<PAGE>
Filed pursuant to Rule 424b
Registration No. 333-38483
4,500,000 Shares
[LOGO]
Common Stock
---------------------
Of the 4,500,000 shares of common stock, par value $.001 per share (the
"Common Stock"), of U.S. Home & Garden Inc. (the "Company") offered hereby,
4,290,000 shares are being sold by the Company and 210,000 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 December 9, 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>
<CAPTION>
Underwriting Proceeds to Proceeds to the
Price to Discounts and the Selling
the Public Commissions(1) Company(2) Stockholders
<S> <C> <C> <C> <C>
Per Share ...... $ 4.25 $ .30 $ 3.95 $ 3.95
Total(3) ...... $19,125,000 $1,350,000 $16,945,500 $829,500
</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 $950,000.
(3) The Company and certain of the Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 491,110 and 183,890 shares
of Common Stock, respectively, 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, Proceeds to the Company
and Proceeds to the Selling Stockholders will be $21,993,750, $1,552,500,
$18,885,384.50, and $1,555,865.50, 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 December 15, 1997.
EVEREN Securities, Inc. JOSEPHTHAL & CO. INC.
The date of this Prospectus is December 10, 1997
<PAGE>
U. S. H o m e & G a r d e n I n c.
- --------------------------------------------------------------------------------
[Photos to be provided]
SOME OF THE COMPANY'S ACCOUNTS
<TABLE>
<CAPTION>
Home Improvement Centers Mass Merchants Co-ops
- ----------------------------------------- ----------------- -------------
<S> <C> <C> <C>
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
</TABLE>
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 491,110 and 183,890 shares of Common Stock from the Company and
certain of the Selling Stockholders, respectively. 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
<PAGE>
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
<TABLE>
<S> <C>
Common Stock offered:
By the Company .................. 4,290,000 shares
By the Selling Stockholders ...... 210,000 shares
Total ........................... 4,500,000 shares
Common Stock to be
outstanding after the
offering(1) ..................... 19,746,980 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
$3.2 million; (iii) fund approximately $3.25
million of estimated marketing and advertising
expenses for fiscal 1998; (iv) repay approxi-
mately $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>
- -------------
(1) Based on shares of Common Stock outstanding as of December 9, 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 7,770,000 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>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ........................ $ 2,910 $ 3,063 $ 19,692 $ 27,031 $ 52,046
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 (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 com-
mon 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
<PAGE>
<CAPTION>
Three Months
Ended September 30,
------------------------
1996 1997
------------ ----------
<S> <C> <C>
Statement of Income Data:
Net sales ........................ $ 5,523 $ 7,025
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 (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 com-
mon 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>
At September 30, 1997
---------------------------
Actual As Adjusted(4)
--------- ---------------
Balance Sheet Data:
Working capital ............ $ 3,277 $13,751
Intangible assets, net ...... 43,966 43,966
Total assets ............... 65,714 74,088
Short-term debt ............ 7,640 3,240
Long-term debt ............... 17,000 17,000
Stockholders' equity ......... 34,013 46,787
- -------------
(1) Includes goodwill amortization expense of $91,000, $105,000, $475,000,
$585,000, $1.3 million, $230,000 and $394,000 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 4,290,000 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 expenses to the Company 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 66% 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."
Legal Proceeding
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." In
addition, only two of the current five members of the Company's Board of
Directors may be considered to be "independent" as they are not officers or
employees of the Company or its subsidiaries. See "Certain Transactions."
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 2,980,000 of the 15,456,980 shares of Common Stock currently
outstanding are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act of 1933, as amended (the "Act"). These
shares are currently eligible for sale under Rule 144 or pursuant to effective
registration statements. 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 465,650 shares, (355,650 if the Underwriters' over
allotment option is exercised) 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 10,500,000 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 by Management in Application of Proceeds
Of the estimated net proceeds from this offering, approximately $2.2
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."
Continued Nasdaq Listing
Although the Common Stock has been listed on the Nasdaq SmallCap Market
since March 1992, continued listing on Nasdaq requires the Company to continue
to meet certain quantitative financial criteria and adherence to certain
corporate governance provisions. The failure to meet these maintenance criteria
in the future may result in the delisting of the Common Stock from Nasdaq, and
trading, if any, in the Common Stock would thereafter be conducted in the
non-Nasdaq over-the-counter market. As a result of such delisting, an investor
could find it more difficult to dispose of or to obtain accurate quotations as
to the market value of the Common Stock.
In addition, if the Common Stock were for any reason to become delisted
from trading on Nasdaq, trading in such securities could also be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, which requires additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a penny stock (generally, any
non-Nasdaq equity security that has a market price of less than $5.00 per
share, subject to certain exceptions). Such rules require the delivery, prior
to any penny stock transaction, of a disclosure schedule explaining the penny
stock market and the risks associated therewith, and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors (generally institutions).
For these types of transactions, the broker-dealers must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. The additional burdens
imposed upon broker-dealers by such requirements may discourage broker-dealers
from effecting transactions in the Common Stock, which could severely limit the
market price and liquidity of the Common Stock and the ability of purchasers in
this offering to sell their shares in the secondary market.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by it hereby are estimated to be approximately $16.0 million
(approximately $17.9 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 31.3%
Marketing and Advertising(2) ........................... 3,250,000 20.3
Repurchase of Unit Purchase Options(3) .................. 3,221,500 20.1
Repayment of Indebtedness(4) ........................... 2,300,000 14.4
Working Capital and General Corporate Purposes(5) ...... 2,224,000 13.9
----------- -----
$15,995,500 100.0%
=========== =====
</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 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."
(3) Represents the anticipated costs associated with the repurchase of certain
unit purchase options to acquire Common Stock issued by the Company in
connection with the Company's 1993 public and August 1994 private equity
financings. The holders of the unit purchase options were affiliated with
the underwriter of the 1993 public offering, which also acted as the
placement agent of the August 1994 private offering. See "Certain
Transactions."
(4) Represents (i) the payment of $1.7 million 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."
(5) 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. There can be no assurance that the
Proposed Acquisition or any other acquisition will be consummated. See
"Business -- Recent and Proposed Acquisitions."
The Company will not receive any of the proceeds from the sale of the
shares of Common Stock offered by the Selling Stockholders.
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."
16
<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 $ 8,206
======== =========
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; 19,685,000 shares issued and out-
standing, as adjusted(1) 15 20
Additional paid-in capital ................................................ 33,585 49,576
Retained earnings ......................................................... 413 (2,809)(2)
-------- ---------
Total stockholders' equity ................................................ 34,013 46,787
-------- ---------
Total capitalization ................................................... $ 51,013 $ 63,787
======== =========
</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 7,770,000 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 $3.2
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 December 9, 1997) ...... 5.0625 4.125
On December 9, 1997, the last sale price of the Company's Common Stock as
quoted on the Nasdaq SmallCap Market was $4.50. As of December 9, 1997, the
number of stockholders of record of the Company's Common Stock was 180. 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 com-
mon 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
<PAGE>
<CAPTION>
Three Months
Ended September 30,
------------------------
1996 1997
Statement of Income Data: ------------ ----------
<S> <C> <C>
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 com-
mon 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>
<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 $13,751
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 74,088
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 46,787
</TABLE>
- ------------
(1) Includes goodwill amortization expense of $91,000, $105,000, $475,000,
$585,000, $1.3 million, $230,000 and $394,000 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 4,290,000 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.
23
<PAGE>
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 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 %
========= ========= ======== ========
<PAGE>
<CAPTION>
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>
- ------------
(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.
26
<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 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.
28
<PAGE>
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%, 66% 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, 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, 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 69% 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.
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<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. Although there can be no assurance,
the Company does not believe that the outcome of this action will have a
material adverse effect on its future operations.
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.
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<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
</TABLE>
<TABLE>
<CAPTION>
Certain Key Employees
- -------------------------
<S> <C> <C>
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 Assumed
Number of Annual Rates of
Securities Percent of Total Stock
Underlying Options Granted to Exercise 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:
<PAGE>
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. See Note 9 to Notes to
Consolidated Financial Statements.
The Company has adopted a policy not to grant in the future to its
officers, directors, employees, 5% or greater stockholders or to affiliates of
the Company, any option or warrant having an exercise price less than 85% of
the then fair market value of the Common Stock.
The Company will not issue further options, warrants or other securities
convertible into the Common Stock for a period of one year following the date
of this Prospectus, except for (i) options, warrants, or convertible securities
issued in connection with mergers or acquisitions or in connection with
financings obtained from unaffiliated third parties and (ii) options to
purchase an aggregate of 10,000 shares of Common Stock issuable in January 1998
pursuant to the Director Plan.
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 December 9, 1997, and as
adjusted to reflect the sale of the 4,290,000 and 393,890 shares of Common
Stock offered hereby by the Company and the Selling Stockholders, respectively,
assuming the Selling Stockholders' portion of the Underwriters' over-allotment
option (183,890 shares) is exercised in full, 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>
Name and Address Shares Beneficially Owned
of Beneficial Owner(1) Prior to Offering(2)
- ------------------------------------ -----------------------------------
Number Percent
------------------------ ---------
<S> <C> <C>
Maureen Kassel ..................... 910,650(3) 5.8%
Robert Kassel ..................... 4,712,095(4)(5) 26.5
Richard Raleigh .................. 743,320(6) 4.6
Fred Heiden ........................ 12,500(7) *
Jon Schulberg ..................... 12,500(8) *
Joseph Owens II .................. 1,101,896(9) 7.0
Richard Grandy ..................... 1,101,896(9) 7.0
Alan Stahler ..................... 899,368(10) 5.5
Lynda Gustafson .................. 45,000(11) *
Paul Logue ........................ 88,000(12) *
Sheila Jones ..................... 85,800(13) *
Tiger Group, Inc. .................. 25,000 *
All executive officers and directors
as a group (five persons) ......... 5,805,415(4)(5) 30.8
(6)(7)
(8)
<CAPTION>
Shares
to be
Name and Address Sold in Shares Beneficially Owned
of Beneficial Owner(1) Offering After Offering(2)
- ------------------------------------ -------------------------- ------------------------------
Number Percent
-------------------- --------
<S> <C> <C> <C>
Maureen Kassel ..................... 230,000(14) 680,650 3.4%
Robert Kassel ..................... 230,000(14)(15) 4,482,095(14) 20.3
Richard Raleigh .................. 80,000(16) 663,320 3.2
Fred Heiden ........................ -- 12,500 *
Jon Schulberg ..................... -- 12,500 *
Joseph Owens II .................. -- 1,101,896 5.5
Richard Grandy ..................... -- 1,101,896 5.5
Alan Stahler ..................... -- 899,368 4.4
Lynda Gustafson .................. 17,640(17) 27,360 *
Paul Logue ........................ 20,625(18) 67,375 *
Sheila Jones ..................... 20,625(19) 65,175 *
Tiger Group, Inc. .................. 25,000(20) -- --
All executive officers and directors
as a group (five persons) ......... 310,000(21) 5,495,415 23.8
</TABLE>
<PAGE>
- ------------
*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 December 9, 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 December 9, 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 726,320 shares of Common Stock issuable upon exercise of options
and warrants.
(7) Includes 12,500 shares of Common Stock issuable upon exercise of options.
(8) Includes 12,500 shares of Common Stock issuable upon exercise of options.
(9) Includes 162,500 shares of Common Stock issuable to each of Messrs. Grandy
and Owens upon exercise of options. The address of Mr. Owens is 8
Hillandale, 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 45,000 shares of Common Stock issuable upon exercise of options.
(12) Includes 85,000 shares of Common Stock issuable upon exercise of options.
(13) Includes 85,000 shares of Common Stock issuable upon exercise of options.
(14) Includes 110,000 shares included in the Underwriters' over-allotment
option.
(15) Reflects the sale in this offering by Maureen Kassel of 230,000 shares of
Common Stock (assuming 110,000 shares are sold upon exercise of the
Underwriters' over-allotment option) which may also be deemed to be
beneficially owned by Mr. Kassel.
(16) Includes 20,000 shares included in the Underwriters' over-allotment
option. Gives effect to the exercise by Mr. Raleigh of options to purchase
63,000 shares of Common Stock.
(17) Includes 7,640 shares included in the Underwriters' over-allotment option.
Gives effect to the exercise by Ms. Gustafson of options to purchase
17,640 shares of Common stock.
(18) Includes 10,625 shares included in the Underwriters' over-allotment
option. Gives effect to the exercise by Mr. Logue of options to purchase
20,625 shares of Common Stock.
(19) Includes 10,625 shares included in the Underwriters' over-allotment
option. Gives effect to the exercise by Ms. Jones of options to purchase
20,625 shares of Common Stock.
(20) Includes 25,000 shares included in the Underwriters' over-allotment option
which are issuable upon exercise of warrants. The address of Tiger Group
is 49 Walker Street, New York, New York 10013.
(21) Includes 130,000 shares included in the Underwriters' over-allotment
option.
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.
The Company will not issue further options, warrants or other securities
convertible into the Common Stock for a period of one year following the date
of this Prospectus, except for (i) options, warrants or convertible securities
issued in connection with mergers or acquisitions or in connection with
financings obtained from unaffiliated third parties and (ii) options to
purchase an aggregate of 10,000 shares of Common Stock issuable in January 1998
pursuant to the Director Plan. In addition, 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 for the remainder of fiscal
1999, other than options, warrants or any other securities convertible into up
to an aggregate of 750,000 shares of Common Stock.
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 June 30,
2002. Company loans to all officers of the Company are restricted to a maximum
of $850,000 by the terms of the Credit Agreement. Messrs. Kassel and Raleigh
will make annual payments of interest on the outstanding principal balance of
their loans through the maturity date. In addition, payments of principal will
be made during each of the first four years and on maturity of the loans as
follows: As to Mr. Kassel -- $50,000, $50,000, $100,000, $150,000 and the
balance of approximately $205,919 respectively. As to Mr. Raleigh, $25,000,
$25,000, $50,000, $50,000 and the balance of approximately $85,608,
respectively.
The Company has agreed to repurchase from Alan Stahler, a principal
stockholder of the Company, all of his unit purchase options for approximately
$1.69 million. See "Use of Proceeds" and "Principal and Selling Stockholders."
The above transactions and loans were approved or ratified by the
independent directors of the Company who did not have an interest in such
transactions or loans. All future transactions or loans between the Company and
its officers, directors or 5% or greater stockholders will be made or entered
into on terms no less favorable to the Company than those that can be obtained
from unaffiliated third parties. Furthermore, the Company has adopted a policy
that any future material transactions and loans between the Company and its
officers, directors and 5% or greater stockholders, and any forgiveness of any
such loans, must be approved by a majority of the Company's independent
directors who do not have an interest in the transactions and who have access,
at the Company's expense, to the Company's or independent legal counsel.
Notwithstanding the foregoing, there can be no assurance that conflicts of
interest will not arise with respect to any such transactions, or that if
conflicts do arise, they will be resolved in a manner favorable to the Company.
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 December 9, 1997, there were 15,456,980 shares of
Common Stock outstanding and held of record by 180 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.
The Company will not issue its preferred stock to officers, directors or
5% or greater stockholders, except on the same terms as it is offered to all
other existing stockholders or to new stockholders unless the issuance is
approved by a majority of the Company's independent directors who do not have
an interest in the transaction and who have access, at the Company's expense,
to the Company's or independent legal counsel.
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 & Co. Inc. are
acting as representatives (the "Representatives"), have severally agreed to
purchase an aggregate of 4,500,000 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. 2,115,000
Josephthal & Co. Inc. 2,115,000
Bluestone Capital Partners, L.P. 45,000
Fahnestock & Co. Inc. 45,000
McDonald & Company Securities, Inc. 45,000
Needham & Company, Inc. 45,000
The Ohio Company 45,000
Stifel, Nicolaus & Company, Incorporated 45,000
---------
Total 4,500,000
=========
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 $.17 per share. The Underwriters may
allow, and such dealers may reallow, discounts not to exceed $.10 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 and certain of the Selling Stockholders have granted to the
Underwriters an option to purchase up to an aggregate of 491,110 and 183,890
additional shares of Common Stock, respectively, 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. The first shares to be
issued in connection with the exercise of all or a portion of such
over-allotment option will be purchased by the Underwriters from the Selling
Stockholders. 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
49
<PAGE>
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, 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 or warrants (but would prohibit the
sale during the restricted period of any shares of Common Stock purchased upon
exercise of such options or warrants).
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) the
issuance of shares of common stock upon exercise of options, warrants or other
convertible securities outstanding on the date hereof; (ii) grants of options
pursuant to the Director Plan, as in effect on the date hereof; (iii) 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; (iv) 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 outstanding on the date hereof granted outside of the Company's Stock
Option Plans that may expire during the 180-day "lock-up" period or relating to
shares of Common Stock issuable upon exercise of options, warrants or other
convertible securities outstanding on the date hereof granted outside of the
Company's Stock Option Plans as to which the holders thereof have existing
demand registration rights; and (v) 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
50
<PAGE>
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 & Co. Inc. has performed investment banking and advisory
services for the Company since April 1997 for which it received a $100,000 cash
payment and warrants to purchase 250,000 shares of Common Stock at a price
equal to the public offering price of $4.25 per share. The warrants issued to
Josephthal & Co. Inc. (the "Josephthal Warrants") are exercisable at any time
during the four-year period commencing one year following the date of this
Prospectus (the "Warrant Exercise Term"). The Josephthal Warrants and the
shares of Common Stock issuable upon exercise of the Josephthal Warrants may
not be sold, transferred, pledged or hypothecated for a period of one year from
the date of this Prospectus. Josephthal & Co. Inc. has the right to require the
Company to register the shares of Common Stock issuable upon exercise of the
Josephthal Warrants under the Act, on one occasion, during the Warrant Exercise
Term. The Josephthal Warrants provide that the exercise price will be
proportionately adjusted in the event of a stock split, subdivision,
combination of the Common Stock or the issuance of a stock dividend on the
Common Stock.
The Company has granted EVEREN Securities, Inc. and Josephthal & Co. Inc.
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.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary trading
authority in excess of five percent of the number of shares sold by them.
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.
51
<PAGE>
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.
52
<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
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 out-
standing (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
========= ======== ============ =======
<PAGE>
<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>
Three months ended
Years ended June 30, September 30,
------------------------------------------------- --------------------------------
1995 1996 1997 1996 1997
--------------- --------------- --------------- ---------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ..................... $ 1,575,000 $ 2,524,000 $ 3,183,000 $ (1,612,000) $ (716,000)
Adjustments to reconcile net
income loss to net cash pro-
vided by operating activities:
Extraordinary expense ............... -- -- 1,007,000 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 1,990,000 390,000 588,000
Amortization of deferred
financing costs ..................... 219,000 264,000 323,000 61,000 132,000
Changes in operating assets and
liabilities, net of assets
acquired and liabilities
assumed:
Accounts receivable .................. (2,523,000) (2,622,000) (2,763,000) 3,835,000 6,558,000
Inventories ........................ 637,000 (940,000) 444,000 (1,445,000) (1,070,000)
Prepaid expenses and other
current assets ..................... (201,000) (159,000) 324,000 40,000 (96,000)
Accounts payable and
accrued expenses .................. 54,000 1,393,000 2,838,000 325,000 (2,138,000)
Trade credits ........................ 200,000 257,000 46,000 -- --
Other assets ........................ (163,000) (95,000) 262,000 80,000 35,000
Deferred taxes ..................... -- (1,005,000) 2,342,000 (736,000) (229,000)
------------ ------------ ------------ ------------- -----------
Net cash provided by operating
activities .............................. 438,000 618,000 10,545,000 1,945,000 3,064,000
------------ ------------ ------------ ------------- -----------
Cash flows from investing activities
Payment for purchase of busi-
nesses, net of cash acquired (15,387,000) (1,602,000) (28,358,000) (20,823,000) (539,000)
Payment for non-compete
agreement ........................... -- -- (500,000) (500,000) --
Sale of short-term investments ......... 501,000 -- -- -- --
Increase in officer receivables ......... (352,000) (131,000) (77,000) (42,000) (98,000)
Purchase of product rights ............ (105,000) -- -- -- --
Purchase of furniture, fixtures and
equipment ........................... (151,000) (261,000) (528,000) (40,000) (103,000)
Purchase of package design ............ (82,000) (109,000) (131,000) -- (108,000)
------------ ------------ ------------ ------------- -----------
Net cash used in investing activities . (15,576,000) (2,103,000) (29,594,000) (21,405,000) (848,000)
------------ ------------ ------------ ------------- -----------
Cash flows from financing activities .
Proceeds from issuances of stock . 7,452,000 1,507,000 5,294,000 5,189,000 2,453,000
Proceeds from bank line of credit . 11,514,000 17,496,000 41,791,000 7,436,000 --
Payment on bank line of credit ......... (12,109,000) (16,208,000) (43,079,000) (7,782,000) --
Proceeds from notes payable ............ 11,000,000 -- 21,345,000 16,783,000 --
Payments of notes payable ............... (800,000) (1,600,000) (3,385,000) (703,000) (1,920,000)
Acquisition finance costs ............... (1,036,000) -- (1,514,000) (1,399,000) --
------------ ------------ ------------ ------------- -----------
Net cash provided by financing
activities .............................. 16,021,000 1,195,000 20,452,000 19,524,000 533,000
------------ ------------ ------------ ------------- -----------
Net increase (decrease) in cash and
cash equivalents ........................ 883,000 (290,000) 1,403,000 64,000 2,749,000
Cash and cash equivalents, begin-
ning of period 87,000 970,000 680,000 680,000 2,083,000
------------ ------------ ------------ ------------- -----------
Cash and cash equivalents, end of period $ 970,000 $ 680,000 $ 2,083,000 $ 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.
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)
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 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
============ ========== ==========
<CAPTION>
Additional Accumulated
Paid-In-Capital Deficit Total
----------------- ----------------- ----------------
<S> <C> <C> <C>
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
<CAPTION>
U.S. Home & Consolidated
Garden Adjustments Pro Forma
--------------------- ------------- ----------------------
<S> <C> <C> <C>
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
===============================================================================
===============================================================================
4,500,000 Shares
U.S. HOME
& GARDEN INC.
Common Stock
-----------------------------------
PROSPECTUS
-----------------------------------
EVEREN Securities, Inc.
JOSEPHTHAL & CO. INC.
December 10, 1997
===============================================================================
