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 June 26, 1999
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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_________________
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)
________________________________________________________________________________
(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 26, 1999 23,266,204
Class B Stock Outstanding as of June 26, 1999 1,660,919
CENTRAL GARDEN & PET COMPANY FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-------------------------------
Item
- ----
1. Financial Statements
Condensed Consolidated Balance Sheets
September 26, 1998 and June 26, 1999
Condensed Consolidated Statements of Cash Flows
Nine months ended June 27, 1998 and June 26, 1999
Consolidated Statements of Income
Three and Nine months ended
June 27, 1998 and June 26, 1999
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
---------------------------
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
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 26, JUNE 26,
1998 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 10,328 $ 2,691
Accounts receivable (less allowance for doubtful
accounts of $6,458 and $7,535) 142,293 226,791
Inventories 292,809 338,787
Prepaid expenses and other assets 26,884 21,459
----------- -----------
Total current assets 472,314 589,728
LAND, BUILDINGS, IMPROVEMENTS AND EQUIPMENT - NET 86,382 92,684
GOODWILL 339,430 344,781
OTHER ASSETS 30,574 32,077
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TOTAL $ 928,700 $ 1,059,270
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 6,956 $ 58,947
Accounts payable 153,739 263,573
Accrued expenses 32,767 46,269
Current portion of long-term debt 1,139 664
----------- -----------
Total current liabilities 194,601 369,453
LONG-TERM DEBT 125,125 133,832
DEFERRED INCOME TAXES AND OTHER LONG-TERM
OBLIGATIONS 20,200 18,624
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value: 1,000 shares authorized, none
outstanding at September 26, 1998 or June 26, 1999 - -
Class B stock, $.01 par value: 1,661,762 shares outstanding
September 26, 1998 and 1,660,919 outstanding at June 26, 1999 16 16
Common stock, $.01 par value: 29,718,530 issued and 29,646,530
outstanding September 26, 1998; 30,083,154 issued and
23,266,204 outstanding at June 26, 1999 298 301
Additional paid-in capital 519,933 523,192
Retained earnings 69,984 98,827
Treasury stock (1,418) (84,969)
Restricted stock deferred compensation (39) (6)
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Total shareholders' equity 588,774 537,361
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TOTAL $ 928,700 $ 1,059,270
=========== ===========
See notes to consolidated financial statements
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
JUNE 27, JUNE 26,
1998 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 30,779 $ 28,798
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 10,329 14,768
Change in assets and liabilities:
Receivables (62,182) (82,252)
Inventories 35,463 (42,573)
Prepaid expenses and other assets (6,024) 4,365
Accounts payable (26,751) 108,593
Accrued expenses 12,525 20,127
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Net cash provided (used) by operating activities (5,861) 51,826
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to land, buildings, improvements and equipment (12,796) (13,858)
Payments to acquire companies, net of cash acquired (218,613) (13,888)
---------- ----------
Net cash used in investing activities (231,409) (27,746)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) notes payable - net (40,377) 51,991
Repayments of long-term debt (6,619) (1,768)
Proceeds from issuance of stock - net 202,719 1,611
Payments to reacquire stock - (83,551)
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Net cash provided (used) by financing activities 155,723 (31,717)
NET DECREASE IN CASH (81,547) (7,637)
CASH AT BEGINNING OF PERIOD 100,125 10,328
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CASH AT END OF PERIOD $ 18,578 $ 2,691
========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 8,369 $ 6,390
Cash paid for income taxes $ 13,209 $ 12,350
Assets (excluding cash) acquired through purchase of
subsidiaries $ 220,217 $ 6,251
Liabilities assumed through purchase of subsidiaries $ 165,840 $ 3,274
See notes to consolidated financial statements
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED THREE MONTHS ENDED
JUNE 27, JUNE 26, JUNE 27, JUNE 26,
1998 1999 1998 1999
---------- ---------- ---------- ----------
Net Sales $ 997,166 $1,204,265 $ 502,183 $ 529,140
Cost of Goods Sold and Occupancy 783,678 937,907 397,815 421,522
---------- ---------- ---------- ----------
Gross profit 213,488 266,358 104,368 107,618
Selling, General and
Administrative Expenses 155,161 208,251 69,076 80,994
---------- ---------- ---------- ----------
Income from operations 58,327 58,107 35,292 26,624
Interest Expense - Net 5,256 8,456 2,633 3,031
---------- ---------- ---------- ----------
Income before income taxes 53,071 49,651 32,659 23,593
Income Taxes 22,292 20,853 13,720 9,909
---------- ---------- ---------- ----------
Net Income $ 30,779 $ 28,798 $ 18,939 $ 13,684
========== ========== ========== ==========
Net Income per Common
Share Outstanding
Basic $ 1.12 $ 0.99 $ 0.61 $ 0.50
========== ========== ========== ==========
Diluted $ 1.06 $ 0.96 $ 0.56 $ 0.47
========== ========== ========== ==========
See notes to consolidated financial statements
Central Garden & Pet Company
Notes to Condensed Consolidated Financial Statements
Three Months and Nine Months Ended June 26, 1999
(Unaudited)
1. Basis of Presentation
---------------------
The condensed consolidated balance sheet as of June 26, 1999, the
consolidated statements of income for both the three months and nine months
ended June 26, 1999 and June 27, 1998 and the condensed consolidated statements
of cash flows for the nine months ended June 26, 1999 and June 27, 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 and nine months ended June 26, 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 on
Form 10-K 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. On June 9, 1999, the Company's Board of Directors
authorized another increase in the share repurchase program, up to a maximum of
$105 million of common shares. During the three and nine month periods ended
June 26, 1999, the Company repurchased 3,092,050 and 6,616,950 shares for a
total of $38.2 and $83.6 million, respectively. As of August 5, 1999, the
Company had purchased an additional 3,396,500 shares for a total of $31.2
million.
3. Earnings Per Share
------------------
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 26, 1999 June 26, 1999
Net Per Net Per
Income Shares Share Income Shares Share
Basic EPS $ 13,684 27,239 $ .50 $ 28,798 28,980 $ .99
Effect of Dilutive Securities
Options to purchase
common stock 81 131
Convertible notes 1,079 4,107 3,236 4,107
Diluted EPS
Net Income attributed to
Common shareholders $ 14,763 31,427 $ .47 $ 32,034 33,218 $ .96
Three Months Ended Nine Months Ended
June 27, 1998 June 27, 1998
Net Per Net Per
Income Shares Share Income Shares Share
Basic EPS $ 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
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 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 27,
1998
----
(In thousands, except
per share amounts)
Net sales $1,097,540
Gross profit 243,778
Income from operations 57,447
Income before income taxes 50,248
Net Income 29,137
Net income per common
share outstanding:
Basic $ 1.03
Diluted $ .98
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
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. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" which defers the effective date of
SFAS No. 133 until June 15, 2000. The application of the standard is not
expected to have a material effect on the Company's consolidated financial
position or results of operations.
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Since October 1, 1995, the Company has distributed Solaris product nationwide,
pursuant to an exclusive distribution agreement (the "Solaris Agreement") which
will expire on September 30, 1999. 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, the Company,
in addition to serving as the master agent and master distributor of Solaris
products, has provided a wide range of value-added services including logistics,
order processing and fulfillment, inventory distribution and merchandising. As a
result of the Solaris Agreement, a majority of the Company's sales of Solaris
products have been 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. Under the Solaris Agreement, the
Company's inventories of Solaris product have increased significantly, since the
Company has not only carried 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.
Monsanto Company ("Monsanto") has sold its Solaris lawn and garden business
exclusive of its Roundup(R) herbicide products for consumer use to The Scotts
Company ("Scotts") and 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 has learned from Scotts that Scotts intends to alter its
distribution systems for certain products, including Ortho(R) and Miracle-Gro(R)
products and Monsanto's consumer Roundup products for which Scotts acts as
Monsanto's exclusive sales agent. Scotts has indicated to the Company that
following the expiration of the Solaris Agreement, Scotts intends to distribute
Ortho and Roundup products through a system that involves a combination of
distributors, of which the Company will be the largest, as well as through
direct sales by Scotts to certain major retailers. In addition, it is the
Company's understanding that Scotts intends to sell Miracle-Gro directly to
certain retailers.
For the current fiscal year ending September 25, 1999, the business likely to be
taken over next year by Scotts is estimated to be approximately $200-250 million
in sales. The gross profit associated with these sales in the current year is
approximately $15-25 million (4%-7% of estimated total gross profit for the
current year). The Company expects this loss of gross profit to be significantly
offset next year with expense reductions and other business growth.
Due to the changes in Scotts distribution system, the Company's inventory of
Scotts products and the related payables are likely to be reduced by an amount
that is presently estimated to be in excess of $100 million. Additionally, the
Company expects that it will take steps to realign its lawn and garden
distribution operations to reflect business levels for the fiscal year 2000. As
a result, the Company expects to record substantial one-time charges in the
fiscal year ending September 25, 1999.
The amount and profitability of the Company's business with Scotts next year and
in future years may be influenced by numerous factors and is impossible to
predict. Accordingly, the actual results of operations of the Company's lawn and
garden business may differ significantly from the foregoing estimates.
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 adverse effect on the Company's
results of operations.
Three Months Ended June 26, 1999
Compared with Three Months Ended June 27, 1998
Net sales for the quarter ended June 26, 1999 increased by 5.4% or $27.0 million
from $502.2 million for the similar 1998 period. The increase reflects
approximately $10.2 million attributable to newly acquired operations. Of the
sales increase related to existing operations, $16.8 million, approximately $9.5
million was attributable to sales of lawn and garden products, $5.3 million to
sales of pet supplies products and $2.0 million to sales of branded products.
While the current quarter generally accounts for the most significant increase
in sales of lawn and garden products, fiscal 1999 experienced an early spring
which shifted sales into the quarter ended March 1999. Overall sales of branded
products increased modestly offset in part by decreased sales of flea and tick
products reflecting both a weaker flea season and diminishing consumer demand
for flea sprays and foggers in favor of the newer pill and spot on flea
products.
Gross profit increased by 3.1% or $3.3 million from $104.4 million during the
quarter ended June 27, 1998 to $107.6 million for the three months ended June
26, 1999. The increase in gross profit relates principally to the increase in
sales of branded products. Gross profit as a percentage of net sales decreased
slightly from 20.8% for the three months ended June 27, 1998 to 20.3% for the
comparable 1999 period. The decrease in the gross profit as a percentage of net
sales was related to both the garden and pet distribution operations offset in
part by slightly higher margins in the branded products operations. The decrease
in gross profit as a percentage of net sales applicable to the pet distribution
operation relates principally to the increase in sales of lower margin dog food.
The decrease in gross profit percentage relative to garden distribution is
principally related to sales of Solaris products during the quarter.
Selling, general and administrative expenses increased during the quarter ended
June 26, 1999 by $11.9 million from $69.1 million for the similar 1998 period.
As a percentage of net sales, these expenses increased from 13.8% during the
quarter ended June 27, 1998 to 15.3% for the comparable 1999 period. After
adjusting for expenses related to newly acquired operations and expenses related
to the increase in net sales, selling, general and administrative expenses were
approximately $7.5 million greater than was the case for the quarter ended June
27, 1998. Of the increase, approximately $3.8 million was related to the
expanded use of common freight carriers, additional sales and service personnel
and increased facilities costs within the garden distribution operation.
Increased product development, advertising and sales promotions primarily
related to the Pennington operation, accounted for approximately $3.2 million
and approximately $.5 million related to increased facilities costs within the
pet distribution operation. The increased costs related to the garden
distribution operations were incurred in anticipation of a strong sales quarter
which fell significantly below what the Company expected. The Company is
currently analyzing this segment of its business to realign it to reflect the
current business outlook.
Net interest expense for the quarter ended June 26, 1999 increased by $0.4
million from $2.6 million for the comparable 1998 period. This increase is
principally related to increased borrowings to support the Company's stock
repurchase programs. Average short-term borrowings for the three months ended
June 26, 1999 were $52.8 million compared with $69.6 million for the same 1998
period. Average interest rates on short-term borrowings were 8.2% and 7.8%,
respectively.
Nine Months Ended June 26, 1999
Compared with Nine Months Ended June 27, 1998
Net sales for the nine months ended June 26, 1999 increased by 20.8% or $207.1
million from $997.2 million for the comparable 1998 period. The $207.1 million
increase includes approximately $121.1 million attributable to newly acquired
companies. Of the sales increase related to existing operations, $86.0 million,
approximately $53.2 million was attributable to sales of lawn and garden
products, $9.7 million to sales of pet supplies and $23.1 million to sales of
branded products.
Gross profit increased by 24.8% or $52.9 million from $213.5 million during the
nine months ended June 27, 1998 to $266.4 million for the comparable 1999
period. The majority of the increase in gross profit relates to sales of branded
products. Gross profit as a percentage of net sales increased slightly from
21.4% for the nine months ended June 27, 1998 to 22.1% for the like 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 nine months ended June 26, 1999 than
was the case in the comparable 1998 period, offset in part by a decrease of
approximately 1.2% related to sales of lawn and garden products.
For the nine months ended June 26, 1999, selling, general and administrative
expenses increased by $53.1 million from $155.2 million for the comparable 1998
period. As a percentage of net sales, these expenses increased from 15.6% during
the nine months ended June 27, 1998 to 17.3% for the nine months ended June 26,
1996. The increase in selling, general and administrative expenses, after
adjusting for newly acquired businesses and expenses related to increased sales
volume, was approximately $15.1 million. The majority of the expense increase is
related to the garden distribution operation. The increase in selling, general
and administrative expense as a percentage of net sales is attributable to the
newly acquired branded product companies coupled with the increased costs
associated with the garden distribution operation.
Net interest expense for the nine months ended June 26, 1999 increased by $3.2
million from $5.3 million for the comparable 1998 period. The increase in net
interest expense is related to newly acquired companies and increased borrowings
to support the Company's stock repurchase program. Average short-term borrowings
for the nine months ended June 26, 1999 were $38.8 million compared with $49.8
million for the similar 1998 period. Average interest rates on short-term
borrowings were 7.7% and 7.5%, respectively.
Impact of the 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 conclusion of this calendar year.
The plan developed to address vendor and customer issues includes systems
integration, testing and communication strategies. The Company is in the process
of 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
parties to remediate their own Year 2000 Issues. The Company continues 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
fiscal year end 1999. In addition to vendors and customers, the Company 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 expenditure 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 fiscal year 1999.
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 nine months ended June 26, 1999, the Company generated cash from
operating activities of $51.8 million reflecting the normal cycle of receivables
and inventory build up, offset by payables build up and cash collections
received in the peak season. Net cash used in investing activities of $27.7
million resulted from an acquisition completed in January 1999 and from the
acquisition of office and warehouse equipment, including computer hardware and
software. Cash used in financing activities of $31.7 million consisted
principally of payments of $83.6 million to acquire treasury shares, partially
offset by net borrowings of $52.0 million of short-term debt.
The Company has a $125.0 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 26, 1999, the Company had $59.2 million of
outstanding borrowings and had $65.8 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 and includes a ceiling on the dollar amount the Company can utilize
to reacquire Company stock. In connection with the acquisition of one company in
fiscal 1998, the Company assumed a $60 million line of credit, of which $60
million was available at June 26, 1999.
The Company believes that cash flow from operations, funds available under its
lines of credit 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
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
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 and 1998 Annual Report on Form 10-K.
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
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 June 26, 1999:
(1) On June 15, 1999 the Company filed a report on Form
8-K dated June 11, 1999 announcing a $25 million
increase in the Company's share repurchase program.
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 10, 1999
/s/ William E. Brown
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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