<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CENTRAL GARDEN & PET COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 5199 68-0275553
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
---------------
3697 MT. DIABLO BOULEVARD, LAFAYETTE, CALIFORNIA 94549 (510) 283-4573
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
WILLIAM E. BROWN
CENTRAL GARDEN & PET COMPANY
3697 MT. DIABLO BOULEVARD
LAFAYETTE, CALIFORNIA 94549
(510) 283-4573
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
JOHN F. SEEGAL THOMAS A. BEVILACQUA
BRETT E. COOPER BROBECK, PHLEGER & HARRISON LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP TWO EMBARCADERO PLACE
OLD FEDERAL RESERVE BANK BUILDING 2200 GENG ROAD
400 SANSOME STREET PALO ALTO, CALIFORNIA 94303
SAN FRANCISCO, CALIFORNIA 94111
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE
OF SECURITIES TO BE PRICE PER OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 5,750,000 $23.44 $134,780,000 $40,843
</TABLE>
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(1) Includes 750,000 shares of Common Stock subject to an over-allotment
option granted to the Underwriters.
(2) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee based on the average of the high and low
prices of the Registrant's Common Stock as reported on the Nasdaq National
Market on July 9, 1997.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JULY 14, 1997
5,000,000 Shares
LOGO
Common Stock
--------
Of the 5,000,000 shares of Common Stock offered hereby, 4,790,000 shares are
being offered by Central Garden & Pet Company (the "Company") and 210,000
shares are being offered by certain stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders. See "Selling Stockholders." The Company's
Common Stock is traded on the Nasdaq National Market under the symbol "CENT."
On July 11, 1997, the last reported sale price of the Common Stock as reported
on the Nasdaq National Market was $23.75 per share. See "Price Range of Common
Stock."
The Common Stock has one vote per share, whereas the Company's Class B Stock
has the lesser of ten votes per share or 49% of the total votes cast. After
giving effect to the offering (the "Offering"), the holders of the Class B
Stock will have 47.4% of the combined voting power for the election of
directors and all other matters subject to stockholder vote. See "Description
of Capital Stock."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total(3)........................ $ $ $ $
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</TABLE>
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $400,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
Alex. Brown & Sons
INCORPORATED
Hambrecht & Quist
Merrill Lynch & Co.
Wasserstein Perella Securities, Inc.
--------
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[LOGO OF CENTRAL GARDEN & PET AND
MAP OF CONTINENTAL UNITED STATES DEPICITNG OPERATING LOCATIONS OF
CENTRAL GARDEN & PET AND ITS AFFILIATES]
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH THE RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised. Prospective investors should carefully consider the
matters set forth under the caption "Risk Factors." As used in this Prospectus,
"fiscal 1995" refers to the nine month period ended September 30, 1995, "fiscal
1996" refers to the fiscal year ending September 28, 1996 and "fiscal 1997"
refers to the fiscal year ending September 27, 1997.
THE COMPANY
Central Garden & Pet Company is the leading national distributor of lawn and
garden and pet supply products as well as a major distributor of pool supplies.
The Company also offers a broadening array of proprietary branded lawn and
garden and pet supply products, including FourPaws(R), Zodiac(R) and
Grant's(R). As a result of both acquisitions and internal expansion, the
Company has grown rapidly from sales of approximately $25 million in 1987 to
approximately $620 million in fiscal 1996 and increased the number of Company
distribution and manufacturing centers from one in 1987 to 48 currently. Since
1988, the Company has completed 26 acquisitions, including four acquisitions,
to date, in 1997, making it the leader in the consolidation of distribution
channels for the lawn and garden and pet supplies industries. In fiscal 1996,
lawn and garden products accounted for approximately 76% of the Company's net
sales, pet supplies accounted for approximately 19% and pool supplies accounted
for approximately 5%. According to industry sources, lawn and garden retail
sales exceeded $20 billion in 1996.
With 48 distribution and manufacturing centers servicing most regions of the
United States, the Company offers major retailers the opportunity to satisfy
their distribution requirements through a single source of supply. Similarly,
the Company provides manufacturers access to major retailers on a national
basis through one primary distributor. By focusing on the emergence of high-
volume retailers and their needs, the Company has become the principal provider
of lawn and garden products to a variety of major retailers including Wal*Mart,
Home Depot, Target and Costco as well as to numerous other retailers.
The Company's business strategy is to capitalize on its national presence,
comprehensive product selection, menu of value-added services and efficient
operations. Utilizing these capabilities, the Company strives to develop and
enhance servicing relationships with both large national and regional retailers
as well as manufacturers. Customers may select a customized array of services
from a broad menu of the Company's value-added services, which are designed to
increase the sales and profitability of both retailers and manufacturers. The
Company's services extend beyond the scope of traditional distribution
functions of order taking, shipping and billing, and include merchandising,
training and developing sales programs. The Company believes that its focus,
experience and leading industry position enable it to provide these services
efficiently, particularly in product categories which have a high number of
SKUs and require continuous inventory management and merchandising.
The Company distributes a wide selection of products consisting of
approximately 45,000 SKUs from approximately 1,000 manufacturers. The Company
generally focuses on providing those brand name products that are suited to
distribution due to their seasonality, variable sales movements, complexity to
consumers and retailers and handling and transportation difficulties, and which
therefore generally require value-added services. Selected brand name lawn and
garden products sold by the Company include Ortho, Round-Up, Miracle-Gro and
HTH. In addition, the Company focuses on serving specialty pet supply retailers
which sell a wide variety of pet supplies.
The Company also has expanded its offerings of proprietary branded products
by acquiring complementary branded product lines or companies. The Company
seeks to acquire branded products
3
<PAGE>
which it believes would benefit from access to the Company's distribution
system and expertise. The Company believes its proprietary branded products
typically have higher margins than the other products it currently distributes.
The Company entered into an agreement effective October 1, 1995 with The
Solaris Group, a strategic business unit of Monsanto ("Solaris"), the
manufacturer of Ortho, Round-Up and Green Sweep lawn and garden products, to
become the master agent and master distributor for Solaris products nationwide.
This agreement has led to an increase in the Company's sales of Solaris
products, which had been adversely impacted by Solaris' increased direct sales
to retailers in recent years. Under the agreement, which has an initial four-
year term, the Company provides a wide range of value-added services in
connection with sales of Solaris products, including logistics, order
processing and fulfillment, inventory distribution and merchandising.
The Company has developed a multi-faceted growth strategy designed to
increase its position as the leading distributor of lawn and garden products
and to continue to consolidate the fragmented pet supply industry. The Company
intends to further expand in these markets by (i) continuing to make strategic
acquisitions, (ii) obtaining new customers and increasing sales to existing
customers, (iii) adding new product lines or expanding existing product lines
that are currently distributed by the Company and (iv) expanding its offerings
of proprietary branded products that are complementary to the products it
currently distributes.
RECENT DEVELOPMENTS
As part of its growth strategy to make strategic acquisitions of lawn and
garden product and pet supplies distributors and expand its offerings of
proprietary branded products, the Company has made the following acquisitions
in 1997:
Proprietary Branded Products
. On May 23, 1997, the Company acquired the United States and Canada flea
and tick protection business of Sandoz Agro, Inc. ("Sandoz") (the
"Sandoz Flea and Tick Acquisition"). The acquisition includes all
methoprene-based products produced by Sandoz for use in the United
States and Canada, including on-animal sprays, shampoos and powders,
collars, indoor foggers, aerosols, concentrates and pump-sprays, and
certain other specialty products. The acquisition includes ownership in
the United States and Canada of the Zodiac(R) and Vet-Kem(R) trademarks
as well as those for Ovitrol(R), Siphotrol(R), Fleatrol(TM), vIGRen(R),
Petcor(R), Precor(R) and Natural Signature(R).
. On January 20, 1997, the Company acquired Four Paws Products, Ltd., Inc.
("Four Paws"), a manufacturer of branded pet supply products. Four Paws
is one of the largest manufacturers of dog, cat, reptile and small
animal products in the United States, under brand names which include
Magic Coat(R) and Four Paws(R). Four Paws products are distributed
throughout the United States, Canada, Europe and Asia.
Lawn and Garden Product Distribution
. On May 5, 1997, the Company acquired Ezell Nursery Supply, Inc.
("Ezell"), a distributor of lawn and garden, barbecue and patio products
based in Southern California.
. On March 4, 1997, the Company acquired an equity interest in Commerce
LLC, the leading East coast distributor of lawn and garden products,
with a five year option to purchase the entire company.
4
<PAGE>
Pet Supplies Distribution
. On February 21, 1997, the Company acquired the pet supply business of
Country Pet Supply, a distributor of pet supply and pet food products in
the Southeastern United States.
In addition, on February 12, 1997, the Company entered into an agreement
relating to joint development, marketing and distribution with Hoechst Roussel
Vet ("HR Vet"). The agreement provides HR Vet with exclusive United States and
Canada sales and marketing rights for the Vet-Kem line of methoprene-based flea
and tick products sold directly and exclusively through veterinarians, and
acquired by the Company in the Sandoz Flea and Tick Acquisition. In addition,
the Company received consumer marketing rights to certain HR Vet products.
THE OFFERING
Common Stock offered by the Company..... 4,790,000 shares
Common Stock offered by the Selling 210,000 shares
Stockholders............................
Shares to be outstanding after the
Offering:
Common Stock.......................... 18,323,182 shares(1)
Class B Stock......................... 1,663,167 shares
Total............................... 19,986,349 shares(1)
Use of Proceeds......................... Repayment of certain indebtedness and
to finance future acquisitions.
Nasdaq National Market symbol........... CENT
- --------
(1) Based upon 13,333,182 shares of Common Stock and 1,863,167 shares of Class
B Stock outstanding as of June 30, 1997. Excludes 1,458,560 shares of
Common Stock issuable upon exercise of stock options outstanding as of June
28, 1997. Also excludes 1,672,733 shares of Common Stock reserved for
future issuance under the Company's 1993 Omnibus Equity Incentive Plan,
Employee Stock Purchase Plan, Nonemployee Director Stock Option Plan and
registration statements on Form S-4 for future acquisitions. Also excludes
4,107,143 shares of Common Stock issuable upon the conversion of the
Company's 6% Convertible Subordinated Notes due 2003 and 100,000 shares of
Common Stock issuable upon the conversion of 100 shares of Series A
Preferred Stock. See "Business--The Solaris Agreement."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTH
PERIOD FISCAL YEAR
FISCAL YEAR ENDED(1) ENDED(1) ENDED(1) SIX MONTHS ENDED
-------------------------------------- ------------- ------------- -------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
1992 1993 1994(2) 1995(2) 1996 1996 1997
------------ ------------ ------------ ------------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $321,707 $334,682 $421,427 $373,734 $619,622 $260,132 $336,485
Gross profit............ 50,657 55,936 67,331 56,902 84,433 33,126 51,170
Income from operations.. 8,708 11,234 8,842 8,827 17,488 3,204 8,326
Net income ............. 2,133 3,994 1,405 1,079 8,448 428 3,231
Net income per common
and common equivalent
share(3)(4)
Primary................ $ 0.83 $ 0.24 $ 0.18 $ 0.72 $ 0.04 $ 0.21
Fully diluted.......... 0.18 0.71 0.04 0.21(5)
Weighted average shares
outstanding(3)(4)
Primary................ 4,789 5,947 5,943 11,702 10,381 15,200
Fully diluted.......... 6,050 11,904 10,441 15,284(5)
OPERATING DATA:
Distribution and
manufacturing centers
at period end.......... 25 30 39 38 41 37 46
</TABLE>
<TABLE>
<CAPTION>
MARCH 29, 1997
------------------------------
ACTUAL AS ADJUSTED(6)
-------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $159,527 $267,201
Total assets..................................... 523,756 630,370
Short-term borrowings............................ 1,060 --
Long-term borrowings............................. 117,025(5) 117,025
Shareholders' equity............................. 143,425 251,099
</TABLE>
- --------
(1) In 1992, the Company adopted a 52/53 week fiscal year ending on the last
Sunday in December. In 1995, the Company changed its fiscal year end to the
last Saturday in September. Accordingly, the fiscal year ended September
30, 1995 was a nine month period.
(2) Results for 1994 and 1995 reflect the effect of increased direct sales by
the Company's major supplier (Solaris) and other factors. The Company
entered into an agreement effective October 1, 1995 with Solaris to become
the master agent and master distributor for Solaris products nationwide.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(3) During 1992, the Company was reorganized (see Note 2 of Notes to the
Consolidated Financial Statements). As a result, net income per common and
common equivalent share and weighted average shares outstanding are not
presented for fiscal year 1992 because such information would not be
comparable with the post-reorganization periods.
(4) In November 1995, the Company sold 5,750,000 shares of its Common Stock at
a public offering price of $6.75 per share. Net proceeds were used to
reduce borrowings under the Company's principal line of credit. In July
1996, the Company sold 2,752,500 shares of its Common Stock at a public
offering price of $18.00. Net proceeds were used, in part, to repay the $33
million borrowed in connection with the Kenlin Pet Supply, Inc. ("Kenlin")
acquisition.
(5) In November 1996, the Company issued $115,000,000 of 6% Convertible
Subordinated Notes due 2003. Net income per common and common equivalent
share, fully diluted and weighted average shares outstanding, fully diluted
for the six months ended March 29, 1997 do not reflect the assumed
conversion of the 6% Convertible Subordinated Notes as the impact was
antidilutive for the period.
(6) Adjusted to reflect the sale of the 4,790,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $23.75
per share and the application of the estimated net proceeds therefrom as
described in "Use of Proceeds."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus. The statements contained in
or incorporated into this Prospectus which are not historical facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. Factors that could cause or contribute
to such differences include those discussed below, as well as those discussed
elsewhere in this Prospectus.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act")
regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, results of operations
and financial position. Prospective investors are cautioned that any forward-
looking statements are not guarantees of future performance and are subject to
risks and uncertainties and that actual results may differ materially from
those included within the forward-looking statements as a result of various
factors. Factors that could cause or contribute to such differences include,
but are not limited to, those described below, under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.
Supplier Concentration; Dependence on Solaris. While the Company purchases
products from over 1,000 different manufacturers and suppliers, the Company
believes that over 59% of the Company's net sales in fiscal 1996 were derived
from products purchased from the Company's five largest suppliers. The Company
believes that approximately 29% of the Company's net sales during fiscal 1995
and 44% of the Company's net sales during fiscal 1996 were derived from sales
of products purchased from Solaris, the Company's largest supplier. Starting
in 1991, Solaris' predecessors began to sell directly to retailers. These
direct sales programs were expanded in 1994 and had a material adverse effect
on the Company's results of operations during 1994 and fiscal 1995. Because of
the dependence of the Company on sales of Solaris products, future changes
implemented by Solaris to its marketing and sales programs or any overall
decrease in the sales of Solaris products could have a material adverse effect
on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company entered into a four-year agreement with Solaris (the "Solaris
Agreement") effective October 1, 1995 which the Company believes has added
stability to its relationship with Solaris. As a result of the Solaris
Agreement, the Company's sales of Solaris products during fiscal 1996 have
increased substantially compared with fiscal 1995 and the Company's dependence
on Solaris is even greater than before the Solaris Agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview." The loss of, or a significant adverse change in, the
relationship between the Company and Solaris or any other key manufacturer or
supplier could have a material adverse impact on the Company's business and
financial results. In addition, during the peak selling season, there may be
unanticipated shortages of certain high demand products. Although historically
the Company has purchased enough inventory of such products or their
substitutes to satisfy retailer demand, the unanticipated failure of any
manufacturer or supplier to meet the Company's requirements or the Company's
inability to obtain substitutes could have a material adverse effect on the
Company. Although the Company has entered into long-term agreements with
certain suppliers, including Solaris, in many cases the Company operates
without written agreements with its suppliers. Accordingly, although the
Company believes it has good relationships with its suppliers, there is a risk
that one or more of its suppliers may at any time terminate its supply
relationship with the Company.
7
<PAGE>
The Solaris Agreement. The Company believes that a significant portion of
its net sales and operating income since October 1995 has been attributable to
its relationship with Solaris. Under the Solaris Agreement, Solaris is
obligated to reimburse the Company for costs incurred in connection with
services provided by the Company to Solaris' direct sale accounts. In
addition, the Company receives payments based on the level of sales of Solaris
products to these accounts, and these payments are subject to increase based
on the growth of sales of Solaris products. The Company also shares with
Solaris in the economic benefits of certain cost reductions, to the extent
achieved. It is possible that disagreements could arise between Solaris and
the Company as to measurement of the costs incurred in servicing Solaris'
direct sales accounts. The cost reimbursement arrangement is based on certain
estimates which are subject to reconciliation at the end of each fiscal year.
As a result, the Solaris Agreement could contribute to variability in the
Company's operating results. The relationship with Solaris embodied in the
Solaris Agreement does not assure that the Company will be profitable overall.
As a result of the Solaris Agreement, a majority of the Company's sales of
Solaris products are currently derived from servicing direct sales accounts,
whereas in 1994 and fiscal 1995, a majority of the Company's sales of Solaris
products were made by the Company as a traditional distributor. The Company
acts as the master agent on direct sales of Solaris products to certain major
retailers and the master distributor in connection with sales of Solaris
products to other distributors and retailers. Solaris negotiates its sales
prices directly with its direct sales accounts. The Solaris Agreement contains
provisions which, without the consent of Solaris, could limit the Company's
ability to distribute certain lawn and garden products manufactured by
suppliers other than Solaris. These provisions could result in lower sales of
non-Solaris products, which could have an adverse effect on the Company's
business. The Solaris Agreement does not expire until September 30, 1999.
However, Solaris has the right to terminate the agreement prior to its
expiration in the event of a material breach of the agreement by the Company,
including the Company's failure to satisfy certain performance criteria, or,
under certain other circumstances, including a sale of Solaris. Any such early
termination would have a material adverse effect on the Company. See
"Business--The Solaris Agreement."
Customer Concentration; Dependence on Wal*Mart and Home Depot. Approximately
52% and 50% of the Company's net sales for fiscal 1995 and fiscal 1996,
respectively, were derived from sales to the Company's top ten customers. The
Company's largest customer is Wal*Mart, which accounted for approximately 22%
and 23% of the Company's net sales for fiscal 1995 and fiscal 1996,
respectively. The Company's second largest customer is Home Depot, which
accounted for approximately 10% and 11% of the Company's net sales for fiscal
1995 and fiscal 1996, respectively. The loss of, or significant adverse change
in, the relationship between the Company and Wal*Mart or Home Depot could have
a material adverse effect on the Company's business and financial results. The
loss of or reduction in orders from any significant customer, losses arising
from customer disputes regarding shipments, fees, merchandise condition or
related matters, or the Company's inability to collect accounts receivable
from any major customer could have a material adverse impact on the Company's
business and financial results. In particular, the Company reserved for and
subsequently wrote off an account receivable of approximately $500,000 from
Ernst Home Centers which filed for bankruptcy in July 1996.
Direct Sales. Manufacturers and suppliers of lawn and garden products and
pet supplies have sold, and may intensify their efforts to sell, their
products directly to retailers, including major customers of the Company.
Prior to the acquisition of Ortho by Monsanto, both Ortho (in late 1991) and
Monsanto (in 1993) had initiated direct sale programs. Solaris expanded these
direct sales programs in 1994. Most of the Company's major customers,
including its top ten customers, purchase certain products--typically high
volume items ordered in large quantities--directly from manufacturers or
suppliers. The Company believes that most major manufacturers and suppliers
that utilize distributors continually evaluate the effectiveness of their
distribution programs as well as the performance of individual distributors,
and accordingly, there can be no assurance that major manufacturers and
suppliers of the products distributed by the Company will not modify their
distribution programs in ways that could adversely affect the
8
<PAGE>
Company. In addition to direct sales from manufacturers and suppliers to
retailers, certain retailers have, and may intensify their efforts to have,
products shipped by the Company to their internal distribution centers rather
than directly to stores. Such direct shipments generally yield lower gross
margins to the Company than shipments to retailers' stores, but the Company
believes that its associated operating costs are typically lower with such
direct shipments. If these programs become more common or if other methods of
distribution of lawn and garden products and pet supplies become more widely
accepted, the Company's business and financial results could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Retailers," "--Manufacturers
and Suppliers " and "--Competition."
Weather and Seasonality. Because demand for lawn and garden products is
significantly influenced by weather, particularly weekend weather during the
peak gardening season, the Company's results of operations could be adversely
affected by certain weather patterns such as unseasonably cool or warm
temperatures, water shortages or floods. During the first six months of the
calendar year in both 1993 and 1995, and the first three months of the
calendar year in 1996, the Company's results of operations were negatively
affected by severe weather conditions in many parts of the country.
Additionally, the Company's business is highly seasonal, with approximately
66% of the Company's sales in fiscal 1996 occurring during the second and
third quarters of the fiscal year. Historically, substantially all of the
Company's operating income is generated in this period, while operating losses
are generally incurred during the rest of the year. The Company seeks to
mitigate the effects of seasonality through various promotional efforts and
incentives during the first and fourth quarters of the fiscal year and the
sale of less seasonal products such as pet supplies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality and Quarterly Fluctuations."
Low Margins; Competition. The distribution industry in which the Company
operates is characterized by relatively low profit margins. As a result, the
Company's success is highly dependent upon increasing revenues and profits
through internal expansion and acquisitions, effective cost and management
controls and differentiating its services from those of its competitors. The
wholesale lawn and garden and pet supplies distribution businesses are highly
competitive, with many companies competing principally on the basis of price
and service. In addition to competition from other distributors, the Company
also competes with manufacturers and suppliers that elect to distribute
certain of their products directly to retailers, including major customers of
the Company, and private label product suppliers. See "--Direct Sales." There
can be no assurance that the Company will not encounter increased competition
in the future or will not lose business from major manufacturers that elect to
sell their products directly to retailers, either of which could adversely
affect the Company's operations and financial results.
Expansion; Acquisitions. As part of its growth strategy, the Company
aggressively pursues the acquisition of other companies, assets and product
lines that either complement or expand its existing business. See "Business--
Growth Strategy." Acquisitions involve a number of special risks, including
the diversion of management's attention to the assimilation of the operations
and personnel of the acquired companies, adverse short-term effects on the
Company's operating results, integration of financial reporting systems and
the amortization of acquired intangible assets. The Company completed seven
acquisitions in 1993, four acquisitions in 1994, one acquisition in 1995, two
acquisitions in 1996, including the acquisition of Kenlin, the largest
distributor of pet supply products in the eastern United States, and to date,
four acquisitions in 1997, including Four Paws, Country Pet Supply, Ezell and
the Sandoz Flea and Tick Acquisition. There can be no assurance that the
Company can successfully integrate Kenlin, Four Paws, Country Pet Supply,
Ezell and the Sandoz Flea and Tick Acquisition or that the businesses of
Kenlin, Four Paws, Country Pet Supply, Ezell and the Sandoz Flea and Tick
Acquisition will enhance the Company's business. The Company has also had
preliminary acquisition discussions with, or has evaluated the potential
acquisition of, numerous other companies over the last several years. The
Company is unable to predict the likelihood of a material acquisition being
completed in the future. If the
9
<PAGE>
Company proceeds with a large acquisition for cash, the Company may be able to
use the increased borrowing capacity resulting from this Offering to
consummate such transaction. See "Use of Proceeds." The Company may also seek
to finance any such acquisition through additional debt or equity financings.
The Company anticipates that one or more potential acquisition
opportunities, including those that would be material, may become available in
the near future. If and when appropriate acquisition opportunities become
available, the Company intends to pursue them actively. No assurance can be
given that any acquisition by the Company will or will not occur, that if an
acquisition does occur that it will not materially and adversely affect the
Company or that any such acquisition will be successful in enhancing the
Company's business. The Company's future results of operations will also
depend in part on its ability to successfully expand internally by increasing
the number of distribution centers and new product lines, and to manage any
future growth. No assurance can be given that the Company will be able to open
or operate new distribution centers, obtain or integrate additional product
lines or manage any future growth successfully. See "Use of Proceeds" and
"Business--Growth Strategy."
Branded Products Strategy. The Company intends to continue to seek to
acquire manufacturers of consumer products, such as Four Paws and the flea and
tick protection business of Sandoz, in pursuit of its branded products
strategy. Since the Company's management has limited experience in acquiring
or managing consumer products manufacturers, such acquisitions are likely to
subject the Company to additional risks and there can be no assurance that any
such acquisition will be successful in enhancing the Company's business. In
addition, there can be no assurance that the Company's branded products
strategy will not have a material adverse effect on the Company's relationship
with its suppliers or customers who may have competing products.
Dependence on Key Personnel. The Company's future performance is
substantially dependent upon the continued services of William E. Brown, its
Chairman and Chief Executive Officer, and Glenn W. Novotny, its President and
Chief Operating Officer. See "Management." The loss of the services of either
of such persons could have a material adverse effect upon the Company. In
addition, the Company's future performance depends on its ability to attract
and retain skilled employees. There can be no assurance that the Company will
be able to retain its existing personnel or attract additional qualified
employees in the future.
Management Information Systems. The Company is presently upgrading and
installing one uniform, integrated management information system across the
United States at an estimated cost to complete of $1 million. The Company has
completed the installation of the new system for the Southwest, Midwest and
Southeast regions and expects to convert the remaining regions within the next
eight months. No assurances can be given that such transition and system
enhancement can be accomplished in a timely and cost-effective manner without
disrupting the Company's operations. In addition, there can be no assurance
that the Company's current system or planned upgrade will be sufficient or
effective or that further investments in management information systems will
not be necessary. See "Business--Management Information Systems."
Variability of Quarterly Results; Volatility of Stock Price. The Company
expects to continue to experience variability in its net sales and net income
on a quarterly basis. Factors that may contribute to this variability include:
(i) weather conditions and seasonality during peak gardening seasons as
described in "--Weather and Seasonality;" (ii) shifts in demand for lawn and
garden products; (iii) changes in product mix, service levels and pricing by
the Company and its competitors; (iv) the cost reimbursement and payment
provisions of the Solaris Agreement; (v) the effect of acquisitions and (vi)
economic stability of retail customers. In addition, because the Company
operates on relatively low margins, the Company's operating results in any
quarterly period could be affected significantly by slight variations in
revenues or operating costs. For the same reason, the Company's quarterly
results also may be vulnerable to problems in areas such as collectibility of
accounts receivable, inventory control and competitive price pressures. The
market price of the Common Stock could be subject to significant fluctuations
in response to these variations in quarterly operating results and other
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality and Quarterly Fluctuations."
10
<PAGE>
Control of the Company; Disparate Voting Rights. After the Offering and
assuming the Underwriters' over-allotment option is not exercised, William E.
Brown, Chairman of the Board and Chief Executive Officer of the Company will
control approximately 45.8% of the voting power of the capital stock of the
Company and, therefore, will effectively control the Company, including the
power to elect all of the directors of the Company. Holders of Class B Stock
are entitled to the lesser of ten votes per share or 49% of the total votes
cast. Holders of Common Stock are entitled to one vote for each share owned.
Holders of Class B Stock are likely to be able to elect all of the Company's
directors, control the management and policies of the Company and determine
the outcome of any matter submitted to a vote of the Company's stockholders
except to the extent that a class vote of the Common Stock is required by
applicable law. The disproportionate voting rights of the Common Stock and
Class B Stock could have an adverse effect on the market price of the Common
Stock. Such disproportionate voting rights may make the Company a less
attractive target for a takeover than it otherwise might be, or render more
difficult or discourage a merger proposal, a tender offer or a proxy contest,
even if such actions were favored by stockholders of the Company other than
the holders of the Class B Stock. Accordingly, such disproportionate voting
rights may deprive holders of Common Stock of an opportunity to sell their
shares at a premium over prevailing market prices, since takeover bids
frequently involve purchases of stock directly from stockholders at such a
premium price. See "Selling Stockholders" and "Description of Capital Stock."
Environmental Considerations. The Company's subsidiary, Grant Laboratories,
Inc., which manufactures ant control products, and many of the products
distributed by the Company are subject to regulation by federal, state and
local authorities. In addition, in connection with the Sandoz Flea and Tick
Acquisition, the Company acquired a production facility in Texas which
manufactures, among other things, products based upon the active ingredient
methoprene, and is subject to regulation by federal, state and local
authorities. Such regulations are often complex and are subject to change.
Environmental regulations may affect the Company by restricting the
manufacturing, transportation or use of its products or by regulating their
disposal. Regulatory or legislative changes may cause future increases in the
Company's operating costs or otherwise affect operations. Although the Company
believes it is and has been in substantial compliance with such regulations,
there is no assurance in the future that the Company may not be adversely
affected by such regulations or incur increased operating costs in complying
with such regulations. However, neither the compliance with regulatory
requirements nor the Company's environmental procedures can ensure that the
Company will not be subject to claims for personal injury, property damages or
governmental enforcement. See "Business--Environmental Considerations."
Product Liability; Insurance. The Company's business exposes it to potential
product liability risks which are inherent in the manufacture and distribution
of certain of its products. Although the Company generally seeks to insure
against such risks, there can be no assurance that such coverage is adequate
or that the Company will be able to maintain such insurance on acceptable
terms. A successful product liability claim in excess of the Company's
insurance coverage could have a material adverse effect on the Company and
could prevent the Company from obtaining adequate product liability insurance
in the future on commercially reasonable terms.
General Economic Conditions. The sale of lawn and garden products and pet
and pool supplies historically have been subject to fluctuation, with
purchases of these products tending to decline during periods of recession in
the general economy or uncertainty regarding future economic prospects that
affect consumer spending habits, particularly on discretionary items. These
economic cycles and any related fluctuation in consumer demand could have a
material adverse effect on the Company's results of operations and financial
condition. In addition, various retailers, including some of the Company's
customers, have experienced financial difficulties during the past several
years, thereby increasing the risk that such retailers may not pay for the
Company's products in a timely manner, if at all.
Shares Eligible for Future Sale. Sales of substantial amounts of shares of
Common Stock in the public market following the Offering could have an adverse
impact on the market price of the Common Stock. After the closing of the
Offering, 18,146,313 shares of Common Stock, including the 5,000,000
11
<PAGE>
shares offered hereby, the 2,530,000 shares of Common Stock that were sold by
the Company in the initial public offering, the 5,750,000 shares of Common
Stock sold by the Company in the public offering in November 1995 and the
2,752,500 shares of Common Stock sold by the Company in the public offering in
July 1996, and 11,260 shares of Common Stock issuable upon conversion of Class
B Stock, will be freely tradeable without restriction under the Securities
Act, except for any shares purchased by affiliates of the Company, which will
be subject to certain resale limitations of Rule 144 promulgated under the
Securities Act. The remaining 176,869 shares of Common Stock and 1,651,907
shares of Class B Stock, which are held by the Company's directors and
executive officers are subject to lock-up agreements with the Underwriters.
The directors and executive officers of the Company who hold such shares have
agreed not to sell or otherwise dispose of any shares for 90 days after the
date of this Prospectus without the prior written consent of Alex. Brown &
Sons Incorporated. After the expiration of the 90 day lock-up period, these
shares may be sold in accordance with Rule 144. In addition, 193,104 shares
and 400,126 shares of Common Stock issued in connection with prior
acquisitions, which are freely tradeable under the Securities Act, are subject
to acquisition related lockup agreements until April 1998 and January 1999,
respectively. The Company has filed registration statements under the
Securities Act covering 1,500,000 shares of Common Stock on Form S-4 for use
in potential acquisitions. As of June 30, 1997, there are 856,952 shares of
Common Stock available for future issuances. The Company has also filed
registration statements under the Securities Act covering 2,000,000 shares of
Common Stock reserved for issuance under the 1993 Omnibus Equity Incentive
Plan, 100,000 shares of Common Stock reserved for issuance under the
Nonemployee Director Stock Option Plan, and 400,000 shares of Common Stock
under the Employee Stock Purchase Plan. As of June 30, 1997, there were
options outstanding to purchase 1,435,850 shares and 22,760 shares of Common
Stock under the 1993 Omnibus Equity Plan and the Nonemployee Director Stock
Option Plan, respectively, and 400,000 shares available for issuance pursuant
to the Employee Stock Purchase Plan. See "Shares Eligible for Future Sale."
THE COMPANY
The Company was incorporated in Delaware in June 1992 and is the successor
to Central Garden Supply, a California corporation which was acquired in 1980
by William E. Brown, the Company's Chairman and Chief Executive Officer.
Unless the context otherwise requires, references in this Prospectus to the
Company include Central Garden & Pet Company and its subsidiaries and
predecessor companies. The Company's executive offices are located at 3697 Mt.
Diablo Boulevard, Lafayette, California 94549, and its telephone number is
(510) 283-4573. This Prospectus refers to various trademarks owned by
companies other than the Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,790,000 shares of
Common Stock offered hereby are estimated to be approximately $107.7 million
($124.6 million if the Underwriters' over-allotment option is exercised in
full), at an assumed public offering price of $23.75 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. The Company intends to utilize a portion of such net proceeds to
repay all of the outstanding borrowings under its principal line of credit. As
of June 28, 1997, the amount of the borrowings outstanding under the Company's
principal line of credit (which currently bears interest at the prime rate
plus 3/4% per annum) was approximately $28.0 million. The increase in
available borrowing capacity will provide the Company with a source of funds
for working capital and possible acquisitions of complementary businesses. As
part of its growth strategy, the Company aggressively pursues the acquisition
of other companies, assets and product lines that either complement or expand
its existing business, and it anticipates it will continue to evaluate and
pursue potential acquisition candidates. See "Business--Growth Strategy." The
Company completed seven acquisitions in 1993, four acquisitions in 1994, one
acquisition in 1995, two acquisitions
12
<PAGE>
in 1996, and to date, four acquisitions in 1997. If the Company proceeds with
a large acquisition for cash, the Company may be able to use the increased
borrowing capacity resulting from this Offering to consummate such
transaction. In addition, the Company may be required to raise additional
capital either through debt or equity financings. For additional information
regarding the Company's principal line of credit, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and Note 5 of Notes to Consolidated Financial Statements.
The Company will not receive any proceeds from the sale of shares by the
Selling Stockholders.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock in the past.
The Company currently intends to retain any earnings for use in its business
and does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's line of credit contains
restrictions on the Company's ability to pay dividends. See Note 5 of Notes to
Consolidated Financial Statements.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
since the Company's initial public offering on July 15, 1993. The following
table sets forth, for the periods indicated, the highest and lowest closing
sale prices for the Common Stock, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ------
<S> <C> <C>
Fiscal 1995(1)
First Quarter........................................... 4 1/4 3 5/16
Second Quarter.......................................... 6 3 1/2
Third Quarter........................................... 6 7/8 5 1/8
Fiscal 1996
First Quarter........................................... 9 1/2 5 1/2
Second Quarter.......................................... 10 8 1/8
Third Quarter........................................... 19 9 1/4
Fourth Quarter.......................................... 26 1/8 16 3/4
Fiscal 1997
First Quarter........................................... 24 5/8 18 7/8
Second Quarter.......................................... 28 3/4 16 1/8
Third Quarter........................................... 24 15/16 16 1/2
Fourth Quarter (through July 11, 1997).................. 25 23 1/8
</TABLE>
- --------
(1) In 1994, the fiscal year ended December 25, 1994. In 1995, the Company
changed its fiscal year end to the last Saturday in September.
Accordingly, the fiscal year ended September 30, 1995 was a nine month
period.
On July 11, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $23.75. As of June 30, 1997, there were
approximately 107 holders of record of the Company's Common Stock and 10
holders of record of the Company's Class B Stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 29, 1997 (i) on an actual basis and (ii) as adjusted to give
effect to the sale of the shares of Common Stock being sold by the Company (at
an assumed public offering price of $23.75 per share) and the application of
the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 29, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings(1)........................... $ 1,060 $ --
======== ========
Long-term borrowings............................... $117,025(2) $117,025
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000 shares
authorized; 100 shares outstanding.............. -- --
Class B Stock, $.01 par value; 3,000,000 shares
authorized; 1,863,167 shares outstanding;
1,663,167 outstanding as adjusted(3)............ 19 17
Common Stock, $.01 par value; 40,000,000 shares
authorized; 13,112,871 shares outstanding;
18,102,871 shares outstanding as adjusted(4).... 131 181
Additional paid-in capital....................... 121,821 229,447
Retained earnings................................ 21,964 21,964
Treasury Stock................................... (364) (364)
Restricted stock deferred compensation(5)........ (146) (146)
-------- --------
Total shareholders' equity..................... 143,425 251,099
-------- --------
Total capitalization......................... $260,450 $368,124
======== ========
</TABLE>
- --------
(1) As of June 28, 1997, there was approximately $28.0 million outstanding
under the Company's line of credit primarily due to the Sandoz Flea and
Tick Acquisition. The borrowings under the line of credit will be repaid
with a portion of the net proceeds of the Offering.
(2) In November 1996, the Company issued $115,000,000 of 6% Convertible
Subordinated Notes due 2003.
(3) Reflects conversion of 200,000 shares of Class B Stock into Common Stock
by a Selling Stockholder.
(4) Excludes 1,458,560 shares of Common Stock issuable upon exercise of stock
options outstanding as of June 28, 1997. Also excludes 1,672,733 shares of
Common Stock reserved for future issuance under the Company's 1993 Omnibus
Equity Incentive Plan, Employee Stock Purchase Plan, Nonemployee Director
Stock Option Plan and registration statements on Form S-4 for future
acquisitions. Also excludes 4,107,143 shares of Common Stock issuable upon
conversion of the Company's 6% Convertible Subordinated Notes due 2003 and
100,000 shares of Common Stock issuable upon the conversion of 100 shares
of Series A Preferred Stock.
(5) Reflects the issuance in 1992 by the Company of 237,217 shares of Class B
Stock and the transfer of 32,420 shares of Class B Stock to certain
employees by William E. Brown and the related deferred compensation. All
of such shares are subject to various restrictions, including vesting
periods of up to 10 years.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected income statement and balance sheet data of the
Company as of and for each of the fiscal years in the three-year period ended
December 25, 1994, the nine-month period ended September 30, 1995 and the
fiscal year ended September 28, 1996 have been derived from the Company's
audited consolidated financial statements. Such financial statements as of
September 30, 1995 and September 28, 1996 and for the fiscal year ended
December 25, 1994, the nine-month period ended September 30, 1995 and the
fiscal year ended September 28, 1996 are included elsewhere in this Prospectus
and have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report included herein. The following selected income
statement and balance sheet data of the Company as of and for the six-month
periods ended March 30, 1996 and March 29, 1997, are derived from the
unaudited consolidated financial statements of the Company. In the opinion of
management, the unaudited consolidated financial statements of the Company
have been prepared on the same basis as the audited consolidated financial
statements included herein and include all adjustments necessary for the fair
presentation of financial position and results of operations for these
periods, which adjustments are only of a normal recurring nature. The
financial data set forth below should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTH
PERIOD FISCAL YEAR
FISCAL YEAR ENDED(1) ENDED(1) ENDED SIX MONTHS ENDED
-------------------------------------- ------------- ------------- --------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
1992 1993 1994 1995 1996 1996(3) 1997
------------ ------------ ------------ ------------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $321,707 $334,682 $421,427 $373,734 $619,622 $260,132 $336,485
Cost of goods sold and occupancy.. 271,050 278,746 354,096 316,832 535,189 227,006 285,315
-------- -------- -------- -------- -------- -------- --------
Gross profit..................... 50,657 55,936 67,331 56,902 84,433 33,126 51,170
Selling, general and
administrative expenses.......... 41,949 44,702 58,489 48,075 66,945 29,922 42,844
-------- -------- -------- -------- -------- -------- --------
Income from operations............ 8,708 11,234 8,842 8,827 17,488 3,343 8,326
Interest expense-net.............. (4,028) (3,751) (5,642) (5,891) (4,061) (2,452) (2,747)
Other income (expense)-net........ (742) (878) (856) (953) 1,038 -- --
-------- -------- -------- -------- -------- -------- --------
Income before income taxes and
minority interest................ 3,938 6,605 2,344 1,983 14,465 752 5,579
Income tax expense................ 1,595 2,637 936 904 6,017 324 2,348
-------- -------- -------- -------- -------- -------- --------
Income before minority interest... 2,343 3,968 1,408 1,079 8,448 428 3,231
Minority interest................. (210) 26 (3) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income ....................... $ 2,133 $ 3,994 $ 1,405 $ 1,079 $ 8,448 $ 428 $ 3,231
======== ======== ======== ======== ======== ======== ========
Net income per common
and common equivalent share(2)(3)
Primary.......................... $ 0.83 $ 0.24 $ 0.18 $ 0.72 $ 0.04 $ 0.21
Fully diluted.................... 0.18 0.71 0.04 0.21(4)
Weighted average shares outstanding(2)(3)
Primary.......................... 4,789 5,947 5,943 11,702 10,381 15,200
Fully diluted.................... 6,050 11,904 10,441 15,284(4)
OPERATING DATA:
Distribution and manufacturing
centers at period end............ 25 30 39 38 41 37 46
BALANCE SHEET DATA (AT PERIOD
END):
Working capital................... $ 10,288 $ 26,719 $ 21,003 $ 25,316 $ 95,670 $ 61,538 $159,527
Total assets...................... 123,484 143,748 173,953 142,680 283,664 229,776 523,756
Short-term borrowings............. 41,453 32,162 44,995 39,670 29,508 22,451 1,060
Long-term borrowings(4)........... 5,975 8,804 7,019 11,130 7,635 8,635 117,026
Shareholders' equity.............. 16,114 35,359 36,376 38,402 129,559 74,575 143,425
- -------
(1) In 1992, the Company adopted a 52/53 week fiscal year ending on the last
Sunday in December. In 1995, the Company changed its fiscal year end to
the last Saturday in September. Accordingly, the fiscal year ended
September 30, 1995 was a nine month period.
(2) During 1992, the Company was reorganized (see Note 2 of Notes to
Consolidated Financial Statements). As a result, net income per common and
common equivalent share and weighted average shares outstanding are not
presented for fiscal year 1992 because such information would not be
comparable with the post-reorganization periods.
(3) In November 1995, the Company sold 5,750,000 shares of its Common Stock at
a public offering price of $6.75 per share. Net proceeds were used to
reduce borrowings under the Company's principal line of credit. In July
1996, the Company sold 2,752,500 shares of its Common Stock at a public
offering price of $18.00. Net proceeds were used, in part, to repay the
$33 million borrowed in connection with the Kenlin acquisition.
(4) In November 1996, the Company issued $115,000,000 of 6% Convertible
Subordinated Notes due 2003. Net income per common and common equivalent
share, fully diluted and weighted average shares outstanding, fully
diluted for the six months ended March 29, 1997 do not reflect the assumed
conversion of the 6% Convertible Subordinated Notes as the impact was
antidilutive for the period.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the leading national distributor of lawn and garden and pet
supply products as well as a major distributor of pool supplies. As a result
of both acquisitions and internal expansion, the Company has grown rapidly
from sales of approximately $25 million in 1987 to approximately $620 million
in fiscal 1996 and increased the number of Company distribution and
manufacturing centers from one in 1987 to 48 currently. Since 1988, the
Company has completed 26 acquisitions, making it the leader in the
consolidation of distribution channels for the lawn and garden and pet
supplies industries. The Company completed seven acquisitions in 1993, four
acquisitions in 1994, one acquisition in 1995, two acquisitions in 1996,
including the acquisition of Kenlin, the largest distributor of pet supply
products in the eastern United States, and to date, four acquisitions in 1997,
including Four Paws, Country Pet Supply, Ezell and the Sandoz Flea and Tick
Acquisition. These acquisitions included five lawn and garden distributors and
nine distributors of pet supplies. In fiscal 1996, lawn and garden products
accounted for approximately 76% of the Company's net sales, pet supplies
accounted for approximately 19% and pool supplies accounted for approximately
5%. As a result of its recent acquisitions, including Kenlin, Four Paws,
Country Pet Supply and the Sandoz Flea and Tick Acquisition, the Company
expects that sales of pet supplies will increase as a percentage of net sales.
Manufacturers and suppliers of lawn and garden products and pet supplies
have sold, and may intensify their efforts to sell, their products directly to
retailers, including major customers of the Company. In response to increased
direct sales, the Company has developed programs designed to encourage
manufacturers to continue to utilize the Company's services. In many instances
when manufacturers have increased direct sales, the Company has continued to
provide merchandising and other services to both manufacturers and retailers.
Historically, sales of Solaris products to direct accounts (referred to as
"agency sales") included lower levels of services; therefore, the Company's
gross profit as a percentage of net sales on this type of business was lower
than on full service sales.
The Company entered into an agreement effective October 1, 1995 with Solaris
to become both the master agent and master distributor for sales of Solaris
products nationwide. Management believes that the relationship with Solaris
embodied in the Solaris Agreement has had a substantial impact on the
Company's results of operations. Under the Solaris Agreement, which has an
initial four-year term, the Company, in addition to serving as the agent and
distributor for sales of Solaris products, provides a wide range of value-
added services including logistics, order processing and fulfillment,
inventory distribution and merchandising. However, Solaris continues to
negotiate its sales prices directly with its direct sales accounts. As a
result of the Solaris Agreement, a majority of the Company's sales of Solaris
products are derived from servicing direct sales accounts, whereas in 1994 and
fiscal 1995, a majority of the Company's sales of Solaris products were made
by the Company as a traditional distributor. A substantial portion of these
sales consist of large shipments to retail distribution centers which are
characterized by a lower gross profit as a percentage of net sales compared
with sales made by the Company as a traditional distributor. The Company
believes that the operating expenses associated with this type of sale are
lower than the operating expenses associated with sales made by the Company as
a traditional distributor. The Company believes that the gross profit as a
percentage of net sales associated with the Company's services to Solaris
direct sales accounts is higher than the gross profit as a percentage of net
sales associated with the Company's historical agency sales due to the greater
services provided pursuant to the Solaris Agreement. The Company believes that
the collective impact of these factors has lead to substantially increased
sales of Solaris products, increased gross profit from sales of Solaris
products and lower gross profit as a percentage of net sales.
In addition, under the Solaris Agreement, the Company's accounts receivable
related to Solaris products sold to direct sales accounts are paid more
quickly since the amount owed to the Company is settled by Solaris within 15
days of receipt of an invoice, rather than waiting for payment by retailers in
accordance with their normal payment terms. Since entering into the Solaris
Agreement, inventories of
16
<PAGE>
Solaris products have increased since the Company is not only carrying
inventories to support its own sales of Solaris products but also certain
inventory previously carried by Solaris as well as additional inventories to
support sales of Solaris products by the Company's network of independent
distributors.
The Solaris Agreement provides for the Company to be reimbursed for costs
incurred in connection with services provided to Solaris' direct sales
accounts and to receive payments based on the growth of sales of Solaris
products. The Company also shares with Solaris in the economic benefits of
certain cost reductions, to the extent achieved. As a result, management
believes that the Company's profitability is more directly attributable to the
success of Solaris than it has been in the past.
Historically, the Company's sales have been influenced by weather and
climate conditions in the markets it serves. For example, during the first six
months of the calendar year in both 1993 and 1995 and the first three months
of the calendar year in 1996, the Company's results of operations were
negatively affected by severe weather conditions in many parts of the country.
The statements contained in this Prospectus which are not historical facts
are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set forth in
or implied by forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales.
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTH FISCAL YEAR SIX MONTHS ENDED
ENDED PERIOD ENDED ENDED -------------------
DECEMBER SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
25, 1994 1995 1996 1996 1997
----------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and
occupancy.............. 84.0 84.8 86.4 87.3 84.8
----- ----- ----- ----- -----
Gross profit.......... 16.0 15.2 13.6 12.7 15.2
Selling, general and
administrative
expenses............... 13.9 12.9 10.8 11.5 12.7
----- ----- ----- ----- -----
Income from operations.. 2.1 2.3 2.8 1.3 2.5
Interest expense--net... 1.3 1.6 0.7 0.9 0.8
Other income (expense).. 0.2 0.2 0.2 -- --
----- ----- ----- ----- -----
Income before income
taxes.................. 0.6 0.5 2.3 0.3 1.7
Income taxes............ 0.3 0.2 0.9 0.1 0.7
----- ----- ----- ----- -----
Net income.............. 0.3% 0.3% 1.4% 0.2% 1.0%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 29, 1997 COMPARED WITH SIX MONTHS ENDED MARCH 30, 1996
Net sales for the first half of fiscal year 1997 increased by 29.4% or $76.4
million to $336.5 million from $260.1 million for the first half of fiscal
year 1996. Of the $76.4 million increase, approximately $57.7 million is
related to newly acquired businesses. The increase in sales from existing
operations, $18.7 million, was due principally to expanded product listings
and new store openings by existing customers.
Gross profit increased by 54.5% or $18.0 million from $33.1 million during
the six months ended March 30, 1996 to $51.2 million for the comparable 1997
period. Gross profit as a percentage of net sales increased from 12.7% in the
six months ended March 30, 1996 to 15.2% during the similar 1997 period. The
increase in the gross profit percentage is due primarily to the higher gross
profit margins associated with the newly acquired pet related businesses.
17
<PAGE>
Selling, general and administrative expenses increased by $12.9 million from
$29.9 million during the six months ended March 30, 1996 to $42.8 million for
the comparable 1997 period. Of the $12.9 million increase in expenses,
approximately $10.0 million related to the newly acquired businesses with the
remainder, $2.9 million attributable to the increase in sales of the existing
operations. As a percentage of net sales, selling, general and administrative
expenses, increased from 11.5% during the six months ended March 30, 1996 to
12.7% for the similar 1997 period. The increase in these expenses as a
percentage of net sales relates principally to the newly acquired pet
businesses which have a higher gross margin percentage with corresponding
higher operating costs than is the case with the lawn and garden business.
Interest expense for the six months ended March 29, 1997 increased by 12.0%
or $0.3 million from $2.5 million for the six months ended March 30, 1996 to
$2.7 million. As noted in the quarterly discussion, the increase is
attributable to the issuance, on November 15, 1996, of $115.0 million of the
Company's 6% convertible notes offset in part by the reduction in both the
Company's long term debt and its revolving credit facility as a result of the
application of proceeds received from the convertible debt offering. Average
outstanding borrowings for the six months ended March 29, 1997 were $62.3
million compared with $33.8 million for the comparable 1996 period. Average net
interest rates for the six months ended March 1997 and 1996 were 7.5% and
10.5%, respectively.
The Company's effective income tax rate was approximately 42% for the six
months ended March 29, 1997 and 43% for the comparable 1996 period.
FISCAL 1996 COMPARED WITH TWELVE MONTHS ENDED SEPTEMBER 30, 1995
In 1995, the Company changed its fiscal year to the last Saturday in
September. Accordingly, the fiscal year ended September 30, 1995 was a nine
month period. As a result of this change, 1996 operating results are not
directly comparable with operating results for the nine month period ended
September 30. The Company believes that comparing fiscal 1996 with the twelve
month period ending September 30, 1995 will provide a more meaningful analysis
of the Company's operating results. Unaudited summary operating results for the
twelve months ended September 30, 1995 are shown in Note 11 to the consolidated
financial statements.
Net sales for the year ended September 28, 1996 increased by 41.8% or $182.6
million to $619.6 million from $437.0 million for the comparable 1995 period.
The increase in net sales was due to (1) incremental business resulting from
the Solaris Agreement, (2) acquisition of two pet supplies distributors in the
fourth quarter of fiscal 1996, and (3) the addition of stores previously
serviced by a competitor, expanded product placements and new store openings
with existing customers.
Gross profit increased by 26.5% or $17.7 million from $66.7 million during
the twelve months ended September 30, 1995 to $84.4 million for the same period
in 1996. Gross profit as a percentage of net sales decreased from 15.3% in the
twelve months ended September 30, 1995 to 13.6% for the comparable 1996 period.
The decrease in the gross profit as a percentage of net sales is due
principally to the incremental sales of Solaris product which were sold to high
volume, minimum service level retail distribution centers and to a lesser
extent, the elimination of certain discounts and rebates which historically had
been part of the Solaris marketing programs.
For the year ended September 28, 1996, selling, general and administrative
expenses increased by $5.8 million to $66.9 million from $61.2 million for the
similar 1995 period. As a percentage of net sales, these expenses decreased
from 14.0% in the twelve months ended September 30, 1995 to 10.8% in the
comparable 1996 period. The $5.8 million increase relates to the two pet
supplies distributors acquired in the fourth quarter of fiscal 1996 and
increased sales, offset in part by cost reductions in the existing pet
operations. The decrease in these expenses as a percentage of net sales relates
to the fixed portion of these expenses being spread over substantially greater
sales volume in 1996 compared with 1995.
18
<PAGE>
Interest for the year ended September 28, 1996 decreased by 44.6% or $3.3
million to $4.1 million from $7.4 million for the twelve months ended September
30, 1995. The decrease is attributable principally to lower average outstanding
borrowings as a result of applying the proceeds from the Company's two public
offerings of its common stock during fiscal 1996 and the termination of the
Monsanto trade financing agreement. Average short-term borrowings for fiscal
1996 were $28.2 million compared with $79.0 million for the comparable 1995
period. The outstanding borrowings include amounts due to Solaris under the
Monsanto trade financing agreement which ended in November 1995. The average
rates for the twelve months ended September 28, 1996 and September 30, 1995
were 10.5% and 7.6% respectively.
The Company's effective income tax rate for fiscal 1996 was 41.6% compared
with a tax credit of 36.6% for the similar 1995 period.
FIRST NINE MONTHS OF 1995 COMPARED WITH FIRST NINE MONTHS OF 1994
In 1995, the Company changed its fiscal year to the last Saturday in
September. Accordingly, the fiscal year ended September 30, 1995 was a nine
month period. As a result of this change, 1995 operating results will not be
directly comparable with 1994. The Company believes that comparing the nine
months periods of 1994 and 1995 will provide a more meaningful analysis of the
Company's operating results. Unaudited summary operating results for the nine
months ended September 25, 1994 are shown in Note 11 to the consolidated
financial statements.
Net sales for the nine months ended September 30, 1995 increased by 4.4% or
$15.6 million to $373.7 million from $358.1 million for the comparable 1994
period. The increase in net sales was due to revenue from acquired operations
and an increase in agency sales during the third calendar quarter of 1995,
offset in part by a sales decline in the Western region lawn and garden
markets. The lawn and garden sales decrease in the Western region was due
principally to adverse weather conditions and the loss of certain customers who
elected to buy direct from the Company's major supplier. Agency sales as a
percentage of net sales increased in the first nine months of 1995 to 12.9%
compared with 9.0% for the similar 1994 period.
Gross profit decreased by 1.1% or $0.6 million from $57.5 million during the
nine months ended September 25, 1994 to $56.9 million for the comparable 1995
period. Gross profit as a percentage of net sales decreased from 16.1% in the
nine months ended September 25, 1994 to 15.2% in the comparable 1995 period.
The decrease in gross profit for the nine months ended September 30, 1995 was
due principally to lower gross margin agency sales to high volume, low service
accounts, which also typically have lower associated operating expenses. In
addition, the Company sold a higher percentage of lower margin products.
For the nine months ended September 30, 1995, selling, general and
administrative expenses increased by $2.7 million from $45.4 million for the
comparable 1994 period. As a percentage of net sales, these expenses increased
slightly from 12.7% during the first nine months of 1994 to 12.9% for the
comparable 1995 period. Of the $2.7 million increase, approximately $0.4
million is associated with the increase in sales while the balance, $2.3
million, relates to (i) increased costs related to the consolidation of
facilities in Colorado; (ii) increased costs in the pet supplies division
related to the downsizing and integration of the Company's Northern California
pet operations, (iii) costs associated with certain potential pet acquisitions,
(iv) costs associated with retention of employees in anticipation of increased
sales and (v) additional bad debt provision.
Interest expense for the first nine months of 1995 increased by 41.8% or $1.7
million from $4.2 million for the comparable 1994 period. The increase is due
principally to a combination of higher interest rates and increased borrowing
under the Company's trade financing agreement with its major supplier and under
the Company's principal credit facility. Average short-term borrowings for the
nine months ended September 30, 1995 were $73.8 million compared with $58.0
million for the comparable period in 1994. The average interest rates were 9.3%
and 6.9%, respectively.
19
<PAGE>
The Company's effective income tax rate for the nine months ended September
30, 1995 increased to 45% compared with 40% for the similar 1994 period,
principally due to the impact of non-deductible goodwill amortization.
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation, the Company believes that the effects of inflation on its
operations have been immaterial.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business is highly seasonal. In the nine months ended
September 30, 1995 and fiscal 1996, approximately 68% and 66%, respectively,
of the Company's sales occurred during the second and third quarters of the
fiscal year. Substantially all of the Company's operating income is typically
generated in this period which has historically offset the operating losses
incurred during the rest of the year. Typically, the lawn and garden business
is more seasonal than the pet supplies business, with a higher proportion of
sales occuring in the first two calendar quarters. In fiscal 1996, the
Company's lawn and garden business accounted for approximately 76% of net
sales, pet supplies accounted for approximately 19% of net sales and pool
supplies accounted for approximately 5% of net sales.
The following table provides certain unaudited quarterly financial
information for the calendar periods indicated. In management's opinion, this
information reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented. These results may not be indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 26, JUNE 25, SEPT. 30, DEC. 30,
1995 1995 1995 1995(1)
------------------ -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................. $117,925 $153,844 $101,965 $ 78,112
Gross profit.............. 18,361 21,953 16,588 11,320
Income (loss) from
operations............... 3,589 5,869 (631) (2,698)
Net income (loss)......... 747 1,844 (1,512) (2,363)
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 30, JUNE 29, SEPT. 28, DEC. 28,
1996 1996 1996 1996
------------------ -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................. $182,020 $227,591 $131,899 $100,144
Gross profit.............. 21,806 30,650 20,657 17,454
Income (loss) from
operations............... 5,902 12,447 1,844 (2,179)
Net income (loss)......... 2,791 6,635 1,385 (1,807)
<CAPTION>
THREE MONTHS ENDED
MARCH 29, 1997
------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................. $236,341
Gross profit.............. 33,716
Income from operations.... 10,505
Net income................ 5,038
</TABLE>
- --------
(1) In 1995, the Company changed its fiscal year end to the last Saturday in
September. Accordingly, the fiscal year ended September 30, 1995 was a
nine month period, and the quarter ended December 30, 1995 is the first
quarter of fiscal 1996.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth through a combination of
bank borrowings, supplier credit and internally generated funds. In addition,
the Company received net proceeds (after offering expenses) of approximately
$100.0 million from its three public offerings of common stock in July 1993,
November 1995 and July 1996. Further, in November 1996 the Company completed
the sale of $115 million 6% subordinated convertible notes generating
approximately $112 million net of underwriting commissions.
The Company's business is highly seasonal and its working capital
requirements and capital resources track closely to this seasonal pattern.
During the first fiscal quarter accounts receivable reach their lowest level
while inventory, accounts payable, and short-term borrowings begin to
increase. Since the Company's short-term credit line fluctuates based upon a
specified asset borrowing base, this quarter is typically the period when the
asset borrowing base is at is lowest and consequently the Company's ability to
borrow is at its lowest. During the second quarter, receivables, accounts
payable and short-term borrowings begin to increase, reflecting the build-up
of inventory and related payables in anticipation of the peak selling season.
During the third quarter, principally due to the Solaris Agreement, inventory
levels remain relatively constant while accounts receivable peak and short-
term borrowings start to decline as cash collections are received during the
peak selling season. During the fourth quarter, inventory levels are at their
lowest, and accounts receivable and payables are substantially reduced through
conversion of receivables to cash.
For the six months ended March 29, 1997, the Company used cash in operating
activities of $5.4 million reflecting the normal cycle of inventory and
receivables build up. Net cash used from investing activities of $55.5 million
resulted from acquisitions and equity investments during the second fiscal
quarter and the acquisition of office and warehouse equipment. Cash generated
from financing activities of $74.5 million consisted of net proceeds from the
sale of $115 million principal amount of 6% subordinated convertible notes due
2003 less repayment of $10.7 million of long-term debt and approximately $27.3
million of short-term debt.
For the twelve months ended September 28, 1996, the Company used cash from
operating activities of approximately $32.4 million, resulting principally
from the initial build up of inventory related to the Solaris Agreement
combined with the termination of a trade financing agreement with Monsanto.
The Company believes that the increased Solaris inventory will allow it to
accommodate the increased sales of Solaris products under the Solaris
Agreement without significantly increasing inventory levels in 1997. Cash used
from investing activities was $34.3 million reflecting the purchase of two pet
supplies distribution businesses for approximately $35.0 million and additions
to plant and equipment of $3.0 million offset in part by the proceeds of $3.7
million from the sale of the Company's Visalia, California warehouse. Cash
provided from financing activities of $67.8 million consisted primarily of
$81.9 million net proceeds from the Company's stock sales in November 1995 and
July 1996 offset in part by repayments of short and long-term debt of
approximately $13.7 and $0.4 million to acquire treasury shares.
The Company generated cash from operating activities of $7.1 million in
fiscal year 1994 and $10.4 million for the nine month period ended September
30, 1995. Cash used in investing activities, which included approximately
$14.0 million to acquire four companies during 1994, and $1.3 million to
acquire one company in 1995, and the purchase of warehouse and delivery
equipment, office furniture and equipment and leasehold improvements in fiscal
year 1994 and the nine month period ended September 30, 1995 was $14.3 million
and $4.1 million, respectively. Cash provided by financing activities of
approximately $7.3 million in 1994 consisted primarily of proceeds related to
the Company's short-term credit facility reduced by approximately $3.3 million
repayments of its long-term debt. Cash used in financing activities during
1995 of $6.3 million was attributable to reductions in both short-term and
long-term debt offset in part by proceeds from the sale of 100 shares of the
Company's 5% convertible preferred stock ($0.9 million) to Monsanto Company
and the exercise of stock options of approximately $0.1 million.
21
<PAGE>
The Company has a $75 million line of credit with Congress Financial
Corporation (Western). The available amount under the line of credit
fluctuates based upon a specific asset borrowing base. The line of credit,
which bears interest at a rate equal to the prime rate plus 3/4% per annum, is
secured by substantially all of the Company's assets. At June 28, 1997, the
Company had approximately $28.0 million outstanding borrowings and had $47.0
million of available borrowing capacity under this line. The Company's line of
credit contains certain financial covenants such as minimum net worth and
minimum working capital requirements. The line also requires the lender's
prior written consent to any acquisition of a business. The Company intends to
use a portion of the net proceeds of the Offering to repay the outstanding
borrowings under the line of credit.
The Company believes that cash flow from operations, funds available under
its line of credit, arrangements with suppliers and proceeds from the Offering
will be adequate to fund its presently anticipated working capital
requirements for the foreseeable future. The Company anticipates that its
capital expenditures, excluding acquisitions, will not exceed $3.6 million for
the next 12 months.
22
<PAGE>
BUSINESS
OVERVIEW
The Company is the leading national distributor of lawn and garden and pet
supply products as well as a major distributor of pool supplies. The Company
also offers a broadening array of proprietary branded lawn and garden and pet
supply products, including FourPaws(R), Zodiac(R) and Grant's(R). As a result
of both acquisitions and internal expansion, the Company has grown rapidly
from sales of approximately $25 million in 1987 to approximately $620 million
in fiscal 1996 and increased the number of Company distribution and
manufacturing centers from one in 1987 to 48 currently. Since 1988, the
Company has completed 26 acquisitions, including four acquisitions, to date,
in 1997, making it the leader in the consolidation of distribution channels
for the lawn and garden and pet supplies industries. In fiscal 1996, lawn and
garden products accounted for approximately 76% of the Company's net sales,
pet supplies accounted for approximately 19% and pool supplies accounted for
approximately 5%.
INDUSTRY OVERVIEW
Lawn and Garden. The lawn and garden industry has retail sales in excess of
$20 billion. According to the 1996-1997 National Gardening Survey conducted
for the National Gardening Association by the Gallup Organization, 64% of the
approximately 101 million households in the United States participated in some
form of gardening in 1996. The Company believes that gardening is one of the
most popular leisure activities in America and that as the population of
America ages, gardening's popularity will increase.
The lawn and garden supply industry is complex for a number of reasons. The
industry is highly seasonal with half of all sales occurring during the peak
spring gardening season and two-thirds of all sales occurring in the first six
months of the calendar year. The industry is also complex because of the
breadth and depth of merchandise offered including fertilizers, insecticides,
sprinkler systems, and gardening tools, as well as perishable items such as
live plants and higher priced items such as power tools. Further, merchandise
selection is complicated by varying regional and local climate conditions and
problems such as pest infestations and weed growth. There are at least 10
distinctly different climatic zones in the continental U.S., each of which has
different lawn and garden needs. Finally, lawn and garden sales are driven by
weekly weather conditions and manufacturer promotions which heavily impact
consumer demand for lawn and garden products.
As a result of the complexity and variability of lawn and garden sales,
retailers, manufacturers and suppliers must constantly adapt to changes in
consumer demand. Industry retailers--ranging from small local garden centers
to regional and national mass merchandisers and discounters--must carefully
plan their lawn and garden needs prior to the peak selling season and adjust
those plans as the season develops. Because of the large number of product
SKUs in the category, merchandise availability from a wide selection is
important. Having rapid access to these goods is also important, particularly
for national retailers, in adapting to regional and local lawn and gardening
conditions. Lastly, retailers need quick deliveries to keep shelves full
(especially prior to weekends) and require high in-stock and order-fulfillment
rates. Manufacturers and suppliers have historically relied on distributors to
inventory large volumes of product close to the retail market in order to
efficiently deliver products in a timely manner to retail stores.
Manufacturers and suppliers also rely on distributors to support and execute
promotion and marketing plans and training of store employees at the store and
regional level. Therefore, distributors represent an effective solution to the
retailer facing a complex industry and an efficient means for a manufacturer
or supplier to distribute and market its products.
Historically, lawn and garden products were distributed through small local
distributors that provided knowledgeable and personalized services to small
local independent nursery centers and retailers. In recent years, as regional
and national chains of retailers such as Wal*Mart, Home Base, Target and Home
23
<PAGE>
Depot have grown, there has been a trend towards consolidation among
distributors in this category with larger regional distributors experiencing
substantial growth as these volume driven accounts demand the administrative
efficiency as well as the value-added services larger distributors can
provide. Therefore, to the extent that sales of lawn and garden supplies shift
from smaller more specialized nursery stores to larger regional and national
chains, the Company believes that there will be a similar trend towards
consolidation of distributors leading to the predominance of regional and
national distributors.
Pet Supplies. In 1996, over half of all U.S. households, or approximately 58
million households, owned at least one pet and 44% of these households owned
more than one pet. The Company believes that pet ownership has increased as a
result of an increase of empty-nest households with additional disposable
income to spend on pets and an increase in families with young children. The
Company believes that sales of premium pet food and pet supplies have
increased due to these changing demographics, the increasing pet owner concern
for animal nutrition and safety and recommendations by veterinarians and
breeders.
The Company believes the channels of distribution for pet food and pet
supplies are highly fragmented. Pet food manufacturers generally sell directly
to mass merchants and supermarkets. With respect to pet supplies, however,
management believes that the large number of product SKUs carried by specialty
pet stores make merchandise availability from a wide selection and short
delivery times important to retailers who require high in-stock and order-
fulfillment rates. Because of the fragmented nature of the pet supply
industry, manufacturers and suppliers have historically relied on distributors
to inventory large volumes of product close to the retail market and to
support and execute promotion and marketing plans and training of store
employees at the store and regional level. In addition, aquarium and fish
supply products are more complex than dog or cat supplies and often provide
independent pet retailers that carry such products a unique advantage in
product knowledge and services. Therefore, the Company believes it represents
an effective solution to the specialty pet retailer's problems and an
efficient means for a manufacturer or supplier to distribute and market its
products.
BUSINESS STRATEGY
The Company's goals are (i) to increase its position as the leading
distributor of lawn and garden products and pet supplies in the United States
and (ii) to expand its offerings of proprietary branded products that are
complementary to the products it currently distributes. The Company's business
strategy is designed to meet the needs of retailers and manufacturers, both of
which are critical to the Company's success. The Company believes that each of
the key elements of its business strategy will enhance its position as a
distributor and facilitate its expansion into proprietary branded products.
The key elements of the Company's business strategy include:
Comprehensive Product Selection. The breadth and depth of the Company's
comprehensive selection of approximately 24,000 lawn and garden products and
approximately 21,000 pet supply products enable retailers to fulfill a
substantial portion of their product needs from a single source. In lawn and
garden supply, the Company generally focuses on those products that are suited
to distribution due to their seasonality, variable sales movements, complexity
to consumers and retailers, handling and transportation difficulties, and
which therefore generally require value-added services. In pet supplies, the
Company carries many of the best-known brands. The Company does not carry live
plants, power tools, live animals or higher priced items which are generally
sourced directly.
Value-Added Services. The Company offers a complete menu of value-added
services independently priced so that each garden or pet customer can choose a
program tailored to its individual needs. Value-added services offered include
national, regional and store level merchandise planning, promotional planning
and support, in-store merchandising and training, reorder support, stock-
balancing, as well as the actual shipping, warehousing and distribution
functions. The Company aggressively seeks opportunities to increase the range
and scope of these value-added services to help retailers sell more product.
24
<PAGE>
National Presence. The Company has invested significant resources to build
and consolidate its position as the leading national distributor of lawn and
garden products and pet supplies as well as a major national distributor of
pool supplies. Management believes that this strategy makes the Company more
attractive and efficient to both manufacturers and retailers.
Manufacturer Services. To those manufacturers that sell products directly to
retailers, the Company offers servicing arrangements pursuant to which the
Company performs sales merchandising, warehousing, delivery, store training,
billing and other services for the direct sale accounts. The Company intends
to pursue longer-term joint ventures and agency arrangements with key
manufacturers that sell directly to retailers.
Efficient Operations. The Company believes that its strategically located
warehouses, investments in MIS systems, employee training and incentive
measures have helped the Company improve its operating efficiencies. In order
to attract new retail customers and maintain relationships with existing
retailers, the Company also strives to maintain a high in-stock position and
order-fulfillment rate.
Large Retailers. Management utilizes the Company's comprehensive product
selection, national presence, value-added services and efficient operations to
develop relationships with large national and regional chains and independent
retailers that have the ability to generate significant sales volume. The
Company believes that it offers these retailers an efficient and cost
effective method of distribution. These retailers generally purchase more
merchandise per order which permits the Company to reduce its distribution
expense as a percentage of sales. The Company believes that these retailers
are gaining market share in the lawn and garden industry and hopes to grow
with its customers to the extent they continue to grow.
GROWTH STRATEGY
The Company has developed a multi-faceted growth strategy that is designed
to increase its position as the leading distributor of lawn and garden
products and to continue to consolidate the fragmented pet supply industry.
The Company intends to continue to expand in these markets by (i) continuing
to make strategic acquisitions, (ii) obtaining new customers and increasing
sales to existing customers, (iii) adding new product lines or expanding
existing product lines that are currently distributed by the Company and (iv)
expanding its offerings of proprietary branded products that are complementary
to the products it currently distributes.
Acquisitions. The Company seeks to continue to strengthen its leadership
position in the consolidation of the distribution channels for the lawn and
garden and pet supply industries. The Company's strategy is to acquire
companies in these industries that enable it to gain access to new customers,
enter new geographical areas, lower operating cost levels and improve service
levels to existing customers. Management believes that the Company's national
presence brings certain synergies to regional distributors that are appealing
to manufacturers. In addition, the Company believes the fragmented nature of
the pet supply industry and the continuing consolidation of both retailers and
distributors will create a number of acquisition opportunities. For example,
in July 1996, the Company acquired Kenlin, the largest distributor of pet
supply products in the eastern United States, and, in February 1997, the
Company acquired the pet supply business of Country Pet Supply, a distributor
of pet supply and pet food products.
Customer Growth. The Company's national presence has enabled it to obtain
new customers as well as expand sales to certain existing customers desiring
more centralized and efficient distribution. For example, during the period
from 1991 to June 30, 1997, the Company added approximately 1,200 Wal*Mart
stores through acquisitions and internal growth and now serves approximately
1,700, or 74% of Wal*Mart stores nationally. The Company's goal is to grow
with its customers, such as Wal*Mart and Home Depot, to the extent they
continue to add new stores and expand lawn and garden sections. Management
also plans to continue to seek new relationships with large volume accounts
whether on a local, regional or national scale. The Company intends to seek to
negotiate additional long-term agreements with manufacturers, such as the
Solaris Agreement.
25
<PAGE>
Product Line Expansion. The Company will also seek to add new product lines
or expand existing product lines where the Company believes its strength in
managing complex product categories or its national presence will make the
product line a value-added member of the distribution channel. In addition,
the Company perceives significant opportunities in the pet supply business as
the industry consolidates in a manner similar to the lawn and garden industry.
Management believes that its ability to deliver pet supplies cost-effectively
and to provide value-added services to retailers has contributed to the
Company's success in this area.
Grow Branded Products. The Company intends to pursue the acquisition of
complementary branded product lines or companies which can benefit from the
Company's distribution system and expertise and which the Company believes
typically offer higher margins than distributed products. For example, in
January 1997, the Company acquired Four Paws, one of the largest manufacturers
of dog, cat, reptile and small animals products in the United States,
including brand names such as Magic Coat(R) and Four Paws(R), and, in May
1997, the Company acquired the United States and Canada flea and tick
protection business of Sandoz, including ownership in the United States and
Canada of the Zodiac(R) and Vet-Kem(R) trademarks. The Company also seeks to
develop new complementary products within its existing proprietary branded
product lines. See "--Products--Proprietary Branded Products."
PRODUCTS
General
In fiscal 1996, lawn and garden products accounted for approximately 76% of
the Company's net sales, pet supplies accounted for approximately 19% and pool
supplies accounted for approximately 5%. The Company offers its customers a
comprehensive selection of brand name lawn and garden products and pet and
pool supplies. This selection consists of approximately 45,000 products from
approximately 1,000 manufacturers. The Company generally focuses on those lawn
and garden brand name products that are suited to distribution due to their
seasonality, variable sales movements, complexity to consumers and retailers,
handling and transportation difficulties, and which therefore generally
require value-added services. The Company focuses on these types of products
because it believes that retailers cannot source these products directly from
suppliers as effectively as they can through distributors and that
manufacturers of these products are likely to view the services offered by the
Company as highly desirable and cost-effective. The Company carries many of
the best-known brands in pet foods and supplies and combines these products
into single shipments, providing its pet supply customers a wide variety of
products on a cost-effective basis. Through the acquisition of Kenlin in 1996
and Country Pet Supply in 1997, the Company has significantly expanded its pet
supply distribution business. Management intends to continue to expand this
business line due to the relatively large number of SKUs (approximately
21,000), the fragmented nature of the retail segment for pet supplies, the
lack of any national distributor in this field and a more steady year-round
sales volume with a peak selling season in the last quarter of the calendar
year. The Company does not carry live plants, animals, power tools or high
priced items which are generally sourced directly from manufacturers. The
Company believes that its broad and deep selection of products permits
retailers to fulfill substantially all of their lawn, garden, pet and pool
supply requirements from a single source. In fiscal 1996, substantially all of
the Company's products had suggested retail prices of $20 or less.
26
<PAGE>
The following table indicates the approximate number of SKUs, the
approximate number of manufacturers and suppliers and selected brand names in
each of the Company's current major product categories according to the
Company's internal records. The Company may change from time to time the
selection and mix of its products, which may change the approximate number of
manufacturers and suppliers and SKUs depending on the season.
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
MANUFACTURERS APPROXIMATE
AND NUMBER OF SELECTED
PRODUCT CATEGORY SUPPLIERS SKUS BRAND NAMES
---------------- ------------- ----------- -----------
<C> <C> <C> <S>
Chemicals and Fertilizer(1)................ 100 4,000 Ortho, Round-Up,
Miracle-Gro, Green
Light, American
Cyanamid, Ironite, Raid,
Black Flag, Lilly
Miller, Grant's
Other Lawn and Garden Products(2).......... 700 20,000 Matthews, Sunset,
Gilmour, Corona,
Rainbird, Rubbermaid,
Perky-Pet
Pet Supplies(3)............................ 200 21,000 Four Paws, Zodiac,
Hagen, Tetra/Second
Nature, All Glass
Aquariums, Penn Plax
Pool Supplies and Other Seasonal Items(4).. 20 400 HTH, Pace
</TABLE>
- --------
(1) Category includes fertilizers, insecticides, weed killers, herbicides,
animal repellents, other chemicals and electronic pest controls.
(2) Category includes barbecues, bird feeders, lawn and flower seeds, tomato
baskets, gloves, instructional books, plant stakes, safety equipment,
plant meters, weather instruments, wheelbarrows, spreaders, rakes, long
handle tools, hand tools, brooms, axes, shears, saws, hedge tools, hoses,
sprayers, dusters, sprinklers, drip watering systems and nozzles.
(3) Category includes various pet supplies and pet care products and dog, cat,
fish and bird food.
(4) Category includes pool chemicals, equipment, toys, Christmas products and
other seasonal items.
Proprietary Branded Products
The principal lawn and garden product lines owned by the Company are the
Matthews(R) line of redwood products, the Grant's(R) line of ant control
products, the Greentouch line of cutting tools and four proprietary brands of
fertilizer. The Matthews(R) line of redwood products consists of redwood tubs,
planter boxes and trellises. The Grant's(R) line of ant control products
consists of ant stakes, granules and twists and ties. The Greentouch(R) line
of cutting tools consists of small hand tools used for gardening which are
supplied to the Company by a contract manufacturer located in the Far East.
The Company has four proprietary brands of fertilizer--Colorado's Own(R) and
Mountain States(R), which are manufactured by the Company, and Easy-Gro(R) and
Turf Magic(R), which are supplied to the Company by contract manufacturers.
The principal pet supply product lines owned by the Company are the Four
Paws' line of animal products, the United States and Canada flea and tick
protection business of Sandoz and the Island Aquarium line of aquariums. In
January 1997, the Company acquired Four Paws, one of the largest manufacturers
of dog, cat, reptile and small animal products in the United States, including
brand names such as Magic Coat(R) and Four Paws(R). Four Paws products are
distributed throughout the United States, Canada, Europe and Asia. Sales in
1996 were approximately $30 million. In May 1997, the Company acquired the
United States and Canada flea and tick protection business of Sandoz. The
acquisition includes ownership in the United States and Canada of the
Zodiac(R) and Vet-Kem(R) trademarks as well as those of Ovitrol(R),
Siphotrol(R), Fleatrol(TM), vIGRen(R), Petcor(R), Precor(R) and Natural
Signature(R). These products--which include on-animal sprays, shampoos and
powders, collars, indoor foggers, aerosols,
27
<PAGE>
concentrates and pump-sprays--are based on the active ingredient methoprene to
which the Company has acquired exclusive rights in the United States and
Canada. In connection with this acquisition, the Company acquired a
manufacturing, formulation, packaging and research facility in Dallas, Texas
and all existing inventory, along with a staff of highly trained technical
professionals. Additionally, the Company manufactures aquariums sold under the
brand name Island(R) Aquarium.
The Company intends to pursue the acquisition of additional proprietary
branded products in both the lawn and garden and pet supply product industries
which would benefit from access to the Company's distribution system and
expertise and which the Company believes typically offer higher margins than
distributed products.
In connection with the expansion of its proprietary branded products, the
Company now currently operates eight manufacturing facilities. In addition,
certain of its proprietary branded products are manufactured by contract
manufacturers. The Company also has a development team that is responsible for
developing new products within existing proprietary branded product lines and
the development of new proprietary branded product lines.
SALES AND SERVICE
The Company's strategy is to offer a broad range of services to help
retailers and manufacturers maximize their sales and profitability. The
Company has implemented this strategy by developing a knowledgeable and
profit-incented sales force and by offering a broad menu of services.
Sales. At May 31, 1997, the Company employed approximately 700 sales and
marketing personnel located throughout its distribution center network. Sales
and marketing personnel typically service retail customers within a 250 mile
radius of the distribution centers. They are trained with knowledge of local
market conditions, the Company's products and merchandising skills. A
significant number of sales personnel are certified nurserymen, horticultural
graduates and/or master gardeners. The Company has divided its sales force
into key account managers, who act as consultants to the buyers of large
retailers, and field sales personnel, who are responsible for servicing
specific retail customers in their assigned territory.
Menu of Value-Added Services. The Company offers retailers and manufacturers
a comprehensive menu of value-added services with separate or combination
prices from which each customer may select according to its individual needs.
Each value-added service is generally designed either to increase a retailer's
sales or decrease a retailer's costs. The Company generally offers retailers
deliveries within one business day from the time the Company receives an
order. In addition to the standard delivery services, many of the Company's
customers choose a high percentage of the value-added services listed below.
Program Development. The Company's key account managers recommend and assist
retail buyers in developing national and local product listings, advertising,
promotions and shelf space planning at the beginning of and during the peak
selling season to optimize store sales and profits.
Training of Store Employees. The Company's sales personnel conduct formal
and informal product training sessions with store personnel to help them
provide informed consumer service. The Company believes that the demand for
this service is greater at larger regional and national retail chains due to
their higher employee turnover and employee inexperience with gardening
products.
Weekend Consumer Clinics. Sales personnel also conduct and assist in
preparing and giving in-store weekend consumer education clinics to help
increase retail sales and improve consumer relations.
Designing and Setting Store Displays. The Company's sales personnel assist
in designing and planning store shelves at the beginning of each season. Their
expertise in product knowledge, sales trends, in-season promotions and
consumer demand for specific products allows them to help each store adjust
shelf stock and displays to increase sales in a timely fashion.
Point-of-Purchase. The Company assists the manufacturer and retailer in the
design and installation of point-of-purchase ("POP") material to increase
sales. The POP material is generally matched to manufacturers' advertising and
promotions as well as local lawn, gardening and insect problems.
28
<PAGE>
Merchandising of Shelf Stock. The Company's store service personnel
physically restock store shelves with all the Company's merchandise on a
weekly basis. This service can also include price stickering for stores not on
electronic point-of-sale systems.
Electronic Data Interchange ("EDI"). The Company's systems offer EDI
capabilities to retailers which can include paperless invoices, payments and
product history movements to help retailers monitor, plan and order products
at a lower administrative cost.
"Hot Shot" Deliveries. The Company offers rush deliveries to help retailers
satisfy high consumer demand. This service is often critical to keep retailers
from being out-of-stock on a weekend during the peak selling season.
The Company believes that retailers choose these services because the
Company can in many cases provide them more efficiently and effectively than
manufacturers or retailers themselves. The Company's sales force often advises
and assists store management to increase or decrease shelf space of certain
products to match the expected and unexpected seasonal demands. The Company
believes that a typical store needs to change the shelf space dedicated to
lawn and garden products several times during the peak selling season. The
sales force also often highlights specific products appropriate for the local
market.
RETAILERS
The Company focuses on selling lawn and garden products to retailers with
high volume retail stores. The Company's customer base is comprised of a wide
range of retailers, including "do-it-yourself" superstores, mass merchants,
warehouse clubs, high volume local and regional nurseries, regional and
national chains of drug and grocery stores and specialty pet stores. The
following table sets forth selected lawn and garden supply and pet supply
customers of the Company for each major category of retailer.
<TABLE>
<CAPTION>
DO-IT-
YOURSELF MASS HIGH-VOLUME DRUG AND SPECIALTY
SUPERSTORES MERCHANTS NURSERIES GROCERY STORES PET STORES
- ----------- --------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Builders Bi-Mart Bachman Nurseries Albertson's Petco
Square
Costco Kmart Calloway's Nursery Bruno's PETsMART
Eagle Target Frank's Fred Meyer Pet Supplies Plus
Hardware &
Garden
Home Depot Wal*Mart Navlet's Nurseries Long's Drug Stores
Home Base Woolworth Pike Nurseries Payless Drugstrores
Lowes Sunbelt Nurseries Raley's
Orchard
Supply
Hardware
Payless
Cashways
</TABLE>
As a result of its national presence, the Company has an opportunity to
enter into relationships with national chains, whereby the Company, directly
or through its affiliates, provides services to all or substantially all of
the individual stores in the chain. From the point of view of the national
retailer, such an arrangement offers the benefit of a high level of service,
lower cost of doing business and administrative efficiencies. The Company
believes its customers also benefit from the in-depth local market knowledge
of the Company's sales personnel, in-store stocking, training of store
employees and other value-added merchandising services. Because these
arrangements are not formalized in writing, these retailers may at any time
purchase products from competing distributors.
Most major retailers, including customers of the Company, currently purchase
a portion of their lawn and garden products directly from certain large
manufacturers rather than through distributors such as the Company. If a
number of the Company's major customers were to substantially shift or
increase their purchases to direct shipments from manufacturers, the sales and
earnings of the Company could be adversely affected. See "Risk Factors--Direct
Sales," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "--Competition."
29
<PAGE>
The Company's current practice on product returns generally is to accept and
credit the return of unopened cases of products from customers where the
quantity is small, where the product has been misshipped or the product is
defective. The Company has arrangements with its manufacturers and suppliers
to stock balance and/or credit the Company for a certain percentage of
returned or defective products. While in the past the Company's return
practice has not caused any material adverse impact on operations, there can
be no assurance in the future that the Company's operations will not be
adversely impacted due to the return of products.
MANUFACTURERS AND SUPPLIERS
The Company believes that the reason manufacturers and suppliers in the lawn
and garden industry use distributors to ship a large percentage of their
products to retailers is because it is a highly efficient method of
distribution. In an industry with a large, diverse group of retailers combined
with a relatively short and dynamic selling season, the Company believes that
in most instances during the peak selling season each manufacturer or supplier
would need to make weekly deliveries of an uneconomical volume of products to
a large number of retailers in order to satisfy consumer demand. Similarly,
each week retailers would have to place multiple orders and manage separate
deliveries from a large number of manufacturers and suppliers rather than from
a comparatively small number of distributors. The Company can typically
deliver many products with one truck (often on one or more pallets for each
store) as part of its delivery route to a number of stores. On the other hand,
the same order using direct shipments from manufacturers or suppliers would
require multiple deliveries from the various manufacturers and suppliers.
The Company's national presence enables manufacturers and suppliers to
access retail outlets and end users through one primary distributor. In
addition, the Company's menu of value-added services to retailers includes
product promotion and merchandising support that the Company believes many
manufacturers and suppliers could not efficiently perform. While the Company
purchases products from approximately 1,000 different manufacturers and
suppliers, the Company believes that approximately 29% and 44% of the
Company's net sales for fiscal 1995 and fiscal 1996, respectively, were
derived from products purchased from Solaris.
Prior to the acquisition of Ortho by Monsanto, both Ortho (in late 1991) and
Monsanto (in 1993) had initiated direct sale programs. Solaris, a strategic
business unit of Monsanto, expanded these direct sales programs in 1994, which
now constitute a majority of Solaris' sales. The Company believes that these
programs had, during 1994 and fiscal 1995, an adverse effect on the Company's
lawn and garden business. The Company further believes that the adverse impact
of these programs will continue to be mitigated by the Solaris Agreement,
although there can be no assurance in this respect.
THE SOLARIS AGREEMENT
The Company entered into an agreement with Solaris effective October 1, 1995
to become the master agent master distributor for sales of Solaris products
nationwide.
The Company believes that a significant portion of its net sales and
operating income since October 1996 has been attributable to its relationship
with Solaris. Under the Solaris Agreement, Solaris is obligated to reimburse
the Company for costs incurred in connection with services provided by the
Company to Solaris' direct sales accounts. In addition, the Company receives
payments based on the level of sales of Solaris products to these accounts,
and these payments are subject to increase based on the growth of sales of
Solaris products. The Company also shares with Solaris in the economic
benefits of certain cost reductions, to the extent achieved. It is possible
that disagreements could arise between Solaris and the Company as to
measurement of the costs incurred in servicing Solaris' direct sales accounts.
The cost reimbursement arrangement is based on estimates which are subject to
reconciliation at the end of each fiscal year. As a result, the Solaris
Agreement could contribute to variability in the Company's operating results.
The relationship with Solaris embodied in the Solaris Agreement does not
assure that the Company will be profitable overall.
30
<PAGE>
Under the Solaris Agreement, Solaris continues to negotiate prices directly
with its direct sales accounts. As a result of the Solaris Agreement a
majority of the Company's sales of Solaris products are derived from servicing
direct sales accounts, whereas in 1994 and fiscal 1995, a majority of the
Company's sales of Solaris products were made by the Company as a traditional
distributor. The Company acts as the master agent on direct sales of Solaris
products to certain major retailers and the master distributor in connection
with sales of Solaris products to other distributors and retailers. The
Solaris Agreement contains provisions which, without the consent of Solaris,
could limit the Company's ability to distribute certain lawn and garden
products manufactured by suppliers other than Solaris. These provisions could
result in lower sales of non-Solaris products, which could have an adverse
effect on the Company's business. The Solaris Agreement does not expire until
September 30, 1999. However, Solaris has the right to terminate the agreement
prior to its expiration in the event of a material breach of the agreement by
the Company, including the Company's failure to satisfy certain performance
criteria, or under certain other circumstances, including a sale of Solaris.
Any such early termination would have a material adverse effect on the
Company.
MANAGEMENT INFORMATION SYSTEMS
During their weekly visits to the retail stores, sales personnel transmit
orders to the appropriate distribution centers in any one of three methods:
remote order entry units (hand held, electronic devices), telephone or
facsimile. Generally, sales personnel transmit orders several times each day.
Certain retailers can also order products directly through the Company's EDI
system or by purchasing items directly at each distribution center. After
customer orders are received and processed, shipping tickets are printed and
credit approved prior to the orders being sent to the warehouse manager. The
Company's warehouse employees then fill orders by manual selection and
packaging. The Company believes that due to the unusual shapes and sizes of
its products (e.g., hand held tools, wheelbarrows and bags of fertilizer)
current automatic order selection systems are not as efficient and cost
effective as the Company's current manual systems.
The Company's management information systems collect data needed for
receivables and inventory management, customer, product and facility
profitability analysis, as well as permit electronic data interface with
customers and suppliers. The Company is presently electronically connected
with several major customers with a variety of applications that range from
purchase order receipt to paperless invoicing. The Company has also purchased
and is now using a new shelf space planning system that optimizes retail shelf
space utilization and profitability. The Company receives more than a majority
of its daily order volume from field sales representatives utilizing hand-held
order entry computers. The Company's systems enable it to provide delivery
within one business day.
The Company is presently upgrading and installing one uniform, integrated
system on IBM Model AS-400 computers across the United States at an estimated
cost to complete of $1 million. The Company has completed the installation of
the new system for the Southwest, Midwest and Southeast regions. The Company
expects to convert the remaining regions to the new system within the next
eight months. No assurances can be given that such transition and system
enhancement can be accomplished in a timely and cost-effective manner without
disrupting the Company's operations. In addition, there can be no assurance
that the Company's current system or planned upgrade will be sufficient or
effective and that further investments in management information systems will
not be necessary.
DISTRIBUTION
In order to develop the most effective possible national distribution
network, the Company relies not only on its 40 Company-operated, distribution
centers (see "--Properties"), but also on its affiliation arrangement with two
leading regional distributors of lawn and garden products and, in the case of
Solaris products, on agreements with a group of 30 independent distributors
for specific geographic areas.
The Company generally will make deliveries from its distribution centers
within one to two days after receipt of the order and, if the customer
requests, will generally make "hot shot" deliveries within four
31
<PAGE>
hours after receipt of the order. The Company organizes its truck and delivery
routes to optimize each truck's merchandise load and number of deliveries. The
Company uses trucks to deliver a substantial percentage of the Company's
products and common carriers for a small percentage of deliveries. Common
carriers are typically used for deliveries beyond a 200 mile radius from the
distribution center.
The Company's affiliation arrangements are intended to permit the Company to
more effectively solicit national accounts and to assure that such accounts
can be effectively serviced on a national basis without requiring the Company
to incur the capital costs of opening new distribution centers or undertaking
an acquisition. The Company presently has affiliation agreements with Commerce
LLC, a distributor serving the Northeast in which the Company has a one-third
equity interest, and U.S. Garden Sales, a distributor serving Ohio and
Michigan.
Under the affiliation arrangements, Company personnel negotiate transactions
with national retail chains and the affiliated distributors provide such
retail chains with products and related services in the geographic regions in
which they operate. The Company receives fees from the affiliated distributors
to compensate it for its costs, and sales of these affiliated distributors are
not reflected in the Company's statements. The Company earned no profits in
fiscal 1996 from these arrangements as the Company set its fees in connection
with such arrangements at a level which was designed to cover only the
Company's administrative costs.
The Company has negotiated agreements with a group of 30 independent
distributors for the distribution of Solaris products. These agreements
provide coverage of geographic areas where the Company does not have
facilities or where established relationships with specific retailers make
such arrangements desirable.
On February 12, 1997, the Company entered into an agreement relating to
joint development, marketing and distribution with HR Vet. The agreement
provides HR Vet with exclusive United States and Canada sales and marketing
rights for the Vet-Kem line of methoprene-based flea and tick products sold
directly and exclusively through veterinarians, and acquired by the Company in
the Sandoz Flea and Tick Acquisition. In addition, the Company received
consumer marketing rights to certain HR Vet products.
PROPERTIES
The Company currently operates 40 distribution centers and eight
manufacturing facilities totaling approximately 2,883,000 square feet. The
Company currently owns two distribution centers located in San Antonio, Texas
and Lubbock, Texas and leases the remaining distribution centers. Most
distribution centers consist of office and warehouse space, several large bays
for loading and unloading and a store for walk-in commercial accounts. Each
distribution center provides warehouse, distribution, sales and support
functions for its geographic area under the supervision of a regional manager.
Twenty-seven distribution centers service lawn and garden products and pool
supplies, with seven of these also servicing pet supplies. Fourteen
distribution centers exclusively service pet supplies. The Company's executive
offices are located in Lafayette, California.
The Company periodically evaluates the location and efficiency of its
facilities to maximize customer satisfaction and to increase economies of
scale. Accordingly, the Company may close or relocate a distribution center
from time to time. The Company's leases generally expire between 1997 and
2005. Substantially all of the leases contain renewal provisions with
automatic rent escalation clauses. In addition to the facilities that are
owned, the Company's fixed assets are comprised primarily of trucks,
warehousing and transportation equipment. As of March 29, 1997, the Company
operated a fleet of approximately 265 trucks, of which most were leased.
During the Company's peak season it rents additional trucks.
32
<PAGE>
The table below lists the Company's distribution and manufacturing
facilities and the map on the inside cover page of this Prospectus illustrates
their locations.
WESTERN REGION EASTERN REGION NORTHWEST REGION
Bellflower, CA China Grove, NC Algona, WA
Compton, CA Damascus, OH* Boise, ID
Fullerton, CA* Hauppauge, NY(2)* Denver, CO
Orange, CA Mahwah, NJ(2) Longmont, CO*
Phoenix, AZ Providence, RI Medford, OR
Sacramento, CA(2)
Portland, OR
San Diego, CA SOUTHWEST REGION Salt Lake City, UT
San Leandro, CA*
Santa Fe Springs, CA Albuquerque, NM MIDWEST REGION
Dallas, TX(2)
Stockton, CA*
Van Nuys, CA Dallas, TX* Bloomington, IL
Visalia, CA Hammond, LA Kansas City, MO
Houston, TX(2) Minneapolis, MN
Little Rock, AR
MEXICO
SOUTHEAST REGION
Lubbock, TX
Celaya McAlester, OK
Pharr, TX Atlanta, GA
San Antonio, TX Greensboro, NC
Miami, FL
Orlando, FL
Tampa, FL
* manufacturing facility
COMPETITION
The lawn and garden products and pet supply distribution industries are
highly competitive. Traditionally, these industries have been characterized by
intense competition from large numbers of smaller local and regional
distributors--with competition based on price, service and personal
relationships. In recent years, the Company has moved aggressively to insulate
itself from this type of competition through the development of a nationwide
presence, forging relationships with manufacturers, suppliers and major
retailers and adding new value-added services. See "Business Strategy" and
"Risk Factors--Competition."
In addition to competition from other distributors, the Company also faces
existing and potentially increased competition from manufacturers and
suppliers which distribute some percentage of their products directly to
retailers, bypassing distributors, or through a dual distribution system in
which the manufacturer or supplier competes with distributors for sales to
certain accounts. See "Risk Factors--Competition" and "--Direct Sales." Such
competition is typically based on service and price. Although the Company
competes against direct sales by manufacturers and suppliers, it is often able
to participate in such direct sales by entering into agreements with the
manufacturers and suppliers pursuant to which it provides the manufacturers
and suppliers with order processing, warehousing, shipping and certain in-
store services in connection with such direct sales in return for a fee from
the manufacturers and suppliers.
EMPLOYEES
As of May 31, 1997, the Company had approximately 2,700 employees of which
approximately 2,300 were full-time employees and 400 were temporary employees.
The Company hires substantial numbers of temporary employees for the peak
shipping season of February through June in order to meet the increased demand
experienced during the spring and summer months, including merchandising in
stores. All of the Company's temporary employees are paid on an hourly basis.
The Company considers its relationship with its employees to be good.
33
<PAGE>
ENVIRONMENTAL CONSIDERATIONS
The Company's subsidiary, Grant Laboratories, Inc., which manufactures ant
control products, and many of the products distributed by the Company are
subject to regulation by federal, state and local authorities. In addition, in
connection with Sandoz Flea and Tick Acquisition, the Company acquired a
production facility in Texas which manufactures, among other things, products
based upon the active ingredient methoprene, and is subject to regulation by
federal, state and local authorities. Such regulations are often complex and
are subject to change. Environmental regulations may affect the Company by
restricting the manufacturing or use of its products or regulating their
disposal. Regulatory or legislative changes may cause future increases in the
Company's operating costs or otherwise affect operations. Although the Company
believes it is and has been in substantial compliance with such regulations,
that it is adequately indemnified with respect to the environmental
liabilities of the operations of the Texas facility acquired pursuant to the
Sandoz Flea and Tick Acquisition and has strict internal guidelines on the
handling and disposal of its products, there is no assurance in the future
that the Company may not be adversely affected by such regulations or incur
increased operating costs in complying with such regulations. However, neither
the compliance with regulatory requirements nor the Company's environmental
procedures can ensure that the Company will not be subject to claims for
personal injury, property damages or governmental enforcement.
LITIGATION
The Company is not a party to any material litigation.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of the
date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William E. Brown........ 55 Chairman of the Board and Chief Executive Officer
Glenn W. Novotny........ 50 President, Chief Operating Officer and Director
Neill J. Hines.......... 57 Executive Vice President
Robert B. Jones......... 64 Vice President, Chief Financial Officer and Secretary
Lee D. Hines, Jr.(1).... 51 Director
Daniel P. Hogan,
Jr.(1)................. 69 Director
</TABLE>
- --------
(1) Member of the Audit and Compensation Committee.
Mr. Brown has been Chairman and Chief Executive Officer of the Company since
1980. Additionally, since 1978 he has served as the Chief Executive Officer of
Grant Laboratories, Inc., a manufacturer of garden-related insecticides. From
1977 to 1980, Mr. Brown was Senior Vice President of the Vivitar Corporation
with responsibility for Finance, Operations, and Research & Development. From
1972 to 1977, he was with McKesson Corporation where he was responsible for
its 200-site data processing organization. Prior to joining McKesson
Corporation, Mr. Brown spent the first 10 years of his business career at
McCormick, Inc. in manufacturing, engineering and data processing.
Mr. Novotny has been President of the Company since June 1990 and was
President of Weyerhaeuser Garden Supply Company ("WGS") since 1988. Prior
thereto, he was with Weyerhaeuser Corporation for 20 years with a wide range
of managerial experience including manufacturing, accounting, strategic
planning, sales, general management and business turnarounds. From 1985 to
1988, Mr. Novotny was Region General Manager, Building Materials Distribution.
From 1982 to 1985, he was Regional General Manager, Southern Mill Direct
Sales. From 1979 to 1982, Mr. Novotny managed the strategic planning and
analysis department of Weyerhaeuser's Solid Wood Business.
Mr. Hines joined the Company in June 1990 as Executive Vice President and
was Vice President-Finance since 1989 with WGS. Prior thereto, he was with
Weyerhaeuser Corporation for 25 years in a broad variety of positions
including Eastern Region Manager of Finance and Planning, Forest Products;
North Carolina Business and Financial Manager; Plywood Plant Manager; Manager
Finishing, Shipping & Customer Service; Paper Mills; and various
controllership positions.
Mr. Jones joined the Company in July 1991 as Corporate Controller. He was
appointed to his present position in June 1993. From May 1990 to July 1991,
Mr. Jones was Executive Vice President of International Tropic-Cal, Inc. From
February 1988 to April 1990, Mr. Jones was Vice President and Chief Financial
Officer of Compu-Rite Corporation, a manufacturer of computer ribbons. Prior
to joining Compu-Rite, Mr. Jones was Vice President and Chief Financial
Officer of Vivitar Corporation from 1982 to 1988.
Mr. Hines, Jr. has served as a Director since 1991. Mr. Hines, Jr. is a
self-employed business consultant. From April 1991 until June 1993, he was
Executive Vice President and Chief Financial Officer of the Company. From May
1990 to April 1991, Mr. Hines was President and Chief Executive Officer of
International Tropic-Cal, Inc., a designer and marketer of sunglasses and hair
accessories. From September 1988 to May 1990, Mr. Hines was Vice President and
Chief Financial Officer of Avalon Marketing, Inc. From 1983 to September 1988,
he was Chief Financial Officer of Applause Inc. and Vice President of Finance
of Applause from 1982 to 1983. Prior to joining Applause, Mr. Hines served as
the Chief Financial Officer of Vivitar from 1977 to 1982.
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<PAGE>
Mr. Hogan has served as a Director since October 1993. Mr. Hogan is a self-
employed business consultant. Prior to his retirement in 1986, Mr. Hogan was a
Vice President of Chevron Chemical Company and General Manager of its Ortho
Consumer Products Division.
The Company's board of directors has an Audit and Compensation Committee.
The Audit and Compensation Committee recommends the annual engagement of the
Company's auditors with whom the Committee will review the scope of audit and
non-audit assignments, related fees, the accounting principles used by the
Company in financial reporting, internal financial auditing procedures and the
adequacy of the Company's internal control procedures. The Audit and
Compensation Committee also determines officers' salaries and bonuses, and
administers the Company's 1993 Omnibus Equity Incentive Plan. Further, the
majority of the independent and disinterested directors must approve any
material agreements or arrangements between the Company and directors,
officers, existing principal stockholders and their affiliates. Lee D. Hines,
Jr. and Daniel P. Hogan, Jr. currently serve as members of the Audit and
Compensation committee. The Company's directors are elected at the annual
stockholders' meeting and serve until their respective successors are elected
or until death, resignation or removal. Officers are appointed by, and serve
at the discretion of, the board of directors. There are no family
relationships among any directors or executive officers of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that its directors will
not be liable to the Company or its stockholders for monetary damages for
breaches of fiduciary duty, to the fullest extent permitted by law. This
provision is intended to allow the Company's directors the benefit of the
Delaware General Corporation law which provides that directors of Delaware
corporations may be relieved of monetary liability for breaches of their
fiduciary duty of care except under certain circumstances, including breach of
the duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct or known violation of law or any transaction from which
the director derived an improper personal benefit.
The Company has entered into separate indemnification agreements with each
of the directors and executive officers, whereby the Company agrees, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors or officers, to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, and to obtain directors' and officers' insurance if
available at reasonable terms. There is no pending litigation or proceeding
involving a director, officer, employee or other agent of the Company as to
which indemnification is being sought, nor is the Company aware of any pending
or threatened litigation, that may result in claims for indemnification by any
director, officer, employee or other agent.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has an Audit and Compensation Committee, consisting
of two independent and disinterested directors which makes decisions regarding
executive compensation. Lee D. Hines, Jr., a member of the Board of Directors
and the Audit and Compensation Committee, performed certain consulting
services for the Company during fiscal 1996 for which he received compensation
of $40,000.
BOARD COMPENSATION
Directors who are not employees of the Company are paid directors fees
consisting of $12,000 per year and $1,000 for each Board of Directors meeting
attended. Directors who attend meetings of the Audit and Compensation
Committee receive an additional $1,000 for each meeting not held on the same
day as a Board of Directors meeting. In addition, Lee D. Hines, Jr. performed
certain consulting services for the Company during fiscal 1996 for which he
received compensation of $40,000. In February 1996, the Board of Directors
adopted a Nonemployee Director Stock Option Plan. This plan provides for the
grant of options to outside directors. There are 100,000 shares of Common
Stock reserved for issuance upon exercise of options pursuant to this plan. As
of May 31, 1997, options to purchase 11,380 shares of Common Stock at an
average exercise price of $10.11 had been granted to each of the two outside
directors.
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<PAGE>
SELLING STOCKHOLDERS
William E. Brown, the Company's Chairman of the Board and Chief Executive
Officer will sell 200,000 shares of Common Stock in the Offering. Prior to the
Offering, Mr. Brown is the beneficial owner of no shares of Common Stock and
1,806,359 shares of Class B Stock or 11.9% of the total number of shares of
Common Stock and Class B Stock outstanding. In connection with the Offering,
Mr. Brown will convert 200,000 shares of Class B Stock into Common Stock for
sale in the Offering. After the Offering, Mr. Brown will own no shares of
Common Stock and 1,606,359 shares of Class B Stock or 8.0% of the total number
of shares of Common Stock and Class B Stock outstanding. After the Offering
and assuming the Underwriters' over-allotment option is not exercised, Mr.
Brown will control approximately 45.8% of the voting power of the capital
stock of the Company.
In addition, Robert B. Jones, the Company's Vice President and Chief
Financial Officer will sell 10,000 shares of Common Stock in the Offering.
Prior to the Offering, Mr. Jones is the beneficial owner of 12,008 shares of
Common Stock or less than 1% of the total number of shares of Common Stock and
Class B Stock outstanding. After the Offering, Mr. Jones will own 2,008 shares
of Common Stock or less than 1% of the total number of shares of Common Stock
and Class B Stock outstanding. The foregoing stock ownership data excludes
options to purchase 46,000 shares of the Company's Common Stock held by Mr.
Jones.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 40,000,000 shares of Common Stock ("Common Stock"),
3,000,000 shares of Class B Stock ("Class B Stock") and 1,000 shares of
Preferred Stock ("Preferred Stock"). Upon the closing of the Offering,
18,323,182 shares of Common Stock, 1,663,167 shares of Class B Stock and 100
shares of Preferred Stock will be issued and outstanding (assuming no exercise
of the Underwriters' over-allotment option).
The following summary description of the Company's capital stock does not
purport to be complete and is subject to and is qualified in its entirety by
the description of the Company's capital stock contained in the Company's
Certificate of Incorporation, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Reference is made
to such exhibit for a detailed description of the provisions thereof
summarized below.
COMMON STOCK AND CLASS B STOCK
Voting, Dividend and Other Rights. The voting powers, preferences and
relative rights of the Common Stock and the Class B Stock are identical in all
respects, except that (i) the holders of Common Stock are entitled to one vote
per share and the holders of Class B Stock are entitled to the lesser of ten
votes per share or 49% of the total votes cast, (ii) stock dividends on Common
Stock may be paid only in shares of Common Stock and stock dividends on Class
B Stock may be paid only in shares of Class B Stock and (iii) shares of Class
B Stock have certain conversion rights and are subject to certain restrictions
on ownership and transfer described below under "Conversion Rights and
Restrictions on Transfer of Class B Stock." Except as described above,
issuances of additional shares of Class B Stock and modifications of the terms
of the Class B Stock require the approval of a majority of the holders of the
Common Stock and Class B Stock, voting as separate classes. The Certificate of
Incorporation cannot be modified, revised or amended without the affirmative
vote of the majority of outstanding shares of Common Stock and Class B Stock,
voting separately as a class. Except as described above or as required by law,
holders of Common Stock and Class B Stock vote together on all matters
presented to the stockholders for their vote or approval, including the
election of directors. The stockholders are not entitled to vote cumulatively
for the election of directors.
After the sale of the Common Stock offered hereby, the outstanding shares of
Common Stock will equal 91.7% of the total shares outstanding (and, together
with the 100 shares of Series A Preferred Stock owned by Monsanto Company,
will have 52.6% of the combined voting power of the outstanding shares), and
the holders of Class B Stock will have 47.4% of the combined voting power of
the outstanding shares. The holders of the Class B Stock will, therefore, be
likely to be able to elect the entire Board of Directors of the Company and to
determine the outcome of any matter submitted to the stockholders for approval
including the power to determine the outcome of all corporate transactions.
Each share of Common Stock and Class B Stock is entitled to receive
dividends if, as and when declared by the Board of Directors of the Company
out of funds legally available therefor. The Common Stock and Class B Stock
share equally, on a share-for-share basis, in any cash dividends declared by
the Board of Directors.
Stockholders of the Company have no preemptive or other rights to subscribe
for additional shares. Subject to any rights of holders of any Preferred
Stock, all holders of Common Stock and Class B Stock, regardless of class, are
entitled to share equally on a share-for-share basis in any assets available
for distribution to stockholders on liquidation, dissolution or winding up of
the Company. No Common Stock or Class B Stock is subject to redemption or a
sinking fund. All shares of Common Stock offered hereby will be, when so
issued or sold, validly issued, fully paid and nonassessable.
Conversion Rights and Restrictions on Transfer of Class B Stock. The Common
Stock has no conversion rights. However, at the option of the holder, each
share of Class B Stock is convertible at any
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<PAGE>
time and from time to time into one share of Common Stock. If at any time the
holders of a majority of outstanding shares of Class B Stock vote to convert
the outstanding shares of Class B Stock to Common Stock, then all outstanding
shares of Class B Stock shall be deemed automatically converted into shares of
Common Stock.
The Company's Certificate of Incorporation provides that any holder of
shares of Class B Stock desiring to transfer such shares to a person other
than a Permitted Transferee (as defined below) must present such shares to the
Company for conversion into an equal number of shares of Common Stock upon
such transfer. Thereafter, such shares of Common Stock may be freely
transferred to persons other than Permitted Transferees, subject to applicable
securities laws.
Shares of Class B Common Stock may not be transferred except generally to
family members, certain trusts, heirs and devisees (collectively, "Permitted
Transferees"). Upon any sale or transfer of ownership or voting rights to a
transferee other than a Permitted Transferee or to the extent an entity no
longer remains a Permitted Transferee, such shares of Class B Stock will
automatically convert into an equal number of shares of Common Stock.
Accordingly, no trading market is expected to develop in the Class B Stock and
the Class B Stock will not be listed or traded on any exchange or in any
market.
Effects of Disproportionate Voting Rights. The disproportionate voting
rights of the Common Stock and Class B Stock could have an adverse effect on
the market price of the Common Stock. Such disproportionate voting rights may
make the Company a less attractive target for a takeover than it otherwise
might be, or render more difficult or discourage a merger proposal, a tender
offer or a proxy contest, even if such actions were favored by stockholders of
the Company other than the holders of the Class B Stock. Accordingly, such
disproportionate voting rights may deprive holders of Common Stock of an
opportunity to sell their shares at a premium over prevailing market prices,
since takeover bids frequently involve purchases of stock directly from
stockholders at such a premium price.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to issue up to
1,000 shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders.
The issuance of Preferred Stock with voting and conversion rights may
adversely affect the voting power of the holders of the Common Stock.
In July 1995, the Company issued 100 shares of Series A Preferred Stock to
Monsanto Company, of which Solaris is a strategic business unit. The Series A
Preferred Stock is entitled to receive a cumulative 5% annual cash dividend
which must be paid prior to the declaration or payment of any dividends on the
Common Stock. Each share of Series A Preferred Stock is entitled to a
liquidation preference of $9,000 per share, is convertible into 1,000 shares
of Common Stock, votes together with the Common Stock and has a number of
votes equal to the number of shares of Common Stock into which it is
convertible.
The Company has no present plans to issue any additional shares of Preferred
Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. This statute generally prohibits, under certain
circumstances, a Delaware corporation whose stock is publicly traded, from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder,
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<PAGE>
unless (i) a corporation has elected in its certificate of incorporation or
bylaws not to be governed by this Delaware law (the Company has not made such
an election); (ii) prior to the time the stockholder became an interested
stockholder, the board of directors approved either the business combination
or the transaction which resulted in the person becoming an interested
stockholder, (iii) the stockholder owned at least 85% of the outstanding
voting stock of the corporation (excluding shares held by directors who were
also officers or held in certain employee stock plans) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder or (iv) the business combination was approved by the board of
directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder). An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or any time within the prior three years did own) 15% or more of the
corporation's outstanding voting stock. The term "business combination" is
defined generally to include mergers, consolidations, stock sales, asset-based
transactions, and other transactions resulting in a financial benefit to the
interested stockholder.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. serves as the transfer agent and
registrar for the Company's Common Stock.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Hambrecht & Quist LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Wasserstein Perella Securities, Inc. have
severally agreed to purchase from the Company and the Selling Stockholders the
following respective numbers of shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Hambrecht & Quist LLC.................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................
Wasserstein Perella Securities, Inc...................................
---------
Total................................................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days from the date of this Prospectus, to purchase up to 750,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the table bears to 5,000,000, and the Company will be
obligated, pursuant to such options, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares of Common Stock on the same
terms as those on which the 5,000,000 shares are being offered.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act.
The Representatives of the Underwriters have advised the Company that,
pursuant to Regulation M under the Securities Act, certain persons
participating in the Offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of fixing or maintaining
the price of the Common Stock. A "syndicate covering transaction" is the bid
for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position incurred by the Underwriters in connection with the
Offering. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or
syndicate member in connection with the Offering if the Common Stock
originally sold by such Underwriter or syndicate member is purchased by the
Representatives in a syndicate covering transaction and has therefore not been
effectively placed by such Underwriter or syndicate member. The
Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
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<PAGE>
As permitted by Rule 103 under the Exchange Act, Underwriters or prospective
Underwriters that are market makers ("passive market makers") in the Common
Stock may make bids for or purchases of Common Stock on the Nasdaq National
Market until such time, if any, when a stabilizing bid for such securities has
been made. Rule 103 generally provides that: (i) a passive market maker's net
daily purchases of the Common Stock may not exceed 30% of its average daily
trading volume in such securities for the two full consecutive calendar months
(or any 60 consecutive days ending within the 10 days) immediately preceding
the filing date of the registration statement of which this Prospectus forms a
part; (ii) a passive market maker may not effect transactions or display bids
for the Common Stock at a price that exceeds the highest independent bid for
the Common Stock by persons who are not passive market makers; and (iii) bids
made by passive market makers must be identified as such.
Wasserstein Perella Securities, Inc., one of the Representatives of the
Underwriters, has, from time to time, provided financial advisory services to
the Company in connection with acquisitions, for which the firm received
customary fees.
The Company and each of the directors and executive officers of the Company
have agreed not to offer to sell, sell, contract to sell or otherwise dispose
of any shares of Common Stock of the Company or securities convertible or
exchangeable for any shares of Common Stock of the Company for a period of 90
days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. See "Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Sales of substantial amounts of Common Stock in the public market could have
an adverse impact on the market price of the Common Stock. After the closing
of the Offering, the Company will have 18,323,182 shares of Common Stock and
1,663,167 shares of Class B Stock outstanding. Of these shares, 18,146,313,
including the 5,000,000 shares offered hereby, the 2,530,000 shares of Common
Stock that were sold by the Company in the initial public offering, the
5,750,000 shares of Common Stock sold in the public offering in November 1995
and the 2,752,500 shares of Common Stock sold in the public offering in
July 1996 and 11,260 shares of Common Stock issuable upon conversion of the
Class B Stock, will be freely tradeable without restriction under the
Securities Act, except for any shares purchased by affiliates of the Company,
which will be subject to certain resale limitations of Rule 144 promulgated
under the Securities Act. The remaining 176,869 shares of Common Stock and
1,651,907 shares of Class B Stock, which are held by the Company's directors
and executive officers, are subject to lock-up agreements with the
Underwriters. The directors and executive officers of the Company who hold
such shares of Common Stock have agreed not to sell or otherwise dispose of
any shares for 90 days after the date of this Prospectus without the prior
written consent of Alex. Brown & Sons Incorporated. After the expiration of
the 90 day lock-up period, these shares may be sold in accordance with Rule
144. In addition, 193,104 shares and 400,126 shares of Common Stock issued in
connection with prior acquisitions, which are freely tradeable under the
Securities Act, are subject to acquisition related lockup agreements until
April 1998 and January 1999, respectively.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned for at
least one year shares of Class B Stock or Common Stock that are treated as
"restricted securities," including persons who may be deemed affiliates of the
Company, would be entitled to sell, within any three-month period, a number of
shares of Common Stock that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (183,332 shares immediately after the
Offering) or the average weekly trading volume in the Common Stock during the
four calendar weeks preceding the date on which notice of such sale is given,
provided certain manner of sale and notice requirements and requirements as to
the availability of current public information about
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the Company are satisfied. Under Rule 144(k), a stockholder who is deemed not
to have been an affiliate of the Company at any time during the 90 days
preceding a sale by such stockholder, and who has beneficially owned for at
least two years shares of Common Stock that are treated as "restricted
securities," would be entitled to sell such shares without regard to the
foregoing restrictions and requirements.
The Company has registered under the Securities Act, 2,000,000 shares of
Common Stock reserved for issuance under the 1993 Equity Incentive Stock Plan,
1,500,000 shares of Common Stock on Form S-4 for use in potential
acquisitions, 100,000 shares of Common Stock reserved for issuance under the
Nonemployee Director Stock Option Plan and 400,000 shares of Common Stock
under the Employee Stock Purchase Plan.
The Company can make no predictions as to the effect, if any, that sales of
shares of Common Stock or the availability of Common Stock for sale will have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market could adversely
affect the market price of the Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity securities.
REGISTRATION RIGHTS
The Company has granted certain rights with respect to the registration of
its shares under the Securities Act to Monsanto and to former stockholders of
a corporation acquired by the Company in 1993. In the event that the Company
proposes to register any of its Common Stock under the Securities Act, either
for its own account or the account of other security holders, Monsanto and
such former stockholders will be entitled to notice of such registration and
will be entitled to include their Common Stock in such registration, subject
to certain marketing and other limitations. As of September 30, 1995, the
Company had a Registration Statement in effect covering 204,420 shares of
Common Stock for resale by the former stockholders of the corporation acquired
by the Company. In addition, Monsanto has the right, subject to certain
limitations, to require the Company, on not more than one occasion, to file a
registration statement under the Securities Act in order to register not less
than 70,000 shares of Common Stock. Any such demand registration shall be at
the expense of Monsanto unless it is effected pursuant to Form S-3. The
Company may in certain circumstances defer such registrations.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Orrick, Herrington & Sutcliffe LLP, San
Francisco, California. Certain matters will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements and the related financial statement
schedule of the Company for the year ended September 28, 1996 included in this
Prospectus and elsewhere in the registration statement and the financial
statements of the Sandoz flea and tick protection business for the year ended
September 30, 1996 and the consolidated financial statements of Four Paws
Products, Ltd. for the year ended December 31, 1996 incorporated in this
Prospectus by reference from the Company's Current Report on Form 8-K/A dated
April 3, 1997 and July 14, 1997, respectively, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement or incorporated by reference
herein, and have been so included, or incorporated, in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act on Form S-3
(together with all amendments and exhibits thereto) with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto, certain parts of which have been omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus regarding the contents of any contract or other
document are not necessarily complete and in each instance reference is hereby
made to the copy of such contract or document filed as an exhibit to the
Registration Statement. Copies of the Registration Statement and the exhibits
and schedules thereto may be inspected, without charge, at the principal
office of the Commission located at 450 Fifth Street, N.W., Washington, D.C.
20549, the New York Regional Office located at 7 World Trade Center, Suite
1300, New York, New York 10048, and the Chicago Regional Office located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, or obtained
upon payment of prescribed rates from the Public Reference Section of the
Commission at its principal office.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports and other information with the
Commission. Reports, proxy statements and other information filed by the
Company can be inspected and copied (at prescribed rates) at the offices of
the Commission set forth under "Additional Information" above. In addition,
the Commission maintains a World Wide Web site on the Internet at www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Quotations
relating to the Company's Common Stock appear on the Nasdaq National Market
and such reports, proxy statements and other information concerning the
Company can also be inspected at the offices of The Nasdaq Stock Market, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are hereby incorporated by reference in this Prospectus:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1996, as amended; and
(2) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 28, 1996 and March 29, 1997; its Current Reports on Form 8-K
dated October 13, 1996, October 30, 1996, November 11, 1996, January 20,
1997 and May 26, 1997; and its Current Reports on Form 8-K/A dated April 3,
1997 and July 14, 1997.
All documents filed by the Company pursuant to sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the securities offered hereby shall be
deemed to be incorporated by reference in this Prospectus. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained in any subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
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<PAGE>
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents which are not specifically incorporated
by reference into the information that this Prospectus incorporates. Requests
for such copies should be directed to the Company's principal executive
offices at: Central Garden & Pet Company, 3697 Mt. Diablo Boulevard,
Lafayette, California 94549, Attn: Chief Financial Officer, (510) 283-4573.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Central Garden & Pet Company
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets, September 28, 1996, September 30, 1995 and
March 29, 1997 (unaudited).............................................. F-3
Consolidated Statements of Income for Fiscal Year Ended September 28,
1996, the Nine-Month Period Ended September 30, 1995 and Fiscal Year
Ended December 25, 1994 and the unaudited Six-Month Periods Ended March
29, 1997 and March 30, 1996............................................. F-4
Consolidated Statements of Shareholders' Equity for Fiscal Year Ended
September 28, 1996, the Nine-Month Period Ended September 30, 1995 and
Fiscal Year Ended December 25, 1994 and the unaudited Six-Month Period
Ended March 29, 1997.................................................... F-5
Consolidated Statements of Cash Flows for Fiscal Year Ended September 28,
1996, the Nine-Month Period Ended September 30, 1995 and Fiscal Year
Ended December 25, 1994 and the unaudited Six-Month Periods Ended March
29, 1997 and March 30, 1996............................................. F-6
Notes to Consolidated Financial Statements for Fiscal Year Ended
September 28, 1996, the Nine-Month Period Ended September 30, 1995 and
Fiscal Year Ended December 25, 1994 and the unaudited Six-Month Periods
Ended March 29, 1997 and March 30, 1996................................. F-7
</TABLE>
F-1
<PAGE>
LOGO
--------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-
2230Facsimile: (415) 247-4329
INDEPENDENT AUDITORS' REPORT
Board of Directors
Central Garden & Pet Company
Lafayette, California
We have audited the accompanying consolidated balance sheets of Central
Garden & Pet Company (the "Company") and subsidiaries as of September 28, 1996
and September 30, 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for the fiscal year ended September 28,
1996, the nine-month period ended September 30, 1995 and the fiscal year ended
December 25, 1994. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries as of September 28, 1996 and September 30, 1995, and the results
of their operations and their cash flows for the fiscal year ended September
28, 1996, the nine-month period ended September 30, 1995 and the fiscal year
ended December 25, 1994 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
November 15, 1996 (May 23, 1997 as to Note 12)
LOGO
F-2
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28, MARCH 29,
1995 1996 1997
------------- ------------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................. $ 143 $ 1,272 $ 14,843
Accounts receivable, less allowance
for doubtful accounts of $4,161,
$5,278 and $4,705.................... 41,315 62,231 127,197
Inventories........................... 69,425 169,835 270,722
Prepaid expenses and other assets..... 5,751 7,132 8,401
-------- -------- --------
Total current assets............... 116,634 240,470 421,163
Land, Buildings, Improvements and
Equipment:............................
Land.................................. 982 431 469
Buildings and improvements............ 6,031 3,450 6,882
Transportation equipment.............. 2,174 3,161 3,323
Warehouse equipment................... 6,106 7,878 10,468
Office furniture and equipment........ 6,631 8,046 10,041
-------- -------- --------
Total.............................. 21,924 22,966 31,183
Less accumulated depreciation and
amortization.......................... 9,846 11,502 15,233
-------- -------- --------
Land, buildings, improvements and
equipment--net.................... 12,078 11,464 15,950
Goodwill............................... 11,013 29,971 72,957
Other Assets........................... 2,955 1,759 13,686
-------- -------- --------
Total.............................. $142,680 $283,664 $523,756
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable......................... $ 37,971 $ 27,904 $ 600
Accounts payable...................... 45,120 104,049 247,761
Accrued expenses...................... 6,528 11,243 12,815
Current portion of long-term debt..... 1,699 1,604 460
-------- -------- --------
Total current liabilities.......... 91,318 144,800 261,636
Long-Term Debt......................... 11,130 7,635 117,025
Deferred Income Taxes and Other Long-
Term Obligations...................... 1,830 1,670 1,670
Commitments and Contingencies (Note 10)
Shareholders' Equity:
Series A convertible preferred stock.. -- -- --
Class B stock......................... 22 19 19
Common stock.......................... 36 125 131
Additional paid-in capital............ 28,267 111,228 121,821
Retained earnings..................... 10,330 18,733 21,964
Restricted stock deferred
compensation......................... (253) (182) (146)
Treasury stock........................ -- (364) (364)
-------- -------- --------
Total shareholders' equity......... 38,402 129,559 143,425
-------- -------- --------
Total.............................. $142,680 $283,664 $523,756
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
-----------------------
FISCAL YEAR NINE MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
1994 1995 1996 1996 1997
------------ ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............... $421,427 $373,734 $619,622 $260,132 $336,485
Cost of goods sold and
occupancy.............. 354,096 316,832 535,189 227,006 285,315
-------- -------- -------- -------- --------
Gross profit........... 67,331 56,902 84,433 33,126 51,170
Selling, general and
administrative
expenses............... 58,489 48,075 66,945 29,922 42,844
-------- -------- -------- -------- --------
Income from
operations............ 8,842 8,827 17,488 3,204 8,326
Interest expense --
net.................... (5,642) (5,891) (4,061) (2,452) (2,749)
Other income (expense)
-- net................. (859) (953) 1,038 -- --
-------- -------- -------- -------- --------
Income before income
taxes................. 2,341 1,983 14,465 752 5,579
Income taxes............ 936 904 6,017 324 2,348
-------- -------- -------- -------- --------
Net income.............. $ 1,405 $ 1,079 $ 8,448 $ 428 $ 3,231
======== ======== ======== ======== ========
Net income per common
and common equivalent
share
Fully diluted.......... $ .24 $ .18 $ .71 $ .04 $ .21
======== ======== ======== ======== ========
Primary................ $ .24 $ .18 $ .72 $ .04 $ .21
======== ======== ======== ======== ========
Weighted average shares
outstanding
Fully diluted.......... 5,947 6,050 11,904 10,441 15,284
======== ======== ======== ======== ========
Primary................ 5,947 5,943 11,702 10,381 15,200
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE RESTRICTED
PREFERRED STOCK CLASS B STOCK COMMON STOCK ADDITIONAL STOCK TREASURY STOCK
------------------ ----------------- ------------------ PAID-IN RETAINED DEFERRED -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SHARES AMOUNT
------- -------- --------- ------ ---------- ------ ---------- -------- ------------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 26,
1993............ 3,800,000 $38 2,795,120 $ 28 $ 29,644 $11,889 $(1,260) (684,234) $(4,980)
Amortization,
restricted stock
deferred
compensation.... 405
Treasury stock.. (85,159) (802)
Conversion of
Class B stock
into common
stock........... (449,383) (5) 449,383 5
Cancellation of
Class B stock... (143,949) (1) (710) 365
Issuance of
common stock.... 35,600 -- 354
Issuance of
common stock
held in escrow
to purchase
subsidiary (1).. 100,000 1
Net income...... 1,405
--- -------- --------- --- ---------- ---- -------- ------- ------- -------- -------
Balance,
December 25,
1994............ 3,206,668 32 3,380,103 34 29,288 13,294 (490) (769,393) (5,782)
Amortization,
restricted stock
deferred
compensation.... 237
Treasury stock.. (49,185) (256)
Retirement of
treasury stock.. (809,578) (8) (9,000) (1,987) (4,043) 818,578 6,038
Conversion of
Class B stock
into common
stock........... (218,216) (2) 218,216 2
Issuance of
common stock.... 17,645 -- 66
Issuance of
preferred
stock........... 100 -- 900
Net income...... 1,079
--- -------- --------- --- ---------- ---- -------- ------- ------- -------- -------
Balance, September
30, 1995............ 100 -- 2,178,874 22 3,606,964 36 28,267 10,330 (253) -- --
Amortization,
restricted stock
deferred
compensation.... 71
Treasury stock.. (26,000) (364)
Conversion of
Class B stock
into common
stock........... (245,299) (3) 245,299 3
Issuance of
common stock.... 8,710,258 86 82,961
Net income...... 8,448
Preferred
dividends paid.. (45)
------- -------- --------- --- ---------- ---- -------- ------- ------- -------- -------
Balance,
September 28,
1996............ 100 -- 1,933,575 19 12,562,521 125 111,228 18,733 (182) (26,000) (364)
--- -------- --------- --- ---------- ---- -------- ------- ------- -------- -------
Amortization,
restricted stock
deferred
compensation.... 36
Treasury stock..
Conversion of
Class B stock
into common
stock........... (70,408) 70,408 1
Issuance of
common stock.... 505,942 5 10,593
Net income...... 3,231
Preferred
dividends paid..
------- -------- --------- --- ---------- ---- -------- ------- ------- -------- -------
Balance, March
29, 1997
(unaudited)..... 100 $ -- 1,863,167 $19 13,138,871 $131 $121,821 $21,964 $ (146) (26,000) $ (364)
======= ======== ========= === ========== ==== ======== ======= ======= ======== =======
<CAPTION>
TOTAL
--------
<S> <C>
Balance,
December 26,
1993............ $ 35,359
Amortization,
restricted stock
deferred
compensation.... 405
Treasury stock.. (802)
Conversion of
Class B stock
into common
stock...........
Cancellation of
Class B stock... (346)
Issuance of
common stock.... 354
Issuance of
common stock
held in escrow
to purchase
subsidiary (1).. 1
Net income...... 1,405
--------
Balance,
December 25,
1994............ 36,376
Amortization,
restricted stock
deferred
compensation.... 237
Treasury stock.. (256)
Retirement of
treasury stock.. --
Conversion of
Class B stock
into common
stock...........
Issuance of
common stock.... 66
Issuance of
preferred
stock........... 900
Net income...... 1,079
--------
Balance,
September 30,
1995............ 38,402
Amortization,
restricted stock
deferred
compensation.... 71
Treasury stock.. (364)
Conversion of
Class B stock
into common
stock........... --
Issuance of
common stock.... 83,047
Net income...... 8,448
Preferred
dividends paid.. (45)
--------
Balance,
September 28,
1996............ 129,559
--------
Amortization,
restricted stock
deferred
compensation.... 36
Treasury stock.. --
Conversion of
Class B stock
into common
stock........... 1
Issuance of
common stock.... 10,598
Net income...... 3,231
Preferred
dividends paid.. --
--------
Balance, March
29, 1997
(unaudited)..... $143,425
========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTH FISCAL YEAR SIX MONTH PERIOD ENDED
ENDED PERIOD ENDED ENDED -----------------------
DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28, MARCH 30, MARCH 29,
1994 1995 1996 1996 1997
------------ ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 1,405 $ 1,079 $ 8,448 $ 428 $ 3,231
Adjustments to
reconcile net income
to net cash provided
(used) by operating
activities:
Depreciation and
amortization......... 2,526 1,817 3,057 1,616 1,703
Deferred taxes
(benefit) on income.. (996) 590 596 -- --
Gain on sale of land,
building and
improvements......... -- -- (260) (305) --
Changes in assets and
liabilities:
Receivables.......... 1,664 (4,549) (15,959) (49,533) (61,026)
Inventories.......... (1,314) 38,208 (89,454) (40,726) (89,534)
Prepaid expenses and
other assets........ (1,495) (683) (154) 483 (3,421)
Accounts payable..... 3,060 (23,147) 57,750 66,278 142,803
Accrued expenses..... 1,650 (2,824) 4,166 4,353 858
Other long-term
obligations......... 556 (55) (595) 6 --
------- ------- ------- ------- -------
Net cash provided
(used) by operating
activities......... 7,056 10,436 (32,405) (17,400) (5,386)
Cash flows from
investing activities:
Additions to land,
buildings,
improvements and
equipment............. (759) (2,781) (3,015) (2,199) (2,280)
Proceeds from sale of
land, buildings,
improvements and
equipment............. 400 -- 3,676 3,600 --
Payments to acquire
companies, net of cash
acquired.............. (13,989) (1,341) (34,950) -- (53,232)
------- ------- ------- ------- -------
Net cash provided
(used) by investing
activities......... (14,348) (4,122) (34,289) 1,401 (55,512)
Cash flows from
financing activities:
Proceeds (repayments)
from notes payable,
net................... 12,900 (5,212) (10,067) (17,142) (27,304)
Payments on long-term
debt.................. (3,313) (1,980) (3,590) (2,572) (10,662)
Payments to reacquire
stock................. (802) (117) (364) -- --
Payments on notes
payable to affiliate.. (1,503) -- -- -- --
Proceeds from issuance
of long-term debt..... -- -- -- -- 111,836
Proceeds from issuance
of stock.............. -- 966 81,889 35,709 599
Dividends paid......... -- -- (45) -- --
------- ------- ------- ------- -------
Net cash provided
(used) by financing
activities......... 7,282 (6,343) 67,823 15,995 74,469
Net increase (decrease)
in cash................ (10) (29) 1,129 (4) 13,571
Cash at beginning of
period................. 182 172 143 143 1,272
------- ------- ------- ------- -------
Cash at end of period... $ 172 $ 143 $ 1,272 $ 139 $14,843
======= ======= ======= ======= =======
Supplemental
information:
Cash paid for
interest.............. $ 4,597 $ 5,654 $ 3,141 $ 1,542 $ 2,633
Cash paid for income
taxes................. 2,171 1,125 4,115 17 229
Conversion of accounts
payable to long-term
debt.................. -- 5,885 -- -- --
Assets (excluding cash)
acquired through
purchase of
subsidiaries.......... 28,076 1,341 18,169 -- 28,589
Liabilities assumed
through purchase of
subsidiaries.......... 17,924 -- 2,318 -- 5,531
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 28, 1996,
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
AND FISCAL YEAR ENDED DECEMBER 25, 1994
SIX-MONTH PERIODS ENDED MARCH 29, 1997 AND MARCH 30, 1996 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization -- Central Garden & Pet Company, a Delaware corporation (the
"Company"), is the leading national distributor of lawn and garden and pet
supply products as well as a major distributor of pool supplies. The Company's
business strategy is to capitalize on its national presence, comprehensive
product selection, menu of value-added services and efficient operations.
Utilizing these capabilities, the Company strives to develop and enhance
servicing relationships with both large national and regional retailers as
well as manufacturers.
The Solaris Agreement -- The Company entered into an agreement effective
October 1, 1995 with The Solaris Group ("Solaris"), a strategic business unit
of Monsanto Company, the manufacturer of Ortho, Round-up and Green Sweep lawn
and garden products (the "Solaris Agreement"). Under the Solaris Agreement,
which has an initial four year term, the Company, in addition to serving as
the master agent and master distributor for sales of Solaris products,
provides a wide range of value-added services including logistics, order
processing and fulfillment, inventory distribution and merchandising. However,
Solaris continues to negotiate its sales prices directly with its direct sales
accounts. The Solaris Agreement provides for the Company to be reimbursed for
costs incurred in connection with services provided to Solaris' direct sales
accounts and to receive payments based on the growth of sales of Solaris
products. The Company will also share with Solaris in the economic benefits of
certain cost reductions, to the extent achieved.
Basis of Consolidation and Presentation -- The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
transactions between the consolidated companies are eliminated.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires that management make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition -- Sales are recorded at the time merchandise is shipped
from the Company's warehouses. Merchandise returns are recognized when
approved for return.
Income Taxes are accounted for under the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes result primarily from bad debt allowances,
inventory reserves, depreciation and nondeductible reserves.
Inventories, which primarily consist of garden products and pet supplies
finished goods are stated at the lower of FIFO cost or market. Cost includes
certain indirect purchasing, merchandise handling and storage costs.
Land, buildings, improvements and equipment are stated at cost. Depreciation
is computed by the straight-line method over thirty years for buildings.
Improvements are amortized on a straight-line basis over the shorter of the
useful life of the asset or the terms of the related leases. Depreciation on
equipment is computed by the straight-line and accelerated methods over the
estimated useful lives of 3 to 10 years.
F-7
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill is amortized using the straight-line method over periods ranging
from 20 to 40 years. The Company reviews goodwill periodically for potential
impairment by comparing the carrying amount to the expected future cash flows
of acquired entities over the remaining amortization period. Accumulated
amortization totaled $2,288,000 and $1,653,000 at September 28, 1996 and
September 30, 1995, respectively.
Net income per common and common equivalent share is computed based on the
total weighted average number of Class B shares and common shares outstanding
during the year plus common stock equivalents.
Unaudited Interim Information -- The financial information with respect to
the six-month periods ended March 29, 1997 and March 30, 1996 is unaudited. In
the opinion of management, such information contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of such periods. The results of operations for the
six-month period ended March 29, 1997 are not necessarily indicative of the
results to be expected for the full year.
Fiscal Year -- In 1995, the Company changed its fiscal year end to the last
Saturday in September.
Reclassifications -- Certain 1994 and 1995 balances have been reclassified
to conform with the 1996 presentation.
New Accounting Pronouncements -- In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, which requires a company to review the
carrying value of long-lived assets and certain intangibles for impairment
when events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. This standard is effective for the Company's
1997 fiscal year. The Company has not yet determined the effects SFAS No. 121
will have on its financial position or the results of its operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which will be effective for the Company's 1997 fiscal year. SFAS
No. 123 allows companies which have stock-based compensation arrangements with
employees to adopt a new fair-value basis of accounting for stock options and
other equity instruments, or to continue to apply the existing accounting
required by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees and disclose the proforma impact of adoption in the
footnotes to the financial statements. The Company intends to continue to
account for stock-based compensation arrangements under APB Opinion No. 25
and, therefore, management does not believe that the effect of implementing
this standard will be material to the Company's financial position, results of
operations or cash flows.
2. ACQUISITIONS
On December 29, 1993, the Company acquired substantially all of the assets
and assumed certain of the liabilities of Aquarium Supplies Unlimited ("ASU")
which prior to that date was a Chapter 11 Debtor-In-Possession. ASU is a
distributor of pet supplies, principally in the Southern California market.
The cash purchase price of $3,996,000 was less than net assets acquired by
$341,000.
During the first half of 1994, the Company acquired the lawn and garden
distribution operations of Tony's Gas & Chemical House, Inc. ("Tony's"); the
lawn and garden distribution operations of Esco Distributors ("Esco") and
acquired the pet supply distribution operations of Rumford Aquarium, Inc.
("Rumford"). The aggregate cash purchase price of these acquisitions was
approximately $10,322,000, which exceeded the fair market value of the net
assets acquired by $3,578,000, which was recorded as goodwill.
F-8
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 14, 1995, the Company acquired substantially all of the assets of
Valley Pet Supply, Inc. ("Valley"), which was prior to that date a Chapter 11
Debtor-In-Possession. Valley was a distributor of pet supplies in California
and parts of Oregon and Washington. The purchase price was $1,341,000, which
exceeded net assets acquired by $345,000, which was recorded as goodwill.
On July 12, 1996, the Company acquired the pet supply distribution
operations of Kenlin Pet Supply, Inc. ("Kenlin") and Longhorn Pet Supply
("Longhorn"). The aggregate cash purchase price of these acquisitions was
approximately $34,560,000, which exceeded the fair market value of the net
assets acquired by $18,540,000, which was recorded as goodwill.
Unaudited Pro Forma Results of Operations -- The following table summarizes
on a pro forma basis the combined results of operations of the Company and its
subsidiaries for fiscal year 1996 and the nine-month period ended September
30, 1995 as if the fiscal year 1996 acquisition of Kenlin was made on December
26, 1994. The pro forma results of operations also reflect pro forma
adjustments for stock issued to facilitate the acquisition of Kenlin,
adjustments to conform inventory methods and facilities costs, and for the
amortization of goodwill. Although this pro forma combined information
includes the results of operations of Kenlin, it does not necessarily reflect
the results of operations that would have occurred had Kenlin been managed by
the Company prior to its acquisition.
<TABLE>
<CAPTION>
FISCAL YEAR NINE-MONTH
ENDED PERIOD ENDED
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales................................... $675,502 $420,691
Gross profit................................ 97,840 67,808
Income from operations...................... 20,945 11,395
Income before income taxes.................. 17,055 3,734
Net income.................................. $ 9,941 $ 2,064
======== ========
Net income per common and common equivalent
share:
Fully diluted............................. $ 0.72 $ 0.26
======== ========
Primary................................... $ 0.73 $ 0.26
======== ========
</TABLE>
3. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS AND SUPPLIERS
Customer Concentration -- Approximately 47%, 52% and 50% of the Company's
net sales for fiscal year 1994, the nine-month period ended September 30, 1995
and fiscal year 1996, respectively, were derived from sales to the Company's
top ten customers. The Company's largest customer accounted for approximately
19%, 22% and 23% of the Company's net sales for fiscal year 1994, the nine-
month period ended September 30, 1995 and fiscal year 1996, respectively. The
Company's second largest customer accounted for approximately 7%, 10% and 11%
of the Company's net sales for fiscal year 1994, the nine-month period ended
September 30, 1995 and fiscal year 1996, respectively. The loss of, or
significant adverse change in, the relationship between the Company and these
two customers could have a material adverse effect on the Company's business
and financial results. The loss of or reduction in orders from any significant
customer, losses arising from customer disputes regarding shipments, fees,
merchandise condition or related matters, or the Company's inability to
collect accounts receivable from any major customer could have a material
adverse impact on the Company's business and financial results.
F-9
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Supplier Concentration -- While the Company purchases products from over
1,000 different manufacturers and suppliers, approximately 59% of the
Company's net sales in fiscal year 1996 were derived from products purchased
from the Company's five largest suppliers. The Company believes that
approximately 29% of the Company's net sales for the nine-month period ended
September 30, 1995 and 44% of the Company's net sales during fiscal year 1996
were derived from sales of products purchased from Solaris, the Company's
largest supplier. Because of the dependence of the Company on sales of Solaris
products, future changes implemented by Solaris to its marketing and sales
programs or any overall decrease in the sales of Solaris products could have a
material adverse effect on the Company.
4. ACCOUNTS AND NOTES PAYABLE
The Company has a line of credit providing for aggregate borrowings of up to
$75,000,000, which expires on July 12, 1998. The available amount under the
line of credit fluctuates based upon a specific asset borrowing base. At
September 30, 1995 and September 28, 1996, balances of $33,870,000 and
$27,904,000, respectively, were outstanding under this agreement, bearing
interest at a rate related to the prime rate (9.5% at September 30, 1995 and
9.0% at September 28, 1996). Available borrowings at September 30, 1995 and
September 28, 1996 were $19,840,000 and $47,096,000, respectively. This line
is secured by substantially all of the Company's assets, and contains certain
financial covenants requiring maintenance of minimum levels of working capital
and net worth, and restricts the Company's ability to pay dividends. The
Company was in compliance with such covenants at September 30, 1995 and
September 28, 1996.
The Company had an additional line of credit of $6,000,000 with another
lender as a result of its 1993 acquisition of CGS Distributing Inc. that was
paid off in 1996. At September 30, 1995, $4,100,000 was outstanding under this
agreement, bearing interest (9.25% at September 30, 1995) at a rate related to
the prime rate. The line was secured by substantially all of the assets of the
acquired distributor and contained certain financial covenants. The Company
was in compliance with such covenants at September 30, 1995.
Under the covenants in the Company's principal credit agreement described
above, dividends can only be paid if there is no material default of any of
the covenants contained in the agreement. The amount of such dividends shall
not exceed the prior year's net income and the aggregate amount of all
dividends paid from June 12, 1992 through June 12, 1998 is limited to
approximately $4.5 million. Such restrictions would have limited dividends in
1996 to $1.1 million.
F-10
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28, MARCH 29,
1995 1996 1997
------------- ------------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Convertible Subordinated Notes,
interest at 6% payable
semi-annually, principal due 2003..... $115,000
Mortgage note payable, interest at
8.25% payable monthly through 2003.... 1,300
Note payable to a former owner of an
acquired company, interest at 8.25%,
payable monthly through 1999.......... 985
Note payable to a former owner of an
acquired company, interest at 10%,
payable quarterly, principal due
2000.................................. 200
Note payable to Weyerhaeuser
Corporation, discounted at 10.25%
imputed rate, interest due in
quarterly installments, principal due
in annual installments through 1999,
secured by certain inventory and
equipment............................. $ 3,750 $2,750 --
Note payable to a former supplier,
interest at 10% and principal due
March 1998............................ 5,885 5,885 --
Note payable to former shareholder,
interest at 1% under prime (7.75% at
September 30, 1995; 7.25% at September
28, 1996), principal and interest due
in annual installments to 1997,
secured by stock of the principal
shareholder........................... 1,200 600 --
Note payable to bank, interest based on
a formula (8.125% at September 30,
1995), principal repaid in 1996....... 1,889 -- --
Note payable to bank, interest based on
a formula (9.5% at September 30,
1995), principal repaid in 1996....... 78 -- --
Other notes payable.................... 27 4 --
------- ------ --------
Total................................ 12,829 9,239 117,485
Less current portion of long-term debt 1,699 1,604 460
------- ------ --------
Total.............................. $11,130 $7,635 $117,025
======= ====== ========
</TABLE>
Principal repayments on long-term debt are scheduled as follows:
<TABLE>
<CAPTION>
SEPTEMBER 28, MARCH 29,
1996 1997
------------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Fiscal year:
1997................................................. $1,604
1998................................................. 6,885 $ 460
1999................................................. 750 685
2000................................................. 640
2001................................................. 200
2002................................................. 200
Thereafter........................................... 115,300
------ --------
Total............................................. $9,239 $117,485
</TABLE>
F-11
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. OPERATING LEASES
The Company has operating lease agreements principally for office and
warehouse facilities and equipment. Such leases have remaining terms,
inclusive of renewal options, of 1 to 8 years. Rent expense for all operating
leases amounted to $5,903,000 for fiscal year 1994, $6,437,000 for the nine-
month period ended September 30, 1995, and $9,896,000 for fiscal year 1996.
Certain facility leases have renewal options and provide for additional rent
based upon increases in the Consumer Price Index.
Aggregate minimum annual payments on noncancelable operating leases at
September 28, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year:
1997...................................................... $ 8,006
1998...................................................... 6,921
1999...................................................... 5,169
2000...................................................... 3,825
2001...................................................... 3,313
Thereafter ............................................... 2,309
-------
Total.................................................. $29,543
</TABLE>
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL NINE MONTH FISCAL
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28,
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Current:
Federal............................ $1,530 $187 $4,523
State.............................. 402 127 1,040
------ ---- ------
Total............................... 1,932 314 5,563
Deferred............................ (996) 590 454
------ ---- ------
Total........................... $ 936 $904 $6,017
====== ==== ======
</TABLE>
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL NINE MONTH FISCAL
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28,
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Statutory rate.................... 34% 34% 34%
State income taxes, net of federal
benefit.......................... 5 5 5
Nondeductible expenses............ 5 9 6
Other............................. (4) (3) (3)
--- --- ---
Effective tax rate................ 40% 45% 42%
=== === ===
</TABLE>
F-12
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences and carryforwards which
give rise to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 SEPTEMBER 28, 1996
-------------------- --------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Current:
Allowance for doubtful accounts
receivable..................... $1,204 $1,036
Inventory reserves.............. 972 910
Prepaid expenses................ $ 239 $ 219
Nondeductible reserves.......... 888 837
Net operating loss
carryforwards.................. 139 97
Other........................... 29 86 460
------ ------ ------ ------
Total........................ 3,232 325 3,340 219
Valuation allowance.............. (25) (25)
------ ------ ------ ------
Current.......................... 3,207 325 3,315 219
Noncurrent:
Adoption of FIFO inventory
method......................... 639 321
Depreciation.................... 978 1,248
Other........................... 60 132
------ ------ ------ ------
Noncurrent....................... -- 1,677 132 1,569
------ ------ ------ ------
Total........................ $3,207 $2,002 $3,447 $1,788
====== ====== ====== ======
</TABLE>
8. SHAREHOLDERS' EQUITY
At September 28, 1996, there were 1,000 shares of Series A convertible
preferred stock ($.01 par value) authorized, of which 100 were outstanding. In
July 1995, in connection with an agreement to become the master agent and
distributor for Solaris, the Company received from Monsanto Company $900,000
in exchange for its issuance of 100 shares of Series A convertible preferred
stock and a warrant to purchase up to 500,000 shares of common stock with an
exercise price of $9.00 per share. Each share of Series A convertible
preferred stock is entitled to a liquidation preference of $9,000 per share,
is convertible into 1,000 shares of common stock, is entitled to an annual 5%
cumulative dividend, votes together with common stock, and has a number of
votes equal to the number of shares of common stock into which it is
convertible. The warrant expires on the earlier of the tenth anniversary of
the Solaris Agreement or the expiration or termination of the Solaris
Agreement.
At September 28, 1996, there were 3,000,0000 shares of Class B stock ($.01
par value) authorized, of which 1,933,575 were outstanding. The voting powers,
preferences and relative rights of the Class B stock are identical to common
stock in all respects except that (i) the holders of common stock are entitled
to one vote per share and the holders of Class B stock are entitled to the
lesser of ten votes per share or 49% of the total votes cast, (ii) stock
dividends on common stock may be paid only in shares of common stock and stock
dividends on Class B stock may be paid only in shares of Class B stock and
(iii) shares of Class B stock have certain conversion rights and are subject
to certain restrictions on ownership and transfer. Each share of Class B stock
is convertible into one share of common stock, at the option of the holder.
Additional shares of Class B stock may only be issued with majority approval
of the holders of the common stock and Class B stock, voting as separate
classes.
F-13
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 28, 1996, there were 40,000,000 shares of common stock ($.01
par value) authorized, of which 12,536,521 were outstanding.
On November 15, 1995, the Company completed an offering of 5,750,000 shares
of its common stock at $6.75 per share before deduction for underwriting
commission and expenses related to the offering. The net proceeds were used to
reduce the Company's borrowings under its principal line of credit.
On July 19, 1996, the Company completed its third public stock offering
which consisted of 2,752,500 shares of its common stock at $18.00 per share
before deduction for underwriting commission and expenses related to the
offering. The net proceeds were used to repay the Company's borrowings
(including borrowings used for the Kenlin acquisition) under its principal
line of credit.
In 1993, the Company adopted the Omnibus Equity Incentive Plan (the "Plan")
which provided for the grant of options to key employees and consultants of
the Company for the purchase of up to an aggregate of 900,000 shares of common
stock of the Company. In 1995, the Company amended the Plan to increase the
number of shares authorized for issuance by an additional 300,000 and in 1996,
the Company further amended the Plan to increase the number of shares
authorized for issuance by an additional 800,000. The Plan is administered by
the Audit and Compensation Committee of the Board of Directors, comprised of
outside independent directors only, who determine individual awards to be
granted, vesting and exercise of share conditions. Option activity under the
Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------
SHARES PRICE
AVAILABLE SHARES PER SHARE
--------- -------- -------------
<S> <C> <C> <C>
Balance at December 26, 1993.............. 827,906 72,094 $9.75-3.75
Options granted in 1994................... (301,780) 301,780 $9.75-1.30
Options cancelled in 1994................. 12,995 (12,995) $3.75
-------- -------- -------------
Balance at December 25, 1994.............. 539,121 360,879 $9.75-1.30
Authorized................................ 300,000
Options granted in 1995................... (236,500) 236,500 $5.125-3.31
Options exercised in 1995................. (17,645) $3.75-1.30
Options cancelled in 1995................. 9,183 (9,183) $3.75-1.30
-------- -------- -------------
Balances at September 30, 1995............ 611,804 570,551 $9.75-1.30
Authorized................................ 800,000
Options granted in 1996................... (458,500) 458,500 $19.625-6.125
Options exercised in 1996................. (148,016) $4.00-1.30
Options cancelled in 1996................. 4,500 (4,500) $5.125-3.31
-------- -------- -------------
Balances at September 28, 1996............ 957,804 876,535 $19.625-1.30
======== ======== =============
</TABLE>
The 1994 options granted vest one year from date of grant and can be
exercised in full at any time thereafter during the following four years.
Certain of the 1995 and 1996 options granted vest in full over periods ranging
from 3 to 6 years and can be exercised in full at any time thereafter, while
other 1995 and 1996 options granted vest on a straight-line basis over periods
ranging from 3 to 8 years and can be exercised at any time thereafter during
the following year. Options totaling 112,795 were exercisable at September 28,
1996.
The Company has a 401(k) plan to which it contributed $198,000 for fiscal
year 1994, $148,000 for the nine-month period ended September 30, 1995 and
accrued $209,000 for fiscal year 1996.
F-14
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. TRANSACTIONS WITH RELATED PARTIES
The Company leases certain warehouse facilities and equipment from related
entities which are controlled by the Company's principal shareholder. Rental
expense under these leases totaled $115,000 for fiscal year 1994, $116,000 for
the nine-month period ended September 30, 1995 and $156,000 for fiscal year
1996.
10. BATON ROUGE FIRE
On July 14, 1992, the Company's warehouse in Baton Rouge, Louisiana and two
adjoining warehouse spaces leased by third parties were damaged as the result
of a fire that originated while an environmental contractor was removing
broken containers of a swimming pool water purifier maintained in the
Company's inventory. The warehouse was one of the Company's smallest and the
inventory, although substantially damaged, was an immaterial portion of the
Company's total inventories at that time.
The lawsuits arising out of the fire were settled in September 1996, and in
connection with the settlement the Company recorded approximately $1 million
as other income.
The Company is not currently a party to any material litigation.
11. SELECTED CONSOLIDATED INCOME STATEMENT DATA (UNAUDITED)
The following selected consolidated income statement data have been derived
from the unaudited consolidated financial statements of the Company. In the
opinion of management, the unaudited selected data shown below have been
prepared on the same basis as the audited consolidated statements of income
included herein and include adjustments only of a normal recurring nature.
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 25, SEPTEMBER 30,
1994 1995
------------- -------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE)
<S> <C> <C>
Sales....................................... $358,138 $437,023
Gross profit................................ 57,524 66,709
Selling, general and administrative
expenses................................... 45,380 61,184
Income from operations...................... 12,144 5,524
Income taxes................................ 2,965 (1,125)
Net income (loss)........................... 4,431 (1,947)
Net income (loss) per common and common
equivalent share:..........................
Fully diluted.............................. 0.75 (0.33)
Primary.................................... 0.75 (0.33)
</TABLE>
12. SUBSEQUENT EVENTS
On November 15, 1996, the Company sold in a private placement $115,000,000
aggregate principal amount of 6% Convertible Subordinated Notes due 2003. The
net proceeds of the offering were used for repayment of short- and long-term
indebtedness and for acquisitions and general corporate purposes.
On February 21, 1997, the Company's wholly owned Kenlin Pet Supply
subsidiary acquired the pet supplies business of Country Pet Supply, N.W.,
Inc., a distributor of pet supply and pet food products in Florida, Georgia,
Alabama and South Carolina.
F-15
<PAGE>
On January 20, 1997, the Company acquired Four Paws Products, Ltd., a
manufacturer of branded dog, cat, reptile and small animal products that are
distributed throughout the United States, Canada, Europe and Asia.
On March 4, 1997, the Company acquired an equity interest in Commerce, a
distributor of lawn and garden products to customers in the middle Atlantic
and New England markets.
On May 5, 1997, the Company acquired Ezell Nursery Supply, Inc., a
distributor of lawn and garden, barbecue and patio products in California,
Arizona, Nevada, New Mexico and Texas.
On May 23, 1997 the Company completed its acquisition of the United States
and Canada flea and tick business of Sandoz Argo, Inc. The acquisition
includes all methoprene-based products produced by Sandoz for use in the U.S.
and Canada, and certain other specialty products. The Company will proceed
with its joint development, marketing and distribution agreement with Hoechst
Roussel Vet. Under the agreement, the Company will license exclusive U.S. and
Canadian sales and marketing rights for the Vet-Kem(R) line of flea and tick
products. Hoechst Roussel Vet and the Company have also agreed to certain
joint development efforts. The Company will retain exclusive rights to market
any new products arising from these efforts to the mass market.
*****
F-16
<PAGE>
[Inside Back Cover]
[Four pictures of Central Garden & Pet products with the following caption in
the lower right hand corner:
1
Solaris brands, brands owned
by Central Garden & Pet and other
brands distributed by Central
Garden & Pet.
2 3 4
Brands owned by Central
Garden & Pet.]
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 12
Use of Proceeds.......................................................... 12
Dividend Policy.......................................................... 13
Price Range of Common Stock.............................................. 13
Capitalization........................................................... 14
Selected Consolidated Financial and Operating Data....................... 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 23
Management............................................................... 35
Selling Stockholders..................................................... 37
Description of Capital Stock............................................. 38
Underwriting............................................................. 41
Shares Eligible for Future Sale.......................................... 42
Legal Matters............................................................ 43
Experts.................................................................. 43
Additional Information................................................... 44
Available Information.................................................... 44
Incorporation of Certain Documents by Reference.......................... 44
Index to Consolidated Financial Statements............................... F-1
</TABLE>
================================================================================
================================================================================
5,000,000 Shares
[LOGO CENTRAL GARDEN & PET]
COMMON STOCK
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
Hambrecht & Quist
Merrill Lynch & Co.
Wasserstein Perella Securities, Inc.
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in
connection with the sale and distribution of the Common Stock being
registered. All amounts are estimated except the SEC registration fee, the
NASD filing fee and the Nasdaq Listing Application Fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 40,843
NASD Filing Fee................................................ 13,978
Nasdaq Listing Application Fee................................. 17,500
Blue Sky Qualification Fees and Expenses (including related
legal fees)................................................... 3,000
Accounting Fees................................................ 75,000
Legal Fees and Expenses........................................ 125,000
Transfer Agent and Registrar Fees and Expenses................. 5,000
Printing and Engraving......................................... 90,000
Miscellaneous.................................................. 29,679
--------
Total........................................................ $400,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixth, Section 2 of the Registrant's Certificate of Incorporation
provides that directors of the Registrant shall not be personally liable to
the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, to the fullest extent permitted by the General
Corporation Law of the State of Delaware. Article V of the Registrant's By-
laws provides for indemnification of officers and directors to the full extent
and in the manner permitted by Delaware law. Section 145 of the Delaware
General Corporation Law makes provision for such indemnification in terms
sufficiently broad to cover officers and directors under certain circumstances
for liabilities arising under the Securities Act of 1933.
The Registrant has entered into indemnification agreements with each
director which provide indemnification under certain circumstances for acts
and omissions which may not be covered by any directors' and officers'
liabilities insurance.
The form of Underwriting Agreement, filed as Exhibit 1.1 to the Registration
Statement, provides for indemnification of the Registrant and its controlling
persons against certain liabilities under the Securities Act of 1933, as
amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Set forth below is a list of exhibits that are being filed with this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Specimen Common Stock Certificate (Incorporated by reference from
Exhibit 4.1 to Registration Statement No. 33-48070).
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP as legality of
Common Stock, including consent.
23.1 Independent Auditors' Consent (Deloitte & Touche LLP).
23.2 Consent of Orrick, Herrington & Sutcliffe LLP (See Exhibit 5.1).
24 Power of Attorney (See page II-3).
</TABLE>
II-1
<PAGE>
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offering therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the provisions described on
Item 15 above, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, expressed in the Act and is
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, CENTRAL GARDEN &
PET COMPANY CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF LAFAYETTE, STATE OF CALIFORNIA, ON
JULY 14, 1997.
Central Garden & Pet Company
/s/ William E. Brown
By: _________________________________
(WILLIAM E. BROWN, CHIEF EXECUTIVE
OFFICER AND DIRECTOR)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William E. Brown and Glenn W. Novotny, or
either of them, each with the power of substitution, his attorney-in-fact, to
sign any amendments to this Registration Statement (including any and all
post-effective amendments), and any related registration statement that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933 and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY DATE
/s/ William E. Brown Chief Executive July 14, 1997
- ------------------------------------- Officer and
(WILLIAM E. BROWN) Director (Principal
Executive Officer)
/s/ Robert B. Jones Vice President, July 14, 1997
- ------------------------------------- Chief Financial
(ROBERT B. JONES) Officer (Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Glenn W. Novotny Director July 14, 1997
- -------------------------------------
(GLENN W. NOVOTNY)
/s/ Daniel P. Hogan, Jr. Director July 14, 1997
- -------------------------------------
(DANIEL P. HOGAN, JR.)
/s/ Lee D. Hines, Jr. Director July 14, 1997
- -------------------------------------
(LEE D. HINES, JR.)
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
4.1 Specimen Common Stock Certificate (Incorporated by
reference from Exhibit 4.1 to Registration
Statement No. 33-48070).
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP as
legality of Common Stock, including consent.
23.1 Independent Auditors' Consent (Deloitte & Touche
LLP).
23.2 Consent of Orrick, Herrington & Sutcliffe LLP (See
Exhibit 5.1).
24 Power of Attorney (See page II-3).
</TABLE>
<PAGE>
Draft Dated 7/11/97
5,000,000 Shares
CENTRAL GARDEN & PET COMPANY
Common Stock
($0.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
_______, 1997
Alex. Brown & Sons Incorporated
Hambrecht & Quist LLC
Merrill Lynch, Pierce, Fenner & Smith, Incorporated
Wasserstein Perella Securities, Inc.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
1 South Street
Baltimore, Maryland 21202
Gentlemen:
Central Garden & Pet Company, a Delaware corporation (the "Company")
and certain stockholders of the Company (the "Selling Stockholders") named in
Schedule II hereto propose to sell to the several underwriters (the
"Underwriters") named in Schedule I hereto for whom you are acting as
representatives (the "Representatives") an aggregate of 5,000,000 shares of the
Company's Common Stock, $0.01 par value (the "Firm Shares"), of which 4,790,000
shares will be issued and sold by the Company and 210,000 shares will be sold by
the Selling Stockholders. The respective amounts of the Firm Shares to be so
purchased by the several Underwriters from the Company and the Selling
Stockholders are set forth opposite their names in Schedule I hereto. The
Company also proposes to sell at the Underwriters' option up to 750,000
additional shares of the Company's Common Stock (the "Option Shares") as set
forth below.
As the Representatives, you have advised the Company and the Selling
Stockholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their
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pro rata portion of the Option Shares if you elect to exercise the
Over-allotment option in whole or in part for the accounts of the several
Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. (a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
-------------------------------------------------------------
STOCKHOLDERS. The Company and the Selling Stockholders, jointly and severally,
- ------------
represent and warrant to each of the Underwriters as follows:
(i) A registration statement on Form S-3 (File No. 333-_____)
with respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. The Company meets all of the requirements for filing
on Form S-3. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462(b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus." Any reference herein to the
Registration Statement, any Preliminary Prospectus or the Prospectus, as the
case may be, shall be deemed to refer to and include the documents incorporated
by reference therein pursuant to Item 12 of Form S-3 which were filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(ii) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and corporate authority to own or lease its
properties and conduct its business as described in the Registration Statement.
Each of the subsidiaries of the Company as listed in Exhibit A hereto
(collectively, the "Subsidiaries") has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
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its incorporation, with corporate power and corporate authority to own or lease
its properties and conduct its business as described in the Registration
Statement. The Company and each of the Subsidiaries are duly qualified to
transact business in all jurisdictions in which the conduct of their business
requires such qualification, except where such failure would not have a material
adverse effect on the Company and its Subsidiaries taken as a whole. The
outstanding shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable and are owned
by the Company or another Subsidiary free and clear of all liens, encumbrances
and equities and claims; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in the
Subsidiaries are outstanding. The Company does not own, directly or indirectly,
any shares of stock or any other equity or long-term debt securities of any
corporation or have any equity interest in any firm, partnership, joint venture,
association or other entity, other than of its subsidiaries or as described in
the Registration Statement.
(iii) The outstanding shares of Common Stock of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; the Shares to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of any
shares of Common Stock.
(iv) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the Shares
conform to the description thereof contained in the Registration Statement. The
form of certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(v) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Shares nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all material statements which are required to be stated therein by, and
will in all material respects conform, to the requirements of the Act and the
Rules and Regulations. The Registration Statement and any amendment hereto do
not contain, and will not contain, any untrue statement of a material fact and
do not omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus and any amendments and supplements thereto do not contain, and will
not contain, any untrue statement of material fact; and do not omit, and will
not omit, to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus,
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<PAGE>
or any such amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any Underwriter
through the Representatives, specifically for use in the preparation thereof.
The documents incorporated by reference in the Registration Statement, any
Preliminary Prospectus and the Prospectus, when they were filed with the
Commission, conformed in all material respects to the requirements of the
Exchange Act and the rules and regulations of the Commission thereunder, and
none of such documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(vi) The consolidated financial statements of the Company and
the Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the results of
operations and cash flows of the Company and the consolidated Subsidiaries, at
the indicated dates and for the indicated periods. Such financial statements and
related schedules have been prepared in accordance with generally accepted
principles of accounting, consistently applied throughout the periods involved,
except as disclosed herein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary financial
and statistical data included in the Registration Statement presents fairly the
information shown therein and such data has been compiled on a basis consistent
with the financial statements presented therein and the books and records of the
Company. The pro forma financial information incorporated by reference in the
Registration Statement and the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein. No other financial statements or schedules of
the Company or any other entity are required to be included in, or incorporated
into, the Registration Statement pursuant to any requirement of the Act or any
Rules and Regulations, including Rule 3-05 of Regulation S-X.
(vii) Deloitte & Touche LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(viii) There is no action, suit, claim or proceeding pending
or, to the knowledge of the Company, threatened against the Company or any of
the Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects (so
far as the Company can reasonably foresee) of the Company and of the
Subsidiaries taken as a whole or to prevent the consummation of the transactions
contemplated hereby, except as set forth in the Registration Statement.
4
<PAGE>
(ix) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described, subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the Registration
Statement) or which are not material in amount. The Company and the Subsidiaries
occupy their leased properties under valid and binding leases conforming in all
material respects to the description thereof set forth in the Registration
Statement.
(x) The Company and the Subsidiaries have filed all Federal,
State, local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments received
by them or any of them to the extent that such taxes have become due and are not
being contested in good faith. All tax liabilities have been adequately provided
for in the financial statements of the Company.
(xi) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company and its Subsidiaries taken as a whole,
whether or not occurring in the ordinary course of business, and there has not
been any material transaction entered into or any material transaction that is
probable of being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent obligations which
are not disclosed in the Company's financial statements which are included in
the Registration Statement.
(xii) Except as disclosed in the Prospectus, neither the
Company nor any of the Subsidiaries is or with the giving of notice or lapse of
time or both, will be, in violation of or in default under its Charter or Bylaws
or under any agreement, lease, contract, indenture or other instrument or
obligation to which it is a party or by which it, or any of its properties, is
bound and which default is of material significance in respect of the condition,
financial or otherwise of the Company and its Subsidiaries taken as a whole or
the business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries taken
as a whole. The execution and delivery of this Agreement and the consummation of
the transactions herein contemplated and the fulfillment of the terms hereof
will not conflict with or result in a breach of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust or
other agreement or instrument to which the Company or any Subsidiary is a party,
or of the Charter or Bylaws of the Company or any order, rule or regulation
applicable to the Company or any Subsidiary of any court or of any regulatory
body or administrative agency or other governmental body having jurisdiction.
5
<PAGE>
(xiii) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares for public offering
by the Underwriters under state securities or Blue Sky laws) has been obtained
or made and is in full force and effect.
(xiv) The Company and each of the Subsidiaries holds all
material licenses, certificates and permits from governmental authorities which
are necessary to the conduct of their businesses; and the Company has no
knowledge that either the Company or any of the Subsidiaries has infringed any
patents, patent rights, trade names, trademarks or copyrights, which
infringement is material to the business of the Company and the Subsidiaries
taken as a whole. The Company knows of no material infringement by others of
patents, patent rights, trade names, trademarks or copyrights owned by or
licensed to the Company.
(xv) Neither the Company nor the Selling Stockholders, and to
the Company's best knowledge, none of the Company's nor any Selling
Stockholder's affiliates, have taken or may take, directly or indirectly, any
action designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares. The Company acknowledges that the Underwriters may engage in passive
market making transactions in the Shares on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act.
(xvi) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
(xvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xviii) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
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<PAGE>
(xix) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(xx) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 517.075, Florida Statutes relating to
doing business with the government of Cuba or with any person or affiliate
located in Cuba.
(xxi) To the Company's knowledge, the Company is (i) in
compliance with any and all applicable United States, state and local
environmental laws, rules, regulations, treaties, statutes and codes promulgated
by any and all governmental authorities relating to the protection of human
health and safety, the environment or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its business as currently conducted, and (iii) is in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permit
licenses or other approvals (a) would not, individually or in the aggregate,
have a material adverse effect or (b) would be covered by indemnification
protection the Company receives in connection with certain of its acquisitions.
No action, proceeding, revocation proceeding, writ, injunction or claim is
pending or threatened relating to the Environmental Laws or to the Company's
activities involving Hazardous Materials. "Hazardous Materials" means any
material or substance (i) that is prohibited or regulated by any environmental
law, rule, regulation, order, treaty, statute or code promulgated by any
governmental authority, or any amendment or modification thereto, or (ii) that
has been designated or regulated by any governmental authority as radioactive,
toxic, hazardous or otherwise a danger to health, reproduction or the
environment.
(xxii) To the Company's knowledge, the Company has not engaged
in the generation, use, manufacture, transportation or storage of any Hazardous
Materials on any of the Company's properties or former properties, except (i)
where such use, manufacture, transportation or storage is in compliance with
Environmental Laws, (ii) to the extent such activity could be reasonably
expected not to have a material adverse effect on the Company, or (iii) to the
extent such activity is covered by indemnification protection the Company
receives in connection with certain of its acquisitions. To the Company's
knowledge, no Hazardous Materials have been treated or disposed of on any of the
Company's properties or on properties formerly owned or leased by the Company
during the time of such ownership or lease, except in compliance with
Environmental Laws, or those that could reasonably be expected not to have a
material adverse effect on the Company.
7
<PAGE>
(b) REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
----------------------------------------------------------
The Selling Stockholders represent and warrant to, and agrees with, each of the
Underwriters as follows:
(i) Each of the Selling Stockholders has, and on the Closing
Date hereinafter mentioned will have, good and marketable title to the Shares
proposed to be sold by the Selling Stockholders hereunder on such Closing Date
and full right, power and authority to enter into this Agreement and to sell,
assign, transfer and deliver such Shares hereunder, free and clear of all voting
trust arrangements, liens, encumbrances, equities, security interests,
restrictions and claims whatsoever; and upon delivery of and payment for such
Shares hereunder, the Underwriters will acquire good and marketable title
thereto, free and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts or other defects of title
whatsoever.
(ii) Each of the Selling Stockholders has executed and
delivered a Power of Attorney and caused to be executed and delivered on his
behalf a Custody Agreement (hereinafter collectively referred to as the
"Stockholders' Agreement") and in connection herewith such Selling Stockholder
further represents, warrants and agrees that the Selling Stockholder has
deposited in custody, under the Stockholder's Agreement, with the agent named
therein (the "Agent") as custodian, certificates in negotiable form for the
Shares to be sold hereunder by the Selling Stockholder, for the purpose of
further delivery pursuant to this Agreement. The Selling Stockholder agrees that
the Shares to be sold by the Selling Stockholder on deposit with the Agent are
subject to the interests of the Company and the Underwriters, that the
arrangements made for such custody are to that extent irrevocable, and that the
obligations of the Selling Stockholder hereunder shall not be terminated, except
as provided in this Agreement or in the Stockholders' Agreement, by any act of
the Selling Stockholder, by operation of law, by the death or incapacity of the
Selling Stockholder or by the occurrence of any other event. If the Selling
Stockholder should die or become incapacitated, or if any other event should
occur, before the delivery of the Shares to be sold by the Selling Stockholder
hereunder, the documents evidencing Shares to be sold by the Selling Stockholder
then on deposit with the Agent shall be delivered by the Agent in accordance
with the terms and conditions of this Agreement as if such death, incapacity or
other event had not occurred, regardless of whether or not the Agent shall have
received notice thereof. This Agreement and the Stockholders' Agreement have
been duly executed and delivered by or on behalf of the Selling Stockholder and
the form of such Stockholders' Agreement has been delivered to you.
(iii) The performance of this Agreement and the Stockholders'
Agreement and the consummation of the transactions contemplated hereby and by
the Stockholders' Agreement will not result in a breach or violation by the
Selling Stockholder of any of the terms or provisions of, or constitute a
default by the Selling Stockholder under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement, lease, franchise, license
or other agreement or instrument to which the Selling Stockholder is a party or
by which the Selling Stockholder or any of his properties is bound, any statute,
or any judgment, decree, order, rule or regulation of any court or governmental
8
<PAGE>
agency or body applicable to the Selling Stockholder or any of his properties.
(iv) Each of the Selling Stockholders has not taken and will
not take, directly or indirectly, any action designed to stabilize or
manipulate, or which has constituted or which might reasonably be expected to
cause or result in stabilization or manipulation, of the price of any security
of the Company to facilitate the sale or resale of the Shares to be sold by the
Selling Stockholder.
(v) The Registration Statement, each Preliminary Prospectus
and the Prospectus, insofar as it has related to the Selling Stockholder, has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and has not included any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were made.
(vi) Each of the Selling Stockholder agrees with the Company
and the Underwriters not for a period of 90 days subsequent to the date of the
Final Prospectus offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, any securities convertible into, derivative of, or
exercisable or exchangeable for such Common Stock of the Company, including
without limitation, shares of Common Stock that may be deemed to be beneficially
owned by such Selling Stockholder and shares of Common Stock that may be issued
upon exercise of stock options or warrants, without the prior written consent of
Alex. Brown & Sons Incorporated.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, (i) the
Company agrees to sell to the Underwriters 4,790,000 of the Firm Shares, and
(ii) the Selling Stockholders agree to sell to the Underwriters an aggregate of
210,000 of the Firm Shares. Each Underwriter agrees, severally and not jointly,
to purchase, from the Company and the Selling Stockholders at a price of $_____
per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof.
(b) Delivery of certificates for the Firm Shares and the Option Shares
(if the option granted pursuant to Section 2(c) hereof shall have been exercised
not later than 12:00 p.m., Baltimore time, on the date at least two business
days preceding the Closing Date) to be sold hereunder shall be made against
receipt of a wire transfer reference number issued by the Federal Reserve System
evidencing payment of the purchase price therefor by the several Underwriters by
wire transfer of immediately available funds, to accounts specified in writing
by the Company and the Selling Stockholders, respectively, at the offices of
Alex. Brown & Sons Incorporated, 1 South Street, Baltimore, Maryland, at 10:00
a.m., Baltimore time, on the third (or if the Shares are priced, as contemplated
by Rule 15c6-1(c) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") after 4:30 P.M., Washington D.C. time, the fourth) business day
after the date
9
<PAGE>
of this Agreement or at such other time and date not later than five business
days thereafter as you and the Company shall agree upon, such time and date
being herein referred to as the "Closing Date." (As used herein, "business day"
means a day on which the New York Stock Exchange is open for trading and on
which banks in New York are open for business and are not permitted by law or
executive order to be closed.) The certificates for the Firm Shares will be
delivered in such denominations and in such registrations as the Representatives
request in writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by the Representatives
at least one business day prior to the Closing Date. If the Representatives so
elect, delivery of the Shares purchased from the Company and the Selling
Stockholders may be made by credit through full fast transfer to the accounts at
The Depository Trust Company designated by the Representatives.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company setting forth the
number of Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be delivered.
The time and date at which certificates for Option Shares are to be delivered
shall be determined by the Representatives but shall not be earlier than three
nor later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein referred to
as the "Option Closing Date"). If the date of exercise of the option is two or
more days before the Closing Date, the notice of exercise shall set the Closing
Date as the Option Closing Date. The number of Option Shares to be purchased by
each Underwriter shall be in the same proportion to the total number of Option
Shares being purchased as the number of Firm Shares being purchased by such
Underwriter bears to 5,000,000, adjusted by you in such manner as to avoid
fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several Underwriters,
may cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company. If the option granted pursuant to
this Section shall be exercised after 12:00 p.m., Baltimore time, on the date
two business days preceding the Closing Date, and on or before the 30th day
after the date of this Agreement, delivery of certificates for the Option Shares
shall be made against receipt of a wire transfer reference number issued by the
Federal Reserve System evidencing payment of the purchase price therefor by the
several Underwriters by wire transfer of immediately available funds, to an
account specified in writing by the Company at the offices of Alex. Brown & Sons
Incorporated, 1 South Street, Baltimore, Maryland. If the Representatives so
elect, delivery of the Option Shares purchased from the Company may be made by
credit through full fast transfer to the accounts at The Depository Trust
Company designated
10
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by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY.
------------------------
(a) The Company covenants and agrees with the several Underwriters
that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations and (C) file on a timely basis all
reports and any definitive proxy or information statements required to be filed
by the Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Shares by the Underwriters.
(ii) The Company will advise the Representatives promptly (A)
when the Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, and (D) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus or of the institution of
any proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
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endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representatives
may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution of the
Shares as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is necessary
at any time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus so that
the Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the Prospectus
will comply with the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made
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available.
(vii) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports and copies
of all other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Exchange Act.
The Company will deliver to the Representatives similar reports with respect to
significant subsidiaries, as that term is defined in the Rules and Regulations,
which are not consolidated in the Company's financial statements.
(viii) No offering, sale, short sale or other disposition of
any shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 90 days after
the date of this Agreement, directly or indirectly, by the Company otherwise
than hereunder or with the prior written consent of Alex. Brown & Sons
Incorporated. The foregoing sentence shall not apply to (A) options to purchase
Common Stock granted or Common Stock issued under the Company's presently
authorized employee benefit plans described in the Prospectus, (B) any shares of
Common Stock issued pursuant to any non-employee director stock plan or dividend
reinvestment plan, (C) up to an aggregate of 2,000,000 shares of Common Stock
issued as consideration in connection with mergers or acquisitions to which the
Company or any of its subsidiaries is a party, and (D) any shares of Common
Stock issued upon exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectus .
(ix) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on the Nasdaq National Market.
(x) The Company has caused each officer and director of the
Company identified by the Representatives to furnish to you, on or prior to the
date of this agreement, a letter or letters, in form and substance satisfactory
to the Underwriters, pursuant to which each such person shall agree not to
offer, sell, sell short or otherwise dispose of any shares of Common Stock of
the Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to direct
the disposition of) for a period of 90 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of Alex. Brown &
Sons Incorporated ("Lockup Agreements").
(xi) The Company shall apply the net proceeds of its sale of
the Shares as set forth in the Prospectus.
(xii) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act").
(xiii) The Company will maintain a transfer agent and, if
necessary under
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the jurisdiction of incorporation of the Company, a registrar for the Common
Stock.
(xiv) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
5. COSTS AND EXPENSES.
------------------
Whether or not the transactions contemplated hereunder are consummated
or this Agreement becomes effective or is terminated, the Company and, unless
otherwise paid by the Company, the Selling Stockholders, agree to pay, in such
proportions as they may agree among themselves all costs, expenses and fees
incident to the performance of the obligations of the Company under this
Agreement, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of counsel
for the Company; the cost of printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Underwriters' Selling Memorandum, the
Underwriters' Invitation Letter, the Additional Listing Application, the Blue
Sky Survey and any supplements or amendments thereto; the filing fees of the
Commission; the filing fees incident to securing any required review by the
National Association of Securities Dealers, Inc. (the "NASD") of the terms of
the sale of the Shares; and the expenses, including the fees and disbursements
of counsel for the Underwriters, incurred in connection with the qualification
of the Shares under State securities or Blue Sky laws. The Company agrees to pay
all costs and expenses of the Underwriters, including the fees and disbursements
of counsel for the Underwriters, incident to the offer and sale of directed
shares of the Common Stock by the Underwriters to employees and persons having
business relationships with the Company and its Subsidiaries. The Company shall
not, however, be required to pay for any of the Underwriters' expenses (other
than those related to qualification under NASD regulation and State securities
or Blue Sky laws). This Section 5 shall not affect any agreement relating to the
payment of expenses between the Company and the Selling Stockholders.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares
on the Closing Date and the Option Shares, if any, on the Option Closing Date
are subject to the accuracy, as of the Closing Date or the Option Closing Date,
as the case may be, of the representations and warranties of the Company
contained herein, and to the performance by the Company of its covenants and
obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendment thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall
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have been disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the Registration
Statement, as amended from time to time, shall have been issued and no
proceedings for that purpose shall have been taken or, to the knowledge of the
Company, shall be contemplated by the Commission and no injunction, restraining
order, or order of any nature by a Federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would prevent
the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Orrick, Herrington &
Sutcliffe LLP, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
(ii) The Company has the full corporate power and corporate
authority to own, lease and operate its business as described in the
Prospectus; and the Company is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions in the
United States in which the Company is required to be qualified and in
which the failure so to qualify taken in the aggregate would have a
material adverse effect on the business, operations or financial
condition of the Company.
(iii) The outstanding shares of capital stock of the Company
have been duly and validly authorized and issued and are fully paid and
nonassessable and free of preemptive rights and issued in compliance
with all federal securities laws.
(iv) The Shares to be issued by the Company pursuant to the
terms of the Underwriting Agreement will be, when duly countersigned by
the Company's transfer agent and registrar and upon issuance and
delivery against payment therefor in accordance with the terms thereof,
duly authorized, validly issued and fully paid and nonassessable, and
the shareholders of the Company have no preemptive rights with respect
to the issuance of the Shares.
(v) The Underwriting Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly
executed and delivered by the Company.
(vi) The Registration Statement has become effective under the
1933 Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or, to
the best of such counsel's knowledge, are pending or contemplated under
the 1933 Act.
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(vii) The documents incorporated by reference in the
Prospectus (except for any financial statements and schedules and
financial and statistical information included in such documents as to
which such counsel need express no opinion), when they were filed with
the Commission, complied as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
(viii) The terms and provisions of the capital stock of the
Company conform in all material respects to the description thereof
contained in the Registration Statement and the Prospectus and the form
of certificate evidencing the shares to be delivered hereunder are in
due and proper form under Delaware law.
(ix) To the best of such counsel's knowledge, no
authorization, consent, approval of or qualification with, any
governmental authority is required for the performance by the Company
of its obligations under the Underwriting Agreement, except such as
have been made or obtained under the 1933 Act or such as may be
required under state or other blue sky laws in connection with the
purchase and distribution of the Shares (on which we express no
opinion) by the Underwriters.
(x) To the best of such counsel's knowledge, all contracts,
indentures, mortgages, loan agreements, leases, or other documents that
are required to be filed as exhibits to the Registration Statement or
required to be described in the Registration Statement, have been filed
or incorporated by reference as Exhibits thereto or described therein.
(xi) The execution and delivery by the Company of, and
performance by the Company of its obligations under, the Underwriting
Agreement, do not conflict with or violate the Company's Amended and
Restated Certificate of Incorporation or Bylaws, or to the best of such
counsel's knowledge (1) constitute a breach of or constitute a default
under, the affiliation arrangements, as defined in the Prospectus, and
any agreement or other instrument binding upon the Company or any of
its subsidiaries and identified to us by the Company as material, as
incorporated by reference into the Registration Statement, and (2) do
not conflict with or violate any judgment, order or decree of any court
or governmental authority against the Company or by which any of its
properties is bound.
(xii) To the best of such counsel's knowledge, and except as
disclosed in the Registration Statement and the Prospectus, there is no
action, suit or proceeding at law or in equity or by or before any
governmental instrumentality or other agency now pending or threatened
against or affecting the Company which would require disclosure in the
Prospectus.
(xiii) To the best of such counsel's knowledge, except as set
forth in the
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Registration Statement and the Prospectus, no holders of securities of
the Company have registration rights with respect to such securities.
(xiv) Except as disclosed in or specifically contemplated by
the Prospectus, to the best of such counsel's knowledge, there are no
outstanding options, warrants or other rights calling for the issuance
of, and no commitments, plans or arrangements to issue, any shares of
capital stock of the Company or any security convertible into or
exchangeable for capital stock of the Company.
(xv) This Agreement and the Stockholders' Agreement have been
duly authorized, executed and delivered by or on behalf of each Selling
Stockholder; the Agent has been duly and validly authorized to act as
the custodian of the Common Shares to be sold by each Selling
Stockholder; to the best of such counsel's knowledge, the performance
of this Agreement and the Stockholders' Agreement and the consummation
of the transactions herein contemplated by each Selling Stockholder
will not result in a breach of, or constitute a default under, any
material indenture, mortgage, deed of trust, trust (constructive or
other), loan agreement, lease, franchise, license or other material
agreement or instrument to which each Selling Stockholder is a party or
by which each Selling Stockholder or any of his properties may be
bound, or violate any statute, judgment, decree, order, rule or
regulation known to such counsel of any court or governmental body
having jurisdiction over each Selling Stockholder or any of his
properties; and to the best of such counsel's knowledge, no approval,
authorization, order or consent of any court, regulatory body,
administrative agency or other governmental body is required for the
execution and delivery of this Agreement or the Stockholders' Agreement
or the consummation by each Selling Stockholder of the transactions
contemplated by this Agreement, except such as have been obtained and
are in full force and effect under the Act and such as may be required
under the rules of the NASD and applicable Blue Sky laws;
(xvi) To the best of such counsel's knowledge, each Selling
Stockholder has full right, power and authority to enter into this
Agreement and the Stockholders' Agreement and to sell, transfer and
deliver the Common Shares to be sold on such Closing Date by each
Selling Stockholder hereunder and good and marketable title to such
Shares so sold, free and clear of all liens encumbrances, equities,
claims, restrictions, security interests, voting trusts, or other
defects of title whatsoever, has been transferred to the Underwriters
(whom counsel may assume to be bona fide purchasers) who have purchased
such Shares hereunder; and
(xvii) To the best of such counsel's knowledge, the
Stockholders' Agreement are valid and binding agreements of each
Selling Stockholder, enforceable in accordance with their terms except
as enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally.
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In rendering such opinion, such counsel may rely as to matters
of local law on opinions of local counsel, and as to matters of fact, on
certificates of the Selling Stockholders and of officers of the Company and of
governmental officials, in which case their opinion is to state that they are so
doing and that the Underwriters are justified in relying on such opinions or
certificates and copies of said opinions or certificates are to be attached to
the opinion or delivered at the Closing. Such counsel shall also include
statements to the effect that (1) such counsel believes that, as of the
effective date of the Registration Statement, the Registration Statement and the
Prospectus complied as to form in all material respects with the requirements of
the 1933 Act; and (2) nothing has come to such counsel's attention that would
lead such counsel to believe that either at the effective date of the
Registration Statement or at the applicable Closing Date the Registration
Statement or the Prospectus, or any such amendment or supplement, contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that such
counsel need not express such an opinion as to the financial statements,
schedules and financial data contained in the Registration Statement or the
Prospectus.
(c) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Knox Ricksen, counsel
for the Company and its Subsidiaries, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) Each of the Subsidiaries of the Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California.
(ii) Each of the Subsidiaries of the Company has the full
corporate power and corporate authority to own, lease and operate its business
as described in the Prospectus; and each of the Subsidiaries of the Company is
duly qualified to do business as a foreign corporation and is in good standing
in all jurisdictions in the United States in which such subsidiary is required
to be qualified and in which the failure so to qualify taken in the aggregate
would have a material adverse effect on the business, operations or financial
condition of the Company.
(iii) The outstanding shares of capital stock of each of the
Subsidiaries of the Company have been duly and validly authorized and issued and
are fully paid and nonassessable and free of preemptive rights and issued in
compliance with all federal securities laws.
(d) The Representatives shall have received from Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (iv), (v) and (vi) of subparagraph (b) of this
Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Delaware. In rendering such opinion
Brobeck, Phleger & Harrison LLP may rely as
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to all matters governed other than by the laws of the State of California or
Federal laws on the opinion of counsel referred to in Paragraph (b) of this
Section 6. In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Prospectus, or any supplement thereto, on
the date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements, in the light of the circumstances under which they
are made, not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement, Brobeck, Phleger & Harrison LLP may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
(e) The Representatives shall have received at or prior to the Closing
Date from Brobeck, Phleger & Harrison LLP a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the State
securities or Blue Sky laws of such jurisdictions as the Representatives may
reasonably have designated to the Company.
(f) The Representatives shall have received, on each of the dates
hereof, the Closing Date and the Option Closing Date, as the case may be, a
letter dated the date hereof, the Closing Date or the Option Closing Date, as
the case may be, in form and substance satisfactory to you, of Deloitte & Touche
LLP confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder and
stating that in their opinion the financial statements and schedules examined by
them and included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations; and containing such other statements and
information as is ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial and
statistical information contained in the Registration Statement and Prospectus.
(g) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and
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no stop order suspending the effectiveness of the Registrations
Statement has been issued, and no proceedings for such purpose have
been taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion and to the best
of his or her knowledge, as of the effective date of the Registration
Statement, the statements contained in the Registration Statement were
true and correct in all material respects, and such Registration
Statement and Prospectus did not omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment;
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been
any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects (so far as the Company
can reasonably foresee) of the Company and the Subsidiaries taken as a
whole, whether or not arising in the ordinary course of business.
(h) The Representatives shall have received, on each of the dates
hereof, the Closing Date and the Option Closing Date, as the case may be, in
form and substance satisfactory to the Representatives, a certificate, dated
such Closing Date and addressed to the Representatives, signed by or on behalf
of each of the Selling Stockholders to the effect that the representations and
warranties of the Selling Stockholders in this Agreement are true and correct,
as if made at and as of such Closing Date, and the Selling Stockholders have
complied with all the agreements and satisfied all the conditions on his part to
be performed or satisfied prior to such Closing Date.
(i) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(j) The Firm Shares and Option Shares, if any, have been approved for
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designation upon notice of issuance on the Nasdaq National Market.
(k) The Lockup Agreements described in Section 4(a)(x) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by noting the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such an event, the Company and the Underwriters shall not be under
any obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
---------------
(a) The Company and the Selling Stockholders, jointly and severally,
agree to indemnify and hold harmless each Underwriter and each person, if any,
who controls any Underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities to which such Underwriter or such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and will reimburse each Underwriter and each such controlling person
for any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or not such
Underwriter or controlling person is a party to any action or proceeding;
provided, however, that neither the Company nor the Selling Stockholders will be
liable in any such case to the extent that any such loss, claim,
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damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. The Underwriters acknowledge
that the Company and the Selling Stockholders intend to agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to their respective amounts of such liability for which they each
shall be responsible. This indemnity agreement will be in addition to any
liability which the Company or the Selling Stockholders may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, each person, if any, who controls the Company
within the meaning of the Act and the Selling Stockholders, against any losses,
claims, damages or liabilities to which the Company, the Selling Stockholders or
any such director, officer, or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances under
which they were made; and will reimburse any legal or other expenses reasonably
incurred by the Company, the Selling Stockholders or any such director, officer,
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however, that
each Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought
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against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgement for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, (or actions or
23
<PAGE>
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company and the Selling Stockholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this Section
8(d) were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 8(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court already having jurisdiction over the
Company or any Selling Stockholder.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or any persons controlling the Company or any Selling Stockholders, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination
24
<PAGE>
of this Agreement. A successor to any Underwriter, to the Company, its directors
or officers, or any person controlling the Company or any Selling Stockholders,
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 8.
(g) The liability of each Selling Stockholder under the indemnity
agreements contained in the provisions of this Section 8 shall be limited to an
amount equal to the public offering price of the Shares to be sold by such
Selling Stockholder to the Underwriters minus the amount of the underwriting
discount paid thereon to the Underwriters by such Selling Stockholder. The
Company and such Selling Stockholders may agree, as among themselves and without
limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible.
9. DEFAULT BY UNDERWRITERS.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or the
Selling Stockholders, you, as Representatives of the Underwriters, shall use
your reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company or the Selling
Stockholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company, the
Selling Stockholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company except to the extent provided
in Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option Closing
Date, as the case may be, may be postponed for such period, not exceeding seven
days, as you, as Representatives, may determine in order that the required
changes in the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term "Underwriter" includes any
person substituted for a defaulting
25
<PAGE>
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. NOTICES.
-------
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 101 California Street, 46th Floor, San Francisco, California
94111, Attention: Peter B. Breck; with a copy (i) to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:
General Counsel and (ii) Brobeck, Phleger & Harrison LLP, Two Embarcadero Place,
2200 Geng Road, Palo Alto, California, 94303 Attention: Thomas A. Bevilacqua,
Esq.; if to the Company or the Selling Stockholders, to Central Garden & Pet
Company, 3697 Mount Diablo Boulevard, Suite 310, P.O. Box 899, Lafayette,
California 94549, Attention: William E. Brown, with a copy to Orrick, Herrington
& Sutcliffe LLP, Old Federal Reserve Bank Building, 400 Sansome Street, San
Francisco, California 94111, Attention John F. Seegal, Esq.
11. TERMINATION.
-----------
Without limiting the right to terminate this Agreement pursuant to any
other provision hereof:
(a) This Agreement may be terminated by the Company or any Selling
Stockholder by notice to you or by you by notice to the Company or any such
Selling Stockholder at any time prior to the earlier of (i) the time the Shares
are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) This Agreement may also be terminated by you at any time prior to
the Closing Date if any of the following has occurred: (i) since the respective
dates as of which information is given in the Registration Statement and the
Prospectus, any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and its Subsidiaries taken
as a whole, whether or not arising in the ordinary course of business, (ii) any
outbreak or escalation of hostilities or declaration of war or national
emergency or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets of
the United States would, in your reasonable judgment, make it impracticable to
market the Shares or to enforce contracts for the sale of the Shares, (iii)
suspension of trading in securities generally on the New York Stock Exchange or
the American Stock Exchange or limitation on prices (other than limitations on
hours or numbers of days of trading) for securities on either such Exchange,
(iv) the
26
<PAGE>
enactment, publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) declaration of a banking moratorium
by United States or New York State authorities, (vi) the suspension of trading
of the Company's common stock by the Commission on the Nasdaq National Market or
(vii) the taking of any action by any government body or agency in respect of
its monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. FAILURE OF THE SELLING STOCKHOLDER TO SELL AND DELIVER.
------------------------------------------------------
If any of the Selling Stockholders shall fail to sell and deliver to
the Underwriters the Shares to be sold and delivered by such Selling Stockholder
at the Closing Date under the terms of this Agreement, then the Underwriters
may, at their option, by written notice from you to the Company and the Selling
Stockholders, either (i) terminate this Agreement without any liability on the
part of any Underwriter or, except as provided in Sections 5 and 8 hereof, the
Company or the Selling Stockholders, or (ii) purchase the shares which the
Company has agreed to sell and deliver in accordance with the terms hereof. In
the event of a failure by the Selling Stockholders to sell and deliver as
referred to in this Section, either you or the Company shall have the right to
postpone the Closing Date for a period not exceeding seven business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected.
13. SUCCESSORS.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
14. INFORMATION PROVIDED BY UNDERWRITERS.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
27
<PAGE>
15. MISCELLANEOUS.
-------------
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
28
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Stockholders and the several Underwriters in accordance with its terms.
Very truly yours,
CENTRAL GARDEN & PET COMPANY
By
---------------------------
William E. Brown
Chief Executive Officer
THE SELLING STOCKHOLDERS
By:
---------------------------
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
ALEX. BROWN & SONS INCORPORATED
HAMBRECHT & QUIST LLC
MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED
WASSERSTEIN PERELLA SECURITIES, INC.
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By:
------------------------
Authorized Officer
29
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares Number of Firm Shares
----------- to be Purchased to be Purchased From
From the Company the Selling Stockholders
---------------- ------------------------
<S> <C> <C>
Alex. Brown & Sons Incorporated......................
Hambrecht & Quist LLC ...............................
Merrill Lynch, Pierce, Fenner & Smith,
Incorporated.......................................
Wasserstein Perella Securities, Inc.................
--------- -------
TOTAL 4,790,000 210,000
========= =======
</TABLE>
30
<PAGE>
SCHEDULE II
SCHEDULE OF SELLING STOCKHOLDERS
William E. Brown
Robert B. Jones
31
<PAGE>
EXHIBIT A
MATERIALS SUBSIDIARIES
Four Paws Products Limited, Inc.
Kenlin Pet Supply, Inc.
Wellmark International
32
<PAGE>
EXHIBIT 5.1
[Letterhead of Orrick, Herrington & Sutcliffe LLP]
July 14, 1997
Central Garden & Pet Company
3697 Mt. Diablo Boulevard
Lafayette, CA 94549
Re: Central Garden & Pet Company
Registration Statement on Form S-3
Ladies and Gentlemen:
At your request, we are rendering this opinion in connection with a proposed
sale by Central Garden & Pet Company, a Delaware corporation (the "Company")
of up to 5,540,000 shares of common stock, $.01 par value (the "Common
Stock"), and the sale by certain Company stockholders of 210,000 shares of
Common Stock.
We have examined instruments, documents, and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures; (b) the conformity
to the originals of all documents submitted to us as copies; and (c) the
truth, accuracy, and completeness of the information, representations, and
warranties contained in the records, documents, instruments, and certificates
we have reviewed.
Based on such examination, we are of the opinion that the 5,540,000 shares
of Common Stock to be issued and sold by the Company (of which up to 750,000
shares are to be issued to cover over-allotments, if any) are validly
authorized shares of Common Stock, and, when issued against payment of the
purchase price therefor, will be legally issued, fully paid and nonassessable.
We are of the further opinion that the 210,000 shares of Common Stock to be
sold by the selling stockholders are, as of the date hereof, validly
authorized, legally issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the above
referenced Registration Statement and to the use of our name wherever it
appears in the Registration Statement and in the Prospectus included therein,
and any amendment or supplement thereto. In giving such consent, we do not
consider that we are "experts" within the meaning of such term as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission issued thereunder, with respect to any part
of the Registration Statement, including this opinion as an exhibit or
otherwise.
Very truly yours,
/s/ ORRICK, HERRINGTON & SUTCLIFFE LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Central Garden & Pet Company
Lafayette, California
We consent to the use in this Registration Statement of Central Garden & Pet
Company on Form S-3 of our reports dated November 15, 1996, appearing in the
Prospectus, which is a part of this Registration Statement, and incorporated
by reference from the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1996, and our report on Four Paws Products, Ltd. and
subsidiaries dated January 20, 1997 and our report on the Sandoz flea and tick
protection business dated December 20, 1996 (May 23, 1997 as to Note 9)
incorporated by reference herein from the Company's Current Reports on Form 8-
K/A dated April 3, 1997 and July 14, 1997, respectively, and to the references
to us under the headings "Selected Consolidated Financial and Operating Data"
and "Experts" in such Prospectus.
Deloitte & Touche LLP
San Francisco, California
July 14, 1997
