EXHIBIT 1.4
PENNINGTON SEED, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30,
1997 AND 1996 AND FOR THE THREE-YEARS THEN ENDED
AND AS OF AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1997 AND 1996 (UNAUDITED)
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Pennington Seed, Inc.:
We have audited the accompanying consolidated balance sheets of PENNINGTON SEED,
INC. (a Georgia corporation) and subsidiaries as of June 30, 1997 and 1996 and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pennington Seed, Inc. and its
subsidiaries as of June 30, 1997 and 1996 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
Atlanta, Georgia
August 29, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pennington Seed, Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in shareholders' equity and of cash flows present fairly, in all
material respects, the results of operations and cash flows of Pennington Seed,
Inc. and its subsidiary for the year ended June 30, 1995 in conformity with
generally accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Atlanta, Georgia
September 20, 1995
-2-
PENNINGTON SEED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
--------------------- 1997
1997 1996 (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 4,448 $ 3,963 $ 620
Trade receivables, less allowances of $1,633 and $1,085
in 1997 and 1996, respectively, and $1,708 at December 31, 1997 (unaudited) 35,999 40,907 22,311
Inventories 50,644 42,102 73,625
Prepaids and other current assets 1,371 1,895 2,229
-------- -------- --------
Total current assets 92,462 88,867 98,785
PROPERTY, PLANT, AND EQUIPMENT, net 25,245 23,375 25,639
OTHER ASSETS:
Goodwill net of accumulated amortization of $40 and $0
in 1997 and 1996, respectively, and $67 at December 31, 1997 (unaudited) 772 - 745
Investments 380 1,048 380
Other 257 192 531
-------- -------- --------
Total other assets 1,409 1,240 1,656
-------- -------- --------
TOTAL ASSETS $119,116 $113,482 $126,080
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,213 $ 2,667 $ 4,183
Accounts payable 25,798 24,446 26,703
Accrued compensation and benefits 5,216 4,073 3,044
Accrued income taxes 1,575 - 10
Other accrued expenses 994 1,137 620
-------- -------- --------
Total current liabilities 37,796 32,323 34,560
LONG-TERM DEBT, less current maturities 38,000 50,377 44,431
DEFERRED INCOME TAXES 2,330 2,419 2,330
OTHER LIABILITIES - - -
-------- -------- --------
Total 78,126 85,119 81,321
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Series A 10% cumulative preferred stock, $1 par value;
1,000 shares authorized, 412 shares issued - - -
Common stock, $1 par value; 1,000,000 shares authorized,
10,000 shares issued and outstanding 10 10 10
Additional paid-in capital 1,984 1,984 1,984
Retained earnings 39,013 26,386 42,782
-------- -------- --------
Total 41,007 28,380 44,776
Less treasury stock 17 shares of Series A 10% cumulative
preferred stock, at cost (17) (17) (17)
-------- -------- --------
Total stockholders' equity 40,990 28,363 44,759
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $119,116 $113,482 $126,080
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
-3-
PENNINGTON SEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE
FOR THE YEARS ENDED SIX-MONTH PERIODS
JUNE 30, ENDED DECEMBER 31,
-------------------------------------------------- ---------------------------------
1997 1996 1995 1997 1996
(UNAUDITED)
NET SALES $297,774 $266,805 $223,914 $115,638 $101,412
COST OF SALES 213,863 198,608 165,619 81,600 72,100
-------- -------- -------- -------- --------
83,911 68,197 58,295 34,038 29,312
-------- -------- -------- -------- --------
WAREHOUSING AND DELIVERY
EXPENSES 28,267 25,775 24,627 12,520 11,872
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 31,631 26,400 24,645 14,557 13,111
-------- -------- -------- -------- --------
59,898 52,175 49,272 27,077 24,983
-------- -------- -------- -------- --------
OPERATING PROFIT 24,013 16,022 9,023 6,961 4,329
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense, net (3,460) (3,648) (3,094) (1,302) (1,704)
Other, net 558 (324) 140 551 392
-------- -------- -------- -------- --------
Total other expense (2,902) (3,972) (2,954) (751) (1,312)
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 21,111 12,050 6,069 6,210 3,017
PROVISION FOR INCOME TAXES 8,444 4,483 2,205 2,410 1,147
-------- -------- -------- -------- --------
NET INCOME $ 12,667 $ 7,567 $ 3,864 $ 3,800 $ 1,870
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
-4-
PENNINGTON SEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995 AND
SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 (In thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
BALANCE, June 30, 1994 $10 $1,984 $15,035 $(17) $17,012
Dividends - - (40) - (40)
Net income - - 3,864 - 3,864
---------- ----------- ------- ---------- -------
BALANCE, June 30, 1995 10 1,984 18,859 (17) 20,836
Dividends - - (40) - (40)
Net income - - 7,567 - 7,567
---------- ----------- ------- ---------- -------
BALANCE, June 30, 1996 10 1,984 26,386 (17) 28,363
Dividends - - (40) - (40)
Net income - - 12,667 - 12,667
---------- ----------- ------- ---------- -------
BALANCE, June 30, 1997 10 1,984 39,013 (17) 40,990
Dividends (unaudited) - - (30) - (30)
Net income (unaudited) - - 3,800 - 3,800
---------- ----------- ------- ---------- -------
BALANCE, December 31, 1997
(Unaudited) $10 $1,984 $42,782 $(17) $44,759
========== =========== ======= ========== =======
The accompanying notes are an integral part of these consolidated statements.
-5-
PENNINGTON SEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE
FOR THE YEARS ENDED SIX-MONTH PERIODS
JUNE 30, ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1997 1996
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,667 $ 7,567 $ 3,864 $ 3,800 $ 1,870
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,143 2,470 2,284 1,430 1,392
Write-down of equity investment and related goodwill
(Note 2) 272 701 - - -
Gain (loss) on sale of property, plant, and equipment (653) (22) 197 (4) (41)
Deferred income taxes (511) (653) (197) - -
Changes in operating assets and liabilities:
Trade receivables 6,943 (6,942) 253 13,688 16,408
Inventories (6,636) (8,603) 4,359 (22,981) (14,545)
Prepaids and other assets 195 (133) (440) (111) (667)
Accounts payable 76 2,044 (3,299) 905 (3,967)
Accrued compensation and benefits 1,143 1,187 188 (2,172) (416)
Accrued income taxes and other accrued liabilities 1,167 (618) 814 (2,961) 79
-------- ------- ------- -------- --------
Net cash provided by (used in) operating activities 17,806 (3,002) 8,023 (8,406) 113
-------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (3,694) (5,705) (3,109) (1,797) (1,908)
Proceeds from sale of property, plant, and equipment 817 151 32 4 41
Proceeds from sale of investment 334 - - - -
Proceeds from liquidation of life insurance policies 813 - - - -
Acquisition of majority interest in subsidiary, net of
cash acquired (Note 2) (313) - - - -
-------- ------- ------- -------- --------
Net cash used in investing activities (2,043) (5,554) (3,077) (1,793) (1,867)
-------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings of long-term debt 1,813 10,604 1,042 8,003 735
Net reductions of long-term debt (17,051) (2,530) (9,391) (1,602) (2,525)
Dividends paid (40) (40) (40) (30) (30)
-------- ------- ------- -------- --------
Net cash (used in) provided by financing activities (15,278) 8,034 (8,389) 6,371 (1,820)
-------- ------- ------- -------- --------
NET INCREASE (DECREASE) IN CASH 485 (522) (3,443) (3,828) (3,574)
CASH:
Beginning of year 3,963 4,485 7,928 4,448 3,963
-------- ------- ------- -------- --------
End of period $ 4,448 $ 3,963 $ 4,485 $ 620 $ 389
======== ======= ======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 3,125 $ 3,659 $ 3,094 $ 1,302 $ 1,704
======== ======= ======= ======== ========
Income taxes, net of refunds received $ 6,978 $ 5,653 $ 1,856 $ 2,400 $ 1,577
======== ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
-6-
PENNINGTON SEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995 AND DECEMBER 31, 1997
(Information as of and for the six-months ended
December 31, 1997 and 1996 is unaudited)
- --------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Pennington Seed, Inc. and its subsidiaries
(collectively, the "Company") manufacture and distribute grass seed, bird
seed, and lawn and garden supplies throughout the United States. The
majority of the Company's operations are in the southeastern United States,
although certain of the Company's operations are located in the northwestern
and central United States. The Company sells primarily to large national
chains and independent retailers throughout the United States.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Pennington Seed, Inc. and its subsidiaries which are more
than 50% owned. All material intercompany accounts and transactions have
been eliminated.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current year presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The book values of cash, trade
receivables, accounts payable, and other financial instruments approximate
their fair values principally because of the short-term maturities of these
instruments. The fair value of the Company's long-term debt is estimated
based on current rates offered to the Company for debt of similar terms and
maturities. Under this method, the Company's fair value of long-term debt
was not significantly different from the stated value at June 30, 1997 and
1996.
UNAUDITED INTERIM INFORMATION - The financial information with respect to the
six-month periods ended December 31, 1997 and December 31, 1996 is unaudited.
In the opinion of management, such information contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of such periods. The results of operations for
the six month periods ended December 31, 1997 and 1996 are not necessarily
indicative of the results to be expected for the full year.
-7-
INVENTORIES are stated at the lower of average cost, determined on the first-
in, first-out ("FIFO") method, or market.
Inventories are summarized as follows (in thousands):
AS OF
AS OF JUNE 30, DECEMBER 31,
------------------------ ----------------
1997 1996 1997
(UNAUDITED)
Manufacturing:
Raw materials $24,715 $16,901 $26,959
Finished goods 10,370 9,458 17,795
Supplies 2,796 3,239 4,838
------- ------- -------
37,881 29,598 49,592
------- ------- -------
Distribution:
Merchandise held for resale 11,917 12,256 22,111
Supplies 846 248 139
------- ------- -------
12,763 12,504 22,250
------- ------- -------
Total $50,644 $42,102 $71,842
======= ======= =======
INVESTMENTS in which the Company has an interest of 20% to 50% are carried at
cost, adjusted for the Company's proportionate share of the investments'
undistributed earnings or losses. Investments in which the Company has an
interest of less than 20% are recorded at historical cost. All investments
are classified as other assets in the accompanying consolidated balance
sheets.
PROPERTY, PLANT AND EQUIPMENT are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided
for financial reporting purposes principally using the straight-line method
over the estimated useful lives of the assets, ranging from 3 to 40 years.
Accelerated depreciation methods are used for income tax purposes.
Significant expenditures which add materially to the utility or useful lives
of property, plant, and equipment are capitalized. All other maintenance and
repair costs are charged to current operations. When property and equipment
are sold or retired, the related costs and accumulated depreciation are
removed from the accounts and any gain or loss is included in the
consolidated statement of operations.
-8-
Property, plant and equipment are summarized as follows (in thousands):
AS OF
AS OF JUNE 30, DECEMBER 31,
------------------------ -----------
1997 1996 1997
(UNAUDITED)
Land and improvements $ 1,366 $ 1,317 $ 1,366
Buildings and improvements 17,032 14,966 16,791
Leasehold improvements 265 265 265
Machinery and equipment 23,213 20,099 24,782
Furniture and fixtures 1,152 945 1,249
Airplane 186 924 536
Vehicles 3,783 3,786 3,848
Other 220 376 -
-------- -------- --------
Total 47,217 42,678 48,837
Less accumulated depreciation (21,972) (19,303) (23,198)
-------- -------- --------
Total $ 25,245 $ 23,375 $ 25,639
======== ======== ========
Depreciation expense approximated $3,005,000, $2,352,000 and $2,284,000 for
the years ended June 30, 1997, 1996 and 1995, respectively, and $1,401,000
and $1,365,000 for the six-month periods ended December 31, 1997 and 1996,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews the values
assigned to long-lived assets, including property, goodwill, and other
deferred costs, to determine whether any impairments are other than
temporary. Management believes the long-lived assets in the accompanying
1997 balance sheet are appropriately valued.
INTEREST RATE SWAPS are accounted for under the accrual method, with all
interest received or payable credited to or charged against interest expense.
INCOME TAXES - The Company records deferred income taxes using enacted tax
laws and rates for the years in which the taxes are expected to be paid.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts. Differences result primarily from inventory
valuation, depreciation, and unfunded accruals (Note 5).
2. ACQUISITION OF MAJORITY INTEREST IN SUBSIDIARY
During 1996, the Company contributed its 50% equity interest in Cactus Seed,
Inc. for a 37.5% equity interest in a newly formed joint venture, Seeds West,
Inc. ("Seeds West" or the "Subsidiary"). The Company's equity interest at
the date of formation of Seeds West was $596,000. In addition, the Company
also had goodwill of approximately $140,000 related to its original
investment in Cactus Seed, Inc. The investment in and goodwill related to
Seeds West were written down to zero as of June 30, 1996 to reflect the
Company's share of Seeds West's net deficit. The Company was not obligated
to fund any deficit of Seeds West.
-9-
The Company made purchases from Seeds West of $4,885,000 during the year
ended June 30, 1996. Included in other assets at June 30, 1996 is a $250,000
note receivable from Seeds West. The note is due upon demand and accrues
interest monthly at a variable rate.
On July 25, 1996, Seeds West acquired 37,500 shares from its shareholders for
approximately $359,000. As a result, the Company's interest in Seeds West
increased to 60%. The treasury stock transaction was recorded as an
acquisition using the purchase method of accounting, and accordingly, the
results of operations of Seeds West for the period from July 25, 1996 to June
30, 1997 are included in the accompanying financial statements. The purchase
price of the treasury stock was allocated to the assets acquired and
liabilities assumed based on fair market values at the date of acquisition.
The Company's share of the excess of the treasury stock price over the net
assets acquired, approximately $522,000, was recorded as goodwill.
At the date of acquisition and throughout fiscal 1997, Seeds West was in a
shareholders' deficit position and the minority shareholders were not
obligated to fund the Subsidiary's shareholders' deficit. As a result, the
Company recorded additional goodwill at the date of acquisition for the
minorities' 40% interest in the shareholders' deficit. The goodwill recorded
attributable to the minorities' interest in the Subsidiary's shareholders'
deficit at the date of acquisition approximated $290,000.
During fiscal 1997, the Subsidiary recorded net income of $127,000 on a
stand-alone basis. After considering intercompany profits, the Subsidiary
recorded a net loss of $17,000. Because the minority shareholders are not
obligated to fund the Subsidiary's deficit, the Company's statement of
operations for the year ended June 30, 1997 includes all losses generated by
the Subsidiary.
Goodwill attributable to the Subsidiary's acquisition of treasury stock,
approximately $812,000, is being amortized using the straight-line method
over 20 years. Goodwill attributable to the minority interest in the
shareholders' deficit at the date of acquisition, approximately $290,000 will
be reduced by subsequent subsidiary profits applicable to the minority
interest. However, subsequent subsidiary profits applicable to the minority
interest will first be allocated to the Company to the extent the Company has
absorbed the minorities' interest in subsequent subsidiary losses.
As a result of the treasury stock transaction, the Company was required to
record its equity investment share of the Subsidiary's losses through the
acquisition date. Accordingly, the Company recorded a $272,000 charge
attributable to the Subsidiary's previous losses. The charge is included in
other income (expense) in the accompanying consolidated statement of
operations for the year ended June 30, 1997.
3. CONCENTRATION OF CREDIT RISK
The Company sells products to chain stores and other customers and extends
credit based on an evaluation of the customer's financial condition,
generally without requiring collateral. The Company monitors its exposure
for credit losses and maintains allowances for anticipated losses. During
1997, 1996 and 1995, sales to the Company's two largest customers represented
54%, 60% and 57%, respectively, of net sales. These customers also represent
64% and 72% of total accounts receivable at June 30, 1997 and 1996,
respectively.
-10-
4. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
AS OF
AS OF JUNE 30, DECEMBER 31,
------------------------ --------------
1997 1996 1997
(UNAUDITED)
Revolving credit loan payable to a consortium of banks due
May 30, 1999, secured by substantially all company assets,
bearing interest at prime (8.5% at June 30, 1997) or LIBOR
plus .875%, at the Company's option $27,500 $39,663 $34,603
Note payable to a bank in quarterly principal installments of
$392,000, with a final principal installment of $3,552,000
due May 30, 1999, secured by real estate, equipment, and
personal property, bearing interest at prime or LIBOR plus
1.75%, at the Company's option 5,904 7,472 5,120
Notes payable to a bank with varying maturity dates through
2001, secured by certain equipment and vehicles, bearing
interest at rates from 6.85% to 10.2% 2,099 1,746 2,260
Industrial development revenue bonds due in annual sinking
fund installments of $300,000 through December 1, 2005,
bearing interest at varying rates, secured by an unconditional
letter of credit 2,700 3,000 2,400
Industrial development revenue bonds due in quarterly sinking
fund installments of $30,000, with a final principal installment
of $90,000 due March 1, 2004, bearing interest at varying
rates, secured by an unconditional letter of credit 870 990 810
Subsidiary revolving line of credit payable to a bank due
January 1, 1998, secured by the accounts receivable and
inventory of a subsidiary, bearing interest at the bank's prime
rate plus .25% 1,145 - 1,471
Subsidiary note payable to a bank due in quarterly principal
installments of $21,000 through December 30, 2007, bearing
interest at 8.39%, interest rate subject to change every three
years 895 - 892
Subsidiary note payable to a bank due in quarterly principal
installments of $15,000 through December 28,2001, bearing
interest at the bank's prime rate plus .5% 270 - 255
Subsidiary subordinated notes payable to subsidiary
shareholders with principal due September 30, 2001 and
December 28, 2001, bearing interest at prime plus .5% to 1% 500 - 500
Other 330 173 303
------- ------- -------
Total 42,213 53,044 48,614
Less current portion (4,213) (2,667) (4,183)
------- ------- -------
Total $38,000 $50,377 $44,431
======= ======= =======
In connection with the issuance of the industrial development revenue bonds
due March 1, 2004, the Company obtained a letter of credit from a bank issued
in favor of the trustee securing payment of the principal and interest
installments. Another letter of credit was obtained for the industrial
development revenue bonds due December 1, 2005. Each letter of credit fee is
1% of the outstanding principal balance of the bonds and is payable to the
bank on a quarterly basis.
-11-
On May 27, 1996, the Company refinanced the revolving credit agreement with
various banks, whereby the Company may borrow up to $60,000,000, provided
that borrowings may not exceed the total of 80% of eligible accounts
receivable and between 50% and 65% of eligible inventory, as defined in the
agreement. The credit agreement is secured by substantially all accounts
receivable and inventory of the Company. At June 30, 1997 and 1996,
$27,500,000 and $39,663,000, respectively, of the loan had been drawn under
the revolving credit agreement. This revolving credit loan is classified as
long-term debt in the accompanying consolidated balance sheets.
The subsidiary revolving line of credit, note payable due December 28, 2001,
note payable due December 30, 2007, and subordinated notes payable due to
subsidiary shareholders are indebtedness of Seeds West. The subsidiary
revolving line of credit, note payable due December 28, 2001, and note
payable due December 30, 2007 are collateralized by the accounts receivable,
inventory, and fixed assets of Seeds West and are guaranteed by the Company
as well as a certain subsidiary shareholder.
Under the provisions of the revolving credit agreement, the industrial
development revenue bond agreements, the note payable, and conventional
financing arrangements with various banks, the Company must comply with
certain restrictive covenants. These covenants, among other things, require
the Company to maintain specified financial ratios and levels of tangible net
worth and restrict the payment of cash dividends. At June 30, 1997 and 1996,
the Company was in compliance with all applicable covenants.
Under the provisions of the subsidiary revolving line of credit, note payable
due December 28, 2001, and note payable due December 30, 2007, Seeds West
must comply with certain restrictive covenants. These covenants, among other
things, require Seeds West to maintain certain levels of working capital and
net worth and place limitations on the incurrence of debt and capital
expenditures. At June 30, 1997, Seeds West was in violation of certain of
these restrictive covenants. Seeds West has obtained a waiver from the
lender for all events of noncompliance as of June 30, 1997.
The Company has two interest rate swaps outstanding at June 30, 1997, with
notional principal amounts of $6,000,000 and $3,000,000 which expire over a
three- and two-year period, respectively. These swaps exchanged the variable
interest rate on the note payable due March 30, 1999 for a blended fixed
rate. The swaps thus serve to substantially hedge the interest expense of
the life of the loan. The Company accounts for the interest paid (received)
under the swaps as a charge or credit to interest expense on a quarterly
basis. The fair value of these interest rate swaps is not material to the
financial statements.
Aggregate principal maturities of long-term debt as of June 30, 1997 are as
follows (in thousands):
Year ending June 30:
1998 $ 4,213
1999 33,092
2000 1,066
2001 717
2002 1,039
Thereafter 2,086
-------
Total $42,213
=======
-12-
5. INCOME TAXES
The components of the provision (benefit) for income taxes in fiscal 1997,
1996 and 1995 are as follows (in thousands):
1997 1996 1995
-------------- -------------- --------------
Current:
Federal $7,638 $4,344 $2,022
State 1,317 792 379
------ ------ ------
8,955 5,136 2,401
------ ------ ------
Deferred:
Federal (427) (552) (166)
State (84) (101) (30)
------ ------ ------
(511) (653) (196)
------ ------ ------
Total $8,444 $4,483 $2,205
====== ====== ======
An analysis of the difference between the expected federal income tax for the
years ended June 30, 1997, 1996 and 1995 and the effective tax rate is as
follows (in thousands):
1997 1996 1995
-------------- -------------- --------------
Tax expense at statutory rate $7,389 $4,225 $2,063
Effect of:
State income tax, net of federal benefit 801 471 235
Other, net 254 (213) (93)
------ ------ ------
Provision for income taxes $8,444 $4,483 $2,205
====== ====== ======
-13-
Significant components of the Company's deferred tax liabilities and assets
as of June 30, 1997 and 1996 are as follows (in thousands):
1997 1996
-------------- --------------
Deferred tax liabilities:
Depreciation $2,405 $2,385
Other 201 285
------ ------
2,606 2,670
------ ------
Deferred tax assets:
Accounts receivable 641 422
Equity investment 232 232
Inventory 546 231
Net operating loss carryforwards 489
Other 229 232
State carryforwards 34 38
------ ------
2,171 1,155
------ ------
Deferred tax assets valuation allowance (569) -
------ ------
Total $1,004 $1,515
====== ======
The net operating loss carryforwards were generated by Seeds West and expire
at various dates through 2011. Since it is currently more likely than not
that the net deferred tax assets resulting from the net operating loss
carryforwards and other deferred tax items will not be realized by Seeds
West, a valuation allowance at June 30, 1997 of $569,000 has been provided in
the accompanying consolidated financial statements.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors the Profit Sharing Plan for the Employees of Pennington
Enterprises, Inc. and Subsidiaries (the "Plan"), a defined contribution plan
covering substantially all employees of the Company. Under the Plan's
deferred compensation arrangement, the Company contributes 25% of the first
4% of eligible compensation of employees who elect to participate in the
Plan. The Company, at the discretion of the board of directors of the
Company, may also make a profit-sharing contribution. During the years ended
June 30, 1997, 1996 and 1995, the Company contributed approximately $102,000,
$85,000 and $74,000, respectively, to the Plan and accrued a profit-sharing
contribution of $900,000, $700,000 and $400,000, respectively.
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7. COMMITMENTS AND CONTINGENCIES
The following is a schedule of future minimum rental payments required under
noncancelable operating leases at June 30, 1997 that have initial lease terms
in excess of one year (in thousands):
Year ending June 30:
1998 $502
1999 66
2000 25
2001 7
2002 5
----
Total $605
====
The Company has contracted with certain of its suppliers to purchase seed.
As of year-end, the Company owns this seed, although the final price has not
yet been settled. Accordingly, the Company has recorded this seed at market
rates. The value of this seed as of June 30, 1997 in the accompanying
consolidated balance sheet is approximately $5,011,000. Significant changes
in market rates could affect the purchase price of this seed.
As of June 30, 1997, the Company has entered into purchase agreements with
various suppliers of seed. Subject to the suppliers' quality and
performance, the purchase commitments covered by these agreements aggregate
approximately $25,000,000, and the purchase agreements are to be settled
during fiscal 1998.
As of June 30, 1997, the Company has also entered into sales commitments to
sell certain amounts of seed. The aggregate amount of seed committed to be
sold during fiscal 1998 totaled approximately $2,100,000 at June 30, 1997.
The Company self-insures a portion of its workers' compensation liability
exposure up to $100,000 per claim. Reserves for the self-insurance program
are established to provide for estimated claims losses and applicable legal
expenses for any claims incurred through the balance sheet date and are
recorded in other current liabilities in the accompanying consolidated
balance sheets. Commercial insurance has been obtained on a claims-incurred
basis for coverage in excess of the self-insured amounts. A letter of credit
in the amount of $570,000 is required by the Company's workers' compensation
insurance carrier.
For general liability claims, the Company is self insured up to $50,000 per
claim. Reserves for general liability claims are established to provide for
estimated losses for claims incurred through the balance sheet date and are
included in other accrued expenses in the accompanying consolidated balance
sheets.
The Company is also self-insured for its group health plan and retains
liability exposure of $50,000 per claimant. Reserves for the self-insurance
program are established to provide for estimated losses for claims incurred
through the balance sheet date and are included in other accrued expenses in
the accompanying consolidated balance sheets.
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8. RELATED PARTY TRANSACTIONS
During fiscal 1997, the Company received payments totaling $813,000 for its
share of life insurance premiums paid for the former chairman of the Company.
The amounts were included in prepaids and other current assets in the
accompanying balance sheet at June 30, 1996.
Rental expense for 1997, 1996 and 1995 approximated $1,499,000, $1,836,000
and $1,992,000, respectively. Included in rental expense for 1997, 1996 and
1995 were approximately $597,000, $636,000 and $690,000, respectively, paid
to the principal shareholder of the Company or his estate for building
leases. Lease payments due to the principal shareholder's estate through the
end of the lease term in fiscal 1998 are approximately $400,000.
During 1997, the Company purchased a building and land from the estate of the
former chairman for approximately $900,000, the appraised value of the
property.
The Company owned a 33.3% interest in its unconsolidated affiliate Fine Lawn
Research, Inc. The Company sold its interest in Fine Lawn Research, Inc.
during fiscal 1997 for approximately $334,000. The investment in Fine Lawn
Research, Inc. was $313,000 at June 30, 1996. The Company made purchases
from Fine Lawn Research, Inc. of approximately $0, $252,000 and $1,000,000
during 1997, 1996 and 1995, respectively.
The Company owns a 49% interest in its unconsolidated affiliate Newtco, Inc.
("Newtco"). The Company made purchases from a subsidiary of Newtco of
approximately $2,761,000 during fiscal 1997.
9. REDEEMABLE PREFERRED STOCK
The preferred stock shareholders are entitled to a 10% cumulative annual
dividend, as declared by the board of directors of the Company based on a
per share value of $1,000. All cumulative dividends on the preferred stock
are payable before any dividends on the common stock may be declared. The
Company's board of directors declared a dividend of $100 per share of the
preferred stock during 1997, 1996 and 1995.
The preferred stock is redeemable at the option of the Company at any time at
the liquidation value of the preferred stock. The liquidation rights of the
preferred stock are precedent over those of the common shares. In the event
of a liquidation of the Company, each share of preferred stock is valued for
distribution of the Company assets at a liquidation value of $1,000 per share
plus all declared but unpaid dividends. Holders of the preferred stock do
not receive voting rights.
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