|
|
87,254
|
|
|
|
82,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
(259,567
|
)
|
|
|
(250,498
|
)
|
|
|
82,344
|
|
|
|
(427,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on revolving line of credit
|
|
|
(878,678
|
)
|
|
|
|
|
|
|
|
|
|
|
(878,678
|
)
|
Borrowings on revolving line of credit
|
|
|
982,530
|
|
|
|
|
|
|
|
|
|
|
|
982,530
|
|
Repayments of long-term debt
|
|
|
(473,376
|
)
|
|
|
54
|
|
|
|
|
|
|
|
(473,322
|
)
|
Proceeds from issuance of long-term debt
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
Proceeds from issuance of common stock
|
|
|
114,297
|
|
|
|
|
|
|
|
|
|
|
|
114,297
|
|
Excess tax benefits from stock-based awards
|
|
|
4,026
|
|
|
|
|
|
|
|
|
|
|
|
4,026
|
|
Repurchase of common stock
|
|
|
(10,014
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,014
|
)
|
Payment of financing costs
|
|
|
(6,600
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
332,185
|
|
|
|
54
|
|
|
|
|
|
|
|
332,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(13,645
|
)
|
|
|
13,259
|
|
|
|
|
|
|
|
(386
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
22,732
|
|
|
|
6,060
|
|
|
|
|
|
|
|
28,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
9,087
|
|
|
$
|
19,319
|
|
|
$
|
|
|
|
$
|
28,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 24, 2005
(in thousands)
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
Parent
|
|
|
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash provided (used) by operating activities
|
|
$
|
91,796
|
|
|
$
|
25,362
|
|
|
$
|
(59,499
|
)
|
|
$
|
57,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property
|
|
|
(259
|
)
|
|
|
(18,417
|
)
|
|
|
|
|
|
|
(18,676
|
)
|
Businesses acquired, net of cash acquired
|
|
|
(62,194
|
)
|
|
|
|
|
|
|
|
|
|
|
(62,194
|
)
|
Restricted investments
|
|
|
15,062
|
|
|
|
|
|
|
|
|
|
|
|
15,062
|
|
Investment in guarantor
|
|
|
(51,766
|
)
|
|
|
(7,733
|
)
|
|
|
59,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
(99,157
|
)
|
|
|
(26,150
|
)
|
|
|
59,499
|
|
|
|
(65,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on revolving line of credit
|
|
|
(291,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(291,000
|
)
|
Proceeds from issuance of long-term debt
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Borrowings on revolving line of credit
|
|
|
236,000
|
|
|
|
|
|
|
|
|
|
|
|
236,000
|
|
Payments on long-term debt
|
|
|
(1,574
|
)
|
|
|
20
|
|
|
|
|
|
|
|
(1,554
|
)
|
Proceeds from issuance of common stock
|
|
|
7,926
|
|
|
|
|
|
|
|
|
|
|
|
7,926
|
|
Payment of financing costs
|
|
|
(533
|
)
|
|
|
|
|
|
|
|
|
|
|
(533
|
)
|
Treasury stock purchases
|
|
|
(754
|
)
|
|
|
|
|
|
|
|
|
|
|
(754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
25,065
|
|
|
|
20
|
|
|
|
|
|
|
|
25,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
17,704
|
|
|
|
(1,133
|
)
|
|
|
|
|
|
|
16,571
|
|
Cash and cash equivalents at beginning of year
|
|
|
5,028
|
|
|
|
7,193
|
|
|
|
|
|
|
|
12,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
22,732
|
|
|
$
|
6,060
|
|
|
$
|
|
|
|
$
|
28,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72