<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1996
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or
[_] TRANSITION REPORT PURSUANT OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-20242
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CENTRAL GARDEN & PET COMPANY
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Delaware 68-0275553
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3697 Mt. Diablo Blvd., Suite 310, Lafayette, California 94549
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(Address of principle executive offices)
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(510) 283-4573
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [_] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of June 29, 1996 9,503,487
Class B Stock Outstanding as of June 29, 1996 2,166,075
<PAGE>
FORM 10-Q
CENTRAL GARDEN & PET COMPANY
Part 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
CENTRAL GARDEN & PET COMPANY
------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 29,
1995 1996
-------------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 143 $ 121
Accounts receivable (less allowance for doubtful
accounts of $4,161 and 4,471) 41,315 120,109
Inventories 69,425 107,225
Prepaid expenses and other assets 5,751 5,682
-------- --------
Total current assets 116,634 233,137
Land, Buildings, Improvements and Equipment:
Land 982 431
Buildings and improvements 6,031 3,441
Transportation equipment 2,174 1,876
Warehouse equipment 6,106 6,736
Office furniture and equipment 6,631 7,036
-------- --------
Total 21,924 19,520
Less accumulated depreciation and amortization 9,846 9,945
-------- --------
Land, buildings, improvements and equipment - net 12,078 9,575
Goodwill 11,013 11,144
Other Assets 2,955 2,852
-------- --------
Total $142,680 $256,708
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 37,971 $ 23,797
Accounts payable 45,120 123,913
Accrued expenses 6,528 15,224
Current portion of long-term debt 1,699 1,620
-------- --------
Total current liabilities 91,318 164,554
Long-Term Debt 11,130 8,635
Deferred Income Taxes and Other Long-Term
Obligations 1,830 1,771
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value: 100 shares outstanding
September 30, 1995 and June 29, 1996 -- --
Class B stock, $.01 par value: 2,178,874 shares outstanding September 30, 1995,
2,166,075 shares outstanding June 29, 1996 22 22
Common stock, $.01 par value: 3,606,964 shares outstanding September 30, 1995
9,529,487 shares issued and 9,503,487 outstanding June 29, 1996 36 95
Additional paid-in capital 28,267 64,802
Retained earnings 10,330 17,393
Restricted stock deferred compensation (253) (200)
Treasury stock, at cost -- (364)
-------- --------
Total shareholders' equity 38,402 81,748
-------- --------
Total $142,680 $256,708
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
June 25, June 29, June 25, June 29,
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $335,058 $487,723 $153,844 $227,591
Cost of Goods Sold and Occupancy 284,937 423,947 131,891 196,941
-------- -------- -------- --------
Gross profit 50,121 63,776 21,953 30,650
Selling, General and
Administrative Expenses 43,965 47,996 16,084 18,213
-------- -------- -------- --------
Income from operations 6,156 15,780 5,869 12,437
Interest Expense - Net (5,576) (3,414) (2,146) (962)
Other Income (Expense) - Net (1,037) (136) (433) 3
-------- -------- -------- --------
Income (loss) before income taxes (457) 12,230 3,290 11,478
Income Taxes (22) 5,167 1,446 4,843
-------- -------- -------- --------
Net Income (Loss) $ (435) $ 7,063 $ 1,844 $ 6,635
======== ======== ======== ========
Weighted Average Shares Outstanding 5,869 10,811 5,880 11,973
======== ======== ======== ========
Net Income (Loss) Per Share $ (0.07) $ 0.65 $ 0.31 $ 0.55
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
CENTRAL GARDEN & PET COMPANY
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 25, June 29,
1995 1996
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (loss) $ (435) $ 7,063
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 1,908 1,707
Gain on sale of land, building and improvements 0 (305)
Change in assets and liabilities:
Receivables (28,443) (78,794)
Inventories (12,685) (37,800)
Prepaid expenses and other assets (4,106) (320)
Accounts payable 63,740 78,793
Accrued expenses 5,019 9,049
Deferred income taxes and other long-term obligations 23 18
-------- --------
Net cash provided (used) by operating activities 25,021 (20,589)
Cash Flows From Investing Activities:
Additions to land, buildings, improvements and equipment (2,042) (1,791)
Payments to acquire company, net of cash acquired (1,341) 0
Proceeds from sale of land, building and improvements 400 3,600
-------- --------
Net cash provided (used) by investing activities (2,983) 1,809
Cash Flows From Financing Activities:
Proceeds from (repayments of) notes payable - net (17,375) (14,174)
Payments on long-term debt (2,419) (2,574)
Proceeds from issuance of stock - net 40 35,870
Payments to reacquire stock (539) (364)
-------- --------
Net cash provided (used) by financing activities (20,293) 18,758
Net Increase (decrease) in Cash 1,745 (22)
Cash at Beginning of Period 190 143
-------- --------
Cash at End of Period $ 1,935 $ 121
======== ========
Supplemental Information:
Cash paid for interest $ 3,534 $ 2,542
Cash paid for income taxes 1,098 325
Assets (excluding cash) acquired through purchase of company 1,341
</TABLE>
See notes to consolidated financial statements
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED JUNE 29, 1996
(UNAUDITED)
1. Basis of Presentation
---------------------
The consolidated balance sheet as of June 29, 1996, the consolidated
statements of income for both the three months and nine months ended June 29,
1996 and June 25, 1995 and consolidated cash flows for the nine months ended
June 29, 1996 and June 25, 1995 have been prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows of the Company for the periods
mentioned above, have been made.
Due to the seasonal nature of the Company's business, the results of
operations for the three months ended June 29, 1996 are not indicative of the
operating results that may be expected for the year ending September 28, 1996.
2. Recent Acquisitions
-------------------
On July 12, 1996, the Company completed the acquisition of Kenlin Pet
Supply, Inc. Kenlin, the largest distributor of pet supplies in the eastern
United States, operates in 17 states and has approximately 290 employees. Under
the terms of the agreement, Central paid an aggregate of $33,000,000 in cash to
acquire or redeem all of Kenlin's outstanding stock and eliminate all of its
outstanding debt. Kenlin's revenues for 1995 were approximately $63,000,000.
Also on July 12, 1996, the Company acquired the assets of Longhorn Pet
Supply, Inc., a distributor of pet supplies in Texas, Louisiana and Oklahoma.
The purchase price was $1,580,000. Longhorn's revenues for 1995 were
approximately $13,100,000.
3. Common Stock Offering
---------------------
On August 1, 1996 the Company completed an offering 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
reduce the Company's borrowings under its principal line of credit.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company entered into a long-term agreement, effective October 1, 1995, with
Solaris, its largest supplier, whereby the Company serves as master agent and
master distributor for sales of Solaris products within the United States. The
agreement also provides for the Company to perform a wide range of value added
services including logistics, order processing and fulfillment, inventory
management and merchandising, principally for Solaris' direct sales accounts.
As a result of the Solaris Agreement, a majority of the Company's sales of
Solaris products are now derived from servicing Solaris direct accounts, whereas
historically, a majority of such sales were made by the Company as a traditional
distributor.
A substantial portion of these sales now consist of large shipments to customer
distribution centers. This type of sale is characterized by lower gross margins
as a percent of sales and lower associated operating costs. The collective
impact of these factors has served to substantially increase the Company's sales
of Solaris products, increase gross profit and lower gross margins as a percent
of sales.
The Solaris Agreement provides for the Company to be reimbursed for costs
incurred in connection with the services provided to Solaris' direct sales
accounts and to receive payments based on the sales growth of Solaris products.
The Company will also share with Solaris in the economic benefits of certain
cost reductions, to the extent realized. As a result, management believes that
the Company's profitability has become more directly attributable to the success
of Solaris than it was in the past.
THREE MONTHS ENDED JUNE 29, 1996
COMPARED WITH THREE MONTHS ENDED JUNE 25, 1995
Net sales for the three months ended June 29, 1996 increased by 47.9% or $73.8
million to $227.6 million from $153.8 million during the three months ended June
25, 1995. Substantially all of the sales increase was attributable to the lawn
and garden segment of the business of which approximately $35.4 million related
to sales generated under the new Solaris agreement. The balance of the increase
in net sales, $38.4 million is attributable to (i) expanded product listings and
new store openings with existing customers, (ii) addition of approximately 244
Wal-Mart stores in the midwest region previously serviced by a competitor, (iii)
more favorable weather patterns in the Western region.
Gross profit increased by 39.6% or $8.7 million from $22.0 million during the
three months ended June 25, 1995 to $30.7 million for the comparable 1996
period. Gross profit as a percentage of net sales decreased from 14.3% in the
three months ended June 25, 1995 to 13.5% for the similar period in 1996. The
decline in the gross profit percentage relates principally to the increase in
sales of Solaris products to retail distribution centers. As noted in the
Overview section above, this type of sale is characterized by lower gross
margins as a percent of sales. Selling, general and administrative expenses
increased by $2.1 million during the three months ended June 29, 1996 from $16.1
million for the comparable 1995 period. As a percentage of net sales these
expenses decreased from 10.5% in
<PAGE>
1995 to 8.0% in 1996. This percentage decrease in expenses relates principally
to the fixed portion of the operating expenses being spread over a substantially
greater sales volume.
Interest expense decreased by $1.1 million from $2.1 million during the three
months ended June 25, 1995 to $1.0 million for the comparable 1996 period.
The decrease in interest expense is attributed to lower average outstanding
borrowings as a result of applying the proceeds from the sale of 5,750,000
shares of the Company's stock in November 1995 coupled with the termination of a
financing agreement with the Company's major supplier. Average short-term
borrowings for the quarter ended June 29, 1996 were $23.1 million compared to
$77.1 million for the comparable 1995 period. The average interest rates were
10.4% and 6.9%, respectively.
The Company's effective income tax rate for the three months ended June 29, 1996
decreased to 42.2% compared with 43.9% for the comparable 1995 period. The
decrease in effective rate is related principally to the non-deductible
amortization of intangibles being a smaller component of net income during the
three months ended June 29, 1996 compared with the similar 1995 period.
NINE MONTHS ENDED JUNE 29, 1996
COMPARED WITH NINE MONTHS ENDED JUNE 25, 1995
Net sales for the nine months ended June 29, 1996 increased by 45.5% or $152.6
million to $487.7 million from $335.1 million for the comparable 1995 period.
Of the $152.6 million increase, approximately $95.8 million is attributable to
sales resulting from the Solaris Agreement, principally to retail distribution
centers. The balance of the sales increase, $56.8 million was due principally
to the addition of stores previously serviced by a competitor, expanded product
placements and new store openings with existing customers, as well as an
increase in sales of pet supplies.
Gross profit increased by 27.3% or $13.7 million from $50.1 million during the
nine months ended June 25, 1995 to $63.8 million for the comparable 1996 period.
Gross profit as a percentage of net sales decreased from 15.0% in the nine
months ended June 25, 1995 to 13.1% for the similar 1996 period. The decrease
in gross profit as a percentage of net sales is primarily due to the increase in
sales to high volume, low service level retail distribution centers principally
in the second and third quarters of 1996. Additionally, the gross profit
percentage was adversely impacted by the elimination of certain discounts and
rebates which historically had been part of the Solaris marketing programs.
For the nine months ended June 29, 1996, selling, general and administrative
expenses increased by $4.0 million from $44.0 million for the comparable 1995
period. As a percentage of net sales, these expenses decreased from 13.1%
during the first nine months of 1995 to 9.8% for the same period in 1996. The
increase of $4.0 million is associated principally with the increase in net
sales. 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 expense for the nine months ended June 29, 1996 decreased by 39.3% or
$2.2 million from $5.6 million for the nine months ended June 25, 1995. The
decrease is attributable principally to lower average outstanding borrowing as a
result of applying the proceeds from the sale of 5,750,000 shares of the
Company's stock in November, 1995 and the termination of the Monsanto trade
financing agreement. Average short-term borrowings for the nine months ended
June 29, 1996 were $30.8
<PAGE>
million compared to $82.7 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. Purchases of Solaris products
are currently handled on typical credit terms with extended due dates. The
average interest rates for the nine months ended June 29, 1996 and June 25, 1995
were 10.2% and 7.6%, respectively.
The Company's effective income tax rate for the first nine months of fiscal 1996
was 42.2%.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements contained in this report which are not historical facts
are forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements, including the possibility of
unanticipated costs and difficulties related to the integration of the Kenlin
acquisition and other acquisitions, the Company's dependence on sales of Solaris
products, the Company's dependence on sales to Wal-Mart, Home Depot and other
large retailers, the impact in the Company's results of operations of
seasonality and weather, and other risks disclosed in the Company's SEC filings.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth through a combination of bank
borrowings, supplier credit and internally generated funds. In addition, the
Company received net proceeds (after offering expenses) of approximately $54.0
million from its two public offerings in July, 1993 and November, 1995.
Further, the Company recently completed its third public offering in July, 1996
generating approximately $46.8 million net of underwriting commissions.
The Company's business is highly seasonal and its working capital requirements
and capital resources track closely to this seasonal pattern. During the first
fiscal quarter accounts receivable reach their lowest level while inventory,
accounts payable, and short-term borrowings begin to increase. Since the
Company's short-term credit line fluctuates based upon a specified asset
borrowing base, this quarter is typically the period when the asset borrowing
base is at its lowest and consequently the Company's ability to borrow is at its
lowest. During the second quarter, receivables, accounts payable and short-term
borrowings begin to increase, reflecting the build-up of inventory and related
payables in anticipation of the peak selling season. During the third quarter,
principally due to the new Solaris Agreement, inventory levels remain relatively
constant while accounts receivable peak and short-term borrowings start to
decline as cash collections are received during the peak selling season. During
the fourth quarter, inventory levels are at their lowest, and accounts
receivable and payables are substantially reduced through conversion of
receivables to cash.
For the nine months ended June 29, 1996, the Company used cash in operating
activities of $20.6 million reflecting the normal cycle of inventory and
receivables build up. Net cash generated from investing activities of $1.8
million resulted from the sale of the Visalia, California warehouse. This
facility had been leased to a third party since February, 1995 and was not
considered necessary for future requirements. Cash generated from financing
activities of $18.8 million consisted of net proceeds from the sale of 5,750,000
shares of the Company's stock less repayment of debt.
The Company has a $75 million line of credit with Congress Financial Corporation
(Western). The available amount under the line of credit fluctuates based upon
a specific asset borrowing base. The line of credit, 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 June 29, 1996, the Company had outstanding
borrowings of approximately $23.8 million and had an additional $51.2 million of
available borrowing capacity under this line. The Company's line of credit
contains certain financial covenants such as minimum net worth and minimum
working capital requirements. The line also requires the lender's prior written
consent to any material acquisition of a business.
The Company had a financing arrangement with a financing affiliate of Monsanto
Company 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
extended credit terms.
The Company believes that cash flow from operations, funds available under its
line of credit and arrangements with suppliers will be adequate to fund its
presently anticipated working capital
<PAGE>
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 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.
<PAGE>
CENTRAL GARDEN & PET COMPANY FORM 10-Q
II. OTHER INFORMATION
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter ended
June 29, 1996.
<PAGE>
CENTRAL GARDEN & PET COMPANY FORM 10-Q
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunder
duly authorized.
CENTRAL GARDEN & PET COMPANY
---------------------------------------------
Registrant
Dated: August 7, 1996
---------------------------------------------
William E. Brown, Chairman of the Board and
Chief Executive Officer
/s/ Robert B. Jones
---------------------------------------------
Robert B. Jones, Vice President-Finance and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-29-1996
<CASH> 121
<SECURITIES> 0
<RECEIVABLES> 120,109
<ALLOWANCES> 4,471
<INVENTORY> 107,225
<CURRENT-ASSETS> 5,682
<PP&E> 19,520
<DEPRECIATION> 9,945
<TOTAL-ASSETS> 256,708
<CURRENT-LIABILITIES> 164,554
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 22
<TOTAL-LIABILITY-AND-EQUITY> 256,708
<SALES> 487,723
<TOTAL-REVENUES> 487,723
<CGS> 423,947
<TOTAL-COSTS> 47,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,414
<INCOME-PRETAX> 12,230
<INCOME-TAX> 5,167
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,063
<EPS-PRIMARY> .65
<EPS-DILUTED> 0
</TABLE>
