U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 1996
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from __________ to __________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Name of small business issuer in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
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None Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value and Class A Common Stock Purchase Warrants
(Title of Class)
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its fiscal year ended June 30, 1996 were
$27,030,924.
The aggregate market value of the Common Stock held by non-affiliates of
the issuer (based upon the closing sale price) on September 30, 1996 was
approximately $32,800,000.
As of September 30, 1996, 13,914,516 shares of the issuer's Common Stock,
par value $.001 per share were outstanding.
Transitional Small Business Disclosure Format
Yes _____ No X
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Part I.
Item 1. Description of Business
General
U.S. Home & Garden Inc. (the "Company"), manufactures, converts, markets
and distributes through its wholly owned subsidiary, Easy Gardener Acquisition
Corp. ("Easy Gardener" or "EGAC") consumer lawn and garden care products for
consumers and agricultural users and, through its wholly-owned subsidiary,
Golden West Agri-Products, Inc. ("Golden West"), which it acquired in August
1992, a line of products for agricultural use. In September 1994, the Company,
through Easy Gardener, acquired substantially all of the assets used in the
business of Easy Gardener, Inc. ("EGI"), a Texas based manufacturer of a variety
of home lawn and garden care products. In August 1995, the Company, through
Emerald Products Corporation ("Emerald PC"), a subsidiary of Easy Gardener,
acquired the assets of Emerald Products LLC. In August 1996, the Company,
through Easy Gardener, acquired all of the outstanding capital stock of
Weatherly Consumer Products Group, Inc. ("Weatherly") a Kentucky based
manufacturer and distributor of home and outdoor fertilizer spikes and other
home, lawn and garden care products. See "Notes 1 and 12 of Notes to
Consolidated Financial Statements."
Easy Gardener markets and distributes a variety of home lawn and garden
care products, including among others, Weedblock(R), a landscape fabric used to
control weed growth in the garden. In addition to landscape fabrics, Easy
Gardener sells complementary lawn and garden products for use by the home
gardener such as Emerald Edge lawn edging and Shade Fabric(TM). With the
acquisition of Weatherly the Company has added to its product line, among other
things, a variety of home and outdoor fertilizer spikes sold under the Jobe's(R)
label, tree root feeders sold under the Ross(R) label and animal repellents for
plants sold under the XP-20(TM) label.
The Company's subsidiary, Golden West, is primarily engaged in the
manufacture and distribution of humic acid based agricultural products. The
Company's principal agricultural products consist of Energizer(R), a nutrient
absorption enhancement formula for crops; Penox(R), an agent that increases the
effectiveness of certain agricultural products; and Powergizer 45(R), a type of
plant food. The Company, through Golden West, sells its agricultural products to
distributors who market such products to commercial farmers.
As part of the Company's decision in June 1994, to concentrate future
marketing efforts on products that management
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believed would have the greatest sales potential, the Company, during the fiscal
year ended June 30, 1995 ceased marketing the insect and animal control products
formerly sold under its Thunder and Garden Thunder(R) labels and its three
Garden Thunder(R) organic lawn and plant care products. In addition, during the
fiscal year ended June 30, 1996 the Company sold its remaining inventory of
Power Gardener(TM) units and related manufacturing and product rights without
manufacturing any additional units for future sale and ceased manufacturing its
Liquid Lime product.
The Company was organized under the laws of the State of California in
August 1990 and reincorporated in the State of Delaware in January 1992. Unless
the context otherwise requires, all references in this document to the Company
include U.S. Home & Garden Inc. and its wholly-owned subsidiaries, Golden West
and Easy Gardener and their wholly-owned subsidiaries.
Lawn and Garden Care Products
Landscape Fabrics. Landscape fabrics, which accounted for approximately 80%
and 70% of EGI's\Easy Gardener's revenues for the fiscal years ended June 30,
1995 and 1996, are used to prevent weeds from growing around new or existing
plantings, on open terrain including steep slopes and retaining walls, under
decks, driveways and patios or under swing sets and other recreational
equipment. Landscape fabrics allow water, nutrients and oxygen to filter through
to the soil but prevent weed growth by blocking light, which prevents weeds from
germinating. Easy Gardener's primary landscape fabrics are made from non-woven
fabrics which are generally manufactured with extruded polymers, pressed or
vacuum formed into thin sheets having the feel and texture of light plastics.
The fabrics are manufactured into long, continuous rolls of material. Easy
Gardener markets five different types of landscape fabric in varying thicknesses
and strengths under the trade names WeedBlock(R), WeedBlock 6(TM), MicroPore(R),
Pro WeedBlock(TM) and WeedShield(TM). Depending upon their thickness, these
fabrics are intended to remain effective for a period of three to six or more
years.
Landscape fabrics are intended to be easy for home gardeners to use. For
use around new plantings, for example, landscape fabric is measured, cut and
placed over soil that has been prepared for planting. The fabric is then pegged
down and secured, and slits are cut into the material where flowers or
vegetables are to be planted. After plants or seeds are planted into the
openings, a thin layer of bark or mulch is spread over the fabric and around the
plants. Although the primary use for landscape fabrics is weed control, other
uses may include prevention of soil erosion, improvement of drainage and
promoting increased fertilizer and moisture retention.
Shade Cloth. In June 1995 Easy Gardener commenced marketing for sale and
delivery during the fiscal year ending June 30,
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1996, shade cloth fabrics in a variety of sizes and colors. The shade cloth is
utilized generally in conjunction with some type of outdoor structure such as a
patio veranda, and provides shade, privacy and/or protection from wind for
people, plants and pets. Easy Gardener markets the shade cloth fabrics as an
exclusive United States retail distributor of a shade cloth manufacturer
pursuant to an agreement that expires on September 30, 1998 (unless renewed by
Easy Gardener for an additional two year period). The agreement is subject to
earlier termination by the parties under certain circumstances.
Landscape Edging. Since the August 1995 acquisition by Emerald PC, a
subsidiary of Easy Gardener, of the assets of Emerald Products LLC, Easy
Gardener has been marketing two landscape edgings which are used by consumers to
define the perimeter of planting areas, as well as to prevent the encroachment
of weeds into lawns from planting areas. Both of these edging products are
injection molded strips which can be installed by the consumer. One edging has
an extra sharp bottom edge and is marketed on an "easy to install" basis while
the other has special grooves to hold it in place and is marketed on that basis.
Fertilizer, Plant Food and Insecticide Spikes. Since the acquisition of
Weatherly in August 1996 Easy Gardener has been marketing a line of indoor and
outdoor fertilizer, plant food and insecticide "spikes" and stakes for plants,
trees and shrubs, sold under the "Jobe's(R)" trademark.
Other Products. In addition to landscape fabrics, shadecloth, landscape
edging and fertilizer, plant food and insecticide spikes, Easy Gardener also
sells complementary lawn and garden products for the home gardener. The products
include a variety of protective plant and tree covers, bird and animal mesh
blocks, synthetic mulch, fabric pegs and bird feeders. In addition, a variety of
root feeders, deer, garden and tree netting, and deer, rabbit, dog and cat
repellents products acquired from Weatherly are all marketed through Easy
Gardener's distribution channels.
The Power Gardener(TM)
In fiscal 1996, the Company sold its remaining inventory and product molds
and the rights to market and manufacture the "Power Gardener," a
battery-operated hand held spreader in exchange for future trade credits. See
"Item 6 -- Management's Discussion and Analysis or Plan of Operation."
Other Potential Lawn Care Products
In December 1991 the Company purchased from Agri-Mart, Inc. ("Agri-Mart")
the technology, rights and formulas for certain garden care products, including,
but not limited to, a formula
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for increasing the root development of plants and trees, a solid starter-booster
for potted plants, a wind chill frost inhibitor for vegetables and ornamentals,
and a humic acid feeding mixture for deep tree roots. In January 1995 the
Company settled a dispute with Agri-Mart concerning the product formulas which
has allowed the Company to commence an evaluation of these formulas to determine
whether it will, in the future, introduce and market any products that utilize
these formulas. There can be no assurance that the Company will ever market any
product that utilizes formulas the Company acquired from Agri-Mart.
Agricultural Products
The Company, through Golden West, manufactures and distributes certain
humic acid based agricultural products for use on farms and orchards. Humic
acids, when processed correctly and applied in a proper manner, stimulate
growth, yield and quality of most tree, vine and row crops. Golden West
generally sells its products to agricultural distributors, which in turn market
Golden West's products to farms and orchards.
The principal products manufactured and/or distributed by Golden West are:
Energizer(R) - a formulation of humic acids which, when applied in
conjunction with liquid fertilizers, permits crops to absorb a greater amount of
the nutrients in the fertilizer. Energizer may be used on lettuce, broccoli,
carrots, celery and other vegetables.
Penox(R) - a surfactant, or penetrating wetting agent, that contains humic
acid which, when applied in conjunction with herbicides, defoliants and other
agricultural products, increases their effectiveness.
Powergizer 45(R) - a foliar nutrient, or plant food, containing humic acid
which promotes growth and vigor in many types of crops, including, among others,
almonds, apples, citrus, hops, plums and walnuts.
The Company also has the exclusive right to market, sell and distribute, in
certain states in the western portion of the United States, under Golden West's
tradename and trademark, a low-foaming spreader and sticker (the "Spreader") for
agricultural use. The Spreader is utilized as a means of enhancing the ability
of herbicides and fungicides to adhere to the plants that are being treated.
These rights were acquired in March 1993 pursuant to an exclusive Marketing and
Distribution Agreement between the Company and San Joaquin Supply Co., Inc., dba
Knapp Manufacturing Co. ("Knapp"). As part of this agreement, Golden West has
agreed to purchase all of the Spreader from Knapp. The initial term of the
agreement expires on
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February 28, 2000, with automatic two-year extensions thereafter, subject to
earlier termination in certain specified circumstances.
Manufacturing and Supply
Lawn and Garden Products
Easy Gardener purchases a majority of the landscape fabric used to
manufacture WeedBlock(R) from Tredegar Industries, Inc. ("Tredegar") of
Richmond, Virginia. Easy Gardener purchases large spools of various types of
landscape fabric from Tredegar for shipment to its Waco, Texas facility where it
converts the bulk fabric and then packages the fabric and ships it to customers.
Easy Gardener has been purchasing a majority of its landscape fabrics from
Tredegar pursuant to an exclusive supply arrangement. However, Tredegar is free
to terminate its relationship with Easy Gardener at any time and accordingly
could market its fabrics to other companies, including competitors of Easy
Gardener. Nevertheless, Easy Gardener owns the registered trademark
"Weedblock(R)" and to the extent that it establishes alternative supply
arrangements, its rights to market products under the Weedblock(R) brand name
would continue without restriction.
Easy Gardener purchases its basic materials for its other products from a
variety of suppliers. All of such materials are converted, packaged and shipped
by Easy Gardener from its Waco, Texas facility.
Weatherly purchases its basic materials for its products from a variety of
suppliers. All of such materials are converted, packaged, and shipped from
either Easy Garderner's Waco, Texas facility or Weatherly's Paris, Kentucky
facility.
Although other manufacturers do and are capable of manufacturing landscape
fabrics, if Easy Gardener's relationship with Tredegar were to be terminated for
any reason, or were Tredegar unable to fulfill Easy Gardener's needs for
landscape fabric, especially during its busier seasons, its ability to fulfill
supply orders on a timely basis could be severely adversely affected which would
adversely affect the Company's operations.
Agricultural Products
Golden West does not own or lease any manufacturing facilities. The
Company's agricultural products are manufactured processed and/or supplied
pursuant to the following agreements and/or arrangements:
In November 1989, Golden West entered into an agreement with Mammoth
International Chemical Corporation ("Mammoth") wherein Mammoth granted Golden
West the right to manufacture and market humic acids; use the trade names
Energizer(R) and Powergizer(R) 45 and develop, manufacture and market any other
new and/or different products containing or utilizing certain patented humic
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acid formulations in limited geographic areas (generally the western United
States, Mexico and Central and South America). Golden West agreed that it would
not market any products produced pursuant to the agreement in certain other
areas (generally Europe and the Far East) in which Mammoth retained exclusive
rights. The agreement also provides that either Golden West or Mammoth may
manufacture and market humic acid based products in any territory not specified
in the agreement. The agreement provides that it will continue in force
indefinitely, subject to earlier termination in certain specified circumstances.
In June 1985, Golden West entered into processing agreements with Western
Farm Services, Inc. ("Western Farm") in which Western Farm agreed to process, at
certain specified rates, Powergizer 45(R), Energizer(R) and Penox(R). Each
processing agreement has an initial term of 360 days but provides that, after
the initial expiration date, it will be extended for a similar period with the
express or implied agreement of the parties. Golden West is dependent upon
Western Farm for substantially all of its processing requirements. Furthermore,
Golden West, through Western Farm, has an open purchase order arrangement with
an entity which supplies it with leonardite ore, a source of humic acid used in
its agricultural products. The Company believes that it would have no difficulty
in finding alternative suppliers of leonardite ore or other sources of humic
acid should this supplier be unable to satisfy the Company's humic acid
requirements.
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Marketing, Distribution and Advertising
Easy Gardener markets its products in the United States and Canada through
approximately 30 independent representative organizations. Easy Gardener also is
developing relationships with distributors in Europe. However, sales to
customers in Canada and Europe accounted for less than 2% of EGI's/Easy
Gardener's sales during the fiscal years ended June 30, 1995 and 1996. Easy
Gardener participates in trade shows and advertising, primarily on a co-op
basis.
Easy Gardener's customers include national home center chains, hardware
co-ops, discount stores and lawn and garden nurseries throughout the United
States. Both Easy Gardener's and EGI's three largest customers for 1995 and
1996, Home Depot, K-Mart and Builder's Square, accounted for an aggregate of
approximately 42% and 44% respectively, of its sales during each of such years.
EGI's/ Easy Gardener's ten largest customers as a group accounted for 73% and
74% of its sales during 1995 and 1996, respectively.
Easy Gardener's sales are seasonable due to the nature of the lawn and
garden business, in parallel with the annual growing season. Easy Gardener's
shipping and sales are most active from late December through April when home
lawn and garden care customers are purchasing supplies for spring planting and
retail stores are increasing their inventory of lawn and garden products. Sales
typically decline by early to mid summer.
Achieving marketing acceptance of the Company's lawn and garden care
products by consumers may require substantial marketing efforts and the
expenditure of significant funds to educate potential customers as to the
distinctive characteristics and perceived benefits of the Company's lawn and
garden care products.
During the fiscal year ending June 30, 1997 the Company intends to conduct
a regional (Midwest/Southeast) comprehensive media advertising campaign of its
Jobe's(R) Spikes product line to determine the effectiveness of such
advertising in increasing product line sales.
The Company intends to utilize the trade credits it received upon the sale
of its Power Gardener inventory and manufacturing rights and molds to satisfy a
portion of its advertising needs.
Golden West's products are primarily marketed through three full-time
employees who are compensated on a salary plus commissions basis. One of the
employees is also engaged in administration.
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The Company uses the services of non-exclusive sales representatives, on a
commission basis, for sales of lawn and garden care products and, on a limited
basis, Golden West products.
No customer of Golden West accounted for more than 3% of the Company's
consolidated sales for either of the fiscal years ended June 30, 1995 or June
30, 1996. For the fiscal year ended June 30, 1995, sales to Home Depot, K-Mart
and Builders Square accounted for approximately 24%, 9% and 5%, respectively, of
the Company's consolidated sales and 26%, 10% and 6% respectively, of Easy
Gardener's sales. For the fiscal year ended June 30, 1996, sales to Home Depot,
K Mart and Builders Square accounted for approximately 28%, 7% and 5%,
respectively, of the Company's consolidated sales and 30%, 8% and 6%,
respectively, of Easy Gardener's sales. Sales to such customers are not governed
by any contractual arrangement and are made pursuant to standard purchase
orders. The loss of any of these customers could have an adverse effect upon the
results of operations of the Company.
Retailers and the Retail Market
Traditionally, consumers have purchased lawn and garden care products at a
variety of retail locations including retail outlets ranging from garden
centers/retail nurseries, hardware stores, and mass merchandiser and discount
stores to feed/seed stores, supermarkets, drug stores, and home centers. Such
purchases are also made by consumers through mail order.
It is anticipated that the Company's lawn and garden products will continue
to be introduced by retailers primarily through the use of special displays and
in-store consumer promotions in mass-merchandise stores, hardware stores,
nurseries and garden centers. The Company provides retailers with special trade
incentives and promotions to feature the Company's products in the retailers'
spring and summer advertisements while tailoring its marketing effort to the
particular needs and marketing requirements of the retail outlet in order to
obtain optimum shelf space for its products.
Brand Identification and Product Appeal
The Company believes that a substantial portion of lawn and garden sales
are impulse driven and not overly price sensitive. Therefore, the Company
believes that increased consumer awareness and understanding of its products
sold through Easy Gardener, together with strong brand identification, should
increase product sales. In targeting the end-user Easy Gardener anticipates
spending approximately $2,750,000 in the fiscal year ending June 30, 1997 on a
combination of advertising, co-
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operative advertising (advertising done in conjunction with retailers) and
public relations to promote awareness, understanding and brand identification of
its products and brands.
Seasonality
The Company believes that sales for manufacturers in the lawn and garden
care industry generally peak during the first three months of the calendar year
and decline during the second calendar quarter (traditionally, the two biggest
quarters for such industry).
Sales of the Company's lawn and garden care products are thus expected to
be highly seasonal, with Company shipments of products expected to be heavily
concentrated in the spring (third fiscal quarter) and, to a lesser extent,
summer (fourth fiscal quarter). As a result, the Company's results of operations
could fluctuate significantly from quarter to quarter.
Sales of Golden West's products are also seasonal. Most shipments occur
during the period from March through October (the agricultural cultivation
period).
Competition
The consumer lawn and garden care market generally is highly competitive
and somewhat fractionalized, with no single dominant competitor. The Company
competes with a combination of national and regional companies ranging from
large petrochemical companies to garden catalog businesses and companies
specializing in the manufacture of lawn and garden care products. Several of
such companies have captured a significant share of such markets. Many of the
Company's competitors have achieved significant national, regional and local
brand name and product recognition and engage in extensive advertising and
promotional programs, both generally and in response to efforts by additional
competitors to enter new markets or introduce new products. Many of these
companies have substantially greater financial, technical, marketing and other
resources than the Company. In addition, the lawn and garden care industry is
characterized by the frequent introduction of new products, accompanied by
substantial promotional campaigns.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the Solaris Group, a division of Monsanto Company, and other
lawn and garden care companies have, in the past, manufactured and marketed
landscape fabrics. Currently, few of such competitors compete with Easy Gardener
in this industry. Nevertheless, well capitalized companies and smaller regional
firms may develop and market landscape fabrics
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and compete with Easy Gardener for customers that may purchase other lawn and
garden care products from such companies.
Among the Company's competitors in the lawn and garden market for any
product it may develop that utilizes the formulas acquired from Agri-Mart, are
large petrochemical companies such as Solaris Group.
Golden West's competitors consist of other manufacturers of products that
are humic acid based but that utilize formulas that are different from Golden
West's. These competitors include American Colloid Company, Monterey Chemical
Corporation and Custom Chemicide Inc., all of which sell, in addition to humic
acid based products, other agricultural products. The use of these other
agricultural products by farms and orchards gives these competitors greater name
recognition among such purchasers. American Colloid Company markets its products
mainly in the eastern United States, while Monterey Chemical Corporation and
Custom Chemicide Inc. market their products mainly in the western United States.
Government Regulation
Products which the Company markets or may market as fertilizers are subject
to an extensive and frequently evolving statutory and regulatory framework,
including, but not limited to the Federal and state laws discussed below.
Federal Regulation - The Federal Hazardous Materials Transportation Act
("HazMat") regulates the transportation of products possessing characteristics
which have the potential to create a hazard to humans or the environment during
transport and imposes extensive manifesting, labelling and other requirements
upon the transportation of any products regulated by such act. Failure to comply
with the requirements of HazMat could result in the imposition of sanctions,
including, but not limited to, suspension or restriction of product
transportation, civil penalties and/or criminal sanctions. Although the Company
believes that other than one product acquired from Weatherly, none of the
products presently manufactured by its subsidiaries are subject to HazMat there
can be no assurance that products that the Company or its subsidiaries intend to
market in the future will not be subject to HazMat.
The distribution and sale of pesticides is subject to regulation by the
U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"). A substance is a
pesticide under FIFRA if it is intended to prevent, destroy, repel or mitigate
pests or defoliate, desiccate or regulate the growth of plants. Under FIFRA, all
pesticides must be registered with the EPA and must be approved for their
intended use based upon an evaluation of the risks posed by the product to human
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health and the environment. FIFRA also imposes stringent labelling, packaging,
reporting, and recordkeeping requirements on the marketing of such products.
Failure to comply with the requirements of FIFRA could result in the imposition
of sanctions, including, but not limited to, suspension or restriction of
product distribution, civil penalties and/or criminal sanctions. Although the
Company believes that except for certain animal repellents and insecticide
spikes acquired in connection with the Weatherly acquisition, none of the
products sold by it or its subsidiaries are pesticides under FIFRA, there can be
no assurance that future products marketed by the Company or its subsidiaries
will not be subject to FIFRA.
Advertising relating to the Company's products is subject to the review of
the Federal Trade Commission and state agencies, pursuant to their general
authority to monitor and prevent unfair or deceptive trade practices.
State Regulation - Many states regulate pesticides in a manner similar to
Federal law. Moreover, many states also impose restrictions upon products
marketed for use as fertilizing materials (which are not typically regulated
under FIFRA). Accordingly, state requirements may be applicable to a broader
range of the Company's and its subsidiaries' intended products than Federal law.
Registration of products on the state level essentially involves the filing with
the appropriate state agency of the labels used on the products, payment of
registration fees and the filing of reports in many states. In certain states,
the manufacturer or the distributor is required to be licensed, instead of or in
addition to the product registration. Products may be subject to state testing.
In addition, if a label makes any claims relating to the product's
effectiveness, the accuracy of the claims may have to be proven to the
satisfaction of the state regulatory authorities. The Company believes that it
or its subsidiaries have obtained the required material licenses and
registrations of their material products in the states in which their products
are sold. Should the number of states in which the Company's products are sold
increase, such products may be required to be registered in such states.
There can be no assurance that the Company and its subsidiaries will be
able to comply with, or continue to comply with, the current or future federal,
state or local regulations in every jurisdiction in which they will conduct
their material business operations without substantial cost or interruption of
their operations. In the event that the Company or its subsidiaries are unable
to comply with such requirements, they could be subject to substantial
sanctions, including a recall of, or a sales limitation placed on, one or more
of their products, monetary liability and/or criminal sanctions, if they
distribute or market products in violation of those requirements, any of which
could have a material adverse effect upon the Company's business.
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Environmental Compliance-Manufacturing Facility. Certain manufacturing
operations involve the discharge of pollutants into the air or water. Federal
and state environmental regulations often require manufacturers to obtain
permits for these discharges. The permits regulate the amount of pollutants that
can be discharged and impose certain sampling, recordkeeping and reporting
obligations on the permittees. Ownership and operation of manufacturing
facilities also involve handling and storage of hazardous substances, which are
regulated under various federal and state environmental laws. Failure to comply
with environmental laws or to obtain, or comply with, the necessary state and
federal permits can subject the manufacturer to substantial civil and criminal
penalties. Easy Gardener and Weatherly each own and operate one manufacturing
facility. The Company believes that Easy Gardener and Weatherly are currently in
substantial compliance with applicable material environmental laws concerning
their respective facilities and that they are in compliance in all material
respects with, all necessary material environmental permits concerning their
respective facilities. There can be no assurance that the Company or its
subsidiaries will be able to continue to comply with the requirements of
applicable environmental laws or permits.
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Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose liability for environmental damages and
cleanup costs on owners and operators of hazardous waste facilities, as well as
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. Easy Gardener and Weatherly each own and operate a
manufacturing facility and, as a result, could be subject to liability under
these statutes. Golden West contracts with other companies for the manufacture
of its products. The Company and its subsidiaries could incur liability under
CERCLA, or similar state statutes, for any damage caused as a result of the
mishandling or release of hazardous substances owned by the Company but
processed and manufactured by others on the Company's behalf. As a result, there
can be no assurance that the manufacture of the products sold by the Company and
its subsidiaries will not subject the Company or its subsidiaries to liability
pursuant to CERCLA or a similar state statute. Furthermore, there can be no
assurance that Easy Gardener or Weatherly will not be subject to liability
relating to manufacturing facilities owned and/or operated by them.
Trademarks, Proprietary Information and Patents
The Company believes that product recognition is an important competitive
factor in the lawn and garden care products industry. Accordingly, in connection
with its marketing activities of its lawn and garden care products, the Company
promotes, and intends to promote, certain tradenames and trademarks which are
believed to have value to the Company.
In connection with its acquisition of the assets of EGI, Easy Gardener
acquired certain trademarks and copyrights used by EGI in connection
with its business including, but not limited to, the trademarks, WEEDBLOCK(R),
WEEDSHIELD(TM), MICROPORE(R) and BIRDBLOCK(R). In connection with its
acquisition of Weatherly, Easy Gardener acquired certain patents, as well as
certain copyrights and trademarks used in connection with Weatherly's business
including, but not limited to, Jobe's(R), Ross(R), Green Again(R),
Gro-Stakes(R), Tree Gard(R) and XP-20(TM). Easy Gardener also acquired certain
patents and trademarks when it acquired the assets of Emerald Products, LLC.
Although the Company does not believe that its trademarks violate the
proprietary rights of others, there can
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be no assurance that the Company's marks do not and will not violate the
proprietary rights of others, that the Company's marks would be upheld if
challenged or that the Company would not be prevented from using its marks, any
of which could have an adverse effect upon the Company.
The Company regards the formulas and processes used to manufacture certain
of the lawn and garden products sold by it and agricultural products sold
through Golden West as proprietary and intends to rely for protection upon trade
secret laws and non-disclosure agreements with their customers, suppliers,
dealers, employees and sales representatives. Despite these restrictions, it may
be possible for competitors or customers to copy one or more aspects of the
Company's or Golden West's products or obtain information that the Company
regards as proprietary. Furthermore, there can be no assurance that others will
not independently develop products similar to those sold by the Company and its
subsidiaries. Although the Company believes that the products sold by it do not
and will not infringe upon the patents or violate the proprietary rights of
others, it is possible that such infringement or violation has or may occur. In
the event that products sold by the Company are deemed to infringe upon the
patents or proprietary rights of others, the Company could be required to modify
its products or obtain a license for the manufacture or sale of such products.
There can be no assurance that, in such an event, the Company would be able to
do so in a timely manner, upon acceptable terms and conditions or at all, and
the failure to do any of the foregoing could have a material adverse effect upon
the Company.
Golden West licenses from Mammoth the right to manufacture and otherwise
commercialize humic acids patented under a certain specified patent. The
contract embodying this right has an indefinite term. Although Golden West and
the Company believe that Golden West is in compliance with this contract, the
decision by Mammoth to terminate this contract, whether for good reason or
otherwise, could have a material adverse effect on the business of Golden West,
and therefore, the Company.
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<PAGE>
Acquisition of Weatherly Consumer Products Group, Inc.
On August 9, 1996 (the "Closing"), Easy Gardener acquired all of the
outstanding capital stock (the "Acquisition") of Weatherly pursuant to the stock
purchase agreement, dated August 9, 1996 (the "Purchase Agreement"), by and
among the Company, Easy Gardener, Weatherly and all of its stockholders (the
"Weatherly Stockholders").
As consideration for the Acquisition, the Weatherly Stockholders received
(i) an aggregate of 1,000,000 shares of the issued and outstanding Common Stock
of the Company (the "Registrant's Shares") and (ii) an aggregate sum of
$22,937,321, less that amount required to discharge certain outstanding
indebtedness of Weatherly, as more particularly set forth in the Purchase
Agreement, and adjusted dollar for dollar based upon the value of the Net
Current Assets (as defined in the Purchase Agreement) of Weatherly at the
Closing. The consideration paid for the business acquired (the "Business") was
determined by negotiations among the representatives of Easy Gardener, the
Company and Weatherly.
In conjunction with the Acquisition:
(a) The Company agreed to file a registration statement with respect
to the Registrant's Shares.
(b) The Company agreed to issue pro ratably to the Weatherly
Stockholders who still possess The Registrant's Shares at the one year
anniversary of the Closing, additional shares of its Common Stock, as more
particularly set forth in the Purchase Agreement, in the event the average
of the closing bid and ask prices of the Common Stock, on the NASDAQ
Small-Cap Market, for the ten trading days preceding such anniversary is
less than $3.00.
Simultaneous with the Closing:
1. Weatherly Consumer Products, Inc., a subsidiary of Weatherly, ("WCP")
and two of its stockholders each entered into separate Non-Competition
Agreements, whereby WCP paid to each of the two stockholders $250,000, and each
of the two stockholders agreed, for a period of twenty years, not to interfere
with the operation of the Business or to engage or become interested, directly
or indirectly, in a competitive enterprise as specified in the Non-Competition
Agreements.
2. With respect to the Registrants's Shares, each Weatherly Stockholder
executed a Lock-Up Agreement, whereby each Weatherly Stockholder agreed not to
transfer or dispose of more than an aggregate of twenty-five percent of any
securities of Registrant acquired and beneficially owned by such Weatherly
Stockholder prior to the six (6) months anniversary of the Closing and
thereafter until the year anniversary of the Closing,
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of no more than an aggregate of fifty percent of any such securities.
In connection with the financing of the Weatherly acquisition, the Company
issued to one of the lending institutions that provided the financing a
five-year warrant to purchase up to 400,000 shares of common stock at $2.50 per
share.
The source of the consideration paid for the business acquired was shares
of common stock of the Company contributed to Easy Gardener and cash procured by
Easy Gardener. See Item 6. "Management's Discussion and Analysis or Plan of
Operation.
Employees
The Company, exclusive of Golden West and Easy Gardener, currently has five
employees, three of whom are officers of the Company. One of the employees is
responsible for finance and one is responsible for administration and
communication and certain clerical functions. Certain officers, whose primary
responsibilities are in other areas, also participate in sales and marketing
activities.
Golden West currently has four employees. One employee is engaged in
administration and sales, two are engaged in sales and one is engaged in
clerical functions. One of the salesmen devotes a portion of his work time to
logistics and material control and government regulations.
Easy Gardener currently has fifty-two full-time employees of whom two are
officers, nine are responsible for administration and finance, eleven are
engaged in sales, twenty-two are engaged in production and eight are engaged in
warehouse, shipping and receiving. An additional eight part-time employees are
engaged in production.
Weatherly currently has seventy-nine employees, of whom twelve are
responsible for administration and finance, one is engaged in marketing,
fifty-eight are engaged in production and eight are engaged in warehouse,
shipping and receiving. The Company anticipates that the Weatherly employees
engaged in administration, finance and marketing will either be terminated with
their duties handled by other Company personnel or their positions will be moved
to Easy Gardener's facility in Waco, Texas.
Item 2. Description of Property
The Company's executive offices are currently located in San Francisco,
California, in approximately 2,440 square feet of office space, leased from an
unaffiliated party, to whom the Company pays $4,068 per month in rent, which
amount includes the costs of utilities and janitorial services. The Company
believes
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that its current office space, which it rents pursuant to a lease expiring in
February 1998, is adequate for the Company's planned future operations.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases from an unaffiliated party, to whom the
Company pays $1,150 per month base rent, with rent increases at a rate of 4% a
year. The lease expires in June 1999 subject to the Company's option to renew
the lease for an additional three year period.
Easy Gardener leases approximately 200,000 square feet of office and
warehouse space in Waco, Texas from an unaffiliated party, to whom the Company
pays $17,918 per month in rent, pursuant to a one year lease agreement that is
renewable annually through November 30, 2000. Easy Gardener's facilities contain
landscape fabric converters, packaging equipment and warehouse and shipping
facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky from an unaffiliated party, to whom the
Company pays $10,000 per month in rent pursuant to a lease that expires on June
30, 1998. The Company also leases an additional 18,900 feet of warehouse space
in Paris, Kentucky from an unaffiliated party, to whom the Company pays $5,417
per month in rent pursuant to a lease that expires on May 3, 1997. Weatherly
also utilizes approximately 9,300 square feet of office space in Lexington,
Kentucky which it leases from an unaffiliated party, to whom the Company pays
$12,290 per month in rent through August 31, 1998 and $13,625 per month in rent
for the final year of the lease which expires on August 31, 1999. The Company
intends to close the Lexington, Kentucky office as the functions provided by
that office will be handled through Easy Gardener's Waco, Texas facility.
Item 3. Legal Proceedings
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded in the over-the-counter market and
been quoted on the Nasdaq SmallCap Market since March 26, 1992. The NASDAQ
symbol for the Company's Common Stock is "USHG". The following table sets forth,
for the periods indicated, the high and low bid and asked quotations for the
Common Stock, as reported by NASDAQ. These amounts represent quotations between
dealers (not actual transactions) and do not include retail markups, markdowns
or commissions.
Year Ended June 30, 1996 Bid Asked
------------------- --------------------
High Low High Low
First Quarter ........ 3 1/2 2 3/4 3 3/4 2 7/8
Second Quarter ....... 3 3/16 2 3/8 3 3/8 2 1/2
Third Quarter ........ 3.00 2 1/8 3 1/8 2 5/16
Fourth Quarter ....... 3 5/8 2 5/8 3 13/16 2 1/2
Year Ended June 30, 1995 Bid Asked
------------------- --------------------
High Low High Low
First Quarter ........ 3 7/8 2 3/4 4 3 1/4
Second Quarter ....... 3 2 3 1/4 2 3/8
Third Quarter ........ 2 7/8 2 3 1/16 2 3/16
Fourth Quarter ....... 3 1 5/8 3 1/8 1 7/8
As of September 30, 1996, the number of stockholders of record of the
Company's Common Stock was 104. The Company believes that, in addition, there
are in excess of 500 beneficial owners of its Common Stock whose shares are held
in "street name".
The Company has not paid any cash dividends on its common stock to date and
does not expect to declare or pay any cash or stock dividends in the foreseeable
future. Certain agreements among the Company, Easy Gardener and Easy Gardener's
primary lending institutions prohibit Easy Gardener from paying dividends
without the lenders' consent. This restriction adversely affects the Company's
ability to pay dividends.
Item 6. Management's Discussion and Analysis or Plan of Operation
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
During the year ended June 30, 1996 the Company had consolidated net sales
of $27,030,924 compared to consolidated net sales of $19,691,859 for the fiscal
year ended June 30, 1995. Approximately $3,760,000 of the increase in net sales
for the year ended June 30, 1996 resulted from the introduction of new products.
In addition, the Company believes that its sales were positively affected by the
continued penetration in existing markets, expansion into new markets and a
higher recognition of EGAC's brand and products. Furthermore, the increase in
net sales also resulted from the inclusion of twelve months of net
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sales of EGAC's products in the 1996 period compared to ten month period in the
prior fiscal year.
The Company's consolidated cost of goods sold and gross profit generated
during the year ended June 30, 1996 were also higher than the comparable period
in 1995 primarily due to the increase in net sales and the inclusion of twelve
months of EGAC's cost of goods sold in the 1996 period compared to ten months in
the 1995 period. Gross profit, as a percentage of net sales, for the year ended
June 30, 1996 and 1995 was 53% and 54%, respectively. The decrease in the gross
profit percentage was due to a change in the product mix sold and to higher
costs, during the 1996 period, of resin and corrugated cardboard, which are the
principal materials used in the manufacturing and packaging of EGAC's main
product, Weedblock(R).
The Company's consolidated selling and shipping expenses increased to
$6,264,025 during the year ended June 30, 1996 from $4,373,681 in the comparable
period in 1995 primarily as a result of the increase in net sales. In addition,
the increase in selling and shipping expenses was a result of the inclusion of
twelve months of EGAC's selling and shipping expenses in 1996 compared to ten
months in 1995. Selling and shipping expenses as a percentage of net sales
increased from 22% to 23% for the year ended June 30, 1996 compared to the
comparable period in 1995. This increase was primarily due to introductory
advertising on new products.
The Company's consolidated general and administrative expenses increased to
$4,347,741 during the year ended June 30, 1996 from $2,777,666 during the
comparable period in 1995 primarily as a result of the inclusion of twelve
months of EGAC's general and administrative expenses in 1996 compared to ten
months in 1995. Furthermore, the increase in general and administrative expenses
was due to approximately $208,000 of additional amortization and depreciation
expense together with other additional related overhead expenses associated with
the overall increase in the size of the Company. General and administrative
expenses, as a percentage of net sales, for the year ended June 30, 1996 and
1995, was 16% and 14%.
The Company's consolidated interest expense increased to $2,009,157 during
the year ended June 30, 1996 from $1,809,901 during the comparable period in
1995 primarily as a result of the inclusion in the 1995 period of only ten
months of interest of EGAC's outstanding indebtedness which was incurred in
connection with the purchase of the assets of EGI in September 1994. This
increase was partially offset by the February 1995 conversion of $2 million of
convertible notes into common stock and principal payments of $1,600,000 on
other notes payable. The convertible notes and other notes payable were incurred
in connection with the purchase of the assets of EGI in September 1994.
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<PAGE>
During the year ended June 30, 1996, the Company recorded a $715,000 tax
benefit compared to $38,000 tax expense during the comparable period in 1995
primarily due to the Company's recognition of a deferred tax asset associated
with the Federal net operating loss carryforwards. See "Liquidity and Capital
Resources."
As a result of the foregoing, the Company achieved a consolidated net
income of $2,523,666 in the year ended June 30, 1996 compared to a consolidated
net income of $1,574,779 in the comparable 1995 period.
Liquidity and Capital Resources
From inception the Company has financed its operations primarily through
net proceeds from the Company's private and public sales of securities and
borrowings from lending institutions.
At June 30, 1996, the Company had consolidated cash and short-term
investments totalling $679,850 and working capital of $5,327,886 compared to
June 30, 1995 when the Company had consolidated cash and short-term investments
totalling $970,310 and working capital of $3,325,674. The increase in working
capital from June 30, 1995 is due primarily to the increase in net income for
the year ended June 30, 1996.
Net cash provided by operating activities for the year ended June 30, 1996
was $617,718 consisting primarily of net income plus depreciation, an increase
in accounts payable and, offset in part by, an increase in inventory,
receivables, and the deferred tax asset. Net cash used in investing activities
for the year ended June 30, 1996 was $2,102,788, consisting primarily of cash
used for the acquisition of the assets of Emerald Products LLC and the
additional purchase price of the assets of EGI and, to a lesser extent, capital
expenditures primarily for the EGAC facility. Net cash provided by financing
activities for the year ended June 30, 1996 was $1,194,609, consisting primarily
of the exercising of warrants to purchase common stock and proceeds from the
bank line of credit and, offset in part by payments of notes payable.
In August 1995, the Company acquired all the assets of Emerald Products LLC
for a cash purchase price of $935,000.
Subsequent to June 30, 1996, warrants to purchase common stock were
exercised resulting in net proceeds to the Company of approximately $5,300,000.
The proceeds of these warrant exercises were used to fund a portion of the
Weatherly acquisition.
In connection with the acquisition of the assets of EGI, EGAC obtained from
certain institutional lenders a $8,000,000 five year term loan, a $3,000,000
seven year term loan and a $6,000,000
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<PAGE>
revolving credit facility. At June 30, 1996, the outstanding principal amounts
owing under the term loans and revolving credit facilities were $8,599,998 and
$1,288,146, respectively.
In August 1996, in connection with the acquisition of Weatherly, EGAC
entered into a new credit agreement ("Credit Agreement") with certain
institutional lenders under which its outstanding term loan and revolving credit
indebtedness were refinanced. Pursuant to the Credit Agreement, the lenders
have provided the Company with the following revolving credit and term loan
facilities:
(a) Revolving Credit Facility: The maximum amount available for borrowing
under this facility from time to time is equal to the lesser of $13 million and
a borrowing base determined by reference to specified percentages of EGAC's
consolidated accounts receivable and inventory deemed to be "eligible" by the
lenders. As of September 30, 1996, based on this formula, approximately
$4,978,384 was available for borrowing and $942,394 aggregate principal amount
of revolving credit loans was outstanding.
Revolving credit loans bear interest at an annual rate chosen by EGAC based
on the prime rate of one of the lenders or LIBOR (the London inter-bank offered
rate) plus an applicable marginal rate. At September 30, 1996, the effective
annual rate for outstanding revolving credit loans was 9.5%. The revolving
credit facility expires on June 30, 2002 (the "Expiration Date") and all
outstanding revolving credit loans are then due, unless such loans are required
to be repaid earlier by the terms of the Credit Agreement. In addition, for a 10
day period in each year, all outstanding revolving credit loans must be paid and
no revolving credit loans may be borrowed. Revolving credit loans may be
voluntarily prepaid at any time. Subject to the availability formula and the
Expiration Date, amounts repaid may be reborrowed and, subject to certain
restrictions, outstanding prime rate loans may be converted to LIBOR rate loans.
EGAC is also required to pay certain commitment, service and other fees in
connection with this facility. If EGAC determines to terminate the revolving
credit facility prior to the Expiration Date, the outstanding revolving credit
loan must be prepaid together with a premium from 1% to 3% of the "Average
Yearly Loan Balance" (as defined in the Credit Agreement) of the revolving
credit loans.
(b) Term Loan Facility: Pursuant to this facility, EGAC obtained two term
loans (the "Term Loans"), one in the principal amount of $23 million ("Term Loan
I") and the other in the principal amount of $2.25 million ("Term Loan II"),
each of which matures on the Expiration Date. The Term Loans are payable in
quarterly installments of principal, commencing as to Term Loan I in September
1996 and as to Term Loan II in September 1998. Interest on Term Loan I is
payable, at the election of
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EGAC, at the adjusted prime rate or LIBOR rate described above, and EGAC may
from time to time, subject to certain restrictions, convert Term Loan I from a
prime rate loan to a LIBOR rate loan. The effective annual rate of interest for
Term Loan I is 9.5%. Term Loan II bears interest at a floating rate equal to
prime rate of one of the lenders plus 6%. The effective annual rate of interest
for Term Loan II is 14.25%. Interest is payable monthly in arrears on prime rate
loans and at the end of the interest period for a LIBOR rate loan if the
interest period is 3 months or less. If EGAC elects to prepay Term Loan I in
full, at any time prior to the Expiration Date, EGAC is also obligated to prepay
a premium of from 1% to 3% of the amount prepaid. Term Loan I is subject to
certain mandatory prepayments of the principal amount of such Term Loan from
"excess cash flow" (as defined in the Credit Agreement) of EGAC and certain net
proceeds of asset sales, condemnation awards and insurance recoveries. The next
mandatory prepayment of the principal amount of the Term Loan I on account of
"excess cash flow", if any, will be due in October 1997.
EGAC's obligation to pay the principal of, interest on, premium, if any,
and all other amounts payable on account of the revolving credit loans and the
Term Loans is secured by substantially all of the assets of EGAC and its
subsidiaries and the irrevocable guaranties of the Company and EGAC's
subsidiaries of such obligations. Upon the occurrence of events of default
specified in the Credit Agreement, the maturity of the outstanding principal
amounts of the revolving credit loans and the Term Loans may be accelerated by
the lenders and the security interests of the lenders in the assets of EGAC and
its subsidiaries may be foreclosed.
Under the Credit Agreement (a) EGAC is required, among other things, to
comply with certain limitations on incurring additional indebtedness, liens,
guaranties, capital and operating lease expenses in excess of a specified amount
per year, and sales of assets and payment of dividends, (b) EGAC and the Company
must comply with certain limitations on merger, liquidations, changes in
business, investments, loans and advances, or certain acquisition of
subsidiaries. In addition, EGAC must comply with certain minimum interest
coverage, debt service and fixed change rates, not permit its Net Worth (as
defined) to be less than certain amounts and generate certain minimum amounts of
income before interest expenses, taxes, depreciation and amortization. A
violation of any of these covenants constitutes an event of default under the
Credit Agreement.
The Company's cash flow and capital requirements are typically affected by
the seasonal nature of its business. Sales of the Company's lawn and garden care
products, including EGACS, are highly seasonal, with the shipments of products
heavily concentrated in the spring and summer. Sales of the Company's
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agricultural products, through its subsidiary Golden West are also seasonal.
Most shipments of Golden West's products occur during the period from March
through October (the agricultural cultivation period), with orders by
agricultural distributors generally placed a month prior to shipment. The
Company's results of operations may be severely adversely affected by poor
weather conditions. Prolonged periods of poor weather conditions could result in
reduced consumer weekend purchases of do-it-yourself lawn and garden care
products and reduced agricultural plantings, thereby reducing sales of the
Company's products. In addition, unexpected production or transportation
difficulties occurring at a time of peak production on sales could cause sales
losses which would not be readily reversed before the following year.
The Company believes that the operations of EGAC will generate sufficient
cash flow to service the debt incurred in connection with the acquisitions of
EGI's assets and of Weatherly. However, if such cash flow is not sufficient to
service the debt, the Company will be required to seek additional financing
which may not be available on commercially acceptable terms or at all. In
addition, the Company has commenced amortizing over 30 years approximately
$14,170,000 of goodwill related to the purchase of the assets of EGI (being the
value of the cost over the value of the assets acquired). Furthermore, the
company has commenced amortizing over 20 years approximately $780,000 of
goodwill related to the purchase of Emerald Products LLC. The Company is already
amortizing approximately $105,000 per year of goodwill relating to the
acquisition of Golden West. As a result of the debt refinancing occurring in the
first quarter of fiscal 1997 associated with the Weatherly acquisition, the
Company will record as an extraordinary expense approximately $1.4 million
relating to the write off of the old loan fees plus certain prepayment
penalties.
In April 1996, the Company entered into an agreement with an unaffiliated
company pursuant to which it sold all of the remaining inventory of Power
Gardener, as well as, the manufacturing rights and manufacturing molds relating
to Power Gardener in consideration for $1,600,000 of trade credits. To the
extent the unaffiliated company sells Power Gardener units it will remit a
specified percentage of the net cash proceeds of such sales to the Company which
will proportionately reduce the value of the trade credits received by the
Company. The trade credits are for advertising media, equipment and services and
expire three years from the date of the agreement.
As of June 30, 1996, the Company has a net deferred tax asset of
$1,333,000, the majority relating to the tax benefit associated with the
accumulated net operating losses of approximately $3,498,000 for Federal income
tax purposes which expire in 2009. The Company believes that with the successful
implementation of the September 1994 acquisition of the assets of EGI
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and the most recent Weatherly Consumer Products acquisition in August 1996,
realization of this asset is more likely than not. Because taxable income in the
next fiscal year is estimated to be in excess of the net operating loss
carryforward, the Company has recognized the estimated $1,190,000 benefit of
federal net operating loss carryovers as a current deferred tax asset. For
California income tax purposes, the Company has accumulated net operating losses
of approximately $2,097,000 which expire through 2000. Based upon the estimated
taxable income to be apportioned to California over the next few fiscal years
and considering the expiration date of the net operating loss carryovers, the
Company has established a valuation reserve of $148,000 relating to the
estimated $200,000 benefit associated with the California net operating loss
carryovers.
The Company believes that the cash generated from operations, available
borrowings and net proceeds from warrants exercised to purchase common stock,
will be sufficient to fund its operations at least through fiscal 1997.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB"), issued
a Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which requires that companies measure the cost of
stock-based employee compensation at the grant date based on the value of the
award and recognize this cost over the service period. The value of the
stock-based award is determined using the intrinsic method whereby compensation
cost is the excess of the quoted market price of the stock at the date of grant
or other measurement date over the amount an employee must pay to acquire the
stock. SFAS No. 123 is effective for financial statements issued for fiscal
years beginning after December 15, 1995, and is not expected to have a
significant impact on the Company's financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement requires that long-lived assets and certain intangibles be held and
used by an entity and be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. The measurement of an impairment loss for long-lived assets and
indemnifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995, and is not
expected to have a significant impact on the Company's financial statements.
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Item 7. Financial Statements
This information appears in a separate section of this report following
Part III.
Item 8. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure.
Not applicable.
Part III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The current directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Robert Kassel 57 Chairman of the Board, President,
Treasurer and Chief Executive
Officer
Richard Raleigh 42 Chief Operating Officer and
Director
Maureen Kassel 48 Vice President - Public Relations
and Advertising, Secretary and
Director
Jon Schulberg 37 Director
Fred Heiden 55 Director
Robert Kassel co-founded the Company and has been Chairman of the Board and
President of the Company since October 1990. In addition, from 1985 to August
1991 he was a consultant to Comtel Communications, Inc. ("Comtel"), a company
specializing in the installation and operation of telephone systems in hotels.
From 1985 to 1990, Mr. Kassel was also a real estate developer in Long Island,
New York and Santa Barbara, California. From 1965 to 1985, he was a practicing
attorney in New York City, specializing in corporate and securities law.
Richard Raleigh has been a Director of the Company since March 1993, Chief
Operating Officer of the Company since June 1992 and served as the Company's
Executive Vice President-Operations from December 1991 to June 1992. Prior to
joining the Company, Mr. Raleigh was a free-lance marketing consultant to the
lawn and garden industry from January 1991 to December 1991. From April 1988 to
January 1991 he was employed by Monsanto Agricultural Co. as its Director of
Marketing, Lawn and Garden. From December
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1986 to April 1988 he was employed by The Andersons, a company engaged in the
sale of consumer and professional lawn and garden products, as Vice President of
Sales and Marketing. From November 1978 to December 1986 he held a variety of
positions at The Andersons, including Operations Manager and New Products
Development Manager.
Maureen Kassel, the wife of Robert Kassel, co-founded the Company and has been
Vice President and a director of the Company since November 1990 and Secretary
since February 1992. For the last ten years, she has assisted in the general
administration and operation of real estate and other businesses. Ms. Kassel is
Chairman of the Board of Comtel.
Jon Schulberg, a director of the Company since March 1993, has been employed as
president of Schulberg MediaWorks, a company engaged in the independent
production of television programs and television advertising, since January
1992. From April 1989 to January 1992 he was a producer for Guthy-Renker
Corporation, a television production company. From September 1987 to April 1989
he was the director of development for Eric Jones Productions. For the three
years prior thereto, he was the Director of Video Publishing for Preview Media.
Fred Heiden, a director of the Company since March 1993, has been a private
investor since November 1989. From April 1984 to November 1989 Mr. Heiden was
the president and principal owner of Bonair Construction, a Florida based home
improvement construction company.
In addition to its officers listed above the key employees of the Company
include Joseph A. Owens, II and Richard M. Grandy.
Joseph A. Owens, II, 56, Vice President of Easy Gardener, founded EGI in
1983 after serving from 1972 until 1981 as a founder and Secretary and Treasurer
of International Spike, Inc. in Lexington, Kentucky a manufacturer of plant
fertilizers, including "Jobe's Spikes," for the retail plant care market.
Richard M. Grandy, 50, Vice President of Easy Gardener, founded EGI with
Mr. Owens in 1983 after serving as Marketing Director at International Spike,
Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a sales
representative for the Ortho Division of Chevron Chemical Co.
All directors of the Company hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Officers of
the Company are elected annually by the Board of Directors and hold office at
the discretion of the respective Board.
The Company has agreed that until August 5, 1998, if so requested by D.H.
Blair Investment Banking Corp. ("Blair"), the
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underwriter of its 1993 public offering, Blair will have the right to designate
one person to serve on the Company's Board of Directors who shall be reasonably
acceptable to the Company.
Blair has not yet exercised its right to designate such a person.
Item 10. Executive Compensation
The following table discloses the compensation awarded by the Company, for
the three fiscal years ended June 30, 1996, 1995 and 1994, to Mr. Robert Kassel,
its Chief Executive Officer and Mr. Richard J. Raleigh, its Chief Operating
Officer. During the fiscal year ended June 30, 1996, no other executive officer
of the Company received a salary that exceeded $100,000 during such fiscal year.
Summary Compensation Table
Annual
Compensation
Name and Long Term
Principal Position Year Salary ($) Bonus ($) Compensation
- ------------------ ---- ---------- --------- ------------
Securities
Underlying
Options (#)
-----------
Robert Kassel, 1996 250,000.00 100,000 200,000 (1)
Chairman, Chief Executive 1995 150,000.00 100,000 687,653 (2)
Officer, President and 1994 128,734.02 60,000 80,000
Treasurer
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Richard Raleigh, 1996 150,000 10,000 100,000 (1)
Chief Operating Officer 1995 120,000.00 10,000 50,000 (2)
1994 107,254.04 -- 20,000
- ------------
(1) Includes 200,000 five-year options granted to Mr. Kassel and 100,000
five-year options granted to Mr. Raleigh in June 1995 under the Company's
1995 Stock Option Plan which grants were subject to stockholder approval of
the plan obtained in February 1996.
(2) Does not include the options referenced in footnote (1) above.
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The following table discloses information concerning stock options granted
in the year ended June 30, 1996 to the executive officers named in the foregoing
table (the "Named Executives").
Option Grants in Fiscal Year Ended June 30, 1996
Individual Grants
Percent of
Number of Total Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal Price Expiration
Name Granted(#) Year ($/Sh) Date
- ---- ---------- ---- ------ ----
Robert Kassel(1) 200,000 22.0 2.28 6/1/00
Richard Raleigh(1) 100,000 11.0 2.28 6/1/00
- --------------------
(1) Represents 200,000 five-year options granted to Mr. Kassel and 100,000
five-year options granted to Mr. Raleigh in June 1995 under the Company's 1995
Stock Option Plan which grants were subject to stockholder approval of the plan
obtained in February 1996.
-31-
<PAGE>
The following table sets forth information concerning the number of options
owned by the Named Executive and the value of any in-the-money unexercised stock
options as of June 30, 1996. No stock options were exercised by the Named
Executives during the fiscal year ended June 30, 1996:
Aggregated Option Exercises In Fiscal Year Ended
June 30, 1996 And Fiscal Year-End Option Values
-----------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
June 30, 1996 June 30, 1996*
--------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Robert 1,067,653 -0- $1,547,913 $-0-
Kassel
Richard 237,500 -0- $ 296,656 $-0-
Raleigh
* Options are "in-the-money" if the fiscal year end fair market value of the
Common Stock exceeds the option exercise price. The last sale price of the
Common Stock on June 28, 1996 (the last trading day prior to June 30, 1996)
was $3.1875 per share.
Employment Agreements
The Company has entered into employment agreements with Messrs. Robert
Kassel and Richard Raleigh, each dated as of April 1, 1996. Mr. Kassel's
employment agreement provides that he will serve as CEO and President for an
initial term of one year subject to certain renewal provisions. His current
annual salary is $350,000, and is subject to such bonuses and increases as are
approved at the discretion of the Board of Directors. Mr. Raleigh's employment
agreement provides that he will serve as Chief Operating Officer for an initial
term of one year subject to certain renewal provisions. Mr. Raleigh's current
annual salary is $162,500, and is subject to such bonuses and increases as are
approved at the discretion of the Board. Each of the employment agreements
requires that substantially all of the employee's business time be devoted to
the Company and that the employee not compete, or engage in a business
competitive with, the Company's current and/or anticipated business for the term
of the agreement and for two years thereafter (although they each may own not
more than 5% of the securities of any publicly traded competitive company). Mr.
Kassel's agreement also provides that if his employment is
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<PAGE>
terminated under certain circumstances, including termination of Mr. Kassel upon
a change of control of the Company, (as defined in the agreement) a failure by
the Company to comply with its obligations under the agreement, the failure of
the Company to obtain the assumption of the agreement by any successor
corporation, or a change in Mr. Kassel's duties and obligations from those
contemplated by the agreement, and termination by the Company of Mr. Kassel's
employment other than for disability or cause, he will be entitled to receive
severance pay equal to the greater of (i) $350,000 ($3,500,000 plus the value of
other compensation of approximately $500,000 in the event of a change of
control) or (ii) the total compensation earned by Mr. Kassel from the Company
during the one-year period (multiplied by ten in the event of a change of
control) prior to the date of his termination.
Mr. Raleigh's agreement also provides that if his employment is terminated
under certain circumstances, including termination of Mr. Raleigh upon a change
of control of the Company, (as defined in the agreement) a failure by the
Company to comply with its obligations under the agreement, the failure of the
Company to obtain the assumption of the agreement by any successor corporation,
or a change in Mr. Raleigh's duties and obligations from those contemplated by
the agreement, and termination by the Company of Mr. Raleigh's employment other
than for disability or cause, he will be entitled to receive severance pay equal
to the greater of (i) $162,500 ($812,500 plus the value of the compensation of
approximately $187,500 in the event of a change of control) or (ii) the total
compensation earned by Mr. Raleigh from the Company during the one-year period
(multiplied by five in the event of a change of control) prior to the date of
his termination.
Each of Mr. Kassel and Mr. Raleigh is, in addition to salary, entitled to
certain fringe benefits, including the use of an automobile and payment of
related expenses.
Stock Option Plans
In September 1991, the Company adopted a stock option plan (the "Option
Plan") pursuant to which 700,000 shares of Common Stock have been reserved for
issuance upon the exercise of options designated as either (i) options intended
to constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended (the "Code") or (ii) non-qualified options. ISOs may be
granted under the Option Plan to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company.
The purpose of the Option Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The Option Plan is administered by the
Board of
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<PAGE>
Directors. The Board, within the limitations of the Option Plan, determines the
persons to whom options will be granted, the number of shares to be covered by
each option, whether the options granted are intended to be ISOs, the duration
and rate of exercise of each option, the option purchase price per share and the
manner of exercise, the time, manner and form of payment upon exercise of an
option, and whether restrictions such as repurchase rights in the Company are
to be imposed on shares subject to options.
ISOs granted under the Option Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any related
corporation) may not exceed $100,000. Non-qualified options granted under the
Option Plan may not be granted at a price less than the fair market value of the
Common Stock on the date of grant. Options granted under the Option Plan will
expire not more than ten years from the date of grant (five years in the case of
ISOs granted to persons holding 10% or more of the voting stock of the Company).
An aggregate of 688,100 options have been granted to date under the Option Plan
(including 447,500 to executive officers of the Company).
The Company has adopted, a Non-Employee Director Stock Option Plan (the
"Director Plan"). Only non-employee directors of the Company are eligible to
receive grants under the Director Plan. The Director Plan provides that eligible
directors automatically receive a grant of options to purchase 5,000 shares of
Common stock at fair market value upon first becoming a director and,
thereafter, an annual grant, in January of each year, of 5,000 options at fair
market value. Options to purchase an aggregate of up to 100,000 shares of Common
Stock are available for the automatic grants under the Director Plan. An
aggregate of 10,000 options has been granted to date under the Director Plan.
The Company has adopted, a 1995 Stock Option Plan ("1995 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Stock Option Committee (the "Committee") of
the 1995 Plan, as the case may be, will have discretion to determine the number
of shares subject to each nonqualified option (subject to the number of shares
available for grant under the 1995 Plan and other limitations on grant set forth
in the 195 Plan), the exercise price thereof (provided such price is not less
than the par value of the underlying shares of Common Stock), the term thereof
(but not in excess of 10 years from the date of grant, subject to earlier
termination in certain circumstances), and the manner in
-34-
<PAGE>
which the option becomes exercisable (amounts, intervals and other conditions).
Directors who are employees of the Company (but not members of the Committee of
the 1995 Plan) will be eligible to be granted incentive stock options or
nonqualified options under such plan. The Board or Committee of the 1995 Plan,
as the case may be, also has discretion to determine the number of shares
subject to each incentive stock option ("ISO"), the exercise price and other
terms and conditions thereof, but their discretion as to the exercise price, the
term of each ISO and the number of ISOs that may vest may be in any year is
limited by the Internal Revenue Code of 1986, as amended. An aggregate of
1,325,000 options have been granted to date under the 1995 Plan (including
775,000 to executive officers of the Company).
To date, no options have been exercised under the Option Plan, the Director
Plan or the 1995 Plan.
The Company from time to time has also granted non-plan options to certain
officers, employees and consultants to the Company.
Director Compensation
During the fiscal year ended June 30, 1996 each of the Company's two
non-employee directors, Messrs. Schulberg and Heiden, received $3,500 for
serving as directors of the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information at September 30, 1996, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director, and (iii) all executive officers and directors as a
group.
Amount and
Nature of
Name and Address Beneficial Percentage
of Beneficial Owner Ownership(1)(2) of Class
- ------------------- --------------- --------
Maureen Kassel(3) 965,650(4) 6.8
Robert Kassel(3) 4,297,095(5)(6) 27.3
Richard Raleigh 555,140(7) 3.8
Fred Heiden 7,500(8) *
Jon Schulberg 7,500(9) *
Joseph Owens II 1,014,396(10) 7.3
Richard Grandy 1,014,396(10) 7.3
Alan Stahler 899,368(11) 6.1
Kalman Renov 715,156(12) 5.0
All executive officers
and directors as a
group (five persons) 5,232,235(4)(5)(6) 31.3
(7)(8)(9)
- --------------
*less than 1%
-35-
<PAGE>
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from September 30, 1996 upon the
exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from September 30, 1996 have been exercised.
(3) The address of Maureen and Robert Kassel is c/o the Company.
(4) Includes presently exercisable options and warrants issued to Ms. Kassel to
purchase an aggregate of 365,000 shares of the Company's Common Stock.
(5) Of such shares, (i) 600,650 are owned of record by Maureen Kassel; however,
because Ms. Kassel has appointed her husband as her proxy and
attorney-in-fact to vote all 600,650 of the shares owned of record by her,
Robert Kassel may also be deemed to have beneficial ownership of such
shares; (ii) an aggregate of 914,396 shares are owned of record by each of
Messrs. Joseph Owens and Richard Grandy, officers of a subsidiary of the
Company, who have entered into a voting trust agreement (the "Voting
Agreement") providing Mr. Kassel with the right to vote the shares until
September 1, 2001.
(6) Includes presently exercisable options and warrants granted to Mr. Kassel
to purchase an aggregate of 1,867,653 shares of Common Stock.
(7) Includes presently exercisable options and warrants granted to Mr. Raleigh
to purchase an aggregate of 540,140 shares of Common Stock.
(8) Includes 7,500 shares of Common Stock issuable upon exercise of options
granted to Mr. Heiden.
(9) Includes 7,500 shares of Common Stock issuable upon exercise of options
granted to Mr. Schulberg.
(10) Does not include 175,000 shares issuable upon exercise of options that are
not currently exercisable. Includes 75,000 shares issueable upon exercise
of options.
-36-
<PAGE>
(11) The address for Mr. Stahler is 44 Wall Street, New York, New York 10005.
Includes shares issuable upon the exercise of (i) options to purchase an
aggregate of 89,441 shares of Common Stock underlying a five-year Unit
Purchase Option granted on August 12, 1993 ("1993 Unit Purchase Option")
and (ii) options to purchase up to 785,094 shares underlying a five-year
Unit Purchase Option granted on August 29, 1994 ("1994 Unit Purchase
Option"). Also includes options to purchase an aggregate of 24,833 shares
underlying additional 1993 Unit Purchase Options granted to D.H. Blair &
Co., Inc. Mr. Stahler is the Vice-Chairman and he and his wife are
stockholders of D.H. Blair and Co., Inc. Certain information with respect
to Mr. Stahler is derived from his Schedule 13D filed with the Securities
and Exchange Commission.
(12) The address for Mr. Renov is 44 Wall Street, New York, New York 10005.
Includes shares issuable upon the exercise of (i) options to purchase an
aggregate of 89,441 shares of Common Stock underlying the 1993 Unit
Purchase Option and (ii) options to purchase up to 600,882 shares
underlying the 1994 Unit Purchase Option. Also includes options to purchase
an aggregate of 24,833 shares underlying additional 1993 Unit Purchase
Options granted to D.H. Blair & Co., Inc. Mr. Renov is the Vice-Chairman
and he and his wife are principal stockholders of D.H. Blair & Co., Inc.
Certain information with respect to Mr. Renov is derived from his Schedule
13D filed with the Securities and Exchange Commission.
Item 12. Certain Relationships and Related Transactions.
In June 1993, Richard Raleigh, the Company's Chief Operating Officer,
assigned to the Company his option to acquire, for $124,000, the rights to the
Power Gardener, which option was originally granted to him pursuant to an
agreement, dated November 2, 1990, between Mr. Raleigh and the developer of the
Power Gardener. In August 1993, the Company exercised such option to acquire all
rights to manufacture, market and otherwise exploit the Power Gardener. In
consideration for the assignment from Mr. Raleigh, the Company has paid him
approximately $583,000, such amount representing Mr. Raleigh's costs of
acquiring the purchase option (in the amount of $112,000) and expenses relating
to the development of the product. Pursuant to the terms of the Company's
agreement with Mr. Raleigh, the Company will also pay him a royalty of 2% of the
Company's annual gross revenues from the sale of the Power Gardener payable in
Common Stock of the Company, but only for those years during
-37-
<PAGE>
which the Company has recovered the allocable portion of the development
expenses of the Power Gardener. No royalty payment has been accrued or paid to
date although in February 1994 the Company loaned Mr. Raleigh, on a full
recourse basis, $100,000 as an advance against possible future royalties. The
advance bears interest at 6.5% per annum.
Prior to entering into any written agreement with Mr. Raleigh, the Company,
from time to time, commencing in January 1993, disbursed funds for the
development of the Power Gardener. As of June 30, 1993, such funds aggregated
approximately $365,000. In June 1993, in connection with entering into the
assignment agreement, Mr. Raleigh repaid approximately $141,000 of such amount
to the Company and issued promissory notes to the Company in the aggregate
amount of $224,835 for the balance thereof. The promissory notes have been
repaid.
In July 1994 the Company granted to Mr. Kassel a five year option to
purchase not less than 100,000 shares of the Company's Common Stock. The number
of shares issuable upon exercise of the option has been increased, pursuant to
the terms of the option, to 161,333. The exercise price of the option is $1.69
per share.
To obtain a portion of the financing for the acquisition of Easy Gardener,
Mr. Kassel provided for the benefit of the lender $500,000 cash collateral and a
personal guarantee of $333,000. In consideration of providing such guarantees
and collateral, the Company has granted Mr. Kassel options and warrants to
purchase an aggregate of 526,300 shares of Common Stock for an aggregate
exercise price of approximately $822,000.
Item 13. Exhibits, List and Report on Form 8-K.
(a) Exhibits
Exhibit No.
- -----------
3.1 Certificate of Incorporation, as amended.**
3.2 By-laws of the Company, incorporated by reference to Exhibit 3(b)
of the Company's Registration Statement on Form S-1 (Registration
No. 33-45428).
4.1 Form of certificate evidencing Common Stock, $.001 par value, of
the Company, incorporated by reference to Exhibit 4(a) of the
Company's Registration Statement on Form S-1 (Registration No.
33-45428).
4.2 Form of Underwriter's Warrant, incorporated by reference to
Exhibit 4(b) of the Company's Registration Statement on Form S-1
(Registration No. 33-45428).
-38-
<PAGE>
4.3 Form of Unit Purchase Option granted to D.H. Blair & Co.*
4.4 Form of Public Warrant Agreement with respect to Class A
Warrants.*
4.5 Warrant Agreement with respect to Class B Warrants., incorporated
by reference to Exhibit 4(c) of the Company's Registration
Statement on Form S-3 (Registration No. 33-89800).
9.1 Voting Agreement among Joseph A. Owens, II, the Company, and
Robert Kassel.+
9.2 Voting Agreement among Richard M. Grandy, the Company and Robert
Kassel.+
10.1 Employment Agreement of Robert Kassel.
10.2 Employment Agreement of Richard Raleigh.
10.3 1991 Stock Option Plan, incorporated by reference to Exhibit 10.5
of the Company's Registration Statement on Form S-1 (Registration
No. 33-45428).
10.4 1995 Stock Option Plan.*
10.5 Non-Employee Director Stock Option Plan.*
10.6 Asset Purchase Agreement dated as of June 18, 1994 among the
Company, Easy Gardener Acquisition Corp., Joseph A. Owens II,
Richard M. Grandy and Easy Gardener, Inc.+
10.7 Stock Purchase Agreement between Golden West Chemical
Distributors, Inc., the Company and Peter Baraldi, incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form
8-K dated August 19, 1992.
10.8 Agreement, dated November 1, 1989, between Golden West Chemical
Distributors, Inc. and Mammoth International Chemical Corporation,
incorporated by reference to Exhibit 10.9 of the Company's Form
10-KSB for the fiscal year ended June 30, 1992.
10.9 Manufacturing Agreement, dated June 10, 1985, between Golden West
Chemical Distributors, Inc. and Western Farm Services, Inc.
relating to Energizer, incorporated by reference to Exhibit 10.10
of the Company's Form 10-KSB for the fiscal year ended June 30,
1992.
10.10 Manufacturing Agreement, dated June 10, 1985, between Golden West
Chemical Distributors, Inc. and Western Farm
-39-
<PAGE>
Services, Inc. relating to Penox, incorporated by reference to
Exhibit 10.11 of the Company's Form 10-K SB for the fiscal year
ended June 30, 1992.
10.11 Manufacturing Agreement, dated June 10, 1985, between Golden West
Chemical Distributors, Inc. and Western Farm Services, Inc.
relating to Powergizer 45, incorporated by reference to Exhibit
10.12 of the Company's Form 10- KSB for the fiscal year ended June
30, 1992.
10.12 Lease with respect to the Company's executive offices,
incorporated by reference to Exhibit 10.14 of the Company's Form
10-KSB for the fiscal year ended June 30, 1992.
10.13 February 8, 1995 modification to lease with respect to the
Company's executive offices.*
10.14 Form of Mergers and Acquisitions Agreement between the Company and
D.H. Blair Investment Banking Corp.**
10.15 Assignment of Rights, dated June 16, 1993, between Richard J.
Raleigh and the Company.**
10.16 Agreement dated as of April 16, 1996 between the Company and The
Intrac Group.
10.17 Credit Agreement among Easy Gardener Acquisition Corp., the
Company, The Provident Bank, as Administrative and Collateral
Agent,and The Provident Bank and other certain lending
institutions, dated as of August 9, 1996.
10.18 Lease and lease extension agreements between Crawford- Austin Mfg.
Co. and Easy Gardener.*
10.19 Purchase Agreement, dated as of August 9, 1996, by and among the
Company, EGAC, Weatherly and the Weatherly Stockholders
(incorporated by reference to Exhibit 10.1 filed with the
Company's Form 8-K for the event dated August 9, 1996)
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule.
- ----------
-40-
<PAGE>
* Incorporated by reference to the comparable exhibit filed with the Company's
Form 10-KSB for the fiscal year ended June 30, 1995.
** Incorporated by reference to the exhibit filed under the same number in the
Company's Registration Statement on Form SB-2 (file no. 33-61984).
*** Incorporated by reference to Exhibit 10.20 filed with the Company's
Registration Statement on Form SB-2 (file no. 33-82758).
+ Incorporated by reference to the exhibit contained in the Current Report on
form 8-K filed by the Company for the event dated September 1, 1994.
(b) Report on Form 8-K. No reports on Form 8-K were filed by the Company
during its fiscal quarter ended June 30, 1996.
-41-
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Contents
================================================================================
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated balance sheet as of June 30, 1996 F-3 - F-4
Consolidated statements of income for the
years ended June 30, 1996 and 1995 F-5
Consolidated statements of shareholders'
equity for the years ended June 30, 1996 and
1995 F-6
Consolidated statements of cash flows for the
years ended June 30, 1996 and 1995 F-7 - F-8
Summary of accounting policies F-9 - F-11
Notes to consolidated financial statements F-12 - F-30
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc. (formerly
Natural Earth Technologies, Inc.)
and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheet of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the two
years in the period ended June 30, 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 1996, and the results of their operations and
their cash flows for each of the two years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Francisco, California
August 29, 1996
F-2
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
================================================================================
June 30, 1996
- --------------------------------------------------------------------------------
Assets (Notes 1 and 5)
Current
Cash and cash equivalents $ 679,850
Accounts receivable, less allowance for doubtful accounts
and sales returns of $155,000 7,109,392
Inventories (Note 3) 3,391,553
Prepaid expenses and other current assets 462,246
Deferred tax asset (Note 9) 1,333,000
- --------------------------------------------------------------------------------
Total current assets 12,976,041
Furniture, fixtures and equipment, net (Note 4) 1,215,660
Intangible assets (Note 1)
Excess of cost over net assets acquired of Easy Gardener, net
of accumulated amortization of $828,289 13,343,918
Excess of cost over net assets acquired of Golden West, net
of accumulated amortization of $406,903 1,690,700
Excess of cost over net assets acquired of Emerald Edge, net
of accumulated amortization of $29,356 749,375
Deferred financing costs, net of accumulated amortization of
$467,193 (Note 12) 1,004,614
Product rights, net of accumulated amortization of $56,500 198,500
Package design, net of accumulated amortization of $56,016 180,293
Trade credits (Note 2) 1,294,560
Officer receivables (Note 6) 617,204
Other assets 313,117
- --------------------------------------------------------------------------------
$ 33,583,982
================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
- --------------------------------------------------------------------------------
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheet
================================================================================
June 30, 1996
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Note 1)
Current
Line of credit (Notes 5 and 12) $ 1,288,146
Current maturities of notes payable (Notes 1, 5 and 12) 2,361,798
Accounts payable 1,285,585
Accrued expenses 1,085,797
Accrued commissions 545,670
Accrued interest (Note 5) 592,271
Accrued purchase consideration (Note 1) 488,888
- --------------------------------------------------------------------------------
Total current liabilities 7,648,155
Deferred tax liability (Note 9) 328,000
Notes payable, less current maturities (Notes 1, 5 and 12) 6,238,200
- --------------------------------------------------------------------------------
Total liabilities 14,214,355
- --------------------------------------------------------------------------------
Commitments, contingency and subsequent event
(Notes 1, 5, 7, 8 and 12)
Shareholders' equity (Notes 8 and 12)
Preferred stock, $.001 par value - shares authorized,
1,000,000; no shares outstanding --
Common stock, $.001 par value - shares authorized,
30,000,000; 10,507,381 shares issued and outstanding
at June 30, 1996 10,507
Additional paid-in capital 21,413,422
Accumulated deficit (2,054,302)
- --------------------------------------------------------------------------------
Total shareholders' equity 19,369,627
- --------------------------------------------------------------------------------
$ 33,583,982
================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
================================================================================
Year ended June 30, 1996 1995
- --------------------------------------------------------------------------------
Net sales (Note 10) $ 27,030,924 $ 19,691,859
Cost of sales 12,670,563 9,151,223
- --------------------------------------------------------------------------------
Gross profit 14,360,361 10,540,636
- --------------------------------------------------------------------------------
Operating expenses
Selling and shipping 6,264,025 4,373,681
General and administrative 4,347,741 2,777,666
- --------------------------------------------------------------------------------
10,611,766 7,151,347
- --------------------------------------------------------------------------------
Income from operations 3,748,595 3,389,289
Other income (expense)
Investment income 69,228 33,391
Interest expense (Note 5) (2,009,157) (1,809,901)
- --------------------------------------------------------------------------------
Income before taxes 1,808,666 1,612,779
Income tax (benefit) expense (Note 9) (715,000) 38,000
- --------------------------------------------------------------------------------
Net income $ 2,523,666 $ 1,574,779
================================================================================
Income per common share $ 0.25 $ 0.19
================================================================================
Weighted average common and common equivalent
shares outstanding 10,206,000 8,376,000
================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- ------------------ Additional Total
Number of Number of Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 (Note 8) -- -- 4,600,125 $ 4,600 $9,298,545 $(6,152,747) $3,150,398
Sale of common stock, net of stock issuance
costs of approximately $1,300,000 -- -- 3,774,765 3,775 7,431,698 -- 7,435,473
Issuance of common stock for payment of
trade payables -- -- 417,261 417 683,100 -- 683,517
Exercise of stock options and warrants -- -- 30,425 31 35,298 -- 35,329
Issuance of unit purchase options -- -- -- -- 400,000 -- 400,000
Conversion of debt and accrued interest into
common stock (Note 1) -- -- 914,396 914 2,059,086 -- 2,060,000
Net income -- -- -- -- -- 1,574,779 1,574,779
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 (Note 8) -- -- 9,736,972 9,737 19,907,727 (4,577,968) 15,339,496
Exercise of stock warrants, net of stock
issuance costs of approximately $114,000 -- -- 770,409 770 1,505,695 -- 1,506,465
Net income -- -- -- -- -- 2,523,666 2,523,666
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 (Notes 8 and 12) -- -- 10,507,381 $ 10,507 $21,413,422 $(2,054,302) $19,369,627
====================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Increase (decrease) in cash and cash equivalents
Year ended June 30, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,523,666 $ 1,574,779
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and other amortization 834,014 636,987
Amortization of deferred financing costs 264,261 218,572
Changes in operating assets and liabilities, net of assets acquired and
liabilities assumed:
Accounts receivable (2,455,310) (2,519,614)
Inventories (939,682) 637,417
Prepaid expenses and other current assets (159,031) (201,385)
Accounts payable and accrued expenses 1,393,258 54,449
Trade credits 256,796 199,857
Other assets (95,254) (163,400)
Deferred taxes (1,005,000) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 617,718 437,662
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payment for purchase of businesses, net of cash
acquired (1,601,872) (15,386,929)
Sale of short-term investments -- 501,000
Increase in officer receivables (130,621) (352,614)
Purchase of product rights -- (105,000)
Purchase of furniture, fixtures and equipments (260,834) (151,282)
Purchase of package design (109,460) (81,622)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,102,787) (15,576,447)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended June 30, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities
Proceeds from issuances of stock $ 1,506,465 $ 7,451,752
Proceeds from bank line of credit 17,496,209 11,514,524
Payment on bank line of credit (16,208,063) (12,108,642)
Proceeds from notes payable -- 11,000,000
Payments of notes payable (1,600,002) (800,000)
Acquisition finance costs -- (1,036,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,194,609 16,021,424
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (290,460) 882,639
Cash and cash equivalents, beginning of year 970,310 87,671
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 679,850 $ 970,310
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-8
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Nature of
Business
U.S. Home & Garden Inc. (the "Company" - formerly known as Natural Earth
Technologies, Inc. until July 1995), through its wholly- owned subsidiaries, is
a manufacturer and distributor of lawn and garden care products to retailers
primarily throughout North America.
Golden West Agri-Products, Inc. ("Golden West"), a wholly-owned subsidiary, is a
manufacturer and distributor of humic acid based agricultural products. Golden
West currently sells its products in the Western United States, Mexico and
Central America.
On September 1, 1994, the Company, through its wholly-owned subsidiary Easy
Gardener Acquisition Corporation ("Easy Gardener"), acquired all of the assets
of Easy Gardener, Inc., a developer, manufacturer and marketer of lawn and
garden care products. Easy Gardener primarily sells its products throughout
North America.
On August 11, 1995, Emerald Products Corporation, a wholly-owned subsidiary of
Easy Gardener, acquired the assets of Emerald Products, LLC. Emerald Products
sells its product, Emerald Edge(R), throughout North America.
On August 9, 1996, Easy Gardener acquired all of the stock outstanding of
Weatherly Consumer Products Group, Inc. (Note 12).
Principles of
Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries and the results of operations of Easy Gardener and
Emerald Products since their date of acquisition (Note 1). Significant
intercompany accounts and transactions have been eliminated.
Inventories
Inventories, which consist of raw materials, finished goods, and packaging
materials, are stated at the lower of cost or market; cost is determined by the
first-in, first-out (FIFO) cost method.
Furniture, Fixtures
and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation is computed
by the straight-line method over the estimated five to seven year useful lives
of the assets.
F-9
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Intangible Assets
Excess of cost over net assets acquired
- ---------------------------------------
The excess of cost over net assets acquired, which relates to the Company's
acquisitions of Golden West, Easy Gardener and Emerald Edge, are being amortized
over periods of twenty to thirty years using the straight-line method.
Periodically, the recoverability of goodwill is evaluated by comparing
undiscounted estimated future net income to the estimated net income projected
at the time of acquisition.
Deferred financing costs
- ------------------------
Direct costs associated with the Company's long-term financing arrangements are
being amortized over the life of the loans, a period of five to seven years
(Note 12).
Package design
- --------------
Package design costs associated with Easy Gardener products are being amortized
over a five-year period using the straight-line method.
Product rights
- --------------
Product rights are being amortized over a 15-year estimated useful life.
Revenue
Recognition
Sales are recorded as products are shipped to customers.
Net Income Per
Share
Net income per common share has been computed following Accounting Principles
Board Opinion No. 15. Net income per share has been computed by dividing the net
income by the weighted average number of common shares outstanding. Common stock
equivalents such as common stock options and warrants were not included in the
computation of average shares outstanding because their inclusion would be
antidilutive.
F-10
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Income Taxes
Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Reclassification
Certain 1995 financial statement amounts have been reclassified to conform to
the 1996 presentation.
Advertising Costs
The Company incurs advertising expense primarily relating to cooperative
advertising credits granted to customers based on qualified expenses incurred by
the customers to advertise the Company's products. Cooperative advertising
credits are usually limited to a percentage of an agreed-upon sales volume. The
Company also incurs advertising expense relating to the distribution of catalogs
and the broadcasting of radio and television commercials. Advertising costs are
expensed as incurred. Advertising expense was $1,822,783 and $1,236,459 during
the years ended June 30, 1996 and 1995.
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 and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all short-term investments purchased with an initial
maturity of three months or less to be cash equivalents.
F-11
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Business
Acquisitions
On August 11, 1995, Emerald Products Corporation, a newly-formed, wholly-owned
subsidiary of Easy Gardener, acquired from Emerald Products, LLC ("Emerald") all
of the assets, including product rights and all other intangible assets, of
Emerald used in connection with Emerald's home lawn and garden care distribution
business. The purchase price, subject to adjustment as described below, was
$835,000 in cash and a $100,000 non-interest bearing promissory note, which was
paid off during fiscal 1996 using cash from operations. The purchase price is
subject to increase based upon the Company achieving certain annual gross sales
levels of acquired product lines through September 2002. This additional
consideration is payable in cash annually and based upon 2.5% of annual Emerald
gross sales of up to $4,000,000, 1.5% of annual gross sales between $4,000,001
and $5,000,000 and 1% of annual gross sales greater than $5,000,000.
On September 1, 1994 (the "Closing Date"), Easy Gardener Acquisition Corp., a
newly formed, wholly-owned subsidiary of the Company, acquired from Easy
Gardener, Inc. (the "Seller") all of the assets of the Seller used in
connection with the Seller's home lawn and garden care products distribution
business (the "Purchased Assets") pursuant to an assets purchase agreement dated
as of June 19, 1994. The purchase price was $20,500,000 (subject to adjustment
as described below) which was paid by the delivery of (i) $8,000,000 in cash
(ii) a promissory note (the "Note") issued by Easy Gardener Acquisition Corp. in
the initial principal amount of $10,500,000, and (iii) two convertible
promissory notes (the "Convertible Notes") issued by the Company each in the
initial principal amount of $1,000,000. The Note was paid from the proceeds of
the Company's bank financing in September 1994. The Convertible Notes plus
accrued interest were each converted into 457,198 shares of the Company's common
stock and Class B warrants to acquire 457,198 shares of common stock at an
exercise price of $2.28 per share. The Convertible Notes were automatically
converted upon the February 1995 approval by the stockholders of the Company of
an Amendment to the Company's Certificate of Incorporation increasing the amount
of the Company's authorized common stock to 30,000,000 shares. The shares of
common stock issued upon exercise of the
F-12
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Convertible Notes, and the shares of common stock issuable upon exercise of the
warrants, are subject to a seven-year voting agreement with Mr. Robert Kassel,
Chairman of the Company. The purchase price was subject to increase, if and to
the extent that on the Closing Date current assets of Easy Gardener, Inc.
exceeded current liabilities by $6,600,000. This additional amount approximated
$783,000 at the date of closing and was paid in October 1994.
Approximately $2,200,000 was contingently payable to the Seller over the four
years following the Closing Date based upon the acquired business generating
certain specified levels of net income. As of June 30, 1996, $733,332 has been
added to the excess of cost over net assets acquired of Easy Gardener based upon
operating results obtained through June 30, 1996. As of June 30, 1996,
approximately $489,000 is payable for this additional purchase price. As of June
30, 1996, the seller is still eligible to receive approximately $1.47 million in
additional future contingent consideration.
The following unaudited pro forma summary combines the consolidated results of
operations of the Company and Easy Gardener as if the acquisition had occurred
at the beginning of fiscal 1994, after giving effect to certain adjustments,
including the amortization of excess of cost over net assets acquired, and
interest expense on the notes payable. This pro forma summary does not
necessarily reflect the results of operations as they would have been if the
Company and Easy Gardener had constituted a single entity during such periods
and is not necessarily indicative of results which may be obtained in the
future. The pro forma effect of the Emerald Products acquisition has not been
reflected since its prior revenue was not material to the Company's operations.
F-13
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Year ended June 30, 1995
================================================================================
Net sales $ 21,348,000
================================================================================
Income from operations $ 3,132,000
================================================================================
Net income $ 1,381,000
================================================================================
Net income per share $ .16
================================================================================
2. Trade Credits
In April 1996, the Company entered into an agreement to exchange unsold assets
held for sale for credit against the future purchase of products and services.
This transaction has been reported at the estimated fair market value of the
assets exchanged by the Company. No gain or loss was recognized on such
transaction as the Company had previously written down its assets held for sale
to their estimated fair market value. The agreement requires the Company to pay
a portion of the purchase price of the product or services received. Depending
on the nature of the products or services purchased, the Company will receive a
credit against the future price ranging from 10% to 45% of the cash purchase
price. The Company will also receive a percentage of the cash proceeds from the
ultimate sale of the assets. As of June 30, 1996, included in accounts
receivable is approximately $105,000 of cash expected to be received on the sale
of a portion of the assets by the third party. The agreement provides that the
Company will receive maximum total credits and cash totaling $1.6 million. The
agreement expires in April 1999 and requires the Company to use all credits by
this date. The Company expects to use the credits primarily by purchasing
operating assets and advertising time. The Company expects to use all available
credits by the expiration date and will continually evaluate this asset based
upon credits utilized and future operating goals.
F-14
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Inventories Inventories at June 30, 1996 consist of:
- --------------------------------------------------------------------------------
Raw materials $ 81,932
Finished goods 3,309,621
- --------------------------------------------------------------------------------
$3,391,553
================================================================================
4. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment at June 30, 1996 consist of:
-----------------------------------------------------------------------------
Leasehold improvements $ 73,465
Furniture, fixtures and
equipment 1,575,270
- --------------------------------------------------------------------------------
1,648,735
Less accumulated depreciation 433,075
================================================================================
$1,215,660
- --------------------------------------------------------------------------------
5. Notes Payable
and Line of
Credit
Notes payable consist of the following at June 30, 1996:
- --------------------------------------------------------------------------------
$8,000,000 note payable, interest at 12.25%,
monthly principal payments of $133,333, plus
interest, commencing January 31, 1995 until
January 2000, collateralized by the assets of
Easy Gardener and a guaranty of the Company. $ 5,599,998
$3,000,000 note payable, interest at 12%, equal
monthly principal payments of $125,000, plus
interest, commencing the earlier of the repay-
ment of the $8,000,000 note payable or Janu-
ary 31, 2000, collateralized by assets of Easy
Gardener and a guaranty of the Company. 3,000,000
- --------------------------------------------------------------------------------
8,599,998
Less current portion 2,361,798
- --------------------------------------------------------------------------------
$ 6,238,200
================================================================================
F-15
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company's financing arrangements include a $6,000,000 revolving credit
facility expiring December 1999, bearing interest at prime (8.25% at June 30,
1996) plus 2%, payable in monthly installments commencing January 1, 1995 and
collateralized by assets of Easy Gardener and a guaranty of the Company. As of
June 30, 1996, there was $1,288,146 outstanding on the credit line (Note 12).
The $3 million note payable also requires the Company to pay additional interest
(defined as a success fee) when the loan is paid off. The success fee ranges
from $300,000 in the first year to $4,140,000 in the seventh year. As of June
30, 1996, the accrued success fee was approximately $481,000 (Note 12).
The $8 million note payable is subject to certain mandatory prepayments of
"excess cash flow" of Easy Gardener and certain net proceeds of asset sales,
condemnation awards and insurance recoveries. As of June 30, 1996, $761,798 is
the payment for "excess cash flow" which was made subsequent to year end. This
amount has been included in the current portion of notes payable. Also, certain
optional prepayments of advances under the revolving facility and the $8 million
note payable require the payment of a premium (Note 12).
Future minimum principal payments are as follows:
Year ending June 30, Amount
- --------------------------------------------------------------------------------
1997 $ 2,361,798
1998 1,600,000
1999 1,600,000
2000 1,538,200
2001 1,500,000
- --------------------------------------------------------------------------------
$ 8,599,998
================================================================================
F-16
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In connection with the acquisition of Weatherly Products Inc. on August 9, 1996,
both of the above term notes payable were refinanced and a new line of credit
agreement was executed (Note 12).
6. Officer
Receivables
Officer receivables represents advances which bear interest at 7%. The advances
have no specific maturity date. Accordingly, these advances have been classified
as a long-term asset.
7. Commitments
Employment agreements
---------------------
The Company entered into new employment agreements with two of its officers in
April 1996. The agreements are for one-year periods but are automatically
renewed unless specifically terminated by the Company or the employee. If the
employment agreements are terminated by the Company, the officers will be
entitled to an additional ten and five years of annual compensation. Annual
compensation under the employment agreements are $350,000 and $162,500. The
employment agreements also provide for certain lump sum payments in the event of
a change in control equal to approximately $5 million. Agreements with two
officers of Easy Gardener provide for varying base aggregate annual salaries of
approximately $350,000 in 1997 and $400,000 in 1998. In addition, the agreements
provide for incentive and additional compensation under certain circumstances.
Operating leases
- ----------------
The Company leases office space under three operating leases which expire in
various years through 2000. The Company also leases certain office equipment and
automobiles under operating leases expiring in 1998 through 2001. The future
minimum lease payments under these non-cancelable operating leases are as
follows:
F-17
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Year ending June 30, Amount
- --------------------------------------------------------------------------------
1997 $ 288,000
1998 276,000
1999 248,000
2000 122,000
2001 4,000
- --------------------------------------------------------------------------------
$ 938,000
================================================================================
Rent expense was approximately $336,000 and $303,000 for the years ended June
30, 1996 and 1995.
Pension plan
- ------------
Easy Gardener has established an employee defined contribution pension plan (the
Plan). Employees of the Company, Easy Gardener and Golden West are eligible to
participate. The Company is required to match the first 3% of employee
contributions up to 5% of the employees wage base. The plan also allows
discretionary contributions by the Company. The Company's contribution vests
over a seven-year period. Pension expense associated with the Plan for 1996 and
1995 was approximately $180,000 and $64,000.
Royalty agreements
- ------------------
The Company has entered into royalty agreements which provide for payments based
upon a percentage of net sales of certain products. These agreements expire in
various years from 1998 to 2005. Royalty expense during the years ended June 30,
1996 and 1995 was $103,687 and $64,300.
F-18
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
8. Shareholders'
Equity
(a) Convertible Preferred stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's common stock.
(b) Common stock
The Company raised a portion of the Easy Gardener, Inc. purchase price through
the August 1994 private placement of $8,025,000 of Units (for which it received
net proceeds of approximately $6,900,000), each $100,000 Unit consisting of
43,860 shares of common stock and a class B warrant to purchase 43,860 shares of
common stock for $2.28 per share.
In June 1994, the Company sold approximately 200,000 shares to various foreign
investors. Proceeds to the Company, after deducting commissions and expenses
approximated $435,000. In a related transaction during July 1994, the Company
sold an additional 240,000 shares to foreign investors resulting in net proceeds
to the Company of approximately $518,000. Proceeds were used for the Easy
Gardener acquisition.
(c) Stock option plans
The Company adopted the 1991 Stock Option Plan (the "1991 Plan") pursuant to
which 700,000 shares of common stock have been reserved for issuance upon the
exercise of options designated as either (i) options intended to constitute
incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) non-qualified options. ISOs may be granted under
the Plan to employees and officers of the Company. Nonqualified options may be
F-19
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
granted to consultants, directors (whether or not they are employees), employees
or officers of the Company.
During fiscal 1995, the Board of Directors of the Company adopted, subject to
stockholder approval, two additional stock option plans. The 1995 Stock Option
Plan (the "1995 Plan") allows the granting of either ISOs or non-qualified
options. The maximum aggregate number of shares to be granted under this plan is
1,500,000. The Non-Employee Director Stock Option Plan (the "Non-Employee
Director Plan") was established to attract, retain and compensate for their
services as directors, highly qualified individuals who are not employees of the
Company. The maximum aggregate number of shares issued under this plan is
100,000. No options have been granted under the Non-Employee Director Plan at
June 30, 1995. During 1996, 10,000 options were granted. The 1995 Plan is
administered by a committee of the Board of Directors and the Non-Employee
Director Plan is a formula plan.
The 1991 Plan is administered by the Board of Directors of the Company (the
"Board"). The Board, or committee, as the case may be, within the limitations of
the 1991 and 1995 Plans, as the case may be, determines the persons to whom
options will be granted, the number of shares to be covered by each option,
whether the options granted are intended to be ISOs, the duration and rate of
exercise of each option, the option purchase price per share and the manner of
exercise, the time, manner and form of payment upon exercise of an option, and
whether restrictions such as repurchase rights in the Company are to be imposed
on shares subject to options.
ISOs granted under the plans may not be granted at a price less than the fair
market value of the common stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). The aggregate fair market value of shares for which ISOs granted to
any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any related
corporation) may
F-20
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
not exceed $100,000. Nonqualified options granted under the 1991 plan may not be
granted at a price less than the fair market value of the common stock on the
date of grant (not less than par value in the case of the 1995 Plan). Options
granted under the plans will expire not more than ten years from the date of
grant (five years in the case of ISOs granted to persons holding 10% or more of
the voting stock of the Company).
All options granted under the 1991 Plan, Non Employee Director Plan and ISOs
under the 1995 Plan are not transferable during an optionee's lifetime but are
transferable at death by will or by the laws of descent and distribution.
The Board of Directors also has authorization to issue stock options ("Non-Plan
Options") to employees or consultants for services performed.
The following is a summary of activity relating to stock options.
Option Available
Price Per Out- Exer- for
Share standing cisable Grant
- --------------------------------------------------------------------------------
1991 Plan
June 30, 1995 688,100 588,100 18,900
Became exercisable - 100,000 -
- --------------------------------------------------------------------------------
June 30, 1996 1.69(1) 688,100 688,100 18,900
- --------------------------------------------------------------------------------
1995 Plan
June 30, 1995 $2.28 400,000 - 1,100,000
Granted during 1996 2.25 310,000(3) 10,000 (310,000)
Became exercisable - 400,000 -
- --------------------------------------------------------------------------------
June 30, 1996 $2.25-2.28 710,000 410,000 790,000
- --------------------------------------------------------------------------------
F-21
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Option Available
Price Per Out- Exer- for
Share standing cisable Grant
- --------------------------------------------------------------------------------
Non-Plan Options
- ----------------
June 30, 1995 $1.69-2.28 544,766(2) 544,766 -
Granted during 1996 2.25 315,000(3) - -
- --------------------------------------------------------------------------------
June 30, 1996 $1.69-2.28(1) 859,766 544,766 -
- --------------------------------------------------------------------------------
(1) During fiscal 1995, the Board of Directors authorized a reduction in the
exercise price. The ending option price per share reflects the reduced
exercise price. During fiscal 1995, approximately 1.1 million options to
purchase common stock were repriced to $1.69.
(2) Options outstanding reflect the effect of certain antidilution provisions.
(3) Options vest over four years with the exception of 10,000 immediately
vesting 1995 Plan options.
(d) Unit purchase options
In October 1994, the Company granted six unit purchase options (UPOs), each
consisting of 43,860 shares of the Company's common stock and Class B Warrants
to purchase 43,860 shares of common stock at an exercise price of $2.28. These
UPOs, which expire on August 31, 1999, have a nominal exercise price. Three of
the UPOs were granted to an officer of the Company for his personal guarantees
in connection with the Easy Gardener acquisition. Three were granted to an
outside consultant for its services in connection with financing obtained for
the Easy Gardener acquisition. The six UPOs issued with the nominal exercise
price were valued at $400,000 and included in deferred
F-22
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
financing costs. Concurrently, the Company also granted six UPOs, consisting of
the same components, each with a current exercise price of approximately
$75,000, three of which were granted to an officer of the Company. All these
transactions were done in lieu of cash compensation in consideration for certain
financial consulting and other services and for the personal guarantee and other
collateral provided in connection with the Company's acquisition of Easy
Gardener, Inc., without which the Company's transaction with Easy Gardener, Inc.
would not have occurred.
In connection with the Company's August 1994 Private Placement, the placement
agent and its designees were granted approximately 28 UPOs exercisable at
$100,000 each. Each UPO consists of 43,860 shares of common stock and warrants
to purchase 43,860 shares of common stock at $2.28 per share. These warrants
expire in August 1999, if the underlying UPO is not exercised.
If exercised, the warrants expire in May 2000.
The total shares of common stock issuable upon exercise of the UPOs, including
the underlying warrants, would be approximately 3,500,000 shares.
(e) Warrants
In connection with certain business transactions and stock offerings, the
Company has granted various warrants to purchase common stock. The following
schedule will summarize the activity.
F-23
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Warrant Expi-
Price Per Out- Exer- ration
Share standing(1) cisable Date
- --------------------------------------------------------------------------------
July 1, 1994 $1.50-6.00 1,729,341 1,729,341 1996-1998
Warrants issued in
connection with
private placement 2.28 3,519,765 3,519,765 May 2000
Warrants issued
with convertible
debenture 2.28 914,396 914,396 Feb. 2000
Warrants issued 2.28-3.38 100,000 100,000 Aug. 1999
Warrants exercised 1.50-1.89 (30,425) (30,425)
- --------------------------------------------------------------------------------
June 30, 1995 1.50-6.00 6,233,077 6,233,077 1996-2000
Increase for
antidilution 2.28 152,580 152,580
Warrants exercised 1.89-2.28 (770,409) (770,409)
- --------------------------------------------------------------------------------
June 30, 1996 $1.50-6.00 5,615,248 5,615,248 1996-2000
- --------------------------------------------------------------------------------
(1) The warrants contain anti-dilution provisions which could effect the number
of shares of common stock issuable upon exercise of the warrants as well as
the per share warrant prices. Additionally, these warrants contain certain
redemption provisions.
(f) Common stock reserved
At June 30, 1996, approximately 11,800,000 shares of common stock have been
reserved for issuance upon the exercise of warrants, options and UPOs.
F-24
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is
established for deferred income tax assets when realization is not deemed more
likely than not. Deferred tax assets (liabilities) at June 30, 1996 consist
principally of the following:
- --------------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforwards $ 1,384,000
Accounts receivable allowance and other 97,000
- --------------------------------------------------------------------------------
Total deferred tax asset 1,481,000
Less valuation allowance (148,000)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 1,333,000
================================================================================
- --------------------------------------------------------------------------------
Deferred tax liability
Depreciation and amortization in excess of
book amount $ (328,000)
================================================================================
At June 30, 1996, the Company had approximately $3,498,000 of net operating loss
(NOL) carryforwards available to reduce future Federal taxable income. These
losses are available through 2009. California allows an NOL carryforward of 50%
of a company's California taxable loss. The carryforward for California
purposes, after the 50% reduction, was approximately $2,097,000 at June 30, 1996
and expires through 2000. Use of the Company's NOLs could be limited in the
future as a result of issuance or exercise of stock options and warrants or sale
or issuance of stock. The Company files its tax returns on a calendar year
basis.
F-25
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
At June 30, 1996, the Company established a $148,000 valuation allowance for the
benefits pertaining to California NOLs which are not estimated to be realizable
prior to their expiration.
The income tax (benefit) provision consists of:
Years ended June 30, 1996 1995
- --------------------------------------------------------------------------------
Current
Federal $ -- $ --
State 290,000 38,000
- --------------------------------------------------------------------------------
290,000 38,000
Deferred
Federal (1,013,000) --
State 8,000 --
- --------------------------------------------------------------------------------
(1,005,000) --
- --------------------------------------------------------------------------------
$ (715,000) $ 38,000
================================================================================
The effective tax rate for the year ended June 30, 1996 differs from the federal
statutory rate principally due to the utilization of prior years' operating loss
carryovers, and elimination of the valuation allowance for deferred tax assets.
For the year ended June 30, 1995, income tax expense relates exclusively to
state franchise taxes. 1995 Federal income tax expense has been eliminated
primarily because of a $2.0 million restructuring expense recognized for tax
purposes (previously recorded for book purposes in 1994).
F-26
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
10. Financial Instruments
and Concen-
tration of
Credit Risk
The Company's financial instruments consist of cash, accounts receivable and
debt. The carrying value of cash and accounts receivable approximate fair value
based upon the liquidity and short-term nature of the assets. The carrying value
of short-term and long-term debt approximates the fair value based upon
short-term borrowings at market rate interest and consideration that all debt
was repaid subsequent to year end (Note 12).
Cash and cash equivalents are held principally at three high quality financial
institutions. At times such balances may be in excess of the FDIC insurance
limit.
Trade accounts receivable are due primarily from numerous customers located in
many geographic regions throughout the United States. The Company performs
ongoing credit evaluations of its customers' financial conditions and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. The Company does
not require collateral from its customers.
During the year ended June 30, 1996, sales to one Easy Gardener customer
accounted for approximately 28% of consolidated net sales and 30% of Easy
Gardener net sales. Included in accounts receivable at June 30, 1996 is
$1,440,379 due from this customer. Sales to three customers of Golden West
accounted for approximately 56% of Golden West net sales and 2% of consolidated
net sales.
During the year ended June 30, 1995, sales to two Easy Gardener customers
accounted for approximately 24% and 9% of consolidated net sales and 26% and 10%
of Easy Gardener net sales. Sales to three customers of Golden West accounted
for approximately 50% of Golden West net sales and 3% of consolidated net sales.
Substantially all of Easy Gardener's raw material purchases for Weedblock(R)
inventory, representing approximately 50% and 66% of the Company's consolidated
raw material purchases during the years
F-27
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
ended June 30, 1996 and 1995, are from one vendor. Management believes that
other suppliers could provide a similar product on comparable terms. A change in
suppliers, however, could cause delays and a possible loss of sales, which would
affect operating results adversely. Included in accounts payable at June 30,
1996 is $139,296 due to this vendor.
11. Supplemental
Cash Flow
Information
Year ended June 30, 1996 1995
- --------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 1,295,800 $ 1,528,300
Taxes $ 96,069 $ 9,594
================================================================================
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company purchased all of the assets of Easy Gardener, Inc. for $21,283,000
in September 1994.
- --------------------------------------------------------------------------------
Fair value of assets acquired $ 28,525,772
Cash paid for assets acquired (14,423,707)
Promissory notes (12,783,392)
- --------------------------------------------------------------------------------
Liabilities assumed $ 1,318,673
================================================================================
During 1995, the Company entered into agreements to issue approximately 417,000
shares of common stock, valued at approximately $683,000 as payment of certain
accounts payable.
During 1995, $2,000,000 of convertible debentures and related accrued interest
was converted into 914,396 shares of common stock and 914,396 Class B warrants.
F-28
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
During 1995, deferred financing costs of approximately $400,000 was paid for by
the issuance of 6 UPO's with a nominal exercise price.
During 1996, the Company exchanged assets held for sale with a book value of
approximately $1.4 million for future trade credits.
12. Subsequent
Events
On August 9, 1996, Easy Gardener acquired all of the outstanding stock of
Weatherly Consumer Products (Weatherly), a lawn and garden care company, for
1,000,000 shares of the Company's common stock (valued at $3 per share) and
$22,937,321, less an amount required to discharge certain outstanding
indebtedness of the acquired company, and adjusted dollar for dollar based upon
the ultimate value of the acquired company's net current assets. The Company
intends to operate the acquired company's product lines as a subsidiary of Easy
Gardener.
In connection with the above acquisition, the Company's outstanding notes
payable were refinanced and a new line of credit arrangement was established.
Under the terms of the new loan agreement, two promissory notes were issued for
$23,000,000 and $2,250,000. The $23,000,000 note requires quarterly principal
payments ranging from $570,000 to $1,350,000 beginning September 30, 1996
through June 30, 2002 and bears interest at the lower of prime or LIBOR rates,
as defined. The $2,250,000 note requires quarterly principal payments totaling
$140,625 beginning September 30, 1998 through December 30, 1999 and bears
interest at prime plus 6%. The line of credit agreement calls for maximum
borrowings totaling $13,000,000 with interest at the lower of prime or LIBOR
rates. As a result of this refinancing, the entire balance of deferred finance
costs, net of accumulated amortization plus certain prepayment penalties, will
be written off as an extraordinary item during the first quarter of fiscal 1997.
In conjunction with the debt refinancing, a warrant to purchase 400,000 shares
of stock at $2.50 per share was issued to the financial institution.
F-29
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Subsequent to June 30, 1996, warrants and a unit purchase option to purchase
common stock were exercised resulting in net proceeds to the Company of
approximately $5,300,000. These proceeds were used to fund a portion of the
Weatherly acquisition.
Subsequent to year end, the Company granted stock options (with and exercise
price equal to the current market price) to purchase 1,300,000 shares of common
stock to various employees and consultants as bonus compensation for the fiscal
1996 operating results and Weatherly acquisition. In addition, the Company also
granted an option to purchase 200,000 shares of common stock to an investment
advisor for services relating to the Weatherly acquisition. The option has a
nominal exercise price and will be recorded as a cost of the acquisition
(approximately $500,000), thus increasing the excess of cost over net assets
acquired of Weatherly.
F-30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned duly
authorized.
U.S. Home & Garden Inc.
-----------------------
(Registrant)
By:/s/ Robert Kassel
-----------------------
Robert Kassel, President
Dated: October 11, 1996
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Robert Kassel Chairman of the Board October 11, 1996
- --------------------- of Directors, President
Robert Kassel and Treasurer (Chief
Executive, Accounting and
Financial Officer)
/s/Maureen Kassel Vice-President, October 11, 1996
- --------------------- Secretary and Director
Maureen Kassel
/s/Richard Raleigh Chief Operating Officer October 11, 1996
- --------------------- and Director
Richard Raleigh
- --------------------- Director October , 1996
Jon Schulberg
/s/Fred Heiden Director October 11, 1996
- ---------------------
Fred Heiden
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
10.1 Employment Agreement of Robert Kassel
10.2 Employment Agreement of Richard Raleigh
10.16 Agreement dated as of April 16, 1996
between the Company and The Intrac Group.
10.17 Credit Agreement among Easy Gardener
Acquisition Corp., the Company, The
Provident Bank as Administrative and Collateral
Agent and The Provident Bank and
certain other lending institutions.
21 Subsidiaries of the Company
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule
EMPLOYMENT AGREEMENT
AGREEMENT dated as of April 1, 1996 between U.S. Home & Garden, Inc. a
Delaware corporation (the "Employer" or the "Company"), and Robert L. Kassel
(the "Executive").
W I T N E S S E T H :
WHEREAS, the Employer desires to employ the Executive as President and
Chief Executive Officer (CEO) of the Company, and to be assured of his services
as such on the terms and conditions hereinafter set forth; and
WHEREAS, the Executive is willing to accept such employment on such terms
and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and intending to be legally bound hereby, the Employer
and the Executive hereby agree as follows:
1. Term. Employer hereby agrees to employ Executive, and Executive hereby
agrees to serve Employer as herein provided, commencing effective as of the date
of this Agreement (the "Effective Date") for a term of one (1) year thereafter
(such period being herein referred to as the "Initial Term," and any year
commencing on the Effective Date or any anniversary of the Effective Date being
hereinafter referred to as an "Employment Year"), unless further extended or
sooner terminated as hereinafter provided. After the Initial Term and on the
last day of any Employment Year thereafter, this Agreement shall be
automatically renewed for successive one year periods (each such period being
referred to as a "Renewal Term"), unless, more than ninety (90) days prior to
the expiration of the Initial Term or any Renewal Term, either the Executive or
the Company gives written notice that employment will not be renewed ("Notice of
Non-Renewal"), whereupon (i) if the Executive gives the Notice of Non-Renewal,
the term of the Executive's employment shall terminate upon the expiration of
the Initial Term or the then current Renewal Term, as the case may be, or (ii)
if the Company gives the Notice of Non-Renewal, the term of the Executive's
employment shall be for a final ten (10) year period (the "Final Renewal Term"),
commencing effective at the date of the Notice of Non-Renewal, unless sooner
terminated pursuant to Section 6 hereof.
2. Executive Duties.
(a) During the term of this Agreement, the Executive shall have the duties
and responsibilities of President and Chief Executive Officer of the Company,
reporting to the
<PAGE>
Chairman and the Board of Directors of the Employer (the "Board"). It is
understood that such duties and responsibilities shall be reasonably related to
the Executive's position.
(b) The Executive shall devote substantially all of his business time,
attention, knowledge and skills faithfully, diligently and to the best of his
ability, in furtherance of the business and activities of the Company. The
principal place of performance by the Executive of his duties hereunder shall be
the Company's principal executive offices or such other place as the Board shall
determine, although the Executive may be required to travel outside of the area
where the Company's principal executive offices are located in connection with
the business of the Company.
3. Compensation.
(a) During the term of this Agreement, the Employer shall pay the Executive
a salary (the "Salary") at a rate of $350,000 per annum in respect of each
Employment Year, payable in equal installments bi-weekly, or at such other times
as may mutually be agreed upon between the Employer and the Executive. Such
Salary may be increased from time to time at the discretion of the Board.
(b) In addition to the foregoing, the Executive shall be entitled to such
other cash bonuses as may from time to time be awarded to him by the Board
during or in respect of his employment hereunder.
4. Benefits.
(a) During the term of this Agreement, the Executive shall have the right
to receive or participate in all benefits and plans which the Company may from
time to time institute during such period for its employees and for which the
Executive is eligible. Nothing paid to the Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary or any other obligation payable to the Executive
pursuant to this Agreement.
(b) During the term of this Agreement, the Executive shall be granted the
same number of paid holidays, personal days off, vacation days and sick leave
days as are determined by the Company from time to time. Such vacation may be
taken in the Executive's discretion with the prior approval of the Employer, and
at such time or times as are not inconsistent with the reasonable business needs
of the Company.
5. Travel Expenses. All travel and other expenses incident to the rendering
of services reasonably incurred on behalf of the Company by the Executive during
the term of this Agreement shall be paid by the Employer. If any such expenses
-2-
<PAGE>
are paid in the first instance by the Executive, the Employer shall reimburse
him therefor on presentation of appropriate receipts for any such expenses.
6. Termination. Executive's employment under this Agreement may be
terminated, effective as of the Date of Termination pursuant to Section 8 of
this Agreement, without any breach of this Agreement only on the following
circumstances:
6.1. Death. The Executive's employment under this Agreement shall
terminate upon his death.
6.2. Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his
duties under this Agreement for 150 calendar days during any calendar year,
the Employer may terminate the Executive's employment under this Agreement
by giving the Notice of Termination (as defined in Section 7 below) anytime
after the 150th calendar day.
6.3. Cause. The Employer may terminate the Executive's employment
under this Agreement for Cause. For purposes of this Agreement, the
Employer shall have "Cause" to terminate the Executive's employment under
this Agreement upon (a) the willful and continued failure by the Executive
to substantially perform his duties under this Agreement (other than any
such failure resulting from the Executive's incapacity due to physical or
mental illness) after demand for substantial performance is delivered by
the Employer, in writing, specifically identifying the manner in which the
Employer believes the Executive has not substantially performed his duties
and the Executive fails to perform as required within 15 business days
after such demand is made, (b) the willful engaging by the Executive in
criminal misconduct (including embezzlement and criminal fraud) which is
materially injurious to the Company, monetarily or otherwise or (c) the
conviction of the Executive of a felony. For purposes of this paragraph, no
act, or failure to act, on the Executive's part shall be considered
"willful" unless done, or omitted to be done, by him not in good faith and
without reasonable belief that his action or omission was in the best
interest of the Employer.
Notwithstanding anything contained in this Agreement to the contrary,
the Executive shall not be deemed to have been terminated for Cause unless
and until there shall have been delivered to the Executive, together with
the Notice of Termination (as defined in Section 7 below), a copy of a
resolution, duly adopted by the affirmative vote of not less than sixty
percent of the entire membership of the Board (other than the Executive) at
a meeting of the Board called and held for such purpose (after reasonable
written notice to the Executive and an opportunity for him, together with
his counsel, to be heard before the Board), finding that in the good faith
opinion of the
-3-
<PAGE>
Board, the Executive was guilty of conduct set forth above in clause (a),
(b) or (c), and specifying the particulars thereof in detail.
6.4. Termination by the Executive for Good Reason, Upon a Change of
Control or Because of Ill Health. The Executive may terminate his
employment under this Agreement (a) for Good Reason (as hereinafter
defined), (b) at any time within six months after a Change of Control, or
(c) if his health should become impaired to any extent that makes the
continued performance of his duties under this Agreement hazardous to his
physical or mental health or his life, provided that, in the latter case,
the Executive shall have furnished the Employer with a written statement
from a qualified doctor to such effect and provided, further, that at the
Employer's request and expense the Executive shall submit to an examination
by a doctor selected by the Employer and such doctor shall have concurred
in the conclusion of the Executive's doctor.
6.4.1. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean (a) any assignment to the Executive of any duties or
reporting obligations other than those contemplated by, or any
limitation of the powers of the Executive in any respect not
contemplated by, this Agreement, (b) failure by the Employer to comply
with its material obligations and agreements contained in this
Agreement, or (c) failure of the Employer to obtain the assumption of
the agreement to perform this Agreement by any successor as
contemplated in Section 9(f) of this Agreement. With respect to the
matters set forth in clauses (a), (b) and (c) of this paragraph, the
Executive must give the Employer thirty (30) days prior written notice
of his intent to terminate this Agreement as a result of any breach or
alleged breach of the applicable provision and the Employer shall have
the right to cure any such breach or alleged breach within such thirty
(30) day period.
6.4.2. Change of Control. For purposes of this Agreement, a
"Change of Control" shall be deemed to occur, unless previously
consented to in writing by the Executive, upon (a) the actual
acquisition or the execution of an agreement to acquire 20% or more of
the voting securities of the Employer by any person or entity not
affiliated with the Executive (other than pursuant to a bona fide
underwriting agreement relating to a public distribution of securities
of the Employer), (b) the commencement of a tender or exchange offer
for more than 20% of the voting securities of the Employer by any
person or entity not affiliated with the Executive, (c) the
commencement of a proxy contest against the management for the
election of a majority of the Board of the Employer if the group
conducting the proxy contest owns, has or gains the power to vote at
least 20% of the voting securities of the Employer, (d) a vote by the
Board to merge, consolidate, sell all or substantially all of the
assets of the Employer to any person or entity not affiliated with the
-4-
<PAGE>
Executive, or (e) the election of directors constituting a majority of
the Board of Directors who have not been nominated or approved by the
Executive.
7. Notice of Termination.
Any termination of the Executive's employment by the Employer or by the
Executive (other than termination by reason of the Executive's death) shall be
communicated by written Notice of Termination to the other party of this
Agreement. For purposes of this Agreement, a "Notice of Termination" shall mean
a notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
8. Date of Termination.
The "Date of Termination" shall mean (a) if the Executive's employment is
terminated by his death, the date of his death, (b) if the Executive's
employment is terminated pursuant to Section 6.2 above, the date on which the
Notice of Termination is given, (c) if the Executive's employment is terminated
pursuant to Section 6.3 above, the date specified on the Notice of Termination
after the expiration of any cure periods, (d) if the Executive's employment is
terminated pursuant to a Notice of Non-Renewal given by the Employer, the tenth
(10th) anniversary of the date of such notice unless sooner terminated pursuant
to any of Sections 6.1, 6.2 or 6.3, and (e) if the Executive's employment is
terminated for any other reason, the date on which a Notice of Non-Renewal or a
Notice of Termination is given after the expiration of any relevant cure
periods.
9. Compensation Upon Termination or During Disability.
(a) If the Executive's employment shall be terminated by reason of his
death, the Employer shall pay to such person as he shall designate in a notice
filed with the Employer, or if no such person shall be designated, to his estate
as a lump sum benefit, his full Salary to the date of his death in addition to
any payments the Executive's spouse, beneficiaries or estate may be entitled to
receive pursuant to any pension or employee benefit plan or life insurance
policy or similar plan or policy then maintained by the Employer, and such
payments shall, assuming the Employer is in compliance with the provisions of
this Agreement, fully discharge the Employer's obligations with respect to
Section 3 of this Agreement, but all other obligations of the Employer under
this Agreement, including the obligations to indemnify, defend and hold harmless
the Executive, shall remain in effect.
-5-
<PAGE>
(b) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness, the
Executive shall continue to receive his Salary and other compensation until the
Executive's employment is terminated pursuant to Section 6.2 of this Agreement,
or until the Executive terminates his employment pursuant to Section 6.4(a) of
this Agreement, whichever first occurs. After termination, the Executive shall
be paid, in equal monthly installments, 100% of his Salary and other
compensation, at the rate in effect at the time Notice of Termination is given,
for one year, and thereafter for one additional year at an annual rate equal to
50% of the Salary and other compensation which would have been in effect under
this Agreement, plus, in each case, any disability payments otherwise payable by
or pursuant to plans provided by the Employer; provided, however, that any
payments hereunder becoming due and owing during the Final Renewal Term shall be
limited to that portion of the installments (whether based upon 100% or 50% of
the compensation rate) payable or becoming payable to the Executive on or before
the expiration of the Final Renewal Term. To the extent physically and mentally
capable of so doing without potentially impairing or damaging his health, the
Executive shall provide consulting services to the Employer during the period
that he is receiving payments pursuant to this Section 9(b).
(c) If the Executive's employment shall be terminated for Cause, the
Employer shall pay the Executive his full Salary and other compensation through
the Date of Termination, at the rate in effect at the time Notice of Termination
is given, and the Employer shall, assuming the Employer is in compliance with
the provisions of this Agreement, have no further obligations with respect to
Section 3 of this Agreement, but all other obligations of the Employer under
this Agreement, including the obligations to indemnify, defend and hold harmless
the Executive, shall remain in effect.
(d) If (A) in breach of this Agreement, the Employer shall terminate the
Executive's employment other than pursuant to Sections 6.2 or 6.3 hereof (it
being understood that a purported termination pursuant to Section 6.2 or 6.3
hereof which is disputed and finally determined not to have been proper shall be
a termination by the Employer in breach of this Agreement), including as a
result of a Change of Control, and/or (B) the Executive shall terminate his
employment for Good Reason or at any time within six months after a Change of
Control, then the Employer shall pay to the Executive:
(i) his full Salary and other compensation through the Date of
Termination at the rate in effect at the time Notice of Termination is
given;
(ii) for periods subsequent to the Date of Termination (in lieu of any
further payments pursuant to Section
-6-
<PAGE>
3 of this Agreement), Severance Pay (as hereinafter defined), payable on
the first day following the Date of Termination, as follows:
(1) if prior to and not as a result of a Change of Control, the
Executive's employment is terminated either by the Executive for Good
Reason or by the Employer other than pursuant to Sections 6.2 or 6.3
hereof, a lump sum amount equal to the higher of (a) $350,000 or (b)
the total compensation earned by the Executive from the Employer
during the one-year period prior to such Date of Termination, or
(2) if after or as a result of a Change of Control, the
Executive's employment is terminated by the Executive within six
months after a Change in Control, or by the Employer other than
pursuant to Sections 6.2 or 6.3 hereof, a lump sum amount equal to the
higher of (i) $3,500,000 or (ii) the product obtained by multiplying
10 with the average of the total compensation earned by the Executive
during the one-year period prior to such Date of Termination (in case
of either (ii)(1) or (ii)(2), "Severance Pay"); and
(iii) all other damages to which the Executive may be entitled as
result of the termination of his employment under this Agreement, including
all legal fees and expenses incurred by him in contesting or disputing any
such termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement.
(e) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 9 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 9 be reduced by
any compensation earned by the Executive as the result of employment by another
employer or business or by profits earned by the Executive from any other source
at any time before and after the Date of Termination. The amounts payable to
Employer under this Agreement shall not be treated as damages but as severance
compensation to which Employer is entitled by reason of his employment in the
circumstances contemplated by this Agreement.
(f) The Employer will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Employer, by agreement, in form and reasonably
substance satisfactory to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Employer would be required to perform it if no such succession had taken place.
Failure of the Employer to obtain such Agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Employer in the same amount and on the same
terms as he would be entitled to hereunder
-7-
<PAGE>
if he terminated his employment within six months after a Change in Control,
except for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Employer" shall mean the Employer and any successor to its
business and/or assets which executes the Agreement or which otherwise becomes
bound by the terms and conditions of this Agreement by operation of law.
10. Confidentiality; Noncompetition.
(a) The Employer and the Executive acknowledge that the services to be
performed by the Executive under this Agreement are unique and extraordinary
and, as a result of such employment, the Executive will be in possession of
confidential information relating to the business practices of the Company. The
term "confidential information" shall mean any and all information (verbal and
written) relating to the Company or any of its affiliates, or any of their
respective activities, other than such information which can be shown by the
Executive to be in the public domain (such information not being deemed to be in
the public domain merely because it is embraced by more general information
which is in the public domain) other than as the result of breach of the
provisions of this Section 10(a), including, but not limited to, information
relating to: trade secrets, personnel lists, financial information, research
projects, services used, pricing, customers, customer lists and prospects,
product sourcing, marketing and selling and servicing. The Executive agrees that
he will not, during or for a period of two years after the termination of
employment, except as may be required in the course of the performance of his
duties hereunder, directly or indirectly, use, communicate, disclose or
disseminate to any person, firm or corporation any confidential information
regarding the clients, customers or business practices of the Company acquired
by the Executive, without the prior written consent of Employer; provided,
however, that the Executive understands that Executive will be prohibited from
misappropriating any trade secret (as defined for purposes of Indiana law) at
any time during or after the termination of employment.
(b) The Executive hereby agrees that he shall not, during the period of his
employment and for a period of two (2) years following such employment, directly
or indirectly, within any county (or adjacent county) in any State within the
United States or territory outside the United States in which the Company is
engaged in business during the period of the Executive's employment or on the
date of termination of the Executive's employment, engage, have an interest in
or render any services to any business (whether as owner, manager, operator,
licensor, licensee, lender, partner, stockholder, joint venturer, employee,
consultant or otherwise) competitive with the Company's business activities.
Notwithstanding the foregoing, nothing
-8-
<PAGE>
herein shall prevent the Executive from owning stock in a publicly traded
corporation whose activities compete with those of the Company's, provided that
such stock holdings are not greater than 5% of such corporation. The Executive
agrees, during the term of this Agreement, to disclose to the Company all
investments which the Executive has, directly or indirectly, in an entity which
competes with the Company, or an entity which does business with the Company.
(c) The Executive hereby agrees that he shall not, during the period of his
employment and for a period of two (2) years following such employment, directly
or indirectly, take any action which constitutes an interference with or a
disruption of any of the Company's business activities including, without
limitation, the solicitations of the Company's customers, or persons listed on
the personnel lists of the Company. At no time during the term of this
Agreement, or thereafter shall the Executive directly or indirectly, disparage
the commercial, business or financial reputation of the Company.
(d) For purposes of clarification, but not of limitation, the Executive
hereby acknowledges and agrees that the provisions of subparagraphs 10(b) and
(c) above shall serve as a prohibition against him, during the period referred
to therein, directly or indirectly, hiring, offering to hire, enticing,
soliciting or in any other manner persuading or attempting to persuade any
officer, employee, agent, lessor, lessee, licensor, licensee or customer who has
been previously contacted by either a representative of the Company, including
the Executive, (but only those suppliers existing during the time of the
Executive's employment by the Company, or at the termination of his employment),
to discontinue or alter his, her or its relationship with the Company.
(e) Upon the termination of the Executive's employment for any reason
whatsoever, all documents, records, notebooks, equipment, price lists,
specifications, programs, customer and prospective customer lists and other
materials which refer or relate to any aspect of the business of the Company
which are in the possession of the Executive including all copies thereof, shall
be promptly returned to the Company.
(f) (i) The Executive agrees that all processes, technologies and
inventions ("Inventions"), including new contributions, improvements, ideas and
discoveries, whether patentable or not, conceived, developed, invented or made
by him during his employment by Employer shall belong to the Company, provided
that such Inventions grew out of the Executive's work with the Company are
related in any manner to the business (commercial or experimental) of the
Company or are conceived or made on the Company's time or with the use of the
Company's facilities or materials. The Executive shall further: (a) promptly
disclose such Inventions to the Company; (b) assign to
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the Company, without additional compensation, all patent and other rights to
such Inventions for the United States and foreign countries; (c) sign all papers
necessary to carry out the foregoing; and (d) give testimony in support of his
inventorship;
(ii) If any Invention is described in a patent application or is disclosed
to third parties, directly or indirectly, by the Executive within two years
after the termination of his employment by the Company, it is to be presumed
that the Invention was conceived or made during the period of the Executive's
employment by the Company; and
(iii) The Executive agrees that he will not assert any rights to any
Invention as having been made or acquired by him prior to the date of this
Agreement, except for Inventions, if any, disclosed to the Company in writing
prior to the date hereof.
(g) The Company shall be the sole owner of all products and proceeds of the
Executive's services hereunder, including, but not limited to, all materials,
ideas, concepts, formats, suggestions, developments, arrangements, packages,
programs and other intellectual properties that the Executive may acquire,
obtain, develop or create in connection with and during the term of the
Executive's employment hereunder, free and clear of any claims by the Executive
(or anyone claiming under the Executive) of any kind or character whatsoever
(other than the Executive's right to receive payments hereunder). The Executive
shall, at the request of the Company, execute such assignments, certificates or
other instruments as the Company may from time to time deem necessary or
desirable to evidence, establish, maintain, perfect, protect, enforce or defend
its right, or title and interest in or to any such properties.
(h) The parties hereto hereby acknowledge and agree that (i) the Company
would be irreparably injured in the event of a breach by the Executive of any of
his obligations under this Section 10, (ii) monetary damages would not be an
adequate remedy for any such breach, and (iii) the Company shall be entitled to
injunctive relief, in addition to any other remedy which it may have, in the
event of any such breach.
(i) The parties hereto hereby acknowledge that, in addition to any other
remedies the Company may have under Section 10(h) hereof, the Company shall have
the right and remedy to require the Executive to account for and pay over to the
Company all compensation, profits, monies, accruals, increments or other
benefits (collectively, "Benefits") derived or received by the Executive as the
result of any transactions constituting a breach of any of the provisions of
Section 10, and the Executive hereby agrees to account for any pay over such
Benefits to the Company.
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(j) Each of the rights and remedies enumerated in Section 10(h) and 10(i)
shall be independent of the other, and shall be severally enforceable, and all
of such rights and remedies shall be in addition to, and not in lieu of, any
other rights and remedies available to the Company under law or in equity.
(k) If any provision contained in this Section 10 is hereafter construed to
be invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid portions.
(l) If any provision contained in this Section 10 is found to be
unenforceable by reason of the extent, duration or scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, scope or other provision and in its reduced form any such
restriction shall thereafter be enforceable as contemplated hereby.
(m) It is the intent of the parties hereto that the covenants contained in
this Section 10 shall be enforced to the fullest extent permissible under the
laws and public policies of each jurisdiction in which enforcement is sought
(the Executive hereby acknowledging that said restrictions are reasonably
necessary for the protection of the Company). Accordingly, it is hereby agreed
that if any of the provisions of this Section 10 shall be adjudicated to be
invalid or unenforceable for any reason whatsoever, said provision shall be
(only with respect to the operation thereof in the particular jurisdiction in
which such adjudication is made) construed by limiting and reducing it so as to
be enforceable to the extent permissible, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of said
provision in any other jurisdiction.
11. Indemnification. The Employer shall indemnify and hold harmless the
Executive against any and all expenses reasonably incurred by him in connection
with or arising out of (a) the defense of any action, suit or proceeding in
which he is a party, or (b) any claim asserted or threatened against him, in
either case by reason of or relating to his being or having been an employee,
officer or director of the Company, whether or not he continues to be such an
employee, officer or director at the time of incurring such expenses, except
insofar as such indemnification is prohibited by law. Such expenses shall
include, without limitation, the fees and disbursements of attorneys, amounts of
judgments and amounts of any settlements, provided that such expenses are agreed
to in advance by the Employer. The foregoing indemnification obligation is
independent of any similar obligation provided in the Employer's Certificate of
Incorporation or Bylaws, and shall apply with respect to any matters
attributable
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to periods prior to the Effective Date, and to matters attributable to his
employment hereunder, without regard to when asserted.
12. General. This Agreement is further governed by the following
provisions:
(a) Notices. All notices relating to this Agreement shall be in writing and
shall be either personally delivered, sent by telecopy (receipt confirmed) or
mailed by certified mail, return receipt requested, to be delivered at such
address as is indicated below, or at such other address or to the attention of
such other person as the recipient has specified by prior written notice to the
sending party. Notice shall be effective when so personally delivered, one
business day after being sent by telecopy or five days after being mailed.
To the Employer:
U.S. Home & Garden Inc.
655 Montgomery Street
Suite 830
San Francisco, CA 94111
Attention: Chief Operating Officer
To the Executive:
Robert L. Kassel
3444 Washington Street
San Francisco, CA 94118
With, in either case, a copy in the same manner to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
(b) Parties in Interest. Executive may not delegate his duties or assign
his rights hereunder. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective heirs, legal
representatives, successors and permitted assigns.
(c) Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Executive by the Employer and contains all of the
covenants and agreements between the parties with respect to such employment in
any manner whatsoever. Any modification or termination of this Agreement will be
effective only if it is in writing signed by the party to be charged.
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<PAGE>
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(e) Warranty. Executive hereby warrants and represents as follows:
(i) That the execution of this Agreement and the discharge of
Executive's obligations hereunder will not breach or conflict with any
other contract, agreement, or understanding between Executive and any other
party or parties.
(ii) Executive has ideas, information and know-how relating to the
type of business conducted by Employer, and Executive's disclosure of such
ideas, information and know-how to Employer will not conflict with or
violate the rights of any third party or parties.
(f) Severability. In the event that any term or condition in this Agreement
shall for any reason be held by a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other term or condition of this Agreement,
but this Agreement shall be construed as if such invalid or illegal or
unenforceable term or condition had never been contained herein.
(g) Execution in Counterparts. This Agreement may be executed by the
parties in one or more counterparts, each of which shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts has been
signed by each of the parties hereto and delivered to each of the other parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
Employer: U.S. HOME & GARDEN, INC.
By:/s/ Richard J. Raleigh
-------------------------
Richard J. Raleigh, Chief
Operating Officer
Employee:
/s/ Robert L. Kassel
-------------------------
ROBERT L. KASSEL
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EMPLOYMENT AGREEMENT
AGREEMENT dated as of April 1, 1996 between U.S. Home & Garden, Inc. a
Delaware corporation (the "Employer" or the "Company"), and Richard J. Raleigh
(the "Executive").
W I T N E S S E T H :
WHEREAS, the Employer desires to employ the Executive as Chief Operating
Officer of the Company, and to be assured of his services as such on the terms
and conditions hereinafter set forth; and
WHEREAS, the Executive is willing to accept such employment on such terms
and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and intending to be legally bound hereby, the Employer
and the Executive hereby agree as follows:
1. Term. Employer hereby agrees to employ Executive, and Executive hereby
agrees to serve Employer as herein provided, commencing effective as of the date
of this Agreement (the "Effective Date") for a term of one (1) year thereafter
(such period being herein referred to as the "Initial Term," and any year
commencing on the Effective Date or any anniversary of the Effective Date being
hereinafter referred to as an "Employment Year"), unless further extended or
sooner terminated as hereinafter provided. After the Initial Term and on the
last day of any Employment Year thereafter, this Agreement shall be
automatically renewed for successive one year periods (each such period being
referred to as a "Renewal Term"), unless, more than ninety (90) days prior to
the expiration of the Initial Term or any Renewal Term, either the Executive or
the Company gives written notice that employment will not be renewed ("Notice of
Non-Renewal"), whereupon (i) if the Executive gives the Notice of Non-Renewal,
the term of the Executive's employment shall terminate upon the expiration of
the Initial Term or the then current Renewal Term, as the case may be, or (ii)
if the Company gives the Notice of Non-Renewal, the term of the Executive's
employment shall be for a final five (5) year period (the "Final Renewal Term"),
commencing effective at the date of the Notice of Non-Renewal, unless sooner
terminated pursuant to Section 6 hereof.
2. Executive Duties.
(a) During the term of this Agreement, the Executive shall have the duties
and responsibilities of the Chief Operating Officer of the Company, reporting to
the President and/or the Chief Executive Officer and the Board of Directors of
<PAGE>
the Employer (the "Board"). It is understood that such duties and
responsibilities shall be reasonably related to the Executive's position.
(b) The Executive shall devote substantially all of his business time,
attention, knowledge and skills faithfully, diligently and to the best of his
ability, in furtherance of the business and activities of the Company. The
principal place of performance by the Executive of his duties hereunder shall be
the Company's principal executive offices or such other place as the Board shall
determine, although the Executive may be required to travel outside of the area
where the Company's principal executive offices are located in connection with
the business of the Company.
3. Compensation.
(a) During the term of this Agreement, the Employer shall pay the Executive
a salary (the "Salary") at a rate of $162,500 per annum in respect of each
Employment Year, payable in equal installments bi-weekly, or at such other times
as may mutually be agreed upon between the Employer and the Executive. Such
Salary may be increased from time to time at the discretion of the Board.
(b) In addition to the foregoing, the Executive shall be entitled to such
other cash bonuses as may from time to time be awarded to him by the Board
during or in respect of his employment hereunder.
4. Benefits.
(a) During the term of this Agreement, the Executive shall have the right
to receive or participate in all benefits and plans which the Company may from
time to time institute during such period for its employees and for which the
Executive is eligible. Nothing paid to the Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary or any other obligation payable to the Executive
pursuant to this Agreement.
(b) During the term of this Agreement, the Executive shall be granted the
same number of paid holidays, personal days off, vacation days and sick leave
days as are determined by the Company from time to time. Such vacation may be
taken in the Executive's discretion with the prior approval of the Employer, and
at such time or times as are not inconsistent with the reasonable business needs
of the Company.
5. Travel Expenses. All travel and other expenses incident to the rendering
of services reasonably incurred on behalf of the Company by the Executive during
the term of this
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Agreement shall be paid by the Employer. If any such expenses are paid in the
first instance by the Executive, the Employer shall reimburse him therefor on
presentation of appropriate receipts for any such expenses.
6. Termination. Executive's employment under this Agreement may be
terminated, effective as of the Date of Termination pursuant to Section 8 of
this Agreement, without any breach of this Agreement only on the following
circumstances:
6.1. Death. The Executive's employment under this Agreement shall
terminate upon his death.
6.2. Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his
duties under this Agreement for 150 calendar days during any calendar year,
the Employer may terminate the Executive's employment under this Agreement
by giving the Notice of Termination (as defined in Section 7 below) anytime
after the 150th calendar day.
6.3. Cause. The Employer may terminate the Executive's employment
under this Agreement for Cause. For purposes of this Agreement, the
Employer shall have "Cause" to terminate the Executive's employment under
this Agreement upon (a) the willful and continued failure by the Executive
to substantially perform his duties under this Agreement (other than any
such failure resulting from the Executive's incapacity due to physical or
mental illness) after demand for substantial performance is delivered by
the Employer, in writing, specifically identifying the manner in which the
Employer believes the Executive has not substantially performed his duties
and the Executive fails to perform as required within 15 business days
after such demand is made, (b) the willful engaging by the Executive in
criminal misconduct (including embezzlement and criminal fraud) which is
materially injurious to the Company, monetarily or otherwise or (c) the
conviction of the Executive of a felony. For purposes of this paragraph, no
act, or failure to act, on the Executive's part shall be considered
"willful" unless done, or omitted to be done, by him not in good faith and
without reasonable belief that his action or omission was in the best
interest of the Employer.
Notwithstanding anything contained in this Agreement to the contrary,
the Executive shall not be deemed to have been terminated for Cause unless
and until there shall have been delivered to the Executive, together with
the Notice of Termination (as defined in Section 7 below), a copy of a
resolution, duly adopted by the affirmative vote of not less than sixty
percent of the entire membership of the Board (other than the Executive) at
a meeting of the Board called and held for such purpose (after reasonable
written notice to the Executive and an opportunity for him, together with
his counsel, to be heard
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<PAGE>
before the Board), finding that in the good faith opinion of the Board, the
Executive was guilty of conduct set forth above in clause (a), (b) or (c),
and specifying the particulars thereof in detail.
6.4. Termination by the Executive for Good Reason, Upon a Change of
Control or Because of Ill Health. The Executive may terminate his
employment under this Agreement (a) for Good Reason (as hereinafter
defined), (b) at any time within six months after a Change of Control, or
(c) if his health should become impaired to any extent that makes the
continued performance of his duties under this Agreement hazardous to his
physical or mental health or his life, provided that, in the latter case,
the Executive shall have furnished the Employer with a written statement
from a qualified doctor to such effect and provided, further, that at the
Employer's request and expense the Executive shall submit to an examination
by a doctor selected by the Employer and such doctor shall have concurred
in the conclusion of the Executive's doctor.
6.4.1. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean (a) any assignment to the Executive of any duties or
reporting obligations other than those contemplated by, or any
limitation of the powers of the Executive in any respect not
contemplated by, this Agreement, (b) failure by the Employer to comply
with its material obligations and agreements contained in this
Agreement, or (c) failure of the Employer to obtain the assumption of
the agreement to perform this Agreement by any successor as
contemplated in Section 9(g) of this Agreement. With respect to the
matters set forth in clauses (a), (b) and (c) of this paragraph, the
Executive must give the Employer thirty (30) days prior written notice
of his intent to terminate this Agreement as a result of any breach or
alleged breach of the applicable provision and the Employer shall have
the right to cure any such breach or alleged breach within such thirty
(30) day period.
6.4.2. Change of Control. For purposes of this Agreement, a
"Change of Control" shall be deemed to occur, unless previously
consented to in writing by the Executive, upon (a) the actual
acquisition or the execution of an agreement to acquire 20% or more of
the voting securities of the Employer by any person or entity not
affiliated with the Executive (other than pursuant to a bona fide
underwriting agreement relating to a public distribution of securities
of the Employer), (b) the commencement of a tender or exchange offer
for more than 20% of the voting securities of the Employer by any
person or entity not affiliated with the Executive, (c) the
commencement of a proxy contest against the management for the
election of a majority of the Board of the Employer if the group
conducting the proxy contest owns, has or gains the power to vote at
least 20% of the voting securities of the Employer, (d) a vote by the
Board to merge, consolidate, sell all or substantially all of the
assets
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<PAGE>
of the Employer to any person or entity not affiliated with the
Executive, or (e) the election of directors constituting a majority of
the Board of Directors who have not been nominated or approved by the
Executive.
7. Notice of Termination.
Any termination of the Executive's employment by the Employer or by the
Executive (other than termination by reason of the Executive's death) shall be
communicated by written Notice of Termination to the other party of this
Agreement. For purposes of this Agreement, a "Notice of Termination" shall mean
a notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
8. Date of Termination.
The "Date of Termination" shall mean (a) if the Executive's employment is
terminated by his death, the date of his death, (b) if the Executive's
employment is terminated pursuant to Section 6.2 above, the date on which the
Notice of Termination is given, (c) if the Executive's employment is terminated
pursuant to Section 6.3 above, the date specified on the Notice of Termination
after the expiration of any cure periods, (d) if the Executive's employment is
terminated pursuant to a Notice of Non-Renewal given by the Employer, the fifth
(5th) anniversary of the date of such notice unless sooner terminated pursuant
to any of Sections 6.1, 6.2 or 6.3, and (e) if the Executive's employment is
terminated for any other reason, the date on which a Notice of Non-Renewal or a
Notice of Termination is given after the expiration of any relevant cure
periods.
9. Compensation Upon Termination or During Disability.
(a) If the Executive's employment shall be terminated by reason of his
death, the Employer shall pay to such person as he shall designate in a notice
filed with the Employer, or if no such person shall be designated, to his estate
as a lump sum benefit, his full Salary to the date of his death in addition to
any payments the Executive's spouse, beneficiaries or estate may be entitled to
receive pursuant to any pension or employee benefit plan or life insurance
policy or similar plan or policy then maintained by the Employer, and such
payments shall, assuming the Employer is in compliance with the provisions of
this Agreement, fully discharge the Employer's obligations with respect to
Section 3 of this Agreement, but all other obligations of the Employer under
this Agreement, including the obligations to indemnify, defend and hold harmless
the Executive, shall remain in effect.
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<PAGE>
(b) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness, the
Executive shall continue to receive his Salary and other compensation until the
Executive's employment is terminated pursuant to Section 6.2 of this Agreement,
or until the Executive terminates his employment pursuant to Section 6.4(a) of
this Agreement, whichever first occurs. After termination, the Executive shall
be paid, in equal monthly installments, 100% of his Salary and other
compensation, at the rate in effect at the time Notice of Termination is given,
for one year, and thereafter for one additional year at an annual rate equal to
50% of the Salary and other compensation which would have been in effect under
this Agreement, plus, in each case, any disability payments otherwise payable by
or pursuant to plans provided by the Employer; provided, however, that any
payments hereunder becoming due and owing during the Final Renewal Term shall be
limited to that portion of the installments (whether based upon 100% or 50% of
the compensation rate) payable or becoming payable to the Executive on or before
the expiration of the Final Renewal Term. To the extent physically and mentally
capable of so doing without potentially impairing or damaging his health, the
Executive shall provide consulting services to the Employer during the period
that he is receiving payments pursuant to this Section 9(b).
(c) If the Executive's employment shall be terminated for Cause, the
Employer shall pay the Executive his full Salary and other compensation through
the Date of Termination, at the rate in effect at the time Notice of Termination
is given, and the Employer shall, assuming the Employer is in compliance with
the provisions of this Agreement, have no further obligations with respect to
Section 3 of this Agreement, but all other obligations of the Employer under
this Agreement, including the obligations to indemnify, defend and hold harmless
the Executive, shall remain in effect.
(d) If (A) in breach of this Agreement, the Employer shall terminate the
Executive's employment other than pursuant to Sections 6.2 or 6.3 hereof (it
being understood that a purported termination pursuant to Section 6.2 or 6.3
hereof which is disputed and finally determined not to have been proper shall be
a termination by the Employer in breach of this Agreement), including as a
result of a Change of Control, and/or (B) the Executive shall terminate his
employment for Good Reason or at any time within six months after a Change of
Control, then the Employer shall pay to the Executive:
(i) his full Salary and other compensation through the Date of
Termination at the rate in effect at the time Notice of Termination is
given;
(ii) for periods subsequent to the Date of Termination (in lieu of any
further payments pursuant to Section
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3 of this Agreement), Severance Pay (as hereinafter defined), payable on
the first day following the Date of Termination, as follows:
(A) if, prior to and not as a result of a Change of Control, the
Executive's employment is terminated either by the Executive for Good
Reason or by the Employer other than pursuant to Sections 6.2 or 6.3
hereof, a lump sum amount equal to the higher of (a) $162,500 or (b)
the total compensation earned by the Executive from the Employer
during the one-year period prior to such Date of Termination, or
(B) if after or as a result of a Change of Control, the
Executive's employment is terminated by the Executive within six
months after a Change in Control, or by the Employer other than
pursuant to Sections 6.2 or 6.3 hereof, a lump sum amount equal to the
greater of (i) $812,500 or (ii) the product obtained by multiplying 5
with the average of the total compensation earned by the Executive
during the one-year period prior to the Date of Termination (in case
of either (ii)(A) or (ii)(B), "Severance Pay"); and
(iii) all other damages to which the Executive may be entitled as
result of the termination of his employment under this Agreement, including
all legal fees and expenses incurred by him in contesting or disputing any
such termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement.
(e) In the event of a termination of this Agreement by the Executive as a
result of a Change of Control pursuant to which the Severance Pay is as set
forth above in Section 9(d), the Severance Pay shall be the average taxable
compensation of the Executive for the five taxable years prior to such
termination or such higher amount as may be permitted by the Internal Revenue
Service to compute "base amount" for purposes of Section 280G of the Internal
Revenue Code of 1954 (as amended) multiplied by three (but in no event may this
amount exceed Severance Pay as provided by Section 9(d) of this Agreement unless
agreed to by the Executive). In the event of a termination of this Agreement by
the Executive as a result of a Change of Control the amount payable pursuant to
Section 9(d) may not exceed the maximum amount which the Employer may pay the
Executive without such amount being subject to excise tax as a result of excess
para-chute payments pursuant to the Internal Revenue Code of 1986, as amended,
unless agreed to by the Executive in writing. The Executive shall be entitled to
initially receive the entire amount provided for in Section 9(d) and shall only
be required to repay to the Employer any amount which is ultimately and finally
determined by the Internal Revenue Service (or an appropriate court) to have
been in excess of the permitted amount and the Employer agrees to use its best
efforts to support the Executive's position that such payments
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<PAGE>
are not subject to excise tax in any dealings with the Internal Revenue Service
and in any appropriate legal proceedings.
(f) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 9 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 9 be reduced by
any compensation earned by the Executive as the result of employment by another
employer or business or by profits earned by the Executive from any other source
at any time before and after the Date of Termination. The amounts payable to
Employer under this Agreement shall not be treated as damages but as severance
compensation to which Employer is entitled by reason of his employment in the
circumstances contemplated by this Agreement.
(g) The Employer will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Employer, by agreement, in form and reasonably
substance satisfactory to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Employer would be required to perform it if no such succession had taken place.
Failure of the Employer to obtain such Agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Employer in the same amount and on the same
terms as he would be entitled to hereunder if he terminated his employment
within six months after a Change in Control, except for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Employer" shall mean
the Employer and any successor to its business and/or assets which executes the
Agreement or which otherwise becomes bound by the terms and conditions of this
Agreement by operation of law.
10. Confidentiality; Noncompetition.
(a) The Employer and the Executive acknowledge that the services to be
performed by the Executive under this Agreement are unique and extraordinary
and, as a result of such employment, the Executive will be in possession of
confidential information relating to the business practices of the Company. The
term "confidential information" shall mean any and all information (verbal and
written) relating to the Company or any of its affiliates, or any of their
respective activities, other than such information which can be shown by the
Executive to be in the public domain (such information not being deemed to be in
the public domain merely because it is embraced by more general information
which is in the public domain) other than as the result of breach of the
provisions of this Section 10(a), including, but not limited to, information
relating to: trade secrets, personnel lists, financial information, research
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<PAGE>
projects, services used, pricing, customers, customer lists and prospects,
product sourcing, marketing and selling and servicing. The Executive agrees that
he will not, during or for a period of two years after the termination of
employment, except as may be required in the course of the performance of his
duties hereunder, directly or indirectly, use, communicate, disclose or
disseminate to any person, firm or corporation any confidential information
regarding the clients, customers or business practices of the Company acquired
by the Executive, without the prior written consent of Employer; provided,
however, that the Executive understands that Executive will be prohibited from
misappropriating any trade secret (as defined for purposes of Indiana law) at
any time during or after the termination of employment.
(b) The Executive hereby agrees that he shall not, during the period of his
employment and for a period of two (2) years following such employment, directly
or indirectly, within any county (or adjacent county) in any State within the
United States or territory outside the United States in which the Company is
engaged in business during the period of the Executive's employment or on the
date of termination of the Executive's employment, engage, have an interest in
or render any services to any business (whether as owner, manager, operator,
licensor, licensee, lender, partner, stockholder, joint venturer, employee,
consultant or otherwise) competitive with the Company's business activities.
Notwithstanding the foregoing, nothing herein shall prevent the Executive from
owning stock in a publicly traded corporation whose activities compete with
those of the Company's, provided that such stock holdings are not greater than
5% of such corporation. The Executive agrees, during the term of this Agreement,
to disclose to the Company all investments which the Executive has, directly or
indirectly, in an entity which competes with the Company, or an entity which
does business with the Company.
(c) The Executive hereby agrees that he shall not, during the period of his
employment and for a period of two (2) years following such employment, directly
or indirectly, take any action which constitutes an interference with or a
disruption of any of the Company's business activities including, without
limitation, the solicitations of the Company's customers, or persons listed on
the personnel lists of the Company. At no time during the term of this
Agreement, or thereafter shall the Executive directly or indirectly, disparage
the commercial, business or financial reputation of the Company.
(d) For purposes of clarification, but not of limitation, the Executive
hereby acknowledges and agrees that the provisions of subparagraphs 10(b) and
(c) above shall serve as a prohibition against him, during the period referred
to therein, directly or indirectly, hiring, offering to hire, enticing,
soliciting or in any other manner persuading or attempting to
-9-
<PAGE>
persuade any officer, employee, agent, lessor, lessee, licensor, licensee or
customer who has been previously contacted by either a representative of the
Company, including the Executive, (but only those suppliers existing during the
time of the Executive's employment by the Company, or at the termination of his
employment), to discontinue or alter his, her or its relationship with the
Company.
(e) Upon the termination of the Executive's employment for any reason
whatsoever, all documents, records, notebooks, equipment, price lists,
specifications, programs, customer and prospective customer lists and other
materials which refer or relate to any aspect of the business of the Company
which are in the possession of the Executive including all copies thereof, shall
be promptly returned to the Company.
(f) (i) The Executive agrees that all processes, technologies and
inventions ("Inventions"), including new contributions, improvements, ideas and
discoveries, whether patentable or not, conceived, developed, invented or made
by him during his employment by Employer shall belong to the Company, provided
that such Inventions grew out of the Executive's work with the Company are
related in any manner to the business (commercial or experimental) of the
Company or are conceived or made on the Company's time or with the use of the
Company's facilities or materials. The Executive shall further: (a) promptly
disclose such Inventions to the Company; (b) assign to the Company, without
additional compensation, all patent and other rights to such Inventions for the
United States and foreign countries; (c) sign all papers necessary to carry out
the foregoing; and (d) give testimony in support of his inventorship;
(ii) If any Invention is described in a patent application or is disclosed
to third parties, directly or indirectly, by the Executive within two years
after the termination of his employment by the Company, it is to be presumed
that the Invention was conceived or made during the period of the Executive's
employment by the Company; and
(iii) The Executive agrees that he will not assert any rights to any
Invention as having been made or acquired by him prior to the date of this
Agreement, except for Inventions, if any, disclosed to the Company in writing
prior to the date hereof.
(g) The Company shall be the sole owner of all products and proceeds of the
Executive's services hereunder, including, but not limited to, all materials,
ideas, concepts, formats, suggestions, developments, arrangements, packages,
programs and other intellectual properties that the Executive may acquire,
obtain, develop or create in connection with and during the term of the
Executive's employment hereunder, free and clear of any claims by the Executive
(or anyone claiming under the
-10-
<PAGE>
Executive) of any kind or character whatsoever (other than the Executive's right
to receive payments hereunder). The Executive shall, at the request of the
Company, execute such assignments, certificates or other instruments as the
Company may from time to time deem necessary or desirable to evidence,
establish, maintain, perfect, protect, enforce or defend its right, or title and
interest in or to any such properties.
(h) The parties hereto hereby acknowledge and agree that (i) the Company
would be irreparably injured in the event of a breach by the Executive of any of
his obligations under this Section 10, (ii) monetary damages would not be an
adequate remedy for any such breach, and (iii) the Company shall be entitled to
injunctive relief, in addition to any other remedy which it may have, in the
event of any such breach.
(i) The parties hereto hereby acknowledge that, in addition to any other
remedies the Company may have under Section 10(h) hereof, the Company shall have
the right and remedy to require the Executive to account for and pay over to the
Company all compensation, profits, monies, accruals, increments or other
benefits (collectively, "Benefits") derived or received by the Executive as the
result of any transactions constituting a breach of any of the provisions of
Section 10, and the Executive hereby agrees to account for any pay over such
Benefits to the Company.
(j) Each of the rights and remedies enumerated in Section 10(h) and 10(i)
shall be independent of the other, and shall be severally enforceable, and all
of such rights and remedies shall be in addition to, and not in lieu of, any
other rights and remedies available to the Company under law or in equity.
(k) If any provision contained in this Section 10 is hereafter construed to
be invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid portions.
(l) If any provision contained in this Section 10 is found to be
unenforceable by reason of the extent, duration or scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, scope or other provision and in its reduced form any such
restriction shall thereafter be enforceable as contemplated hereby.
(m) It is the intent of the parties hereto that the covenants contained in
this Section 10 shall be enforced to the fullest extent permissible under the
laws and public policies of each jurisdiction in which enforcement is sought
(the Executive hereby acknowledging that said restrictions are
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<PAGE>
reasonably necessary for the protection of the Company). Accordingly, it is
hereby agreed that if any of the provisions of this Section 10 shall be
adjudicated to be invalid or unenforceable for any reason whatsoever, said
provision shall be (only with respect to the operation thereof in the particular
jurisdiction in which such adjudication is made) construed by limiting and
reducing it so as to be enforceable to the extent permissible, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of said provision in any other jurisdiction.
11. Indemnification. The Employer shall indemnify and hold harmless the
Executive against any and all expenses reasonably incurred by him in connection
with or arising out of (a) the defense of any action, suit or proceeding in
which he is a party, or (b) any claim asserted or threatened against him, in
either case by reason of or relating to his being or having been an employee,
officer or director of the Company, whether or not he continues to be such an
employee, officer or director at the time of incurring such expenses, except
insofar as such indemnification is prohibited by law. Such expenses shall
include, without limitation, the fees and disbursements of attorneys, amounts of
judgments and amounts of any settlements, provided that such expenses are agreed
to in advance by the Employer. The foregoing indemnification obligation is
independent of any similar obligation provided in the Employer's Certificate of
Incorporation or Bylaws, and shall apply with respect to any matters
attributable to periods prior to the Effective Date, and to matters attributable
to his employment hereunder, without regard to when asserted.
12. General. This Agreement is further governed by the following
provisions:
(a) Notices. All notices relating to this Agreement shall be in writing and
shall be either personally delivered, sent by telecopy (receipt confirmed) or
mailed by certified mail, return receipt requested, to be delivered at such
address as is indicated below, or at such other address or to the attention of
such other person as the recipient has specified by prior written notice to the
sending party. Notice shall be effective when so personally delivered, one
business day after being sent by telecopy or five days after being mailed.
To the Employer:
U.S. Home & Garden Inc.
655 Montgomery Street
Suite 830
San Francisco, CA 94111
Attention: Robert L. Kassel, President
-12-
<PAGE>
To the Executive:
Richard J. Raleigh
204 Trinidad Drive
Tiburon, CA 94920
With, in either case, a copy in the same manner to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
(b) Parties in Interest. Executive may not delegate his duties or assign
his rights hereunder. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective heirs, legal
representatives, successors and permitted assigns.
(c) Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Executive by the Employer and contains all of the
covenants and agreements between the parties with respect to such employment in
any manner whatsoever. Any modification or termination of this Agreement will be
effective only if it is in writing signed by the party to be charged.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(e) Warranty. Executive hereby warrants and represents as follows:
(i) That the execution of this Agreement and the discharge of
Executive's obligations hereunder will not breach or conflict with any
other contract, agreement, or understanding between Executive and any other
party or parties.
(ii) Executive has ideas, information and know-how relating to the
type of business conducted by Employer, and Executive's disclosure of such
ideas, information and know-how to Employer will not conflict with or
violate the rights of any third party or parties.
(f) Severability. In the event that any term or condition in this Agreement
shall for any reason be held by a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other term or condition of this Agreement,
but this Agreement shall be construed as if such
-13-
<PAGE>
invalid or illegal or unenforceable term or condition had never been contained
herein.
(g) Execution in Counterparts. This Agreement may be executed by the
parties in one or more counterparts, each of which shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts has been
signed by each of the parties hereto and delivered to each of the other parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
U.S. HOME & GARDEN, INC.
By:/s/ Robert L. Kassel
------------------------------
Robert L. Kassel, President
/s/ Richard J. Raleigh
------------------------------
RICHARD J. RALEIGH
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THIS AGREEMENT (hereinafter referred to as the "Agreement") is made as of
the 16th day of April, 1996, by and between THE INTRAC GROUP, with offices
located at 424 Madison Avenue, New York, New York 10017 (hereinafter referred to
as "Intrac") and US HOME AND GARDEN, with offices located at 655 Montgomery
Street, Suite 830, San Francisco, California 94111.
WHEREAS, US Home and Garden desires to sell certain products to Intrac, and
Intrac desires to purchase such products from US Home and Garden, in exchange
for trade credits issued by Intrac, which credits may be utilized by US Home and
Garden in connection with the purchase of advertising media, services and/or
merchandise from and/or through Intrac, subject to and in accordance with the
terms and conditions set forth hereinafter.
NOW, THEREFORE, for and in consideration of the mutual promises hereinafter
contained, the parties hereto agree as follows:
1. PRODUCTS. US Home and Garden hereby sells the products more fully
described in Exhibit A attached hereto and made a part hereof (hereinafter
referred to as the "Products") to Intrac, for use and/or resale by Intrac, for
the consideration set forth in Paragraph 2 hereof, the sufficiency of which is
hereby conclusively acknowledged and established.
2. CONSIDERATION.
(a) Upon Intrac's receipt of a signed proof of delivery attesting to
the fact that the Products have been delivered pursuant to Paragraph 4 hereof,
Intrac shall issue trade credits on its books and records (hereinafter referred
to as "Credits"), in favor of US Home and Garden, in the full amount of the
price for such Products, as set forth in Exhibit A, which Credits may be used by
US Home and Garden solely in connection with the purchase of advertising media,
merchandise and/or services from Intrac pursuant to all of the terms and subject
to all of the conditions set forth hereinafter.
(b) Within thirty (30) days following Intrac's resale of the Products
and receipt of the proceeds from its resale of the Products, Intrac will remit
to US Home and Garden an amount equal to forty-two (42%) percent of the net cash
proceeds of sale actually realized by Intrac, for which the amount of the cash
received by US Home and Garden shall equally and proportionately reduce the
dollar amount of the Credits as established by the purchase of the inventory as
listed on Exhibit A.
<PAGE>
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) US Home and Garden warrants and represents that:
(i) the Products are sold as is, of good and merchantable
quality, is in salable condition and in unopened factory sealed boxes, cartons
and/or containers;
(ii) the Products, and all packaging, meet and conform to US Home
and Garden's specifications, industry standards and the requirements of any
regulatory body that may have jurisdiction over the manufacture, distribution,
sale and/or packaging of the Products;
(iii) it has good and marketable title to the Products;
(iv) the transfer provided for herein is rightful; and
(v) the Products shall be delivered to Intrac or its assignee(s)
free from any security interest or other lien or encumbrance or any claim of any
third party, whatsoever, including but not limited to any claim of infringement
or the like.
(b) US Home and Garden agrees to indemnify, defend and hold Intrac and
its successors and assignees harmless from and against any warranty and/or
product liability claim relating to the Products and/or any other claim, action
or cause of action arising or resulting from the breach of any term, covenant,
representation or warranty of or by US Home and Garden contained herein and/or
any loss up to the price schedule as detailed on Exhibit A, expense, damage,
liability or obligation(including reasonable attorney's fees) suffered,
sustained or incurred by Intrac or its successors and assignees in connection
therewith.
(c) US Home and Garden shall deliver to Intrac a Certificate of
Product Liability Insurance, naming Intrac and its successors and assigns as
party insured, at no cost to Intrac.
(d) The Products shall be covered by, and US Home and Garden agrees to
honor, US Home and Garden's standard limited consumer warranty for the Products
in the form of replacement product on a unit-by-unit basis.
4. SHIPMENT AND DELIVERY OF PRODUCTS; RISK OF LOSS.
(a) US Home and Garden shall, at its sole cost and expense, deliver
the Products in full truckload quantity, to or on behalf of Intrac, pursuant to
and within ten (10) days
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<PAGE>
following US Home and Garden's receipt of written shipping instructions from
Intrac, to the location(s) designated by Intrac (hereinafter referred to as the
"Designated Location(s)"), F.O.B. destination, full freight allowed within the
Continental U.S.A.
(b) US Home and Garden shall also, at its sole cost and expense,
warehouse and insure the Products prior to delivery to the Designated
Location(s) and risk of loss shall remain with US Home and Garden until delivery
of the Products to the Designated Location(s). As of June 20, 1996, Intrac shall
be solely responsible for all warehousing and insuring the Products with the
exception of outcharges that are to remain the responsibility of US Home and
Garden.
(c) After each shipment, US Home and Garden will provide Intrac with
written confirmation that the Products have been shipped, the date of shipment,
the number of units shipped and the destination.
(d) After each delivery, US Home and Garden shall provide Intrac with
a signed proof of delivery attesting to the fact that the Products have been
delivered, the date of delivery, the number of units delivered and the place of
delivery.
5. UTILIZATION OF THE TRADE CREDITS.
(a) US Home and Garden shall utilize the Credits as follows:
(i) US Home and Garden shall advise Intrac, at least thirty (30)
days prior to the first airing date, and at least ninety (90) days prior to the
first posting date and/or publication date, of (A) the specifications, in terms
of demographic and geographic market weights ("gross rating points"), by
standard dayparts, of all of US Home and Garden's requirements for spot
television air time, network television air time, spot cable air time, network
cable air time, spot radio air time, and/or network radio air time, and/or (B)
all of US Home and Garden's print requirements for which US Home and Garden
qualifies with the publication(s) on a barter basis, and/or (C) all of US Home
and Garden's requirements for out-of-home media, and Intrac will provide the
same to US Home and Garden, subject to availability, upon prepayment by US Home
and Garden to Intrac, in cash, within ten (10) days following US Home and
Garden's receipt of Intrac's invoice(s), of the amount of Intrac's price
therefor; and
(ii) Intrac shall charge against the outstanding balance of US
Home and Garden's Credits the difference between the amount of Intrac's price
for such advertising media and the amount of the costs or rates for such media
determined by reference to (1) Spot Quotations and Data ("SQAD") in the case of
spot television air time, (2) Nielsen
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<PAGE>
Audience Demographics ("NAD") in the case of network television air time, (3)
Marketer's Guide to Media ("MGM") in the case of network cable air time, spot
cable air time, network radio air time and/or spot radio air time, (4) Standard
Rate and Data Source ("SRDS") in the case of magazine space, (5) Buyer's Guide
to Outdoor Advertising ("BGOA") in the case of out-of-home media, and/or (6)
other recognized syndicated industry cost sources, as applicable.
(iii) For purposes of Paragraph 5(a)(ii) hereof, Intrac shall
determine and advise US Home and Garden as to the applicable rates for the
advertising requested as determined by reference to the most current published
edition of SQAD, NAD, MGM, SRDS and/or BGOA, and each shall be calculated in
accordance with the applicable demographic and geographic market, calendar
quarter and daypart, as per the applicable rate source in effect at the time
Intrac places the order for the advertising media, without any deduction or
discount for commission or otherwise and the discount or premium for any
commercial length other than thirty (30) seconds, in the case of spot television
air time, network television air time, spot cable air time, network cable air
time, and network radio air time, or sixty (60) seconds, in the case of spot
radio air time, and the cost-per- rating point for any demographic market or
daypart other than those specifically included in the rate sources referred to
above, will be as mutually agreed upon by Intrac and US Home and Garden and/or
its designated advertising agency (hereinafter referred to as "Agency").
(iv) US Home and Garden will be responsible for all "production"
and "traffic" functions with respect to all advertising media purchased by US
Home and Garden from Intrac hereunder.
(v) Before contracting for any advertising media on US Home and
Garden's behalf, Intrac shall provide US Home and Garden and/or Agency with a
written broadcast order confirmation for such media, which must be acknowledged
by US Home and Garden and/or Agency and returned to Intrac.
(vi) If any of US Home and Garden's broadcast advertisements are
pre-empted, Intrac will provide US Home and Garden with substitute advertising
media (a "makegood") of at least comparable value. All makegoods will, if
possible, be provided within fifteen (15) days after the last telecast of the
flight.
(b) US Home and Garden may also, at its option, advise Intrac of any
other services or merchandise (including but not limited to those listed in the
attached Exhibit B) which US Home and Garden desires to purchase and the price
at which the same are available to US Home and Garden. Intrac will advise US
Home and Garden as to whether Intrac can obtain and/or provide
-4-
<PAGE>
such services and/or merchandise and, if so, the price at which Intrac will
provide such services and/or merchandise to US Home and Garden. Intrac and US
Home and Garden shall mutually agree on the cash and credit utilization factors
for such services and/or merchandise, and Intrac shall purchase the same for
and/or provide the same to US Home and Garden, upon prepayment by US Home and
Garden to Intrac, in cash, within ten (10) days following US Home and Garden's
receipt of Intrac's invoice, of the amount of Intrac's price therefor. In
addition to the foregoing cash payment, Intrac shall also charge against the
outstanding balance of US Home and Garden's Credits the difference between (x)
the amount of Intrac's price for such services and/or merchandise and (y) the
price at which the said services and/or merchandise were otherwise available to
US Home and Garden.
(c) The Credits may only be utilized pursuant to Paragraphs 5(a)
and/or 5(b) hereof and, notwithstanding anything contained herein, in no event
may the Credits be returned to Intrac for cash or shall US Home and Garden be
entitled to receive cash from Intrac for any reason, whatsoever.
6. REPORTS. At US Home and Garden's request, Intrac shall provide US Home
and Garden and/or Agency with a written report setting forth the total amount of
Credits utilized by US Home and Garden to date and the amount of Credits then
outstanding on Intrac's books and records in US Home and Garden's favor.
7. TERM. US Home and Garden's Credits, and Intrac's obligations to US Home
and Garden hereunder, will expire finally and fully and terminate thirty-six
(36) months from the date of this Agreement or at such earlier time as US Home
and Garden's Credits shall have been fully exhausted by charges pursuant to
Paragraphs 5(a) and/or 5(b) hereof; provided, however, that to the extent that
any advertising media requested by US Home and Garden and confirmed by Intrac is
pre-empted during the final three (3) months of said period, US Home and Garden
shall have an additional three (3) months within which to request makeup media.
8. FORCE MAJEURE. Should Intrac be unable to provide advertising media,
merchandise and/or services to US Home and Garden hereunder by reason of acts of
God, labor or material shortages, equipment breakdown, air or ground delays or
other traffic problems, fires, explosions, breakdown of facilities, strikes,
civil authority or any other cause which is beyond the control of Intrac
(hereinafter referred to as "Force Majeure"), Intrac shall give prompt notice of
such Force Majeure to US Home and Garden, and the obligations of Intrac
hereunder shall be suspended, and the term of this Agreement shall be extended,
to the extent made necessary by such Force Majeure.
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<PAGE>
9. MEDIATION/ARBITRATION. Unless the parties mutually agree otherwise, all
claims or disputes between Intrac and US Home and Garden arising out of, or in
any way relating to, this Agreement, or the interpretation, construction or
breach hereof or thereof, shall be submitted first, within thirty (30) days
after the claim or dispute has arisen, to mediation, in the City of New York,
under the auspices of the American Arbitration Association ("AAA"), in
accordance with AAA's Commercial Mediation Rules then in effect. In the event of
the termination of the mediation proceedings, either as the result of the
written declaration of the mediator(s) appointed by AAA to the effect that
further efforts at mediation are no longer worthwhile or as a result of the
written declaration of the parties, all such claims or disputes shall be
submitted to arbitration, within thirty (30) days thereafter, by a panel of
three (3) arbitrators, in the City of New York, under the auspices of AAA, in
accordance with AAA's Commercial Arbitration Rules then in effect. The award
rendered by the arbitrators appointed by AAA shall be final, and judgment may be
entered upon the arbitrators' award in accordance with applicable law in any
court of competent jurisdiction. The agreements to mediate and arbitrate set
forth herein may be specifically enforced by either party.
10. BINDING EFFECT; ASSIGNABILITY. All, or any part, of US Home and
Garden's Credits may, from time to time, be assigned by US Home and Garden to
any subsidiary or affiliate of US Home and Garden; provided, however, that any
assignment of US Home and Garden's Credits to other than a subsidiary or
affiliate of US Home and Garden shall require Intrac's prior written consent,
which may be given or withheld in Intrac's sole and absolute discretion. Except
as otherwise provided herein, this agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective successors and assigns.
11. NOTICE. All communications provided for herein shall be in writing and
shall be delivered in person or by certified mail, return receipt requested, or
by overnight courier service, as follows: to Intrac at 424 Madison Avenue, New
York, New York 10017, attention: Thomas Settineri, Chairman; and to US Home and
Garden at 655 Montgomery Street, Suite 830, San Francisco, California 94111,
Attention: Mr. Richard Raleigh.
12. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement
are for convenience and reference purposes only and shall not affect the meaning
or interpretation of this Agreement.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to conflict of laws principles.
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<PAGE>
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall be deemed tro be one and the same instrument.
15. SEVERABILITY. In case any clause or provision in this Agreement shall
be deemed to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining clauses and provisions hereof shall not in any
way be affected or impaired thereby.
16. INTERPRETATION. This Agreement shall be interpreted as having been
fully negotiated and drafted jointly by both parties, and shall not be more
strictly construed against either party.
17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement by
and between the parties hereto with respect to the transactions contemplated
hereby, supersedes all prior oral and/or written understandings and agreements
relating thereto. Neither party nor any of its agents has made any
representations to the other which the parties intend to have any force or
effect, except as specifically set forth herein, and neither party, in executing
or performing this Agreement, is relying upon any statement, covenant,
representation or information, of any nature, whatsoever, to whomsoever made or
given, directly or indirectly, verbally or in writing, by any person or entity,
except as specificaLly set forth herein. This Agreement may not be modified or
changed, in any way, except in writing signed by both of the parties hereto.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
hereto have each caused this Agreement to be duly executed as of the date first
above written.
THE INTRAC GROUP US HOME AND GARDEN
By:/s/ Gary Levi By: /s/ Richard J. Raleigh
-------------------------- ------------------------------
Title: President Title: COO
----------------------- --------------------------
Date: 4/16/96 Date: 4/16/96
------------------------ --------------------------
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<PAGE>
EXHIBIT A
PRODUCTS
DESCRIPTION QUANTITY
Power Gardeners 70,000, Units (estimate)
Manufacturing Rights to the
Power Gardner
Manufacturing Molds to the
Power Gardner
TOTAL VALUE $1,600,000
<PAGE>
EXHIBIT B
PRODUCTS/SERVICES/MERCHANDISE
AVAILABLE WITH TRADE CREDIT UTILIZATION
---------------------------------------
Estimated Range of
Trade Credit Utilization
------------------------
o Promotional & Marketing Programs 20-50%
o Merchandise Incentive Programs 20-50%
o Rack, Counter, and Point-of-Purchase
Displays 5-30%
o Telecommunications Services 5-30%
o Group Air Travel & Hotel Accommodations 5-25%
o Printing & Graphic Services 5-15%
o Transportation/Freight, Air Cargo,
Household/Corporate Moves 5-10%
o Computer Hardware and Software 10-20%
o Travel Incentive Cruises 10-40%
o Full range of Insurance Services 10-25%
o Public Relations Services 10-35%
o Automotive/Fleet Requirements 5-20%
o Furniture/Furniture Management Services 10-25%
================================================================================
CREDIT AGREEMENT
AMONG
THE PROVIDENT BANK,
ADMINISTRATIVE AND COLLATERAL AGENT,
EASY GARDENER ACQUISITION CORP.,
BORROWER,
U.S. HOME & GARDEN INC.,
GUARANTOR
AND
VARIOUS LENDERS
DESCRIBED HEREIN
August 9, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 INTERPRETATION..........................................1
1.1 Definitions.............................................1
1.2 Rules of Construction..................................19
ARTICLE 2 LOAN TERMS AND AMOUNTS.................................21
2.1 Revolving Credit Commitment............................21
2.2 Revolving Credit Notes.................................22
2.3 Fees...................................................23
2.4 Term Loan Commitment...................................23
2.5 Term Promissory Notes..................................23
2.6 Interest Payable on the Loans..........................25
2.7 Procedures for Making Draws............................27
2.8 Interest on Overdue Payments; Default Rate.............30
2.9 Prepayments of Principal...............................30
2.10 Time and Place of Payments.............................32
2.11 Application of Funds...................................32
2.12 Payments to be Free of Deductions......................33
2.13 Use of Proceeds........................................34
2.14 Additional Costs, Etc..................................34
2.15 Libor Breakage Cost....................................35
ARTICLE 3 SECURITY INTERESTS.....................................35
3.1 Grant of Security Interest.............................35
3.2 One General Obligation; Cross Collateral...............36
3.3 Additional Security for Loans..........................36
3.4 .......................................................36
ARTICLE 4 REPRESENTATIONS AND WARRANTIES.........................37
4.1 Corporate Existence....................................37
4.2 Corporate Power; Authorization.........................37
4.3 Enforceable Obligations................................37
4.4 No Legal Bar...........................................38
4.5 No Litigation..........................................38
4.6 Financial Condition....................................38
4.7 No Change..............................................38
4.8 No Default.............................................38
4.9 Intellectual Property..................................38
4.10 Compliance with Laws...................................39
4.11 Contractual Obligations................................39
4.12 Taxes..................................................39
4.13 Margin Stock...........................................39
4.14 ERISA..................................................39
4.15 Environmental Matters..................................39
4.16 Investment Company Act.................................40
4.17 Capitalization.........................................40
4.18 Brokerage..............................................40
4.19 Place of Business......................................41
<PAGE>
ii
4.20 General Collateral Representation.......................41
4.21 Accounts................................................42
4.22 Inventory...............................................43
4.23 Disclosure..............................................43
4.24 Solvency................................................43
4.25 Ownership and Control...................................43
4.26 Undisclosed Liabilities.................................43
4.27 Indemnity Agreements....................................44
4.28 Operating Agreements....................................44
4.29 Reports with Governmental Bodies........................44
4.30 Employee Matters........................................44
4.31 Survival of Representations and Warranties..............44
ARTICLE 5 AFFIRMATIVE COVENANTS...................................45
5.1 Financial Statements....................................45
5.2 Certificates; Other Information.........................46
5.3 Payment of Obligations..................................48
5.4 Conduct of Business and Maintenance of Existence........48
5.5 Debtor's Condition. ...................................48
5.6 Maintenance of Property; Insurance......................49
5.7 Liability Insurance.....................................49
5.8 Inspection of Property; Books and Records...............50
5.9 Notices.................................................50
5.10 Environmental Laws......................................51
5.11 Inventory...............................................52
5.12 Equipment...............................................52
5.13 Reclamation, Returns and Repossessions..................53
5.14 Collateral..............................................53
5.15 Banking Services........................................53
5.16 Further Documents.......................................53
5.17 Life Insurance..........................................54
5.18 Employee Benefit Plans..................................54
5.19 Other Information.......................................54
ARTICLE 6 NEGATIVE COVENANTS......................................54
6.1 Limitations on Restricted Payments......................54
6.2 Transactions with Affiliates............................55
6.3 Limitations on Indebtedness.............................56
6.4 Ownership of Borrower...................................56
6.5 Interest Coverage Ratio.................................56
6.6 Maintenance of Net Worth................................57
6.7 Debt Service Coverage Ratio.............................57
6.10 Limitations on Operating Lease Expense..................60
6.11 Limitations on Capital Expenditures.....................60
6.12 Limitation on Liens.....................................60
6.13 Limitation on Guarantee Obligations.....................60
6.14 Limitation on Fundamental Changes.......................61
6.15 Limitation on Sale of Assets............................61
6.16 Limitation on Investments, Loans and Advances...........62
<PAGE>
iii
6.17 Limitation on Optional Payments and
Modifications of Debt Instruments.......................62
6.18 Limitation on Creation or Acquisition of
Subsidiaries............................................63
6.19 Corporate Documents......................................63
6.20 Dividends and Similar Transactions.......................63
6.21 Change of Locations; Collateral..........................63
ARTICLE 7 CONDITIONS PRECEDENT.....................................63
7.1 Conditions Precedent to Initial Loan.....................63
7.2 Conditions Precedent to All Loans........................67
ARTICLE 8 EVENTS OF DEFAULT........................................67
8.1 Payments.................................................67
8.2 Representations and Warranties...........................67
8.3 Certain Covenants........................................68
8.4 Registration of Warrant Stock............................68
8.5 Additional Covenants.....................................68
8.6 Effectiveness of Security Documents......................68
8.7 Destruction of Collateral................................68
8.8 Cross-Default to Other Indebtedness......................68
8.9 Commencement of Bankruptcy or Reorganization
Proceeding..............................................69
8.10 Default by Guarantor.....................................69
8.11 Material Judgments.......................................69
8.12 ERISA....................................................70
8.13 Material Adverse Change..................................70
ARTICLE 9 REMEDIES, COLLECTION OF COLLATERAL, ETC..................70
9.1 Remedies.................................................70
9.2 Application of Proceeds..................................71
9.3 Set-off; Pro Rata Sharing................................71
9.4 Rights Cumulative; Waiver................................72
9.5 Collections on Accounts..................................72
9.6 Notification of Debtors; Grant of Powers.................72
9.7 Disclaimer of Liability..................................73
ARTICLE 10 AGENCY PROVISIONS........................................74
10.1 Appointment of the Agent.................................74
10.2 Authority................................................74
10.3 Acceptance of Appointment................................74
10.4 Application of Moneys....................................75
10.5 Reliance by the Agent....................................75
10.6 Exculpatory Provisions...................................75
10.7 Action by the Agent......................................76
10.8 Amendments, Waivers and Consents.........................76
10.9 Indemnification..........................................77
10.10 Reimbursement of the Agent...............................77
10.11 Sharing of Funds Received................................78
<PAGE>
iv
10.12 Dealing with Lenders.....................................78
10.13 Agent as Lender..........................................78
10.14 Duties Not to be Increased...............................78
10.15 Lender Credit Decisions..................................78
10.16 Resignation or Removal of Agent..........................78
10.17 Assignment of Notes; Participation.......................79
ARTICLE 11 MISCELLANEOUS............................................80
11.1 Amendments and Waivers...................................80
11.2 Notices..................................................80
11.3 Successors and Assigns...................................80
11.4 Expenses; Indemnity......................................80
11.5 Collection Costs.........................................81
11.6 Counterparts.............................................82
11.7 Consent to Jurisdiction..................................82
11.8 WAIVER OF JURY TRIAL.....................................82
11.9 Other Waivers............................................83
11.10 Confidentiality .........................................83
<PAGE>
EXHIBITS
A Borrowing Base Report
B Borrower's Facilities
C Revolving Credit Notes
D Term I Promissory Notes
E Term II Promissory Notes
F Collateral Assignment of Trade Names and Trademarks
G Collateral Assignment of Patents
H Collateral Assignment of Life Insurance
I Pledge Agreement
J Guaranty and Subordination Agreement
K Licenses, Patents, Permits, Trademarks, Trade Names,
Copyrights
L Opinion of Borrower's Counsel
M Assignment and Assumption Agreement
N Notice of Election to Convert to a Libor Rate Loan
O Subsidiary Guaranty
P Subsidiary Security Agreement
Q Warrant
SCHEDULES:
1 Lenders
1.1 Permitted Liens
4.2 Required Consents and Filings
4.5 Litigation
4.6 Equity/Long-Term Investments
4.7 Changes Since June 30, 1994
4.8 Defaults
4.9 Intellectual Property Matters
4.10 Compliance with Laws
4.12 Tax Matters
4.14 Employee Benefit Plans
4.15 Environmental Matters
4.18 Brokers
4.20 Required Filing Locations
4.27 Indemnity Agreements with Directors and Officers
6.3 Indebtedness Existing on Closing Date
6.16(a) Borrower Exceptions to Limitations on Investments, Loans
and Advances
<PAGE>
THIS CREDIT AGREEMENT is made as of August 9, 1996, by and among EASY
GARDENER ACQUISITION CORP., a Delaware corporation ("Borrower"), U. S. HOME &
GARDEN INC., a Delaware corporation ("Guarantor"), THE PROVIDENT BANK, an Ohio
banking corporation ("Provident"), the banks and lending institutions set forth
on Schedule 1 hereto ("Lenders"), and THE PROVIDENT BANK, an Ohio banking
corporation ("Provident"), executing this Agreement in its capacity as
administrative and collateral agent for the Lenders under this Agreement
(hereinafter called "Agent", which expressions shall, where the context so
admits, include a successor Agent).
ARTICLE 1
INTERPRETATION
Section 1.1 Definitions.
The following capitalized terms are defined as follows:
"Accounts" means and includes all of present and future rights to payment
for goods, merchandise or Inventory sold, rented or leased or for services
rendered of Borrower and its Subsidiaries, including, without limitation, those
which are not evidenced by instruments or chattel paper, and whether or not they
have been earned by performance; all accounts (as that term is defined in the
Uniform Commercial Code) accounts receivable, chattel paper, contract rights,
documents and instruments of Borrower and its Subsidiaries; all other
obligations or indebtedness owed to the Borrower and its Subsidiaries from
whatever source arising; all guarantees of any of the foregoing and all security
therefor; all of the right, title and interest of the Borrower and its
Subsidiaries in and with respect to the goods, services or other property which
gave rise to or which secure any of the foregoing and all insurance policies and
proceeds relating thereto; and all of the foregoing whether now owned by the
Borrower and/or its Subsidiaries or hereafter acquired or in existence.
"Additional Purchase Price" means the additional purchase price as defined
in Section 2.5 of the Easy Gardener Acquisition Agreement.
"Adjusted Prime Rate" means the rate of interest per annum equal to the sum
of the Prime Rate plus the Applicable Margin.
"Adjusted Prime Rate Loans" means a Loan which bears interest at the
Adjusted Prime Rate.
"Affiliate" means any Person which directly or indirectly controls, or is
controlled by, or is under common control with, any Person. The term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise. The term "Affiliate"
does not include any Lender or Agent.
"Agency Fee" means an annual amount payable to Agent, as an administrative
and collateral agency fee, as described in Agent's commitment letter with
Borrower dated June 25, 1996. Such fee shall be payable quarterly in arrears on
each Principal Payment Date.
"Agent" means Provident acting (whether or not the term "Agent" is preceded
or followed by the phrases "on behalf of Lenders" or "for the benefit of
Lenders", or words or phrases of similar import) in an administrative and
collateral agency capacity for the Lenders under the Loan Documents, and any
successor agent.
"Agent Deposit Account" has the meaning set forth in Section 2.7(b) hereof.
"Agreement" or "this Agreement" means this Loan and Security Agreement
(including all exhibits annexed hereto) as originally executed, or if
supplemented, amended, or restated from time to time, as so supplemented,
amended, or restated.
<PAGE>
2
"Applicable Margin" shall initially mean 1.25 percent for Adjusted Prime
Rate Loan and 3.50 percent for Libor Rate Loans; provided that commencing with
the first Interest Adjustment Date after September 30, 1996, the Applicable
Margin shall mean the amount set forth below, as a percentage, to be added to
the Prime Rate or the Libor Rate, as the case may be, and used in calculating
the rate of interest for applicable Revolving Credit Loans and Term Loan I (but
not Term Loan II) at any time:
Margin Ratio Applicable
Margin
(expressed as
a percent)
Adjusted Prime Libor Rate
Rate Loan Loan
Less than 2.00 to 1.00 0.75 3.00
Greater than or equal to 2.00 to 1.00 1.25 3.50
In the event that the Borrower fails to timely provide to Agent the
financial statements and compliance certificates required to be provided
pursuant to Section 5.1, the Applicable Margin shall be deemed to be the
highest margin set forth above.
"Average Daily Loan Balance" means the sum of the unpaid balances of
Revolving Credit Loans owing by Borrower to Lenders at the end of each day for
each day during the period in question, divided by the number of days in such
period.
"Average Yearly Loan Balance" means (x) the sum of the Average Daily Loan
Balances for the immediately preceding one year period (or if the Closing Date
occurred less than one year ago, then the sum of the Average Daily Loan Balances
for the number of days since the Closing Date) divided by (y) 365 or 366, as
applicable (or if the Closing Date occurred less than one year ago, then by the
number of days elapsed since the Closing Date).
"Borrowing Base" means the sum of (A) Fifty Percent (50%) of the cost or
market value, whichever is lower, of Eligible Inventory, not to exceed Five
Million and 00/100 Dollars ($5,000,000.00), and (B) Eighty Percent (80%) of the
outstanding amount of Eligible Accounts (excepting those Eligible Accounts which
have a due date more than ninety (90) days but not more than one hundred fifty
(150) days past the invoice date, with respect to which the advance rate shall
be Fifty Percent (50%), not to exceed Four Million Dollars ($4,000,000.00)),
less deductions for co-op advertising liability, customer rebate liabilities and
the other deductions specified on the Borrowing Base Report.
"Borrowing Base Report" means a report including schedules furnished by
Borrower, in substantially the form of Exhibit attached hereto or otherwise in a
form provided by (or otherwise satisfactory to) Agent.
"Business Day" means any day except a Saturday, Sunday or legal holiday on
which commercial banking institutions are open for business in Cincinnati, Ohio.
"Capital Expenditures" means any amounts paid or incurred in connection
with the purchase of plant, machinery, equipment or similar expenditures
(including a Financing Lease of any of the foregoing) which would be required to
be capitalized and shown as an asset on a balance sheet in accordance with GAAP.
"Cash Equivalents" means: (i) (A) marketable direct obligations issued or
unconditionally guarantied by the United States Government or issued by any
agency thereof and unconditionally
<PAGE>
3
guaranteed or backed by the full faith and credit of the United States, in each
case maturing within one (1) year from the date of acquisition thereof or (B)
marketable direct obligations issued by any State of the United States of
America or other political subdivision or agency thereof rated at least AA by
Standard & Poor's Rating Group ("S&P") or the equivalent thereof by Moody's
Investors Service, Inc. ("Moody's") having a maturity of not more than one (1)
year from the date of acquisition; (ii) investments in certificates of deposit,
time deposits, Euro-dollar deposits or bankers' acceptances maturing within one
(1) year from the date of acquisition issued by any Lender which is a commercial
bank or Agent or any other commercial bank organized under the laws of the
United States or any state thereof having capital surplus and undivided profits
aggregating at least Two Hundred Fifty Million Dollars ($250,000,000); (iii)
investments in commercial paper of any lender or Agent or their holding
companies, or any commercial paper which at the time of issuance have a rating
of at least A-1 from S&P or at least P-1 from Moody's and maturing not more than
two hundred seventy (270) days from the date of creation thereof; (iv)
obligations of the type described in (i), (ii) or (iii) above purchased pursuant
to a repurchase agreement obligating the counterparty to repurchase such
obligations not later than thirty (30) days after the purchase thereof, secured
by a fully perfected security interest in any such obligation, and having a
market value at the time such repurchase agreement is entered into of not less
than 100% of the repurchase obligation of the issuing bank; (v) time deposits or
Eurodollar time deposits maturing no more than thirty (30) days from the date of
creation with commercial banks having membership in the Federal Deposit
Insurance Corporation in amounts not exceeding the lesser of One Hundred
Thousand Dollars ($100,000) or the maximum insurance applicable to the aggregate
amount of such Person's deposits in such institution; (vi) deposits or
investments in mutual funds or similar funds offered or sponsored by brokerage
or other companies having membership in the Securities Investor Protection
Corporation in amounts not exceeding the lesser of One Hundred Thousand Dollars
($100,000) or the maximum insurance applicable to the aggregate amount of such
Person's deposits in such institution and investing exclusively in any or all of
the investments in (i) through (v) above; (vii) the securities of any investment
company registered under the Investment Company Act of 1940 which is a no-load
"money market fund" within the meaning of regulations of the Securities and
Exchange Commission, or an interest in a pooled fund maintained by a commercial
bank having comparable investment restrictions; and (viii) cumulative preferred
stock of corporations having senior unsecured long-term debt ratings of AA or
AA2 or better by S&P or Moody's, respectively.
"Cash Flow" means, for any period of determination thereof, Net Income of
the Borrower and its Subsidiaries determined on a consolidated basis for such
period plus depreciation and amortization (net of any non-cash credits), minus
the sum of the following items for such period (without duplication):
extraordinary gains, Capital Expenditures, scheduled principal repayments on the
Obligations, mandatory prepayments on the Revolving Credit Loans pursuant to
Section 2.9(c), principal repayments with respect to any other Indebtedness of
the Borrower (other than representing Capital Expenditures already deducted in
computing Cash Flow), the Seller Contingent Payments (to the extent paid in cash
or Cash Equivalents), the Additional Purchase Price and the Emerald Contingent
Payments.
"Closing Date" means the Business Day on which all conditions precedent
specified in Article hereof shall have been satisfied in full.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral" means all real and personal property of Borrower and/or any of
its Subsidiaries, whether now owned or hereafter acquired, including: (a) all of
the Equipment, General Intangibles, Inventory, Accounts, and all other items of
personal property now owned or hereafter acquired by the Borrower and/or any of
its Subsidiaries or in which the Borrower and/or any of its Subsidiaries has
granted or may in the future grant a security interest to Agent, on behalf of
the Lenders, (b) the Pledged Stock, (c) all proceeds and products of any of the
foregoing in whatever form, including cash, negotiable instruments and other
evidences of indebtedness, chattel paper, security agreements or
<PAGE>
4
other documents and all rights of the Borrower and/or any of its Subsidiaries
in, to and under all leases and rental agreements relating to the foregoing, (d)
all of the right, title and interest of the Borrower and/or any of its
Subsidiaries in and to all goods or other property represented by or securing
any of the Accounts, including all goods that may be reclaimed or repossessed
from or returned by Debtors, (e) all of the rights of the Borrower and/or any of
its Subsidiaries as an unpaid seller, including stoppage in transit, detinue and
reclamation, (f) all additional amounts due to the Borrower and/or any of its
Subsidiaries from any Debtor, irrespective of whether such additional amounts
have been specifically assigned to the Agent on behalf of the Lenders, (g) all
guaranties, or other agreements or property securing or relating to any of the
items referred to in (a) above, or acquired for the purpose of securing and
enforcing any of such items, (h) all instruments, documents, securities, cash,
property, deposit accounts, and the proceeds of any of the foregoing, owned by
the Borrower and/or any of its Subsidiaries or in which Borrower and/or any of
its Subsidiaries has an interest, which are now or may hereafter be in the
possession or control of the Agent or any Lender or in transit by mail or
carrier to or from the Agent or any Lender, or in the possession of any third
party acting on behalf of the Agent or any Lender, without regard to whether the
Agent or any Lender received same in pledge, for safekeeping, as agent for
collection or transmission or otherwise or whether the Agent or any Lender had
conditionally released the same, (i) all ledger sheets, files, records,
documents, blueprints, drawings and instruments (including, without limitation,
computer programs, tapes and related electronic data processing software)
evidencing an interest in or relating to the foregoing, (j) all other rights,
properties or interests granted by the Borrower and/or any of its Subsidiaries
to the Agent or any Lender to secure the Loans and (k) all proceeds and products
of the Collateral described above, including without limitation, all claims
against third parties for damage to or loss or destruction of any of the
foregoing, including proceeds, accounts, contract rights, chattel paper and
general intangibles arising out of any sale, lease or other disposition of any
of the foregoing.
"Collateral Assignment of Patents" means the Collateral Assignment of
Patents dated of even date herewith between Borrower and Agent.
"Collateral Assignment of Trade Names and Trademarks" means the Collateral
Assignment of Trade Names and Trademarks between Borrower and Agent.
"Commonly Controlled Entity" means an entity, whether or not incorporated,
which is under common control with the Borrower within the meaning of Section
4001 of ERISA or is part of a group which includes the Borrower and which is
treated as a single employer under Section 414 of the Code.
"Computation Date" means the last day of each March, June, September and
December following the date of this Agreement.
"Contractual Obligation" means, with respect to any Person, any provision
or requirement of any security issued by such Person or of any agreement,
instrument or other undertaking to which such Person is a party or by which it
or any of its property is bound.
"Credit Commitment" means, in the context of more than one Lender
hereunder, the maximum amount to be loaned by such Lender to Borrower as set
forth on the signature page hereof or as from time to time amended pursuant to
Section 10.17 hereof.
"Debtor" means an account debtor with respect to any of the Accounts and/or
the prospective purchaser with respect to any contract right, and/or any party
who enters into or proposes to enter into any contract or other arrangement with
the Borrower pursuant to which the Borrower is to deliver any personal property
or perform any service.
"Debt Service Coverage Ratio" means, for any period of determination
thereof, the ratio which (a) Cash Flow plus all scheduled payments of principal
on the Obligations and payments of principal on any other Indebtedness of the
Borrower (including Financing Leases) for such period bears
<PAGE>
5
to (b) all scheduled payments of principal on the Obligations and payments of
principal on any other Indebtedness of the Borrower and its Subsidiaries, if any
(including Financing Leases) for such period.
"Default" means any of the events set forth in Article which with giving of
notice, the lapse of time, or both, would constitute an Event of Default.
"Default Rate" means two percentage points (2%) in excess of the applicable
Interest Rate.
"Disbursement Account" has the meaning set forth in Section 2.7(a) hereof.
"Draw Date" means in relation to any Revolving Credit Loan, the day on
which such Loan is made or to be made to Borrower pursuant to this Agreement.
"EBITDA" means, for any period of determination thereof, Net Income of such
Borrower and its Subsidiaries determined on a consolidated basis prior to
provision for interest and income taxes, depreciation and amortization,
excluding extraordinary gains and losses, all as calculated in accordance with
GAAP.
"Easy Gardener Acquisition Agreement" means the Asset Purchase Agreement
dated as of August 31, 1994 among Borrower, Easy Gardener, Inc., a Texas
corporation, and the stockholders of Easy Gardener, Inc.
"Eligible Accounts" means any Account of the Borrower or any Subsidiary of
Borrower which complies with all of Borrower's representations and warranties to
Lenders applicable to Eligible Accounts in all material respects and is
reasonably acceptable to Agent and a Majority of Lenders. Without limiting the
generality of the foregoing, an Eligible Account must meet the following minimum
requirements (and those determined from time to time by Agent in the reasonable
exercise of its discretion):
(a) The Account has not aged more than sixty (60) days from the due
date of the invoice or, if the due date of the Account is more than sixty
(60) days from the date of the invoice, has not aged more than thirty (30)
days from the due date of the invoice;
(b) The Account is owed by a Debtor who is not more than ninety (90)
days delinquent in the payment of Twenty-Five Percent (25%) or more of all
Accounts owed by such Debtor to the Borrower;
(c) The Account is owed by a Debtor located in the United States;
(d) The Account is not owed by an employee, director, officer, partner
or Affiliate of the Borrower, except as approved in writing by Agent;
(e) The Account is not owed by a Debtor in bankruptcy, liquidation,
receivership or similar proceedings;
(f) The collection of the Account is not determined by Agent in its
reasonable judgment to be doubtful by reason of the financial condition of
the Debtor;
(g) The due date of the Account is not more than one hundred fifty
(150) days from the date of the invoice;
(h) The Account, when aggregated with all other Accounts owed by the
Debtor, does not constitute more than twenty-five percent (25%) of all
Eligible Accounts;
<PAGE>
6
(i) A credit balance does not exist with respect to the Account which
has been in existence for more than ninety (90) days;
(j) The amounts due under the Account do not consist of financing
charges;
(k) The Debtor which owes the Account is not the United States or any
department, agency or instrumentality of the United States, unless the
Borrower has complied with all requirements of the Federal Assignment of
Claims Act of 1940 as such requirements relate to the assignment of any
Accounts to Lenders; and
(l) The Account does not exceed a credit limit determined by Agent and
a Majority of Lenders with respect to the Account owed by the Debtor.
An Account which was previously an Eligible Account will cease to be an
Eligible Account if it ceases to comply with the above minimum requirements.
"Eligible Inventory" means any Inventory of the Borrower and/or any
Subsidiary of Borrower which meets the following standards (and those determined
from time to time by Agent and a Majority of Lenders in the reasonable exercise
of their discretion) and complies with the terms of Section 4.22:
(a) is in the possession of Borrower or any Subsidiary of Borrower and
located within one of the facilities listed on Exhibit or is stored with a
bailee or warehouseman if approved by Agent in writing or if Borrower or
any of its Subsidiaries has delivered non-negotiable warehouse receipt to
Agent covering such Inventory,
(b) meets in all material respects all standards imposed by any
governmental agency or department or division thereof having regulatory
authority over such Inventory, its use or sale;
(c) is currently usable or saleable in the normal course of the
Borrower's business without any notice to, or consent of, any third party
as reasonably determined by Agent in good faith, i.e., such Eligible
Inventory does not consist of (i) slow moving items, (ii) Inventory
exceeding a recommended shelf life, (iii) packaging and shipping materials,
(iv) supplies used or consumed in the Borrower's business, (v) Inventory in
transit or held at the premises of third parties, (vi) bill and hold goods,
(vii) defective goods, or (viii) returned goods or seconds;
(d) is subject to a properly perfected first priority security
interest in favor of the Agent on behalf of the Lenders, except for
Permitted Liens (but the value of any such Inventory subject to a Permitted
Lien shall be excluded from the calculation of Eligible Inventory for
purposes of Section 2.1(a)(y)(A) to the extent of liens described in
subparagraphs (e) through (i) under the definition of "Permitted Liens")
and landlord liens if Agent has received a landlord's waiver in form and
substance reasonably satisfactory to Agent;
(e) complies in all material respects with Borrower's representations
and warranties to Lenders as to Eligible Inventory;
(f) consists of raw materials and finished goods; and
(g) is otherwise reasonably acceptable to Agent in all material
respects.
"Emerald" means Emerald Products Corp., a Delaware corporation.
<PAGE>
7
"Emerald Acquisition Agreement" means the Asset Purchase Agreement referred
to in the definition of Emerald Contingent Payments below.
"Emerald Contingent Payments" means certain payments required to be paid by
Borrower to Emerald Products, LLC, a Texas limited liability company ("EPLLC"),
pursuant to Section 2.6 of a certain Asset Purchase Agreement dated as of August
11, 1995 among EPLLC, Emerald and CDHII Management Partners LLC, a Texas limited
liability company, based on sales by Guarantor and its Affiliates of a product
known as "Emerald Edge" and improvements of such product.
"Employee Benefit Plan" means any employee benefit plan within the meaning
of Section 3(3) of ERISA, other than a Multiemployer Plan.
"Environmental Laws" means with respect to any Person, all federal, state
and local laws, rules, regulations, ordinances, permits, orders, writs,
judgments, injunctions, decrees, determinations, awards and consent decrees
relating to hazardous substances and environmental matters applicable to the
business and facilities of such Person (whether or not owned by it). Such laws
and regulations include the Resource Conservation and Recovery Act of 1976
("RCRA"); the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"); the Toxic Substance Control Act; the Clean Water Act;
and the Clean Air Act, all as amended from time to time; state and federal
superlien and environmental cleanup programs; and U.S. Department of
Transportation hazardous materials transportation regulations. The terms
"hazardous substance" and "release" shall have the meanings specified in CERCLA
as the definition of such terms may be subsequently modified, supplemented or
amended, and the terms "solid waste" and "disposed" shall have the meanings
specified in RCRA, as the definition of such terms may be subsequently modified,
supplemented or amended; provided, however, that in the event either CERCLA or
RCRA is amended so as to broaden the meaning of any term defined thereby, such
broader meaning shall apply subsequent to the effective date of such amendment;
and provided, further, however, that to the extent a parcel of real property is
situated in a state or other jurisdiction in which the applicable laws may
establish a meaning for "hazardous substance," "release," "solid waste," or
"disposal" which is broader than that specified in either CERCLA or RCRA, such
broader meaning shall apply.
"Equipment" means all equipment (as that term is defined in the Uniform
Commercial Code) of the Borrower including, without limitation, all furniture,
fixtures, machinery and other equipment of any kind and all substitutions and
replacements thereof and accessories and parts therefor, all whether now owned
or hereafter acquired.
"ERISA" means the Employee Retirement Income Security Act of 1974 and the
rules and regulations issued thereunder, as amended from time to time, and any
successor statute.
"ERISA Affiliate" means, in relation to any Person, any trade or business
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of the
regulations promulgated under Section 414 of the Code.
"Event of Default" has the meaning set forth in Article hereof.
"Excess Cash Flow" means Sixty Percent (60%) of Cash Flow of the Borrower
for each fiscal year as the same shall be adjusted for changes in Working
Capital (increased for any decrease in Working Capital and decreased for any
increase in Working Capital) for such fiscal year from the prior fiscal year,
provided that such adjustments based upon changes in Working Capital have been
approved by Agent and relate to changes in the ordinary course of business (and
not to extraordinary occurrences).
"Financial Statements" means audited financial statements of Borrower for
the fiscal years ended June 30, 1995 and June 30, 1994, and, with respect to the
Guarantor, its Form 10-QSB for the
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8
quarter ended March 31, 1996 and audited financial statements for the fiscal
years ended June 30, 1995 and June 30, 1994, previously delivered to Lenders,
together with such other financial statements as Borrower and Guarantor are
required to deliver in accordance with the terms hereof.
"Financing Lease" means any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of (a)
EBITDA for such period, to (b) Fixed Charges for such period.
"Fixed Charges" means, for any period, the following, each calculated for
such period, without duplication: (a) Interest Expense paid or accrued, minus
(b) consolidated interest income earned or accrued by Borrower and its
Subsidiaries as determined in accordance with GAAP, plus (c) the sum of (i)
scheduled payments of principal made during such period with respect to all
Indebtedness of Borrower, including the principal component of any cash payments
made on any Financing Lease, (ii) state and federal taxes applicable to the
taxable income for such period, (iii) Capital Expenditures made during such
period, (iv) payments of the Seller Contingent Payments made in cash or Cash
Equivalents during such period, (v) the Additional Purchase Price paid during
such period, and (vi) the Emerald Contingent Payments made during such period.
"GAAP" means generally accepted accounting principles in the United States
at the time in effect.
"General Intangibles" means all general intangibles (as that term is
defined in the Uniform Commercial Code) of the Borrower including, without
limitation, all goodwill, patents, formulae, blueprints, proprietary
manufacturing processes, trademarks, licenses, franchises, beneficial interests
in trusts, joint venture interests, partnership interests, rights to tax
refunds, pension plan overfundings, literary rights and other contractual rights
of the Borrower, all whether now owned or hereafter acquired.
"Golden West" means Golden West Agri-Products, Inc., a California
corporation and wholly-owned subsidiary of Guarantor.
"Guarantee Obligation" means, with respect to any Person, any obligation in
the nature of a guaranty, repurchase arrangement, loan or advancement agreement,
reimbursement obligation, comfort letter, hold harmless, indemnity or
counter-indemnity or similar obligation, with respect to any indebtedness,
lease, dividend or other obligations of any other Person, directly or
indirectly, fixed or contingent, matured or unmatured; provided, however, that
the term shall not include endorsements of instruments for deposit or collection
in the ordinary course of business and, the indemnification of officers,
directors and employees under applicable corporate law or the articles of
incorporation and by-laws of such Person and, with respect to the Borrower, such
written indemnity agreements with officers and directors as are disclosed on
Schedule 4.27 hereto, all arising in the ordinary course of business. The amount
of any Guarantee Obligation shall be deemed to be the maximum amount for which
the guaranteeing person may be liable pursuant to the terms of the instrument
embodying such Guarantee Obligation, or if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof.
"Guarantor" means U.S. Home & Garden Inc., a Delaware corporation, which is
the owner of One Hundred Percent (100%) of the outstanding capital stock of
Borrower and Emerald.
"Guaranty Agreement" means the Guaranty and Subordination Agreement dated
of even date herewith by Guarantor in favor of Agent for the benefit of Lenders
and in favor of Lenders.
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9
"Hazardous Materials" means any hazardous materials, hazardous wastes,
hazardous constituents, hazardous or toxic substances, petroleum products
(including crude oil or any fraction thereof), defined or regulated as such in
or under any Environmental Law.
"Head Office" means, in relation to the Agent so long as Provident is
Agent, the head office of The Provident Bank located at One East Fourth Street,
Cincinnati, Ohio 45202 or such office designated in writing to Borrower and
Lenders by Provident or any successor Agent.
"Indebtedness" means, without duplication, with respect to any Person at
any date, (a) all indebtedness of such Person for borrowed money, including
overdrafts and charges related thereto, (b) indebtedness of such Person for the
deferred purchase price of services or property, which purchase price is (i) due
twelve (12) months or more from the date of incurrence of the obligation in
respect thereof or (ii) is evidenced by a note, bond, debenture or similar
instrument, (c) all obligations of such Person under Financing Leases, (d) all
obligations of such Person in respect of acceptances, letters of credit or
similar facilities issued or created for the account of such Person, (e) all
interest whether accrued or actually paid or payable, (f) all liabilities of
taxes, and (g) all liabilities secured by any Lien on any property owned by such
Person even though such Person has not assumed or otherwise become liable for
the payment thereof.
"Interest Adjustment Date" means the first day of the first month after the
date on which the following are required to be delivered to Agent: (i) the
quarterly compliance certificates required to be delivered under Section 5.2(a)
with respect to the most recent quarter and (ii) the monthly unaudited financial
statements required to be delivered under Section 5.1(b) with respect to the
last month in such quarter.
"Interest Coverage Ratio" means, for any period, the ratio of (a) EBITDA
for such period to (b) Interest Expense for such period.
"Interest Expense" means, for any period, and with respect to any Borrower
and its Subsidiaries on a consolidated basis, interest expense of such Persons
determined in accordance with GAAP, including interest paid or expensed during
such period, plus interest required or permitted to be capitalized in accordance
with GAAP.
"Interest Period" means:
(a) For each Libor Rate Loan, the period commencing on the Draw Date
or the date of conversion of a Prime Rate Loan and ending 30, 60 or 90 days
thereafter; provided that
(i) any Interest Period which would otherwise end on a day which
is not a Business Day shall be extended to the next succeeding
Business Day unless such Business Day falls in another calendar month,
in which case such Interest Period shall end on the next preceding
Business Day;
(ii) any Interest Period which begins on the last Business Day of
a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month; and
(iii) any Interest Period which begins before the Termination
Date and would otherwise end after the Termination Date shall end on
the Termination Date; and
(b) For an Adjusted Prime Rate Loan, the period ending on the earlier
of repayment by the Borrower, the date on which such Adjusted Prime Rate
Loan is converted to a Libor Rate Loan pursuant to Section 2.4(a) hereof,
or the Termination Date.
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10
"Inventory" means all inventory (as that term is defined in the Uniform
Commercial Code) of the Borrower and/or any of its Subsidiaries, including,
without limitation, all goods, merchandise and other personal property,
wheresoever located and whether or not in transit, now owned or hereafter
acquired by Borrower and/or any of its Subsidiaries, which are held for sale or
lease, or are furnished or to be furnished under any contract or service by the
Borrower and/or any of its Subsidiaries, or are raw materials, work-in-progress,
finished goods, supplies or materials used or consumed in the business of the
Borrower and/or any of its Subsidiaries, and all products thereof, all whether
now owned or hereafter acquired by the Borrower and/or any of its Subsidiaries;
and all right, title and interest of the Borrower and/or any of its Subsidiaries
in and to any leases or rental agreements for such inventory.
"Liabilities" means all indebtedness, obligations and other liabilities,
whether matured or unmatured, liquidated or unliquidated, direct or contingent
or joint or several, that should, in accordance with GAAP, be classified as
liabilities on a balance sheet of a Person.
"Libor" shall mean the rate (rounded upward to the next highest 1/100 of
1%) obtained by dividing (x) the rate of interest per annum determined by the
Agent equal to the offered rates for deposits in U.S. Dollars of one, two or
three-month periods (as the case may be) commencing of the first date of the
applicable Interest Period for which such rate is determined as such rate
appears on the Telerate system as of 11:00 a.m. (London, England time) on the
date which is two (2) Business Days preceding the first day of such Interest
Period, for a period comparable to the duration of such Interest Period and in
an amount comparable to the amount of the Libor Rate Loan to be outstanding
during such Interest Period, by (y) a percentage equal to 100% minus the stated
maximum rate of all reserves required to be maintained against "Libor Rate
liabilities" as specified in Regulation D (or against any other category of
liabilities which includes deposits by reference to which the interest rate on
Libor Rate Loans or loans is determined or any category of extensions of credit
or other assets which includes loans by a non-United States office of a bank to
United States residents) on such date to any member bank of the Federal Reserve
System.
"Libor Break Funding Costs" means an amount sufficient to reimburse each
Lender for any and all loss, cost or expense (including, without limitation, any
loss incurred in obtaining, liquidating or reemploying deposits from third
parties acquired to maintain any Loan or part thereof as a Libor Rate Loan)
incurred or sustained by each of them as the consequence of the occurrence of
any Libor Break Funding Event. Such indemnification shall include, without
limitation, an amount equal to the excess, if any, of (i) the amount of interest
that otherwise would have accrued on the principal amount so paid, prepaid or
repaid or not borrowed for the period, beginning with the date of such payment,
prepayment or repayment until the last day of the Interest Period that would
otherwise have been in effect for such Libor Rate Loan, at the applicable rate
of interest for such Libor Rate Loan over (ii) the amount of interest
(reasonably determined by Agent) that otherwise would have accrued on such
principal amount by reemploying such amount at a rate equal to Libor for such
period or nearest available period for deposits bearing a rate equal to Libor.
"Libor Break Funding Event" means any of the events or occurrences set
forth in Sections 2.15(a) or 2.15(b).
"Libor Rate" shall mean for each Interest Period, the rate of interest per
annum equal to the sum of Libor plus the Applicable Margin "Libor Rate Loan"
means a Loan which bears interest at the Libor Rate.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any Financing Lease having substantially the same economic
effect as
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11
any of the foregoing, and the filing of any Financing Statement under the
Uniform Commercial Code or comparable law of any jurisdiction in respect of any
of the foregoing). The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances affecting property.
"Loans" means the Revolving Credit Loans and the Term Loans.
"Loan Documents" means this Agreement, the Notes and the Security Documents
and all other documents, instruments, financing statements, certificates and
other agreements now or hereafter executed in connection with the Loans.
"Loan Year" means each period of twelve (12) consecutive months, commencing
on the Closing Date and on each anniversary thereof.
"Majority of Lenders" means at such times as there are any Loans
outstanding, the Lenders whose aggregate Pro Rata Shares of the outstanding
Loans are greater than or equal to Sixty-Six and 2/3 Percent (662/3%) of the
aggregate amount of the outstanding Loans, and at all other times, the Lenders
whose aggregate Credit Commitments are greater than or equal to Sixty-Six and
2/3 Percent (662/3%) of the aggregate Credit Commitments of all the Lenders.
"Margin Ratio" means, as of any date subsequent to the date of this
Agreement, the ratio of (a) Indebtedness of Borrower and its Subsidiaries with
respect to borrowed money as of the date of determination, provided that in
calculating such Indebtedness for purposes of determining the Margin Ratio, any
amount of Indebtedness arising from the Revolving Loans shall be deemed equal to
the average daily outstanding balance of the Revolving Loan for the twelve month
period immediately preceding the date of such determination, to (b) EBITDA, all
calculated for the four fiscal quarters ending on the Computation Date
immediately preceding the date for which such ratio is calculated.
"Material Adverse Effect" means a material adverse effect on (a) the
business, operations, property or financial condition of the Borrower and its
Subsidiaries, taken as a whole, or the Borrower and its Subsidiaries and
Guarantor taken as a whole, (b) the Collateral, (c) the ability of the Borrower
or Guarantor to perform their obligations under this Agreement or any other Loan
Document to which they are a party, or (d) the validity or enforceability of
this Agreement, the Notes or any of the other Loan Documents or the rights or
remedies of the Agent and any Lender.
"Multiemployer Plan" means a Plan which is a multiemployer plan as defined
in Section 4001(a)(3) of ERISA.
"Net Income" means, for any period of determination thereof, the net income
(or loss) of a Person for such period in accordance with GAAP.
"Net Worth" means, at any particular date, all amounts which, in accordance
with GAAP, should be included under shareholders' equity including without
limitation the par or stated value of all outstanding capital stock, additional
paid-in capital and retained earnings on a balance sheet of a Person at such
date.
"Notes" means the Revolving Credit Notes and the Term Notes evidencing the
Loans.
"Obligations" means, without limitation, the Loans and all other debts,
obligations, or liabilities of every kind and description of the Borrower to the
Agent or any Lender and arising under this Agreement, whether now due or to
become due, direct or indirect, absolute or contingent, presently existing or
hereafter arising, joint or several, secured or unsecured, whether for payment
or performance, regardless of how the same arise or by what instrument,
agreement or book account
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12
they may be evidenced, or whether evidenced by any instrument, agreement or book
account, including, without limitation, all Loans (including any Loan by renewal
or extension). Obligations shall also include all interest and other charges
chargeable to the Borrower or due from the Borrower to the Agent or any Lender
from time to time and all costs and expenses referred to in Sections 11.4 and
11.5.
"Operating Lease Expense" means, with respect to any Person for any period
of determination, all payment obligations of such Person under agreements for
lease, hire or use of any real or personal property (net of sublease income and
excluding taxes, insurance and similar related expenses unless payable as
additional rent), other than obligations under Financing Leases.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Participation Percentage" means, in relation to the particular Lender, the
percentage set forth with respect to such Lender on Schedule 1.
"Permitted Liens" means the liens and interests in favor of Lenders or the
Agent for the benefit of Lenders granted in connection herewith securing any of
the Obligations hereof and:
(a) Liens arising by operation of law for taxes not yet delinquent or
thereafter payable without penalty or interest;
(b) statutory Liens of mechanics, materialmen, shippers and
warehousemen for services or materials for which payment is not yet overdue
for a period of more than sixty (60) days and which occur in the ordinary
course of business;
(c) Liens incurred or pledges or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment
insurance and other types of social security;
(d) claims and liens for taxes due and payable and claims of
mechanics, materialmen, shippers, warehousemen, carriers and landlords;
provided, that the validity or amount thereof is being contested in good
faith and by appropriate and lawful proceedings promptly initiated and
diligently conducted (of which the Borrower has given prior written notice
to the Agent in the case of any single lien in excess of Ten Thousand and
00/100 Dollars ($10,000.00)) and, in all cases, for which appropriate
reserves (in accordance with GAAP) have been established and so long as
levy and execution have been and continue to be stayed;
(e) Liens incurred in connection with transactions permitted under
Section 6.3(c);
(f) judgment liens taken against the Borrower and/or any of its
Subsidiaries not in excess of One Hundred Thousand and 00/100 Dollars
($100,000.00) in the aggregate;
(g) pledges and deposits to secure the performance of bids, trade
contracts, leases, statutory obligations, surety and approval bonds,
performance bonds, obligations to public utilities, liens in favor of
customs or revenue authorities arising as a matter of law to secure customs
duties in connection with the importation of goods, all in an aggregate
amount not to exceed Fifty Thousand and 00/100 Dollars ($50,000.00);
(h) Liens in existence on the Closing Date listed on Schedule 1.1
securing Indebtedness permitted by Section hereof;
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13
(i) Liens on goods, the purchase price of which is financed by a
letter of credit for the account of a Debtor where such lien secures the
obligation of Debtor and/or any of its Subsidiaries in respect of such
letter of credit;
(j) easements, rights of way and other similar encumbrances incurred
in the ordinary course of business which, in the aggregate are not
substantial in amount and do not materially detract from the value of
property subject thereto or materially interfere with the ordinary course
of business of Borrower or any Subsidiary of Borrower; and
(k) any Lien permitted in writing by Agent.
"Person" means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"Pledge Agreement" means a pledge agreement substantially in the form of
Exhibit I hereto pledging (a) all of the issued and outstanding capital stock of
Borrower, of whatever class or description, made by Guarantor to the Agent for
the benefit of Lenders as additional collateral security for the payment of
Guarantor's obligations under the Guaranty Agreement; (b) all of the issued and
outstanding capital stock of each existing direct Subsidiary of Borrower, of
whatever class or description, made by Borrower to the Agent for the benefit of
the Lenders as additional collateral security for the Loans; (c) all of the
issued and outstanding capital stock of each direct Subsidiary of Weatherly, of
whatever class or description, made by Weatherly as additional collateral
security for its Subsidiary Guaranty; and (d) all of the capital stock of each
direct or indirect Subsidiary of Borrower hereafter formed or acquired, of
whatever class or description, made by the holder of such stock to the Agent for
the benefit of the Lender as additional collateral security for the Loans or the
Subsidiary Guaranty of such Subsidiary, as the case may be; in each case, with
such changes in the text of the Pledge Agreement to reflect the obligations
secured thereby.
"Pledged Stock" means, as the context requires, all of the issued and
outstanding shares of capital stock of the Borrower, or a Subsidiary of the
Borrower which have been or will be pledged by Guarantor (in the case of the
outstanding capital stock of the Borrower) or by Borrower or a Subsidiary of
Borrower (in the case of the outstanding capital stock of a Subsidiary of
Borrower) as collateral security for the Loans or a guaranty obligation of the
Guarantor or a Subsidiary, as applicable.
"Prepayment Amount" means the amount of any principal prepaid on the Loans
under Section hereof.
"Prime Rate" means the annual percentage rate of interest which is
established by Provident, from time to time as its prime rate, whether or not
such rate is publicly announced, and which provides a base to which loan rates
may be referenced. The Prime Rate is not necessarily the lowest lending rate of
Provident. Provident shall determine the Prime Rate in effect from time to time.
Any change in the Prime Rate shall, for all purposes of this Agreement and any
of the other Loan Documents, become effective on the effective date of such
change as announced by Provident in accordance with Provident's customary
practices. If Provident ceases to publish a "prime rate," the term "Prime Rate"
shall mean a variable rate of interest per annum equal to the rate of interest
from time to time most recently published as the "Prime Rate" in the "Money
Rates" section of the Wall Street Journal (Western Edition).
"Principal Payment Date" means each March 31, June 30, September 30, and
December 31 from and after the Closing Date until the Termination Date.
"Pro Rata Share" means, in the context of more than one Lender hereunder,
and in relation to any particular item, the share of a Lender in such item,
which shall be in the same proportion which
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14
the aggregate amount of all of the Obligations owing to such Lender with respect
to such item at such time shall bear to the aggregate amount of all of the
Obligations owing to all of the Lenders with respect to such item at such time
net of any and all charges or fees due and payable to Agent under the Loan
Documents.
"Rate Option" means the Adjusted Prime Rate or the Libor Rate.
"Reference Period" means, with respect to a particular Computation Date,
unless otherwise provided, the period of four (4) consecutive calendar quarters
ending on such Computation Date, provided such date occurs subsequent to the
date of this Agreement except that with respect to any Computation Date prior to
September 30, 1997, the applicable reference period shall be the period from and
including the calendar quarter in which falls the Closing Date through such
Computation Date.
"Reportable Event" means any of the events set forth in section 4043(b) of
ERISA, other than those events as to which the thirty day notice period is
waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. ss.2615.
"Requirements of Law" means, with respect to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other governmental authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Responsible Officer" means, with respect to any Person, the (i) chief
executive officer, the president or any executive or senior vice-president of
such Person, and (ii) with respect to financial matters, the chief financial
officer of such Person, and (iii) with respect to any documents to be delivered
at Closing, any vice president or the secretary of such Person.
"Restricted Payment" means (a) any dividend or distribution on the capital
stock of the Borrower (except dividends payable solely in existing or presently
issued shares of such capital stock of Borrower delivered to Agent as secured
party under the Pledge Agreement and subject to the terms of the Pledge
Agreement), (b) any purchase, redemption or other acquisition for value of any
capital stock of the Borrower, (c) any loan, advance, extension of credit or
Guarantee Obligation by the Borrower to any Affiliates of the Borrower or any
Affiliates of the Guarantor, other than as permitted hereby, or (d) any
investment in any Affiliates of the Borrower or any Affiliates of the Guarantor,
other than as permitted hereby.
"Revolving Credit Commitment" means Thirteen Million and 00/100 Dollars
($13,000,000.00).
"Revolving Credit Loans" means, collectively, the Revolving Credit Loans,
each singly a Revolving Credit Loan, made or to be made to Borrower by each
Lender pursuant to this Agreement as set forth in Article 2 hereof.
"Revolving Credit Notes" means the promissory notes referred to in Section
2.2 to evidence the Revolving Credit Loans.
"Security Documents" means all of the documents and instruments now or
hereafter evidencing the collateral security of Lenders, including without
limitation, all UCC-1 Financing Statements and UCC-3 Continuation Statements
with respect to the Collateral, the Collateral Assignment of Trademarks and
Trade Names, the Collateral Assignment of Patents, the Collateral Assignment of
Life Insurance, the Guaranty Agreement, the Subsidiary Guaranties, the Security
Agreements and the Pledge Agreements, whether such documents are issued to or
signed by Agent, Agent for the benefit of Lenders, or Lenders.
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15
"Seller Contingent Payments" means certain payments required to be made to
Messrs. Richard Grandy and Joseph A. Owens II upon the occurrence of certain
contingencies pursuant to Section 2.6 of the Easy Gardener Acquisition
Agreement.
"Solvent" means, with respect to any Person, that as of any date of
determination, (a) the then present fair saleable value of the property of such
Person on a going concern basis is greater than the total amount of liabilities
(including contingent liabilities) of such Person, (b) such Person's property is
not unreasonably small in relation to its business or any contemplated or
undertaken transaction, and (c) such Person does not intend to incur and does
not believe or reasonably should not believe that it will incur, debts beyond
its ability to pay such debts as they become due.
"Subsidiary" means, with respect to any Person, a corporation, partnership
or other entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests having
such power only by reason of the happening of a contingency) to elect a majority
of the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person. Unless otherwise qualified, all references to a "Subsidiary" or
to "Subsidiaries" in this Agreement shall refer to any Subsidiary or all
Subsidiaries of the Borrower, whether now in existence or hereafter organized.
"Term Loan I" and "Term Loan II" have the respective meanings set forth in
Section 2.4.
"Term Loans" means the Term Loan I and Term Loan II.
"Term Notes I" and " Term Notes II" have the respective meanings set forth
in Section 2.4.
"Term Notes" means the Term Notes I and Term Notes II.
"Uniform Commercial Code" or "UCC" means the Uniform Commercial Code in
each case in effect in the jurisdiction where the Collateral is located.
"Warrants" means the warrants delivered to each Lender on the Closing Date,
substantially in the form of Exhibit Q hereto, and any other warrants issued to
the Lenders in substitution or modification thereof or as a supplement thereto.
"Weatherly" means Weatherly Consumer Products Group, Inc., a Delaware
corporation, whose principal office is located at 651 Perimeter Drive, Suite
300, Lexington, Kentucky.
"Weatherly Acquisition" means the acquisition by Borrower of all of the
capital stock of Weatherly pursuant to the terms of the Weatherly Acquisition
Agreement.
"Weatherly Acquisition Agreement" means the Stock Purchase Agreement dated
as of August 9, 1996, among Borrower, U. S. Home & Garden Inc., Weatherly and
the Weatherly Stockholders.
"Weatherly Stockholders" means Laban P. Jackson, Jr., Emanuel M. Metz, E.H.
Arnold, and James R. Hills.
"Working Capital" means current assets (excluding cash) minus current
liabilities (excluding current maturities of long-term indebtedness).
Section 1.2 Rules of Construction.
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16
(a) Use of Capitalized Terms. For purposes of this Agreement, unless
the context otherwise requires, the capitalized terms used in this
Agreement shall have the meanings herein assigned to them, and such
definitions shall be applicable to both singular and plural forms of such
terms. In addition, all terms defined in the Uniform Commercial Code shall
have the meanings given therein unless otherwise defined herein.
(b) Construction. All references in this Agreement to the single
number and neuter gender shall be deemed to mean and include the plural
number and all genders, and vice versa, unless the context shall otherwise
require.
(c) Headings. The underlined headings contained herein are for
convenience only and shall not affect the interpretation of this Agreement.
(d) Entire Agreement. This Agreement and the other Loan Documents
shall constitute the entire agreement of the parties with respect to the
subject matter hereof.
(e) Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
(f) Governing Law. This Agreement, the Notes and the other Loan
Documents and the rights and obligations of the parties under this
Agreement, the Notes and the other Loan Documents shall be governed by, and
construed and interpreted in accordance with, the law of the State of Ohio.
(g) Accounting Terms and Determinations. All accounting terms not
specifically defined herein shall be construed, all accounting
determinations shall be made, and all financial statements required to be
delivered pursuant hereto shall be prepared, in accordance with GAAP
consistently applied in the preparation of such Person's financial
statements. In the event that any accounting changes occur and such changes
result in a change in the method of calculation of financial covenants,
standards and terms contained in this Agreement, then Borrower and Lender
agree to enter into negotiations to amend such provisions of this Agreement
so as to reflect such changes with the desired result that the criteria for
evaluating the financial condition of Borrower shall be the same after
giving effect to the accounting changes, as if such accounting changes had
not been made.
(h) Borrower's Knowledge. Any statements, representations and
warranties that are based upon the best knowledge of the Borrower or
Guarantor shall be deemed to have been made after due inquiry by such
Person with respect to the matter in question. "Knowledge" of Borrower or
Guarantor means the knowledge of a Responsible Officer of Borrower or
Guarantor, as the case may be, following the time such Responsible Officer
has been informed of or otherwise learns of the information of which
Borrower or Guarantor is sought to be charged.
(i) Loan Documents. The definition of each Loan Document shall be
deemed to include all renewals, amendments, modifications, restatements and
replacements of such document from time to time duly executed by the party
to be charged with performance thereunder.
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17
ARTICLE 2
LOAN TERMS AND AMOUNTS
Section 2.1 Revolving Credit Commitment.
(a) Commitment. Each Lender, severally and not jointly, agrees, upon
the terms and subject to the conditions contained in this Agreement, to
make the Revolving Credit Loans to the Borrower, from time to time, in an
amount not to exceed its Participation Percentage in the Revolving Credit
Commitment available to the Borrower. The aggregate amount of all Revolving
Credit Loans shall be the lesser of the Borrowing Base and the Revolving
Credit Commitment. No Lender shall have any obligation to make any
Revolving Credit Loan under this Section to the extent any requested loan
or advance would cause the principal balance of the Revolving Credit Loan
then outstanding to exceed the Revolving Credit Commitment. Subject to the
limitations herein, until termination of the Revolving Credit Commitment,
any amounts borrowed may be repaid in whole or in part without prepayment
penalty (except as described in Section ) and may be reborrowed until such
termination as provided herein and provided that at the time of such
borrowing request no Default or Event of Default exists. The Revolving
Credit Commitment shall terminate and all of the indebtedness evidenced by
the Revolving Credit Notes shall, if not sooner due and payable pursuant to
the provisions hereof, be in any event absolutely and unconditionally due
and payable in full by the Borrower on June 30, 2002, the date of the
maturity of the Revolving Credit Notes.
(b) Conditions Required for Subsequent Revolving Credit Loans. The
obligation of the Lenders to make any Revolving Credit Loans after the
Closing Date shall be subject to the satisfaction, prior thereto or
concurrently therewith, of each of the following conditions precedent:
(i) Legality of Transactions. It shall not be unlawful (A) for
the Agent or any Lender to perform any of their respective agreements
or obligations under any of the Loan Documents to which the Agent or
Lender is a party on the date of such Loan, or (B) for the Borrower or
Guarantor to perform any of their respective agreements or obligations
under any of the Loan Documents to which it is a party on such date.
(ii) Representations and Warranties. Each of the representations
and warranties made by the Borrower and Guarantor to the Agent or any
Lender in this Agreement or any Loan Document (A) shall be true and
correct in all material respects when made, and (B) shall, for all
purposes of this Agreement, be deemed to be repeated on and as of the
date any Loan, and shall be true and correct in all material respects
as of each of such dates, except to the extent such representations
and warranties relate expressly to an earlier date.
(iii) Performance, Etc. The Borrower and Guarantor shall have
duly and properly performed, complied with and observed in all
material respects each of their respective covenants, agreements and
obligations contained in this Agreement and all of the other Loan
Documents to which they are parties. No event shall have occurred on
or prior to such date and be continuing on such date, and no condition
shall exist on such date, which constitutes a Default or an Event of
Default.
(iv) Proceedings and Documents. All corporate, governmental and
other proceedings in connection with the transactions contemplated by
the Loan Documents and all instruments and documents incidental
thereto shall be in form and substance reasonably satisfactory to
Lenders and Lenders shall have received all such counterpart originals
or
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certified or other copies of all such instruments and documents as
Lenders shall have reasonably requested.
In addition, if requested by Lenders, Borrower and Guarantor shall execute
and deliver a certificate of a Responsible Officer in form and substance
reasonably satisfactory to Agent certifying that each of the conditions set
forth in subparagraphs (ii) and (iii) above applicable to it have been
satisfied. The Borrower shall furnish to Agent (for further delivery to Lenders)
a Borrowing Base Report signed by a Responsible Officer of Borrower on a monthly
basis, by the fifteenth (15th) day of each month as to the immediately preceding
calendar month, unless otherwise reasonably requested by Agent. Such report
shall show the age of the Accounts in intervals of not more than thirty (30)
days and contain such further information as Agent may reasonably require from
time to time.
Section 2.2 Revolving Credit Notes.
The absolute and unconditional obligation of the Borrower to repay each
Lender its respective Pro Rata Share of the principal of each Revolving Credit
Loan and the interest thereon shall be evidenced by Revolving Credit Notes
executed by the Borrower in the form of Exhibit C attached to this Agreement
(the "Revolving Credit Notes"). Each Revolving Credit Loan made by each Lender
to the Borrower and each payment made on account of principal on the Revolving
Credit Notes shall be recorded by the Agent on the books of the Agent which
record shall constitute prima facie evidence of the accuracy of the information
contained therein; provided, however, that the failure of the Agent to make such
notation shall not limit or otherwise affect the obligations of the Borrower
under the Revolving Credit Notes or this Agreement. The Revolving Credit Notes
shall include the following terms:
(a) Term. The Revolving Credit Notes shall be in the form of Exhibit
C, and shall mature and be due and payable in full on or before, the
earlier of: (i) June 30, 2002, or (ii) the date upon which the entire
principal and interest of the Revolving Credit Notes shall otherwise become
due and payable pursuant to the provisions hereof;
(b) Interest Rate. The Revolving Credit Notes shall bear interest
(computed on the basis of the actual number of days elapsed over a 360-day
year) on the daily outstanding principal balance thereunder at an annual
rate calculated pursuant to Section 2.6;
(c) Interest Payment Dates. Interest on the Revolving Credit Notes
shall be payable in accordance with Section 2.6(g), and on the date the
Revolving Credit Loans are due (whether by maturity, acceleration, or
otherwise); and
(d) Annual Zero Balance Requirement. For a period of not less than ten
(10) consecutive days during each year of this Agreement in the month of
August, commencing with August 1997, the entire principal and interest on
the Revolving Credit Notes shall be paid in full and no amounts shall be
borrowed on such Revolving Credit Loans during such period.
Section 2.3 Fees.
(a) Unused Commitment Fee. The Borrower agrees to pay the Agent for the
ratable benefit of the Lenders a loan fee equal to One-half of One Percent
(.50%) per annum (based on a year of 360 days and actual days elapsed) on the
unborrowed amount of the Revolving Credit Commitment for each day from and
including the date hereof to and including the maturity of the Revolving Credit
Notes. Such fee shall be payable quarterly in arrears on the last day of
September, December, March and June of each year prior to the maturity of the
Revolving Credit Notes.
(b) Service Fee. The Borrower shall (i) promptly upon request, reimburse
the Agent for all reasonable out-of-pocket travel expenses relating to its
audits (as discussed below) not to exceed $7,000.00 per year, and (ii) pay the
Agent a service fee for the
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maintenance of the Revolving Credit Commitment of Two Thousand Five Hundred
and 00/100 Dollars ($2,500.00) per month, payable in advance on the first
day of each month, to cover all additional expenses incurred in connection
with the monitoring by the Agent of the Revolving Credit Loans. The Agent
and the Lenders shall have the right to conduct a comprehensive field audit
of the Borrower not more than twice per year prior to the occurrence of an
Event of Default, and the Borrower shall cooperate fully with the Agent in
the completion of such audit.
(c) Agency Fee. The Agent (and no other Lender) shall receive the
Agency Fee.
Section 2.4 Term Loan Commitment. Each Lender, severally and not jointly,
subject to the terms and conditions of this Agreement, hereby agrees to make
loans to Borrower in an amount equal to its Participation Percentage of the term
loans of Twenty-three Million and 00/100 Dollars ($23,000,000.00) ("Term Loan
I") and (i) Two Million Two Hundred Fifty Thousand and 00/100 Dollars
($2,250,000.00) ("Term Loan II").
Section 2.5 Term Promissory Notes. The absolute and unconditional
obligation of the Borrower to repay the principal of the Term Loans and the
interest thereon shall be evidenced by promissory notes executed by the Borrower
to each Lender in substantially the form of Exhibits and G attached to this
Agreement (respectively, "Term Notes I" and "Term Notes II"). In the event of an
assignment under Section 10.17(a), Borrower shall issue new notes to reflect the
new Credit Commitments of the assigning Lender and the assignee thereof. The
Term Notes shall include the following terms:
(a) Terms. Each Term Note shall be dated as of the Closing Date and
shall mature and be due and payable in full on June 30, 2002.
(b) Interest Rate. Each Term Note shall bear interest (computed on the
basis of the actual number of days elapsed over a 360-day year) on the
daily outstanding principal balance thereunder at a rate per annum
calculated in accordance with Section 2.6 hereof.
(c) Interest Payment Dates. Interest on the Term Notes shall be
payable in accordance with Section 2.6(g), and on the date a Term Loan is
due (whether by maturity, acceleration or otherwise).
(d) Principal Payments on Term Loan I. Quarterly installments of
principal on Term Loan I shall be payable commencing on September 30, 1996
and on each Principal Payment Date thereafter in accordance with the
following schedule and such payment shall be distributed ratably among the
Lenders in accordance with their respective Credit Commitments:
Payment Date Principal Payment
September 30, 1996 $570,000
December 31, 1996 570,000
March 31, 1997 1,350,000
June 30, 1997 1,350,000
September 30, 1997 570,000
December 31, 1997 570,000
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March 31, 1998 1,350,000
June 30, 1998 1,350,000
September 30, 1998 570,000
December 31, 1998 570,000
March 31, 1999 1,350,000
June 30, 1999 1,350,000
September 30, 1999 570,000
December 31, 1999 570,000
March 31, 2000 1,350,000
June 30, 2000 1,350,000
September 30, 2000 570,000
December 31, 2000 570,000
March 31, 2001 1,350,000
June 30, 2001 1,350,000
September 30, 2001 570,000
December 31, 2001 570,000
March 31, 2002 1,350,000
June 30, 2002 1,310,000
(e) Principal Payments on Term Loan II. Quarterly installments of
principal on Term Loan II shall be payable commencing on September 30, 1998
and on each Principal Payment Date thereafter in an amount of $140,625.00
on each Principal Payment Date until paid in full.
Section 2.6 Interest Payable on the Loans.
(a) Interest Rate. Except as otherwise provided herein, the Revolving
Credit Loans and Term Loans I shall bear interest on the daily outstanding
principal balance thereunder at an annual rate equal to, at Borrower's
option, the Adjusted Prime Rate or Libor Rate. The Term Loans II shall
bear interest on the outstanding principal amount thereof at an annual rate
equal to the Prime Rate plus six percent (6%). Each Libor Rate Loan shall
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bear interest from and including the first day of the Interest Period
applicable thereto to (but not including) the last day of such Interest
Period at the interest rate determined as applicable to such Libor Rate
Loan. Borrower shall select Interest Periods with respect to Libor Rate
Loans so that it is not necessary to pay a Libor Rate Loan prior to the
last day of the applicable Interest Period in order to repay the Loans on
June 30, 2002.
The determination of Applicable Margin hereunder as of any Interest
Adjustment Date shall be based on unaudited monthly financial statements of
Borrower and Subsidiaries for the last month of the most recent quarter prior to
such Date required to be delivered pursuant to Section 5.1(b) and compliance
certificate of Borrower required to be delivered pursuant to Section 5.2(a)
hereof, provided, that in the event of any discrepancy between computations
based upon any compliance certificate of Borrower and the related unaudited
financial statements of Borrower and its Subsidiaries furnished pursuant to
Section 5.1(b) and the audited financial statements of Borrower and its
Subsidiaries delivered pursuant to Section 5.1(a), the computation based upon
the audited financial statements of Borrower and its Subsidiaries delivered
pursuant to Section 5.1(a) shall govern (retroactive to the most recent Interest
Adjustment Date). In the event of a retroactive correction of the determinations
of the Applicable Margin in favor of the Lenders, the amount of interest thereby
overdue and payable by the Borrower shall be paid to the Lenders within five (5)
days after the date of such retroactive correction. Upon any upward adjustment
of the Applicable Margin, there shall be no downward adjustment of the
Applicable Margin until the first day of the first month after the Margin Ratio
shall have been less than or equal to the Margin Ratio which would result in
such downward adjustment as of the end of a subsequent fiscal quarter. No
downward adjustment of the Applicable Margin shall occur if, at the time such
downward adjustment would otherwise be made, there shall exist any Default or
Event of Default, provided, that such downward adjustment shall be made on the
first day of the first month after the date on which any Default or Event of
Default shall have been waived or cease to exist.
(b) Notice. Except as otherwise provided herein, if, on any day any
part of the Revolving Credit Loans or Term Loan is outstanding with respect
to which notice has not been timely received by the Agent in accordance
with this Agreement specifying that the Libor Rate shall be applicable
thereto, then for that day such Loan shall bear interest at the Adjusted
Prime Rate.
(c) Conversions. Borrower may elect from time to time to convert all
or part of the outstanding principal balance of any Revolving Credit Loan
or any Term Loan I (but no part of the Term Loan II) from an Adjusted Prime
Rate Loan to a Libor Rate Loan by the Borrower's giving Agent at least
three (3) Business Days prior irrevocable notice of such an election;
provided, that no Loan may be converted to a Libor Rate Loan while a
Default or an Event of Default has occurred and is continuing. Borrower may
also elect from time to time to continue any outstanding Libor Rate Loan
(whether for a similar or a different Interest Period) upon expiration of
the Interest Period then applicable thereto by the Borrower's giving the
Agent at least three (3) Business Days' prior irrevocable notice of suchc
ontinuation of such Libor Rate Loan; provided, that no Revolving Credit
Loan or Term Loan I may be continued as a Libor Rate Loan while a Default
or an Event of Default has occurred and is continuing.
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(d) Election. Each notice of election to convert to a Libor Rate
Loan or to continue a Libor Rate Loan shall be in the form of Exhibit
hereto and shall specify (i) the proposed conversion or continuation
date; (ii) the amount of the Revolving Credit Loan or Term Loan I, as
the case may be, to be converted or continued; (iii) whether a
conversion or a continuation is being requested; and (iv) the
requested Interest Period, which shall be one (1), two (2) or three
(3) months. Each such notice shall also certify that no Default or
Event of Default has occurred and is then continuing.
(e) Effectiveness. On the date upon which each conversion to a
Libor Rate Loan or continuation of a Libor Rate Loan is being made
pursuant to a notice given in accordance with this Agreement, the
Agent shall take such action as is necessary to effect such conversion
or continuation. Subject to the limitations set forth in this Section
and in the definition of Interest Period, all or any part of the
Revolving Credit Loans or Term Loan I may be conver ted into Libor
Rate Loans or continued as Libor Rate Loans as provided herein;
provided, that partial conversions or continuations of any Libor Rate
Loan shall be in the minimum amount of $500,000 and, if in excess
thereof, in integral multiples of $100,000; provided, further, that
there shall be no more than four (4) borrowings comprised of Libor
Rate Loans outstanding at any time.
(f) Determination of Adjusted Prime Rate. Agent shall determine
the Adjusted Prime Rate in effect from time to time. Any change in the
Adjusted Prime Rate shall, for all purposes of this Agreement and any
of the other Loan Documents, become effective on the effective date of
such change in the Prime Rate as announced by Agent in accordance with
Agent's customary practices.
(g) Monthly Installments. Borrower shall pay to Agent:
(i) for the account of Lenders in accordance with their
respective Pro Rata Shares, monthly in arrears on the last
Business Day of each month beginning with the month in which the
Closing Date falls, interest on the outstanding principal amount
of the Adjusted Prime Rate Loans at the annual rate equal to the
Adjusted Prime Rate; provided, however, that if Borrower elects,
pursuant to the last paragraph of Section 2.6(c) to convert an
Adjusted Prime Rate Loan, or any portion thereof, to a Libor Rate
Loan, Borrower shall pay to Agent, for the account of Lenders in
accordance with their respective Pro Rata Shares, all accrued but
unpaid interest on the Adjusted Prime Rate Loan, or such portion
thereof, being converted for the period commencing the date of
the last payment date under this paragraph to the first day of
the Interest Period for the Libor Rate Loan into which the
Adjusted Prime Rate Loan was converted.
(ii) For the account of Lenders in accordance with their
respective Pro Rata Shares, in arrears on the last Business Day
of each Interest Period for each Libor Rate Loan interest on the
outstanding principal amount of the Libor Rate Loans at the
annual rate equal to the Libor Rate; provided, however, that for
each Libor Rate Loan having an Interest Period longer than three
months, interest accrued on such Loan shall also be payable on
the last day of each three month interval during such Interest
Period.
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Section 2.7 Procedures for Making Draws.
(a) A Revolving Credit Loan shall be advanced at Borrower's request
either by a request by Borrower for a wire transfer of the proceeds of such
Loan or by a check drawn by Borrower on a central disbursement account (the
"Disbursement Account") of Borrower maintained with Agent. Any request for
a Revolving Credit Loan by wire transfer may be transmitted to Agent at its
Head Office via facsimile provided Borrower concurrently notifies Agent by
telephone of such request. All such requests for wire transfer advances
shall be made to, and received by, Agent not later than 3:00 p.m, (Eastern
time) on the Draw Date of the particular Loan and each such check or
request for wire transfer of funds shall be deemed to be a request for an
advance of a Revolving Credit Loan on the date when received and processed
by Agent. Borrower hereby designates its President, Treasurer or Chief
Financial Officer (or any other officer authorized by Borrower and
designated as such to Agent by a writing signed by the President, Treasurer
or CFO) acting individually or jointly to make all requests for draws and
advances.
(b) Except as provided in Section 2.7(a), all collections of Accounts
shall be directed to an account at Agent's Head Office (the "Agent Deposit
Account") as provided in Section 9.5. Agent shall on each Business Day
automatically debit the Agent Deposit Account and apply the proceeds
pursuant to the provisions of Section 2.11. So long as no Event of Default
shall have occurred and be continuing, if funds remain in the Agent Deposit
Account following the application provided for in the preceding sentence,
the balance will be promptly transferred to the Disbursement Account or any
other account designated by Borrower and maintained with Agent. The
crediting of items deposited in the Agent Deposit Account to the reduction
of the Obligations shall be conditioned upon final payment of the item and
if any item is not so paid, the amount of any credit given for it may be
charged back to the Borrower in accordance with Section 2.10, whether or
not the item is returned.
(c) In order to administer the Revolving Credit Loans in an efficient
manner and to minimize the transfer of funds between the Agent and the
Lenders, so long as the conditions for borrowing in Section 7.2 remain
satisfied, the Agent may, in its sole discretion, make available, on behalf
of the Lenders, the full amount of all Revolving Credit Loans requested by
the Borrower pursuant to subsection 2.7(a). Agent may, in lieu of advancing
funds pursuant to this Section 2.7(c), promptly notify each Lender by
facsimile of its proportionate share of a requested Revolving Credit Loan
and the date of such borrowing. On the borrowing date specified in such
notice by Agent to each Lender, each Lender shall make its share of the
borrowing available at the Head Office of the Agent for deposit to such
account as the Agent shall designate, no later than 3:00 Cincinnati, Ohio
time in federal or other immediately available funds. Upon receipt of the
funds to be made available by Lenders to fund any Revolving Credit Loan
hereunder, the Agent shall disburse such funds by depositing them into the
Disbursement Account.
(i) If the Agent shall have advanced Revolving Credit Loans on
behalf of the Lenders, as provided in this subsection 2.7(c), the
amount of each
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Lender's Participation Percentage of Revolving Credit Loans shall be
computed weekly rather than daily and shall be adjusted upward or
downward on the basis of the amount of outstanding Revolving Credit
Loans as of 5:00 p.m. (Eastern time) on the Business Day immediately
preceding the date of each computation; provided, however, that the
Agent retains the absolute right at any time or from time to time to
make the aforedescribed adjustments at intervals more frequent than
weekly. The Agent shall deliver to each of the Lenders after the end
of each week, or such lesser period or periods as the Agent shall
determine, a summary statement of the amount of outstanding Revolving
Credit Loans and a summary of the Borrowing Base Report Activity for
such period (such week or lesser period or periods being hereinafter
referred to as a "Settlement Period"). If the summary statement is
sent by the Agent and received by the Lenders prior to 12:00 Noon
(Eastern time), each Lender shall make the transfers described in the
next succeeding sentence no later than 3:00 p.m. (Eastern time) on the
day such summary statement was sent; and if such summary statement is
sent by the Agent and received by the Lenders after 12:00 Noon
(Eastern time), each Lender shall make such transfers no later than
3:00 p.m. (Eastern time) on the next succeeding Business Day. If in
any Settlement Period, the amount of a Lender's Participation
Percentage of the Revolving Credit Loans is more than such Lender's
Participation Percentage of the Revolving Credit Loans for the
previous Settlement Period, the Lender shall forthwith (but in no
event later than the time set forth in the next preceding sentence)
transfer to such Agent by wire transfer in immediately available funds
the amount of the increase; and, if in any Settlement Period, the
amount of a Lender's Participation Percentage of the Revolving Credit
Loans is less than such Lender's Participation Percentage of the
Revolving Credit Loans for the previous Settlement Period, the Agent
shall forthwith (but in no event later than the time set forth in the
next preceding sentence) transfer to such Lender by wire transfer in
immediately available funds the amount of the decrease. The obligation
of each of the Lenders to transfer such funds shall be irrevocable and
unconditional and without recourse to or warranty by the Agent. Each
of the Agent and the Lenders agree to mark their respective books and
records at the end of each Settlement Period to show at all times the
Dollar amount of their respective Participation Percentages of the
outstanding Revolving Credit Loans.
(ii) To the extent that the Agent has made any such amounts
available and the settlement described above shall not yet have
occurred, upon repayment of Revolving Credit Loans by the Borrower,
the Agent may apply such amounts repaid directly to the amounts made
available by the Agent pursuant to this subsection 2.7(c).
(iii) Because the Agent on behalf of the Lenders may be advancing
and/or may be repaid Revolving Credit Loans prior to the time when the
Lenders will actually advance and/or be repaid Revolving Credit Loans,
interest with respect to Revolving Credit Loans shall be allocated by
the Agent to each Lender (including the Agent) in accordance with the
amount of Revolving Credit Loans actually advanced by and repaid to
each Lender (including the
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Agent) during each Settlement Period and shall accrue from and
including the date such Loans are advanced by the Agent to but
excluding the date such Loans are repaid by the Borrower in accordance
with Section or actually settled by the applicable Lender as described
in this subsection 2.7(c).
(iv) The Agent may advance funds as described above so long as
the Agent shall not have received prior to such borrowing an officers'
certificate from the Borrower under Section 5.9(a) indicating the
existence of a Default or Event of Default, or a written notice from
any Lender that the conditions to such borrowing have not been
satisfied.
Section 2.8 Interest on Overdue Payments; Default Rate. If any payment of
interest on or principal of a Note is not paid when due and within any
applicable grace period, then, at the option of any Lender, interest may be
charged and collected in accordance with each Note from the Borrower at the
Default Rate as provided in such Note.
Upon the occurrence and during the continuance of any Event of
Default, or if Lenders elect to exercise their remedies hereunder to
accelerate the Notes following the occurrence of an Event of Default, or
upon the Borrower's failure to pay the principal amount of the Notes at
maturity, the outstanding principal and all accrued interest as well as any
other charges due the Agent or any Lender hereunder or under any Loan
Document, shall bear interest from the date on which such amount shall have
first become due and payable to the Agent or any Lender to the date on
which such amount shall be paid to the Agent or any Lender (whether before
or after judgment), at the Default Rate. The accrued unpaid interest shall
become and be absolutely due and payable to the Lenders, on demand, at any
time. Interest will continue to accrue and will (to the extent permitted by
applicable law) be compounded daily until the Obligations in respect of the
payment are discharged (whether before or after judgment).
Section 2.9 Prepayments of Principal.
(a) Optional Prepayment of Revolving Credit Loans. In the event
Borrower decides to terminate the Revolving Credit Commitment hereunder
prior to June 30, 2002, Borrower shall prepay the outstanding principal
amount Revolving Credit Loans in full upon notice to Lenders at least three
(3) Business Days prior to the specified termination date, together with
accrued interest thereon to the date fixed for such prepayment, plus a
premium calculated as follows:
If the Prepayment Occurs: Then the Premium Shall Be:
- ------------------------ --------------------------
During the first Loan Year 3% of the Average Yearly Loan Balance
During the second Loan Year 2% of the Average Yearly Loan Balance
During the third Loan Year 1% of the Average Yearly Loan Balance
and each Loan Year thereafter
If Borrower decides to terminate the Revolving Credit Commitment
hereunder, Borrower will simultaneously with the prepayment of the
Revolving Credit Loans prepay in
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full the entire outstanding principal of the Term Loans, all accrued and unpaid
interest on the Term Loans and all other charges owing in connection therewith.
(b) Optional Prepayment of Term Loan. The Borrower shall have the
right to prepay the principal of Term Loan I in full at any time and in
part from time to time upon notice to Lenders at least three (3) Business
Days prior to the specified prepayment date and upon payment to Lenders of
the principal amount to be prepaid, together with accrued interest thereon
to the date fixed for such prepayment, plus a premium calculated as
follows:
If the Prepayment Occurs: Then the Premium Shall Be:
- -------------------------- ---------------------------
During the first Loan Year 3% of the Prepayment Amount
During the second Loan Year 2% of the Prepayment Amount
During the third Loan Year 1% of the Prepayment Amount
and each Loan Year thereafter
If the Borrower prepays the principal of any Loan at any time as a result
of Sections 2.7(b), 2.9(c), 2.9(d), or as the result of an Event of Default,
then no premium on such prepayment shall be payable to any Lender. Borrower
shall have no right to prepay Term Loan II, unless Borrower shall have prepaid
in full Term Loan I and terminated the Revolving Credit Commitment, in which
event Term Loan II shall be prepaid in full and without premium or penalty
applicable to Term Loan II.
(c) Mandatory Prepayments Under Revolving Credit Loan. If at any time
the aggregate amount of the Revolving Credit Loans outstanding to the
Borrower exceeds the Borrowing Base, the Borrower shall be obligated to
immediately prepay, without premium or penalty, the amount that exceeds the
Borrowing Base.
(d) Mandatory Prepayments Under Term Loan I. The net cash proceeds
(which for purposes hereof shall mean the gross selling price or amounts
received less transfer and gains taxes, conveyance fees imposed by
governmental authorities, brokerage fees, reasonable legal fees and other
reasonable fees and expenses of the transaction, including litigation and
negotiation costs reasonably related to the transaction, and income taxes
incurred as a result of the transaction) available to Borrower as a result
of (i) any asset sales permitted by Section 6.15 hereof, other than
finished goods in the ordinary course of business and except to the extent
any other assets disposed of pursuant to Section 6.15 are replaced or the
proceeds of investments are reinvested as permitted hereby, (ii) any
condemnation awards, (iii) any casualty loss insurance recoveries to the
extent the affected assets are not replaced in accordance with the
provisions of Section 5.6 hereof, (iv) Excess Cash Flow for any given
fiscal year, or (v) any adjustment in favor of Borrower in the purchase
price payable by Borrower in connection with the Weatherly Acquisition
occurring after the Closing Date, shall, with respect to amounts described
in subparagraphs (i) through (v), be paid to Lenders in the amount of their
respective Pro Rata Share within ten (10) days after receipt thereof by
Borrower and with respect to any Excess Cash Flow, within fifteen (15) days
of delivery of the Financial Statements for the applicable fiscal
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year of Borrower, which amounts each Lender shall apply to the regularly
scheduled principal payments on Term Loan I until paid, in inverse order of
the stated maturity of principal payments thereof. No premium shall be due
on any payment made in compliance with this Section 2.9(d).
(e) Application of Prepayments. Except as provided in Section , any
prepayment of the Obligations under the Notes or any of the other Loan
Documents shall be applied by Agent as set forth in Section 2.11 hereof.
Any amounts received in connection with a payment, repayment or prepayment
shall be applied to the extent possible, first, to Adjusted Prime Rate
Loans and, then, to Libor Rate Loans. To the extent that such payment,
repayment or prepayment shall be applied to a Libor Rate Loan, Agent shall
retain such amount until the expiration of the Interest Period applicable
to such Libor Rate Loan or deposit such amount into the Disbursement
Account for application in accordance with Section 2.7(b), and apply such
payment at such time so as to minimize the Libor Break Funding Costs
applicable to such payment, repayment or prepayment, unless otherwise
instructed by Borrower, to pay, repay or prepay such Libor Rate Loan and
nonetheless incur the applicable Libor Break Funding Cost.
(f) Libor Breakage Costs. Upon any repayment or prepayment pursuant to
this Section 2.9 of any Loan which is also a Libor Rate Loan not made on
the last day of any Interest Period for such Libor Rate Loan, Borrower
shall pay to Agent for the ratable benefit of the Lenders, such Libor
Breakage Costs pursuant to Section 2.14 hereof, but not as the result of a
mandatory prepayment pursuant to Sections 2.9(c) or 2.9(d) if Agent does
not observe Section 2.9(e).
Section 2.10 Time and Place of Payments. Notwithstanding anything in this
Agreement or any of the other Loan Documents to the contrary, except when Agent
applies the proceeds of a the Agent Deposit Account as permitted hereby or
debits the Disbursement Account or any other account of Borrower, each payment
payable by the Borrower to the Agent under this Agreement or any of the other
Loan Documents, shall be made directly to Agent, for the account of each Lender,
by wire transfer to the account of Agent at the address set forth on the
signature page hereof, or to such other address as Agent shall notify to
Borrower not later than 3:00 p.m. (Eastern time), on the due date of each such
payment in immediately available and freely transferrable funds. Upon receipt of
any such payment, Agent shall forward to each Lender its Pro Rata Share thereof
by wire transfer in good funds at the address of such Lender set forth on the
signature page hereof, or to such other address as a Lender shall notify to
Agent. In order to cause the timely payment to be made of all Obligations as and
when due, Borrower hereby authorizes and directs Agent, at Agent's option, to
debit the Disbursement Account or any other deposit account of Borrower
maintained by the Agent or to apply the proceeds of a Revolving Credit Loan to
pay such Obligations and for that purpose Agent is hereby authorized, to the
extent funds are available under the Revolving Credit Commitment, to advance a
Revolving Credit Loan.
Section 2.11 Application of Funds. Subject to Section 2.9(e) in respect of
LIBOR Rate Loans, the funds received by the Agent pursuant to Section 2.7(b)
shall be applied toward the Obligations as follows provided, however, that if an
Event of Default exists, the
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28
funds may be applied to the Obligations in such order and manner as Agent may
(or if directed by a Majority of Lenders shall) determine:
(a) First, to the payment of all fees, charges and other sums (with
the exception of principal and interest) when due and payable to the Agent
or Lenders under the Notes, this Agreement or the other Loan Documents at
such time including, without limitation, all costs, expenses, disbursements
and losses which shall have been reasonably incurred or sustained in good
faith by the Agent or Lenders in or incidental to the collection of the
Obligations hereunder or the exercise, protection, or enforcement by the
Agent or Lenders of all or any of the rights, remedies, powers and
privileges of the Agent or Lenders under this Agreement, the Notes, or any
of the other Loan Documents and in and towards the provision of adequate
indemnity to the Agent or Lenders against all taxes or Liens which by law
shall have, or may have priority over the rights of the Agent or Lenders in
and to such funds;
(b) Second, to the payment of the interest which shall be due and
payable on the principal of the Revolving Credit Notes at the time of such
payment;
(c) Third, to the payment of interest on the Term Notes then due;
(d) Fourth, to the payment of principal then due on the Term Loan I
Notes;
(e) Fifth, to the payment of any outstanding principal on the
Revolving Credit Notes;
(f) Sixth, if such payment is received in connection with a prepayment
in full of the Term Loan I and a termination of the Revolving Credit
Commitment, the payment of any outstanding principal of the Term Loan II
Notes; and
(g) Seventh, if no Default or Event of Default exists or if all
Obligations have been paid or satisfied in full, the surplus remaining (if
any) to the Borrower as provided in Section 2.7(b).
Section 2.12 Payments to be Free of Deductions. Each payment payable by the
Borrower to the Agent or any Lender under this Agreement, any Note, or any of
the other Loan Documents shall be made in accordance with Section 2.10 hereof,
without set-off or counterclaim and free and clear of and without any deduction
of any kind for any taxes, levies, imposts, duties, charges, fees, deductions,
withholdings, restrictions or conditions of any nature now or hereafter imposed
or levied by any political subdivision or any taxing or other authority therein,
unless the Borrower is compelled by law to make any such deduction or
withholding. If any such obligation to deduct or withhold is imposed upon the
Borrower with respect to any such payment payable by the Borrower to the Agent
or any Lender, (a) the Borrower shall be permitted to make the deduction or
withholding required by law in respect of the said payment, and (b) there shall
become and be absolutely due and payable by the Borrower to the Agent or such
Lender on the date on which the said payment shall become due and payable, and
the Borrower hereby promises to pay to the Agent or such Lender on such date,
such additional amount as shall be necessary to enable the Agent or such
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29
Lender to receive the same net amount which the Agent or such Lender would have
received on such due date had no such obligation been imposed by law. Anything
in this Section to the contrary notwithstanding, the foregoing provisions of
this Section shall not apply in the case of any deductions or withholdings made
in respect of taxes charged upon or by reference to the overall net income,
profits or gains of the Agent or any Lender (or any transferee or assignee
thereof). If Agent or any Lender receives a refund in respect of any taxes which
Borrower shall have paid for or on an account of taxes payable by Agent or
Lender pursuant to this Section 2.12, it will promptly notify Borrower of such
refund and, within ten (10) Business Days after giving Borrower such notice (and
promptly upon receipt, if Borrower has applied for such refund), pay such refund
to Borrower (to the extent of amounts paid by Borrower under this Section 2.12).
Section 2.13 Use of Proceeds. The Borrower represents, warrants and
covenants to the Agent and each Lender that all proceeds of the Revolving Credit
Loans and the Term Loans shall be used by the Borrower solely for the purpose of
(i) financing all or a portion of the transactions contemplated by the Weatherly
Acquisition, (ii) refinancing existing Indebtedness to institutional lenders,
(iii) funding expenses relating to the Loans and related transactions, (iv)
working capital and other general corporate purposes, and (v) funding payments
permitted pursuant to Section 6.1(a), (c) and (d).
Section 2.14 Additional Costs, Etc.
(a) Anything in this Agreement to the contrary notwithstanding, if
after the Closing Date, any change in any applicable United States law
shall (i) materially change the basis of taxation of payments to Agent or
any Lender of the principal of or the interest on any Loan or any other
amounts payable to Agent or any Lender under this Agreement, or any of the
other Loan Documents, or (ii) impose or increase or render applicable any
special or supplementary special deposit or reserve or similar requirements
(whether or not having the force of law) against assets held by, or
deposits in or for the account of, or any eligible liabilities of, or loans
by any office or branch of, Agent or any Lender (except any Reserve
Requirement which is reflected in LIBOR), or (iii) impose on Agent or any
Lender any other condition or requirement with respect to this Agreement,
any Note or any of the other Loan Documents, and the result of any of the
foregoing is (A) to increase the cost to Agent or any Lender of making,
funding or maintaining all or any part of the principal of the LIBOR Rate
Loans by an amount deemed in good faith by such Lender or the Agent to be
material, or (B) to reduce the amount of principal, interest or any other
sum payable by Borrower to Agent or any Lender under this Agreement, any
Note or any of the other Loan Documents, or (C) to require Agent or any
Lender to make any payment or to forego any interest or other sum payable
by Borrower to Agent (other than the Agency Fee) or any Lender under this
Agreement, any Note or any of the other Loan Documents, the amount of which
payment or foregone interest or other sum is measured by or calculated by
reference to the gross amount of any sum receivable by Agent or any Lender
from Borrower under this Agreement, any Note or any of the other Loan
Documents, then, and in each such case, Borrower will pay to Agent for
Agent or the account of a Lender, as the case may be, within forty-five
(45) days of written notice by Agent or such Lender, such additional
amounts as will compensate
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30
Agent or such Lender for such additional cost, reduction, payment or
foregone interest or other sum. Agent or any Lender, as the case may be,
shall provide to Borrower reasonable documentation, including calculations
in reasonable detail, to support the basis for such costs, etc., being
claimed, together with such written notice. Anything in this paragraph to
the contrary notwithstanding, the foregoing provisions of this paragraph
shall not apply in the case of any additional cost, reduction, payment or
foregone interest or other sum resulting solely from or arising solely as a
consequence of any taxes charged upon or by reference to the overall net
income, profits or gains of Agent or any Lender.
(b) If any Lender shall reasonably determine that any present or
future applicable law, rule or regulation regarding capital adequacy, or
any change therein or in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by any Lender
with any request or directive regarding capital adequacy (whether or not
having the force of law) from any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of
return on such Lender's capital as a consequence of its obligations
hereunder, to a level below that which such Lender could have achieved but
for such adoption, change or compliance (taking into consideration such
Lender's policies with respect to capital adequacy) by any amount deemed in
good faith by such Lender to be material, then Borrower shall pay to such
Lender within forty-five (45) days upon receipt of written notice thereof,
such amount or amounts, in addition to the amounts payable under the other
provisions of this Agreement, the Notes or any of the other Loan Documents,
as will compensate for such reduction. Such Lender shall provide to
Borrower a copy of the calculations showing how in reasonable detail such
determination has been made together with such notice. Determinations by
any Lender of the additional amount or amounts required to compensate such
Lender in respect of the foregoing shall be prima facie evidence of the
correctness of such calculations. In determining such amount or amounts,
Lenders may use any reasonable averaging and attribution methods.
Section 2.15 Libor Breakage Cost. Subject to Sections 2.9(e) and 2.9(f),
Borrower shall pay to Agent, for the ratable benefit of each Bank, the Libor
Break Funding Costs that Agent determines are attributable to the following
events (regardless of whether such events occur as a result of the occurrence of
an Event of Default or the exercise of any right or remedy of the Agent or the
Lenders under this Agreement or any other agreement, or at law):
(a) any payment (including, without limitation, the acceleration of
the Loans pursuant to this Agreement or any Loan Document), repayment,
optional prepayment, or conversion of a Libor Rate Loan for any reason on a
date other than the last day of the Interest Period for such Libor Rate
Loan; or
(b) any failure by Borrower for any reason to borrow a Libor Rate Loan
on the date for such borrowing specified in the relevant notice of
borrowing given pursuant to this Agreement.
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31
ARTICLE 3
SECURITY INTERESTS
Section 3.1 Grant of Security Interest. To secure the payment and
performance of all of the Obligations, the Borrower hereby grants to Lenders,
and will cause its Subsidiaries and Emerald to grant to Lenders, a continuing
security interest in and assigns to the Agent, on behalf of the Lenders, all of
the Collateral. The Collateral shall also include the property and rights
subject to:
(a) the Collateral Assignment of Trade Names and Trademarks in
substantially the form attached hereto as Exhibit F;
(b) the Collateral Assignment of Patents in substantially the form
attached hereto as Exhibit G; and
(c) the Collateral Assignment of Life Insurance in substantially the
form attached hereto as Exhibit H.
Section 3.2 One General Obligation; Cross Collateral. All loans and
advances by the Lenders to the Borrower under this Agreement and under all other
agreements constitute one loan, and all indebtedness and obligations of the
Borrower to Lenders under this and under all other agreements, present and
future, constitute one general obligation secured by the Collateral and security
held and to be held by Lenders or the Agent on behalf of the Lenders hereunder
and by virtue of all other assignments and security agreements between the
Borrower and Lenders or the Agent on behalf of the Lenders now and hereafter
existing. It is expressly understood and agreed that all of the rights of the
Agent and each Lender contained in this Agreement shall likewise apply insofar
as applicable to any modification of or supplement to this Agreement and to any
other agreements, present and future, among the Agent, Lenders and the Borrower.
Section 3.3 Additional Security for Loans. As additional collateral
security for such of the Obligations as are described therein, the following
documents constituting part of the Security Documents hereunder shall be
delivered to the Agent on behalf of the Lenders:
(a) a Pledge Agreement in substantially the form attached hereto as
Exhibit executed by (i) Guarantor with respect to the stock of Borrower,
(ii) Borrower with respect to the stock of each direct Subsidiary thereof,
and (iii) Weatherly with respect to each of its direct Subsidiaries; in
each case with appropriate changes in text thereof to reflect whether such
Pledge Agreement secures the direct obligations of Borrower, the Guaranty
Agreement or a Subsidiary Guarantee, as the case may be;
(b) the Guaranty Agreement in substantially the form attached hereto
as Exhibit J;
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32
(c) a Subsidiary Guaranty from Emerald, Weatherly and each Subsidiary
of Weatherly, in substantially the form attached hereto as Exhibit O; and
(d) a Subsidiary Security Agreement from Emerald, Weatherly and each
Subsidiary of Weatherly, in substantially the form attached hereto as
Exhibit P.
Section 3.4 Future Real Property Interest. Concurrently with the
acquisition of any fee interest in real property, Borrower shall deliver to the
Agent a Mortgage with respect to such property and such other security documents
encumbering the acquired real property as a Majority of Lenders may reasonably
require.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
In order to induce the Agent and each Lender to enter into this Agreement,
the Borrower and Guarantor hereby represent and warrant to the Agent and each
Lender that:
Section 4.1 Corporate Existence. The Borrower and Guarantor are
corporations duly organized, validly existing, and in good standing under the
laws of the State of Delaware with full power and authority to conduct their
businesses as presently conducted. The Borrower is duly qualified as a foreign
corporation in the State of Texas, and Borrower and Guarantor are duly qualified
as foreign corporations in all other jurisdictions in which their activities or
ownership of property requires such qualification, except to the extent that the
failure to so qualify could not be expected to have a Material Adverse Effect.
Section 4.2 Corporate Power; Authorization. The Borrower and Guarantor have
the corporate power and authority to make, deliver and perform this Agreement
and such other Loan Documents to which they are a party and have taken all
necessary corporate action to authorize the borrowings on the terms and
conditions of this Agreement and the Notes and to authorize the execution,
delivery and performance of this Agreement, the Notes and such other Loan
Documents to which they are a party. No consent or authorization of, or filing
with, any Person (including, without limitation, any governmental authority), is
required in connection with the borrowings hereunder or the execution, delivery
and performance by the Borrower and Guarantor, and the validity or
enforceability (with respect to the Borrower and Guarantor) of this Agreement,
the Notes or such other Loan Documents, except for (i) consents and filings
referred to or disclosed on Schedule 4.2 which consents and filings have been or
will be obtained or made on or prior to the Closing Date and will be in full
force and effect on such date, and (ii) consents, filings or notifications
which, individually or in the aggregate could not be expected to have a Material
Adverse Effect.
Section 4.3 Enforceable Obligations. This Agreement, the Notes and the
other Loan Documents have been duly executed and delivered on behalf of the
Borrower and/or Guarantor, as the case may be, and constitute the legal, valid
and binding obligations of the
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33
Borrower and/or Guarantor, as the case may be, enforceable against the Borrower
and/or Guarantor, as the case may be, in accordance with their respective terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law) which if
determined adversely to either of them would have a Material Adverse Effect.
Section 4.4 No Legal Bar. The execution, delivery and performance of this
Agreement, the Notes and the other Loan Documents and the consummation of the
transactions contemplated thereby, will not violate any Requirements of Law or
any Contractual Obligation of the Borrower or the Guarantor, subject to the
receipt of consents, filings and notifications which have not been obtained as
described in Section 4.2.
Section 4.5 No Litigation. Except as set forth on Schedule 4.5, no
litigation, investigation or proceeding of or before any arbitrator or
governmental authority is, to the knowledge of the Borrower or Guarantor, after
due inquiry, pending or, overtly threatened against the Borrower or Guarantor or
against any of their respective existing properties or revenues.
Section 4.6 Financial Condition. The Financial Statements previously
delivered to each Lender present fairly in all material respects, the financial
condition of the Borrower and Guarantor described therein as of the respective
dates thereof, and in conformity with GAAP (except that any unaudited Financial
Statements may not contain any or all of the footnotes required by GAAP and are
subject to year-end audit adjustments). There has been no material adverse
change in the assets, liabilities, business or financial condition of the
Borrower or Guarantor since the respective dates of the Financial Statements.
Except as disclosed on Schedule 4.6 hereto, there exist no equity or long-term
investments in or outstanding advances to any Person not reflected in the
Financial Statements. Except for trade payables arising in the ordinary course
of business, since the dates reflected in the Financial Statements, the Borrower
and Guarantor have no material Indebtedness other than as reflected in such
Financial Statements. The Financial Statements, including the related schedules
and notes thereto, have been prepared in conformity with GAAP consistently
applied throughout the periods involved (except that any unaudited Financial
Statements may not contain any or all of the footnotes required by GAAP and are
subject to year end audit adjustments).
Section 4.7 No Change. Except as disclosed in Schedule 4.7, since June 30,
1995, there has been no development or event which has had or could reasonably
be expected to have a Material Adverse Effect, and no dividends or other
distributions have been declared, paid or made upon the capital stock of the
Borrower or Guarantor nor has any of the capital stock of the Borrower or
Guarantor been redeemed, retired, purchased or otherwise acquired for value by
the Borrower or Guarantor.
Section 4.8 No Default. Except as disclosed in Schedule 4.8, neither the
Borrower nor the Guarantor is in default under or with respect to any of its
Contractual Obligations in
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34
any respect which would have a Material Adverse Effect. To the knowledge of
Borrower and Guarantor no Default or Event of Default has occurred and is
continuing.
Section 4.9 Intellectual Property. Except as disclosed in Schedule 4.9, the
Borrower possesses or is licensed to use all patents, permits, trademarks, trade
names, copyrights, technology, know-how and processes necessary for the conduct
of its business as currently conducted, except for those the failure to possess
or license which could not be reasonably expected to have a Material Adverse
Effect, and all such licenses, patents, permits, trademarks, trade names, and
copyrights are listed on Exhibit attached hereto and made a part hereof. Except
as disclosed on Schedule 4.5, no claim has been asserted and is pending by any
Person challenging or questioning the use of any such property or rights or the
validity or effectiveness of any such property or rights, nor does Borrower or
Guarantor know of any valid basis for any such claim. To the best of Borrower's
and Guarantor's knowledge, the use of such property and rights by the Borrower
does not infringe on the rights of any Person.
Section 4.10 Compliance with Laws. Except as set forth on Schedule 4.10, to
the best of Borrower's and Guarantor's knowledge, Borrower and Guarantor are in
compliance in all material respects with all Requirements of Law to the extent
the failure to so comply would result in a Material Adverse Effect.
Section 4.11 Contractual Obligations. Neither Borrower nor Guarantor is a
party to or has any Contractual Obligation which has or is reasonably expected
to have a Material Adverse Effect.
Section 4.12 Taxes. Except as set forth on Schedule 4.12, the Borrower and
Guarantor have filed or caused to be filed all tax returns which, to the
knowledge of the Borrower and Guarantor, are required to be filed (except for
returns with respect to which the due date or extended due dates has not yet
occurred) and have paid, withheld, or made adequate provision for all taxes
shown to be due and payable on said returns or on any assessments made against
them or any of their property and all other taxes, fees or other charges imposed
on them or any of their property by any governmental authority (other than any
taxes, fees or other charges the amount or validity of which are currently being
contested in good faith by appropriate proceedings and with respect to which
reserves in conformity with GAAP have been provided on the books of the Borrower
or Guarantor, as the case may be); no tax Lien has been filed, and, to the
knowledge of the Borrower or Guarantor, no claim is being asserted against
Borrower or Guarantor, with respect to any such tax, fee or other charge by any
governmental authority which if not paid when due or before the same becomes
delinquent would have a Material Adverse Effect.
Section 4.13 Margin Stock. Borrower is not engaged, principally or as one
of its important activities, in the business of extending credit for the purpose
of "purchasing" or "carrying" any "Margin Stock" within the respective meanings
of each of the quoted terms under Regulations G, T, U and X of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect. No part of the proceeds of any loans hereunder will be used for
"purchasing" or "carrying" Margin Stock as so defined or for any purpose which
violates, or which would be inconsistent with, the provisions of the Regulations
of such Board of Governors.
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35
Section 4.14 ERISA. Schedule 4.14 contains a list of all Employee Benefit
Plans maintained by Borrower. Borrower and its ERISA Affiliates are in
compliance in all material respects with any applicable provisions of ERISA and
the regulations thereunder and the Code, with respect to all such Employee
Benefit Plans.
Section 4.15 Environmental Matters.
(a) Except as set forth on Schedule hereto:
(i) To the knowledge of Borrower and Guarantor , the properties and
facilities of the Borrower and Guarantor are not being used to make, store,
handle, treat, dispose, generate, or transport hazardous substances in
violation of any applicable law now in effect; (ii) to Borrower's and
Guarantor's knowledge, hazardous substances are not being made, stored,
handled, treated, disposed of, generated, or transported on or from the
properties and facilities of the Borrower and Guarantor, except in
accordance with applicable law now in effect; (iii) to Borrower's and
Guarantor's knowledge, the properties, facilities and operations of the
Borrower and Guarantor comply in all material respects with all applicable
Environmental Laws; (iv) to Borrower's and Guarantor's knowledge, none of
the properties, facilities or operations of the Borrower or Guarantor is
subject to any judicial or administrative proceedings alleging the
violation of any Environmental Laws; (v) to Borrower's and Guarantor's
knowledge, none of the properties, facilities or operations of the Borrower
or Guarantor is the subject of federal, state or local investigation
evaluating whether any remedial action is needed to respond to a release of
any hazardous or toxic waste, substance or constituent, any petroleum or
petroleum product (including, without limitation, crude oil or any fraction
thereof), or any other hazardous, illegal or unlawful substance into the
environment; (vi) neither the Borrower nor the Guarantor has filed, nor to
Borrower's and Guarantor's knowledge, is presently required to file any
notice under any federal, state or local law indicating past or present
treatment or disposal of a hazardous waste, hazardous substance or any
petroleum or petroleum product (including, without limitation, crude oil or
any fraction thereof), or reporting a spill or release of a hazardous or
toxic waste, substance or constituent, any petroleum or petroleum product
(including, without limitation, crude oil or any fraction thereof), or any
other substance into the environment; and (vii) neither the Borrower nor
Guarantor has received notice of any contingent liability in connection
with any release of any hazardous or toxic waste, substance or constituent,
any petroleum or petroleum product (including, without limitation, crude
oil or any fraction thereof), or any other substance into the environment,
which contingent liability (A) will more likely than not become liquidated,
(B) if it becomes liquidated, would not be adequately covered by insurance
or other indemnification rights, and (C) presently has a Material Adverse
Effect, or if liquidated would have a Material Adverse Effect.
Section 4.16 Investment Company Act. Borrower is not an "investment
company" or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
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36
Section 4.17 Capitalization. Borrower has no Subsidiaries, other than
Emerald, Weatherly and Weatherly Consumer Products, Inc. ("WCP"). WCP is a
wholly-owned Subsidiary of Weatherly. The Guarantor owns One Hundred Percent
(100%) of the capital stock of Borrower.
Section 4.18 Brokerage. Except as set forth on Schedule, neither the
Borrower nor the Guarantor has dealt with any broker or finder in connection
with the making of the Loans. Borrower and Guarantor hereby indemnify the Agent
and each Lender and agree to hold them harmless from and against any claims for
finders' or brokerage fees or commissions of brokers or finders Borrower or
Guarantor have dealt with in connection therewith and agree to pay all expenses
reasonably incurred by the Agent and any Lender in connection with the defense
of any action or proceeding brought to collect any such fees or commissions.
Section 4.19 Place of Business. The Borrower maintains places of business
and owns Collateral only at the addresses specified in Exhibit hereto and
maintains its books of account and records, including all records concerning the
Collateral, only at the addresses specified in Exhibit B, except for Inventory
stored in Canada. The Borrower maintains its chief executive office at the
address specified in Exhibit B.
Section 4.20 General Collateral Representation.
(a) The Borrower has good and marketable title to any real property
purported to be owned by it and good title to the other Collateral
consisting of personal property, free from all Liens in favor of any
Person, other than the Agent and except for Permitted Liens; and has full
right and power to grant the Agent a security interest therein. Borrower
does not own any fee interest in any real property. All information
furnished to the Agent concerning the Collateral is complete, accurate and
correct in all material respects when furnished;
(b) No security agreement, Financing Statement, equivalent security or
Lien instrument or continuation statement covering all or any part of the
Collateral is on file or of record in any public office, except such as may
have been filed (i) by Borrower in favor of Agent for the benefit of
Lenders or any Lender pursuant to this Agreement, or (ii) in respect of the
items of Collateral subject to the Permitted Liens;
(c) The provisions of this Agreement are sufficient to create in favor
of Lenders or the Agent for the benefit of Lenders, as of the Closing Date,
a valid and continuing lien on, and security interest in, the types of the
Collateral hereunder in which a security interest may be created under
Article 9 of the UCC. Financing Statements on Form UCC-1 have been duly
executed on behalf of Borrower and the description of such Collateral set
forth therein is sufficient to perfect security interests in such
Collateral in which a security interest may be perfected by the filing of
Financing Statements under the UCC. When such Financing Statements are duly
filed in the filing offices listed on Schedule hereto, and the requisite
filing fees are paid, such filings will be sufficient to perfect security
interests in such of the Collateral described in the Financing Statements
as can be perfected by filing (other than
<PAGE>
37
Equipment affixed to real property so as to become fixtures), which
perfected security interests will be prior to all other Liens in favor of
others and rights of others (except for Permitted Liens), enforceable as
such as against creditors of and purchasers from Borrower (other than
purchasers of Inventory in the ordinary course) and as against any owner of
the real property where any of the Equipment is located and as against any
purchaser of such real property and any present or future creditor
obtaining a Lien on such real property, except that (i) certain statutory
liens arising by operation of law may have priority over a security
interest perfected by a previously filed Financing Statement, (ii) under
certain circumstances described in the UCC, the right of the Agent or any
Lender to enforce a security interest in proceeds may be limited, and (iii)
Section 552 of the Bankruptcy Code limits the extent to which property
acquired by a debtor after the commencement of a case under the Bankruptcy
Code may be subject to a Lien perfected prior to the filing of such case.
All action necessary to protect and perfect a security interest in each
item of the Collateral has been duly taken, or in the case of Equipment
covered by certificates of title will be taken within ninety (90) days of
the Closing Date, or in the case of the Pledged Stock as set forth below;
(d) Upon delivery to and possession by Agent for the benefit of
Lenders of the Pledged Stock pursuant to the terms of the Pledge Agreement,
Agent, for the benefit of Lenders, shall possess a valid, first priority
security interest in such Pledged Stock in accordance with Article 9 of the
UCC; and
(e) No person now having possession or control of any of the
Collateral consisting of Inventory or Equipment has issued, in receipt
therefor, a negotiable bill of lading, warehouse receipt or other document
of title.
Section 4.21 Accounts. As to each and every Eligible Account classified
hereunder as an Eligible Account:
(a) it is a bona fide existing obligation, valid and enforceable
against the Debtor for a sum certain for sales of goods shipped or
delivered, or goods leased, or services rendered in the ordinary course of
business;
(b) all supporting documents, instruments, chattel paper and other
evidence of indebtedness, if any, delivered to the Agent are complete and
correct and valid and enforceable in accordance with their terms, and, to
the best knowledge of Borrower, all signatures and endorsements that appear
thereon are genuine, and all signatories and endorsers have full capacity
to contract;
(c) the Debtor is liable for and is obligated to make payment of the
amount expressed in the invoice pertaining to such Account according to its
terms;
(d) it will be subject to no discount, allowance or special terms of
payment without the prior approval of the Agent except prompt payment and
other discounts and allowances which are customary in the industry and
consistent with the past practice of Borrower;
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38
(e) to the best knowledge of Borrower, it is subject to no dispute,
counterclaim, defense or offset, real or claimed;
(f) it is not subject to any prohibition or limitation upon
assignment; and
(g) the Borrower has full right and power to grant Lenders or the
Agent for the benefit of Lenders a security interest therein and the
security interest granted in such Account in Article 3 hereof, when
perfected, will be a valid first security interest which will inure to the
benefit of Lenders without further action, subject to Permitted Liens and
the provisions of Section 4.20(c).
The warranties set out herein shall be deemed to have been made with respect to
each and every Eligible Account now owned or hereafter acquired by the Borrower.
Section 4.22 Inventory. All Eligible Inventory (a) is and will be of good
and merchantable quality, free from defects, and (b) is not, nor will be, stored
with a bailee or warehouseman without the prior written consent of Agent, except
to the extent Borrower delivers to Agent a non-negotiable warehouse receipt
covering same.
Section 4.23 Disclosure. No representation or warranty made by the Borrower
or Guarantor in this Agreement or in any other document furnished or to be
furnished from time to time in connection herewith or therewith contains or will
contain any misrepresentation of a material fact or omits or will omit to state
any material fact necessary to make the statements herein or therein not
misleading.
Section 4.24 Solvency. After giving effect to the transactions contemplated
hereby, the Borrower will be Solvent.
Section 4.25 Ownership and Control. All outstanding shares of the
Borrower's capital stock have been duly authorized and validly issued, are fully
paid and nonassessable and are owned of record and beneficially by Guarantor,
subject only to the lien created by the Pledge Agreement. There are no
outstanding options, rights and warrants issued by the Borrower for the
acquisition of shares of the capital stock of the Borrower, nor any outstanding
securities or obligations convertible into such shares, nor any agreements by
the Borrower to issue or sell such shares. There are no options, sale
agreements, pledges, proxies, voting trusts, powers of attorney or any other
agreements or instruments binding upon any of Borrower's shareholders with
respect to beneficial or record ownership of or voting rights with respect to
shares of the capital stock of the Borrower (other than pursuant to the Pledge
Agreement in favor of the Agent for the benefit of Lenders).
Section 4.26 Undisclosed Liabilities. To the knowledge of Borrower and
Guarantor, neither the Borrower nor the Guarantor has any material obligation or
liability (whether accrued, absolute, contingent, unliquidated, or otherwise,
whether due or to become due) arising out of transactions entered into at or
prior to the date hereof, or any action or inaction at or prior to the date
hereof, except (a) liabilities reflected on the Financial Statements; (b)
liabilities incurred in the ordinary course of business since March 31, 1996
(none of which, to the knowledge of Borrower and Guarantor, are liabilities for
breach of contract,
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39
breach of warranty, torts, infringements, claims or lawsuits); (c) liabilities
or obligations disclosed in the schedules hereto; (d) liabilities or obligations
incurred pursuant to the Loan Documents to which they are parties; (e) the
Weatherly Acquisition Agreement and agreements entered into pursuant thereto;
(f) Seller Contingent Payments; (g) Additional Purchase Price; and (h) Emerald
Contingent Payments.
Section 4.27 Indemnity Agreements. Except as set forth on Schedule 4.27, or
as otherwise permitted or not prohibited hereby, no indemnity agreements exist
between the Borrower and any of its officers or directors.
Section 4.28 Operating Agreements. Borrower possesses or has the right to
use all licenses, customer quality ratings, regulatory approvals and permits,
and has entered into all supply agreements, site or equipment leases and similar
operating agreements necessary for the conduct of its business as currently
conducted, except where the failure to possess or to have the right to use any
such permit, license, approval or rating, or to have entered into any such
agreement, could not reasonably be expected to have a Material Adverse Effect.
Section 4.29 Reports with Governmental Bodies. Except where the failure to
do so would not have any Material Adverse Effect, Borrower and Guarantor have
duly and timely filed all material reports and other filings which are required
to be filed by them under any rules or regulations promulgated by any foreign,
federal, state, municipal or other government, or any department, commission,
board, bureau, agency, public authority, or instrumentality thereof.
Section 4.30 Employee Matters.
(a) On the date hereof and on the Closing Date, none of the employees
of Borrower is subject to any collective bargaining agreement; no petition
for certification or union license is pending with respect to any of the
employees of Borrower; to the best knowledge of Borrower, no union or
collective bargaining agreement unit has sought certification or
recognition with respect to any of the employees of Borrower; and there are
no strikes, work stoppages, unfair labor practice complaints or
controversies pending or, to the knowledge of Borrower, threatened in
writing against Borrower by any of its employees, other than employee
grievances arising out of the ordinary course of business, none of which in
the aggregate have or has had Material Adverse Effect.
(b) Neither Borrower nor, to the knowledge of Borrower, any key
employee of Borrower is subject to any employment agreement or
non-competition agreement with any former employer or any other Person,
which agreement would prohibit Borrower from using any information which
Borrower would not otherwise be prohibited from using under the terms of
such agreement.
Section 4.31 Survival of Representations and Warranties. The foregoing
representations and warranties are made by the Borrower and Guarantor with the
knowledge and intention that the Agent and Lenders will rely thereon, and shall
survive the execution and delivery of this Agreement and the making of all Loans
hereunder.
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40
ARTICLE 5
AFFIRMATIVE COVENANTS
So long as any Note remains outstanding and unpaid or any other Obligation
is owing to the Agent or any Lender, the Borrower and Guarantor agree as
follows, except as otherwise expressly consented to in writing by a Majority of
Lenders pursuant to Section 10.8:
Section 5.1 Financial Statements.
(a) Year End Report. As soon as filed with the Securities and Exchange
Commission, but in no event later than one hundred five (105) days after
the end of each fiscal year of the Borrower and Guarantor, commencing with
the fiscal year ended June 30, 1996, Borrower and Guarantor shall deliver
to Agent copies of (i) the audited consolidated financial statements of
Borrower and its Subsidiaries (except the annual financial statements as at
June 30, 1996 shall relate solely to Borrower) and (ii) the audited
consolidated and unaudited consolidating financial statements of Guarantor
and its Subsidiaries, as at the end of such year, together with, in each
case, the related statements of income and retained earnings and of cash
flows for such year, containing in comparative form the figures for the
previous year. Such audited financial statements shall be accompanied by a
report without a "going concern" or like exception or qualification arising
out of the scope of the audit of independent certified public accountants
of nationally recognized standing reasonably acceptable to each Lender,
stating that such financial statements present fairly, in all material
respects, the respective financial positions of the Borrower and Guarantor
and results of operations and cash flow for the fiscal year then ended in
conformity with GAAP consistently applied in a manner consistent with prior
fiscal periods. In addition, Borrower and Guarantor shall furnish Agent
with a comparison of the fiscal year's results against the budgets
furnished to each Lender. Each Lender acknowledges the Guarantor's
employment of BDO Seidman as independent certified public accountants and
presently accepts their employment for purposes of this paragraph and
Section.
(b) Monthly Reports. No later than the fifteenth (15th) day of each
month in respect of the immediately preceding month, commencing with August
15, 1996, Borrower shall provide to Agent (i) a detailed aging report of
Accounts, aged by the due date of each invoice (and reflecting the actual
date of such invoice), and by total, (ii) a schedule describing all
Accounts, (iii) a report of any book overdraft, (iv) a list and description
of all Inventory, (v) the designation of Inventory by raw materials, work
in process and finished goods, and (vi) the listing of the costs of
Borrower's raw materials, work in process and finished goods. As soon as
available, but in any event not later than forty-five (45) days after the
end of each month, the Borrower and Guarantor shall each deliver to Agent
copies of their respective unaudited financial statements including a
balance sheet of Guarantor and Borrower, and their respective consolidated
Subsidiaries, if any, as at the end of such month and the related unaudited
consolidated statements of income and retained earnings and of cash flows
of Guarantor and the Borrower for such month and the portion of the fiscal
year through
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41
the end of such month, setting forth in each case in comparative form the
figures for the previous year, certified by a Responsible Officer of the
Guarantor as being fairly stated in all material respects when considered
in relation to the financial statements referred to in Section 5.1(a)
(subject to normal year-end audit adjustments), together with a comparison
of the month's results against the budgets furnished to each Lender.
(c) Daily Reports. If required by Agent after the occurrence and
during the continuance of an Event of Default, the Borrower shall deliver
to Agent, on a weekly basis or such shorter period as Agent may reasonably
request, copies of collection reports, sales journals and the Borrowing
Base Report. If requested by Agent after the occurrence and during the
continuance of an Event of Default, Borrower shall also provide Agent with
copies of invoices, original delivery receipts, customers purchase orders,
shipping instructions, bills of lading and other documentation pertaining
to shipping arrangements, or if Agent so directs any and all such
documentation shall be held by Borrower as custodian for Agent.
Agent shall promptly forward to each Lender a copy of all documents supplied to
Agent by Borrower or Guarantor pursuant to Section 5.1. All of such financial
statements shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods, except as approved by such accountants, as the case may be, and
disclosed therein.
Section 5.2 Certificates; Other Information.
(a) Auditor's Certificates. Concurrently with the delivery of the
financial statements referred to in Section 5.1(a), Borrower shall furnish
to Agent a certificate of the independent certified public accountants
reporting on such financial statements stating that in making their
examination thereof, no knowledge was obtained of any Default or Event of
Default, except as specified in such certificate.
(b) Additional Certificates. Within 45 days following the end of each
fiscal quarter of Borrower, the Borrower and Guarantor shall furnish to
Agent a certificate of a Responsible Officer of the Borrower and Guarantor
(i) stating that, to the best of such officer's knowledge, the Borrower and
Guarantor during such period have observed or performed all of their
covenants and other agreements and satisfied every condition contained in
this Agreement and in the Notes and the other Loan Documents to which they
are parties, to be observed, performed or satisfied by them, and that such
Responsible Officer has obtained no knowledge of any Default or Event of
Default, except as specified in such certificate, (ii) setting forth in
reasonable detail the calculations supporting and used to determine
Borrower's compliance as of the date of such financial statements, with the
financial covenants contained in Sections 6.5 through 6.9 of this
Agreement; (iii) setting forth in detail, with respect to the immediately
preceding quarter, all Restricted Payments under Section 6.1, if any, and
all transactions with Affiliates of the Borrower; and (iv) describing in
discussion form the variances which occurred between the budgeted results
and actual results, with a statement of the reasons for such variances.
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42
(c) Budget Projections. Not later than the end of each fiscal year of
the Borrower and Guarantor, the Borrower shall deliver to Agent a copy of
the income statement budget, the cash flow budget and the projected balance
sheets for each of the Borrower and the Guarantor and their respective
Subsidiaries, if any, for the succeeding fiscal year, prepared by month,
and detailing the assumptions upon which such projections have been made,
such projections to be accompanied by a certificate of a Responsible
Officer of Borrower and Guarantor to the effect that such projections have
been prepared on the basis of sound financial planning practice and that
such Responsible Officer has no reason to believe they are incorrect or
misleading in any material respect.
(d) Warehouse and Lease Agreements. Borrower shall provide Agent with
copies of all agreements between Borrower and any warehouse or other
location at which Inventory may, from time to time, be kept and all leases
or similar agreements between Borrower and any Person, whether Borrower is
lessor or lessee thereunder, except in instances where Borrower has
previously delivered to Lender a warehouse receipt therefor. At Agent's or
any Lender's request, Borrower shall use its best efforts to obtain any
third party waivers or consents (such as, but not limited to, landlord's
waivers with respect to leases) necessary to allow any Lender or Agent for
the benefit of Lenders to create, perfect or foreclose upon any security
interest in any Collateral to which any Lender is entitled hereunder.
(e) Capital Expenditures. If required by Agent, Borrower shall provide
Agent, on the last day of each March, June, September and December, for the
calendar quarter most recently ended, a schedule of all Capital
Expenditures made by Borrower during such preceding quarter.
(f) Audit Reports. Within five (5) Business Days after receipt
thereof, Borrower and Guarantor shall furnish to Agent a copy of each
report, other than the reports referred to in subsection (a), including any
so-called "Management Letter" or similar reports, submitted to Borrower or
Guarantor in connection with any annual, interim or special audit of the
books of such Person.
(g) Reports to Security Holders and Securities Authorities. Within
five (5) Business Days after becoming available, Guarantor shall furnish to
each Agent copies of: all annual reports and other financial statements
sent by such Person to its security holders and all periodic reports on
Forms 10-KSB and 10-QSB filed by such Person with the Securities and
Exchange Commission or any governmental agency succeeding to any of its
functions.
(h) Request for ERISA Waiver. Borrower and Guarantor will furnish to
each Agent copies of any request submitted by either of them for a waiver
of the funding standards or any extension of the amortization periods
required by Sections 303 and 304 of ERISA or Section 412 of the IRC within
five (5) Business Days after any such request is submitted to the
Department of Labor or the Internal Revenue Service, as the case may be.
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43
(i) Deposit Accounts. At the time it furnishes Agent with its year-end
financial statements and at any other time upon Agent's request, Borrower
shall furnish Agent a list of all deposit accounts of Borrower, containing
the name and address of the depository financial institution with respect
to Borrower's deposit accounts. Borrower shall also promptly but in no
event more than ten (10) Business Days after opening or closing a deposit
account notify Agent of each deposit account which from time to time is
opened or closed.
Borrower and Guarantor authorize Agent to communicate directly with their
Responsible Officers and with their respective accountants to the extent
provided in the next sentence. Borrower and Guarantor authorize their respective
accountants to disclose to each Lender, after notice to Borrower or Guarantor,
as the case may, and after an opportunity for Borrower or Guarantor to provide
the requested information, any and all financial statements, work papers and
other information of any kind that they may have with respect to such Persons
and their respective business, financial and other affairs, all of which
information, to the extent not in the public domain, shall be subject to the
provisions of Section 11.10. Upon the request of Agent, Borrower and Guarantor
will deliver a letter addressed to their respective accountants instructing them
to comply with the provisions of this Section.
Section 5.3 Payment of Obligations. Except as permitted by Section 8.8 with
respect to the Borrower, Borrower and Guarantor shall pay, discharge or
otherwise satisfy at or before maturity or before they become delinquent, as the
case may be, all of their obligations of whatever nature, except where (a) the
amount or validity thereof is currently being contested in good faith by
appropriate proceedings, (b) reserves in conformity with GAAP with respect
thereto have been provided on the books of the Borrower or Guarantor, as the
case may be, and (c) the Borrower and Guarantor, as the case may be, shall have
posted any bond or other security required by applicable law against the payment
thereof.
Section 5.4 Conduct of Business and Maintenance of Existence. Borrower and
Guarantor shall continue to engage in business of the same general type as now
conducted by them and preserve, renew and keep in full force and effect their
corporate existence and take all reasonable action to maintain all rights,
privileges and franchises necessary or desirable in the normal conduct of their
businesses. Borrower and Guarantor shall comply with all Contractual Obligations
and Requirements of Law, except to the extent the failure to comply therewith
would not to have a Material Adverse Effect and except where the validity of any
such Contractual Obligation, Requirement of Law or the amount of any related
monetary claim is being contested in good faith by appropriate proceedings
timely instituted and diligently conducted if it has maintained adequate
reserves with respect thereto in accordance with GAAP.
Section 5.5 Debtor's Condition. Promptly upon:
(a) any Responsible Officer's learning thereof, Borrower shall inform
Agent, in writing, of any material delay in Borrower's performance of any
of its obligations to any Debtor and of any assertion of any material
claims, offsets or counterclaims by any Debtor and of any allowances,
credits and/or other monies
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44
granted by Borrower to any Debtor to the extent the Accounts of such Debtor
represent in excess of One Hundred Thousand and 00/100 Dollars
($100,000.00); or
(b) any Responsible Officer's receipt or learning thereof, Borrower
shall furnish to and inform each Lender of all material adverse information
relating to the financial condition of any Debtor whose Accounts represent
in excess of One Hundred Thousand and 00/100 Dollars ($100,000.00) at the
time outstanding.
Section 5.6 Maintenance of Property; Insurance. Borrower and Guarantor
shall keep all property useful and necessary in their businesses in good working
order and condition, except for ordinary wear and tear and damage or loss to the
extent covered by insurance; maintain all workers' compensation insurance
required by law; maintain with insurance companies that are rated A8 or better
by A.M. Best Company, Inc. (or the equivalent thereof or otherwise approved by
Agent), insurance on all of their personal property having an insurable value in
amounts sufficient to insure One Hundred Percent (100%) of the actual
replacement costs thereof (subject to normal deductibles and/or self insured
retentions in an amount not in excess of the amounts in place at the Closing
Date) and against at least such risks as are usually insured against in the same
general area by companies engaged in the same or a similar business, or, in case
an Event of Default shall occur and be continuing as the Agent may specify from
time to time, with insurers in amounts reasonably acceptable to Agent. Borrower
shall furnish to Agent, upon written request of Agent, full information as to
the insurance carried. If either the Borrower or Guarantor fails to do so, Agent
may obtain such insurance and charge the cost thereof to the Borrower's account
and add it to the Obligations hereunder. Lenders agree that, if any loss should
occur, and no Event of Default has occurred hereunder, Guarantor or Borrower, as
the case may be, may apply such insurance proceeds to repair or replace the
Collateral as to which the loss occurred, provided that the Borrower and
Guarantor promptly execute and deliver to Agent such documents, instruments,
financing statements or other agreements as may be reasonably necessary to
perfect the security interest of the Agent for the benefit of Lenders in all
such property, or if not so applied or if a Default or an Event of Default has
occurred hereunder and is continuing, Borrower and Guarantor agree that, the
proceeds of all such insurance policies may be applied to the payment of all or
any part of the Obligations hereunder, as a Majority of Lenders may direct. The
Agent, for the benefit of Lenders, shall be named as loss payee or mortgagee on
such insurance policies to the extent that such policies insure the Collateral
and Borrower and Guarantor, as the case may be, shall furnish Agent and each
Lender insurance certificates to such effect. All policies shall provide for at
least thirty (30) days' written notice of cancellation to the Agent.
Section 5.7 Liability Insurance. Borrower shall, at all times, maintain in
full force and effect such liability insurance with respect to its activities
and business interruption and other insurance as may be reasonably required by a
Majority of Lenders, such insurance to be provided by insurer(s) acceptable to
Agent, and if requested by Agent, such insurance shall name the Agent, for the
benefit of Lenders as additional insureds.
Section 5.8 Inspection of Property; Books and Records. Borrower and
Guarantor shall maintain complete and accurate books of accounts and records in
which full, true and correct entries in conformity with GAAP and all
Requirements of Law shall be made of all
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45
dealings and transactions in relation to the Collateral and the operations of
the Borrower and Guarantor; and Borrower will grant to the Agent and its
representatives, upon reasonable notice, full and complete access to the
Collateral and all books of account, records, correspondence and other papers
relating to the Collateral upon notice at least one Business Day prior to such
inspection and conducted during normal business hours and Borrower and Guarantor
grant to Agent, its representatives the right to inspect, examine, verify and
make abstracts from the copies of their respective books of account, records,
correspondence and other papers, and to investigate during normal business hours
such other records, activities and business of the Borrower and Guarantor as
Agent may deem reasonably necessary at the time, provided, however (except in
the case of an Event of Default hereunder), such right of access, inspection or
investigation is exercised in a manner as to not unreasonably disrupt the
business of Borrower or Guarantor.
Section 5.9 Notices. Borrower and Guarantor shall give notice to Agent of:
(a) the occurrence of any Event of Default, together with a written
statement of a Responsible Officer of the Borrower and Guarantor setting
forth the details of the Default or Event of Default and any action taken
or contemplated to be taken with respect to the same, promptly following a
Responsible Officer of Borrower or Guarantor, as the case may be, learning
thereof;
(b) any (i) default or event of default under any Contractual
Obligation relating to any Indebtedness of the Borrower in excess of Twenty
Five Thousand and 00/100 Dollars ($25,000), and any (ii) litigation,
investigation or proceeding which may exist at any time between the
Borrower or Guarantor and any governmental authority, which in either case,
if not cured or if adversely determined, as the case may be, would have a
Material Adverse Effect, promptly following a Responsible Officer of
Borrower or Guarantor, as the case may be, learning thereof;
(c) the commencement, existence or written threat of any action or
proceeding by or before any governmental or political subdivision or any
agency, authority, bureau, central bank, commission, department or
instrumentality of either, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic, against or affecting
the Borrower or Guarantor which if determined adversely to Borrower or
Guarantor could reasonably be expected to have a Material Adverse Effect,
promptly following a Responsible Officer of Borrower or Guarantor, as the
case may be, becoming aware of the commencement, existence or written
threat of any such proceeding;
(d) the following events, as soon as possible and in any event within
thirty (30) days after a Responsible Officer of the Borrower or Guarantor
knows or has reason to know thereof: (i) the occurrence or expected
occurrence of any Reportable Event with respect to any Employee Benefit
Plan, or any withdrawal from, or the termination, reorganization (within
the meaning of Section 4241 of ERISA) or insolvency (within the meaning of
Section 4245 of ERISA) of any Multiemployer Plan, or (ii) the institution
of proceedings or the taking of any other action by the PBGC or the
Borrower or any Commonly Controlled Entity or any Multiemployer
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46
Plan with respect to the withdrawal from, or the termination,
reorganization (within the meaning of Section 4241 of ERISA) or insolvency
(within the meaning of Section 4245 of ERISA) of, any Employee Benefit Plan
or Multiemployer Plan;
(e) at least fifteen (15) Business Days prior to any change of the
certified public accounting firm auditing Guarantor or Borrower, notice
that such change is to occur together with the name of the new certified
public accounting firm and an appropriate letter of the type described in
the last sentence of Section 5.1 addressed to such new accountants. Such
new accountants shall be one of the Big "6" accounting firms or another
independent, national certified public accounting firm reasonably
satisfactory to Agent; and
(f) any change in the business, operations, property or condition
(financial or otherwise) of the Borrower or Guarantor which could
reasonably be expected to have a Material Adverse Effect.
Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer of Borrower and Guarantor setting forth in reasonable detail
the occurrence referred to therein and stating what action the Borrower proposes
to take with respect thereto.
Section 5.10 Environmental Laws. Borrower shall:
(a) comply with all applicable Environmental Laws and obtain and
comply with and maintain any and all licenses, approvals, registrations or
permits required by Environmental Laws unless, in any case, the failure to
do so could not reasonably be expected to have a Material Adverse Effect;
(b) conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required by the
governmental authority having jurisdiction over Borrower under
Environmental Laws and promptly comply with all lawful orders and
directives of all such governmental authorities respecting applicable
Environmental Laws, except to the extent that the same are being contested
in good faith by appropriate proceedings or the failure to so comply could
not reasonably be expected to have a Material Adverse Effect; and
(c) defend, indemnify and hold harmless the Agent and Lenders, and
their respective employees, agents, officers and directors, from and
against any claims, demands, penalties, fines, liabilities, settlements,
damages, costs and expense of whatever kind or nature known or unknown,
contingent or otherwise, arising out of, or in any way relating to the
violation of or noncompliance with any Environmental Laws applicable to any
real property owned, operated or leased by the Borrower or any of its
Subsidiaries, or any orders, requirements or demands of governmental
authorities related thereto, including, without limitation, reasonable
attorney's and consultant's fees, investigation and laboratory fees, court
costs and litigation expenses, except to the extent that any of the
foregoing arise out of the gross negligence or willful misconduct of the
party seeking indemnification therefor and provided any settlement is
effected with Borrower's prior consent, which shall not be unreasonably
withheld or delayed.
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Section 5.11 Inventory. With respect to the Inventory, Borrower shall:
(a) sell or dispose of the Inventory only to buyers in the ordinary
course of business (which may include disposing of obsolete inventory in
the ordinary course of business and in accordance with standard industry
practices);
(b) promptly notify Agent of any change in location of any of the
Inventory and, prior to any such change, execute and deliver to the Agent
such Financing Statements satisfactory to Agent and a Majority of Lenders
as Agent or any Lender may reasonably request; and
(c) provide Agent with a report similar to the Borrowing Base Report
or such other form reasonably satisfactory to Agent and with such frequency
as reasonably determined by Agent, containing such information as Agent may
reasonably request regarding the Inventory.
Section 5.12 Equipment. Borrower shall:
(a) keep and maintain the Equipment in good operating condition and
repair excluding normal wear and tear and loss or damage by insured
casualty and shall make all replacements thereof as Borrower deems
reasonably necessary so that the value, utility and operating efficiency
thereof shall at all times be maintained and preserved in substantially the
same condition as on the Closing Date excluding normal wear and tear and
loss or damage by insured casualty, except to the extent items of Equipment
become obsolete, worn out or no longer useful in the ordinary course of
business, and not permit any such items to become a fixture to real estate
or accession to other personal property not constituting Collateral; and
(b) immediately on demand thereof by Agent after the occurrence of an
Event of Default, deliver to Agent any and all documents or other
instruments reasonably necessary to transfer title to or evidence of
ownership of any of the Equipment to Agent, as Secured Party hereunder
(including, without limitation, certificates of title and applications for
the title).
Section 5.13 Reclamation, Returns and Repossessions. With reasonable
promptness following a Responsible Officer of Borrower or Guarantor learning
thereof, report to Agent any material reclamation, return or repossession of
goods, any material claim or dispute asserted by any Debtor or other obligor,
and any other matters materially affecting the value and enforceability or
collectibility of any of the Collateral. In addition, the Borrower shall, at its
sole cost and expense (including attorney's fees), settle or contest by
appropriate proceedings any and all such material claims and disputes and
indemnify and protect the Agent and Lenders against any liability, loss or
expense arising therefrom or out of any such reclamation, return or repossession
of goods, provided, however, if Agent shall so elect, they shall have the right
after the occurrence of an Event of Default to settle, compromise, adjust or
litigate all claims or disputes directly with the Debtor or other obligor upon
such terms and conditions as it deems advisable and charge all costs and
expenses thereof (including reasonable attorney's fees) to the Borrower's
account and add them to the Obligations.
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Section 5.14 Collateral. Borrower shall maintain the Collateral, as the
same is constituted from time to time, free and clear of all Liens, except
Permitted Liens; defend the Collateral against all adverse claims and demands of
all Persons at any time claiming the same or any interest therein and pay all
costs and expenses (including reasonable attorneys fees) incurred in connection
with such defense.
Section 5.15 Banking Services. Borrower shall maintain all primary
depository accounts, including without limitation, all operating, cash
management accounts and pension and employee arrangements with Provident for so
long as Provident shall remain Agent hereunder . Section 5.16 Further Documents.
Borrower shall, on or prior to the Closing Date, execute such documents and
instruments and take such other action as to enable Agent for the benefit of
Lenders:
(a) to properly file, register and record each document (including,
without limitation, Uniform Commercial Code Financing Statements and
applications for certificates of title) required or, in Agent's or Agent's
counsel's opinion, advisable to be filed, registered or recorded in order
to perfect a Lien on the Collateral in each office in each jurisdiction in
which such filings, registration and recordations are required; and
(b) to cause Agent's Lien to be noted on each document of ownership or
title as to which evidence of Agent's Lien is necessary or, in Agent's or
Agent's counsel's opinion, advisable to be shown in order to perfect
Agent's' Lien on the Collateral covered by such document.
In addition, Borrower shall promptly pay all necessary filing, subscription and
inscription fees and all recording and other similar fees, and all taxes and
other expenses related to any such filings, registrations or recordings.
After the Closing Date, at the request of the Agent, Borrower shall execute and
deliver such Financing Statements, documents and instruments, and perform all
other acts as the Agent deems reasonably necessary to carry out and perform the
intent and purpose of this Agreement, and pay, upon demand, all expenses
(including reasonable attorney's fees) incurred by the Agent in connection
therewith.
Section 5.17 Life Insurance. Guarantor shall have applied and paid for, and
once issued, shall maintain, term life insurance policies insuring the lives of
Richard Raleigh and Richard Grandy in the amount of One Million and 00/100
Dollars ($1,000,000.00) each, in each case naming the Agent, as beneficiary
thereof, and to be assigned to Agent, for the benefit of Lenders, as collateral
security hereunder.
Section 5.18 Employee Benefit Plans. Borrower will and will cause each of
its ERISA Affiliates to (a) comply in all material respects with all
requirements imposed by ERISA and the Code applicable from time to time to any
Employee Benefit Plans of Borrower or any ERISA Affiliate; (b) make full payment
when due of all amounts which
<PAGE>
49
under the provisions of such Employee Benefit Plans or under applicable law, are
required to be paid as contributions thereto; (c) file on a timely basis all
reports, notices and other filings required by any governmental agency with
respect to any such Employee Benefit Plans; (d) furnish to all participants,
beneficiaries, and employees under any such Employee Benefit Plan, within the
periods prescribed by law, all reports, notices and other information to which
they are entitled under applicable law, and (e) take no action which would cause
any such Employee Benefit Plan to fail to meet in any material respect any
qualification requirement imposed by the Code.
Section 5.19 Other Information. Borrower shall furnish to Agent such other
financial and business information and reports in form and substance reasonably
satisfactory to Agent as and within a reasonable time after Agent may from time
to time reasonably request.
ARTICLE 6
NEGATIVE COVENANTS
The Borrower and Guarantor covenant and agree with the Agent and Lenders
and warrant that, as long as any of the Loans shall remain unpaid:
Section 6.1 Limitations on Restricted Payments. Without the prior written
consent of Agent, the Borrower shall not, at any time, enter into, participate
in, or make any Restricted Payment, except:
(a) management fees in the amount of One Hundred Twenty-Five Thousand
and 00/100 Dollars ($125,000) per calendar quarter payable to Guarantor in
arrears, provided that at the time of and after giving effect to the
payment of such management fee the following conditions are satisfied: (i)
no Default of Event of Default exists hereunder, and (ii) Borrower has
minimum excess borrowing availability under the Revolving Credit Commitment
plus cash of not less than $1.5 million;
(b) dividends for the purpose of paying income tax liabilities of the
consolidated group which includes the Borrower and Guarantor, but only to
the extent such liabilities are allocated to Borrower in a manner permitted
by the Code and the applicable regulations thereunder; and
(c) investments in the capital stock of Weatherly pursuant to the
Weatherly Acquisition Agreement and indirectly in the capital stock of
Weatherly's Subsidiaries pursuant to Borrower's acquisition of the capital
stock of Weatherly.
Section 6.2 Transactions with Affiliates.
(a) Except as otherwise permitted by this Agreement, the Borrower
shall not, without first obtaining the written consent of Agent:
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50
(i) permit the direct or indirect transfer, loan or advance,
distribution or payment of any of its funds, assets or property to any
director, officer, shareholder or employee of Borrower;
(ii) enter into or participate in any other transaction with any
Affiliate of the Borrower or Guarantor, including without limitation,
any purchase, sale, lease or exchange of property or the rendering of
any service, except for such transactions as are in the ordinary
course of business and are on such terms and conditions as are no less
favorable to Borrower than it could obtain in a comparable arms-length
transaction with a third party;
except, in respect of clauses (i) and (ii) above, the following
transactions are expressly permitted hereby:
(A) the payment of salaries and benefits to employees of
Borrower and its Subsidiaries and the reimbursement of reasonable
business expenses, all in the ordinary course of business of
Borrower and its Subsidiaries or to any of Borrower's respective
Affiliates or to any director, officer, shareholder, employee or
Affiliate of Guarantor; or
(B) Borrower's obligations and liabilities under the
Weatherly Acquisition Agreement and under agreements entered into
by Borrower pursuant to the Weatherly Acquisition Agreement; and
(C) the Additional Purchase Price, the Seller Contingent
Payments and the Emerald Contingent Payments.
(b) Any agreement between the Borrower and any of its Affiliates
otherwise permitted hereby shall provide that the Borrower's obligations
thereunder shall be subordinated to the obligations of the Borrower
hereunder on terms reasonably satisfactory to Agent; except for (i) the
employment agreements with Richard Grandy and Joseph A. Owens II as
approved by Lenders, it being understood that the employment agreements in
effect on the Closing Date, without giving effect to any later amendment
thereof or supplement thereto, are acceptable to Agent; (ii) the Additional
Purchase Price, the Seller Contingent Payments and the Emerald Contingent
Payments; and (iii) the Weatherly Acquisition Agreement and the agreements
entered into by Borrower pursuant thereto; and
(c) Borrower shall not, and shall use its best efforts to cause
Guarantor not to, commingle its assets and business functions with those of
Golden West, maintain separate accounting records from those of Golden
West, and take such action as may be reasonable from time to time to
separate its operations and corporate identity from those of Golden West.
Section 6.3 Limitations on Indebtedness. The Borrower and its Subsidiaries
will not at any time create, incur or assume, or become or be liable (directly
or indirectly) in respect of, any Indebtedness, other than:
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51
(a) The Obligations incurred pursuant to this Agreement;
(b) Accounts payable, accrued expenses and similar obligations arising
out of transactions (other than borrowings) in the ordinary course of
business;
(c) Indebtedness of the Borrower and/or any of its Subsidiaries, not
to exceed One Hundred Thousand and 00/100 Dollars ($100,000.00) in the
aggregate, with respect to any purchase, lease, conditional sale or similar
transaction for which the seller, lessor or other party to the transaction
takes a purchase money security interest in the property which is the
subject matter of such transaction, provided that such property is acquired
(whether by purchase, lease, conditional sale or other similar transaction)
for use by the Borrower in the ordinary course of its business and,
provided, further, that such transaction will not cause the Borrower to
violate any other covenant of this Agreement; and
(d) Indebtedness listed on Schedule 6.3 as of the Closing Date.
Section 6.4 Ownership of Borrower. At all times after the date hereof,
Guarantor (subject to the Pledge Agreement) shall own and control, with the
power to vote, not less than One Hundred Percent (100%) of the issued and
outstanding shares in every class of the capital stock of the Borrower.
Section 6.5 Interest Coverage Ratio. On each Computation Date set forth
below, the Borrower shall not permit, for the relevant Reference Period the
Interest Coverage Ratio to be less than the minimum ratio specified below:
MINIMUM INTEREST
COMPUTATION DATE COVERAGE RATIO
---------------- ----------------
December 31, 1996 1.00
March 31, 1997 2.80
June 30, 1997 3.60
September 30, 1997 3.80
December 31, 1997 4.00
March 31, 1998 4.20
June 30, 1998 4.40
September 30, 1998 4.40
December 31, 1998 4.40
March 31, 1999 4.40
June 30, 1999 6.50
September 30, 1999 6.50
December 31, 1999 6.50
March 31, 2000 6.50
June 30, 2000 9.00
September 30, 2000 9.00
December 31, 2000 9.00
March 31, 2001 9.00
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52
June 30, 2001 9.00
September 30, 2001 9.00
December 31, 2001 9.00
March 31, 2002 9.00
June 30, 2002 9.00
Section 6.6 Maintenance of Net Worth. The Borrower shall not permit Net
Worth of the Borrower at each Computation Date to be less than the following
amounts at any computation date as specified below:
COMPUTATION DATE MINIMUM NET WORTH
---------------- -----------------
June 30, 1997 $20,000,000.00
June 30, 1998 24,000,000.00
On June 30 of each subsequent year, the Net Worth of the Borrower shall not
be less than the sum of (i) the minimum Net Worth requirement for the previous
Computation Date, plus (ii) an amount equal to Seventy-Five Percent (75%) of
Borrower's Net Income for the fiscal year then ended. If Net Income is a
negative number, the amount added under clause (ii) shall be zero.
Section 6.7 Debt Service Coverage Ratio. On each Computation Date set forth
below, the Borrower shall not permit, for the relevant Reference Period its Debt
Service Coverage Ratio to be less than the minimum ratio specified below:
COMPUTATION DATE RATIO
------------------ -----
December 31, 1996 ____
March 31, 1997 1.04
June 30, 1997 1.25
September 30, 1997 1.35
December 31, 1997 1.45
March 31, 1998 1.50
June 30, 1998 1.60
September 30, 1998 1.60
December 31, 1998 1.60
March 31, 1999 1.60
June 30, 1999 1.60
September 30, 1999 1.60
December 31, 1999 1.60
March 31, 2000 1.60
June 30, 2000 2.00
September 30, 2000 2.00
December 31, 2000 2.00
March 31, 2001 2.00
June 30, 2001 2.35
September 30, 2001 2.35
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53
December 31, 2001 2.35
March 31, 2002 2.35
June 30, 2002 2.35
Section 6.8 EBITDA. Borrower shall not permit EBITDA for the Reference
Period ending on each Computation Date set forth below to be less than the
dollar amount set forth below opposite such date.
COMPUTATION DATE AMOUNT
---------------- -----------
December 31, 1996 $ 1,400,000
March 31, 1997 6,700,000
June 30, 1997 11,500,000
September 30, 1997 12,000,000
December 31, 1997 12,000,000
March 31, 1998 13,000,000
June 30, 1998 13,500,000
September 30, 1998 13,500,000
December 31, 1998 13,500,000
March 31, 1999 13,500,000
June 30, 1999 15,000,000
September 30, 1999 15,000,000
December 31, 1999 15,000,000
March 31, 2000 15,000,000
June 30, 2000 16,300,000
September 30, 2000 16,300,000
December 31, 2000 16,300,000
March 31, 2001 16,300,000
June 30, 2001 17,500,000
September 30, 2001 17,500,000
December 31, 2001 17,500,000
March 31, 2002 17,500,000
June 30, 2002 18,500,000
Section 6.9 Fixed Charge Coverage. Borrower shall not permit its Fixed
Charge Coverage Ratio for the Reference Period ending on the dates set forth
below to be less than the amount set forth opposite such date.
COMPUTATION DATE RATIO
---------------- -----
December 31, 1996 0.40
March 31, 1997 0.90
June 30, 1997 1.00
September 30, 1997 1.03
December 31, 1997 1.05
March 31, 1998 1.05
June 30, 1998 1.05
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54
September 30, 1998 1.05
December 31, 1998 1.05
March 31, 1999 1.05
June 30, 1999 1.05
September 30, 1999 1.05
December 31, 1999 1.05
March 31, 2000 1.05
June 30, 2000 1.15
September 30, 2000 1.15
December 31, 2000 1.15
March 31, 2001 1.15
June 30, 2001 1.15
September 30, 2001 1.15
December 31, 2001 1.15
March 31, 2002 1.15
June 30, 2002 1.15
Section 6.10 Limitations on Operating Lease Expense. The aggregate amount
of Operating Lease Expense of the Borrower and its Subsidiaries, on a
consolidated basis, shall not exceed Eight Hundred Thousand and 00/100 Dollars
($800,000.00) for the fiscal year ending June 30, 1997 and for each subsequent
fiscal year shall not exceed an amount that is Ten Percent (10%) in excess of
the amount of Operating Lease Expense of Borrower and its Subsidiaries, on a
consolidated basis, permitted in the immediately preceding fiscal year.
Section 6.11 Limitations on Capital Expenditures. The Borrower and its
Subsidiaries, on a consolidated basis, shall not, without first obtaining the
written consent of a Majority of Lenders, make Capital Expenditures in any
fiscal year, in an aggregate amount greater than Seven Hundred Thousand and
00/100 Dollars ($700,000.00). To the extent all or any portion of such amount is
not used in any given fiscal year, Fifty Percent (50%) of such amount may be
carried forward to the immediately following fiscal year and used for capital
expenditures during such immediately following fiscal year.
Section 6.12 Limitation on Liens. The Borrower shall not create, incur,
assume or suffer to exist any Lien upon any of its property, assets or revenues,
whether now owned or hereafter acquired, except for Permitted Liens.
Section 6.13 Limitation on Guarantee Obligations. The Borrower shall not
create, incur, assume or suffer to exist any Guarantee Obligation with respect
to Borrower or its Subsidiaries, except for:
(a) guaranties of payment or performance issued to suppliers and
customers of Borrower and/or any of its Subsidiaries under agreements
entered into in the ordinary course of business by Borrower and/or any of
its Subsidiaries to supply Borrower and/or any of its Subsidiaries with
goods or services or to sell Inventory to customers;
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55
(b) product warranties, return or replacement guaranties and similar
assurances made by Borrower and/or any of its Subsidiaries with respect to
products sold to customers in the ordinary course of business;
(c) indemnification provisions under this Agreement or any other Loan
Document to which Borrower and/or any of its Subsidiaries is a party;
(d) reimbursement obligations of Borrower and/or any of its
Subsidiaries under letters of credit which are permitted by subparagraph
(i) under the definition of "Permitted Liens" or otherwise approved by
Lenders hereunder;
(e) indemnification obligations under the Easy Gardener Acquisition
Agreement, the Weatherly Acquisition Agreement and agreements to be entered
into by Borrower pursuant to the Weatherly Acquisition Agreement and the
Emerald Acquisition Agreement;
(f) agreements with suppliers and customers with respect to insurance
and indemnification matters required of Borrower and/or any of its
Subsidiaries in the ordinary course of its business and made in accordance
with the past practices of the Borrower and/or any of its Subsidiaries;
(g) indemnification obligations under permitted Financing Leases and
operating leases permitted pursuant to Section 6.10;
(h) indemnification obligations contained in the employment agreements
of Borrower with Messrs. Joseph A. Owens II and Richard Grandy;
(i) indemnification provisions of officers, directors, employees and
agents contained in Borrower's certificate of incorporation; and
(j) the indemnification obligations under the Termination Agreement by
and among FINOVA Capital Corporation, Borrower and Guarantor. .
Section 6.14 Limitation on Fundamental Changes. Neither the Borrower, its
Subsidiaries nor Guarantor shall enter into any merger, consolidation or
amalgamation, or liquidate, wind up or dissolve themselves (or suffer any
liquidation or dissolution), or make any material change in their business or
their present method of conducting business, except (a) pursuant to and as
contemplated by the Weatherly Acquisition Agreement, (b) Guarantor may merge
with or consolidate into another corporation if the Guarantor is the surviving
corporation and the resulting corporation has a Net Worth not less than that of
the Guarantor immediately prior to such merger or consolidation, (c) mergers of
any Subsidiaries of Borrower with and into Borrower or another Subsidiary of
Borrower, provided such Subsidiary has executed and delivered a Subsidiary
Guaranty and Subsidiary Pledge Agreement to Agent, (d) the dissolution and
liquidation of any Subsidiary of Borrower, provided that its net assets, if any,
are distributed to Borrower or any other Subsidiary of
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56
Borrower which has executed and delivered a Subsidiary Guaranty and Subsidiary
Pledge Agreement to Agent.
Section 6.15 Limitation on Sale of Assets. The Borrower shall not convey,
sell, lease, assign, transfer or otherwise dispose of any of its property,
business or assets (including, without limitation, receivables and leasehold
interests), whether now owned or hereafter acquired to any Person, except:
(a) tangible personal property which is obsolete, uneconomical or worn
out property, in the reasonable judgment of Borrower, and is disposed of in
the ordinary course of business;
(b) the sale or other disposition of any other property, including
Inventory, in the ordinary course of business and for fair market value;
(c) the sale or discount without recourse of Accounts arising in the
ordinary course of business in connection with the compromise or collection
thereof; and
(d) the sale of investments in the ordinary course of business.
Section 6.16 Limitation on Investments, Loans and Advances. Neither the
Borrower nor Guarantor shall make any advance, loan, extension of credit or
capital contribution to, or purchase any stock, bonds, notes, debentures or
other securities of or any assets constituting a business unit of, or make any
other investment in, any Person, except as otherwise expressly permitted by the
terms hereof, and except for:
(a) extensions of trade credit, accounts receivable and loans and
advances extended to employees, consultants and subcontractors in the
ordinary course of business, provided that in the case of employees, such
amounts in the case of Borrower shall not exceed $10,000 for any individual
or $20,000 in the aggregate at any time outstanding, except as set forth on
Schedule 6.16(a), and such amounts in the case of Guarantor shall not
exceed $750,000 in the aggregate at any time outstanding;
(b) investments by Guarantor in Borrower and in Golden West;
(c) investments in Cash Equivalents;
(d) investments by Borrower and/or Guarantor, directly and/or
indirectly, in Emerald, Weatherly and/or any of Weatherly's Subsidiaries
and the making by Borrower and/or Guarantor, directly or indirectly, to
Borrower and/or any of Borrower's Subsidiaries of loans, advances,
extensions of credit (including pursuant to Finance Lease and/or operating
lease transactions with Borrower and/or any of Borrower's Subsidiaries) and
capital contributions to finance or fund the working capital requirements
and other corporate purposes of Borrower and/or any of its Subsidiaries;
and
<PAGE>
57
(e) investments in, loans to, extensions of credit, advances and
capital contributions to another Person, and purchases of any assets
constituting a business unit of another Person, by Guarantor or any other
Subsidiary of Guarantor, so long as Guarantor shall not commingle any
business acquired thereby with those of Borrower and its Subsidiaries,
maintain separate accounting records from those of Borrower and its
Subsidiaries, and take such action as may be reasonable from time to time
to separate the operations and corporate identity of any business acquired
from those of Borrower and its Subsidiaries.
Section 6.17 Limitation on Optional Payments and Modifications of Debt
Instruments. The Borrower shall not:
(a) make any optional payment or prepayment on any Indebtedness (other
than the Obligations under this Agreement); or
(b) amend, modify or change or consent or agree to any amendment,
modification or change to any of the terms relating to the payment or
prepayment or principal of or interest on, any such Indebtedness (unless
the amendment, modification or change would extend the maturity or reduce
the amount of payments of principal thereof prior to the maturity of the
Indebtedness created by this Agreement or would reduce the rate or extend
the date for payment of interest thereon).
Section 6.18 Limitation on Creation or Acquisition of Subsidiaries. Except
as permitted by Section 6.16, neither Borrower nor Guarantor will create, make
any capital contributions to or acquire any Subsidiary or transfer any assets to
any Subsidiary without the prior written consent of Agent.
Section 6.19 Corporate Documents. Neither Borrower nor Guarantor shall make
any material change, amendment or modification to Borrower's or Guarantor's
articles of incorporation or by-laws.
Section 6.20 Dividends and Similar Transactions. Without the prior written
consent of a Majority of Lenders, except as otherwise expressly permitted by
this Agreement, the Borrower shall not declare or pay any dividends or make any
other payments on its capital stock, issue, redeem, repurchase or retire any of
its capital stock, grant or issue any warrant, right or option pertaining
thereto or other security convertible into any of the foregoing, or make any
distribution to its stockholders, other than dividends payable solely in the
common stock of Borrower.
Section 6.21 Change of Locations; Collateral. The Borrower shall not (i)
change its chief executive office or principal place of business, (ii) remove
the books and records or the Collateral from the locations set forth in Exhibit
B, except for removal of (A) Inventory upon its sale in the ordinary course of
business, (B) disposition of assets permitted by Section 6.15, and (C) Equipment
in the ordinary course of business; or (iii) keep any of such books and records
at any other office(s) or location(s) unless (A) Borrower gives Agent written
notice thereof and of the new location of said books and records at least
fifteen (15) days prior thereto, and (B) such other office or location is within
the continental United States.
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58
ARTICLE 7
CONDITIONS PRECEDENT
Section 7.1 Conditions Precedent to Initial Loan. The obligation of the
Lenders to make the initial Loans to Borrower under this Agreement on the
Closing Date is subject to the satisfaction of the following conditions
precedent (in form and substance as is reasonably satisfactory to Agent, in its
sole discretion):
(a) Certified Copies of Charter Documents. Agent shall have received
from the Borrower and Guarantor copies, certified by a duly authorized
officer of the Borrower and Guarantor to be true and complete on and as of
the Closing Date, of each of the charter or other organization documents
and by-laws of the Borrower and Guarantor each as in effect on such date of
certification (together with any amendments thereto);
(b) Proof of Appropriate Action. Agent shall have received from the
Borrower and Guarantor copies, certified by a duly authorized officer of
the Borrower and Guarantor to be true and complete on and as of the Closing
Date, of the records of all action taken by the Borrower and Guarantor to
authorize the execution and delivery of this Agreement and any other
agreements entered into on the Closing Date and to which they are or are to
become a party as contemplated or required by this Agreement, and their
performance of all of their agreements and obligations under each of such
documents;
(c) Incumbency Certificates. Agent shall have received from each of
the Borrower and Guarantor an incumbency certificate, dated the Closing
Date, signed by a duly authorized officer of the Borrower and Guarantor and
giving the name and bearing a specimen signature of each individual who
shall be authorized (i) to sign, in the name and on behalf of the Borrower
and Guarantor this Agreement and each of the other Loan Documents to which
such person is or is to become a party on the Closing Date, and (ii) to
give notices and to take other action on behalf of the Borrower and
Guarantor under the Loan Documents;
(d) Representations and Warranties. Each of the representations and
warranties made by and on behalf of the Borrower and Guarantor to Lenders
in this Agreement and in the other Loan Documents shall be true and correct
when made, shall, for all purposes of this Agreement, be deemed to be
repeated on and as of the Closing Date, and shall be true and correct in
all material respects on and as of such date, except to the extent such
representation or warranty expressly relates to an earlier date;
(e) Loan Documents, Etc. Each of the Notes and the other Loan
Documents shall have been duly and properly authorized, executed and
delivered to Agent, as the case may be, by the respective party or parties
thereto and shall be in full force and effect on and as of the Closing
Date;
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59
(f) Legality of Transactions. No change in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful (i) for the Agent or any Lender to perform any of its agreements
or obligations under this Agreement, the Notes, or under any of the other
Loan Documents, or (ii) for the Borrower or Guarantor to perform any of
their material agreements or obligations under this Agreement, the Notes,
or under any of the other Loan Documents;
(g) Perfection of Security Interests. Agent shall have received all
Uniform Commercial Code Financing Statements required or, in Agent's
opinion, advisable to be filed in order to create, in favor of the Agent
for the benefit of Lenders, a perfected Lien on the Collateral with respect
to which a Lien can be perfected by means of filing Uniform Commercial Code
Financing Statements (or for the filing of an application for certificate
of title); said Financing Statements shall have been properly filed in each
office in each jurisdiction in which such filings are required or, in the
opinion of Agent, advisable; Agent shall have received confirmation from
its local counsel or local counsel to Borrower that all such filings and
recordations have been made, and that all necessary filing, subscription
and inscription fees and all recording and other similar fees, and all
taxes and other expenses related to such filings and recordings have been
paid or provided for in full by or on behalf of Borrower;
(h) Priority. Agent shall have received evidence reasonably
satisfactory to Lenders that Agent's Liens for the benefit of Lenders are
first and prior, and there are no other superior, equal, or inferior Liens
except the Permitted Liens;
(i) Insurance. Agent shall have received evidence that the items of
tangible Collateral having an insurable value are fully insured in such
amounts, against such risks, and with such insurers as may be reasonably
satisfactory to Agent, with loss payable to Agent for the benefit of the
Lenders, together with certificates evidencing such insurance as required
hereby;
(j) Audit. Provident shall have completed its audit of the business
operations, facilities and books and records of Borrower and Guarantor,
including but not limited to, review of (i) all material agreements,
contracts and commitments of Borrower and Guarantor, including, but not
limited to, the Weatherly Acquisition Agreement; (ii) all insurance
policies and programs of Borrower and Guarantor; (iii) the pension and
employee benefit plans of Borrower and Guarantor; (iv) all tax returns,
filings and audit information relating to Borrower and Guarantor; (v)
accounts receivable and inventory; and (vi) information regarding any
pending or threatened litigation, claims or actions against Borrower or
Guarantor, which audit shall be reasonably satisfactory to Agent;
(k) Performance, Etc. Borrower and Guarantor shall have duly and
properly performed, complied with and observed, in all material respects,
each of their respective covenants, agreements and obligations contained in
each of the Loan Documents. No event shall have occurred on or prior to the
Closing Date, and no condition shall exist on the Closing Date, which
constitutes a Default or an Event of Default;
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60
(l) Legal Opinions. Agent shall have received a written legal opinion
of counsel to Borrower and Guarantor, addressed to Agent, dated the Closing
Date, in substantially the form attached hereto as Exhibit L;
(m) Consents. Agent shall have received from a Responsible Officer of
Borrower and Guarantor all consents, if any, necessary for the completion
of the transactions contemplated by each of the Loan Documents, and all
instruments and documents incidental thereto shall be in full force and
effect except as otherwise disclosed in Section 4.2;
(n) Availability Under Revolving Credit Commitment. The amount
available under the Revolving Credit Commitment and Cash Equivalents as of
the Closing Date shall be no less than Four Million and 00/100 Dollars
($4,000,000.00);
(o) Financial Statements and Projections. Agent shall have received
the audited statements of the Borrower for 1994 and 1995, unaudited
statements for the period from July 1, 1995 to the end of the most recent
month completed prior to the Closing Date, projections of the Borrower's
operations for the entire term of the Loans, and such other financial
information regarding Borrower's operations as Agent may reasonably
require;
(p) Broker. If the services of a broker have been utilized by the
Borrower to arrange the Loans, each Lender shall have received evidence
that any fee due such broker has been paid or will be paid at Closing;
(q) Environmental Assessment. Agent shall have received a copy of the
Phase I investigation report of Weatherly's facility in Paris, Kentucky,
together with a reliance letter from the engineering firm conducting such
investigation addressed to Agent and for the benefit of each Lender, and
the scope and results of such investigation shall reasonably be
satisfactory to Agent. All costs associated with compliance with
Environmental Laws as indicated by such investigation, shall be the sole
responsibility of Borrower;
(r) Weatherly Acquisition. Borrower shall be prepared to close the
Weatherly Acquisition and in connection therewith, (i) Guarantor shall have
received or have binding commitments to receive, contingent only upon the
making of the Loans contemplated hereby, an additional $4,900,000 in equity
for Borrower, on terms and conditions reasonably satisfactory to Agent,
(ii) Guarantor shall issue to the Weatherly Stockholders stock of Guarantor
having a value on the Closing Date of not greater than $3,000,000 in the
aggregate, and (iii) Weatherly's balance sheet shall reflect cash or Cash
Equivalents of at least $2,000,000.00. Borrower shall cause Weatherly to
enter into a Subsidiary Guaranty substantially in the form of Exhibit O
hereto;
(s) Provident and Lender Fees and Expenses. Provident shall receive
the underwriting fee separately agreed to in its commitment letter and
reimbursement of all of its costs and expenses related hereto (including
the reasonable fees and expenses
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of its counsel). Each Lender shall have received a closing fee in the
amount of 1% of its total Credit Commitment for the Loans;
(t) Purchase and Sale Agreement. Lenders shall have received a copy of
the Weatherly Acquisition Agreement executed by the parties thereto;
(u) References. Agent shall have received customer, vendor and credit
reference checks, tax lien, litigation and judgment searches on the
Borrower and Guarantor, and the senior management of the Borrower and
Guarantor;
(v) Warrants. Each Lender shall have received a Warrant from Guarantor
in the amount of its Participation Percentage of 400,000 shares of the
capital stock of Guarantor; and
(w) Other Information. Agent shall have received such other
information concerning the Borrower, the Weatherly Acquisition and the
transactions contemplated hereby as Agent may reasonably require.
Section 7.2 Conditions Precedent to All Loans. The obligation of each
Lender to make any Loan (including the initial Loans on the Closing Date) to
Borrower under this Agreement is subject to the satisfaction of the following
conditions precedent (in form, substance and action as is satisfactory to Agent,
in its sole discretion):
(a) Representations and Warranties. The representations and warranties
made by Borrower and Guarantor in this Agreement or the other Loan
Documents, or which are contained in any certificate, document or financial
or other statement of Borrower or Guarantor furnished at any time under or
in connection with this Agreement or the other Loan Documents shall be
correct in all material respects on and as of the date requested for the
making of such Loan as if made on and as of such date, except to the extent
such representation or warranty expressly relates to an earlier date;
(b) No Default. No Default or Event Default shall have occurred and be
continuing on such date or after giving effect to the Loan to be made on
such date; and
(c) Interest Rate Not Usurious. The interest rates applicable to the
Loans (before giving effect to any savings clause) will not exceed the
maximum rate permitted by applicable law.
ARTICLE 8
EVENTS OF DEFAULT
"Events of Default" shall mean the occurrence or existence of any one or
more of the following:
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Section 8.1 Payments. Failure by the Borrower to pay any Obligation within
three (3) Business Days of when due and payable or declared due and payable, as
the case may be, except for the payment due upon the maturity of any Note for
which no grace period shall be applicable.
Section 8.2 Representations and Warranties. Any representation or warranty
made or deemed made by the Borrower or Guarantor in this Agreement, any other
Loan Document or in any certificate, document or financial or other statement
furnished at any time in connection herewith or therewith shall prove to have
been untrue in any material respect on the date when made or deemed to have been
made.
Section 8.3 Certain Covenants. Borrower shall fail to comply with the
covenants set forth in Sections 5.6, 5.7, 5.9(a), 5.11(a) or 5.17 or any one of
the Sections of Article 6.
Section 8.4 Registration of Warrant Stock. Guarantor shall fail to have
filed a registration statement with the SEC for the registration of the shares
of stock of Guarantor underlying the Warrants on or before January 31, 1997.
Section 8.5 Additional Covenants. Default by the Borrower or Guarantor in
the observance or performance of any other covenant or agreement contained
herein or in any Loan Document to be observed or performed by Borrower or
Guarantor, as the case may be, and continuance of such default unremedied for a
period of twenty (20) days (except where this Agreement or the Notes require
that such default be cured within a shorter period).
Section 8.6 Effectiveness of Security Documents. On or after the date of
the execution and delivery thereof, if for any reason any Security Document
shall cease to be in full force and effect (other than by operation of the terms
thereof) or any of the Liens intended to be created by any Security Document
ceases to be or is not a valid and perfected Lien in the Collateral having the
priority contemplated thereby (other than by reason of acts or omissions of
Agent or any Lender, except where Borrower, thereafter, fails to cooperate with
Agent or any such Lender in good faith and except for Permitted Liens), or if
any party to any Security Document (other than the Agent or any Lender) shall
assert in writing that any such document or agreement has ceased to be in full
force and effect, other than by payment in full of the obligations secured
thereby.
Section 8.7 Destruction of Collateral. Any material damage to or loss,
theft or destruction of any of the tangible Collateral which is uninsured or
underinsured in an amount equal to or greater than Two Hundred Fifty Thousand
and 00/100 Dollars ($250,000.00).
Section 8.8 Cross-Default to Other Indebtedness. The Borrower shall default
in any payment of principal of or interest on any of its Indebtedness (other
than any such default in respect of the Notes) or in the payment of any
Guarantee Obligation relating to Indebtedness, beyond the period of grace, if
any, provided in the instrument or agreement under which such Indebtedness or
Guarantee Obligation was created or default in the observance or performance of
any other agreement or condition relating to any such Indebtedness or Guarantee
Obligation or contained in any instrument or agreement evidencing, securing or
relating thereto, or any other event shall occur or condition exist, the effect
of which default or other event or
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condition is to cause, or to permit the holder or holders of such Indebtedness
or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or
agent on behalf of such holder or holders or beneficiary or beneficiaries) to
cause, with the giving of notice or the passage of time or both, if required,
such Indebtedness to become due prior to its stated maturity or such Guarantee
Obligation to become payable; provided, however, that such event shall not be
considered an Event of Default if the amount of Indebtedness or such Guarantee
Obligation in default, when combined with all other amounts of Indebtedness or
Guarantee Obligations described by this Section, does not exceed Two Hundred
Fifty Thousand and 00/100 Dollars ($250,000.00).
Section 8.9 Commencement of Bankruptcy or Reorganization Proceeding.
(a) The Borrower or Guarantor or any Subsidiary of Guarantor shall
commence a case, proceeding or other action (i) under any existing or
future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization or relief of debtors, seeking to
have an order for relief entered with respect to it, or seeking to
adjudicate it as bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, wind-up, liquidation, dissolution, composition or
other relief with respect to it or its debts, or (ii) seeking appointment
of a receiver, trustee, custodian or other similar official for it or for
all or any substantial part of its assets; or
(b) There shall be commenced against the Borrower or Guarantor or any
Subsidiary of Guarantor any such case, proceeding or other action which
results in the entry of an order for relief or any such adjudication or
appointment or remains undismissed, undischarged or unbonded for a period
of sixty (60) days; or
(c) There shall be commenced against the Borrower or Guarantor or any
Subsidiary of Guarantor any case, proceeding or other action seeking
issuance of a warrant of attachment, execution, distraint or similar
process against all or any substantial part of its assets which results in
the entry of an order for any such relief which shall not have been
vacated, discharged, or stayed or bonded pending appeal within sixty (60)
days from the entry thereof; or
(d) Either the Borrower or Guarantor or any Subsidiary of Guarantor
shall, except as expressly permitted hereby, suspend the operation of its
business other than by reason of force majeure or take any action in
furtherance of, or indicating its consent to, approval of, or acquiescence
in, any of the acts set forth above in clauses (a), (b) or (c) above; or
(e) Either the Borrower or Guarantor or any Subsidiary of Guarantor
shall generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due.
Section 8.10 Default by Guarantor. Guarantor shall be in default in the
performance or observance of any of its covenants or agreements contained in any
Loan Document to which it is a party, including, without limitation, the Pledge
Agreement, or demand is made
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on such Guarantor under the terms of the Guaranty Agreement by reason of the
occurrence of an Event of Default.
Section 8.11 Material Judgments. One or more judgments or decrees shall be
entered against the Borrower involving in the aggregate a liability (not paid or
covered by insurance) of One Hundred Thousand and 00/100 Dollars ($100,000.00)
or more and all such judgments or decrees shall not have been vacated,
satisfied, discharged or bonded pending appeal within sixty (60) days from the
entry thereof.
Section 8.12 ERISA. If any of the following events shall occur:
(a) the institution of any steps by the Borrower, any member of its
Controlled Group or any other Person to terminate a Employee Benefit Plan
if, as a result of such termination, the Borrower or any such member could
be required to make a contribution to such Employee Benefit Plan, or could
reasonably expect to incur a liability or obligation to such Employee
Benefit Plan, that would result in, or would be reasonable likely to result
in, a Material Adverse Effect;
(b) a contribution failure occurs with respect to any Employee Benefit
Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; or
(c) the occurrence of any event that could reasonably be expected to
result in the assessment of withdrawal liability against the Borrower or
any member of its Controlled Group by a Multiemployer Plan that would be
reasonably likely to result in a Material Adverse Effect.
Section 8.13 Material Adverse Change. There shall occur a change in the
condition or affairs (financial or otherwise) of the Borrower or Guarantor
(whether as a result of a single event or series of events or conditions) which
the Lenders determine, in good faith, even in the absence of any Default or
Event of Default, (a) will, or does, materially adversely impair the Collateral
or the Net Worth, determined on a consolidated basis of the Borrower or
Guarantor, (b) will, or does, materially reduce the likelihood that the Borrower
or Guarantor can pay the Obligations in full, or (c) will, or does, materially
increase the risk that the Obligations will not be paid in full if the Agent is
required to delay the acceleration of the maturity of the Obligations.
ARTICLE 9
REMEDIES, COLLECTION OF COLLATERAL, ETC.
Section 9.1 Remedies. Upon the occurrence of an Event of Default described
in Article which has not been waived in accordance with Section 10.8, Lenders
may:
(a) declare the Obligations of the Borrower immediately due and
payable, without presentment, notice, protest or demand of any kind for the
payment of all or any part of the Obligations (all of which are expressly
waived by the Borrower) and
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65
exercise or cause Agent to exercise all of their respective rights and
remedies against the Borrower and any Collateral provided herein, in any of
the other Loan Documents, or in any other agreement among the Borrower,
Guarantor and the Agent and any Lender, and
(b) exercise or cause Agent to exercise all rights granted to a
secured party under the other Loan Documents or otherwise available to
Lenders or Agent, on behalf of Lenders, at law or in equity, including
without limitation, the Uniform Commercial Code.
Upon the occurrence of an Event of Default, or in the event of non-payment of
any of the Loans when due, a Majority of Lenders may cause Agent to take
possession of the Collateral, or any part thereof, and the Borrower and
Guarantor hereby grant the Agent and each Lender authority to enter upon any
premises on which the Collateral may be situated, and remove the Collateral from
such premises or use such premises, together with the materials, supplies, books
and records of the Borrower and Guarantor, to maintain possession and/or the
condition of the Collateral and to prepare the Collateral for sale. The Borrower
and Guarantor shall, upon demand by a Majority of Lenders, assemble the
Collateral and make it available at a place designated by Agent or a Majority of
Lenders which is reasonably convenient to both parties. Unless the Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market, Agent or a Majority of Lenders will give the
Borrower and Guarantor reasonable notice of the time and place of any public
sale thereof or of the time after which any private sales or other intended
disposition thereof is to be made. The requirement of reasonable notice shall be
met if such notice is mailed, postage prepaid, to the address of the Borrower
and Guarantor set forth on the signature page hereof or to such other address
designated pursuant to Section 11.2 hereof at least ten (10) days prior to the
time of such sale or disposition. If Borrower fails to make any payment or
perform any act required to be made or performed hereunder or under any Loan
Document by it (including, without limitation, maintaining insurance required
pursuant to Section 5.6) with the consent of a Majority of Lenders, Agent, upon
contemporaneous notice to Borrower and without waiving or releasing any
obligation or default, may (but shall be under no obligation to) at any time
thereafter make such payment or perform such act for the account and at the
expense of Borrower and may take all such action with respect thereto as, in
Agent's judgment, may be necessary or appropriate therefor.
Section 9.2 Application of Proceeds. The Agent, or any Lender receiving
such proceeds, shall apply the proceeds of any disposition of the Collateral to
the payment of the Obligations in accordance with the provisions of Section 2.11
hereof.
Section 9.3 Set-off; Pro Rata Sharing. Each Lender shall have the right (to
be exercised, however, only with the consent of a Majority of Lenders), upon
notice to the Borrower or Guarantor, to set-off and apply against the payment of
the Obligations in such order and manner as such Lender may determine, subject,
however, to the provisions of Section 10.11, whether matured or unmatured, any
amount owing from such Lender to the Borrower or Guarantor at, or at any time
after, the happening of any Event of Default, and such right of set-off may be
exercised by such Lender against the Borrower or Guarantor or against any
trustee in bankruptcy, debtor in possession, assignee for the benefit of
creditors,
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66
receiver, custodian or execution, judgment or attachment creditor of the
Borrower or Guarantor, or against anyone else claiming through or against the
Borrower or Guarantor or such trustee in bankruptcy, debtor in possession,
assignee for the benefit of creditors, receivers, or execution, judgment or
attachment creditor, notwithstanding the fact that such right of setoff shall
not have been exercised by such Lender prior to the making, filing or issuance,
or service upon such Lender of, or of notice of, any such petition, assignment
for the benefit of creditors, appointment or application for the appointment of
a receiver, or issuance of execution, subpoena, order or warrant. Each Lender
agrees promptly to notify the Borrower and Guarantor after any such set-off and
application made by such Lender, provided that the failure to give such notice
shall not affect the validity of such set-off and application.
Section 9.4 Rights Cumulative; Waiver. The rights, options and remedies of
the Agent on behalf of Lenders or any Lender shall be cumulative and no failure
or delay by the Agent on behalf of Lenders or any Lender in exercising any
right, option or remedy shall be deemed a waiver thereof or of any other right,
option or remedy, or waiver of any Event of Default hereunder, nor shall any
single or partial exercise of any such right, power or remedy preclude any other
or further exercise thereof or the exercise of any other right, power or remedy
hereunder. Neither Agent nor any Lender shall be deemed to have waived any of
the Agent's or any Lender's rights hereunder or under any other agreement,
instrument or paper signed by the Borrower or Guarantor unless such waiver shall
be in writing and signed by each Lender in accordance with the provisions of
Section 10.8 hereof.
Section 9.5 Collections on Accounts. Unless a Majority of Lenders requests
otherwise, all Debtors on the Collateral shall be notified that all payments be
directed to a lock box with Provident or such other account as designated by a
Majority of Lenders. All collections on the Accounts made by the Borrower or
Guarantor, shall be deemed the property of the Lenders, shall be held in trust
for the Lenders and shall not be commingled with the Borrower's or Guarantor's
other funds or be deposited in any bank account of the Borrower or Guarantor, as
the case may be, used in any manner except to pay the Obligations. The Borrower
or Guarantor, as the case may be, shall immediately deposit all collections on
the Accounts in the Agent Deposit Account, over which Agent for the benefit of
Lenders shall have the sole power of withdrawal. On a daily basis, the Agent
will apply all or part of the collected balance of the Agent Deposit Account
against the Obligations, the amount, order and method of such application to be
in accordance with Section 2.11 hereof, but without any prepayment premium
pursuant to Section 2.9. If no Default or Event of Default shall have occurred
and be continuing, any part of the collected balance in the Agent Deposit
Account which the Agent does not apply to the Obligations shall be paid over to
the Borrower's Disbursement Account to the extent permitted under Section 2.11.
The crediting of items deposited in the Agent Deposit Account to the reduction
of the Obligations shall be conditioned upon final payment of the item and if
any item is not so paid, the amount of any credit given for it may be charged to
the Obligations or to any other deposit account of the Borrower, whether or not
the item is returned.
Section 9.6 Notification of Debtors; Grant of Powers. The Agent on behalf
of the Lenders, may or, if directed by a Majority of Lenders, shall have the
right at any time after the occurrence and during the continuance of an Event of
Default to notify Debtors of its security interest in the Accounts and to
require payments to be made directly to Agent or
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Lenders at such address or in such manner as the Agent may deem appropriate.
Upon request of Agent or a Majority of Lenders at any time after the occurrence
and during the continuance of an Event of Default, the Borrower will so notify
the account Debtors and will indicate on all billings to the account Debtors
that the Accounts are payable to Agent, for the benefit of Lenders. To
facilitate direct collection, the Borrower hereby appoints the Agent on behalf
of the Lenders, Lenders and any officer or employee of the Agent or any Lender
as the Agent may from time to time designate, as attorney-in-fact for the
Borrower, after the occurrence and during the continuance of an Event of
Default, to (a) receive and open of all mail addressed to the Borrower and take
therefrom any payments on or proceeds of Accounts, and forward all mail not
containing payments to Borrower, (b) take over the Borrower's post office boxes
or make other arrangements, in which the Borrower shall cooperate, to receive
the Borrower's mail, including notifying the post office authorities to change
the address for delivery of mail addressed to the Borrower to such address as
the Agent shall designate, (c) endorse the name of the Borrower in favor of the
Agent on behalf of the Lenders, or Lenders upon any and all checks, drafts,
money orders, notes, acceptances or other evidences or payment or Collateral
that may come into the Agent's possession, (d) sign and endorse the name of the
Borrower on any invoice or bill of lading relating to any of the Accounts, on
verifications of Accounts sent to any Debtor, to drafts against Debtors, to
assignments of Accounts and to notices to Debtors, and (e) do all acts and
things reasonably necessary to carry out this Agreement, including signing the
name of the Borrower on any instruments required by law in connection with the
transactions contemplated hereby and on Financing Statements as permitted by the
Uniform Commercial Code. The Borrower hereby ratifies and approves all acts of
such attorneys-in-fact, and neither the Agent nor any other such
attorney-in-fact shall be liable for any acts of commission or omission, or for
any error of judgment or mistake of fact or law, except for willful misconduct.
This power, being coupled with an interest, is irrevocable so long as any of the
Obligations remain unsatisfied.
Section 9.7 Disclaimer of Liability. Neither Agent nor any Lender shall,
under any circumstances, be liable for any error or omission or delay of any
kind occurring in the settlement, collection or payment of any Accounts or any
instruments received in payment thereof or for any damage resulting therefrom,
unless caused by the Agent's or Lender's gross negligence or willful and
malicious acts. The Agent may after the occurrence and during the continuance of
an Event of Default, without notice to or consent from the Borrower or
Guarantor, sue upon or otherwise collect, extend the time of payment of, or
compromise or settle for cash, credit or otherwise upon any terms, any of the
Accounts or any securities, instruments or insurance applicable thereto and/or
release the obligor thereon. The Agent is authorized after the occurrence and
during the continuance of an Event of Default to accept the return of the goods
represented by any of the Accounts, without notice to or consent by the Borrower
or Guarantor, or without discharging or in any way affecting the Obligations
hereunder. The Agent and Lenders shall not be liable for or prejudiced by any
loss, depreciation or other damage to Accounts or other Collateral unless caused
by the Agent's or any Lender's willful and malicious act, and the Agent and
Lenders shall have no duty to take any action to preserve or collect any Account
or other Collateral.
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ARTICLE 10
AGENCY PROVISIONS
The Borrower, Guarantor, Agent and Lenders agree as follows:
Section 10.1 Appointment of the Agent. Each of the Lenders hereby appoints
Provident to serve as collateral and administrative Agent, under this Agreement
and the other Loan Documents, and in such capacity, to administer this
Agreement, and the other Loan Documents.
Section 10.2 Authority. Each of the Lenders hereby irrevocably authorizes
the Agent to take such action on such Lender's behalf under this Agreement and
the other Loan Documents and to exercise such powers and to perform such duties
hereunder and thereunder as are delegated to or required of the Agent by the
terms hereof or thereof, together with such powers as are reasonably incidental
thereto. The Agent will promptly notify each of the Lenders as soon as it
becomes aware of any Default or Event of Default or any failure by the Borrower
to make any payment in respect of any of the Notes, provided, however, that
Agent shall not be deemed to have knowledge of any item until such time as
Agent's officers responsible for administration of the Loans shall receive
written notice thereof or have actual knowledge thereof. If any Lender becomes
aware of any Default or Event of Default by Borrower, it shall promptly notify
Agent thereof provided, however, that Lenders shall not be deemed to have
knowledge of any item until such time as Lenders' officers responsible for
administration of the Loans shall receive written notice thereof or have actual
knowledge of such event.
Section 10.3 Acceptance of Appointment. The Agent hereby accepts its
appointment as Agent for each of the Lenders under this Agreement and the other
Loan Documents, but only on the terms set forth in this Agreement, including the
following:
(a) Agent makes no representation as to the value, validity or
enforceability of this Agreement or of any of the other Loan Documents or
as to the correctness of any statement contained in this Agreement or in
any of the other Loan Documents;
(b) Agent may exercise its powers and perform its duties under this
Agreement and the other Loan Documents either directly or through its
agents or attorneys;
(c) Agent shall be entitled to obtain from counsel selected by it with
reasonable care advice with respect to legal matters pertaining to this
Agreement, or any of the other Loan Documents and shall not be liable for
any action taken, omitted to be taken or suffered in good faith in
accordance with the advice of such counsel;
(d) Agent shall not be required to use its own funds in the
performance of any of its duties or in the exercise of any of its rights or
powers, and Agent shall not be obligated to take any action which, in its
reasonable judgment, would involve it in
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any expense or liability unless it shall have been furnished security or
indemnity in an amount and in form and substance satisfactory to it;
(e) Agent, in performing its duties and functions under this Agreement
and the other Loan Documents on behalf of the Lenders, will exercise the
same care which it normally exercises in making and handling loans in which
it alone is interested, but does not assume further responsibility; and
(f) The Agent shall not be removed, replaced or succeeded without its
consent except for its gross negligence or willful misconduct, any breach
by Agent of its obligations under Sections or , the failure of the Agent to
perform its other obligations under the Loan Documents on a recurring
basis, or as may be expressly otherwise provided herein, or the Agent
becomes subject to any insolvency proceeding or receivership.
Section 10.4 Application of Moneys. All moneys realized by the Agent under
the Loan Documents shall be held by Agent to apply in accordance with Section
2.11 hereof.
Section 10.5 Reliance by the Agent. Agent shall be entitled to rely on any
notice, consent, certificate, affidavit, letter, telegram, telecopy, facsimile
or teletype message, statement, order, instrument or other document believed by
it to be genuine and correct and to have been signed or sent by the proper
person or persons. Agent shall deem and treat the payee of any Note as the
absolute owner thereof for all purposes hereof until such time as it receives
actual notice of an assignment permitted hereunder of such payee's interest,
together with the written agreement of the assignee in form and substance
satisfactory to Agent that such assignee is bound by this Agreement as a
"Lender" hereunder.
Section 10.6 Exculpatory Provisions. Neither Agent nor any of its
shareholders, directors, officers, employees or agents shall be liable in any
manner to any of the Lenders for any action taken, omitted to be taken or
suffered in good faith by it or them under any of the Loan Documents or in
connection therewith, or be responsible for the consequences of any oversight or
error of judgment, except for losses due to gross negligence or willful
misconduct of such Agent, shareholder, director, officer, employee or agent.
Without limiting the generality of the foregoing sentence of this Section 10.6,
under no circumstances shall the Agent be subject to any liability to any Lender
on account of any action taken or omitted to be taken by such Agent in
compliance with the direction of the Majority of Lenders or all of the Lenders,
as the case may be as provided for hereunder.
Agent shall not be responsible in any manner to any of the Lenders for the
due execution, effectiveness, genuineness, validity or enforceability,
perfection or recording of this Agreement, any of the Notes, any of the other
Loan Documents or for any certificate, report or other document used under or in
connection with this Agreement or any of the other Loan Documents, or for the
truth or accuracy of any recitals, statements, warranties or representations
contained herein or in any certificate, report or other document at any time
hereafter furnished or purporting to have been furnished to it by or on behalf
of Borrower, or any other Person, or be under any obligation to any of the
Lenders to ascertain or inquire as to the performance or observance by Borrower,
or any other Person of any of the covenants,
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agreements or conditions set forth in this Agreement, the Notes or any of the
other Loan Documents or as to the use of any moneys lent hereunder or
thereunder.
Agent shall not be obligated to take any action or refrain from taking any
action under any Loan Document that might, in its judgment, involve it in any
expense or liability until it shall have been indemnified to its satisfaction by
or received an agreement to indemnify from each Person which such Agent
reasonably believes may be an intended recipient of such distribution. If a
court of competent jurisdiction shall adjudge that any amount received and
distributed by the Agent is to be repaid, each Person to whom any such
distribution shall have been made shall either repay to the Agent its
proportionate share of the amount so adjudged to be repaid or shall pay over the
same in such manner and to such Persons as shall be determined by such court.
Section 10.7 Action by the Agent. Except as otherwise expressly provided
under the Agreement or in any other of the Loan Documents, Agent will take such
action, assert such rights and pursue such remedies under this Agreement and the
other Loan Documents as the Majority of Lenders or all of the Lenders, as the
case may be as provided for hereunder, shall direct. Except as otherwise
expressly provided in any of the Loan Documents, Agent will not (and shall not
be obligated to) take any action, assert any rights or pursue any remedies under
this Agreement or any of the other Loan Documents in violation or contravention
of any express direction or instruction of the Majority of Lenders or all of the
Lenders, as the case may be, as provided for hereunder. Agent may refuse (and
shall not be obligated) to take any action, assert any rights or pursue any
remedies under this Agreement or any of the other Loan Documents without the
express written direction and instruction of the Majority of Lenders or all of
the Lenders, as the case may be, as provided for hereunder. In the event Agent
fails, within a commercially reasonable time, to take such action, assert such
rights, or pursue such remedies in the manner in which it is directed to take
such action, the Majority of Lenders or all of the Lenders, as the case may be,
as provided for hereunder, shall have the right to take such action, to assert
such rights, or pursue such remedies on behalf of all of the Lenders unless the
terms hereof otherwise require the consent of all the Lenders to the taking of
such actions. All notices and other material information required to be
delivered by Borrower to Agent hereunder shall be delivered to each Lender
within a reasonable time (and in any event not more than five (5) days) after
Agent's receipt of same by Agent. No Lender (other than the Agent, acting in its
capacity as Agent) shall be entitled to take any enforcement action of any kind
under any of the Loan Documents, except as expressly provided in this Agreement.
Action that may be taken by Majority of Lenders or all of the Lenders, as the
case may be as provided for hereunder may be taken pursuant to a vote at a
meeting (which may be held by telephone conference call) of all of the Lenders,
or pursuant to the written consent of such Lenders.
Section 10.8 Amendments, Waivers and Consents. Any provision of this
Agreement, the Notes or the other Loan Documents may be amended or waived upon
the consent of the Majority of Lenders, and after such consent, Agent, on behalf
of the Lenders, may execute and deliver to Borrower a written instrument waiving
or amending such provision; provided, however, that neither this Agreement, the
Notes, nor any of the other Loan Documents may be amended, waived or a variation
therefrom consented to or a forbearance to act with respect thereto agreed upon,
without the written consent of the Agent and all of Lenders which effect
<PAGE>
71
(i) an increase in the Revolving Credit Commitment or the maximum principal
amount of the Term Loans; (ii) a change in any Lender's Credit Commitment; (iii)
a reduction in the interest rates or reduction of the principal set forth in the
Notes; (iv) the extension of the maturity date on the Notes; (v) a change in the
payment schedule or amount of any interest or principal; (vi) a change in this
paragraph, the definition of Majority of Lenders or any provision of this
Agreement which requires consent or action of all the Lenders for action
thereunder; (vii) a change in the obligations and liabilities of Agent; (viii) a
change which increases the obligations of any Lender; or (ix) a change in any
fees or charges hereunder; and provided further that Agent may release or
compromise any Collateral and the proceeds thereof having a value not greater
than ten percent (10%) of the total book value of all Collateral, either in a
single transaction or in a series of related transactions, with the consent of
Lenders owning a total of at lease eighty percent (80%) of the Commitments of
all Lenders, but in no event, however, will Agent, acting under the authority
granted to it in this Section 10.8, release or compromise Collateral or the
proceeds thereof having a total book value in excess of thirty percent (30%) of
the book value of all Collateral, as determined by Agent, during any one
calendar year period.
Notwithstanding anything to the contrary contained herein, Agent may, at
its sole discretion, release or compromise Collateral and the proceeds thereof
to the extent otherwise permitted by this Agreement.
Section 10.9 Indemnification. Each Lender agrees to indemnify Agent (to the
extent Agent is not promptly reimbursed by Borrower), in accordance with its Pro
Rata Share from and against any and all liabilities, obligations, losses,
damages, penalties, interests, actions, judgments and suits of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against Agent
relating to or arising out of this Agreement or any of the other Loan Documents
or relating to any action taken or omitted by such Agent under this Agreement or
any of the other Loan Documents, provided that no Lender shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties, interest,
actions, judgments or suits resulting from Agent's own gross negligence or
willful misconduct.
Section 10.10 Reimbursement of the Agent. Each Lender further agrees to
reimburse Agent, in accordance with its Pro Rata Share, for any reasonable
out-of-pocket costs or expenses incurred by Agent in connection with its duties
under this Agreement (including, but not limited to, reasonable fees and
disbursements of counsel, travel and living expenses away from home of employees
or agents of the Agent and compensation of agents or of experts employed by the
Agent to render services for the Lenders hereunder), but only to the extent such
fees, disbursements, expenses and compensation have not been reimbursed to the
Agent by Borrower after commercially reasonable attempt by Agent to collect such
amounts from Borrower, Guarantor or any guarantor of the Obligations (which
attempts need not include the commencement of any judicial proceeding). If any
such sums are reimbursed to the Agent by Borrower after one or more of the
Lenders have reimbursed the Agent for such sums, the Agent will refund such sums
ratably to the Lenders who contributed such sums.
Section 10.11 Sharing of Funds Received. Each Lender agrees with Agent and
each of the other Lenders that if such Lender shall receive from Borrower or any
other Person or Persons, whether by payment received otherwise than in
accordance with the terms of the
<PAGE>
72
Loan Documents, exercise of the right of set-off, counterclaim, cross-claim,
enforcement of any claim, or proceedings against Borrower or any other Person or
Persons, proof of claim in bankruptcy, reorganization, liquidation, receivership
or other similar proceedings, or otherwise, and shall retain and apply to the
payment of any of the Obligations owing to such Lender any amount in excess of
its Pro Rata Share of the payments received by all of the Lenders and the Agent
in respect of all of the Obligations, such Lender will promptly make such
dispositions and arrangements with the other Lenders and the Agent with respect
to such excess, either by way of distribution, pro tanto assignment of claim,
subrogation or otherwise, as shall result in each of the Lenders receiving in
respect of the Obligations owing to it, its Pro Rata Share of such payments.
Section 10.12 Dealing with Lenders. Agent may at all times deal solely with
the several Lenders for all purposes of this Agreement and the protection,
enforcement and collection of the Notes, including without limitation the
acceptance and reliance upon any certificate, consent or other document executed
on behalf of one or more of the Lenders and the division of payments pursuant to
this Article 10 hereof. The Agent shall not have a fiduciary relationship in
respect of any Lender by reason of this Agreement. The Agent shall have no
implied duties to the Lenders, or any obligation to the Lenders to take any
action hereunder except any action specifically provided by this Agreement to be
taken by the Agent.
Section 10.13 Agent as Lender. Provident, and any successor agent, shall
have, in its capacity as a Lender under the Loan Documents, the same obligations
and the same rights, remedies, powers and privileges under this Agreement and
the other Loan Documents as it would have were it not also an Agent.
Section 10.14 Duties Not to be Increased. The duties and liabilities of
Agent under this Agreement and the other Loan Documents shall not be increased
or otherwise changed without its express prior written consent. The Agent shall
have no duty to provide information to the Lenders except as expressly set forth
herein.
Section 10.15 Lender Credit Decisions. Each Lender acknowledges that it
has, independently of and without reliance upon Agent or any of the other
Lenders, made its own credit analysis and decision to enter into this Agreement
and the other Loan Documents to which it is a party. Each Lender also
acknowledges that it will, independently of and without reliance upon Agent or
any of the other Lenders, continue to make its own credit decisions in taking or
not taking action under this Agreement or any of the other Loan Documents and in
determining the compliance or lack thereof by Borrower and any other Person with
any provision of any Loan Document or other document or agreement.
Section 10.16 Resignation or Removal of Agent. Provident and any successor
Agent may resign as such at any time by giving thirty (30) days' prior written
notice of resignation to each Lender and the Borrower, such resignation to be
effective on the date which is specified in such notice. Upon any such
resignation by Provident as Agent, or in the event the office of Agent shall
thereafter become vacant for any other reason, the Majority of Lenders shall
appoint a successor Agent, by an instrument in writing signed by such Lenders
and delivered to such successor Agent and the Borrower whereupon, such successor
Agent
<PAGE>
73
shall succeed to all of the rights and obligations of the retiring Agent as if
originally named. The retiring Agent shall duly assign, transfer and deliver to
such successor Agent all moneys at the time held by the retiring or removed
Agent hereunder after deducting therefrom its expenses for which it is entitled
to be reimbursed. Upon such succession of any such successor Agent, the retiring
Agent shall be discharged from its duties and obligations hereunder, except for
its gross negligence or willful misconduct arising prior to its retirement or
removal hereunder. After any Agent's resignation, the provisions of this Section
shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as Agent.
Section 10.17 Assignment of Notes; Participation.
(a) Each Lender may, with concurrent notice to Agent and the Borrower,
but without the consent of the Borrower or any other Lenders, assign to one
or more banks or other financial institutions all or a portion of its
rights and obligations under this Agreement and the Notes; provided that
(i) for each such assignment, the parties thereto shall execute and deliver
to an Assignment and Assumption Agreement, in the form of Exhibit hereto,
together with any Notes subject to such assignment, (ii) no such assignment
shall be for less than Five Million and 00/100 Dollars ($5,000,000.00) of
the aggregate of the Lender's Credit Commitment, unless such assignment is
to a then-current holder of a Note, and (iii) no such assignee is the
Borrower, Guarantor or any holder of the Seller Debt or any Affiliate of
any of the foregoing. Upon such execution and delivery of such Assignment
and Assumption Agreement to Agent, from and after the date specified as the
effective date in such Agreement (the "Acceptance Date"), (x) the assignee
thereunder shall be a party hereto, and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such agreement,
such assignee shall have the rights and obligations of a Lender hereunder
and (y) the assignor thereunder shall, to the extent that rights and
obligations hereunder have been assigned by it pursuant to such agreement,
relinquish its rights (other than any rights it may have pursuant to
Section which will survive) and be released from its obligations under this
Agreement (and, in the case of an assignment covering all or the remaining
portion of an assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto).
(b) Each Lender may sell participations of up to Forty-Nine Percent
(49%) of its rights and obligations under the Loan Documents to one or more
banks or other entities (including, without limitation, up to such portion
of its Credit Commitment, the Loans owing to it, the Note held by it);
provided, however, that (i) such Lenders' obligations under the Loan
Documents (including, without limitation, its Credit Commitment to the
Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain
solely responsible to the other parties hereto for the performance of such
obligations, (iii) such Lender shall remain the holder of any such Note for
all purposes of the Loan Documents, (iv) the participating banks or other
entities shall be entitled to the cost protection provisions of Section
2.14 and 11.5 hereof, but a participant shall not be entitled to receive
pursuant to such provisions an amount larger than its share of the amount
to which the Lender granting such participation would have been entitled,
(v) the Borrower, the Agent and the other Lenders shall continue to deal
solely and directly with such Lender in connection with such Lender's
rights and obligations under the Loan Documents, and (vi) no such transfer
shall include the transfer of any of such
<PAGE>
74
Lender's rights to grant consents or approve amendments or modifications to
the Loan Documents except with respect to those items requiring the action
of or consent by all of the Lenders or affecting the rights and obligations
of Agent. It is understood and agreed that, subject to the provisions of
Section each Lender may share any and all information received by it from
or on behalf of the Borrower pursuant to this Agreement or any of the other
Loan Documents with any participant or prospective participant of such
Lender.
(c) In the event of an assignment under Section 10.17, Borrower shall,
upon surrender of the assigning Lender's Notes, issue new Notes to reflect
the new Credit Commitments of the assigning Lender and its assignee.
ARTICLE 11
MISCELLANEOUS
Section 11.1 Amendments and Waivers. Except as otherwise provided herein,
the Borrower, Guarantor and Agent may amend this Agreement, the Notes, or the
other Loan Documents to which they are parties, and Agent may waive future
compliance by the Borrower or Guarantor with any provision of this Agreement,
the Notes, or such other Loan Documents, but no such amendment or waiver shall
be effective unless in a written instrument executed by an authorized officer of
Agent, Borrower and Guarantor.
Section 11.2 Notices. All notices, consents, requests and demands to or
upon the respective parties hereto shall be in writing and, unless otherwise
expressly provided herein, shall be deemed to have been duly given or made when
delivered by hand, or three (3) days after deposited in the mail, postage
prepaid, or, in the case of telex, telegraphic or telecopy notice, when sent,
addressed to such address set forth on the signature pages hereof. Notices of
changes of address shall be given in the same manner.
Section 11.3 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the Borrower, the Guarantor, the Agent, the Lenders,
and their respective successors and assigns, except that neither Agent, the
Borrower, nor the Guarantor may assign or transfer any of their rights or
obligations under this Agreement or the Notes without the prior written consent
of the Lenders. If the Agent or any Lender shall transfer any or all of its
respective rights under this Agreement, and the transferee assumes such
obligations hereunder, then the Agent or such Lender subject to the provisions
of Section 11.10, as the case may be, shall be relieved and released from its
obligations hereunder.
Section 11.4 Expenses; Indemnity.
(a) Borrower shall reimburse the Agent and each Lender for all
reasonable costs and expenses incurred by the Agent in connection with the
preparation of this Agreement and the making of the Loans hereunder,
including the reasonable fees and expenses of the Agent's counsel, and for
all UCC search, filing, recording and other costs connected with the
perfection of the security interest in the Collateral (excluding
<PAGE>
75
any stamp, excise, or mortgage tax, levy or other taxes payable in
connection with the consummation of the transactions contemplated hereby).
(b) Borrower shall also reimburse the Agent, upon demand by Agent at
any time and as often as the occasion therefor may reasonably require, for
all reasonable costs and expenses which shall at any time be incurred or
sustained by Agent or any Lender as a consequence of, on account of, in
relation to or any way in connection with the perfection and continuation
of the rights of Agent in connection with the Loans, as well as the
preparation, negotiation, execution, or delivery of any amendment or
modification of any of the Loan Documents or as a consequence of, on
account of, in relation to or any way in connection with the granting by
Agent of any consents, approvals or waivers under any of the Loan Documents
including, but not limited to, reasonable attorneys' fees and
disbursements.
(c) Borrower shall absolutely and unconditionally indemnify and hold
harmless Agent and each Lender against any and all claims, demands, suits,
actions, causes of action, damages, losses, settlement payments,
obligations, costs, expenses and all other liabilities whatsoever which
shall at any time or times be incurred or sustained by Agent or any Lender
or by any of their shareholders, directors, officers, employees,
subsidiaries, Affiliates or agents on account of, or in relation to, or in
any way in connection with, any of the arrangements or transactions
contemplated by, associated with or ancillary to this Agreement or any of
the other Loan Documents, whether or not all or any of the transactions
contemplated by, associated with or ancillary to this Agreement, or any of
such Loan Documents are ultimately consummated; provided, that Borrower
shall have no obligation hereunder to Agent or any Lender arising from (i)
the gross negligence willful misconduct of the Agent or any Lender or (ii)
any legal proceeding commenced against Agent or any Lender by any other
Lender or any assignee thereof.
(d) Borrower agrees that any sums expended by Agent or any Lender for
which Agent or any Lender is entitled to be reimbursed shall be immediately
due and payable upon demand by Agent or any Lender, and shall bear interest
at the interest rate applicable to Term Notes I and after the occurrence of
an Event of Default hereunder, the Default Rate applicable to Term Notes I
from the date Agent or any such Lender incurred such expense until the date
such payment is made in full to Agent or such Lender.
Section 11.5 Collection Costs. All reasonable costs and expenses incurred
by the Agent to obtain, enforce or preserve the security interests granted by
this Agreement and to collect the Obligations, all reasonable costs to maintain
and preserve the Collateral and reasonable attorneys' fees and legal expenses
incurred in obtaining or enforcing payment of any of the Obligations or
foreclosing the Agent's security interest in any of the Collateral, whether
through judicial proceedings or otherwise, or in enforcing or protecting its
rights and interests under this Agreement or under any other instrument or
document delivered pursuant hereto, or in protecting the rights of any holder or
holders with respect thereto, or in defending or prosecuting any actions or
proceedings arising out of or relating to the Agent's transactions with the
Borrower and Guarantor, shall be paid by the Borrower to the Agent,
<PAGE>
76
upon demand, or, at the Agent's charged to the Borrower's account and added to
the Obligations, and the Agent or Lender may take judgment against the Borrower
for all such costs, expense and fees in addition to all other amounts due from
the Borrower hereunder.
Section 11.6 Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
Section 11.7 Consent to Jurisdiction. The Borrower and Guarantor hereby
absolutely and irrevocably consent and submit to the jurisdiction of the courts
of the State of Ohio and of any federal court located in the said state in
connection with any actions or proceedings brought against the Borrower or
Guarantor by the Agent or any Lender arising out of or relating to this
Agreement, the Notes or any other Loan Documents. The Borrower and Guarantor
hereby waive and shall not assert in any such action or proceeding, in each
case, to the fullest extent permitted by applicable law, any claim that (a) the
Borrower or Guarantor is not personally subject to the jurisdiction of any such
court, (b) the Borrower or Guarantor is immune from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to it or its property, (c) any
such suit, action or proceeding is brought in an inconvenient forum, (d) the
venue of any such suit, action or proceeding is improper, or (e) this Agreement,
the Notes or any Loan Documents may not be enforced in or by any such court. In
any such action or proceeding, the Borrower and Guarantor hereby absolutely and
irrevocably waive personal service of any summons, complaint, declaration or
other process and hereby absolutely and irrevocably agree that the service
thereof may be made by certified, registered or first-class mail directed to the
Borrower and Guarantor at the address specified on the signature pages hereof or
such other address of which Agent or Lenders shall have been first notified
pursuant to Section 11.2. The Borrower and Guarantor hereby agree that they will
appear or answer any such summons, complaint, declaration or other process so
served upon them within thirty (30) days after receipt of the same. Any action
brought by the Borrower or Guarantor in connection with this Agreement or the
transactions contemplated hereby shall be brought in a court of general
jurisdiction sitting in Hamilton County, Ohio. Anything hereinbefore to the
contrary notwithstanding, the Agent or any Lender hereof may sue the Borrower or
Guarantor in the courts of any other country, state of the United States or
place where the Borrower or Guarantor or any of the property or assets may be
found or in any other appropriate jurisdictions.
Section 11.8 WAIVER OF JURY TRIAL. AS A SPECIFICALLY BARGAINED INDUCEMENT
FOR THE LENDERS TO EXTEND CREDIT TO THE BORROWER AND GUARANTOR, AND AFTER HAVING
THE OPPORTUNITY TO CONSULT COUNSEL, THE BORROWER AND GUARANTOR HEREBY EXPRESSLY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATING TO THIS
AGREEMENT OR ARISING IN ANY WAY FROM THE OBLIGATIONS.
Section 11.9 Other Waivers. The Borrower and Guarantor waive notice of
nonpayment, demand, notice of demand, presentment, protest and notice of protest
with respect to the Obligations, or notice of acceptance hereof, notice of Loans
made, credit
<PAGE>
77
extended, Collateral received or delivered, or any other action taken in
reliance hereon, and all other demands and notices of any description, except
such as are expressly provided for herein.
Section 11.10 Confidentiality. Each Lender and the Agent agrees (on behalf
of itself and each of its Affiliates) to use reasonable precautions to keep
confidential, in accordance with their customary procedures for handling
confidential information of this nature and in accordance with safe and sound
practices, any non-public information supplied to it by either Borrower or
Guarantor or any of their respective Subsidiaries pursuant to this Agreement
which is identified by either Borrower or Guarantor as being confidential at the
time the same is delivered to the Lenders or the Agent, provided that nothing
herein shall limit the disclosure of any such information (i) to the extent
required by statute, rule, regulation or judicial process, (ii) to counsel for
any of the Lenders or the Agent, (iii) to regulatory personnel, auditors or
accountants, (iv) to the Agent or any other Lender, (v) in connection with any
litigation to which any one or more of the Lenders or the Agent is a party, (vi)
to a Subsidiary or Affiliate of such Lender as provided in cause (a) above or
(vii) to any assignee or participant (or prospective assignee or participant),
so long as such prospective assignee or participant agrees to maintain the
confidentiality of the information to the same extent as Lenders and Agent.
[Remainder of page intentionally left blank. Signature page follows.]
<PAGE>
78
IN WITNESS WHEREOF, the parties have duly executed this Agreement by their
duly authorized officers as of the date first above written.
BORROWER:
EASY GARDENER ACQUISITION CORP.
Notices to be sent to:
BY: /s/ Richard J. Raleigh
Easy Gardener Acquisition Corp. -----------------------------
655 Montgomery Street, Suite 830 Richard J. Raleigh,
San Francisco, California 94111 Vice President
Attn: Robert Kassel
Phone: (415) 616-8111
Facsimile: (415) 616-8110
With a copy of notices to:
Tenzer Greenblatt LLP
23rd Floor
405 Lexington Ave.
New York, New York 10174
Attn: Robert J. Mittman, Esq.
Phone: (212) 885-5555
Facsimile: (212) 885-5001
<PAGE>
79
Notices to be sent to: GUARANTOR:
U. S. Home & Garden, Inc.
655 Montgomery Street, Suite 830 U.S. HOME & GARDEN, INC.
San Francisco, California 94111
Attn: Robert Kassel BY: /s/ Richard J. Raleigh
--------------------------
Phone: (415) 616-8111 Richard J. Raleigh,
Facsimile:(415) 616-8110 Chief Operating Officer
With a copy of notices to:
Tenzer Greenblatt LLP
23rd Floor
405 Lexington Avenue
New York, New York 10174
Attn: Robert J. Mittman, Esq.
Phone: (212) 885-5555
Facsimile: (212) 885-5001
<PAGE>
80
Notices to be sent to: LENDERS:
THE PROVIDENT BANK
The Provident Bank
One East Fourth Street
Seventh Floor BY: /s/ Nick Jevic
-----------------------
Cincinnati, Ohio 45202 Nick Jevic
Phone: (513) 579-2337 Vice President
Facsimile: (513) 579-2858
Attn: Nick Jevic
CREDIT COMMITMENTS:
With a copy of notices to: 37.254902%
Keating, Muething & Klekamp Revolving Credit Commitment:
1800 Provident Tower $4,843,137.26
Cincinnati, Ohio 45202
Phone: (513) 579-6400 Term Loan I Commitment:
Facsimile: (513) 579-6457 $8,568,627.45
Attn: J. David Rosenberg
Term Loan II Commitment:
Payments to be sent to: $ 838,235.29
The Provident Bank
ABA# 042000424
Credit Loan Desk
Ref: Easy Gardener
Attn: Nick Jevic
<PAGE>
81
LASALLE NATIONAL BANK
Notices to be sent to:
BY: /s/ Jeffrey D. Kadlic
LaSalle National Bank -----------------------
120 South LaSalle St.
Chicago, Illinois 60603
Phone: (312) 904-8587 CREDIT COMMITMENTS:
Facsimile: (312) 904-6242 29.411765%
Attn: Jeffrey D. Kadlic
Revolving Credit Commitment:
With a copy of notices to: $3,823,529.41
Term Loan I Commitment:
$6,764,705.88
Payments to be sent to:
Term Loan II Commitment:
LaSalle National Bank $ 661,764.71
ABA#
Credit ___________
Ref: ________________
Attn: ____________
<PAGE>
82
Notices to be sent to: ANTARES LEVERAGE CAPITAL CORP.
Antares Leverage Capital Corp.
311 South Wacker Drive BY: /s/ David Mahon
Chicago, Illinois 60606-6604 -----------------------
Phone: (312) 697-3959
Facsimile: (312) 697-3998 CREDIT COMMITMENTS:
Attn: David Mahon and Eric Hanson 33.333333%
With a copy of notices to: Revolving Credit Commitment:
$4,333,333.33
Schwartz, Cooper, Greenberger & Krauss,
Chartered Term Loan I Commitment:
Suite 2700 $7,666,666.67
180 North LaSalle Street
Chicago, Illinois 60601 Term Loan II Commitment:
Phone: (312) 346-1300 $ 750,000.00
Facsimile: (312) 782-8416
Attn: Andrew H. Connor
Payments to be sent to:
Bank of America Illinois, Chicago, Ill.
- ---------------------------------------
ABA# 071000039
- ---------------------------------------
Credit: Antares Leverage Capital
- ---------------------------------------
Ref: Easy Gardner
- ---------------------------------------
Attn: Jim Luchashy 312-697-3991
- ---------------------------------------
<PAGE>
83
Notices to be sent to: AGENT:
The Provident Bank THE PROVIDENT BANK, AS AGENT
One East Fourth Street
Seventh Floor
Cincinnati, Ohio 45202 BY: /s/ Nick Jevic
-----------------------
Phone: (513) 579-2337 Nick Jevic
Facsimile: (513) 579-2858 Vice President
Attn: Nick Jevic
With a copy of notices to:
Keating, Muething & Klekamp
1800 Provident Tower
Cincinnati, Ohio 45202
Phone: (513) 579-6595
Facsimile: (513) 579-6457
Attn: J. David Rosenberg
SUBSIDIARIES OF U.S. HOME & GARDEN INC.
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Easy Gardener Acquisition Corp. Delaware
Emerald Products Corp.* Delaware
Golden West Agri-Products, Inc. California
Weatherly Consumer Products Group, Inc.* Delaware
Weatherly Consumer Products, Inc.+ Delaware
- ----------
* Subsidiary of Easy Gardener Acquisition Corp.
+ Subsidiary of Weatherly Consumer Products Group, Inc.
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
U.S. Home & Garden Inc.
(formerly Natural Earth Technologies, Inc.)
San Francisco, California
We hereby consent to the incorporation by reference in the Registration Nos.
33-82758, 33-89800 and 33-94924 on Form S-3 and 33-55020 on Form S-8 of U.S.
Home & Garden Inc. of our report dated August 29, 1996, relating to the
consolidated financial statements of U.S. Home & Garden Inc. appearing in this
Annual Report on Form 10-KSB of U.S. Home & Garden Inc. for the year ended June
30, 1996.
/s/ BDO Seidman, LLP
--------------------
BDO SEIDMAN, LLP
San Francisco, California
October 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-KSB FOR JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 679,850
<SECURITIES> 0
<RECEIVABLES> 7,264,392
<ALLOWANCES> 155,000
<INVENTORY> 3,391,553
<CURRENT-ASSETS> 12,976,041
<PP&E> 1,648,735
<DEPRECIATION> 433,075
<TOTAL-ASSETS> 33,583,982
<CURRENT-LIABILITIES> 7,648,155
<BONDS> 0
0
0
<COMMON> 10,507
<OTHER-SE> 19,359,120
<TOTAL-LIABILITY-AND-EQUITY> 33,583,982
<SALES> 27,030,924
<TOTAL-REVENUES> 27,030,924
<CGS> 12,670,563
<TOTAL-COSTS> 12,670,563
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,009,157
<INCOME-PRETAX> 1,808,666
<INCOME-TAX> (715,000)
<INCOME-CONTINUING> 2,523,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,523,666
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
