<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 27, 1997
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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. [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 27, 1997 26,193,637
Class B Stock Outstanding as of December 27, 1997 1,663,167
<PAGE>
CENTRAL GARDEN & PET COMPANY FORM 10-Q
Part 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
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CENTRAL GARDEN & PET COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 27,
1997 1997
------------------------ -----------------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $ 100,125 $ 77,856
Accounts receivable (less allowance for doubtful
accounts of $5,204 and $4,880) 85,028 104,865
Inventories 218,796 308,014
Prepaid expenses and other assets 10,470 11,977
------------------------ -----------------------
Total current assets 414,419 502,712
LAND, BUILDINGS, IMPROVEMENTS AND EQUIPMENT - NET 22,688 45,530
GOODWILL 113,018 242,278
OTHER ASSETS 8,918 26,079
------------------------ -----------------------
TOTAL $ 559,043 $ 816,599
======================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 72 $ 21,543
Accounts payable 136,220 162,931
Accrued expenses 24,201 31,751
Current portion of long-term debt 0 503
------------------------ -----------------------
Total current liabilities 160,493 216,728
LONG-TERM DEBT 115,200 127,843
DEFERRED INCOME TAXES AND OTHER LONG-TERM
OBLIGATIONS 1,543 15,380
COMMITMENTS AND CONTINGENCIES ---- ----
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value: 100 shares outstanding
September 27, 1997 and December 27, 1997 ---- ----
Class B stock, $.01 par value: 1,663,167 shares outstanding
September 27, 1997, and December 27, 1997 16 16
Common stock, $.01 par value: 19,143,325 shares outstanding
September 27, 1997 26,219,637 shares issued and 26,193,637
shares outstanding December 27, 1997 191 264
Additional paid-in capital 245,783 421,053
Retained earnings 36,291 35,772
Treasury Stock (364) (364)
Restricted stock deferred compensation (110) (93)
------------------------ -----------------------
Total shareholders' equity 281,807 456,648
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TOTAL $ 559,043 $ 816,599
======================== =======================
</TABLE>
See notes to consolidated financial statements
3
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CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 27,
1996 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,807) $ (519)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 699 1,701
Change in assets and liabilities:
Receivables (16,442) (5,465)
Inventories (49,861) (71,190)
Prepaid expenses and other assets (247) (2,047)
Accounts payable 69,089 20,137
Accrued expenses (3,431) (590)
------------------ -----------------
Net cash used in operating activities (2,000) (57,973)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to land, buildings, improvements and equipment (751) (1,767)
Payments to acquire companies and other assets, net of cash acquired 0 (137,911)
------------------ -----------------
Net cash used in investing activities (751) (139,678)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) notes payable - net (27,904) 39
Repayments of long-term debt (8,635) 0
Proceeds from issuance of long-term debt - net 111,836 0
Proceeds from issuance of stock - net 8 175,343
------------------ -----------------
Net cash provided by financing activities 75,305 175,382
NET INCREASE (DECREASE) IN CASH 72,554 (22,269)
CASH AT BEGINNING OF PERIOD 1,272 100,125
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CASH AT END OF PERIOD $ 73,826 $ 77,856
================== =================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 1,722 $ 210
Cash paid for income taxes 193 147
Assets (excluding cash) acquired through
purchase of subsidiaries 0 63,562
Liabilities assumed through purchase
of subsidiaries 0 49,112
</TABLE>
See notes to consolidated financial statements
4
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CENTRAL GARDEN & PET COMPANY
Consolidated Statements of Operations
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 28, DECEMBER 27,
1996 1997
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<S> <C> <C>
Net Sales $ 100,144 $ 138,827
Cost of Goods Sold and Occupancy 82,690 105,505
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Gross Profit 17,454 33,322
Selling, General and
Administrative Expenses 19,633 33,289
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Income (Loss) from operations (2,179) 33
Interest Expense - Net (937) (927)
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Loss Before Income Taxes (3,116) (894)
Income Taxes (1,309) (375)
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Net Loss $ (1,807) $ (519)
========== ==========
Net Loss per Common
Share Outstanding
Basic $ (0.12) $ (0.02)
========== ==========
Diluted $ (0.12) $ (0.02)
========== ==========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended December 27, 1997
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated balance sheet as of December 27, 1997, and the
consolidated statements of operations and cash flows for the three months
ended December 27, 1997 and December 28, 1996 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 27, 1997 are not indicative
of the operating results that may be expected for the year ending September
26, 1998.
2. Recent Acquisitions
-------------------
On December 17, 1997, the Company announced that it had acquired Kaytee
Products Incorporated ("Kaytee"), one of the nation's largest manufacturers
of bird and small animal food. Kaytee has approximately 425 employees and
sales of $103 million for the fiscal year ended June 30, 1997. Under the
terms of the agreement, the Company paid approximately $50 million. An
additional payment, not to exceed $3 million, may be made based on future
earnings of Kaytee.
On December 19, 1997, the Company announced that it had acquired TFH
Publications, Inc. ("TFH"), a manufacturer of premium dog chews and the
largest producer of pet books in the U.S. TFH has approximately 275
employees and sales of $32 million in the fiscal year ended December 31,
1996. Under the terms of the agreement, the Company paid approximately $70
million for the stock of TFH, and will pay $13 million for the stock of a
related company over the next four years, subject to certain adjustments.
Additional amounts may be paid based on future earnings over a five year
period.
The purchase price of Kaytee and TFH exceeded the fair market value of net
assets acquired by approximately $124,000,000, which was recorded as
goodwill and is being amortized on a straight line basis over 40 years.
The fair value of net assets acquired are based on preliminary estimates
which are subject to change.
3. Common Stock Offering
---------------------
On December 22, 1997, the Company issued 7,000,000 shares of its Common
stock at $26.25 per share before deduction for underwriting commission and
expenses related to the offering.
6
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The net proceeds were used to finance the recent acquisitions of TFH and
Kaytee and for general corporate purposes.
4. Earnings Per Share
------------------
<TABLE>
<CAPTION>
For the Three-Month Period Ended December 27, 1997
Per-Share
Loss Shares Amount
<S> <C> <C> <C>
BASIC AND DILUTED EPS
Net loss attributed to
common stockholders $(519,000) 21,318,000 $(0.02)
For the Three-Month Period Ended December 28, 1996
BASIC AND DILUTED EPS
Net loss attributed to
common stockholders $(1,807,000) 14,474,000 $(0.12)
</TABLE>
Options to purchase 1,388,308 and 843,304 shares of common stock at prices
ranging from $1.30 to $29.88 per share were outstanding during the three-month
periods ended December 27, 1997 and December 26, 1996, respectively, but were
not included in the computation of diluted EPS because the assumed exercise
would have been anti-dilutive in each period. Shares of common stock from the
assumed conversion of the Company's convertible securities totaling 4,207,143
were also not included in the computation of diluted EPS for the three-month
periods ended December 27, 1997 and December 26, 1996 because the assumed
conversion would have been anti-dilutive.
7
<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.
On January 8, 1998, Monsanto Company issued a press release stating it was
considering alternatives for several of its businesses, including the Solaris
Group. The alternatives included partnerships, restructurings, divestitures or
joint ventures. While the Company's Master Agent and Distributor Agreement
provides it with substantial protection, any significant change in the Company's
relationship with Solaris as the result of any actions contemplated by the
Monsanto announcement could have a significant impact on the Company's future
performance.
THREE MONTHS ENDED DECEMBER 27, 1997
COMPARED WITH THREE MONTHS ENDED DECEMBER 28, 1996
Net sales for the three months ended December 27, 1997 increased by 38.6% or
$38.7 million from $100.1 million for the comparable fiscal 1997 period. The
$38.7 million increase reflects approximately $42.7 million of increases
attributable to companies acquired subsequent to December 1996, and
approximately $2.1 million relates principally to sales of lawn and garden
products offset by a decrease of $6.1 million related to sales of pet supplies.
While sales of pet supplies in the Northwest and Southwest markets increased
during the current quarter by approximately 15.0% compared with the comparable
fiscal 1997 quarter, the loss of certain large customers, principally in the
Northeast and California, acquired during 1997 by a major pet retail chain,
caused the total sales of pet supplies to decline.
8
<PAGE>
Gross profit increased by 90.9% or $15.9 million from $17.4 million during the
three months ended December 28, 1996 to $33.3 million for the three months ended
December 27, 1997. The increase in gross profit relates to the increase in
sales of lawn and garden products offset by a decrease in the sales of pet
supplies coupled with the gross profit generated by the newly acquired
operations, which primarily accounted for the increase. Gross profit as a
percentage of net sales increased from 17.4% in the quarter ended December 28,
1996 to 24.0% for the similar period in fiscal 1998. While both pet supplies
and lawn and garden products experienced higher gross profit margins in the
current quarter, the overall increase in the gross margin percentage was largely
attributable to the newly acquired branded products businesses which generate a
significantly higher gross margin percent than lawn and garden and pet supplies
products.
For the three months ended December 27, 1997, selling, general and
administrative expenses increased by $13.7 million from $19.6 million for the
similar 1997 quarter. As a percentage of net sales, these expenses increased
from 19.6% during the quarter ended December 28, 1996 to 24.0% for the
comparable fiscal 1998 period. The entire increase in these expenses is
directly related to the businesses acquired subsequent to December 1996.
The Company has a receivable due from one of its distributor agents for
approximately $2.4 million. The Company believes that it is likely the
distributor will file for protection under the federal bankruptcy laws.
Although there can be no assurances, the Company believes that the exposure in
such event would be substantially reduced by supplier credits and the
application of previously established reserves.
Net interest expense for the first three months of fiscal 1998 of $.9 million
remained virtually unchanged compared with the comparable fiscal 1997 quarter.
Interest related to the Company's $115.0 million 6% subordinated notes issued
November 15, 1996 increased during the three months ended December 27, 1997
compared to the comparable fiscal 1997 period as a result of being outstanding
for the entire three months. This increase was offset in part by interest
income resulting from the proceeds received from the Company's common stock
offering completed on August 1, 1997 and to a lesser extent from the common
stock offering completed on December 22, 1997. Interest expense related to the
Company's revolving credit line was lower during the current quarter when
compared with the comparable fiscal 1997 quarter due to a lower average
outstanding loan balance. Average short term borrowings for the three months
ended December 27, 1997 were $5.3 million compared with $12.3 million for the
similar fiscal 1997 period. Average interest rates on short term borrowings
were 9.4% and 10.6%, respectively.
The Company's effective income tax rate was 42.0% for both periods.
During fiscal 1997, the Company commenced an analysis of the impact of modifying
its existing computer software for conforming to the requirements of Year 2000.
While the analysis is not finalized, the Company believes that all software
required to effectively operate our business will be replaced, modified or
upgraded by the Year 2000, and that any associated costs will not have a
material impact on the operations, cash flows or financial condition of future
periods.
9
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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 $227.0
million from its four public offerings of common stock in July 1993, November
1995, July 1996 and August 1997, and in November 1996 the Company completed the
sale of $115 million 6% subordinated convertible notes generating approximately
$112 million net of underwriting commissions. Further, the Company recently
completed its fifth public offering in December 1997 generating approximately
$175 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 27 1997, the Company used cash in operating
activities of $58.0 million principally relating to $56.0 million of early
payments for purchases of inventory under various promotional programs offered
by certain suppliers and the normal cycle of inventory and receivables build up.
Net cash used from investing activities of $139.7 million resulted from
acquisitions during the fiscal quarter and the acquisition of office and
warehouse equipment. Cash generated from financing activities of $175.4 million
consisted principally of net proceeds from the sale of 7,000,000 shares of the
Company's stock in December 1997.
The Company has recently amended its line of credit with Congress Financial
Corporation (Western) increasing the loan limit to $100 million. The available
amount under the line of credit fluctuates based upon a specific asset borrowing
base. The amended line of credit, bears interest at a rate equal to the prime
rate per annum, is secured by substantially all of the Company's assets. At
December 27, 1997, the Company had no outstanding borrowings and had $100.0
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 acquisition of a business. In connection with the
acquisition of two companies in December 1997, their combined lines of credit
were $22.1 million of which $7.0 million was available. Interest rates related
to these lines averaged approximately 7.0% at December 27, 1997.
The Company believes that cash flow from operations, funds available under its
line of credit, proceeds from its sale of convertible notes, common stock sales
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 $5.0 million
for the next 12 months.
10
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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 7,000,000 shares of stock completed in December 1997, 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.
11
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CENTRAL GARDEN & PET COMPANY FORM 10-Q
II. OTHER INFORMATION
12
<PAGE>
ITEM 6. REPORTS ON FORM 8-K
(a) The following report on Form 8-K was filed during the quarter
ended December 27, 1997.
(1) On December 8, 1997, the Company filed a report on Form 8-K
dated December 8, 1997, disclosing that the Company issued
a press release announcing that it had signed a letter of
intent to acquire TFH Publications.
(2) On December 8, 1997, the Company filed a report on
Form 8-K dated December 8, 1997, disclosing that the Company
issued a press release announcing that it had signed a
letter of intent to acquire Kaytee Products Incorporated.
13
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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 9, 1998
---------------------------------------------
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
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> DEC-27-1997
<CASH> 77,856
<SECURITIES> 0
<RECEIVABLES> 104,865
<ALLOWANCES> 4,880
<INVENTORY> 308,014
<CURRENT-ASSETS> 502,712
<PP&E> 81,994
<DEPRECIATION> 36,464
<TOTAL-ASSETS> 816,599
<CURRENT-LIABILITIES> 216,728
<BONDS> 115,000
0
0
<COMMON> 264
<OTHER-SE> 16
<TOTAL-LIABILITY-AND-EQUITY> 816,599
<SALES> 138,827
<TOTAL-REVENUES> 138,827
<CGS> 105,505
<TOTAL-COSTS> 33,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 927
<INCOME-PRETAX> (894)
<INCOME-TAX> (375)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (519)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
