<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1034
For the quarterly period ended December 28, 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
incorporation or organization) Identification No.)
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. [ x ] Yes [ ] 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 December 28, 1996 12,611,084
Class B Stock Outstanding as of December 28, 1996 1,863,167
<PAGE>
CENTRAL GARDEN & PET COMPANY FORM 10-Q
Part 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 28,
1996 1996
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(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 1,272 $ 73,826
Accounts receivable (less allowance for doubtful
accounts of $5,278 and $4,279) 62,231 78,673
Inventories 169,835 219,696
Prepaid expenses and other assets 7,132 7,180
--------- ---------
Total current assets 240,470 379,375
LAND, BUILDINGS, IMPROVEMENTS AND EQUIPMENT:
Land 431 431
Buildings and improvements 3,450 3,563
Transportation equipment 3,161 3,087
Warehouse equipment 7,878 8,226
Office furniture and equipment 8,046 8,410
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Total 22,966 23,717
Less accumulated depreciation and amortization 11,502 11,996
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Land, buildings, improvements and equipment - net 11,464 11,721
GOODWILL 29,971 29,730
OTHER ASSETS 1,759 5,176
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TOTAL $ 283,664 $ 426,002
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 27,904 $ 0
Accounts payable 104,049 173,138
Accrued expenses 11,243 7,812
Current portion of long-term debt 1,604 604
--------- ---------
Total current liabilities 144,800 181,554
LONG-TERM DEBT 7,635 115,000
DEFERRED INCOME TAXES AND OTHER LONG-TERM OBLIGATIONS 1,670 1,670
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value: 100 shares outstanding
September 28, 1996 and December 28, 1996 -- --
Class B stock, $.01 par value: 1,933,575 shares outstanding
September 28, 1996, 1,863,167 shares outstanding
December 28, 1996 19 19
Common stock, $.01 par value: 12,562,521 shares outstanding
September 28, 1996, 12,637,084 shares issued and
12,611,084 shares outstanding December 28, 1996 125 125
Additional paid-in capital 111,228 111,236
Retained earnings 18,733 16,926
Treasury Stock (364) (364)
Restricted stock deferred compensation (182) (164)
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Total shareholders' equity 129,559 127,778
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TOTAL $ 283,664 $ 426,002
========= =========
</TABLE>
See notes to consolidated financial statements
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CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 30, DECEMBER 28,
1995 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,363) $ (1,807)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 656 699
Change in assets and liabilities:
Receivables (4,895) (16,442)
Inventories (31,060) (49,861)
Prepaid expenses and other assets (39) (247)
Accounts payable 14,441 69,089
Accrued expenses (676) (3,431)
Deferred income taxes and other long-term obligations (3) 0
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Net cash used in operating activities (23,939) (2,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to land, buildings, improvements and equipment (1,416) (751)
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Net cash used by investing activities (1,416) (751)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) notes payable - net (10,125) (27,904)
Repayments of long-term debt (81) (8,635)
Proceeds from long-term debt - net 0 111,836
Proceeds from issuance of stock - net 35,665 8
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Net cash provided by financing activities 25,459 75,305
NET INCREASE IN CASH 104 72,554
CASH AT BEGINNING OF PERIOD 143 1,272
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CASH AT END OF PERIOD $ 247 $ 73,826
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 785 $ 1,722
Cash paid for income taxes 14 193
</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>
THREE MONTHS ENDED
DECEMBER 30, DECEMBER 28,
1995 1996
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<S> <C> <C>
Net Sales $ 78,112 $ 100,144
Cost of Goods Sold and Occupancy 66,792 82,690
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Gross Profit 11,320 17,454
Selling, General and Administrative Expenses 14,018 19,633
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Loss from operations (2,698) (2,179)
Interest Expense - Net (1,376) (937)
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Loss Before Income Taxes (4,074) (3,116)
Income Taxes (1,711) (1,309)
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Net Loss $ (2,363) $ (1,807)
======== =========
Net Loss per Common and Common Equivalent Share
Fully Diluted $ (0.26) $ (0.12)
======== =========
Primary $ (0.26) $ (0.12)
======== =========
Weighted Average Shares Outstanding
Fully Diluted 8,959 14,474
Primary 8,959 14,474
</TABLE>
See notes to consolidated financial statements
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 28, 1996
(UNAUDITED)
1. Basis of Presentation
---------------------
The consolidated balance sheet as of December 28, 1996, the consolidated
statements of income and cash flows for the three months ended December 28, 1996
and December 30, 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 December 28, 1996 are not indicative of the operating
results that may be expected for the year ending September 27, 1997.
2. Recent Acquisitions
-------------------
On January 17, 1997, the Company announced that its wholly owned Kenlin Pet
Supply subsidiary had reached an agreement for the acquisition of the pet
supplies business of Country Pet Supply, N.W., Inc., a distributor of pet supply
and pet food products in Florida, Georgia, Alabama and South Carolina. Country
has annual pet supply sales of approximately $33 million.
On January 20, 1997, the Company announced that it had acquired Four Paws
Products, Ltd., Inc., a manufacturer of branded dog, cat, reptile and small
animal products that are distributed throughout the United States, Canada,
Europe and Asia. Sales in 1996 were approximately $30 million. Under the terms
of the agreement, the Company paid $45 million in cash and 449,944 shares of
common stock.
3. Convertible Subordinated Notes
------------------------------
On November 15, 1996, the Company sold in a private placement $115,000,000
aggregate principal amount of 6% Convertible Subordinated Notes due 2003. A
portion of the net proceeds of the offering were used for repayment of short-
and long-term indebtedness and for acquisitions, including the acquisition of
Four Paws.
<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 DECEMBER 28, 1996
COMPARED WITH THREE MONTHS ENDED DECEMBER 30, 1995
Net sales for the three months ended December 28, 1996 increased by 28.2% or
$22.0 million from $78.1 million for the comparable 1995 period. Of the $22.0
million increase, approximately $25.0 million was attributable to the two pet
distribution businesses acquired in July 1996 offset by a decrease of $5.0
million in sales of lawn and garden products. The decrease in garden sales
relates principally to sales of Solaris products shipped to retail distribution
centers which the Company believes to be a timing issue.
Gross profit increased by 54.2% or $6.1 million from $11.3 million during the
three months ended December 30, 1995 to $17.5 million for the three months ended
December 28, 1996. Gross profit as a percentage of net sales increased from
14.5% in the three months ended December 30, 1995 to 17.4% for the similar
period in 1996. Both the increase in the gross profit dollars and the increase
in gross profit as a percentage of net sales is due principally to the pet
distribution businesses acquired in July 1996. Since lawn and garden sales are
lowest in the Company's first fiscal quarter, the impact on margins of the
addition of the newly acquired pet distribution businesses is expected to be
significantly less during the remainder of fiscal 1997 than it was in the first
quarter.
<PAGE>
For the three months ended December 28, 1996, selling, general and
administrative expenses increased by $5.6 million from $14.0 million for the
similar 1995 period. As a percentage of net sales these expenses increased from
17.9% during the three months ended December 30, 1995 to 19.6% for the
comparable 1995 period. Of the $5.6 million increase, approximately $4.7
million is attributable to the newly acquired pet businesses while the balance
relates to the combination of relocation to larger distribution facilities in
Dallas and Atlanta and increased sales expense associated with increased garden
business developed during the second quarter of 1996.
Net interest expense for the first three months of fiscal 1997 decreased by
31.9% or $.4 million from $1.4 million for the three months ended December 30,
1995. The decrease is due to lower average outstanding borrowings on the
Company's revolving credit facility and the reduction of approximately $8.6
million in its long term debt resulting from the application of proceeds
received from the issuance of $115.0 million 6% subordinated convertible notes
completed November 15, 1996. The average amount outstanding on the 6%
convertible notes for the three months ended December 28, 1996 was $57.5
million. Average short-term borrowings for the three months ended December 28,
1996 were $12.3 million compared to $30.3 million for the comparable 1995
period. Average net interest rates were 10.6% and 10.9%, respectively.
The Company's effective income tax rate was 42% for both the 1996 and 1995
quarters.
<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 $100.0
million from its three public offerings of common stock in July 1993, November
1995 and July 1996. Further, in November 1996 the Company completed the sale of
$115 million 6% subordinated convertible notes generating approximately $112
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 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 three months ended December 28, 1996, the Company used cash in operating
activities of $2.0 million reflecting the normal cycle of inventory and
receivables build up. Net cash used from investing activities of $.8 million
resulted from the acquisition of office and warehouse equipment. Cash generated
from financing activities of $75.3 million consisted of net proceeds from the
sale of $115 million principal amount of 6% subordinated convertible notes due
2003 less repayment of $8.6 million of long-term debt and approximate $28.0
million of short-term 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 December 28, 1996, the Company had no
outstanding borrowings and had $75.0 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 believes that cash flow from operations, funds available under its
line of credit, proceeds from its recent sale of convertible notes and
arrangements with suppliers 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. On January 20, 1997, the
Company announced that it had acquired Four Paws Products, Ltd., Inc., a
manufacturer of branded dog, cat, reptile and small animal products. Under the
terms of the
<PAGE>
agreement, the Company paid $45 million in cash and 449,944 shares of common
stock. 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) The following reports on Form 8-K were filed during the quarter
ended December 28, 1996.
(1) On October 15, 1996, the Company filed a report on Form 8-K
dated October 13, 1996, disclosing that the Company issued a
press release announcing that it had entered into a definitive
agreement to acquire assets comprising the flea and tick
protection business in the United States and Canada of Sandoz,
Ltd.
(2) On November 6, 1996, the Company filed a report on Form 8-K
dated October 30, 1996, disclosing that the Company issued a
press release announcing that it was proposing to offer in a
private placement $100,000,000 aggregate principal amount of 6%
Convertible Subordinated Notes due 2003 (not including up to an
additional $15,000,000 to cover over-allotments, if any).
(3) On November 13, 1996, the Company filed a report on Form 8-K
dated November 11, 1996, disclosing that the Company issued a
press release announcing that it had sold in a private placement
$100,000,000 aggregate principal amount of 6% Convertible
Subordinated Notes due 2003 (not including up to an additional
$15,000,000 to cover over-allotments, if any).
(4) On December 2, 1996, the Company filed a report on Form 8-K/A
to amend the Form 8-K dated October 13, 1996 to move all of the
disclosure previously reported under Item 2 to Item 5.
<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: February 6, 1997
----------------------------------------------
William E. Brown, Chairman of the Board and
Chief Executive Officer
/ s / Robert B. Jones
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Robert B. Jones, Vice President-Finance and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> DEC-28-1996
<CASH> 73,826
<SECURITIES> 0
<RECEIVABLES> 78,673
<ALLOWANCES> 4,279
<INVENTORY> 219,696
<CURRENT-ASSETS> 379,375
<PP&E> 23,717
<DEPRECIATION> 11,996
<TOTAL-ASSETS> 426,002
<CURRENT-LIABILITIES> 181,554
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 19
<TOTAL-LIABILITY-AND-EQUITY> 426,002
<SALES> 100,144
<TOTAL-REVENUES> 100,144
<CGS> 82,690
<TOTAL-COSTS> 19,633
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 937
<INCOME-PRETAX> (3,116)
<INCOME-TAX> (1,309)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,807)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
