<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 March 27, 1999
-------------------------------------------------
or
[_] TRANSITION REPORT PURSUANT OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________to_______________________
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)
________________________________________________________________________________
(925) 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 March 27, 1999 26,485,387
Class B Stock Outstanding as of March 27, 1999 1,660,919
<PAGE>
CENTRAL GARDEN & PET COMPANY FORM 10-Q
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
-----------------------------
1. Financial Statements
Condensed Consolidated Balance Sheets
September 26, 1998 and March 27, 1999
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 28, 1998 and March 27, 1999
Consolidated Statements of Income
Three and Six Months Ended
March 28, 1998 and March 27, 1999
Notes to Condensed Consolidated Financial Statements
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
--------------------------
1. Legal Proceedings
2. Changes in Securities and Use of Proceeds
3. Defaults Upon Senior Securities
4. Submission of Matter to a Vote of Securities Holders
5. Other Information
6. Exhibits and Reports on Form 8-K
Exhibit Index
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 26, MARCH 27,
1998 1999
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 10,328 $ 3,565
Accounts receivable (less allowance for doubtful
accounts of $6,458 and $6,782) 142,293 275,160
Inventories 292,809 409,051
Prepaid expenses and other assets 26,884 22,090
--------------- ----------------
Total current assets 472,314 709,866
LAND, BUILDINGS, IMPROVEMENTS AND EQUIPMENT - NET 86,382 92,809
GOODWILL 339,430 347,148
OTHER ASSETS 30,574 25,157
--------------- ----------------
TOTAL $ 928,700 $ 1,174,980
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 6,956 $ 74,410
Accounts payable 153,739 353,143
Accrued expenses 32,767 42,334
Current portion of long-term debt 1,139 604
--------------- ----------------
Total current liabilities 194,601 470,491
LONG-TERM DEBT 125,125 125,576
DEFERRED INCOME TAXES AND OTHER LONG-TERM
OBLIGATIONS 20,200 17,542
COMMITMENTS AND CONTINGENCIES ---- ----
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value: none outstanding at September 26, 1998 and
March 27, 1999 ---- ----
Class B stock, $.01 par value: 1,661,762 shares outstanding September 26, 1998,
1,660,919 shares outstanding March 27, 1999 16 17
Common stock, $.01 par value: 29,718,530 issued and 29,646,350 outstanding at
September 26, 1998; 30,010,287 issued and 26,485,387 outstanding at 298 300
March 27, 1999
Additional paid-in capital 519,933 522,719
Retained earnings 69,984 85,097
Treasury stock (1,418) (46,749)
Restricted stock deferred compensation (39) (13)
--------------- ----------------
Total shareholders' equity 588,774 561,371
--------------- ----------------
TOTAL $ 928,700 $ 1,174,980
=============== ================
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 28, MARCH 27,
1998 1999
-------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,840 $ 15,113
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 5,166 9,695
Change in assets and liabilities:
Receivables (77,459) (130,621)
Inventories (92,128) (112,837)
Prepaid expenses and other assets (5,478) 10,655
Accounts payable 114,524 198,163
Accrued expenses (5,744) 4,903
--------------- ----------------
Net cash used in operating activities (49,279) (4,930)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to land, buildings, improvements and equipment (5,617) (11,182)
Payments to acquire companies, net of cash acquired (217,163) (13,827)
--------------- ----------------
Net cash used in investing activities (222,780) (25,009)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of notes payable - net (5,624) 67,454
Repayments of long-term debt (3,705) (84)
Payments to reacquire stock 0 (45,331)
Proceeds from issuance of stock - net 204,364 1,137
--------------- ----------------
Net cash provided by financing activities 195,035 23,176
NET DECREASE IN CASH (77,024) (6,763)
CASH AT BEGINNING OF PERIOD 100,125 10,328
--------------- ----------------
CASH AT END OF PERIOD $ 23,101 $ 3,565
=============== ================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 4,556 $ 4,729
Cash paid for income taxes 7,113 1,316
Assets (excluding cash) acquired through purchase of subsidiaries 220,217 6,251
Liabilities assumed through purchase of subsidiaries 165,840 3,274
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 28, MARCH 27, MARCH 28, MARCH 27,
1998 1999 1998 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 494,983 $ 675,126 $ 356,156 $ 447,105
Cost of Goods Sold and Occupancy 385,863 516,385 280,358 344,845
-------------- -------------- -------------- --------------
Gross profit 109,120 158,741 75,798 102,260
Selling, General and
Administrative Expenses 86,085 127,259 52,796 72,367
-------------- -------------- -------------- --------------
Income from operations 23,035 31,482 23,002 29,893
Interest Expense - Net (2,623) (5,425) (1,696) (3,084)
-------------- -------------- -------------- --------------
Income before income taxes 20,412 26,057 21,306 26,809
Income Taxes 8,572 10,944 8,947 11,260
-------------- -------------- -------------- --------------
Net Income $ 11,840 $ 15,113 $ 12,359 $ 15,549
============== ============== ============== ==============
Net Income per Common
Share Outstanding
Basic $ 0.46 $ 0.51 $ 0.41 $ 0.55
============== ============== ============== ==============
Diluted $ 0.45 $ 0.50 $ 0.39 $ 0.51
============== ============== ============== ==============
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Six Months Ended March 27, 1999
(Unaudited)
1. Basis of Presentation
---------------------
The condensed consolidated balance sheet as of March 27, 1999, the
consolidated statements of income for both the three and six months ended
March 27, 1999 and March 28, 1998, and the condensed consolidated
statements of cash flows for the six months ended March 27, 1999 and
March 28, 1998 have been prepared by the Company, without audit. The
condensed consolidated balance sheet as of September 26, 1998 has been
derived from the audited financial statements of the Company for the year
ended September 26, 1998. 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 March 27, 1999 are not indicative of
the operating results that may be expected for the year ending September
25, 1999.
It is suggested that these interim financial statements be read in
conjunction with the annual audited financial statements, accounting
policies and financial notes thereto, included in the Company's 1998 Annual
Report which has previously been filed with the Securities and Exchange
Commission.
2. Share Repurchase Program
------------------------
On December 18, 1998, the Company's Board of Directors authorized the
Company to increase the share repurchase program up to a maximum of $55
million of common shares. On January 4, 1999, the Company's Board of
Directors authorized another increase in the share repurchase program, up
to a maximum of $80 million of common shares. During the three and six
month periods ended March 27, 1999, the Company repurchased 1,377,900 and
3,452,900 shares for a total of $18.6 and $45.3 million, respectively. As
of May 6, 1999, the Company had purchased an additional 382,950 shares for
a total of $5.7 million.
<PAGE>
3. Earnings Per Share
------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted per-share computations for income from continuing
operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 27, 1999 March 27, 1999
Income Shares Per Share Income Shares Per Share
<S> <C> <C> <C>
Basic EPS: <C> <C> <C>
Net Income $15,549 28,475 $0.55 $15,113 29,851 $0.51
Effect of Dilutive Securities:
Options to purchase
Common stock 251 301
Convertible Notes $ 1,079 4,107 $ 2,158 4,107
Diluted EPS:
Net income attributed
to common
shareholders $16,628 32,833 $0.51 $17,271 34,259 $0.50
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 28, 1998 March 28, 1998
Income Shares Per Share Income Shares Per Share
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net Income $12,359 30,151 $0.41 $11,840 25,734 $0.46
Effect of Dilutive Securities:
Options to purchase
Common stock 464 420
Convertible Notes $ 1,079 4,107 --- ---
Series A Convertible
Preferred Stock 100 100
Diluted EPS:
Net income attributed
to common
shareholders $13,438 34,822 $0.39 $11,840 26,254 $0.45
</TABLE>
Shares of common stock from the aassumed conversion of the Company's convertible
securities totaling 4,107,143 were not included in the computation of diluted
EPS for the six-month period ended March 28, 1998 because the assumed conversion
would have been anti-dilutive.
<PAGE>
4. Prior Year Acquisitions
-----------------------
The following table summarizes on a pro forma basis the combined results of
operations of the Company as if the Kaytee Products, TFH Publications and
Pennington Seed, Inc. acquisitions made during the first six months of 1998
had occurred on September 29, 1996. The pro forma results of operations
also reflects pro forma adjustments for cash paid and stock issued to
facilitate the acquisitions and for the amortization of goodwill. Although
this pro forma combined information includes the results of operations of
the acquisition, it does not necessarily reflect the results of operations
that would have occurred had the companies been managed by the Company
prior to their acquisitions.
Pro Forma
Six Months Ended
March 28,
1998
----
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<S> <C>
Net Sales $595,357
Gross profit 139,410
Income from operations 21,793
Income before income taxes 17,589
Net Income $ 10,198
Net Income per Common
Share Outstanding:
Basic $ 0.38
Diluted $ 0.37
</TABLE>
5. New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in either
assets or liabilities. This statement is effective for fiscal years
beginning after June 15, 1999 and is not to be applied retroactively to
financial statements for prior periods. If adopted at March 27, 1999, the
application of the standard would not have had a material effect on the
Company's consolidated financial position or results of operations.
<PAGE>
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 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 runs through
September 30, 1999, 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 1995 and prior, 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.
In addition, under the Solaris Agreement, the Company's inventories of Solaris
products have increased significantly 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 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.
Monsanto has announced that it sold its Solaris lawn and garden business
exclusive of its Roundup herbicide products for consumer use to The Scotts
Company ("Scotts") and that it has entered into a separate, long-term, exclusive
agreement pursuant to which Monsanto will continue to make Roundup herbicide
products for consumer use and Scotts will market the products. Scotts has been
for many years a substantial supplier to the Company and, in connection with its
direct sales, a substantial purchaser of the Company's services.
The Company expects to enter into a new relationship with Scotts effective
October 1, 1999. Since Scotts is expected to be the Company's largest lawn and
garden customer by a substantial margin, the terms of this new arrangement will
have a substantial impact on the Company's future profitability. There can be
no assurance that the Company will be successful in negotiating and implementing
a new relationship with Scotts or that the new relationship with Scotts will
provide the Company with comparable profitability to the profitability it has
experienced from its prior relationships with Solaris and Scotts.
<PAGE>
The sale of the Solaris business by Monsanto and the approaching end of the
Solaris Agreement, subject the Company's lawn and garden business to significant
uncertainties. These include the negotiation of new relationships with Scotts
and the final accounting for all issues between the Company and Monsanto under
the Solaris Agreement, such as the amounts receivable from Monsanto for cost
reimbursements, payments for cost reductions and payments for services; the
amounts payable to Monsanto for inventory; and responsibility for obsolete
inventory and for non-payment by Solaris' direct sales accounts. The resolution
of such uncertainties could have a material effect, either positive or negative,
on the Company's results of operations.
THREE MONTHS ENDED MARCH 27, 1999
COMPARED WITH THREE MONTHS ENDED MARCH 28, 1998
Net sales for the three months ended March 27, 1999 increased by 25.5% or $90.9
million from $356.2 million for the comparable fiscal 1998 period. The $90.9
million increase includes approximately $36.1 million attributable to companies
acquired subsequent to December 1997. Of the sales increase related to existing
operations, $54.8 million, approximately $28.9 million was attributable to sales
of lawn and garden products, $23.7 million to sales of branded products and $2.2
million to sales of pet supplies products.
Gross profit increased by 34.9% or $26.5 million from $75.8 million during the
three months ended March 27, 1998 to $102.3 million for the three months ended
March 27, 1999. The majority of the increase in gross profit relates to sales of
branded products. Gross profit as a percentage of net sales increased from 21.3%
in the quarter ended March 28, 1998 to 22.9% for the comparable 1999 period. The
increase in gross margin as a percentage of net sales was attributable to the
sales mix in the current quarter, where the higher-margin branded products
accounted for a greater percentage of total sales than was the case in the
comparable 1998 quarter, offset in part by a slight decrease in gross margin
percentage on Solaris lawn and garden products. Under the Solaris Agreement, the
Company is reimbursed for costs incurred in connection with services provided to
direct sales accounts. Not all direct sales accounts require the same service
levels consequently, as sales volume vary with respect to specific accounts, the
overall gross margin will be impacted.
For the three months ended March 27, 1999, selling, general and administrative
expenses increased by $19.6 million from $52.8 million for the comparable fiscal
1998 quarter. As a percentage of net sales, these expenses increased from 14.8%
during the quarter ended March 28, 1998 to 16.2% for the quarter ended March 27,
1999. After adjusting for the expenses related to newly acquired operations and
expenses related to the increase in net sales, selling, general and
administrative expenses were approximately $7.0 million greater than was the
case for the March 28, 1998 quarter. The majority of the increase is related to
the lawn and garden distribution operations. Delivery expense increased by
approximately $2.5 million due to the expanded use of common carriers. The
increased use of these carriers was influenced, in part, by certain retailers
imposing strict delivery terms, which, if not met, would mean the loss of sales
or fines. To avoid potential problems, these customers now have substantially
all of their deliveries handled by common carriers. In addition, the Company has
expanded into certain new geographic markets where there is currently not
sufficient mass to justify operating its own trucks, consequently these new
markets are serviced by common carriers. Increased warehouse costs accounted
for approximately $1.2 million of the total increase. These costs are related to
increased overtime and outside contact labor required to handle the heavy sales
increase, most of which occurred during the last 40 days of the quarter. Selling
expense increased approximately $1.5 million related principally to a
significant increase in both sales personnel and store merchandisers, in
anticipation of increased sales volume in the Company's third fiscal quarter.
The Company has established a corporate marketing and market research unit
staffed by experienced professionals. This unit works with the Company's branded
product companies to test and evaluate new products, design and test new
packaging and promotional programs, as well as evaluate product lines of
potential acquisitions. This function accounted for approximately $1.8 million
of the total expense increase. The Company believes the increased costs
associated with both the use of common carriers and the corporate marketing
function will continue through the balance of fiscal 1999 and the increased
costs associated with the warehousing and selling functions will be absorbed
through expected sales increases during the balance of fiscal 1999.
Net interest expense for the quarter ended March 27, 1999 increased by $1.4
million from $1.7 million for the three months ended March 28, 1998 to $3.1
million for the three months ended March 27, 1999. The increase in net interest
expense relates principally to debt associated with the newly acquired
businesses and increased borrowings to support the Company's stock repurchase
programs. Average short-term borrowings for the three months ended March 27,
1999 were $65.9 million compared with $54.9 million for the similar fiscal 1998
period. Average interest rates on short-term borrowings were 7.4% and 8.6%,
respectively.
<PAGE>
The Company's effective income tax rate was 42.0% for both periods.
SIX MONTHS ENDED MARCH 27, 1999
COMPARED WITH SIX MONTHS ENDED MARCH 28, 1998
Net sales for the six months ended March 27, 1999 increased by 36.4% or $180.1
million from $495.0 million for the comparable fiscal 1998 period. The $180.1
million increase includes approximately $110.8 million attributable to companies
acquired subsequent to December 1997. Of the sales increase related to existing
operations, $69.3 million, approximately $43.5 million was attributable to sales
of lawn and garden products, $21.5 million to sales of branded products and $4.3
million to sales of pet supplies products.
Gross profit increased by 45.5% or $49.6 million from $109.1 million during the
six months ended March 27, 1998 to $158.7 million for the six months ended March
27, 1999. The majority of the increase in gross profit relates to sales of
branded products. Gross profit as a percentage of net sales increased from 22.0%
for the six months ended March 28, 1998 to 23.5% for the comparable 1999 period.
The increase in gross margin as a percentage of net sales was attributable to
the sales mix, where sales of higher-margin branded products accounted for a
greater percentage of total sales for the six months ended March 27, 1999 than
was the case in the comparable 1998 period, offset in part by a decrease in
gross margin of approximately 1.9% related to sales of lawn and garden products.
This decrease was largely related to sales during the first three months of
fiscal 1999 where a significant portion of sales were to retail distribution
centers, which carry a lower gross margin than sales to individual stores.
For the six months ended March 27, 1999, selling, general and administrative
expenses increased by $41.2 million from $86.1 million for the comparable fiscal
1998 quarter. As a percentage of net sales, these expenses increased from 17.4%
for the six months ended March 28, 1998 to 18.8% for the like 1999 period. The
increase in selling, general and administrative expense, after adjusting for
newly acquired businesses and expenses related to increased sales volume, was
approximately $7.6 million, of which $7.0 million related to the three months
ended March 27, 1999.
Net interest expense for the six months ended March 27, 1999 increased by $2.8
million from $2.6 million for the six months ended March 28, 1998 to $5.4
million for the six months ended March 27, 1999. The increase in net interest
expense related to newly acquired companies and increased borrowings to support
the Company's stock repurchase program. Funds which were invested in interest
bearing short-term securities during the first quarter of fiscal 1998 were
subsequently used to acquire new businesses. Average short-term borrowings for
the six months ended March 27, 1999 were $38.8 million compared with $33.2
million for the similar fiscal 1998 period. Average interest rates on short-term
borrowings were 8.0% and 8.8%, respectively
The Company's effective income tax rate was 42.0% for both periods.
<PAGE>
IMPACT OF YEAR 2000
State of Readiness. In early 1998, the Company conducted an overall assessment
of its computer systems, including Year 2000 readiness. Based on this
assessment, the Company has developed a plan to deal with the Year 2000 Issue,
which covers both systems and vendor/customer issues. The plan includes both
upgrades to or replacement of current systems to bring all of the Company's
systems into compliance. Many of the existing information systems used by
subsidiaries or divisions acquired by the Company are being replaced, primarily
in response to business reasons apart from the Year 2000 Issue.
The Company will use primarily internal resources to reprogram or replace and
test its information systems for Year 2000 compliance. In addition, the Company
will use certain external resources to replace outdated information systems at
certain of its subsidiaries' operations. A majority of the system changes were
completed by the end of this quarter, and the remaining changes will be
completed by the summer of 1999.
The plan developed to address vendor and customer issues includes systems
integration, testing and communication strategies. The Company has begun the
process of initiating formal communications with significant vendors and
customers to determine the extent to which the Company may be vulnerable to a
failure by any of these third parties to remediate their own Year 2000 Issues.
The Company is currently testing electronic data transmissions to and from its
major vendors and customers to ensure Year 2000 compliance. The Company expects
to conclude this testing by the summer of 1999. In addition to vendors and
customers, the Company also relies upon governmental agencies, utility
companies, telecommunication service companies and other service providers
outside of the Company's control. There can be no assurance that the Company's
vendors or customers, governmental agencies or other third parties will not
suffer a Year 2000 business disruption that could have a material adverse effect
on the Company's results of operations or financial position.
Costs to Address the Year 2000 Issue. To date, the Company has incurred no
significant incremental costs addressing Year 2000 Issues, although it has
incurred costs, independent of the Year 2000 Issue, relating to the
implementation of new systems for certain subsidiaries. The Company has no
separate budget and none is currently planned for Year 2000 Issues. The Company
does not expect expenditures relating to the Year 2000 Issue to be material or
to have a significant impact on the Company's results of operations or financial
position.
Risks Presented by the Year 2000 Issue. The Company presently believes that
with the planned upgrades and implementation of new systems and software, the
Year 2000 Issue will not pose significant operational problems for its computer
systems. However, if such conversions are not made, or are not completed in a
timely manner, the Year 2000 Issue could have a material impact on the
operations of the Company. In addition, if any third parties who provide goods
or services essential to the Company's business activities fail to address
appropriately their Year 2000 Issues, such failure could have a material adverse
effect on the Company's results of operations or financial position.
Contingency Plans. The Company's Year 2000 plan includes the development of
contingency plans in the event that the Company has not completed all of its
remediation plans in a timely manner or any third parties who provide goods or
services essential to the Company's business fail to appropriately address their
Year 2000 issues. The Company expects to conclude the development of these
contingency plans by the end of the third quarter of 1999.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through a combination of bank borrowings,
supplier credit, internally generated funds and sales of securities to the
public. The Company received net proceeds (after offering expenses) of
approximately $431.0 million from its five public offerings of common stock in
July 1993, November 1995, July 1996, August 1997 and January 1998. 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 fiscal 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 fiscal 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 fiscal quarter, inventory levels are at their
lowest, and accounts receivable and payables are substantially reduced through
conversion of receivables to cash.
For the six months ended March 27, 1999, the Company used cash in operating
activities of $4.9 million principally relating to the normal cycle of inventory
and receivables build up. Net cash used in investing activities of $25.0
million resulted from an acquisition completed in January 1999 and for the
acquisition of office and warehouse equipment. Cash generated from financing
activities of $23.2 million consisted principally of net borrowings of $67.5
million of short-term debt offset by payments of $45.3 million to acquire
treasury shares.
The Company has a $100 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 bears interest
at a rate equal to the prime rate per annum and is secured by substantially all
of the Company's assets. At March 27, 1999, the Company had $40.6 million
outstanding borrowings and had $59.4 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 one company in fiscal 1998,
the Company assumed a $60.0 million line of credit, of which $28.6 million was
available at March 27, 1999.
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 $15.0 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
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes there has been no material change in its exposure to market
risk from that discussed in the Company's 1998 Consolidated Financial
Statements.
<PAGE>
CENTRAL GARDEN & PET COMPANY FORM 10-Q
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matter to a Vote of Securities Holders
(a) The annual meeting of shareholders was held on February 22, 1999.
(b) The following directors were elected at the meeting:
William E. Brown
Glenn W. Novotny
Lee D. Hines, Jr.
Daniel P. Hogan, Jr.
Brooks M. Pennington III
The foregoing constituted all members of the Board of Directors
of the Company.
(c) At the annual meeting, the shareholders voted to approve the
amendment of the 1993 Omnibus Equity Incentive Plan to increase
the number of shares authorized for issuance thereunder by
800,000.
Set forth below is a tabulation with respect to the matters voted
on at the meeting:
Against or Broker
For Withheld Abstentions Non-Votes
---------- ---------- ----------- ---------
Proposal to Amend the
1993 Omnibus Equity
Incentive Plan
Common Stock 17,834,049 6,266,136 7,354 -0-
Class B Stock 1,651,707 -0- -0- -0-
Election of Directors
William E. Brown
Common 23,931,599 175,940
Class B 1,651,707 -0-
Glenn W. Novotny
Common 23,932,152 175,387
Class B 1,651,707 -0-
Lee D. Hines, Jr.
Common 23,930,562 176,977
Class B 1,651,707 -0-
Daniel P. Hogan, Jr.
Common 23,927,340 180,199
Class B 1,651,707 -0-
Brooks M. Pennington III
Common 23,930,077 177,462
Class B 1,651,707 -0-
(d) Inapplicable.
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following report on Form 8-K was filed during the quarter
ended March 27, 1999.
(1) On January 6, 1999, the Company filed a report on Form 8-K
dated January 4, 1999 disclosing that the Company had
acquired Norcal Pottery Products, Inc.
<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: May 10, 1999
/s/ William E. Brown
--------------------------------------------
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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> SEP-25-1999 SEP-25-1999
<PERIOD-START> DEC-27-1998 SEP-27-1998
<PERIOD-END> MAR-27-1999 MAR-27-1999
<CASH> 3,565 3,565
<SECURITIES> 0 0
<RECEIVABLES> 275,160 275,160
<ALLOWANCES> 6,782 6,782
<INVENTORY> 409,051 409,051
<CURRENT-ASSETS> 709,866 709,866
<PP&E> 92,809 92,809
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 1,174,980 1,174,980
<CURRENT-LIABILITIES> 470,491 470,491
<BONDS> 115,000 115,000
0 0
0 0
<COMMON> 17 17
<OTHER-SE> 561,354 561,354
<TOTAL-LIABILITY-AND-EQUITY> 1,174,980 1,174,980
<SALES> 447,105 675,126
<TOTAL-REVENUES> 447,105 675,126
<CGS> 344,845 516,385
<TOTAL-COSTS> 417,712 643,644
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,084 5,425
<INCOME-PRETAX> 26,809 26,057
<INCOME-TAX> 11,260 10,944
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 15,549 15,113
<EPS-PRIMARY> 0.55 0.51
<EPS-DILUTED> 0.51 0.50
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