<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
September 28, 1996 0-20242
- -------------------------- ----------------------
CENTRAL GARDEN & PET COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 68-0275553
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3697 Mt. Diablo Boulevard, Lafayette, California 94549
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(Address of principal executive offices) (Zip Code)
Telephone Number: (510) 283-4573
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
-----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
At December 11, 1996, the aggregate market value of the registrant's Common
Stock and Class B Stock held by non-affiliates of the registrant was
approximately $243,820,529 and $275,378, respectively.
At December 11, 1996, the number of shares outstanding of registrant's
Common Stock was 12,607,290. In addition, on such date the registrant had
outstanding 1,865,939 shares of its Class B Stock which is convertible into
Common Stock on a share-for-share basis.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders - Part III of this Form 10-K.
<PAGE>
PART I
Item 1 - Business
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GENERAL
The Company is the largest national distributor of lawn and garden products
as well as a major distributor of pet and pool supplies. The Company's business
strategy is to capitalize on its national presence, comprehensive product
selection, menu of value-added services and efficient operations. Utilizing
these capabilities, the Company strives to develop and enhance servicing
relationships with both large national and regional retailers as well as
manufacturers.
The Company was incorporated in Delaware in June 1992 and is the successor
to a California corporation which was incorporated in 1955. Unless the context
otherwise requires, references herein to the Company include Central Garden &
Pet Company and its subsidiaries, and their predecessor companies and
subsidiaries. The Company's principal executive offices are located at 3697 Mt.
Diablo Boulevard, Lafayette, California 94549 and its telephone number is (510)
283-4573.
RECENT DEVELOPMENTS
On November 15, 1996, the Company completed the sale of an aggregate of
$115,000,000 of 6% Convertible Subordinated Notes due 2003. The net proceeds to
the Company were approximately $111,400,000. On July 19, 1996 the Company
completed the sale of 2,752,500 shares of Common Stock. The net proceeds to the
Company were approximately $46,100,000.
In October 1996, the Company entered into a definitive agreement to acquire
the United States and Canada flea and tick business of Sandoz Agro, Inc. (the
"Sandoz Flea & Tick Acquisition"). The acquisition includes products, such as
on-animal sprays, shampoos and powders, collars, indoor foggers, aerosols,
concentrates and pump sprays, based on the active ingredient Methoprene. The
acquisition includes ownership in the United States and Canada of the Zodiac and
Vet-Kem trademarks as well as those for Ovitrol, Siphotrol, Fleatrol, vIGRen,
Pector, Precor and Natural Signature. The acquisition is expected to close
before March 1997. However, the consummation of the acquisition is subject to a
number of conditions, including the Federal Trade Commission ("FTC") approval
relating to the divestiture of the Sandoz Flea and Tick business in connection
with the merger of Sandoz Ltd. and Ciba-Geigy Limited into Novartis AG,
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and there can be no assurance that FTC approval will be obtained or that the
Sandoz Flea and Tick Acquisition will be consummated.
On July 12, 1996, the Company acquired Kenlin Pet Supply, Inc. ("Kenlin"),
the largest distributor of pet supply products in the eastern United States.
Kenlin, which is based on Mahwah, New Jersey, operates in 17 eastern states and
has approximately 290 employees. Under the terms of the stock purchase
agreement, the Company paid an aggregate of $33 million in cash to acquire or
redeem all of Kenlin's outstanding stock and eliminate all of its outstanding
debt.
Effective October 1, 1995, the Company entered into an agreement with The
Solaris Group ("Solaris"), the manufacturer of Ortho, Round-Up and Green Sweep
lawn and garden products, to become the master agent and master distributor for
sales of Solaris products nationwide. Under the agreement, which has an initial
four year term, the Company provides a wide range of value-added services in
connection with sales of Solaris products, including logistics, order processing
and fulfillment, inventory distribution and merchandising. Solaris is the
Company's largest supplier, and the Company believes that Solaris products
accounted for approximately 44% of the Company's net sales in fiscal 1996.
Prior to fiscal 1996, the Company had been a non-exclusive distributor for
Solaris, which had increasingly pursued direct sales to retailers thereby
adversely impacting the Company's operating results.
In 1995, the Company changed its fiscal year end to the last Saturday in
September. Accordingly, the fiscal period ended September 30, 1995 (hereinafter
referred to as fiscal 1995) was a nine month period.
PRODUCTS
The Company offers its customers a comprehensive selection of brand name
lawn, garden, pet and pool supplies. This selection consists of approximately
45,000 products from approximately 1,000 manufacturers. The Company generally
focuses on those lawn and garden brand name products that are suited to
distribution due to their seasonality, variable sales movements, complexity to
consumers and retailers, handling and transportation difficulties, and which
therefore generally require value-added services. The Company focuses on these
types of products because it believes that retailers cannot source these
products directly from suppliers as effectively as they can through distributors
and that manufacturers of these products are likely to view the services offered
by the Company as highly desirable and cost-effective. The Company carries many
of the best-known brands in pet foods and supplies and combines these products
into single shipments, providing its pet supplies customers a wide variety of
products on a cost-effective basis.
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The Company does not carry live plants, animals, power tools or high priced
items which are generally sourced directly from manufacturers. The Company
believes that its broad and deep selection of products permits retailers to
fulfill substantially all of their lawn, garden, pet and pool supply
requirements from a single source. In fiscal 1996, substantially all of the
Company's products had suggested retail prices of $20 or less.
In fiscal 1996, lawn and garden products accounted for approximately 76% of
the Company's net sales, pet supplies accounted for approximately 19% and pool
supplies accounted for approximately 5%. In order to reduce the seasonality of
its business and improve the efficient use of its distribution system during the
non-peak selling season, the Company offers Christmas trees and other products.
SALES AND SERVICE
The Company's strategy is to offer a broad range of services to help
retailers and manufacturers maximize their sales and profitability. The Company
has implemented this strategy by developing a knowledgeable and profit-incented
sales force and by offering a broad menu of services.
Sales
At September 28, 1996, the Company employed approximately 375 sales and
marketing personnel located throughout its distribution center network. Sales
and marketing personnel typically service retail customers within a 250 mile
radius of the distribution centers. They are trained with knowledge of local
market conditions, the Company's products and merchandising skills. A
significant number of sales personnel are certified nurserymen, horticultural
graduates and/or master gardeners. The Company has divided its sales force into
key account managers, who act as consultants to the buyers of large retailers,
and field sales personnel, who are responsible for servicing specific retail
customers in their assigned territory.
Menu of Value-Added Services
The Company offers retailers and manufacturers a comprehensive menu of
value-added services with separate or combination prices from which each
customer may select according to its individual needs. Each value-added service
is generally designed either to increase a retailer's sales or decrease a
retailer's costs. The Company generally offers retailers deliveries within one
business day from the time the Company receives an order. In addition to the
standard delivery services, many of the Company's customers choose a high
percentage of the value-added services listed below.
Program Development. The Company's key account managers recommend and
assist retail buyers in developing
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national and local product listings, advertising, promotions and shelf
space planning at the beginning of and during the peak selling season to
optimize store sales and profits.
Training of Store Employees. The Company's sales personnel conduct
formal and informal product training sessions with store personnel to help
them provide informed consumer service. The Company believes that the
demand for this service is greater at larger regional and national retail
chains due to their higher employee turnover and employee inexperience with
gardening products.
Weekend Consumer Clinics. Sales personnel also conduct and assist in
preparing and giving in-store weekend consumer education clinics to help
increase retail sales and improve consumer relations.
Designing and Setting Store Displays. The Company's sales personnel
assist in designing and planning store shelves at the beginning of each
season. Their expertise in product knowledge, sales trends, in-season
promotions and consumer demand for specific products allows them to help
each store adjust shelf stock and displays to increase sales in a timely
fashion.
Point-of-Purchase. The Company assists the manufacturer and retailer
in the design and installation of point-of-purchase ("POP") material to
increase sales. The POP material is generally matched to manufacturers'
advertising and promotions as well as local lawn, gardening and insect
problems.
Merchandising of Shelf Stock. The Company's store service personnel
physically restock store shelves with all the Company's merchandise on a
weekly basis. This service can also include price stickering for stores
not on electronic point-of-sale systems.
Electronic Data Interchange ("EDI"). The Company's systems offer EDI
capabilities to retailers which can include paperless invoices, payments
and product history movements to help retailers monitor, plan and order
products at a lower administrative cost.
"Hot Shot" Deliveries. The Company offers rush deliveries to help
retailers satisfy high consumer demand. This service is often critical to
keep retailers from being out-of-stock on a weekend during the peak selling
season.
The Company believes that retailers choose these services because the
Company can in many cases provide them more efficiently and effectively than
manufacturers or retailers themselves. The Company's sales force often advises
and assists store management to increase or decrease shelf space of certain
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products to match the expected and unexpected seasonal demands. The Company
believes that a typical store needs to change the shelf space dedicated to lawn
and garden products several times during the peak selling season. The sales
force also often highlights specific products appropriate for the local market.
RETAILERS
The Company focuses on selling lawn and garden products to retailers with
high volume retail stores. The Company's customer base is comprised of a wide
range of retailers, including specialty "do-it-yourself" superstores, mass
merchants, warehouse clubs, high volume local and regional nurseries and
regional and national chains of drug and grocery stores.
As a result of its national presence the Company has an opportunity to
enter into relationships with national chains, whereby the Company, directly or
through its affiliates, provides services to all or substantially all of the
individual stores in the chain. From the point of view of the national
retailer, such an arrangement offers the benefit of a high level of service,
lower cost of doing business and administrative efficiencies. The Company
believes its customers also benefit from the in-depth local market knowledge of
the Company sales personnel, in-store stocking, training of store employees and
other value added merchandising services. Because these arrangements are not
formalized in writing, these retailers may at any time purchase products from
competing distributors.
Most major retailers, including customers of the Company, currently
purchase a portion of their lawn and garden products directly from certain large
manufacturers rather than through distributors such as the Company. If a number
of the Company's major customers were to substantially increase their direct
purchases from manufacturers, the sales and earnings of the Company could be
adversely affected.
The Company's current practice on product returns generally is to accept
and credit the return of unopened cases of products from customers where the
quantity is small, where the product has been misshipped or the product is
defective. The Company has arrangements with its manufacturers and suppliers to
stock balance and/or credit the Company for a certain percentage of returned or
defective products. While in the past the Company's return practice has not
caused any material adverse impact on operations, there can be no assurance in
the future that the Company's operations will not be adversely impacted due to
the return of products.
MANUFACTURERS AND SUPPLIERS
The Company believes that the reason manufacturers and suppliers in the
lawn and garden industry use distributors to ship a large percentage of their
products to retailers is because
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it is a highly efficient method of distribution. In an industry with a large,
diverse group of retailers combined with a relatively short and dynamic selling
season, the Company believes that in most instances during the peak selling
season each manufacturer or supplier would need to make weekly deliveries of an
uneconomical volume of products to a large number of retailers in order to
satisfy consumer demand. Similarly, each week retailers would have to place
multiple orders and manage separate deliveries from a large number of
manufacturers and suppliers rather than from a comparatively small number of
distributors. The Company can typically deliver many products with one truck
(often on one or more pallets for each store) as part of its delivery route to a
number of stores. On the other hand, the same order using direct shipments from
manufacturers or suppliers would require multiple deliveries from the various
manufacturers and suppliers.
The Company's national presence enables manufacturers and suppliers to
access retail outlets and end users through one primary distributor. In
addition, the Company's menu of value-added services to retailers includes
product promotion and merchandising support that the Company believes many
manufacturers and suppliers could not efficiently perform. While the Company
purchases products from approximately 1,000 different manufacturers and
suppliers, the Company believes that approximately 29% and 44% of the net sales
of the Company for the fiscal years ended September 30, 1995 and September 28,
1996, respectively, were derived from products purchased from Solaris.
Prior to the acquisition of Ortho by Monsanto, both Ortho (in late 1991)
and Monsanto (in 1993) had initiated direct sale programs. Solaris, a strategic
business unit of Monsanto, expanded these direct sales programs in 1994, which
now constitute a majority of Solaris' sales. The Company believes that these
programs had, during fiscal 1994 and fiscal 1995, an adverse effect on the
Company's lawn and garden business. The Company further believes that the
adverse impact of these programs will be mitigated by the Solaris Agreement,
although there can be no assurance in this respect.
THE SOLARIS AGREEMENT
The Company entered into an agreement with Solaris effective October 1,
1995 to become the master agent and master distributor for sales of Solaris
products nationwide.
The Company believes that a significant portion of its net sales and
operating income during fiscal 1996 was attributable to its new relationship
with Solaris. Under the Solaris Agreement, Solaris is obligated to reimburse
the Company for costs incurred in connection with services provided by the
Company to Solaris' direct sales accounts. In addition, the Company receives
payments based on the level of sales of Solaris products to these accounts, and
these payments are subject to increase based on the
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growth of sales of Solaris products. The Company also shares with Solaris in
the economic benefits of certain cost reductions, to the extent achieved. It is
possible that disagreements could arise between Solaris and the Company as to
measurement of the costs incurred in servicing Solaris' direct sales accounts.
The cost reimbursement arrangement is based on estimates which are subject to
reconciliation at the end of each fiscal year. As a result, the Solaris
Agreement could contribute to variability in the Company's operating results.
The new relationship with Solaris embodied in the Solaris Agreement does not
assure that the Company will be profitable overall.
Under the Solaris Agreement, Solaris will continue to negotiate prices
directly with its direct sales accounts. As a result of the Solaris Agreement a
majority of the Company's sales of Solaris products are derived from servicing
direct sales accounts, whereas in 1994 and fiscal 1995, a majority of the
Company's sales of Solaris products were made by the Company as a traditional
distributor. The Company acts as the master agent on direct sales of Solaris
products to certain major retailers and the master distributor in connection
with sales of Solaris products to other distributors and retailers. The Solaris
Agreement contains provisions which, without the consent of Solaris, could limit
the Company's ability to distribute certain lawn and garden products
manufactured by suppliers other than Solaris. These provisions could result in
lower sales of non-Solaris products, which could have an adverse effect on the
Company's business. The Solaris Agreement does not expire until September 30,
1999. However, Solaris has the right to terminate the agreement prior to its
expiration in the event of a material breach of the agreement by the Company,
including the Company's failure to satisfy certain performance criteria, or
under certain other circumstances, including a sale of Solaris. Any such early
termination would have a material adverse effect on the Company.
PROPRIETARY BRANDED PRODUCTS
The principal product lines owned by the Company are the Matthew's line of
redwood products, the Grant's line of ant control products, the Greentouch line
of cutting tools and four proprietary brands of fertilizer. The Matthew's line
of redwood products consists of redwood tubs, planter boxes and trellises. The
Grant's line of ant control products consists of ant stakes, granules and twists
and ties. The Greentouch line of cutting tools consists of small hand tools
used for gardening which are supplied to the Company by a contract manufacturer
located in the Far East. The Company has four proprietary brands of fertilizer
- -- Colorado's Own and Mountain States, which are manufactured by the Company,
and Easy-Gro and Turf-Magic, which are supplied to the Company by contract
manufacturers. Additionally, the Company manufactures aquariums sold under the
brand name Island Aquarium.
Over the long-term, the Company intends to pursue the acquisition of
additional proprietary branded products which
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would benefit from access to the Company's distribution system and expertise.
In October 1996, the Company entered into a definitive agreement to acquire the
United States and Canada flea and tick business of Sandoz Agro, Inc. The
acquisition includes products, such as on-animal sprays, shampoos and powders,
collars, indoor foggers, aerosols, concentrate and pump sprays, based on the
active ingredient Methoprene. The acquisition includes ownership in the United
States and Canada of the Zodiac and Vet-Kem trademarks as well as those for
Ovitrol, Siphotrol, Fleatrol, vIGRen, Petcor, Precor and Natural Signature. The
acquisition is expected to close before March 1997. However, the consummation
of the acquisition is subject to a number of conditions, including FTC approval
relating to the divestiture of the Sandoz Flea and Tick business in connection
with the merger of Sandoz Ltd. and Ciba-Geigy Limited into Novartis AG, and
there can be no assurance that FTC approval will be obtained or that the Sandoz
Flea and Tick Acquisition will be consummated. There can be no assurance that
the Company can successfully integrate Sandoz Flea and Tick or that Sandoz Flea
and Tick's business will enhance the Company's business.
MANAGEMENT INFORMATION SYSTEMS
During their weekly visits to the retail stores, sales personnel transmit
orders to the appropriate distribution centers in any one of three methods:
remote order entry units (hand held, electronic devices), telephone or
facsimile. Generally, sales personnel transmit orders several times each day.
Certain retailers can also order products directly through the Company's EDI
system or by purchasing items directly at each distribution center. After
customer orders are received and processed, shipping tickets are printed and
credit approved prior to the orders being sent to the warehouse manager. The
Company's warehouse employees then fill orders by manual selection and
packaging. The Company believes that due to the unusual shapes and sizes of its
products (e.g., hand held tools, wheelbarrows and bags of fertilizer) current
automatic order selection systems are not as efficient and cost effective as the
Company's current manual systems.
The Company's management information systems collect data needed for
receivables and inventory management, customer, product and facility
profitability analysis, as well as permit electronic data interface with
customers and suppliers. The Company is presently electronically connected with
several major customers with a variety of applications that range from purchase
order receipt to paperless invoicing. The Company has also purchased and is now
using a new shelf space planning system that optimizes retail shelf space
utilization and profitability. The Company receives more than a majority of its
daily order volume from field sales representatives utilizing hand-held order
entry computers. The Company's systems enable it to provide delivery within one
business day.
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The Company is presently upgrading and installing one uniform, integrated
system on IBM Model AS-400 computers across the United States at an estimated
cost to complete of $1 million. The Company has completed the installation of
the new system for the Southwest, Midwest and Southeast regions. The Company
expects to convert the remaining regions to the new system within the next
twelve months. No assurances can be given that such transition and system
enhancement can be accomplished in a timely and cost-effective manner without
disrupting the Company's operations. In addition, there can be no assurance
that the Company's current system or planned upgrade will be sufficient or
effective and that further investments in management information systems will
not be necessary.
DISTRIBUTION
In order to develop the most effective possible national distribution
network, the Company relies not only on its network of 41 Company-operated,
distribution centers (see "-- Properties"), but also on its affiliation
arrangements with two leading regional distributors of lawn and garden products
and, in the case of Solaris products, on agreements with a group of independent
distributors for specific geographic areas.
The Company generally will make deliveries from its distribution centers
within one to two days after receipt of the order and, if the customer requests,
will generally make "hot shot" deliveries within four hours after receipt of the
order. The Company organizes its truck and delivery routes to optimize each
truck's merchandise load and number of deliveries. The Company uses trucks to
deliver a substantial percentage of the Company's products and common carriers
for a small percentage of deliveries. Common carriers are typically used for
deliveries beyond a 200 mile radius from the distribution center.
The Company's affiliation arrangements are intended to permit the Company
to more effectively solicit national accounts and to assure that such accounts
can be effectively serviced on a national basis without requiring the Company to
incur the capital costs of opening new distribution centers or undertaking an
acquisition. The Company's affiliation arrangements are with the following
distributors:
Affiliated Distributor Geographic Region
Commerce Corporation Northeast
U.S. Garden Sales Ohio and Michigan
Under the affiliation arrangements, Company personnel negotiate
transactions with national retail chains and the affiliated distributors provide
such retail chains with products and related services in the geographic regions
in which they operate. The Company receives fees from the affiliated
distributors to compensate it for its costs, and sales of these
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affiliated distributors are not reflected in the Company's statements. The
Company earned no profits in fiscal 1996 from these arrangements as the Company
set its fees in connection with such arrangements at a level which was designed
to cover only the Company's administrative costs.
The Company has negotiated agreements with a group of 32 independent
distributors for the distribution of Solaris products by the independent
distributors. These agreements provide coverage of geographic areas where the
Company does not have facilities or where established relationships with
specific retailers make such arrangements desirable.
COMPETITION
The lawn and garden products and pet supply distribution industries are
highly competitive. Traditionally, these industries have been characterized by
intense competition from large numbers of smaller local and regional
distributors--with competition based on price, service and personal
relationships. In recent years, the Company has moved aggressively to insulate
itself from this type of competition through the development of a nationwide
presence, forging relationships with manufacturers, suppliers and major
retailers and adding new value-added services.
In addition to competition from other distributors, the Company also faces
existing and potentially increased competition from manufacturers and suppliers
which distribute some percentage of their products directly to retailers,
bypassing distributors, or through a dual distribution system in which the
manufacturer or supplier competes with distributors for sales to certain
accounts. Such competition is typically based on service and price. Although
the Company competes against direct sales by manufacturers and suppliers, it is
often able to participate in such direct sales by entering into agreements with
the manufacturers and suppliers pursuant to which it provides the manufacturers
and suppliers with order processing, warehousing, shipping and certain in-store
services in connection with such direct sales in return for a fee from the
manufacturers and suppliers.
EMPLOYEES
As of September 28, 1996, the Company had approximately 1,800 employees of
which approximately 1,700 were full-time employees and 100 were temporary
employees. The Company hires substantial numbers of temporary employees for the
peak shipping season of February through June in order to meet the increased
demand experienced during the spring and summer months, including merchandising
in stores. All of the Company's temporary employees are paid on an hourly
basis. None of the Company's employees is represented by a labor union. The
Company considers its relationship with its employees to be good. Employees in
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Kenlin's distribution facility previously voted to create a union, although
there is currently no collective bargaining agreement in place between such
union and Kenlin.
ENVIRONMENTAL CONSIDERATIONS
The Company's subsidiary, Grant Laboratories, Inc., which manufactures ant
control products, and many of the products distributed by the Company are
subject to regulation by federal, state and local authorities. In addition, in
connection with Sandoz Flea and Tick Acquisition the Company will acquire a
production facility in Texas which makes, among other things, products based
upon the active ingredient Methoprene, and is subject to regulation by federal,
state and local authorities. Such regulations are often complex and are subject
to change. Environmental regulations may affect the Company by restricting the
manufacturing or use of its products or regulating their disposal. Regulatory
or legislative changes may cause future increases in the Company's operating
costs or otherwise affect operations. Although the Company believes it is and
has been in substantial compliance with such regulations and has strict internal
guidelines on the handling and disposal of its products, there is no assurance
in the future that the Company may not be adversely affected by such regulations
or incur increased operating costs in complying with such regulations. However,
neither the compliance with regulatory requirements nor the Company's
environmental procedures can ensure that the Company will not be subject to
claims for personal injury, property damages or governmental enforcement.
EXECUTIVE OFFICERS
Certain information regarding the executive officers of the Company is set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
William E. Brown........... 55 Chairman of the Board and
Chief Executive Officer
Glenn W. Novotny........... 50 President, Chief Operating
Officer and Director
Neill J. Hines............. 56 Executive Vice President
Robert B. Jones............ 64 Vice President, Chief
Financial Officer and
Secretary
</TABLE>
William E. Brown has been Chairman and Chief Executive Officer of the
Company since 1980. From 1977 to 1980, Mr. Brown was Senior Vice President of
the Vivitar Corporation with responsibility for Finance, Operations, and
Research & Development. From 1972 to 1977, he was with McKesson Corporation
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where he was responsible for its 200-site data processing organization. Prior
to joining McKesson Corporation, Mr. Brown spent the first 10 years of his
business career at McCormick, Inc. in manufacturing, engineering and data
processing.
Glenn W. Novotny has been President of the Company since June 1990 and was
President of the predecessor Weyerhaeuser Garden Supply ("WGS") since 1988.
Prior thereto, he was with Weyerhaeuser Corporation for 20 years with a wide
range of managerial experience including manufacturing, accounting, strategic
planning, sales, general management and business turnarounds. From 1985 to
1988, Mr. Novotny was Region General Manager, Building Materials Distribution.
From 1982 to 1985, he was Regional General Manager, Southern Mill Direct Sales.
From 1979 to 1982, Mr. Novotny managed the strategic planning and analysis
department of Weyerhaeuser's Solid Wood Business.
Neill J. Hines joined the Company in June 1990 as Executive Vice President
and was Vice President-Finance since 1989 with WGS. Prior thereto, he was with
Weyerhaeuser Corporation for 25 years in a broad variety of positions including
Eastern Region Manager of Finance and Planning, Forest Products; North Carolina
Business and Financial Manager; Plywood Plant Manager; Manager Finishing,
Shipping & Customer Service; Paper Mills; and various controllership positions.
Robert B. Jones joined the Company in July 1991 as Corporate Controller.
He became Chief Financial Officer in June 1993 and Secretary in May 1994. From
May 1990 to July 1991, Mr. Jones was Executive Vice President of International
Tropic-Cal., Inc. From February 1988 to April 1990, Mr. Jones was Vice
President and Chief Financial Officer of Compu-Rite Corporation, a manufacturer
of computer ribbons. Prior to joining Compu-Rite, Mr. Jones was Vice President
and Chief Financial Officer of Vivitar Corporation from 1982 to 1988. Prior to
joining Vivitar, Mr. Jones was the Chief Financial Officer for a supplemental
air carrier. Mr. Jones began his business career as an auditor with the
international accounting firm of Arthur Young & Company (now Ernst & Young),
leaving that firm after nine years as an audit principal.
Item 2 - Properties
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As of September 28, 1996, the Company operated 41 distribution centers.
The Company currently owns two distribution centers which it uses in San Antonio
and Lubbock, Texas and leases the remaining distribution centers. Most
distribution centers consist of office and warehouse space, several large bays
for loading and unloading and a store for walk-in commercial accounts. The
Company's executive offices are located in Lafayette, California. The table
below lists the Company's distribution facilities.
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<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FOOTAGE USE OWN/LEASE
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<S> <C> <C> <C>
WESTERN REGION
Visalia, CA 57,000 Whse/Office Lease
Stockton, CA 81,000 Whse/Office Lease
Phoenix, AZ 50,000 Whse/Office Lease
Sacramento, CA 170,000 Whse/Office Lease
Sacramento, CA 54,000 Whse/Office Lease
San Leandro, CA 11,000 Warehouse Lease
Orange, CA 45,000 Whse/Office Lease
Riverside, CA 15,000 Warehouse Lease
Van Nuys, CA 28,000 Warehouse Lease
San Diego, CA 24,000 Warehouse Lease
Santa Fe Springs, CA 68,000 Whse/Office Lease
Fullerton, CA 29,000 Warehouse Lease
NORTHWEST REGION
Algona, WA 109,000 Whse/Office Lease
Boise, ID 9,000 Warehouse Lease
Denver, CO 130,000 Whse/Office Lease
Medford, OR 1,000 Warehouse Lease
Portland, OR 65,000 Warehouse Lease
Salt Lake City, UT 73,000 Whse/Office Lease
MIDWEST REGION
Bloomington, IL 45,000 Whse/Office Lease
Kansas City, MO 57,000 Whse/Office Lease
Minneapolis, MN 40,000 Whse/Office Lease
SOUTHWEST REGION
Albuquerque, NM 32,000 Warehouse Lease
Hammond, LA 64,000 Warehouse Lease
Dallas, TX 132,000 Whse/Office Lease
Houston, TX 54,000 Warehouse Lease
Houston, TX 32,000 Warehouse Lease
Houston, TX 47,000 Whse/Office Lease
Little Rock, AR 27,000 Warehouse Lease
Lubbock, TX 30,000 Warehouse Own
McAlester, OK 40,000 Whse/Office Lease
McGregor, TX 21,000 Warehouse Lease
Pharr, TX 30,000 Warehouse Lease
San Antonio, TX 39,000 Warehouse Own
SOUTHEAST REGION
Atlanta, GA 39,000 Whse/Office Lease
Greensboro, NC 36,000 Warehouse Lease
Orlando, FL 104,000 Warehouse Lease
EASTERN REGION
China Grove, NC 27,000 Warehouse Lease
E. Providence, RI 53,000 Whse/Office Lease
Mahwah, NJ 155,000 Whse/Office Lease
Ramsey, NJ 21,000 Warehouse Lease
MEXICO
Celaya 3,000 Whse/Office Lease
---------
2,147,000
Total
</TABLE>
The Company's leases generally expire between 1997 and 2005. Substantially
all of the leases contain renewal provisions with automatic rent escalation
clauses. In addition to the facilities that are owned, the Company's fixed
assets are comprised primarily of trucks, warehousing and transportation
equipment. As of September 28, 1996, the Company operated a fleet of
approximately 175 trucks of which most are leased. During the Company's peak
season it rents additional trucks.
14
<PAGE>
Item 3 - Legal Proceedings
- --------------------------
The Company is not a party to any material litigation.
For information concerning the settlement during fiscal 1996 of certain
litigation see Note 10 of Notes to Consolidated Financial Statements.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Inapplicable.
15
<PAGE>
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
The Common Stock of the Company has been traded on the National Market
System of NASDAQ under the symbol CENT since the Company's initial public
offering on July 15, 1993. The following table sets forth, for the periods
indicated, the highest and lowest closing sale prices for the Common Stock, as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal 1995/(1)/
---------------
<S> <C> <C>
First Quarter.... 4-1/4 3-5/16
Second Quarter... 6 3-1/2
Third Quarter.... 6-3/4 5-1/8
Fiscal 1996
-----------
First Quarter.... 9-1/2 5-1/2
Second Quarter... 10 8-1/8
Third Quarter.... 19 9-1/4
Fourth Quarter... 26-1/8 16-3/4
- --------------------
</TABLE>
/(1)/ In 1995, the Company changed its fiscal year end to the last Saturday in
September. Accordingly, the fiscal period ended September 30, 1995 (hereinafter
referred to as fiscal 1995) was a nine month period.
As of September 28, 1996, there were approximately 105 holders of record of
the Company's Common Stock and approximately 15 holders of record of the
Company's Class B Stock.
In August 1996, the Company paid a cash dividend in the aggregate amount of
$45,000 to the holders of its Series A Preferred Stock. Except as mentioned in
the previous sentence, the Company has not paid any cash dividends in the past.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's line of credit contains
restrictions on the Company's ability to pay dividends. See Note 4 of Notes to
Consolidated Financial Statements.
Item 6 - Selected Financial Data
- --------------------------------
The following selected income statement and balance sheet data of the
Company as of and for each of the fiscal years in the three-year period ended
December 25, 1994, the nine month period ended September 30, 1995 and the
twelve month period ended September 28, 1996 have been derived from the
Company's audited consolidated financial statements. The financial data set
forth
16
<PAGE>
below should be read in conjunction with "Item 8 - Financial Statements and
Supplemental Data - Consolidated Financial Statements of the Company and related
Notes thereto and Item 7 -Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR NINE MONTH FISCAL YEAR
ENDED ENDED ENDED PERIOD ENDED ENDED
DECEMBER 27, DECEMBER 26, DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28,
1992 1993 1994 1995(1) 1996
------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales........................................ $321,707 $334,682 $421,427 $373,734 $619,622
Cost of goods sold and occupancy................. 271,050 278,746 354,096 316,832 535,189
-------- -------- -------- -------- --------
Gross profit......................... 50,657 55,936 67,331 56,902 84,433
Selling, general and administrative expenses..... 41,949 44,702 58,489 48,075 66,945
-------- -------- -------- -------- --------
Income from operations........................... 8,708 11,234 8,842 8,827 17,488
Interest expense - net........................... (4,028) (3,751) (5,642) (5,891) (4,061)
Other income (expense)........................... (742) (878) (859) (953) 1,038
-------- -------- -------- -------- --------
Income (loss) before income taxes and minority 3,938 6,605 2,341 1,983 14,465
interest........................................
Income tax expense............................... 1,595 2,637 936 904 6,017
-------- -------- -------- -------- --------
Income before minority interest.................. 2,343 3,968 1,405 1,079 8,448
Minority interest................................ (210) 26 -- -- --
-------- -------- -------- -------- --------
Net income....................................... $ 2,133 $ 3,994 $ 1,405 $ 1,079 $ 8,448
======== ======== ======== ======== ========
Net income per common and common equivalent
share (2)
Fully diluted (3)........................... 0.18 0.71
Primary..................................... 0.83 0.24 0.18 0.72
Weighted average shares outstanding(2)
Fully diluted (3)........................... 6,050 11,904
Primary..................................... 4,789 5,947 5,943 11,702
<CAPTION>
DECEMBER 27, DECEMBER 26, DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28,
1992 1993 1994 1995 1996
------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $ 10,288 $ 26,719 $ 21,003 $ 25,316 $ 95,670
Total assets..................................... 123,484 143,748 173,953 142,680 283,664
Short-term borrowings............................ 41,453 32,162 44,995 39,670 29,508
Long-term borrowings............................. 5,975 8,804 7,019 11,130 7,635
Shareholders' equity............................. 16,114 35,359 36,376 38,402 129,559
</TABLE>
_________________
(1) In 1992, the Company adopted a 52/53 week fiscal year ending on the last
Sunday in December. In 1995, the Company changed its fiscal year end to the
last Saturday in September. Accordingly, the fiscal period ended September
30, 1995 was a nine-month period.
(2) During 1992, the Company was reorganized. As a result, net income per
common and common equivalent share and weighted average shares outstanding
are not presented for fiscal year 1992 because such information would not be
comparable with the post-reorganization periods.
(3) For periods not presented, fully diluted amounts were equal to primary as
common stock equivalents were anti-dilutive.
17
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
OVERVIEW
The Company entered into an agreement effective October 1, 1995 with
Solaris to become both the master agent and master distributor for sales of
Solaris products nationwide. Management believes that the new relationship with
Solaris embodied in the Solaris Agreement has had a substantial impact on the
Company's results of operations. Under the Solaris Agreement, which has an
initial four-year term, the Company, in addition to serving as the master agent
and master distributor for sales of Solaris products, provides a wide range of
value-added services including logistics, order processing and fulfillment,
inventory distribution and merchandising. However, Solaris continues to
negotiate its sales prices directly with its direct sales accounts. As a result
of the Solaris Agreement a majority of the Company's sales of Solaris products
are derived from servicing direct sales accounts, whereas in 1994 and fiscal
1995, a majority of the Company's sales of Solaris products were made by the
Company as a traditional distributor. A substantial portion of these sales
consists of large shipments to retail distribution centers which are
characterized by lower gross profit as a percentage of net sales compared with
sales made by the Company as a traditional distributor. The Company believes
that the operating expenses associated with this type of sale are lower than the
operating expenses associated with sales made by the Company as a traditional
distributor. The Company believes that the gross profit as a percentage of net
sales associated with the Company's services to Solaris direct sales accounts is
higher than the gross profit as a percentage of net sales associated with the
Company's historical agency sales due to the greater services provided pursuant
to the Solaris Agreement. The Company believes that the collective impact of
these factors has led to substantially increased sales of Solaris products,
increased gross profit from sales of Solaris products and lower gross profit as
a percentage of net sales.
In addition, under the Solaris Agreement, the Company's accounts receivable
related to Solaris products sold to direct sales accounts are paid more quickly
since the amount owed to the Company is settled by Solaris within 15 days of
receipt of an invoice, rather than waiting for payment by retailers in
accordance with their normal payment terms. Since entering into the Solaris
Agreement, inventories of Solaris products have increased since the Company is
not only carrying inventories to support its own sales of Solaris products but
also certain inventory previously carried by Solaris as well as additional
inventories to support sales of Solaris products by the Company's network of
independent distributors.
The Solaris Agreement provides for the Company to be reimbursed for costs
incurred in connection with services
18
<PAGE>
provided to Solaris' direct sales accounts and to receive payments based on the
growth of sales of Solaris products. The Company also shares with Solaris in
the economic benefits of certain cost reductions, to the extent achieved. As a
result, management believes that the Company's profitability is more directly
attributable to the success of Solaris than it has been in the past.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
<TABLE>
<CAPTION>
NINE MONTH FISCAL
FISCAL PERIOD YEAR
YEAR ENDED ENDED ENDED
DECEMBER SEPTEMBER SEPTEMBER
25, 1994 30, 1995 28, 1996
--------- ---------- ---------
<S> <C> <C> <C>
Net Sales................................. 100.0% 100.0% 100.0%
Cost of goods sold and occupancy.......... 84.0 84.8 86.4
-------- -------- --------
Gross profit......................... 16.0 15.2 13.6
Selling, general and administrative 13.9 12.9 10.8
expenses................................. -------- -------- --------
Income from operations.................... 2.1 2.3 2.8
Interest expense - net.................... 1.3 1.6 0.7
Other income (expense).................... (0.2) (0.2) 0.2
-------- -------- --------
Income before income taxes and minority 0.6 0.5 2.3
interest.................................
Income taxes.............................. 0.3 0.2 0.9
-------- -------- --------
Net income................................ 0.3% 0.3% 1.4%
</TABLE>
FISCAL 1996 COMPARED WITH TWELVE MONTHS ENDED SEPTEMBER 30, 1995
In 1995, the Company changed its fiscal year to the last Saturday in
September. Accordingly, the fiscal year ended September 30, 1995 was a nine
month period. As a result of this change, 1996 operating results are not
directly comparable with operating results for the nine month period ended
September 30. The Company believes that comparing fiscal 1996 with the twelve
month period ending September 30, 1995 will provide a more meaningful analysis
of the Company's operating results. Unaudited summary operating results for the
twelve months ended September 30, 1995 are shown in Note 11 to the consolidated
financial statements.
Net sales for the year ended September 28, 1996 increased by 41.8% or
$182.6 million to $619.6 million from $437.0 million for the comparable 1995
period. The increase in net sales was due to (1) incremental business resulting
from the Solaris Agreement, (2) acquisition of two pet supplies distributors in
the fourth quarter of fiscal 1996, and (3) the addition of stores previously
serviced by a competitor, expanded product placements and new store openings
with existing customers.
Gross profit increased by 26.5% or $17.7 million from $66.7 million during
the twelve months ended September 30, 1995 to $84.4 million for the same period
in 1996. Gross profit as a percentage of net sales decreased from 15.3% in the
twelve months ended September 30, 1995 to 13.6% for the comparable 1996 period.
The decrease in the gross profit as a percentage of net sales is
20
<PAGE>
due principally to the incremental sales of Solaris product which were sold to
high volume, minimum service level retail distribution centers and to a lesser
extent, the elimination of certain discounts and rebates which historically had
been part of the Solaris marketing programs.
For the year ended September 28, 1996, selling, general and administrative
expenses increased by $5.8 million to $66.9 million from $61.2 million for the
similar 1995 period. As a percentage of net sales, these expenses decreased from
14.0% in the twelve months ended September 30, 1995 to 10.8% in the comparable
1996 period. The $5.8 million increase relates to the two pet supplies
distributors acquired in the fourth quarter of fiscal 1996 and increased sales,
offset in part by cost reductions in the existing pet operations. The decrease
in these expenses as a percentage of net sales relates to the fixed portion of
these expenses being spread over substantially greater sales volume in 1996
compared with 1995.
Interest for the year ended September 28, 1996 decreased by 44.6% or $3.3
million to $4.1 million from $7.4 million for the twelve months ended September
30, 1995. The decrease is attributable principally to lower average outstanding
borrowings as a result of applying the proceeds from the Company's two public
offerings of its common stock during fiscal 1996 and the termination of the
Monsanto trade financing agreement. Average short-term borrowings for fiscal
1996 were $28.2 million compared with $79.0 million for the comparable 1995
period. The outstanding borrowings include amounts due to Solaris under the
Monsanto trade financing agreement which ended in November 1995. The average
interest rates for the twelve months ended September 28, 1996 and September 30,
1995 were 10.5% and 7.6% respectively.
The Company's effective income tax rate for fiscal 1996 was 41.6% compared
with a tax credit of 36.6% for the similar 1995 period.
FIRST NINE MONTHS OF 1995 COMPARED WITH FIRST NINE MONTHS OF 1994
In 1995, the Company changed its fiscal year to the last Saturday in
September. Accordingly, the fiscal year ended September 30, 1995 was a nine
month period. As a result of this change, 1995 operating results will not be
directly comparable with 1994. The Company believes that comparing the nine
months periods of 1994 and 1995 will provide a more meaningful analysis of the
Company's operating results. Unaudited summary operating results for the nine
months ended September 25, 1994 are shown in Note 13 to the consolidated
financial statements.
Net sales for the nine months ended September 30, 1995 increased by 4.4% or
$15.6 million from $358.1 million for the
21
<PAGE>
comparable 1994 period. The increase in net sales was due to revenue from
acquired operations and an increase in agency sales during the third calendar
quarter of 1995, offset in part by a sales decline in the Western region lawn
and garden markets. The lawn and garden sales decrease in the Western region
was due principally to adverse weather conditions and the loss of certain
customers who elected to buy direct from the Company's major supplier. Agency
sales as a percentage of net sales increased in the first nine months of 1995 to
12.9% compared with 9.0% for the similar 1994 period.
Gross profit decreased by 1.1% or $0.6 million from $57.5 million during
the nine months ended September 25, 1994 to $56.9 million for the comparable
1995 period. Gross profit as a percentage of net sales decreased from 16.1% in
the nine months ended September 25, 1994 to 15.2% in the comparable 1995 period.
The decrease in gross profit for the nine months ended September 30, 1995 was
due principally to lower gross margin agency sales to high volume, low service
accounts, which also typically have lower associated operating expenses. In
addition, the Company sold a higher percentage of lower margin products.
For the nine months ended September 30, 1995, selling, general and
administrative expenses increased by $2.7 million from $45.4 million for the
comparable 1994 period. As a percentage of net sales, these expenses increased
slightly from 12.7% during the first nine months of 1994 to 12.9% for the
comparable 1995 period. Of the $2.7 million increase, approximately $0.4
million is associated with the increase in sales while the balance, $2.3
million, relates to (i) increased costs related to the consolidation of
facilities in Colorado; (ii) increased costs in the pet supplies division
related to the downsizing and integration of the Company's Northern California
pet operations, (iii) costs associated with certain potential pet acquisitions,
(iv) costs associated with retention of employees in anticipation of increased
sales and (v) additional bad debt provision.
Interest expense for the first nine months of 1995 increased by 41.8% or
$1.7 million from $4.2 million for the comparable 1994 period. The increase is
due principally to a combination of higher interest rates and increased
borrowing under the Company's trade financing agreement with its major supplier
and under the Company's principal credit facility. Average short-term
borrowings for the nine months ended September 30, 1995 were $73.8 million
compared with $58.0 million for the comparable period in 1994. The average
interest rates were 9.3% and 6.9%, respectively.
The Company's effective income tax rate for the nine months ended September
30, 1995 increased to 45% compared with 40% for the similar 1994 period,
principally due to the impact of non-deductible goodwill amortization.
22
<PAGE>
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation, the Company believes that the effects of inflation on its operations
have been immaterial.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth through a combination of
bank borrowings, supplier credit, internally generated funds and sales of its
stock to the public. Additionally, in November 1996, the Company received net
proceeds (after offering expenses) of approximately $111.4 million from the sale
of $115.0 million of 6% Convertible Subordinated Notes due 2003.
The Company's business is highly seasonal and its working capital
requirements and capital resources track closely to this seasonal pattern.
During the first quarter of each calendar year, inventory, accounts receivable,
accounts payable, and short-term borrowings begin to increase, reflecting the
build up of inventory and related payables in anticipation of the peak selling
season. During the second quarter of the calendar year, inventory levels
decrease while account receivables peak and short-term borrowings start to
decline as cash collections are received during the peak selling period. In the
third quarter of the calendar year inventory levels are at their lowest level
and receivables and accounts payable are substantially reduced through
conversion of accounts receivable to cash. During the fourth quarter of the
calendar year, accounts receivable reach their lowest levels, while inventory
and accounts payable and short-term borrowings begin to increase. Since the
Company's short-term credit line fluctuates based upon a specified asset
borrowing base, the fourth quarter of each calendar year is typically the period
when the asset borrowing base is at its lowest and consequently its ability to
borrow is at its lowest.
For the twelve months ended September 28, 1996, the Company used cash from
operating activities of approximately $32.4 million, resulting principally from
the initial build up of inventory related to the Solaris Agreement combined with
the termination of the Monsanto trade financing agreement. The Company believes
that the increased Solaris inventory will allow it to accommodate the increased
sales of Solaris products under the Solaris Agreement without significantly
increasing inventory levels in 1997. Cash used from investing activities was
$34.3 million reflecting the purchase of two pet supplies distribution
businesses for approximately $35.0 million and additions to plant and equipment
of $3.0 million offset in part by the proceeds of $3.7 million from the sale of
the Company's Visalia, California warehouse. Cash provided from financing
activities of $67.8 million consisted primarily of
23
<PAGE>
$81.9 million net proceeds from the Company's stock sales in November 1995 and
July 1996 offset in part by repayments of short and long-term debt of
approximately $13.7 and $0.4 million to acquire treasury shares.
The Company generated cash from operating activities of $7.1 million in
fiscal year 1994 and $10.4 million for the nine month period ended September 30,
1995. Cash used in investing activities, which included approximately $14.0
million to acquire four companies during 1994, and $1.3 million to acquire one
company in 1995, and the purchase of warehouse and delivery equipment, office
furniture and equipment and leasehold improvements in fiscal year 1994 and the
nine month period ended September 30, 1995 was $14.3 million and $4.1 million,
respectively. Cash provided by financing activities of approximately $7.3
million in 1994 consisted primarily of proceeds related to the Company's short-
term credit facility reduced by approximately $3.3 million repayments of its
long-term debt. Cash used in financing activities during 1995 of $6.3 million
was attributable to reductions in both short-term and long-term debt offset in
part by proceeds from the sale of 100 shares of the Company's 5% convertible
preferred stock ($0.9 million) to Monsanto Company and the exercise of stock
options of approximately $0.1 million.
The Company has a line of credit with Congress Financial Corporation
(Western) for $75 million. The available amount under the line of credit
fluctuates based upon a specific asset borrowing base. The line of credit,
which bears interest at a rate equal to the prime rate plus 3/4% per annum, is
secured by substantially all of the Company's assets. At September 28, 1996,
the Company had outstanding borrowings of approximately $27.9 million and had an
additional $47.1 million of available borrowing capacity under this line. As a
result of the Company's sale of $115.0 million of Convertible Subordinated
Notes, as of November 15, 1996, the indebtedness to Congress was eliminated
leaving the Company with $75.0 million of borrowing availability. The Company's
line of credit contains certain financial covenants such as minimum net worth
and minimum working capital requirements. The line also requires the lender's
prior written consent to any acquisition of a business.
The Company had a trade credit arrangement with a financing affiliate of
Monsanto pursuant to which Monsanto permitted the Company to borrow up to $81.0
million for the purchase of Solaris products. Such borrowings were secured by a
first priority lien on the Company's inventory of Solaris products and a second
priority lien on all other inventories and receivables and bore interest at a
rate 1-1/2% below the prime rate. This arrangement expired on November 15,
1995. Subsequent to that date, financing arrangements with Monsanto have been
on typical Solaris credit terms.
The Company believes that cash flow from operations, funds available under
its line of credit and its arrangements with suppliers including Monsanto and
funds available related to the sale of $115.0 million of Convertible
Subordinated Notes in
24
<PAGE>
November 1996 will be adequate to fund its presently anticipated working capital
requirements for the foreseeable future. The Company anticipates that its
capital expenditures will not exceed $3.0 million for the next 12 months.
As part of its growth strategy, the Company has engaged in acquisition
discussions with a number of companies in the past and it anticipates it will
continue to evaluate potential acquisition candidates. If one or more potential
acquisition opportunities, including those that would be material, become
available in the near future, the Company after first using the funds received
from the sale of its 6% Convertible Subordinated Notes may require additional
external capital. In addition, such acquisitions would subject the Company to
the general risks associated with acquiring companies, particularly if the
acquisitions are relatively large.
In October 1996, the Company entered into a definitive agreement to acquire
the United States and Canada flea and tick business of Sandoz Agro, Inc.
("Sandoz Flea and Tick") for approximately $41.0 million. The acquisition is
expected to close before March 1997, subject to approval by the Federal Trade
Commission ("FTC") of the divestiture of Sandoz Flea and Tick in connection with
the merger of Sandoz Ltd. and Ciba-Geigy Limited into Novartis AG. Certain
terms of the agreement, including the purchase price, are subject to change
depending on the FTC review. If the acquisition is consummated, proceeds from
the sale of convertible subordinated notes will be used to finance the
transaction.
WEATHER AND SEASONALITY
Historically, the Company's sales have been influenced by weather and
climate conditions in the markets it serves. For example, during the first six
months of both 1993 and 1995 and the first three months of the calendar year in
1996, the Company's results of operations were negatively affected by severe
weather conditions in many parts of the country. Additionally, the Company's
business is highly seasonal. In 1994, approximately 63% of the Company's sales
occurred in the first six months of the year. Substantially all of the
Company's operating income is typically generated in this period which has
historically offset the operating losses incurred during the rest of the year.
25
<PAGE>
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Central Garden & Pet Company
<S> <C>
Independent Auditors' Report.......................................................... 27
Consolidated Balance Sheets, September 28, 1996 and September 30, 1995................ 28
Consolidated Statements of Income for the Fiscal Year Ended September 28, 1996,
the Nine-Month Period Ended September 30, 1995 and the Fiscal Year Ended
December 25, 1994.................................................................... 29
Consolidated Statements of Shareholders' Equity for the Fiscal Year Ended
September 28, 1996, the Nine-Month Period Ended September 30, 1995 and the
Fiscal Year Ended December 25, 1994.................................................. 30
Consolidated Statements of Cash Flows for the Fiscal Year Ended September 28, 1996,
the Nine-Month Period Ended September 30, 1995 and the Fiscal Year Ended
December 25, 1994.................................................................... 31
Notes to Consolidated Financial Statements for the Fiscal Year Ended September 28,
1996, the Nine-Month Period Ended September 30, 1995 and Fiscal Year Ended
December 25, 1994.................................................................... 32-43
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Central Garden & Pet Company
Lafayette, California
We have audited the accompanying consolidated balance sheets of Central Garden &
Pet Company (the "Company") and subsidiaries as of September 28, 1996 and
September 30, 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for the fiscal year ended September 28,
1996, the nine-month period ended September 30, 1995 and the fiscal year ended
December 25, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries as
of September 28, 1996 and September 30, 1995, and the results of their
operations and their cash flows for the fiscal year ended September 28, 1996,
the nine-month period ended September 30, 1995 and the fiscal year ended
December 25, 1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
November 15, 1996
27
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 143 $ 1,272
Accounts receivable, less allowance
for doubtful accounts of $4,161 and $5,278 41,315 62,231
Inventories 69,425 169,835
Prepaid expenses and other assets 5,751 7,132
-------- --------
Total current assets 116,634 240,470
LAND, BUILDINGS, IMPROVEMENTS AND EQUIPMENT:
Land 982 431
Buildings and improvements 6,031 3,450
Transportation equipment 2,174 3,161
Warehouse equipment 6,106 7,878
Office furniture and equipment 6,631 8,046
-------- --------
Total 21,924 22,966
Less accumulated depreciation and amortization 9,846 11,502
-------- --------
Land, buildings, improvements and equipment - net 12,078 11,464
GOODWILL 11,013 29,971
OTHER ASSETS 2,955 1,759
-------- --------
TOTAL $142,680 $283,664
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 37,971 $ 27,904
Accounts payable 45,120 104,049
Accrued expenses 6,528 11,243
Current portion of long-term debt 1,699 1,604
-------- --------
Total current liabilities 91,318 144,800
LONG-TERM DEBT 11,130 7,635
DEFERRED INCOME TAXES AND OTHER LONG-TERM OBLIGATIONS 1,830 1,670
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Series A convertible preferred stock - -
Class B stock 22 19
Common stock 36 125
Additional paid-in capital 28,267 111,228
Retained earnings 10,330 18,733
Restricted stock deferred compensation (253) (182)
Treasury stock - (364)
-------- --------
Total shareholders' equity 38,402 129,559
-------- --------
TOTAL $142,680 $283,664
======== ========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
------------- -------------- -------------
DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28,
1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET SALES $421,427 $373,734 $619,622
COST OF GOODS SOLD AND OCCUPANCY 354,096 316,832 535,189
-------- -------- --------
Gross profit 67,331 56,902 84,433
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 58,489 48,075 66,945
-------- -------- --------
Income from operations 8,842 8,827 17,488
INTEREST EXPENSE - NET (5,642) (5,891) (4,061)
OTHER INCOME (EXPENSE) - NET (859) (953) 1,038
-------- -------- --------
Income before income taxes 2,341 1,983 14,465
INCOME TAXES 936 904 6,017
-------- -------- --------
NET INCOME $ 1,405 $ 1,079 $ 8,448
======== ======== ========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE
Fully diluted $ .24 $ .18 $ .71
======== ======== ========
Primary $ .24 $ .18 $ .72
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Fully diluted 5,947 6,050 11,904
======== ======== ========
Primary 5,947 5,943 11,702
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK CLASS B STOCK COMMON STOCK
-------------------------- ---------------------------- ------------------------------
(DOLLARS IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 26, 1993 3,800,000 $38 2,795,120 $ 28
AMORTIZATION, RESTRICTED
STOCK DEFERRED COMPENSATION
TREASURY STOCK
CONVERSION OF CLASS B STOCK
INTO COMMON STOCK (449,383) (5) 449,383 5
CANCELLATION OF CLASS B STOCK (143,949) (1)
ISSUANCE OF COMMON STOCK 35,600 -
ISSUANCE OF COMMON STOCK
HELD IN ESCROW TO PURCHASE
SUBSIDIARY (1) 100,000 1
NET INCOME
---------- --- ---------- -----
BALANCE, DECEMBER 25, 1994 3,206,668 32 3,380,103 34
AMORTIZATION, RESTRICTED
STOCK DEFERRED COMPENSATION
TREASURY STOCK
RETIREMENT OF TREASURY STOCK (809,578) (8) (9,000)
CONVERSION OF CLASS B STOCK
INTO COMMON STOCK (218,216) (2) 218,216 2
ISSUANCE OF COMMON STOCK 17,645 -
ISSUANCE OF PREFERRED STOCK 100 $ -
NET INCOME
---- ---- ---------- --- ---------- -----
BALANCE, SEPTEMBER 30, 1995 100 - 2,178,874 22 3,606,964 36
AMORTIZATION, RESTRICTED
STOCK DEFERRED COMPENSATION
TREASURY STOCK
CONVERSION OF CLASS B STOCK
INTO COMMON STOCK (245,299) (3) 245,299 3
ISSUANCE OF COMMON STOCK 8,710,258 86
NET INCOME
PREFERRED DIVIDENDS PAID
---- ---- ---------- --- ---------- -----
BALANCE, SEPTEMBER 28, 1996 100 $ - 1,933,575 $19 12,562,521 $ 125
==== ==== ========== === ========== =====
<CAPTION>
RESTRICTED
ADDITIONAL STOCK TREASURY STOCK
PAID-IN RETAINED DEFERRED ----------------------------
(DOLLARS IN THOUSANDS) CAPITAL EARNINGS COMPENSATION SHARES AMOUNT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 26, 1993 $ 29,644 $11,889 $(1,260) (684,234) $(4,980) $ 35,359
AMORTIZATION, RESTRICTED
STOCK DEFERRED COMPENSATION 405 405
TREASURY STOCK (85,159) (802) (802)
CONVERSION OF CLASS B STOCK
INTO COMMON STOCK
CANCELLATION OF CLASS B STOCK (710) 365 (346)
ISSUANCE OF COMMON STOCK 354 354
ISSUANCE OF COMMON STOCK
HELD IN ESCROW TO PURCHASE
SUBSIDIARY (1) 1
NET INCOME 1,405 1,405
-------- ------- ----- ------- ------- --------
BALANCE, DECEMBER 25, 1994 29,288 13,294 (490) (769,393) (5,782) 36,376
AMORTIZATION, RESTRICTED
STOCK DEFERRED COMPENSATION 237 237
TREASURY STOCK (49,185) (256) (256)
RETIREMENT OF TREASURY STOCK (1,987) (4,043) 818,578 6,038 -
CONVERSION OF CLASS B STOCK
INTO COMMON STOCK
ISSUANCE OF COMMON STOCK 66 66
ISSUANCE OF PREFERRED STOCK 900 900
NET INCOME 1,079 1,079
-------- ------- ----- ------- ------- --------
BALANCE, SEPTEMBER 30, 1995 28,267 10,330 (253) - - 38,402
AMORTIZATION, RESTRICTED
STOCK DEFERRED COMPENSATION 71 71
TREASURY STOCK (26,000) (364) (364)
CONVERSION OF CLASS B STOCK
INTO COMMON STOCK -
ISSUANCE OF COMMON STOCK 82,961 83,047
NET INCOME 8,448 8,448
PREFERRED DIVIDENDS PAID (45) (45)
-------- ------- ----- ------- ------- --------
BALANCE, SEPTEMBER 28, 1996 $111,228 $18,733 $(182) (26,000) $ (364) $129,559
======== ======= ===== ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
------------- -------------- -------------
DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28,
1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,405 $ 1,079 $ 8,448
Adjustments to reconcile net income
to net cash provided
(used) by operating activities:
Depreciation and amortization 2,526 1,817 3,057
Deferred taxes (benefit) on income (996) 590 596
Gain on sale of land, building and
improvements - - (260)
Changes in assets and liabilities:
Receivables 1,664 (4,549) (15,959)
Inventories (1,314) 38,208 (89,454)
Prepaid expenses and other assets (1,495) (683) (154)
Accounts payable 3,060 (23,147) 57,750
Accrued expenses 1,650 (2,824) 4,166
Other long-term obligations 556 (55) (595)
-------- -------- --------
Net cash provided (used) by
operating activities 7,056 10,436 (32,405)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to land, buildings,
improvements and equipment (759) (2,781) (3,015)
Proceeds from sale of land,
buildings, improvements and equipment 400 - 3,676
Payments to acquire companies, net of
cash acquired (13,989) (1,341) (34,950)
-------- -------- --------
Net cash used by investing
activities (14,348) (4,122) (34,289)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) from notes
payable, net 12,900 (5,212) (10,067)
Payments on long-term debt (3,313) (1,980) (3,590)
Payments to reacquire stock (802) (117) (364)
Payments on notes payable to affiliate (1,503) - -
Proceeds from issuance of stock - 966 81,889
Dividends paid - - (45)
-------- -------- --------
Net cash provided (used) by
financing activities 7,282 (6,343) 67,823
NET INCREASE (DECREASE) IN CASH (10) (29) 1,129
CASH AT BEGINNING OF PERIOD 182 172 143
-------- -------- --------
CASH AT END OF PERIOD $ 172 $ 143 $ 1,272
======== ======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 4,597 $ 5,654 $ 3,141
Cash paid for income taxes 2,171 1,125 4,115
Conversion of accounts payable to
long-term debt - 5,885 -
Assets (excluding cash) acquired
through purchase of subsidiaries 28,076 1,341 18,169
Liabilities assumed through purchase
of subsidiaries 17,924 - 2,318
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Central Garden & Pet Company, a Delaware corporation (the
"Company"), is the largest national distributor of lawn and garden products
as well as a major distributor of pet and pool supplies. The Company's
business strategy is to capitalize on its national presence, comprehensive
product selection, menu of value-added services and efficient operations.
Utilizing these capabilities, the Company strives to develop and enhance
servicing relationships with both large national and regional retailers as
well as manufacturers.
THE SOLARIS AGREEMENT - The Company entered into an agreement effective
October 1, 1995 with The Solaris Group ("Solaris"), a strategic business
unit of Monsanto Company, the manufacturer of Ortho, Round-up and Green Sweep
lawn and garden products (the "Solaris Agreement"). Under the Solaris
Agreement, which has an initial four year term, the Company, in addition to
serving as the master agent and master distributor for sales of Solaris
products, provides a wide range of value-added services including logistics,
order processing and fulfillment, inventory distribution and merchandising.
However, Solaris continues to negotiate its sales prices directly with its
direct sales accounts. The Solaris Agreement provides for the Company to be
reimbursed for costs incurred in connection with services provided to
Solaris' direct sales accounts and to receive payments based on the growth of
sales of Solaris products. The Company will also share with Solaris in the
economic benefits of certain cost reductions, to the extent achieved.
BASIS OF CONSOLIDATION AND PRESENTATION - The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
transactions between the consolidated companies are eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles 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. Actual results could differ from those
estimates.
REVENUE RECOGNITION - Sales are recorded at the time merchandise is shipped
from the Company's warehouses. Merchandise returns are recognized when
approved for return.
INCOME TAXES are accounted for under the liability method in accordance with
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Deferred income taxes result primarily from bad debt allowances,
inventory reserves, depreciation and nondeductible reserves.
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.
32
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
LAND, BUILDINGS, IMPROVEMENTS AND EQUIPMENT are stated at cost. Depreciation
is computed by the straight-line method over thirty years for buildings.
Improvements are amortized on a straight-line basis over the shorter of the
useful life of the asset or the terms of the related leases. Depreciation on
equipment is computed by the straight-line and accelerated methods over the
estimated useful lives of 3 to 10 years.
GOODWILL is amortized using the straight-line method over periods ranging
from 20 to 40 years. The Company reviews goodwill periodically for potential
impairment by comparing the carrying amount to the expected future cash flows
of acquired entities over the remaining amortization period. Accumulated
amortization totaled $2,288,000 and $1,653,000 at September 28, 1996 and
September 30, 1995, respectively.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE is computed based on the
total weighted average number of Class B shares and common shares outstanding
during the year plus common stock equivalents.
FISCAL YEAR - In 1995, the Company changed its fiscal year end to the last
Saturday in September.
RECLASSIFICATIONS - Certain 1994 and 1995 balances have been reclassified to
conform with the 1996 presentation.
NEW ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires a company to review the
carrying value of long-lived assets and certain intangibles for impairment
when events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. This standard is effective for the
Company's 1997 fiscal year. The Company has not yet determined the effects
SFAS No. 121 will have on its financial position or the results of its
operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which will be effective for the Company's 1997 fiscal year.
SFAS No. 123 allows companies which have stock-based compensation
arrangements with employees to adopt a new fair-value basis of accounting for
stock options and other equity instruments, or to continue to apply the
existing accounting required by Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees and disclose the proforma
impact of adoption in the footnotes to the financial statements. The Company
intends to continue to account for stock-based compensation arrangements
under APB Opinion No. 25 and, therefore, management does not believe that the
effect of implementing this standard will be material to the Company's
financial position, results of operations or cash flows.
33
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
2. ACQUISITIONS
On December 29, 1993, the Company acquired substantially all of the assets
and assumed certain of the liabilities of Aquarium Supplies Unlimited ("ASU")
which prior to that date was a Chapter 11 Debtor-In-Possession. ASU is a
distributor of pet supplies, principally in the Southern California market.
The cash purchase price of $3,996,000 was less than net assets acquired by
$341,000.
During the first half of 1994, the Company acquired the lawn and garden
distribution operations of Tony's Gas & Chemical House, Inc. ("Tony's"); the
lawn and garden distribution operations of Esco Distributors ("Esco") and
acquired the pet supply distribution operations of Rumford Aquarium, Inc.
("Rumford"). The aggregate cash purchase price of these acquisitions was
approximately $10,322,000, which exceeded the fair market value of the net
assets acquired by $3,578,000, which was recorded as goodwill.
On April 14, 1995, the Company acquired substantially all of the assets of
Valley Pet Supply, Inc. ("Valley"), which was prior to that date a Chapter 11
Debtor-In-Possession. Valley was a distributor of pet supplies in California
and parts of Oregon and Washington. The purchase price was $1,341,000, which
exceeded net assets acquired by $345,000, which was recorded as goodwill.
On July 12, 1996, the Company acquired the pet supply distribution operations
of Kenlin Pet Supply, Inc. ("Kenlin") and Longhorn Pet Supply ("Longhorn").
The aggregate cash purchase price of these acquisitions was approximately
$34,560,000, which exceeded the fair market value of the net assets acquired
by $18,540,000, which was recorded as goodwill.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS - The following table summarizes on
a pro forma basis the combined results of operations of the Company and its
subsidiaries for fiscal year 1996 and the nine-month period ended September
30, 1995 as if the fiscal year 1996 acquisition of Kenlin was made on
December 26, 1994. The pro forma results of operations also reflect pro
forma adjustments for stock issued to facilitate the acquisition of Kenlin,
adjustments to conform inventory methods and facilities costs, and for the
amortization of goodwill. Although this pro forma combined information
includes the results of operations of Kenlin, it does not necessarily reflect
the results of operations that would have occurred had Kenlin been managed by
the Company prior to its acquisition.
34
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
<TABLE>
<CAPTION>
Fiscal year Nine-Month
Ended Period Ended
September 28, September 30,
1996 1995
(In thousands, except
per share amounts)
<S> <C> <C>
Net sales $675,502 $420,691
Gross profit 97,840 67,808
Income from operations 20,945 11,395
Income before income taxes 17,055 3,734
Net income $ 9,941 $ 2,064
======== ========
Net income per common and common
equivalent share:
Fully diluted $ 0.72 $ 0.26
======== ========
Primary $ 0.73 $ 0.26
======== ========
</TABLE>
3. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS AND SUPPLIER
CUSTOMER CONCENTRATION - Approximately 47%, 52% and 50% of the Company's net
sales for fiscal year 1994, the nine-month period ended September 30, 1995
and fiscal year 1996, respectively, were derived from sales to the Company's
top ten customers. The Company's largest customer accounted for
approximately 19%, 22% and 23% of the Company's net sales for fiscal year
1994, the nine-month period ended September 30, 1995 and fiscal year 1996,
respectively. The Company's second largest customer accounted for
approximately 7%, 10% and 11% of the Company's net sales for fiscal year
1994, the nine-month period ended September 30, 1995 and fiscal year 1996,
respectively. The loss of, or significant adverse change in, the
relationship between the Company and these two customers could have a
material adverse effect on the Company's business and financial results. The
loss of or reduction in orders from any significant customer, losses arising
from customer disputes regarding shipments, fees, merchandise condition or
related matters, or the Company's inability to collect accounts receivable
from any major customer could have a material adverse impact on the Company's
business and financial results.
SUPPLIER CONCENTRATION - While the Company purchases products from over 1,000
different manufacturers and suppliers, approximately 59% of the Company's net
sales in fiscal year 1996 were derived from products purchased from the
Company's five largest suppliers. The Company believes that approximately
29% of the Company's net sales for the nine-month period ended September 30,
1995 and
35
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
44% of the Company's net sales during fiscal year 1996 were derived from
sales of products purchased from Solaris, the Company's largest supplier.
Because of the dependence of the Company on sales of Solaris products, future
changes implemented by Solaris to its marketing and sales programs or any
overall decrease in the sales of Solaris products could have a material
adverse effect on the Company.
4. ACCOUNTS AND NOTES PAYABLE
The Company has a line of credit providing for aggregate borrowings of up to
$75,000,000, which expires on July 12, 1998. The available amount under the
line of credit fluctuates based upon a specific asset borrowing base. At
September 30, 1995 and September 28, 1996, balances of $33,870,000 and
$27,904,000, respectively, were outstanding under this agreement, bearing
interest at a rate related to the prime rate (9.5% at September 30, 1995 and
9.0% at September 28, 1996). Available borrowings at September 30, 1995 and
September 28, 1996 were $19,840,000 and $47,096,000, respectively. This line
is secured by substantially all of the Company's assets, and contains certain
financial covenants requiring maintenance of minimum levels of working
capital and net worth, and restricts the Company's ability to pay dividends.
The Company was in compliance with such covenants at September 30, 1995 and
September 28, 1996.
The Company had an additional line of credit of $6,000,000 with another
lender as a result of its 1993 acquisition of CGS Distributing Inc. that was
paid off in 1996. At September 30, 1995, $4,100,000 was outstanding under
this agreement, bearing interest (9.25% at September 30, 1995) at a rate
related to the prime rate. The line was secured by substantially all of the
assets of the acquired distributor and contained certain financial covenants.
The Company was in compliance with such covenants at September 30, 1995.
Under the covenants in the Company's principal credit agreement described
above, dividends can only be paid if there is no material default of any of
the covenants contained in the agreement. The amount of such dividends shall
not exceed the prior year's net income and the aggregate amount of all
dividends paid from June 12, 1992 through June 12, 1998 is limited to
approximately $4.5 million. Such restrictions would have limited dividends
in 1996 to $1.1 million.
36
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Note payable to Weyerhaeuser Corporation, discounted at
10.25% imputed rate, interest due in quarterly
installments, principal due in annual installments
through 1999, secured by certain inventory and equipment $ 3,750 $2,750
Note payable to a former supplier, interest at 10% and
principal due March 1998 5,885 5,885
Note payable to former shareholder, interest at 1%
under prime (7.75% at September 30, 1995; 7.25%
at September 28, 1996), principal and interest
due in annual installments to 1997, secured by
stock of the principal shareholder 1,200 600
Note payable to bank, interest based on a formula
(8.125% at September 30, 1995), principal repaid
in 1996 1,889 -
Note payable to bank, interest based on a formula
(9.5% at September 30, 1995), principal repaid in
1996 78 -
Other notes payable 27 4
------- ------
Total 12,829 9,239
Less current portion of long-term debt 1,699 1,604
------- ------
Total $11,130 $7,635
======= ======
</TABLE>
Principal repayments on long-term debt are scheduled as follows at September
28, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year:
1997 $1,604
1998 6,885
1999 750
------
Total $9,239
======
</TABLE>
6. OPERATING LEASES
The Company has operating lease agreements principally for office and
warehouse facilities and equipment. Such leases have remaining terms,
inclusive of renewal options, of 1 to 8 years. Rent expense for all
operating leases amounted to $5,903,000 for fiscal year 1994, $6,437,000 for
the nine-month period ended September 30, 1995, and $9,896,000 for fiscal
year 1996.
37
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
Certain facility leases have renewal options and provide for additional rent
based upon increases in the Consumer Price Index.
Aggregate minimum annual payments on noncancelable operating leases at
September 28, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year:
1997 $ 8,006
1998 6,921
1999 5,169
2000 3,825
2001 3,313
Thereafter 2,309
-------
Total $29,543
=======
</TABLE>
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
------------ ------------ -------------
DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28,
1994 1995 1996
<S> <C> <C> <C>
Current:
Federal $1,530 $ 187 $4,523
State 402 127 1,040
------ ----- ------
Total 1,932 314 5,563
Deferred (996) 590 454
------ ----- ------
Total $ 936 $ 904 $6,017
====== ===== ======
</TABLE>
38
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
------------ ------------- -------------
DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28,
1994 1995 1996
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
State income taxes, net of federal benefit 5 5 5
Nondeductible expenses 5 9 6
Other (4) (3) (3)
---- ---- ----
Effective tax rate 40% 45% 42%
==== ==== ====
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences and carryforwards which
give rise to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 SEPTEMBER 28, 1996
------------------------------ ------------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
<S> <C> <C> <C> <C>
Current:
Allowance for doubtful accounts receivable $1,204 $1,036
Inventory reserves 972 910
Prepaid expenses $ 239 $ 219
Nondeductible reserves 888 837
Net operating loss carryforwards 139 97
Other 29 86 460
------ ------ ------ ------
Total 3,232 325 3,340 219
Valuation allowance (25) (25)
------ ------ ------ ------
Current 3,207 325 3,315 219
Noncurrent:
Adoption of FIFO inventory method 639 321
Depreciation 978 1,248
Other 60 132
------ ------ ------ ------
Noncurrent - 1,677 132 1,569
------ ------ ------ ------
Total $3,207 $2,002 $3,447 $1,788
====== ====== ====== ======
</TABLE>
39
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
8. SHAREHOLDERS' EQUITY
At September 28, 1996, there were 1,000 shares of Series A convertible
preferred stock ($.01 par value) authorized, of which 100 were outstanding.
In July 1995, in connection with an agreement to become the master agent and
distributor for Solaris, the Company received from Monsanto Company $900,000
in exchange for its issuance of 100 shares of Series A convertible preferred
stock and a warrant to purchase up to 500,000 shares of common stock with an
exercise price of $9.00 per share. Each share of Series A convertible
preferred stock is entitled to a liquidation preference of $9,000 per share,
is convertible into 1,000 shares of common stock, is entitled to an annual 5%
cumulative dividend, votes together with common stock, and has a number of
votes equal to the number of shares of common stock into which it is
convertible. The warrant expires on the earlier of the tenth anniversary of
the Solaris Agreement or the expiration or termination of the Solaris
Agreement.
At September 28, 1996, there were 3,000,0000 shares of Class B stock ($.01
par value) authorized, of which 1,933,575 were outstanding. The voting
powers, preferences and relative rights of the Class B stock are identical to
common stock in all respects except that (i) the holders of common stock are
entitled to one vote per share and the holders of Class B stock are entitled
to the lesser of ten votes per share or 49% of the total votes cast, (ii)
stock dividends on common stock may be paid only in shares of common stock
and stock dividends on Class B stock may be paid only in shares of Class B
stock and (iii) shares of Class B stock have certain conversion rights and
are subject to certain restrictions on ownership and transfer. Each share of
Class B stock is convertible into one share of 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 28, 1996, there were 40,000,000 shares of common stock ($.01 par
value) authorized, of which 12,536,521 were outstanding.
On November 15, 1995, the Company completed an offering of 5,750,000 shares
of its common stock at $6.75 per share before deduction for underwriting
commission and expenses related to the offering. The net proceeds were used
to reduce the Company's borrowings under its principal line of credit.
On July 19, 1996, the Company completed its third public stock offering which
consisted of 2,752,500 shares of its common stock at $18.00 per share before
deduction for underwriting commission and expenses related to the offering.
The net proceeds were used to repay the Company's borrowings (including
borrowings used for the Kenlin acquisition) under its principal line of
credit.
In 1993, the Company adopted the Omnibus Equity Incentive Plan (the "Plan")
which provided for the grant of options to key employees and consultants of
the Company for the purchase of up to an aggregate of 900,000 shares of
common stock of the Company. In 1995, the Company amended the Plan to
increase the number of shares authorized for issuance by an additional
300,000 and in 1996, the Company further amended the Plan to increase the
number of shares authorized for issuance by an additional
40
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
800,000. The Plan is administered by the Audit and Compensation Committee of
the Board of Directors, comprised of outside independent directors only, who
determine individual awards to be granted, vesting and exercise of share
conditions. Option activity under the Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
SHARES PRICE
AVAILABLE SHARES PER SHARE
<S> <C> <C> <C>
Balance at December 26, 1993 827,906 72,094 $ 9.75-3.75
Options granted in 1994 (301,780) 301,780 $ 9.75-1.30
Options cancelled in 1994 12,995 (12,995) $ 3.75
-------- --------
Balance at December 25, 1994 539,121 360,879 $ 9.75-1.30
Authorized 300,000
Options granted in 1995 (236,500) 236,500 $ 5.125-3.31
Options exercised in 1995 (17,645) $ 3.75-1.30
Options cancelled in 1995 9,183 (9,183) $ 3.75-1.30
-------- --------
Balances at September 30, 1995 611,804 570,551 $ 9.75-1.30
Authorized 800,000
Options granted in 1996 (458,500) 458,500 $19.625-6.125
Options exercised in 1996 (148,016) $ 4.00-1.30
Options cancelled in 1996 4,500 (4,500) $ 5.125-3.31
-------- -------- -------------
Balances at September 28, 1996 957,804 876,535 $ 19.625-1.30
======== ======== =============
</TABLE>
The 1994 options granted vest one year from date of grant and can be
exercised in full at any time thereafter during the following four years.
Certain of the 1995 and 1996 options granted vest in full over periods
ranging from 3 to 6 years and can be exercised in full at any time
thereafter, while other 1995 and 1996 options granted vest on a straight-line
basis over periods ranging from 3 to 8 years and can be exercised at any time
thereafter during the following year. Options totaling 112,795 were
exercisable at September 28, 1996.
The Company has a 401(k) plan to which it contributed $198,000 for fiscal
year 1994, $148,000 for the nine-month period ended September 30, 1995 and
accrued $209,000 for fiscal year 1996.
9. TRANSACTIONS WITH RELATED PARTIES
The Company leases certain warehouse facilities and equipment from related
entities which are controlled by the Company's principal shareholder. Rental
expense under these leases totaled $115,000 for fiscal year 1994, $116,000
for the nine-month period ended September 30, 1995 and $156,000 for fiscal
year 1996.
41
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
10. BATON ROUGE FIRE
On July 14, 1992, the Company's warehouse in Baton Rouge, Louisiana and two
adjoining warehouse spaces leased by third parties were damaged as the
result of a fire that originated while an environmental contractor was
removing broken containers of a swimming pool water purifier maintained in
the Company's inventory. The warehouse was one of the Company's smallest and
the inventory, although substantially damaged, was an immaterial portion of
the Company's total inventories at that time.
The lawsuits arising out of the fire were settled in September 1996, and in
connection with the settlement the Company recorded approximately $1 million
as other income.
The Company is not currently a party to any material litigation.
11. SELECTED CONSOLIDATED INCOME STATEMENT DATA (UNAUDITED)
The following selected consolidated income statement data have been derived
from the unaudited consolidated financial statements of the Company. In the
opinion of management, the unaudited selected data shown below have been
prepared on the same basis as the audited consolidated statements of income
included herein and include adjustments only of a normal recurring nature.
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 25, SEPTEMBER 30,
1994 1995
------------- --------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE)
<S> <C> <C>
Sales $358,138 $437,023
Gross profit 57,524 66,709
Selling, general and administrative expenses 45,380 61,184
Income from operations 12,144 5,524
Income taxes 2,965 (1,125)
Net income (loss) 4,431 (1,947)
Net income (loss) per common and common equivalent share:
Fully diluted 0.75 (0.33)
Primary 0.75 (0.33)
</TABLE>
12. EVENTS SUBSEQUENT TO SEPTEMBER 28, 1996
In October 1996, the Company announced that it entered into a definitive
asset purchase agreement to acquire the United States and Canada flea and
tick business of Sandoz Agro, Inc. ("Sandoz Flea and Tick") for
approximately $41 million. The acquisition is expected to close before March
1997. However, the consummation of the acquisition is subject to a number of
conditions, including the Federal Trade Commission ("FTC") approval relating
to the divestiture of Sandoz Flea and Tick business.
42
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
(CONTINUED)
in connection with the merger of Sandoz Ltd. and Ciba-Geigy Limited into
Novartis AG, and there can be no assurance that FTC approval will be obtained
or that the Sandoz Flea and Tick Acquisition will be consummated.
On November 15, 1996, the Company sold in a private placement $115,000,000
aggregate principal amount of 6% Convertible Subordinated Notes due 2003.
The net proceeds of the offering will be used for repayment of short- and
long-term indebtedness and for potential acquisitions and general corporate
purposes, including the pending acquisition of Sandoz Flea and Tick.
******
43
<PAGE>
Item 9 - Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------- --------------
Financial Disclosure
- --------------------
None.
PART III
Item 10 - Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information required by this item is incorporated by reference from
pages 1, 2 and 10 of the Company's Definitive Proxy Statement for the Company's
1997 Annual Meeting of Stockholders under the captions "Election of Directors"
and "Section 16(a) Information." See also Item 1 above.
Item 11 - Executive Compensation
- --------------------------------
The information required by this item is incorporated by reference from
pages 3, 4 and 5 of the Company's Definitive Proxy Statement for the Company's
1997 Annual Meeting of Stockholders under the caption "Compensation of Executive
Officers."
Item 12 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this item is incorporated by reference from
page 10 of the Company's Definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders under the caption "Ownership of Management and
Principal Stockholders."
Item 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated by reference from
page 5 of the Company's Definitive Proxy Statement for the Company's 1997 Annual
Meeting of Stockholders under the captions "Compensation Committee Interlocks
and Insider Participation" and "Transactions with the Company."
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements of the Company are included in
Part II, Item 8:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
44
<PAGE>
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Consolidated Supplementary Financial Statement Schedule for the
fiscal year ended December 25, 1994, the nine month period ended
September 30, 1995 and the fiscal year ended September 28, 1996:
Independent Auditors' Report
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because of the absence of
conditions under which they are required or because the required
information is included in the consolidated financial statements
or notes thereto.
(3) Exhibits:
See attached Exhibit Index.
(b) On July 12, 1996, the Company filed a report on Form 8-K which
disclosed that the Company had consummated the Kenlin acquisition.
Kenlin's historical financial statements were included in the
Company's Form 8-K filed on June 28, 1996.
45
<PAGE>
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 13, 1996
CENTRAL GARDEN & PET COMPANY
By /s/ WILLIAM E. BROWN
-------------------------------------
William E. Brown
Chairman of the Board
46
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ WILLIAM E. BROWN Chairman and Chief Executive December 13, 1996
- ------------------------ Officer (Principal Executive
William E. Brown Officer
/s/ ROBERT B. JONES Vice President, Chief Financial December 13, 1996
- ------------------------ Officer (Principal Financial
Robert B. Jones Officer and Principal Accounting
Officer)
/s/ GLENN W. NOVOTNY Director December 13, 1996
- ------------------------
Glenn W. Novotny
/s/ DANIEL P. HOGAN, JR. Director December 13, 1996
- ------------------------
Daniel P. Hogan, Jr.
/s/ LEE D. HINES, JR. Director December 13, 1996
- ------------------------
Lee D. Hines, Jr.
</TABLE>
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Central Garden & Pet Company:
We have audited the consolidated financial statements of Central Garden &
Pet Company and subsidiaries as of September 28, 1996 and September 30, 1995,
and for the fiscal year ended September 28, 1996, the nine-month period ended
September 30, 1995 and the fiscal year ended December 25, 1994 and have issued
our report thereon dated November 15, 1996; such report is included elsewhere in
this Form 10-K. Our audits also included the consolidated supplementary
financial schedule of the Company, listed in Item 14(a). This consolidated
supplementary financial schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated supplementary financial schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
San Francisco, California
November 15, 1996
48
<PAGE>
SCHEDULE II
CENTRAL GARDEN & PET COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Fiscal Year Ended December 25, 1994,
Nine Month Period Ended September 30, 1995
and Fiscal Year Ended September 28, 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
Balances at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
AMOUNTS DEDUCTED FROM ASSETS TO
WHICH THEY APPLY:
Year ended December 25, 1994--Allowance for
doubtful accounts receivable.................. 2,259 814 1,175(1) 791 3,457
Nine month period ended September 30, 1995--
Allowance for doubtful accounts receivable.... 3,457 1,397 300 993 4,161
Year ended September 28, 1996--Allowance for
doubtful accounts receivable.................. 4,161 1,708 517(1) 1,108 5,278
-------- -------- -------- -------- --------
</TABLE>
- -------------------
Note: (1) Recorded on the books of companies acquired.
49
<PAGE>
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated
by reference into this Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
<C> <S> <C>
2.1 Form of Agreement of Merger and Plan of Merger
between Central Garden Supply of Southern
California and Central Garden & Pet Company
(Incorporated by reference from Exhibit 2.1 to
Registration Statement No. 33-48070).
2.2 Form of Agreement of Merger and Plan of Merger
between Central Garden Sales Corp. and Central
Garden & Pet Company (Incorporated by
reference from Exhibit 2.2 to Registration
Statement No. 33-48070).
2.3 Form of Reorganization Agreement between
Central Garden Supply and Central Garden & Pet
Company (Incorporated by reference from
Exhibit 2.3 to Registration Statement No. 33-
48070).
2.4 Agreement and Plan of Merger between Central
Garden & Pet Supply Company and Central Garden
& Pet Company dated as of June 11, 1992
(Incorporated by reference from Exhibit 2.4 to
Registration Statement No. 33-48070).
3.1 Third Amended and Restated Certificate of
Incorporation (Incorporated by reference from
Exhibit 3.1 to Registration Statement No. 33-
98544).
3.1.1 Certificate of Amendment of Third Amended and
Restated Certificate of Incorporation
(Incorporated by reference from Exhibit 3.1.1
to Registration Statement No. 333-05261)
3.2 Copy of Registrant's Bylaws (Incorporated by
reference from Exhibit 3.2 to Registration
Statement No. 33-48070).
4.1 Specimen Common Stock Certificate
(Incorporated by reference from Exhibit 4.1 to
Registration Statement No. 33-48070).
10.1 Promissory note from Central Garden Supply to
Weyerhaeuser Company for $6,750,000 dated as
of June 29, 1990 (Incorporated by reference
from Exhibit 10.5 to Registration Statement
No. 33-48070).
10.2 Lease between Central Garden Supply and Road
80 Properties, dated as of August 1, 1988
(Incorporated by reference from Exhibit 10.10
to Registration Statement No. 33-48070).
10.3 Lease between Central Garden Supply and Road
80 Investors dated as of December 31, 1985
(Incorporated by reference from Exhibit 10.11
to Registration Statement No. 33-48070).
10.4 Supplementary Retirement Benefit Agreement for
Key Employees between Central Garden & Pet
Supply Company and Glenn W. Novotny dated as
of July 1, 1991 (Incorporated by reference
from Exhibit 10.12 to Registration Statement
No. 33-48070).
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
<C> <S> <C>
10.5 Supplementary Retirement Benefit Agreement for
Key Employees between Central Garden & Pet
Supply Company and Neill J. Hines dated as of
July 1, 1991 (Incorporated by reference from
Exhibit 10.13 to Registration Statement
No. 33-48070).
10.6 1992 Management Incentive Plan (Incorporated
by reference from Exhibit 10.14 to
Registration Statement No. 33-48070).*
10.7 1992 Profit Sharing Plan (Incorporated by
reference from Exhibit 10.15 to Registration
Statement No. 33-48070).*
10.8 Form of Indemnification Agreement between
Registrant and Executive Officers and
Directors (Incorporated by reference from
Exhibit 10.18 to Registration Statement
No. 33-48070).
10.9 Accounts Financing Agreement [Security
Agreement] between Congress Financial
Corporation (Western) and Central Garden
Supply, Central Garden & Pet Company, Central
Garden & Pet Supply Company, Matthews Redwood
and Nursery Supply, Inc. and Cal Liquid Corp.
dated as of June 12, 1992, including Amendment
No. 1 (Incorporated by reference from Exhibit
10.28 to Registration Statement No. 33-48070).
10.9.1 Amendment No. 2 to Accounts Financing
Agreement dated as of July 12, 1992 among
Congress Financial Corporation, the Company
and certain subsidiaries of the Company
(Incorporated by reference to Exhibit 10.28.2
to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 25, 1995).
10.9.2 Amendment No. 3 to Accounts Financing
Agreement dated as of July 12, 1992 among
Congress Financial Corporation, The Company
and certain subsidiaries of the Company
(Incorporated by reference to Exhibit 10.28.3
to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 25, 1995).
10.10 Intercreditor Agreement between Congress
Financial Corporation (Western) and Monsanto
Corporation dated as of January 28, 1994
(Incorporated by reference to Exhibit 10.32.1
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 26, 1993).
10.11 Subordination Agreement among Central Garden
Supply, Central Garden & Pet Company, Central
Garden & Pet Supply Company, Weyerhaeuser
Company and Congress Financial Corporation
(Western) dated as of June 12, 1992
(Incorporated by reference from Exhibit 10.34
to Registration Statement No. 33-48070).
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
<C> <S> <C>
10.12 Forms of Restricted Stock Grant Agreements
(Incorporated by reference from Exhibit 10.35
to Registration Statement No. 33-48070).*
10.13 Continuing Guaranty and Waiver by Central
Garden Supply, Cal Liquid Corp., Central
Garden & Pet Company and Central Garden & Pet
Supply Company of indebtedness of Matthews
Redwood and Nursery Supply, Inc. to Congress
Financial Corporation (Western) dated as of
June 12, 1992 (Incorporated by reference from
Exhibit 10.36 to Registration Statement
No. 33-48070).
10.14 Continuing Guaranty and Waiver by Central
Garden Supply, Central Garden & Pet Company,
Central Garden & Pet Supply Company and
Matthews Redwood and Nursery Supply, Inc. for
indebtedness of Cal Liquid Corp. to Congress
Financial Corporation (Western) dated as of
June 12, 1992 (Incorporated by reference from
Exhibit 10.37 to Registration Statement
No. 33-48070).
10.15 Continuing Guaranty and Waiver by Central
Garden Supply, Central Garden & Pet Supply
Company, Matthews Redwood and Nursery Supply,
Inc. and Cal Liquid Corp. for indebtedness of
Central Garden & Pet Company to Congress
Financial Corporation (Western) dated as of
June 12, 1992 (Incorporated by reference from
Exhibit 10.38 to Registration Statement
No. 33-48070).
10.16 Continuing Guaranty and Waiver by Source One
for indebtedness of Central Garden Supply,
Central Garden & Pet Company, Central Garden &
Pet Supply Company, Matthews Redwood and
Nursery Supply, Inc. and Cal Liquid Corp. to
Congress Financial Corporation (Western) dated
as of June 12, 1992 (Incorporated by reference
from Exhibit 10.39 to Registration Statement
No. 33-48070).
10.17 Inventory and Equipment Security Agreement
Supplement to Accounts Financing Agreement
[Security Agreement] between and among
Congress Financial Corporation (Western) and
Central Garden Supply, Central Garden & Pet
Company, Central Garden & Pet Supply Company,
Matthews Redwood and Nursery Supply, Inc. and
Cal Liquid Corp. dated as of June 12, 1992
(Incorporated by reference from Exhibit 10.40
to Registration Statement No. 33-48070).
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
<C> <S> <C>
10.18 Letter Agreement Re: Inventory Loans between
and among Congress Financial Corporation
(Western) and Central Garden Supply, Central
Garden & Pet Company, Central Garden & Pet
Supply Company, Matthews Redwood and Nursery
Supply, Inc. and Cal Liquid Corp. dated as of
June 12, 1992 (Incorporated by reference from
Exhibit 10.41 to Registration Statement
No. 33-48070).
10.19 Trademark Collateral Assignment and Security
Agreement between Central Garden Supply and
Congress Financial Corporation (Western) dated
as of June 12, 1992 (Incorporated by reference
from Exhibit 10.42 to Registration Statement
No. 33-48070).
10.20 Assignment of Policy as Collateral Security to
Congress Financial Corporation (Western) dated
as of June 12, 1992 (Incorporated by reference
from Exhibit 10.43 to Registration Statement
No. 33-48070).
10.21 Trade Financing Agreement Supplement to
Accounts Financing Agreement [Security
Agreement] between and among Congress
Financial Corporation (Western) and Central
Garden Supply, Central Garden & Pet Company,
Central Garden & Pet Supply Company, Matthews
Redwood and Nursery Supply, Inc. and Cal
Liquid Corp. dated as of June 12, 1992
(Incorporated by reference from Exhibit 10.44
to Registration Statement No. 33-48070).
10.22 Covenant Supplement to Accounts Financing
Agreement [Security Agreement] between and
among Congress Financial Corporation (Western)
and Central Garden Supply, Central Garden &
Pet Company, Central Garden & Pet Supply
Company, Matthews Redwood and Nursery Supply,
Inc. and Cal Liquid Corp. dated as of June 12,
1992 (Incorporated by reference from Exhibit
10.45 to Registration Statement No. 33-48070).
10.23 Stock Purchase Agreement, dated December 30,
1992, by and between Jean Claude Gallienne and
Pierre Gallienne (Incorporated by reference
from Exhibit 10.50 to Registration Statement
No. 33-60332).
10.24 Stock Pledge Agreement between William E.
Brown and Vincent P. Dole, dated as of
December 30, 1992 (Incorporated by reference
from Exhibit 10.51 to Registration Statement
No. 33-60332).
10.25 Stipulation of Settlement and Mutual Release
of Claims, dated December 30, 1992, between
Central Garden Supply, Central Garden & Pet
Company and William E. Brown and Jean-Claude
Gallienne and Pierre Gallienne (Incorporated
by reference from Exhibit 10.52 to
Registration Statement No. 33-60332).
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
<C> <S> <C>
10.26 Promissory Note, dated December 30, 1992
(Incorporated by reference from Exhibit 10.53
to Registration Statement No. 33-60332).
10.27 Guaranty Agreement, dated December 30, 1992,
by Central Garden & Pet Company for the
benefit of the holders of the Bourcycham Debt
(Incorporated by reference from Exhibit 10.54
to Registration Statement No. 33-60332).
10.28 Agreement and plan of reorganization among
Central Garden & Pet Company and the
shareholders of CGS Distributing, Inc.
(Incorporated by reference from Exhibit 10.55
to Registration Statement No. 33-60332).
10.29 Registration Rights Agreement among Central
Garden & Pet Company and the shareholders of
CGS Distributing, Inc. (Incorporated by
reference from Exhibit 10.56 to Registration
Statement No. 33-60332).
10.30 Form of Restricted Stock Grant Agreement
(Incorporated by reference from Exhibit
10.35(a) to Registration Statement No. 33-
60332).*
10.31 1993 Omnibus Equity Incentive Plan
(Incorporated by reference to Exhibit 10.62 to
the Company's Annual Report on Form 10-K for
the fiscal year ended December 26, 1993).*
10.32 Master Agreement by and between The Solaris
Group, a Strategic Business Unit of Monsanto
Company, and the Company dated July 21, 1995
(Incorporated by reference to Exhibit 10.66 to
the Company's Quarterly Report on Form 10-Q
for the quarter ended June 25, 1995).
10.33 Stock and Warrant Purchase Agreement by and
between The Solaris Group and Central Garden &
Pet Company dated July 21, 1995 (Incorporated
by reference to Exhibit 10.67 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 25, 1995).
10.34 Exclusive Agency and Distributor Agreement by
and between The Solaris Group and the Company
dated July 21, 1995 (Incorporated by reference
to Exhibit 10.68 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June
25, 1995).
10.35 Compensation Agreement by and between The
Solaris Group and Central Garden & Pet Company
dated July 21, 1995 (Incorporated by reference
to Exhibit 10.69 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June
25, 1995).
10.36 Stock Purchase Agreement dated as of June 18,
1996 among the Company and the shareholders of
Kenlin Pet Supply, Inc. (Incorporated by
reference to Exhibit 1.2 to the Company's
report on Form 8-K dated July 12, 1996).
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
<C> <S> <C>
21.1 List of Subsidiaries
23.1 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>
- -----------
* Indicates, as required by Item 14(a)(3), a management contract or
compensatory plan required to be filed as an exhibit to this Form 10-K.
55
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
The following table sets forth certain information concerning the principal
subsidiaries of the Company.
State or other
jurisdiction of
Name incorporation
---- ---------------
KENLIN PET SUPPLY, INC. DELAWARE
The names of certain subsidiaries have been omitted because such unnamed
subsidiaries, considered in the aggregate, would not constitute a significant
subsidiary as that term is defined in Regulation S-X.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Central Garden & Pet Company's
Registration Statement Nos. 333-09065, 333-01238, 33-96816, 33-89216 and
33-72326 on Forms S-8, Registration Statement No. 333-05261 on Form S-4 and
Registration Statement No. 33-86284 on Form S-3 of our report dated November
15, 1996 appearing in this Annual Report on Form 10-K of Central Garden & Pet
Company for the year ended September 28, 1996.
DELOITTE & TOUCHE LLP
San Francisco, California
December 13, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-28-1996
<CASH> 1,272
<SECURITIES> 0
<RECEIVABLES> 62,231
<ALLOWANCES> 5,278
<INVENTORY> 169,835
<CURRENT-ASSETS> 240,470
<PP&E> 22,966
<DEPRECIATION> 11,502
<TOTAL-ASSETS> 283,664
<CURRENT-LIABILITIES> 144,800
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 19
<TOTAL-LIABILITY-AND-EQUITY> 283,664
<SALES> 619,622
<TOTAL-REVENUES> 619,622
<CGS> 535,189
<TOTAL-COSTS> 66,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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</TABLE>
