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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 18, 1996
--------------------------------
Central Garden & Pet Company
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(Exact name of registrant as specified in its charter)
Delaware 0-20242 68-0275553
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(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
3697 Mt. Diablo Boulevard, Lafayette, California 94549
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 283-4573
------------------------------
Inapplicable
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(Former name or former address if changed since last report)
Exhibit Index located on page 3
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Item 2. Acquisition or Disposition of Assets
------------------------------------
On June 18, 1996, Central Garden & Pet Company (the "Company" entered
into a definitive agreement (the "Agreement") to acquire Kenlin Pet
Supply, Inc. ("Kenlin"), the largest distributor of pet supply
products in the eastern United States. Kenlin, which is based in
Mahwah, New Jersey and China Grove, North Carolina, had annual sales
of approximately $63.0 million in fiscal 1995, operates in 17 eastern
states and has approximately 290 employees. Under the terms of the
stock purchase agreement, the Company will pay an aggregate of $33
million in cash to acquire or redeem all of Kenlin's outstanding stock
and eliminate all of its outstanding debt. The Company anticipates
that it will use financing under its existing credit facility, to
finance the acquisition.
Item 7. Financial Statements and Exhibits
---------------------------------
(a)(1) Financial Statements of Kenlin are attached as Exhibit 1.3
hereto.
(a)(2) Accountants' report is attached hereto as Exhibit 1.4.
(b)(1) Pro Forma Condensed Financial Information is attached hereto
as Exhibit 1.5.
(c) See attached Exhibit Index.
2
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
1.1 Press Release dated June 18, 1996.
1.2 Stock Purchase Agreement dated as of
June 18, 1996.
1.3 Financial Statements of Kenlin.
1.4 Report of Independent Auditors.
1.5 Pro Forma Condensed Financial Information.
1.6 Consent of Independent Auditors.
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CENTRAL GARDEN & PET COMPANY
By /s/ Robert B. Jones
-------------------------------
Robert B. Jones, Vice President
and Chief Financial Officer
Dated: June 28, 1996
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[LETTERHEAD OF CENTRAL GARDEN & PET]
Corporate Office
3696 Mt. Diablo Blvd. Suite 310
Lafayette, CA 94549
(510) 283-4573
Fax (510) 283-4984
EXHIBIT 1.1
FOR IMMEDIATE RELEASE
- ---------------------
Contact: Gregory Reams
Central Garden & Pet
510/283-4573
Paul Verbinnen/Dan Connolly
Sard Verbinnen & Co
212/687-8080
CENTRAL GARDEN & PET COMPANY TO ACQUIRE KENLIN PET SUPPLY
CREATING NATION'S LARGEST DISTRIBUTOR OF PET SUPPLIES
--------------------------------
LAFAYETTE, CALIFORNIA, JUNE 18, 1996 --- Central Garden & Pet Company
(NASDAQ:CENT) today announced that it has entered into a definitive agreement to
acquire Kenlin Pet Supply, Inc., the largest distributor of pet supply products
in the eastern United States. Under the terms of the agreement, Central will
pay an aggregate of $33 million in cash to acquire or redeem all of Kenlin's
outstanding stock and eliminate all of its outstanding debt.
"The acquisition of Kenlin Pet Supply is an important leap forward for
Central's already successful pet supply operations, which have been focused
primarily in the western U.S.," said William Brown, Chairman and Chief Executive
Officer of Central Garden & Pet. "Similar to our lawn and garden business,
Central's pet supply business will now span coast-to-coast."
Brown added: "A key part of Central's business strategy has been to expand
its presence in the $12 billion pet supplies industry through internal growth
and strategic acquisitions. With the addition of Kenlin, we have taken a major
step toward fulfilling that goal."
Based in Mahwah, New Jersey and China Grove, North Carolina, Kenlin Pet
Supply has annual sales of approximately $70 million. Kenlin operates in 17
eastern states and has approximately 290 employees.
The acquisition is expected to close in July, however, consummation of the
acquisition is subject to a number of conditions, including expiration of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976.
Central Garden & Pet Company is the leading national distributor of lawn
and garden supply products, as well a major distributor of pet and pool
supplies.
# # #
<PAGE>
EXHIBIT 1.2
Exhibit A to the
Option Agreement
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is dated as of the __ day
of June, 1996, by and among (i) CENTRAL GARDEN & PET COMPANY, a Delaware
corporation (the "Buyer"), (ii) the shareholders of KENLIN PET SUPPLY, INC., a
Delaware corporation (the "Company") listed on Schedule 1 hereto (the
"Stockholders"), (iii) the optionholders of the Company listed on Schedule 1
hereto (the "Optionholders") and (iv) the warrantholder of the Company listed on
Schedule 1 hereto (the "Warrantholder", and together with the Stockholders and
the Optionholders, the "Sellers").
WHEREAS, the Stockholders own all of the issued and outstanding capital
stock of the Company (the "Stockholder Shares") other than the issued and
outstanding shares of preferred stock of the Company (the "Preferred Shares");
and
WHEREAS, the Optionholders own options (the "Options") exercisable for
shares of common stock of the Company (the "Option Shares"); and
WHEREAS, the Warrantholder owns warrants (the "Warrant") exercisable for
shares of the common stock of the Company (the "Warrant Shares", and together
with the Stockholder Shares and the Option Shares, the "Stock")
WHEREAS, the Optionholders and the Warrantholder will exercise the Options
and the Warrant in full at or prior to the Closing (as defined in Section 2.1)
and receive the Option Shares and the Warrant Shares, respectively; and
WHEREAS, the Sellers desire to sell the Stock to the Buyer and the Buyer
desires to purchase the Stock from the Sellers, upon the terms and subject to
the conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and agreements set
forth herein, the Buyer and the Sellers agree as follows:
1. SALE AND PURCHASE OF STOCK. Subject to the terms and conditions set
forth in this Agreement, each of the Sellers agrees to sell to the Buyer, and
the Buyer agrees to purchase from such Seller, at the Closing, all of the
outstanding shares of Stock owned by such Seller as set forth opposite such
Seller's name on Schedule 1 hereto in exchange for the payment of an aggregate
purchase price (the "Purchase Price") equal to $33,000,000, less (a) the
aggregate amount of all Indebtedness
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(as defined in Section 8 hereto) of the Company outstanding as of the Closing
and (b) the aggregate amount required to complete the Redemption. $250,000 of
the Purchase Price shall be paid by crediting the Deposit (as such term is
defined in the Option Agreement, dated as of June 7, 1996, among the Company,
the Sellers and the Buyer) against the Purchase Price. At Closing, the Purchase
Price shall be distributed among the Sellers pro rata in accordance with the
percentages set forth on Schedule 1 hereto (with respect to each Seller, the
"Pro Rata Share").
2. CLOSING.
2.1. Time and Place. The closing of the sale and purchase of the Stock
(the "Closing") shall be held at the offices of Bingham, Dana & Gould, 150
Federal Street, Boston, Massachusetts, on or before the Termination Date (as
defined in Section 13(a) hereof), or at such other time or place as the Buyer
and the Sellers may agree. The date on which the Closing is actually held
hereunder is sometimes referred to herein as the "Closing Date".
2.2. Transactions at Closing. At the Closing:
(a) The Stockholders shall deliver to the Buyer, free and clear of any
lien, claim or encumbrance, certificates representing the Stockholder Shares
duly endorsed in blank or with duly executed stock powers attached.
(b) The Optionholders shall exercise the Options for the Option Shares and
shall deliver to the Buyer, free and clear of any lien, claim or encumbrance,
certificates representing the Option Shares duly endorsed in blank or with duly
executed stock powers attached.
(c) The Warrantholder shall exercise the Warrant for the Warrant Shares
and shall deliver to the Buyer, free and clear of any lien, claim or
encumbrance, certificates representing the Warrant Shares duly endorsed in blank
or with duly executed stock powers attached.
(d) The Sellers shall cause the Company (i) to prepare and deliver to the
Buyer the Certificate of Indebtedness pursuant to Section 6.5 hereto, and (ii)
to deliver to the Buyer pay-off letters, releases and lien discharges (or
agreements therefor) reasonably satisfactory to the Buyer from each creditor
listed on the Certificate of Indebtedness.
(e) The Buyer shall provide the Company with sufficient funds to enable
the Company to redeem (the "Redemption") the Preferred Shares for the
liquidation value thereof (including accrued unpaid dividends through the
Closing Date) calculated in
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accordance with the Company's Certificate of Incorporation and the Sellers shall
cause the Company to complete the Redemption.
(f) The Buyer shall pay and discharge all outstanding Indebtedness of the
Company evidenced on the Certificate of Indebtedness.
(g) The Buyer shall deliver to each of the Sellers its Pro Rata Share of
the Purchase Price by wire transfer or by certified or bank checks.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLERS. Each of the Sellers
severally, and not jointly, represents and warrants to the Buyer as follows:
3.1. Organization; Authority. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company has delivered to the Buyer complete and correct copies of its
charter documents and by-laws and all amendments thereto. The Company is duly
qualified and in good standing as a foreign corporation in all jurisdictions in
which the character of the properties owned or leased by it or the nature of the
activities conducted by it makes such qualification necessary.
3.2. Right to Sell Shares; Approvals; Binding Effect. Such Seller has all
requisite power and full legal right to enter into this Agreement, to perform
all of its agreements and obligations under this Agreement in accordance with
its terms, and to sell to the Buyer all of the Stock owned by such Seller. This
Agreement has been duly executed and delivered by such Seller and constitutes
the legal, valid and binding obligation of such Seller, enforceable against such
Seller in accordance with its terms, except to the extent such enforceability is
subject to the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or other law affecting or relating to creditors' rights generally and
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
3.3. Subsidiaries. The Company does not own or hold of record and/or
beneficially, any shares of any class of the capital stock of any corporation or
any legal and/or beneficial interests in any partnerships, business trusts or
joint ventures or in any unincorporated trade or business enterprises.
3.4. Capitalization. The authorized capital of the Company, prior to
giving effect to the transactions contemplated in Sections 2.2(b), (c) and (e)
hereto, consists of (a) 11,000 shares of Class A Voting Common Stock, par value
$.01 per share,
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2,822.22 shares of which are issued and outstanding on the date hereof, (b)
11,000 shares of Class B Non-Voting Common Stock, par value $.01 per share,
4,000 shares of which are issued and outstanding on the date hereof, (c) 11,000
shares of Class C Voting Common Stock, par value $.01 per share, 2,377.78 shares
of which are issued and outstanding on the date hereof and (d) 10,000 shares of
Preferred Stock, par value $1.00 per share, 3,252.42 shares of which are issued
and outstanding on the date hereof. All of the shares of Stock are validly
issued and outstanding, fully paid and nonassessable. As of the date hereof,
other than as set forth on Schedule 3.4 hereto, the Company does not have any
outstanding options, warrants or other rights to subscribe for or purchase any
securities of the Company.
3.5. Title to Stock, Liens, etc. Except as set forth in Schedule 3.5
hereto, such Seller has, and as of the consummation of the Closing the Buyer
will have, record and beneficial ownership of such Seller's Stock as set forth
on Schedule 3.5 hereto, free and clear of any mortgage, lien, pledge, charge,
security interest, encumbrance, title retention agreement, option, equity or
other adverse claim thereto.
3.6. Non-Contravention. Neither the execution and delivery of this
Agreement by such Seller nor the consummation by such Seller of the transactions
contemplated hereby will constitute a violation of, or be in conflict with, or
constitute or create a default under, or result in the creation or imposition of
any lien, claim or encumbrance upon any property of the Company pursuant to, (a)
the charter documents or by-laws of the Company, each as amended to date; (b)
any material agreement or commitment to which the Company is a party or by which
the Company or any of its properties is bound or any of such properties is
subject (other than agreements or commitments evidencing, or entered into by the
Company or the Sellers in connection with, Indebtedness of the Company to be
paid and discharged at Closing pursuant to Section 7.4 hereto); or (c) subject
to the expiration, or early termination, of the waiting period under the HSR Act
(as defined in Section 8 hereto), any statute or any judgment, decree, order,
regulation or rule of any court or governmental authority, except, in the case
of clauses (b) or (c) above, any violations, conflicts, defaults, liens, claims
or encumbrances that would not, either individually or in the aggregate, have a
Material Adverse Effect.
3.7. Governmental Consents. Subject to the expiration, or early
termination, of the waiting period under the HSR Act, no consent, approval or
authorization of, or registration, qualification or filing with, any
governmental agency or authority is required for the execution and delivery of
this
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Agreement by such Seller or for the consummation by such Seller of the
transactions contemplated hereby.
3.8. Financial Statements.
(a) The Sellers have delivered the following financial statements (the
"Financial Statements") to the Buyer, and they are attached as Schedule 3.8
hereto: (a) the audited consolidated balance sheet of the Company as of July
31, 1995 (the "Audited Balance Sheet"), and the related audited consolidated
statements of income and retained earnings for the fiscal year then ended, and
(b) the unaudited consolidated balance sheet of the Company as of March 31, 1996
and the related unaudited consolidated statements of income and retained
earnings for the eight-month period then ended (the "Interim Financials").
Subject to normal, recurring year-end audit adjustment and the absence of
footnotes in the case of the Interim Financials, each of the Financial
Statements has been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with prior periods; each of such
balance sheets fairly presents the consolidated financial condition of the
Company as of its respective date; and each of such statements of income and
retained earnings fairly presents the results of consolidated operations of the
Company for the period covered thereby.
(b) Until the Closing Date, the Sellers shall, as soon as reasonably
practicable and in any event within 45 days after the end of each calendar month
ending after March 31, 1996, deliver to the Buyer the unaudited consolidated
balance sheet of the Company as of the last day of such month and the related
unaudited consolidated statements of income for the period then ended (the
"Subsequent Financials"). Subject to normal, recurring year-end audit
adjustment and the absence of footnotes, each of the Subsequent Financials shall
be prepared in accordance with generally accepted accounting principles applied
on a basis consistent with prior periods; each of such balance sheets shall
fairly present the consolidated financial condition of the Company as of its
respective date; and each of such statements of income shall fairly present the
results of consolidated operations of the Company for the period covered
thereby.
3.9. Taxes. The Company has duly filed with the appropriate government
agencies all of the income, sales, use, employment and other tax returns and
reports required to be filed by it as of the date hereof, and will duly file all
such returns and reports as are required to be filed by it on or before the
Closing Date. In all material respects all such returns and reports are and
will be accurate, true, correct and complete. No waiver of any statute of
limitations relating to taxes has been executed or given by the Company. All
taxes, assessments, fees and other
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governmental charges upon the Company or upon any of its properties, assets,
revenues, income and franchises with respect to periods ending on or before the
Closing Date, have been paid or fully provided for in the Audited Balance Sheet,
the Interim Financials or the Subsequent Financials, other than those
attributable solely to the operations of the Company since the date of the last
Subsequent Financials (none of which are overdue). The Company has withheld and
paid all taxes required to be withheld or paid in connection with amounts paid
or owing to any employee, creditor, independent contractor or third party,
foreign entity or corporation or nonresident alien individual. Except as set
forth on Schedule 3.9 hereto, no federal tax return of the Company is currently
under audit by the IRS (as defined in Section 8 hereto), no other tax return of
the Company is currently under audit by any other taxing authority and no
elections, consents, waivers, conventions or agreements have been filed or
entered into in respect of any tax or taxing authority. Neither the IRS nor any
other taxing authority is now asserting or, to such Seller's knowledge,
threatening to assert against the Company any deficiency or claim for additional
taxes or interest thereon or penalties in connection therewith.
3.10. Absence of Certain Changes. Except as set forth on Schedule 3.10
hereto or as contemplated by this Agreement, since March 31, 1996 there has not
been: (a) any material adverse change in the assets, liabilities, sales, income
or business of the Company or in its relationships with suppliers, customers or
lessors; (b) any acquisition or disposition by the Company of any asset or
property other than in the ordinary course of business; (c) any damage,
destruction or casualty loss, whether or not covered by insurance, which
exceeds, either in any case or in the aggregate, $25,000; (d) any declaration,
setting aside or payment of any dividend or any other distributions in respect
of the Stock; (e) any issuance of any shares of the capital stock of the Company
or any direct or indirect redemption, purchase or other acquisition of any of
the Stock; (f) any increase in the compensation, pension or other benefits
payable or to become payable by the Company to any of its officers or employees,
or any bonus payments or arrangements made to or with any of them (other than
pursuant to the terms of any existing written agreement or plan or other than
annual or periodic increases made in the ordinary course of business consistent
with the Company's past practice); (g) any entry by the Company into any
transaction other than in the ordinary course of business or as contemplated
herein; (h) any incurrence by the Company of any material obligations or
material liabilities, whether absolute, accrued, contingent or otherwise
(including, without limitation, liabilities as guarantor or otherwise with
respect to obligations of others), other than obligations and liabilities
incurred in the ordinary course of business or as contemplated herein; or
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(i) any discharge or satisfaction by the Company of any lien or encumbrance or
payment by the Company of any material obligation or material liability (fixed
or contingent) other than in the ordinary course of business or as contemplated
herein.
3.11. Litigation, etc. Except as set forth on Schedule 3.11 hereto, no
action, suit, proceeding or investigation is pending or, to the knowledge of
such Seller, threatened, against the Company.
3.12. Conformity to Law. The Company has complied with, and is in
compliance with, all laws, statutes and governmental regulations and all
judicial or administrative tribunal orders, judgments, writs, injunctions or
decrees applicable to its business except where any or all failures of such
compliance, either individually or in the aggregate, would not have a Material
Adverse Effect. Except as set forth in Schedule 3.12 hereto, the Company has not
been charged with any violation of any provision of any federal, state or local
law or administrative regulation in respect of its business which, either
individually or in the aggregate, would have a Material Adverse Effect.
3.13. Real Property and Environmental Matters.
(a) Schedule 3.13 hereto includes legal descriptions of all real property
owned or leased by the Company (the "Real Property"). Neither such Seller nor
the Company have received, since August 21, 1992, any notice that either the
whole or any material portion of the Real Property is to be condemned,
requisitioned or otherwise taken by any public authority. The Company has not
received notice nor does such Seller have any knowledge of any public
improvements that will be made that may result in special assessments against or
otherwise affect any of the Real Property.
(b) Except as set forth on Schedule 3.13:
(i) the Company is not in violation of any judgment, decree, order, law,
license, rule or regulation (each a "Violation") pertaining to environmental
matters which arose from or originated during the Company's operation or
occupation of any of the Real Property, and, to such Seller's knowledge, the
Company is not in any Violation pertaining to environmental matters which arose
from or originated during another Person's ownership, occupation or operation of
any of the Real Property, including without limitation, those arising under the
Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the
Superfund Amendments and Reauthorization
7
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Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act,
the Toxic Substances Control Act, or any state or local statute, regulation,
ordinance, order or decree relating to health, safety or the environment
(hereinafter "Environmental Laws"), except for Violations which, either
individually or in the aggregate, would not have a Material Adverse Effect;
(ii) neither the Company nor, to such Seller's knowledge, any prior owner
or operator of any of the Real Property, has used any of the Real Property for
the disposal of Hazardous Waste or Hazardous Materials as those terms are
defined in this paragraph (b)(ii) . As used in Section 3.13 hereto, the term
"Hazardous Materials" or "Hazardous Waste" shall mean any hazardous or toxic
substances, materials, and wastes listed in the United States Department of
Transportation Hazardous Materials Table (49 CFR 172.101) or by the
Environmental Protection Agency as a hazardous substance (40 CFR Part 302) and
amendments thereto, or such substances, materials and wastes which are or may
become regulated under any applicable local, state or federal law, including,
without limitation, any material, waste or substance which is (A) petroleum, (B)
asbestos, (C) polychlorinated biphenyls, (D) defined as a "hazardous waste,"
"extremely hazardous waste," "restricted hazardous waste" or "hazardous
material" under applicable state laws and regulations, (E) designated as a
"hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C.
(S) 1251, et seq. (33 U.S.C. (S) 1321) or U.S.C. (S) 1317, (F) defined as a
"hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. (S) 6901, et seq. (42 U.S.C. (S) 6903) or (G) defined as
a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. (S) 9601, et
seq. (42 U.S.C. (S) 9601);
(iii) during the course of any activities conducted on any of the Real
Property by the Company and, to such Seller's knowledge, by any prior owner or
operator of any of the Real Property, no Hazardous Waste or Hazardous Materials
have been generated or are being used on any such properties, except in
accordance with applicable Environmental Laws;
(iv) the Company has not received written notice from any third party
including, without limitation, any federal, state or local governmental
authority, (A) that the Company has been identified by the United States
Environmental Protection Agency ("EPA") as a potentially responsible party under
CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R.
Part 300 Appendix B (1986); (B) that any Hazardous Waste or Hazardous Materials
which the Company has generated, transported or disposed of has been found at
any site at which a federal, state or local agency or other third party has
conducted
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or has ordered that the Company conduct a remedial investigation, removal or
other response action pursuant to any Environmental Law; or (C) that the Company
is or shall be a named party to any claim, action, cause of action, complaint,
(contingent or otherwise) legal or administrative proceeding arising out of any
third party's incurrence of costs, expenses, losses or damages of any kind
whatsoever in connection with the release of Hazardous Waste or Hazardous
Materials; and
(v) The Company has been issued, and will maintain until the Closing Date,
all required federal, state and local permits, licenses, certificates and
approvals with respect to the Real Property relating to (A) air emissions, (B)
discharges to surface water or groundwater (C) noise emissions, (D) solid or
liquid waste disposal and (E) the use, generation, storage, transportation or
disposal of Hazardous Materials or Hazardous Wastes, except where the failure to
obtain or maintain any such permits, licenses, certificates and approvals would
not, either individually or in the aggregate, have a Material Adverse Effect.
3.14. Insurance. Schedule 3.14 hereto lists all policies of fire,
liability, workmen's compensation, life, property and casualty and other
insurance owned or held by the Company.
3.15. Contracts. Schedule 3.15 hereto sets forth a list of all contracts
to which the Company is a party or by which it is bound or to which the Company
is subject, except (a) any contract that does not require payment by any party
thereto of more than $50,000, (b) any contract that is terminable by the Company
upon ninety (90) days' notice or less without the payment of any material
penalty or material termination fee, (c) any contract entered into, after the
date hereof and prior to Closing, with the Buyer or with any other Person in
connection with any transaction contemplated by this Agreement, (d) any contract
entered into in the ordinary course of business after the date hereof and prior
to the Closing, (e) purchase orders for goods and services entered into in the
ordinary course of business, and (f) any contract specifically listed in any
other Schedule to this Agreement. As used in this Section 3.15, the word
"contract" means and includes every written agreement of any kind which is
legally enforceable by or against the Company. Each of the contracts listed on
Schedule 3.15 hereto or any of the other Schedules hereto is in full force and
effect and the Company has not committed any breach or default thereunder which
would have a Material Adverse Effect. Each of the Employment Agreements, dated
as of August 21, 1992, as amended on November 3, 1993 and April 25, 1996,
between the Company and Alexander A. Friend and Steven F. Skoler, respectively,
is in full force and effect as of the date hereof, and will not lapse or
terminate as a consequence of the consummation of the sale of the Stock
hereunder.
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3.16. Employee Benefit Plans. Except as set forth on Schedule 3.16
hereto, the Company does not maintain or have any obligation to make
contributions to, any employee benefit plan (an "ERISA Plan") within the meaning
of Section 3(3) of the United States Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or any other retirement, profit sharing, stock
option, stock bonus or employee benefit plan (a "Non-ERISA Plan"). All such
ERISA Plans and Non-ERISA Plans have been maintained and operated in all
material respects in accordance with all federal, state and local laws
applicable to such plans and the terms and conditions of the respective plan
documents except where the failure to so maintain or operate such ERISA Plans
and Non-ERISA Plans would not have a Material Adverse Effect. The Internal
Revenue Service has issued a favorable determination letter with respect to each
ERISA Plan that is intended to be a "qualified plan" within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). No
ERISA Plan is subject to Title IV or Section 302 of ERISA or Section 412 of the
Code. No ERISA Plan is a "multiemployer plan" within the meaning of Section
4001(a)(3) of ERISA (a "Multiemployer Plan") or a plan that has two or more
contributing sponsors at least two of whom are not under common control, within
the meaning of Section 4063 of ERISA (a "Multiple Employer Plan"), nor has the
Company at any time contributed to, or been obligated to contribute to, any
Multiemployer Plan or any Multiple Employer Plan. The Company has never been a
member of a group described in Sections 414(b), (c), (m) or (o) of the Code.
Except for continuation coverage as required by Section 4980(B) of the Code or
by applicable state insurance laws, no ERISA Plan or Non-ERISA Plan provides
life, health, medical or other welfare benefits to former employees or
beneficiaries or dependents thereof.
3.17. Trademarks, Patents, Etc. Schedule 3.17 hereto sets forth a list of
(a) all patents, trademarks, trade names and copyrights registered in the name
of the Company and all applications therefor, and (b) all material written
agreements relating to technology, know-how and processes which the Company is
licensed or authorized to use by others or which the Company has licensed or
authorized for use by others. Except to the extent set forth in Schedule 3.17,
the Company owns or has permission to use all patents, trademarks, trade names
and copyrights material to, and used in the ordinary course of, the operation of
the Company's business as presently conducted. No claims are pending against
the Company by any person regarding the use of any such trademarks, trade names,
copyrights, technology, know-how or processes, or challenging or questioning the
validity or effectiveness of any such license or agreement, which either
individually or in the aggregate would have a Material Adverse Effect.
10
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3.18. Indebtedness. Except for Indebtedness reflected or reserved against
in the Audited Balance Sheet or Indebtedness incurred in the ordinary course of
business after the date of the Audited Balance Sheet, the Company has no
Indebtedness outstanding at the date hereof. As of the Closing, the Company will
have no Indebtedness outstanding other than as described on Schedule 3.18
hereto. Except as disclosed on Schedule 3.18, the Company is not in default with
respect to any outstanding Indebtedness or any instrument relating thereto and
no such Indebtedness or any instrument or agreement relating thereto purports to
limit the issuance of any securities by the Company or the operation of the
business of the Company. Complete and correct copies of all instruments
(including all amendments, supplements, waivers and consents) relating to any
Indebtedness of the Company listed on Schedule 3.18 have been furnished to the
Buyer.
3.19. Labor Relations. The Company is in compliance in all material
respects with all federal and state laws respecting employment and employment
practices, terms and conditions of employment, wages and hours and
nondiscrimination in employment except where any or all failures of such
compliance, either individually or in the aggregate, would not have a Material
Adverse Effect, and is not engaged in any unfair labor practice which would have
a Material Adverse Effect. There is no charge pending or, to the knowledge of
such Seller, threatened against the Company alleging unlawful discrimination in
employment practices before any court or agency which would have a Material
Adverse Effect, and there is no charge of or proceeding with regard to any
unfair labor practice against the Company pending before the National Labor
Relations Board. There is no labor strike, dispute, slow-down or work stoppage
actually pending or, to the knowledge of such Seller, threatened, against or
involving the Company other than disputes with individual employees or as
otherwise described on Schedule 3.19 hereto. None of the employees of the
Company is covered by any collective bargaining agreement, and, except as
disclosed on Schedule 3.19 hereto, no collective bargaining agreement is
currently being negotiated by the Company.
3.20. Customers. Schedule 3.20 hereto contains a true and correct list of
the Company's largest twenty (20) customers, as determined by sales, for each of
the 1994 and 1995 calendar years. Except as disclosed on Schedule 3.20, to such
Seller's knowledge, no such customer intends to cancel or substantially
adversely modify its relations with the Company or materially decrease its
current purchase of the Company's products beyond purchase fluctuations in such
customer's ordinary course of business.
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3.21. Disclosure. No representation or warranty by such Seller in this
Agreement or in any exhibit or schedule attached hereto, contains or will
contain any untrue statement of material fact or omits or will omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading.
3.22. Brokers. Except for PaineWebber Incorporated, who has been retained
by the Company, neither such Seller nor the Company has retained, utilized or
been represented by any broker or finder in connection with the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents and
warrants to the Sellers as follows:
4.1. Organization and Standing of Buyer. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Buyer has full power and authority under its Certificate of
Incorporation and by-laws and applicable laws to execute and deliver this
Agreement and to consummate the transactions contemplated hereby.
4.2. Corporate Approval; Binding Effect. The Buyer has obtained all
necessary authorizations and approvals required for the execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by the Buyer and constitutes
the legal, valid and binding obligation of the Buyer, enforceable against the
Buyer in accordance with its terms.
4.3. Non-Contravention. Neither the execution and delivery of this
Agreement by the Buyer nor the consummation by the Buyer of the transactions
contemplated hereby will constitute a violation of, or be in conflict with,
constitute or create a default under, or result in the creation or imposition of
any liens upon any property of the Buyer pursuant to (a) the charter documents
or by-laws of the Buyer, each as amended to date; (b) any agreement or
commitment to which the Buyer is a party or by which the Buyer or any of its
properties is bound or to which the Buyer or any of its properties is subject;
or (c) subject to the expiration, or early termination, of the waiting period
under the HSR Act, any statute or any judgment, decree, order, regulation or
rule of any court or governmental authority relating to the Buyer.
4.4. Governmental Consents. Subject to the expiration, or early
termination, of the waiting period under the HSR Act, no consent, approval or
authorization of, or registration, designation, declaration or filing with, any
governmental agency
12
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or authority is required in connection with the purchase of the Stock pursuant
to this Agreement or for the consummation by the Buyer of any other transaction
contemplated hereby.
4.5. Brokers. Except for Wasserstein Perella & Co. and Antares Partners,
the Buyer has not retained, utilized or been represented by any broker or finder
in connection with the transactions contemplated by this Agreement.
4.6. Due Diligence Review. The Buyer acknowledges that it has completed to
its satisfaction its own due diligence investigation with respect to the
Company. The Buyer further acknowledges and agrees that upon consummation of
the transactions contemplated hereby, it will have no further recourse against
any of the Sellers with respect to the Stock in the absence of fraud on the part
of the Sellers except for claims for indemnification made pursuant to Section
12.1 hereto.
5. CONDUCT OF BUSINESS BY SELLERS PENDING CLOSING. The Sellers jointly
and severally covenant and agree that, from and after the date of this Agreement
and until the Closing, except as otherwise specifically consented to or approved
by the Buyer in writing:
5.1. Access. Each of the Sellers shall cause the Company to afford to the
Buyer and its authorized representatives access during normal business hours to
all properties, books, records, contracts and documents of the Company and an
opportunity to make such investigations as they shall reasonably desire to make
of the Company (provided that such investigations shall be conducted so as to
minimize any disruption of the operations of the Company), and the Sellers shall
furnish or cause to be furnished to the Buyer and its authorized representatives
all such information with respect to the affairs and businesses of the Company
as the Buyer may reasonably request.
5.2. Carry on in Regular Course. Each of the Sellers shall cause the
Company to maintain its owned and leased properties in accordance with its
historical maintenance practices and shall carry on its business substantially
in the same manner as heretofore. Without limiting the generality of the
foregoing, the Sellers shall cause the Company to continue to pay its trade
payables consistent with its past practices.
5.3. No General Increases. Except as set forth in Schedule 5.3 hereto, the
Sellers shall not permit the Company to grant any general or uniform increase in
the rates of pay of employees of the Company, or to grant any general or uniform
increase in the benefits under any bonus or pension plan or other contract or
commitment unless such grant or increase is made in
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the ordinary course of business consistent with past practices or is required by
the terms of any existing agreement; or to increase the compensation payable or
to become payable to officers, key salaried employees or agents, or to increase
any bonus, insurance, pension or other benefit plan, payment or arrangement made
to, for or with any such officers, key salaried employees or agents unless such
grant or increase is made in the ordinary course of business consistent with
past practices or is required by the terms of any existing agreement.
5.4. Contracts and Commitments. The Sellers shall not permit the Company
to enter into any contract or commitment or engage in any transaction not
contemplated by this Agreement or not in the usual and ordinary course of
business and consistent with its normal business practices.
5.5. Sale of Capital Assets. The Sellers shall not permit the Company to
sell or otherwise dispose of any capital asset other than capital assets with a
fair market value not in excess of $25,000 or sales or dispositions in the
ordinary course of business.
5.6. Preservation of Organization. Each of the Sellers shall, and shall
cause the Company to, use reasonable efforts to preserve the Company's business
organization intact and to preserve for the Buyer the present relationships of
the Company with its suppliers and customers and others having business
relations with the Company.
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The obligation of the
Buyer to consummate the Closing shall be subject to the satisfaction at or prior
to the Closing of each of the following conditions (to the extent noncompliance
is not waived in writing by the Buyer):
6.1. Representations and Warranties True at Closing. The representations
and warranties made by the Sellers in or pursuant to this Agreement shall be
true and correct at and as of the Closing Date with the same effect as though
such representations and warranties had been made or given at and as of the
Closing Date.
6.2. Compliance With Agreement. The Sellers shall have performed and
complied with all of their obligations under this Agreement to be performed or
complied with by them on or prior to the Closing Date.
6.3. Officer's Certificate. The Sellers shall have delivered to the Buyer
in writing, at and as of the Closing, a certificate, in form and substance
satisfactory to the Buyer,
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certifying that the conditions in each of Sections 6.1 and 6.2 hereof have been
satisfied.
6.4. No Material Adverse Change. There shall have been no change as of the
Closing Date, since the date hereof, in the business or the assets of the
Company which either individually or in the aggregate would have a Material
Adverse Effect.
6.5. Certificate of Indebtedness. The Sellers shall have caused the
Company to prepare and deliver to the Buyer a certificate (the "Certificate of
Indebtedness") certifying as to the amount of Indebtedness of the Company
outstanding on the Closing Date and specifying the amount owed to each creditor
listed thereon.
6.6. No Restraining Order. No restraining order or injunction shall
prohibit the transactions contemplated by this Agreement.
6.7. Resignations of Directors and Officers. Except as set forth on
Schedule 6.7 hereto, all of the directors and officers of the Company shall have
resigned their positions with the Company on or prior to the Closing Date.
6.8. Opinion of Counsel. Bingham, Dana & Gould LLP, special counsel to the
Sellers, shall have delivered to the Buyer a written opinion, addressed to the
Buyer and dated the Closing Date, substantially in the form of Exhibit A hereto.
6.9. HSR Act. Any applicable waiting period under the HSR Act, including
any extension thereof, shall have expired, or shall have been earlier
terminated.
7. CONDITIONS PRECEDENT TO SELLERS' OBLIGATIONS. The obligation of the
Sellers to consummate the Closing shall be subject to the satisfaction, at or
prior to the Closing, of each of the following conditions (to the extent
noncompliance is not waived in writing by the Sellers):
7.1. Representations and Warranties True at Closing. The representations
and warranties made by the Buyer in this Agreement shall be true at and as of
the Closing Date with the same effect as though made or given at and as of the
Closing Date.
7.2. Compliance with Agreement. The Buyer shall have performed and
complied with all of its obligations under this Agreement that are to be
performed or complied with by it at or prior to the Closing.
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7.3. Officer's Certificate. The Buyer shall have delivered to the Sellers
in writing, at and as of the Closing, a certificate, in form and substance
satisfactory to the Sellers, to the effect that the conditions in each of
Sections 7.1 and 7.2 hereto have been satisfied.
7.4. Discharge of Indebtedness. The Buyer shall have paid in full and
terminated all liabilities of the Company for all Indebtedness evidenced on the
Certificate of Indebtedness.
7.5. Redemption of Preferred Shares. The Buyer shall have provided funds
in an amount sufficient to complete the Redemption and the Redemption shall have
been completed.
7.6. Opinion of Counsel. Orrick, Herrington & Sutcliffe, counsel to the
Buyer, shall have delivered to the Sellers a written opinion, addressed to the
Sellers and dated the Closing Date, substantially in the form of Exhibit B
hereto.
7.7. HSR Act. Any applicable waiting period under the HSR Act, including
any extension thereof, shall have expired, or shall have been earlier
terminated.
8. CERTAIN DEFINITIONS. As used herein the following terms not otherwise
defined have the following respective meanings:
"HSR Act": The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"Indebtedness": As applied to any Person (as defined in this Section 8),
(a) all indebtedness of such Person for borrowed money, whether current or
funded, or secured or unsecured, (b) all indebtedness of such Person for the
deferred purchase price of property or services represented by a note, (c) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (d) all indebtedness of such Person secured by a purchase money
mortgage or other lien to secure all or part of the purchase price of property
subject to such mortgage or lien, (e) all obligations under leases which shall
have been or must be, in accordance with generally accepted accounting
principles, recorded as capital leases in respect of which such Person is liable
as lessee, (f) any liability of such Person in respect of banker's acceptances
or letters of credit, and (g) all indebtedness referred to in clause (a), (b),
(c), (d), (e) or (f) above which is directly or indirectly guaranteed by such
Person
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or which such Person has agreed (contingently or otherwise) to purchase or
otherwise acquire or in respect of which it has otherwise assured a creditor
against loss.
"IRS": The United States Internal Revenue Service.
"Material Adverse Effect": A material adverse effect on the business,
operations or financial condition of the Company.
"Person": A corporation, an association, a partnership, an organization, a
trust, a business or an individual.
9. CERTAIN COVENANTS.
9.1. Confidential Information. Each of the Sellers and the Buyer agrees
that any and all information disclosed by the Buyer to the Sellers or by the
Sellers to the Buyer as a result of the negotiations leading to the execution of
this Agreement, or in furtherance thereof, or disclosed by either party in
connection with any of the transactions contemplated hereby, which information
is of a proprietary nature, or was not already known, to the Sellers or to the
Buyer, as the case may be ("Confidential Information"), shall remain
confidential by the Sellers and the Buyer and their respective employees,
directors, officers, agents and representatives (collectively, "Related
Parties") pursuant to the terms of that certain Confidentiality Agreement, dated
as of April 9, 1996. The Sellers and Buyer further agree that each such Person
will not, and will cause each of their respective Related Parties to not, (a)
use, or permit the use of, any Confidential Information for any purpose other
than to evaluate the transactions contemplated hereby, or (b) disclose, or
permit the disclosure of, any Confidential Information (including the fact that
discussions and negotiations relating to the transactions contemplated hereby
have been, or are in the process of being, completed) to any Person, unless (i)
in the opinion of the Sellers or the Buyer, as the case may be, disclosure is
required to be made under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, and (ii) the nondisclosing party
has been consulted and been provided with prior written notice thereof. If the
Closing does not take place for any reason, each of the Sellers and the Buyer
agrees not to further divulge or disclose or use for its benefit or purposes any
Confidential Information at any time in the future unless such information has
otherwise become public. The information intended to be protected hereby shall
include, but not be limited to, financial information, customers, sales
representatives, and anything else having an economic or pecuniary benefit to
the Buyer, the Sellers or the Company, respectively.
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9.2. Hart-Scott-Rodino. The Buyer hereby agrees, and each of the Sellers
hereby agrees to cause the Company, to prepare and, on or before the date
hereof, file with the United States Department of Justice and the United States
Federal Trade Commission all notifications, reports or other documents required
to be filed by them under the HSR Act concerning the transactions contemplated
hereby and promptly comply with any request by the Department of Justice or the
Federal Trade Commission for additional documents or information so that the
waiting period specified in the HSR Act shall expire as soon as practicable
after the execution and delivery of this Agreement. Each of the Sellers and the
Buyer further agree to act in good faith in providing all information and other
assistance reasonably requested by the other party hereto in connection with the
preparation and filing of such notifications, reports and documents.
10. STANDSTILL. The Buyer hereby acknowledges that certain Confidential
Information contains competitively sensitive information concerning the
Company's operations in the Eastern Territory (as defined below) and, as a
condition to the disclosure thereof to the Buyer, the Buyer hereby agrees that
it will not, either directly or through a Related Party or an affiliate, during
the Standstill Period (as defined below), (a) acquire, make an equity investment
in, make a loan to or guarantee any obligation of any Person more than 5% of
whose gross revenues are derived from distributing pet supplies (a "Pet Supply
Distributor") in the Eastern Territory, or (b) make an additional equity
investment in, make an additional loan to or extend an existing guarantee of any
obligation of any Pet Supply Distributor (or any Person which will use the same
in order to become a Pet Supply Distributor) in the Eastern Territory in which
the Buyer or such Related Party or affiliate has a minority equity interest
other than Rumford Aquarium. The "Standstill Period" shall be the period
commencing on the date hereof and concluding on the earlier of October 15, 1996
or the Closing Date. For purposes of this paragraph, the term "Eastern
Territory" shall mean all states of the United States east of the Mississippi
River. During the Standstill Period, the Buyer further agrees to (a) suspend
all of its acquisition activity with respect to Pet Supply Distributors in the
Eastern Territory, (b) not pursue, solicit, encourage or entertain proposals
from or enter into negotiations with or furnish any nonpublic information to any
other Person regarding the acquisition of any assets or stock of any Pet Supply
Distributor in the Eastern Territory or (c) not continue or begin any
negotiations for the acquisition of any Pet Supply Distributor in the Eastern
Territory.
11. EXCLUSIVE DEALING. The Sellers hereby agree that during the
Exclusivity Period (as defined below), neither the Sellers, the Company nor any
of their Related Parties or affiliates shall engage
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in negotiations with any Person, other than the Buyer, concerning the purchase
of all or any substantial portion of the stock or assets of the Company. The
"Exclusivity Period" shall be the period commencing on the date hereof and
ending on the earlier of the Closing Date or the date on which this Agreement is
terminated in accordance with the provisions hereof.
12. INDEMNIFICATION.
12.1. Indemnity. Subject to the overall limitations, the minimum amounts
and the time limitations set forth in Section 12.3 hereto, each of the Sellers
agree severally, and not jointly, to indemnify and hold the Buyer harmless from
and with respect to any and all claims, liabilities, losses, damages, costs and
expenses, including without limitation the fees and disbursements of counsel
(collectively, "Damages"), related to or arising directly or indirectly out of
any inaccuracies in any representation or warranty or breach of any covenant
made by the Sellers in this Agreement. For purposes of indemnification pursuant
to this Section 12, (a) the term "Buyer" shall mean the Buyer and its permitted
successors and assigns, and (b) the existence and extent of any inaccuracy in or
breach of any representation or warranty contained in Section 3 hereto which is
qualified by reference to the defined term "Material Adverse Effect" shall be
determined by reading such representation or warranty as if the "Material
Adverse Effect" qualifier contained therein had been deleted in its entirety.
12.2. Third Party Claims. In the event that the Buyer desires to make a
claim against the Sellers under Section 12.1 above in connection with any
action, suit, proceeding or demand at any time instituted against or made upon
the Buyer by any third party for which the Buyer may seek indemnification
hereunder (a "Third Party Claim"), the Buyer shall promptly notify the Sellers
of such Third Party Claim and of the Buyer's claim of indemnification with
respect thereto. The Sellers shall have thirty (30) days after receipt of such
notice to notify the Buyer if they have elected to assume the defense of such
Third Party Claim, provided, that the Buyer shall in any event be entitled to
take such actions as are reasonably necessary to avoid prejudicing the Buyer's
rights with respect to such Third Party Claim during such 30-day period while it
awaits notice from the Seller. Once the Sellers elect to assume the defense of
such Third Party Claim, the Sellers shall be entitled at their own expense to
conduct and control the defense and settlement of such Third Party Claim through
counsel of their own choosing; provided that the Buyer may participate in the
defense of such Third Party Claim with its own counsel at its own expense. If
the Sellers fail to notify the Buyer within thirty (30) days after receipt of
the Buyer's notice of a Third Party Claim, the Buyer shall be entitled to assume
the
19
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defense of such Third Party Claim at the expense of the Sellers, provided, that
the Buyer may not settle any Third Party Claim without the Sellers' consent
(such consent not to be unreasonably withheld).
12.3. Limitations of Liability. (a) The Sellers shall not be required to
indemnify the Buyer hereunder (ii) for any Damages arising from any particular
breach by the Sellers of any representation or warranty contained in Section 3
hereof or any covenant contained herein or any particular Third Party Claim if
the aggregate amount of the Damages arising from such particular breach or Third
Party Claim do not exceed $10,000 (each, a "De Minimis Claim"), and (ii) subject
to paragraph (c) below, except to the extent that the aggregate amount of
Damages (excluding De Minimis Claims) for which the Buyer is entitled to
indemnification pursuant to Section 12.1 hereto exceeds $250,000 (it being
understood and agreed that the $250,000 amount is intended as a deductible, and
the Sellers shall not be liable for the first $250,000 of Damages for which the
Buyer is entitled to indemnification).
(b) Subject to paragraph (c) below, the aggregate Damages payable by the
Sellers pursuant to Section 12.1 above with respect to all claims for
indemnification shall not exceed $2,000,000.
(c) The maximum liability of any Seller with respect to any claim for
Damages shall be an amount equal to the aggregate liability of all of the
Sellers with respect to such claim multiplied by the percentage set forth
opposite such Seller's name on Schedule 1 hereto; provided, however, that the
representations and warranties contained in Section 3.5 hereof are made
severally by each Seller as to himself or itself only and any Seller who has
breached such representation or warranty as to himself or itself (but only such
Seller) shall be liable with respect to Damages arising from the breach thereof
up to the full amount of the Purchase Price received by such Seller and no other
Seller shall be liable therefor.
(d) No action or claim for Damages pursuant to this Section 12 shall be
brought or asserted after the date eighteen (18) months from the Closing, except
for Damages arising from a breach of the representations and warranties
contained in (i) Section 3.9 hereto for which the Sellers shall not be liable
unless the Buyer has asserted a claim for such Damages prior to the expiration
of the applicable statute of limitations, and (ii) Section 3.5 hereto for which
claims for Damages may be asserted at any time after the Closing Date.
12.4. Expiration of Representations and Warranties; Scope of Sellers'
Liability. Each of the representations and warranties
20
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of the Sellers contained in this Agreement shall irrevocably expire on the last
day on which any action or claim for breach of such representation or warranty
may be brought or asserted pursuant to Section 12.3(d) hereto (the "Expiration
Date"). The Buyer acknowledges and agrees that its sole remedy against the
Sellers for any matter arising out of the transactions contemplated by this
Agreement is set forth in Section 12.1 hereto and that, except to the extent the
Buyer has asserted a claim for indemnification prior to the applicable
Expiration Date, the Buyer shall have no remedy against the Sellers for any
breach of a representation, warranty or covenant made by them in this Agreement.
Notwithstanding anything in this Section 12.4 to the contrary, nothing herein
shall be construed so as to waive any of the Buyer's rights or remedies under
the antifraud provisions of applicable federal and state securities laws or with
respect to any fraud on the part of the Sellers.
13. RIGHT TO TERMINATE.
(a) Subject to paragraph (b) below, in the event that the Closing does not
occur on or before July 21, 1996 (the "Termination Date"), either party may
terminate this Agreement at any time after the close of business on the
Termination Date by delivering written notice to the other party hereto so long
as such failure to close is not a result of a breach by the terminating party of
any of its obligations hereunder.
(b) Notwithstanding anything to the contrary in this Agreement, if the
conditions set forth in Sections 6.9 and 7.7 hereto have not been satisfied by
July 21, 1996, the Termination Date shall automatically be extended to the
earlier of (i) five (5) days after the expiration, or early termination, of the
applicable waiting period under the HSR Act, or (ii) September 21, 1996. If
this Agreement is terminated prior to Closing after the Termination Date has
been so extended, the Standstill Period under Section 10 hereto shall
automatically be extended by the same number of days that the Termination Date
is extended beyond July 21, 1996.
(c) Pursuant to paragraph (a) above, in the event that the Buyer
terminates this Agreement because either (i) the condition precedent to the
Buyer's obligation to consummate the Closing contained in Section 6.4 hereof has
not been satisfied, or (ii) the Buyer shall have satisfied all of the conditions
precedent to the Sellers' obligation to consummate the Closing and the Sellers
shall have failed to satisfy any of the conditions precedent contained in
Section 6 hereof, then the Buyer shall be entitled to a refund of the entire
amount of the Deposit. In the event that this Agreement is terminated for any
reason other than as contemplated by the preceding sentence, the Sellers shall
be entitled to retain the
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entire amount of the Deposit and the Deposit shall be distributed to the Sellers
based on each Seller's Pro Rata Share.
14. GENERAL.
14.1. Expenses. All expenses of the preparation, execution and
consummation of this Agreement and of the transactions contemplated hereby,
including, without limitation, attorneys', accountants' and outside advisers'
fees and disbursements, shall be borne by (a) the Buyer if incurred for the
Buyer's account, including, without limitation, all fees and expenses of
Wasserstein Perella & Co. and Antares Partners or (b) the Sellers if incurred
for the account of the Company or the Sellers, including without limitation, all
fees and expenses of PaineWebber Incorporated.
14.2. Notices. All notices, demands and other communications hereunder
shall be in writing or by written telecommunication, and shall be deemed to have
been duly given if delivered personally or by overnight courier or if mailed by
certified mail, return receipt requested, postage prepaid, or sent by written
telecommunication, as follows:
If to the Sellers, to:
c/o BancBoston Ventures Inc.
100 Federal Street
Boston, MA 02110
Attention: Mark H. DeBlois
with a copy sent contemporaneously to:
Robert M. Wolf, Esq.
Bingham, Dana & Gould
150 Federal Street
Boston, Massachusetts 02110
If to the Buyer, to:
c/o Central Garden & Pet Company
3697 Mt. Diablo Boulevard
Lafayette, California
Attention: William E. Brown
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with a copy sent contemporaneously to:
John F. Seegal, Esq.
Orrick, Herrington & Sutcliffe
400 Sansome Street
San Francisco, California 94111
14.3. Entire Agreement. This Agreement contains the entire understanding
of the parties, supersedes all prior agreements and understandings relating to
the subject matter hereof and shall not be amended except by a written
instrument hereafter signed by all of the parties hereto.
14.4. Governing Law. The validity and construction of this Agreement
shall be governed by the internal laws (and not the choice-of-law rules) of the
Commonwealth of Massachusetts.
14.5. Sections and Section Headings. All enumerated subdivisions of this
Agreement are herein referred to as "Section" or "subsection." The headings of
Sections and subsections are for reference only and shall not limit or control
the meaning thereof.
14.6. Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns. Neither this Agreement nor the obligations of any party
hereunder shall be assignable or transferable by such party without the prior
written consent of the other parties hereto, except, upon the prior written
notice thereof to the Sellers, by the Buyer to one of its subsidiaries.
Notwithstanding the prior sentence, no such assignment or transfer by the Buyer
shall release the Buyer of its obligations hereunder.
14.7. Further Assurances. The Sellers and the Buyer shall execute and
deliver to all appropriate other parties such other instruments as may be
reasonably required in connection with the performance of this Agreement and
each shall take all such further actions as may be reasonably required to carry
out the transactions contemplated by this Agreement.
14.8. No Implied Rights or Remedies. Except as otherwise expressly
provided herein, nothing herein expressed or implied is intended or shall be
construed to confer upon or to give any person, firm or corporation, other than
the Sellers and the Buyer and their respective shareholders, any rights or
remedies under or by reason of this Agreement.
14.9. Knowledge. Whenever the phrase "to the knowledge of such Seller" or
another similar qualification is used herein, the relevant knowledge is limited
solely to the actual knowledge of such Seller, together with the knowledge of
Alexander A. Friend,
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Steven F. Skoler and BancBoston Ventures, Inc., without imputing to such Seller
any knowledge of any other Person, including the Company and any other Seller.
14.10. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.11. Satisfaction of Conditions Precedent. The Sellers and the Buyer
will each use their best efforts to cause the satisfaction of the conditions
precedent contained in this Agreement; provided, however, that nothing contained
in this Section 14.11 shall obligate any party hereto to waive any right or
condition under this Agreement.
14.12. Public Statements or Releases. Except as otherwise required by
applicable law, the parties hereto each agree that no party to this Agreement
will make, issue or release any public announcement, statement or acknowledgment
of the existence of, or reveal the status of, this Agreement, the transactions
contemplated hereby or any negotiations or discussions related thereto or
hereto, without first obtaining the prior consent of the other parties hereto.
Each of the parties hereto further agrees to provide written notice to the other
parties to this Agreement, immediately upon the knowledge thereof, of any
obligation under applicable law to make, issue or release any such public
announcement, statement or acknowledgment. IN WITNESS WHEREOF, and intending to
be legally bound hereby, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective duly authorized officers as of
the date and year first above written.
STOCKHOLDERS:
BANCBOSTON VENTURES INC.
By:_____________________________
Title:
CORAL REEF PARTNERS, L.P.
By:_____________________________
Title:
________________________________
Alexander A. Friend
24
<PAGE>
- -25-
________________________________
Steven F. Skoler
OPTIONHOLDERS:
________________________________
Alexander A. Friend
________________________________
Steven F. Skoler
________________________________
Thomas Maddux
________________________________
Greg Sullivan
________________________________
Fred DeTomasso
________________________________
Steve Misovic
WARRANTHOLDER:
GREYROCK CAPITAL GROUP, INC.
By:_____________________________
Title:
BUYER:
CENTRAL GARDEN & PET COMPANY
By:_____________________________
William E. Brown
Chairman and Chief Executive
Officer
25
<PAGE>
- -26-
COMPANY:
KENLIN PET SUPPLY, INC.
By:_____________________________
Title:
26
<PAGE>
- -27-
Schedule 1
OWNERSHIP
I. Stockholders
1. BancBoston Ventures Inc.
2. Alexander A. Friend
3. Steven F. Skoler
4. Coral Reef Partners, Inc.
II. Optionholders
1.
II. Warrantholders
1. Greylock Capital Group, Inc.
PRO RATA SHARE OF PURCHASE PRICE
Sellers
Number of
Shares
Percentage of
Ownership
Portion of
Purchase Price
27
<PAGE>
- -28-
BancBoston Ventures Inc.
Alexander A. Friend
Steven F. Skoler
Coral Reef Partners, L.P.
[optionholders]
[Greylock Capital Group, Inc.]
100%
28
<PAGE>
EXHIBIT 1.3
Kenlin Pet Supply, Inc.
Financial Statements
July 31, 1995
CONTENTS
Report of Independent Auditors............................. 1
Balance Sheets............................................. 2
Statements of Operations and Retained Earnings (Deficit)... 3
Statements of Cash Flows................................... 4
Notes to Financial Statements.............................. 5
<PAGE>
Report of Independent Auditors
Board of Directors
Kenlin Pet Supply, Inc.
We have audited the accompanying balance sheets of Kenlin Pet Supply, Inc. as of
July 31, 1995 and 1994 and the related statements of operations and retained
earnings (deficit) and cash flows for each of the two years in the period ended
July 31, 1995 and the period August 21, 1992 (commencement date of operations)
through July 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kenlin Pet Supply, Inc. at July
31, 1995 and 1994 and the results of its operations and its cash flows for each
of the two years in the period ended July 31, 1995 and the period August 21,
1992 (commencement date of operations) through July 31, 1993 in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Hackensack, New Jersey
September 22, 1995
1
<PAGE>
Kenlin Pet Supply, Inc.
Balance Sheets
<TABLE>
<CAPTION>
JULY 31 MARCH 30
1994 1995 1996
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 539,718 $ 41,681 $ 98,539
Accounts receivable, less allowances
of $133,044 in 1994 and $212,728 in 1995 3,247,337 3,952,587 5,069,213
Merchandise inventories 7,701,598 8,190,580 9,987,463
Miscellaneous receivables and other
current assets 501,649 529,718 544,185
Prepaid income taxes 92,300
Deferred taxes (Note 4) 163,100 203,900 203,900
----------- ----------- -----------
Total current assets 12,153,402 13,010,766 15,903,300
Other assets 66,508 80,131 83,630
Equipment, furniture, fixtures and
leasehold improvements, net of
accumulated depreciation of
$454,926 in 1994 and $764,454 in 1995 926,607 1,172,592 1,595,647
Intangibles and deferred financing
costs, net 1,206,044 775,847 1,032,789
Organization and start-up costs, net 430,793 289,905 242,286
Goodwill, net 2,860,195 2,785,041 2,967,003
----------- ----------- -----------
$17,643,549 $18,114,282 $21,824,655
=========== =========== ===========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and
long-term debt (Note 2) $ 1,721,812 $ 462,638
Accounts payable 1,175,488 2,053,728 $ 2,402,652
Accrued expenses and other current
liabilities 759,188 960,574 1,129,376
Income taxes payable 472,027 61,547 230,509
----------- ----------- -----------
Total current liabilities 4,128,515 3,538,487 3,762,537
Other liabilities:
Deferred taxes (Note 4) 24,600 400 400
Notes payable and long-term debt
(Note 2) 9,205,430 8,950,265 11,080,507
Redeemable preferred stock (Note 3):
Cumulative, redeemable preferred stock,
par value $1.00 per share, authorized
10,000 shares, issued and outstanding
2,867 shares for 1994 and
3,107 shares for 1995 2,866,849 3,106,849 3,227,505
Common stockholders' equity (Notes 3 and 5):
Class A voting common stock,
par value $.01 per share,
authorized 11,000 shares,
issued and outstanding 2,822 shares 28 28 28
Class B non-voting common stock,
par value $.01 per share,
authorized 11,000 shares,
issued and outstanding 4,000 shares 40 40 40
Class C voting common stock,
par value $.01 per share,
authorized 11,000 shares,
issued and outstanding 2,378 shares 24 24 24
Additional paid-in capital 873,059 873,059 873,059
Retained earnings 545,004 1,645,130 2,880,555
----------- ----------- -----------
Total common stockholders' equity 1,418,155 2,518,281 3,753,706
----------- ----------- -----------
$17,643,549 $18,114,282 $21,824,655
=========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
Kenlin Pet Supply, Inc.
Statements of Operations and Retained Earnings (Deficit)
<TABLE>
<CAPTION>
PERIOD EIGHT MONTHS ENDED
ENDED YEAR ENDED JULY 31 MARCH 30
JULY 31 -------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $44,716,387 $53,253,525 $62,979,341 $42,888,323 $48,748,181
Cost of goods sold 33,394,092 38,603,547 45,783,989 31,250,001 35,338,857
------------ ------------ ---------- ---------- ----------
Gross profit 11,322,295 14,649,978 17,195,352 11,638,322 13,409,324
Selling, general and
administrative expenses 9,163,816 11,214,833 13,133,341 8,845,294 9,973,112
------------ ------------ ---------- ---------- ----------
Income from operations 2,158,479 3,435,145 4,062,011 2,793,028 3,436,212
Amortization expense 965,474 907,902 646,239 441,759 396,640
Interest expense 1,225,230 1,130,709 1,134,921 771,561 726,486
Other income-net 41,095 31,026 19,275 (7,271) (15,643)
Income before income taxes 8,870 1,427,560 2,300,126 1,572,437 2,297,443
Provision for income taxes
(Note 4) 28,200 623,226 960,000 649,016 941,362
------------ ------------ ---------- ---------- ----------
Net income (loss) (19,330) 804,334 1,340,126 923,421 1,356,081
Dividends on redeemable
preferred stock (240,000) (240,000) 120,985 120,656
Retained earnings (deficit)
at beginning of year - (19,330) 545,004 545,004 1,645,130
------------ ------------ ---------- ---------- ----------
Retained earnings (deficit)
at end of year $ (19,330) $ 545,004 $1,645,130 $1,347,440 $2,880,555
============ ============ ========== ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
Kenlin Pet Supply, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD EIGHT MONTHS ENDED
ENDED YEAR ENDED JULY 31 MARCH 30
JULY 31 ------------------------------ ---------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ (19,330) $ 804,334 $ 1,340,126 $ 923,421 $ 1,356,081
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 1,166,384 1,177,364 999,933 683,092 725,675
Loss on disposal of assets 9,575 17,134
Provision for doubtful accounts 143,582 167,820 182,084 30,517 99,971
Deferred tax benefit (121,500) (17,000) (65,000)
Changes in operating assets
and liabilities:
Accounts receivable (279,076) (174,498) (887,334) (1,053,016) (1,125,784)
Inventories 2,100,224 63,557 (488,982) (646,513) (1,179,433)
Miscellaneous receivables and
other current assets 29,322 (117,126) (120,369) 135,180 77,833
Other assets (59,358) (7,150) (13,623) (3,499)
Accounts payable (378,538) 213,565 878,240 828,576 220,507
Organization and start-up costs (38,020)
Accrued expenses and other current
liabilities 260,650 354,909 (209,094) (17,257) 296,337
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities 2,813,915 2,482,909 1,615,981 884,000 467,688
INVESTING ACTIVITIES
Cash paid for acquired business (877,012)
Purchase of equipment, furniture,
fixtures and leasehold improvements (282,020) (365,767) (599,679) (460,633) (563,740)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (282,020) (365,767) (599,679) (460,633) (1,440,752)
FINANCING ACTIVITIES
Proceeds from (principal payments
on) notes payable and long-term debt (225,000) (1,590,550) (1,687,289) (1,480,777) 1,492,560
Net proceeds (repayments) on revolving
credit note payable (1,950,000) (646,950) 172,950 570,157 (462,638)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
financing activities (2,175,000) (2,237,500) (1,514,339) (910,620) 1,029,922
----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents 356,895 (120,358) (498,037) (487,253) 56,858
Cash and cash equivalents at beginning
of year 303,181 660,076 539,718 539,718 41,681
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 660,076 $ 539,718 $ 41,681 $ 52,465 $ 98,539
============ =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest $ 1,194,831 $ 1,130,710 $ 1,134,921 $ 771,561 $ 726,486
Federal and state income taxes 197,500 118,756 1,527,780 1,035,692 843,753
Non-cash investing and financing
activities:
Issuance of note payable for
acquired business 650,000
Liabilities assumed from acquired
business 128,417
</TABLE>
See accompanying notes.
4
<PAGE>
Kenlin Pet Supply, Inc.
Notes to Financial Statements
July 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
On August 21, 1992 (commencement of operations), Kenlin Acquisition Corporation
("Kenlin") purchased certain assets and assumed certain liabilities of Kenlin
Pet Supply, Inc. (the "Seller"). Prior to this transaction, Kenlin was
inactive. Also on this date, Kenlin changed its name to Kenlin Pet Supply, Inc.
(the "Company"). The transaction was accounted for as a purchase.
CONCENTRATION OF CREDIT RISK
The Company is engaged in the distribution of a broad line of pet supply
products, principally to retail outlets, in the Northeastern and Midatlantic
United States. No individual customer represents a significant percentage of
sales. The Company performs periodic credit evaluations of its customers and
requires certain customers to personally guarantee amounts due.
CASH EQUIVALENTS
Cash equivalents consist of highly-liquid investments with a maturity of three
months or less when purchased.
MERCHANDISE INVENTORIES
Inventories are stated at the lower of cost (average cost) or market.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
EQUIPMENT, FURNITURE, FIXTURES AND LEASEHOLD IMPROVEMENTS
Equipment, furniture, fixtures and leasehold improvements are stated at cost.
Depreciation is provided on the straight-line basis over estimated useful lives
of the related assets or the remaining term of the lease, which range from 3 to
10 years.
5
<PAGE>
Kenlin Pet Supply, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES AND DEFERRED FINANCING COSTS
Intangible assets include values assigned to a non-compete agreement
($1,500,000) and consulting services agreement ($750,000) with the controlling
shareholder of the Seller. The non-compete agreement is being amortized over a
period of five years and the consulting services agreement was amortized over a
2 year period. Accumulated amortization of the non-compete and consulting
services agreements at July 31, 1995 and 1994 was $1,632,740 and $1,315,480,
respectively. Goodwill, all of which resulted from the purchase transaction
described above is being amortized over 40 years. Accumulated amortization of
goodwill at July 31, 1995 and 1994 was $221,126 and $145,972, respectively.
Costs incurred in connection with long-term debt have been deferred and are
being amortized over the lives of the related debt issues using the interest
method. Accumulated amortization of deferred financing costs at July 31, 1995
and 1994 was $251,213 and $138,276, respectively.
ORGANIZATION AND START-UP COSTS
Costs associated with the organization of the corporation and other costs
incurred to complete the acquisition and start the business operations described
above are being amortized over 60 months. Accumulated amortization of these
costs at July 31, 1995 and 1994 was $414,536 and $273,648, respectively.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements as of March 30, 1996 and
for each of the eight month periods ended March 30, 1996 and 1995 include all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the Company's financial position and results of operations and
cash flows for the periods presented. All adjustments are of a normal recurring
nature. The results of the Company's operations for the eight months ended
March 30, 1996 are not necessarily indicative of the results of operations for a
full fiscal year.
6
<PAGE>
Kenlin Pet Supply, Inc.
Notes to Financial Statements (continued)
2. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31
1994 1995
----------- ----------
<S> <C> <C>
Revolving credit note payable $ 1,827,050 $2,000,000
Term note payable to bank, payable in
quarterly installments in increasing
amounts, including interest which has
accrued from the last monthly payment
of interest, through August 1998
(Tranche A Note) 2,184,450 462,638
Term note payable to bank, payable in
quarterly installments of $250,000
commencing November 30, 1997 through
August 31, 1998 and $375,000 through
August 31, 1999, including interest
which has accrued from the last
monthly payment of interest, through
August 1999 (Tranche B Note) 2,500,000 2,500,000
Subordinated note payable to Seller,
payable on August 31, 2002, with
interest payable in quarterly
installments commencing November 30,
1992 at 10%, through August 2002 4,415,742 4,415,742
Capital lease obligation 34,523
----------- ----------
10,927,242 9,412,903
Less current portion 1,721,812 462,638
----------- ----------
Total long-term debt $ 9,205,430 $8,950,265
=========== ==========
</TABLE>
The revolving credit note payable represents the amount outstanding under a $6
million revolving credit note with a bank due the earlier of August 21, 1999 or
the date on which the two term loans are paid in full. Any unused portion of
the revolving credit facility is subject to a .5% commitment fee. Borrowings
under the revolving credit note are based on a specific borrowing formula based
on eligible assets. The outstanding balance under the revolving credit note has
been excluded from current liabilities because the Company intends that at least
that amount would remain outstanding under this agreement for an uninterrupted
period extending beyond one year from the balance sheet date. The revolving
credit note payable and two term loans ("senior loans") bear interest, payable
monthly, based upon a rate option selected by the Company and adjusted based
upon the
7
<PAGE>
Kenlin Pet Supply, Inc.
Notes to Financial Statements (continued)
2. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
terms of each note. The rates in effect at July 31, 1995 are 10.38%, 10.63%,
and 13.13%, respectively (8.78%, 9.04% and 11.54%, respectively, at July 31,
1994). The senior loans are collateralized by substantially all assets of the
Company. Among other things, the senior loans restrict the Company's ability to
incur additional indebtedness and require the Company to maintain certain
financial ratios. In addition, the repayment terms of the senior loans call for
accelerated payments based upon "excess cash flow" (as defined). At July 31,
1995, $217,970 has been classified as a current liability based on 1995 excess
cash flows.
In accordance with the terms of the senior loans, the Company had an interest
rate cap agreement for a notional principal amount of $5 million, which provided
for a maximum increase of 2.72% over the rate in effect at the date of the
agreement for a period of thirty months. This agreement expired in April 1995
The subordinated note payable is subject to a mandatory prepayment schedule at
such time that all senior loans have been paid in full ("senior loan payment
date"). The prepayment schedule provides that 20% of the principal be paid on
the first through fifth anniversary date of such payment date.
As of July 31, 1995, maturities of bank loans and notes payable over the next
five fiscal years are as follows:
<TABLE>
<S> <C>
1996 $ 462,638
1997 --
1998 750,000
1999 1,375,000
2000 2,375,000
Thereafter 4,450,265
</TABLE>
3. CUMULATIVE REDEEMABLE PREFERRED STOCK
The cumulative, redeemable preferred stock is non-voting and has a minimum
liquidating preference of $1,000 per share and is subject to redemption by the
Company on the earlier of August 21, 1999 or the date of a redemption event, as
defined in the Certificate of Incorporation. Dividends are fixed at $240,000
per year and are on a paid-in-kind basis.
8
<PAGE>
Kenlin Pet Supply, Inc.
Notes to Financial Statements (continued)
4. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
PERIOD
ENDED
JULY 31 YEAR ENDED JULY 31
1993 1994 1995
--------- ------------------------------
<S> <C> <C> <C>
Current:
Federal $ 112,800 $480,000 $ 787,000
State 36,900 160,226 238,000
--------- -------- -----------
149,700 640,226 1,025,000
Deferred:
Federal (94,300) (13,000) (52,000)
State (27,200) (4,000) (13,000)
--------- -------- ----------
(121,500) (17,000) (65,000)
--------- -------- ----------
$ 28,200 $623,226 $ 960,000
========= ======== ==========
</TABLE>
The Company's income tax provisions differ from the statutory rate principally
due to state income taxes and the nondeductibility of goodwill amortization for
tax purposes.
The components of the Company's current and long-term deferred tax accounts
consisted of the following:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------- ---------- --------
<S> <C> <C> <C>
JULY 31, 1994
Deferred tax assets:
Bonus accrual $ 19,100 $ 19,100
Accounts receivable allowance 58,000 58,000
Capitalized inventory costs 112,000 112,000
-------- --------
Total deferred tax assets 189,100 189,100
Deferred tax liabilities:
Tax over book depreciation $ 24,600 24,600
Prepaid expenses 15,400 15,400
State taxes 10,600 10,600
-------- -------- --------
Total deferred tax liabilities 26,000 24,600 50,600
-------- -------- --------
Net deferred tax assets $163,100 $(24,600) $138,500
======== ======== ========
</TABLE>
9
<PAGE>
Kenlin Pet Supply, Inc.
Notes to Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------- --------- --------
<S> <C> <C> <C>
JULY 31, 1995
Deferred tax assets:
Book over tax amortization $33,700 $ 33,700
Bonus accrual $ 27,100 27,100
Accounts receivable allowance 94,200 94,200
Capitalized inventory costs 124,800 124,800
-------- ------- --------
Total deferred tax assets 246,100 33,700 279,800
Deferred tax liabilities:
Tax over book depreciation 34,100 34,100
Prepaid expenses 27,200 27,200
State taxes 15,000 15,000
-------- ------- --------
Total deferred tax liabilities 42,200 34,100 76,300
-------- ------- --------
Net deferred tax assets (liabilities) $203,900 $ (400) $203,500
======== ======= ========
</TABLE>
No valuation allowance on deferred tax assets was considered necessary at either
July 31, 1995 or 1994.
5. COMMON STOCKHOLDERS' EQUITY
The Class A and Class C common stock are convertible into an equal number of
shares of Class B common stock, and Class B common stock is convertible into an
equal number of shares of Class A common stock. All shares of Class C common
stock are subject to automatic conversion into an equal number of Class A common
stock upon closing of the first underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933 in an amount
not less than $20 million in gross proceeds.
In consideration for making the Tranche B Note, the Company has issued to the
bank Warrants to purchase up to 800 additional shares (plus additional "anti-
dilution" shares) of the Company's Class A common stock. The Warrants are
exercisable at $.01 per share, subject to adjustment under the terms of the
Warrant. The Warrants are subject to mandatory redemption at the option of the
holder at the earliest of August 21, 1997 or the occurrence of certain events
which effectively repay the senior loans and revolving loan. Redemption at the
option of the Company can also occur during certain periods as specified in the
Warrant. The mandatory and optional redemptions will be at per share values
defined in the Warrant and are based upon fair market value. The Warrant
expires on August 21, 2002.
10
<PAGE>
Kenlin Pet Supply, Inc.
Notes to Financial Statements (continued)
5. COMMON STOCKHOLDERS' EQUITY (CONTINUED)
The Company has entered into option agreements with two key employee
stockholders which entitle them each to purchase Class A common stock in an
amount up to 2% (plus additional "anti-dilution" shares) of total common stock
on a fully diluted basis. These options become exercisable based upon a
financial calculation at a price equal to $.10 per share. The options terminate
at the earlier of August 21, 2012 or a terminating event, as defined.
At July 31, 1995, 7,779 shares of unissued Class A common stock of the Company
were reserved for issuance in accordance with the terms of the convertible
securities, the stock option agreements, and the Warrants and 7,000 shares of
the Class B common stock were reserved for issuance under the terms of the
convertible securities.
The Class B and Class C common stock are subject to put by the stockholder on or
after August 22, 1997 and call by the Company on or after August 22, 1998, each
at a price per share equal to the greater of the fair market value at the date
of put or call or an amount calculated based upon certain financial information
as defined in the Securities Purchase Agreement. The Agreement terminates on
the date there are no longer any preferred or common shares outstanding.
Under certain circumstances, Class C common stock has special voting rights as
compared to Class A common stock. In addition, the Company is party to a
Registration Rights Agreement which provides certain shares with rights to
request registration of their shares under the Securities Act of 1933 at any
time after August 21, 1997.
6. STOCK COMPENSATION PLAN
In August 1992, the Company established a Stock Compensation Plan under which
shares of common stock may be issued and options may be granted at the
discretion of the Board of Directors to employees, directors, officers,
consultants and advisors. In November 1993 an option to purchase up to 101
shares of the Company's Class A common stock for $.10 per share was granted to
an employee. The option vests in November 1995. The compensation element
related to this grant was not material.
11
<PAGE>
Kenlin Pet Supply, Inc.
Notes to Financial Statements (continued)
7. EMPLOYEE BENEFIT PLAN
During 1993, the Company established an employee profit sharing plan covering
substantially all employees. The Company at its discretion contributes to the
plan an amount determined by the Board of Directors. The Company has accrued
$62,500, $52,500 and $50,500 for the years ended July 31, 1995 and 1994 and the
period ended July 31, 1993, respectively.
8. COMMITMENTS
The Company leases its principal warehouse and administrative facility under a
five year non-cancellable operating lease with a 5 year renewal option. Rental
expense under this operating lease was approximately $795,000, $714,000 and
$714,000 for the years ended July 31, 1995 and 1994 and the period ended July
31, 1993, respectively.
Approximate minimum future lease payments for noncancellable operating leases
with terms in excess of one year for each fiscal year are as follows:
1996 $924,000
1997 972,000
1998 51,000
The Company has entered into 5 year employment agreements with two key employee
stockholders. Each agreement provides for an annual base salary plus an annual
incentive bonus. The agreements expire on July 31, 1997.
9. EVENTS SUBSEQUENT TO AUDITED FINANCIAL STATEMENTS
On November 9, 1995, the Company acquired certain assets and assumed certain
liabilities of Specter Wholesale Supply, Inc., a company engaged in the
distribution of pet supplies. The aggregate purchase price was approximately
$1,200,000. The transaction was accounted for under the purchase method of
accounting. In addition, the Company entered into a ten year non-competition
agreement with the former owners for $500,000.
On June 18, 1996 the shareholders of the Company entered into an agreement with
Central Garden and Pet Company to sell all of the outstanding common stock of
the Company to Central Garden and Pet Company.
12
<PAGE>
EXHIBIT 1.5
PRO FORMA CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The Company's acquisition of Kenlin ("Acquisition") will be accounted
for under the "purchase" method of accounting which requires the purchase price
to be allocated to the acquired assets and liabilities of Kenlin on the basis of
their estimated fair values as of the date of acquisition. The following pro
forma combined condensed balance sheet gives effect to the Acquisition of Kenlin
as if it occurred on March 30, 1996 and the pro forma combined condensed
statements of income give effect to the Acquisition as if it occurred on
December 26, 1994 and include adjustments directly attributable to the
Acquisition and expected to have a continuing impact on the combined company
(collectively, the "Pro Forma Financial Information"). As the Pro Forma
Financial Information has been prepared based on preliminary estimates of fair
values, amounts actually recorded may change upon determination of the total
purchase price and additional analysis of individual assets and liabilities
assumed.
The Pro Forma Financial Information and related notes are provided for
informational purposes only and are not necessarily indicative of the
consolidated financial position or results of operations of the Company as they
may be in the future or as they might have been had the Acquisition been
effected on the assumed dates. The Pro Forma Financial Information should be
read in conjunction with the historical consolidated financial statements of the
Company, and the related notes thereto, which are included in the Company's
Annual Report on Form 10-K for the nine-month period ended September 30, 1995,
and the historical financial statements of Kenlin, and the related notes
thereto, presented elsewhere in this Current Report on Form 8-K. See Exhibit 1.3
attached hereto.
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- --------------------------
Central Garden Kenlin Adjustments Combined
----------------------- --------------------------
<S> <C> <C> <C> <C>
Net sales.................... $373,734 $46,957 $420,691
Costs of goods sold and
occupancy.................. 316,832 34,075 $1,976 (a) 352,883
----------------------- --------------------------
Gross profit................. 56,902 12,882 (1,976) 67,808
Selling, general and
administrative expenses.... 48,075 10,426 (2,088)(a),(b) 56,413
----------------------- --------------------------
Income from operations....... 8,827 2,456 112 11,395
Interest and other expenses.. 6,844 817 1,637 (c) 9,298
----------------------- --------------------------
Income before income taxes... 1,983 1,639 (1,525) 2,097
Income taxes................. 904 688 (561)(d) 1,031
----------------------- --------------------------
Net income................... $1,079 $951 ($964) $1,066
======================= ==========================
Net income per share......... $0.18 $0.18
======== ======
Weighted average common
and common equivalent
shares outstanding......... 5,943 5,943
</TABLE>
Notes to Unaudited Pro Form Combined Condensed Statement of Income
- ------------------------------------------------------------------
The following adjustments represent those necessary to show how the purchase
might have affected the historical consolidated financial statements had it been
consummated at December 26, 1994.
a. Represents the reclassification of certain costs to conform with Central
Garden's policy.
b. Reflects an adjustment to goodwill amortization totaling $56,000 for the
excess of amortization recognized by Kenlin on a historical basis over the
goodwill resulting from the Kenlin acquisition. Goodwill is amortized on a
straight-line basis over forty years.
c. Represents interest expense on borrowings under the Company's line of
credit incurred in conjunction with the Acquisition and on estimated
average borrowings during the nine months. Interest expense was computed
at 9.61% (based on the prime rate plus 3/4% per annum).
d. Adjusts the historical provision for income taxes to give effect to the pro
forma adjustments discussed in a., b. and c. above.
2
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE SIX MONTH PERIOD ENDED MARCH 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- -------------------------
Central Garden Kenlin Adjustments Combined
------------------------- -------------------------
<S> <C> <C> <C> <C>
Net sales.................... $260,132 $37,826 $297,958
Costs of goods sold and
occupancy.................. 227,006 27,398 $1,575 (a) 255,979
------------------------- -------------------------
Gross profit................. 33,126 10,428 (1,575) 41,979
Selling, general and
administrative expenses.... 29,783 7,938 (1,617)(a),(b) 36,104
------------------------- -------------------------
Income from operations....... 3,343 2,490 42 5,875
Interest and other expenses.. 2,591 589 994(c) 4,174
------------------------- -------------------------
Income before income taxes... 752 1,901 (952) 1,701
Income taxes................. 324 778 (296)(d) 806
------------------------- -------------------------
Net income................... $428 $1,123 ($656) $895
========================= =========================
Net income per share......... $0.04 $0.09
========== =====
Weighted average common
and common equivalent
shares outstanding......... 10,381 10,381
</TABLE>
Notes to Unaudited Pro Form Combined Condensed Statement of Income
- ------------------------------------------------------------------
The following adjustments represent those necessary to show how the purchase
might have affected the historical consolidated financial statements had it been
consummated at December 26, 1994.
a. Represents the reclassification of certain costs to conform with Central
Garden's policy.
b. Reflects an adjustment to goodwill amortization totaling $53,000 for the
excess of amortization recognized by Kenlin on a historical basis over the
goodwill resulting from the Kenlin acquisition. Goodwill is amortized on a
straight-line basis over forty years.
c. Represents interest expense on borrowings under the Company's line of
credit incurred in conjunction with the Acquisition and on estimated
average borrowings during the six months. Interest expense was computed at
9.15% (based on the prime rate plus 3/4% per annum).
d. Adjusts the historical provision for income taxes to give effect to the pro
forma adjustments discussed in a., b. and c. above.
3
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
March 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ---------------------------
Central Garden Kenlin Adjustments Combined
------------------------- ---------------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash................... $139 $99 $238
Inventories............ 110,151 9,987 $(63)(a) 120,075
Other current assets... 95,978 5,817 1,011 (b) 102,806
Land, buildings,
improvements and
equipment-net........ 9,833 1,596 11,429
Other assets........... 13,675 4,325 15,180 (c),(d) 33,180
------------------------- ---------------------------
Total $229,776 $21,824 $16,128 $267,728
========================= ===========================
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities.... $144,730 $ 3,763 $34,189 (e),(f) $182,682
Long-term debt......... 8,635 11,080 (11,080)(g) 8,635
Deferred items......... 1,836 0 1,836
Shareholders' equity... 74,575 6,981 (6,981)(h) 74,575
------------------------- ---------------------------
Total.................. $229,776 $21,824 $16,128 $267,728
========================= ===========================
</TABLE>
Notes to Unaudited Pro Form Combined Condensed Balance Sheet
- ------------------------------------------------------------
The following adjustments represent those necessary to allocate the purchase
price paid to acquire Kenlin, had the acquisition been consummated at March 30,
1996.
a. Includes adjustments of (i) $375,000 to reduce inventories to approximate
fair value as determined by the Company based on its analysis of the
individual inventory items, and (ii) $312,000 to capitalize additional
costs into inventory to conform with the Company's capitalization policy.
b. Represents the deferred tax impact of (i) certain pro forma adjustments for
reserves and accruals which are not deductible for tax purposes until
future periods, and (ii) tax basis in excess of the Company's book basis of
acquired intangibles.
c. Represents the $19,421,000 excess of purchase price over the fair value of
net assets acquired.
d. Eliminates Kenlin's previously recorded intangible assets of $4,241,000.
e. Consists of an accrual of $1,189,000 for estimated expenses incurred which
are directly related to the Acquisition.
f. Includes borrowings of $33,000,000 incurred in connection with the
Acquisition of Kenlin.
g. Reflects the repayment of Kenlin's long-term debt.
h. Reflects the elimination of Kenlin's shareholders' equity due to the
Acquisition.
4
<PAGE>
EXHIBIT 1.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated September 22, 1995, with respect to
the financial statements of Kenlin Pet Supply, Inc. incorporated by reference
into the Registration Statement (Form S-4 dated June 5, 1996) and related
Prospectus of Central Garden & Pet Supply Company for the registration of
750,000 shares of its common stock and included in its Current Report on Form
8-K dated June 18, 1996, both filed with the Securities and Exchange Commission.
Ernst & Young LLP
Hackensack, New Jersey
June 27, 1996
