U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value and Class A Common Stock Purchase Warrants
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(Title of Class)
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Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 25, 1997 was
approximately $61,900,000.
As of September 25, 1997, 15,295,331 shares of the Registrant's Common
Stock, par value $.001 per share were outstanding.
Documents Incorporated By Reference: None
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Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report 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, seasonal and
weather fluctuations, expansion and other activities of competitors, changes in
federal or state environmental laws and the administration of such laws and the
general condition of the economy and its effect on the securities markets.
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 fabric and root feeders which are sold under recognized brand names such
as WeedBlock(R), Jobe's(R), Emerald Edge(R),Shade Fabric(R) and Ross(R). The
Company believes that it has significant market share and favorable brand-name
recognition in several of these 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, Wal-Mart,
Builder's Square and Home Base.
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 subsidiaries, 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
Report to "the Company" mean U.S. Home & Garden Inc. and its subsidiaries. The
Company's executive offices are located at 655 Montgomery Street, San Francisco,
California 94111, and its telephone number is (415)616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry has been comprised of relatively
small regional manufacturers and distributors whose products have been sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, home improvement and mass merchant retailers have replaced many of
these local garden centers as the dominant 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
Retail Accounts has shifted towards single source suppliers such as the Company
that offer broad product lines of consumer brand-name merchandise and the
service necessary to stimulate consumer demand and ensure timely and cost
effective order fulfillment.
According to the 1996-1997 National Gardening Survey conducted by the
Gallup organization, 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.
Moreover, 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. Sales growth in the lawn and garden industry is being driven in part by
the "baby boomer" consumer segment reaching such age group.
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Recent and Proposed Acquisitions.
Since August 1992, the Company has consummated the following five (5)
acquisitions of 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 $1,075,000 of promissory notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping products
including WeedBlock(R), 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 in the principal amount of $1
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 $978,000 is payable in the fiscal year ending June 30,
1999.
o Emerald Products LLC. A manufacturer of decorative landscape edging was
acquired in August 1995 for $835,000 in cash and a $100,000 promissory
note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products was acquired in August
1996 for 1,000,000 shares of Common Stock and approximately $22.9 million
in cash.
o Plasti-Chain Product Line. A product line of plastic chain links and
decorative edgings 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 letter of intent to purchase a
manufacturer and distributor of outdoor lawn and garden products for $5.25
million in cash. There can be no assurance that the acquisition will be
consummated.
Products
Landscape Fabric. The Company markets different types of landscape fabric
in varying thicknesses and strengths under the trade names WeedBlock(R),
WeedBlock 6(R), MicroPore(R), Pro WeedBlock(TM) and Weedshield(TM). Landscape
fabrics allow water, nutrients and oxygen to filter through to the soil but
prevent weed growth by blocking sunlight, preventing seeds from germinating. The
Company's primary landscape fabrics are made from non-woven fabrics which are
generally manufactured with extruded polymers, pressed or vacuum formed into
thin sheets having the feel and texture of light plastics. For the fiscal years
ended June 30, 1995, 1996 and 1997, sales of landscape fabrics represented 71%,
69% and 44%, respectively, of the Company's consolidated net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver
plant food and fertilizer directly to the root of the plant, an alternative
method of maintaining plant health to surface-delivered liquid or solid
fertilizers. 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. Some of the
Company's fertilizer spikes have the added feature of containing an insecticide
for the control of unwanted insects. For the fiscal year ended June 30, 1997,
sales of fertilizer, plant food and insecticide spikes represented approximately
24% of the Company's consolidated net sales.
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Fertilizers and Root Feeders. The Company markets fertilizers under the
Ross(R) trade name. The Ross(R) fertilizer, when applied through a Ross(R) Root
Feeder, a long steel irrigation tube with 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(R) Root Feeder may also be used without
fertilizer as a deep watering device.
Landscape Edging. The Company markets a variety of decorative landscape
edgings, which are used by consumers to define the perimeter of planting areas
under a variety of trade names including Emerald Edge(R) and Terra Cotta Tiles.
The Company recently acquired the Plasti-Chain line of products, which included
additional landscape edgings.
Shade Cloth. In June 1995, the Company commenced marketing for sale and
delivery during fiscal 1996, 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 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 by the Company for an additional two year period).
Animal Repellents. The Company markets a line of animal repellents that are
formulated to deter dogs, cats, deer and rabbits from destroying garden and
landscape environs.
Other Products. In addition to landscape fabrics; fertilizer, plant food
and insecticide spikes, root feeders, landscape edging and shade cloth, the
Company also sells complementary lawn and garden products for the home gardener.
The products include a variety of protective plant and tree covers, bird and
animal mesh blocks, 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 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 45(R) - a foliar nutrient, or plant food,
containing humic acid which promotes growth and vigor in many types of crops.
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Conversion, Manufacturing and Supply
Lawn and Garden Products
Except for the materials for WeedBlock(R), which is 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(R) from Tredegar Industries, Inc. ("Tredegar"). The Company purchases
large rolls of various types of landscape fabric from Tredegar for shipment to
its Waco, Texas facility where it converts the bulk fabric and then packages the
fabric and ships it to customers. Although the Company has purchased all of its
supply from Tredegar for in excess of 10 years and the Company 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(R) brand name would continue without restriction.
The Company manufactures and packages its Jobe's(R) 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 into shelf-ready blisterpacks. 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.
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, Energizer, Penox and Powergizer 45, 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.
Furthermore, the Company, through Western Farm, has an open purchase order
arrangement with an entity which supplies it with leonardite ore, a source of
humic acid used in its agricultural products. The Company believes that it would
have no difficulty in finding alternative processors or suppliers of leonardite
ore or other sources of humic acid should this supplier be unable to satisfy the
Company's humic acid requirements.
Customers
The Company's customers include home improvement centers, mass
merchandisers, hardware stores and lawn and garden nurseries and other retail
channels throughout the United States. The Company's three largest customers for
fiscal 1997, Home Depot, Lowes
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and K-Mart, accounted for approximately 26%, 10% and 7%, respectively, of its
net sales during such year. The Company's ten largest customers as a group
accounted for 69% and 65% of its net sales during fiscal 1996 and 1997,
respectively.
During fiscal 1995 and fiscal 1996, sales to Home Depot, Lowes and K-Mart
accounted for approximately 27%, 6% and 9%, respectively, and 27%, 9% and 7%,
respectively, of the Company's net sales. 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 sales in
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.
The national sales manager's duties include 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 favorable
relationship with the Company's largest customers in addition to managing the
overall sales operations. The Company also utilizes the services of
approximately 26 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 mass-merchandise stores, 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
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the size of its displays to the dimensions requested by such customers. The
Company's independent sales representatives periodically visit individual retail
outlets to assist Retail Accounts in achieving innovative and optimal use of the
Company's distinctive store displays.
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(R) 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(R) brand names.
The Company anticipates spending approximately $4.0 million in the fiscal
year ending June 30, 1998 on a combination of media development, print, radio
and television advertising, cooperative advertising (advertising done in
conjunction with retailers), attendance at trade shows and public relations to
promote awareness, understanding and brand identification of its lawn and garden
products and brands.
Information Systems
The Company maintains a sophisticated retail data information system which
enables it to provide timely and efficient order fulfillment to its Retail
Accounts and other customers. The Company's purchase order process can be
paperless, with most Retail Accounts placing their orders through an electronic
data interchange with the Company. In addition, with Wal-Mart, the Company's
system allows it to evaluate in-store inventory, thereby allowing the Company's
sales managers to proactively address such Retail Account's needs.
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.
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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 period from March through October (the agricultural
cultivation period).
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 high levels of inventory,
the Company has historically experienced minimal inventory obsolescence since
the high demand during this season has generally minimized the Company's levels
of obsolete inventory. Retail Accounts generally require delivery within five
business days. Orders are normally processed within 48 hours and shipped by
common carrier. The Company's on-time order fill rate is approximately 99%. The
Company is also able to meet certain just-in-time delivery needs when required.
Competition
The consumer lawn and garden care market generally is highly competitive
and somewhat fractionalized, with no single dominant competitor. The Company
competes with a combination of national and regional companies ranging from
large agri-chemical companies to garden catalog businesses and companies
specializing in the manufacture of lawn and garden care products. Several of
such companies have captured a significant share of such markets. Many of the
Company's competitors have achieved significant national, regional and local
brand name and product recognition and engage in extensive advertising and
promotional programs, both generally and in response to efforts by other
competitors to enter new markets or introduce new products. Many of these
companies have substantially greater financial, technical, marketing and other
resources than the Company. In addition, the lawn and garden care industry is
characterized by the frequent introduction of new products, accompanied by
substantial promotional campaigns.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the Solaris Group, a division of Monsanto Company, and other
lawn and garden care companies have, in the past, manufactured and marketed
landscape fabrics. Currently, few of such competitors compete with 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(R) Spike line of fertilizer and insecticide products are large
agri-chemical companies such as Solaris Group and Scotts Miracle-Gro Products,
Inc. Competition for the Company's
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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.
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 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 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 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 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.
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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 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 lease and operate
one manufacturing facility. The Company believes that all of its facilities are
in substantial compliance with all applicable material environmental laws.
Nonetheless, 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, 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
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 wastes at a particular site. 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.
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 mishandling or release of hazardous
substances owned by the Company but processed and manufactured by others on the
Company's behalf. As a result, there can be no assurance that the manufacture of
the products sold by the Company 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 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.
In connection with its acquisition of the assets of Easy Gardener Inc.
("EGI") in September 1994, Easy Gardener acquired certain trademarks and
copyrights used by EGI in connection with its business including, but not
limited to, the trademarks, WEEDBLOCK(R), EASY GARDENER(R), WEEDSHIELD(TM),
MICROPORE(R) and BIRDBLOCK(R). In connection with its acquisition of Weatherly
Consumer Products Group, Inc. in August 1996, Easy Gardener acquired certain
patents, as well as certain copyrights and trademarks used in connection with
Weatherly's business including, but not limited to, Jobe's(R), Ross(R), Green
Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(TM). Easy Gardener also acquired
certain patents and trademarks when it acquired the assets of Emerald Products,
LLC and also acquired certain trademarks in connection with its purchase of the
Plasti-Chain line of products from Plastic Molded Concepts, Inc. Although the
Company does not believe that its trademarks violate the proprietary rights of
others, there can be no assurance that the Company's marks do not and will not
violate the proprietary
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rights of others, that the Company's marks would be upheld if challenged or that
the Company would not be prevented from using its marks, any of which could have
an adverse effect upon the Company.
Although the Company believes that the products sold by it do not and will
not infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, the Company could be required to 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.
Employees
As of August 31, 1997 the Company had 123 full-time employees. Of such
employees, three are executive officers of the Company, 17 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 are covered by collective bargaining agreements. The Company
believes that it has a good relationship with its employees.
Item 2. 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.
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.
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 pursuant to a one year lease agreement that is renewable annually through
November 30, 2000. Easy Gardener's facilities contain landscape fabric
converters, packaging equipment and warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $10,000 per month in rent pursuant to a
lease that expires on June 30, 1998. 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.
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Item 3. 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 a relevant 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 on 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.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of Stockholders was held on June 27, 1997 at which time
the following directors were reappointed to serve until the Annual Meeting of
Stockholders of the Company to be held in 1998:
Votes For Votes Withheld
--------- --------------
Robert Kassel 11,869,446 79,950
Richard Raleigh 11,870,446 78,950
Maureen Kassel 11,868,496 80,900
Fred Heiden 11,828,346 121,050
Jon Schulberg 11,829,346 120,100
In addition, at the Meeting, the stockholders approved the Company's 1997
Stock Option Plan by a vote of 8,186,576 in favor, 843,077 against and 194,475
abstaining.
-13-
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded in the over-the-counter market and
been quoted on the Nasdaq SmallCap Market since March 26, 1992. The NASDAQ
symbol for the Company's Common Stock is "USHG". The following table sets forth,
for the periods indicated, the high and low bid quotations for the Common Stock,
as reported by NASDAQ. These amounts represent quotations between dealers (not
actual transactions) and do not include retail markups, markdowns or
commissions.
Year Ended June 30, 1996 Bid
-------------------------
High Low
--------- --------
First Quarter ...................... $ 3.50 $ 2.75
Second Quarter ..................... 3.1875 2.375
Third Quarter ...................... 3.00 2.125
Fourth Quarter ..................... 3.625 2.625
Year Ended June 30, 1997 Bid
-------------------------
High Low
--------- --------
First Quarter ..................... $ 3.313 $ 2.313
Second Quarter .................... 2.813 2.00
Third Quarter ..................... 2.813 2.063
Fourth Quarter .................... 2.438 2.063
As of September 25, 1997, the number of stockholders of record of the
Company's Common Stock was 190. The Company believes that, in addition, there
are in excess of 500 beneficial owners of its Common Stock whose shares are held
in "street name".
The Company has not paid any cash dividends on its common stock to date and
does not expect to declare or pay any cash or stock dividends in the foreseeable
future. Certain agreements among the Company, Easy Gardener and Easy Gardener's
primary lending institutions prohibit Easy Gardener from paying dividends
without the lenders' consent. This restriction adversely affects the Company's
ability to pay dividends.
During the quarter ended June 30, 1997, the Company issued five-year
options to purchase 50,000 shares of its common stock at $2.25 per share to an
entity for financial consultanting services. The Company also sold a total of
59,969 shares of its common stock to two individuals upon the exercise of
options previously granted to them and a total of 5,000 shares were sold for
nominal consideration to two charitable organizations. Sales of these securities
were made in private transactions pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933.
-14-
<PAGE>
Item 6. Selected Financial Data
(in thousands, except share and per share data)
The following selected financial data at and for the years ended June 30,
1993, 1994, 1995, 1996 and 1997 has been derived from the Company's audited
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 and the notes thereto appearing
elsewhere in this Report.
Statement of Income Data:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<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 .................. 1,826 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 tax (expense) benefit ............. -- -- (38) 715 (3,200)
Income (loss) before
extraordinary expense .................... (469) (5,219) 1,575 2,524 4,190
------------ ------------ ------------ ------------ ------------
Extraordinary expense, net ............... 389 -- -- -- (1,007)
------------ ------------ ------------ ------------ ------------
Net income (loss) ........................ $ (80) $ (5,219) $ 1,575 $ 2,524 $ 3,183
============ ============ ============ ============ ============
Income (loss) per share
before extraordinary expense ............. $ (.22) $ (1.31) $ .19 $ .25 $ .26
Net income (loss) per share .............. $ (.04) $ (1.31) $ .19 $ .25 $ .20
Weighted average number of
common and common
equivalent shares outstanding ............ 2,177,968 3,980,318 8,376,000 10,206,000 17,908,000(1)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) ...................... $ 607 $ (347) $ 3,326 $ 5,328 $ 2,642
Total assets ...................................... 5,977 5,654 28,140 33,584 68,125
Intangible assets, net ............................ 2,858 2,046 16,692 17,167 44,364
Short-term debt ................................... 1,134 594 2,200 3,650 8,990
Total liabilities ................................. 2,150 2,504 12,800 14,214 36,549
Stockholders' equity .............................. 3,827 3,150 15,399 19,370 31,926
</TABLE>
- --------
(1) The income per share calculations for fiscal 1997 are based upon 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 certain treasury shares of common
stock and retire outstanding indebtedness. The retirement of the outstanding
indebtedness and related reduction in interest expense is assumed to increase
net income by $450,000. See Note 14 to Notes to Financial Statements.
-15-
<PAGE>
Item 7. 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
approximately $57 million in cash, notes and equity. As a result of such
acquisitions, the Company recognized a significant amount of goodwill, which
aggregated approximately $44.4 million at June 30, 1997. The Company is
currently amortizing such goodwill, using the straight-line method, over various
time periods ranging from 20 to 30 years. See "Summary of Accounting Policies -
Intangible Assets" and Note 1 to Notes to 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 line of credit (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 $.06, from $.26 to $.20. See Notes 13 and 14 to Notes to Financial
Statements.
Although the Company's net income per common share decreased from $.25 in
fiscal 1996 to $.20 in fiscal 1997, the decrease is not reflective of the
improved operating results the Company achieved during fiscal 1997. The
reduction in earnings per share is the result of several factors, including an
extraordinary expense of approximately $1.0 million, net of tax benefits, or
$0.06 per common share recorded in fiscal 1997. In addition, 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 $0.07 during fiscal
1996 resulting from the recognition of a deferred tax asset relating to
available future net operating loss carryforwards. The net effect of the
difference in the income tax rate for 1997 compared to fiscal 1996 was a $0.25
reduction in net income per common share. Moreover, net income per common share
in fiscal 1997 was adversely affected by the requirement that the Company use
the modified treasury stock method to calculate earnings per share for fiscal
1997. The effect of using this method was to reduce net income per common share
by $.05 in the 1997 period. Moreover, if application of the modified treasure
stock method had not been required income per share before income taxes and
extraordinary expense would have been $0.54 for fiscal 1997 compared to $0.18 in
fiscal 1996.
-16-
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain selected
income data as a percentage of net sales:
Percentages of Net Sales
--------------------------------
Year Ended June 30,
--------------------------------
1995 1996 1997
----- ----- -----
Net sales ................................ 100.0% 100.0% 100.0%
Cost of sales ............................ 46.5 46.9 45.4
----- ----- -----
Gross profit ............................. 53.5 53.1 54.6
Selling and shipping expenses ............ 22.2 23.2 21.6
General and administrative expenses ...... 14.1 16.1 12.5
----- ----- -----
Income from operations ................... 17.2 13.9 20.5
Interest expense ......................... 9.2 7.4 6.4
Income tax (expense) benefit ............. (0.2) 2.7 (6.2)
Extraordinary expense, net ............... -- -- 1.9
Net income ............................... 8.0 9.3 6.1
===== ===== =====
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 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. 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. The increase in the amount of products shipped was a
consequence of the acquisition of Weatherly and an increase in sales of
pre-existing product lines, particularly landscape fabrics and landscape edging
products. Selling and shipping expenses as a percentage of net sales decreased
from 23.2% in fiscal 1996 to 21.6% in fiscal 1997. This decrease was primarily
due to the consolidation of the Company's customer services at the Waco, Texas
office and the elimination of the majority of the Weatherly sales positions in
connection with the integration of the acquisition.
General and administrative expenses. General and administrative expenses
increased $2.2 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
-17-
<PAGE>
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 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 related to the recognition of a deferred tax asset relating
to available future 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
successful integration of the Easy Gardener and Weatherly organizations 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 $.05 to $0.20 in fiscal 1997. 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 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 1996 resulting from the
recognition of a deferred tax asset relating to available net loss
carryforwards. The effective income tax rate for fiscal 1997 compared to fiscal
1996 resulted in a $0.25 reduction in net income per common share. The decrease
in net
-18-
<PAGE>
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 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 required, income per common share before income taxes and
extraordinary expenses would have been $0.54 for fiscal 1997 compared to $0.18
in fiscal 1996.
Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net sales. Net sales increased by $7.3 million, or 37.3%, 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 twelve
months of net sales of Easy Gardener products in the fiscal 1996 period compared
to ten 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 twelve months of
Easy Gardener's cost of goods sold in the 1996 period compared to ten months in
fiscal 1995. Gross profit as a percentage of net sales decreased from 54% in
fiscal 1995 to 53% in fiscal 1996. The decrease was due to a change in the
product mix sold and to higher costs, during the 1996 period, of resin and
corrugated cardboard, which are the principal materials used in the
manufacturing and packaging of Weedblock(R).
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 twelve months of Easy Gardener's selling
and shipping expenses in fiscal 1996 compared to ten months in fiscal 1995. As a
percentage of net sales, selling and shipping expenses increased to 23% for
fiscal 1996 compared to 22% for 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% in fiscal 1996 from 14% in fiscal 1995. The increase
in general and administrative expenses during fiscal 1996 was primarily a result
of the inclusion of twelve months of Easy Gardener's general and administrative
expenses in fiscal 1996 compared to ten months in fiscal 1995. The increase in
-19-
<PAGE>
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 the 1996 period of twelve months of interest on Easy
Gardener's outstanding indebtedness which was incurred in connection with the
purchase of the assets of EGI in September 1994 when compared to the inclusion
of interest expense for only ten months in the 1995 period. This increase was
partially offset by the February 1995 conversion of $2.0 million of convertible
notes into Common Stock and principal payments 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 EGI 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 comparable period in 1995
primarily due to the Company's recognition of a deferred tax asset associated
with the federal net operating loss carryforwards. See "Liquidity and Capital
Resources."
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 $.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
-20-
<PAGE>
occur during the period from March through October (the agricultural cultivation
period).
Set forth below is certain unaudited quarterly financial information:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------
(in thousands, except percentages and per share data)
September 30, December 31, March 31, June 30,
1995 1995 1996 1996
============= ============= ============ ============
<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 .............. 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 income (loss) ............. $ (835) $ (1,352) $ 2,467 $ 2,244
========== =========== ============ ============
Net income (loss) per share ... $ (0.08) $ (0.13) $ 0.16(1) $ 0.14(1)
========== =========== ============ ============
Weighted average common and
common equivalent shares
outstanding ................... 9,944 10,200 19,002(1) 19,721(1)
========== =========== ============ ============
Net sales ..................... 100% 100% 100% 100%
Cost of sales ............... 48% 48% 48% 45%
---------- ----------- ------------ ------------
Gross profit ................ 52% 52% 52% 55%
Selling, general and
administrative .............. 68% 88% 26% 32%
---------- ----------- ------------ ------------
Income (loss) from operations . (16%) (36%) 26% 27%
Investment income ............. 1% 0% 0% 0%
Interest expense .............. (14%) (17%) (4%) (6%)
---------- ----------- ------------ ------------
Income (loss) before income
taxes ....................... (29%) (53%) 22% 18%
Income taxes .................. 3% 3% 1% 4%
Extraordinary expense ......... 0% 0% 0% 0%
---------- ----------- ------------ ------------
Net income (loss) ............. (26%) (50%) 23% 22%
========== =========== ============ ============
<CAPTION>
Quarter Ended
-----------------------------------------------------------
(in thousands, except percentages and per share data)
September 30, December 31, March 31, June 30,
1996 1996 1997 1997
============= ============= ============ ============
<S> <C> <C> <C> <C>
Net sales ..................... $ 5,523 $ 7,416 $ 20,559 $ 18,549
Cost of sales ............... 2,607 3,217 9,025 8,800
---------- ----------- ------------ ------------
Gross profit ................ 2,916 4,199 11,534 9,749
Selling, general and
administrative .............. 3,264 4,048 5,539 4,894
---------- ----------- ------------ ------------
Income (loss) from operations . (348) 151 5,995 4,855
Investment income ............. 26 17 16 17
Interest expense .............. (563) (813) (993) (970)
---------- ----------- ------------ ------------
Income (loss) before income
taxes ......................... (885) (645) 5,018 3,902
Income tax benefit (expense) 280 195 (2,075) (1,600)
Extraordinary expense ......... (1,007)
---------- ----------- ------------ ------------
Net income (loss) ............. $ (1,612) $ (450) $ 2,943 $ 2,302
========== =========== ============ ============
Net income (loss) per share ... $ (0.12) $ (0.03) $ 0.14(1) $ 0.11(1)
========== =========== ============ ============
Weighted average common and
common equivalent shares
outstanding ................... 12,915 13,917 22,696(1) 22,191(1)
========== =========== ============ ============
Net sales ..................... 100% 100% 100% 100%
Cost of sales ............... 47% 43% 44% 47%
---------- ----------- ------------ ------------
Gross profit ................ 53% 57% 56% 53%
Selling, general and
administrative .............. 59% 55% 27% 26%
---------- ----------- ------------ ------------
Income (loss) from operations . (6%) 2% 29% 27%
Investment income ............. 0% 0% 0% 0%
Interest expense .............. (10%) (11%) (5%) (6%)
---------- ----------- ------------ ------------
Income (loss) before income
taxes ....................... (16%) (9%) 24% 21%
Income taxes .................. 5% 3% (10%) (9%)
Extraordinary expense ......... (18%) 0% 0% 0%
---------- ----------- ------------ ------------
Net income (loss) ............. (29%) (6%) 14% 12%
========== =========== ============ ============
</TABLE>
- ----------
(1) Calculated using the modified treasury stock method. 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
From 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 June 30, 1997, the Company had consolidated cash and short-term
investments totalling $2.1 million and working capital of $2.6 million. At June
30, 1996, the Company had consolidated cash and short-term investments totalling
$680,000 and working capital of $5.3 million. This decrease in working capital
was due primarily to the increase in notes payable relating to the Weatherly
acquisition.
-21-
<PAGE>
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.
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.
At June 30, 1997 the Company had consolidated term debt of $26.6 million
which includes debt incurred pursuant to the Refinancing and consists of three
outstanding term loans of $20.5 million, $2.3 million and $3.8 million.
In connection with the acquisition of Weatherly, Easy Gardener entered into
a new credit agreement ("Credit Agreement") with certain institutional 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 this facility from time to time is equal to the lesser of
$13 million and a borrowing base determined by reference to specified
percentages of Easy Gardener's consolidated accounts receivable and
inventory deemed to be "eligible" by the lenders. As of June 30, 1997,
based on this formula, $7.4 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 LIBOR (the London
inter-bank offered rate) 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 June 30, 1997, the effective annual rate
for outstanding revolving credit loans was 9.75%. The revolving credit
facility expires on June 30, 2002 (the "Expiration Date") and all
outstanding revolving credit loans are then due, unless such loans are
required to be repaid earlier by the terms of the Credit Agreement. In
addition, for a 10-day period in 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 revolving credit loan must be prepaid
together with a premium of from 1% to 2% of the "Average Yearly Loan
Balance" (as defined in the Credit Agreement) of the revolving credit
loans.
-22-
<PAGE>
(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"), $20.5 million of which was outstanding at
June 30, 1997, one in the principal amount of $2.3 million ("Term Loan
II"), all of which was outstanding at June 30, 1997, and one in the
principal amount of $3.8 million ("Term Loan III"), all of which was
outstanding at June 30, 1997. Term Loan I and Term Loan II mature on the
Expiration Date. Term Loan III expires 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 III is payable in full upon its expiration. 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 June 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 of interest for Term Loan III is 12% and interest is
payable monthly in arrears. 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 is 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 loans
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 loans 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
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<PAGE>
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 June 30, 1997, the Company had a net deferred tax asset of $448,000,
the majority of which relates to the tax benefit associated with the accumulated
net operating losses of approximately $1.0 million for Federal income tax
purposes which expire in 2011. For California income tax purposes, the Company
has accumulated net operating losses of approximately $2.2 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
$165,000 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 loan 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 a $3.8 million increase in the Company's term debt. The
additional term debt is payable in November 1997.
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 a calculation of basic (giving no
dilutive effect to all derivative securities) earnings per share and dilutive
(reflecting the dilutive effect of all derivative securities) earnings per
share. Accordingly, the Company plans to adopt SFAS No. 128 in its December 31,
1997 interim financial statements. The Company has not yet determined the effect
that SFAS No. 128 would have had on the earnings per share, if it had been
adopted in the first quarter of fiscal 1997.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
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<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
This information appears in a separate section of this report following
Part III.
Item 9. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure.
Not applicable.
-25-
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The current directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Robert Kassel 57 Chairman of the Board, Chief
Executive Officer, President
and Treasurer
Richard Raleigh 43 Chief Operating Officer and
Director
Maureen Kassel 49 Vice President of Public Relations
and Advertising, Secretary and
Director
Jon Schulberg 38 Director
Fred Heiden 56 Director
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. In
addition, from 1985 to August 1991 he was a consultant to Comtel Communications,
Inc. ("Comtel"), a company specializing in the installation and operation of
telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real
estate developer in Long Island, New York and Santa Barbara, California. From
1965 to 1985, he was a practicing attorney in New York City, specializing in
corporate and securities law.
Richard Raleigh has been a Director of the Company since March 1993, Chief
Operating Officer of the Company since June 1992 and served as the Company's
Executive Vice President-Operations from December 1991 to June 1992. Prior to
joining the Company, Mr. Raleigh was a free-lance marketing consultant to the
lawn and garden industry from January 1991 to December 1991. From April 1988 to
January 1991 he was 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 the director of development for Eric Jones
-26-
<PAGE>
Productions. For the three years prior thereto, he was the Director of Video
Publishing for Preview Media.
Fred Heiden, a director of the Company since March 1993, has been a private
investor since November 1989. From April 1984 to November 1989 Mr. Heiden was
the president and principal owner of Bonair Construction, a Florida based home
improvement construction company.
Certain Key Employees
Richard M. Grandy, 51, has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of EGI
in September 1994 until July 1997. Mr. Grandy co-founded EGI 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, 33, 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
Supervisor of the Business Consulting Department of the certified public
accounting firm of Hood & Strong. From September 1988 to August 1990, she has
held the positions of Staff Accountant and Senior Accountant at the certified
public accounting firm of Schwartz, McGuire & Co.
Sheila Jones, 42, 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 EGI by the Company, Ms. Jones was employed by EGI 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, 41, has been National Sales Manager of Easy Gardener since the
Company's acquisition of EGI in September 1994. Prior to joining the Company,
Mr. Logue was employed by EGI from September 1989 to September 1994, where he
was 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.
Item 11. Executive Compensation
The following table discloses the compensation awarded by the Company, for
the three fiscal years ended June 30, 1997, 1996 and 1995, to Mr. Robert Kassel,
its Chief Executive Officer and Mr. Richard J. Raleigh, its Chief Operating
Officer (the "Named Executives"). During fiscal 1997, no other executive officer
of the Company received a salary and bonus that exceeded $100,000 during such
fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation
------------
Name and Long Term All Other
Principal Position Year Salary ($) Bonus ($) Compensation Compensation(1)
- ------------------ ---- ---------- --------- ------------ ---------------
Securities
Underlying
Options (#)
------------
<S> <C> <C> <C> <C> <C>
Robert Kassel, 1997 350,000 250,000 1,200,000(2) $5,995
Chairman, Chief Executive 1996 250,000 100,000 200,000(3) --
Officer, President and 1995 150,000 100,000 687,653(4) --
Treasurer
Richard Raleigh, 1997 195,000 111,275 500,000(2) $8,390
Chief Operating Officer 1996 150,000 10,000 100,000(3) --
1995 120,000 10,000 50,000(4) --
</TABLE>
- ------------
(1) Represents Company contributions to the Named Executives' 401(k) Account.
(2) Includes 200,000 options previously granted to Mr. Kassel and 100,000
options previously granted to Mr. Raleigh whose exercise prices were
repriced to reflect a reduction in the market price of the Common Stock at
the time of repricing. Does not include 50,000 options previously granted
to Mr. Raleigh the expiration date of which was extended during fiscal
1997.
(3) Includes 200,000 five-year options granted to Mr. Kassel and 100,000
five-year options granted to Mr. Raleigh in June 1995 under the Company's
1995 Stock Option Plan which grants were subject to stockholder approval of
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<PAGE>
the plan obtained in February 1996.
(4) Does not include the options referenced in footnote (3) above.
The following table discloses information concerning stock options granted
in the year ended June 30, 1997 to the Named Executives.
Option Grants in Fiscal Year Ended June 30, 1997
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------
Potential Realizable
Number of Value at Assumed
Securities Percent of Annual Rates of Stock
Underlying Total Options Price Appreciation
Options Granted to Exercise for Option Term (2)
Granted Employees in Price Expiration -------------------------------
Name (#)(1) Fiscal Year ($/Sh) Date 5% 10%
- ---- ----------- -------------- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Kassel 350,000 19.8 $2.06 7/24/01 $199,000 $440,000
450,000 25.5 2.06 8/30/01 256,000 566,000
200,000 11.3 2.06 12/24/01 114,000 252,000
200,000 11.3 2.06 6/01/00 114,000 252,000
Richard Raleigh 125,000 7.0 2.06 7/24/01 71,000 158,000
175,000 9.5 2.06 8/30/01 100,000 220,000
100,000 5.7 2.06 12/24/01 57,000 126,000
100,000 5.7 2.06 6/01/00 57,000 126,000
</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.
-28-
<PAGE>
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 stock options were exercised by the Named
Executives during fiscal 1997:
Aggregated Option Exercises
And Fiscal Year-End Option Values
---------------------------------
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
June 30, 1997 June 30, 19979(1)
------------------------------------- ------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert 2,067,653 -0- $3,214,598 $-0-
Kassel
Richard 637,500 -0- $887,938 $-0-
Raleigh
</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. Options are "in-the-money" if the fiscal
year end fair market value of the Common Stock exceeds the option exercise
price. The last sale price of the Common Stock on June 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 in March 31, 1998, subject to certain renewal provisions. His current
annual salary is $350,000, and is subject to such bonuses and increases as are
approved at the discretion of the Board of Directors. Mr. Raleigh currently
serves as Chief Operating Officer pursuant to the employment agreement for a
term expiring in 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. Each of the employment
agreements requires that substantially all of the employee's business time be
devoted to the Company and that the employee not compete, or engage in a
business competitive with, the Company's current or anticipated business for the
term of the agreement and for two years thereafter (although they each may own
not more than 5% of the securities of any publicly traded competitive company).
Mr. Kassel's agreement also provides that if his employment is terminated
under certain circumstances, including termination of Mr. Kassel upon a change
of control of the Company (as defined
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<PAGE>
in the agreement), a failure by the Company to comply with its obligations under
the agreement, the failure of the Company to obtain the assumption of the
agreement by any successor corporation, or a change in Mr. Kassel's duties and
obligations from those contemplated by the agreement, and termination by the
Company of Mr. Kassel's employment other than for disability or cause, he will
be entitled to receive severance pay equal to the greater of (i) $350,000
($3,500,000 in the event of a change of control) or (ii) the total compensation
earned by Mr. Kassel from the Company during the one-year period (multiplied by
ten in the event of a change of control) prior to the date of his termination.
Mr. Raleigh's agreement also provides that if his employment is terminated
under certain circumstances, including termination of Mr. Raleigh upon a change
of control of the Company, (as defined in the agreement) a failure by the
Company to comply with its obligations under the agreement, the failure of the
Company to obtain the assumption of the agreement by any successor corporation,
or a change in Mr. Raleigh's duties and obligations from those contemplated by
the agreement, and termination by the Company of Mr. Raleigh's employment other
than for disability or cause, he will be entitled to receive severance pay equal
to the greater of (i) $162,500 ($812,500 in the event of a change of control) or
(ii) the total compensation earned by Mr. Raleigh from the Company during the
one-year period (multiplied by five in the event of a change of control) prior
to the date of his termination.
Each of Mr. Kassel and Mr. Raleigh is, in addition to salary, entitled to
certain fringe benefits, including the use of an automobile and payment of
related expenses.
Easy Gardener has entered into a four-year 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. The agreement requires Mr. Grandy 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 of agreement.
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 has recently established a
Compensation Committee of its Board of Directors, consisting of Messrs. Kassel,
Heiden and Schulberg. 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
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<PAGE>
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 deliberations of the Board of Directors
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 has served on the Board of Directors of the Company.
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 repur chase 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 per sons 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
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<PAGE>
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
1991 Plan will expire not more than ten years from the date of grant (five years
in the case of ISOs granted to persons holding 10% or more of the voting stock
of the Company). An aggregate of 562,000 options were outstanding under the 1991
Plan at June 30, 1997.
The Company has adopted, a Non-Employee Director Stock Option Plan (the
"Director Plan"). Only non-employee directors of the Company are eligible to
receive grants under the Director Plan. The Director Plan provides that eligible
directors automatically receive a grant of options to purchase 5,000 shares of
Common stock at fair market value upon first becoming a director and,
thereafter, an annual grant, in January of each year, of 5,000 options at fair
market value. Options to purchase an aggregate of up to 100,000 shares of Common
Stock are available for the automatic grants under the Director Plan. An
aggregate of 20,000 options were outstanding under the Director Plan at June 30,
1997.
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") of
the 1995 Plan, 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 ISO's or NQO's 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
provisions of the Code applicable to IS0s granted under the 1991 Plan. An
aggregate of 1,385,000 options were outstanding under the 1995 Plan at June 30,
1997.
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 of the 1997 Plan, as the case may
be, will have discretion to determine the number of shares subject to each
nonqualified option (subject to the number of shares available for grant under
the 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
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<PAGE>
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 incentive stock options or nonqualified options 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 provisions of the Code applicable to ISOs granted under the
1991 Plan. An aggregate of 500,000 options were granted under the 1997 Plan
subsequent to June 30, 1997.
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.
Director Compensation
During the fiscal year ended June 30, 1997 each of the Company's two
non-employee directors, Messrs. Schulberg and Heiden, received $5,000 for
serving as directors of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information at September 25, 1997, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director, (ii) each Named Executive and (iv) all executive
officers and directors as a group.
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<PAGE>
Amount and
Nature of
Name and Address Beneficial Percentage
of Beneficial Owner Ownership(1)(2) of Class
- ------------------- --------------- --------
Maureen Kassel(3) 910,650(4) 5.8
Robert Kassel(3) 4,712,095(5)(6) 26.8
Richard Raleigh 743,320(7) 4.6
Fred Heiden 7,500(8) *
Jon Schulberg 7,500(9) *
Joseph Owens II 1,064,396(10) 6.5
Richard Grandy 1,064,396(10) 6.5
Alan Stahler 899,368(11) 5.6
All executive officers
and directors as a
group (five persons) 5,795,415(4)(5)(6) 28.3
(7)(8)(9)
- ----------
*less than 1%
- --------------------------------------------------------------------------------
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from September 25, 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 per son) and which are
exercisable within 60 days from September 25, 1997 have been exercised.
(3) The address of Maureen and Robert Kassel is c/o the Company.
(4) Includes presently exercisable options and warrants issued to Ms. Kassel to
purchase an aggregate of 325,000 shares of the Company's Common Stock.
(5) 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")
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<PAGE>
providing Mr. Kassel with the right to vote the shares until September 1,
2001.
(6) Includes 2,297,653 shares of Common Stock issuable upon exercise of options
and warrants.
(7) Includes 726,320 shares of Common Stock issuable upon exercise of options
and warrants.
(8) Includes 7,500 shares of Common Stock issuable upon exercise of options.
(9) Includes 7,500 shares of Common Stock issuable upon exercise of options.
(10) Includes 125,000 shares of Common Stock issuable to each of Messrs. Grandy
and Owens upon exercise of options. The address of Mr. Grandy is c/o the
Company. The address of Mr. Owens is 8 Hillendale, Waco, Texas 76710.
(11) The address for Mr. Stahler is 44 Wall Street, New York, New York 10005.
Includes shares issuable upon the exercise of (i) options to purchase an
aggregate of 89,441 shares of Common Stock underlying a five-year Unit
Purchase Option granted on August 12, 1993 ("1993 Unit Purchase Option")
and (ii) options to purchase up to 785,094 shares underlying a five-year
Unit Purchase Option granted on August 29, 1994 ("1994 Unit Purchase
Option"). Also includes options to purchase an aggregate of 24,833 shares
underlying additional 1993 Unit Purchase Options granted to D.H. Blair &
Co., Inc. Mr. Stahler is the Vice-Chairman and he and his wife are
stockholders of D.H. Blair and Co., Inc. The information with respect to
Mr. Stahler is derived from his Schedule 13D filed with the Securities and
Exchange Commission.
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<PAGE>
Item 13. Certain Relationships and Related Transactions.
To obtain a portion of the financing for the Company's acquisition of EGI,
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 the fiscal year ended June
30, 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.
From time to time Messrs. Kassel and Raleigh have borrowed monies from the
Company. During the fiscal year ended June 30, 1997, the highest amount owed to
the Company by Messrs. Kassel and Raleigh were $607,472 and $225,294,
respectively, and at September 26, 1997, the balance of such indebtedness was
$556,452 and $235,653, respectively. The loans bear interest at 7% per annum and
mature on July 1, 2002. Company loans to all officers of the Company are
restricted to a maximum of $850,000 by the terms of the Credit Agreement. The
Company's Board of Directors has adopted a policy pursuant to which any loan
between the Company and one or more of its officers or directors, or any third
party in which one or more or its officers or directors has a material interest,
must be approved by a majority of the disinterested members of the Audit
Committee, or the Board of Directors.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No.
- -----------
3.1 Certificate of Incorporation, as amended.**
3.2 By-laws of the Company, incorporated by reference to Exhibit 3(b)
of the Company's Registration Statement on Form S-1 (Registration
No. 33-45428).
4.1 Form of certificate evidencing Common Stock, $.001 par value, of
the Company, incorporated by reference to Exhibit 4(a) of the
Company's Registration Statement on Form S-1 (Registration No.
33-45428).
-36-
<PAGE>
4.3 Form of Unit Purchase Option granted to D.H. Blair & Co.**
4.4 Form of Public Warrant Agreement with respect to Class A
Warrants.**
4.5 Warrant Agreement with respect to Class B Warrants., incorporated
by reference to Exhibit 4(c) of the Company's Registration
Statement on Form S-3 (Registration No. 33-89800).
9.1 Voting Agreement among Joseph A. Owens, II, the Company, and
Robert Kassel.+
9.2 Voting Agreement among Richard M. Grandy, the Company and Robert
Kassel.+
10.1 Employment Agreement of Robert Kassel.++
10.2 Employment Agreement of Richard Raleigh.++
10.3 Employment Agreement of Richard Grandy.
10.4 1991 Stock Option Plan, incorporated by reference to Exhibit 10.5
of the Company's Registration Statement on Form S-1 (Registration
No. 33-45428).
10.5 1995 Stock Option Plan.*
10.6 Non-Employee Director Stock Option Plan.*
10.7 1997 Stock Option Plan, incorporated by reference to Exhibit A to
the Company's proxy statement dated May 27, 1997.
10.8 Asset Purchase Agreement dated as of June 18, 1994 among the
Company, Easy Gardener Acquisition Corp., Joseph A. Owens II,
Richard M. Grandy and Easy Gardener, Inc.+
10.9 Lease with respect to the Company's executive offices,
incorporated by reference to Exhibit 10.14 of the Company's Form
10-KSB for the fiscal year ended June 30, 1992.
10.10 February 8, 1995 modification to lease with respect to the
Company's executive offices.*
10.11 May 6, 1997 modification to lease with respect to the Company's
executive offices.
10.12 Lease with respect to Weatherly's warehouse facilities in Paris,
Kentucky.
-37-
<PAGE>
10.13 Form of Mergers and Acquisitions Agreement between the Company
and D.H. Blair Investment Banking Corp.**
10.14 Agreement dated as of April 16, 1996 between the Company and The
Intrac Group.++
10.15 Credit Agreement among Easy Gardener, the Company, The Provident
Bank, as Administrative and Collateral Agent,and The Provident
Bank and other certain lending institutions, dated as of
August 9, 1996.++
10.16 First Amendment, dated April 3, 1997 to the Credit Agreement.
10.17 Second Amendment, dated May 9, 1997 to the Credit Agreement.
10.18 Third Amendment, dated June 30, 1997 to the Credit Agreement.
10.19 Lease and lease extension agreements between Crawford- Austin
Mfg. Co. and Easy Gardener.*
10.20 Warehouse Lease, dated May 7, 1997, between Weatherly Consumer
Products, Inc. and Sarah C. Lear.
10.21 Purchase Agreement, dated as of August 9, 1996, by and among the
Company, Easy Gardener, Weatherly and the Weatherly Stockholders
(incorporated by reference to Exhibit 10.1 filed with the
Company's Form 8-K for the event dated August 9, 1996)
10.22 Purchase Agreement, dated as of May 9, 1997, by and among the
Company, Easy Gardener and Plastic Molded Concepts, Inc.
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule (for SEC use only).
- ----------
* Incorporated by reference to the comparable exhibit filed with the Company's
Form 10-KSB for the fiscal year ended June 30, 1995.
** Incorporated by reference to the exhibit filed under the same
number in the Company's Registration Statement on Form SB-2 (file
no. 33-61984).
+ Incorporated by reference to the exhibit contained in the Current Report on
form 8-K filed by the Company for the event dated September 1, 1994.
-38-
<PAGE>
++ Incorporated by reference to the applicable exhibit contained in the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996.
(b) Report on Form 8-K. No reports on Form 8-K were filed by the Company
during its fiscal quarter ended June 30, 1997.
-39-
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Index to Consolidated Financial Statements
================================================================================
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 1996
and 1997 F-3 - F-4
Consolidated statements of income for the
years ended June 30, 1995, 1996 and 1997 F-5
Consolidated statements of stockholders'
equity for the years ended June 30, 1995, 1996
and 1997 F-6 - F-7
Consolidated statements of cash flows for the
years ended June 30, 1995, 1996 and 1997 F-8 - F-9
Summary of accounting policies F-10 - F-15
Notes to consolidated financial statements F-16 - F-39
Consolidated Financial Statement Schedules
Schedule II--valuation and qualifying accounts F-40
Note: All other schedules have been omitted since
the required information is contained in the
Consolidated Financial Statements or because
such schedules are not required.
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. We have also audited
Schedule II - Valuation and Qualifying Accounts (the Schedule). These financial
statements and Schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule 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 and schedule 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 and schedule. 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.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
-----------------------
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, 1996 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets (Notes 1 and 6)
Current
Cash and cash equivalents $ 680,000 $ 2,083,000
Accounts receivable, less allowance for doubtful
accounts and sales returns of $155,000 and $314,000 7,109,000 11,542,000
Inventories (Note 3) 3,392,000 5,254,000
Prepaid expenses and other current assets 462,000 419,000
Deferred tax asset (Note 10) 1,333,000 448,000
- -----------------------------------------------------------------------------------
Total current assets 12,976,000 19,746,000
Furniture, fixtures and equipment, net (Note 4) 1,216,000 2,315,000
Intangible assets (Note 1)
Excess of cost over net assets acquired (Note 5) 15,784,000 41,834,000
Deferred financing costs, net of accumulated amor-
tization of $467,000 and $302,000 1,005,000 1,621,000
Product rights, patents and trademarks, net of
accumulated amortization of $56,000 and $75,000 198,000 180,000
Non-compete agreement, net of accumulated
amortization of $22,000 -- 478,000
Package design, net of accumulated amortization
of $56,000 and $110,000 180,000 251,000
Trade credits (Note 2) 1,295,000 1,149,000
Officer receivables (Note 7) 617,000 694,000
Other assets 313,000 207,000
- -----------------------------------------------------------------------------------
$33,584,000 $68,475,000
===================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, 1996 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
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
Accounts payable 1,285,000 1,774,000
Accrued expenses 901,000 3,983,000
Accrued co-op advertising 185,000 1,098,000
Accrued commissions 546,000 859,000
Accrued interest (Note 6) 592,000 261,000
Accrued purchase consideration (Note 1) 489,000 489,000
- -----------------------------------------------------------------------------------------
Total current liabilities 7,648,000 17,454,000
Accrued purchase consideration (Note 1) -- 978,000
Deferred tax liability (Note 10) 328,000 547,000
Notes payable, less current maturities (Notes 1, 6 and 13) 6,238,000 17,570,000
- -----------------------------------------------------------------------------------------
Total liabilities 14,214,000 36,549,000
- -----------------------------------------------------------------------------------------
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 and 14,073,000 shares issued
and outstanding at June 30, 1996 and 1997 11,000 14,000
Additional paid-in capital 21,413,000 30,783,000
Retained earnings (deficit) (2,054,000) 1,129,000
- -----------------------------------------------------------------------------------------
Total stockholders' equity 19,370,000 31,926,000
- -----------------------------------------------------------------------------------------
$ 33,584,000 $ 68,475,000
=========================================================================================
</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 Income
================================================================================
<TABLE>
<CAPTION>
Years ended June 30, 1995 1996 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 11) $ 19,692,000 $ 27,031,000 $ 52,046,000
Cost of sales 9,151,000 12,670,000 23,649,000
- ----------------------------------------------------------------------------------------
Gross profit 10,541,000 14,361,000 28,397,000
- ----------------------------------------------------------------------------------------
Operating expenses
Selling and shipping 4,374,000 6,264,000 11,232,000
General and administrative 2,778,000 4,348,000 6,513,000
- ----------------------------------------------------------------------------------------
7,152,000 10,612,000 17,745,000
- ----------------------------------------------------------------------------------------
Income from operations 3,389,000 3,749,000 10,652,000
Other income (expense)
Investment income 34,000 69,000 76,000
Interest expense (Note 6) (1,810,000) (2,009,000) (3,338,000)
- ----------------------------------------------------------------------------------------
Income before income taxes and
extraordinary expense 1,613,000 1,809,000 7,390,000
Income tax (expense) benefit (Note 10) (38,000) 715,000 (3,200,000)
- ----------------------------------------------------------------------------------------
Income before extraordinary expense 1,575,000 2,524,000 4,190,000
Extraordinary expense of $1,459,000
on debt refinancing, net of income
taxes of $452,000 (Note 13) -- -- (1,007,000)
- ----------------------------------------------------------------------------------------
Net income $ 1,575,000 $ 2,524,000 $ 3,183,000
========================================================================================
Income per common share before
extraordinary expense (Note 14) $ .19 $ 0.25 $ .26
Extraordinary expense (Notes 13 and 14) -- -- (.06)
- ----------------------------------------------------------------------------------------
Net income per common share (Note 14) $ .19 $ 0.25 $ .20
- ----------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding (Note 14) 8,376,000 10,206,000 17,908,000
- ----------------------------------------------------------------------------------------
</TABLE>
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 Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- --------------------- Additional Retained Total
Number of Number of Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 (Note 9) -- -- 4,600,000 $ 5,000 $ 9,298,000 $(6,153,000) $ 3,150,000
Sale of common stock, net of stock issuance
costs of approximately $1,300,000 -- -- 3,775,000 4,000 7,432,000 -- 7,436,000
Issuance of common stock for payment of
trade payables -- -- 417,000 -- 683,000 -- 683,000
Exercise of stock options and warrants -- -- 31,000 -- 35,000 -- 35,000
Issuance of unit purchase options -- -- -- -- 400,000 -- 400,000
Conversion of debt and accrued interest into
common stock (Note 1) -- -- 914,000 1,000 2,059,000 -- 2,060,000
Net income -- -- -- -- -- 1,575,000 1,575,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 (Note 9) -- -- 9,737,000 10,000 19,907,000 (4,578,000) 15,339,000
Exercise of stock warrants, net of stock
issuance costs of approximately $114,000 -- -- 770,000 1,000 1,506,000 -- 1,507,000
Net income -- -- -- -- -- 2,524,000 2,524,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 (Note 9) -- -- 10,507,000 11,000 21,413,000 (2,054,000) 19,370,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- --------------------- Additional Retained Total
Number of Number of Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock options, warrants,
and UPOs, net of issuance costs of
approximately $300,000 -- -- (1)2,566,000 2,000 5,292,000 -- 5,294,000
Stock issued for Weatherly acquisition
(Note 1) -- -- 1,000,000 1,000 2,999,000 -- 3,000,000
Options and warrants issued for acquisition
and consulting services and bank refinancing
(Notes 1) -- -- -- -- 1,079,000 -- 1,079,000
Net income -- -- -- -- -- 3,183,000 3,183,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (Note 9) -- -- 14,073,000 $ 14,000 $30,783,000 $ 1,129,000 $31,926,000
====================================================================================================================================
</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-7
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Years ended June 30, 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,575,000 $ 2,524,000 $ 3,183,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary expense -- -- 1,007,000
Loss on disposal of assets -- -- 226,000
Bad debt expense 3,000 167,000 323,000
Depreciation and other amortization 637,000 834,000 1,990,000
Amortization of deferred financing costs 219,000 264,000 323,000
Changes in operating assets and liabilities, net
of assets acquired and liabilities assumed:
Accounts receivable (2,523,000) (2,622,000) (2,763,000)
Inventories 637,000 (940,000) 444,000
Prepaid expenses and other current assets (201,000) (159,000) 324,000
Accounts payable and accrued expenses 54,000 1,393,000 2,838,000
Trade credits 200,000 257,000 46,000
Other assets (163,000) (95,000) 262,000
Deferred taxes -- (1,005,000) 2,342,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 438,000 618,000 10,545,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payment for purchase of businesses, net of cash
acquired (15,387,000) (1,602,000) (28,358,000)
Payment for non-compete agreement -- -- (500,000)
Sale of short-term investments 501,000 -- --
Increase in officer receivables (352,000) (131,000) (77,000)
Purchase of product rights (105,000) -- --
Purchase of furniture, fixtures and equipment (151,000) (261,000) (528,000)
Purchase of package design (82,000) (109,000) (131,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,576,000) (2,103,000) (29,594,000)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Years ended June 30, 1995 1996 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from issuances of stock $ 7,452,000 $ 1,507,000 $ 5,294,000
Proceeds from bank line of credit 11,514,000 17,496,000 41,791,000
Payment on bank line of credit (12,109,000) (16,208,000) (43,079,000)
Proceeds from notes payable 11,000,000 -- 21,345,000
Payments of notes payable (800,000) (1,600,000) (3,385,000)
Acquisition finance costs (1,036,000) -- (1,514,000)
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,021,000 1,195,000 20,452,000
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash 883,000 (290,000) 1,403,000
Cash and cash equivalents, beginning of year 87,000 970,000 680,000
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 970,000 $ 680,000 $ 2,083,000
===========================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-9
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Nature of
Business
U.S. Home & Garden Inc. (the "Company" - formerly known as Natural Earth
Technologies, Inc. until July 1995), through its wholly- owned
subsidiaries, is a manufacturer and distributor of lawn and garden care
products to retailers primarily throughout North America.
Golden West Agri-Products, Inc. ("Golden West"), a wholly-owned subsidiary,
is a manufacturer and distributor of humic acid based agricultural
products. Golden West currently sells its products in the Western United
States, Mexico and Central America.
On September 1, 1994, the Company, through its wholly-owned subsidiary Easy
Gardener Acquisition Corporation ("Easy Gardener"), acquired all of the
assets of Easy Gardener, Inc., a developer, manufacturer and marketer of
lawn and garden care products. Easy Gardener primarily sells its products
throughout North America.
On August 11, 1995, Emerald Products Corporation, a wholly-owned subsidiary
of Easy Gardener, acquired the assets of Emerald Products, LLC. Emerald
Products sells its product, Emerald Edge(R), throughout North America.
On August 9, 1996, Easy Gardener acquired all of the 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.
F-10
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
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.
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.
F-11
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Revenue
Recognition
Sales are recorded as products are shipped to customers.
Net Income Per
Share
Net income per common share has been computed following Accounting
Principles Board Opinion No. 15 (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.
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.
F-12
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
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
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
F-13
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
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
F-14
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
operations and financial position, however, will be unaffected by any
future 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.
F-15
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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
F-16
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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-17
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
Years ended June 30, 1995 1996 1997
--------------------------------------------------------------------
Net sales $21,349,000 $46,102,000 $52,788,000
====================================================================
Net income before extra-
ordinary expense and
income taxes $ 1,420,000 $ 2,369,000 $ 6,990,000
====================================================================
Net income before extra-
ordinary expense $ 1,382,000 $ 3,462,000 $ 4,098,000
====================================================================
Net income $ 1,382,000 $ 1,542,000 $ 2,571,000
====================================================================
Net income per common
share before extra-
ordinary expenses $ .16 $ .25 .22
====================================================================
F-18
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Years ended June 30, 1995 1996 1997
---------------------------------------------------------------------------
Net income per
common share $ .16 $ .11 $ .15
===========================================================================
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.
3. Inventories
Inventories consist of:
June 30, 1996 1997
---------------------------------------------------------------------------
Raw materials $ 82,000 $ 578,000
Finished goods 3,310,000 4,676,000
---------------------------------------------------------------------------
$ 3,392,000 $ 5,254,000
===========================================================================
F-19
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
4. Furniture,
Fixtures and
Equipment
Furniture, fixtures and equipment consist of:
June 30, 1996 1997
---------------------------------------------------------------------------
Leasehold improvements $ 74,000 $ 397,000
Furniture, fixtures and equipment 1,575,000 2,761,000
---------------------------------------------------------------------------
1,649,000 3,158,000
Less accumulated depreciation 433,000 843,000
---------------------------------------------------------------------------
$1,216,000 $2,315,000
===========================================================================
5. Excess of
Cost Over
Net Assets
Acquired
The excess of cost over net assets acquired consists of the following:
June 30, 1996 1997
---------------------------------------------------------------------------
Weatherly Consumer Products
Group, Inc. $ -- $23,046,000
Easy Gardener, Inc. 14,172,000 15,639,000
Plastic Molded Concepts, Inc. -- 2,760,000
Golden West Chemical
Distributions, Inc. 2,098,000 2,098,000
Emerald Products, LLC 778,000 870,000
---------------------------------------------------------------------------
17,048,000 44,413,000
Less accumulated amortization 1,264,000 2,579,000
---------------------------------------------------------------------------
$15,784,000 $41,834,000
===========================================================================
F-20
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Notes Payable
and Line of
Credit
Notes payable consist of the following:
June 30, 1996 1997
---------------------------------------------------------------------------
$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
$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
$3,800,000 note payable, interest only due
monthly at 12% with the full principal due
November 1997. -- 3,800,000
$8,000,000 note payable, interest at
12.25%, monthly principal payments of
$133,333, plus interest, commencing
January 31, 1995 until January 2000,
collateralized by the assets of Easy
Gardener and a guaranty of the Company.
This note was refinanced during 1997.
5,600,000 --
F-21
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
June 30, 1996 1997
---------------------------------------------------------------------------
$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
Less current portion 2,362,000 8,990,000
---------------------------------------------------------------------------
$6,238,000 17,570,000
===========================================================================
At June 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, 1997, no amounts were outstanding on
the credit line. The credit agreement contains various restrictions which
require, among other things, maintenance of certain financial ratios and an
annual zero balance for ten consecutive days during August. At June 30,
1997, the Company was in compliance with all such covenants. If the
revolving credit facility is terminated prior to June 2002, the Company
will be subject to certain prepayment penalties.
At June 30, 1996, the Company's had a $6,000,000 revolving credit facility
bearing interest at prime (8.25% at June 30, 1996) plus 2%, payable in
monthly installments commencing January 1, 1995 and collateralized by
assets of Easy Gardener and a guaranty of the Company. As of June 30, 1996,
there 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.
F-22
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 prepayments of
"excess cash flow" of Easy Gardener and certain net proceeds of asset
sales, condemnation awards and insurance recoveries. As of June 30, 1996,
$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.
F-23
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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:
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.
F-24
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
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.
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.
F-25
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In June 1994, the Company sold approximately 200,000 shares to various
foreign investors. Proceeds to the Company, after deducting commissions and
expenses approximated $435,000. In a related transaction during July 1994,
the Company sold an additional 240,000 shares to foreign investors
resulting in net proceeds to the Company of approximately $518,000.
Proceeds were used for the Easy Gardener acquisition.
(c) Stock Option Plans
The Company adopted the 1991 Stock Option Plan (the "1991 Plan") pursuant
to which 700,000 shares of common stock have been reserved for issuance
upon the exercise of options designated as either (i) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended (the "Code") or (ii) non-qualified options. ISOs may be
granted under the Plan to employees and officers of the Company.
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.
F-26
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
F-27
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Board of Directors also has authorization to issue stock options
("Non-Plan Options") to employees or consultants for services performed.
The following is a summary of activity relating to stock options.
<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) 588,000 488,000 112,000 5 years
Became
exercisable -- 100,000 --
---------------------------------------------------------------------------------------------
June 30, 1996 $1.71(1) 588,000 588,000 112,000 4 years
Expired in 1997 $1.69 (26,000) (26,000) 26,000
---------------------------------------------------------------------------------------------
June 30, 1997 $1.71(1) 562,000 562,000 138,000 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 4 years
==============================================================================================
</TABLE>
F-28
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
<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>
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 $1.96(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.
(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.
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
F-29
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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
F-30
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
(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
Option 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
-----------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Option Remaining
Price Per Out- Exer- Contractual
Share standing(1) cisable Life
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 3,709,000 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.
(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.
F-32
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
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.
F-33
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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:
June 30 1996 1997
--------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforwards $1,384,000 $555,000
Accounts receivable allowance
and other 97,000 58,000
--------------------------------------------------------------------------
Total deferred tax asset 1,481,000 613,000
Less valuation allowance (148,000) (165,000)
--------------------------------------------------------------------------
Net deferred tax asset $1,333,000 $448,000
==========================================================================
--------------------------------------------------------------------------
Deferred tax liability
Depreciation and amortization in
excess of book amount $(328,000) $(547,000)
==========================================================================
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
F-34
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 and 1997, the Company established a $148,000 and $165,000
valuation allowance for the benefits pertaining to California NOLs which
are not estimated to be realizable prior to their expiration.
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:
F-35
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1995 1996 1997
--------------------------------------------------------------------------
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)%
==========================================================================
11. Concen-
tration 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
customer accounted for approximately 36% (27% and 9%) and 36% (26% and 10%)
of consolidated net sales. Included in accounts receivable at June 30, 1996
and 1997 is $1,440,000 and $2,320,000 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. 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 and 1997 is $139,000 and $349,000 due to this
vendor.
F-36
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
12. Supplemental
Cash Flow
Information
<TABLE>
<CAPTION>
June 30, 1995 1996 1997
-----------------------------------------------------------------------------
<S> <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
Taxes $ 10,000 $ 96,000 $ 131,000
=============================================================================
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
============================================================================
</TABLE>
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.
F-37
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
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.
---------------------------------------------------------------------------
Weighted average common shares
outstanding for the period 13,695,000
Weighted average common share
equivalents 4,213,000
---------------------------------------------------------------------------
17,908,000
===========================================================================
Computation for Statement of Operations
Reconciliation of net income per statement of operations to amount used in
primary earnings per share computation:
---------------------------------------------------------------------------
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)
--------------------------------------------------------------------------
F-38
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Net income assumed for the period
in computing per share earnings
as adjusted $ 3,633,000
--------------------------------------------------------------------------
Income per share before extra-
ordinary expense $ 0.26
Extraordinary expense (0.06)
--------------------------------------------------------------------------
Net income per share $ 0.20
==========================================================================
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, l997, the Company granted stock options to acquire
600,000 shares of common stock at $3.25 per share under the 1997 stock
option plan.
During July 1997, 453,000 warrants were exercised generating $1,033,000 in
cash proceeds to the Company.
On August 22, 1997, the Company entered into a non-binding letter of intent
which provides for the acquisition of all of the outstanding shares of
common stock of a company that manufacturers and distributes outdoor lawn
and garden products in exchange for approximately $5,250,000. The purchase
is subject to the completion of due diligence, approval by the directors of
the Company and the execution and delivery of a stock purchase agreement.
The letter of intent terminates, without liability, if the acquisition is
not consummated by October 21, 1997.
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-39
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Charged to
Beginning Costs and Writeoffs Ending
Balance Expenses of Accounts Balance
- --------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Year ended June 30, 1995 $ 5,000 $ 3,000 $ (3,000) $ 5,000
Year ended June 30, 1996 5,000 167,000 (17,000) 155,000
Year ended June 30, 1997 155,000 323,000 (164,000) 314,000
- --------------------------------------------------------------------------------
F-40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
U.S. Home & Garden Inc.
(Registrant)
By: /s/ Robert Kassel
-------------------------------
Robert Kassel, President
Dated: September 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert Kassel Chairman of the Board September 29, 1997
- ------------------------ of Directors, President
Robert Kassel and Treasurer (Chief
Executive and Financial
Officer)
/s/ Maureen Kassel
- ------------------------ Vice-President, September 29, 1997
Maureen Kassel Secretary and Director
/s/ Richard Raleigh
- ------------------------ Chief Operating Officer September 29, 1997
Richard Raleigh and Director
/s/ Lynda Gustafson
- ------------------------ Vice President - September 29, 1997
Lynda Gustafson Finance (Principal
Financial Officer)
/s/ Jon Schulberg
- ------------------------ Director September 29, 1997
Jon Schulberg
/s/ Fred Heiden
- ------------------------ Director September 29, 1997
Fred Heiden
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of the 1st day of
September 1994, by and between EASY GARDENER ACQUISITION CORP., a Delaware
corporation (the "Company"), and Richard M. Grandy (the "Executive").
W I T N E S S E T H :
WHEREAS, the Company has entered into an Asset Purchase Agreement with Easy
Gardener, Inc. ("Easy Gardener") and Natural Earth Technologies, Inc. ("NETX")
pursuant to which the Company has agreed to purchase substantially all of the
assets (the "Purchased Assets") of Easy Gardener (the "Acquisition"); and
WHEREAS, the Executive has been an officer and principal shareholder of
Easy Gardener and, as such, possesses an intimate knowledge of the business and
affairs of the business represented by the Purchased Assets, its policies,
methods, personnel, opportunities and problems; and
WHEREAS, the Company recognizes that the Executive's contribution to the
growth and success of the Company following the consummation of the Acquisition
will be substantial and the Company desires to assure itself of the Executive's
employment as the Vice President - Marketing and Sales of the Company and to
compensate him for such efforts; and
WHEREAS, the Executive is desirous of committing himself to serve the
Company on the terms herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties contained in this Agreement the parties
hereto hereby agree as follows:
1. Employment.
The Company agrees to employ the Executive and the Executive agrees to be
so employed on the terms and conditions set forth in this Agreement, for a
four-year period commencing on the date hereof; provided, however, that this
Agreement may be extended by the mutual written agreement of the Company and the
Executive.
2. Position and Duties.
During the term of this Agreement the Executive shall have the title of the
Vice President - Marketing and Sales of the Company and shall have such duties
as may be from time to
<PAGE>
time delegated to him by the Board of Directors or the President of the Company.
The Executive shall report to Richard Raleigh or Robert Kassel (or another
designee of the Board of Directors) and the Board of Directors and shall devote
substantially all of his business time, attention, knowledge and skills
faithfully, diligently end to the best of his ability, in furtherance of the
business and activities of the Company. The Executive shall faithfully and
diligently discharge his duties hereunder and use his best efforts to implement
the policies established by the Board of Directors.
3. Indemnification of Executives.
The Company will indemnify the Executive (and his legal representatives or
other successors) to the fullest extent permitted (including payment of expenses
in advance of final disposition of the proceeding) by the laws of the State of
Delaware as in effect at the time of the subject act or omission, or such other
state in which the Company may be incorporated at such time, or the Certificate
of Incorporation and By-Laws of the Company as in effect at such time or on the
date of this Agreement, whichever affords or afforded greater protection to the
Executive.
4. Place of Performance.
In connection with his employment by the Company, the Executive shall be
based at the Company's principal executive offices in Waco, Texas.
5. Offices.
If mutually agreed between the Company and the Executive, the Executive may
serve on the Board of Directors of the Company, without additional compensation.
6. Compensation.
6.1 Base Salary. During the first full year of the term of this Agreement,
the Executive shall be paid a base salary at the annual rate of $150,000,
payable in advance, in installments, and in the same manner as other employees
of the Company are paid. During the second and third full years of this
Agreement the Executive shall be paid a salary at the annual rate of $175,000
and during the fourth full year of this Agreement, the Executive shall be paid a
salary at the annual rate of $200,000. Such salary is hereinafter referred to as
the "Base Salary."
7. Expenses.
During the term of this Agreement, the Company shall reimburse the
Executive for such costs and expenses as the
-2-
<PAGE>
Executive may reasonably incur in connection with the performance of his duties
hereunder, including, but not limited to, expenses for entertainment, travel and
similar items. The Company will reimburse the Executive for such expenses upon
presentation of expense statements or vouchers or such other supporting
information as the Company may require, in accordance with the policies and
procedures of the Company for the reimbursement of business expenses of its
senior executive officers.
8. Participation in Employee Benefit Plans.
During the term of his employment hereunder, the Executive shall have the
right, but only to the extent provided in any such plan, to receive or
participate in all benefits and plans which the Company may from time to time
institute during such period for its employees and for which the Executive is
eligible.
9. Participation in Medical Plan.
During the term of his employment hereunder, the Executive shall be
entitled to participate in the current or any future medical plan of the Company
to the extent provided in such plan.
10. Vacations, Holidays and Sick Leave.
The Executive will be entitled to four (4) weeks paid vacation and the
number of paid holidays, and sick leave days in each calendar year as are
determined by the Company from time to time (prorated, in any calendar year
during which the Executive is employed under this Agreement for less than the
entire such year, in accordance with the number of days in such calendar year
during which he is so employed). Such vacation may be taken in the Executive's
discretion, and at such time or times as are not inconsistent with the
reasonable business needs of the Company. Vacation time may not be carried over
from year to year.
11. Insurability; Right to Insure.
During the continuance of the Executive's employment hereunder, the Company
shall have the right to maintain term life insurance in its own name covering
the Executive's life in such amount as shall be determined by the Company, for a
term ending on the termination date of this Agreement. The Executive shall aid
in the procuring of such insurance by submitting to the required medical
examinations, if any, and by filling out, executing and delivering such
applications and other instruments in writing as may be reasonably required by
an insurance company or companies to which application or applications for
insurance may be made by or for the Company.
-3-
<PAGE>
12. Termination.
The Executive's employment under this Agreement may be terminated without
any breach of this Agreement only on the following circumstances:
12.1 Death. The Executive's employment under this Agreement shall terminate
upon his death.
12.2 Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
under this Agreement for 90 calendar days during any calendar year, the Company
may terminate the Executive's employment under this Agreement.
12.3 Cause. The Company may terminate the Executive's employment under this
Agreement for Cause. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment under this Agreement upon (a)
the failure by the Executive to perform his duties under this Agreement (other
than any such failure resulting from the Executive's incapacity due to physical
or mental illness) after demand for performance is delivered by the Company, in
writing, identifying the manner in which the Company believes the Executive has
not performed his duties and the Executive fails to perform as required within
15 days after such demand is made, (b) the engaging by the Executive in
misconduct (including embezzlement and criminal fraud) which is injurious to the
Company, monetarily or otherwise or (c) the indictment of the Executive of a
crime involving moral turpitude or dishonesty.
12.4 Termination by the Executive for Good Reason or Because of Ill health.
The Executive may terminate his employment under this Agreement (a) for Good
Reason (as hereinafter defined), or (b) if his health should become impaired to
any extent that makes the continued performance of his duties under this
Agreement hazardous to his physical or mental health or his life, provided that,
in the latter case, the Executive shall have furnished the Company with a
written statement from a qualified doctor to such effect and provided, further,
that at the Company's request and expense the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor.
12.4.1 Good Reason. For purposes of this Agreement, "Good Reason" shall
mean the failure by the Company to comply with its material obligations and
agreements contained in this Agreement including, without limitation, the
relocation of the Executive's workplace to more than forty (40) miles from its
current location or requests by the Company that the Executive engage in illegal
conduct. With respect to the matters set forth
-4-
<PAGE>
in this paragraph, the Executive must give the Company 30 days prior written
notice of his intent to terminate this Agreement as a result of any breach or
alleged breach of the applicable provision and the Company shall have the right
to cure any such breach or alleged breach within such 30 day period.
13. Notice of Termination.
Any termination of the Executive's employment by the Company or by the
Executive (other than termination by reason of the Executive's death) shall be
communicated by written Notice of Termination to the other party of this
Agreement. For purposes of this Agreement, a "Notice of Termination" shall mean
a notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
14. Date of Termination.
The "Date of Termination" shall mean (a) if the Executive's employment is
terminated by his death, the date of this death, (b) if the Executive's
employment is terminated pursuant to Paragraph 12.2 above, the date on which the
Notice of Termination is given, (c) if the Executive's employment is terminated
pursuant to Paragraph 12.3 above, the date specified in the Notice of
Termination after the expiration of any cure periods and (d) if the Executive's
employment is terminated for any other reason, the date on which a Notice of
Termination is given after the expiration of any cure periods.
15. Compensation Upon Termination or During Disability
(a) If the Executive's employment shall be terminated by reason of his
death, the Company shall pay to such person as he shall designate in notice
filed with the Company, or, if no such person shall be designated, to his estate
as a lump sum death benefit, his full salary to the date of his death in
addition to any payments the Executive's spouse, beneficiaries or estate may be
entitled to receive pursuant to any pension or employee benefit plan or life
insurance policy or similar plan or policy then maintained by the Company, and
such payments shall , assuming the Company is in compliance with the provisions
of this Agreement, fully discharge the Company's obligations with respect to
this Agreement.
(b) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness, the
Executive shall continue to receive his Base Salary until the Executive's
employment is terminated pursuant to Paragraph 12.2 of this Agreement, or until
the Executive terminates his employment pursuant to Paragraph
-5-
<PAGE>
12.4(b) of this Agreement, whichever first occurs, less, in each case, any
disability payments otherwise payable by or pursuant to plans provided by the
Company ("Disability Payments"). The Executive shall provide consulting services
to the Company during the period that he is receiving payments pursuant to this
Paragraph 15(b).
(c) If the Executive's employment shall be terminated for Cause, the
Company shall pay the Executive his Base Salary through the Date of Termination,
at the rate in effect at the time Notice of Termination is given, and the
Company shall, have no further obligation with respect to this Agreement.
(d) If (A) in breach of this Agreement, the Company shall terminate the
Executive's employment other than pursuant to Paragraphs 12.2 or 12.3 hereof (it
being understood that a purported termination pursuant to Paragraphs 12.2 or
12.3 hereof which is disputed and finally determined not to have been proper
shall be a termination by the Company in breach of this Agreement), and/or (B)
the Executive shall terminate his employment for Good Reason, then the Company
shall pay to the Executive his Base Salary through the Date of Termination at
the rate in effect at the time Notice of Termination is given and through the
date of the expiration of the initial term of this Agreement payable in
accordance with the Company's normal payroll policies in full satisfaction of
the Company's obligation to the Executive hereunder.
16. Stock Options. Simultaneous with the execution hereof, the Company
shall cause Natual Earth Technologies, Inc. ("NET") to issue to the Executive
options to purchase up to 100,000 shares of NET's common stock at an exercise
price equal to the closing price of the NET Common Stock on the date hereof;
such options shall be exercisable as follows: 50,000 shares after the first
anniversary of the date of this Agreement; up to 75,000 shares after the second
anniversary of the date of this Agreement; up to 87,500 shares after the third
anniversary of the date of this Agreement, and up to 100,000 shares after the
fourth anniversary of the date of the Agreement.
17. Miscellaneous Provisions.
17.1 Execution in Counterparts. This Agreement may be executed by the
parties in one or more counterparts, each of which shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts has been
signed by each of the parties hereto and delivered to each of the other parties
hereto.
-6-
<PAGE>
17.2 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given or
made as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail, postage prepaid, return receipt requested, as
follows:
If to Company, to: c/o Natural Earth Technologies,
Inc.
655 Montgomery Street
San Francisco, California 94111
Attention: Robert Kassel
Copy to: Tenzer, Greenblatt, Fallon & Kaplan
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
If to Executive, to: 802 Wooded Crest
Waco, Texas 76710
or to such other address as either party hereto shall have designated by like
notice to the other party hereto (except that a notice of change of address
shall only be effective upon receipt).
17.3 Amendments. This Agreement may only be amended by a written instrument
executed by each of the parties hereto.
17.4 Entire Agreement. This Agreement constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof, and supersedes all
prior agreements and understandings of the parties hereto, oral and written,
with respect to the subject matter hereof.
17.5 Headings. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
17.6 Binding Effect; Benefits. Employee may not delegate his duties or
assign his rights hereunder. This Agreement shall inure to the benefit of, and
be binding upon, the parties hereto and their respective heirs, legal
representatives, successors and permitted assigns.
17.7 Waiver, etc. The failure of either of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this
-7-
<PAGE>
Agreement or any provision hereof or the right of either of the parties hereto
to thereafter enforce each and every provision of this Agreement. No waiver of
any breach of any of the provisions of this Agreement shall be effective unless
set forth in a written instrument executed by the party against whom or which
enforcement of such waiver is sought; and no waiver of any such breach shall be
construed or deemed to be a waiver of any other or subsequent breach.
17.8 Records. Upon the termination of the Executive's employment for any
reason whatsoever, all documents, records, notebooks and other materials which
refer or relate to any aspect of the business of the Company or any of its
parent, subsidiary or affiliated corporations, which are in the possession of
the Executive including all copies thereof, shall be promptly returned to the
Company.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto as of the date first above written.
EASY GARDENER ACQUISITION CORP.
By: /s/ Richard J. Raleigh
------------------------------
Name: Richard J. Raleigh
Title: VP
/s/ Richard M. Grandy
--------------------------------
Richard M. Grandy
-8-
Montgomery
Washington
Tower
May 6, 1997
Mr. Robert Kassel
Natural Earth Technologies
dba US Home & Garden
655 Montgomery Street, Suite 830
San Francisco, California 94111
Dear Mr. Kassel:
This letter shall serve to modify that Lease Agreement dated August 4, 1992
(which together with any amendments, modifications and extensions thereof is
herein called the Lease) between Crow-Spieker #99 as Landlord and Natural Earth
Technologies dba US Home & Garden.
Premises
Effective March 1, 1998 your premises shall become a portion of the 5th
floor commonly known as Suite 500 as shown on Exhibit A, attached hereto.
Tenant's proportionate share of the Premises shall be adjusted to 1.62%.
Term
The term for Suite 500 shall commence March 1, 1998 for a period of three
(3) years until February 28, 2001.
Rental
The estimated monthly rental shall be as follows:
Base Rent: $ 6,938.00
Operating Expenses: 3,337.00*
----------
Total Monthly Rental: $10,275.00
*based on 1997 operating expenses
<PAGE>
Natural Earth Technologies
May 6, 1997
Page 2
If you agree with the above, please sign below and return both copies to
the building management office. A fully executed copy will then be returned to
you. This offer is valid until 5:00 p.m. Friday, May 9, 1997.
Sincerely,
/s/ Patrick J. Gilligan
- -------------------------------
Patrick J. Gilligan
Partner
AGREED AND ACCEPTED:
/s/ Robert Kassel 5/7/97
- ------------------------------- ---------------
Robert Kassel Date
Natural Earth Technologies dba
US Home & Garden
THIS LEASE AGREEMENT, made as of July 1, 1988, among ANNETTE FOX, LAKE
POLAN, III, MARILYN JABLO, ROSILYN ROSS and LOIS ANNE POLAN, doing business as
VALOP REALTY COMPANY, a partnership, hereinafter referred to as "Lessors", and
INTERNATIONAL SPIKE, INC., a corporation created and existing under the laws of
the Commonwealth of Kentucky, hereinafter referred to as "Lessee".
WITNESSETH that for and in consideration of the rentals herein reserved and
to be paid by Lessee to Lessors, and of the covenants and agreements herein
contained and to be kept and performed by Lessee, Lessors do hereby lease and
demise unto Lessee, for a term of ten years, beginning on the 1st day of July,
1988, and ending at midnight on June 30, 1998, all that certain piece or parcel
of real estate situated in Paris, Bourbon County, Kentucky, as described in
Exhibit A which is attached hereto and made a part hereof, together with all of
the appurtenances thereto and the improvements thereon, but subject to the
exceptions set forth in Exhibit 3, which is attached hereto and made a part
hereof. The premises herein leased and demised are hereinafter sometimes
referred to as the "demised premises."
Lessee in consideration of said lease and demise, hereby accept the lease
of the demised premises from Lessors for the term and period aforesaid upon the
following covenants, agreements, term and conditions:
I. RENTAL
Lessee covenants and agrees to pay to Lessors for the demised premises as
rent reserved under contract the sum of $1,200,000.00, payable in equal monthly
installments of $10,000.00 each, beginning on the 1st day of July, 1988.
II. POSSESSION
Lessee has the right to quietly enjoy possession of the demised premises,
subject to the terms and conditions contained herein.
III. REPAIRS
Lessee covenants and agrees that it will, at its own cost and expense, keep
the demised premises, including the building to be constructed by Lessors upon
the demised premises, in good repair at all times throughout the term of this
lease and return the same in such good repair and condition to Lessors at the
termination of this lease, reasonable wear and use excepted, and in no event
shall any damage to said premises or lack of repair impose any burden upon
Lessors whatsoever or affect or diminish the obligations of Lessee to pay the
rental herein provided for
<PAGE>
and to keep and perform the covenants herein contained and to be kept and
performed by Lessee. It is expressly provided, however, that in the event the
demised premises shall be damaged or destroyed by fire or other casualty, the
provisions of this article shall not apply but the provisions of Article XI
hereof shall control. Beyond Lessee's hereinabove described duty to keep the
demised premises in good repair. The Lessor shall make all repairs, changes,
alterations, and additions which may be required by an laws, ordinances, orders,
or regulations of any public authorities having jurisdiction over the leased
property, except that the Lessee shall make all such repairs, changes,
alterations and additions required because of any use made of the demised
premises by Lessee peculiar to the use of Lessee.
IV. ALTERATIONS
(a) Lessors agree that at any time during the term of this lease, if Lessee
is not in default of its obligations under this lease, Lessee shall have the
right to make any and all improvements or alterations to the demised premises
which it shall consider advisable; provided, however, that no such alterations
shall lessen the value or weaken the structural integrity of the improvements
now located upon the demised premises.
(b) Before making any improvements or alterations, Lessee agrees that it
will first submit to Lessors the plans and specifications covering the
construction details of such proposed improvements or alterations, to the end
that Lessors can determine and advise Lessee as to whether such improvements or
alterations will lessen the value or weaken the structural integrity of the
improvements now located upon the demised premises. Lessors shall notify Lessee
in writing of their approval or disapproval of the proposed improvements or
alterations within thirty (30) days from the date of receipt by them of the
plans and specifications. In the event Lessors should disapprove of any such
proposed improvements or alterations, the parties hereto shall jointly endeavor
to agree on acceptable plans and specifications, and if the parties cannot agree
within sixty (60) days following the receipt by Lessee of Lessor's written
disapproval, the Lessee may submit the matter to arbitration before the American
Arbitration Association and the decision of such arbitration shall be, and is
hereby deemed to be, a condition precedent to litigation by either party.
(c) In the event Lessee shall make any such improvements or alterations, it
shall before undertaking such work, indemnify and [sic] laborer's liens with
respect to the construction of such improvements and alterations by obtaining,
at its own cost and expense, and delivering to Lessors a good and appropriate
surety bond in a penal amount of not less than the anticipated construction
cost.
<PAGE>
(d) All such alterations or improvements made by Lessee to the demised
premises under the provisions of this article shall become a part of the realty
and belong to Lessors, subject only to the terms of this lease, and Lessee shall
not have the right to remove the same; provided, however, Lessee may at any time
prior to or upon the termination of this lease remove from the demised premises
all materials, machinery, equipment, and property used in its business conducted
by Lessee thereon.
V. USE OF PREMISES
Lessee covenants and agrees that it will use the demised premises solely
for the purposes of conducting a manufacturing operation and in conjunction
therewith to make sales of manufactured products from the demised premises and
to engage generally in other types of business normally associated with a
manufacturing operation, including, but not limited to, warehousing. Lessee
further covenants and agrees that it will not use said premises or any part
thereof in an unlawful manner or for an unlawful purpose and that it will comply
with all federal, state, and municipal laws, ordinances, and regulations with
respect to said premises and the use thereof, and will save harmless Lessors
from any penalty, damage, or charge imposed or incurred by the violation of any
such law, ordinance, or regulation, whether occasioned by lessee or any agent,
tenant, contractor or other person then [sic] authority to enter into this lease
for the term herein granted and that the leased property may be used by lessee
during the entire term for the purposes above set forth.
VI. RIGHT OF INSPECTION
Lessors, by and through their agent or agents, shall at all reasonable
times during the term of this lease have the right to enter upon and inspect the
demised premises for the purposes of determining whether or not the covenants,
agreements, and obligations by Lessee herein made are being faithfully
performed.
VII. INSURANCE
Lessee shall keep the improvements located upon the demised premises
insured throughout the term of this lease against the following:
1. Loss or damage by fire and such other risks as may be included in the
broadest form of extended coverage insurance from time to time available, in an
amount not less than $650,000.00 which amount may be either increased or
decreased upon sixty (60) days' written notice to Lessee from time to time to
reflect an appraisal of the demised premises and all improvements thereon to be
made by Industrial Appraisal Company or such other recognized appraisal company
at the sole cost and expense of Lessors. Any appraisal made pursuant to this
paragraph shall be made solely
<PAGE>
for the purposes of establishing the value of the demised premises and all
improvements thereon for purposes of insurance. If Lessee takes exception to any
said appraisal made on behalf of Lessors, and the parties cannot agree within
thirty [sic] Lessee shall submit the matter to arbitration before the American
Arbitration Association, and the decision of such arbitration shall be binding
upon the parties.
2. Loss or damage by explosion of steam boilers or other similar apparatus
now or hereafter installed in any building located upon the demised premises in
such limits with respect to any one accident as may be reasonably requested from
time to time by Lessors.
Policies of insurance required to be maintained by Lessee as hereinabove
provided shall be payable in the event of loss to Lessees and to Lessors, as
their interests may appear or, if requested by Lessors, to Lessees, Lessors and
their mortgagees as their interests may appear under a standard mortgage clause.
All insurance required to be maintained by Lessee shall be effected under
enforceable policies issued by insurers of recognized responsibility licensed to
do business in the Commonwealth of Kentucky. At least thirty (30) days prior to
the expiration of any policy of insurance Lessee is obligated to carry under
this lease, Lessee shall furnish a binder to Lessors renewing each such policy.
Each policy and/or binder shall provide for at least fifteen (15) days' notice
to Lessors of any change or cancellation thereof. Lessee shall promptly deliver
to Lessors a certification from the insurance carrier evidencing the renewal of
the policy and the payment of premium.
Notwithstanding any provision to the contrary herein, the Lessee may insure
its interest in the leasehold improvements installed on the premises by the
Lessee, and the Lessors shall have no claim for the proceeds of insurance
payable to the Lessee for loss or damage sustained thereto.
VIII. TAXES AND ASSESSMENT
Lessee agrees to pay all state, county, municipal and school district taxes
and all other assessments of any kind or character assessed against the demised
premises with respect to all of the years of its tenancy as called for herein.
Lessee covenants that it will, throughout the term of this lease, pay for
all water, heating and gas, natural or artificial, electricity for all purposes,
and every other service, commodity supplied to Lessee or used upon or in
connection with the demised premises. During the final year of this lease taxes
will be prorated.
<PAGE>
IX. DAMAGE OF DESTRUCTION OF PREMISES
BY FIRE OR OTHER CASUALTY
If, at any time during the term of this lease, the improvements upon the
demised premises should be damaged or destroyed by fire or other casualty to an
extent that the cost of rebuilding or repairing the same would be an amount in
excess of fifty percent or more of the insurable value of such improvements at
the time of such fire or other casualty, then either Lessors or Lessee shall
have the right to cancel this lease by giving to the other five (5) days written
notice thereof within thirty (30) days after the date of any such damage or
destruction. If such right shall be exercised by either Lessors or Lessee, this
lease shall terminate on the date specified in such notice, and all taxes,
rents, and other charges shall be prorated and paid to the date specified in
such notice of termination. If such right shall not be exercised by either
Lessors or Lessee, this lease shall continue and Lessors shall, at their own
expense, proceed promptly to rebuild. In the event the improvements upon the
demised premises should be damaged by fire or other casualty at any time during
the term of this lease, but not to the extent hereinabove in this article
provided, Lessors shall forthwith, at their own expense, repair, replace and
rebuild improvements.
If any damage resulting from fire or other casualty shall be so extensive
as to interfere with the conduct of Lessee's business upon he demised premises,
there shall be a just and proportionate abatement of the rent until such time as
such damage shall have been repaired. [sic] carriers, hereby waive any claim or
subrogation agist Lessee arising as a result of any loss to the improvements
upon the demised premises covered by a standard insurance policy or policies and
arising by reason of fire or other casualty.
X. INDEMNITY
Lessee shall save harmless and indemnify Lessors from and against all loss,
cost and expense, including attorneys fees, arising in any manner or under any
circumstances through the exercise of any rights conferred hereby, including
personal injuries sustained on the premises covered by this lease or on the
sidewalks or alleys adjacent thereto. For the further protection of Lessors,
Lessee covenants and agrees that, throughout the term of this lease, it will, at
its sole expense, carry public liability insurance on the demised premises with
a proper endorsement naming Lessors as additional insureds thereunder, which
insurance shall be for no less than $500,000.00 for injury or death to any one
person, $1,000,000.00 for any one occurrence and $100,000.00 for property
damage. Lessee shall furnish to Lessors a certificate evidencing the above
insurance.
<PAGE>
XI. WAIVER OF BREACH
Each of the parties hereto covenants that any waiver by the other party of
the keeping or performance of any covenant, agreement, or undertaking to be kept
or performed in the manner and at the time herein provided shall not be
construed as a waiver of any subsequent breach or failure to keep or perform
that or any other covenant, agreement, or undertaking to be kept or performed,
and any indulgence by the other party in enforcing or failing to enforce to tak
advantage of any remedy herein provided for or to which it may be entitled at
any time shall enforce the same at any other time.
XII. QUIET POSSESSION
Lessors covenant that, subject to the right of forfeiture and re-entry as
hereinabove provided int he event of Lessee's failure to pay all rental and
perform all covenants and agreements as herein set forth, Lessee shall have
quiet possession of the demised premises during the term of this lease.
XIII. FORFEITURE ON DEFAULT
Lessee covenants that if at any time default should be made in the payment
of any one or more of the payments of rental or in the payment of any other sum
due under the terms hereof when and as such rentals or other sums shall be due
and payable as herein provided and such default should continue for a period of
ten days after written notice thereof by registered mail shall have been given
Less by Lessors, or if Lessee should fail to keep or be guilty of breach of any
one or more of the covenants or agreement by it herein made other than for the
payment of rent or other sums of money as herein provided, and such failure or
breach should continue for a period of thirty days after written notice by
registered mail shall have been given to Lessee of such breach, or if Lessee
should be adjudged a bankrupt or, because of Lessee' insolvency, a receiver
should be appointed to take charge of its property or affairs and said receiver
should not be discharged within four months, then, in any of these events, this
lease shall, at the option of Lessors, become and be forthwith forfeited and
terminated, and Lessors shall have the right at any time afterwards, without
further notice or demand of any character whatsoever, to re-enter into or upon
the demised premises or a part thereof in the name of the whole and repossess
and enjoy the same as of their former estate.
XIV. CONDEMNATION
If the whole of the demised premises should be taken for public or
quasi-public use by any public authority under the power of eminent domain or by
private purchase in lieu thereof, then this lease shall automatically terminate
as of the date that title shall be taken. In the event of such termination,
Lessee
<PAGE>
shall be entitled to be paid by Lessors from the condemnation award an amount
equal to the unamortized cost to Lessee of all leasehold improvements made by it
during the term of this lease. The phrase "unamortized cost" as used herein
shall mean the cost of such improvements during the period beginning on the date
of the completion of such improvements and ending on the date of the taking
computed in accordance with the method adopted by the Lessee for purposes of
federal income taxes and evidenced by its federal income tax returns. No other
claim shall be made by Lessee against Lessors with respect to any condemnation
proceedings other than the claim herein specifically mentioned, it being the
intention of the parties that all proceeds of condemnation, except the aforesaid
claim of Lessee, shall be retained by Lessors.
XV. ASSIGNMENT OR SUBLETTING
This lease shall not be assigned or sublet by Lessee without the express
written consent of Lessors, which consent shall not be unreasonably withheld.
XVI. NOTICES
Any notice which either Lessors or Lessee may desire to serve upon the
other party may be served by mailing such notice by registered mail addressed as
follows:
To Lessors at P.O. Box 1700, Huntington, West Virginia 25717.
All rents and other payments to be made hereunder shall be made to Lessors
at the above address.
Either party may change its mailing address by giving written notice of
such change of address to the party by registered mail.
IN WITNESS WHEREOF, Lessors have each hereunto set their hand and seal,
Lessee has caused its corporate name to be hereunto signed and its corporate
seal to be hereunto affixed by its proper officer thereunto duly authorized, and
Optionees have each hereunto set their hand and seal, all as the day and date
first above written.
/s/ ANNETTE FOX (SEAL)
-----------------------------
ANNETTE FOX
/s/ LAKE POLAN, III (SEAL)
-----------------------------
LAKE POLAN, III
<PAGE>
/s/ MARILYN JABLO (SEAL)
-----------------------------
MARILYN JABLO
/s/ ROSILYN ROSS (SEAL)
-----------------------------
ROSILYN ROSS
/s/ LOIS ANNE POLAN (SEAL)
-----------------------------
LOIS ANNE POLAN
INTERNATIONAL SPIKE, INC.
(Corporate Seal) By /s/ JAMES R. MILLS (SEAL)
--------------------------
Its Chief Operating Officer
This instrument prepared by:
_______________________________
Eugene R. Hoyer
HOYER, HOYER & SMITH
Capitol Street
Charleston, WV 25501
<PAGE>
EXHIBIT "A"
CECIL C. HARP ENGINEERS
180 Market Street
Lexington, Kentucky
40507
--------
Telephone
November 30, 1973
LEGGETT AND MYERS INCORPORATED
ON 17TH STREET, HANSLEY STREET,
NORTH CLIFTON STREET EXTENDED AND BRENT STREET
IN PARIS, BOURBON COUNTY, KENTUCKY
All that tract or parcel of land situated in Paris, Bourbon County, Kentucky and
more fully described and bounded as follows, to-wit:
Beginning at a point in the southeast extremity of 17th Street, said
point being marked by an iron pin 4 feet southwest of the southwest
wall of the Bourbon (brick| Warehouse; thence parallel to and four
feet from the aforesaid wall S 28(degrees) 52' E. 184.57 feet to an
iron pin in the Louisville and Nashville Railroad West right-of-way;
thence with said west right-of-way for two calls, S 30(degrees) 58' W
390.2 feet to an iron pin and S 31(degrees) 19' W 340.05 feet to an
iron pin, corner to property owned by the Louisville and Nashville
Railroad thence with the aforesaid railroad property for two calls, N
29(degrees) 15' W 136.85 feet to an iron pin and S 31(degrees) [sic]
feet to an iron fence post corner to Lot [sic] of the Fairground
Addition as recorded in Deed Book 89 Page 488 in the Bourbon County
Clerk's Office; thence the line of the aforesaid Lot 14, N 55(degrees)
53' W 97.26 feet to an iron fence post in the southeast property line
of Brent Street; thence with the property line of Brent Street for two
calls, N 33(degrees) 42 1/2' W 121.73 feet to a corner of Lots 10 and
11 of the aforementioned Fairgrounds Addition; thence with the line of
the aforementioned Lots 10 and 11, N 51(degrees) 43' E 150 feet;
thence with the rear line of the aforementioned Lot 10, N 29(degrees)
15' W 11.53 feet to the fence on the southeast side of North Clifton
Street Extended; thence with the aforementioned fence and its line
extended N 51o 43' E 297.57 feet, thence N 29(degrees) 53 1/2' W 66.65
feet to a
<PAGE>
concrete nail in the paving where North Clifton Street Extended comes
into Hansley Street; thence N 60(degrees) 01 1/2' E parallel to and
thirty feet southeast of the southeast wall of the Paris (brick)
Warehouse, now Central District Warehousing Corporation, 161.61 feet
to an iron pin; thence N 30(degrees) 11' W parallel to and four feet
northeast of the northeast wall of the aforementioned warehouse 115.21
feet to an iron pin thence N 63(degrees) 23' E 183.76 feet to the
beginning and containing 4.316 acres.
<PAGE>
Exhibit B
LEASEHOLD EXCEPTION
There is excepted and reserved to Lessors, their heirs and assigns, from
the demised premises as described in the lease to which this Exhibit is
attached, the area outlined in red hereon with the rights appurtenant thereto,
which include:
1. The existing boiler house,
2. The existing smokestack,
3. Three feet of land outside the exterior walls of the boiler house and
smokestack,
4. A ten foot easement (to be located by Lessors so as not to interfere
with Lessee's operations) from the existing boiler house to the
property line for underground pipes and conduits,
5. Right of access to the area reserved, and
6. Necessary easements for utilities to the area reserved.
Lessors shall have the right to remove the machinery and equipment from the
existing boiler house and, as well, to demolish and remove the existing boiler
house building and the existing smokestack.
FIRST AMENDMENT TO
CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("First Amendment") dated as of
April 3, 1997 by and among EASY GARDENER ACQUISITION CORP., a Delaware
corporation, (the "Borrower") U.S. HOME & GARDEN INC., a Delaware corporation,
("Guarantor"), THE PROVIDENT BANK, an Ohio banking corporation ("Agent") and
LASALLE NATIONAL BANK, ANTARES LEVERAGED CAPITAL CORP. and THE PROVIDENT BANK
("Lenders").
PRELIMINARY STATEMENT
WHEREAS, Borrower, Agent and Lenders have entered into a Credit Agreement
dated as of August 9, 1996, (the "Credit Agreement"); and
WHEREAS, Borrower has requested Agent and Lenders to provide additional
revolving credit loans to provide Borrower additional working capital to fund
its operations; and
WHEREAS, Borrower, Agent and Lenders now wish to amend the Credit Agreement
in accordance with the terms and provisions hereof;
NOW, THEREFORE, the parties hereto agree to supplement and amend the Credit
Agreement upon such terms and conditions as follows:
1. Capitalized Terms. All capitalized terms used herein shall have the
meanings assigned to them in the Credit Agreement unless the context hereof
requires otherwise. Any definitions as capitalized terms set forth herein shall
be deemed incorporated into the Credit Agreement as amended by this First
Amendment.
2. Definitions; Exhibits; and Schedules; (a) The following definitions
contained in Section 1.2 of the Credit Agreement are hereby amended in their
entirety to read as follows:
"Credit Commitment" means, in the context of more than one Lender
hereunder, the maximum amount to be loaned by such Lender to Borrower as
set forth on Schedule 1 hereto or as such Credit Commitment may be amended
from time to time or as such is adjusted from time to time amended pursuant
to Section hereof.
"Revolving Credit Commitment" means Thirteen Million and 00/100
Dollars ($13,000,000.00) during the months of January and June through
December and Sixteen Million and 00/100 Dollars ($16,000,000.00) during the
months of February, March, April and May of each year.
(b) Exhibit C of the Credit Agreement is hereby amended in its entirety by
Exhibit C attached to this First Amendment.
<PAGE>
- 2 -
3. Reaffirmation of Covenants, Warranties and Representations. Borrower
hereby agrees and covenants that all representations and warranties in the
Credit Agreement, including without limitation all of those warranties and
representations set forth in Article 4 are true and accurate as of the date
hereof. Borrower further reaffirms all covenants in the Credit Agreement, and
reaffirm each of the affirmative covenants set forth in Article 5 and negative
covenants set forth in Article 6 thereof, as if fully set forth herein, except
to the extent modified by this First Amendment.
4. Conditions Precedent to Closing of First Amendment. On or prior to the
closing of the First Amendment (hereinafter the "First Amendment Closing Date"),
each of the following conditions precedent shall have been satisfied:
(a) Proof of Corporate Authority. Agent shall have received from
Borrower copies, certified by a duly authorized officer to be true and
complete on and as of the First Amendment Closing Date, of records of all
action taken by Borrower to authorize (i) the execution and delivery of
this First Amendment and all other certificates, documents and instruments
to which it is or is to become a party as contemplated or required by this
First Amendment, and (ii) its performance of all of its obligations under
each of such documents. Agent shall have received from the Delaware
Secretary of State a Certificate of Good Standing of recent date certifying
the existence and good standing of Borrower and Guarantor under the laws of
the State of Delaware and a good standing for Borrower in each state where
Borrower is required to qualify to conduct business.
(b) Documents. Each of the documents to be executed and delivered at
the First Amendment Closing and all other certificates, documents and
instruments to be executed in connection herewith shall have been duly and
properly authorized, executed and delivered by Borrower and shall be in
full force and effect on and as of the First Amendment Closing Date.
(c) Legality of Transactions. No change in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful (i) for Agent and each Lender to perform any of its agreements or
obligations under any of the Loan Documents, or (ii) for Borrower to
perform any of its agreements or obligations under any of the Loan
Documents.
(d) Performance, Etc. Except as set forth herein, Borrower shall have
duly and properly performed, complied with and observed each of its
covenants, agreements and obligations contained in each of the Loan
Documents. Except as set forth herein, no event shall have occurred on or
prior to the First Amendment Closing Date, and no condition shall exist on
the First Amendment Closing Date, which constitutes a Default or an Event
of Default.
(e) Proceedings and Documents. All corporate, governmental and other
proceedings in connection with the transactions contemplated on the First
Amendment
<PAGE>
- 3 -
Closing Date, including execution and delivery of amended and restated
Revolving Credit Notes to each Lender in the amounts of their respective
Credit Commitments, each of the other Loan Documents and all instruments
and documents incidental thereto shall be in form and substance reasonably
satisfactory to Agent.
(f) Changes; None Adverse. Since the date of the most recent balance
sheets of Borrower delivered to Provident, no changes shall have occurred
in the assets, liabilities, financial condition, business, operations or
prospects of Borrower which, individually or in the aggregate, are material
to Borrower, and Provident shall have completed such review of the status
of all current and pending legal issues as Agent shall deem necessary or
appropriate.
(g) Closing Fees. Agent shall have receive, for the benefit of Lenders
in accordance with their Participation Percentages, their portion of the
closing fee of $60,000 with respect to the amendment to the Revolving
Credit Commitment.
5. Miscellaneous. (a) Borrower shall reimburse Agent for all fees and
disbursements of legal counsel to Agent which shall have been incurred by Agent
in connection with the preparation, negotiation, review, execution and delivery
of this First Amendment and the handling of any other matters incidental hereto.
(b) All of the terms, conditions and provisions of the Agreement not herein
modified shall remain in full force and effect. In the event a term, condition
or provision of the Agreement conflicts with a term, condition or provision of
this First Amendment, the latter shall govern.
(c) This First Amendment shall be governed by and shall be construed and
interpreted in accordance with the laws of the State of Ohio.
(d) This First Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, successors and
assigns.
(e) This First Amendment may be executed in several counterparts, each of
which shall constitute an original, but all which together shall constitute one
and the same agreement.
[Remainder of page intentionally left blank. Signature page follows.]
<PAGE>
- 4 -
IN WITNESS WHEREOF, this First Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the day and in the year
first above written.
SIGNED IN THE PRESENCE OF: EASY GARDENER ACQUISITION CORP.,
Borrower
/s/ By: /s/ Richard J. Raleigh
- ------------------------------ ------------------------------
/s/ Lynda G. Gustafson Name: Richard J. Raleigh
- ------------------------------ Title: Corporate Secretary
U.S. HOME & GARDEN INC., Guarantor
/s/ By: /s/ Richard J. Raleigh
- ------------------------------ ------------------------------
/s/ Lynda G. Gustafson Name: Richard J. Raleigh
- ------------------------------ Title: C.O.O.
THE PROVIDENT BANK, Agent
/s/ Joy E. Herald By: /s/ Nick Jevic
- ------------------------------ ------------------------------
/s/ Leslie McHugh Name: Nick Jevic
- ------------------------------ Title: Vice President
THE PROVIDENT BANK, Lender
/s/ Joy E. Herald By: /s/ Nick Jevic
- ------------------------------ ------------------------------
/s/ Leslie McHugh Name: Nick Jevic
- ------------------------------ Title: Vice President
<PAGE>
- 5 -
LASALLE NATIONAL BANK, Lender
/s/ Kelly [Whitney] By: /s/ Jeffrey D. Kadlic
- ----------------------------- ---------------------------------
Name: Jeffrey D. Kadlic
Title: Commerical Lending Officer
ANTARES LEVERAGED CAPITAL
CORP., Lender
/s/ Stephanie [Neal] By: /s/ Eric P. Hansen
- ------------------------------ --------------------------------
Name: Eric P. Hansen
Title: Director
/s/
- ------------------------------
<PAGE>
SCHEDULE 1
Lender Credit Commitment
------ -----------------
The Provident Bank Revolving Credit Commitment:
Percentage: 37.254902% $5,960,784.32
Term Loan I Commitment:
$8,568,627.46
Term Loan II Commitment:
$838,235.30
LaSalle National Bank Revolving Credit Commitment:
Percentage: 29.411765% $4,705,882.36
Term Loan I Commitment:
$6,764,705.95
Term Loan II Commitment:
$661,764.71
Antares Leveraged Capital Corp. Revolving Credit Commitment:
Percentage: 33.333333% $5,333,333.32
Term Loan I Commitment:
$7,666,666.59
Term Loan II Commitment:
$749,999.99
SECOND AMENDMENT TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT ("Second Amendment") dated as of
May 9, 1997 by and among EASY GARDENER ACQUISITION CORP., a Delaware
corporation, (the "Borrower") U.S. HOME & GARDEN INC., a Delaware corporation,
("Guarantor"), THE PROVIDENT BANK, an Ohio banking corporation ("Agent") and
LASALLE NATIONAL BANK, ANTARES LEVERAGED CAPITAL CORP. and THE PROVIDENT BANK
("Lenders").
PRELIMINARY STATEMENT
WHEREAS, Borrower, Agent and Lenders have entered into a Credit Agreement
dated as of August 9, 1996, and by a First Amendment to Credit Agreement dated
as of April 3, 1997 (the "Credit Agreement"); and
WHEREAS, Borrower has requested Agent and Lenders to provide additional
loans to fund the purchase by Borrower of the assets of Plasti-Chain; and
WHEREAS, Borrower, Agent and Lenders now wish to amend the Credit Agreement
in accordance with the terms and provisions hereof;
NOW, THEREFORE, the parties hereto agree to supplement and amend the Credit
Agreement upon such terms and conditions as follows:
1. Capitalized Terms. All capitalized terms used herein shall have the
meanings assigned to them in the Credit Agreement unless the context hereof
requires otherwise. Any definitions as capitalized terms set forth herein shall
be deemed incorporated into the Credit Agreement as amended by this Second
Amendment.
2. Definitions; Exhibits; and Schedules; (a) The following definitions
contained in Section 1.2 of the Credit Agreement are hereby amended in their
entirety to read as follows:
"Borrowing Base" means the sum of (A) Fifty Percent (50%) of the cost
or market value, whichever is lower, of Eligible Inventory, not to exceed
Seven Million and 00/100 Dollars ($7,000,000.00), and (B) Eighty Percent
(80%) of the outstanding amount of Eligible Accounts (excepting those
Eligible Accounts which have a due date more than ninety (90) days but not
more than one hundred fifty (150) days past the invoice date, with respect
to which the advance rate shall be Fifty Percent (50%), not to exceed Four
Million Dollars ($4,000,000.00)), less deductions for co-op advertising
liability, customer rebate liabilities and the other deductions specified
on the Borrowing Base Report.
"Credit Commitment" means, in the context of more than one Lender
hereunder, the maximum amount to be loaned by such Lender to Borrower as
set forth on Schedule 1 hereto or as such Credit Commitment may be amended
from
<PAGE>
- 2 -
time to time or as such is adjusted from time to time amended pursuant to
Section hereof.
"Term Loans" means the Term Loan I, the Term Loan II and the Bridge
Loan.
"Term Notes" means the Term Notes I, the Term Notes II and the Bridge
Notes.
(b) Section 1.2 of the Credit Agreement is hereby amended to add the
following definitions to read in their entirety as follows:
"Bridge Loans" shall have the meaning set forth in Section 2.5A.
"Bridge Notes" shall have the meaning set forth in Section 2.5A.
"Make-Whole Amount" - means an amount equal to (i) the sum of the
present values of the then remaining scheduled payments of principal and
interest discounted at the Make-Whole Discount Rate, (ii) minus the sum of
the outstanding principal amount and the amount of interest accrued on such
principal since the immediately preceding scheduled payment date; provided,
however, that in no event shall the Make-Whole Amount be less than zero.
"Make-Whole Discount Rate" means, at any time, with respect to the
principal amount of the Loan being prepaid, the per annum percentage rate
(rounded to the nearest basis point) equal to (i) the arithmetic mean of
the average annual yields to maturity for actively traded marketable United
States Treasury fixed interest rate securities, adjusted to a rate equal to
that reported for U.S. Government--Treasury Constant Maturity (as such term
is calculated and defined in the then applicable Statistical Release H.15
published by the Federal Reserve Board) for the two calendar weeks ending
on the Saturday next preceding the date of prepayment most nearly equal to
the weighted average life to maturity of the outstanding remaining payments
of principal.
"Plasti-Chain Acquisition" means the acquisition by Borrower of
substantially all the properties and assets of Plastic Molded Concepts,
Inc., a Wisconsin corporation ("PMC") related to a product line of PMC
commonly known as the Plastic-Chain product line, substantially on the
terms and conditions of an Asset Purchase Agreement dated as of May 9, 1997
among Guarantor, Borrower and PMC.
(c) The Credit Agreement is hereby amended to add a new Exhibit R to read
in its entirety as Exhibit R to this Second Amendment.
<PAGE>
- 3 -
(d) Schedule 4.9 of the Credit Agreement is hereby amended to add the
Intellectual Property Matters listed on Schedule 4.9A to this Second Amendment.
(e) Schedule 4.20 of the Credit Agreement is hereby amended to add the
jurisdictions listed on Schedule 4.20A to this Second Amendment.
3. Bridge Loan Commitment and Terms. Article 2 of the Credit Agreement is
hereby amended to add a new Section 2.5A to be inserted immediately preceding
Section 2.6 to read in its entirety as follows:
Section 2.5A Bridge Loan.
(a) Commitment. Each Lender, severally and not jointly, subject to the
terms and conditions of this Agreement, hereby agrees to make loans to Borrower
in an amount equal to its Participation Percentage of the bridge loans of Three
Million Eight Hundred Thousand and 00/100 Dollars ($3,800,000.00) ("Bridge
Loan").
(b) Bridge Notes. The absolute and unconditional obligation of the Borrower
to repay the principal of the Bridge Loans and the interest thereon shall be
evidenced by promissory notes executed by the Borrower to each Lender in
substantially the form of Exhibit R. In the event of an assignment under Section
10.17(a), Borrower shall issue new notes to reflect the new Credit Commitments
of the assigning Lender and the assignee thereof. The Bridge Notes shall include
the following terms:
(i) Bridge Loan Maturity. Each Bridge Note shall be dated as of the
Second Amendment Closing Date and shall mature and be due and payable in
full on November 5, 1997.
(ii) Interest Rate. Each Bridge Note shall bear interest (computed on
the basis of the actual number of days elapsed over a 360-day year) on the
daily outstanding principal balance thereunder at a rate per annum equal to
Twelve percent (12%) per annum. No part of the Bridge Loan shall be
eligible to become a Libor Rate Loan pursuant to Section 2.6.
(iii) Interest Payment Dates. Interest on the Bridge Notes shall be
payable monthly in arrears on the last Business Day of each month beginning
May 31, 1997, for the account of Lenders in accordance with their
respective Pro Rata Shares, and on the date a Bridge Loan is due (whether
by maturity, acceleration or otherwise).
4. Prepayment of Bridge Loan. Section 2.9(b) of the Credit Agreement is
hereby amended to add a new sentence at the end thereof to read as follows:
"The Borrower shall have the right to prepay the principal of Bridge Loan
in full at any time and in part from time to time upon notice to Lenders at
least three (3) Business Days prior to the specified prepayment date and
upon payment to
<PAGE>
- 4 -
Lenders of the Make Whole Amount with respect to the Bridge Loan principal
being prepaid."
5. Application of Funds. Section 2.11(f) of the Credit Agreement is hereby
amended in its entirety to read as follows:
"(f) Sixth, to the payment of any outstanding principal on the Bridge
Loan, and then, if such payment is received in connection with a prepayment
in full of the Term Loan I and a termination of the Revolving Credit
Commitment, the payment of any outstanding principal of the Term Loan II
Notes; and"
6. Use of Proceeds. Section 2.13 of the Credit Agreement is hereby
amended to add a new sentence at the end thereof to read as follows:
"The Borrower represents, warrants and covenants to the Agent and each
Lender that all proceeds of the Bridge Loan shall be used by the Borrower
solely for the purpose of financing all or a portion of the transactions
contemplated by the Plasti-Chain Acquisition."
7. Additional Security for Loans. Section 3.3 of the Credit Agreement is
hereby amended to delete the word "and" at the end of clause (c), to replace the
"." at the end of clause (d) with "; and", to add a new clause (e) to read as
follows:
(e) each of the following documents with respect to the Plasti-Chain
Acquisition:
(i) a Collateral Assignment of Purchase Agreement;
(ii) a Collateral Assignment of Management and Manufacturing
Contracts;
(iii) UCC-1 Financing statements for each of the jurisdictions
set forth on Schedule 4.20A of the Second Amendment; and
8. EBITDA. Section 6.8 of the Credit Agreement is hereby amended in its
entirety to read as follows:
Section 6.8 EBITDA. Borrower shall not permit EBITDA for the Reference
Period ending on each Computation Date set forth below to be less than the
dollar amount set forth below opposite such date.
<PAGE>
- 5 -
- --------------------------------------------------------------------------------
COMPUTATION DATE AMOUNT
- --------------------------------------------------------------------------------
December 31, 1996 $1,400,000
- --------------------------------------------------------------------------------
March 31, 1997 6,700,000
- --------------------------------------------------------------------------------
June 30, 1997 11,500,000
- --------------------------------------------------------------------------------
September 30, 1997 12,000,000
- --------------------------------------------------------------------------------
December 31, 1997 12,000,000
- --------------------------------------------------------------------------------
March 31, 1998 13,500,000
- --------------------------------------------------------------------------------
June 30, 1998 14,250,000
September 30, 1998
December 31, 1998
March 31, 1999
- --------------------------------------------------------------------------------
June 30, 1999 16,000,000
September 30, 1999
December 31, 1999
March 31, 2000
- --------------------------------------------------------------------------------
June 30, 2000, and each Computation 17,000,000
Date thereafter
- --------------------------------------------------------------------------------
9. Fixed Charge Coverage. For purposes of calculating compliance with
Section 6.9 of the Credit Agreement, for Reference Periods including any period
during which the Bridge Loan is outstanding, the calculation of Fixed Charges
shall be reduced by the outstanding balance of the Bridge Loan at such time.
10. Reaffirmation of Covenants, Warranties and Representations. Borrower
hereby agrees and covenants that all representations and warranties in the
Credit Agreement, including without limitation all of those warranties and
representations set forth in Article 4 are true and accurate as of the date
hereof. Borrower further reaffirms all covenants in the Credit Agreement, and
reaffirm each of the affirmative covenants set forth in Article 5 and negative
covenants set forth in Article 6 thereof, as if fully set forth herein, except
to the extent modified by this Second Amendment.
11. Conditions Precedent to Closing of Second Amendment. On or prior to the
closing of the Second Amendment (hereinafter the "Second Amendment Closing
Date"), each of the following conditions precedent shall have been satisfied:
(a) Proof of Corporate Authority. Agent shall have received from
Borrower and Guarantor copies, certified by a duly authorized officer to be
true and complete on and as of the Second Amendment Closing Date, of
records of all action taken by Borrower to authorize (i) the execution and
delivery of this Second Amendment and all
<PAGE>
- 6 -
other certificates, documents and instruments to which it is or is to
become a party as contemplated or required by this Second Amendment, and
(ii) its performance of all of its obligations under each of such
documents.
(b) Documents. Each of the documents to be executed and delivered at
the Second Amendment Closing and all other certificates, documents and
instruments to be executed in connection herewith shall have been duly and
properly authorized, executed and delivered by Borrower and shall be in
full force and effect on and as of the Second Amendment Closing Date.
(c) Legality of Transactions. No change in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful (i) for Agent and each Lender to perform any of its agreements or
obligations under any of the Loan Documents, or (ii) for Borrower to
perform any of its agreements or obligations under any of the Loan
Documents.
(d) Performance, Etc. Except as set forth herein, Borrower shall have
duly and properly performed, complied with and observed each of its
covenants, agreements and obligations contained in each of the Loan
Documents. Except as set forth herein, no event shall have occurred on or
prior to the Second Amendment Closing Date, and no condition shall exist on
the Second Amendment Closing Date, which constitutes a Default or an Event
of Default.
(e) Proceedings and Documents. All corporate, governmental and other
proceedings in connection with the transactions contemplated on the Second
Amendment Closing Date, including execution and delivery of a Bridge Note
to each Lender in the amount of its respective Credit Commitments, each of
the other Loan Documents and all instruments and documents incidental
thereto shall be in form and substance reasonably satisfactory to Agent.
(f) Changes; None Adverse. Since the date of the most recent balance
sheets of Borrower delivered to Provident, no changes shall have occurred
in the assets, liabilities, financial condition, business, operations or
prospects of Borrower which, individually or in the aggregate, are material
to Borrower, and Provident shall have completed such review of the status
of all current and pending legal issues as Agent shall deem necessary or
appropriate.
(g) Closing Fees. Agent shall have receive, for the benefit of Lenders
in accordance with their Participation Percentages, their portion of the
closing fee of $84,000 with respect to the Bridge Loan.
(h) Plasti-Chain Acquisition. Borrower shall have closed, or be
prepared to close contemporaneously with the closing of this Second
Amendment, the Plasti-Chain Acquisition on terms and conditions reasonably
satisfactory to Agent.
<PAGE>
- 7 -
12. Miscellaneous. (a) Borrower shall reimburse Agent for all fees and
disbursements of legal counsel to Agent which shall have been incurred by Agent
in connection with the preparation, negotiation, review, execution and delivery
of this Second Amendment and the handling of any other matters incidental
hereto.
(b) All of the terms, conditions and provisions of the Agreement not herein
modified shall remain in full force and effect. In the event a term, condition
or provision of the Agreement conflicts with a term, condition or provision of
this Second Amendment, the latter shall govern.
(c) This Second Amendment shall be governed by and shall be construed and
interpreted in accordance with the laws of the State of Ohio.
(d) This Second Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, successors and
assigns.
(e) This Second Amendment may be executed in several counterparts, each of
which shall constitute an original, but all which together shall constitute one
and the same agreement.
[Remainder of page intentionally left blank. Signature page follows.]
<PAGE>
- 8 -
IN WITNESS WHEREOF, this Second Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the day and in the year
first above written.
SIGNED IN THE PRESENCE OF: EASY GARDENER ACQUISITION CORP.,
Borrower
/s/ Kathleen Brown By: /s/ Richard J. Raleigh
- -------------------------- ----------------------------
/s/ Lynda G. Gustafson Name: Richard J. Raleigh
- -------------------------- Title: VP and Secretary
U.S. HOME & GARDEN INC., Guarantor
/s/ Kathleen Brown By: /s/ Richard J. Raleigh
- -------------------------- ----------------------------
/s/ Lynda G. Gustafson Name: Richard J. Raleigh
- -------------------------- Title: C.O.O.
THE PROVIDENT BANK, Agent
/s/ Joy E. Herald By: /s Nick Jevic
- -------------------------- ----------------------------
/s/ Leslie McHugh Name: Nick Jevic
- -------------------------- Title: VP
THE PROVIDENT BANK, Lender
/s/ Joy E. Herald By: /s/ Nick Jevic
- -------------------------- ----------------------------
/s/ Leslie McHugh Name: Nick Jevic
- -------------------------- Title: VP
<PAGE>
- 9 -
LASALLE NATIONAL BANK, Lender
By: /s/ Jeffrey D. Kadlic
--------------------------------
Name: Jeffrey D. Kadlic
Title: Commercial Lending Officer
ANTARES LEVERAGED CAPITAL
CORP., Lender
By: /s/ Eric P. Hansen
--------------------------------
Name: Eric P. Hansen
Title: Director
<PAGE>
SCHEDULE 1
Lender Credit Commitment
------ -----------------
The Provident Bank Revolving Credit Commitment:
Percentage: 37.254902% $5,960,784.32
Term Loan I Commitment:
$8,568,627.46
Term Loan II Commitment:
$838,235.30
Bridge Loan Commitment:
$1,415,686.28
LaSalle National Bank Revolving Credit Commitment:
Percentage: 29.411765% $4,705,882.40
Term Loan I Commitment:
$6,764,705.95
Term Loan II Commitment:
$661,764.71
Bridge Loan Commitment:
$1,117,647.07
Antares Leveraged Capital Corp. Revolving Credit Commitment:
Percentage: 33.333333% $5,333,333.28
Term Loan I Commitment:
$7,666,666.59
Term Loan II Commitment:
$749,999.99
Bridge Loan Commitment:
$1,266,666.65
THIRD AMENDMENT TO
CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT ("Third Amendment") dated as of
June 30, 1997 by and among EASY GARDENER ACQUISITION CORP., a Delaware
corporation, (the "Borrower") U.S. HOME & GARDEN INC., a Delaware corporation,
("Guarantor"), THE PROVIDENT BANK, an Ohio banking corporation ("Agent") and
LASALLE NATIONAL BANK, ANTARES LEVERAGED CAPITAL CORP. and THE PROVIDENT BANK
("Lenders").
PRELIMINARY STATEMENT
WHEREAS, Borrower, Agent and Lenders have entered into a Credit Agreement
dated as of August 9, 1996, as amended by a First Amendment to Credit Agreement
dated as of April 3, 1997, and by a Second Amendment dated as of May 9, 1997
(the "Credit Agreement"); and
WHEREAS, Borrower has requested Agent and Lenders to amend the restriction
on lmitations on making loans and advances to officers and employees of
Borrower; and
WHEREAS, Borrower, Agent and Lenders now wish to amend the Credit Agreement
in accordance with the terms and provisions hereof;
NOW, THEREFORE, the parties hereto agree to supplement and amend the Credit
Agreement upon such terms and conditions as follows:
1. Capitalized Terms. All capitalized terms used herein shall have the
meanings assigned to them in the Credit Agreement unless the context hereof
requires otherwise. Any definitions as capitalized terms set forth herein shall
be deemed incorporated into the Credit Agreement as amended by this Third
Amendment.
2. Loans to Employees. Section 6.16(a) of the Credit Agreement is hereby
amended in its entirety to read as follows:
"(a) extensions of trade credit, accounts receivable and loans and
advances extended to employees, consultants and subcontractors in the
ordinary course of business, provided that in the case of employees, such
amounts in the case of Borrower shall not exceed $150,000 in the aggregate
at any time outstanding, except as set forth on Schedule 6.16(a) , and such
amounts in the case of Guarantor shall not exceed $850,000 in the aggregate
at any time outstanding;"
3. Waiver Regarding Loans to Employees. The Lenders hereby waive the
application of Sections 6.2(a)(i) and 6.16(a) of the Credit Agreement as it
relates to the period prior to the date of this Third Amendment insofar as they
relate to restrictions on loans and advances to
<PAGE>
- 2 -
employees and officers. This waiver applies only to Sections 6.2(a)(i) and
6.16(a) of the Credit Agreement to the extent referenced herein and does not
otherwise modify or waive any other covenant or agreement contained in the
Credit Agreement.
4. Reaffirmation of Covenants, Warranties and Representations. Borrower
hereby agrees and covenants that all representations and warranties in the
Credit Agreement, including without limitation all of those warranties and
representations set forth in Article 4 are true and accurate as of the date
hereof. Borrower further reaffirms all covenants in the Credit Agreement, and
reaffirm each of the affirmative covenants set forth in Article 5 and negative
covenants set forth in Article 6 thereof, as if fully set forth herein, except
to the extent modified by this Third Amendment.
5. Conditions Precedent to Closing of Third Amendment. On or prior to the
closing of the Third Amendment (hereinafter the "Third Amendment Closing Date"),
each of the following conditions precedent shall have been satisfied:
(a) Documents. Each of the documents to be executed and delivered at
the Third Amendment Closing and all other certificates, documents and
instruments to be executed in connection herewith shall have been duly and
properly authorized, executed and delivered by Borrower and shall be in
full force and effect on and as of the Third Amendment Closing Date.
(b) Legality of Transactions. No change in applicable law shall have
occurred as a consequence of which it shall have become and continue to be
unlawful (i) for Agent and each Lender to perform any of its agreements or
obligations under any of the Loan Documents, or (ii) for Borrower to
perform any of its agreements or obligations under any of the Loan
Documents.
(c) Changes; None Adverse. Since the date of the most recent balance
sheets of Borrower delivered to Provident, no changes shall have occurred
in the assets, liabilities, financial condition, business, operations or
prospects of Borrower which, individually or in the aggregate, are material
to Borrower, and Provident shall have completed such review of the status
of all current and pending legal issues as Agent shall deem necessary or
appropriate.
6. Miscellaneous. (a) Borrower shall reimburse Agent for all fees and
disbursements of legal counsel to Agent which shall have been incurred by Agent
in connection with the preparation, negotiation, review, execution and delivery
of this Third Amendment and the handling of any other matters incidental hereto.
(b) All of the terms, conditions and provisions of the Agreement not herein
modified shall remain in full force and effect. In the event a term, condition
or provision of the
<PAGE>
- 3 -
Agreement conflicts with a term, condition or provision of this Third Amendment,
the latter shall govern.
(c) This Third Amendment shall be governed by and shall be construed and
interpreted in accordance with the laws of the State of Ohio.
(d) This Third Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, successors and
assigns.
(e) This Third Amendment may be executed in several counterparts, each of
which shall constitute an original, but all which together shall constitute one
and the same agreement.
[Remainder of page intentionally left blank. Signature page follows.]
<PAGE>
- 4 -
IN WITNESS WHEREOF, this Third Amendment has been duly executed and
delivered by or on behalf of each of the parties as of the day and in the year
first above written.
SIGNED IN THE PRESENCE OF: EASY GARDENER ACQUISITION CORP.,
Borrower
/s/ Kathleen Brown By: /s/ Richard J. Raleigh
- ------------------------- --------------------------
/s/ Bien Fernandez Name: Richard J. Raleigh
- ------------------------- Title: Secretary & VP
U.S. HOME & GARDEN INC., Guarantor
/s/ Kathleen Brown By: /s/ Richard J. Raleigh
- ------------------------- --------------------------
/s/ Bien Fernandez Name: Richard J. Raleigh
- ------------------------- Title: COO
THE PROVIDENT BANK, Agent
/s/ Lisa A. Becker By: /s/ Nick Jevic
- ------------------------- --------------------------
/s/ Shila B. Zeuni Name: Nick Jevic
- ------------------------- Title: VP
THE PROVIDENT BANK, Lender
/s/ Lisa A. Becker By: /s/ Nick Jevic
- ------------------------- --------------------------
/s/ Shila B. Zeuni Name: Nick Jevic
- ------------------------- Title: VP
<PAGE>
- 5 -
LASALLE NATIONAL BANK, Lender
/s/ By: /s/ Jennifer Bailey
- ------------------------- --------------------------
/s/ Rosemary Rodriquez Name: Jennifer Bailey
- ------------------------- Title: Assistant Vice President
ANTARES LEVERAGED CAPITAL
CORP., Lender
By: /s/ Eric P. Hansen
- ------------------------- --------------------------
/s/ Stephanie [Neal] Name: Eric P. Hansen
- ------------------------- Title: Director
Lease of Warehouse
This Lease made and executed this 9th day of May, 1997, by and between
SARAH C. LEER, hereinafter called "LESSOR", and WEATHERLY CONSUMER PRODUCTS,
INC., hereinafter called "LESSEE".
W I T N E S S E T H:
The address of the Lessor for all purposes is:
Sarah C. Leer, P.O. Box 606, Paris, Kentucky 40361.
The address of the Lessee for all purposes is:
Weatherly Consumer Products, Inc. c/o Easy Gardener, Inc. P.O. Box 21025,
Waco, Texas 76702-1025.
1. The premises leased consist of all of the old Bourbon Warehouse located at
Astro Street, Paris, Kentucky.
2. The term of this Lease shall be for one year from the date of execution,
provided however, that Lessee shall have the option to terminate this Lease upon
60 days notice in writing to the Lessor.
3. The monthly rental for the premises shall be $5,416.66 per month payable to
the Lessor at the address shown above on or about the 15th of each month.
In the event that during the term of this Lease the ad valorem taxes and/or
the cost of the premium for the present amount of insurance coverage should
increase from time to time, then the rental shall be increased by such amounts
as exceed 10% of the taxes and insurance at the time of execution of this Lease.
Lessor shall give prompt written notice and full documentation of any such
increase to the Lessee, and the rent shall thereafter be adjusted accordingly.
4. The Lessor shall maintain the roof of the premises in good order. The Lessee
shall promptly notify the Lessor in writing of any defects or leaks which might
develop in the roof.
During the year 1995, 1/4 of the roof was replaced, and Lessor now agrees
to replace the remaining 3/4ths of the roof, in equal parts in the years 1996,
1997 and 1998.
The Lessee shall maintain the rest of the premises and keep them in good
order; provided, however, that any damages or defects in the upper floor
blacktop flooring which might occur, but which are not caused by Lessee's
operation and use, shall be repaired by the Lessor.
<PAGE>
5. The Lessee shall use the premises for the purpose of storage of plant food
spikes and other consumer products and packaging and raw materials and
production and material handling machinery and company files and records, and
for no other purpose without the written consent of the Lessor.
6. The Lessee agrees to commit no waste on the premises and not permit a
nuisance to be committed or to be maintained thereon and to return possession
thereof at the termination of the Lease in the same condition as when possession
was delivered to the Lessor, natural wear and tear excepted.
7. The Lessor shall have the right of entry on the leased premises at any time
for the purpose of inspecting the same and for the further purposes of making
any repairs thereto that the Lessor may desire so long as such action does not
unreasonably interfere with the Lessee's use of the premises. Lessor will notify
Lessee by phone prior to making such entry.
8. The Lessee covenants and agrees to keep the premises at all times in a clean
and sanitary condition, not to permit waste or debris to accumulate.
9. The Lessee shall at its expense provide liability insurance covering the
leased premises including all improvements, approaches, sidewalks, parking lots
and grounds in at least the sum of $200,000.00 any one person and $500,000.00
any one accident and $50,000.00 property damage with both Lessor and Lessee as
named insureds therein; and such insurance as it shall desire upon all its
property located on the leased premises.
10. The Lessee shall, prior to termination of any term of this Lease remove all
personal property of the Lessee. In the event Lessee so fails to remove personal
property after termination of any term of the Lease, the Lessor may remove and
store such, the Lessee to bear the costs of such removal and storage and the
Lessor shall not be responsible to the Lessee for the loss or damage to such
property caused by such removal and storage.
11. The Lessor assumes all property located in the premises to be that of the
Lessee even though said property has been traded sold or given to a third party.
12. The Lessor shall not be responsible to the Lessee for any loss or damage to
any of the property of the Lessee while situated on the leased premises unless
such loss or damage is occasioned by the negligent acts of the Lessor, its
agents or employees.
13. In the event the leased premises are destroyed or damaged by fire or other
casualty without fault or negligence on Lessee's part or due to structural
defect of the premises or defect in Lessor installed plumbing or electrical
equipment to the extent
-2-
<PAGE>
that they cannot be used by the Lessee for the intended purpose, the rent herein
contemplated shall abate until the premises are restored to a usable condition
by the Lessor. The Lessor or the Lessee in the event of such destruction or
damage may, however, elect to terminate the Lease an the Lessor shall be under
no obligation to the Lessee to so restore or rebuild.
14. Lessee shall pay all utilities.
15. The Lessee agrees in the event of condemnation of this building by city,
county, state or Federal government or any of their agencies to comply with such
condemnation procedures and release the Lessor of any and all obligations that
might be remaining on this Lease.
16. The Lessee may sublease all or part of the premises or assign this Lease to
another tenant with the express written approval of the Lessor. Such approval
will be upon reasonable terms and will not be unreasonably withheld.
/s/ SARAH C. LEER
----------------------------------
SARAH C. LEER
WEATHERLY CONSUMER PRODUCTS, INC.
By: /s/ Sheila B. Jones
-------------------------------
Name: Sheila B. Jones
Title: VP Operations
Prepared By:
/s/ Henry Prewitt\
- ---------------------------
Henry Prewitt
Attorney at Law
P.O. Box 350
Paris, Kentucky 40362-0350
-3-
PLASTIC MOLDED CONCEPTS, INC.
ASSET PURCHASE AGREEMENT
AGREEMENT, dated as of the 9th day of May 1997, by and among U.S. Home &
Garden, Inc., a Delaware corporation (the "Company"), Easy Gardener Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of the Company (the
"Buyer"), and Plastic Molded Concepts, Inc., a Wisconsin corporation ("PMC").
WHEREAS, PMC owns and distributes a series of products (the "Products") (as
set forth more fully on Schedule 1.2 hereof) known as its Plasti-Chain product
line;
WHEREAS, PMC wishes to sell to Buyer, and Buyer wishes to purchase from
PMC, as a going concern, the business and substantially all of the properties
and assets of PMC related to the Plasti-Chain product line, as specifically
described herein (the "Business"), all subject to the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of and in reliance upon the mutual
premises and the representations, warranties, covenants and conditions herein
contained, the parties agree as follows:
1. Purchase and Sale Agreement.
1.1 Agreement of Purchase and Sale. Subject to the terms and conditions set
forth in this Agreement and in reliance upon the representations, warranties,
covenants and
<PAGE>
conditions herein contained, on the Closing Date (as defined in Subsection 2.1
hereof) PMC shall sell, convey, assign, transfer and deliver to Buyer, and Buyer
shall purchase from PMC the Purchased Assets (as defined in Section 1.2 hereof),
free and clear of any and all liens, claims, charges or encumbrances of any
nature whatsoever, other than those which are designated as a "Permitted
Encumbrance" on Schedule 1.1 (the liens, claims, charges and encumbrances which
are so designated being hereinafter collectively called the "Permitted
Encumbrances").
1.2 Purchased Assets. As used in this Agreement, the term "Purchased
Assets" means those properties and assets related to the Plasti-Chain product
line owned by PMC or otherwise employed, used or available for use in the
Business, personal, tangible and intangible, as the same shall exist on the
Closing Date, which are set forth on Schedule 1.2 hereof and all of the
following as they relate to the Business: (i) goodwill; pending or executory
contracts and commitments for the provision of services in connection with the
Business, and other leases and pending or executory contracts and commitments of
any nature relating to the Business; deferred charges, advance payments, prepaid
expenses and deposits as set forth on Schedule 1.2; rights of offset and credits
of all kinds; and rights under governmental and administrative licenses, permits
and approvals, (ii) specifications, manuals and technical data, trade secrets,
trademarks, tradenames, customer lists, discoveries, know-how, formulations and
intangible rights necessary or desirable in connection with the manufacture,
sale or distribution of the
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Products (as hereinafter defined), (iii) purchase orders for customers of the
Business, (iv) EDI addresses and telephone numbers, (v) files, books and records
relating solely to any of the foregoing, (vi) the Purchased Receivables (as
hereinafter defined) and (vii) all inventory of advertising materials related to
the Products. The Purchased Assets shall not include, (i) cash, (ii) accounts
receivable other than the Purchased Receivables or (iii) Inventory (as defined
in paragraph 1.3 below) of the Business other than the Allocated Inventory (as
described in Section 1.3 below).
1.3 Inventory. The "Inventory" shall mean all packaging, work in process,
finished goods, and purchased components related to the Plasti-Chain product
line as of May 6, 1997. The "Allocated Inventory" shall mean Inventory up to a
maximum of Five Hundred Thousand Dollars ($500,000) value as identified on
Schedule 1.2. For purposes of valuing the Allocated Inventory, all purchased
component inventory and packaging material inventory shall be based on the
invoice cost thereof and all finished goods inventory shall be valued at the
internal cost paid by the Plasti-Chain division to PMC's plastics operation for
such inventory.
1.4 Purchased Receivables. The "Purchased Receivables" shall mean the
accounts receivable of the Business existing as of the Closing Date and
reflected on PMC's books of account up to a maximum of Six Hundred Fifty
Thousand Dollars ($650,000). The parties hereto acknowledge and agree that the
accounts receivable purchased hereunder as part of the Purchased
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Assets shall include only the accounts receivable of the Business set forth on
Schedule 1.2 which are designated as Purchased Receivables.
1.5 Product Returns. Buyer and PMC acknowledge and agree that Buyer shall
be responsible for the payment of all claims of customers for Products returned
after the Closing Date, if any, regardless of when such Products were sold (the
"Product Returns") provided, however, PMC shall be responsible for reimbursing
the Buyer for certain Product returns in accordance with the following: (i) for
those Products sold by PMC prior to the Closing Date which are returned in the
normal course and the return of which has been approved by PMC, PMC shall pay to
Buyer the cost of such returned Product based on retail price at which the
returned Product was originally sold, and (ii) for those Products which are sold
by Buyer after the Closing Date and provided by PMC to Buyer under the
Manufacturing Agreement, PMC shall pay to Buyer the cost for all such Products
returned as defective, provided PMC has approved such return, based on the price
established in the Manufacturing Agreement for such returned Products. PMC
agrees that it shall not unreasonably withhold or delay approval for any product
returned in the normal course pursuant to clause (i), above, or returned as
defective pursuant to clause (ii), above.
1.6 Assumed Liabilities. Subject to the terms and conditions set forth in
this Agreement and in reliance upon the representations, warranties, covenants
and conditions herein contained, on the Closing Date Buyer shall, in partial
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consideration of the Purchased Assets, assume, and shall only assume (i) PMC's
obligations under the pending and executory contracts which are included among
the Purchased Assets, including, without limitation, open purchase orders for
the purchase of Inventory items, but only to the extent that they represent
obligations which are by their stated terms to be performed, in the ordinary
course of business, subsequent to the Closing Date, (ii) all claims for (a)
product liability related to Products that were sold after the Closing Date, and
(b) product returns regardless of when sold, subject to PMC's obligations to
Buyer with respect to such product returns as set forth in Section 1.5, above,
(iii) such additional liabilities related to the Business as Buyer specifically
elects to assume in writing (the liabilities and obligations referred to in the
immediately preceding clauses (i), (ii) and (iii) being hereinafter collectively
called the "Assumed Liabilities").
1.6 Purchase Price. The purchase price for the Purchased Assets (the
"Purchase Price") shall be the sum of the follow:
(a) Three Million One Hundred Thousand Dollars ($3,100,000) for the
fixed assets of the Business as set forth on Schedule 1.2; plus
(b) an amount equal to the book value of the Purchased Receivables as
set forth on Schedule 1.2 up to a maximum amount of $650,000; plus
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(c) an amount equal to the value of the Allocated Inventory as
determined in accordance with the provisions of Paragraph 1.3, above and as
set forth in Schedule 1.2 up to a maximum amount of $500,000; plus
(d) the amount of the prepaids, if any, set forth on Schedule 1.2
which are to be included in the Purchased Assets and transferred to Buyer
as of the Closing Date.
For the purposes of determining the Purchase Price, PMC shall deliver to
Buyer an amended Schedule 1.2 dated as of the Closing Date setting forth the
fixed assets, Purchased Receivables, Allocated Inventory and prepaids of the
Business existing as of the Closing Date. The purchase price determined as of
Closing pursuant to the provisions of this Section 1.6 shall be subject to
adjustment after the Closing Date pursuant to the provisions of Section 4.12.1
and Section 8, below.
2. Closing.
2.1 Closing Date. The closing of the sale and purchase provided for herein
(the "Closing") shall take place at 10:00 A.M., local time, at the offices of
Godfrey & Kahn, S.C. on May 8, 1997, or at such other place, time and date as
may hereafter be mutually agreed upon by the parties (such time and date of
Closing being hereinafter called the "Closing Date").
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2.2 Action by Buyer. Subject to the terms and conditions herein contained,
on the Closing Date Buyer shall deliver to PMC (in addition to the documents and
instruments to be delivered by it pursuant to Section 10 hereof), (i) an
Assignment and Assumption Agreement substantially in the form of Exhibit A,
attached hereto (the "Assignment and Assumption Agreement"), duly executed by
Buyer, and (ii) a certified or official bank check, payable to the order of PMC,
or a wire transfer in the amount of the Purchase Price.
2.3 Action by PMC. Subject to the terms and conditions herein contained, on
the Closing Date PMC shall deliver to Buyer (in addition to the documents and
instruments to be delivered by it pursuant to Section 11 hereof): (i) a duly
executed Bill of Sale in substantially the form of Exhibit B attached hereto and
made a part hereof; (ii) the Assignment and Assumption Agreement, duly executed
by PMC; (iii) assignments for all trademarks and tradenames related to the
Products, (iv) all third party consents and governmental and administrative
approvals, as shall be, in the opinion of Buyer, reasonably necessary or
appropriate in order to convey, transfer and assign to and vest in Buyer good
and marketable right, title and interest in and to the Purchased Assets, free
and clear of all liens, security interests, claims, charges and encumbrances of
any nature whatsoever, except for the Permitted Encumbrances.
3. Additional Covenants.
3.1 Further Assurances. PMC, the Company and Buyer each agree that they
shall from time to time after the
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Closing Date, at each party's respective cost and expense, take any and all
actions, and execute, acknowledge, deliver, file and/or record any and all
documents and instruments, as Buyer or PMC may reasonably request in order to
more fully perfect the rights which are intended to be granted to Buyer
hereunder and in order to more effectively consummate the transactions
contemplated by this Agreement and the documents delivered in connection
herewith.
3.2 Consummation of Transaction. Each of the parties hereto hereby agrees
to use its best efforts to cause all conditions precedent to its obligations and
to the obligations of the other parties hereto to consummate the transactions
contemplated hereby to be satisfied, including, but not limited to, using
reasonable efforts to obtain all required consents, waivers, amendments,
modifications, approvals, authorizations, novations and licenses; provided,
however, that nothing herein contained shall be deemed to modify any of the
absolute obligations imposed upon any of the parties hereto under this Agreement
or any agreement executed and delivered pursuant hereto.
3.3 Cooperation. Each of the parties hereto hereby agrees to fully
cooperate with the other party hereto in preparing and filing any notices,
applications, reports and other instruments and documents which are required by,
or which are desirable in the opinion of either of the parties hereto in respect
of, any statute, rule, regulation or order of any
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governmental or administrative body in connection with the transactions
contemplated hereby.
3.4 Accuracy of Representations. Each party hereto agrees that prior to the
Closing Date it will enter into no transaction and take no action, and will use
its best efforts to prevent the occurrence of any event, which would result in
any of its representations, warranties or covenants contained in this Agreement
or in any agreement, document or instrument delivered pursuant hereto not to be
true and correct, or not to be performed as contemplated, at and as of the time
immediately after the occurrence of such transaction or event.
3.5 Conduct of Business Pending the Closing. Subject to the express
provisions of this Agreement as to actions to be taken or not to be taken by PMC
between the date hereof and the Closing Date, PMC hereby agrees that it shall,
during the period commencing of the date hereof and ending on the Closing Date,
conduct the Business in a normal manner in accordance with existing policies and
practices and that it shall use normal and reasonable efforts to (i) preserve
its business organization intact, (ii) maintain and preserve the Purchased
Assets, (iii) retain its good will, and (iv) preserve its relationships with its
clients and suppliers.
3.6 Management Agreement; Manufacturing Agreement. PMC, the Company and
Buyer shall enter into a Management Agreement in the form attached hereto as
Exhibit C (the "Management Agreement") and a Manufacturing Agreement in the
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form attached hereto as Exhibit D (the "Manufacturing Agreement").
3.7 Payment of Taxes Upon Transfer of Purchased Assets. Buyer shall be
responsible for, and shall pay, any and all sales, transfer and similar taxes
arising out of the transactions contemplated by this Agreement (the "Taxes");
provided, however, PMC shall pay all such Taxes to the extent that they exceed
$1,000.
3.8 Survival of Representations and Warranties. Each of the parties hereto
hereby agrees that all representations and warranties made by or on behalf of it
in this Agreement or in any document or instrument delivered pursuant hereto
shall survive the Closing Date and the consummation of the transactions
contemplated until the later of (1) 90 days from the date the Company files its
next Form 10K with the Securities and Exchange Commission or (ii) one year
following the Closing Date, except for representations and warranties of PMC set
forth in Section 5.5 below relating to title to the Purchased Assets, which
shall survive for applicable statutes of limitation.
3.9 Books and Records. PMC shall, for a period of at least three years
following the Closing Date, maintain and make available to Buyer and its
representatives for inspection and reproduction, during regular business hours,
all books and records relating to the Purchased Assets, the Business or the
Assumed Liabilities which Buyer may reasonably require which are not included
among the Purchased Assets and Buyer shall, for a period of three years
following the Closing Date, or such longer
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period as may be required by any governmental authority, maintain and make
available to PMC and its representatives, for inspection and reproduction,
during regular business hours, all books and records relating to the Business
and included among the Purchased Assets.
3.10 Discharge of Liens. PMC shall cause all liens, claims, charges and
encumbrances upon any of the Purchased Assets, other than the Permitted
Encumbrances, to be terminated or otherwise discharged at or prior to the
Closing.
3.11 Accounts Receivable.
3.11.1. Purchased Receivables. For a period of one hundred eighty (180)
days immediately following the Closing Date (the "Collection Period"), Buyer
shall use reasonable efforts to collect the Purchased Receivables; provided,
however, that the Buyer shall not be obligated to retain the services of
collection agencies or attorneys, commence legal action or take extraordinary
efforts in connection with collection of the Purchased Receivables. Payments
received with respect to the Purchased Receivables shall be applied to
outstanding receivables in the order of the occurrence unless otherwise directed
by the account debtor, in which event payment shall be applied as directed by
the account debtor. On or before the 15th day of each calendar month following
the Closing Date the Buyer shall provide PMC with a written update of the
collection of the Purchased Receivables. Any amounts charged against the
Purchased Receivables for returns, allowances or trade credits shall be deemed
as amounts collected with respect
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to such Purchased Receivables. Upon completion of the Collection Period, Buyer
shall provide PMC with a statement of all collections made with respect to the
Purchased Receivables and provide PMC with reasonable access upon reasonable
notice to such records as PMC may reasonably request in order to verify
collection of the Purchased Receivables by Buyer. In the event less than the
aggregate amount of the Purchased Receivables set forth on Schedule 1.2 is
collected by Buyer during the Collection Period, the parties agree that (i) the
Purchase Price shall be reduced by the amount of such short fall, and (ii)the
Buyer shall transfer to PMC the uncollected Purchased Receivables. If the
Purchase Price is reduced pursuant to this Section 3.11.1, then subject to the
provisions set forth below, PMC agrees that is shall pay Buyer the amount of
such Purchase Price reduction within ten (10) days after the Collection Period.
Any amounts received by the Buyer after the Collection Period with respect to
the uncollected Purchased Receivables which have been transferred to PMC shall
be immediately paid to PMC upon receipt by the Buyer. Notwithstanding any
provision of this agreement to the contrary, as a condition to PMC's payment to
Buyer for any Purchase Price reduction pursuant to this Section 3.11.1, with
respect to those uncollected Purchased Receivables which are to be transferred
to PMC, the Buyer shall (i) warrant to PMC that the Buyer has not sold or
shipped any products to account debtors of such uncollected Purchased
Receivables at any time when such account debtor's account was more than ninety
(90) days past due, and (ii) covenant and agree that no product shall be sold or
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shipped to such account debtor until such time as the uncollected Purchased
Receivable is collected by PMC or otherwise settled by PMC.
3.11.2. Retained Receivables. The Buyer acknowledges that accounts
receivable of the Business existing through as of the Closing Date other than
the Purchased Receivables (the "Retained Receivables") are to be retained and
collected solely by PMC after the Closing Date. In the event any of the Retained
Receivables are more than ninety (90) days past due during the Collection
Period, then, provided PMC has used reasonable efforts to collect such account
consistent with past practices, the Buyer agrees that it shall, upon written
notice from PMC (the "PMC Notice"), either (i) forestall all shipments or sales
of goods to the account debtor of such uncollected Retained Receivable until
such time as the Retained Receivable has been paid in full or otherwise settled
by PMC, or (ii) purchase such uncollected Retained Receivable from PMC at the
value thereof as reflected on PMC's books of account. The Buyer shall notify PMC
within seven (7) days after the date of the PMC Notice as to which option under
the foregoing clause (i) or clause (ii) above, Buyer has elected to exercise. If
Buyer fails to notify PMC within such time of its elected option, the Buyer
shall be deemed to have elected the option set forth in clause (i), above. If
the Buyer elects to purchase any uncollected Retained Receivable pursuant to
clause (ii), above, then (x) payment for such uncollected Retained Receivable
shall be made by certified or cashier's check to PMC within ten (10) days of the
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PMC Notice and simultaneously therewith such uncollected Retained Receivables
shall be transferred to Buyer, (y) PMC shall provide access to such accounting
records as the Buyer may reasonably request in order to verify the value of such
uncollected Retained Receivable, and (z) any amounts received by PMC for such
uncollected Retained Receivable after purchase by the Buyer shall be promptly
paid to Buyer upon receipt by PMC.
3.12 Disclosure Schedules. The parties hereto agree that while the
information set forth in the Disclosure Schedules hereto specifically refer to
the paragraph of this Agreement to which the schedules and information is
responsive, each such schedule and information shall be deemed to have been
disclosed with respect to any other paragraph or section of this Agreement but
only if such information appears on such Schedule in such form and detail that
it is reasonably responsive to the information required on such other Schedule.
All capitalized terms not otherwise defined in the Schedules shall have the
meaning set forth in this Agreement for such terms.
4. Representations and Warranties as to PMC. PMC represents and warrants to
Buyer as follows:
4.1 Organization, Standing and Power. PMC is a corporation duly organized,
validly existing and in good standing under the laws of the State of Wisconsin,
with full corporate power and authority to own, lease and operate its properties
and to carry on its Business as presently conducted by it. There are no states
or jurisdictions in which the conduct of the Business makes it necessary for PMC
to qualify to do business as a foreign
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corporation where the failure to so qualify would have a material adverse effect
on the Business or the Purchased Assets. Copies of the Certificate of
Incorporation of PMC and all amendments thereof, and of the By-laws of PMC, as
amended to date, have been furnished to Buyer and are complete and correct.
4.2 Authority. The execution, delivery and performance by PMC of this
Agreement and of all of the agreements to be executed and delivered by it
pursuant hereto, the performance by it of its obligations hereunder and
thereunder, and the consummation of the transactions contemplated hereby and
thereby, have been duly and validly authorized by all necessary corporate action
on the part of PMC (including, but not limited to, the unanimous consent of its
stockholders and Board of Directors) and PMC has all necessary power with
respect thereto. This Agreement is, when executed and delivered by PMC (and each
of the other agreements to be delivered by it pursuant hereto will be), the
valid and binding obligation of PMC in accordance with its terms.
4.3 Noncontravention. Except as set forth on Schedule 4.3, neither the
execution and delivery by PMC of this Agreement or of any agreement to be
executed and delivered by it pursuant hereto, nor the consummation of any of the
transactions contemplated hereby or thereby, nor the performance by it of any of
its obligations hereunder or thereunder, will (nor with the giving of notice or
the lapse of time or both would) (A) conflict with or result in a breach of any
provision of the Certificate of Incorporation or By-laws of PMC, or (B) give
rise to a default,
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or any right of termination, cancellation or acceleration, or otherwise be in
conflict with or result in a loss of contractual benefits to it under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation related and material to the Business
to which it is a party or by which it or any of the Purchased Assets may be
bound, or require any consent, approval or notice under the terms of any such
document or instrument, or (C) to the best knowledge of PMC, violate any order,
writ, injunction, decree, law, statute, rule or regulation of any court or
governmental authority which is applicable to either the Business or any of the
Purchased Assets, or (D) result in the creation or imposition of any lien,
claim, restriction, charge or encumbrance upon any of the Purchased Assets, or
(E) interfere with or otherwise adversely affect the ability of Buyer to carry
on the Business after the Closing Date on substantially the same basis as is now
conducted by PMC.
4.4 Transactions Since March 31, 1997. Except as otherwise set forth
herein, since March 31, 1997, PMC has not entered into any commitment or
transaction or experienced any event that is material to this Agreement or to
any of the other agreements and documents executed or to be executed pursuant to
this Agreement or to the transactions contemplated hereby or thereby, or that
has affected, or should reasonably be expected to affect, materially and
adversely, the operations, assets, liabilities, financial or other condition of
the Business. PMC has not, with respect to the Business, since March 31, 1997:
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(1) Incurred any liabilities or obligations, either accrued, absolute,
contingent, or otherwise except:
(i) To the extent specifically set forth in any of the schedules
furnished to Buyer in connection herewith; and
(ii) Those incurred in or as a result of the ordinary course of
business of PMC as consistent with past practices.
(2) Mortgaged, pledged or subjected to lien, or otherwise encumbered
any of the Purchased Assets, tangible or intangible;
(3) Sold, assigned or transferred any patents, trademarks, trade
names, copyrights, licenses or other intangible assets related to the
Business or the Purchased Assets;
(4) Suffered any event or condition of any character materially and
adversely affecting the Business; or
(5) Altered, in any material way, the customer lists or price lists
relating to the Business other than in the ordinary course of business; or
(6) Waived any rights of substantial value or entered into any
transactions not in the ordinary course of business.
4.5 Properties. Other than inventory in excess of the Allocated Inventory
and accounts receivable in excess of
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the Purchased Receivables, the Purchased Assets comprise all of the properties
and assets used solely in the Business as of the Closing Date. Buyer
acknowledges that there are certain assets of PMC used in the operation of the
Business which are also used by PMC in its other business operations (the
"Shared Assets") and that the Shared Assets are not included in the Purchased
Assets. PMC has and is transferring to Buyer good and valid title to all of the
Purchased Assets, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except for the Permitted Encumbrances
described on Schedule 1.1 and except for those mortgages, liens, pledges,
charges or encumbrances which are described on Schedule 4.5 (all of which liens
and encumbrances on the Purchased Assets listed on Schedule 4.5 shall be removed
on or prior to the Closing). All machinery and equipment of the Business
included as a Purchased Asset (including all tools, molds and dies) is in
substantially good operating condition and repair, ordinary wear and tear
accepted, and is suitable for the purposes for which it is used.
4.6 Inventory. The Allocated Inventory reflected on Schedule 1.2 consists
of items of a quality and quantity usable or saleable in the ordinary course of
business as previously conducted by PMC, except for obsolete materials,
slow-moving items, materials of below standard quality and not readily
marketable items, all of which have been written down to net realizable value or
adequately reserved against on the books and records of PMC.
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4.7 Absence of Changes. Since March 31, 1997, there has not been (i) any
material adverse change in the condition (financial or otherwise), assets,
liabilities, business, prospects, or results of operations of the Business
(including, without limitation, any such adverse change resulting from damage,
destruction or other casualty loss, whether or not covered by insurance) or (ii)
any waiver by PMC of any right, or cancellation of any debt or claim, of
substantial value related to the Business.
4.8 Litigation. Other than as set forth in Schedule 4.8, there are no suits
or actions, or administrative, arbitration or other proceedings or governmental
investigations, pending or, to the best of the knowledge of PMC, threatened,
against or relating to the Business or any of the Purchased Assets or relating
to the manufacture, sale or distribution of any of the Products which, if
finally determined against PMC, would have a material adverse affect on the
Business or Purchased Assets. There are no judgments, orders, stipulations,
injunctions, decrees or awards in effect which relate to the Business or any of
the Purchased Assets, the effect of which is (A) to limit, restrict, regulate,
enjoin or prohibit any aspect of the Business, or (B) otherwise materially
adverse to the Business or any of the Purchased Assets.
4.9 No Violation of Law. To the best knowledge of PMC, PMC is not engaging
in any activity or omitting to take any action as a result of which (A) it is in
violation of any law, rule, regulation, zoning or other ordinance, statute,
order,
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injunction or decree, or any other requirement of any court or governmental or
administrative body or agency, applicable to the Business or any of the
Purchased Assets, including, but not limited to, those relating to: occupational
safety and health; environmental and ecological protection (e.g., the use,
storage, handling, transport or disposal of pollutants, contaminants or
hazardous or toxic materials or wastes, and the exposure of persons thereto) and
(B) the Business and/or any of the Purchased Assets have been or may be
materially and adversely affected.
4.10 Insurance. Schedule 4.10 is a complete and correct list and summary
description of all policies of insurance relating to any of the Purchased Assets
or the Business in which PMC is an insured party, beneficiary or loss payable
payee. Such policies are in full force and effect, all premiums due and payable
with respect thereto have been paid, and no notice of cancellation or
termination has been received by PMC with respect to any such policy. In the
opinion of PMC, such policies cover risks normally insured against, and are in
amounts normally carried, by companies engaged in businesses similar to that of
the Business.
4.11 Certain Business Matters. Except as is set forth in Schedule 4.11, (A)
PMC is not a party to or bound by any distributorship, dealership, sales agency,
franchise or similar agreement which relates to the sale or distribution of any
of the Purchased Assets or the Products of the Business, (B) with respect to the
Business, PMC has no sole-source supplier of significant goods or services
(other than utilities) with respect
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to which practical alternative sources are not available on comparable terms and
conditions, (C) there are no pending, or to the best of the knowledge of PMC
threatened, labor negotiations, work stoppages or work slowdowns involving or
affecting the Business, and (D) PMC is not a party to or bound by any agreement
which limits its freedom to compete in any line of business or with any person,
or which is otherwise materially burdensome to it.
4.12 Certain Contracts. Schedule 4.12 is a complete and correct list of all
contracts, commitments, obligations and understandings which relate to the
Business and which are not set forth in any other schedule delivered hereunder
and to which PMC is a party or otherwise bound, except for each of those which
(A) was made in the ordinary course of business, and (B) either (1) is
terminable by PMC (and will be terminable by Buyer) without liability, expense
or other obligation on 30 days' notice or less, or (2) may be anticipated to
involve aggregate annual payments to or by PMC of $10,000 (or the equivalent) or
more. Complete and correct copies of all contracts, commitments, obligations and
undertakings set forth on any of the schedules delivered pursuant to this
Agreement have been furnished or made available by PMC to Buyer, and except as
expressly stated on the schedule on which they are set forth, (A) each of them
is in full force and effect, and, to the best knowledge of PMC, no person or
entity which is a party thereto or otherwise bound thereby is in default
thereunder, and, to the best knowledge of PMC, no event, occurrence, condition
or act
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exists which does (or which with the giving of notice or the lapse of time or
both would) give rise to a default or right of cancellation, acceleration or
loss of contractual benefits thereunder; (B) to the best knowledge of PMC, there
has been no threatened cancellations thereof, and there are no outstanding
disputes thereunder; and (C) none of them is materially burdensome to the
Business.
4.13 Approvals. Set forth on Schedule 4.13, is a complete and correct list
of all governmental and administrative consents, permits, appointments,
approvals, licenses, certificates and franchises which, to the best knowledge of
PMC, are necessary for the operation of the Business, all of which have been
obtained by PMC and are in full force and effect.
4.14 Customers and Suppliers. Set forth on Schedule 4.14, is a complete and
correct list setting forth, with respect to the years ended December 31, 1995
and December 31, 1996, and the period ended March 31, 1997, (i) the ten (10)
largest customers of the Business and the amount for which each such customer
was invoiced and (ii) the ten (10) largest suppliers of the Business and the
amount of goods and services purchased from each such supplier. To the best of
the knowledge of PMC, (i) there has been no material adverse change in the
business relationship between the Business and any such customer or supplier,
and (ii) there is no reason to believe that said suppliers and customers will
not continue their respective relationships with the Business after the Closing
Date on substantially the same basis as now exists.
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4.15 Business Practices and Commitments. Set forth on Schedule 4.15 is a
summary description of (i) PMC's rebate and volume discount practices and
obligations with respect to the Business, (ii) PMC's allowance and customer
return practices and obligations with respect to the Business, and (iii) PMC's
warranty practices and obligations with respect to the Business.
4.16 Backlog. Set forth on Schedule 4.16 is the backlog of PMC with respect
to the Business as at April 24, 1997.
4.17 Brokers. Except as set forth on Schedule 4.17, no agent, broker,
person, or firm acting on behalf of PMC, or under its authority, is or will be
entitled to a financial advisory fee, brokerage commission or other like payment
in connection with any of the transactions contemplated hereby.
4.18 Information as to PMC. None of the representations or warranties made
by PMC in this Agreement or in any agreement executed and delivered by or on
behalf of any of them pursuant hereto are false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to make
the statements therein contained not misleading.
5. Representations and Warranties as to the Company and Buyer. The Company
and Buyer jointly and severally represent and warrant to PMC as follows:
5.1 Organization, Standing and Power. The Company and Buyer are each a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with full corporate power and authority to own, lease
-23-
<PAGE>
and operate its properties and to carry on its business as presently conducted
by it. Copies of the Certificate of Incorporation of Buyer and all amendments
thereto, and of the ByLaws of Buyer, as amended to date, have been furnished to
PMC and are complete and correct.
5.2 Authority. The execution and delivery by the Company and Buyer of this
Agreement and of each agreement to be executed and delivered by them pursuant
hereto, the compliance by the Company and Buyer with the provisions hereof and
thereof, and the consummation of the transactions contemplated hereby and
thereby, have been duly and validly authorized by all necessary corporate action
on the part of the Company and Buyer, and the Company and Buyer have all
necessary corporate power with respect thereto. This Agreement is, when executed
and delivered by the Company and Buyer, and each other agreement to be executed
and delivered by them pursuant hereto will be, the valid and binding obligation
of each of the Company and Buyer in accordance with its terms. Neither the
execution and delivery by the Company and Buyer of this Agreement or of any of
the aforementioned other agreements, nor the consummation of the transactions
contemplated hereby or thereby, nor the compliance by the Company and Buyer with
the provisions hereof and thereof, will (nor with the giving of notice or the
lapse of time or both, would) conflict with or result in a violation of any
provision of the Certificates of Incorporation or By-laws of the Company or
Buyer, or in the breach of any material agreement to which the Company or Buyer
is a party or otherwise bound or violate any order, writ,
-24-
<PAGE>
injunction, decree, law, statute, rule or regulation of any court or
governmental authority which is applicable to either the Company or Buyer or
interfere with or otherwise adversely affect the ability of the Company and
Buyer to carry out the transactions contemplated by this Agreement.
6. Indemnification.
6.1 Indemnification by PMC. PMC hereby agrees to indemnify and hold the
Company and Buyer harmless from and against any and all losses, obligations,
deficiencies, liabilities, claims, damages, costs and expenses (including,
without limitation, the amount of any settlement entered into pursuant hereto,
and all reasonable legal and other expenses incurred in connection with the
investigation, prosecution or defense of any matter indemnified pursuant hereto)
which Buyer may sustain, suffer or incur and which arise out of, are caused by,
relate to, or result or occur from or in connection with (i) the noncompliance
with Wisconsin bulk transfer laws, (ii) the breach by PMC of any representation,
warranty or covenant made by it in this Agreement or in any agreement or
instrument executed and delivered pursuant hereto or (iii) any failure of PMC to
pay or perform any liability or obligation of PMC other than the Assumed
Liabilities.
6.2 Indemnification by the Company and Buyer. The Company and Buyer hereby
agree jointly and severally to indemnify and hold PMC harmless from and against
any and all losses, obligations, deficiencies, liabilities, claims, damages,
costs and expenses (including, without limitation, the amount of
-25-
<PAGE>
any settlement entered into pursuant hereto, and all reasonable legal and other
expenses incurred in connection with the investigation, prosecution or defense
of any matter indemnified pursuant hereto), which it may sustain, suffer or
incur and which arise out of, are caused by, relate to, or result or occur from
or in connection with (i) the failure of Buyer to pay or perform the Assumed
Liabilities, or (ii) the breach by Buyer of any representation, warranty or
covenant made by it in this Agreement or in any agreement or instrument executed
and delivered pursuant hereto, including, without limitation, the Management
Agreement, the Manufacturing Agreement and the Confidentiality Agreement.
6.3 Procedure Relative to Indemnification.
(a) In the event that any party hereto shall claim that it is entitled to
be indemnified pursuant to the terms of this Section 6, it (the "Claiming
Party") shall so notify the party or parties against which the claim is made
(the "Indemnifying Party") in writing of such claim within thirty (30) days
after receipt of a notice of such claim or notice of any claim of a third party
that may reasonably be expected to result in a claim by such party against the
party to which such notice is given; provided, however, that failure to give
such notification shall not affect the indemnification provided hereunder except
to the extent the Indemnifying Party shall have been actually prejudiced as a
result of such failure. Such notice shall specify the breach of representation,
warranty or agreement claim by the Claiming Party and the liability, loss, cost
or expense incurred by, or imposed upon the Claiming Party
-26-
<PAGE>
on account thereof. If such liability, loss, cost or expense is liquidated in
amount, the notice shall so state and such amount shall be deemed the amount of
the claim of the Claiming Party. If the amount is not liquidated, the notice
shall so state and in such event a claim shall be deemed asserted against the
Indemnifying Party on behalf of the Claiming Party, but no payment shall be made
on account thereof until the amount of such claim is liquidated and the claim is
finally determined; provided, however that the Indemnifying Party shall
nonetheless bear the expenses of investigating, defending and negotiating such
claim in accordance with the terms hereof.
(b) The following provisions shall apply to any claim of the Claiming Party
which is based upon (i) a suit, action or proceeding filed or instituted by any
third party, or (ii) any form of proceeding or assessment instituted by any
governmental entity:
(i) The Indemnifying Party shall, upon receipt of such written notice
and at its expense, defend such claim in its own name or, if necessary, in
the name of the Claiming Party; provided, however, that if the proceeding
involves a matter solely of concern to the Claiming Party in addition to
the claim for which indemnification under Section 7 is being sought, such
matter of sole concern shall be within the sole responsibility of the
Claiming Party and its counsel. The Claiming Party will cooperate with and
make available to the Indemnifying Party such assistance and materials as
may be reasonably requested of it, and the Claiming Party shall have the
-27-
<PAGE>
right, at its expense, to participate in the defense. The Indemnifying
Party shall have the right to settle and compromise such claim only with
the consent of the Claiming Party (which consent shall not be unreasonably
withheld).
(ii) In the event the Indemnifying Party shall notify the Claiming
Party that it disputes any claim made by the Claiming Party and/or it shall
fail to defend such claim actively and in good faith, then the Claiming
Party shall have the right to conduct a defense against such claim and
shall have the right to settle and compromise such claim upon ten (10) days
prior notice to, and with the consent of, the Indemnifying Party, which
consent shall not be unreasonably withheld. The Claiming Party shall be
entitled to pursue each and every remedy available to it at law or in
equity to enforce the indemnification provisions of this Section 6 and, in
the event it is determined, or the Indemnifying Party agrees, that it is
obligated to indemnify the Claiming Party for such claim, the Indemnifying
Party agrees to pay all costs, expenses and fees, including all reasonable
attorneys' fees which may be incurred by the Claiming Party in attempting
to enforce indemnification under this Section 6, whether the same shall be
enforced by suit or otherwise.
6.4 Limitations. Notwithstanding anything to the contrary contained herein,
none of the parties hereto shall be required to make any indemnification payment
pursuant to this Section 7 until such time as the total amount of all damages
sustained, suffered or incurred by such party seeking
-28-
<PAGE>
indemnification exceeds $50,000 in the aggregate, and if the total amount of
such damages exceeds $50,000, then the indemnified party shall be entitled to be
indemnified against and compensated and reimbursed for all of such damages in
excess of $50,000; provided, however, that if any single claim is in excess of
$25,000, the indemnified party shall be entitled to be indemnified against and
compensated and reimbursed for all of such damages (provided that the aggregate
of such claims equals or exceeds such $50,000 threshold), and provided, further
that the maximum aggregate liability of any party hereunder shall in no event
exceed $2,000,000. Notwithstanding anything contained herein to the contrary the
$50,000 limitation described above shall not apply to claims by Buyer with
respect to Buyer's failure to receive amounts due with respect to Purchased
Receivables or PMC's failure to fulfill its obligations with respect to Product
Returns or the failure to comply with Wisconsin bulk transfer laws.
7. Treatment of Indemnity Payments. Any indemnity payments made pursuant to
Section 6 shall be treated as an adjustment to the Purchase Price.
8. Nondisclosure; Noncompete. PMC shall enter into a Confidentiality and
Non-Compete Agreement with the Company and Buyer in the form attached hereto as
Exhibit E, (the "Confidentiality Agreement").
9. Right of Buyer to Abandon. Buyer shall have the right to terminate this
Agreement and abandon the transactions contemplated hereby in the event that any
of the following shall
-29-
<PAGE>
not be true or shall not have occurred, as the case may be, as of the Closing
Date:
9.1 Accuracy of Representations and Warranties. The representations and
warranties of PMC contained in this Agreement or in any document, agreement or
instrument delivered by it pursuant hereto shall have been true in all material
respects when made, and, in addition, shall be true, in all material respects,
on and as of the Closing Date with the same force and effect as though made on
and as of the Closing Date.
9.2 Performance of Agreements. PMC shall have performed all material
obligations and agreements, and complied, in all material respects, with all
covenants and conditions, contained in this Agreement or in any document,
agreement or instrument delivered by it pursuant hereto and required to be
performed or complied with by it at or prior to the Closing Date.
9.3 Certificate. PMC shall have furnished Buyer with a certificate executed
by its President, dated the Closing Date, to the effect that it has fulfilled
the conditions specified in Subsections 9.1 and 9.2 above.
9.4 Opinion of Counsel for PMC. Buyer shall have received the opinion of
Godfrey & Kahn, S.C., counsel for PMC, dated the Closing Date, in substantially
the form of Exhibit F attached hereto and made a part hereof.
9.5 Litigation. No order of any court or administrative agency shall be in
effect which restrains or prohibits the transactions contemplated hereby, and no
suit, action, inquiry, investigation or proceeding in which it will be,
-30-
<PAGE>
or it is, sought to restrain, prohibit or change the terms of or obtain damages
or other material relief in connection with this Agreement or any of the
transactions contemplated hereby shall have been instituted or threatened by any
person or entity against the Company or Buyer.
9.6 Due Diligence Investigation. Buyer shall have been satisfied with the
results of its "due diligence" investigation of PMC's relationship with its
customers.
9.7 Financing. Buyer shall have consummated financing arrangements
necessary to engage in the transactions set forth herein.
9.8 Consents and Approvals. All consents, waivers, approvals, licenses and
authorizations by third parties and governmental and administrative authorities
(and all amendments or modifications to existing agreements with third parties)
required as a precondition to the performance by PMC of its obligations
hereunder and under any agreement delivered pursuant hereto, or which in Buyer's
reasonable judgment are necessary to continue unimpaired any rights in and to
the Purchased Assets which could be impaired by the purchase and sale hereunder,
shall have been duly obtained and shall be in full force and effect.
9.9 Manufacturing Agreement. PMC, the Company and Buyer shall have executed
and delivered the Manufacturing Agreement.
-31-
<PAGE>
9.10 Management Agreement. PMC, the Company and Buyer shall have executed
and delivered the Management Agreement in the form attached hereto as Exhibit D.
9.11 Confidentiality Agreement. PMC shall have executed and delivered the
Confidentiality Agreement in the form attached hereto as Exhibit E.
9.12 Date of Consummation. The sale and purchase of the Purchased Assets
pursuant hereto shall have been consummated on or prior to May 16, 1997.
9.13 Validity of Transactions. The validity of all transactions
contemplated hereby, as well as the form and substance of all agreements,
instruments, opinions, certificates and other documents delivered by PMC
pursuant hereto, shall be reasonably satisfactory in all material respects to
Buyer and its counsel.
10. Right of PMC to Abandon. PMC shall have the right to terminate this
Agreement and abandon the transactions contemplated hereby in the event that any
of the following shall not be true or shall not have occurred, as the case may
be, as of the Closing Date:
10.1 Accuracy of Representations and Warranties. The representations and
warranties of the Company and Buyer contained in this Agreement or in any
document, agreement or instrument delivered by it pursuant hereto shall have
been true when made, and, in addition, shall be true on and as of the Closing
Date with the same force and effect as though made on and as of the Closing
Date.
-32-
<PAGE>
10.2 Performance of Agreements. The Company and Buyer shall have performed
all obligations and agreements, and complied with all covenants and conditions,
contained in this Agreement or in any document, agreement or instrument
delivered by them pursuant hereto and required to be performed or complied with
by them at or prior to the Closing Date.
10.3 Certificate. The Company and Buyer shall have furnished PMC with
certificates, executed by an executive officer at each of the Company and Buyer,
as the case may be, dated the Closing Date, to the effect that each of them has
fulfilled the conditions specified in Subsections 10.1 and 10.2 hereof.
10.4 Opinion of Counsel for Buyer. PMC shall have received an opinion of
Tenzer Greenblatt LLP, counsel for Buyer, dated the Closing Date, in
substantially the form of Exhibit G attached hereto and made a part hereof.
10.5 Manufacturing and Management Agreement. PMC, the Company and Buyer
shall have executed and delivered the Manufacturing Agreement and the Management
Agreement.
10.6 Litigation. No order of any court or administrative agency shall be in
effect which restrains or prohibits the transactions contemplated hereby, and no
suit, action, inquiry, investigation or proceeding in which it will be, or it
is, sought to restrain, prohibit or change the terms of or obtain damages or
other relief in connection with this Agreement or any of the transactions
contemplated hereby, and which in the judgment of PMC makes it inadvisable to
proceed with the
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<PAGE>
consummation of such transactions, shall have been instituted or threatened by
any person or entity.
10.7 Consents and Approvals. All consents, waivers, approvals, licenses and
authorizations by third parties and governmental and administrative authorities
(and all amendments and modifications to existing agreements with third parties)
required as a precondition to the performance by the Company and Buyer of its
obligations hereunder shall have been duly obtained and shall be in full force
and effect.
10.8 Date of Consummation. The sale and purchase of the Purchased Assets
pursuant hereto shall have been consummated on or prior to May 16, 1997.
10.9 Validity of Transactions. The validity of all transactions
contemplated hereby, as well as the form and substance of all agreements,
instruments, opinions, certificates and other documents delivered by Buyer
pursuant hereto, shall be satisfactory in all material respects to PMC and its
counsel.
11. Miscellaneous Provisions.
11.1 Effect of Abandonment. In the event that this Agreement is terminated
and the transactions contemplated hereby are abandoned pursuant to the terms
hereof, this Agreement shall forthwith become wholly void and of no force and
effect; provided, however, that nothing in this Agreement contained shall be
deemed to relieve any party hereto from liability for any breach of this
Agreement prior to termination.
11.2 Expenses. Except as otherwise provided in this Agreement, each of the
parties hereto shall pay its own
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<PAGE>
costs and expenses in connection with this Agreement and the transactions
contemplated hereby.
11.3 Execution in Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.
11.4 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given or
made as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail, postage prepaid, return receipt requested, as
follows:
If to the Company,
to: U.S. Home & Garden, Inc.
655 Montgomery Street - Suite 830
San Francisco, California 94111
Attn: Robert Kassel
If to Buyer, to: Easy Gardener Acquisition Corp.
655 Montgomery Street - Suite 830
San Francisco, California 94111
Attn: Robert Kassel
Copy to: Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attn: Barry S. Rutcofsky, Esq.
If to PMC, to: Plastic Molded Concepts, Inc.
111 Murphy Drive
P.O. Box 490
Eagle, Wisconsin 53119
Attn: Larry K. Floyd
-35-
<PAGE>
Copy to: Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
Attn: Daniel Ryan, Esq.
or to such other address as any party shall have designated by like notice to
the other parties hereto (except that a notice of change of address shall only
be effective upon receipt).
11.5 Amendment. This Agreement may only be amended by a written instrument
executed by each of the parties hereto.
11.6 Entire Agreement. This Agreement (together with the other agreements
and documents being delivered pursuant to or in connection with this Agreement)
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
11.7 Applicable Law. This Agreement shall be governed by the laws of the
State of Wisconsin applicable to contracts made and to be wholly performed
therein.
11.8 Headings. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
11.9 Assignment. Prior to the Closing Date, neither this Agreement nor any
rights, interests or obligations hereunder may be assigned (by operation of law
or otherwise) by any party hereto without the prior written consent of all of
the
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<PAGE>
parties hereto, except that this Agreement may be assigned to a wholly-owned
subsidiary of Buyer without the need for such prior consent; provided, however,
in no event shall such assignment relieve the Company or Buyer of any of such
party's respective obligations hereunder.
11.10 Binding Effect; Benefits. This Agreement shall inure to the benefit
of, and shall be binding upon, the parties hereto and their respective legal
representatives, successors and permitted assigns. Nothing herein contained,
express or implied, is intended to confer upon any person other than the parties
hereto and their respective legal representatives, successors and permitted
assigns, any rights or remedies under or by reason of this Agreement.
11.11 Waiver, etc. The failure of any of the parties hereto to at any time
enforce any of the provisions of this Agreement shall not be deemed or construed
to be a waiver of any such provision, nor to in any way affect the validity of
this Agreement or any provision hereof or the right of any of the parties hereto
to thereafter enforce each and every provision of this Agreement. No waiver of
any breach of any of the provisions of this Agreement shall be effective unless
set forth in a written instrument executed by the party or parties against whom
or which enforcement of such waiver is sought; and no waiver of any such breach
shall be construed or deemed to be a waiver of any other or subsequent breach.
11.12 Severability. Any provision of this Agreement which is held by a
court of competent jurisdiction to
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<PAGE>
be prohibited or unenforceable in any jurisdiction(s) shall be, as to such
jurisdiction(s), ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
11.13 Announcements. No party hereto shall issue any press release or
otherwise divulge the existence of this Agreement or the transactions
contemplated hereby without the prior approval of the other parties hereto,
except as may be required by applicable law or the applicable rules or
regulations of any stock exchange.
11.14 Schedules and Exhibits. The Schedules and Exhibits delivered pursuant
to this Agreement are an integral part hereof. Notwithstanding any
cross-references in the schedules (all of which are included as a matter of
convenience only), each schedule shall be deemed to include the information
contained in all other schedules such that reference to a matter or item under
one schedule shall be deemed to constitute disclosure under all other schedules.
Buyer acknowledges and agrees that PMC shall have the right to supplement, on or
before the Closing Date, any schedule required by this Agreement; provided,
however, that if any such supplement adversely affects the rights of Buyer
hereunder, Buyer shall have the right to terminate this Agreement and abandon
the transactions contemplated hereby.
-38-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto as of the date first above written.
U.S. HOME & GARDEN, INC.
By: /s/ Richard J. Raleigh
------------------------------------
Name: Richard J. Raleigh
Title: C.O.O.
EASY GARDENER ACQUISITION
CORP.
By: /s/ Richard J. Raleigh
------------------------------------
Name: Richard J. Raleigh
Title: VP and Secretary
PLASTIC MOLDED CONCEPTS, INC.
By: /s/ Larry K. Floyd
------------------------------------
Name: Larry K. Floyd
Title: President
-39-
Exhibit 21
SUBSIDIARIES OF U.S. HOME & GARDEN INC.
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Easy Gardener, Inc. Delaware
Emerald Products Corp. Delaware
Golden West Agri-Products, Inc. California
Weatherly Consumer Products Group, Inc.* Delaware
Weatherly Consumer Products, Inc.+ Delaware
- ---------
* Subsidiary of Easy Gardener, Inc.
+ Subsidiary of Weatherly Consumer Products Group, Inc
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
U.S. Home & Garden Inc.
San Francisco, California
We hereby consent to the incorporation by reference in the Registration Nos.
33-82758, 33-89800, 33-94924 and 333-21667 on Form S-3 and 33-55020 on Form S-8
of U.S. Home & Garden Inc. of our report dated August 1, 1997, except for Note
15 which is as of September 15, 1997, relating to the consolidated financial
statements and Schedule of U.S. Home & Garden Inc. appearing in this Annual
Report on Form 10-K of U.S. Home & Garden Inc. for the year ended June 30, 1997.
/s/ BDO Seidman, LLP
--------------------
BDO SEIDMAN, LLP
San Francisco, California
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-K AT JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,083,000
<SECURITIES> 0
<RECEIVABLES> 11,856,000
<ALLOWANCES> 314,000
<INVENTORY> 5,254,000
<CURRENT-ASSETS> 19,746,000
<PP&E> 3,158,000
<DEPRECIATION> 843,000
<TOTAL-ASSETS> 68,475,000
<CURRENT-LIABILITIES> 17,454,000
<BONDS> 17,570,000
0
0
<COMMON> 14,000
<OTHER-SE> 31,912,000
<TOTAL-LIABILITY-AND-EQUITY> 68,475,000
<SALES> 52,046,000
<TOTAL-REVENUES> 52,046,000
<CGS> 23,649,000
<TOTAL-COSTS> 23,649,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,338,000
<INCOME-PRETAX> 7,390,000
<INCOME-TAX> 3,200,000
<INCOME-CONTINUING> 4,190,000
<DISCONTINUED> 0
<EXTRAORDINARY> 1,007,000
<CHANGES> 0
<NET-INCOME> 3,183,000
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
