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 1934
For the quarterly period ended June 27, 1998
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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 (I.R.S. Employer Identification No.)
of 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 June 27, 1998 29,641,232
Class B Stock Outstanding as of June 27, 1998 1,662,967
CENTRAL GARDEN & PET COMPANY FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item
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1. Financial Statements
Condensed Consolidated Balance Sheets
September 27, 1997 and June 27, 1998
Consolidated Statements of Cash Flows
Nine months ended June 28, 1997 and June 27, 1998
Consolidated Statements of Income
Three and Nine months ended
June 28, 1997 and June 27, 1998
Notes to 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
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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 8-K
Exhibit Index
CENTRAL GARDEN & PET COMPANY
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
September 27, June 27,
1997 1998
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ASSETS
Current Assets:
Cash & cash equivalents $ 100,125 $ 18,578
Accounts receivable (less allowance for doubtful
accounts of $5,204 and $6,692) 85,028 206,954
Inventories 218,796 277,245
Prepaid expenses and other assets 10,470 17,918
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Total current assets 414,419 520,695
Land, Buildings, Improvements and Equipment - Net 22,688 81,185
Goodwill 113,018 345,210
Other Assets 8,918 30,773
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Total $ 559,043 $ 977,863
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 72 $ 31,837
Accounts payable 136,220 158,260
Accrued expenses 24,201 57,921
Current portion of long-term debt 0 667
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Total current liabilities 160,493 248,685
Long-Term Debt 115,200 129,600
Deferred Income Taxes and Other Long-Term
Obligations 1,543 15,986
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000 shares authorized, 100 shares
issued and oustanding in 1997; 1,000,000 authorized,
100 issued and none outstanding in 1998 -- --
Class B stock, $.01 par value: 3,000,000 shares authorized;
1,663,167 shares outstanding in 1997 and 1,662,967
outstanding in 1998 16 16
Common stock, $.01 par value: 40,000,000 shares authorized,
19,143,325 shares issued and 19,117,325 outstanding in 1997;
80,000,000 shares authorized, 29,667,232 issued and
29,641,232 outstanding in 1998 191 298
Additional paid-in capital 245,783 516,629
Retained earnings 36,291 67,070
Treasury Stock (364) (364)
Restricted stock deferred compensation (110) (57)
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Total shareholders' equity 281,807 583,592
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Total $ 559,043 $ 977,863
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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)
Nine Months Ended
June 28, June 27,
1997 1998
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Cash Flows From Operating Activities:
Net Income $ 15,038 $ 30,779
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 3,621 10,329
Change in assets and liabilities:
Receivables (56,807) (62,182)
Inventories (20,434) 35,463
Prepaid expenses and other assets (3,738) (6,024)
Accounts payable 52,678 (26,751)
Accrued expenses 8,598 12,525
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Net cash used in operating activities (1,044) (5,861)
Cash Flows From Investing Activities:
Additions to land, buildings, improvements and equipment (3,011) (12,796)
Payments to acquire companies, net of cash acquired (95,814) (218,613)
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Net cash used in investing activities (98,825) (231,409)
Cash Flows From Financing Activities:
Repayments of notes payable - net 95 (40,377)
Repayments of long-term debt (12,062) (6,619)
Proceeds from issuance of long-term debt 111,227 0
Proceeds from issuance of stock - net 674 202,719
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Net cash provided by financing activities 99,934 155,723
Net Increase (Decrease) in Cash 65 (81,547)
Cash at Beginning of Period 1,272 100,125
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Cash at End of Period $ 1,337 $ 18,578
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Supplemental Information:
Cash paid for interest $ 4,226 $ 8,369
Cash paid for income taxes 5,748 13,209
Assets (excluding cash) acquired through purchase of companies 69,780 220,217
Liabilities assumed through purchase of companies 35,765 165,840
See notes to consolidated financial statements
CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
June 28, June 27, June 28, June 27,
1997 1998 1997 1998
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Net Sales $ 656,887 $ 997,166 $ 320,402 $ 502,183
Cost of Goods Sold and Occupancy 551,203 783,678 265,888 397,815
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Gross profit 105,684 213,488 54,514 104,368
Selling, General and
Administrative Expenses 74,739 155,161 31,895 69,076
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Income from operations 30,945 58,327 22,619 35,292
Interest Expense - Net (5,012) (5,256) (2,265) (2,633)
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Income before income taxes 25,933 53,071 20,354 32,659
Income Taxes 10,895 22,292 8,547 13,720
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Net Income $ 15,038 $ 30,779 $ 11,807 $ 18,939
========= ========= ========== =========
Net Income per Common
Share
Basic $ 1.01 $ 1.12 $ 0.78 $ 0.61
========= ========= ========== =========
Diluted $ 0.94 $ 1.06 $ 0.65 $ 0.56
========= ========= ========== =========
See notes to consolidated financial statements
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Nine Months Ended June 27, 1998
(Unaudited)
1. Basis of Presentation
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The condensed consolidated balance sheet as of June 27, 1998, the consolidated
statements of income for both the three months and nine months ended June 27,
1998 and June 28, 1997 and consolidated statements of cash flows for the nine
months ended June 27, 1998 and June 28, 1997 have been prepared by the Company,
without audit. The condensed consolidated balance sheet as of September 27,
1997 has been derived from the audited financial statements of the Company for
the year ended September 27, 1997. 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 and nine months ended June 27, 1998 are not
indicative of the operating results that may be expected for the year ending
September 26, 1998.
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 1997 Annual Report on
Form 10-K which has previously been filed with the Securities and Exchange
Commission.
2. Current Year Acquisitions
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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
reflect 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 acquisitions, 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.
Nine Months Ended
June 28, June 27,
1997 1998
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(In thousands, except
per share amounts)
Net Sales $959,125 $1,097,540
Gross profit 201,815 243,778
Income from operations 54,871 57,447
Income before income taxes 34,272 50,248
Net Income 20,098 29,137
Net income per Common
Share Outstanding:
Basic $ 1.18 $ 1.03
Diluted $ 1.08 $ .98
3. Earnings Per Share
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The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" in the first quarter of the current fiscal year. All
per share amounts have been restated in accordance with the provisions of SFAS
No. 128.
The following is a reconciliation of the numerators and denominators of the
basic and diluted per-share computations for net income:
Three Months Ended Nine Months Ended
June 27, 1998 June 27, 1998
Net Per Net Per
Income Shares Share Income Shares Share
Basic EPS
Net Income $18,939 31,207 $ .61 $30,779 27,559 $ 1.12
Effect of Dilutive Securities
Options to purchase
common stock 505 448
Convertible notes 1,079 4,107 3,236 4,107
Series A Convertible
Preferred stock 97 99
Diluted EPS
Net Income attributed to
Common shareholders $20,018 35,916 $ .56 $34,015 32,213 $ 1.06
Three Months Ended Nine Months Ended
June 28, 1997 June 28, 1997
Net Per Net Per
Income Shares Share Income Shares Share
Basic EPS
Net Income $11,807 15,196 $ .78 $15,038 14,874 $ 1.01
Effect of Dilutive Securities
Options to purchase
common stock 532 492
Convertible notes 1,069 4,107 2,662 3,385
Series A Convertible
Preferred stock 100 100
Diluted EPS
Net Income attributed to
Common shareholders $12,876 19,935 $ .65 $17,700 18,851 $ .94
ITEM 2: 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,
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, which runs through September 30, 1999, 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 June 25, 1998, Monsanto Company announced that Scotts Company had signed a
letter of intent to acquire Monsanto's Solaris business. The parties have
stated that they are working towards closing the transaction within the next few
months. After the transaction is completed, the Company will commence
discussions with Scotts on how the Company and Scotts will work together
subsequent to September 30, 1999. The Company anticipates these discussions
will take several months. The outcome of these discussions could have a
material impact on the Company's future results of operations.
The Company has developed a plan to deal with the year 2000 (Y2K) issue which
covers both systems and vendor/customer issues. The systems portion of the plan
includes a detailed survey of the Company's current systems and associated
upgrades, as well as options relating to the replacement or reprogramming of
current systems to bring all of the Company's systems into compliance. The plan
developed to address vendor and customer issues includes systems integration,
testing and communication strategies. The Company expects that the majority of
the system changes will be complete by early 1999, and that the remaining issues
will be resolved by the summer of 1999. The Company intends to utilize both
internal and external resources to reprogram, replace and test the systems for
Y2K modifications.
The Company does not expect expenditures relating to the Y2K issue to be
material and does not expect costs associated with Y2K to have a significant
impact on the Company's results of operations or financial position. However,
there can be no assurance that the Company will not experience unexpected
difficulties in connection with Y2K or that the systems of other companies on
which the Company's systems rely will be timely converted.
THREE MONTHS ENDED JUNE 27, 1998
COMPARED WITH THREE MONTHS ENDED JUNE 28, 1997
Net sales for the three months ended June 27, 1998 increased by 56.7% or $181.8
million from $320.4 million for the comparable 1997 period. The increase
reflects approximately $141.5 million attributable to newly acquired companies
with the balance related to increased sales of lawn and garden products from
existing operations. The sales increase in lawn and garden products was driven
in part by a late spring which shifted sales into the third quarter.
Gross profit increased by 91.4% or $49.9 million from $54.5 million during the
quarter ended June 28, 1997 to $104.4 million for the quarter ended June 27,
1998. The increase in gross profit relates principally to the increase in sales
of lawn and garden products offset in part by a decrease in the sales of pet
products coupled with the increased sales of newly acquired businesses. Gross
profit as a percentage of net sales increased from 17.0% for the three months
ended June 28, 1997 to 20.8% for the three months ended June 27, 1998. The
increase in the gross margin percentage was attributable to a significantly
greater proportion of branded product sales to total sales during the current
quarter compared with the 1997 quarter. Proprietary branded products generally
produce a significantly higher gross profit margin percentage than does garden
and pet distribution.
Selling, general and administrative expenses increased during the quarter ended
June 27, 1998 by $37.2 million from $31.9 million for the similar 1997 period.
As a percentage of net sales, these expenses increased from 10.0% during the
quarter ended June 28, 1997 to 13.8% for the comparable 1998 period. Of the
$37.2 million increase in these expenses, approximately $6.6 million relates to
(1) the increase in sales of lawn and garden products; (2) costs associated with
the consolidation of certain pet facilities; and (3) increased amortization of
goodwill related to the newly acquired businesses. The balance of the increase
is attributable to the newly acquired operations. The increase in selling,
general and administrative expenses as a percentage of net sales is due
principally to the recent acquisitions of branded product companies which
typically generate higher levels of operating expenses as a percentage of their
sales than is the case with garden and pet distribution.
Net interest expense for the quarter ended June 27, 1998 increased by $0.3
million from $2.3 million for the comparable 1997 period. The increase is
related to the newly acquired companies offset in part by an increase in
interest income generated from proceeds received from the Company's common stock
offerings completed in December 1997 and January 1998 and certain supplier
advances. Average short-term borrowings for the three months ended June 27,
1998 were $69.6 million compared with $9.2 million for the same 1997 period.
Average interest rates on short-term borrowings were 7.8% and 7.3%,
respectively.
NINE MONTHS ENDED JUNE 27, 1998
COMPARED WITH NINE MONTHS ENDED JUNE 28, 1997
Net sales for the nine months ended June 27, 1998 increased by 51.8% or $340.3
million from $656.9 million for the comparable 1997 period. Of the sales
increase, approximately $303.8 million was attributable to newly acquired
companies and approximately $52.0 million to increased sales of lawn and garden
products offset in part by a decrease of $15.5 million principally related to
sales of pet supplies. Net sales of pet supplies have declined principally due
to the loss of certain large retail customers in the Northeast and California
markets due to their being acquired by a major pet chain and to a lesser extent
the use of proprietary distribution centers by some retailers.
Gross profit increased by 102.0% or $107.8 million from $105.7 million during
the nine months ended June 28, 1997 to $213.5 million for the comparable 1998
period. The increase in gross profit is largely due to the newly acquired
businesses. Gross profit as a percentage of net sales increased from 16.1% in
the nine months ended June 28, 1997 to 21.4% for the similar 1998 period. While
both garden and pet products experienced modest increases in their margin
percentages during the current nine month period, the overall increase in gross
margin as a percentage of sales was principally related to the newly acquired
branded product businesses.
For the nine months ended June 27, 1998, selling, general and administrative
expenses increased by $80.5 million from $74.7 million for the comparable 1997
period. As a percentage of net sales, these expenses increased from 11.4%
during the nine months ended June 28, 1997 to 15.6% for the nine months ended
June 27, 1998. Of the $80.5 million increase, approximately $70.5 million is
related to the newly acquired businesses with the balance attributable to
increased amortization of goodwill and the increase in sales related to existing
operations. The increase in selling, general and administrative expenses as a
percentage of net sales is principally related to the newly acquired branded
product companies.
Net interest expense for the nine months ended June 27, 1998 increased by $0.3
million from $5.0 million for the comparable 1997 period. The increase reflects
interest related to newly acquired companies coupled with interest on the
Company's $115.0 million 6% subordinated notes outstanding for the entire nine
months of 1998 offset in part by interest income resulting from the proceeds
received from the Company's common stock offerings completed in August and
December 1997, and interest income related to advances to suppliers. Average
short-term borrowings for the nine months ended June 27, 1998 were $49.8 million
compared with $5.7 million for the similar 1997 period. Average interest rates
on short-term borrowings were 7.5% and 7.8%, respectively.
"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, changes resulting from
the possible sale of the Solaris business by Monsanto, 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 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, and 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 nine months ended June 27, 1998, the Company used cash in operating
activities of $5.9 million reflecting the normal cycle of receivables build up,
$56 million of early payments for purchases of inventory under various
promotional programs offered by certain suppliers offset by increased lawn and
garden sales in the third quarter which reduced inventory levels. Net cash used
in investing activities of $231.4 million resulted from acquisitions and
equity investments during the first and second fiscal quarters and the
acquisition of office and warehouse equipment. Cash generated from financing
activities of $155.7 million consisted principally of net proceeds from the sale
of 8,050,000 shares of the Company's stock in December 1997 and January 1998,
less repayment of $6.6 million of long-term debt and approximately $40.4 of
short-term debt.
The Company has a $100.0 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 June 27, 1998, 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 three companies in fiscal 1998, the Company
assumed combined lines of credit aggregating $86.7 million, of which $55.7
million was available at June 27, 1998. Interest rates related to these lines
averaged approximately 7.8% at June 27, 1998.
The Company believes that cash flow from operations, funds available under its
lines 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 $7.0
million for the next 12 months.
As part of its growth strategy, the Company has engaged in acquisition
discussions with a number of companies in the past and it anticipates it will
continue to evaluate potential acquisition candidates. If one or more potential
acquisition opportunities, including those that would be material, become
available in the near future, the Company may require additional external
capital. In addition, such acquisitions would subject the Company to the
general risks associated with acquiring companies, particularly if the
acquisitions are relatively large.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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
Not Applicable
ITEM 5. Other Information
In accordance with Rule 14a-4(c)(1) promulgated by the
Securities and Exchange Commission, management proxies
intend to use their discretionary voting authority with
respect to any shareholder proposal raised at the Company's
annual meeting as to which the proponent fails to notify
the Company on or before December 9, 1998.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following reports on Form 8-K were filed during the
quarter ended June 27, 1998.
(1) On May 6, 1998, the Company filed a report on Form
8-K/A amending Item 7 of the Form 8-K which was
filed on March 11, 1998, to provide the required
financial statements related to the acquisition of
Pennington Seed, Inc.
(b) Exhibits
Ex 10 Loan and Security Agreement by and among
Congress Financial Corporation and Central
Garden and Pet Company.
Ex 27 Financial Data Schedule.
CENTRAL GARDEN & PET COMPANY FORM 10-Q
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: August 11, 1998
/s/ William E. Brown
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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