UNITED STATESMISMISUNITED 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 29, 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 incorporation or organization) (I.R.S. Employer 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 March 29, 1997 13,112,871
Class B Stock Outstanding as of March 29, 1997 1,863,167
FORM 10-Q
CENTRAL GARDEN & PET COMPANY
Part I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED BALANCE SHEETS
September 28, March 29,
1996 1997
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(Unaudited)
(In thousands)
ASSETS
Current Assets:
Cash & cash equivalents $ 1,272 $ 14,843
Accounts receivable (less allowance for doubtful
accounts of $5,278 and $4,705) 62,231 127,197
Inventories 169,835 270,722
Prepaid expenses and other assets 7,132 8,401
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Total current assets 240,470 421,163
Land, Buildings, Improvements and Equipment:
Land 431 469
Buildings and improvements 3,450 6,882
Transportation equipment 3,161 3,323
Warehouse equipment 7,878 10,468
Office furniture and equipment 8,046 10,041
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Total 22,966 31,183
Less accumulated depreciation and amortization 11,502 15,233
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Land, buildings, improvements and equipment - net 11,464 15,950
Goodwill 29,971 72,957
Other Assets 1,759 13,686
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Total $ 283,664 $ 523,756
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 27,904 $ 600
Accounts payable 104,049 247,761
Accrued expenses 11,243 12,815
Current portion of long-term debt 1,604 460
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Total current liabilities 144,800 261,636
Long-Term Debt 7,635 117,025
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
March 29, 1997 ---- ----
Class B stock, $.01 par value: 1,933,575 shares outstanding September 28, 1996,
1,863,167 shares outstanding March 29, 1997 19 19
Common stock, $.01 par value: 12,536,521 shares outstanding September 28, 1996
13,138,871 shares issued and 13,112,871 shares outstanding March 29, 1997 125 131
Additional paid-in capital 111,228 121,821
Retained earnings 18,733 21,964
Treasury Stock (364) (364)
Restricted stock deferred compensation (182) (146)
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Total shareholders' equity 129,559 143,425
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Total $ 283,664 $ 523,756
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See notes to consolidated financial statements
CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
March 29, March 30,
1996 1997
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Cash Flows From Operating Activities:
Net Income $ 428 $ 3,231
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,616 1,703
Gain on sale of land, building and improvements (305) 0
Change in assets and liabilities:
Receivables (49,533) (61,026)
Inventories (40,726) (89,534)
Prepaid expenses and other assets 483 (3,421)
Accounts payable 66,278 142,803
Accrued expenses 4,353 858
Deferred income taxes and other long-term obligations 6 0
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Net cash used in operating activities (17,400) (5,386)
Cash Flows From Investing Activities:
Additions to land, buildings, improvements and equipment (2,199) (2,280)
Payments to acquire companies, net of cash acquired 0 (53,232)
Proceeds from sale of land, buildings, improvements and equipment 3,600 0
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Net cash provided (used) by investing activities 1,401 (55,512)
Cash Flows From Financing Activities:
Proceeds from (repayments of) notes payable - net (17,142) (27,304)
Repayments of long-term debt (2,572) (10,662)
Proceeds from issuance of long-term debt 0 111,836
Proceeds from issuance of stock - net 35,709 599
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Net cash provided by financing activities 15,995 74,469
Net Increase (Decrease) in Cash (4) 13,571
Cash at Beginning of Period 143 1,272
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Cash at End of Period $ 139 $ 14,843
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Supplemental Information:
Cash paid for interest $ 1,542 $ 2,633
Cash paid for income taxes 17 229
Assets (excluding cash) acquired through purchase of subsidiaries - 28,589
Liabilities assumed through purchase of subsidiaries - 5,531
See notes to consolidated financial statements
Central Garden & Pet Company
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended Three Months Ended
March 30, March 29, March 30, March 29,
1996 1997 1996 1997
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Net Sales $ 260,132 $ 336,485 $ 182,020 $ 236,341
Cost of Goods Sold and Occupancy 227,006 285,315 160,214 202,625
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Gross profit 33,126 51,170 21,806 33,716
Selling, General and
Administrative Expenses 29,922 42,844 15,904 23,211
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Income from operations 3,204 8,326 5,902 10,505
Interest Expense - Net (2,452) (2,747) (1,076) (1,810)
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Income before income taxes 752 5,579 4,826 8,695
Income Taxes 324 2,348 2,035 3,657
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Net Income $ 428 $ 3,231 $ 2,791 $ 5,038
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Net Income per common and common
equivalent share
Primary $ 0.04 $ 0.21 $ 0.24 $ 0.33
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Fully diluted $ 0.04 $ 0.21 $ 0.24 $ 0.31
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Weighted average shares outstanding
Primary 10,381 15,200 11,803 15,444
Fully diluted 10,441 15,284 11,836 15,515
Central Garden & Pet Company
Notes to Consolidated Financial Statements
Three Months and Six Months Ended March 29, 1997
(Unaudited)
1. Basis of Presentation
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The consolidated balance sheet as of March 29, 1997, the consolidated
statements of income for both the three months and six months ended March 29,
1997 and March 30, 1996 and consolidated cash flows for the six months ended
March 29, 1997 and March 30, 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 March 29, 1997 are not indicative of the
operating results that may be expected for the year ending September 27, 1997.
2. Acquisition of Equity Stake
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On March 4, 1997, the Company announced that it had acquired an equity stake
in Commerce, a distributor of lawn and garden products to customers in the
middle Atlantic and New England markets. Commerce has annual sales of
approximately $110 million and has approximately 200 employees.
3. Recent Acquisition
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On May 5, 1997, the Company announced that it had acquired Ezell Nursery
Supply, Inc., a distributor of lawn and garden, barbecue and patio products in
California, Arizona, Nevada, New Mexico and Texas. Ezell has annual sales of
approximately $55 million and has approximately 125 employees.
4. Recently Issued Accounting Standard
-----------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the first quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
Pro forma amounts for basic EPS assuming SFAS 128 had been in effect for the
quarter and year-to-date periods are as follows:
Three Months Ended Six Months Ended
Pro Forma March 30, March 29, March 30, March 29,
1996 1997 1996 1997
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Basic $ .24 $ .34 $ .04 $ .22
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Diluted EPS under SFAS 128 would not have been significantly different than
fully-diluted EPS currently reported for the periods.
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 will be more directly attributable to the success of
Solaris than it was in the past.
Three Months Ended March 29, 1997
Compared with Three Months Ended March 30, 1996
Net sales for the three months ended March 29, 1997 increased by 29.8% or $54.3
million to $236.3 million from $182.0 million during the three months ended
March 30, 1996. Of the $54.3 million increase, approximately $32.8 million is
attributable to companies acquired subsequent to June 30, 1996. The balance of
the increase in net sales, $21.5 million is attributable principally to
expanded product listings and new store openings by existing customers.
Gross profit increased by 54.6% or $11.9 million from $21.8 million during the
three months ended March 30, 1996 to $33.7 million for the comparable 1997
period. Gross profit as a percentage of net sales increased from 12.0% in the
quarter ended March 30, 1996 to 14.3% for the similar period in 1997. The
increase in gross profit as a percentage of net sales is due principally to the
acquisitions of higher margin pet distribution businesses subsequent to June
1996 and a pet products manufacturer in January 1997.
Selling, general and administrative expenses increased by $7.3 million during
the three months ended March 29, 1997 from $15.9 million for the comparable 1996
period. This increase in expense is due principally to the inclusion of the
newly acquired businesses and secondarily to an increase related to
the increase in net sales from the existing operations. As a percentage of net
sales, these expenses increased from 8.7% in 1996 to 9.8% in 1997.
Net interest expense for the three months ended March 29, 1997 increased by
68.2% or $.7 million from $1.1 million for the comparable 1996 period. The
increase is due principally to the issuance, on November 15, 1996, of $115.0
million of the Company's 6% convertible notes offset in part by the reduction in
both the Company's long term debt and its revolving credit facility as a result
of the application of proceeds received from the convertible note offering.
Average outstanding borrowings for the quarter ended March 29, 1997 were $90.7
million compared with $26.0 million for the comparable 1996 period. Average net
interest rates were 7.1% and 10.7%, respectively.
The Company's effective income tax rate was approximately 42.0% for both the
1997 and 1996 quarters.
Six Months Ended March 29, 1997
Compared with Six Months Ended March 30, 1996
Net sales for the first half of fiscal year 1997 increased by 29.4% or $76.4
million to $336.5 million from $260.1 million for the first half of fiscal year
1996. Of the $76.4 million increase, approximately $57.7 million is related to
newly acquired businesses. The increase in sales from existing operations,
$18.7 million, was due principally to expanded product listings and new store
openings by existing customers.
Gross profit increased by 54.5% or $18.0 million from $33.1 million during the
six months ended March 30, 1996 to $51.2 million for the comparable 1997 period.
Gross profit as a percentage of net sales increased from 12.7% in the six months
ended March 30, 1996 to 15.2% during the similar 1997 period. The increase in
the gross profit percentage is due primarily to the higher gross profit margins
associated with the newly acquired pet related businesses.
Selling, general and administrative expenses increased by $12.9 million from
$29.9 million during the six months ended March 30, 1996 to $42.8 million for
the comparable 1997 period. Of the $12.9 million increase in expenses,
approximately $10.0 million related to the newly acquired businesses with the
remainder, $2.9 million attributable to the increase in sales of the existing
operations. As a percentage of net sales, selling, general and administrative
expenses, increased from 11.5% during the six months ended March 30, 1996 to
12.7% for the similar 1997 period. The increase in these expenses as a
percentage of net sales relates principally to the newly acquired pet businesses
which have a higher gross margin percentage with corresponding higher operating
costs than is the case with the lawn and garden business.
Interest expense for the six months ended March 29, 1997 increased by 12.0% or
$.3 million from $2.5 million for the six months ended March 30, 1996 to $2.7
million. As noted in the quarterly discussion, the increase is attributable to
the issuance, on November 15, 1996, of $115.0 million of the Company's 6%
convertible notes offset in part by the reduction in both the Company's long
term debt and its revolving credit facility as a result of the application of
proceeds received from the convertible debt offering. Average outstanding
borrowings for the six months ended March 29, 1997 were $62.3
million compared with $33.8 million for the comparable 1996 period. Average net
interest rates for the six months ended March 1997 and 1996 were 7.5% and 10.5%,
respectively.
The Company's effective income tax rate was approximately 42% for the six months
ended March 29, 1997 and 43% for the comparable 1996 period.
"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 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.
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 six months ended March 29, 1997, the Company used cash in operating
activities of $5.4 million reflecting the normal cycle of inventory and
receivables build up. Net cash used from investing activities of $55.5 million
resulted from acquisitions and equity investments during the second fiscal
quarter and the acquisition of office and warehouse equipment. Cash generated
from financing activities of $74.5 million consisted of net proceeds from the
sale of $115 million principal amount of 6% subordinated convertible notes due
2003 less repayment of $10.7 million of long-term debt and approximately $27.3
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 March 29, 1997, 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 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 $3.6 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 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.
II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders
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(a) The annual meeting of shareholders was held on March 31, 1997.
(b) The following directors were elected at the meeting:
William E. Brown
Glenn W. Novotny
Lee D. Hines, Jr.
Daniel Hogan
The foregoing constitute all members of the Board of Directors of
the Company.
(c) At the annual meeting, the shareholders voted to approve
proposals to adopt the Nonemployee Director Stock Option Plan and
to approve the Employee Stock Purchase Plan.
Set forth below is a tabulation with respect to the matters voted
on at the meeting:
AGAINST OR
FOR WITHHELD ABSTENTIONS BROKER NON-VOTES
Proposal to adopt the
Nonemployee Director
Stock Option Plan
Common Stock 10,169,111 67,056 13,904 - 0 -
Class B Stock 1,851,907 - 0 - - 0 - - 0 -
Preferred 100 - 0 - - 0 - - 0 -
Proposal to approve the
Employee Stock Purchase
Plan
Common Stock 10,215,396 21,903 12,773 - 0 -
Class B Stock 1,851,907 - 0 - - 0 - - 0 -
Preferred 100 - 0 - - 0 - - 0 -
AGAINST OR
FOR WITHHELD ABSTENTIONS BROKER NON-VOTES
ELECTION OF DIRECTORS
William E. Brown
Common 10,094,184 155,887
Class B 1,851,907 - 0 -
Preferred 100 - 0 -
Glenn W. Novotny
Common 10,094,184 155,887
Class B 1,851,907 -0-
Preferred 100 - 0 -
Lee D. Hines, Jr.
Common 10,094,184 155,887
Class B 1,851,907 - 0 -
Preferred 100 - 0 -
Daniel P. Hogan, Jr.
Common 10,078,086 171,985
Class B 1,851,907 - 0 -
Preferred 100 - 0 -
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are attached hereto:
Exhibit No. Exhibit
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11 Central Garden & Pet Company. Computation of
Fully Diluted Earnings per Share
12 Central Garden & Pet Company. Computation of
Ratios of Earnings to Fixed Charges.
(b) The following report on Form 8-K was filed during the
quarter ended March 29, 1997.
(1) On January 23, 1997, the Company filed a report on
Form 8-K dated January 20, 1997, disclosing that the
Company issued a press release announcing that it had
acquired Four Paws Products, Ltd.
SIGNATURES
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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
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Registrant
Dated: May 9, 1997
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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