<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 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
ORRICK, HERRINGTON & SUTCLIFFE LLP BROBECK, PHLEGER & HARRISON LLP
OLD FEDERAL RESERVE BANK BUILDING TWO EMBARCADERO PLACE
400 SANSOME STREET 2200 GENG ROAD
SAN FRANCISCO, CALIFORNIA 94111 PALO ALTO, CALIFORNIA 94303
---------------
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
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 8,050,000 $27.25 $219,362,500 $64,712
</TABLE>
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(1) Includes 1,050,000 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 December 3, 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 December 8, 1997
7,000,000 SHARES
[CENTRAL GARDEN & PET LOGO]
COMMON STOCK
--------
All of the 7,000,000 shares of Common Stock offered hereby are being offered
by Central Garden & Pet Company (the "Company"). The Company's Common Stock is
traded on the Nasdaq National Market under the symbol "CENT." On December 4,
1997, the last reported sale price of the Common Stock as reported on the
Nasdaq National Market was $28.25 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 38.9% 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 6.
--------
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.
<TABLE>
<CAPTION>
=========================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................... $ $ $
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Total(3)........................ $ $ $
=========================================================================================
</TABLE>
(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
1,050,000 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 BT Alex. Brown Incorporated, Baltimore, Maryland on or about ,
1997.
BT ALEX. BROWN
HAMBRECHT & QUIST
MERRILL LYNCH & CO.
WASSERSTEIN PERELLA SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[MAP OF THE UNITED STATES INDICATING DISTRIBUTION AND
MANUFACTURING FACILITIES OF THE COMPANY]
----------------
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
contained elsewhere and incorporated by reference 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 ended
September 28, 1996 and "fiscal 1997" refers to the fiscal year ended September
27, 1997.
THE COMPANY
Central Garden & Pet Company is the leading national distributor of lawn and
garden and pet supply products. 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 $841 million in fiscal 1997 and increased
the number of Company distribution and manufacturing centers from one in 1987
to 49 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 1997, lawn and garden products accounted for
approximately 71% of the Company's net sales and pet supplies accounted for
approximately 29%. According to industry sources, lawn and garden retail sales
exceeded $20 billion in 1996.
With 49 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 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.
3
<PAGE>
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.
PENDING ACQUISITIONS
As part of its growth strategy to make strategic acquisitions of lawn and
garden product and pet supply distributors and expand its offerings of
proprietary branded products, in fiscal 1997 the Company acquired two branded
pet supply businesses, a lawn and garden distributor and a pet supply
distributor. In addition, in December 1997 the Company agreed to acquire the
following branded product companies:
Kaytee Products Incorporated. The Company has signed a letter of intent to
purchase the stock of Kaytee Products Incorporated ("Kaytee"). Kaytee is one of
the nation's largest manufacturers of bird seed for caged and wild birds as
well as a manufacturer of food for small animals. The business being acquired
by the Company reported annual sales of approximately $103 million for the
fiscal year ended June 28, 1997. The Company expects to pay approximately $50
million in cash for Kaytee, plus an earn-out not to exceed $3 million.
TFH Publications, Inc. The Company has entered into a definitive agreement to
purchase the stock of TFH Publications, Inc. ("TFH"). TFH is the largest
producer of pet books in the United States. TFH also manufactures premium dog
chews and edible bones under the brand name Nylabone(R). TFH reported annual
sales of approximately $32 million for the fiscal year ended December 31, 1996.
The Company has agreed to pay $70 million in cash for the stock of TFH and $12
million for the stock of a related company, subject to certain adjustments,
plus earn-outs.
The Company anticipates closing the Kaytee and TFH acquisitions in December
1997. There can be no assurance that either the Kaytee or TFH acquisition will
be consummated or, if consummated, that such businesses can be successfully
integrated into the Company's business. See "Risk Factors--Expansion;
Acquisitions" and "Use of Proceeds."
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company......... 7,000,000 shares
Shares to be outstanding after the Offering:
Common Stock............................. 26,117,325 shares(1)
Class B Stock............................ 1,663,167 shares
Total................................ 27,780,492 shares(1)
Use of Proceeds............................. To finance acquisitions,
including the pending
acquisitions of Kaytee and TFH,
and for general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol............... CENT
</TABLE>
- --------
(1) Based upon 19,117,325 shares of Common Stock and 1,663,167 shares of Class
B Stock outstanding as of September 27, 1997. Excludes 1,447,890 shares of
Common Stock issuable upon exercise of stock options outstanding as of
September 27, 1997. Also excludes 1,647,723 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. In November
1997, the Company's Board of Directors voted to increase the number of
shares reserved for issuance under the 1993 Omnibus Equity Incentive Plan,
subject to stockholder approval, by 2,000,000 shares. Also excludes
4,107,143 shares of Common Stock issuable upon the assumed conversion of
the Company's 6% Convertible Subordinated Notes due 2003 and 100,000 shares
of Common Stock issuable upon the assumed conversion of 100 shares of
Series A Preferred Stock. See "Business--The Solaris Agreement."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTH
PERIOD
FISCAL YEAR ENDED ENDED(1) FISCAL YEAR ENDED
------------------------- ------------- ---------------------------
DECEMBER 26, DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 27,
1993 1994(2) 1995(2) 1996 1997
------------ ------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $334,682 $421,427 $373,734 $619,622 $841,007
Gross profit............ 55,936 67,331 56,902 84,433 146,082
Income from operations.. 11,234 8,842 8,827 17,488 36,922
Net income ............. 3,994 1,405 1,079 8,448 17,603
Net income per common
and common equivalent
share(3)
Primary................ $ 0.83 $ 0.24 $ 0.18 $ 0.72 $ 1.08
Fully diluted.......... 0.18 0.71 1.07
Weighted average shares
outstanding(3)
Primary................ 4,789 5,947 5,943 11,702 16,293
Fully diluted.......... 6,050 11,904 19,970(4)
OPERATING DATA:
Distribution and
manufacturing centers
at period end.......... 30 39 38 41 49
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------------------
ACTUAL AS ADJUSTED(5)(6)
-------- -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $253,926 $442,377
Total assets..................................... 559,043 747,422
Short-term borrowings............................ 72 0
Long-term borrowings............................. 115,200 115,200
Shareholders' equity............................. 281,807 470,258
</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.
(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) In November 1995, the Company sold 5,750,000 shares of its Common Stock at
a public offering price of $6.75 per share. In July 1996, the Company sold
2,752,500 shares of its Common Stock at a public offering price of $18.00
per share. In August 1997, the Company sold 5,540,000 shares of its Common
Stock at a public offering price of $24.25 per share.
(4) In November 1996, the Company issued $115,000,000 of 6% Convertible
Subordinated Notes due 2003. Fully diluted weighted average shares
outstanding includes shares of Common Stock issuable upon the assumed
conversion of such notes.
(5) Adjusted to reflect the sale of the 7,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $28.25
per share and the application of the estimated net proceeds therefrom as
described in "Use of Proceeds."
(6) Does not reflect the amounts to be paid, if any, in connection with the
acquisitions of Kaytee and TFH or approximately $32 million of debt of
these companies. See "Prospectus Summary -- Pending Acquisitions."
5
<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. 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 45% of the Company's net sales in fiscal 1997 were derived
from products purchased from the Company's five largest suppliers. The Company
believes that approximately 44% of the Company's net sales during fiscal 1996
and 32% of the Company's net sales during fiscal 1997 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 and
fiscal 1997 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.
6
<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
50% and 47% of the Company's net sales for fiscal 1996 and fiscal 1997,
respectively, were derived from sales to the Company's top ten customers. The
Company's largest customer is Wal*Mart, which accounted for approximately 23%
and 19% of the Company's net sales for fiscal 1996 and fiscal 1997,
respectively. The Company's second largest customer is Home Depot, which
accounted for approximately 11% and 8% of the Company's net sales for fiscal
1996 and fiscal 1997, 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 fiscal 1996, the Company reserved for and
subsequently wrote off an account receivable of approximately $500,000 from
Ernst Home Centers which filed for bankruptcy. On July 21, 1997, Payless
Cashways, a customer of the Company, filed for bankruptcy. The Company had an
outstanding account receivable balance of approximately $175,000 for which the
Company had established adequate reserves.
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
7
<PAGE>
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 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 1997 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. The Company seeks to mitigate the effects of
seasonality through 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 and four acquisitions, to date, in 1997. In addition, in
December 1997 the Company agreed to acquire Kaytee and TFH. There can be no
assurance that these acquisitions will be consummated. There can be no
assurance that the Company can successfully integrate acquired businesses or
that such businesses will enhance the Company's business. See "Prospectus
Summary--Pending Acquisitions." 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 Company proceeds with a large acquisition for cash, the Company may use
a portion of the net proceeds from this Offering to consummate such
transaction. See
8
<PAGE>
"Use of Proceeds." The Company may also seek to finance any such acquisition
through additional debt or equity financings, which could result in dilution
and additional risk for the holders of the Company's Common Stock.
The Company anticipates that one or more potential acquisition opportunities,
including those that would be material, may become available in the near
future. Such acquisition opportunities are likely to include one or more of the
Company's principal suppliers. 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.
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."
Management Information Systems. Although the Company integrates the financial
reporting systems of businesses it acquires, the Company generally allows such
businesses to retain their existing operating systems. There can be no
assurance that these operating systems will adequately support the operations
of the Company as a whole or that the acquired businesses can be integrated
with the Company's financial systems in a timely and cost effective manner. In
addition, there can be no assurance that the Company's current management
information systems or any planned upgrades will be sufficient
9
<PAGE>
or effective or that further investments in management information systems
will not be necessary. See "Business--Management Information Systems."
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 37.6% 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.
After the Offering, the holders of Class B Stock will have 38.9% of the
combined voting power. 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 "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
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.
10
<PAGE>
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, 25,951,784 shares of Common Stock, including the 7,000,000 shares
offered hereby, 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 176,801 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 BT
Alex. Brown 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 449,944 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 September 27, 1997, there were 856,952 shares
of Common Stock available for future issuance. 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 September 27, 1997, there were
options outstanding to purchase 1,447,890 shares of Common Stock under the
1993 Omnibus Equity Plan and the Nonemployee Director Stock Option Plan and
400,000 shares available for issuance pursuant to the Employee Stock Purchase
Plan. In November 1997, the Company's Board of Directors voted to increase the
number of shares reserved for issuance under the 1993 Omnibus Equity Incentive
Plan, subject to stockholder approval, by 2,000,000 shares. The Company
intends to file a registration statement covering these additional shares. 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 7,000,000 shares of
Common Stock offered hereby are estimated to be approximately $188.5 million
($216.8 million if the Underwriters' over-allotment option is exercised in
full), at an assumed public offering price of $28.25 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. The Company intends to use the net proceeds to finance acquisitions,
including approximately $120 million for the pending Kaytee and TFH
acquisitions, and for general corporate purposes. There can be no assurance
that these acquisitions will be consummated or if consummated can be
successfully integrated into the Company's business. As of December 2, 1997,
the Company had approximately $75 million available under its principal line
of credit. This borrowing capacity will provide the Company with a source of
funds for possible acquisitions of complementary businesses and working
capital. As part of its growth
11
<PAGE>
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 in 1996 and four acquisitions, to date, in 1997.
Pending use of the net proceeds for the above purposes, the Company intends to
invest such funds in short-term, investment grade, interest-bearing
obligations. 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 4 of
Notes to Consolidated Financial Statements.
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 4 of Notes to
Consolidated Financial Statements.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market,
under the symbol "CENT," 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 on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
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 1/4
Fourth Quarter.......................................... 31 1/16 20 1/2
FISCAL 1998
First Quarter (through December 4, 1997)................ 32 25 3/4
</TABLE>
On December 4, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $28.25 per share. As of September 27, 1997, there
were approximately 111 holders of record of the Company's Common Stock and
approximately 10 holders of record of the Company's Class B Stock.
12
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 27, 1997 (i) on an actual basis and (ii) as adjusted to
give effect to the sale of 7,000,000 shares of Common Stock being sold by the
Company (at an assumed public offering price of $28.25 per share) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings................................. $ 72 $ --
======== ========
Long-term borrowings(1)............................... $115,200 $115,200
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; 1,663,167 shares outstanding, actual
and as adjusted.................................... 16 16
Common Stock, $.01 par value; 40,000,000 shares
authorized; 19,117,325 shares outstanding, actual
and 26,117,325 shares outstanding, as adjusted(2).. 191 261
Additional paid-in capital.......................... 245,783 434,164
Retained earnings................................... 36,291 36,291
Restricted stock deferred compensation(3)........... (110) (110)
Treasury stock, at cost............................. (364) (364)
-------- --------
Total shareholders' equity........................ 281,807 470,258
-------- --------
Total capitalization............................ $397,007 $585,458
======== ========
</TABLE>
- --------
(1) In November 1996, the Company issued $115,000,000 of 6% Convertible
Subordinated Notes due 2003.
(2) Excludes 1,447,890 shares of Common Stock issuable upon exercise of stock
options outstanding as of September 27, 1997. Also excludes 1,647,723
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. In November 1997, the Company's Board of
Directors voted to increase the number of shares reserved for issuance
under the 1993 Omnibus Equity Incentive Plan, subject to stockholder
approval, by 2,000,000 shares. Also excludes 4,107,143 shares of Common
Stock issuable upon assumed conversion of the Company's 6% Convertible
Subordinated Notes due 2003 and 100,000 shares of Common Stock issuable
upon the assumed conversion of 100 shares of Series A Preferred Stock.
(3) Reflects the issuance 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 certain future vesting
periods of up to 10 years.
(4) Does not reflect the amounts to be paid, if any, in connection with the
acquisitions of Kaytee and TFH or approximately $32 million of debt of
these companies. See "Prospectus Summary--Pending Acquisitions."
13
<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 two-year period ended
December 25, 1994, the nine-month period ended September 30, 1995 and each of
the fiscal years in the two-year period ended September 27, 1997 have been
derived from the Company's audited consolidated financial statements. Such
financial statements as of September 28, 1996 and September 27, 1997 and for
the nine-month period ended September 30, 1995 and the fiscal years in the
two-year period ended September 27, 1997 are included elsewhere in this
Prospectus and have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report included herein. 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 ENDED ENDED(1) FISCAL YEAR ENDED
------------------------- ------------- ---------------------------
DECEMBER 26, DECEMBER 25, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 27,
1993 1994 1995 1996 1997
------------ ------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $334,682 $421,427 $373,734 $619,622 $841,007
Cost of goods sold and occupancy...... 278,746 354,096 316,832 535,189 694,925
-------- -------- -------- -------- --------
Gross profit......................... 55,936 67,331 56,902 84,433 146,082
Selling, general and administrative
expenses............................. 44,702 58,489 48,075 66,945 109,160
-------- -------- -------- -------- --------
Income from operations................ 11,234 8,842 8,827 17,488 36,922
Interest expense-net.................. (3,751) (5,642) (5,891) (4,061) (6,554)
Other income (expense)-net............ (878) (859) (953) 1,038 --
-------- -------- -------- -------- --------
Income before income taxes and
minority interest.................... 6,605 2,341 1,983 14,465 30,368
Income tax expense.................... 2,637 936 904 6,017 12,765
-------- -------- -------- -------- --------
Income before minority interest....... 3,968 1,405 1,079 8,448 17,603
Minority interest..................... 26 -- -- -- --
-------- -------- -------- -------- --------
Net income ........................... $ 3,994 $ 1,405 $ 1,079 $ 8,448 $ 17,603
======== ======== ======== ======== ========
Net income per common and common
equivalent share(2)
Primary.............................. $ 0.83 $ 0.24 $ 0.18 $ 0.72 $ 1.08
Fully diluted........................ 0.18 0.71 1.07
Weighted average shares outstanding(2)
Primary.............................. 4,789 5,947 5,943 11,702 16,293
Fully diluted........................ 6,050 11,904 19,970(3)
OPERATING DATA:
Distribution and manufacturing centers
at period end........................ 30 39 38 41 49
BALANCE SHEET DATA (AT PERIOD END):
Working capital....................... $ 26,719 $ 21,003 $ 25,316 $ 95,670 $253,926
Total assets.......................... 143,748 173,953 142,680 283,664 559,043
Short-term borrowings................. 32,162 44,995 39,670 29,508 72
Long-term borrowings.................. 8,804 7,019 11,130 7,635 115,200(3)
Shareholders' equity.................. 35,359 36,376 38,402 129,559 281,807
</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.
(2) In November 1995, the Company sold 5,750,000 shares of its Common Stock at
a public offering price of $6.75 per share. In July 1996, the Company sold
2,752,500 shares of its Common Stock at a public offering price of $18.00
per share. In August 1997, the Company sold 5,540,000 shares of its Common
Stock at a public offering price of $24.25 per share.
(3) In November 1996, the Company issued $115,000,000 of 6% Convertible
Subordinated Notes due 2003. Fully diluted weighted average shares
outstanding includes shares of Common Stock issuable upon the assumed
conversion of such notes.
14
<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 a result of both acquisitions and internal expansion, the
Company has grown rapidly from sales of approximately $25 million in 1987 to
approximately $841 million in fiscal 1997 and increased the number of Company
distribution and manufacturing centers from one in 1987 to 49 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, and
four acquisitions, to date, in 1997. These acquisitions included five lawn and
garden distributors and nine distributors of pet supplies. In addition, in
December 1997 the Company agreed to acquire Kaytee and TFH. In fiscal 1997,
lawn and garden products accounted for approximately 71% of the Company's net
sales and pet supplies accounted for approximately 29%. As a result of its
recent acquisitions and the proposed acquisitions of Kaytee and TFH, 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 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. 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 1995 and prior, 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 consists of large shipments to retail distribution
centers which are characterized by 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 led to substantially
increased sales of Solaris products, increased gross profit from sales of
Solaris products as well as lower gross profit as a percentage of net sales.
In addition, under the Solaris Agreement, the Company's inventories of
Solaris products have increased significantly 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.
15
<PAGE>
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.
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>
<CAPTION>
NINE MONTH FISCAL FISCAL
PERIOD ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0%
Cost of goods sold and occupancy.... 84.8 86.4 82.6
----- ----- -----
Gross profit........................ 15.2 13.6 17.4
Selling, general and administrative
expenses............................ 12.9 10.8 13.0
----- ----- -----
Income from operations.............. 2.3 2.8 4.4
Interest expense--net............... 1.6 0.7 0.8
Other income (expense)--net......... (0.2) 0.2 0.0
----- ----- -----
Income before income taxes.......... 0.5 2.3 3.6
Income taxes........................ 0.2 0.9 1.5
----- ----- -----
Net income.......................... 0.3% 1.4% 2.1%
===== ===== =====
</TABLE>
FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales for the year ended September 27, 1997 increased by 35.7% or $221.4
million to $841.0 million from $619.6 million for the year ended September 28,
1996. Of the $221.4 million increase, approximately $146.5 million was
attributable to businesses acquired subsequent to October 1, 1995. The
increase related to the existing business was attributable principally to the
lawn and garden operations with modest sales increases in both the pet and
branded areas of the Company's operations.
Gross profit increased by 73.0% or $61.6 million from $84.4 million during
the year ended September 28, 1996 to $146.1 million for the same period in
1997. Gross profit as a percentage of net sales increased from 13.6% for the
year ended September 28, 1996 to 17.4% for the comparable 1997 period. While
the existing operations reported a modest increase in gross margin as a
percentage of net sales, the increase is due principally to a greater
percentage of higher margin pet and branded sales relative to total sales than
was the case in fiscal 1996. The change in sales mix is primarily attributable
to the newly acquired businesses.
For the year ended September 27, 1997, selling, general and administrative
expenses increased by $42.3 million to $109.2 million from $66.9 million for
the comparable 1996 period. The increase in selling, general and
administrative expenses is attributable to a combination of increased sales
and the addition of the newly acquired businesses. As a percentage of net
sales, operating expenses increased from 10.8% in the twelve months ended
September 28, 1996 to 13.0% for the similar 1997 period. This percentage
increase relates principally to the pet and branded product operations which
have significantly higher operating costs as a percentage of sales than the
lawn and garden operations. As these two product areas become a greater
percentage of total sales, selling, general and administrative expense as a
percentage of net sales will continue to increase.
16
<PAGE>
Interest expense -- net for the year ended September 27, 1997 increased by
61.4% or $2.5 million to $6.6 million from $4.1 million for the year ended
September 28, 1996. The increase is due principally to the issuance of
$115,000,000, 6% convertible notes in November 1996 offset, in part, by
interest income earned from funds available resulting from proceeds from the
issuance of both the convertible notes and a public offering of the Company's
common stock in August 1997. Average borrowings for fiscal 1997 were $105.2
million compared with $28.2 million for the comparable 1996 period. The
average interest rates for the fiscal years ended September 27, 1997 and
September 28, 1996 were 7.4% and 10.5%, respectively.
The Company's effective income tax rate for fiscal 1997 was 42.0% compared
with 41.6% for the similar 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 will not be
directly comparable with 1995. The Company believes that comparing 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 (approximately $98.0 million), (2) acquisition of two
pet supplies distributors in the fourth quarter of fiscal 1996 (approximately
$22.2 million), and (3) the addition of stores previously serviced by a
competitor, expanded product placements and new store openings with existing
customers (approximately $62.4 million).
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
supplies comparable 1996 period. Of the $5.8 million increase, approximately
$4.4 million relates to the two pet supplies distributors acquired in the
fourth quarter of fiscal 1996 and approximately $6.1 million is related to the
increase in sales, offset in part by approximately $4.7 million resulting from
a combination of cost reductions in the existing pet operations and costs
related to inventory on hand at September 28, 1996. 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.
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 sales 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
17
<PAGE>
under the Monsanto trade financing agreement which ended in November 1995. The
average interest rate 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.
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 fiscal 1997, approximately 66%
of the Company's sales occurred in the second and third quarters of the fiscal
year. Historically, substantially all of the Company's operating income is
generated in this period. Typically, the lawn and garden business is more
seasonal than the pet supplies business, with a higher proportion of sales
occurring in the first two calendar quarters. In fiscal 1997, the Company's
lawn and garden business accounted for approximately 71% of net sales and pet
supplies accounted for approximately 29% 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
--------------------------------------
DEC. 30, MARCH 30, JUNE 29, SEPT. 28,
1995 1996 1996 1996
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................ $ 78,112 $182,020 $227,591 $131,899
Gross profit............................. 11,320 21,806 30,650 20,657
Income (loss) from operations............ (2,698) 5,902 12,440 1,844
Net income (loss)........................ (2,363) 2,791 6,635 1,385
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
DEC. 28, MARCH 29, JUNE 28, SEPT. 27,
1996 1997 1997 1997
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................ $100,144 $236,341 $320,402 $184,120
Gross profit............................. 17,454 33,716 54,514 40,398
Income (loss) from operations............ (2,179) 10,505 22,619 5,977
Net income (loss)........................ (1,807) 5,038 11,807 2,565
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth through a combination of
bank borrowings, supplier credit, internally generated funds and sales of its
stock and convertible notes to the public. During fiscal 1997, the Company
received net proceeds (after offering expenses) of approximately $111.4
million from the sale of $115.0 million of 6% Convertible Subordinated Notes
due 2003 and approximately $127.2 million (after offering expenses) from the
sale of 5,540,000 shares of common stock completed in August 1997. The Company
used the cash generated from its August 1997 offering to repay approximately
$28.0 million outstanding under its principal line of credit and approximately
$56.0 million related to early payments for purchases of inventory under
various promotional programs offered by certain suppliers.
18
<PAGE>
The Company's business is highly seasonal and its working capital
requirements and capital resources track closely to this seasonal pattern.
During the first quarter of each calendar year, inventory, accounts
receivable, 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 second quarter of the calendar year,
inventory levels decrease while account receivables peak and short-term
borrowings start to decline as cash collections are received during the peak
selling period. In the third quarter of the calendar year, inventory levels
are at their lowest level and receivables and accounts payable are
substantially reduced through conversion of accounts receivable to cash.
During the fourth quarter of the calendar year, accounts receivable reach
their lowest levels, while inventory and 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, the fourth quarter of
each calendar year is typically the period when the asset borrowing base is at
its lowest and consequently its ability to borrow is at its lowest.
For the twelve months ended September 27, 1997, the Company generated $10.2
million of cash from operating activities. Cash used from investing activities
was approximately $101.4 million of which $96.8 million was related to the
acquisitions of two manufacturers of pet supplies products (Four Paws and the
flea and tick operations of Sandoz Agro, Inc.), one pet distributor (Country
Pet Supply), one lawn and garden distributor (Ezell Nursery Supply), plus an
equity interest in a lawn and garden distributor (Commerce). The balance, $4.6
million reflects additions to plant and equipment. Cash provided from
financing activities of $190.0 million consisted principally of $238.6 million
of net proceeds from the issuance of $115.0 million principal amount of 6%
Subordinated Convertible Notes and the sale of 5,540,000 shares of common
stock offset in part by repayments of both short and long-term debt of
approximately $42.1 million. Additionally, the Company redeemed for $7.0
million warrants to purchase 500,000 shares of the Company's stock which were
originally issued to Monsanto Company in connection with the Company's
agreement to become the master agent and distributor for Solaris, a business
unit of Monsanto, and Monsanto's purchase of 100 shares of the Company's
preferred stock. The redemption price reflected the fair market value of the
Company's common stock at date of acquisition less the exercise price of $9.00
per share.
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 the Monsanto trade financing agreement. 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 by approximately $13.7 and $0.4 million to acquire treasury shares.
The Company has a line of credit with Congress Financial Corporation
(Western) for up to $75 million. 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 September 27, 1997,
as a result of the sale of $115.0 million of Convertible Subordinated Notes in
November 1996, and the sale of its common stock in August 1997, the
indebtedness to Congress was repaid leaving the Company with $75.0 million of
borrowing availability. 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.
During 1995, the Company had a trade credit arrangement with a financing
affiliate of Monsanto pursuant to which Monsanto permitted the Company to
borrow up to $81.0 million for the purchase of Solaris products. Such
borrowings were secured by a first priority lien on the Company's inventory of
19
<PAGE>
Solaris products and a second priority lien on all other inventories and
receivables and bore interest at a rate 1 1/2% below the prime rate. This
arrangement was eliminated on November 15, 1995 and subsequent to that date,
financing arrangements with Monsanto have been on typical Solaris credit
terms.
The Company believes that its current cash balance, cash flow from
operations, funds available under its line of credit and its arrangements with
suppliers including Monsanto will be adequate to fund its presently
anticipated working capital requirements for the foreseeable future. The
Company anticipates that its capital expenditures, excluding any future
acquisitions, will not exceed $5.0 million for the next 12 months.
As part of its growth strategy, the Company has engaged in acquisition
discussions with a number of companies in the past and it anticipates it will
continue to evaluate potential acquisition candidates. If one or more
potential acquisition opportunities, including those that would be material,
become available in the near future, the Company may require additional
external capital. In addition, such acquisitions would subject the Company to
the general risks associated with acquiring companies, particularly if the
acquisitions are relatively large. See "Risk Factors--Acquisitions; Expansion.
"
20
<PAGE>
BUSINESS
OVERVIEW
The Company is the leading national distributor of lawn and garden and pet
supply products. 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 $841 million in fiscal 1997 and increased
the number of Company distribution and manufacturing centers from one in 1987
to 49 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 addition, in December 1997 the Company agreed to
acquire Kaytee and TFH. In fiscal 1997, lawn and garden products accounted for
approximately 71% of the Company's net sales and pet supplies accounted for
approximately 29%.
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
21
<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 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.
22
<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. 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 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 May 1997, the Company acquired Ezell Nursery Supply, Inc.
("Ezell"), a distributor of lawn and garden, barbecue and patio products. 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 Pet Supply, Inc. ("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 September 27, 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
23
<PAGE>
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.
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 Products, Ltd., Inc. ("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 Agro, Inc.
("Sandoz") (the "Sandoz Flea and Tick Acquisition"), 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 1997, lawn and garden products accounted for approximately 71% of
the Company's net sales and pet supplies accounted for approximately 29%. The
Company offers its customers a comprehensive selection of brand name lawn,
garden and pet 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, 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 and pet supply
requirements from a single source. In fiscal 1997, substantially all of the
Company's products had suggested retail prices of $20 or less.
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.
24
<PAGE>
<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, HTH, Pace,
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
</TABLE>
- --------
(1) Category includes fertilizers, insecticides, weed killers, herbicides,
animal repellents, other chemicals and electronic pest controls.
(2) Category includes pool chemicals, equipment and toys, 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, nozzles, Christmas products and other seasonal
items.
(3) Category includes various pet supplies and pet care products and dog, cat,
fish and bird food.
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. 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, 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.
25
<PAGE>
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 September 27, 1997, the Company employed approximately 500 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.
26
<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 Square Bi-Mart Bachman Albertson's Petco
Nurseries
Costco Kmart Calloway's Bruno's PETsMART
Nursery
Eagle Hardware & Target Frank's Fred Meyer Pet Supplies Plus
Garden
Home Depot Wal*Mart Navlet's Long's Drug Stores
Nurseries
Home Base Woolworth Pike Nurseries Payless Drugstores
Lowes Sunbelt Raley's
Nurseries
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 and pet supplies 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."
27
<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 44% and 32% of the
Company's net sales for fiscal 1996 and fiscal 1997, 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.
28
<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.
Although the Company integrates the financial reporting systems of
businesses it acquires, the Company generally allows such businesses to retain
their existing operating systems. There can be no assurance that these
operating systems will adequately support the operations of the Company as a
whole or that the acquired businesses can be integrated with the Company's
financial reporting systems in a timely and cost effective manner. In
addition, there can be no assurance that the Company's current management
information systems or any planned upgrades 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 41 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 independent distributors for
specific geographic areas.
29
<PAGE>
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 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 1997 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 41 distribution centers and eight
manufacturing facilities totaling approximately 3,374,000 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, 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 1998 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 September
27, 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.
30
<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
Stockton, CA* Dallas, TX(2)
Van Nuys, CA Dallas, TX* Bloomington, IL
Visalia, CA Hammond, LA Kansas City, MO
Houston, TX(3) St. Louis, MO
MEXICO Little Rock, AR Minneapolis, MN
Celaya Lubbock, TX
McAlester, OK SOUTHEAST REGION
San Antonio, TX
Atlanta, GA
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--Low Margins; 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--Low Margins; 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 September 27, 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
31
<PAGE>
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.
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.
32
<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........ 56 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......... 65 Vice President, Chief Financial Officer and Secretary
Lee D. Hines, Jr.(1).... 51 Director
Daniel Hogan(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. is a self-employed business consultant. Mr. Hines joined the
Company in April 1991 as Executive Vice President and Chief Financial Officer,
a position he retained until June 1993. He became a Director in 1991. 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 1980 to 1982.
33
<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 1997 for which he received compensation
of $65,000.
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
34
<PAGE>
Company during fiscal 1997 for which he received compensation of $65,000. 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 September 27, 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.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Class B Stock and Common Stock as of
September 27, 1997 and, as adjusted to reflect the sale of the shares of
Common Stock offered hereby, (i) by each person (or group of affiliated
persons) who is known by the Company to own beneficially more than five
percent of the Company's outstanding Stock, (ii) by each of the Company's
directors and executive officers and (iii) by all directors and executive
officers as a group. Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect
to all shares of Stock shown as beneficially owned by them, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING PERCENTAGE
----------------------------------- ----------------------------------- OF TOTAL
NUMBER NUMBER OF NUMBER NUMBER OF VOTING
OF CLASS B COMMON OF CLASS B COMMON POWER AFTER
BENEFICIAL OWNERS SHARES SHARES PERCENT(1) SHARES SHARES PERCENT(1) OFFERING(2)
----------------- ---------- --------- ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Brown(3)...... 1,606,359 -- 7.7% 1,606,359 -- 5.8% 37.6%
Putnam Investments,
Inc.(4)................. -- 2,591,288(5) 12.5 -- 2,591,288(5) 9.3 6.1
Warburg, Pincus
Counsellors, Inc.(6).... -- 1,924,800(5) 9.3 -- 1,924,800(5) 6.9 4.5
The Kaufmann Fund,
Inc.(7)................. -- 1,600,000(5) 7.7 -- 1,600,000(5) 5.8 3.7
Strong Capital
Management, Inc.(8)..... -- 1,357,725(5) 6.5 -- 1,357,725(5) 4.9 3.2
AIM Management Group
Inc.(9)................. -- 1,052,600(5) 5.1 -- 1,052,600(5) 3.8 2.5
Glenn W. Novotny......... -- 94,800(10) * -- 94,800(10) * *
Neill J. Hines........... 45,548 37,608(11) * 45,548 37,608(11) * 1.2
Robert B. Jones.......... -- 2,008 * -- 2,008 * *
Lee D. Hines, Jr......... -- 51,000 * -- 51,000 * *
Daniel P. Hogan, Jr...... -- 6,000 * -- 6,000 * *
All directors and
executive officers as a
group (6 persons)....... 1,651,907 191,416(12) 8.9% 1,651,907 191,416(12) 6.6% 39.1%
</TABLE>
- ---------------------
(*) Less than 1%
(1) Represents the number of shares of Class B Stock and Common Stock
beneficially owned by each stockholder as a percentage of the total
number of shares of Class B Stock and Common Stock outstanding.
(2) The percentage of total voting power after Offering represents the
percentage of the voting power each stockholder will have after the
Offering, assuming such stockholder does not convert his Class B Stock
into Common Stock, and giving effect to the disparate voting rights
between the Class B Stock and the Common Stock.
(3) The address of Mr. Brown is 3697 Mt. Diablo Boulevard, Lafayette,
California 94549. Mr. Brown may be deemed to be a "control person" of the
Company within the meaning of the rules and regulations of the Securities
and Exchange Act of 1934, as amended, by virtue of his stock ownership
and positions with the Company.
(4) The address of Putnam Investments, Inc. is One Post Office Square, 12th
Floor, Boston, Massachusetts 02109.
(5) Based on a Schedule 13F filed reflecting beneficial ownership as of
September 30, 1997.
(6) The address of Warburg, Pincus Counsellors, Inc. is 466 Lexington Avenue,
New York, New York 10017.
(7) The address of The Kaufmann Fund, Inc. is 140 East 45th Street, 43rd
Floor, New York, New York 10017.
(8) The address of Strong Capital Management, Inc. is 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
(9) The address of AIM Management Group Inc. is 11 Greenway Plaza, Suite
1919, Houston, Texas 77046.
(10) Includes 9,487 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 27, 1997.
(11) Includes 5,128 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 27, 1997.
(12) Includes 14,615 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 27, 1997.
35
<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").
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 94.0% of the total shares outstanding (and, together
with the 100 shares of Series A Preferred Stock owned by Monsanto Company,
have approximately 61% of the combined voting power of the outstanding
shares), and the holders of Class B Stock have approximately 39% of the
combined voting power of the outstanding shares. The holders of the Class B
Stock are, therefore, 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 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
36
<PAGE>
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, 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
37
<PAGE>
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.
38
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") have severally agreed to purchase
from the Company 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>
BT Alex. Brown Incorporated...........................................
Hambrecht & Quist LLC.................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................
Wasserstein Perella Securities, Inc...................................
---------
Total................................................................. 7,000,000
=========
</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 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 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 1,050,000
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 7,000,000, 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 7,000,000 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 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 Underwriters 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 Underwriters in a syndicate covering transaction and
has therefore not been effectively placed by such Underwriter or syndicate
member. The Underwriters 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.
39
<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 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 BT
Alex. Brown 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 26,117,325 shares of Common Stock and
1,663,167 shares of Class B Stock outstanding. Of these shares, 25,951,784,
including the 7,000,000 shares offered hereby, 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
176,801 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 BT Alex. Brown 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 449,944 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 (approximately 261,173 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 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.
40
<PAGE>
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. In November 1997, the Company's Board
of Directors voted to increase the number of shares reserved for issuance
under the 1993 Omnibus Equity Incentive Plan, subject to stockholder approval,
by 2,000,000 shares. The Company intends to file a registration statement
covering these additional shares.
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 as of September 27, 1997 and September 28, 1996 and
for each of the two fiscal years in the period ended September 27, 1997 and
for the nine-month period ended September 30, 1995 included, and incorporated
by reference, in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
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.
41
<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.
42
<PAGE>
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 27, 1997;
(2) The Company's Current Reports on Form 8-K dated December 8, 1997; and
(3) The description of the Company's capital stock in the Company's
Registration Statement on Form 8-A dated March 30, 1993.
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.
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.
43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Central Garden & Pet Company
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets, September 27, 1997 and September 28, 1996... F-3
Consolidated Statements of Income for Fiscal Years Ended September 27,
1997 and September 28, 1996 and the Nine-Month Period Ended September
30, 1995................................................................ F-4
Consolidated Statements of Shareholders' Equity for Fiscal Years Ended
September 27, 1997 and September 28, 1996 and the Nine-Month Period
Ended September 30, 1995................................................ F-5
Consolidated Statements of Cash Flows for Fiscal Years Ended September
27, 1997 and September 28, 1996 and the Nine-Month Period Ended
September 30, 1995...................................................... F-6
Notes to Consolidated Financial Statements for Fiscal Years Ended
September 27, 1997 and September 28, 1996 and the Nine-Month Period
Ended September 30, 1995................................................ F-7
</TABLE>
F-1
<PAGE>
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 27, 1997
and September 28, 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the fiscal years ended September 27,
1997 and September 28, 1996, and the nine-month period ended September 30,
1995. 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 27, 1997 and September 28, 1996, and the results
of their operations and their cash flows for the fiscal years ended September
27, 1997 and September 28, 1996, and the nine-month period ended September 30,
1995 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
November 4, 1997
F-2
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $100,125 $ 1,272
Accounts receivable, less allowance for doubtful
accounts of $5,204 and $5,278.................... 85,028 62,231
Inventories....................................... 218,796 169,835
Prepaid expenses and other assets................. 10,470 7,132
-------- --------
Total current assets........................... 414,419 240,470
Land, Buildings, Improvements and Equipment:
Land.............................................. 2,216 431
Buildings and improvements........................ 8,935 3,450
Transportation equipment.......................... 3,968 3,161
Warehouse equipment............................... 12,748 7,878
Office furniture and equipment.................... 12,541 8,046
-------- --------
Total.......................................... 40,408 22,966
Less accumulated depreciation and amortization..... 17,720 11,502
-------- --------
Land, buildings, improvements and equipment-
net............................................ 22,688 11,464
Goodwill........................................... 113,018 29,971
Other Assets....................................... 8,918 1,759
-------- --------
Total.......................................... $559,043 $283,664
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable..................................... $ 72 $ 27,904
Accounts payable.................................. 136,220 104,049
Accrued expenses.................................. 24,201 11,243
Current portion of long-term debt................. -- 1,604
-------- --------
Total current liabilities...................... 160,493 144,800
Long-Term Debt..................................... 115,200 7,635
Deferred Income Taxes and Other Long-Term
Obligations........................................ 1,543 1,670
Commitments and Contingencies (Note 10)
Shareholders' Equity:
Series A convertible preferred stock.............. -- --
Class B stock..................................... 16 19
Common stock...................................... 191 125
Additional paid-in capital........................ 245,783 111,228
Retained earnings................................. 36,291 18,733
Restricted stock deferred compensation............ (110) (182)
Treasury stock.................................... (364) (364)
-------- --------
Total shareholders' equity..................... 281,807 129,559
-------- --------
Total.......................................... $559,043 $283,664
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR NINE-MONTH
ENDED ENDED PERIOD ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales........................... $841,007 $619,622 $373,734
Cost of goods sold and occupancy.... 694,925 535,189 316,832
-------- -------- --------
Gross profit...................... 146,082 84,433 56,902
Selling, general and administrative
expenses............................ 109,160 66,945 48,075
-------- -------- --------
Income from operations............ 36,922 17,488 8,827
Interest expense--net............... (6,554) (4,061) (5,891)
Other income (expense)--net......... -- 1,038 (953)
-------- -------- --------
Income before income taxes........ 30,368 14,465 1,983
Income taxes........................ 12,765 6,017 904
-------- -------- --------
Net income.......................... $ 17,603 $ 8,448 $ 1,079
======== ======== ========
Net income per common and common
equivalent share
Fully diluted..................... $ 1.07 $ .71 $ .18
======== ======== ========
Primary........................... $ 1.08 $ .72 $ .18
======== ======== ========
Weighted average shares outstanding
Fully diluted..................... 19,970 11,904 6,050
======== ======== ========
Primary........................... 16,293 11,702 5,943
======== ======== ========
</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 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
dividend 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... 72
Conversion of
Class B stock
into common
stock.......... (270,408) (3) 270,408 3
Issuance of
common stock... 6,310,396 63 141,571
Net income...... 17,603
Preferred
dividend paid.. (45)
Redemption of
stock warrant.. (7,016)
------- -------- --------- --- ---------- ---- -------- ------- ----- -------- --------
Balance,
September 27,
1997
(unaudited).... 100 $ -- 1,663,167 $16 19,143,325 $191 $245,783 $36,291 $(110) (26,000) $ (364)
======= ======== ========= === ========== ==== ======== ======= ===== ======== ========
TOTAL
--------
<S> <C>
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................................... 63,047
Net income................................................. 8,448
Preferred dividend paid.................................... (45)
--------
Balance, September 28, 1996................................ 129,559
Amortization, restricted stock deferred compensation....... 72
Conversion of Class B stock into common stock.............. --
Issuance of common stock................................... 141,634
Net income................................................. 17,603
Preferred dividend paid.................................... (45)
Redemption of stock warrant................................ (7,016)
--------
Balance, September 27, 1997 (unaudited).................... $281,807
========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR NINE-MONTH
ENDED ENDED PERIOD ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 17,603 $ 8,448 $ 1,079
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization..... 5,373 3,057 1,817
Deferred income taxes............. 983 596 590
Gain on sale of land, building and
improvements..................... -- (260) --
Changes in assets and liabilities:
Receivables..................... (7,107) (15,959) (4,549)
Inventories..................... (20,830) (89,454) 38,208
Prepaid expenses and other as-
sets........................... (1,322) (154) (683)
Accounts payable................ 18,853 57,750 (23,147)
Accrued expenses................ (3,341) 4,166 (2,824)
Other long-term obligations..... -- (595) (55)
-------- ------- -------
Net cash provided (used) by
operating activities.......... 10,212 (32,405) 10,436
-------- ------- -------
Cash flows from investing activities:
Additions to land, buildings,
improvements and equipment........ (4,605) (3,015) (2,781)
Proceeds from sale of land,
buildings, improvements and
equipment......................... -- 3,676 --
Payments to acquire companies, net
of cash acquired.................. (96,793) (34,950) (1,341)
-------- ------- -------
Net cash used by investing ac-
tivities...................... (101,398) (34,289) (4,122)
-------- ------- -------
Cash flows from financing activities:
Proceeds (repayments) from notes
payable, net...................... (27,832) (10,067) (5,212)
Payments on long-term debt......... (14,247) (3,590) (1,980)
Payments to reacquire stock........ -- (364) (117)
Payment to redeem warrant.......... (7,016) -- --
Proceeds from issuance of long-term
debt.............................. 111,227 -- --
Proceeds from issuance of stock.... 127,952 81,889 966
Preferred dividends paid........... (45) (45) --
-------- ------- -------
Net cash provided (used) by
financing
activities.................... 190,039 67,823 (6,343)
-------- ------- -------
Net increase (decrease) in cash...... 98,853 1,129 (29)
Cash at beginning of period.......... 1,272 143 172
-------- ------- -------
Cash at end of period................ $100,125 $ 1,272 $ 143
======== ======= =======
Supplemental information:
Cash paid for interest............. $ 7,049 $ 3,141 $ 5,654
Cash paid for income taxes......... 12,682 4,115 1,125
Conversion of accounts payable to
long- term debt................... -- -- 5,885
Assets (excluding cash) acquired
through purchase of
subsidiaries...................... 58,280 18,169 1,341
Liabilities assumed through pur-
chase of subsidiaries............. 34,897 2,318 --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996,
AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
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. 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.
Income Taxes are accounted for under the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. Deferred income taxes result primarily from bad debt allowances,
inventory reserves, depreciation and nondeductible reserves.
Cash and cash equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less at the date of acquisition.
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.
F-7
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 $4,558,000 and $2,288,000 at September 27, 1997 and
September 28, 1996, 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.
Fiscal Year--In 1995, the Company changed its fiscal year end to the last
Saturday in September.
Reclassifications--Certain 1995 and 1996 balances have been reclassified to
conform with the 1997 presentation.
Accounting Changes--In fiscal 1997, the Company adopted SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which requires review of 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. The adoption of SFAS 121 did not have a material impact on the
Company's consolidated financial statements.
In fiscal 1997, the Company adopted the disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation," which provides for the
disclosure of pro forma net earnings and net earnings per share as if the fair
value method were used to account for stock-based employee compensation plans.
The Company has elected to continue to use the intrinsic value method to
account for stock-based compensation plans in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees"; see Note 8.
New Accounting Pronouncements--In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings per Share." The Company is
required to adopt SFAS 128 in December 1997.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
F-8
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma amounts for basic and diluted EPS, assuming SFAS 128 had been in
effect, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR NINE-MONTH
ENDED ENDED PERIOD ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net income per share:
Basic............................... $ 1.11 $ 0.74 $ 0.19
====== ====== ======
Diluted............................. $ 1.07 $ 0.71 $ 0.18
====== ====== ======
</TABLE>
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise report, by
major components and as a single total, the change in its net assets during
the period from nonowner sources; and No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major
customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
2. ACQUISITIONS
Fiscal 1995
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.
Fiscal 1996
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 net assets
acquired by $18,540,000, which was recorded as goodwill.
Fiscal 1997
On January 20, 1997, the Company acquired Four Paws Products, Ltd., a
manufacturer of branded dog, cat, reptile and small animal products, for
$55,000,000, including the issuance of 449,944 shares of common stock at a
value of $10,000,000. The purchase price exceeded the fair market value of net
assets acquired by $39,607,000.
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. On March 4, 1997, the
Company acquired an equity interest in Commerce, a distributor of lawn and
garden products. On May 5, 1997, the Company acquired Ezell Nursery Supply,
Inc., a distributor of lawn and garden, barbecue and patio products. The
purchase price for these three acquisitions totaled $24,438,000, including the
issuance of 193,104 shares of common stock at a value of $3,645,000. The
purchase price exceeded the fair market value of net assets acquired by
$18,683,000.
F-9
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On May 23, 1997, the Company completed its acquisition of the United States
and Canada flea and tick business of Sandoz Argo, Inc., for $31,000,000, which
exceeded the fair market value of net assets acquired by $27,161,000. The fair
value of net assets acquired are based on preliminary estimates which are
subject to change. The acquisition includes all methoprene-based products
produced by Sandoz for use in the U.S. and Canada, and certain other specialty
products.
The fiscal 1997 net assets acquired included liabilities totaling $6.7
million related to the planned closures of facilities and involuntary
termination benefits, of which $5.5 million remained outstanding at September
27, 1997.
The fiscal 1997, 1996 and 1995 acquisitions, except for Commerce, which is
being accounted for under the equity method, have been accounted for under the
purchase method and have been included in the Company's consolidated
statements of income from time of acquisition.
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 years 1997 and 1996 as if the fiscal year 1997
acquisitions were on October 1, 1995. The pro forma results of operations also
reflect pro forma adjustments for stock issued to facilitate the acquisitions,
adjustments to conform inventory methods and facilities costs, and for the
amortization of goodwill. Fiscal 1997 pro forma net income reflects the
dilutive impact of the 1997 acquisitions had they been included in the
Company's results of operations during periods in which certain acquired
companies incurred operating losses. Although this pro forma combined
information includes the results of operations of the acquisitions, it does
not necessarily reflect the results of operations that would have occurred had
the acquisitions been managed by the Company prior to their acquisition.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales......................................... $912,460 $855,076
Gross profit...................................... 165,832 176,847
Income from operations............................ 28,243 42,145
Income before taxes............................... 19,809 33,879
Net income........................................ 11,114 20,519
Net income per common and common equivalent share:
Fully diluted................................... $ 0.67 $ 1.46
Primary......................................... $ 0.68 $ 1.48
Weighted average common and common equivalent
shares outstanding:
Fully diluted................................... 16,549 14,062
Primary......................................... 16,437 13,860
</TABLE>
3. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS AND SUPPLIERS
Customer Concentration--Approximately 47%, 50% and 52% of the Company's net
sales for fiscal years 1997 and 1996, and the nine-month period ended
September 30, 1995, respectively, were derived from sales to the Company's top
ten customers. The Company's largest customer accounted for approximately 19%,
23% and 22% of the Company's net sales for fiscal years 1997 and 1996, and the
nine-month period ended September 30, 1995, respectively. The Company's second
largest customer
F-10
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accounted for approximately 8%, 11% and 10% of the Company's net sales for
fiscal years 1997 and 1996, and the nine-month period ended September 30,
1995, 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.
Supplier Concentration --While the Company purchases products from over
1,000 different manufacturers and suppliers, approximately 45% of the
Company's net sales in fiscal year 1997 were derived from products purchased
from the Company's five largest suppliers. The Company believes that
approximately 32%, 44% and 29% of the Company's net sales during fiscal years
1997 and 1996 and the nine-month period ended September 30, 1995,
respectively, 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. 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 27, 1997 and September 28, 1996, balances of $72,000 and
$27,904,000, respectively, were outstanding under this agreement, bearing
interest at a rate related to the prime rate (9.25% at September 27, 1997 and
9.0% at September 28, 1996). Available borrowings at September 27, 1997 and
September 28, 1996 were $74,928,000 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 27, 1997 and
September 28, 1996.
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
1997 to $4.5 million.
F-11
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER SEPTEMBER
27, 28,
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Convertible Subordinated Notes, interest at 6% payable
semi-annually, principal due 2003......................... $115,000 --
Note payable to Weyerhaeuser Corporation, discounted at
10.25% imputed rate, interest due in quarterly install-
ments, principal repaid in 1997........................... -- $2,750
Note payable to a former supplier, interest at 10% and
principal repaid in 1997.................................. -- 5,885
Other notes payable........................................ 200 604
-------- ------
Total.................................................... 115,200 9,239
Less current portion of long-term debt..................... - 1,604
-------- ------
Total.................................................... $115,200 $7,635
======== ======
</TABLE>
Principal repayments on long-term debt are scheduled as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year:
1998........................................................... --
1999........................................................... --
2000........................................................... $ 200
2001........................................................... --
2002........................................................... --
Thereafter..................................................... 115,000
--------
Total........................................................ $115,200
========
</TABLE>
F-12
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 27, 1997, the carrying amount of cash and cash equivalents
approximates its fair market value. The fair market value of the Company s
long-term debt was $138,575,000 at September 27, 1997, which was computed by
using quoted market prices.
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 $12,669,000 and $9,896,000 for fiscal years 1997 and 1996, and
$6,437,000 for the nine-month period ended September 30, 1995, respectively.
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 27, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
FISCAL YEAR:
1998..................................................... $11,867
1999..................................................... 9,772
2000..................................................... 8,622
2001..................................................... 7,518
2002..................................................... 3,132
Thereafter............................................... 4,612
-------
Total................................................... $45,523
=======
</TABLE>
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL FISCAL NINE-MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal............................. $ 9,578 $4,523 $187
State............................... 2,204 1,040 127
------- ------ ----
Total............................. 11,782 5,563 314
Deferred............................ 983 454 590
------- ------ ----
Total............................. $12,765 $6,017 $904
======= ====== ====
</TABLE>
F-13
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL NINE-MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Statutory rate................... 35% 34% 34%
State income taxes, net of
federal benefit.................. 5 5 5
Nondeductible expenses........... 6 6 9
Other............................ (4) (3) (3)
--- --- ---
Effective tax rate............... 42% 42% 45%
=== === ===
</TABLE>
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 27, 1997 SEPTEMBER 28, 1996
-------------------- --------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Current:
Allowance for doubtful accounts
receivable.................... $1,566 $1,036
Inventory reserves............. 973 910
Prepaid expenses............... $ 492 $ 219
Nondeductible reserves......... 2,823 837
Net operating loss
carryforwards................. 97 97
Other.......................... 369 460
------ ------- ------ ------- ---
Total........................ 5,828 492 3,340 219
Valuation allowance.............. (25) (25)
------ ------- ------ -------
Current.......................... 5,803 492 3,315 219
Noncurrent:
Adoption of FIFO inventory
method........................ 321
Depreciation................... 1,436 1,248
Other.......................... 82 132
------ ------- ------ -------
Noncurrent....................... 82 1,436 132 1,569
------ ------- ------ -------
Total........................ $5,885 $ 1,928 $3,447 $ 1,788
====== ======= ====== =======
</TABLE>
8. SHAREHOLDERS' EQUITY
At September 27, 1997, 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. In July 1997, the
Company redeemed the warrant for $7.0 million.
F-14
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 27, 1997, there were 3,000,0000 shares of Class B stock ($.01
par value) authorized, of which 1,663,167 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.
At September 27, 1997, there were 40,000,000 shares of common stock ($.01
par value) authorized, of which 19,117,325 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 an 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.
On August 8, 1997, the Company completed an offering which consisted of
5,540,000 shares of its common stock at $24.25 per share before deduction for
underwriting commission and expenses related to the offering. The net proceeds
were used to repay the Company's borrowings under its principal line of credit
(including borrowings used for the acquisition of the flea and tick business
of Sandoz Agro Inc.) and to provide the Company with a source of funds for
working capital and possible acquisitions of complementary businesses.
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 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.
Additional Stock Plan Information--As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board No. 25, Accounting for
Stock Issued to Employees, and its related interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net earnings and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1996.
These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-
Scholes option pricing model with the following weighted average assumptions:
expected life of four years from date of grant; stock volatility, 64% in
fiscal 1997 and fiscal 1996; risk free interest rates, 6.07% in fiscal 1997
and 6.25% in fiscal 1996; and no dividends during the expected term.
F-15
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of
the fiscal 1997 and fiscal 1996 awards had been amortized to expense in the
consolidated financial statements over the vesting period of the awards, pro
forma net earnings would have been $15,433,000 ($0.91 per fully diluted share,
$0.92 per primary share) in fiscal 1997 and $8,112,000 ($0.67 per fully
diluted share, $0.68 per primary share) in fiscal 1996. However, the impact of
outstanding non-vested stock options granted prior to fiscal 1996 has been
excluded from the pro forma calculation; accordingly, the fiscal 1997 and
fiscal 1996 pro forma adjustments are not indicative of future period pro
forma adjustments, when the calculation will apply to all future applicable
stock options.
Option activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Balance at December 25, 1994................................ 360,879 $ 3.38
Granted..................................................... 236,500 3.89
Exercised................................................... (17,645) 3.41
Cancelled................................................... (9,183) 2.52
---------
Balance September 30, 1995.................................. 570,551 3.60
Granted (weighted average fair value of $7.93).............. 458,500 13.24
Exercised................................................... (148,016) 3.51
Cancelled................................................... (4,500) 7.24
---------
Balance at September 28, 1996............................... 876,535 8.64
Granted (weighted average fair value of $10.65)............. 660,402 18.26
Exercised................................................... (72,918) 3.15
Cancelled................................................... (16,129) 9.25
---------
Balance at September 27, 1997............................... 1,447,890 $13.38
=========
Exercisable at September 28, 1996........................... 112,795 $ 4.52
Exercisable at September 27, 1997........................... 122,310 $ 5.39
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING SEPTEMBER 27, 1997 SEPTEMBER 27, 1997
- ----------------------------------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS LIFE EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.30--$ 4.99 301,978 2.5 $ 2.96 90,251 $3.14
5.00-- 9.99 257,684 1.7 6.41 20,184 8.57
15.00-- 19.99 517,728 3.9 17.16 11,875 17.14
20.00-- 23.75 370,500 3.4 21.43 -- --
--------- -------
$ 1.30--$23.75 1,477,890 3.4 $13.38 122,310 $5.39
========= =======
</TABLE>
F-16
<PAGE>
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a 401(k) plan for which it accrued a contribution of
$293,000 for fiscal year 1997, and contributed $209,000 for fiscal year 1996
and $148,000 for the nine-month period ended September 30, 1995.
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 $156,000 and $156,000 for fiscal years 1997
and 1996, and $116,000 for the nine-month period ended September 30, 1995.
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>
*****
F-17
<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............................................................. 6
The Company.............................................................. 11
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 12
Price Range of Common Stock.............................................. 12
Capitalization........................................................... 13
Selected Consolidated Financial and Operating Data....................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 21
Management............................................................... 33
Principal Shareholders................................................... 35
Description of Capital Stock............................................. 36
Underwriting............................................................. 39
Shares Eligible for Future Sale.......................................... 40
Legal Matters............................................................ 41
Experts.................................................................. 41
Additional Information................................................... 42
Available Information.................................................... 42
Incorporation of Certain Documents by Reference.......................... 43
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,000,000 SHARES
LOGO
COMMON STOCK
-----------
PROSPECTUS
-----------
BT ALEX. BROWN
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........................................... $ 64,712
NASD Filing Fee................................................ 22,436
Nasdaq Listing Application Fee................................. 17,500
Blue Sky Qualification Fees and Expenses (including related
legal fees)................................................... 3,000
Accounting Fees................................................ 70,000
Legal Fees and Expenses........................................ 120,000
Transfer Agent and Registrar Fees and Expenses................. 5,000
Printing and Engraving......................................... 90,000
Miscellaneous.................................................. 7,352
--------
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 DECEMBER 8,
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. Novomy, 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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ William E. Brown Chief Executive Officer and
- ------------------------------------ Director (Principal December 8, 1997
(WILLIAM E. BROWN) Executive Officer)
/s/ Robert B. Jones Vice President, Chief
- ------------------------------------ Financial Officer December 8, 1997
(ROBERT B. JONES) (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Glenn W. Novotny
- ------------------------------------ Director December 8, 1997
(GLENN W. NOVOTNY)
/s/ Daniel P. Hogan, Jr.
- ------------------------------------ Director December 8, 1997
(DANIEL P. HOGAN, JR.)
/s/ Lee D. Hines, Jr.
- ------------------------------------ Director December 8, 1997
(LEE D. HINES, JR.)
</TABLE>
II-3
<PAGE>
EXHIBIT 1.1
7,000,000 Shares
CENTRAL GARDEN & PET COMPANY
Common Stock
($0.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
December __, 1997
BT Alex. Brown Incorporated
Hambrecht & Quist LLC
Merrill Lynch, Pierce, Fenner & Smith, Incorporated
Wasserstein Perella Securities, Inc.
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
1 South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Central Garden & Pet Company, a Delaware corporation (the "Company")
proposes 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 7,000,000 shares of the Company's Common
Stock, $0.01 par value (the "Firm Shares"), all of which will be issued and sold
by the Company. The respective amounts of the Firm Shares to be so purchased by
the several Underwriters from the Company are set forth opposite their names in
Schedule I hereto. The Company also proposes to sell at the Underwriters' option
up to 1,050,000 additional shares of the Company's Common Stock (the "Option
Shares") as set forth below. In the event that there is no syndicate, all
references herein to "the Representatives" shall refer to you, as the
Underwriters.
As the Representatives, you have advised the Company (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 pro rata portion of the Option Shares
if you elect to exercise the Over-allotment option in whole or in part for the
1
<PAGE>
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. The Company
represents and warrants 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 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
2
<PAGE>
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, 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
3
<PAGE>
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.
(ix) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected in the financial
statements (or
4
<PAGE>
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.
(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
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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) The Company, and to the Company's best knowledge, the
Company's affiliates, have not taken or may not 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.
(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
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("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) 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.
(xxi) 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.
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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, the
Company agrees to sell to the Underwriters all 7,000,000 of the Firm
Shares. Each Underwriter agrees, severally and not jointly, to purchase,
from the Company 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 at the offices of BT Alex.
Brown 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 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 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
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<PAGE>
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 7,000,000 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 BT Alex. Brown 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 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
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<PAGE>
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
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
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<PAGE>
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 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 BT Alex.
Brown 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
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<PAGE>
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 BT Alex. Brown 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 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 agrees to
pay 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
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<PAGE>
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).
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 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.
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<PAGE>
(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.
(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
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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 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.
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 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
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<PAGE>
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 its
state of incorporation.
(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 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).
16
<PAGE>
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 of the Prospectus, 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 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
17
<PAGE>
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 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.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
(j) 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
18
<PAGE>
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 agrees 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 the Company will not be
liable in any such case to the extent that any such loss, claim, 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. This indemnity agreement will be in
addition to any liability which the Company 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 against any losses, claims, damages
or liabilities to which the Company, 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, or any such director,
officer, or controlling person in connection with investigating or
defending any such loss, claim,
19
<PAGE>
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 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
20
<PAGE>
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 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 proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by
the Company 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 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 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 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
21
<PAGE>
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.
(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 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, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.
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,
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 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, 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
22
<PAGE>
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 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 BT Alex.
Brown Incorporated, 101 California Street, 46th Floor, San Francisco,
California 94111, Attention: Peter B. Breck; with a copy (i) to BT Alex.
Brown Incorporated, 1 South Street, 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, 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 by notice to you
or by you by notice to the Company 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
23
<PAGE>
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 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. 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.
13. 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.
14. 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
24
<PAGE>
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.
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 and the several
Underwriters in accordance with its terms.
Very truly yours,
CENTRAL GARDEN & PET COMPANY
By
-------------------------
William E. Brown
Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN 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: BT Alex. Brown Incorporated
By:
--------------------------------
Authorized Officer
25
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Share
to be urchased
Underwriter From the Company
----------- ----------------
BT Alex. Brown Incorporated ...........................
Hambrecht & Quist LLC .................................
Merrill Lynch, Pierce, Fenner & Smith,
Incorporated...........................................
Wasserstein Perella Securities, Inc....................
---------
TOTAL 7,000,000
=========
26
<PAGE>
EXHIBIT A
MATERIAL SUBSIDIARIES
Four Paws Products Limited, Inc.
Wellmark International
27
<PAGE>
[LETTERHEAD OF ORRICK, HERRINGTON & SUTCLIFFE LLP]
EXHIBIT 5.1
December 8, 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 8,050,000 shares of common stock, $.01 par value (the
"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 8,050,000
shares of Common Stock to be issued and sold by the Company (of which up to
1,050,000 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 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,
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Central Garden & Pet
Company on Form S-3 of our reports dated November 4, 1997, appearing in the
Prospectus, which is part of this Registration Statement, and incorporated by
reference from the Company's Annual Report on Form 10-K for the year ended
September 27, 1997 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
December 8, 1997
