<PAGE>
As filed with the Securities and Exchange Commission on November 12, 1997.
Registration No. 333-38483
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------
U.S. Home & Garden Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 2879 77-0262908
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification number) identification number)
</TABLE>
655 Montgomery Street
San Francisco, CA 94111
(415) 616-8111
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
---------------------
Robert Kassel, President
U.S. Home & Garden Inc.
655 Montgomery Street
San Francisco, CA 94111
(415) 616-8111
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
Robert J. Mittman, Esq. Kenneth R. Lamb, Esq.
Tenzer Greenblatt LLP Gibson, Dunn & Crutcher LLP
405 Lexington Avenue One Montgomery Street
New York, New York 10174 Telesis Tower
Telephone No. (212) 885-5000 San Francisco, California 94104
Telecopier No. (212) 885-5001 Telephone No. (415) 393-8200
Telecopier No. (415) 986-5309
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
---------------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
===============================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 12, 1997
6,000,000 Shares
U.S. HOME & GARDEN INC.
Common Stock
---------------------
Of the 6,000,000 shares of common stock, par value $.001 per share (the
"Common Stock"), of U.S. Home & Garden Inc. (the "Company") offered hereby,
5,100,000 shares are being sold by the Company and 900,000 shares are being
sold by certain stockholders of the Company (the "Selling Stockholders"). See
"Principal and Selling Stockholders." The Company will not receive any
proceeds from the sale of the Common Stock offered by the Selling
Stockholders. The Common Stock is traded on the Nasdaq SmallCap Market under
the symbol "USHG." On November 10, 1997, the last reported sale price of the
Common Stock as reported on the Nasdaq SmallCap Market was $4.50 per share.
See "Price Range of Common Stock."
---------------------
See "Risk Factors" beginning on Page 9 for a discussion of certain information
that should be considered by prospective purchasers of the Common Stock
offered hereby.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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===================================================================================
Underwriting Proceeds to Proceeds to the
Price to Discounts and the Selling
the Public Commissions(1) Company(2) Stockholders
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<S> <C> <C> <C> <C>
Per Share ...... $ $ $ $
- -----------------------------------------------------------------------------------
Total(3) ...... $ $ $ $
===================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters by the Company and the Selling Stockholders and other
matters.
(2) Before deducting expenses of the offering, payable by the Company,
estimated at $815,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 900,000 shares of Common Stock at the Price to the Public less
Underwriting Discounts and Commissions, solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to the
Public, Underwriting Discounts and Commissions and Proceeds to the Company
will be $ , $ , and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are being offered hereby by the Underwriters
named herein, subject to prior sale, when, as and if issued by the Company and
delivered to and accepted by the Underwriters and subject to certain prior
conditions, including the right of the Underwriters to reject any order in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York at the offices of EVEREN Clearing
Corporation or through the facilities of The Depository Trust Company on or
about , 1997.
EVEREN Securities, Inc. JOSEPHTHAL LYON & ROSS
INCORPORATED
The date of this Prospectus is , 1997
<PAGE>
U. S. H o m e & G a r d e n I n c.
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[Photos to be provided]
SOME OF THE COMPANY'S ACCOUNTS
- -------------------------------------------------------------------------------
Home Improvement Centers Mass Merchants Co-ops
- -------------------------------------------------------------------------------
Builder's Square Home Quarters Country General Ace Hardware
Eagle Hardware Lowe's Kmart Mid-States
Hechinger Orchard Supply Scotty's True*Serve
HomeBase Yardbirds Wal-Mart
Home Depot
- -------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS, ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Each prospective investor is urged to read this Prospectus in its
entirety. Except as otherwise indicated, all per share data and information in
this Prospectus relating to the number of shares of Common Stock outstanding
assumes no exercise of the Underwriters' over-allotment option to purchase an
additional 900,000 shares of Common Stock from the Company. See
"Underwriting."
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Prospectus contains statements that are forward-looking, such as statements
relating to plans for future activities. Such forward-looking information
involves important risks and uncertainties that could significantly affect
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to, those
relating to the Company's growth strategy, customer concentration, outstanding
indebtedness, dependence on weather conditions, seasonality, expansion and
other activities of competitors, changes in federal or state environmental
laws and the administration of such laws, protection of trademarks and other
proprietary rights and the general condition of the economy and its effect on
the securities markets. See "Risk Factors."
The Company
U.S. Home & Garden Inc. (the "Company") is a leading manufacturer and
marketer of a broad range of consumer lawn and garden products. The Company's
products include weed preventive landscape fabrics, fertilizer spikes,
decorative landscape edging, shade cloth and root feeders, which are sold
under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald Edge(R),
Shade Fabric(TM) and Ross(R). The Company believes that it has significant
market share and brand-name recognition in several of its primary product
categories. The Company markets its products through most large national home
improvement and mass merchant retailers ("Retail Accounts"), including Home
Depot, Lowe's, Kmart, Builder's Square, Wal-Mart and Home Base.
The Company has experienced significant growth in recent years. Net
sales, income from operations and net income grew at average compound annual
rates of 63%, 77% and 42%, respectively, during the period from the fiscal
year ended June 30, 1995 through the fiscal year ended June 30, 1997. The
Company achieved record results from operations for the fiscal year ended June
30, 1997, with net sales, income from operations and net income increasing to
$52.0 million, $10.7 million and $3.2 million, respectively, from $27.0
million, $3.7 million and $2.5 million for the fiscal year ended June 30,
1996. The Company believes that its success has been primarily attributable to
the expansion of its product lines through the acquisition of complementary
lawn and garden businesses, the quality of its products, its focus on
providing Retail Accounts with a single source of lawn and garden products,
the efficiency and reliability of its inventory tracking and order fulfillment
systems and its distinctive advertising and in-store displays.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the
industry has grown, national home improvement and mass merchant retailers have
replaced many of these local garden centers as the primary retail source for
lawn and garden products. In an effort to improve operating margins and reduce
the number of vendors needed to source high volume lawn and garden products,
the preference among home improvement and mass merchant retailers has shifted
to single source suppliers such as the Company that offer broad product lines
of consumer brand-name merchandise and provide the product support necessary
to stimulate consumer demand and ensure timely and cost effective order
fulfillment. Smaller regional suppliers generally lack the capital and other
resources necessary to offer the variety and number of product lines, the
product support and the inventory stocking and tracking capabilities required
by home improvement and mass merchant retailers.
3
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Regional manufacturers, distributors and marketers are now largely
fragmented and the Company believes that many of them are attractive
acquisition candidates for larger suppliers and distributors in the lawn and
garden industry. The Company has historically been successful in locating,
acquiring and integrating certain of these manufacturers and distributors into
its business and intends to continue its acquisition program as a principal
component of its growth strategy.
According to the 1996-1997 National Gardening Survey, 1996 retail sales
of lawn and garden products were approximately $22 billion and 64% of the
approximately 101 million households in the United States participated in some
form of gardening activity during 1996. In addition, sales growth in the lawn
and garden industry is being driven in part by the aging of the "baby boomer"
consumer segment. According to the National Gardening Survey, persons 50 years
of age and older spent an average of $400 per household on lawn and garden
activities in 1996.
Business Strategy
The Company's business objective is to be a leading single source
supplier of lawn and garden products to Retail Accounts and its strategy
includes: (i) marketing low-cost, high-margin products that stimulate impulse
buying by consumers; (ii) supplying Retail Accounts with a broad range of
brand-name products within each of its product catergories; (iii) utilizing
distinctive packaging and point-of-purchase product displays, new product
introductions and other merchandising techniques to stimulate consumer demand;
(iv) generating brand-name recognition of its products through national
marketing and advertising programs; and (v) promoting Retail Account
satisfaction by providing them with timely and cost efficient order
fulfillment services.
Growth Strategy
The Company attributes its historical growth and success to its ability
to capitalize on the consolidation of the lawn and garden industry by
locating, acquiring and effectively integrating acquisition targets and its
ability to act as an efficient single source supplier of a broad range of
quality products. The Company intends to continue this growth strategy, which
consists of the following principal components:
o Pursue Additional Strategic Acquisitions. The Company plans to continue
its primary strategy of acquiring complementary lawn and garden companies
and product lines. The Company has consummated five (5) such acquisitions
since 1992 and recently entered into a non-binding letter of intent to
acquire another lawn and garden product business. By consolidating
companies with complementary product lines, the Company believes it can
capitalize on its existing channels of distribution and gain market share
by increasing sales to its Retail Accounts.
o Increase Brand Awareness. The Company intends to enhance existing
consumer brand awareness by expanding its advertising and marketing
efforts with an emphasis on its Jobe's fertilizer spikes, a
nationally-recognized brand name. The Company believes that the
modernization of its Jobe's packaging, together with a national
television advertising campaign targeted at the "baby boomer" consumer
segment, will allow it to further capitalize on its brand name
recognition.
o Utilize Existing Infrastructure. The Company's management and
administrative infrastructure has been designed to accommodate the
integration of additional products when suitable lawn and garden
companies and product lines are identified and acquired. The Company
believes that its ability to efficiently integrate new businesses and
product lines into its existing infrastructure will result in significant
savings in the areas of management, distribution, marketing and customer
service. The Company also believes that its infrastructure, including its
on-line inventory tracking and order fulfillment capabilities, allows it
to be an effective and efficient source of lawn and garden products for
Retail Accounts.
o Focus on High-Volume Retailers. National high-volume retailers such as
the Company's Retail Accounts are gaining an increasing share of the lawn
and garden retail market. By focusing on the
4
<PAGE>
emergence of high-volume retailers and their needs, including providing
broad product lines, order fulfillment capabilities and marketing and
merchandising programs, the Company believes that it will increase its
market share and enhance its position as a leading single source supplier
of lawn and garden products.
Recent and Proposed Acquisitions
Since August 1992, the Company has consummated the following five (5)
acquisitions of lawn and garden companies or product lines for a total of over
$56 million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which was acquired in
August 1992 for aggregate consideration of approximately $2.2 million.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock, which was acquired in September 1994 for
aggregate consideration of approximately $23.5 million.
o Emerald Products LLC. A manufacturer of decorative landscape edging,
which was acquired in August 1995 for aggregate consideration of
$935,000.
o Weatherly Consumer Products Group, Inc. A manufacturer of fertilizer
spikes and other lawn and garden products, which was acquired in August
1996 for aggregate consideration of approximately $25.9 million.
o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which was acquired in May
1997 for approximately $4.3 million.
In addition, the Company has entered into a non-binding letter of intent
to purchase a manufacturer and distributor of outdoor lawn and garden products
for approximately $14.0 million (the "Proposed Acquisition"), subject to
increase or decrease based upon certain net current assets of the seller to be
acquired.
The Company was organized under the laws of the State of California in
August 1990 under the name Natural Earth Technologies, Inc. In January 1992,
the Company reincorporated under the laws of the State of Delaware and, in
July 1995, changed its name to U.S. Home & Garden Inc. The Company's lawn and
garden operations are conducted through its subsidiary Easy Gardener, Inc.
("Easy Gardener") and Easy Gardener's subsidiary, Weatherly Consumer Products
Group, Inc. ("Weatherly"), and the Company's agricultural operations are
conducted through its subsidiary Golden West Agri-Products, Inc. ("Golden
West"). Unless the context otherwise requires, references in this Prospectus
to "the Company" mean U.S. Home & Garden Inc., its subsidiaries Easy Gardener
and Golden West and the subsidiaries of Easy Gardener. The Company's executive
offices are located at 655 Montgomery Street, San Francisco, California 94111,
and its telephone number is (415) 616-8111.
5
<PAGE>
The Offering
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<S> <C>
Common Stock offered:
By the Company ..................... 5,100,000 shares
By the Selling Stockholders ...... 900,000 shares
Total ........................... 6,000,000 shares
Common Stock to be
outstanding after the
offering(1) ........................ 20,524,981 shares
Use of Proceeds ..................... The Company intends to use the net proceeds
of this offering to (i) acquire approximately
$5.0 million of inventory, (ii) repurchase cer-
tain unit purchase options for approximately
$4.5 million; (iii) fund approximately $3.25
million of estimated marketing and advertising
expenses for fiscal 1998; (iv) repay approximately
$2.3 million of short-term indebtedness; and (v)
apply the balance for working capital and general
corporate purposes, which may include possible future
acquisitions. See "Use of Proceeds."
Nasdaq SmallCap Symbol ............... USHG
Risk Factors ........................ The Common Stock offered hereby involves
certain risks. See "Risk Factors."
</TABLE>
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(1) Based on shares of Common Stock outstanding as of November 7, 1997. Does
not include (i) an aggregate of approximately 2,730,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options under the
Company's 1991, 1995, 1997 and Non-Employee Director Stock Option Plans
(the "Stock Option Plans"); (ii) an aggregate of approximately 1,070,000
shares of Common Stock which may be issued upon exercise of options
available for future grant under the Stock Option Plans; and (iii)
approximately 7,800,000 shares issuable upon exercise of options granted
outside of the Stock Option Plans and certain outstanding warrants,
exclusive of any additional shares that may be issuable as a result of the
anti-dilution provisions of such options and warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Management -- Stock Option Plans," "Certain Transactions" and Note 9 to
Notes to Consolidated Financial Statements.
6
<PAGE>
Summary Financial Data
(in thousands, except percentage and per share data)
The summary financial data set forth below are derived from the Company's
consolidated financial statements. Such information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
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Three Months
Year Ended June 30, Ended September 30,
----------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ---------- ---------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ........................ $ 2,910 $ 3,063 $19,692 $27,031 $ 52,046 $ 5,523 $ 7,025
Gross profit ..................... 1,402 1,608 10,541 14,361 28,397 2,916 3,503
Selling, general and administrative
expenses(1) ..................... 1,826 6,786 7,152 10,612 17,745 3,264 3,963
------- -------- -------- -------- ----------- -------- -------
Income (loss) from operations ...... (424) (5,178) 3,389 3,749 10,652 (348) (460)
Other income (expense) ............ (45) (41) (1,776) (1,940) (3,262) (537) (806)
Income (loss) before extraordinary
expense ........................ (469) (5,219) 1,575 2,524 4,190 (605) (716)
Extraordinary gain (expense), net 389 -- -- -- (1,007) (1,007) --
Net income (loss) .................. $ (80) $ (5,219) $ 1,575 $ 2,524 $ 3,183 $ (1,612) $ (716)
======= ======== ======== ======== =========== ======== =======
Income (loss) per share before
extraordinary expense ......... $ (0.22) $ (1.31) $ 0.19 $ 0.25 $ 0.26(2) $ (0,04) $ (0.05)
Net income (loss) per share ...... $ (0.04) $ (1.31) $ 0.19 $ 0.25 $ 0.20(2) $ (0.12) $ (0.05)
======= ======== ======== ======== =========== ======== =======
Weighted average number of
common and common equivalent
shares outstanding ............ 2,178 3,980 8,376 10,206 17,908(2) 12,915 14,702
======= ======== ======== ======== =========== ======== =======
Company Operating Data(3):
Net sales growth .................. -- -- -- 37.3 % 92.5 % -- 27.2%
Gross profit growth ............... -- -- -- 36.2 97.7 -- 20.1
Income from operations growth ... -- -- -- 10.6 184.1 -- (32.2)
Gross margin ..................... -- -- 53.5 % 53.1 54.6 52.8% 49.9
Operating income (loss) margin ... -- -- 17.2 13.9 20.5 (6.3) (6.5)
Net income (loss) margin ......... -- -- 8.0 9.3 6.1 (29.2) (10.2)
</TABLE>
At September 30, 1997
---------------------------
Actual As Adjusted(4)
--------- ---------------
Balance Sheet Data:
Working capital ............ $ 3,277 $19,377
Intangible assets, net ...... 43,966 43,966
Total assets ............... 65,714 79,714
Short-term debt ............ 7,640 3,240
Long-term debt ............... 17,000 17,000
Stockholders' equity ......... 34,013 52,413
- ------------
(1) Includes goodwill amortization expense of $91,000, $105,000, $475,000,
$585,000, $1.3 million, $230,000 and $347,000 for the fiscal years ended
June 30, 1993, 1994, 1995, 1996 and 1997 and the three months ended
September 30, 1996 and 1997, respectively.
(2) Net income per share for fiscal 1997 is calculated using the modified
treasury stock method and includes 13,695,000 weighted average common
shares outstanding and 4,213,000 common shares issuable from the exercise
of outstanding options and warrants for fiscal 1997. The calculation
assumes
7
<PAGE>
that all outstanding options and warrants have been exercised and the
proceeds from such exercises have been used to purchase 20% of the shares
outstanding and the balance used to retire outstanding indebtedness. The
retirement of the outstanding indebtedness and related reduction in
interest expense is assumed to increase net income by $450,000 to $3.6
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 14 to Notes to Consolidated Financial
Statements.
(3) Certain comparative Company Operating Data for the fiscal years ended June
30, 1993, 1994 and 1995 have been omitted due to the lack of relevant
comparison after the Company's acquisition of Easy Gardener, Inc. in
September 1994.
(4) As adjusted to give effect to: (i) the repayment in November 1997 of $3.8
million of term debt outstanding at September 30, 1997 using $2.1 million
of available cash and $1.7 million under Easy Gardener's revolving credit
facility and (ii) the sale by the Company of 5,100,000 shares of Common
Stock offered by it hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
8
<PAGE>
RISK FACTORS
Each prospective investor should carefully consider, in addition to the
other information contained in this Prospectus, the following information in
evaluating the Company and its business before purchasing the Common Stock
offered hereby.
Risks Associated with Growth Strategy
The acquisition of complementary lawn and garden companies and product
lines continues to be a principal component of the Company's growth strategy.
The Company's ability to successfully implement its strategy will depend upon
a number of factors including, among other things, the Company's ability to
identify attractive acquisition candidates, to consummate such acquisitions on
terms favorable to the Company, to obtain financing to consummate such
acquisitions on economically acceptable terms, to retain, hire and train
professional management and sales personnel at each such acquired business and
to promptly and profitably integrate the acquired operations into the
Company's operations. Acquiring additional businesses may also require the
consent of the Company's lenders. No assurance can be given that such consent
will be obtained. Any such acquisitions are likely to involve incurring
additional debt or the issuance of one or more classes or series of the
Company's equity securities, which could have a dilutive effect on the then
outstanding Common Stock of the Company. Other than a non-binding letter of
intent relating to the Proposed Acquisition, the Company currently has no
agreements, commitments, understandings or arrangements with respect to any
acquisition. There can be no assurance that the Proposed Acquisition will be
consummated or that the Company will continue to be able to manage its
expanding operations successfully, implement its acquisition strategy or that
any acquired operations will be profitable or will be successfully integrated
into the Company or that any such future acquisitions will not otherwise
materially and adversely affect the Company. See "Business -- Recent and
Proposed Acquisitions."
As a result of five prior acquisitions, the Company is required to
amortize the excess of costs over net assets acquired (an aggregate of
approximately $44.5 million) over a period of up to 30 years. Although such
amortization does not have an effect on the Company's available capital, it
will be treated as an operating expense that will reduce the Company's
reported earnings. Future acquisitions could result in substantial additional
amortization charges to the Company from the accumulation of goodwill and
other intangible assets, which would reduce future earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General" and Consolidated Financial Statements.
Customer Concentration; Consolidating Customer Base
The Company's customers include home improvement centers, mass
merchandisers, hardware stores, nurseries and garden centers and other retail
channels throughout the United States. The Company's three largest customers
for fiscal 1997, Home Depot, Lowe's and Kmart, accounted for approximately
26%, 10% and 7%, respectively, of its net sales during such year. During
fiscal 1996, Home Depot, Lowe's, Kmart and Builder's Square accounted for 27%,
9%, 7% and 5%, respectively, of the Company's net sales. During fiscal 1995,
sales to Home Depot, Kmart, Builders Square and Lowe's accounted for
approximately 27%, 9%, 7% and 6%, respectively, of the Company's net sales.
The Company's ten largest customers as a group accounted for 71%, 69% and 65%
of its net sales during fiscal 1995, 1996 and 1997, respectively. Sales to
such customers are not governed by any contractual arrangement and are made
pursuant to standard purchase orders. While the Company believes that
relations with its largest customers are good, the loss of any of these
customers could have a material adverse effect on the Company.
The Company does not have long-term purchase agreements or other
contractual assurances as to future sales to these or any other Retail
Accounts. The loss of, or significant reduction in sales to, such Retail
Accounts could have a material adverse effect on the Company. Moreover, retail
distribution channels in the lawn and garden industry have been consolidating
in recent years, as home improvement and mass merchant retailers have replaced
local nurseries and garden centers as the dominant source for lawn and garden
products. To the extent such consolidation continues to occur, the Company's
sales and profitability may be increasingly sensitive to a significant
deterioration in the financial condition of, or other adverse developments in
its relationships with, one or more Retail Accounts. In addition, from time to
time, the Company has experienced credit losses due to customers seeking
protection under bankruptcy or similar laws. Although such credit losses have
not had a material adverse effect on the Company to date, there can be no
assurance that future credit losses will not have a material adverse effect on
the Company. See "Business -- Customers."
9
<PAGE>
Significant Outstanding Indebtedness
At September 30, 1997, the Company had an aggregate of $24.6 million of
indebtedness outstanding through Easy Gardener under various financing
arrangements with certain financial institutions (the "Lenders") pursuant to a
credit agreement (the "Credit Agreement"). As part of the Credit Agreement,
the Lenders provided Easy Gardener with a $13.0 million revolving credit
facility to finance its working capital requirements and an additional $3.0
million line of credit under which, subject to certain eligibility
requirements, it may borrow amounts during the months of February through May
of each fiscal year to finance Easy Gardener's working capital needs during
its "peak" selling season. Any such amounts borrowed under this last line must
be repaid by May 31 of the year in which borrowed. There were no amounts
outstanding under the revolving credit facility or line of credit at September
30, 1997.
The Credit Agreement contains financial covenants which require Easy
Gardener to comply with certain financial ratios, including interest coverage
ratios (i.e., the ratio of earnings before interest, taxes, depreciation and
amortization ("EBITDA") to interest expense for Easy Gardener) and debt
service coverage ratio (i.e., the ratio of cash flow and scheduled principal
payments under the credit facilities to such scheduled payments). In addition,
Easy Gardener is required to maintain a minimum net worth equal to $24.0
million in fiscal 1998, and, for each year thereafter during the term of the
Credit Agreement, a sum equal to 75% of Easy Gardener's net income for any
particular year plus the minimum net worth of Easy Gardener for the
immediately preceding year. Easy Gardener, in the past, has on two occasions
not been in compliance with either covenants relating to minimum EBITDA and/or
covenants relating to restrictions on corporate loans and advances. Although
Easy Gardner received waivers of the application of such covenants in the
past, there can be no assurance that the Lenders will waive any future
covenant violations. The Credit Agreement also limits or prohibits the
Company, subject to certain exceptions, from, among other things, incurring
additional indebtedness, liens, guaranties and certain capital and operating
lease obligations, selling assets (other than in the ordinary course of
business), paying dividends, merging or consolidating with another
corporation, changing the Company's business and making certain investments,
loans or advancements, including to affiliates. Easy Gardener's obligation to
pay the principal of, interest on, premium, if any, and all other amounts
payable under such indebtedness is secured by substantially all of the assets
of Easy Gardener and its subsidiaries and the irrevocable guaranties of the
Company and Easy Gardener's subsidiaries. If the Company were obligated to
repay all or a significant portion of its indebtedness, there can be no
assurance that the Company would have sufficient cash to do so or that the
Company could successfully refinance such indebtedness. In addition, a
significant portion of the Company's cash flow from operations is used to make
payments under the Credit Agreement from time to time. If an event of default
occurs under the credit facilities, the Lenders would be entitled to exercise
the remedies available to a secured lender under applicable law, including
foreclosure on the assets of Easy Gardener, which comprise substantially all
of the assets of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Dependence on Weather Conditions
Weather is a significant factor in determining market demand for the
Company's products and is inherently unpredictable. Inclement weather during
the spring gardening season, particularly poor weekend weather, tends to
depress consumer purchases of do-it-yourself lawn and garden care products.
During protracted periods of inclement weather, sales of lawn and garden
products are likely to be severely diminished. In addition, lack of snow or
rain during the winter may adversely affect spring growing conditions and also
lower sales of lawn and garden products. Any of the foregoing may have a
material adverse effect on the Company. Without limiting the generality of the
foregoing, protracted or particularly severe weather conditions may adversely
impact the Company's ability to comply with its obligations to its Lenders
under its financing arrangements. See "-- Significant Outstanding
Indebtedness."
10
<PAGE>
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. The Company competes with a combination of national and
regional companies ranging from large agri-chemical companies to garden
catalog businesses and companies specializing in the manufacture of lawn and
garden care products. Several of such companies, such as Solaris Group, a
division of Monsanto Company, and the Scotts Miracle Gro Company have captured
a significant, and in certain cases controlling, 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 frequent and extensive
advertising and promotional programs, both generally and in response to
efforts by new competitors entering the market or existing competitors
introducing new products. Many of these companies have substantially greater
financial, technical, marketing and other resources than the Company. There
can be no assurance that the Company will be able to compete successfully or
that reacting to competitive pressures will not materially adversely affect
the Company. See "Business -- Competition."
Dependence on Third-Party Manufacturing and Supply Arrangements
The Company purchases all of the material for its primary lawn and garden
product, WeedBlock, from Tredegar Industries, Inc. ("Tredegar") pursuant to a
supply arrangement that can be terminated by Tredegar at any time. The Company
purchases its basic materials for its other lawn and garden products from a
variety of suppliers. Although the Company has purchased all of its landscape
fabric supply from Tredegar for in excess of 10 years and believes that its
relationship with Tredegar is good, Tredegar is free to terminate its
relationship with the Company at any time and accordingly could market its
fabrics to other companies, including competitors of the Company. There can be
no assurance that the production capacity of Tredegar or the Company's other
suppliers, manufacturers and processors will be sufficient to satisfy the
Company's requirements or that alternate suppliers, manufacturers and
processors will be available on commercially reasonable terms, or at all. The
unavailability of certain materials, the unavailability of manufacturing and
processing sources or delays either in manufacturing or in locating new
manufacturing and processing sources could adversely affect the Company's
ability to deliver its products on a timely and competitive basis. In
addition, because the Company recognizes a significant percentage of its
annual sales during a few months of the year, any delay in the delivery or the
unavailability of its products during such months could materially adversely
affect the Company. See "Business -- Conversion, Manufacturing and Supply,"
and "-- Seasonality."
Seasonality
The Company's sales are highly seasonal due to the nature of the lawn and
garden business, which parallels the annual growing season. The Company's
sales and shipping are concentrated in the period from late December through
May when customers purchase supplies for spring planting and Retail Accounts
increase their inventory of lawn and garden products. To support this sales
peak, the Company must anticipate demand and increase inventories of finished
goods throughout the fall and winter. Accordingly, the Company's levels of raw
materials and finished goods inventories tend to be at their highest, relative
to sales, during the Company's first and second fiscal quarters. These factors
increase variations in the Company's quarterly results of operations and
potentially expose the Company to greater adverse effects of changes in
economic conditions and industry trends. Moreover, actual demand for the
Company's products may vary substantially from the anticipated demand, leaving
the Company with either excess inventory or insufficient inventory to satisfy
customer orders. Sales typically decline by early to mid-summer. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations and Seasonality," "Business --
Seasonality" and "-- Inventory and Distribution."
Dependence on a Limited Number of Product Lines
Approximately 44% and 24% of the Company's net sales for fiscal 1997 were
derived from sales of landscape fabric and fertilizer spikes. In fiscal 1995
and 1996, landscape fabric represented 71% and 69% of the Company's net sales,
respectively. Any adverse developments with respect to either of these product
lines, whether arising from actions by existing or new competitors, the
inability of the Company to obtain adequate supplies of landscape fabrics or
the raw materials necessary to manufacture fertilizers, or otherwise, could
have
11
<PAGE>
a material adverse effect on the Company. The Company has also developed a new
marketing campaign for the Jobe's line of products, which has required, and
will require, the allocation of significant capital and other resources by the
Company. No assurance can be given that such campaign will be successful, in
which case the expenditures made to date and in the future in connection with
the campaign may not generate sufficient sales to be profitable or profitable
at the same level as has been achieved historically in connection with the
Jobe's line of products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Products" and "--
Sales and Marketing."
Retail Industry; General Economic Conditions
The Company sells its products through retailers, including home
improvement centers, mass merchandisers, hardware stores, nurseries and other
retail channels. Retail sales depend, in part, on general economic conditions.
A significant decline in such conditions could have a negative impact on sales
by retailers of products sold by the Company and consequently could have a
material adverse effect on the Company. Retail environments which are poor or
perceived to be poor, whether due to economic or other conditions, may lead
manufacturers and marketers, including the Company, to increase their
discounting and promotional activities. Such activities could have a material
adverse effect on the Company's profit margins and, consequently, its results
of operations. The Company may also not be able to fully offset the impact of
inflation through price increases in an unfavorable retail market.
Government Regulation
The Company is subject to many laws and governmental regulations and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by the Company as fertilizers or pesticides are subject to an
extensive and frequently evolving statutory and regulatory framework, at both
the Federal and state levels.
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"), as well as regulation
by many states in a manner similar to FIFRA. Under FIFRA and similar state
laws, all pesticides must be registered with the EPA and the state and must be
approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply
with the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to, suspension or restriction of product
distribution, civil penalties and/or criminal sanctions.
The Company markets certain animal repellent and pesticide products that
are subject to FIFRA and to similar state regulations. The Company also
markets certain fertilizer products that are subject to regulation in some
states. The Company believes that it is in material compliance with FIFRA and
applicable state regulations regarding its material business operations.
However, there can be no assurance that the Company will be able to comply
with future regulations in every jurisdiction in which the Company's material
business operations are conducted without substantial cost or interruption of
operations. Moreover, there can be no assurance that future products marketed
by the Company will not also be subject to FIFRA or to state regulations. If
future costs of compliance with regulations governing pesticides or
fertilizers increase or exceed the Company's budgets for such items, the
Company's business could be adversely affected. If any of the Company's
products are distributed and/or marketed in violation of any of these
regulations, the Company could be subject to a recall of, or a sales
limitation placed on, one or more of its products, or civil or criminal
sanctions, any of which could have a material adverse effect upon the
Company's business.
Environmental Regulation. The Company's manufacturing operations are
subject to various evolving federal, state and local laws and regulations
relating to the protection of the environment, which laws govern, among other
things, emissions to air, discharges to ground, surface water and groundwater,
and the generation, handling, storage, transportation, treatment and disposal
of a variety of hazardous and non-hazardous substances
12
<PAGE>
and wastes. Federal and state environmental laws and regulations often require
manufacturers to obtain permits for these emissions and discharges. 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 operate one
manufacturing facility. Although the Company believes that all of its
facilities are in substantial compliance with all applicable material
environmental laws, it is currently investigating whether it needs two permits
for its Waco, Texas facility. Although the Company believes that it will not
be subject to penalties for failure to obtain a permit if one is needed, there
can be no assurance that penalties will not be assessed. Furthermore, it is
possible that there are material environmental liabilities of which the
Company is unaware. If the costs of compliance with the various existing or
future environmental laws and regulations, including any penalties which may
be assessed for failure to obtain necessary permits, exceed the Company's
budgets for such items, the Company's business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and
operators of facilities at which hazardous substances have been discharged, as
well as on persons who generate, transport or arrange for disposal of
hazardous substances at a particular site. In addition, the opertor of a
facility may be subject to claims by third parties for personal injury,
property damage or other costs resulting from contamination present at or
emanating from property on which its facility is located. Easy Gardener and
Weatherly each operate a manufacturing facility. Moreover, the Company or its
predecessors have owned or operated other manufacturing facilities in the past
and may have liability for remediation of such facilities in the future, to
the extent any is required. In this regard, Weatherly previously owned a
facility that was the subject of certain soil remediation activities. Although
this facility was sold by Weatherly prior to the Company's acquisition of
Weatherly, there can be no assurance that the Company will not be liable for
any previously existing environmental contamination at the facility. Moreover,
although the purchaser of the facility indemnified Weatherly for any
environmental contamination liability and the sellers of Weatherly, in turn,
indemnified the Company from such liability, there can be no assurance that,
if required, the indemnifying parties will be able to fulfill their respective
obligations to indemnify the Company. Furthermore, certain business operations
of the Company's subsidiaries also involve shipping hazaradous waste off-site
for disposal. As a result, the Company could be subject to liability under
these statutes. The Company could also incur liability under CERCLA or similar
state statutes for any damage caused as a result of the 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 will not subject the Company
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
currently or in the past.
Other Regulations. The Company is also subject to various other federal,
state and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. See "Business --
Government Regulation."
Product Liability
The Company, as a manufacturer of lawn and garden care and pesticide
products, may be exposed to significant product liability claims by consumers.
Although the Company has obtained product liability insurance coverage for
U.S. Home & Garden and Golden West in the aggregate amount of $3.0 million,
and for Easy Gardener and Weatherly in the aggregate amount of $2.0 million
(with all policies limited to $1.0 million per occurrence), and has obtained
two umbrella policies in the amounts of $5.0 million and $15.0 million,
respectively, there can be no assurance that such insurance will provide
coverage for any claim against the Company or will be sufficient to cover all
possible liabilities. Although the Company has not incurred any product
liability claims to date, in the event a successful suit is brought against
the Company, unavailibility or insufficiency of insurance coverage could have
a material adverse effect on the Company. Moreover, any adverse publicity
arising from claims made against the Company, even if such claims were not
successful, could adversely affect the reputation and sales of the Company's
products.
Uncertainty of Protection of Trademarks and Proprietary Rights
The Company believes that its ability to successfully implement its
growth strategy is partially dependent on its ability to use its trademarks,
in particular, Easy Gardener, Jobe's and WeedBlock. In addition, except for
13
<PAGE>
patents covering two lawn edge products currently sold by the Company and
certain products obtained as a result of the acquisition of Weatherly, none of
the Company's products is covered by patents. There can be no assurance that
the Company will apply for any additional trademark or patent protection
relating to its products or that its current trademarks and patents will be
enforceable or adequately protect the Company from infringement of its
proprietary rights. Although the Company believes that the products sold by it
do not infringe upon the patents or violate the proprietary rights of others,
it is possible that such infringement or violation has occurred 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 and 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. Moreover, there can be no assurance that the
Company will have the financial or other resources necessary to enforce or
defend a patent infringement or proprietary rights violation action. In
addition, if the Company's products or proposed products are deemed to
infringe upon the patents or proprietary rights of others, the Company could,
under certain circumstances, become liable for damages, which could also have
a material adverse effect on the Company. See "Business -- Trademarks,
Proprietary Information and Patents."
In response to a claim for trademark infringement filed on July 30, 1997
by Easy Gardener against Dalen Products, Inc. ("Dalen") in the United States
District Court for the Western District of Texas, Waco Division, Dalen filed a
counterclaim against Easy Gardener and a third party complaint against the
Company. Dalen alleges, among other things, that the Company and Easy Gardener
monopolized or attempted to monopolize the market for landscape fabrics; that
the Company and Easy Gardener tortiously interfered with Dalen's contractual
and prospective contractual relationships; and that Easy Gardener infringed a
Dalen trademark, deceptively advertised the thickness of one of its products,
and misrepresented the porosity of a Dalen product. Dalen's counterclaim and
third party complaint seek an award of unspecified damages and the entry of
unspecified injunctive relief. See "Business -- Legal Proceeding."
Dependence on Management
The success of the Company will be largely dependent on the personal
efforts of Robert Kassel, its Chairman of the Board, Chief Executive Officer
and President, Richard Raleigh, its Chief Operating Officer, and Richard
Grandy, the President of Easy Gardener, all of whom devote their full time to
the affairs of the Company. Although the Company has entered into employment
agreements with Mr. Kassel and Mr. Raleigh which expire on March 31, 1998,
subject to certain automatic extension provisions, and an employment agreement
with Mr. Grandy that expires in August 1998, and has obtained "key man" life
insurance in the amount of $2.0 million on the life of Mr. Kassel and $1.0
million on the lives of each of Messrs. Raleigh and Grandy, the loss of the
services of either Mr. Kassel, Mr. Raleigh or Mr. Grandy could have a material
adverse effect on the Company. In addition, the employment agreements provide
that Messrs. Kassel and Raleigh will receive a significant severance payment
from the Company upon a change in control of the Company or the occurrence of
certain other events as described therein. The success of the Company may also
be dependent, in part, upon its ability to hire and retain additional
qualified sales and marketing personnel. There can be no assurance that the
Company will be able to hire or retain such necessary personnel. See
"Management."
No Dividends
To date, the Company has not declared or paid any dividends on its Common
Stock and does not expect to declare or pay any cash dividends in the
foreseeable future. In addition, certain agreements between Easy Gardener and
the Lenders restrict the Company from paying cash dividends on the Common Stock
without the Lenders' consent. See "Dividend Policy."
Authorization of Preferred Stock; Anti-Takeover Provisions
The Company's Certificate of Incorporation authorizes the issuance of
"blank check" 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 stockholder approval, to issue
preferred stock with
14
<PAGE>
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. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company. There can be no assurance
that the Company will not issue shares of preferred stock in the future. In
addition, certain provisions of Delaware law applicable to the Company could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company. See "Description of Securities -- Preferred Stock" and "--
Delaware Anti-Takeover Law."
Common Stock Eligible for Future Sale; Registration Rights; Outstanding Options
Approximately 3,100,000 of the 20,524,981 shares of Common Stock
outstanding upon the consummation of this offering are "restricted
securities," as that term is defined under Rule 144 promulgated under the Act.
These shares are currently eligible for sale under Rule 144. In addition, a
significant number of shares of the Common Stock issuable upon exercise of
outstanding options and warrants may be sold under currently effective
registration statements and holders of certain other options and warrants to
acquire a significant number of additional shares of Common Stock have certain
registration rights with respect to such shares. Although an aggregate of
372,650 shares to be held by executive officers and directors of the Company
upon consummation of this offering may not be sold or otherwise transferred
for a period of 180 days following the date of this Prospectus without the
prior written consent of EVEREN Securities, Inc., no prediction can be made as
to the effect, if any, that sales or the possibility of sales of Common Stock
or shares of Common Stock issuable upon exercise of outstanding options or
warrants to purchase approximately 10,530,000 additional shares of Common
Stock or the availability of such securities for sale will have on the market
prices of the Common Stock prevailing from time to time. Nevertheless, the
possibility that substantial amounts of securities may be sold in the public
market may adversely affect prevailing market prices for the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Underwriting."
Broad Discretion in Application of Proceeds
Of the estimated net proceeds from this offering, approximately $7.85
million have been allocated for working capital and general corporate purposes.
Accordingly, the Company will have broad discretion as to the application of
such proceeds, including possibly using a portion of such proceeds to make
acquisitions. See "Use of Proceeds."
15
<PAGE>
USE OF PROCEEDS
Based on assumed offering price of $5.00 per share, the net proceeds to
the Company from the sale of the shares of Common Stock offered by it hereby
are estimated to be approximately $22.9 million (approximately $27.1 million
if the Underwriters' over-allotment option is exercised in full) after
deducting the estimated underwriting discounts and offering expenses payable
by the Company.
The Company expects to use the net proceeds approximately as follows:
<TABLE>
<CAPTION>
Approximate Approximate Percentage
Application of Proceeds Dollar Amount of Net Proceeds
- ----------------------- --------------- -----------------------
<S> <C> <C>
Acquisition of Inventory(1) ........................ $ 5,000,000 21.8
Repurchase of Unit Purchase Options(2) ............... 4,500,000 19.7
Marketing and Advertising(3) ........................ 3,250,000 14.2
Repayment of Indebtedness(4) ........................ 2,300,000 10.0
Working Capital and General Corporate Purposes ...... 7,850,000 34.3
------------ -------
$22,900,000 100.0%
============ =======
</TABLE>
- ------------
(1) Represents primarily the purchase of materials used in the manufacture of
Jobe's Spike's and Emerald Edge decorative edging and packaging material
used in the Company's lawn and garden products. See "Business-Conversion,
Manufacturing and Supply."
(2) Represents the anticipated costs associated with the repurchase of certain
unit purchase options to acquire Common Stock issued by the Company in
connection with certain prior equity financings.
(3) Represents the funding of a portion of the anticipated cost of media
development, print, radio, television and co-operative advertising during
fiscal 1998. See "Business-Sales and Marketing."
(4) Represents (i) the payment of $1,700,000 which was incurred in November
1997 under Easy Gardener's revolving credit facility in connection with
the repayment of $3.8 million of term debt and (ii) the payment of the
next quarterly interest and principal payment under one of Easy Gardener's
existing term loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company will not receive any of the proceeds from the sale of the
shares of Common Stock offered by the Selling Stockholders.
The Company may use a portion of the proceeds allocated to working
capital to acquire businesses or products which the Company believes will
enhance its business. While the Company actively seeks and evaluates possible
acquisition opportunities, except for the Proposed Acquisition the Company
currently has no agreements, commitments, understandings or arrangements with
respect to any acquisition.
Proceeds not immediately required for the purposes set forth above will
be invested principally in United States government securities, short-term
certificates of deposit, money market funds or other investment grade
interest-bearing investments.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends on its Common
Stock and does not expect to declare or pay any cash dividends in the
foreseeable future. The payment of dividends, if any, in the future is within
the discretion of the Board of Directors and will depend upon the Company's
earnings, if any, its capital requirements and financial condition and other
relevant factors. The payment of cash dividends is restricted under the terms
of the Credit Agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to give effect to (i) the repayment in
November 1997 of $3.8 million of term debt outstanding at September 30, 1997
using $2.1 million of available cash and $1.7 million under Easy Gardener's
revolving credit facility and (ii) the sale of the shares of Common Stock
offered by it hereby and the application of the estimated net proceeds
therefrom. The following table should be read in conjunction with the audited
consolidated financial statements of the Company, including the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1997
------------------------------
Actual As Adjusted
---------- -----------------
(Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents ................................................... $ 4,832 $ 13,832
========= ===========
Short-term debt ............................................................ $ 7,640 $ 3,240
========= ===========
Notes payable, less current portion .......................................... $ 17,000 $ 17,000
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares authorized; none issued or
outstanding ............................................................... -- --
Common Stock, $.001 par value 30,000,000 shares authorized; 15,395,000
shares issued and outstanding, actual; 20,495,000 shares issued and out-
standing, as adjusted(1) 15 20
Additional paid-in capital ................................................ 33,585 56,480
Retained earnings ......................................................... 413 (4,087)(2)
--------- -----------
Total stockholders' equity ................................................ 34,013 52,413
--------- -----------
Total capitalization ................................................... $ 51,013 $ 69,413
========= ===========
</TABLE>
(1) Does not include (i) an aggregate of approximately 2,730,000 shares of
Common Stock reserved for issuance upon exercise of outstanding options
under the Stock Option Plans; (ii) an aggregate of approximately 1,070,000
shares of Common Stock which may be issued upon exercise of options
available for future grant under the Stock Option Plans; and (iii)
approximately 7,800,000 shares issuable upon exercise of options granted
outside of the Stock Option Plans and certain outstanding warrants,
exclusive of any shares that may be issuable as a result of the
anti-dilution provisions of such options and warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Management -- Stock Options Plans," "Certain Transactions" and Note 9 to
Notes to Consolidated Financial Statements.
(2) Retained earnings will decrease on an as adjusted basis by the excess of
the offering price over the assumed exercise price of the unit purchase
options being repurchased hereby for an aggregate of approximately $4.5
million.
17
<PAGE>
PRICE RANGE OF COMMON STOCK
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
SmallCap Market symbol for the Company's Common Stock is "USHG". The following
table sets forth, for the periods indicated, the high and low bid quotations
for the Common Stock as reported by Nasdaq SmallCap Market. These amounts
represent quotations between dealers (not actual transactions) and do not
include retail markups, markdowns or commissions.
High Low
---------- ----------
For the Fiscal Year Ended June 30, 1996
First Quarter ................................. $ 3.50 $ 2.75
Second Quarter ................................. 3.1875 2.375
Third Quarter ................................. 3.00 2.125
Fourth Quarter ................................. 3.625 2.625
For the Fiscal Year Ended June 30, 1997
First Quarter ................................. $ 3.313 $ 2.313
Second Quarter ................................. 2.813 2.00
Third Quarter ................................. 2.813 2.063
Fourth Quarter ................................. 3.438 2.063
For the Fiscal Year Ending June 30, 1998
First Quarter ................................. $ 5.0625 $ 2.9375
Second Quarter (through November 10, 1997) ...... 5.0625 4.125
On November 10, 1997, the last sale price of the Company's Common Stock as
quoted on the Nasdaq SmallCap Market was $4.50. As of November 7, 1997, the
number of stockholders of record of the Company's Common Stock was 186. The
Company believes that there are in excess of 500 beneficial owners of its
Common Stock whose shares are held in "street name".
18
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except percentage and per share data)
The following selected financial data at and for the years ended June 30,
1993, 1994, 1995, 1996 and 1997 and at and for the three months ended
September 30, 1996 and 1997 have been derived from the Company's consolidated
financial statements. Such information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1993 1994 1995 1996 1997
Statement of Income Data: ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net sales .............................. $ 2,910 $ 3,063 $ 19,692 $ 27,031 $ 52,046
Cost of sales ........................... 1,508 1,455 9,151 12,670 23,649
------- -------- --------- --------- ------------
Gross profit ........................... 1,402 1,608 10,541 14,361 28,397
Selling, general and administrative
expenses(1) ........................... 1,826 6,786 7,152 10,612 17,745
------- -------- --------- --------- ------------
Income (loss) from operations ......... (424) (5,178) 3,389 3,749 10,652
Other income (expense) .................. (45) (41) (1,776) (1,940) (3,262)
Income taxes (expense) benefit ......... -- -- (38) 715 (3,200)
------- -------- --------- --------- ------------
Income (loss) before extraordinary
expense .............................. (469) (5,219) 1,575 2,524 4,190
Extraordinary gain (expense), net ...... 389 -- -- -- (1,007)
------- -------- --------- --------- ------------
Net income (loss) ..................... $ (80) $ (5,219) $ 1,575 $ 2,524 $ 3,183
======= ======== ========= ========= ============
Income (loss) per share before
extraordinary expense .................. $ (0.22) $ (1.31) $ 0.19 $ 0.25 $ 0.26(2)
Net income (loss) per share ............ $ (0.04) $ (1.31) $ 0.19 $ 0.25 $ 0.20(2)
======= ======== ========= ========= ============
Weighted average number of
common and common equivalent
shares outstanding ..................... 2,178 3,980 8,376 10,206 17,908(2)
======= ======== ========= ========= ============
Company Operating Data(3):
Net sales growth ..................... -- -- -- 37.3 % 92.5 %
Gross profit growth .................. -- -- -- 36.2 97.7
Income from operations growth ......... -- -- -- 10.6 184.1
Gross margin ........................... -- -- 53.5 % 53.1 54.6
Operating income (loss) margin ......... -- -- 17.2 13.9 20.5
Net income (loss) margin ............... -- -- 8.0 9.3 6.1
Three Months
Ended September 30,
-----------------------
1996 1997
Statement of Income Data: ----------- ----------
Net sales .............................. $ 5,523 $ 7,025
Cost of sales ........................... 2,607 3,522
-------- -------
Gross profit ........................... 2,916 3,503
Selling, general and administrative
expenses(1) ........................... 3,264 3,963
-------- -------
Income (loss) from operations ......... (348) (460)
Other income (expense) .................. (537) (806)
Income taxes (expense) benefit ......... 280 550
-------- -------
Income (loss) before extraordinary
expense .............................. (605) (716)
Extraordinary gain (expense), net ...... (1,007) --
-------- -------
Net income (loss) ..................... $ (1,612) $ (716)
======== =======
Income (loss) per share before
extraordinary expense .................. $ (0.04) $ (0.05)
Net income (loss) per share ............ $ (0.12) $ (0.05)
======== =======
Weighted average number of
common and common equivalent
shares outstanding ..................... 12,915 14,702
======== =======
Company Operating Data(3):
Net sales growth ..................... -- 27.2%
Gross profit growth .................. -- 20.1
Income from operations growth ......... -- (32.2)
Gross margin ........................... 52.8 49.9
Operating income (loss) margin ......... (6.3) (6.5)
Net income (loss) margin ............... (29.2) (10.2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30, At September 30, 1997
---------------------------------------------------------- ------------------------
As
1993 1994 1995 1996 1997 Actual Adjusted(4)
Balance Sheet Data: -------- ----------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficiency) ...... $ 607 $ (347) $ 3,326 $ 5,328 $ 2,292 $ 3,277 $19,377
Intangible assets, net ............ 2,858 2,046 16,692 17,167 44,364 43,966 43,966
Total assets ..................... 5,977 5,654 28,140 33,584 68,475 65,714 79,714
Short-term debt .................. 1,134 594 2,200 3,650 8,990 7,640 3,240
Long-term debt ..................... 0 0 8,000 6,238 17,570 17,000 17,000
Stockholders' equity ............... 3,827 3,150 15,339 19,370 31,926 34,013 52,413
</TABLE>
- ------------
(1) Includes goodwill amortization expense of $91,000, $105,000, $475,000,
$585,000, $1.3 million, $230,000 and $347,000 for the fiscal years ended
June 30, 1993, 1994, 1995, 1996 and 1997 and the three months ended
September 30, 1996 and 1997, respectively.
(2) Net income per share for fiscal 1997 is calculated using the modified
treasury stock method and includes 13,695,000 weighted average common
shares outstanding and 4,213,000 common shares issuable from the exercise
of outstanding options and warrants for fiscal 1997. The calculation
assumes that all outstanding options and warrants have been exercised and
the proceeds from such exercises have been used to purchase 20% of the
shares outstanding and the balance used to retire outstanding
indebtedness. The retirement of the outstanding indebtedness and related
reduction in interest expense is assumed to increase net income by
$450,000 to $3.6 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 14 to Notes to
Consolidated Financial Statements.
19
<PAGE>
(3) Certain comparative Company Operations Data for the fiscal years ended
June 30, 1993, 1994 and 1995 have been omitted due to the lack of relevant
comparison after the Company's acquisition of Easy Gardener, Inc. in
September 1994.
(4) As adjusted to give effect to (i) the payment in November 1997 of $3.8
million of term debt outstanding at September 30, 1997 using $2.1 million
of available cash and $1.7 million under Easy Gardener's revolving credit
facility and (ii) the sale by the Company of 5,100,000 shares of Common
Stock offered hereby and the application of the estimated net proceeds
therefrom.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company manufactures and markets a broad range of brand-name consumer
lawn and garden products through its wholly-owned subsidiaries, Easy Gardener
and Golden West, and through Easy Gardener's wholly-owned subsidiary,
Weatherly. Since 1992, the Company has consummated five acquisitions of
complementary lawn and garden companies and product lines for an aggregate
consideration of over $56 million in cash, notes and equity securities. As a
result of such acquisitions, the Company recognized a significant amount of
goodwill which, in the aggregate, was approximately $44.5 million at September
30, 1997. The Company is currently amortizing such goodwill using the
straight-line method over various time periods ranging from 20 to 30 years and
amortization expenses for the fiscal year ended June 30, 1997 were $1.3
million or $0.07 per share. See Consolidated Financial Statements.
The Company's results of operations for the fiscal year ended June 30,
1997 were significantly affected by the acquisition of Weatherly in August
1996. In connection with the acquisition of Weatherly, the Company's
outstanding notes payable were refinanced and replaced with a new credit
facility (the "Refinancing"). As a result of the Refinancing, the Company was
required to record an extraordinary expense of $1.0 million, net of tax
benefits, for the fiscal year ended June 30, 1997, which expense consisted of
the write-off of deferred finance costs at June 30, 1996 plus prepayment
penalties. Such extraordinary expense reduced the Company's net income per
share for fiscal 1997 by $0.06, from $0.26 to $0.20. See Notes 13 and 14 to
Notes to Consolidated Financial Statements.
The Company experienced net sales growth of 37% from fiscal 1995 to
fiscal 1996 and 93% from fiscal 1996 to fiscal 1997. The Company believes that
this growth in net sales was primarily attributable to expansion of its
product lines through the acquisition of complementary lawn and garden
businesses and product lines. Net sales were also positively affected by an
increase in sales of pre-existing product lines. Assuming each of the
Company's acquisitions had been completed prior to the beginning of fiscal
1996, the growth in net sales from fiscal 1996 to fiscal 1997 would have been
15%.
The Company was required to calculate its net income per share in fiscal
1997 utilizing the modified treasury stock method pursuant to Accounting
Principles Bulletin ("APB") No. 15, "Earnings Per Share." Under the modified
treasury stock method, net income per share is calculated assuming that all
outstanding options and warrants have been exercised. Proceeds generated from
the assumed exercise of these options and warrants are first used to
repurchase (at an average stock price) common stock, not to exceed 20% of the
issued and outstanding shares of common stock. Excess proceeds from the
assumed exercise of the options and warrants not used to repurchase 20% of the
outstanding common stock is then assumed to retire outstanding loans. Net
income is assumed to increase by the reduction in interest expense, net of the
Company's effective income tax rate of approximately 44%, associated with the
indebtedness that has been assumed to have been retired. For the fiscal 1997
net income per share calculation, the Company's weighted average common shares
outstanding has been increased from 13,695,000 to 17,908,000 and net income
increased by $450,000 from approximately $3.2 million to $3.6 million as a
result of applying the modified treasury stock method. The modified treasury
stock method was not applicable for fiscal 1995 and 1996 because it was
anti-dilutive.
Effective for periods ending after December 15, 1997, generally accepted
accounting principles will require all reporting companies to calculate
earnings per share in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share." Prior periods will be
required to be restated. The Company will be required to report basic earnings
per share (giving no dilutive effect to derivative securities) and diluted
earnings per share (reflecting the dilutive effect of all derivative
securities). Under the SFAS No. 128 dilutive earnings per share calculation,
all derivative securities with exercise prices below the market price will be
assumed exercised. All proceeds from the exercise of such derivative
securities will be assumed to be used to repurchase common stock (at an
average stock price). Under SFAS No. 128, the modified treasury stock method
will no longer utilized. The following table compares fiscal 1995, 1996 and
1997 net income per share for the Company before extraordinary expense under
SFAS No. 128 compared to historical earnings per share previously reported.
21
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Income per common share before extraordinary item as previously
reported under APB No. 15 .................................... $ 0.19 $ 0.25 $0.26
Income per common share before extraordinary item as calculated
under SFAS No. 128:
Basic ...................................................... 0.19 0.25 0.31
Dilutive ................................................... 0.18 0.22 0.28
</TABLE>
In April 1996, the Company entered into an agreement to exchange certain
unsold assets held for sale for certain trade credits issued by a third party
to be applied against future purchases of products and services from such
third party (primarily the purchase of operating assets and advertising time).
These trade credits are listed as an asset on the balance sheet of the
Company. The agreement requires the Company to pay a portion of the purchase
price of the products and services received, ranging from 45% to 90% of the
total purchase price, and apply the trade credits to the balance. All trade
credits will expire to the extent not used in April 1999 and are required to
be recognized as an expense to the Company as used, with any balance remaining
in April 1999 being expensed at that time. The maximum that the Company is
entitled to receive in credits and cash is $1.6 million, of which the Company
had received approximately $50,000 in cash and had expensed approximately
$300,000 in credits as of September 30, 1997. See Note 2 of Notes to
Consolidated Financial Statements. No assurance can be given that the Company
will use all or any portion of such trade credits or that, to the extent that
the Company uses the trade credits, such trade credits will be used in a
manner likely to generate additional sales of the Company's products. See
"Business -- Sales and Marketing."
Results of Operations
The following table sets forth, for the periods indicated, certain
selected financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Year Ended June 30, Three Months Ended
--------------------------------- -------------------------
September 30,
1995 1996 1997 1996 1997
-------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales ................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................... 46.5 46.9 45.4 47.2 50.1
------ ------- ------ --------- ---------
Gross profit .............................. 53.5 53.1 54.6 52.8 49.9
Selling and shipping expenses ............ 22.2 23.2 21.6 31.8 32.8
General and administrative expenses ...... 14.1 16.1 12.5 27.2 23.6
------ ------- ------ --------- ---------
Income (loss) from operations ............ 17.2 13.9 20.5 (6.3) (6.5)
Interest expense ........................... 9.2 7.4 6.4 10.2 12.1
Income tax (expense) benefit ............... (0.2) 2.7 (6.2) 5.1 7.8
Extraordinary expense, net ............... -- -- 1.9 18.2 --
Net income (loss) ........................ 8.0% 9.3% 6.1% (29.2%) (10.2%)
====== ======= ====== ========= =========
</TABLE>
<PAGE>
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Net sales. Net sales increased by $1.5 million, or 27%, to $7.0 million
during the three months ended September 30, 1997 from $5.5 million during the
comparable period in 1996. The increase in net sales was primarily a result of
the August 1996 acquisition of Weatherly and the May 1997 acquisition of the
Plasti-Chain line of plastic chain links and decorative edgings, combined with
internal growth of the Company's pre-existing product lines.
Gross profit. Gross profit increased by $587,000, or 20%, to $3.5 million
for the three months ended September 30, 1997 from $2.9 million during the
comparable period in 1996. This increase was due primarily to the Weatherly
acquisition. Gross profit as a percentage of net sales decreased to 49.9%
during the three months ended September 30, 1997 from 52.8% during the
comparable period in 1996. The decrease in gross profit as a percentage of net
sales was primarily attributable to the decrease in sales of higher-margin
products.
Selling and shipping expenses. Selling and shipping expenses increased
$545,000 or 31%, to $2.3 million during the three months ended September 30,
1997 from $1.8 million during the comparable period in 1996. This increase was
primarily the result of an increase in the amount of products shipped, which
was a consequence of the acquisition of Weatherly and an increase in sales of
pre-existing product lines. Selling and shipping expenses as a percentage of
net sales increased from 31.8% during the three months ended September 30,
1996 to 32.8% during the comparable period in 1997. This increase was
primarily due to additional marketing and advertising on new and existing
product lines.
22
<PAGE>
General and administrative expenses. General and administrative expenses
increased $154,000 or 10%, to $1.7 million during the three months ended
September 30, 1997 from $1.5 million during the comparable period in 1996.
This increase was primarily due to increased amortization of goodwill as a
result of the acquisition of Weatherly. As a percentage of net sales, general
and administrative expenses decreased from 27.2% during the three months ended
September 30, 1996 to 23.6% during the comparable period in 1997. This
improvement is primarily due to the closing of the Weatherly administrative
offices in February 1997 and the integration of certain administrative
functions into the Company's existing infrastructure.
Loss from operations. Loss from operations increased by $112,000 or 32%
to $460,000 during the three months ended September 30, 1997 from $348,000
during the comparable period in 1996. The loss from operations in actual
dollars was primarily due to the seasonal nature of the business. The increase
in the loss for the 1997 period was primarily attributable to the increased
general and administrative costs resulting from increased amortization of
goodwill and, to a lesser extent, increased marketing expenses. As a
percentage of net sales, loss from operations increased to 6.5% for the three
months ended September 30, 1997 from 6.3% during the comparable period in
1996.
Interest expense. Interest expense increased by $290,000 or 52%, to
$853,000 during the three months ended September 30, 1997, from $563,000
during the comparable period in 1996. The increase in interest expense is
primarily related to the interest associated with the increase in term debt
associated with the Weatherly acquisition, which was partially offset by a
decrease in the Company's effective borrowing rate.
Income taxes. Income tax benefits increased to $550,000 during the three
months ended September 30, 1997 from $280,000 during the comparable period in
1996 primarily due to the increase in the Company's effective tax rate. The
income tax benefit is based upon the Company's estimated effective income tax
rate for the year.
Extraordinary expense, net. In connection with the acquisition of
Weatherly in August 1996, the Company refinanced its term debt and its
revolving line of credit. As a result of its refinancing, the Company was
required to record an extraordinary expense of $1.0 million net of tax
benefits of $452,000, during the three months ended September 30, 1996. The
expense consisted of deferred finance costs at June 30, 1996 net of
accumulated amortization, plus prepayment penalties.
Net loss. Net loss decreased by $896,000, or 56%, to $716,000 during the
three months ended September 30, 1997 from $1.6 million during the comparable
period in 1996. This decrease was attributable to the $1.0 million
extraordinary expense incurred in the 1996 period due to the refinancing. Net
loss per common share decreased $0.07 to $(0.05) during the three months ended
September 30, 1997 from $(0.12) during the comparable period in 1996. The
decrease was primarily attributable to an extraordinary expense of
approximately $0.08 per common share incurred during the 1996 period.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Net sales. Net sales increased by $25.0 million, or 93%, to $52.0 million
in fiscal 1997 from $27.0 million in fiscal 1996. The increase in net sales
was primarily a result of the August 1996 acquisition of Weatherly and
increased sales of the Company's landscape fabrics and landscape edging
products.
Gross profit. Gross profit increased by $14.0 million, or 98%, to $28.4
million in fiscal 1997 from $14.4 million in fiscal 1996. This increase was
due primarily to the Weatherly acquisition. Gross profit as a percentage of
net sales increased to 54.6% in fiscal 1997 from 53.1% in fiscal 1996. The
increase in gross profit as a percentage of net sales was primarily
attributable to the sales of higher-margin products acquired in the Weatherly
acquisition.
Selling and shipping expenses. Selling and shipping expenses increased
$4.9 million, or 78%, to $11.2 million in fiscal 1997 from $6.3 million in
fiscal 1996. This increase was primarily the result of an increase in the
amount of products shipped, which was a consequence of the acquisition of
Weatherly and an increase in sales of pre-existing product lines, particularly
landscape fabrics and landscape edging products. Selling and shipping expenses
as a percentage of net sales decreased from 23.2% in fiscal 1996 to 21.6% in
fiscal 1997. This decrease was primarily due to the consolidation of the
Company's customer services at the Waco, Texas office and the elimination of
the majority of the Weatherly sales positions in connection with the
integration of the acquisition.
General and administrative expenses. General and administrative expenses
increased $2.1 million, or 50%, to $6.5 million in fiscal 1997 from $4.4
million in fiscal 1996. This increase was primarily the result of
23
<PAGE>
the acquisition of Weatherly. As a percentage of net sales, general and
administrative expenses decreased from 16.1% in fiscal 1996 to 12.5% in fiscal
1997. This improvement is primarily due to the closing of the Weatherly
administrative offices in February 1997 and the integration of certain
administrative functions into the Company's existing infrastructure.
Income from operations. Income from operations increased by $6.9 million,
or 184%, to $10.7 million in fiscal 1997 from $3.8 million in fiscal 1996. The
growth in income from operations in actual dollars was primarily due to the
increase in net sales and gross profit as a result of the Weatherly
acquisition. As a percentage of net sales, income from operations increased to
20.5% in fiscal 1997 from 13.9% in fiscal 1996. This increase was due to the
decreases in selling and shipping and general and administrative expenses as a
percentage of net sales.
Interest expense. Interest expense increased by $1.3 million, or 65%, to
$3.3 million in fiscal 1997, from $2.0 million in fiscal 1996. The increase in
interest expense is primarily related to the interest associated with the
increase in both term and working capital debt and expenses associated with
the Weatherly acquisition, partially offset by a decrease in the Company's
effective borrowing rate.
Income taxes. In fiscal 1996, the Company reported a tax benefit of
$715,000 which was a result of the recognition of a deferred tax asset
relating to available net operating loss carryforwards. In fiscal 1997, the
Company incurred a tax expense of $3.2 million, excluding the benefit
associated with the extraordinary expense, reflecting the Company's
profitability and exhaustion of the majority of net operating loss
carryforwards.
Extraordinary expense, net. In connection with the acquisition of
Weatherly, the Company completed the Refinancing. As a result of the
Refinancing, the Company was required to record an extraordinary expense of
$1.0 million net of tax benefits for fiscal 1997, which expense consisted of
deferred finance costs at June 30, 1996 net of accumulated amortization, plus
prepayment penalties.
Net income. Net income increased $659,000, or 26%, to $3.2 million in
fiscal 1997 from $2.5 million in fiscal 1996. This increase was attributable
to the successful integration into Easy Gardener of the Weatherly organization
in fiscal 1997, partially offset by the $1.0 million extraordinary expense,
net of tax benefits, incurred due to the Refinancing.
Net income per common share decreased $0.05 to $0.20 in fiscal 1997 from
$0.25 in fiscal 1996. The decrease was partially attributable to an
extraordinary expense of approximately $1.0 million net of tax benefits, or
$0.06 per common share in fiscal 1997. Additionally, during fiscal 1997 the
Company incurred a tax expense of approximately $3.2 million, or $0.18 per
common share, compared to a tax benefit of approximately $700,000, or $0.07
per share during fiscal 1996 resulting from the recognition of a deferred tax
asset relating to available net loss carryforwards. The decrease in net income
per common share was also adversely affected by the requirement that the
Company use the modified treasury stock method to calculate earnings per share
in fiscal 1997. The effect of using the modified treasury stock method in 1997
was to reduce net income per common share by $0.05. If the modified treasury
stock method had not been used in fiscal 1997, income per common share before
income taxes and extraordinary expense would have been at $0.54 for fiscal
1997 compared to $0.18 in fiscal 1996.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net sales. Net sales increased by $7.3 million, or 37%, to $27.0 million
in fiscal 1996 from $19.7 million in fiscal 1995. A majority of the increase
in net sales resulted from the introduction of new landscape edging and shade
cloth products. In addition, the Company believes that its sales were
positively affected by continued penetration in existing markets, expansion
into new markets and a more widespread recognition of the Easy Gardener brand
and products. The increase in net sales also resulted from the inclusion of 12
months of net sales of Easy Gardener products in the fiscal 1996 period
compared to 10 months in the prior fiscal year.
Gross profit. Gross profit increased by $3.8 million, or 36%, to $14.4
million in fiscal 1996 from $10.5 million in fiscal 1995, primarily due to the
increase in net sales, partially offset by the inclusion of 12 months of Easy
Gardener's cost of goods sold in fiscal 1996 compared to 10 months in fiscal
1995. Gross profit as a
24
<PAGE>
percentage of net sales decreased from 53.5% in fiscal 1995 to 53.1% in fiscal
1996. The decrease was due to a change in the product mix sold and to higher
costs, during fiscal 1996, of resin and corrugated cardboard, which are the
principal materials used in the manufacturing and packaging of WeedBlock.
Selling and shipping expenses. Selling and shipping expenses increased by
$1.9 million, or 43%, to $6.3 million in fiscal 1996 from $4.4 million in
fiscal 1995. The increase was primarily the result of the increase in the
amount of product shipped and the inclusion of 12 months of Easy Gardener's
selling and shipping expenses in fiscal 1996 compared to 10 months in fiscal
1995. As a percentage of net sales, selling and shipping expenses increased to
23.2% in fiscal 1996 compared to 22.2% in fiscal 1995. This increase was
primarily due to introductory advertising on new products.
General and administrative expenses. General and administrative expenses
increased by $1.6 million, or 57%, to $4.4 million in fiscal 1996 from $2.8
million in fiscal 1995. General and administrative expenses as a percentage of
net sales increased to 16.1% in fiscal 1996 from 14.1% in fiscal 1995. The
increase in general and administrative expenses during fiscal 1996 was
primarily a result of the inclusion of 12 months of Easy Gardener's general
and administrative expenses in fiscal 1996 compared to 10 months in fiscal
1995. The increase in general and administrative expenses was also due to
additional amortization and depreciation expense, and additional related
overhead expenses, associated with the overall increase in the size of the
Company.
Income from operations. Income from operations increased by approximately
$400,000, or 12%, to $3.8 million in fiscal 1996 from $3.4 million in fiscal
1995. As a percentage of net sales, income from operations decreased to 13.9%
in fiscal 1996 from 17.2% in fiscal 1995. The decrease in income from
operations as a percentage of net sales was primarily the result of a slight
decrease in gross profit as a percentage of net sales, combined with more
significant increases in selling and shipping and general and administrative
expenses as a percentage of net sales.
Interest expense. Interest expense increased by $200,000, or 11%, to $2.0
million during fiscal 1996 from $1.8 million during fiscal 1995 primarily as a
result of the inclusion in fiscal 1996 of 12 months of interest on Easy
Gardener's outstanding indebtedness which was incurred in connection with the
purchase of the assets of Easy Gardener, Inc. in September 1994 when compared
to the inclusion of such interest for only 10 months in fiscal 1995. This
increase was partially offset by the February 1995 conversion of $2.0 million
of convertible notes into Common Stock and the repayment of $1.6 million on
other notes payable. The convertible notes and other notes payable were
incurred in connection with the purchase of the assets of Easy Gardener, Inc.
in September 1994.
Income taxes. During fiscal 1996, the Company recorded a $715,000 tax
benefit compared to a $38,000 tax expense during the fiscal 1995 primarily due
to the Company's recognition of a deferred tax asset associated with Federal
net operating loss carryforwards. See "-- Liquidity and Capital Resources."
Net income. Net income in fiscal 1996 was $2.5 million or $0.25 per share
based on 10,206,000 weighted average common and common equivalent shares
outstanding compared to net earnings of $1.6 million or $0.19 per share in
fiscal 1995 based on 8,376,000 common and common equivalent shares
outstanding. Such increase was primarily the result of the increase in net
sales.
Quarterly Results of Operations and Seasonality
The Company's sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden 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.
Sales of the Company's agricultural products, which were not material for
fiscal 1997, are also seasonal. Most shipments occur during the agricultural
cultivation period from March through October.
25
<PAGE>
Set forth below is certain unaudited quarterly financial information:
<TABLE>
<CAPTION>
Quarter Ended
September 30, December 31, March 31, June 30,
1995 1995 1996 1996
--------------- -------------- ----------- ----------
(in thousands, except percentages and per share data)
<S> <C> <C> <C> <C>
Net sales ........................... $ 3,265 $ 2,715 $ 10,760 $10,291
Cost of sales ..................... 1,555 1,290 5,156 4,670
----------- ----------- --------- --------
Gross profit ........................ 1,710 1,425 5,604 5,621
Selling, general and administrative
expenses ........................ 2,211 2,394 2,753 3,252
----------- ----------- --------- --------
Income (loss) from operations ...... (501) (969) 2,851 2,369
Investment income .................. 24 10 19 16
Interest expense .................. (458) (473) (541) (538)
----------- ----------- --------- --------
Income (loss) before income taxes ... (935) (1,432) 2,329 1,847
Income tax benefit (expense) ......... 100 80 138 397
Extraordinary expense, net .........
Net income (loss) .................. $ (835) $ (1,352) $ 2,467 $ 2,244
=========== =========== ========= ========
Net income (loss) per share (1) ...... $ (0.08) $ (0.13) $ 0.16 $ 0.14
=========== =========== ========= ========
Weighted average common and com-
mon equivalent shares outstanding
(1) .............................. 9,944 10,200 19,002 19,721
=========== =========== ========= ========
Net sales ........................... 100% 100% 100% 100%
Cost of sales ..................... 47.6 47.5 47.9 45.4
----------- ----------- --------- --------
Gross profit ..................... 52.4 52.5 52.1 54.6
Selling, general and administrative 67.7 88.2 25.6 31.6
----------- ----------- --------- --------
Income (loss) from operations ...... (15.3) (35.7) 26.5 23.0
Investment income .................. .7 .4 .2 .2
Interest expense ..................... (14.0) (17.4) (5.0) (5.3)
----------- ----------- --------- --------
Income (loss) before income taxes ... (28.6) (52.7) 21.7 17.9
Income tax benefit (expense) ...... 3.1 3.0 1.3 3.9
Extraordinary expense, net ......... 0 0 0 0
----------- ----------- --------- --------
Net income (loss) .................. (25.5%) (49.7%) 23.0% 21.8%
=========== =========== ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
September 30, December 31, March 31, June 30, September 30,
1996 1996 1997 1997 1997
--------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net sales ........................... $ 5,523 $ 7,416 $ 20,559 $ 18,549 $ 7,025
Cost of sales ..................... 2,607 3,217 9,025 8,800 3,522
----------- --------- --------- --------- ---------
Gross profit ........................ 2,916 4,199 11,534 9,749 3,503
Selling, general and administrative
expenses ........................ 3,264 4,048 5,539 4,894 3,963
----------- --------- --------- --------- ---------
Income (loss) from operations ...... (348) 151 5,995 4,855 (460)
Investment income .................. 26 17 16 17 47
Interest expense .................. (563) (813) (993) (970) (853)
----------- --------- --------- --------- ---------
Income (loss) before income taxes ... (885) (645) 5,018 3,902 (1,266)
Income tax benefit (expense) ......... 280 195 (2,075) (1,600) 550
Extraordinary expense, net ......... (1,007)
----------- --------- --------- --------- ---------
Net income (loss) .................. $ (1,612) $ (450) $ 2,943 $ 2,302 $ (716)
=========== ========= ========= ========= =========
Net income (loss) per share (1) ...... $ (0.12) $ (0.03) $ 0.14 $ 0.11 $ (0.05)
=========== ========= ========= ========= =========
Weighted average common and com-
mon equivalent shares outstanding
(1) .............................. 12,915 13,917 22,696 22,191 $ 14,702
=========== ========= ========= ========= =========
Net sales ........................... 100% 100% 100% 100% 100%
Cost of sales ..................... 47.2 43.4 43.9 47.4 50.1
----------- --------- --------- --------- ---------
Gross profit ..................... 52.8 56.6 56.1 52.6 49.9
Selling, general and administrative 59.1 54.6 26.9 26.4 56.4
----------- --------- --------- --------- ---------
Income (loss) from operations ...... (6.3) 2.0 29.2 26.2 (6.5)
Investment income .................. .5 .2 .1 .1 0.7
Interest expense ..................... (10.2) (11.0) (4.8) (5.3) (12.1)
----------- --------- --------- --------- ---------
Income (loss) before income taxes ... (16.0) (8.8) 24.5 21.0 (18.0)
Income tax benefit (expense) ...... 5.1 2.6 (10.1) (8.6) 7.8
Extraordinary expense, net ......... (18.2) 0 0 0 0
----------- --------- --------- --------- ---------
Net income (loss) .................. (29.1%) (6.2%) 14.3% 12.4% (10.2%)
=========== ========= ========= ========= =========
</TABLE>
<PAGE>
- ------------
(1) Pursuant to APB No. 15, net income per share was calculated using the
modified treasury stock method except for quarters reporting a net loss.
Such quarters only reflect issued and outstanding shares of Common Stock
in the weighted average shares outstanding. To calculate net income per
share, net income must be increased by $418,000, $509,000, $236,000 and
$213,000 for the quarters ended March 31 and June 30, 1996 and 1997,
respectively.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily
through cash generated by operations, net proceeds from the Company's private
and public sales of securities and borrowings from lending institutions.
At September 30, 1997, the Company had consolidated cash and short-term
investments totalling $4.8 million and working capital of $3.3 million. At
June 30, 1997, the Company had consolidated cash and short-term investments
totalling $2.1 million and working capital of $2.3 million. The increase in
working capital at September 30, 1997 was due primarily to the warrants
exercised to purchase Common Stock which resulted in net proceeds to the
Company of $2.5 million during the three months ended September 30, 1997.
Net cash provided by operating activities for fiscal 1997 was $10.6
million, consisting primarily of net income plus depreciation and amortization
and an extraordinary expense resulting from the Refinancing, an increase in
accounts payable and a decrease in deferred taxes, offset in part by an
increase in accounts receivables. Net cash used in investing activities for
fiscal 1997 was $29.6 million, consisting primarily of cash used for the
acquisition of Weatherly.
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<PAGE>
Net cash provided by financing activities for fiscal 1997 was $20.5
million, consisting primarily of the additional proceeds from the notes
payable used in connection with the purchase of Weatherly, and the exercise of
warrants to purchase Common Stock, the proceeds of which were used primarily
for the purchase of Weatherly.
Net cash provided by operating activities during the three months ended
September 30, 1997 was $3.1 million, consisting primarily of a decrease in
accounts receivable plus depreciation and amortization, offset in part by an
increase in accounts payable and an increase in inventory. Net cash used in
investing activities during the three months ended September 30, 1997 was
$848,000, consisting primarily of cash used for the additional purchase price
for Easy Gardener, Inc.
Net cash provided by financing activities during the three months ended
September 30, 1997 was $533,000, consisting of the $2.45 million from the
exercise of warrants to purchase Common Stock, offset in part by $1.9 million
payments of outstanding notes payable.
At September 30, 1997, the Company had consolidated term debt of $24.6
million which includes debt incurred pursuant to the Refinancing and consists
of three outstanding term loans of $18.55 million, $2.25 million and $3.8
million.
In connection with the acquisition of Weatherly, Easy Gardener entered
into the Credit Agreement with the Lenders. 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 the revolving credit facility (the "Revolving Credit Facility") facility
from time to time is equal to the lesser of $13.0 million and a borrowing base
determined by reference to specified percentages of Easy Gardener's
consolidated accounts receivable and inventory deemed to be "eligible" by the
Lenders. As of September 30, 1997, based on this formula, $3.8 million was
available for borrowing and no amount was outstanding. In April 1997, the
Revolving Credit Facility was amended to provide the Company with an
additional $3.0 million in available borrowing during the months of February,
March, April and May of each fiscal year. Any additional borrowing must be
paid by May 31 of the year in which borrowed. This additional increase is for
the working capital needs during the peak season months and has the same
"eligibility" requirements as the original amount.
Revolving credit loans bear interest at an annual rate chosen by Easy
Gardener based on the prime rate of one of the lenders or the London
Inter-Bank Offered Rate ("LIBOR") plus an applicable marginal rate. Under
certain circumstances, outstanding prime rate loans may be converted to LIBOR
rate loans at the Company's option. At September 30, 1997, the effective
annual rate for outstanding borrowings under the Revolving Credit Facility was
9.75%. The Revolving Credit Facility expires on June 30, 2002 (the "Expiration
Date") and all outstanding revolving credit loans are then due. In addition,
for a 10-day period in August of each year, all outstanding revolving credit
loans must be paid and no revolving credit loans may be borrowed. Revolving
credit loans may be prepaid at any time. However, if Easy Gardener elects to
terminate the Revolving Credit Facility prior to the Expiration Date, the
outstanding balance must be prepaid together with a premium of from 1% to 2%
of the "Average Yearly Loan Balance" (as defined in the Credit Agreement)
under the Revolving Credit Facility.
(b) Term Loan Facility: Pursuant to this facility, Easy Gardener obtained
three term loans (the "Term Loans"), one in the principal amount of $23
million ("Term Loan I"), $18.6 million of which was outstanding at September
30, 1997, one in the principal amount of $2.25 million ("Term Loan II"), all
of which was outstanding at September 30, 1997, and one in the principal
amount of $3.8 million ("Term Loan III"), all of which was outstanding at
September 30, 1997. Term Loan I and Term Loan II mature on the Expiration
Date. Term Loan III was repaid in full and expired in November 1997. Term
Loans I and II 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.
Term Loan I bears interest, at the election of Easy Gardener, at the adjusted
prime rate or LIBOR rate described above, and Easy Gardener may from time to
time, subject to certain restrictions, convert Term Loan I from a prime rate
loan to a LIBOR rate loan. At September 30, 1997, the effective annual rate of
interest for Term Loan I was 9.75%. Term Loan II bears interest at a floating
rate equal to the prime rate of one of the lenders plus 6%. At June 30, 1997,
the effective annual rate of interest for Term Loan II was 14.5%. The annual
rate
27
<PAGE>
of interest for Term Loan III was 12%. Interest on Term Loans I and II 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 three months or less or
on the last day of each three-month interval during the interest period if it
is longer than three months. If Easy Gardener elects to pay Term Loan I in
full at any time prior to the Expiration Date, Easy Gardener is also obligated
to pay a premium of from 1% to 2% of the amount prepaid. Term Loan I is
subject to certain mandatory prepayments of principal from "excess cash flow"
(as defined in the Credit Agreement) of Easy Gardener and certain net proceeds
of asset sales, condemnation awards and insurance recoveries. Mandatory
prepayment of principal of Term Loan I on account of "excess cash flow", if
any, will be due in October of the following fiscal year. No mandatory
prepayment was due in October 1997.
Easy Gardener's obligation to pay the principal of, interest on, premium,
if any, and all other amounts payable on account of the Revolving Credit
Facility and the Term Loans is secured by substantially all of the assets of
Easy Gardener and its subsidiaries and the irrevocable guaranties of the
Company and Easy Gardener's subsidiaries. Upon the occurrence of an event of
default specified in the Credit Agreement, the maturity of the outstanding
principal amounts of the Revolving Credit Facility and the Term Loans may be
accelerated by the lenders who may also foreclose on the secured assets of
Easy Gardener and its subsidiaries.
Under the Credit Agreement (a) Easy Gardener 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 and (b) Easy Gardener 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, Easy
Gardener must comply with certain minimum interest coverage, debt service and
fixed charge rates, not permit its Net Worth (as defined in the Credit
Agreement) 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 believes that its operations will generate sufficient cash
flow to service the debt incurred in connection with its prior acquisitions.
However, if such cash flow is not sufficient to service such debt, the Company
will be required to seek additional financing which may not be available on
commercially acceptable terms or at all.
As of September 30, 1997, the Company had a deferred tax liability of
$597,000 and a deferred tax asset of $727,000, (net of a $265,000 valuation
allowance) the majority of which relates to the tax benefit associated with
the accumulated net operating losses of approximately $2.2 million for Federal
income tax purposes which expire in 2011. For California income tax purposes,
the Company accumulated net operating losses of approximately $2.8 million
which expire at various times through 2001. 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 relating to the majority of the
estimated $265,000 tax benefit associated with the California net operating
loss carryovers.
In January 1997, the Company borrowed $550,000 in the aggregate from
certain lenders. The loans were used to satisfy short term working capital
requirements. In July 1997, the Company repaid $200,000 of the loans and the
$350,000 balance was converted into 154,000 shares of Common Stock.
In May 1997, the Company purchased from Plastic Molded Concepts, Inc.
certain assets relating to its Plasti-Chain Line of products for approximately
$4.3 million. The purchase price was paid through the use of the Revolving
Credit Facility and Term Loan III. The additional term debt is payable in
November 1997.
In connection with the Company's acquisition of Weatherly, the former
stockholders of Weatherly entered into an agreement to indemnify the Company
against tax liabilities relating to periods prior to the acquisition. If any
such tax liabilities arise the Company would be required to make the payments
to the appropriate tax
28
<PAGE>
authority and, in turn, seek reimbursement from the Weatherly stockholders
under their indemnification agreement. The Internal Revenue Service ("IRS") is
currently examining certain Weatherly tax returns covering periods prior to
the acquisition. There can be no assurance that if the Company is required to
make payments to the IRS or any other tax authority it will be able to receive
such amounts from the former Weatherly stockholders. The Company believes that
any payment it may be required to make will not have a material adverse effect
on its financial condition.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB")
issued a Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which is effective for both interim and annual periods
ending after December 15, 1997. SFAS No. 128 requires the calculation and
presentation of basic earnings per share (giving no dilutive effect to
derivative securities) and dilutive earnings per share (reflecting the
dilutive effect of all derivative securities). Accordingly, the Company plans
to adopt SFAS No. 128 in its December 31, 1997 interim financial statements.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
29
<PAGE>
BUSINESS
General
The Company is a leading manufacturer and marketer of a broad range of
consumer lawn and garden products. The Company's products include weed
preventive landscape fabrics, fertilizer spikes, decorative landscape edging,
shade cloth and root feeders, which are sold under recognized brand names such
as WeedBlock(R), Jobe's(R), Emerald Edge(R), Shade Fabric(TM) and Ross(R). The
Company believes that it has significant market share and brand-name
recognition in several of its primary product categories. The Company markets
its products through most large national home improvement and mass merchant
retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Builder's
Square, Wal-Mart and Home Base.
The Company has experienced significant growth in recent years and
believes that its success has been primarily attributable to the expansion of
its product lines through the acquisition of complementary lawn and garden
businesses, the quality of its products, its focus on providing Retail
Accounts with a single source of lawn and garden products, the efficiency and
reliability of its inventory tracking and order fulfillment systems and its
distinctive advertising and store displays.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the
industry has grown, national home improvement and mass merchant retailers have
replaced many of these local garden centers as the primary retail source for
lawn and garden products. In an effort to improve operating margins and reduce
the number of vendors needed to source high volume lawn and garden products,
the preference among home improvement and mass merchant retailers has shifted
towards single source suppliers that offer broad product lines of consumer
brand-name merchandise and the product support necessary to stimulate consumer
demand and ensure timely and cost effective order fulfillment. Smaller
regional suppliers generally lack the capital and other resources necessary to
offer the variety and number of product lines, the product support and the
inventory stocking and tracking capabilities required by home improvement and
mass merchant retailers.
Regional manufacturers, distributors and marketers are now largely
fragmented and the Company believes that many of them are attractive
acquisition candidates for larger, single source suppliers and distributors in
the lawn and garden industry. The Company has historically been successful in
locating, acquiring and integrating certain of these manufacturers and
distributors into its business and intends to continue its acquisition program
as a principal component of its growth strategy.
According to the 1996-1997 National Gardening Survey, 1996 retail sales
of lawn and garden products were approximately $22 billion, and 64% of the
approximately 101 million households in the United States participated in some
form of gardening activity during 1996. In addition, sales growth in the lawn
and garden industry is being driven in part by the aging of the "baby boomer"
consumer segment. According to the National Gardening Survey, persons 50 years
of age and older spent an average of $400 per household on lawn and garden
activities in 1996.
Business Strategy
The Company's business objective is to be a leading single source
supplier to Retail Accounts and its strategy includes the following key
components:
o Market Low-Cost, High-Margin Products. The Company focuses on
manufacturing and marketing low-cost, high-margin products, such as
landscape fabric, fertilizer spikes, landscape edging, shade cloth and
root feeders, with suggested retail prices generally ranging from $2 to
$30. The Company believes that such point-of-purchase products stimulate
impulse buying by consumers and provide high margins with relatively low
price sensitivity.
30
<PAGE>
o Supply a Wide Variety of Products. The Company supplies Retail Accounts
with several product lines, such as landscape fabric, fertilizer spikes,
landscape edging, shade cloth and root feeders. Within such product
categories the Company offers a broad range of products. For example, the
Company's landscape fabrics are available in both woven and non-woven
fabrics of varying grades of thickness. Similarly, the Company's
fertilizer, plant food and insecticide spikes are designed for a wide
variety of indoor and outdoor plants, including mutiple types of trees,
flowers, vegetable plants and shrubs.
o Capitalize on Point-of-Purchase Displays. The Company utilizes
distinctive packaging and point-of-purchase product displays, new product
introductions and other merchandising techniques to stimulate consumer
purchases. The Company's sales representatives periodically visit
individual Retail Accounts to assist them in achieving innovative and
optimal use of the Company's product displays through prominent product
placement and inventory management.
o Utilize Marketing and Advertising Programs. The Company uses national and
regional marketing and advertising programs to generate consumer
brand-name recognition of its product lines. The Company retains agencies
that market and advertise its products through television programs,
newspaper inserts and weekly circulars.
o Promote Retail Account Satisfaction. The Company promotes Retail Account
satisfaction by providing timely and efficient order fulfillment
services. The Company maintains a sophisticated retail data information
system which enables it to provide timely order fulfillment so that
Retail Accounts are not required to maintain a large inventory of the
Company's products.
Growth Strategy
The Company attributes its historical growth and success to its ability
to capitalize on the consolidation of the lawn and garden industry by
locating, acquiring and effectively integrating acquisition targets and its
ability to act as an efficient single source supplier of a broad range of
quality products. The Company intends to continue this growth strategy, which
consists of the following principal components:
o Pursue Additional Strategic Acquisitions. The Company plans to continue
its primary strategy of acquiring complementary lawn and garden companies
and product lines. The Company has consummated five (5) such acquisitions
since 1992 and recently entered into a non-binding letter of intent to
acquire another lawn and garden product business. By consolidating
companies with complementary product lines, the Company believes it can
capitalize on its existing channels of distribution and gain market share
by increasing sales to its Retail Accounts.
o Increase Brand Awareness. The Company intends to enhance existing
consumer brand awareness by expanding its advertising and marketing
efforts with an emphasis on its Jobe's fertilizer spikes, a
nationally-recognized brand name. The Company believes that the
modernization of its Jobe's packaging, together with a national
television advertising campaign targeted at the "baby boomer" consumer
segment, will allow it to further capitalize on its brand-name
recognition.
o Utilize Existing Infrastructure. The Company's management and
administration infrastructure has been designed to accommodate the
integration of additional products when suitable lawn and garden
companies and product lines are identified and acquired. The Company
believes that its ability to efficiently integrate new businesses and
product lines into its existing infrastructure will result in significant
savings in the areas of management, distribution, marketing and customer
service. The Company also believes that its infrastructure, including its
on-line inventory tracking and order fulfillment capabilities, allows it
to be an effective and efficient source of lawn and garden products for
Retail Accounts.
o Focus on High-Volume Retailers. National high-volume retailers such as
the Company's Retail Accounts are gaining an increasing share of the lawn
and garden retail market. By focusing on the emergence of high-volume
retailers and their needs, including providing broad product lines, order
fulfillment capabilities and marketing and merchandising programs, the
Company believes that it will increase its market share and enhance its
position as a leading single source supplier of lawn and garden products.
31
<PAGE>
Recent and Proposed Acquisitions
Since August 1992, the Company has consummated the following five (5)
acquisitions of lawn and garden companies or product lines for a total of over
$56 million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which was acquired in
August 1992 for approximately $1.1 million in cash and $1.1 million of
promissory notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock(R), which was acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5
million promissory note and two convertible notes each in the principal
amount of $1.0 million. Approximately $2.2 million of additional purchase
price was contingent on Easy Gardener meeting certain income
requirements. A total of approximately $1.2 million of the additional
amount has been paid to date and the remaining $1.0 million is payable in
fiscal 1999.
o Emerald Products LLC. A manufacturer of decorative landscape edging,
which was acquired in August 1995 for $835,000 in cash and a $100,000
promissory note.
o Weatherly Consumer Products Group, Inc. A manufacturer of fertilizer
spikes and other lawn and garden products, which was acquired in August
1996 for 1,000,000 shares of Common Stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which was acquired from
Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3 million
in cash.
In addition the Company has entered into a non-binding letter of intent
to purchase a manufacturer and distributor of outdoor lawn and garden products
for approximately $14.0 million, subject to increase or decrease based upon
certain net current assets of the seller to be acquired.
Products
Landscape Fabric. The Company markets different types of landscape fabric
in varying thicknesses and strengths under the trade names WeedBlock,
WeedBlock 6(TM), MicroPore(R), Pro WeedBlock(TM) and WeedShield(TM). Landscape
fabrics allow water, nutrients and oxygen to filter through to soil but
prevent weed growth by blocking sunlight to prevent seeds from germinating.
The Company'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. For the fiscal
years ended June 30, 1995, 1996 and 1997, sales of landscape fabrics
represented 71%, 69% and 44%, respectively, of the Company's net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer and plant food
spikes deliver plant nutrients directly to the root of the plant, as an
alternative method of maintaining plant health to surface-delivered liquid or
solid fertilizers. Some of the Company's fertilizer spikes have the added
feature of containing an insecticide for the control of unwanted insects. The
Company markets a variety of indoor and outdoor specialty fertilizer and plant
food spikes primarily under the Jobe's tradename, one of the most recognized
brands in the consumer lawn and garden industry. For the fiscal year ended
June 30, 1997, sales of fertilizer, plant food and insecticide spikes
represented approximately 24% of the Company's net sales.
Landscape Edging. The Company markets a variety of resin-based decorative
landscape edgings under trade names including Emerald Edge and Terra Cotta
Tiles. The Company's decorative edgings are used by consumers to enclose or
define the perimeter of planting areas with a variety of designs which include
stone, log, terra cotta tiles and picket fences. The Company recently acquired
the Plasti-Chain line of products, which include additional styles of
decorative landscape edgings.
Shade Cloth. The Company markets shade cloth fabrics in a variety of
sizes and colors. 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. The Company markets
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 at the option of the Company for an additional
two-year period).
32
<PAGE>
Fertilizers and Root Feeders. The Company markets fertilizers under the
Ross trade name. The Ross fertilizer, when applied through a Ross root feeder,
a long steel irrigation tube with a hose connector that is inserted deep into
the ground, provides the homeowner with a means of deep feeding and irrigating
trees and shrubs. The Ross root feeder may also be used without fertilizer as
a deep watering device.
Other Products. In addition to landscape fabrics, fertilizer, plant food
and insecticide spikes, landscape edging, shade cloth and root feeders, the
Company also sells complementary lawn and garden products for the home
gardener. The products include a line of animal repellents that are formulated
to deter dogs, cats, deer and rabbits from destroying garden and landscape
environs, a variety of protective plant and tree covers, bird and animal mesh
blocks, protective garden and tree netting to prevent animal damage, synthetic
mulch and fabric pegs.
Agricultural Products. The Company, through Golden West, manufactures and
distributes certain humic acid-based agricultural products for use on farms
and orchards. Golden West generally sells its products to agricultural
distributors, which in turn market Golden West's products to farms and
orchards. The principal agricultural products manufactured and/or distributed
by the Company 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; 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 and Powergizer(R), a foliar nutrient, or plant
food, containing humic acid which promotes growth and vigor in many types of
crops. Sales of the Company's agricultural products accounted for less than 2%
of the Company's net sales in fiscal 1997.
Conversion, Manufacturing and Supply
Lawn and Garden Products
Except for the materials for WeedBlock, which are obtained from a single
source, the basic materials for the Company's lawn and garden products are
purchased from a variety of suppliers. All of such materials are converted,
packaged and shipped by the Company from either its Waco, Texas facility or
its Paris, Kentucky facility.
The Company purchases all of the landscape fabric used to manufacture
WeedBlock from Tredegar. The Company purchases large rolls of various types of
landscape fabric for shipment to its Waco, Texas facility where it sizes, cuts
and packages the fabric for consumer sale. Although the Company has purchased
all of its supply from Tredegar for over 10 years and believes that its
relationship with Tredegar is good, Tredegar is free to terminate its
relationship with the Company at any time and accordingly could market its
fabrics to other companies, including competitors of the Company.
Nevertheless, the Company owns the registered trademark "WeedBlock(R)" and, to
the extent that it establishes alternative supply arrangements, its rights to
market products under the WeedBlock brand name would continue without
restriction.
The Company manufactures and packages its Jobe's fertilizer spikes at its
Paris, Kentucky facility. The raw materials that comprise the Company's indoor
fertilizer spikes are mixed with a binding agent and then passed through an
extrusion process which feeds a continuous strand of fertilizer through a
heat-drying system. The strand is then cut into ready to use fertilizer spikes
which are then machine counted and packaged as shelf-ready product. The
Company's outdoor fertilizer spikes are manufactured in a similar manner
except rather than passing through an extrusion process, the outdoor spikes
are processed through molds which shape the spikes into their final form. The
outdoor spikes are packaged in either a foil pouch, bag or box.
The specifications for the Company's landscape edging, shade cloth and
root feeder products and packaging are designed by the Company and independent
design consultants. The products are then manufactured and packaged by third
party manufacturers according to the Company's specifications.
33
<PAGE>
Agricultural Products
The Company does not own or lease any manufacturing facilities for its
agricultural products. Substantially all of the Company's humic acid-based
agricultural products, including Energizer, Penox and Powergizer, are
processed by Western Farm Services, Inc. ("Western Farm") pursuant to purchase
orders placed by the Company from time to time in the ordinary course of
business. The Company, through Western Farm, also 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.
Customers
The Company's customers include home improvement centers, mass
merchandisers, hardware stores, nurseries and garden centers and other retail
channels throughout the United States. The Company's three largest customers
for fiscal 1997, Home Depot, Lowes and Kmart, accounted for approximately 26%,
10% and 7%, respectively, of its net sales during such year. During fiscal
1996, Home Depot, Lowe's, Kmart and Builder's Square accounted for 27%, 9%, 7%
and 5%, respectively, of the Company's net sales. During fiscal 1995, sales to
Home Depot, Kmart, Builder's Square and Lowe's accounted for approximately
27%, 9%, 7% and 6%, respectively, of the Company's net sales. The Company's
ten largest customers as a group accounted for 74% and 65% of its net sales
during fiscal 1996 and 1997, respectively. Sales to such customers are not
governed by any contractual arrangement and are made pursuant to standard
purchase orders. While the Company believes that relations with its largest
customers are good, the loss of any of these customers could have an adverse
effect upon the results of operations of the Company.
The Company's sales are concentrated in the United States, with
international sales (primarily Europe and Canada) accounting for less than 2%
of the Company's net sales for fiscal 1996 and fiscal 1997. The Company is
currently attempting to develop relationships with distributors outside of the
United States.
Sales and Marketing
The Company's sales efforts are coordinated by its national sales
manager, whose duties include overseeing key accounts and directing the
activities of the Company's six regional sales managers. Because of the
service-oriented nature of the Company's business, the national and regional
sales managers devote a substantial amount of their time to servicing and
maintaining relationships with the Company's largest customers in addition to
managing the overall sales operations. The Company also utilizes the services
of over 25 non-exclusive independent sales organizations, on a commission
basis, who are responsible primarily for sales to customers not serviced
regularly by the regional sales managers. Sales of the Company's agricultural
products are coordinated primarily by two full-time employees who are
compensated on a salary plus commission basis.
The Company's marketing activities are coordinated by its marketing
manager. The marketing manager designs and develops the Company's distinctive
packaging and point-of-sale displays and oversees, among other things, the
Company's advertising campaigns, which are created and placed by advertising
and public relations firms.
The Company expects that its lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and
in-store consumer promotions in Retail Accounts, hardware stores, nurseries
and garden centers. In addition, the Company believes that a substantial
portion of lawn and garden sales are impulse driven and not overly price
sensitive. Therefore, the Company seeks to increase consumer awareness,
understanding and brand identification of its products through its distinctive
packaging and point-of-sale displays. Retail Accounts and the Company's other
customers receive the Company's products in packaging that is easily
displayed. The retail product packaging is informative to the end-user and
incorporates attention-getting, eye-pleasing color schemes. The Company also
tailors its displays to the evolving needs of retailers. Because many home
improvement and mass merchant retailers maintain outdoor sales areas for their
lawn and garden products, the Company utilizes waterproof displays for many of
its products. In addition, the Company meets the specific needs of many of its
larger customers by tailoring the size of its displays to the dimensions
requested by such customers. The Company's independent sales representatives
periodically visit individual retail outlets to replenish product, rearrange
displays and otherwise assist Retail Accounts in achieving innovative and
optimal use of the Company's distinctive store displays.
34
<PAGE>
In order to anticipate and react quickly to changing consumer
preferences, the Company also engages in market research. During fiscal 1997
the Company conducted consumer market research and a regional media
advertising campaign of its Jobe's spikes product line to determine the
effectiveness of such advertising in increasing product line sales. Based on
the positive data derived from such research, the Company intends to focus its
advertising and promotional campaign on the Jobe's brand name, as well as on
the Easy Gardener and Emerald Edge brand names.
Prior to the Company's acquisition of Weatherly, brand recognition of
Jobe's product line was not heavily promoted. In order to enhance the consumer
recognition of the Jobe's name, the Company intends to:
o Modernize Packaging. The Company intends to make the packaging of the
Jobe's products more attention getting, eye-pleasing and informative and
instructional as to product purpose and use in order to increase impulse
purchasing.
o Assist Retail Accounts. The Company will continue its current process of
assisting Retail Accounts in their inventory purchasing, in-store product
placement and the implementation of innovative and optimal use of the
distinctive displays for Jobe's products.
o Advertise Nationally. The Company intends to commence a national
television advertising campaign designed to target the "baby boomer"
consumer segment, which represents the largest lawn and garden consumer
segment. The campaign, which will be created by the Company's advertising
agency, will appear primarily on programming on national cable channels
with favorable "baby boomer" viewing demographics, such as CNN or CNBC.
The Company will also continue to engage in co-operative advertising with
its Retail Accounts primarily through national and regional weekly print
advertising circulars during the primary lawn and garden season.
The Company anticipates spending approximately $4.0 million ($3.25 million
from the proceeds of this offering), including anticipated use of a portion of
existing trade credits, in the fiscal year ending June 30, 1998 on a
combination of media development, print, radio and television advertising,
co-operative advertising (advertising done in conjunction with retailers), and
attendance at trade shows and public relations to promote awareness,
understanding and brand identification of its lawn and garden products.
The Company intends to utilize a substantial portion of its marketing
budget for the fiscal year ending June 30, 1998 on the enhancement of
brand-name recognition of the Jobe's product line. There can be no assurance
that any attempt to increase such recognition will be successful or have any
favorable effect on the Company's net sales.
Information Systems
The Company maintains a sophisticated retail data information system
which enables it to track orders and provide timely and efficient order
fulfillment to its Retail Accounts and other customers. Internally, the
Company's information systems track orders and deliveries and provide
exception reports if product is not delivered on time. The systems "push" the
necessary information to the proper personnel, allowing the Company to react
quickly to information. The Company's purchase order process can be paperless,
with most Retail Accounts placing their orders through an electronic data
interchange with the Company.
Seasonality
The Company sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden 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.
Sales of the Company's agricultural products are also seasonal. Most
shipments occur during the agricultural cultivation period from March through
October.
Inventory and Distribution
In order to meet product demand, the Company keeps relatively large
amounts of product inventory on hand, particularly from December to May, the
months of highest demand. Despite maintaining these relatively
35
<PAGE>
high levels of inventory, historically the Company has experienced minimal
inventory obsolescence. There can be no assurance that inventory obsolescence
will not be higher in the future. Retail Accounts generally require delivery
within five business days. Orders are generally processed within 48 hours and
shipped by common carrier.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. 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, such as Solaris Group, a
division of Monsanto Company, and the Scotts Miracle Gro Company have captured
a significant, and in certain cases controlling, 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 frequent and extensive
advertising and promotional programs, both generally and in response to
efforts by new competitors entering the market or existing competitors
introducing new products. Many of these companies have substantially greater
financial, technical, marketing and other resources than the Company. There
can be no assurance that the Company will be able to compete successfully or
that reacting to competitive pressures will not materially adversely affect
the Company.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the Solaris Group and other lawn and garden care companies
have, in the past, manufactured and marketed landscape fabrics. Currently, few
of such competitors compete with the Company in this industry. Nevertheless,
well capitalized companies and smaller regional firms may develop and market
landscape fabrics and compete with the Company for customers who purchase such
products.
Among the Company's competitors in the lawn and garden market for the
Jobe's line of fertilizer and insecticide spikes are large agri-chemical
companies such as Solaris Group and Scotts Miracle-Gro Products, Inc.
Competition for the Company's agricultural products 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. The
Company competes with a variety of regional lawn and garden manufacturers in
the markets for landscape edging, shade cloth and root feeders.
Government Regulation
The Company is subject to many laws and governmental regulations and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by the Company as fertilizers or pesticides are subject to an
extensive and frequently evolving statutory and regulatory framework, at both
the Federal and state levels.
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"), as well as regulation
by many states in a manner similar to FIFRA. Under FIFRA and similar state
laws, all pesticides must be registered with the EPA and state and must be
approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on the marketing of such products. Moreover, many
states also impose similar requirements upon products marketed for use as
fertilizing materials, which are not typically regulated under FIFRA. Failure
to comply with the requirements of FIFRA and state laws that regulate
marketing and distribution of pesticides and fertilizers could result in the
imposition of sanctions, including, but not limited to, suspension or
restriction of product distribution, civil penalties or criminal sanctions.
The Company markets certain animal repellent and pesticide products that
are subject to FIFRA and to similar state regulations. The Company also
markets certain fertilizer products that are subject to regulation in some
states. The Company believes that it is in material compliance with FIFRA and
applicable state regulations regarding its material business operations.
However, there can be no assurance that the Company will be able to comply
with future regulations in every jurisdiction in which the Company's material
business operations are conducted without substantial cost or interruption of
operations. Moreover, there can be no assurance that future
36
<PAGE>
products marketed by the Company will not also be subject to FIFRA or to state
regulations. If future costs of compliance with regulations governing
pesticides or fertilizers increase or exceed the Company's budgets for such
items, the Company's business could be adversely affected. If any of the
Company's products are distributed and/or marketed in violation of any of
these regulations, the Company could be subject to a recall of, or a sales
limitation placed on, one or more of its products, or civil or criminal
sanctions, any of which could have a material adverse effect upon the
Company's business.
Environmental Regulation. The Company's manufacturing operations are
subject to various evolving federal, state and local laws and regulations
relating to the protection of the environment, which laws govern, among other
things, emissions to air, discharges to ground, surface water and groundwater,
and the generation, handling, storage, transportation, treatment and disposal
of a variety of hazardous and non-hazardous substances and wastes. Federal and
state environmental laws and regulations often require manufacturers to obtain
permits for these emissions and discharges. 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 operates one manufacturing
facility. Although the Company believes that all of its facilities are in
substantial compliance with all applicable material environmental laws, it is
currently investigating whether it needs two permits for its Waco, Texas
facility. Although the Company believes that it will not be subject to
penalties for failure to obtain a permit if one is needed, there can be no
assurance that penalties will not be assessed. Furthermore, it is possible
that there are material environmental liabilities of which the Company is
unaware. If the costs of compliance with the various existing or future
environmental laws and regulations including any penalties which may be
assessed for failure to obtain necessary permits, exceed the Company's budgets
for such items, the Company's business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and
operators of facilities at which hazardous substances have been discharged, as
well as on persons who generate, transport or arrange for disposal of
hazardous substances at a particular site. In addition, the operator of a
facility may be subject to claims by third parties for personal injury,
property damage or other costs resulting from contamination present at or
emanating from property on which its facility is located. Easy Gardener and
Weatherly each operates a manufacturing facility. Moreover, the Company or its
predecessors have owned or operated other manufacturing facilities in the past
and may have liability for remediation of such facilities in the future, to
the extent any is required. In this regard, Weatherly previously owned a
facility that was the subject of certain soil remediation activities. Although
this facility was sold by Weatherly prior to the Company's acquisition of
Weatherly, there can be no assurance that the Company will not be liable for
any previously existing environmental contamination at the facility. Moreover,
although the purchaser of the facility indemnified Weatherly for any
environmental contamination liability and the sellers of Weatherly, in turn,
indemnified the Company from such liability, there can be no assurance that,
if required, the indemnifying parties will be able to fulfill their respective
obligations to indemnify the Company. Furthermore, certain business operations
of the Company's subsidiaries also involve shipping hazardous waste off-site
for disposal. As a result, the Company could be subject to liability under
these statutes. The Company could also incur liability under CERCLA or similar
state statutes for any damage caused as a result of the 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 will not subject the Company
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
currently or in the past.
Other Regulations. The Company is also subject to various other federal,
state and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants.
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.
37
<PAGE>
In connection with its acquisition of the assets of Easy Gardener Inc. in
September 1994, the Company acquired certain trademarks used by Easy Gardener
Inc. in connection with its business including, but not limited to, the
trademarks WeedBlock, Easy Gardener(R), WeedShield, MicroPore and
Birdblock(R). In connection with its acquisition of Weatherly, the Company
acquired certain patents, as well as certain trademarks used in connection
with Weatherly's business including, but not limited to, Jobe's, Ross, Green
Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(R). The Company also acquired
certain patents and trademarks when it acquired the assets of Emerald Products
LLC and acquired trademarks with certain assets of Plastic Molded Concepts,
Inc. There can be no assurance that the Company will apply for any additional
trademark or patent protections relating to its products or that its current
trademarks and patents will be enforceable or adequately protect the Company
from infringement of its proprietary rights.
Although the Company believes that the products sold by it do 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 pay damages and
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.
Legal Proceeding
In response to a claim for trademark infringement filed July 30, 1997 by
Easy Gardener against Dalen Products, Inc. ("Dalen") in the United States
District Court for the Western District of Texas, Waco Division, Dalen filed a
counterclaim against Easy Gardener and a third party complaint against the
Company. Dalen alleges, among other things, that the Company and Easy Gardener
monopolized or attempted to monopolize the market for landscape fabrics; that
the Company and Easy Gardener tortiously interfered with Dalen's contractual
and prospective contractual relationships; and that Easy Gardener infringed
upon a Dalen trademark, deceptively advertised the thickness of one of its
products, and misrepresented the porosity of a Dalen product. Dalen's
counterclaim and third party complaint seek an award of unspecified damages
and the entry of unspecified injunctive relief.
Employees
As of October 31, 1997, the Company had 125 full-time employees. Of such
employees, three are executive officers of the Company, 19 were engaged in
administration and finance, 14 were engaged in sales and marketing, 16 were
engaged in warehouse, shipping and receiving, and 73 were engaged in
production. An additional 17 part-time employees were engaged in production.
None of the Company's employees is covered by collective bargaining
agreements. The Company believes that it has a good relationship with its
employees.
Properties
The Company's executive offices are currently located in San Francisco,
California, in approximately 2,440 square feet of office space for which the
Company pays $4,227 per month in rent, which amount includes the costs of
utilities and janitorial services. In March 1998, the Company will be
relocating to a 3,000 square foot space in the same building with a monthly
rent of $10,275. The Company believes that its office space, which it rents
pursuant to a lease expiring in February 2001, is adequate for the Company's
planned future operations.
Easy Gardener leases approximately 200,000 square feet of office and
warehouse space in Waco, Texas for which the Company pays $17,918 per month in
rent, which will increase to $18,544 per month in February 1998, pursuant to a
lease agreement that expires on February 28, 2001. 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 for $10,000 per month pursuant to a lease
that expires on June 30, 1998. If the Company is unable to extend such lease
it believes that it will be able to lease a replacement facility on
commercially reasonable terms. The Company also leases an additional 53,000
feet of warehouse space in Paris, Kentucky for $5,417 per month in rent
pursuant to a lease that expires on May 6, 1998.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $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.
38
<PAGE>
MANAGEMENT
Directors, Executive Officers and Certain Key Employees
The current directors, executive officers and certain key employees of
the Company are as follows:
<TABLE>
<CAPTION>
Directors and Executive Officers Age Position
- -------------------------------- ----- --------
<S> <C> <C>
Robert Kassel(1) ......... 57 Chairman of the Board, Chief Executive Officer, President and
Treasurer
Richard Raleigh(2) ...... 44 Chief Operating Officer and Director
Maureen Kassel ............ 50 Vice President of Public Relations and Advertising, Secretary and
Director
Jon Schulberg(1)(2) ...... 39 Director
Fred Heiden(1)(2) ......... 56 Director
Certain Key Employees
- ----------------------------
Richard M. Grandy ........ 51 President, Easy Gardener
Lynda Gustafson ........... 33 Vice President of Finance
Sheila Jones .............. 42 Vice President of Operations, Easy Gardener
Paul Logue .............. 41 National Sales Manager, Easy Gardener
</TABLE>
- ------------
(1) Member, Compensation Committee
(2) Member, Audit Committee
Directors and Executive Officers:
Robert Kassel co-founded the Company and has been Chairman of the Board,
Chief Executive Officer, President and Treasurer of the Company since October
1990. 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 Director of Marketing, Lawn and Garden
of Monsanto Agricultural Co. From December 1986 to April 1988, he was Vice
President of Sales and Marketing of The Andersons, a company engaged in the
sale of consumer and professional lawn and garden products. 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 of Public Relations and Advertising and a director of the
Company since November 1990 and Secretary of the Company 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 January 1989 to January 1992, he was a producer for
Guthy-Renker Corporation, a television production company. From September 1987
to January 1989, he was Director of Development for Eric Jones Productions.
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 President and principal owner of Bonair Construction, a
Florida-based home improvement construction company.
Certain Key Employees:
Richard M. Grandy has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of Easy
Gardener, Inc. in September 1994 until July 1997. Mr.
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<PAGE>
Grandy co-founded Easy Gardener, Inc. 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 of lawn and garden products for the
Ortho Division of Chevron Chemical Co.
Lynda Gustafson has been Vice President of Finance of the Company since
September 1997 and served as Controller of the Company from November 1993 to
September 1997. From September 1990 through October 1993, Ms. Gustafson was a
supervisor of the Business Consulting Department of the certified public
accounting firm of Hood & Strong. From September 1988 to August 1990, she held
the positions of Staff Accountant and Senior Accountant at the certified
public accounting firm of Schwartz, McGuire & Co.
Sheila Jones has been Vice President of Easy Gardener since July 1997 and
has also served as its General Manager from September 1994. Prior to the
acquisition of Easy Gardener, Inc. by the Company, Ms. Jones was employed by
Easy Gardener, Inc. from its inception in September 1983 to September 1994,
where she advanced to the positions of Vice President and General Manager.
From April 1977 to September 1983, she was employed by International Spike,
Inc., where she held various project management positions.
Paul Logue has been National Sales Manager of Easy Gardener since its
acquisition by the Company in September 1994. Prior to joining the Company,
Mr. Logue was employed by Easy Gardener, Inc. from September 1989 to September
1994, where he advanced from the position of Northeastern Regional Sales
Manager to National Sales Manager. From March 1988 to September 1989, he was
Regional Sales Manager for Hoffman Brand Fertilizers.
Executive Compensation
The following table discloses the compensation awarded by the Company,
for the three fiscal years ended June 30, 1995, 1996 and 1997, to Mr. Robert
Kassel, its Chief Executive Officer, and Mr. Richard J. Raleigh, its Chief
Operating Officer (together, the "Named Executives"). During the fiscal year
ended June 30, 1997, no other executive officer of the Company received a
salary that exceeded $100,000 during such fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------------------------------------
Long Term All Other
Name and Principal Position Year Salary($) Bonus($) Compensation Compensation ($)(1)
- ------------------------------------------ ------ ----------- ---------- ----------------- --------------------
Securities
Underlying
Options(#)
-----------------
<S> <C> <C> <C> <C> <C>
Robert Kassel, Chairman, Chief Executive 1997 350,000 250,000 1,200,000(2) 5,995
Officer, President and Treasurer 1996 250,000 100,000 200,000(3) --
1995 150,000 100,000 687,653(4) --
Richard Raleigh, Chief Operating Officer 1997 195,000 111,275 500,000(2) 8,390
1996 150,000 10,000 100,000(3) --
1995 120,000 10,000 50,000(4) --
</TABLE>
- ------------
(1) Represents Company contributions to the Named Executives' 401(k) accounts.
(2) Includes options to purchase 200,000 shares previously granted to Mr.
Kassel and options to purchase 100,000 shares previously granted to Mr.
Raleigh whose exercise prices were repriced to reflect a reduction in the
market price of the Common Stock at the time of repricing. Does not
include options to purchase 50,000 shares previously granted to Mr.
Raleigh the expiration date of which was extended during fiscal 1997.
(3) Includes five-year options to purchase 200,000 shares granted to Mr.
Kassel and five-year options to purchase 100,000 shares 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.
(4) Does not include the options referenced in footnote (3) above.
40
<PAGE>
The following table discloses information concerning stock options
granted in the year ended June 30, 1997 to the Named Executives.
Option Grants in Fiscal Year Ended June 30, 1997
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------------------------
Potential
Realizable Value at
Number of Assumed
Securities Percent of Total Annual Rates of
Underlying Options Granted to Exercise Stock Price
Options Granted Employees in Fiscal Price Expiration Appreciation for
Name (#)(1) Year(%) ($/Sh) Date Option Term ($)(2)
- ----------------- ----------------- --------------------- ---------- ------------ -------------------
5% 10%
--------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert Kassel 350,000 19.8 2.06 7/24/01 199,199 440,177
450,000 25.5 2.06 8/30/01 256,113 565,943
200,000 11.3 2.06 12/24/01 113,828 251,530
200,000 11.3 2.06 6/01/00 113,828 251,530
Richard Raleigh 125,000 7.0 2.06 7/24/01 71,142 157,706
175,000 9.5 2.06 8/30/01 99,599 220,089
100,000 5.7 2.06 12/24/01 56,914 125,765
100,000 5.7 2.06 6/01/00 56,914 125,765
</TABLE>
- ------------
(1) All of such options were exercisable in full from the date of grant.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of options providing for termination of
the option following termination of employment or nontransferability of
the options and do not make any provision for taxes associated with
exercise. Because actual gains will depend upon, among other things,
future performance of the Common Stock, there can be no assurance that the
amounts reflected in this table will be achieved.
The following table sets forth information concerning the number of
options owned by the Named Executives and the value of any in-the-money
unexercised stock options as of June 30, 1997. No options were exercised by
the Named Executives during fiscal 1997:
Aggregated Option Exercises
And Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
June 30, 1997 June 30, 1997(1)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Robert Kassel ......... 2,067,653 -0- $3,214,598 $-0-
Richard Raleigh ...... 637,500 -0- $ 887,938 $-0-
</TABLE>
- ------------
(1) Year-end values for unexercised in-the-money options represent the
positive spread between the exercise price of such options and the fiscal
year-end market value of the Common Stock. An option is "in-the-money" if
the fiscal year-end fair market value of the Common Stock exceeds the
option exercise price. The last sale price (the fair market value) of the
Common Stock on June 30, 1997 was $3.375 per share.
Employment Agreements
The Company has entered into employment agreements with Messrs. Kassel and
Raleigh, each dated as of April 1, 1996. Mr. Kassel currently serves as Chief
Executive Officer and President pursuant to the employment agreement for a term
expiring on March 31, 1998, subject to certain renewal provisions. His current
annual salary is $450,000, and is subject to such bonuses and increases as are
approved at the discretion of the Board of Directors. Mr. Raleigh currently
serves as Chief Operating Officer pursuant to the employment agreement for a
term expiring on March 31, 1998, subject to certain renewal provisions. His
current annual salary is $195,000, and is subject to such bonuses and increases
as are approved at the discretion of the Board of Directors. Each
41
<PAGE>
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). 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.
Mr. Kassel's employment agreement also provides that if his employment is
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 (as defined in the
agreement), he will be entitled to receive severance pay equal to the greater
of (i) $350,000 ($3.5 million 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 employment 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 (as defined in the
agreement) he will be entitled to receive severance pay equal to the greater
of (i) $162,500 ($812,500 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.
Easy Gardener has entered into an employment agreement with Mr. Grandy
dated as of September 1, 1994, which expires on August 31, 1998. Mr. Grandy
currently serves as President of Easy Gardener. His current annual salary is
$200,000. Mr. Grandy's employment agreement requires him to devote
substantially all of his business time to Easy Gardener, and in the event Mr.
Grandy's employment agreement is terminated by Easy Gardener without cause (as
defined in the agreement) or if Mr. Grandy resigns with Good Reason (as
defined in the agreement), Mr. Grandy will be entitled to receive his base
salary through the expiration date.
Committees of the Board of Directors
The Company recently established an Audit Committee comprised of Messrs.
Raleigh, Schulberg and Heiden. The Audit Committee will, among other things,
make recommendations to the Board of Directors with respect to the engagement
of the Company's independent certified public accountants and the review of
the scope and effect of the audit engagement. The Company recently established
a Compensation Committee comprised of Messrs. Kassel, Schulberg and Heiden.
The Compensation Committee will, among other things, make recommendations to
the Board of Directors with respect to the compensation of the executive
officers of the Company. The Company maintains a Stock Option Committee
comprised of Messrs. Schulberg and Heiden, which determines the persons to
whom options should be granted under the Company's 1995 and 1997 Stock Option
Plans and the number and other terms of options to be granted to each person
under such plans.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company did not have a Compensation Committee of its Board of
Directors during fiscal 1997. Decisions as to compensation during fiscal 1997
were made by the Company's Board of Directors. Messrs. Kassel and Raleigh, in
their capacity as directors, each participated in the Board of Directors
deliberations concerning compensation of executive officers for fiscal 1997.
During fiscal 1997, none of the executive officers of the Company served on
the Board of Directors or the compensation committee of any other entity, any
of whose officers served on the Board of Directors of the Company.
42
<PAGE>
Stock Option Plans
In September 1991, the Company adopted a 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
("NQO's"). ISOs may be granted under the Option Plan to employees and officers
of the Company. NQO's may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company.
The purpose of the 1991 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 1991 Plan is administered by the
Board of Directors. The Board, within the limitations of the 1991 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 1991 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. NQO's 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. 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). Options to acquire an aggregate of 662,000 shares are currently
outstanding under the 1991 Plan.
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 authorized for the automatic grants under the Director Plan.
Options to acquire an aggregate of 20,000 shares has been granted to date
under the Director Plan.
The Company has also 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"),
as the case may be, will have discretion to determine the number of shares
subject to each NQO (subject to the number of shares available for grant under
the 1995 Plan and other limitations on grant set forth in the 1995 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 which the option becomes exercisable
(amounts, intervals and other conditions). Directors who are employees of the
Company will be eligible to be granted ISOs or NQOs under such plan. The Board
or Committee, as the case may be, also has discretion to determine the number
of shares subject to each 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 same Code provisions applicable to ISOs granted under the 1991 Plan.
Options to acquire an aggregate of 1,483,000 shares are currently outstanding
under the 1995 Plan.
The Company has adopted a 1997 Stock Option Plan ("1997 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Committee, as the case may be, will have
discretion to determine the number of shares subject to each NQO (subject to
the number of shares available for grant under the 1997 Plan and other
limitations on grant set forth in the 1997 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 which the option becomes exercisable (amounts, intervals and
other
43
<PAGE>
conditions). Directors who are employees of the Company (but not members of
the Committee of the 1997 Plan) will be eligible to be granted ISOs or NQOs
under such plan. The Board or Committee, as the case may be, also has
discretion to determine the number of shares subject to each 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 same Code provisions applicable to ISOs
granted under the 1991 Plan. Options to acquire an aggregate of 565,000 shares
are currently outstanding under the 1997 Plan.
To date, no options have been exercised under the Option Plan, the
Director Plan, the 1995 Plan or the 1997 Plan.
The Company from time to time has also granted non-plan options to
certain officers, employees and consultants of the Company.
Director Compensation
During fiscal 1997, each of the Company's two non-employee directors,
Messrs. Schulberg and Heiden, received $5,000 for serving as directors of the
Company.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information at October 31, 1997, 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, (iii) each Named Executive and (iv) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
Shares
to be
Name and Address Shares Beneficially Owned Sold in Shares Beneficially Owned
of Beneficial Owner(1) Prior to Offerings(2) Offering After Offerings(2)
- ------------------------------------ ------------------------------------- ------------------ ------------------------------
Number Percent Number Percent
------------------------ ----------- -------------------- --------
<S> <C> <C> <C> <C> <C>
Maureen Kassel ..................... 910,650(3) 5.8 230,000 680,650 3.3%
Robert Kassel ..................... 4,712,095(4)(5) 26.7 230,000(14) 4,025,985(14) 17.6
Richard Raleigh .................. 711,154(6) 4.4 80,000 631,154 3.0
Fred Heiden ..................... 7,500(7) * -- 7,500 *
Jon Schulberg ..................... 7,500(8) * -- 7,500 *
Joseph Owens II .................. 1,064,396(9) 6.9 230,000 834,396 4.1
Richard Grandy .................. 1,064,396(9) 6.9 226,110 838,286 4.1
Alan Stahler ..................... 899,368(10) 5.5 -- 899,368 4.2
Lynda Gustafson .................. 37,640(11) * 17,640 20,000 *
Paul Logue ........................ 33,625(12) * 20,625 13,000 *
Sheila Jones ..................... 31,925(13) * 20,625 11,300 *
Herbert Berman ..................... 37,500 * 12,500 25,000 *
Nathaniel Berman .................. 25,000 * 25,000 -- --
Tiger Group, Inc. .................. 25,000 * 25,000 -- --
Debra Berman ..................... 12,500 * 12,500 -- --
All executive officers and directors
as a group (five persons) ...... 5,763,249(4)(5) 30.7 310,000(14) 4,997,139(14) 21.1
(6)(7)
(8)
</TABLE>
- ------------
*less than 1%
(1) Unless otherwise noted, the address of the beneficial owner is c/o the
Company, and 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 October 31, 1997 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 October 31, 1997 have been exercised.
(3) The address for Ms. Kassel is c/o the Company. Includes presently
exercisable options and warrants issued to Ms. Kassel to purchase an
aggregate of 325,000 shares of the Company's Common Stock.
(4) The address for Mr. Kassel is c/o the Company. Of such shares, (i)
585,650 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 585,650 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, who have each entered into a voting trust
agreement (the "Voting Agreement") providing Mr. Kassel with the right to
vote the shares until September 1, 2001.
(5) Includes 2,297,653 shares of Common Stock issuable upon exercise of
options and warrants.
(6) Includes 694,154 shares of Common Stock issuable upon exercise of options
and warrants. Gives effect to the exercise by Mr. Raleigh, on a
"cashless" basis, immediately prior to the consummation of this offering
of options to purchase 95,166 shares of Common Stock into 63,000 shares
of Common Stock.
(7) Includes 7,500 shares of Common Stock issuable upon exercise of options.
(8) Includes 7,500 shares of Common Stock issuable upon exercise of options.
(9) Includes 125,000 shares of Common Stock issuable to each of Messrs. Grandy
and Owens upon exercise of options. The address of Mr. Owens is 8
Hillendale, Waco, Texas 76710.
(10) 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. The information with respect to
Mr. Stahler is derived from his Schedule 13D filed with the Securities
and Exchange Commission. Does not give effect to the redemption of any
unit purchase options upon the consummation of this offering.
(11) Includes 20,000 shares of Common Stock issuable upon exercise of options.
Gives effect to the exercise by Ms. Gustafson, on a "cashless" basis,
immediately prior to the consummation of this offering of options to
purchase 30,000 shares of Common Stock into 17,640 shares of Common
Stock.
(12) Includes 10,000 shares of Common Stock issuable upon exercise of options.
Gives effect to the exercise by Mr. Logue, on a "cashless" basis,
immediately prior to the consummation of this offering of options to
purchase 37,500 shares of Common Stock into 20,625 shares of Common
Stock.
(13) Includes 10,000 shares of Common Stock issuable upon exercise of options.
Give effect to the exercise by Ms. Jones, on a "cashless" basis,
immediately prior to the consummation of this offering of options to
purchase 37,500 shares of Common Stock into 20,625 shares of Common
Stock.
(14) Reflects the sale in this offering by Maureen Kassel of 230,000 shares of
Common Stock which may also be deemed to be beneficially owned by Mr.
Kassel. Shares to be Sold in Offering do not reflect the sale in this
offering of 230,000 shares by Mr. Owens or 226,110 shares by Mr. Grandy
which were subject to the Voting Agreement.
45
<PAGE>
CERTAIN TRANSACTIONS
To obtain a portion of the financing for the Company's acquisition of
Easy Gardener, Inc., 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 collateral and guarantee, the Company granted
Mr. Kassel options to purchase an aggregate of 526,300 shares of Common Stock
for an aggregate exercise price of approximately $822,000.
In connection with certain acquisitions, during fiscal 1997, the Company
granted five year non-plan options to Messrs. Kassel and Raleigh to purchase
an aggregate of 650,000 and 275,000 shares of Common Stock, respectively, at
an exercise price of $2.0625 per share. Pursuant to an agreement with the
Underwriters, the Company has agreed not to issue any options, warrants or any
other securities convertible into Common Stock (except under the Director
Plan) to any person during fiscal 1998 or fiscal 1999, other than options,
warrants or any other securities convertible into up to an aggregate of
750,000 shares of Common Stock during fiscal 1999. See "Underwriting."
From time to time Messrs. Kassel and Raleigh have borrowed monies from
the Company. During fiscal 1997, the highest amounts owed to the Company by
Messrs. Kassel and Raleigh were $607,472 and $225,294, respectively, and at
September 30, 1997, the balance of such indebtedness was $555,919 and
$235,608, respectively. The loans bear interest at 7% per annum and mature on
July 1, 2002. Company loans to all officers of the Company are restricted to a
maximum of $850,000 by the terms of the Credit Agreement. The Company's Board
of Directors has adopted a policy pursuant to which any loan between the
Company and one or more of its officers or directors, or any third party in
which one or more of its officers or directors has a material interest, must
be approved by a majority of the disinterested members of the Audit Committee
or the Board of Directors.
The Company has agreed to repurchase from Alan Stahler, a principal
stockholder of the Company, all of his unit purchase options. See "Use of
Proceeds" and "Principal and Selling Stockholders."
46
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $0.001 per share, and 1,000,000 shares of preferred stock, par value
$0.001 per share. As of November 7, 1997, there were 15,424,981 shares of
Common Stock outstanding and held of record by 186 holders, and no shares of
preferred stock are outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors in its discretion out of funds legally available therefor. In the
event of liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably the assets of the Company, if any,
legally available for distribution to them after payment of debts and
liabilities of the Company and after provision has been made for each class of
stock, if any, having preference over the Common Stock. Holders of shares of
Common Stock have no conversion, preemptive or other subscription rights, and
there are no redemption or sinking fund provisions applicable to the Common
Stock. All of the outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be, when issued upon payment of the
consideration set forth in this Prospectus, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue 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 stockholder 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.
In the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company.
Delaware Anti-Takeover Law
The Company is subject to certain anti-takeover provisions under Section
203 of the Delaware General Corporation Law. In general, under Section 203, a
Delaware corporation may not engage in any business combination with any
"interested stockholder" (a person that owns, directly or indirectly, 15% or
more of the outstanding voting stock of a corporation or is an affiliate of a
corporation and was the owner of 15% or more of the outstanding voting stock),
for a period of three years following the date such stockholder became an
interested stockholder, unless (i) prior to such date the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, or (ii)
upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders by at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder. The
restrictions imposed by Section 203 will not apply to a corporation if the
corporation's initial certificate of incorporation contains a provision
expressly electing not to be governed by this section or the corporation by
action of its stockholders holding a majority of outstanding stock adopts an
amendment to its certificate of incorporation or by-laws expressly electing
not to be governed by Section 203.
The Company has not elected out of Section 203, and therefore, the
restrictions imposed by Section 203 will apply to the Company. Such provision
could have the effect of discouraging, delaying or preventing a takeover of
the Company, which could otherwise be in the best interest of the Company's
stockholders, and have an adverse effect on the market price for the Company's
Common Stock.
47
<PAGE>
Limitation of Liability and Indemnification Matters
Section 145 of the Delaware General Corporation Law ("DGCL") contains
provisions entitling the Company's directors and officers to indemnification
from judgments, fines, amounts paid in settlement and expenses (including
attorneys' fees) actually and reasonably incurred as the result of an action,
suit or proceeding in which they may be involved by reason of having been a
director or officer of the Company. In its Certificate of Incorporation, the
Company has included a provision that limits the personal liability of its
directors to the Company or its stockholders for monetary damages arising from
a breach of their fiduciary duties as directors. This provision limits a
director's liability except where such director (i) breaches his duty of
loyalty to the Company or its stockholders, (ii) fails to act in good faith or
engages in intentional misconduct or a knowing violation of laws, (iii)
authorizes payment of an unlawful dividend or stock purchase or redemption as
provided in Section 174 of the DGCL or (iv) obtains an improper personal
benefit. This provision does not prevent the Company or its stockholders from
seeking equitable remedies, such as injunctive relief or rescission. If
equitable remedies are found not to be available to stockholders in any
particular case, stockholders may not have any effective remedy against
actions taken by directors that constitute negligence or gross negligence.
The Company's Certificate of Incorporation, as amended, also includes
provisions to the effect that (subject to certain exceptions) the Company
shall, to the maximum extent permitted from time to time under the law of the
State of Delaware, indemnify, and upon request shall reimburse expenses to,
any director or officer to the extent that such indemnification and
reimbursement of expenses is permitted under such law, as it may from time to
time be in effect. In addition, the Amended and Restated Bylaws of the Company
require the Company to indemnify, to the fullest extent permitted by law, any
director, officer, employee or agent of the Company. At present, the DGCL
provides that, in order to be entitled to indemnification, an individual must
have acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the Company's best interests and, with respect to a
criminal action or proceeding, had no reasonable cause to believe that his or
her conduct was unlawful.
Transfer Agent and Warrant Agent
The transfer agent and registrar for the Common Stock is North American
Transfer Company, Freeport, New York.
48
<PAGE>
UNDERWRITING
Subject to the terms and certain conditions of the Underwriting Agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom EVEREN Securities, Inc. and Josephthal Lyon & Ross
Incorporated are acting as representatives (the "Representatives"), have
severally agreed to purchase an aggregate of 6,000,000 shares of Common Stock
from the Company and the Selling Stockholders. The number of shares of Common
Stock that each Underwriter has agreed to purchase is set forth opposite its
name below:
Underwriter Number of Shares
----------- -----------------
EVEREN Securities, Inc.
Josephthal Lyon & Ross Incorporated
Total 6,000,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters who are parties thereunder are subject to certain conditions. If
any of the shares of Common Stock are purchased by the Underwriters pursuant
to the Underwriting Agreement, all of such shares of Common Stock (other than
the shares of Common Stock covered by the over-allotment option described
below) must be so purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession not to exceed $ per share. The Underwriters
may allow, and such dealers may reallow, discounts not to exceed $ per share
to certain other dealers. After the initial public offering of the shares of
Common Stock, the public offering price and the other selling terms may be
changed by the Representatives.
The Company has granted to the Underwriters an option to purchase up to
an aggregate of 900,000 additional shares of Common Stock at the price to the
public set forth on the cover page of this Prospectus, less underwriting
discounts and commissions, solely to cover over-allotments, if any. Such
option may be exercised at any time until 30 days after the date of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
a number of option shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the Act,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
The public offering price for the Common Stock set forth on the cover
page of this Prospectus was determined by negotiations among the Company and
the Representatives. The factors considered in determining the public offering
price include the information set forth in this Prospectus and otherwise
available to the Representatives, the trading history of the Common Stock on
the Nasdaq SmallCap Market, the history of and prospects for the industry in
which the Company competes, the ability of the Company's management, the past
and present operations of the Company, the historical results of the
operations of the Company, the prospects for future earnings of the Company,
the general condition of the securities market at the time of this offering
and the recent market prices of securities of generally comparable companies.
Prior to this offering, trading in the Company's Common Stock has been
limited. There can be no assurance as to the liquidity of any market that may
develop for the Common Stock or the ability of holders to sell their Common
Stock, nor can there be any assurance that the price at which holders are able
to sell their Common Stock will not be lower than the price at which the
Common Stock is sold to the public by the Underwriters.
The directors and executive officers of the Company have agreed with the
Underwriters not to (other than in connection with this offering or in
connection with certain transfers of Common Stock to entities organized for
the exclusive benefit of family members of such persons, which entities shall
have first expressly agreed in writing to be bound by the terms of such
agreement), directly or indirectly, offer, pledge,
49
<PAGE>
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, any shares of Common Stock of the Company or
any securities convertible into or exercisable or exchangeable for Common
Stock, or enter into any swap or other agreement to do any of the foregoing,
for a period of 180 days after the date of this Prospectus without the written
consent of EVEREN Securities, Inc. These "lock-up" restrictions do not apply
to the estate of any person described above in the event such person dies
during the 180-day "lock-up" period and do not prohibit any person from
exercising options (but would prohibit the sale during the restricted period
of any shares of Common Stock purchased upon exercise of such options).
The Company has also agreed with the Underwriters not to (other than in
connection with this offering), directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise issue any shares of Common Stock of the Company or any securities
convertible into or exercisable or exchangeable for Common Stock, enter into
any swap or other agreement to do any of the foregoing, or file any
registration statement relating to any of the foregoing on behalf of itself or
any other person, for a period of 180 days after the date of this Prospectus,
without the written consent of EVEREN Securities, Inc. The restrictions set
forth in the immediately preceeding sentence are not applicable to: (i) grants
of options pursuant to the Director Plan, as in effect on the date hereof;
(ii) the filing of any registration statement on Form S-8 relating to shares
of Common Stock issuable upon exercise of options outstanding on the date
hereof and described as such herein under the Company's Stock Option Plans;
(iii) the filing of any registration statement on Form S-3 relating to the
potential sale of 100,000 shares of Common Stock issuable upon exercise of
options and warrants granted outside of the Company's Stock Option Plans that
expire during the 180-day "lock-up" period; and (iv) the issuance of shares of
Common Stock or options, warrants or rights to purchase shares of Common Stock
solely in connection with the acquisition by the Company of lawn and garden
companies or product lines; provided, however, that no registration statement
on Form S-4 or any other registration statement relating to such issuance may
be filed during such 180-day period without the written consent of EVEREN
Securities, Inc., which consent may not be unreasonably withheld.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in
accordance with the Securities Exchange Act of 1934 pursuant to which such
persons may bid for or purchase Common Stock for the purpose of stabilizing
its market price. The Underwriters also may create a short position for the
account of the Underwriters by selling more Common Stock in connection with
this offering than they are committed to purchase from the Company and the
Selling Stockholders, and in such case may purchase Common Stock in the open
market following completion of the offering to cover all or a portion of such
shares of Common Stock or may exercise the Underwriters' over-allotment option
referred to above. In addition, the Representatives, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with
the Underwriters whereby they may reclaim from an Underwriter (or dealer
participating in the offering), for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in this
offering but subsequently purchased for the account of the Underwriters in the
open market. In connection with the offering, certain Underwriters, selling
group members and their respective affiliates who are qualified registered
market makers on the Nasdaq SmallCap Market may engage in passing market
making transactions in the Common Stock on the Nasdaq SmallCap Market in
accordance with Rule 103 of Regulation M during a specified period before
commencement of offers or sales of the Common Stock. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at
a price not in excess of the highest independent bid for such security.
However, if all independent bids are lowered below the passive market maker's
bid, the passive market maker's bid must be lowered when certain purchase
limits are exceeded. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Common Stock at a level above
that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if undertaken, may
be discontinued at any time.
Josephthal Lyon & Ross Incorporated has performed investment banking and
advisory services for the Company since April 1997 for which it received
certain cash payments and warrants to purchase 100,000 shares of Common Stock
at $2.25 per share.
50
<PAGE>
The Company has granted EVEREN Securities, Inc. and Josephthal Lyon & Ross
Incorporated certain rights of first refusal to underwrite or place any public
or private offering of equity or debt securities of the Company for a period of
12 months following the consummation of the offering.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for
the Company and the Selling Stockholders by Tenzer Greenblatt LLP, New York,
New York. Certain legal matters relating to the offering will be passed upon
for the Underwriters by Gibson, Dunn & Crutcher LLP. A partner of Tenzer
Greenblatt LLP is the beneficial owner of shares of Common Stock and options
and warrants to purchase shares of Common Stock. Certain other partners of
Tenzer Greenblatt LLP also own shares of Common Stock and/or options to
purchase Common Stock.
EXPERTS
The financial statements and schedule included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected without charge, at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C., 20549, as well as the regional offices of the
Commission located at Northwest Atrium, 500 West Madison Street, Chicago,
Illinois, 60601-2511 and 7 World Trade Center, New York, New York 10048 and
may be copied at prescribed rates. The Commission also maintains a site on the
World Wide Web that contains reports, proxy and information statements and
other information regarding the Company. The address for such site is:
http://www.sec.gov.
The Company has filed with the Commission a registration statement on
Form S-1 under the Act (together with all amendments and exhibits thereto, the
"Registration Statement") with respect to the securities offered hereby. This
Prospectus, filed as part of such Registration Statement, does not contain all
of the information set forth in the Registration Statement, certain portions
of which have been omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete
and are qualified in their entirety by reference to each such contract,
agreement or other document which is filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected without charge at the
Commission's principal office, in Washington, D.C. 20549, at the Commission's
Regional Offices described above, and copies of such materials can be obtained
from the Commission's Public Reference Section at prescribed rates.
51
<PAGE>
Index to Financial Statements
U.S. Home & Garden Inc. and Subsidiaries
<TABLE>
<CAPTION>
Page
---------------
<S> <C>
Report of Independent Certified Public Accountants ................................. F-2
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 1996 and 1997 and for the three months
ended September 30, 1997 (unaudited) ............................................. F-3
Consolidated statements of income for the years ended June 30, 1995, 1996 and 1997
and for the three months ended September 30, 1996 and 1997 (unaudited) ......... F-4
Consolidated statements of stockholders' equity for the years ended June
30, 1995, 1996 and 1997 and for the three months ended September 30, 1997
(unaudited) ....................................................................... F-5
Consolidated statements of cash flows for the years ended June 30, 1995,
1996 and 1997 and for the three months ended September 30, 1996 and 1997
(unaudited) ....................................................................... F-6
Summary of Accounting Policy ...................................................... F-7 - F-9
Notes to Consolidated Financial Statements ........................................ F-10 - F-23
Consolidated Financial Statement Schedule
Weatherly Consumer Products Group, Inc. and Subsidiaries
Report of Independent Public Accountants ............................................. F-24
Consolidated Financial Statements
Consolidated statements of operations for the year ended September 30, 1995 and the
period October 1, 1995 through August 9, 1996 .................................... F-25
Consolidated statements of stockholders' equity for the year ended September 30,
1995 and the period October 1, 1995 through August 9, 1996 ..................... F-26
Consolidated statements of cash flows for the year ended September 30, 1995 and the
period October 1, 1995 through August 9, 1996 .................................... F-27
Notes to Financial Statements ...................................................... F-28-F-32
Proforma Condensed Consolidated Financial Statements
Proforma condensed consolidated financial statements - background .................. F-33
Proforma condensed consolidated statement of operations for the year ended June 30,
1997 .............................................................................. F-34
Notes to proforma condensed consolidated financial statements ..................... F-35
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc.
and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. 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 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended June 30, 1997 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
San Francisco, California
August 1, 1997, except for Note 15 which
is as of September 15, 1997
F-2
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, September 30,
------------------------------- --------------
1996 1997 1997
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Assets (Notes 1 and 6)
Current
Cash and cash equivalents .............................. $ 680,000 $ 2,083,000 $ 4,832,000
Accounts receivable, less allowance for doubtful
accounts and sales returns of $155,000, $314,000
and $289,000 ............................................. 7,109,000 11,542,000 4,983,000
Inventories (Note 3) .................................... 3,392,000 5,254,000 6,324,000
Prepaid expenses and other current assets ............... 462,000 419,000 515,000
Deferred tax asset (Note 10) ........................... 1,333,000 448,000 727,000
------------ ------------- -------------
Total current assets ................................. 12,976,000 19,746,000 17,381,000
Furniture, fixtures and equipment, net (Note 4) ............ 1,216,000 2,315,000 2,254,000
Intangible assets (Note 1)
Excess of cost over net assets acquired (Note 5) ......... 15,784,000 41,834,000 41,491,000
Deferred financing costs, net of accumulated
amortization of $467,000, $302,000 and $434,000 .......... 1,005,000 1,621,000 1,489,000
Product rights, patents and trademarks, net of accumu-
lated amortization of $56,000, $75,000 and $79,000 198,000 180,000 176,000
Non-compete agreement, net of accumulated
amortization of $22,000 and $29,000 ..................... -- 478,000 471,000
Package design, net of accumulated amortization of
$56,000, $110,000 and $129,000 ........................... 180,000 251,000 339,000
Trade credits (Note 2) .................................... 1,295,000 1,149,000 1,149,000
Officer receivables (Note 7) .............................. 617,000 694,000 791,000
Other assets ................................................ 313,000 207,000 173,000
------------ ------------- -------------
$ 33,584,000 $ 68,475,000 $ 65,714,000
============ ============= =============
Liabilities and Stockholders' Equity (Note 1)
Current
Line of credit (Notes 1, 6 and 13) ..................... $ 1,288,000 $ -- $ --
Current maturities of notes payable (Notes 1, 6 and 13) 2,362,000 8,990,000 7,640,000
Accounts payable ....................................... 1,285,000 1,774,000 2,107,000
Accrued expenses ....................................... 901,000 3,983,000 1,871,000
Accrued co-op advertising .............................. 185,000 1,098,000 946,000
Accrued commissions .................................... 546,000 859,000 316,000
Accrued interest (Note 6) .............................. 592,000 261,000 246,000
Accrued purchase consideration (Note 1) .................. 489,000 489,000 978,000
------------ ------------- -------------
Total current liabilities ........................... 7,648,000 17,454,000 14,104,000
Accrued purchase consideration (Note 1) ..................... -- 978,000 --
Deferred tax liability (Note 10) ........................... 328,000 547,000 597,000
Notes payable, less current maturities (Notes 1, 6 and 13) . 6,238,000 17,570,000 17,000,000
------------ ------------- -------------
Total liabilities .......................................... 14,214,000 36,549,000 31,701,000
------------ ------------- -------------
Commitments, contingency and subsequent events (Notes
1, 6, 8, 9 and 15)
Stockholders' equity (Note 9)
Preferred stock, $.001 par value - shares authorized,
1,000,000; no shares outstanding ........................ -- -- --
Common stock, $.001 par value -- shares authorized,
30,000,000; 10,507,000, 14,073,000 and
15,395,000 shares issued and outstanding at June
30, 1996 and 1997, and September 30, 1997 ............... 11,000 14,000 15,000
Additional paid-in capital .............................. 21,413,000 30,783,000 33,585,000
Retained earnings (deficit) .............................. (2,054,000) 1,129,000 413,000
------------ ------------- -------------
Total stockholders' equity ........................... 19,370,000 31,926,000 34,013,000
------------ ------------- -------------
$ 33,584,000 $ 68,475,000 $ 65,714,000
============ ============= =============
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-3
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three months ended
Years ended June 30, September 30,
------------------------------------------------ ----------------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- ---------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales (Note 11) ............... $19,692,000 $27,031,000 $52,046,000 $ 5,523,000 $ 7,025,000
Cost of sales ..................... 9,151,000 12,670,000 23,649,000 2,607,000 3,522,000
------------ ------------ ------------ ------------ ------------
Gross profit ........................ 10,541,000 14,361,000 28,397,000 2,916,000 3,503,000
------------ ------------ ------------ ------------ ------------
Operating expenses
Selling and shipping ............... 4,374,000 6,264,000 11,232,000 1,759,000 2,304,000
General and administrative ......... 2,778,000 4,348,000 6,513,000 1,505,000 1,659,000
------------ ------------ ------------ ------------ ------------
7,152,000 10,612,000 17,745,000 3,264,000 3,963,000
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ...... 3,389,000 3,749,000 10,652,000 (348,000) (460,000)
Other income (expense)
Investment income .................. 34,000 69,000 76,000 26,000 47,000
Interest expense (Note 6) ......... (1,810,000) (2,009,000) (3,338,000) (563,000) (853,000)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes
and extraordinary expense ......... 1,613,000 1,809,000 7,390,000 (885,000) (1,266,000)
Income tax (expense) benefit (Note
10) .............................. (38,000) 715,000 (3,200,000) 280,000 550,000
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary
expense ........................... 1,575,000 2,524,000 4,190,000 (605,000) (716,000)
Extraordinary expense of
$1,459,000 on debt refinancing,
net of income taxes of $452,000
(Note 13) ........................ -- -- (1,007,000) (1,007,000) --
------------ ------------ ------------ ------------ ------------
Net income (loss) .................. $ 1,575,000 $ 2,524,000 $ 3,183,000 $ (1,612,000) $ (716,000)
============ ============ ============ ============ ============
Income (loss) per common share
before extraordinary expense
(Note 14) ........................ $ 0.19 $ 0.25 $ 0.26 $ (.04) $ (.05)
Extraordinary expense (Notes 13
and 14) ........................... -- -- (0.06) (.08) --
------------ ------------ ------------ ------------ ------------
Net income (loss) per common
share (Note 14) .................. $ 0.19 $ 0.25 $ 0.20 $ (.12) $ (.05)
============ ============ ============ ============ ============
Weighted average common and
common equivalent shares
outstanding (Note 14) ............... 8,376,000 10,206,000 17,908,000 12,915,000 14,702,000
============ ============ ============ ============ ============
</TABLE>
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 Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- -------------------------
Number of Number of
Shares Amount Shares Amount
----------- -------- -------------- ---------
<S> <C> <C> <C> <C>
Balance, July 1, 1994 (Note 9) ............... -- -- 4,600,000 $ 5,000
Sale of common stock, net of stock issuance
costs of approximately $1,300,000............ -- -- 3,775,000 4,000
Issuance of common stock for payment of
trade payables .............................. -- -- 417,000 --
Exercise of stock options and warrants ...... -- -- 31,000 --
Issuance of unit purchase options ............ -- -- -- --
Conversion of debt and accrued interest into
common stock (Note 1) ..................... -- -- 914,000 1,000
Net income ................................. -- -- -- --
------ ------ ------------ --------
Balance, June 30, 1995 (Note 9) ............... -- -- 9,737,000 10,000
Exercise of stock warrants, net of stock
issuance costs of approximately $114,000. -- -- 770,000 1,000
Net income ................................. -- -- -- --
------ ------ ------------ --------
Balance, June 30, 1996 (Note 9) ............... -- -- 10,507,000 11,000
------ ------ ------------ --------
Exercise of stock options, warrants,
and UPOs, net of issuance costs of
approximately $300,000 ..................... -- -- 2,566,000(1) 2,000
Stock issued for Weatherly acquisition
(Note 1) .................................... -- -- 1,000,000 1,000
Options and warrants issued for acquisition
and consulting services and bank
refinancing (Note 1) ........................ -- -- -- --
Net income ................................. -- -- -- --
------ ------ ------------ --------
Balance, June 30, 1997 (Note 9) ............... -- -- 14,073,000 14,000
------ ------ ------------ --------
Conversion of debt into common stock
(unaudited) ................................. -- -- 154,000 --
Exercise of stock options and warrants
(unaudited) ................................. -- -- 1,168,000 1,000
Net loss (unaudited) ........................ -- -- -- --
------ ------ ------------ --------
Balance, September 30, 1997 (unaudited) ...... -- -- 15,395,000 $15,000
====== ====== ============ ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Additional Retained Total
Paid-in Earnings Stockholders'
Capital (Deficit) Equity
------------- ----------------- --------------
<S> <C> <C> <C>
Balance, July 1, 1994 (Note 9) ............... $ 9,298,000 $ (6,153,000) $ 3,150,000
Sale of common stock, net of stock issuance
costs of approximately $1,300,000............ 7,432,000 -- 7,436,000
Issuance of common stock for payment of
trade payables .............................. 683,000 -- 683,000
Exercise of stock options and warrants ...... 35,000 -- 35,000
Issuance of unit purchase options ............ 400,000 -- 400,000
Conversion of debt and accrued interest into
common stock (Note 1) ..................... 2,059,000 -- 2,060,000
Net income ................................. -- 1,575,000 1,575,000
------------ ------------- -----------
Balance, June 30, 1995 (Note 9) ............... 19,907,000 (4,578,000) 15,339,000
Exercise of stock warrants, net of stock
issuance costs of approximately $114,000. 1,506,000 -- 1,507,000
Net income ................................. -- 2,524,000 2,524,000
------------ ------------- -----------
Balance, June 30, 1996 (Note 9) ............... 21,413,000 (2,054,000) 19,370,000
------------ ------------- -----------
Exercise of stock options, warrants,
and UPOs, net of issuance costs of
approximately $300,000 ..................... 5,292,000 -- 5,294,000
Stock issued for Weatherly acquisition
(Note 1) .................................... 2,999,000 -- 3,000,000
Options and warrants issued for acquisition
and consulting services and bank
refinancing (Note 1) ........................ 1,079,000 -- 1,079,000
Net income ................................. -- 3,183,000 3,183,000
------------ ------------- -----------
Balance, June 30, 1997 (Note 9) ............... 30,783,000 1,129,000 31,926,000
------------ ------------- -----------
Conversion of debt into common stock
(unaudited) ................................. 350,000 -- 350,000
Exercise of stock options and warrants
(unaudited) ................................. 2,452,000 -- 2,453,000
Net loss (unaudited) ........................ -- (716,000) (716,000)
------------ ------------- -----------
Balance, September 30, 1997 (unaudited) ...... $33,585,000 $ 413,000 $34,013,000
============ ============= ===========
</TABLE>
- ------------
(1) Includes 38,000 shares of common stock issued for services relating to
cash proceeds and approximately 60,000 issued relating to cashless
exercise of 4 UPOs (Note 9).
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 Cash Flows
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ..................... $ 1,575,000 $ 2,524,000 $ 3,183,000
Adjustments to reconcile net
income loss to net cash pro-
vided by operating activities:
Extraordinary expense ............... -- -- 1,007,000
Loss on disposal of assets ......... -- -- 226,000
Bad debt expense ..................... 3,000 167,000 323,000
Depreciation and other
amortization ........................ 637,000 834,000 1,990,000
Amortization of deferred
financing costs ..................... 219,000 264,000 323,000
Changes in operating assets and
liabilities, net of assets
acquired and liabilities
assumed:
Accounts receivable ............... (2,523,000) (2,622,000) (2,763,000)
Inventories ........................ 637,000 (940,000) 444,000
Prepaid expenses and other
current assets .................. (201,000) (159,000) 324,000
Accounts payable and
accrued expenses .................. 54,000 1,393,000 2,838,000
Trade credits ..................... 200,000 257,000 46,000
Other assets ........................ (163,000) (95,000) 262,000
Deferred taxes ..................... -- (1,005,000) 2,342,000
-------------- -------------- --------------
Net cash provided by operating
activities ........................... 438,000 618,000 10,545,000
-------------- -------------- --------------
Cash flows from investing activities
Payment for purchase of busi-
nesses, net of cash acquired (15,387,000) (1,602,000) (28,358,000)
Payment for non-compete
agreement ........................... -- -- (500,000)
Sale of short-term investments ......... 501,000 -- --
Increase in officer receivables ...... (352,000) (131,000) (77,000)
Purchase of product rights ............ (105,000) -- --
Purchase of furniture, fixtures and
equipment ........................... (151,000) (261,000) (528,000)
Purchase of package design ............ (82,000) (109,000) (131,000)
-------------- -------------- --------------
Net cash used in investing activities .... (15,576,000) (2,103,000) (29,594,000)
-------------- -------------- --------------
Cash flows from financing activities
Proceeds from issuances of stock ........ 7,452,000 1,507,000 5,294,000
Proceeds from bank line of credit ....... 11,514,000 17,496,000 41,791,000
Payment on bank line of credit ......... (12,109,000) (16,208,000) (43,079,000)
Proceeds from notes payable ............ 11,000,000 -- 21,345,000
Payments of notes payable ............ (800,000) (1,600,000) (3,385,000)
Acquisition finance costs ............ (1,036,000) -- (1,514,000)
-------------- -------------- --------------
Net cash provided by financing
activities ........................... 16,021,000 1,195,000 20,452,000
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents ........................ 883,000 (290,000) 1,403,000
Cash and cash equivalents, begin-
ning of period .......................... 87,000 970,000 680,000
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 970,000 $ 680,000 $ 2,083,000
============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------------
1996 1997
---------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ..................... $ (1,612,000) $ (716,000)
Adjustments to reconcile net
income loss to net cash pro-
vided by operating activities:
Extraordinary expense ............... 1,007,000 --
Loss on disposal of assets ......... -- --
Bad debt expense ..................... -- --
Depreciation and other
amortization ........................ 390,000 588,000
Amortization of deferred
financing costs ..................... 61,000 132,000
Changes in operating assets and
liabilities, net of assets
acquired and liabilities
assumed:
Accounts receivable ............... 3,835,000 6,558,000
Inventories ........................ (1,445,000) (1,070,000)
Prepaid expenses and other
current assets .................. 40,000 (96,000)
Accounts payable and
accrued expenses .................. 325,000 (2,138,000)
Trade credits ..................... -- --
Other assets ........................ 80,000 35,000
Deferred taxes ..................... (736,000) (229,000)
-------------- -------------
Net cash provided by operating
activities ........................... 1,945,000 3,064,000
-------------- -------------
Cash flows from investing activities
Payment for purchase of busi-
nesses, net of cash acquired (20,823,000) (539,000)
Payment for non-compete
agreement ........................... (500,000) --
Sale of short-term investments ......... -- --
Increase in officer receivables ...... (42,000) (98,000)
Purchase of product rights ............ -- --
Purchase of furniture, fixtures and
equipment ........................... (40,000) (103,000)
Purchase of package design ............ -- (108,000)
-------------- -------------
Net cash used in investing activities .... (21,405,000) (848,000)
-------------- -------------
Cash flows from financing activities
Proceeds from issuances of stock ........ 5,189,000 2,453,000
Proceeds from bank line of credit ....... 7,436,000 --
Payment on bank line of credit ......... (7,782,000) --
Proceeds from notes payable ............ 16,783,000 --
Payments of notes payable ............ (703,000) (1,920,000)
Acquisition finance costs ............ (1,399,000) --
-------------- -------------
Net cash provided by financing
activities ........................... 19,524,000 533,000
-------------- -------------
Net increase (decrease) in cash and
cash equivalents ........................ 64,000 2,749,000
Cash and cash equivalents, begin-
ning of period........................... 680,000 2,083,000
-------------- -------------
Cash and cash equivalents, end of period $ 744,000 $ 4,832,000
============== =============
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-6
<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, manufac turer 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 outstanding stock of
Weatherly Consumer Products Group, Inc. ("Weatherly"), a lawn and garden care
company which primarily sells its products throughout North America.
On May 12, 1997, Easy Gardener acquired the Plasti-Chain product line from
Plastic Molded Concepts, Inc. ("Plastic").
Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries and the results of operations of Weatherly, Easy
Gardener, Plastic, Golden West 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.
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 Weatherly,
Easy Gardener, Plastic, Golden West, and Emerald Products, 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 cash flows to the estimated net cash flows
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 approximately six years.
Package Design Package design costs associated with Easy Gardener and
Weatherly products are being amortized over a five-year period using the
straight-line method.
F-7
<PAGE>
Product Rights Product rights are being amortized over a 15-year
estimated useful life.
Non-Compete Agreement The non-compete agreement was entered into with the
acquisition of Weatherly. The agreement is being amortized over its 20 year
term.
Revenue Recognition
Sales are recorded as products are shipped to customers.
Net Income Per Share
Net income per common share has been computed following Account ing
Principles Board Opinion No. 15 (APB No. 15). Net income per share for 1995
and 1996 has been computed by dividing the net income by the weighted average
number of common shares outstanding. For 1997, common stock equivalents such
as common stock options and warrants were included in the computation of
average shares outstanding because their inclusion was dilutive. 1997 earnings
per share was calculated using the modified treasury stock method (Note 14).
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 1996 financial statement amounts have been reclassified to
conform to the 1997 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 $1,236,000, $1,823,000
and $2,945,000 during the years ended June 30, 1995, 1996 and 1997,
respectively, and $216,000 and $519,000 for the three months ended September
30, 1996 and 1997, respectively (unaudited).
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.
Stock Based Compensation
Effective July 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under this standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. The fair value method is required for all stock based
compensation issued to non-employees. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Companies are permitted to continue to account for employee
F-8
<PAGE>
stock-based transactions under Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees," but are required to disclose
pro forma net income and earnings per share as if the fair value method had
been adopted. The Company has elected to continue to account for stock-based
compensation under APB No. 25 (see Note 9).
New Accounting Pronouncements
On March 3, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings per share. This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with APB
No. 15, Earnings per Share. SFAS No. 128 provides for the calculation of basic
and diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity. SFAS No. 128 is effective for periods
ending after December 15, 1997. Early application is not allowed and
restatement of prior earnings will be required.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
(SFAS 130), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Management does not believe that the Company's current
financial statement disclosures will need to be modified based upon current
operations. Results of operations and financial position, however, will be
unaffected by future implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information,
(SFAS 131) which supersedes SFAS No. 14., Financial reporting for Segments of
a Business Enterprises. SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for period beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. The Company believes it operates under one business segment and has
already substantially complied with the required financial statement
disclosures. Results of operations and financial position, however, will be
unaffected by implementation of this standard.
Financial Instruments
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 and long-term borrowings at market rate interest.
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.
Basis of Presentation
The accompanying balance sheet as of September 30, 1997 and the
statements of operations and cash flows for each of the three months ended
September 30, 1996 and 1997 have not been audited. However, in the opinion of
management, they include all adjustments necessary for a fair presentation of
the financial position and the results of operations for the periods
presented. The results of operations for the three months ended September 30,
1997 are not necessarily indicative of results to be expected for any future
period.
F-9
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is Unaudited)
1. Business Acquisitions
On May 12, 1997, Easy Gardener acquired from Plastic substantially all of
the assets, including product rights and all other intangible assets, of
Plastic used in connection with Plastic's home lawn and garden care
distribution business for approximately $4,300,000.
On August 9, 1996, Easy Gardener acquired all of the outstanding stock of
Weatherly, a lawn and garden care company, for 1,000,000 shares of the
Company's common stock (valued at $3 per share) and $22,937,000, 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 (approximately $2.5 million). The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of Weatherly have been included in the consolidated statement of
income since August 9, 1996. The Company operates the acquired company 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 (See Note 6).
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 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, 1997, the
entire $2,200,000 has been added to the excess of cost over net assets
acquired of Easy Gardener based upon operating results obtained through June
30, 1997 and forecasted results for fiscal year 1998. As of June 30, 1997,
approximately $1,467,000 is payable for this additional purchase price.
F-10
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
1. Business Acquisitions -- (Continued)
The following unaudited pro forma summary combines the consolidated
results of operations of the Company, Weatherly and Easy Gardener as if the
acquisitions had occurred at the beginning of the year of acquisition and the
beginning of the prior year. Accordingly, Easy Gardener is reflected as if the
acquisition occurred on July 1, 1994 and Weatherly as if the acquisition
occurred July 1, 1995. The proforma information gives effect to certain
adjustments, including the amortization of excess of cost over net assets
acquired, the elimination of certain expenses incurred by Weatherly related to
its acquisition and additional 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, Weatherly 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 and
Plastic acquisitions have not been reflected since their prior revenue was not
material to the Company's operations.
<TABLE>
<CAPTION>
Three months ended
Years ended June 30, September 30,
------------------------------------------------ -------------------
1995 1996 1997 1997
-------------- -------------- -------------- -------------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales .............................. $ 21,349,000 $ 46,102,000 $ 52,788,000 $ 6,265,000
============= ============= ============= ============
Net income (loss) before extraordinary
expense and income taxes ............... $ 1,420,000 $ 2,369,000 $ 6,540,000 $ (1,288,000)
============= ============= ============= ============
Net income (loss) before extraordinary
expense ................................. $ 1,382,000 $ 3,462,000 $ 3,648,000 $ (1,008,000)
============= ============= ============= ============
Net income (loss) ........................ $ 1,382,000 $ 1,542,000 $ 2,121,000 $ (2,606,000)
============= ============= ============= ============
Net income (loss) per common share
before extraordinary expenses ......... $ .16 $ .25 $ .22 $ (.08)
============= ============= ============= ============
Net income (loss) per common share ...... $ .16 $ .11 $ .14 $ (.19)
============= ============= ============= ============
</TABLE>
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 subsequently
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-11
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
3. Inventories
Inventories consist of:
June 30, September 30,
---------------------------- --------------
1996 1997 1997
------------ ------------- --------------
(unaudited)
Raw materials ...... $ 82,000 $ 578,000 $ 202,000
Finished goods ...... 3,310,000 4,676,000 6,122,000
----------- ------------ -----------
3,392,000 $ 5,254,000 $6,324,000
=========== ============ ===========
4. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of:
<TABLE>
<CAPTION>
June 30, September 30,
---------------------------- --------------
1996 1997 1997
------------ ------------- --------------
(unaudited)
<S> <C> <C> <C>
Leasehold improvements .................. $ 74,000 $ 397,000 $ 397,000
Furniture, fixtures and equipment ...... 1,575,000 2,761,000 2,852,000
----------- ------------ -----------
1,649,000 3,158,000 3,249,000
Less accumulated depreciation ......... 433,000 843,000 995,000
----------- ------------ -----------
1,216,000 $ 2,315,000 $2,254,000
=========== ============ ===========
</TABLE>
5. Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired consists of the following:
<TABLE>
<CAPTION>
June 30, September 30,
------------------------------ --------------
1996 1997 1997
------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Weatherly Consumer Products Group, Inc. ...... $ -- $ 23,046,000 $23,046,000
Easy Gardener, Inc. ........................... 14,172,000 15,639,000 15,639,000
Plastic Molded Concepts, Inc. ............... -- 2,760,000 2,797,000
Golden West Chemical Distributions, Inc. ...... 2,098,000 2,098,000 2,098,000
Emerald Products, LLC ........................ 778,000 870,000 884,000
------------ ------------- ------------
17,048,000 44,413,000 44,464,000
Less accumulated amortization ............... 1,264,000 2,579,000 2,973,000
------------ ------------- ------------
15,784,000 $ 41,834,000 $41,491,000
============ ============= ============
</TABLE>
F-12
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
6. Notes Payable and Line of Credit Notes payable consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
---------------------------- --------------
1996 1997 1997
------------ ------------- --------------
(unaudited)
<S> <C> <C> <C>
$23,000,000 note payable, interest due monthly at prime (8.5% at
June 30, 1997) plus 1.25% or LIBOR (5.72% at June 30, 1997) plus
3.50%, quarterly principal payments ranging from $570,000 to
$1,350,000 beginning September 30, 1996 through June 30, 2002,
collateralized by Easy Gardener's assets and guaranteed by
the Company. ................................................... $ -- $20,510,000 $18,590,000
$2,250,000 note payable, interest due monthly at prime (8.5% at
June 30, 1997) plus 6.0%, quarterly principal payments of
$140,625 beginning September 30, 1998 through June 30, 2002,
collateralized by Easy Gardener's assets and guaranteed by the
Company. ......................................................... -- 2,250,000 2,250,000
$3,800,000 note payable, interest only due monthly at 12% with the
full principal due November 1997. .............................. -- 3,800,000 3,800,000
$8,000,000 note payable, interest at 12.25%, monthly principal pay-
ments 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. This note was refinanced during
1997. ............................................................ 5,600,000 -- --
$3,000,000 note payable, interest at 12%, equal monthly principal
payments of $125,000, plus interest, commencing the earlier of the
repayment of the $8,000,000 note payable or January 31, 2000,
collateralized by assets of Easy Gardener and a guaranty of
the Company. This note was refinanced during 1997. ............... 3,000,000 -- --
----------- ------------ ------------
8,600,000 26,560,000 24,640,000
Less current portion ............................................. 2,362,000 8,990,000 7,640,000
----------- ------------ ------------
$6,238,000 $17,570,000 $17,000,000
=========== ============ ============
</TABLE>
At June 30 and September 30, 1997, the Company's financing arrangements
include a $13,000,000 revolving credit facility expiring June 2002, bearing
interest at the lower of prime or LIBOR rates plus an additional marginal
amount; collateralized by Easy Gardener's assets and guaranteed by the
Company. The credit facility's availability increases to $16,000,000 for the
months of February through May.
As of June 30 and September 30, 1997, no amounts were outstanding on the
credit line. The credit agreement contains various restrictions which require,
among other things, maintenance of certain financial ratios and an annual zero
balance for ten consecutive days during August. At June 30, 1997, the Company
was in compliance with all such covenants. If the revolving credit facility is
terminated prior to June 2002, the Company will be subject to certain
prepayment penalties.
At June 30, 1996, the Company's had a $6,000,000 revolving credit
facility 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
F-13
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
6. Notes Payable and Line of Credit -- (Continued)
was $1,288,000 outstanding on the credit line which was refinanced during
August 1996 utilizing the $13,000,000 revolving credit facility noted above.
The $3 million note payable also required the Company to pay additional
interest (defined as a success fee) when the loan was 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
13).
The $8 million note payable was subject to certain mandatory prepay ments
of "excess cash flow" of Easy Gardener and certain net proceeds of asset
sales, condemnation awards and insurance recoveries. As of June 30, 1996,
$762,000 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 13).
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 13).
Future minimum principal payments are as follows:
Year ending June 30, Amount
-------------------- -------------
1998 $ 8,990,000
1999 4,402,000
2000 4,403,000
2001 4,402,000
2002 4,363,000
-------------
$ 26,560,000
=============
7. Officer Receivables
Officer receivables represents notes which bear interest at 7% and
require interest only payments on an annual basis. The notes are due June
2002.
8. Commitments
Employment Agreements
During 1996 and 1997, the Company entered into new employment agreements
with three of its officers. 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, $162,000 and $101,000. The employment agreements also provide for
certain lump sum payments in the event of a change in control equal to
approximately $5 million. An agreement with an officer of Easy Gardener
provides for a base aggregate annual salary of approximately $200,000 in 1998.
In addition, the agreements provide for incentive and additional compensation
under certain circumstances.
Operating Leases
The Company leases office and warehouse space under operating leases
which expire in various years through 2001. The Company also leases certain
office equipment and automobiles under operating leases expiring in 1998
through 2002. The future minimum lease payments under these non-cancelable
operating leases are as follows:
F-14
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
8. Commitments -- (Continued)
Year ending June 30, Amount
-------------------- ------------
1998 $ 729,000
1999 591,000
2000 410,000
2001 176,000
2002 1,000
------------
$ 1,907,000
============
Rent expense was approximately $303,000, $336,000 and $680,000 for the
years ended June 30, 1995, 1996 and 1997, respectively, and $152,000 and
$187,000 for the three months ended September 30, 1996 and 1997 respectively.
Pension Plan
Easy Gardener has established an employee defined contribution pension
plan (the Plan). Employees of the Company, Weatherly, 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 1995, 1996 and 1997 was approximately $64,000, $180,000 and
$199,000. Pension expense associated with the Plan for the three months ended
September 30, 1996 and 1997 was $17,000 and $38,000.
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, 1995, 1996 and 1997 was $64,000, $104,000 and
$304,000. Royalty expense during the three months ended September 30, 1996 and
1997 was $24,000 and $49,000.
9. Stockholders' 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 stockholder 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 44,000 shares of common stock and a class B warrant to purchase
44,000 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.
F-15
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
(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. Non-qualified
options may be 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. During 1996 and 1997, 10,000 options were
granted each year. The 1995 Plan is administered by a committee of the Board
of Directors and the Non-Employee Director Plan is a formula plan.
During May 1997, the Board of Directors approved the 1997 Stock Option
Plan. The plan reserves 1,500,000 shares of common stock.
The 1997 plan is subject to shareholder approval. No options have been
granted as of June 30, 1997.
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 not exceed $100,000. Non-qualified 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.
F-16
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
The following is a summary of activity relating to stock options.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Option Available Remaining
Price Per Out- Exer- for Contractual
Share standing cisable Grant Life
-------------- ---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
1991 Plan
June 30, 1995 ............ $ 1.71(1) 688,000 588,000 12,000 5 years
Became exercisable ...... -- 100,000 --
---------- ----------- --------- ----------- -------------
June 30, 1996 ............ $ 1.71(1) 688,000 688,000 12,000 4 years
Expired in 1997 ......... $ 1.69 (26,000) (26,000) 26,000
---------- ----------- --------- ----------- -------------
June 30, 1997 ............ $ 1.71(1) 662,000 662,000 38,000 3 years
========== =========== ========= =========== =============
1995 Plan
June 30, 1995 ............ $ 2.28 400,000 -- 1,100,000 5 years
Granted during 1996 ...... 2.25 310,000(3) 10,000 (310,000)
Became exercisable ...... -- 400,000 --
---------- ----------- --------- ----------- -------------
June 30, 1996 ............ $ 2.26 710,000 410,000 790,000 4.5 years
Granted during 1997 ...... 2.06(4) 675,000 675,000 (675,000)
Became exercisable ...... 2.28 -- 75,000 --
---------- ----------- --------- ----------- -------------
June 30, 1997 ............ $ 2.10(4) 1,385,000 1,160,000 115,000(5) 4 years
========== =========== ========= =========== =============
Non-Plan Options
June 30, 1995 ............ $ 1.85 745,000(2) 645,000 -- 4 years
Granted during 1996 ...... 2.25 315,000(3) -- --
---------- ----------- --------- ----------- -------------
June 30, 1996 ............ $ 1.83(1) 1,060,000 645,000 -- 3.5 years
Became exercisable ...... 2.25 -- 125,000 --
Granted during 1997 ...... 1.91 1,225,000 1,225,000 --
---------- ----------- --------- ----------- -------------
June 30, 1997 ............ $ 1.84(4) 2,285,000 1,995,000 -- 4 years
========== =========== ========= =========== =============
</TABLE>
- ------------
(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.
F-17
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
(3) Options vest over four years with the exception of 10,000 immediately
vesting 1995 Plan options.
(4) In December 1996, 1,490,000 options granted subsequent to June 1995 were
repriced to $2.06 per share.
(5) During the period July 1, 1997 to September 30, 1997, the Company granted
options to acquire 98,000 shares of common stock under the 1995 Plan.
In addition to certain stock options and warrants granted to employees,
the Company also issued a total of 925,000 options and warrants to various
consultants and a financial institution relating to various consulting
services, the acquisitions of Weatherly and PlastiChain, and the new bank
agreement entered into during August 1996. The fair value of such options and
warrants was estimated at approximately $1,079,000. The fair value of such
options and warrants has been expensed except for the fair value related to
acquisitions and the bank financing for which these amounts are being
amortized over the life of the bank financing agreement and the excess of cost
of net assets acquired.
(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
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. During 1997, one UPO and the related
warrants were exercised by the outside consultant. Proceeds to the Company
were approximately $175,000.
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. During 1997, 5 UPOs
were terminated in a cashless exercise and approximately 60,000 shares of
common stock was issued.
The total shares of common stock issuable upon exercise of the UPOs,
including the underlying warrants, would be approximately 3,500,000 and
3,000,000 shares at June 30, 1996 and 1997.
F-18
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
(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.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Warrant Remaining
Price Per Out- Exer- Contractual
Share standing(1) cisable Life
----------- ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
July 1, 1994 .................................... $ 1.89 1,729,000 1,729,000 3.5 years
Warrants issued in connection with private placement 2.28 3,520,000 3,520,000
Warrants issued with convertible debenture ...... 2.28 914,000 914,000
Warrants issued ................................. 2.75 100,000 100,000
Warrants exercised .............................. 1.85 (30,000) (30,000)
------- ------------- -------------
June 30, 1995 .................................... 2.12 6,233,000 6,233,000 4.5 years
------- ------------- ------------- -----------
Increase for antidilution ........................ 2.28 153,000 153,000
Warrants exercised .............................. 2.24 (770,000) (770,000)
------- ------------- -------------
June 30, 1996 .................................... 2.14 5,616,000 5,616,000 3.5 years
Warrants issued ................................. 2.45 525,000 525,000
Warrants exercised .............................. 2.15 (2,380,000) (2,380,000)
Expired .......................................... 6.00 (52,000) (52,000)
------- ------------- -------------
June 30, 1997 .................................... $ 2.18 3,709,000(2) 3,709,000(2) 3 years
======= ============= ============= ===========
</TABLE>
- ------------
(1) The warrants contain anti-dilution provisions which could effect the
number of shares of common issuable stock upon the exercise of the
warrants as well as the per share warrant prices. Additionally, these
warrants contain certain redemption provisions.
(2) During the period July 1, to September 30, 1997, 1,068,000 warrants were
exercised.
(f) Common Stock Reserved
At June 30, 1997, approximately 12,700,000 shares of common stock have
been reserved for issuance upon the exercise of warrants, options and UPOs.
(g) Stock Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for the plan. Under APB
Opinion No. 25, because the exercise price of the Company stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires
the Company to provide pro forma information regarding net loss as if
compensation costs for the Company's stock options and warrants had been
determined in accordance with the fair value based method prescribed in FASB
Statement No. 123. The Company estimates the fair value of each stock option
and warrant at the grant date by using a modified Black-Scholes pricing model
with the following weighted-average assumptions used for grants in 1996 and
1997, respectively: no dividend yield for any year; expected volatility of
approximately 30% in both years; risk-free interest rates of 6.65% and 6.6%;
and expected lives of approximately three to five years.
F-19
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
Under the accounting provisions of FASB Statement No. 123, the Company
net income and net income per common share would have been decreased to the
pro forma amounts indicated below:
Years ended June 30,
----------------------------
1996 1997
------------- ------------
Net Income
As reported ............... $ 2,524,000 $ 3,183,000
Pro forma .................. 2,392,000 1,617,000
Per share as reported ...... 0.25 0.20
Pro forma .................. 0.23 0.12
============ ============
The above pro forma information includes only the effects of 1996 and
1997 grants. Because options potentially vest over several years and
additional awards are made each year, the results shown above may not be
representative of the effects on net earnings in future years.
10. 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) consist principally of the following:
<TABLE>
<CAPTION>
June 30, September 30,
--------------------------------- --------------
1996 1997 1997
--------------- --------------- --------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards ........................... $ 1,384,000 $ 555,000 $ 945,000
Accounts receivable allowance and other ..................... 97,000 58,000 47,000
----------- ----------- ----------
Total deferred tax asset .................................... 1,481,000 613,000 992,000
Less valuation allowance .................................... (148,000) (165,000) (265,000)
----------- ----------- ----------
Net deferred tax asset ....................................... $ 1,333,000 $ 448,000 $ 727,000
=========== =========== ==========
Deferred tax liability
Depreciation and amortization in excess of book amount ...... $ (328,000) $ (547,000) $ (597,000)
=========== =========== ==========
</TABLE>
At June 30, 1997, the Company had approximately $1,025,000 of net
operating loss (NOL) carryforwards available to reduce future Federal taxable
income. These losses are available through 2011. 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 $2,217,000
at June 30, 1997 and expires through 2001. 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. Because of the seasonal nature of the Company's
operations, the different reporting periods for book and tax purposes may
affect the amount of taxes that will ultimately be payable or deferred.
At June 30, 1996, June 30, 1997 and September 30, 1997, the Company
established a $148,000, $165,000 and $265,000 valuation allowance for the
benefits pertaining to California NOLs which are not estimated to be
realizable prior to their expiration. The Company believes that it is more
likely than not that the remaining deferred tax assets will be realized
through future taxable earnings or alternative tax strategies.
F-20
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
10. Income Taxes -- (Continued) The income tax (provision) benefit consists
of:
June 30,
----------------------------------------------
1995 1996 1997
------------ ------------- ---------------
Current
Federal ...... $ -- $ -- $ (283,000)
State ......... (38,000) (290,000) (280,000)
---------- ---------- -------------
(38,000) (290,000) (563,000)
---------- ---------- -------------
Deferred
Federal ...... -- 1,013,000 (2,129,000)
State ......... -- (8,000) (56,000)
---------- ---------- -------------
-- 1,005,000 (2,185,000)
---------- ---------- -------------
$ (38,000) $ 715,000 $ (2,748,000)
========== ========== =============
The 1997 income tax expense consists of $3,200,000 expense from
continuing operations reduced by $452,000 benefit associated with the
extraordinary expense.
The following is a reconciliation between the Statutory Federal income
tax rate and the Company's effective tax rate for continuing operations:
<TABLE>
<CAPTION>
1995 1996 1997
------------ --------- ------------
<S> <C> <C> <C>
Income tax (provision) computed at Federal Statutory rate ...... (34.0)% (34.0)% (34.0)%
State taxes, net of Federal tax benefits ........................ (2.4) (16.5) (4.6)
Nondeductible amortization and other ........................... (3.6) (4.1) (4.5)
Changes in valuation allowance on deferred tax asset ............ (37.6) 94.1 (0.2)
--------- --------- ---------
(Provision) benefit for income taxes ........................... (2.4)% 39.5% (43.3)%
========= ========= =========
</TABLE>
The income tax benefit for the three months ended September 30, 1996 and
1997 is computed based upon the Company's estimated effective tax rate for the
respective fiscal year.
11. Concentration of Credit Risk and Significant Relationships
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 years ended June 30, 1996 and 1997, sales to two Easy Gardener
customers accounted for approximately 36% (27% and 9%) and 36% (26% and 10%)
of consolidated net sales. During the three months ended September 30, 1996
and 1997, sales to two Easy Gardener customers accounted for approximately 51%
(39% and 12%) of consolidated net sales each year. Included in accounts
receivable at June 30, 1996, June 30, 1997 and September 30, 1997 is
$1,440,000, $2,320,000 and $1,470,000 due from the largest customer.
During the year ended June 30, 1995, sales to two Easy Gardener customers
accounted for approximately 24% and 9% of consolidated net sales.
Substantially all of Easy Gardener's raw material purchases for
Weedblock(R) inventory, representing approximately 66%, 50% and 22% of the
Company's consolidated raw material purchases during the years ended June 30,
1995, 1996 and 1997, are from one vendor.
F-21
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
11. Concentration of Credit Risk and Significant Relationships -- (Continued)
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, June 30, 1997 and September 30,
1997 is $139,000, $349,000 and $505,000 due to this vendor.
12. Supplemental Cash Flow Information
Cash paid for:
<TABLE>
<CAPTION>
Years ended Three months ended
June 30, September 30,
--------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash paid during the period
for:
Interest, including deferred
financing costs and
extraordinary expense ...... $ 1,528,000 $ 1,296,000 $ 5,816,000 $2,773,000 $711,000
============ ============ ============ =========== =========
Taxes ........................ $ 10,000 $ 96,000 $ 131,000 $ 3,000 $ 29,000
============ ============ ============ =========== =========
</TABLE>
Supplemental Schedule of Non-cash 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 ...... $ 28,526,000
Cash paid for assets acquired ...... (14,424,000)
Promissory notes .................. (12,783,000)
-------------
Liabilities assumed .................. $ 1,319,000
=============
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.
During 1995, deferred financing costs of approximately $400,000 was paid
for by the issuance of 6 UPOs 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.
During 1997, the Company issued warrants and options for various
consulting services which were valued at approximately $1,079,000.
13. Extraordinary Expense
As a result of the refinancing of all of the Company's outstanding debt
in August 1996 (See Note 6), the entire balance of deferred finance costs at
June 30, 1996, net of accumulated amortization, plus certain prepayment
penalties totaling approximately $455,000, was written off as an extraordinary
expense during the year ended June 30, 1997.
F-22
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for September 30, 1996 and 1997 is Unaudited)
14. Earnings per Share
Earnings per share for 1997 was computed under the guidance of APB 15
using the modified treasury stock method. The following will detail how the
1997 earning per share figures were calculated.
<TABLE>
<S> <C>
Weighted average common shares outstanding for the period ...... 13,695,000
Weighted average common share equivalents ..................... 4,213,000
-----------
17,908,000
===========
</TABLE>
Computation for Statement of Operations
Reconciliation of net income per statement of operations to amount used
in primary earnings per share computation:
<TABLE>
<S> <C>
Income before extraordinary expense, as reported .................. $ 4,190,000
Add:
Interest (expense reduction) on debt, net of income tax effect, on
application of assumed proceeds from exercise of options and
warrants in excess of 20% limitations ........................... 450,000
------------
Income before extraordinary expense .............................. 4,640,000
Extraordinary expense ............................................. (1,007,000)
------------
Net income assumed for the period in computing per share earnings as
adjusted ......................................................... $ 3,633,000
============
Income per share before extraordinary expense ..................... $ 0.26
Extraordinary expense ............................................. (0.06)
------------
Net income per share ............................................. $ 0.20
============
</TABLE>
15. Subsequent Events
Subsequent to June 30, 1997, a $350,000 liability was converted into
154,000 shares of common stock.
Subsequent to June 30, 1997, the Company granted stock options to acquire
565,000 and 98,000 shares of common stock under the 1997 and 1995 stock option
plans.
During July 1997, 453,000 warrants were exercised generating $1,033,000
in cash proceeds to the Company.
The Company is involved in a lawsuit in which it has claimed a competitor
has infringed on a product trademark. The competitor has filed a counter-claim
in September 1997 seeking unspecified damages. The Company does not believe
the outcome of this matter will have a material impact on future operations.
F-23
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders of
Weatherly Consumer Products Group, Inc.,
and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Weatherly Consumer Products Group, Inc.
(a Delaware Corporation) and Subsidiaries for the year ended September 30,
1995 and the period October 1, 1995 through August 9, 1996, the date of the
sale of the Company (Note 1). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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.
As discussed in Note 1 to the consolidated financial statements, all
outstanding capital stock of the Company was acquired by Easy Gardener
Acquisition Corp., a wholly-owned subsidiary of U.S. House & Garden Inc., on
August 9, 1996.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Weatherly Consumer Products Group, Inc. and Subsidiaries for the year
ended September 30, 1995 and the period October 1, 1995 through August 9, 1996
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
San Francisco, California,
October 20, 1997
F-24
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Consolidated Statements of Operations
For the Year Ended September 30, 1995 and the Period
October 1, 1995 through August 9, 1996 (Note 1)
<TABLE>
<CAPTION>
1995 1996
------------- ---------------
<S> <C> <C>
NET SALES (Note 7) ................................. $18,532,297 $ 18,184,995
COST OF GOODS SOLD ................................. 8,872,354 7,677,707
----------- ------------
Gross profit ................................. 9,659,943 10,507,288
----------- ------------
OPERATING EXPENSES (Note 1):
Selling and marketing ........................... 4,960,793 5,251,782
Administrative .................................... 2,552,570 2,414,193
Redemption of employment contracts ............... -- 6,000,000
----------- ------------
7,513,363 13,665,975
----------- ------------
Operating income (loss) ..................... 2,146,580 (3,158,687)
----------- ------------
OTHER EXPENSES:
Interest ....................................... 1,361,987 1,546,311
Other, net ....................................... (67,636) 8,575
----------- ------------
1,294,351 1,554,886
----------- ------------
Income (loss) before (provision) benefit for
income taxes and extraordinary item ......... 852,229 (4,713,573)
(PROVISION) BENEFIT FOR INCOME TAXES (Notes 1
and 3) ............................................. (400,033) 475,535
----------- ------------
Income (loss) before extraordinary item ...... 452,196 (4,238,038)
EXTRAORDINARY ITEM -- Write-off of deferred
financing costs and debt prepayment charges, net of
related income tax benefit of $57,815 (Note 1) ...... -- (520,334)
----------- ------------
Net income (loss) .............................. $ 452,196 $ (4,758,372)
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-25
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Year Ended September 30, 1995 and
the Period October 1, 1995 through August 9, 1996 (Note 1)
<TABLE>
<CAPTION>
Preferred Common
Stock Stock Warrants
--------------- -------------- ------------
<S> <C> <C> <C>
BALANCE,
September 30, 1994 ............... $ 9,983,662 $ (458,850) $ 350,000
Net income ..................... -- -- --
Conversion or retirement of Common
and Preferred Stock and Warrants
(Note 8) ........................ (9,983,662) 458,950 --
------------- ---------- -----------
BALANCE,
September 30, 1995 ............... -- 100 350,000
Net loss ........................ -- -- --
Accretion of warrants (Note 2) ... -- -- 810,442
------------- ---------- -----------
BALANCE,
August 9, 1996 .................. $ -- $ 100 $1,160,442
============= ========== ===========
Additional Accumulated
Paid-In-Capital Deficit Total
----------------- ----------------- ----------------
BALANCE,
September 30, 1994 ............... $ -- $ (11,809,219) $ (1,934,407)
Net income ..................... -- 452,196 452,196
Conversion or retirement of Common
and Preferred Stock and Warrants
(Note 8) ........................ 6,324,712 -- (3,200,000)
----------- ------------- ------------
BALANCE,
September 30, 1995 ............... 6,324,712 (11,357,023) (4,682,211)
Net loss ........................ -- (4,758,372) (4,758,372)
Accretion of warrants (Note 2) ... -- (810,442) --
----------- ------------- ------------
BALANCE,
August 9, 1996 .................. $6,324,712 $ (16,925,837) $ (9,440,583)
=========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
Weatherly Consumer Products Group, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended September 30, 1995
and the Period October 1, 1995 through August 9, 1996 (Note 1)
<TABLE>
<CAPTION>
1995 1996
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 452,196 $ (4,758,372)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Depreciation and amortization .................................... 1,018,594 977,986
Write-off of deferred financing costs and prepayment charges ...... -- 578,149
Reserves for certain property and other assets ..................... -- 247,661
(Gain) on disposition of assets .................................... (63,512) --
Future tax benefit ................................................ 10,828 209,902
Income tax receivable ............................................. -- (1,082,407)
Redemption of employment contracts ................................. -- 6,000,000
Changes in assets and liabilities-
Accounts receivable ................................................ 67,931 (529,880)
Inventory ......................................................... (714,412) 1,249,718
Prepaid expenses and other ....................................... 37,203 (103,273)
Accounts payable and accrued liabilities ........................... (161,761) (211,949)
------------ ------------
Net cash provided by operating activities ........................ 647,067 2,577,535
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on debt ................................................... 3,308,801 4,131,547
Payments on debt ................................................... (4,692,601) (4,978,047)
Proceeds from sale of land and building .............................. 74,492 --
------------ ------------
Net cash used in financing activities ........................... (1,309,308) (846,500)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets ............................................. (53,746) (4,348)
Capital expenditures, net .......................................... (359,134) (327,751)
------------ ------------
Net cash used in investing activities ................................. (412,880) (332,099)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................................... (1,075,121) 1,398,936
CASH AND CASH EQUIVALENTS, beginning of period ........................ 2,128,789 1,053,668
------------ ------------
CASH AND CASH EQUIVALENTS, end of period .............................. $ 1,053,668 $ 2,452,604
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest ............................................. $ 1,295,209 $ 1,039,261
============ ============
Cash paid for income taxes ....................................... $ 192,532 $ 334,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of preferred stock to long-term stockholder debt
(Note 8) ......................................................... $ 3,200,000 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
(1) Sale of the Company
Weatherly Consumer Products Group, Inc. (WCPG) and Subsidiaries (the
Company) is engaged in the manufacture and sale of fertilizer, watering,
insecticide and garden netting products.
On August 9, 1996, all outstanding capital stock of the Company was
acquired by Easy Gardener Acquisition Corp. (EGAC), a wholly-owned subsidiary
of U.S. Home & Garden Inc. for approximately $8 million dollars of net cash
consideration and approximately one million shares of U.S. Home & Garden Inc.
stock valued at $3 per share. Prior to and/or in conjunction with the sale;
o Certain of the officer and employee contracts were redeemed for
approximately $6 million. This expense and related obligation has been
included as a component of administrative expenses in the accompanying
1996 consolidated financial statements.
o The holders of the Company's warrants for Class B common shares agreed to
have their warrants redeemed for $1,160,442. Accordingly, the accretion
of the warrants was accelerated in the accompanying 1996 consolidated
financial statements to reflect the warrants at their respective
redemption price.
o Severance agreements were provided to certain Company employees.
Severance of approximately $450,000 was accrued or paid as of August 9,
1996 and is included in selling and marketing (approximately $395,000)
and administrative expenses ($55,000) in the accompanying 1996
consolidated financial statements.
o Immediately subsequent to the sale of the Company's stock, the
preexisting debt obligations were paid off. Accordingly, the accretion of
the Company's bank loan with detachable warrants was accelerated,
unamortized deferred financing costs were written off and related
prepayment penalties were accrued. The expense associated with the
accretion of the bank loan with detachable warrants (approximately
$271,000) is included as a component of the 1996 interest expense,
whereas the costs associated with the prepayment of the debt obligations
(approximately $578,000) are reflected, net of the related tax benefit,
in the accompanying 1996 consolidated financial statements as an
extraordinary item.
o Immediately prior to the sale, specific assets were transferred to
certain employees and shareholders. The carrying amount of the net assets
transferred (approximately $248,000) is included in administrative
expenses in the accompanying 1996 consolidated financial statements.
o The selling shareholders of the Company entered into an agreement to
indemnify EGAC against any tax liabilities relating to periods prior to
the sale. If any such tax liabilities arise, EGAC would be required to
make the payments to the appropriate tax authority and, in turn, seek
reimbursement from the selling shareholders under their indemnification
agreement. The Internal Revenue Service (IRS) is currently examining
certain tax returns of the Company covering periods prior to the sale.
The Company believes that any payment it may be required to make will not
have a material adverse effect on the accompanying consolidated financial
statements.
(2) Summary of Accounting Policies
(a) Principles of Consolidation--The consolidated financial statements
include the accounts of WCPG and its subsidiaries, Weatherly Consumer
Products, Inc. and Ross Daniels, Inc. (WCP and RDI). All material
intercompany transactions have been eliminated.
(b) Translation of Foreign Currencies--Accounts of the United Kingdom
branch are stated in United States dollars. Currency gains and losses
have been reflected in the statements of operations. Translation
adjustments are not material to the consolidated financial statements
taken as a whole.
(c) Cash and Cash Equivalents--Cash and cash equivalents include operating
cash accounts and money market funds.
F-28
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(2) Summary of Accounting Policies -- (Continued)
(d) Inventories--Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
(e) Equipment and Leasehold Improvements--Equipment and leasehold
improvements are depreciated over their estimated useful lives using
the straight-line method. Major expenditures for renewals and
betterments are charged to the property accounts while repairs and
maintenance, which do not improve or extend the life of the assets, are
charged to operations.
The estimated useful lives of the various classes of assets are as
follows:
Years
--------
Machinery and equipment ...... 3 to 10
Furniture and vehicles ...... 3 to 10
Leasehold improvements ...... 3 to 18
(f) Research and Development--Costs incurred in connection with the
development of new products and changes to existing products are
charged to operations as incurred. Research and development expense for
the year ended September 30, 1995 and the period October 1, 1995
through August 9, 1996 approximated $106,000 and $113,000,
respectively.
(g) Other Assets--Patents, trademarks, product packaging costs and goodwill
are amortized over their estimated lives using the straight-line
method.
The estimated lives of these assets are summarized as follows:
Years
-------
Patents ........................... 11
Trademarks ........................ 25
Goodwill ........................ 25
Product packaging and other ...... 3 to 8
The Company capitalizes significant expenditures for product packaging
development and design work.
(h) Warrants for Common Stock--Detachable warrants to purchase 15% of
WCPG's common stock were issued to Nations Credit Commerical
Corporation (Nations) as part of the financing agreement with Nations
and were redeemed in conjunction with the sale of Company stock (Note
l). Prior to 1996, the warrants were exercisable through July 30, 2003
and subject to redemption at the option of Nations on or after July 30,
1997 at a redemption price equal to the greater of the appraised value
of the Company, liquidation value, consolidated net worth, as defined,
or a multiple of earnings, as defined.
The original value assigned to the warrants was $350,000 and included
in stockholders' equity in the accompanying consolidated financial
statements. The redemption price was estimated annually and adjustments
to accrete the warrants to the estimated redemption price were
recorded, as applicable, with a corresponding charge to retained
earnings. No accretion was recorded in fiscal 1995. In connection with
the sale of the Company, there was a charge of $810,442 to accumulated
deficit to accrete the value of the warrants to the agreed-upon
redemption price.
(i) Advertising--The Company expenses the costs of advertising as incurred.
Advertising expense for the year ended September 30, 1995 and the
period October 1, 1995 through August 9, 1996 approximated $782,000 and
$732,000, respectively.
(j) 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 amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-29
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(2) Summary of Accounting Policies -- (Continued)
(k) Reclassifications--Certain reclassifications have been made to the 1995
consolidated financial statements to conform with the 1996
presentation.
(l) New Accounting Pronouncements--In 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of (SFAS 121), effective for fiscal
years beginning after December 15, 1995. The new standard requires that
long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. The Company does not expect that the adoption of SFAS 121
will have a material impact on the consolidated financial statements.
(m) Revenue Recognition--Sales are recorded as products are shipped to
customers.
(3) Income Taxes
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS 109). Under SFAS 109, deferred tax assets or liabilities are
computed based on the difference between the financial statement basis and
income tax basis of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expenses or credits are based on the changes in the
asset or liability from period to period.
The provision (credit) for income taxes includes the following:
<TABLE>
<CAPTION>
1995 1996
------------ ---------------
<S> <C> <C>
Current payable (receivable) ..................... $ 493,801 $ (685,437)
Benefit of net operating loss carryforwards ...... (104,596) (959,709)
Deferred .......................................... 10,828 (68,291)
Change in valuation allowance ..................... -- 1,237,902
---------- -----------
400,033 (475,535)
Tax benefit of extraordinary item ............... -- (57,815)
---------- -----------
$ 400,033 $ (533,350)
========== ===========
</TABLE>
The following is a reconciliation between the statutory federal income
tax rate and the provision (benefit) for income taxes:
<TABLE>
<CAPTION>
1995 1996
-------------------------- -------------------------------
Amount Rate Amount Rate
------------- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
Computed provision (benefit) for federal income
taxes at the statutory rate ..................... $ 289,757 34.0% $ (1,602,614) (34.0%)
State and local income taxes, net of federal income
taxes .......................................... 47,432 5.6% (263,960) (5.6%)
Changes in valuation allowance .................. (104,596) (12.3%) 1,237,902 26.4%
Nondeductible amortization and other, net ...... 167,440 19.6% 153,137 3.2%
---------- --------- ------------ ---------
$ 400,033 46.9% $ (475,535) (10.0%)
========== ========= ============ =========
</TABLE>
F-30
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(3) Income Taxes -- (Continued)
At September 30, 1995 and August 9, 1996, the net future tax benefit
consists of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ---------------
<S> <C> <C>
Advertising and rebate accruals .............................. $ 81,137 $ 65,808
Warranty reserves .......................................... 24,543 16,486
Accounts receivable reserves ................................. 37,367 6,554
Inventory costs ............................................. 29,873 23,586
Other ...................................................... 36,982 63,798
Benefit of net operating loss and credit carryforwards ...... -- 1,061,670
--------- ------------
209,902 1,237,902
Valuation allowance .......................................... -- (1,237,902)
--------- ------------
$209,902 $ --
--------- ------------
</TABLE>
The valuation allowance is required due to the uncertainty of realizing
the net deferred tax assets through future operations.
As of August 9, 1996, the Company has accumulated approximately
$2,800,000 of tax net operating losses and approximately $149,000 of tax
credits, substantially all of which expire in 2011, which can be carried
forward and used to reduce future taxable income.
(4) Debt Obligations
The Company's long-term debt obligations outstanding during 1995 and 1996
principally consisted of bank loans with interest at a commercial paper rate
plus 4.5% (10.005% at August 9, 1996) and a floating rate equal to the greater
of 11% or the commercial paper rate plus 6% (11.505% at August 9, 1996), and
subordinated notes due to a shareholder with interest at the prime rate (8.25%
at August 9, 1996). All of these long-term obligations were paid in full on
August 10, 1996 in connection with the sale of the Company (Note 1).
The Company had a $20 million credit arrangement with Nations, which was
secured by substantially all the assets of the Company. The working capital
commitment of $7.5 million included within the arrangement permitted
borrowings based on a percentage of eligible receivables and inventory, as
defined. There were no borrowings outstanding on the working capital loan at
September 30, 1995 or August 9, 1996.
The terms of the Nations agreement stipulated, among others, that the
Company maintain certain financial ratios; limit capital expenditures and
retirements; limit lease and debt commitments; may not merge, consolidate,
acquire or sell operating assets; limit compensation to key employees.
The notes payable to shareholders were subordinated to all bank debt.
Accordingly, these notes stipulated that if payments of annual interest to the
shareholders would violate the terms of the Nations agreement, the interest
payments would be deferred until the next annual interest payment date.
(5) Royalty Commitments
WCP has exclusive licenses under patent applications to make, lease, or
sell certain of its products. Royalty expense under the agreements is based on
a percentage of net sales and amounted to approximately $121,000 and $150,000
for the year ended September 30, 1995 and the period October 1, 1995 through
August 9, 1996, respectively.
(6) Commitment
WCP conducts a portion of its operations in leased facilities and leases
equipment under noncancelable operating leases. The total amount charged to
rental expense was approximately $343,000 and $298,000 in 1995 and 1996,
respectively. The minimum scheduled lease payments for the noncancelable
operating leases as of August 9, 1996 are as follows:
F-31
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(6) Commitment -- (Continued)
1997 ............................... $325,000
1998 ............................... 262,000
1999 ............................... 158,000
---------
$745,000
=========
(7) Significant Customers and Concentration of Credit Risk
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.
Approximately 14% and 10% of consolidated gross sales in 1995 were with
two customers. These same two customers represented approximately 15% and 12%
of consolidated gross sales in 1996.
(8) Reorganization
In June, 1995, the Board of Directors approved an amendment of the
Certificate of Incorporation which converted all common and preferred shares
outstanding, except for the 12% Preferred "A" stock, into a new class of
common stock (Class A common stock). The 12% Preferred "A" stock, owned by one
shareholder, was converted into a $3,200,000 subordinated note. In addition,
previously accrued dividends owed by WCP to the shareholders were canceled,
preexisting stock option plans were terminated, certain stock was effectively
canceled for no consideration and consideration was provided to certain
shareholders for certain waivers and releases.
(9) Related Party Activities
During 1995 and 1996, the Company had outstanding subordinated notes and
accrued interest due to a stockholder. This related party debt was paid in
full on August 10, 1996 in connection with the sale of the Company (Notes 1
and 4).
In conjunction with the acquisition of the Company by WCPG, the prior
sole shareholder (and a current shareholder of WCPG) entered into a consulting
agreement with the Company which provided for annual consulting fees of
$125,000. This agreement was terminated January 1, 1995. Consulting fees
expensed in 1995 approximated $31,000.
In July 1993, the Company entered into a two year agreement, subject to
renewals, to sublease office space at fair market rental with its prior sole
stockholder. Rentals, as per the agreement, approximated $4,500 in 1995. The
lease agreement was amended and renewed during 1995 and provides for annual
rentals of $1 per year.
In 1993, the Company entered into a fully insured two year renewable
exclusive distributor agreement with its prior sole stockholder whereby WCP
markets and distributes lawn and garden products owned or controlled by its
prior sole stockholder. The Company distributed products under this agreement
in 1995. Commencing October 1, 1995 this agreement expired and the products
were owned and controlled by WCP.
(10) Employee Benefit Plans
(a) Health Plan--The Company has a fully insured health benefit plan which
provides for hospitalization, surgical, major medical and other
benefits for eligible employees.
(b) 401(k) Plan--The Company has a 401(k) plan for the benefit of all
employees meeting certain minimum eligibility requirements. The Company
contributed approximately $45,000 and $43,000 to this plan in matching
contributions in 1995 and 1996, respectively.
F-32
<PAGE>
U.S. HOME & GARDEN, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 9, 1996, Easy Gardener Acquisition Corporation, a wholly owned
subsidiary of U.S. Home & Garden, 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 in excess
of $2 million.
The acquisition was accounted for as a purchase, with the assets acquired
and liabilities assumed recorded at fair values. The results of Weatherly's
operations have been included in the Company's consolidated financial
statements from the date of acquisition.
The accompanying condensed pro forma consolidated statement of operations
illustrate the effect of the acquisition on the results of operations for the
year ended June 30, 1997 as if the acquisition had taken place on July 1,
1996. The operating results for Weatherly as reflected on the pro forma
statement of operations represents the period ended July 1, 1996 to August 9,
1996.
The pro forma condensed consolidated results of operations may not be
indicative of the actual result which would have been obtained if the
acquisition had occurred on July 1, 1996.
F-33
<PAGE>
U.S. HOME & GARDEN, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Weatherly
Weatherly Adjustments Pro Forma
----------- ----------------- -----------
<S> <C> <C> <C>
Net sales ........................... $ 742 $ 742
Cost of sales ........................ 544 544
-------- -------
Gross profit ........................ 198 198
Operating Expenses:
Selling and shipping ............... 825 (395) (4) 430
(248) (4)
Administrative and general ......... 6,649 (6,055) (4) 346
-------- ----------- -------
Income from operations ............... (7,276) 6,698 (578)
Interest expense, net ............... 463 (271) (4) 192
-------- ----------- -------
Income (loss) before income taxes and
extraordinary item .................. (7,739) 6,969 (770)
Income tax benefit (expense) ......... 886 (578)(5) 308
-------- ----------- -------
Income before extraordinary items ... (6,853) 6,391 (462)
Extraordinary item .................. (520) (520)
-------- ----------- -------
Net income (loss) .................. $ (7,373) $ 6,391 $ (982)
======== =========== =======
(Income) loss per common share
Income before extraordinary item .....
Extraordinary item ..................
Net Income ...........................
Weighted average shares outstanding ...
U.S. Home & Consolidated
Garden Adjustments Pro Forma
------------ ----------- --------------
Net sales ........................... 52,046 $ 52,788
Cost of sales ........................ 23,649 24,193
----------- ------------
Gross profit ........................ 28,397 28,595
Operating Expenses:
Selling and shipping ............... 11,232 11,662
Administrative and general ......... 6,513 80 (1) 6,939
----------- ----- ------------
Income from operations ............... 10,652 (80) 9,994
Interest expense, net ............... 3,262 (2) 3,454
----------- ----- ------------
Income (loss) before income taxes and
extraordinary item .................. 7,390 (80) 6,540
Income tax benefit (expense) ......... (3,200) (2,892)
----------- ----- ------------
Income before extraordinary items ... 4,190 (80) 3,648
Extraordinary item .................. (1,007) (1,527)
----------- ----- ------------
Net income (loss) .................. $ 3,183 (80) $ 2,121
=========== ===== ============
(Income) loss per common share
Income before extraordinary item ... $ 0.26 (3) $ 0.22 (3)
Extraordinary item .................. (0.06)(3) (0.08)(3)
----------- ------------
Net Income ........................... $ 0.20 (3) $ 0.14 (3)
=========== ============
Weighted average shares outstanding ... 17,908,000(3) 18,276,000 (3)
=========== ============
</TABLE>
F-34
<PAGE>
U.S. HOME & GARDEN, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE A--BASIS OF PRESENTATION
Reference is made to the introduction at page PF-1
NOTE B--PRO FORMA ADJUSTMENTS
The pro forma adjustments to the condensed consolidated statement of
operations are as follows:
(1) Amortization of excess of cost over fair value of net assets acquired over
30 years.
(2) No adjustment to interest expense since the lower interest rate offsets
the increase in principal loan balances.
(3) Weighted average shares have been increased by 368,000 shares to reflect
the exercise of approximately 2,385,000 common stock warrants and the
issuance of 1,000,000 shares of common stock to the Weatherly shareholders
as if they had occurred at the beginning of the year. Approximately 4.2
million additional shares deemed outstanding in connection with the
earnings per share calculation using the modified treasury stock method.
Interest savings of $450,000 calculated using the modified treasury stock
method for calculating earnings per share. See Note 14 of the June 30,
1997 audited consolidated financial statements.
(4) To eliminate certain nonrecurring expenses including $6,000,000 buy-out of
employment agreements, severance payments of $450,000, $248,000 salary
expense relating to distribution of assets and nonrecurring interest
expense of $271,000 associated with prior stockholders sale of the
business.
(5) To adjust tax rate to U.S. Home and Garden's statutory tax rate.
F-35
<PAGE>
===============================================================================
No dealer, salesperson or any other person has been authorized to give
any information or to make representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, any of the selling
stockholders or any of the underwriters. This Prospectus does not constitute
an offer to sell or solicitation of an offer to buy, any security other than
the securities offered by this Prospectus, or an offer to sell or a
solicitation of an offer to buy to any person in any jurisdiction in which
such offer or solicitation is not authorized, or in which the person making
the offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information in this Prospectus is correct as
of any time subsequent to the date hereof.
--------------------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ..................... 3
Risk Factors ........................... 9
Use of Proceeds ........................ 16
Dividend Policy ........................ 16
Capitalization ........................... 17
Price Range of Common Stock ............ 18
Selected Financial Data .................. 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................... 21
Business ................................. 30
Management .............................. 39
Principal and Selling Stockholders ...... 45
Certain Transactions ..................... 46
Description of Securities ............... 47
Underwriting ........................... 49
Legal Matters ........................... 51
Experts ................................. 51
Additional Information .................. 51
Index to Financial Statements ............ F-1
===============================================================================
<PAGE>
===============================================================================
6,000,000 Shares
U.S. HOME
& GARDEN INC.
Common Stock
------------
PROSPECTUS
------------
EVEREN Securities, Inc.
JOSEPHTHAL LYON & ROSS
INCORPORATED
, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
The estimated expenses payable by the Company to be incurred in
connection with the distribution of the shares of Common Stock registered
hereby (other than the underwriting discount) are as follows:
Item 13. Other Expenses of Issuance and Distribution.
SEC registration .................................... $9,932.00
NASD fee ............................................. 3,777.50
NASDAQ listing fee .................................... 7,500.00
Printing and engraving costs ........................ 185,000
Legal fees and expenses .............................. 285,000
Accounting fees and expenses ........................ 165,000
Blue Sky fees and expenses ........................... 60,000
Transfer agent and registrar fees and expenses ...... 10,000
Miscellaneous ....................................... 88,790.50
------------
Total ............................................. $ 815,000
Item 14. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities
incurred in legal proceedings involving such persons because of their being or
having been an officer or director.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may
affect a director's liability with respect to any of the following: (i)
breaches of the director's duty of loyalty to the corporation or its
stockholders; (ii) acts or omissions not made in good faith or which involve
intentional misconduct of knowing violations of law; (iii) liability for
dividends paid or stock repurchased or redeemed in violation of the Delaware
General Corporation law; or (iv) any transaction from which the director
derived an improper personal benefit. Section 102(b)(7) does not authorize any
limitation on the ability of the corporation or its stockholders to obtain
injunction relief, specific performance or other equitable relief against
directors.
Article Nine of the Company's Certificate of Incorporation and the
Company's By-laws provide that all persons who the Company is empowered to
indemnify pursuant to the provisions of Section 145 of the General Corporation
law of the State of Delaware (or any similar provision or provisions of
applicable law at the time in effect), shall be indemnified by the Company to
the full extent permitted thereby. The foregoing right of indemnification
shall not be deemed to be exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
Article Ten of the Company's Certificate of Incorporation provides that
no director of the Company shall be personally liable to the Company or its
stockholders for: (i) any monetary damages for breaches of fiduciary duty of
loyalty to the Company or its stockholders'; (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing-violation of
law; (iii) under Section 174 of the General Corporation of Law of the State of
Delaware; or (iv) for any transaction from which the director derived an
improper personal benefit.
Reference is made to the Underwriting Agreement, the proposed form of
which is filed as Exhibit 1.1 pursuant to which the Underwriters have agreed
to indemnify all directors and certain officers of the Company and certain
other persons against certain civil liabilities.
Insofar as indemnification for liabilities under the Act may be permitted
to directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
II-1
<PAGE>
Reference is made to the Underwriting Agreement, the proposed form of
which is filed as Exhibit 1.1, pursuant to which the Underwriters agree to
indemnify the directors and certain officers of the Registrant and certain
other persons against certain civil liabilities.
Item 15. Recent Sales of Unregistered Securities.
Between October 8, 1994 and June 20, 1995 the Company issued to persons
who were officers, directors and non-officer employees and to two financial
consultants stock options to purchase an aggregate of 694,500 shares of its
common stock. These options have an average exercise price of $2.06 per share.
During the fiscal year ended June 30, 1996 the Company issued to a total of 7
of its directors and employees options to purchase an aggregate of 620,000
shares of its common stock. These options have an average exercise price of
$2.25 per share. During the fiscal year ended June 30, 1997 the Company issued
to a total of five of its officers, directors or employees, and seven
consultants and/or lending institutions options or warrants to purchase an
aggregate of 2,315,000 shares of its common stock. The options and warrants
have an average exercise price of $1.96 per share. Subsequent to June 30, 1997
the Company has issued to a total of eight officers and directors and four
consultants options and warrants to purchase an aggregate of 798,000 shares of
its common stock. These options have an average exercise price of $3.13. The
foregoing issuances were made in private transactions pursuant to the
exemptions from registration under the Securities Act of 1933 provided by
Section 4(2) of said act.
Item 16. Exhibits
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C>
1.1 Form of Underwriting Agreement***
3.1 Certificate of Incorporation, as amended.*
3.2 Bylaws 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 Specimen form of Common Stock Certificate.
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).
5 Opinion of Tenzer Greenblatt LLP
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 between the Registrant and Robert Kassel++
10.2 Employment Agreement between the Registrant and 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 1997 Stock Option Plan, incorporated by reference to Exhibit A to the Company's proxy
statement dated May 27, 1997.
10.8 Employment Agreement of Richard Grandy+++
10.9 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.
10.10 February 8, 1995 modification to lease with respect to the Company's executive offices.*
10.11 May 6, 1997 modification to lease with respect to the Company's executive offices.+++
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.12 Lease with respect to Weatherly's warehouse facilities in Paris, Kentucky.+++
10.13 Form of Mergers and Acquisitions Agreement between the Company and D.H. Blair Investment
Banking Corp.**
10.14 Agreement dated as of April 16, 1996 between the Company and The Intrac Group.++
10.15 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 (the "Credit Agreement").++
10.16 First Amendment to the Credit Agreement.+++
10.17 Second Amendment to the Credit Agreement.+++
10.18 Third Amendment to the Credit Agreement.+++
10.19 Lease and lease extension agreements between Crawford-Austin Mfg. Co. and Easy Gardener.*
10.20 Warehouse lease, dated May 7, 1997, between Weatherly Consumer Products, Inc. and Sarah C.
Leer.+++
10.21 Purchase Agreement, dated as of August 9, 1996, by and among the Company, Easy Gardener,
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).
10.22 Lease Extension Agreement dated October 16, 1997 between Crawford-Austin Mfg. Co. and Easy
Gardener.
21 Subsidiaries of the Company.***
23.1 Consent of Tenzer Greenblatt LLP (included in Exhibit 5)
23.2 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included in the Registration Statement)
</TABLE>
- ------------
* 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).
*** Previously filed.
+ 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.
++ Incorporated by reference to the exhibit contained on the Company's Form
10-KSB for the fiscal year ended June 30, 1996.
+++ Incorporated by reference to the comparable exhibit filed with the
Company's Form 10-K for the fiscal year ended June 30, 1997.
(b) Financial Statement Schedule
II-5 Report of Independent Certified Public Accountant on Financial Statement
Schedule
II-6 Schedule II -- Valuation and Qualifying Accounts
Note: All other schedules have been omitted since the required information is
contained in the Consolidated Financial Statements or because such
schedules are not required.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
II-3
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment shall be deemed a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed the initial bona fide offering
thereof.
(3) To remove by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrar
pursuant to any arrangement, provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(4) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement for the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
Report of Independent Certified Public Accountants on Financial Statement
Schedule
Board of Directors
U.S. Home & Garden Inc.
and Subsidiaries
San Francisco, California
The audits referred to in our report to U.S. Home & Garden Inc., dated August
1, 1997, except for Note 15 which is as of September 15, 1997, which is
contained in the Prospectus constituting part of this Registration Statement
included the audit of the schedule listed under Item 16(b) for each of the
three years in the period ended June 30, 1997. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based upon our
audits.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
BDO Seidman, LLP
San Francisco, California
August 1, 1997
II-5
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Charged to
Beginning Costs and Writeoffs Ending
Balance Expenses of Accounts Balance
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended June 30, 1995 ...... $ 5,000 $ 3,000 $ (3,000) $ 5,000
Year ended June 30, 1996 ...... 5,000 167,000 (17,000) 155,000
Year ended June 30, 1997 ...... 155,000 323,000 (164,000) 314,000
========= ========= ========== =======
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, in the
City of San Francisco, State of California, on the 10th day of November, 1997.
U.S. HOME & GARDEN INC.
By: /s/ Robert Kassel
--------------------------
Robert Kassel, President
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert Kassel and Richard Raleigh
severally, as his true and lawful attorney-in-fact and agent, each with full
power of substitution and resubstitution for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact or agent or
substitute lawfully does or causes to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert Kassel Chairman of the Board; President, Chief November 10, 1997
----------------------- Executive Officer and Treasurer (Principal
Robert Kassel Executive and Financial Officer)
/s/ Richard Raleigh Chief Operating Officer and Director November 10, 1997
-----------------------
Richard Raleigh
/s Maureen Kassel Vice President, Secretary and Director November 10, 1997
-----------------------
Maureen Kassel
/s/ Lynda Gustafson Vice President of Finance (Principal November 10, 1997
----------------------- Accounting Officer)
Lynda Gustafson
* Director November 10, 1997
-----------------------
Fred Heiden
* Director November 10, 1997
-----------------------
Jon Schulberg
* /s/ Robert Kassel
-----------------------
By Robert Kassel
as attorney-in-fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C>
1.1 Form of Underwriting Agreement***
3.1 Certificate of Incorporation, as amended.*
3.2 Bylaws 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 Specimen form of Common Stock Certificate.
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).
5 Opinion of Tenzer Greenblatt LLP
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 between the Registrant and Robert Kassel++
10.2 Employment Agreement between the Registrant and 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 1997 Stock Option Plan, incorporated by reference to Exhibit A to the Company's proxy
statement dated May 27, 1997.
10.8 Employment Agreement of Richard Grandy+++
10.9 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.
10.10 February 8, 1995 modification to lease with respect to the Company's executive offices.*
10.11 May 6, 1997 modification to lease with respect to the Company's executive offices.+++
10.12 Lease with respect to Weatherly's warehouse facilities in Paris, Kentucky.+++
10.13 Form of Mergers and Acquisitions Agreement between the Company and D.H. Blair Investment
Banking Corp.**
10.14 Agreement dated as of April 16, 1996 between the Company and The Intrac Group.++
10.15 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 (the "Credit Agreement").++
10.16 First Amendment to the Credit Agreement.+++
10.17 Second Amendment to the Credit Agreement.+++
10.18 Third Amendment to the Credit Agreement.+++
10.19 Lease and lease extension agreements between Crawford-Austin Mfg. Co. and Easy Gardener.*
10.20 Warehouse lease, dated May 7, 1997, between Weatherly Consumer Products, Inc. and Sarah C.
Leer.+++
10.21 Purchase Agreement, dated as of August 9, 1996, by and among the Company, Easy Gardener,
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).
10.22 Lease Extension Agreement dated October 16, 1997 between Crawford-Austin Mfg. Co. and Easy
Gardener.
21 Subsidiaries of the Company.***
23.1 Consent of Tenzer Greenblatt LLP (included in Exhibit 5)
23.2 Consent of BDO Seidman LLP
24.1 Power of Attorney (included in the Registration Statement)
</TABLE>
<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).
*** Previously filed.
+ 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.
++ Incorporated by reference to the exhibit contained on the Company's Form
10-KSB for the fiscal year ended June 30, 1996.
+++ Incorporated by reference to the comparable exhibit filed with the
Company's Form 10-K for the fiscal year ended June 30, 1997.
<PAGE>
EXHIBIT 4.1
COMMON STOCK
NUMBER SHARES
US U.S. HOME & GARDEN INC.
A DELAWARE CORPORATION
CUSIP 902939 10 7
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS
CERTIFIES
THAT
is the
owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$.001 PAR VALUE PER SHARE, OF
U.S. HOME & GARDEN INC.
(the "Company"), transferable in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. The holder hereof accepts said
shares of common stock with notice of and subject to, the provisions of the
Company's Certificate of Incorporation and Bylaws and all amendments thereto.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
NORTH AMERICAN TRANSFER CO.
FREEPORT, N.Y.
TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
/s/ Maureen Kassel SEAL /s/ Robert L. Kassel
SECRETARY PRESIDENT
<PAGE>
The Company is authorized to issue more than one class of stock. A statement
of the powers, designations, preferences, and the relative, participating,
optional or other rights of each class and series of stock and the
qualifications, limitations or restrictions thereon will be provided without
charge to each stockholder upon request to the Company.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM--as tenants in common UNIF GIFT MIN ACT--..........Custodian...........
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right of survivorship under Uniform Gifts to Minors
and not as tenants in common Act........
(State)
</TABLE>
Additional abbreviation may also be used though not in the above list.
For value received hereby sell, assign and transfer unto
-------------------------
Please insert Social Security or other
identifying number of assignee, if any
|--------------------------------------|
| |
|--------------------------------------|
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the Company with full power
of substitution in the premises.
Signature:
--------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as written upon the
face of the Certificate, in every particular
without alteration or enlargement, or any
Date: change whatever.
------------------------
<PAGE>
Exhibit 5
TENZER GREENBLATT LLP
THE CHRYSLER BUILDING
405 LEXINGTON AVENUE
NEW YORK, NEW YORK 10174
(212) 885-5000
November 10, 1997
U.S. Home & Garden Inc.
655 Montgomery Street
San Francisco, California 94111
Gentlemen:
You have requested our opinion in connection with the public
offering and sale (the "Offering") pursuant to a Registration Statement (the
"Registration Statement") on Form S-1 (file no. 333-38483), of U.S. Home &
Garden Inc., a Delaware corporation (the "Company"), under the Securities Act
of 1933, as amended (the "Act"), of (i) up to 6,000,000 shares (the "Offered
Shares") of the Common Stock, $.001 par value, of the Company (the "Common
Stock") to be offered by the Company and (ii) 900,000 shares of Common Stock
of the Company to be offered by certain selling stockholders (the "Selling
Stockholders") of which 703,110 shares are outstanding (the "Issued Shares")
and 196,890 shares (the "Option Shares") are issuable upon exercise of options
or warrants (collectively, the "Options") previously granted by the Company to
certain of the Selling Stockholders.
We have examined originals, or copies certified or otherwise
identified to our satisfaction, of such documents and corporate and public
records as we deem necessary as a basis for the opinion hereinafter expressed.
With respect to such examination, we have assumed the genuineness of all
signatures appearing on all documents presented to us as originals, the
conformity to the originals of all documents presented to us as conformed or
reproduced copies and the enforceability of all agreements and similar
documents presented to us. Where factual matters relevant to such opinion were
not independently established, we have relied upon certificates of appropriate
state and local officials, and upon certificates of executive officers and
responsible employees and agents of the Company.
Based upon and subject to the foregoing, it is our opinion
that:
1. The Offered Shares have been duly and validly authorized
and when sold, paid for and issued as contemplated by the Registration
Statement, will be duly and validly issued and fully paid and nonassessable.
2. The Issued Shares have been duly and validly issued and
are fully paid and nonassessable.
3. The Option Shares have been duly and validly authorized
and when sold, paid for and issued upon exercise of the Options in accordance
with the terms of the Options, will be duly and validly issued and fully paid
and nonassessable.
Please be advised that certain partners of this firm are the
beneficial owners of shares of Common Stock and options and warrants to
purchase shares of Common Stock.
We hereby consent to the use of this opinion as Exhibit 5 to
the Registration Statement, and to the use of our name as your counsel in
connection with the Registration Statement and in the Prospectus forming a
part thereof. In giving this consent, we do not thereby concede that we come
within the categories of persons whose consent is required by the Act or the
General Rules and Regulations promulgated thereunder.
Very truly yours,
/s/ TENZER GREENBLATT LLP
------------------------------
TENZER GREENBLATT LLP
<PAGE>
LEASE EXTENSION AGREEMENT
THIS LEASE EXTENSION AGREEMENT is made and entered into by
and between Crawford-Austin Mfg. Co., as Lessor, and Easy Gardener Acquisition
Corp, as Lessee, upon the following terms, conditions, considerations and
agreements.
WHEREAS by that one certain Lease Agreement (the "Lease") dated 8-1-89
executed by Lessor and Lessee, Lessor leased unto Lessee the "Leased Premises"
as described therein and being described herein as follows:
3016 Franklin Ave
Waco, Texas 76710
WHEREAS Lessor and Lessee desire to extend the Lease in accordance with
the terms thereof;
NOW THEREFORE, for and in consideration of the foregoing, and the
agreements of the parties hereafter set forth, it is agreed as follows:
1. LEASE EXTENSION. The Lease is hereby extended and renewed for a
term of Thirty-nine (39) months, ("Extended Term") with the extended term
beginning on the 1st day of November 1, 1997 and ending on the 28th day of
February, 2001.
2. RENT. The monthly base rental for the Extended Term shall be the
sum of $18,543.96 beginning February 1, 1998 thru February 28, 2001.
Rent will be abated for these periods:
November 1997 $18543.96
December 1997 $18543.96
January 1997 $12912.08 (total rent due in
January is $5631.88)
3. OTHER TERMS. All of the terms, provisions, covenants, and
agreements contained in the Lease, except as may be specifically modified
herein, shall be fully applicable throughout the Extended Term.
4. BINDING EFFECT. The execution hereof and the resulting extension
and/or modification of the Lease, shall not in any way relieve or diminish the
obligations, responsibilities or liability of any Lessee or any guarantor of
any Lessee under the Lease, and it is agreed that all such obligations,
responsibilities and liability, and security therefor, shall continue
throughout the Extended Term. This Agreement shall be binding upon the parties
hereto and their respective heirs, executors, successors and assigns.
5. CHANGES OR ADDITIONS.
1. Monthly rental rate will change if taxes and insurance
increase. Lessor will provide tax receipts and/or copies of
insurance statements should either of these increase.
2. New total lease space size is 206,044 sq. ft. Please see
attached Exhibit "A" site plan.
EXECUTED this 16th day of October, 1997.
Crawford-Austin Mfg. Co. Easy Gardener Acquisition Corp.
/s/ Gordon D. Harriman, III /s/ Sheila B. Jones
- ------------------------------- --------------------------------
Gordon D. Harriman, III, Pres. "Lessee"
"Leessor" Sheila B. Jones, VP Operations
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
U.S. Home & Garden Inc.
San Francisco, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated August 1, 1997, except
for Note 15 which is as of September 15, 1997, relating to the consolidated
financial statements of U.S. Home & Garden Inc. and of our report dated
October 20, 1997, relating to the consolidated financial statements of
Weatherly Consumer Products Group, Inc., both of which are contained in that
Prospectus, and, our report dated August 1, 1997 relating to the Schedule of
U.S. Home & Garden Inc. which is contained in Part II of the Registration
Statement.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
San Francisco, California
November 10, 1997
