<PAGE>
2,200,000 TRUST PREFERRED SECURITIES
U.S. HOME & GARDEN TRUST I
9.40% CUMULATIVE TRUST PREFERRED SECURITIES (LIQUIDATION AMOUNT $25 PER TRUST
PREFERRED SECURITY) FULLY AND UNCONDITIONALLY GUARANTEED BY
[U.S. HOME & GARDEN INC. - LOGO]
---------------------
The 9.40% Cumulative Trust Preferred Securities (the "Trust Preferred
Securities") offered hereby represent undivided beneficial preferred interests
in the assets of U.S. Home & Garden Trust I, a statutory
business trust created under the laws of the State of Delaware (the "Trust").
U.S. Home & Garden Inc., a Delaware corporation (the "Company"), will be the
owner of all of the . . . (continued on page 3)
---------------------
See "Risk Factors" beginning on Page 17 for a discussion of certain
information that should be considered by prospective purchasers
of the securities offered hereby.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to the Discounts and Proceeds to
Public Commissions(1) the Trust(2)
- --------------------------------------------------------------------------------
Per Trust Preferred Security $25 (2) $25
- --------------------------------------------------------------------------------
Total(3) .................... $55,000,000 (2) $55,000,000
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters by the Trust and the Company and other matters.
(2) In view of the fact that all of the proceeds of the sale of the Trust
Preferred Securities will be used to purchase the Junior Subordinated
Debentures, the Company has agreed to pay the Underwriters as compensation
for arranging the investment therein of such proceeds, $1.00 per Trust
Preferred Security or $2,200,000 in the aggregate. See "Underwriting." The
Company has also agreed to pay the expenses of the offering estimated to
be $575,000.
(3) The Trust has granted to the Underwriters a 30-day option to purchase up to
an additional $8,250,000 aggregate liquidation amount of Trust Preferred
Securities on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to the Public and Proceeds to the Trust will be $63,250,000 and
$63,250,000, respectively, and the total compensation to be paid by the
Company to the Underwriters will be $2,530,000. See "Underwriting."
---------------------
The Trust Preferred Securities are being offered hereby by the
Underwriters named herein, subject to prior sale, when, as and if issued by the
Trust and delivered to and accepted by the Underwriters and subject to certain
prior conditions, including the right of the Underwriters to reject any order
in whole or in part. It is expected that delivery of the Trust Preferred
Securities will be made in New York, New York in book-entry form only through
the facilities of The Depository Trust Company on or about April 17, 1998.
EVEREN Securities, Inc.
Hambrecht & Quist
Josephthal & Co. Inc.
The date of this Prospectus is April 13, 1998
<PAGE>
[Photos of certain products]
SOME OF THE COMPANY'S ACCOUNTS
- --------------------------------------------------------------------------------
Home Improvement Centers Mass Merchants Co-ops
- --------------------------------------------------------------------------------
Builder's Square Home Quarters Country General Ace Hardware
Eagle Hardware Lowe's Kmart Mid-States
Hechinger Orchard Supply Scotty's True*Serve
HomeBase Yardbirds Wal-Mart
Home Depot
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE, WHICH STABILIZE, MAINTAIN OR
OTHERWISE AFFECT THE MARKET PRICE OF THE TRUST PREFERRED SECURITIES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE TRUST PREFERRED SECURITIES IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
(Continued from cover page)
beneficial interests represented by common securities of the Trust (the "Common
Securities" and, collectively with the Trust Preferred Securities, the "Trust
Securities"). The Trust exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in an equivalent amount of 9.40%
Junior Subordinated Deferrable Interest Debentures (the "Junior Subordinated
Debentures") to be issued by the Company. The Junior Subordinated Debentures
will mature on April 15, 2028, which date may be shortened (such date, as it
may be shortened, the "Stated Maturity") to a date not earlier than April 15,
2003. The Trust Preferred Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities, which will be
held by the Company. See "Description of the Trust Preferred
Securities--Subordination of Common Securities of the Trust Held by the
Company."
Holders of the Trust Preferred Securities will be entitled to receive
preferential cumulative cash distributions accruing from the date of original
issuance and payable monthly in arrears on the 15th day of each calendar month
of each year (subject to possible deferral as described below), commencing May
15, 1998, at the annual rate of 9.40% of the Liquidation Amount (as defined
herein) of $25 per Trust Preferred Security ("Distributions"). The amount of
each Distribution due with respect to the Trust Preferred Securities will
include amounts accrued through the date such Distribution payment is due
(each, a "Distribution Date"). The Company will have the right, so long as no
Debenture Event of Default (as defined herein) has occurred and is continuing,
to defer payments of interest on the Junior Subordinated Debentures at any time
or from time to time for a period not exceeding 60 consecutive months with
respect to each deferral period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due, the Company may elect to begin a new
Extension Period subject to the requirements set forth herein. If interest
payments on the Junior Subordinated Debentures are so deferred, Distributions
on the Trust Preferred Securities will also be deferred and the Company will
not be permitted, subject to certain exceptions described herein, to declare or
pay any cash distributions with respect to its capital stock or to make any
payment with respect to its debt securities that rank pari passu with or
junior to the Junior Subordinated Debentures. During an Extension Period,
interest on the Junior Subordinated Debentures will continue to accrue (and the
amount of Distributions to which holders of the Trust Preferred Securities are
entitled will accumulate) at the rate of 9.40% per annum, compounded monthly,
and holders of the Trust Preferred Securities will be required to accrue income
and will be required to pay United States federal income tax on the accrued
income. See "Description of Junior Subordinated Debentures--Option to Defer
Interest Payment Period" and "Certain Federal Income Tax Consequences--Interest
Income and Original Issue Discount."
The Company has, through the Guarantee Agreement, the Trust Agreement, the
Junior Subordinated Debentures, the Indenture and the Expense Agreement (each
as defined herein), taken together, fully, irrevocably and unconditionally
guaranteed all of the Trust's obligations under the Trust Preferred Securities.
See "Relationship Among the Trust Preferred Securities, the Junior Subordinated
Debentures and the Guarantee--Full and Unconditional Guarantee." Under the
Guarantee (as defined herein), the Company guarantees the payment of
Distributions by the Trust and payments on liquidation of or redemption of the
Trust Preferred Securities (subordinate to the right to payment of Senior Debt
and Subordinated Debt of the Company, each as defined herein) to the extent of
funds held by the Trust. See "Description of Guarantee." If the Company does
not make required payments on the Junior Subordinated Debentures held by the
Trust, the Trust will have insufficient funds to pay Distributions on the Trust
Preferred Securities. The Guarantee does not cover payment of Distributions
when the Trust does not have sufficient funds to pay such Distributions. In
such event, a holder of the Trust Preferred Securities may institute a legal
proceeding directly against the Company pursuant to the terms of the Indenture
to enforce payment of the Junior Subordinated Debentures to the Trust. See
"Description of Junior Subordinated Debentures--Enforcement of Certain Rights
by Holders of Trust Preferred Securities." The obligations of the Company under
the Guarantee and the Junior Subordinated Debentures are subordinate and junior
in right of payment to all Senior Debt and Subordinated Debt of the Company.
"See Description of Junior Subordinated Debentures--Subordination."
The Trust Preferred Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the Junior Subordinated Debentures at the
Stated Maturity or their earlier redemption, in each case at a redemption price
equal to the aggregate liquidation preference ("Liquidation Amount") of the
Trust Preferred Securities
3
<PAGE>
plus any accumulated and unpaid Distributions thereon to the date of
redemption. The Junior Subordinated Debentures are redeemable prior to maturity
at the option of the Company (i) on or after April 15, 2003, in whole at any
time or in part from time to time, or (ii) at any time, in whole (but not in
part), within 90 days following the occurrence of a Tax Event or an Investment
Company Event (each as defined herein), in each case at a redemption price
equal to the accrued and unpaid interest on the Junior Subordinated Debentures
to the date fixed for redemption, plus 100% of the principal amount thereof.
See "Description of the Trust Preferred Securities--Redemption."
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust as provided by
applicable law, cause a Like Amount (as defined herein) of the Junior
Subordinated Debentures to be distributed to the holders of the Trust
Securities in liquidation of the Trust. See "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Dissolution."
In the event of the dissolution of the Trust, after satisfaction of
liabilities to creditors of the Trust as required by applicable law, the
holders of Trust Preferred Securities will be entitled to receive a Liquidation
Amount of $25 per Trust Preferred Security plus accumulated and unpaid
Distributions thereon to the date of payment, which may be in the form of a
Distribution of such Like Amount of Junior Subordinated Debentures, subject to
certain exceptions. See "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Dissolution."
The Junior Subordinated Debentures and the Guarantee are unsecured and
subordinated to all Senior Debt and Subordinated Debt. The terms of the Junior
Subordinated Debentures and the Guarantee place no limitation on the amount of
Senior Debt and Subordinated Debt that the Company can issue. Currently, the
Company has bank credit agreements (collectively, the "Credit Facility") that
consists of a $29.3 million term loan and a revolving credit facility that
provides for borrowings of up to $20.0 million. The Company will apply a
portion of the net proceeds of this offering to pay off the outstanding balance
under the Credit Facility which was approximately $38.0 million as of April 1,
1998. The Credit Facility will then be terminated. The Company has entered into
negotiations regarding a new credit facility, which may be for an amount less
than the Company's current Credit Facility. Because the Company is a holding
company, substantially all of the Company's assets consist of the capital stock
of its subsidiaries. All obligations of the Company relating to the securities
described herein will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries. The Company may cause additional
trust preferred securities to be issued by trusts similar to the Trust in the
future, and there is no limit on the amount of such securities that may be
issued. In that event, the Company's obligations under the junior subordinated
debentures to be issued to such other trusts and the Company's guarantees of
the payments by such trusts will be pari passu with the Company's obligations
under the Junior Subordinated Debentures and the Guarantee, respectively.
The Trust Preferred Securities have been approved for listing on the
American Stock Exchange, subject to notice of issuance. In order to meet the
listing requirements of the American Stock Exchange, the representatives of the
Underwriters have undertaken to distribute the Trust Preferred Securities to a
minimum of 400 public stockholders. Although the Underwriters have indicated an
intention to make a market in the Trust Preferred Securities, the Underwriters
are not obligated to do so, and any market making may be discontinued at any
time at the sole discretion of any of the Underwriters. There can be no
assurance that a market will develop for the Trust Preferred Securities. See
"Risk Factors--Absence of Existing Public Market; Market Prices" and
"Underwriting."
Each of the Trust Preferred Securities and, if the Junior Subordinated
Debentures are distributed to holders of Trust Preferred Securities, the Junior
Subordinated Debentures will be represented by one or more global certificates
registered in the name of The Depository Trust Company (the "Depositary") or
its nominee. Beneficial interests in the Trust Preferred Securities and, in
such event, the Junior Subordinated Debentures will be shown on, and transfers
thereof will be effected only through, records maintained by participants in
the Depositary. The Depositary and the Paying Agent (as defined herein) will be
responsible for interest and dividend payments to holders of the Trust
Preferred Securities and the Junior Subordinated Debentures. Except as
described herein, the Trust Preferred Securities in certificated form will not
be issued in exchange for global certificates. See "Book-Entry Issuance."
4
<PAGE>
As used herein, (i) the "Indenture" means the Junior Subordinated
Indenture, as amended and supplemented from time to time, between the Company
and Wilmington Trust Company, as Trustee (the "Indenture Trustee"), under which
the Junior Subordinated Debentures will be issued, (ii) the "Trust Agreement"
means the Amended and Restated Trust Agreement relating to the Trust among the
Company, as depositor, Wilmington Trust Company, as Property Trustee (the
"Property Trustee"), Wilmington Trust Company, as Delaware Trustee (the
"Delaware Trustee"), the Administrative Trustees named therein (collectively,
with the Property Trustee and Delaware Trustee, the "Issuer Trustees") and the
holders, from time to time, of the trust securities, (iii) the "Guarantee
Agreement" means the Guarantee Agreement relating to the guarantee between the
Company and Wilmington Trust Company, as Guarantee Trustee (the "Guarantee
Trustee"), and (iv) the "Expense Agreement" means the Agreement as to Expenses
and Liabilities between the Company and the Trust.
AVAILABLE INFORMATION
The Company and the Trust have jointly filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-1
(together with all amendments and exhibits thereto, the "Registration
Statement"), under the Securities Act of 1933 (the "Securities Act"), with
respect to the offering of the securities offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company, the
Trust and the securities offered hereby, reference is made to the Registration
Statement and the exhibits and the financial statements, notes and schedules
filed as a part thereof or incorporated by reference therein, which may be
inspected at the public reference facilities of the Commission, at the
addresses set forth below. Statements made in this Prospectus concerning the
contents of any documents referred to herein are not necessarily complete, and
in each instance are qualified in all respects by reference to the copy of such
document filed as an exhibit to the Registration Statement.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Commission. Reports,
proxy statements and other information filed by the Company can be inspected
and copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional Offices
of the Commission: Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a Web site (http://www.sec.gov) at which reports, proxy and
information statements and other information regarding the Company may be
accessed.
No separate financial statements of the Trust have been included herein.
The Company and the Trust do not consider that such financial statements would
be material to holders of the Trust Preferred Securities because the Trust is a
newly formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than holding as trust assets the Junior Subordinated Debentures of the
Company and issuing the Trust Securities. The Trust is a wholly-owned
subsidiary of the Company, and the Company will fully, irrevocably and
unconditionally guarantee all of the Trust's obligations under the Trust
Preferred Securities. See "Prospectus Summary--The Company" and "--U.S. Home &
Garden Trust I," "Description of the Trust Preferred Securities," "Description
of Junior Subordinated Debentures" and "Description of Guarantee."
The Company will provide to the holders of the Trust Preferred Securities
annual reports containing financial statements audited by the Company's
independent auditors and such other reports as the Company shall determine or
as shall be required by law. The Company will also furnish annual reports on
Form 10-K and quarterly reports on Form 10-Q (except for exhibits thereto) free
of charge to holders of the Trust Preferred Securities who so request in
writing to the Company.
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Each prospective investor is urged to read this Prospectus in its
entirety.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Prospectus contains statements that are forward-looking, such as statements
relating to plans for future activities. Such forward-looking information
involves important known and unknown risks, uncertainties and other factors
that could significantly affect actual results, performance or achievements of
the Company in the future and, accordingly, such actual results, performance or
achievements may materially differ from those expressed or implied in any
forward-looking statements made by or on behalf of the Company. These risks,
uncertainties and factors include, but are not limited to, those relating to
the Company's growth strategy, customer concentration, outstanding
indebtedness, dependence on weather conditions, seasonality, expansion and
other activities of competitors, changes in federal or state environmental laws
and the administration of such laws, protection of trademarks and other
proprietary rights and the general condition of the economy and its effect on
the securities markets. The words "believe", "expect", "anticipate", "intend"
and "plan" and similar expressions identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date the statement was made. See "Risk Factors."
The Company
The Company is a leading manufacturer and marketer of a broad range of
consumer lawn and garden products. The Company's products include weed
preventive landscape fabrics, fertilizer spikes, decorative landscape edging,
shade cloth and root feeders, which are sold under recognized brand names such
as WeedBlock(R), Jobe's(R), Emerald Edge(R), Shade Fabric(TM) and Ross(R). In
February 1998, the Company acquired the assets of Weed Wizard, Inc., a
manufacturer and distributor of weed trimmer replacement heads, and will
continue marketing the product under the "Weed Wizard" trademark. In addition,
in March 1998, the Company acquired substantially all of the assets of
Landmaster Products, Inc., a manufacturer and distributor of polyspun landscape
fabrics. The Company believes that it has significant market share and
brand-name recognition in several of its primary product categories. The
Company markets its products through most large national home improvement and
mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's,
Kmart, Builder's Square, Wal-Mart and Home Base.
The Company has experienced significant growth in recent years. Net sales,
EBITDA (as defined herein) and net income grew at compound annual rates of 63%,
77% and 42%, respectively, during the period from the fiscal year ended June
30, 1995 through the fiscal year ended June 30, 1997. The Company achieved
record results from operations for the fiscal year ended June 30, 1997, with
net sales, EBITDA and net income increasing to $52.0 million, $12.6 million and
$3.2 million, respectively, from $27.0 million, $4.6 million and $2.5 million
for the fiscal year ended June 30, 1996. The Company believes that its success
has been primarily attributable to the expansion of its product lines through
the acquisition of complementary lawn and garden businesses, the quality of its
products, its focus on providing Retail Accounts with a single source of lawn
and garden products, the efficiency and reliability of its inventory tracking
and order fulfillment systems and its distinctive advertising and in-store
displays.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the
number of vendors needed to source high volume lawn and garden products, the
preference among home improvement and mass merchant retailers has shifted to
6
<PAGE>
single source suppliers such as the Company that offer broad product lines of
consumer brand-name merchandise and provide the product support necessary to
stimulate consumer demand and ensure timely and cost effective order
fulfillment. Smaller regional suppliers generally lack the capital and other
resources necessary to offer the variety and number of product lines, the
product support and the inventory stocking and tracking capabilities required
by home improvement and mass merchant retailers.
Regional manufacturers, distributors and marketers are now largely
fragmented and the Company believes that many of them are attractive
acquisition candidates for larger suppliers and distributors in the lawn and
garden industry. The Company has historically been successful in locating,
acquiring and integrating certain of these manufacturers and distributors into
its business and intends to continue its acquisition program as a principal
component of its growth strategy.
According to the 1996-1997 National Gardening Survey, 1996 retail sales of
lawn and garden products were approximately $22 billion and 64% of the
approximately 101 million households in the United States participated in some
form of gardening activity during 1996. In addition, sales growth in the lawn
and garden industry is being driven in part by the aging of the "baby boomer"
consumer segment. According to the National Gardening Survey, persons 50 years
of age and older spent an average of $400 per household on lawn and garden
activities in 1996.
Business Strategy
The Company's business objective is to be a leading single source supplier
of lawn and garden products to Retail Accounts and its strategy includes: (i)
marketing low-cost, high-margin products that stimulate impulse buying by
consumers; (ii) supplying Retail Accounts with a broad range of brand-name
products within each of its product categories; (iii) utilizing distinctive
packaging and point-of-purchase product displays, new product introductions and
other merchandising techniques to stimulate consumer demand; (iv) generating
brand-name recognition of its products through national marketing and
advertising programs; and (v) promoting Retail Account satisfaction by
providing them with timely and cost efficient order fulfillment services.
Growth Strategy
The Company attributes its historical growth and success to its ability to
capitalize on the consolidation of the lawn and garden industry by locating,
acquiring and effectively integrating acquisition targets and its ability to
act as an efficient single source supplier of a broad range of quality
products. The Company intends to continue this growth strategy, which consists
of the following principal components:
o Pursue Additional Strategic Acquisitions. The Company plans to continue
its primary strategy of acquiring complementary lawn and garden companies
and product lines. The Company has consummated seven (7) such acquisitions
since 1992 and recently entered into a non-binding letter of intent to
acquire another lawn and garden product business. By consolidating
companies with complementary product lines, the Company believes it can
capitalize on its existing channels of distribution and gain market share
by increasing sales to its Retail Accounts.
o Increase Brand Awareness. The Company intends to enhance existing
consumer brand awareness by expanding its advertising and marketing
efforts with an emphasis on its Jobe's fertilizer spikes, a
nationally-recognized brand name. The Company believes that the
modernization of its Jobe's packaging, together with a national television
advertising campaign targeted at the "baby boomer" consumer segment, will
allow it to further capitalize on its brand name recognition.
o Utilize Existing Infrastructure. The Company's management and
administrative infrastructure has been designed to accommodate the
integration of additional products when suitable lawn and garden companies
and product lines are acquired. The Company believes that its ability to
efficiently integrate new businesses and product lines into its existing
infrastructure will result in significant savings in the areas of
management, distribution, marketing and customer service. The Company also
believes that its infrastructure, including its on-line inventory tracking
and order fulfillment capabilities, allows it to be an effective and
efficient source of lawn and garden products for Retail Accounts.
7
<PAGE>
o Focus on High-Volume Retailers. National high-volume retailers such as
the Company's Retail Accounts are gaining an increasing share of the lawn
and garden retail market. By focusing on the emergence of high-volume
retailers and their needs, including providing broad product lines, order
fulfillment capabilities and marketing and merchandising programs, the
Company believes that it will increase its market share and enhance its
position as a leading single source supplier of lawn and garden products.
Recent and Proposed Acquisitions
Since August 1992, the Company has consummated the following seven (7)
acquisitions of lawn and garden companies or product lines for a total of over
$75 million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which was acquired in
August 1992 for aggregate consideration of approximately $2.2 million.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock, which was acquired in September 1994 for
aggregate consideration of approximately $23.5 million.
o Emerald Products LLC. A manufacturer of decorative landscape edging,
which was acquired in August 1995 for aggregate consideration of $935,000.
o Weatherly Consumer Products Group, Inc. A manufacturer of fertilizer
spikes and other lawn and garden products, which was acquired in August
1996 for aggregate consideration of approximately $25.9 million.
o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which was acquired in May 1997
for approximately $4.3 million.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads which was acquired in February 1998 for approximately
$16.0 million, of which approximately $5.0 million was based on the value
of certain net current assets acquired.
o Landmaster Products, Inc. A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for
approximately $3.0 million, of which approximately $750,000 was based on
the value of certain net current assets acquired.
In addition, the Company has entered into a non-binding letter of intent
to purchase a manufacturer and distributor of lawn and garden products for
approximately $4.8 million (the "Proposed Acquisition").
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, Weatherly Consumer Products Group,
Inc. ("Weatherly") and Weed Wizard Acquisition Corp. ("Weed Wizard"), and the
Company's agricultural operations are conducted through its subsidiary Golden
West Agri-Products, Inc. ("Golden West"). Except when used with respect to the
Trust Preferred Securities or where the context otherwise requires, references
in this Prospectus to the "Company" mean U.S. Home & Garden Inc., its
subsidiaries Easy Gardener and Golden West and the subsidiaries of Easy
Gardener (all such subsidiaries to be referred to herein as the
"Subsidiaries"). The Company's executive offices are located at 655 Montgomery
Street, San Francisco, California 94111, and its telephone number is (415)
616-8111.
8
<PAGE>
U.S. Home & Garden Trust I
The Trust is a statutory business trust created under Delaware law
pursuant to (i) the trust agreement of the Trust among the Company, as
depositor, the Delaware Trustee and an Administrative Trustee, and (ii) the
filing of a Certificate of Trust with the Delaware Secretary of State on March
16, 1998. The Trust's business and affairs are conducted by the Property
Trustee, the Delaware Trustee and three individual Administrative Trustees who
are officers of the Company. The Trust exists for the exclusive purposes of (i)
issuing and selling the Trust Securities, (ii) using the proceeds from the sale
of the Trust Securities to acquire the Junior Subordinated Debentures issued by
the Company and (iii) engaging in only those other activities necessary,
advisable or incidental thereto. The Junior Subordinated Debentures will be the
sole assets of the Trust and payments by the Company under the Junior
Subordinated Debentures and the Expense Agreement will be the sole revenues of
the Trust. All of the Common Securities will be owned by the Company. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Trust Preferred Securities, except that upon the occurrence and
during the continuance of an event of default under the Trust Agreement
resulting from an event of default under the Indenture, the rights of the
Company as holder of the Common Securities to payment in respect of
Distributions and payments upon liquidation, redemption or otherwise will be
subordinated to the rights of the holders of the Trust Preferred Securities.
See "Description of the Trust Preferred Securities--Subordination of Common
Securities of the Trust Held by the Company." The Company will acquire Common
Securities in an aggregate liquidation amount equal to approximately 3% of the
total capital of the Trust. The Trust has a term of 31 years, but may dissolve
earlier as provided in the Trust Agreement.
The Trust's principal offices are located at 655 Montgomery Street, San
Francisco, California 94111 and its telephone number is (415) 616-8111.
9
<PAGE>
SUMMARY FINANCIAL DATA AND OTHER INFORMATION
(in thousands, except percentages, ratios and per share data)
The summary financial data set forth below has been derived from the
Company's consolidated financial statements. Such information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- -------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ............................ $2,910 $ 3,063 $ 19,692 $ 27,031 $ 52,046
Gross profit ......................... 1,402 1,608 10,541 14,361 28,397
Selling, general and administrative
expenses(1) ........................ 1,826 6,786 7,152 10,612 17,745
------ -------- ---------- -------- ----------
Income (loss) from operations ........ (424) (5,178) 3,389 3,749 10,652
Interest expense, net ................ (45) (41) (1,776) (1,940) (3,262)
Income (loss) before extraordinary
expense ............................ (469) (5,219) 1,575 2,524 4,190
------ -------- ---------- -------- ----------
Extraordinary gain (expense), net..... 389 (1,007)
------ ----------
Net income (loss) .................... $ (80) $ (5,219) $ 1,575 $ 2,524 $ 3,183
====== ======== ========== ======== ==========
Dilutive income (loss) per share:
Income (loss) per share before
extraordinary expense(2) ........... $(0.22) $ (1.31) $ 0.16 $ 0.19 $ 0.26
Net income (loss) per share(2) ....... $(0.04) $ (1.31) $ 0.16 $ 0.19 $ 0.20
====== ======== ========== ======== ==========
Weighted average number of com-
mon and common equivalent
shares outstanding(2) .............. 2,178 3,980 10,125 13,361 16,068
====== ======== ========== ======== ==========
Other Data(3):
EBITDA(4) ............................ $ 4,026 $ 4,583 $ 12,642
Interest expense, net ................ 1,776 1,940 3,262
Depreciation and amortization ........ 637 834 1,990
Capital expenditures ................. 151 261 528
Net cash provided by (used in)
operating activities ............... 438 618 10,545
Net cash (used in) investing
activities ......................... (15,576) (2,103) (29,594)
Net cash provided by financing
activities ......................... 16,021 1,195 20,452
Growth Rates(3):
Net sales growth ..................... 37.3% 92.5%
EBITDA growth(4) ..................... 13.8 175.9
Income from Operations growth ........ 10.6 184.1
Margins(3):
EBITDA margin(4)(5) .................. 20.4% 17.0% 24.3%
Operating income (loss) margin(6) 17.2 13.9 20.5
Net income (loss) margin ............. 8.0 9.3 6.1
Ratios:
EBITDA to interest expense,
net(4) ............................. 2.3x 2.4x 3.9x
Earnings to fixed charges(7) ......... 468(9) 5,219(9) 1.9x 1.9x 3.1x
Pro forma ratio of earnings to
fixed charges(7)(8) ................ 3.6x
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Statement of Income Data:
Net sales ............................ $ 12,939 $ 15,538
Gross profit ......................... 7,114 8,159
Selling, general and administrative
expenses(1) ........................ 7,312 8,552
-------- --------
Income (loss) from operations ........ (198) (393)
Interest expense, net ................ (1,332) (1,493)
Income (loss) before extraordinary
expense ............................ (1,055) (1,086)
-------- --------
Extraordinary gain (expense), net..... (1,007)
--------
Net income (loss) .................... $ (2,062) $ (1,086)
======== ========
Dilutive income (loss) per share:
Income (loss) per share before
extraordinary expense(2) ........... $ (0.08) $ (0.07)
Net income (loss) per share(2) ....... $ (0.15) $ (0.07)
======== ========
Weighted average number of com-
mon and common equivalent
shares outstanding(2) .............. 13,437 15,552
======== ========
Other Data(3):
EBITDA(4) ............................ $ 760 $ 870
Interest expense, net ................ 1,332 1,493
Depreciation and amortization ........ 958 1,263
Capital expenditures ................. 230 486
Net cash provided by (used in)
operating activities ............... (1,540) 682
Net cash (used in) investing
activities ......................... (24,667) (1,414)
Net cash provided by financing
activities ......................... 25,783 11,383
Growth Rates(3):
Net sales growth ..................... 20.1%
EBITDA growth(4) ..................... 14.5
Income from Operations growth ........ (98.5)
Margins(3):
EBITDA margin(4)(5) .................. 5.9% 5.6%
Operating income (loss) margin(6) (1.5) (2.5)
Net income (loss) margin ............. (15.9) (7.0)
Ratios:
EBITDA to interest expense,
net(4) ............................. 0.6x 0.6x
Earnings to fixed charges(7) ......... 1,530(9) 1,886(9)
Pro forma ratio of earnings to
fixed charges(7)(8) ................ 1,488(9)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------
At June 30, 1997 Actual As Adjusted(10)
------------------ ---------- ----------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital ...................................... $ 2,292 $15,753 $ 30,829
Intangible assets, net ............................... 44,364 43,474 57,947
Total assets ......................................... 68,475 77,636 107,985
Short-term debt ...................................... 8,990 6,086 0
Long-term debt ....................................... 17,570 16,430 0
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures(11) ........................ 55,000
Stockholders' equity ................................. 31,926 46,616 45,335
</TABLE>
- -------------
(1) Includes goodwill amortization expense of $91,000, $105,000, $475,000,
$585,000, $1.3 million, $590,000 and $730,000 for the fiscal years ended
June 30, 1993, 1994, 1995, 1996 and 1997 and the six months ended December
31, 1996 and 1997, respectively.
(2) Net income (loss) per share calculations for all periods presented reflects
the retroactive adoption of the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128). See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," Summary of Accounting Policies of Consolidated Financial
Statements and Note 14 of Notes to Consolidated Financial Statements.
(3) Certain Other Data, Growth Rates and Margins for the fiscal years ended
June 30, 1993, 1994 and 1995 have been omitted due to the lack of relevant
comparison after the Company's acquisition of Easy Gardener, Inc. in
September 1994.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization and non-recurring charges. EBITDA is not
intended to represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as an
alternative to cash flow or as a measure of liquidity or as an alternative
to net earnings as indicative of operating performance. The Company's
reported EBITDA may not be comparable to similarly titled measures of
other companies that do not have non-recurring charges. EBITDA, EBITDA
growth, EBITDA margin and EBITDA to interest expense, net are included
herein because management believes they are useful for measuring the
Company's ability to service its debt.
(5) EBITDA margin represents EBITDA divided by net sales.
(6) Operating income (loss) margin represents income (loss) from operations
divided by net sales.
(7) For purposes of calculating the ratio and pro forma ratio of earnings to
fixed charges, earnings consist of income before income taxes, plus fixed
charges. Fixed charges consist of the interest expense on all
indebtedness, including amortization of deferred financing costs, and the
estimated representative interest factor of rental expense.
(8) The average outstanding debt balances for the year ended June 30, 1997 and
the six-month period ended December 31, 1997 were approximately
$28,877,000 and $24,188,000, respectively, and gross interest expense was
approximately $3,338,000 and $1,597,000, respectively. The pro forma
ratios assume the replacement of this indebtedness with a corresponding
amount of Junior Subordinated Debentures on July 1, 1996. If, on a
consolidated basis, the entire $55,000,000 principal amount of Junior
Subordinated Debentures had been outstanding throughout the periods, total
interest expense would have been approximately $5,225,000 and $2,612,500,
respectively.
(9) Earnings are inadequate to cover fixed charges. Amounts shown reflect the
coverage deficiency for this ratio to equal one.
11
<PAGE>
(10) As adjusted to give effect to (i) the acquisitions by the Company of the
assets of Weed Wizard, Inc. and Landmaster Products, Inc. in February and
March 1998 using $10.0 million under the Credit Facility to pay a portion
of the acquisition costs, and (ii) the issuance by the Trust of the
2,200,000 Trust Preferred Securities offered hereby and the receipt by the
Company of the proceeds, net of estimated underwriting compensation and
other estimated offering expenses, from the corresponding sale of the
Junior Subordinated Debentures to the Trust, and the application of the
net proceeds therefrom as described under "Use of Proceeds." Estimated
underwriting compensation and other estimated offering expenses have been
reflected as a deferred financing cost to be amortized over the life of
the Junior Subordinated Debentures. Existing deferred financing costs
related to debt to be repaid from the proceeds of this offering have been
reflected as a charge to earnings.
(11) The assets of the Trust consist solely of an aggregate principal amount of
$56,700,000 Junior Subordinated Debentures.
12
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Trust Preferred
Securities issuer .......... U.S. Home & Garden Trust I (the "Trust")
Securities offered ......... 2,200,000 Trust Preferred Securities having a Liquidation
Amount of $25 per Trust Preferred Security. The Trust
Preferred Securities represent preferred undivided
beneficial interests in the Trust's assets, which will consist
solely of the Junior Subordinated Debentures and
payments thereunder.
Distributions .............. The Distributions payable on each Trust Preferred Security
will be fixed at a rate per annum of 9.40% of the Liquida-
tion Amount of $25 per Trust Preferred Security, will be
cumulative, will accrue from the date of issuance of the
Trust Preferred Securities, and will be payable monthly in
arrears on the 15th day of each calendar month of each
year, commencing on May 15, 1998 (subject to possible
deferral as described below). The amount of each Distribu-
tion due with respect to the Trust Preferred Securities will
include amounts accrued through each Distribution Date.
See "Description of the Trust Preferred Securities."
Extension periods .......... So long as no Debenture Event of Default (as defined
herein) has occurred and is continuing, the Company will
have the right, at any time, to defer payments of interest on
the Junior Subordinated Debentures by extending the inter-
est payment period thereon for a period not exceeding 60
consecutive months with respect to each deferral period
(each an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Jun-
ior Subordinated Debentures. If interest payments are so
deferred, Distributions on the Trust Preferred Securities
will also be deferred and the Company will not be permit-
ted, subject to certain exceptions described herein, to
declare or pay any cash distributions with respect to the
Company's capital stock or future debt securities that rank
pari passu with or junior to the Junior Subordinated
Debentures. During an Extension Period, Distributions will
continue to accumulate at the rate of 9.40% compounded
monthly. Because interest would continue to accrue and
compound on the Junior Subordinated Debentures, to the
extent permitted by applicable law, holders of the Trust
Preferred Securities will be required to accrue income for
United States federal income tax purposes and to pay fed-
eral income tax thereon. See "Description of Junior Subor-
dinated Debentures--Option to Defer Interest Payment
Period" and "Certain Federal Income Tax Consequences--
Interest Income and Original Issue Discount."
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Maturity .......................... The Junior Subordinated Debentures will mature on April
15, 2028 which date may be shortened (such date, as it may
be shortened, the "Stated Maturity") to a date not earlier
than April 15, 2003. The Company might, for example,
exercise its right to shorten the maturity of the Junior Sub-
ordinated Debentures under the circumstances where a Tax
Event, Investment Company Event or other undesirable
event could be avoided simply by shortening the maturity
of the Junior Subordinated Debentures. See "Description of
Junior Subordinated Debentures--General."
Redemption ........................ The Trust Securities are subject to mandatory redemption
upon repayment of the Junior Subordinated Debentures at
their Stated Maturity or their earlier redemption at a
redemption price equal to the aggregate Liquidation
Amount of the Trust Securities plus accumulated and
unpaid Distributions thereon to the date of redemption. The
Junior Subordinated Debentures are redeemable prior to
Stated Maturity at the option of the Company (i) on or after
April 15, 2003 in whole at any time or in part from time to
time, or (ii) at any time, in whole (but not in part), within
90 days following the occurrence of a Tax Event or an
Investment Company Event, in each case at a redemption
price equal to 100% of the principal amount of the Junior
Subordinated Debentures so redeemed, together with any
accrued but unpaid interest to the date fixed for redemp-
tion. See "Description of the Trust Preferred Securities--
Redemption" and "Description of Junior Subordinated
Debentures--Redemption."
Distribution of Junior
Subordinated Debentures ......... The Company has the right at any time to dissolve the
Trust, and, after satisfaction of creditors of the Trust as
required by applicable law, to cause the Junior
Subordinated Debentures to be distributed to holders of
Trust Preferred Securities in liquidation of the Trust. See
"Description of the Trust Preferred Securities--
Distribution of Junior Subordinated Debentures."
Guarantee ......................... Taken together, the Company's obligations under the vari-
ous documents described herein, including the Guarantee
Agreement, provide a full and unconditional guarantee (the
"Guarantee") of payments by the Trust of Distributions and
other amounts due on the Trust Preferred Securities. Under
the Guarantee Agreement, the Company guarantees the
payment of Distributions by the Trust and payments on liq-
uidation or redemption of the Trust Preferred Securities
(subordinate to the right to payment of Senior Debt and
Subordinated Debt of the Company) to the extent of funds
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
held by the Trust. If the Trust has insufficient funds to pay
Distributions on the Trust Preferred Securities (i.e., if the
Company has failed to make required payments under the
Junior Subordinated Debentures), a holder of the Trust Pre-
ferred Securities would have the right to institute a legal
proceeding directly against the Company to enforce pay-
ment on the Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures--
Enforcement of Certain Rights by Holders of Trust Pre-
ferred Securities," and "--Debenture Events of Default"
and "Description of Guarantee."
Ranking ............... The Trust Preferred Securities will rank pari passu, and
payments thereon will be made pro rata, with the Common
Securities of the Trust held by the Company, except as
described under "Description of the Trust Preferred
Securities--Subordination of Common Securities of the
Trust Held by the Company." The obligations of the Com-
pany under the Guarantee, the Junior Subordinated Deben-
tures and other documents described herein are unsecured
and rank subordinate and junior in right of payment to all
current and future Senior Debt and Subordinated Debt of
the Company, the amount of which is unlimited. The Com-
pany will apply a portion of the net proceeds of this offer-
ing to pay off the outstanding balance under the Credit
Facility, which was approximately $38.0 million as of April
1, 1998. The Credit Facility will then be terminated.
Because the Company is a holding company, all obliga-
tions of the Company relating to the securities described
herein will be effectively subordinated to all existing and
future liabilities of the Company's Subsidiaries. The Com-
pany may cause additional trust preferred securities to be
issued by trusts similar to the Trust in the future, and there
is no limit on the amount of such securities that may be
issued. In that event, the Company's obligations under the
junior subordinated debentures to be issued to such other
trusts and the Company's guarantees of the payments by
such trusts will rank pari passu with the Company's obli-
gations under the Junior Subordinated Debentures and the
Guarantee, respectively.
Voting rights ......... The holders of the Trust Preferred Securities will have no
voting rights except in limited circumstances. Except as
provided below, the affirmative consent of the holders of at
least a majority of the outstanding Trust Preferred Securi-
ties will be required by the Trust for amendments to the
Trust Agreement that would affect adversely the rights or
privileges of the holders of the Trust Preferred Securities.
The Property Trustee, the Administrative Trustees and the
Company may amend the Trust Agreement without the
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
consent of holders of the Trust Preferred Securities to
ensure that the Trust will be classified for United States
federal income tax purposes as a grantor trust or to ensure
that the Trust will not be required to register as an "invest-
ment company" under the Investment Company Act, even
if such action adversely affects the interests of such hold-
ers. See "Description of the Trust Preferred Securities--
Voting Rights; Amendment of the Trust Agreement."
ERISA considerations ......... Prospective purchasers should carefully consider the
information set forth under the caption "ERISA
Considerations."
American Stock Exchange
symbol ..................... UHG.Pr.A
Use of proceeds .............. The proceeds to the Trust from the sale of the Trust Pre-
ferred Securities offered hereby will be invested by the
Trust in the Junior Subordinated Debentures of the Com-
pany. The Company will use approximately $38.0 million
of the net proceeds of the offering to pay off in full the
indebtedness outstanding under the Credit Facility. An
additional $735,000 will be used to pay a prepayment pen-
alty resulting from the foregoing repayment. The balance
of the proceeds will be applied to working capital, which
may include, without limitation, funding additional invest-
ments in, or extensions of credit to, the Company's operat-
ing subsidiaries for the expansion of operations. In addi-
tion, a portion of the proceeds allocated to working capital
may be used for possible future acquisitions. See "Use of
Proceeds."
</TABLE>
16
<PAGE>
RISK FACTORS
Each prospective investor should carefully consider, in addition to the
other information contained in this Prospectus, the following information
before purchasing the Trust Preferred Securities offered hereby.
Risk Factors Relating to the Offering
Ranking of the Company's Obligations Under the Junior Subordinated Debentures
and the Guarantee
All obligations of the Company under the Guarantee, the Junior
Subordinated Debentures and other documents described herein are unsecured and
rank subordinate and junior in right of payment to all current and future
Senior Debt and Subordinated Debt of the Company, the amount of which is
unlimited.
The Company will use a portion of the proceeds from this offering to pay
off the outstanding balance under the Credit Facility which was $38.0 million
as of April 1, 1998. The Credit Facility will then be terminated. No assurance
can be given that the Company will be successful in obtaining a replacement
credit facility that will be on terms favorable to the Company. In addition, no
assurance can be given that any such replacement credit facility will not
contain terms and conditions in addition to those already contained in the
Junior Subordinated Debentures which might cause the Company to exercise its
existing right under the Junior Subordinated Debentures to defer the payment of
interest on the Junior Subordinated Debentures or otherwise restrict the
ability of the Company to pay interest on the Junior Subordinated Debentures
and, consequently, the Trust's ability to pay Distributions on the Trust
Preferred Securities.
In addition, because the Company is a holding company, substantially all
of the Company's assets consist of the capital stock of its Subsidiaries. All
obligations of the Company relating to the securities described herein will be
effectively subordinated to all existing and future liabilities of the
Company's Subsidiaries. As a holding company, the right of the Company to
participate in any distribution of assets of any Subsidiary upon such
Subsidiary's liquidation or reorganization or otherwise (and thus the ability
of holders of the Trust Preferred Secur-ities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that Subsidiary,
except to the extent that the Company may itself be recognized as a creditor of
that Subsidiary. Accordingly, the Junior Subordinated Debentures and all
obligations of the Company relating to the Trust Preferred Securities will be
effectively subordinated to all existing and future liabilities of the
Subsidiaries and holders of the Trust Preferred Securities should look only to
the assets of the Company, and not of its Subsidiaries, for principal and
interest payments on the Junior Subordinated Debentures. None of the Indenture,
the Guarantee, the Guarantee Agreement or the Trust Agreement places any
limitation on the amount of secured or unsecured debt, including Senior Debt
and Subordinated Debt, that may be incurred by the Company or its Subsidiaries.
Further, there is no limitation on the Company's ability to issue additional
junior subordinated debentures in connection with any further offerings of
trust preferred securities, and such additional debentures would rank pari
passu with the Junior Subordinated Debentures. See "Description of Junior
Subordinated Debentures--Subordination" and "Description of Guarantee--Status
of the Guarantee."
Option to Defer Interest Payment Period
So long as no Debenture Event of Default (as defined herein) has occurred
and is continuing, the Company has the right under the Indenture to defer
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 60 consecutive months with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. As a consequence of any
such deferral, monthly Distributions on the Trust Preferred Securities by the
Trust will be deferred (and the amount of Distributions to which holders of the
Trust Preferred Securities are entitled will accumulate additional amounts
thereon at the rate of 9.40% per annum, compounded monthly, from the relevant
payment date for such Distributions) during any such Extension Period. During
any such Extension Period, the Company will be prohibited from making certain
payments or distributions with respect to the Company's capital stock
(including dividends on or redemptions of common or preferred stock) and from
making certain payments with respect to any future debt securities of the
Company that rank pari passu with or junior in interest to the Junior
Subordinated Debentures; however, the Company will not be restricted from (a)
paying dividends or distributions in capital stock of the Company, (b)
redeeming rights or taking certain other actions under
17
<PAGE>
a stockholders rights plan, (c) making payments under the Guarantee or (d)
making purchases of common stock related to the issuance of common stock or
rights under any of the Company's benefit plans for its directors, officers,
employees or consultants. Further, during an Extension Period, the Company
would have the ability to continue to make payments on its Senior Debt and
Subordinated Debt, if any. Prior to the termination of any Extension Period,
the Company may further extend such Extension Period provided that such
extension does not cause such Extension Period to exceed 60 consecutive months
or to extend beyond the Stated Maturity. Upon the termination of any Extension
Period and the payment of all interest then accrued and unpaid (together with
interest thereon at the annual rate of 9.40%, compounded monthly), the Company
may elect to begin a new Extension Period subject to the above requirements.
There is no limitation on the number of times that the Company may elect to
begin an Extension Period. As a consequence of the Company's deferral of
interest payments, holders of the Trust Preferred Securities will not receive
cash distributions during such deferral periods (although the Distributions to
which holders of the Trust Preferred Securities are entitled will continue to
accumulate until payment in full), and the market price of the Trust Preferred
Securities is likely to be adversely affected by such deferral. A holder that
disposes of such holder's Trust Preferred Securities during an Extension
Period, therefore, might not receive the same return on such holder's
investment as a holder that continues to hold Trust Preferred Securities. See
"Description of the Trust Preferred Securities--Distributions," "Description of
Junior Subordinated Debentures--Option to Defer Interest Payment Period," and
"Description of Junior Subordinated Debentures--Debenture Events of Default."
Tax Consequences of Option to Defer Interest Payment Period and of a Deferral
of Interest Payment
Because the Company has no current plan to exercise its option to defer
payments of interest and considers the likelihood of exercising the option to
be a remote contingency as of the issue date of the Junior Subordinated
Debentures, it is the Company's position that the Junior Subordinated
Debentures will be treated as issued without "original issue discount" for
United States federal income tax purposes. As a result, holders of Trust
Preferred Securities will include interest in taxable income under their own
methods of accounting (i.e., cash or accrual). However, if the Internal Revenue
Service were to successfully challenge the Company's position, or if the
Company exercises its right to defer payments of interest, the holders of Trust
Preferred Securities will be required to include their pro rata share of
original issue discount in gross income as it accrues for United States federal
income tax purposes in advance of the receipt of cash. If the tax authorities
successfully asserted that, as of the issue date of the Junior Subordinated
Debentures, exercise of the deferment option is not a remote or incidental
contingency, interest would be reportable under the contingent payment debt
rules of the Treasury Regulations as of the issue date. See "Certain Federal
Income Tax Consequences--Interest Income and Original Issue Discount." Should
the Company elect to exercise its right to defer payments of interest in the
future, the market price of the Trust Preferred Securities is likely to be
adversely affected. A holder that disposes of such holder's Trust Preferred
Securities during an Extension Period, therefore, might not receive the same
return on such holder's investment as a holder that continues to hold Trust
Preferred Securities. See "Description of Junior Subordinated
Debentures--Option to Defer Interest Payment Period."
Redemption Prior to Stated Maturity
The Company may, at its option, on or after April 15, 2003, redeem the
Junior Subordinated Debentures in whole at any time or in part from time to
time at 100% of the principal amount together with accrued but unpaid interest
to the date fixed for redemption and therefore cause a mandatory redemption of
the Trust Securities.
In addition, upon the occurrence and during the continuation of a Tax
Event or an Investment Company Event (whether occurring before or after April
15, 2003), the Company has the right, if certain conditions are met, to redeem
the Junior Subordinated Debentures in whole (but not in part) at 100% of the
principal amount together with accrued but unpaid interest to the date fixed
for redemption within 90 days following the occurrence of such Tax Event or
Investment Company Event and therefore cause a mandatory redemption of Trust
Securities. See "Description of the Trust Preferred Securities--Redemption."
18
<PAGE>
A "Tax Event" means the receipt by the Company and the Trust of an Opinion
of Counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such prospective change, pronouncement or decision is announced on or after the
original issuance of the Trust Preferred Secur-ities, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the date
of such opinion, subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, (ii) interest
payable by the Company on the Junior Subordinated Debentures is not, or within
90 days of such opinion, will not be, deductible by the Company, in whole or in
part, for United States federal income tax purposes, or (iii) the Trust is, or
will be within 90 days of the date of the opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges.
An "Investment Company Event" means the receipt by the Company and the
Trust of an Opinion of Counsel experienced in such matters to the effect that,
as a result of any change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change
becomes effective on or after the original issuance of the Trust Preferred
Securities.
If less than all of the Trust Securities issued by the Trust are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed shall be allocated pro rata to the Trust
Preferred Securities and the Common Securities based upon the relative
Liquidation Amounts of such classes. The particular Trust Preferred Securities
to be redeemed shall be selected by the Property Trustee from the outstanding
Trust Preferred Securities not previously called for redemption, by such method
as the Property Trustee shall deem fair and appropriate and which may provide
for the selection for redemption of portions (equal to $25 or an integral
multiple thereof) of the Liquidation Amount of Trust Preferred Securities.
Possible Distribution of Junior Subordinated Debentures to Holders of Trust
Preferred Securities; Risk of Taxation Upon a Distribution
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Preferred Securities in liquidation of the Trust.
Because holders of the Trust Preferred Securities may receive Junior
Subordinated Debentures in liquidation of the Trust and because Distributions
are otherwise limited to payments on the Junior Subordinated Debentures,
prospective purchasers of the Trust Preferred Securities are also making an
investment decision with regard to the Junior Subordinated Debentures and
should carefully review all the information regarding the Junior Subordinated
Debentures contained herein. See "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Dissolution" and "Description of
Junior Subordinated Debentures." If a Tax Event were to occur which would cause
the Trust to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a
distribution of the Junior Subordinated Debentures by the Trust could be a
taxable event to the Trust and the holders of the Trust Preferred Securities.
See "Certain Federal Income Tax Consequences--Distribution of Junior
Subordinated Debentures to Holders of Trust Preferred Securities."
Shortening of Stated Maturity of Junior Subordinated Debentures
The Company will have the right at any time to shorten the maturity of the
Junior Subordinated Debentures to a date not earlier than five years from the
date of issuance and thereby cause the Trust Preferred Securities to be
redeemed on such earlier date. See "Description of Junior Subordinated
Debentures--Redemption."
Limitations on Direct Actions Against the Company and on Rights Under the
Guarantee
The Guarantee guarantees to the holders of the Trust Preferred Securities
the following payments, to the extent not paid by the Trust: (i) any
accumulated and unpaid Distributions required to be paid on the Trust Preferred
Securities, to the extent that the Trust has funds on hand available therefor
at such time, (ii) the redemption price with respect to any Trust Preferred
Securities called for redemption, to the extent that the Trust has
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funds on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of the Trust (unless the
Junior Subordinated Debentures are distributed to holders of the Trust
Preferred Securities), the lesser of (a) the aggregate of the Liquidation
Amount and all accumulated and unpaid Distributions to the date of payment to
the extent that the Trust has funds on hand available therefor at such time
(the "Liquidation Distribution") and (b) the amount of assets of the Trust
remaining available for distribution to holders of the Trust Preferred
Securities after satisfaction of liabilities to creditors of the Trust as
required by applicable law. The holders of not less than a majority in
aggregate Liquidation Amount of the Trust Preferred Securities have the right
to direct the time, method and place of conducting any proceeding for any
remedy available to the Guarantee Trustee in respect of the Guarantee or to
direct the exercise of any trust power conferred upon the Guarantee Trustee
under the Guarantee Agreement. Any holder of the Trust Preferred Securities
may institute a legal proceeding directly against the Company to enforce its
rights under the Guarantee without first instituting a legal proceeding against
the Trust, the Guarantee Trustee or any other person or entity. If the Company
were to default on its obligation to pay amounts payable under the Junior
Subordinated Debentures, the Trust would lack funds for the payment of
Distributions or amounts payable on redemption of the Trust Preferred
Securities or otherwise, and, in such event, holders of the Trust Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. Instead, in the event a Debenture Event of Default shall have occurred
and be continuing and such event is attributable to the failure of the Company
to pay interest on or principal of the Junior Subordinated Debentures on the
date on which such payment is due and payable, then a holder of Trust Preferred
Securities may institute a legal proceeding directly against the Company for
enforcement of payment to such holder of the principal of or interest on such
Junior Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Trust Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Indenture to the extent of any payment made by the Company
to such holder of Trust Preferred Securities in the Direct Action. Except as
described herein, holders of Trust Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of Trust Preferred
Securities" and "Description of Guarantee." The Trust Agreement provides that
each holder of Trust Preferred Securities by acceptance thereof agrees to the
provisions of the Guarantee Agreement and the Indenture.
Ability to Make Payments on the Trust Preferred Securities and Junior
Subordinated Debentures; Dependence on Subsidiaries
The ability of the Trust to pay amounts due on the Trust Preferred
Securities is solely dependent upon the Company making payments on the Junior
Subordinated Debentures as and when required. The Company will have significant
interest expense under the Junior Subordinated Debentures. As of the date
hereof, after giving effect to the offering and the application of net proceeds
therefrom, the Company would have no indebtedness outstanding on a consolidated
basis. As a holding company without significant assets other than its equity
interest in the Subsidiaries, the Company's ability to pay interest on the
Junior Subordinated Debentures to the Trust (and consequently, the Trust's
ability to pay distributions on the Trust Preferred Securities and the
Company's ability to pay its obligations under the Guarantee) depends primarily
on cash and liquid investments of the Company and upon cash dividends and
interest payments the Company may receive in the future from its Subsidiaries.
Such Subsidiaries' ability to make payments to the Company is subject to such
Subsidiaries' profitability, financial condition, and capital expenditure and
other cash flow requirements. In addition, the Indenture does not prohibit the
Company or such Subsidiaries from incurring additional indebtedness including
indebtedness secured by their assets or properties, or from entering into
credit agreements or other financial arrangements that restrict such
Subsidiaries from making payments to the Company. While the Company expects
that its operating cash flow will be sufficient to cover its expenses including
interest costs, there can be no assurance with respect thereto. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Limited Covenants; Absence of Sinking Fund
The covenants in the Indenture are limited. The Company is not required
under the Indenture to meet any financial tests that measure the Company's
working capital, interest coverage or net worth in order to comply
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with the terms of the Indenture. There are no covenants relating to the Company
in the Trust Agreement. As a result, neither the Indenture nor the Trust
Agreement protects holders of Junior Subordinated Debentures, or Trust
Preferred Securities, respectively, in the event of a material adverse change
in the Company's financial condition or results of operations, or limits the
ability of the Company or any Subsidiary to incur additional indebtedness.
Therefore, the provisions of these governing instruments should not be
considered a significant factor in evaluating whether the Company will be able
to comply with its obligations under the Junior Subordinated Debentures or the
Guarantee. Further, the Junior Subordinated Debentures do not have the benefit
of any sinking fund payments by the Company.
Limited Voting Rights
The holders of the Trust Preferred Securities will have no voting rights
except in limited circumstances relating only to the modification of the Trust
Preferred Securities and the exercise of the rights of the Trust as holder of
the Junior Subordinated Debentures and the Guarantee. Except as provided below,
the affirmative consent of the holders of at least a majority of the
outstanding Trust Preferred Securities will be required by the Trust for
amendments to the Trust Agreement that would affect adversely the rights or
privileges of the holders of the Trust Preferred Securities. Holders of Trust
Preferred Securities will not be entitled to vote to appoint, remove or replace
the Property Trustee or the Delaware Trustee, and such voting rights are vested
exclusively in the holder of the Common Securities except upon the occurrence
of certain events described herein. In no event will the holders of the Trust
Preferred Securities have the right to vote to appoint, remove or replace the
Administrative Trustees; such voting rights are vested exclusively in the
holder of the Common Securities. The Property Trustee, the Administrative
Trustees and the Company may amend the Trust Agreement without the consent of
holders of the Trust Preferred Securities to cure any ambiguity or make other
provisions not inconsistent with the Trust Agreement or to ensure that the
Trust will be classified for United States federal income tax purposes as a
grantor trust or to ensure that the Trust will not be required to register as
an "investment company" under the Investment Company Act, even if such action
adversely affects the interests of such holders. See "Description of the Trust
Preferred Securities--Voting Rights; Amendment of the Trust Agreement" and
"--Removal of Trustees."
Absence of Existing Public Market; Market Prices
There is no existing market for the Trust Preferred Securities. The Trust
Preferred Securities have been approved for listing on the American Stock
Exchange, subject to notice of issuance. There can be no assurance, however,
that an active and liquid trading market for the Trust Preferred Securities
will develop or that continued listing of the Trust Preferred Securities will
be available on the American Stock Exchange. Although the representatives of
the Underwriters have informed the Trust and the Company that the Underwriters
intend to make a market in the Trust Preferred Securities offered hereby, the
Underwriters are not obligated to do so and any such market making activity may
be terminated at any time without notice to the holders of the Trust Preferred
Securities. Future trading prices of the Trust Preferred Securities will depend
on many factors including, among other things, prevailing interest rates, the
operating results and financial condition of the Company, and the market for
similar securities. As a result of the existence of the Company's right to
defer interest payments on or shorten the Stated Maturity of the Junior
Subordinated Debentures, the market price of the Trust Preferred Securities may
be more volatile than the market prices of debt securities that are not subject
to such optional deferrals or reduction in maturity. There can be no assurance
as to the market prices for the Trust Preferred Securities or the listing, or
market prices for, the Junior Subordinated Debentures that may be distributed
in exchange for the Trust Preferred Securities if the Company exercises its
right to dissolve and liquidate the Trust. Accordingly, the Trust Preferred
Securities that an investor may purchase, or the Junior Subordinated Debentures
that a holder of the Trust Preferred Securities may receive in liquidation of
the Trust, may trade at a discount from the price that the investor paid to
purchase the Trust Preferred Securities offered hereby.
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Risk Factors Relating to the Company
Each prospective investor should carefully consider, in addition to the
other information contained in this Prospectus, the following information in
evaluating the Company and its business before purchasing the Trust Preferred
Securities offered hereby.
Risks Associated with Growth Strategy
The acquisition of complementary lawn and garden companies and product
lines continues to be a principal component of the Company's growth strategy.
The Company's ability to successfully implement its strategy will depend upon a
number of factors including, among other things, the Company's ability to
identify attractive acquisition candidates, to consummate such acquisitions on
terms favorable to the Company, to obtain financing to consummate such
acquisitions on economically acceptable terms, to retain, hire and train
professional management and sales personnel at each such acquired business and
to promptly and profitably integrate the acquired operations into the Company's
operations. Acquiring additional businesses may also require the consent of the
Company's lenders. No assurance can be given that such consent will be
obtained. Any such acquisitions are likely to involve incurring additional debt
or the issuance of one or more classes or series of the Company's equity
securities, which could have a dilutive effect on the then outstanding Common
Stock of the Company. Other than a non-binding letter of intent relating to the
Proposed Acquisition, the Company currently has no agreements, commitments,
understandings or arrangements with respect to any acquisition. There can
be no assurance that the Proposed Acquisition will be consummated or that the
Company will continue to be able to manage its expanding operations
successfully, implement its acquisition strategy or that any acquired
operations will be profitable or will be successfully integrated into the
Company or that any such future acquisitions will not otherwise materially and
adversely affect the Company. See "Business -- Recent and Proposed
Acquisitions."
As a result of seven prior acquisitions, the Company is required to
amortize the excess of costs over net assets acquired (an aggregate of
approximately $57.5 million) over a period of up to 30 years. Although such
amortization does not have an effect on the Company's available capital, it
will be treated as an operating expense that will reduce the Company's reported
earnings. Future acquisitions could result in substantial additional
amortization expenses to the Company which would reduce future earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General" and Consolidated Financial Statements.
Customer Concentration; Consolidating Customer Base
The Company's customers include home improvement centers, mass
merchandisers, hardware stores, nurseries and garden centers and other retail
channels throughout the United States. The Company's three largest customers
for fiscal 1997, Home Depot, Lowe's and Kmart, accounted for approximately 26%,
10% and 7%, respectively, of its net sales during such year. During fiscal
1996, Home Depot, Lowe's, Kmart and Builder's Square accounted for 27%, 9%, 7%
and 5%, respectively, of the Company's net sales. During fiscal 1995, sales to
Home Depot, Kmart, Builders Square and Lowe's accounted for approximately 27%,
9%, 7% and 6%, respectively, of the Company's net sales. The Company's ten
largest customers as a group accounted for 71%, 69% and 65% of its net sales
during fiscal 1995, 1996 and 1997, respectively. Sales to such customers are
not governed by any contractual arrangement and are made pursuant to standard
purchase orders. While the Company believes that relations with its largest
customers are good, the loss of any of these customers could have a material
adverse effect on the Company.
The Company does not have long-term purchase agreements or other
contractual assurances as to future sales to these or any other Retail
Accounts. The loss of, or significant reduction in sales to, such Retail
Accounts could have a material adverse effect on the Company. Moreover, retail
distribution channels in the lawn and garden industry have been consolidating
in recent years, as home improvement and mass merchant retailers have replaced
local nurseries and garden centers as the dominant source for lawn and garden
products. To the extent such consolidation continues to occur, the Company's
sales and profitability may be increasingly sensitive to a significant
deterioration in the financial condition of, or other adverse developments in
its relationships with, one
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or more Retail Accounts. In addition, from time to time, the Company has
experienced credit losses due to customers seeking protection under bankruptcy
or similar laws. Although such credit losses have not had a material adverse
effect on the Company to date, there can be no assurance that future credit
losses will not have a material adverse effect on the Company. See "Business --
Customers."
Effect of Early Repayment of Outstanding Indebtedness - Possible Need for
Additional Financing
The Company intends to use substantially all of the proceeds from the sale
of the Junior Subordinated Debentures to repay the entire indebtedness
outstanding under the Credit Facility with certain financial institutions (the
"Lenders") pursuant to a credit agreement (the "Credit Agreement"). As a result
of the early payment, the Company will write off deferred financing costs of
approximately $1.4 million and incur a prepayment penalty of approximately
$735,000 during its quarter ending June 30, 1998 which will reduce its reported
income. Upon repayment of the outstanding indebtedness, the Credit Facility
will be terminated and the Company will have no alternate sources of financing.
Although the Company is currently negotiating new credit facilities with
several banks, there can be no assurance that the Company will be able to
obtain a new credit facility on terms acceptable to it, or at all. Failure to
obtain a new credit facility would materially adversely affect the Company's
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Dependence on Weather Conditions
Weather is a significant factor in determining market demand for the
Company's products and is inherently unpredictable. Inclement weather during
the spring gardening season, particularly poor weekend weather, tends to
depress consumer purchases of do-it-yourself lawn and garden care products.
During protracted periods of inclement weather, sales of lawn and garden
products are likely to be severely diminished. In addition, lack of snow or
rain during the winter may adversely affect spring growing conditions and also
lower sales of lawn and garden products. Any of the foregoing may have a
material adverse effect on the Company. Without limiting the generality of the
foregoing, protracted or particularly severe weather conditions may adversely
impact the Company's ability to comply with its obligations under the Junior
Subordinated Debentures or to its lenders under any financing arrangements. In
recent months, large segments of the United States (particularly the east and
west coasts) have experienced severe weather conditions which may be due to a
phenomenon known as "El Nino." The effects of such severe weather on the
Company's operations for the balance of the current fiscal year and the fiscal
year ending June 30, 1999 cannot be predicted at this time. See "--Significant
Outstanding Indebtedness."
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. The Company competes with a combination of national and
regional companies ranging from large agri-chemical companies to garden catalog
businesses and companies specializing in the manufacture of lawn and garden
care products. Several of such companies, such as Solaris Group, a division of
Monsanto Company, and Scotts' Miracle-Gro Products, Inc. have captured a
significant, and in certain cases controlling, share of such markets. Many of
the Company's competitors have achieved significant national, regional and
local brand name and product recognition and engage in frequent and extensive
advertising and promotional programs, both generally and in response to efforts
by new competitors entering the market or existing competitors introducing new
products. Many of these companies have substantially greater financial,
technical, marketing and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully or that
reacting to competitive pressures will not materially adversely affect the
Company. See "Business--Competition."
Dependence on Third-Party Manufacturing and Supply Arrangements
The Company purchases all of the material for its primary lawn and garden
product, WeedBlock, from Tredegar Industries, Inc. ("Tredegar") pursuant to a
supply arrangement that can be terminated by Tredegar at any time. The Company
purchases its basic materials for its other lawn and garden products from a
variety of suppliers. Although the Company has purchased all of its landscape
fabric supply from Tredegar for in excess of 10
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years and believes that its relationship with Tredegar is good, Tredegar is
free to terminate its relationship with the Company at any time and accordingly
could market its fabrics to other companies, including competitors of the
Company. There can be no assurance that the production capacity of Tredegar or
the Company's other suppliers, manufacturers and processors will be sufficient
to satisfy the Company's requirements or that alternate suppliers,
manufacturers and processors will be available on commercially reasonable
terms, or at all. The unavailability of certain materials, the unavailability
of manufacturing and processing sources or delays either in manufacturing or in
locating new manufacturing and processing sources could adversely affect the
Company's ability to deliver its products on a timely and competitive basis. In
addition, because the Company recognizes a significant percentage of its annual
sales during a few months of the year, any delay in the delivery or the
unavailability of its products during such months could materially adversely
affect the Company. See "Business --Conversion, Manufacturing and Supply," and
"--Seasonality."
Seasonality
The Company's sales are highly seasonal due to the nature of the lawn and
garden business, which parallels the annual growing season. The Company's sales
and shipping are concentrated in the period from late December through May when
customers purchase supplies for spring planting and Retail Accounts increase
their inventory of lawn and garden products. To support this sales peak, the
Company must anticipate demand and increase inventories of finished goods
throughout the fall and winter. Accordingly, the Company's levels of raw
materials and finished goods inventories tend to be at their highest, relative
to sales, during the Company's first and second fiscal quarters. These factors
increase variations in the Company's quarterly results of operations and
potentially expose the Company to greater adverse effects of changes in
economic conditions and industry trends. Moreover, actual demand for the
Company's products may vary substantially from the anticipated demand, leaving
the Company with either excess inventory or insufficient inventory to satisfy
customer orders. Sales typically decline by early to mid-summer. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations and Seasonality,"
"Business--Seasonality" and "--Inventory and Distribution."
Dependence on a Limited Number of Product Lines
Approximately 44% and 24% of the Company's net sales for fiscal 1997 were
derived from sales of landscape fabric and fertilizer spikes. In fiscal 1995
and 1996, landscape fabric represented 71% and 66% of the Company's net sales,
respectively. Any adverse developments with respect to either of these product
lines, whether arising from actions by existing or new competitors, the
inability of the Company to obtain adequate supplies of landscape fabrics or
the raw materials necessary to manufacture fertilizers, or otherwise, could
have a material adverse effect on the Company. The Company has also developed a
new marketing campaign for the Jobe's line of products, which has required, and
will require, the allocation of significant capital and other resources by the
Company. No assurance can be given that such campaign will be successful, in
which case the expenditures made to date and in the future in connection with
the campaign may not generate sufficient sales to be profitable or profitable
at the same level as has been achieved historically in connection with the
Jobe's line of products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Products" and "--Sales and
Marketing."
Retail Industry; General Economic Conditions
The Company sells its products through retailers, including home
improvement centers, mass merchandisers, hardware stores, nurseries and other
retail channels. Retail sales depend, in part, on general economic conditions.
A significant decline in such conditions could have a negative impact on sales
by retailers of products sold by the Company and consequently could have a
material adverse effect on the Company. Retail environments which are poor or
perceived to be poor, whether due to economic or other conditions, may lead
manufacturers and marketers, including the Company, to increase their
discounting and promotional activities. Such activities could have a material
adverse effect on the Company's profit margins and, consequently, its results
of operations. The Company may also not be able to fully offset the impact of
inflation through price increases in an unfavorable retail market.
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Government Regulation
The Company is subject to many laws and governmental regulations and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by the Company as fertilizers or pesticides are subject to an
extensive and frequently evolving statutory and regulatory framework, at both
the Federal and state levels.
The distribution and sale of pesticides is subject to regulation by the
U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by
many states in a manner similar to FIFRA. Under FIFRA and similar state laws,
all pesticides must be registered with the EPA and the state and must be
approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply
with the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to, suspension or restriction of product
distribution, civil penalties and/or criminal sanctions.
The Company markets certain animal repellent and pesticide products that
are subject to FIFRA and to similar state regulations. The Company also markets
certain fertilizer products that are subject to regulation in some states. The
Company believes that it is in material compliance with FIFRA and applicable
state regulations regarding its material business operations. However, there
can be no assurance that the Company will be able to comply with future
regulations in every jurisdiction in which the Company's material business
operations are conducted without substantial cost or interruption of
operations. Moreover, there can be no assurance that future products marketed
by the Company will not also be subject to FIFRA or to state regulations. If
future costs of compliance with regulations governing pesticides or fertilizers
increase or exceed the Company's budgets for such items, the Company's business
could be adversely affected. If any of the Company's products are distributed
and/or marketed in violation of any of these regulations, the Company could be
subject to a recall of, or a sales limitation placed on, one or more of its
products, or civil or criminal sanctions, any of which could have a material
adverse effect upon the Company's business.
Environmental Regulation. The Company's manufacturing operations are
subject to various evolving federal, state and local laws and regulations
relating to the protection of the environment, which laws govern, among other
things, emissions to air, discharges to ground, surface water and groundwater,
and the generation, handling, storage, transportation, treatment and disposal
of a variety of hazardous and non-hazardous substances and wastes. Federal and
state environmental laws and regulations often require manufacturers to obtain
permits for these emissions and discharges. Failure to comply with
environmental laws or to obtain, or comply with, the necessary state and
federal permits can subject the manufacturer to substantial civil and criminal
penalties. Easy Gardener operates two manufacturing facilities and Weatherly
and Weed Wizard each operate one manufacturing facility. The Company believes
that all of its facilities are in substantial compliance with all applicable
material environmental laws. However, it is possible that there are material
environmental liabilities of which the Company is unaware. If the costs of
compliance with the various existing or future environmental laws and
regulations, including any penalties which may be assessed for failure to
obtain necessary permits, exceed the Company's budgets for such items, the
Company's business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport or arrange for disposal of hazardous substances
at a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Weatherly and Weed Wizard each operate one manufacturing facility. Moreover,
the Company or its predecessors have owned or operated other manufacturing
facilities in the past and may have liability for remediation of such
facilities in the future, to the extent any is required. In this regard,
Weatherly previously owned
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a facility that was the subject of certain soil remediation activities.
Although this facility was sold by Weatherly prior to the Company's acquisition
of Weatherly, there can be no assurance that the Company will not be liable for
any previously existing environmental contamination at the facility. Moreover,
although the purchaser of the facility indemnified Weatherly for any
environmental contamination liability and the sellers of Weatherly, in turn,
indemnified the Company from such liability, there can be no assurance that, if
required, the indemnifying parties will be able to fulfill their respective
obligations to indemnify the Company. Furthermore, certain business operations
of the Company's subsidiaries also involve shipping hazardous waste off-site
for disposal. As a result, the Company could be subject to liability under
these statutes. The Company could also incur liability under CERCLA or similar
state statutes for any damage caused as a result of the release of hazardous
substances owned by the Company but processed and manufactured by others on the
Company's behalf. As a result, there can be no assurance that the manufacture
of the products sold by the Company will not subject the Company to liability
pursuant to CERCLA or a similar state statute. Furthermore, there can be no
assurance that Easy Gardener, Weatherly and Weed Wizard will not be subject to
liability relating to manufacturing facilities owned and/or operated by them
currently or in the past.
Other Regulations. The Company is also subject to various other federal,
state and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. See "Business--Government
Regulation."
Product Liability
The Company, as a manufacturer of lawn and garden care and pesticide
products, may be exposed to significant product liability claims by consumers.
Although the Company has obtained product liability insurance coverage for U.S.
Home & Garden Inc. and Golden West in the aggregate amount of $3.0 million, and
for Easy Gardener, Weatherly and Weed Wizard in the aggregate amount of $2.0
million (with all policies limited to $1.0 million per occurrence), and has
obtained three umbrella policies in the amounts of $5.0 million, $15.0 million
and $20.0 million, respectively, there can be no assurance that such insurance
will provide coverage for any claim against the Company or will be sufficient
to cover all possible liabilities. In the event a successful suit is brought
against the Company, unavailability or insufficiency of insurance coverage
could have a material adverse effect on the Company. Moreover, any adverse
publicity arising from claims made against the Company, even if such claims
were not successful, could adversely affect the reputation and sales of the
Company's products.
Uncertainty of Protection of Trademarks and Proprietary Rights
The Company believes that its ability to successfully implement its growth
strategy is partially dependent on its ability to use its trademarks, in
particular, Easy Gardener, Jobe's, Weed Wizard and WeedBlock. In addition,
except for patents covering two lawn edge products currently sold by the
Company and certain products obtained as a result of the acquisition of
Weatherly, none of the Company's products is covered by patents. There can be
no assurance that the Company will apply for any additional trademark or patent
protection relating to its products or that its current trademarks and patents
will be enforceable or adequately protect the Company from infringement of its
proprietary rights. Although the Company believes that the products sold by it
do not infringe upon the patents or violate the proprietary rights of others,
it is possible that such infringement or violation has occurred or may occur.
In the event that products sold by the Company are deemed to infringe upon the
patents or proprietary rights of others, the Company could be required to
modify its products or obtain a license for the manufacture and sale of such
products. There can be no assurance that, in such an event, the Company would
be able to do so in a timely manner, upon acceptable terms and conditions, or
at all, and the failure to do any of the foregoing could have a material
adverse effect upon the Company. Moreover, there can be no assurance that the
Company will have the financial or other resources necessary to enforce or
defend a patent infringement or proprietary rights violation action. In
addition, if the Company's products or proposed products are deemed to infringe
upon the patents or proprietary rights of others, the Company could, under
certain circumstances, become liable for damages, which could also have a
material adverse effect on the Company. See "Business--Trademarks, Proprietary
Information and Patents."
Legal Proceeding
In response to a claim for trademark infringement filed on July 30, 1997
by Easy Gardener against Dalen Products, Inc. ("Dalen") in the United States
District Court for the Western District of Texas, Waco Division,
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Dalen filed a counterclaim against Easy Gardener and a third party complaint
against the Company. Dalen alleges, among other things, that the Company and
Easy Gardener monopolized or attempted to monopolize the market for landscape
fabrics; that the Company and Easy Gardener tortiously interfered with Dalen's
contractual and prospective contractual relationships; and that Easy Gardener
infringed a Dalen trademark, deceptively advertised the thickness of one of its
products, and misrepresented the porosity of a Dalen product. Dalen's
counterclaim and third party complaint seek an award of unspecified damages and
the entry of unspecified injunctive relief. An adverse ruling could have a
material adverse effect on the Company. See "Business--Legal Proceeding."
Dependence on Management
The success of the Company will be largely dependent on the personal
efforts of Robert Kassel, its Chairman of the Board, Chief Executive Officer
and President, Richard Raleigh, its Chief Operating Officer, and Richard
Grandy, the President of Easy Gardener, all of whom devote their full time to
the affairs of the Company. Although the Company has entered into employment
agreements with Mr. Kassel and Mr. Raleigh which expire on March 31, 1998,
subject to automatic renewal unless terminated, and an employment agreement
with Mr. Grandy that expires in August 1998, and has obtained "key man" life
insurance in the amount of $2.0 million on the life of Mr. Kassel and $1.0
million on the lives of each of Messrs. Raleigh and Grandy, the loss of the
services of either Mr. Kassel, Mr. Raleigh or Mr. Grandy could have a material
adverse effect on the Company. In addition, the employment agreements provide
that Messrs. Kassel and Raleigh will receive a significant severance payment
from the Company upon a change in control of the Company or the occurrence of
certain other events as described therein. The success of the Company may also
be dependent, in part, upon its ability to hire and retain additional qualified
sales and marketing personnel. There can be no assurance that the Company will
be able to hire or retain such necessary personnel. See "Management." In
addition, only two of the current five members of the Company's Board of
Directors may be considered to be "independent" as they are not officers or
employees of the Company or its subsidiaries. See "Certain Transactions."
USE OF PROCEEDS
All of the proceeds to the Trust from the sale of the Trust Preferred
Securities offered by it hereby will be invested by the Trust in the Junior
Subordinated Debentures. The net proceeds to the Company from the sale of the
Junior Subordinated Debentures are estimated to be approximately $52,225,000
(approximately $60,145,000 if the Underwriters' over-allotment option is
exercised in full) after deducting the estimated underwriting compensation and
offering expenses payable by the Company.
The Company expects to use the net proceeds to repay approximately $38.0
million outstanding under its Credit Facility, which, as of April 1, 1998,
consisted of: (i) approximately $29.3 million outstanding under Easy Gardener's
term loan, of which approximately $10.0 million was incurred in February and
March 1998 to fund the purchase prices of the acquisitions of the assets of
Weed Wizard, Inc. and Landmaster Products, Inc.; and (ii) approximately $8.7
million outstanding under Easy Gardener's revolving credit facility. An
additional $735,000 will be used to pay a prepayment penalty resulting from the
foregoing repayment. The remaining proceeds will be allocated to working
capital which may include, without limitation, funding additional investments
in, or extensions of credit to, the Company's operating subsidiaries for the
expansion of operations. In addition, a portion of the proceeds allocated to
working capital may be used for possible future acquisitions. The Company may
use a portion of the proceeds allocated to working capital to acquire
businesses or products which the Company believes will enhance its business.
While the Company actively seeks and evaluates possible acquisition
opportunities, except for the Proposed Acquisition the Company currently has no
agreements, commitments, understandings or arrangements with respect to any
acquisition. There can be no assurance that the Proposed Acquisition or any
other acquisition will be consummated.
Proceeds not immediately required for the purposes set forth above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other investment grade
interest-bearing investments.
27
<PAGE>
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of the Company. The Trust
Preferred Securities will be presented as a separate line item in the
consolidated balance sheet of the Company under the caption "Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures," and appropriate disclosures about the Trust
Preferred Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the notes to consolidated financial statements. Estimated
underwriting compensation and other estimated offering expenses will be
capitalized as a deferred financing cost and amortized over the life of the
Junior Subordinated Debentures. For financial reporting purposes, the Company
will record Distributions payable on the Trust Preferred Securities and
amortization of deferred financing costs as interest expense in the
consolidated statements of operations.
Future reports of the Company filed under the Exchange Act will include a
footnote to the financial statements stating that (i) the Trust is wholly
owned, (ii) the sole assets of the Trust are the Junior Subordinated Debentures
(specifying the principal amount, interest rate and maturity date of such
Junior Subordinated Debentures), and (iii) the back up obligations, in the
aggregate, constitute a full and unconditional guarantee by the Company of the
obligations of the Trust under the Trust Preferred Securities. The Trust will
not provide separate reports under the Exchange Act.
28
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of December 31, 1997 and as adjusted to give effect to: (i) the
issuance by the Trust of the 2,200,000 Trust Preferred Securities offered
hereby, (ii) the receipt by the Company of the proceeds, net of estimated
underwriting compensation and other estimated offering expenses, from the
corresponding sale of the Junior Subordinated Debentures to the Trust, and
(iii) the application by the Company of the net proceeds therefrom as described
under "Use of Proceeds."
<TABLE>
<CAPTION>
December 31, 1997
-------------------------
Actual As Adjusted
---------- ------------
(Dollars in thousands)
<S> <C> <C>
Short-term debt ............................................... $ 6,086 $ --
======== ========
Notes payable, less current portion ........................... $ 16,430 $ --
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated
debentures(1) ................................................ -- 55,000
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued or outstanding ................................. -- --
Common stock, $.001 par value; 30,000,000 shares authorized;
19,860,000 shares issued and outstanding(2); ............... 20 20
Additional paid-in capital ................................... 49,775 49,775
Accumulated deficit(3) ....................................... (3,179) (4,460)
-------- --------
Total stockholders' equity ................................. 46,616 45,335
-------- --------
Total capitalization .................................... $ 63,046 $100,335
======== ========
</TABLE>
- ------------
(1) The subsidiary trust is the Trust, which will hold an aggregate principal
amount of $56,700,000 of the Junior Subordinated Debentures as its sole
asset. The Trust Preferred Securities are issued by the Trust. The Junior
Subordinated Debentures will bear interest at the rate of 9.40% per annum
and will mature on April 15, 2028, which date may be shortened to a date
not earlier than April 15, 2003 if certain conditions are met. The Junior
Subordinated Debentures are redeemable prior to maturity at the option of
the Company (i) on or after April 15, 2003, in whole at any time or in
part from time to time, or (ii) at any time, in whole (but not in part),
within 90 days following the occurrence and continuation of a Tax Event or
an Investment Company Event. See "Description of Junior Subordinated
Debentures--Redemption." The Company owns all of the Common Securities of
the Trust.
(2) Does not include (i) an aggregate of approximately 2,550,000 shares of
Common Stock reserved for issuance upon exercise of outstanding options
under the Stock Option Plans; (ii) an aggregate of approximately 890,000
shares of Common Stock which may be issued upon exercise of options
available for future grant under the Stock Option Plans; and (iii)
approximately 6,270,000 shares issuable upon exercise of options granted
outside of the Stock Option Plans and certain outstanding warrants,
exclusive of any shares that may be issuable as a result of the
anti-dilution provisions of such options and warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Management--Stock Option Plan," "Certain Transactions," "Underwriting"
and Note 9 of Notes to Consolidated Financial Statements.
(3) The accumulated deficit, as adjusted, reflects deferred financing costs of
approximately $1.4 million and a prepayment penalty of approximately
$735,000 ($1,281,000 net of tax benefits) expensed as a result of the
early repayment of the entire indebtedness outstanding under the Credit
Facility from the assumed use of proceeds from the sale of the Junior
Subordinated Debentures to the Trust. See "Use of Proceeds."
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION
(in thousands, except percentages, ratios and per share data)
The following selected financial data at and for the years ended June 30,
1993, 1994, 1995, 1996 and 1997 and at and for the six months ended December
31, 1996 and 1997 have been derived from the Company's consolidated financial
statements. Such information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ............................. $ 2,910 $ 3,063 $ 19,692 $ 27,031 $ 52,046
Gross profit .......................... 1,402 1,608 10,541 14,361 28,397
Selling, general and administrative
expenses(1) .......................... 1,826 6,786 7,152 10,612 17,745
------- -------- ---------- -------- ----------
Income (loss) from operations ......... (424) (5,178) 3,389 3,749 10,652
Interest expense, net ................. (45) (41) (1,776) (1,940) (3,262)
Income (loss) before extraordinary
expense .............................. (469) (5,219) 1,575 2,524 4,190
------- -------- ---------- -------- ----------
Extraordinary gain (expense), net ..... 389 (1,007)
------- ----------
Net income (loss) ..................... $ (80) $ (5,219) $ 1,575 $ 2,524 $ 3,183
======= ======== ========== ======== ==========
Dilutive income (loss) per share:
Income (loss) per share before
extraordinary expense(2) ............. $ (0.22) $ (1.31) $ 0.16 $ 0.19 $ 0.26
Net income (loss) per share(2) ........ $ (0.04) $ (1.31) $ 0.16 $ 0.19 $ 0.20
======= ======== ========== ======== ==========
Weighted average number of
common and common equivalent
shares outstanding(2) ................ 2,178 3,980 10,125 13,361 16,068
======= ======== ========== ======== ==========
Other Data(3):
EBITDA(4) ............................. $ 4,026 $ 4,583 $ 12,642
Interest expense, net ................. 1,776 1,940 3,262
Depreciation and amortization ......... 637 834 1,990
Capital expenditures .................. 151 261 528
Net cash provided by (used in)
operating activities ................. 438 618 10,545
Net cash (used in) investing
activities ........................... (15,576) (2,103) (29,594)
Net cash provided by financing
activities ........................... 16,021 1,195 20,452
Growth Rates(3):
Net sales growth ...................... 37.3 % 92.5 %
EBITDA growth(4) ...................... 13.8 175.9
Income from Operations growth ......... 10.6 184.1
Margins(3):
EBITDA margin(4)(5) ................... 20.4 % 17.0 % 24.3 %
Operating income (loss) margin(6) 17.2 13.9 20.5
Net income (loss) margin .............. 8.0 9.3 6.1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Statement of Income Data:
Net sales ............................. $ 12,939 $15,538
Gross profit .......................... 7,114 8,159
Selling, general and administrative
expenses(1) .......................... 7,312 8,552
-------- -------
Income (loss) from operations ......... (198) (393)
Interest expense, net ................. (1,332) (1,493)
Income (loss) before extraordinary
expense .............................. (1,055) (1,086)
-------- -------
Extraordinary gain (expense), net ..... (1,007)
--------
Net income (loss) ..................... $ (2,062) $(1,086)
======== =======
Dilutive income (loss) per share:
Income (loss) per share before
extraordinary expense(2) ............. $ (0.08) $ (0.07)
Net income (loss) per share(2) ........ $ (0.15) $ (0.07)
======== =======
Weighted average number of
common and common equivalent
shares outstanding(2) ................ 13,437 15,552
======== =======
Other Data(3):
EBITDA(4) ............................. $ 760 $ 870
Interest expense, net ................. 1,332 1,493
Depreciation and amortization ......... 958 1,263
Capital expenditures .................. 230 486
Net cash provided by (used in)
operating activities ................. (1,540) 682
Net cash (used in) investing
activities ........................... (24,667) (1,414)
Net cash provided by financing
activities ........................... 25,783 11,383
Growth Rates(3):
Net sales growth ...................... 20.1 %
EBITDA growth(4) ...................... 14.5
Income from Operations growth ......... (98.5)
Margins(3):
EBITDA margin(4)(5) ................... 5.9 % 5.6 %
Operating income (loss) margin(6) ( 1.5) ( 2.5)
Net income (loss) margin .............. (15.9) ( 7.0)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
------------------------------------------------------------ ---------------------------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratios:
EBITDA to interest expense, net(4) 2.3x 2.4x 3.9x 0.6x 0.6x
Earnings to fixed charges(7) ......... 468(9) 5,219(9) 1.9x 1.9x 3.1x 1,530(9) 1,886(9)
Pro forma ratio of earnings to fixed
charges(7)(8) ....................... 3.6x 1,488(9)
</TABLE>
<TABLE>
<CAPTION>
At
December
At June 30, 31,
--------------------------------------------------------- -----------
1993 1994 1995 1996 1997 1997
-------- ---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) ......... $ 607 $ (347) $ 3,326 $ 5,328 $ 2,292 $15,753
Intangible assets, net ............... 2,858 2,046 16,692 17,167 44,364 43,474
Total assets ......................... 5,977 5,654 28,140 33,584 68,475 77,636
Short-term debt ...................... 1,134 594 2,200 3,650 8,990 6,086
Long-term debt ....................... 8,000 6,238 17,570 16,430
Stockholders' equity ................. 3,827 3,150 15,339 19,370 31,926 46,616
</TABLE>
- ------------
(1) Includes goodwill amortization expense of $91,000, $105,000, $475,000,
$585,000, $1.3 million, $590,000 and $730,000 for the fiscal years ended
June 30, 1993, 1994, 1995, 1996 and 1997 and the six months ended December
31, 1996 and 1997, respectively.
(2) Net income (loss) per share calculations for all periods presented reflects
the retroactive adoption of the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128). See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," Summary of Accounting Policies of Consolidated Financial
Statements and Note 14 of Notes to Consolidated Financial Statements.
(3) Certain Other Data, Growth Rates and Margins for the fiscal years ended
June 30, 1993, 1994 and 1995 have been omitted due to the lack of relevant
comparison after the Company's acquisition of Easy Gardener, Inc. in
September 1994.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization and non-recurring charges. EBITDA is not
intended to represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as an
alternative to cash flow or as a measure of liquidity or as an alternative
to net earnings as indicative of operating performance. The Company's
reported EBITDA may not be comparable to similarly titled measures of other
companies that do not have non-recurring charges. EBITDA, EDITDA growth,
EBITDA margin, and EBITDA to interest expense, net are included herein
because management believes they are useful for measuring the Company's
ability to service its debt.
(5) EBITDA margins represent EBITDA divided by net sales.
(6) Operating income (loss) margin represents income (loss) from operations
divided by net sales.
(7) For purposes of calculating the ratio and pro forma ratio of earnings to
fixed charges, earnings consist of income before income taxes, plus fixed
charges. Fixed charges consist of the interest expense on all
indebtedness, including amortization of deferred financing costs, and the
estimated representative interest factor of rental expense.
<PAGE>
(8) The average outstanding debt balances for the year ended June 30, 1997 and
the six-month period ended December 31, 1997 were approximately
$28,877,000 and $24,188,000, respectively, and gross interest expense was
approximately $3,338,000 and $1,597,000, respectively. The pro forma
ratios assume the replacement of this indebtedness with a corresponding
amount of Junior Subordinated Debentures on July 1, 1996. If, on a
consolidated basis, the entire $55,000,000 principal amount of Junior
Subordinated Debentures had been outstanding throughout the periods, total
interest expense would have been approximately $5,225,000 and $2,612,500,
respectively.
(9) Earnings are inadequate to cover fixed changes. Amounts shown reflect the
coverage deficiency for this ratio to equal one.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company manufactures and markets a broad range of brand-name consumer
lawn and garden products through its wholly-owned subsidiaries, Easy Gardener
and Golden West, and through Easy Gardener's wholly-owned subsidiaries,
Weatherly and Weed Wizard. Since 1992, the Company has consummated seven
acquisitions of complementary lawn and garden companies and product lines for
an aggregate consideration of over $75 million in cash, notes and equity
securities. As a result of such acquisitions, the Company has recognized a
significant amount of goodwill which, in the aggregate, is approximately $57.5
million at the date of this Prospectus. The Company is currently amortizing
such goodwill using the straight-line method over various time periods ranging
from 20 to 30 years and amortization expenses for the fiscal year ended June
30, 1997 were $1.3 million or $0.08 per dilutive share. See Consolidated
Financial Statements.
The Company's results of operations for the fiscal year ended June 30,
1997 were significantly affected by the acquisition of Weatherly in August
1996. In connection with the acquisition of Weatherly, the Company's
outstanding notes payable were refinanced and replaced with a new credit
facility (the "Refinancing"). As a result of the Refinancing, the Company was
required to record an extraordinary expense of $1.0 million, net of tax
benefits, for the fiscal year ended June 30, 1997, which expense consisted of
the write-off of deferred finance costs at June 30, 1996 plus prepayment
penalties. Such extraordinary expense reduced the Company's net income per
share for fiscal 1997 by $0.06, from $0.26 to $0.20. See Notes 13 and 14 to
Notes to Consolidated Financial Statements.
The Company experienced net sales growth of 37% from fiscal 1995 to fiscal
1996 and 93% from fiscal 1996 to fiscal 1997. The Company believes that this
growth in net sales was primarily attributable to expansion of its product
lines through the acquisition of complementary lawn and garden businesses and
product lines. Net sales were also positively affected by an increase in sales
of pre-existing product lines. Assuming each of the Company's first five
acquisitions had been completed prior to the beginning of fiscal 1996, the
growth in net sales from fiscal 1996 to fiscal 1997 would have been 15%.
The Company was required to calculate its net income per share for all
periods presented in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share," which is effective for periods
ending after December 15, 1997 and requires the Company to report basic
earnings per share (giving no dilutive effect to derivative securities) and
diluted earnings per share (reflecting the dilutive effect of all derivative
securities). Under the SFAS No. 128 dilutive earnings per share calculation,
all derivative securities with exercise prices below the market price have been
assumed exercised. All proceeds from the exercise of such derivative securities
have been assumed to be used to repurchase common stock (at an average stock
price).
In April 1996, the Company entered into an agreement to exchange certain
unsold assets held for sale for certain trade credits issued by a third party
to be applied against future purchases of products and services from such third
party (primarily the purchase of operating assets and advertising time). These
trade credits are listed as an asset on the balance sheet of the Company. The
agreement requires the Company to pay a portion of the purchase price of the
products and services received, ranging from 45% to 90% of the total purchase
price, and apply the trade credits to the balance. All trade credits will
expire to the extent not used in April 1999 and are required to be recognized
as an expense to the Company as used, with any balance remaining in April 1999
being expensed at that time. The maximum that the Company is entitled to
receive in credits and cash is $1.6 million, of which the Company had received
approximately $50,000 in cash and had expensed approximately $400,000 in
credits as of December 31, 1997. See Note 2 of Notes to Consolidated Financial
Statements. No assurance can be given that the Company will use all or any
portion of such trade credits or that, to the extent that the Company uses the
trade credits, such trade credits will be used in a manner likely to generate
additional sales of the Company's products. See "Business -- Sales and
Marketing."
Results of Operations
The following table sets forth, for the periods indicated, certain
selected financial data as a percentage of net sales:
32
<PAGE>
<TABLE>
<CAPTION>
Percentages of Net Sales
-------------------------------------------------------------------
Six Months Ended
Year Ended June 30, December 31,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales ................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 46.5 46.9 45.4 45.0 47.5
------ ------ ------ ------ ------
Gross profit ................................ 53.5 53.1 54.6 55.0 52.5
Selling and shipping expenses ............... 22.2 23.2 21.6 30.8 30.0
General and administrative expenses ......... 14.1 16.1 12.5 25.7 25.0
------ ------ ------ ------ ------
Income (loss) from operations ............... 17.2 13.9 20.5 ( 1.5) ( 2.5)
Interest expense ............................ 9.2 7.4 6.4 10.6 10.3
Income tax (expense) benefit ................ ( 0.2) 2.7 ( 6.2) 3.7 5.2
Extraordinary expense, net .................. -- -- 1.9 ( 7.8) --
------ ------ ------ ------ ------
Net income (loss) ........................... 8.0 9.3 6.1 (15.9) ( 6.9)
====== ====== ====== ====== ======
</TABLE>
Six Months Ended December 31, 1997 Compared to Six Months Ended December 31,
1996
Net sales. Net sales increased by $2.6 million, or 20%, to $15.5 million
during the six months ended December 31, 1997, from $12.9 million during the
comparable period in 1996. The increase in net sales was primarily a result of
the August 1996 acquisition of Weatherly and the May 1997 acquisition of the
Plasti-Chain line of plastic chain links and decorative edgings, combined with
internal growth of the Company's pre-existing product lines.
Gross profit. Gross profit increased by $1.1 million, or 15%, to $8.2
million for the six months ended December 31, 1997, from $7.1 million during
the comparable period in 1996. This increase was due primarily to the Weatherly
acquisition. Gross profit as a percentage of net sales decreased to 52.5%
during the six months ended December 31, 1997, from 55.0% during the comparable
period in 1996. The decrease in gross profit as a percentage of net sales was
primarily attributable to the decrease in sales of higher-margin products.
Selling and shipping expenses. Selling and shipping expenses increased
$671,000, or 17%, to $4.7 million during the six months ended December 31,
1997, from $4.0 million during the comparable period in 1996. This increase was
primarily the result of an increase in the amount of products shipped, which
was a consequence of the acquisition of Weatherly and an increase in sales of
pre-existing product lines. Selling and shipping expenses as a percentage of
net sales decreased from 30.8% during the six months ended December 31, 1996,
to 30.0% during the comparable period in 1997. This decrease was a result of
economies of scale achieved from the sale of new products to existing
customers.
General and administrative expenses. General and administrative expenses
increased $569,000, or 17%, to $3.9 million during the six months ended
December 31, 1997 from $3.3 million during the comparable period in 1996. This
increase was primarily due to increased amortization of goodwill as a result of
the acquisition of Weatherly. Furthermore, the increase is due to the addition
of certain administrative personnel as part of the Company's efforts to build
an infrastructure that it believes will be able to more readily integrate any
future products or businesses that may be acquired. As a percentage of net
sales, general and administrative expenses decreased from 25.7% during the six
months ended December 31, 1996, to 25.0% during the comparable period in 1997.
This improvement is primarily due to the closing of the Weatherly
administrative offices in February 1997 and the integration of certain
administrative functions into the Company's existing infrastructure.
Loss from operations. Loss from operations increased by $195,000, or 98%,
to $393,000 during the six months ended December 31, 1997 from $198,000 during
the comparable period in 1996. The loss from operations in actual dollars was
primarily due to the seasonal nature of the business. The increase in the loss
for the 1997 period was primarily attributable to the increased general and
administrative costs resulting from increased amortization of goodwill and, to
a lesser extent increased marketing expenses. As a percentage of net sales,
loss from operations increased to 2.5% for the six months ended December 31,
1997 from 1.5% during the comparable period in 1996.
Interest expense. Interest expense increased by $222,000, or 16%, to $1.6
million during the six months ended December 31, 1997, from $1.4 million during
the comparable period in 1996. The increase in interest
33
<PAGE>
expense is primarily related to the interest associated with the increase in
term debt associated with the Weatherly acquisition and the acquisition of the
Plasti Chain links and decorative edgings, which was partially offset by a
decrease in the Company's effective borrowing rate.
Income taxes. Income tax benefits increased to $800,000 during the six
months ended December 31, 1997 from $475,000 during the comparable period in
1996 primarily due to the increase in the Company's effective tax rate and, to
a lesser extent, the increase in the loss before income taxes and extraordinary
expense. The income tax benefit for each interim period is based upon the
Company's estimated effective income tax rate for the year.
Extraordinary expense, net. In connection with the acquisition of
Weatherly in August 1996, the Company refinanced its term debt and its
revolving line of credit. As a result of its refinancing, the Company was
required to record an extraordinary expense of $1.0 million net of tax benefits
of $452,000, during the six months ended December 31, 1996. The expense
consisted of deferred finance costs at June 30, 1996, net of accumulated
amortization, plus prepayment penalties.
Net loss. Net loss decreased by $976,000, or 47%, to $1.1 million during
the six months ended December 31, 1997 from $2.1 million during the comparable
period in 1996. This decrease was attributable to the $1.0 million
extraordinary expense incurred in the 1996 period due to the refinancing. Net
loss per common share decreased $0.08 to $0.07 during the six months ended
December 31, 1997 from $0.15 during the comparable period in 1996. The decrease
was primarily attributable to the foregoing expense incurred during the 1996
period and, to a lesser extent, the increase in the number of weighted average
common and equivalent shares outstanding during the 1997 period.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Net sales. Net sales increased by $25.0 million, or 93%, to $52.0 million
in fiscal 1997 from $27.0 million in fiscal 1996. The increase in net sales was
primarily a result of the August 1996 acquisition of Weatherly and increased
sales of the Company's landscape fabrics and landscape edging products.
Gross profit. Gross profit increased by $14.0 million, or 98%, to $28.4
million in fiscal 1997 from $14.4 million in fiscal 1996. This increase was due
primarily to the Weatherly acquisition. Gross profit as a percentage of net
sales increased to 54.6% in fiscal 1997 from 53.1% in fiscal 1996. The increase
in gross profit as a percentage of net sales was primarily attributable to the
sales of higher-margin products acquired in the Weatherly acquisition.
Selling and shipping expenses. Selling and shipping expenses increased
$4.9 million, or 78%, to $11.2 million in fiscal 1997 from $6.3 million in
fiscal 1996. This increase was primarily the result of an increase in the
amount of products shipped, which was a consequence of the acquisition of
Weatherly and an increase in sales of pre-existing product lines, particularly
landscape fabrics and landscape edging products. Selling and shipping expenses
as a percentage of net sales decreased from 23.2% in fiscal 1996 to 21.6% in
fiscal 1997. This decrease was primarily due to the consolidation of the
Company's customer services at the Waco, Texas office and the elimination of
the majority of the Weatherly sales positions in connection with the
integration of the acquisition.
General and administrative expenses. General and administrative expenses
increased $2.1 million, or 50%, to $6.5 million in fiscal 1997 from $4.4
million in fiscal 1996. This increase was primarily the result of the
acquisition of Weatherly. As a percentage of net sales, general and
administrative expenses decreased from 16.1% in fiscal 1996 to 12.5% in fiscal
1997. This improvement is primarily due to the closing of the Weatherly
administrative offices in February 1997 and the integration of certain
administrative functions into the Company's existing infrastructure.
Income from operations. Income from operations increased by $6.9 million,
or 184%, to $10.7 million in fiscal 1997 from $3.8 million in fiscal 1996. The
growth in income from operations in actual dollars was primarily due to the
increase in net sales and gross profit as a result of the Weatherly
acquisition. As a percentage of net sales, income from operations increased to
20.5% in fiscal 1997 from 13.9% in fiscal 1996. This increase was due to the
decreases in selling and shipping and general and administrative expenses as a
percentage of net sales.
34
<PAGE>
Interest expense. Interest expense increased by $1.3 million, or 65%, to
$3.3 million in fiscal 1997, from $2.0 million in fiscal 1996. The increase in
interest expense is primarily related to the interest associated with the
increase in both term and working capital debt and expenses associated with the
Weatherly acquisition, partially offset by a decrease in the Company's
effective borrowing rate. Income taxes. In fiscal 1996, the Company reported a
tax benefit of $715,000 which was a result of the recognition of a deferred tax
asset relating to available net operating loss carryforwards. In fiscal 1997,
the Company incurred a tax expense of $3.2 million, excluding the benefit
associated with the extraordinary expense, reflecting the Company's
profitability and exhaustion of the majority of net operating loss
carryforwards.
Extraordinary expense, net. In connection with the acquisition of
Weatherly, the Company completed the Refinancing. As a result of the
Refinancing, the Company was required to record an extraordinary expense of
$1.0 million net of tax benefits for fiscal 1997, which expense consisted of
deferred finance costs at June 30, 1996 net of accumulated amortization, plus
prepayment penalties.
Net income. Net income increased $659,000, or 26%, to $3.2 million in
fiscal 1997 from $2.5 million in fiscal 1996. This increase was attributable to
the successful integration into Easy Gardener of the Weatherly organization in
fiscal 1997, partially offset by the $1.0 million extraordinary expense, net of
tax benefits, incurred due to the Refinancing.
Dilutive earnings per common share increased $0.01 to $0.20 in fiscal 1997
from $0.19 in fiscal 1996. The increase was due primarily to the increase in
income from operations, which was partially offset by increases in interest and
income tax expense and the extraordinary expense of approximately $1.0 million
net of tax benefits in fiscal 1997 which did not occur in fiscal 1996.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net sales. Net sales increased by $7.3 million, or 37%, to $27.0 million
in fiscal 1996 from $19.7 million in fiscal 1995. A majority of the increase in
net sales resulted from the introduction of new landscape edging and shade
cloth products. In addition, the Company believes that its sales were
positively affected by continued penetration in existing markets, expansion
into new markets and a more widespread recognition of the Easy Gardener brand
and products. The increase in net sales also resulted from the inclusion of 12
months of net sales of Easy Gardener products in the fiscal 1996 period
compared to 10 months in the prior fiscal year.
Gross profit. Gross profit increased by $3.8 million, or 36%, to $14.4
million in fiscal 1996 from $10.5 million in fiscal 1995, primarily due to the
increase in net sales, partially offset by the inclusion of 12 months of Easy
Gardener's cost of goods sold in fiscal 1996 compared to 10 months in fiscal
1995. Gross profit as a percentage of net sales decreased from 53.5% in fiscal
1995 to 53.1% in fiscal 1996. The decrease was due to a change in the product
mix sold and to higher costs, during fiscal 1996, of resin and corrugated
cardboard, which are the principal materials used in the manufacturing and
packaging of WeedBlock.
Selling and shipping expenses. Selling and shipping expenses increased by
$1.9 million, or 43%, to $6.3 million in fiscal 1996 from $4.4 million in
fiscal 1995. The increase was primarily the result of the increase in the
amount of product shipped and the inclusion of 12 months of Easy Gardener's
selling and shipping expenses in fiscal 1996 compared to 10 months in fiscal
1995. As a percentage of net sales, selling and shipping expenses increased to
23.2% in fiscal 1996 compared to 22.2% in fiscal 1995. This increase was
primarily due to introductory advertising on new products.
General and administrative expenses. General and administrative expenses
increased by $1.6 million, or 57%, to $4.4 million in fiscal 1996 from $2.8
million in fiscal 1995. General and administrative expenses as a percentage of
net sales increased to 16.1% in fiscal 1996 from 14.1% in fiscal 1995. The
increase in general and administrative expenses during fiscal 1996 was
primarily a result of the inclusion of 12 months of Easy Gardener's general and
administrative expenses in fiscal 1996 compared to 10 months in fiscal 1995.
The increase in general and administrative expenses was also due to additional
amortization and depreciation expense, and additional related overhead
expenses, associated with the overall increase in the size of the Company.
Income from operations. Income from operations increased by approximately
$400,000, or 12%, to $3.8 million in fiscal 1996 from $3.4 million in fiscal
1995. As a percentage of net sales, income from operations
35
<PAGE>
decreased to 13.9% in fiscal 1996 from 17.2% in fiscal 1995. The decrease in
income from operations as a percentage of net sales was primarily the result of
a slight decrease in gross profit as a percentage of net sales, combined with
more significant increases in selling and shipping and general and
administrative expenses as a percentage of net sales.
Interest expense. Interest expense increased by $200,000, or 11%, to $2.0
million during fiscal 1996 from $1.8 million during fiscal 1995 primarily as a
result of the inclusion in fiscal 1996 of 12 months of interest on Easy
Gardener's outstanding indebtedness which was incurred in connection with the
purchase of the assets of Easy Gardener, Inc. in September 1994 when compared
to the inclusion of such interest for only 10 months in fiscal 1995. This
increase was partially offset by the February 1995 conversion of $2.0 million
of convertible notes into Common Stock and the repayment of $1.6 million on
other notes payable. The convertible notes and other notes payable were
incurred in connection with the purchase of the assets of Easy Gardener, Inc.
in September 1994.
Income taxes. During fiscal 1996, the Company recorded a $715,000 tax
benefit compared to a $38,000 tax expense during the fiscal 1995 primarily due
to the Company's recognition of a deferred tax asset associated with Federal
net operating loss carryforwards. See "-- Liquidity and Capital Resources."
Net income. Net income in fiscal 1996 was $2.5 million, or $0.19 per share
(assuming dilution), based on 13,361,000 weighted average common and common
equivalent shares outstanding compared to net earnings of $1.6 million, or
$0.16 per share, in fiscal 1995 based on 10,125,000 common and common
equivalent shares outstanding. Such increase was primarily the result of the
recognition of a $715,000 income tax benefit.
Quarterly Results of Operations and Seasonality
The Company's sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer.
Sales of the Company's agricultural products, which were not material for
fiscal 1997, are also seasonal. Most shipments occur during the agricultural
cultivation period from March through October.
36
<PAGE>
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,
1995 1995 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Net sales .......................................... $ 3,265 $ 2,715 $ 10,760
Cost of sales ..................................... 1,555 1,290 5,156
---------- --------- ---------
Gross profit ...................................... 1,710 1,425 5,604
Selling, general and administrative expenses . 2,211 2,394 2,753
---------- --------- ---------
Income (loss) from operations ...................... (501) (969) 2,851
Investment income .................................. 24 10 19
Interest expense ................................... (458) (473) (541)
---------- --------- ---------
Income (loss) before income taxes .................. (935) (1,432) 2,329
Income tax benefit (expense) ...................... 100 80 138
Extraordinary expense net ..........................
Net income (loss) .................................. $ (835) $ (1,352) $ 2,467
========== ========= =========
Dilutive income (loss) per share(1) ................ $ (0.08) $ (0.13) $ 0.20
========== ========= =========
Weighted average common and common
equivalent shares outstanding(1) .................. 9,944 10,200 12,535
========== ========= =========
Net sales .......................................... 100% 100% 100%
Cost of sales ..................................... 47.6% 47.5% 47.9%
---------- --------- ---------
Gross profit ...................................... 52.4% 52.5% 52.1%
Selling, general and administrative ............... 67.7% 88.2% 25.6%
---------- --------- ---------
Income (loss) from operations ...................... (15.3%) (35.7%) 26.5%
Investment income .................................. 0.7% 0.4% 0.2%
Interest expense ................................... (14.0%) (17.4%) ( 5.0%)
---------- --------- ---------
Income (loss) before income taxes .................. (28.6%) (52.7%) 21.7%
Income tax benefit (expense) ....................... 3.1% 3.0% 1.3%
Extraordinary expense .............................. 0% 0% 0%
---------- --------- ---------
Net income (loss) .................................. (25.5%) (49.7%) 23.0%
========== ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
(in thousands, except percentages and per share data)
June 30, September 30, December 31, March 31, June 30,
1996 1996 1996 1997 1997
------------ --------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales .......................................... $ 10,291 $ 5,523 $ 7,416 $ 20,559 $18,549
Cost of sales ..................................... 4,670 2,607 3,217 9,025 8,800
-------- --------- ---------- --------- -------
Gross profit ...................................... 5,621 2,916 4,199 11,534 9,749
Selling, general and administrative expenses . 3,252 3,264 4,048 5,539 4,894
-------- --------- ---------- --------- -------
Income (loss) from operations ...................... 2,369 (348) 151 5,995 4,855
Investment income .................................. 16 26 16 16 17
Interest expense ................................... (538) (563) (812) (993) (970)
-------- --------- ---------- --------- -------
Income (loss) before income taxes .................. 1,847 (885) (645) 5,018 3,902
Income tax benefit (expense) ...................... 397 280 195 (2,075) (1,600)
Extraordinary expense net .......................... (1,007)
-------- --------- ---------- --------- -------
Net income (loss) .................................. $ 2,244 $ (1,612) $ (450) $ 2,943 $ 2,302
======== ========= ========== ========= =======
Dilutive income (loss) per share(1) ................ $ 0.16 $ (0.12) $ (0.03) $ 0.18 $ 0.14
======== ========= ========== ========= =======
Weighted average common and common
equivalent shares outstanding(1) .................. 14,142 12,915 13,917 16,059 16,524
======== ========= ========== ========= =======
Net sales .......................................... 100% 100% 100% 100% 100%
Cost of sales ..................................... 45.4% 47.2% 43.4% 43.9% 47.4%
------- --------- ---------- --------- -------
Gross profit ...................................... 54.6% 52.8% 56.6% 56.1% 52.6%
Selling, general and administrative ............... 31.6% 59.1% 54.6% 26.9% 26.4%
------- --------- ---------- --------- -------
Income (loss) from operations ...................... 3.0% (6.3%) 2.0% 29.2% 26.2%
Investment income .................................. 0.2% 0.5% 0.2% 0.1% 0.1%
Interest expense ................................... (5.3%) (10.2%) (11.0%) ( 4.8%) (5.3)%
------- --------- ---------- --------- -------
Income (loss) before income taxes .................. 17.9% (16.0%) (8.8%) 24.5% 21.0%
Income tax benefit (expense) ....................... 3.9% 5.1% 2.6% (10.1%) (8.6)%
Extraordinary expense .............................. 0% (18.2%) 0% 0% 0%
------- --------- ---------- --------- -------
Net income (loss) .................................. 21.8% (29.1%) (6.2%) 14.3% 12.4%
======== ========= ========== ========= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------
(in thousands, except
percentages and per share
data)
September 30, December 31,
1997 1997
--------------- -------------
<S> <C> <C>
Net sales .......................................... $ 7,025 $ 8,513
Cost of sales ..................................... 3,522 3,857
--------- -------
Gross profit ...................................... 3,503 4,656
Selling, general and administrative expenses . 3,963 4,589
--------- -------
Income (loss) from operations ...................... (460) 67
Investment income .................................. 47 57
Interest expense ................................... (853) (744)
--------- -------
Income (loss) before income taxes .................. (1,226) (620)
Income tax benefit (expense) ...................... 550 250
Extraordinary expense net .......................... 0
--------- -------
Net income (loss) .................................. $ (716) $ (370)
========= =======
Dilutive income (loss) per share(1) ................ $ (0.05) $ (.02)
========= =======
Weighted average common and common
equivalent shares outstanding(1) .................. 14,702 16,384
========= =======
Net sales .......................................... 100% 100%
Cost of sales ..................................... 50.1% 45.3%
-------- -----
Gross profit ...................................... 49.9% 54.7%
Selling, general and administrative ............... 56.4% 53.9%
-------- -----
Income (loss) from operations ...................... (6.5%) 0.08%
Investment income .................................. 0.7% 0.7%
Interest expense ................................... (12.1%) (8.7%)
-------- ------
Income (loss) before income taxes .................. (18.0%) 7.3%
Income tax benefit (expense) ....................... 7.8% 2.9%
Extraordinary expense .............................. 0% 0%
-------- ------
Net income (loss) .................................. (10.2%) (4.3%)
======== ======
</TABLE>
- --------
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using
the treasury stock method except for quarters reporting a net loss. Such
quarters only reflect issued and outstanding shares of Common Stock in the
weighted average shares outstanding.
37
<PAGE>
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
cash generated by operations, net proceeds from the Company's private and
public sales of securities and borrowings from lending institutions.
At December 31, 1997, the Company had consolidated cash and short-term
investments totalling $12.7 million and working capital of $15.8 million. At
June 30, 1997, the Company had consolidated cash and short-term investments
totalling $2.1 million and working capital of $2.3 million. The increase in
working capital at December 31, 1997 was due primarily to the proceeds of the
Company's public offering of Common Stock, which was consummated in December
1997 and which resulted in net proceeds to the Company of approximately $15.9
million. In addition, during the six months ended December 31, 1997 the Company
received the proceeds of the exercise of warrants to purchase Common Stock in
the amount of approximately $2.7 million.
Net cash provided by operating activities for fiscal 1997 was $10.5
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 receivable. 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.
Net cash provided by operating activities during the six months ended
December 31, 1997 was $682,000, consisting primarily of a decrease in accounts
receivable plus depreciation and amortization, offset in part by a decrease in
accounts payable and accrued expenses and an increase in inventory. Net cash
used in investing activities during the six months ended December 31, 1997 was
$1.4 million, consisting primarily of cash used for the additional purchase
price for Easy Gardener, Inc. and purchases of furniture and equipment.
Net cash provided by financing activities during the six months ended
December 31, 1997 was $11.4 million, consisting of the $15.9 million from the
Company's public offering and $2.7 million from the exercise of warrants to
purchase Common Stock, offset in part by $6.3 million of payments of
outstanding notes payable and $3.2 million to repurchase certain Unit Purchase
Options.
At December 31, 1997, the Company had consolidated term debt of $20.3
million which included debt incurred pursuant to the Refinancing and consisted
of outstanding Term Loans I and II (as defined below) of $18 million and $2.25
million.
In connection with the acquisition of Weatherly, Easy Gardener entered
into the Credit Agreement with the Lenders. Pursuant to the Credit Agreement,
the Lenders have provided the Company with the following revolving credit and
term loan facilities:
(a) Revolving Credit Facility: The maximum amount available for borrowing
under the revolving credit facility (the "Revolving Credit Facility") from time
to time is equal to the lesser of $13.0 million and a borrowing base determined
by reference to specified percentages of Easy Gardener's consolidated accounts
receivable and inventory deemed to be "eligible" by the Lenders. As of December
31, 1997, based on this formula, $4.5 million was available for borrowing and
$2.2 million 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. In February 1998, the Revolving Credit Facility was amended to provide
the Company with a maximum amount available for borrowing thereunder of $20.0
million.
Revolving credit loans bear interest at an annual rate chosen by Easy
Gardener based on the prime rate of one of the lenders or the London Inter-Bank
Offered Rate ("LIBOR") plus an applicable marginal rate. Under certain
circumstances, outstanding prime rate loans may be converted to LIBOR rate
loans at the Company's
38
<PAGE>
option. At December 31, 1997, the effective annual rate for outstanding
borrowings under the Revolving Credit Facility was 9.75%. The Revolving Credit
Facility expires on June 30, 2002 (the "Expiration Date") and all outstanding
revolving credit loans are then due. In addition, for a 10-day period in August
of each year, all outstanding revolving credit loans must be paid and no
revolving credit loans may be borrowed. Revolving credit loans may be prepaid
at any time. However, if Easy Gardener elects to terminate the Revolving Credit
Facility prior to the Expiration Date, the outstanding balance must be prepaid
together with a premium of from 1% to 2% of the "Average Yearly Loan Balance"
(as defined in the Credit Agreement) under the Revolving Credit Facility.
(b) Term Loan Facility: Pursuant to this facility, Easy Gardener obtained
three term loans (the "Term Loans"), one in the principal amount of $23.0
million ("Term Loan I"), $18.0 million of which was outstanding at December 31,
1997, one in the principal amount of $2.25 million ("Term Loan II"), all of
which was outstanding at December 31, 1997, and one in the principal amount of
$3.8 million ("Term Loan III"), all of which was paid in full and expired in
November 1997. At December 31, 1997, the effective annual rate of interest for
Term Loan I was 9.75%. At December 31, 1997, the effective annual rate of
interest for Term Loan II was 14.5%. In connection with the Company's
acquisition of Weed Wizard, Inc, in February 1998 Term Loan I and Term Loan II
were consolidated into a single term loan (the "Term Loan") and the balance of
the Term Loan was increased to $30.3 million. The Term Loan matures on the
Expiration Date. The Term is payable in quarterly installments of principal
commencing March 31, 1998. The Term Loan 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
the Term Loan from a prime rate loan to a LIBOR rate loan. As of the date of
this Prospectus the Term Loan bears interest at 9.75%. Interest on the Term
Loan 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 the Term Loan
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. The Term
Loan 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 the Term Loan on account of "excess cash
flow", if any, will be due in October of the following fiscal year. No
mandatory prepayment under the Term Loans was due in October 1997.
Easy Gardener's obligation to pay the principal of, interest on, premium,
if any, and all other amounts payable on account of the Revolving Credit
Facility and the Term Loan is secured by substantially all of the assets of
Easy Gardener and its subsidiaries and the irrevocable guaranties of the
Company and Easy Gardener's subsidiaries. Upon the occurrence of an event of
default specified in the Credit Agreement, the maturity of the outstanding
principal amounts of the Revolving Credit Facility and the Term Loan may be
accelerated by the lenders who may also foreclose on the secured assets of Easy
Gardener and its subsidiaries.
Under the Credit Agreement (a) Easy Gardener is required, among other
things, to comply with certain limitations on incurring additional
indebtedness, liens, guaranties, capital and operating lease expenses in excess
of a specified amount per year, and sales of assets and payment of dividends
and (b) Easy Gardener and the Company must comply with certain limitations on
merger, liquidations, changes in business, investments, loans and advances, or
certain acquisition of subsidiaries. In addition, Easy Gardener must comply
with certain minimum interest coverage, debt service and fixed charge rates,
not permit its Net Worth (as defined in the Credit Agreement) to be less than
certain amounts and generate certain minimum amounts of income before interest
expenses, taxes, depreciation and amortization. A violation of any of these
covenants constitutes an event of default under the Credit Agreement.
The Company intends to use substantially all of the proceeds from the sale
of the Junior Subordinated Debentures to repay the entire indebtedness
outstanding under the Credit Facility. As a result of the early payment, the
Company will write off deferred financing costs of approximately $1.4 million
and incur a prepayment penalty of approximately $735,000 during its quarter
ending June 30, 1998 which will reduce its reported income. Upon repayment of
the outstanding indebtedness, the Credit Facility will be terminated and the
Company will have no alternate sources of financing. Although the Company is
currently negotiating new credit facilities with several banks, there can be no
assurance that the Company will be able to obtain a new credit facility on
terms acceptable to it, or at all. Failure to obtain a new credit facility
would materially adversely affect the Company's operations.
39
<PAGE>
As of December 31, 1997, the Company had a deferred tax liability of
$650,000 and a deferred tax asset of $1.1 million (net of a $302,000 valuation
allowance), the majority of which relates to the tax benefit associated with
the accumulated net operating losses of approximately $3.4 million for Federal
income tax purposes which expire in 2011. For California income tax purposes,
the Company accumulated net operating losses of approximately $3.6 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 $302,000 tax benefit associated with the California net operating
loss carryovers.
In January 1997, the Company borrowed $550,000 in the aggregate from
certain lenders. The loans were used to satisfy short term working capital
requirements. In July 1997, the Company repaid $200,000 of the loans and the
$350,000 balance was converted into 154,000 shares of Common Stock.
The Department of Labor has recently advised the Company that it is
examining the method used by the Company to calculate overtime wage payments
and whether the Company should be required to pay certain workers at its Waco,
Texas facilities additional monies as a result thereof. Although there can be
no assurance, the Company believes that any payments it will be required to
make will not have a material adverse effect on the Company.
The Company anticipates spending approximately $4.0 million, including
anticipated use of a portion of existing trade credits, in the fiscal year
ending June 30, 1998 on a combination of media development, print, radio and
television advertising, co-operative advertising (advertising done in
conjunction with retailers), and attendance at trade shows and public relations
to promote awareness, understanding and brand identification of its lawn and
garden products.
In May 1997, the Company purchased from Plastic Molded Concepts, Inc.
certain assets relating to its Plasti-Chain Line of products for approximately
$4.3 million. The purchase price was paid through the use of the Revolving
Credit Facility and Term Loan III.
In February 1998, the Company completed its acquisition of Weed Wizard,
Inc. for a purchase price of approximately $16.0 million, of which
approximately $5.0 million was based on the value of certain current assets
acquired.
In March 1998 the Company completed its acquisition of substantially all
of the assets of Landmaster Products, Inc. for a purchase price of
approximately $3.0 million, of which approximately $750,000 was based on the
value of certain net assets acquired.
The Company has entered into a non-binding letter of intent to purchase a
manufacturer and distributor of outdoor lawn and garden products for
approximately $4.8 million.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
a Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which is effective for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 requires the calculation and presentation of
basic earnings per share (giving no dilutive effect to derivative securities)
and dilutive earnings per share (reflecting the dilutive effect of all
derivative securities). Accordingly, the Company has adopted SFAS No. 128 in
its December 31, 1997 interim financial statements. As required by SFAS No.
128, all prior earnings have been restated to reflect the retroactive
application of this pronouncement.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
40
<PAGE>
BUSINESS
General
The Company is a leading manufacturer and marketer of a broad range of
consumer lawn and garden products. The Company's products include weed
preventive landscape fabrics, fertilizer spikes, decorative landscape edging,
shade cloth, root feeders and weed trimmer replacement heads, which are sold
under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald Edge(R),
Shade FabricTM, Ross(R) and Weed WizardTM. The Company believes that it has
significant market share and brand-name recognition in several of its primary
product categories. The Company markets its products through most large
national home improvement and mass merchant retailers ("Retail Accounts"),
including Home Depot, Lowe's, Kmart, Builder's Square, Wal-Mart and Home Base.
The Company has experienced significant growth in recent years and
believes that its success has been primarily attributable to the expansion of
its product lines through the acquisition of complementary lawn and garden
businesses, the quality of its products, its focus on providing Retail Accounts
with a single source of lawn and garden products, the efficiency and
reliability of its inventory tracking and order fulfillment systems and its
distinctive advertising and store displays.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the
number of vendors needed to source high volume lawn and garden products, the
preference among home improvement and mass merchant retailers has shifted
towards single source suppliers that offer broad product lines of consumer
brand-name merchandise and the product support necessary to stimulate
consumer demand and ensure timely and cost effective order fulfillment. Smaller
regional suppliers generally lack the capital and other resources necessary to
offer the variety and number of product lines, the product support and the
inventory stocking and tracking capabilities required by home improvement and
mass merchant retailers.
Regional manufacturers, distributors and marketers are now largely
fragmented and the Company believes that many of them are attractive
acquisition candidates for larger, single source suppliers and distributors in
the lawn and garden industry. The Company has historically been successful in
locating, acquiring and integrating certain of these manufacturers and
distributors into its business and intends to continue its acquisition program
as a principal component of its growth strategy.
According to the 1996-1997 National Gardening Survey, 1996 retail sales of
lawn and garden products were approximately $22 billion, and 64% of the
approximately 101 million households in the United States participated in some
form of gardening activity during 1996. In addition, sales growth in the lawn
and garden industry is being driven in part by the aging of the "baby boomer"
consumer segment. According to the National Gardening Survey, persons 50 years
of age and older spent an average of $400 per household on lawn and garden
activities in 1996.
Business Strategy
The Company's business objective is to be a leading single source supplier
to Retail Accounts and its strategy includes the following key components:
o Market Low-Cost, High-Margin Products. The Company focuses on
manufacturing and marketing low-cost, high-margin products, such as
landscape fabric, fertilizer spikes, landscape edging, shade cloth and
root feeders, with suggested retail prices generally ranging from $2 to
$30. The Company believes that such point-of-purchase products stimulate
impulse buying by consumers and provide high margins with relatively low
price sensitivity.
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o Supply a Wide Variety of Products. The Company supplies Retail Accounts
with several product lines, such as landscape fabric, fertilizer spikes,
landscape edging, shade cloth and root feeders. Within such product
categories the Company offers a broad range of products. For example, the
Company's landscape fabrics are available in both woven and non-woven
fabrics of varying grades of thickness. Similarly, the Company's
fertilizer, plant food and insecticide spikes are designed for a wide
variety of indoor and outdoor plants, including multiple types of trees,
flowers, vegetable plants and shrubs.
o Capitalize on Point-of-Purchase Displays. The Company utilizes
distinctive packaging and point-of-purchase product displays, new product
introductions and other merchandising techniques to stimulate consumer
purchases. The Company's sales representatives periodically visit
individual Retail Accounts to assist them in achieving innovative and
optimal use of the Company's product displays through prominent product
placement and inventory management.
o Utilize Marketing and Advertising Programs. The Company uses national and
regional marketing and advertising programs to generate consumer
brand-name recognition of its product lines. The Company retains agencies
that market and advertise its products through television programs,
newspaper inserts and weekly circulars.
o Promote Retail Account Satisfaction. The Company promotes Retail Account
satisfaction by providing timely and efficient order fulfillment services.
The Company maintains a sophisticated retail data information system which
enables it to provide timely order fulfillment so that Retail Accounts are
not required to maintain a large inventory of the Company's products.
Growth Strategy
The Company attributes its historical growth and success to its ability to
capitalize on the consolidation of the lawn and garden industry by locating,
acquiring and effectively integrating acquisition targets and its ability to
act as an efficient single source supplier of a broad range of quality
products. The Company intends to continue this growth strategy, which consists
of the following principal components:
o Pursue Additional Strategic Acquisitions. The Company plans to continue
its primary strategy of acquiring complementary lawn and garden companies
and product lines. The Company has consummated seven (7) such acquisitions
since 1992 and recently entered into a non-binding letter of intent to
acquire another lawn and garden product business. By consolidating
companies with complementary product lines, the Company believes it can
capitalize on its existing channels of distribution and gain market share
by increasing sales to its Retail Accounts.
o Increase Brand Awareness. The Company intends to enhance existing
consumer brand awareness by expanding its advertising and marketing
efforts with an emphasis on its Jobe's fertilizer spikes, a
nationally-recognized brand name. The Company believes that the
modernization of its Jobe's packaging, together with a national television
advertising campaign targeted at the "baby boomer" consumer segment, will
allow it to further capitalize on its brand-name recognition.
o Utilize Existing Infrastructure. The Company's management and
administration infrastructure has been designed to accommodate the
integration of additional products when suitable lawn and garden companies
and product lines are acquired. The Company believes that its ability to
efficiently integrate new businesses and product lines into its existing
infrastructure will result in significant savings in the areas of
management, distribution, marketing and customer service. The Company also
believes that its infrastructure, including its on-line inventory tracking
and order fulfillment capabilities, allows it to be an effective and
efficient source of lawn and garden products for Retail Accounts.
o Focus on High-Volume Retailers. National high-volume retailers such as
the Company's Retail Accounts are gaining an increasing share of the lawn
and garden retail market. By focusing on the emergence of high-volume
retailers and their needs, including providing broad product lines, order
fulfillment capabilities and marketing and merchandising programs, the
Company believes that it will increase its market share and enhance its
position as a leading single source supplier of lawn and garden products.
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Recent and Proposed Acquisitions
Since August 1992, the Company has consummated the following seven (7)
acquisitions of lawn and garden companies or product lines for a total of over
$75.0 million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which was acquired in
August 1992 for approximately $1.1 million in cash and $1.1 million of
promissory notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock(R), which was acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5
million promissory note and two convertible notes each in the principal
amount of $1.0 million. Approximately $2.2 million of additional purchase
price was contingent on Easy Gardener meeting certain income requirements.
A total of approximately $1.2 million of the additional amount has been
paid to date and the remaining $1.0 million is payable in fiscal 1999.
o Emerald Products LLC. A manufacturer of decorative landscape edging,
which was acquired in August 1995 for $835,000 in cash and a $100,000
promissory note.
o Weatherly Consumer Products Group, Inc. A manufacturer of fertilizer
spikes and other lawn and garden products, which was acquired in August
1996 for 1,000,000 shares of Common Stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which was acquired from
Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3 million
in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, which was acquired in February 1998 for approximately
$16.0 million, of which approximately $5.0 million was based on the value
of certain net assets acquired. For its 1996 and 1997 fiscal years, Weed
Wizard Inc. achieved net income of $900,000 and $900,000 on revenues of
$8.0 and $7.1 million, respectively. The decrease in revenues was
primarily the result of a decrease in aggregate sales of Weed Wizard and
Weed Wizard II (the "Weed Wizard Line") of over $3.0 million in 1997 from
their 1996 levels. Sales of the Weed Wizard Line decreased mainly due to
(i) Weed Wizard Inc's. decision to allow its retail customers to replace
their inventories of older models of the Weed Wizard Line for improved
models of such products at no cost and (ii) unfavorable weather conditions
in 1997. Although Weed Wizard Inc. believes that allowing the replacement
of the older inventory at no cost generated goodwill with its retail
customers, no assurance can be given that sales of the Weed Wizard Line
will return to their 1996 levels.
o Landmaster Products, Inc. A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for
approximately $3.0 million, of which approximately $750,000 was based on
the value of certain assets acquired.
In addition, the Company has entered into a non-binding letter of intent
to purchase a manufacturer and distributor of lawn and garden products for
approximately $4.8 million.
Products
Landscape Fabric. The Company markets different types of landscape fabric
in varying thicknesses and strengths under the trade names WeedBlock, WeedBlock
6TM, MicroPore(R), Pro WeedBlockTM and WeedShieldTM. Landscape fabrics allow
water, nutrients and oxygen to filter through to soil but prevent weed growth
by blocking sunlight to prevent seeds from germinating. The Company's primary
landscape fabrics are made from non-woven fabrics which are generally
manufactured with extruded polymers, pressed or vacuum formed into thin sheets
having the feel and texture of light plastics. For the fiscal years ended June
30, 1995, 1996 and 1997, sales of landscape fabrics represented 71%, 66% and
44%, respectively, of the Company's net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer and plant food
spikes deliver plant nutrients directly to the root of the plant, as an
alternative method of maintaining plant health to surface-delivered liquid or
solid fertilizers. Some of the Company's fertilizer spikes have the added
feature of containing an insecticide for the control of unwanted insects. The
Company markets a variety of indoor and outdoor specialty fertilizer and plant
food spikes primarily under the Jobe's tradename, one of the most recognized
brands in the consumer lawn and garden industry. For the fiscal year ended June
30, 1997, sales of fertilizer, plant food and insecticide spikes represented
approximately 24% of the Company's net sales.
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Landscape Edging. The Company markets a variety of resin-based decorative
landscape edgings under trade names including Emerald Edge and Terra Cotta
Tiles. The Company's decorative edgings are used by consumers to enclose or
define the perimeter of planting areas with a variety of designs which include
stone, log, terra cotta tiles and picket fences. The Company recently acquired
the Plasti-Chain line of products, which include additional styles of
decorative landscape edgings.
Shade Cloth. The Company markets shade cloth fabrics in a variety of sizes
and colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy and/or
protection from wind for people, plants and pets. The Company markets shade
cloth fabrics as an exclusive United States retail distributor of a shade cloth
manufacturer pursuant to an agreement that expires on September 30, 1998
(unless renewed at the option of the Company for an additional two-year
period).
Fertilizers and Root Feeders. The Company markets fertilizers under the
Ross trade name. The Ross fertilizer, when applied through a Ross root feeder,
a long steel irrigation tube with a hose connector that is inserted deep into
the ground, provides the homeowner with a means of deep feeding and irrigating
trees and shrubs. The Ross root feeder may also be used without fertilizer as a
deep watering device.
Weed Trimmer Replacement Heads. The Company also manufactures and
distributes replacement heads for string weed trimmer products under the Weed
Wizard trademark. The Company's weed trimmer replacement head products consist
of a replacement casing containing either a chain link for heavy duty use or a
plastic blade for routine weed and grass trimming. The products are part of a
multi fit system offered by the Company, which allows the replacement heads to
fit on virtually all consumer gas weed trimmers and most consumer electric weed
trimmers.
Other Products. In addition to landscape fabrics, fertilizer, plant food
and insecticide spikes, landscape edging, shade cloth and root feeders, the
Company also sells complementary lawn and garden products for the home
gardener. The products include a line of animal repellents that are formulated
to deter dogs, cats, deer and rabbits from destroying garden and landscape
environs, a variety of protective plant and tree covers, bird and animal mesh
blocks, protective garden and tree netting to prevent animal damage, synthetic
mulch and fabric pegs.
Agricultural Products. The Company, through Golden West, manufactures and
distributes certain humic acid-based agricultural products for use on farms and
orchards. Golden West generally sells its products to agricultural
distributors, which in turn market Golden West's products to farms and
orchards. The principal agricultural products manufactured and/or distributed
by the Company are: Energizer(R), a formulation of humic acids which, when
applied in conjunction with liquid fertilizers, permits crops to absorb a
greater amount of the nutrients in the fertilizer; Penox(R), a surfactant, or
penetrating wetting agent, that contains humic acid which, when applied in
conjunction with herbicides, defoliants and other agricultural products,
increases their effectiveness and Powergizer(R), a foliar nutrient, or plant
food, containing humic acid which promotes growth and vigor in many types of
crops. Sales of the Company's agricultural products accounted for less than 2%
of the Company's net sales in fiscal 1997.
Conversion, Manufacturing and Supply
Lawn and Garden Products
Except for the materials for WeedBlock, which are obtained from a single
source, the basic materials for the Company's lawn and garden products are
purchased from a variety of suppliers. All of such materials are converted,
packaged and shipped by the Company from either its Waco, Texas facility or its
Paris, Kentucky facility.
The Company purchases all of the landscape fabric used to manufacture
WeedBlock from Tredegar. The Company purchases large rolls of various types of
landscape fabric for shipment to its Waco, Texas facility where it sizes, cuts
and packages the fabric for consumer sale. Although the Company has purchased
all of its supply from Tredegar for over 10 years and believes that its
relationship with Tredegar is good, Tredegar is free to terminate its
relationship with the Company at any time and accordingly could market its
fabrics to other companies, including competitors of the Company. Nevertheless,
the Company owns the registered trademark "WeedBlock(R)" and, to the extent
that it establishes alternative supply arrangements, its rights to market
products under the WeedBlock brand name would continue without restriction.
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The Company manufactures and packages its Jobe's fertilizer spikes at its
Paris, Kentucky facility. The raw materials that comprise the Company's indoor
fertilizer spikes are mixed with a binding agent and then passed through an
extrusion process which feeds a continuous strand of fertilizer through a
heat-drying system. The strand is then cut into ready to use fertilizer spikes
which are then machine counted and packaged as shelf-ready product. The
Company's outdoor fertilizer spikes are manufactured in a similar manner except
rather than passing through an extrusion process, the outdoor spikes are
processed through molds which shape the spikes into their final form. The
outdoor spikes are packaged in either a foil pouch, bag or box.
The specifications for the Company's landscape edging, shade cloth and
root feeder products and packaging are designed by the Company and independent
design consultants. The products are then manufactured and packaged by third
party manufacturers according to the Company's specifications.
The nylon product body (rotary head) and the plastic blades and the chain
links used in the Company's weed trimmer replacement heads are manufactured for
the Company pursuant to open purchaser orders. The Company assembles and
packages the weed trimmer replacement heads with the aid of an electronic
packaging machine.
Agricultural Products
The Company does not own or lease any manufacturing facilities for its
agricultural products. Substantially all of the Company's humic acid-based
agricultural products, including Energizer, Penox and Powergizer, are processed
by Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders
placed by the Company from time to time in the ordinary course of business. The
Company, through Western Farm, also has an open purchase order arrangement with
an entity which supplies it with leonardite ore, a source of humic acid used in
its agricultural products.
Customers
The Company's customers include home improvement centers, mass
merchandisers, hardware stores, nurseries and garden centers and other retail
channels throughout the United States. The Company's three largest customers
for fiscal 1997, Home Depot, Lowe's and Kmart, accounted for approximately 26%,
10% and 7%, respectively, of its net sales during such year. During fiscal
1996, Home Depot, Lowe's, Kmart and Builder's Square accounted for 27%, 9%, 7%
and 5%, respectively, of the Company's net sales. During fiscal 1995, sales to
Home Depot, Kmart, Builder's Square and Lowe's accounted for approximately 27%,
9%, 7% and 6%, respectively, of the Company's net sales. The Company's ten
largest customers as a group accounted for 69% and 65% of its net sales during
fiscal 1996 and 1997, respectively. Sales to such customers are not governed by
any contractual arrangement and are made pursuant to standard purchase orders.
While the Company believes that relations with its largest customers are good,
the loss of any of these customers could have an adverse effect upon the
results of operations of the Company. The Company's sales are concentrated in
the United States, with international sales (primarily Europe and Canada)
accounting for less than 2% of the Company's net sales for fiscal 1996 and
fiscal 1997. The Company is currently attempting to develop relationships with
distributors outside of the United States.
Sales and Marketing
The Company's sales efforts are coordinated by its national sales manager,
whose duties include overseeing key accounts and directing the activities of
the Company's 8 regional sales managers. Because of the service-oriented nature
of the Company's business, the national and regional sales managers devote a
substantial amount of their time to servicing and maintaining relationships
with the Company's largest customers in addition to managing the overall sales
operations. The Company also utilizes the services of over 39 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.
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The Company expects that its lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and
in-store consumer promotions in Retail Accounts, hardware stores, nurseries and
garden centers. In addition, the Company believes that a substantial portion of
lawn and garden sales are impulse driven and not overly price sensitive.
Therefore, the Company seeks to increase consumer awareness, understanding and
brand identification of its products through its distinctive packaging and
point-of-sale displays. Retail Accounts and the Company's other customers
receive the Company's products in packaging that is easily displayed. The
retail product packaging is informative to the end-user and incorporates
attention-getting, eye-pleasing color schemes. The Company also tailors its
displays to the evolving needs of retailers. Because many home improvement and
mass merchant retailers maintain outdoor sales areas for their lawn and garden
products, the Company utilizes waterproof displays for many of its products. In
addition, the Company meets the specific needs of many of its larger customers
by tailoring the size of its displays to the dimensions requested by such
customers. The Company's independent sales representatives periodically visit
individual retail outlets to replenish product, rearrange displays and
otherwise assist Retail Accounts in achieving innovative and optimal use of the
Company's distinctive store displays.
In order to anticipate and react quickly to changing consumer preferences,
the Company also engages in market research. During fiscal 1997 the Company
conducted consumer market research and a regional media advertising campaign of
its Jobe's spikes product line to determine the effectiveness of such
advertising in increasing product line sales. Based on the positive data
derived from such research, the Company intends to focus its advertising and
promotional campaign on the Jobe's brand name, as well as on the Easy Gardener
and Emerald Edge brand names.
Prior to the Company's acquisition of Weatherly, brand recognition of
Jobe's product line was not heavily promoted. In order to enhance the consumer
recognition of the Jobe's name, the Company has recently or intends to:
o Modernize Packaging. The Company has recently redesigned the packaging of
the Jobe's products to make more attention getting, eye-pleasing and
informative and instructional as to product purpose and use in order to
increase impulse purchasing.
o Assist Retail Accounts. The Company will continue its current process of
assisting Retail Accounts in their inventory purchasing, in-store product
placement and the implementation of innovative and optimal use of the
distinctive displays for Jobe's products.
o Advertise Nationally. The Company has recently commenced a national
television advertising campaign designed to target the "baby boomer"
consumer segment, which represents the largest lawn and garden consumer
segment. The campaign, which was created by the Company's advertising
agency, will appear primarily on programming on national cable channels
with favorable "baby boomer" viewing demographics, such as CNN or CNBC.
The Company will also continue to engage in co-operative advertising with
its Retail Accounts primarily through national and regional weekly print
advertising circulars during the primary lawn and garden season.
The Company anticipates spending approximately $4.0 million, including
anticipated use of a portion of existing trade credits, in the fiscal year
ending June 30, 1998 on a combination of media development, print, radio and
television advertising, co-operative advertising (advertising done in
conjunction with retailers), and attendance at trade shows and public relations
to promote awareness, understanding and brand identification of its lawn and
garden products.
The Company intends to utilize a substantial portion of its marketing
budget for the fiscal year ending June 30, 1998 on the enhancement of
brand-name recognition of the Jobe's product line. There can be no assurance
that any attempt to increase such recognition will be successful or have any
favorable effect on the Company's net sales.
Information Systems
The Company maintains a sophisticated retail data information system which
enables it to track orders and provide timely and efficient order fulfillment
to its Retail Accounts and other customers. Internally, the Company's
information systems track orders and deliveries and provide exception reports
if product is not delivered on
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time. The systems "push" the necessary information to the proper personnel,
allowing the Company to react quickly to information. The Company's purchase
order process can be paperless, with most Retail Accounts placing their orders
through an electronic data interchange with the Company.
Seasonality
The Company sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer. Sales of the Company's agricultural products
are also seasonal. Most shipments occur during the agricultural cultivation
period from March through October.
Inventory and Distribution
In order to meet product demand, the Company keeps relatively large
amounts of product inventory on hand, particularly from December to May, the
months of highest demand. Despite maintaining these relatively high levels of
inventory, historically the Company has experienced minimal inventory
obsolescence. There can be no assurance that inventory obsolescence will not be
higher in the future. Retail Accounts generally require delivery within five
business days. Orders are generally processed within 48 hours and shipped by
common carrier.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. The Company competes with a combination of national and
regional companies ranging from large petrochemical companies to garden catalog
businesses and companies specializing in the manufacture of lawn and garden
care products. Several of such companies, such as Solaris Group, a division of
Monsanto Company, and Scotts' Miracle-Gro Products, Inc. have captured a
significant, and in certain cases controlling, share of such markets. Many of
the Company's competitors have achieved significant national, regional and
local brand name and product recognition and engage in frequent and extensive
advertising and promotional programs, both generally and in response to efforts
by new competitors entering the market or existing competitors introducing new
products. Many of these companies have substantially greater financial,
technical, marketing and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully or that
reacting to competitive pressures will not materially adversely affect the
Company.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the Solaris Group and other lawn and garden care companies
have, in the past, manufactured and marketed landscape fabrics. Currently, few
of such competitors compete with the Company in this industry. Nevertheless,
well capitalized companies and smaller regional firms may develop and market
landscape fabrics and compete with the Company for customers who purchase such
products.
Among the Company's competitors in the lawn and garden market for the
Jobe's line of fertilizer and insecticide spikes are large agri-chemical
companies such as Solaris Group and Scotts' Miracle-Gro Products, Inc.
Competition for the Company's agricultural products consist of other
manufacturers of products that are humic acid based but that utilize formulas
that are different from Golden West's. These competitors include American
Colloid Company, Monterey Chemical Corporation and Custom Chemicide Inc. The
Company competes with a variety of regional lawn and garden manufacturers in
the markets for landscape edging, shade cloth and root feeders. Competition for
the Company's weed trimmer replacement heads consists of other manufacturers of
weed trimming replacement part products using nylon based lines and blades.
These include The Source Company.
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.
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Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by the Company as fertilizers or pesticides are subject to an
extensive and frequently evolving statutory and regulatory framework, at both
the Federal and state levels. The distribution and sale of pesticides is
subject to regulation by the U.S. Environmental Protection Agency ("EPA")
pursuant to the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"),
as well as regulation by many states in a manner similar to FIFRA. Under FIFRA
and similar state laws, all pesticides must be registered with the EPA and
state and must be approved for their intended use. FIFRA and state regulations
also impose other stringent requirements on the marketing of such products.
Moreover, many states also impose similar requirements upon products marketed
for use as fertilizing materials, which are not typically regulated under
FIFRA. Failure to comply with the requirements of FIFRA and state laws that
regulate marketing and distribution of pesticides and fertilizers could result
in the imposition of sanctions, including, but not limited to, suspension or
restriction of product distribution, civil penalties or criminal sanctions.
The Company markets certain animal repellent and pesticide products that
are subject to FIFRA and to similar state regulations. The Company also markets
certain fertilizer products that are subject to regulation in some states. The
Company believes that it is in material compliance with FIFRA and applicable
state regulations regarding its material business operations. However, there
can be no assurance that the Company will be able to comply with future
regulations in every jurisdiction in which the Company's material business
operations are conducted without substantial cost or interruption of
operations. Moreover, there can be no assurance that future products marketed
by the Company will not also be subject to FIFRA or to state regulations. If
future costs of compliance with regulations governing pesticides or fertilizers
increase or exceed the Company's budgets for such items, the Company's business
could be adversely affected. If any of the Company's products are distributed
and/or marketed in violation of any of these regulations, the Company could be
subject to a recall of, or a sales limitation placed on, one or more of its
products, or civil or criminal sanctions, any of which could have a material
adverse effect upon the Company's business.
Environmental Regulation. The Company's manufacturing operations are
subject to various evolving federal, state and local laws and regulations
relating to the protection of the environment, which laws govern, among other
things, emissions to air, discharges to ground, surface water and groundwater,
and the generation, handling, storage, transportation, treatment and disposal
of a variety of hazardous and non-hazardous substances and wastes. Federal and
state environmental laws and regulations often require manufacturers to obtain
permits for these emissions and discharges. Failure to comply with
environmental laws or to obtain, or comply with, the necessary state and
federal permits can subject the manufacturer to substantial civil and criminal
penalties. Easy Gardener operates two manufacturing facilities and Weatherly
and Weed Wizard each operate one manufacturing facility. The Company believes
that all of its facilities are in substantial compliance with all applicable
material environmental laws. However, it is possible that there are material
environmental liabilities of which the Company is unaware. If the costs of
compliance with the various existing or future environmental laws and
regulations including any penalties which may be assessed for failure to obtain
necessary permits, exceed the Company's budgets for such items, the Company's
business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport or arrange for disposal of hazardous substances
at a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Weatherly and Weed Wizard each operate one manufacturing facility. Moreover,
the Company or its predecessors have owned or operated other manufacturing
facilities in the past and may have liability for remediation of such
facilities in the future, to the extent any is required. In this regard,
Weatherly previously owned a facility that was the subject of certain soil
remediation activities. Although this facility was sold by Weatherly prior to
the Company's acquisition of Weatherly, there can be no assurance that the
Company will not be liable for any previously existing environmental
contamination at the facility. Moreover, although the purchaser of the facility
indemnified Weatherly for any environmental contamination liability and the
sellers of Weatherly, in turn, indemnified the Company from such liability,
there can be no assurance that, if required, the indemnifying parties will be
able to fulfill their respective obligations to indemnify the Company.
Furthermore, certain business
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operations of the Company's subsidiaries also involve shipping hazardous waste
off-site for disposal. As a result, the Company could be subject to liability
under these statutes. The Company could also incur liability under CERCLA or
similar state statutes for any damage caused as a result of the release of
hazardous substances owned by the Company but processed and manufactured by
others on the Company's behalf. As a result, there can be no assurance that the
manufacture of the products sold by the Company will not subject the Company to
liability pursuant to CERCLA or a similar state statute. Furthermore, there can
be no assurance that Easy Gardener, Weatherly or Weed Wizard will not be
subject to liability relating to manufacturing facilities owned and/or operated
by them currently or in the past.
Other Regulations. The Company is also subject to various other federal,
state and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants.
Trademarks, Proprietary Information and Patents
The Company believes that product recognition is an important competitive
factor in the lawn and garden care products industry. Accordingly, in
connection with its marketing activities of its lawn and garden care products,
the Company promotes, and intends to promote, certain tradenames and trademarks
which are believed to have value to the Company.
In connection with its acquisition of the assets of Easy Gardener Inc. in
September 1994, the Company acquired certain trademarks used by Easy Gardener
Inc. in connection with its business including, but not limited to, the
trademarks WeedBlock(R), Easy Gardener(R), WeedShield, MicroPore and
Birdblock(R). In connection with its acquisition of Weatherly, the Company
acquired certain patents, as well as certain trademarks used in connection with
Weatherly's business including, but not limited to, Jobe's(R), Ross(R), Green
Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(R). The Company also acquired
certain patents and trademarks when it acquired the assets of Emerald Products
LLC and acquired trademarks with certain assets of Plastic Molded Concepts,
Inc. In connection with its acquisition of Weed Wizard, Inc., the Company
acquired the Weed WizardTM product patent and trademark. There can be no
assurance that the Company will apply for any additional trademark or patent
protections relating to its products or that its current trademarks and patents
will be enforceable or adequately protect the Company from infringement of its
proprietary rights.
Although the Company believes that the products sold by it do not infringe
upon the patents or violate the proprietary rights of others, it is possible
that such infringement or violation has or may occur. In the event that
products sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, the Company could be required to pay damages and
modify its products or obtain a license for the manufacture or sale of such
products. There can be no assurance that, in such an event, the Company would
be able to do so in a timely manner, upon acceptable terms and conditions or at
all, and the failure to do any of the foregoing could have a material adverse
effect upon the Company.
Product Liability
The Company, as a manufacturer of lawn and garden care and pesticide
products, may be exposed to significant product liability claims by consumers.
Although the Company has obtained product liability insurance coverage for U.S.
Home & Garden Inc. and Golden West in the aggregate amount of $3.0 million, and
for Easy Gardener, Weatherly and Weed Wizard in the aggregate amount of $2.0
million (with all policies limited to $1.0 million per occurrence), and has
obtained three umbrella policies in the amounts of $5.0 million, $15.0 million,
and $20.0 million, respectively, there can be no assurance that such insurance
will provide coverage for any claim against the Company or will be sufficient
to cover all possible liabilities. In the event a successful suit is brought
against the Company, unavailability or insufficiency of insurance coverage
could have a material adverse effect on the Company. Moreover, any adverse
publicity arising from claims made against the Company, even if such claims
were not successful, could adversely affect the reputation and sales of the
Company's products.
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,
49
<PAGE>
Dalen filed a counterclaim against Easy Gardener and a third party complaint
against the Company. Dalen alleges, among other things, that the Company and
Easy Gardener monopolized or attempted to monopolize the market for landscape
fabrics; that the Company and Easy Gardener tortiously interfered with Dalen's
contractual and prospective contractual relationships; and that Easy Gardener
infringed upon a Dalen trademark, deceptively advertised the thickness of one
of its products, and misrepresented the porosity of a Dalen product. Dalen's
counterclaim and third party complaint seek an award of unspecified damages and
the entry of unspecified injunctive relief. An adverse ruling could have a
material adverse effect on the Company.
Employees
As of March 31, 1998, the Company had 198 full-time employees. Of such
employees, three are executive officers of the Company, 42 were engaged in
administration and finance, 19 were engaged in sales and marketing, 35 were
engaged in warehouse, shipping and receiving, and 99 were engaged in
production. An additional 20 temporary employees were engaged in warehouse and
production. None of the Company's employees is covered by collective bargaining
agreements. The Company believes that it has a good relationship with its
employees.
Properties
The Company's executive offices are currently located in San Francisco,
California, in approximately 3,000 square feet of office space for which the
Company pays $10,275 per month in rent, which amount includes the costs of
utilities and janitorial services. The Company believes that its office space,
which it rents pursuant to a lease expiring in February 2001, is adequate for
the Company's planned future operations.
Easy Gardener leases approximately 200,000 square feet of office and
warehouse space in Waco, Texas for which the Company pays $18,544 per month in
rent pursuant to a lease agreement that expires on February 28, 2001. Easy
Gardener's facilities contain landscape fabric converters, packaging equipment
and warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $10,000 per month pursuant to a lease
that expires on June 30, 1998. 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. If the Company is unable to
extend such leases it believes that it will be able to lease a replacement
facility and warehouse space on commercially reasonable terms.
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.
With respect to the Company's weed trimmer replacement heads, the Company
leases, for nominal rent, a one story office/manufacturing facility of
approximately 50,600 feet in Dahlonega, Georgia pursuant to a lease that
expires in August 1998. If the Company is unable to extend such lease it
believes that it will be able to lease a replacement facility on commercially
reasonable terms.
The Trust
The Trust is a statutory business trust created under Delaware law
pursuant to (i) the trust agreement of the Trust among the Company, as
depositor, the Delaware Trustee and an Administrative Trustee, and (ii) the
filing of a Certificate of Trust with the Delaware Secretary of State on March
16, 1998. The Trust's business and affairs are conducted by the Property
Trustee, the Delaware Trustee and three individual Administrative Trustees who
are officers of the Company. The Trust exists for the exclusive purposes of (i)
issuing and selling the Trust Securities, (ii) using the proceeds from the sale
of the Trust Securities to acquire the Junior Subordinated Debentures issued by
the Company, and (iii) engaging in only those other activities necessary,
advisable or incidental thereto. The Junior Subordinated Debentures will be the
sole assets of the Trust, and payment by the Company under the Junior
Subordinated Debentures and the Expense Agreement will be the sole revenues of
the Trust. All of the Common Securities will be owned by the Company. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Trust Preferred Securities, except that upon the occurrence and
during
50
<PAGE>
the continuance of an event of default under the Trust Agreement resulting from
an event of default under the Indenture, the rights of the Company as holder of
the Common Securities to payment in respect of Distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of the Trust Preferred Securities. See "Description of the Trust
Preferred Securities--Subordination of Common Securities of the Trust Held by
the Company." The Company will acquire Common Securities in an aggregate
liquidation amount equal to approximately 3% of the total capital of the Trust.
The Trust has a term of 31 years, but may dissolve earlier as provided in the
Trust Agreement.
51
<PAGE>
MANAGEMENT
Directors, Executive Officers and Certain Key Employees
The current directors, executive officers and certain key employees of the
Company are as follows:
<TABLE>
<CAPTION>
Directors and Executive Officers Age Position
- ---------------------------------- ----- ------------------------------------------------------------------
<S> <C> <C>
Robert Kassel(1) ................. 57 Chairman of the Board, Chief Executive Officer, President and
Treasurer
Richard Raleigh(2) ............... 44 Chief Operating Officer and Director
Maureen Kassel ................... 50 Vice President of Public Relations and Advertising, Secretary and
Director
Jon Schulberg(1)(2) .............. 39 Director
Fred Heiden(1)(2) ................ 57 Director
</TABLE>
<TABLE>
<CAPTION>
Certain Key Employees
- ---------------------------
<S> <C> <C>
Richard M. Grandy ................ 52 President, Easy Gardener
Lynda Gustafson .................. 33 Vice President of Finance
Sheila Jones ..................... 43 Vice President of Operations, Easy Gardener
Paul Logue ....................... 41 National Sales Manager, Easy Gardener
</TABLE>
- ------------
(1) Member, Compensation Committee
(2) Member, Audit Committee
Directors and Executive Officers:
Robert Kassel co-founded the Company and has been Chairman of the Board,
Chief Executive Officer, President and Treasurer of the Company since October
1990. From 1985 to August 1991, he was a consultant to Comtel Communications,
Inc. ("Comtel"), a company specializing in the installation and operation of
telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real
estate developer in Long Island, New York and Santa Barbara, California. From
1965 to 1985, he was a practicing attorney in New York City, specializing in
corporate and securities law.
Richard Raleigh has been a Director of the Company since March 1993, Chief
Operating Officer of the Company since June 1992 and served as the Company's
Executive Vice President-Operations from December 1991 to June 1992. Prior to
joining the Company, Mr. Raleigh was a free-lance marketing consultant to the
lawn and garden industry from January 1991 to December 1991. From April 1988 to
January 1991, he was Director of Marketing, Lawn and the Company of Monsanto
Agricultural Co. From December 1986 to April 1988, he was Vice President of
Sales and Marketing of The Andersons, a company engaged in the sale of consumer
and professional lawn and garden products. From November 1978 to December 1986,
he held a variety of positions at The Andersons, including Operations Manager
and New Products Development Manager.
Maureen Kassel, the wife of Robert Kassel, co-founded the Company and has
been Vice President of Public Relations and Advertising and a director of the
Company since November 1990 and Secretary of the Company since February 1992.
For the last ten years, she has assisted in the general administration and
operation of real estate and other businesses. Ms. Kassel is Chairman of the
Board of Comtel.
Jon Schulberg, a director of the Company since March 1993, has been
employed as President of Schulberg MediaWorks, a company engaged in the
independent production of television programs and television advertising since
January 1992. From January 1989 to January 1992, he was a producer for
Guthy-Renker Corporation, a television production company. From September 1987
to January 1989, he was Director of Development for Eric Jones Productions.
Fred Heiden, a director of the Company since March 1993, has been a
private investor since November 1989. From April 1984 to November 1989, Mr.
Heiden was President and principal owner of Bonair Construction, a
Florida-based home improvement construction company.
52
<PAGE>
Certain Key Employees:
Richard M. Grandy has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of Easy
Gardener, Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy
Gardener, Inc. in 1983 after serving as Marketing Director at International
Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a
sales representative of lawn and garden products for the Ortho Division of
Chevron Chemical Co.
Lynda Gustafson has been Vice President of Finance of the Company since
September 1997 and served as Controller of the Company from November 1993 to
September 1997. From September 1990 through October 1993, Ms. Gustafson was a
supervisor of the Business Consulting Department of the certified public
accounting firm of Hood & Strong. From September 1988 to August 1990, she held
the positions of Staff Accountant and Senior Accountant at the certified public
accounting firm of Schwartz, McGuire & Co.
Sheila Jones has been Vice President of Easy Gardener since July 1997 and
has also served as its General Manager from September 1994. Prior to the
acquisition of Easy Gardener, Inc. by the Company, Ms. Jones was employed by
Easy Gardener, Inc. from its inception in September 1983 to September 1994,
where she advanced to the positions of Vice President and General Manager. From
April 1977 to September 1983, she was employed by International Spike, Inc.,
where she held various project management positions.
Paul Logue has been National Sales Manager of Easy Gardener since its
acquisition by the Company in September 1994. Prior to joining the Company, Mr.
Logue was employed by Easy Gardener, Inc. from September 1989 to September
1994, where he advanced from the position of Northeastern Regional Sales
Manager to National Sales Manager. From March 1988 to September 1989, he was
Regional Sales Manager for Hoffman Brand Fertilizers.
Executive Compensation
The following table discloses the compensation awarded by the Company, for
the three fiscal years ended June 30, 1995, 1996 and 1997, to Mr. Robert
Kassel, its Chief Executive Officer, and Mr. Richard J. Raleigh, its Chief
Operating Officer (together, the "Named Executives"). During the fiscal year
ended June 30, 1997, no other executive officer of the Company received a
salary that exceeded $100,000 during such fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------------------------------------
Long Term All Other
Name and Principal Position Year Salary($) Bonus($) Compensation Compensation (1)
- ----------------------------------- ------ ----------- ---------- ------------------ -----------------
Securities
Underlying
Options(#)
------------------
<S> <C> <C> <C> <C> <C>
Robert Kassel, 1997 350,000 250,000 1,200,000(2) 5,995
Chairman, Chief Executive 1996 250,000 100,000 200,000(3) --
Officer, President and Treasurer 1995 150,000 100,000 687,653(4) --
Richard Raleigh, 1997 195,000 111,275 500,000(2) 8,390
Chief Operating Officer 1996 150,000 10,000 100,000(3) --
1995 120,000 10,000 50,000(4) --
</TABLE>
- ------------
(1) Represents Company contributions to the Named Executives' 401(k) accounts.
(2) Includes options to purchase 200,000 shares previously granted to Mr.
Kassel and options to purchase 100,000 shares previously granted to Mr.
Raleigh whose exercise prices were repriced to reflect a reduction in the
market price of the Common Stock at the time of repricing. Does not
include options to purchase 50,000 shares previously granted to Mr.
Raleigh the expiration date of which was extended during fiscal 1997.
53
<PAGE>
(3) Includes five-year options to purchase 200,000 shares granted to Mr. Kassel
and five-year options to purchase 100,000 shares granted to Mr. Raleigh in
June 1995 under the Company's 1995 Stock Option Plan, which grants were
subject to stockholder approval of the plan obtained in February 1996.
(4) Does not include the options referenced in footnote (3) above.
The following table discloses information concerning options granted in
fiscal 1997 to the Named Executives.
Option Grants in Fiscal Year Ended June 30, 1997
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Securities Percent of Total Price
Underlying Options Granted to Exercise Appreciation for
Options Granted Employees in Fiscal Price Expiration Option
Name (#)(1) Year(%) ($/Sh) Date Term ($)(2)
- ----------------- ----------------- --------------------- ---------- ------------ ---------------------
5% 10%
--------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Kassel 350,000 19.8 2.06 7/24/01 199,199 440,177
450,000 25.5 2.06 8/30/01 256,113 565,943
200,000 11.3 2.06 12/24/01 113,828 251,530
200,000 11.3 2.06 6/01/00 113,828 251,530
Richard Raleigh 125,000 7.0 2.06 7/24/01 71,142 157,706
175,000 9.5 2.06 8/30/01 99,599 220,089
100,000 5.7 2.06 12/24/01 56,914 125,765
100,000 5.7 2.06 6/01/00 56,914 125,765
</TABLE>
- ------------
(1) All of such options were exercisable in full from the date of grant.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of options providing for termination of
the option following termination of employment or nontransferability of
the options and do not make any provision for taxes associated with
exercise. Because actual gains will depend upon, among other things,
future performance of the Common Stock, there can be no assurance that the
amounts reflected in this table will be achieved.
The following table sets forth information concerning the number of options
owned by the Named Executives and the value of any in-the-money unexercised
options as of June 30, 1997. No options were exercised by the Named Executives
during fiscal 1997:
Aggregated Option Exercises
And Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
June 30, 1997 June 30, 1997(1)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Robert Kassel ........... 2,067,653 -0- $3,214,598 $-0-
Richard Raleigh ......... 637,500 -0- $ 887,938 $-0-
</TABLE>
- ------------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end
market value of the Common Stock. An option is "in-the-money" if the fiscal
year-end fair market value of the Common Stock exceeds the option exercise
price. The last sale price (the fair market value) of the Common Stock on
June 30, 1997 was $3.375 per share.
54
<PAGE>
Employment Agreements
The Company has entered into employment agreements with Messrs. Kassel and
Raleigh, each dated as of April 1, 1996. Mr. Kassel currently serves as Chief
Executive Officer and President pursuant to the employment agreement for a term
expiring on March 31, 1999, subject to automatic renewal unless terminated. His
current annual salary is $450,000, and is subject to such bonuses and increases
as are approved at the discretion of the Board of Directors. Mr. Raleigh
currently serves as Chief Operating Officer pursuant to the employment
agreement for a term expiring on March 31, 1999, subject to automatic renewal
unless terminated. His current annual salary is $195,000, and is subject to
such bonuses and increases as are approved at the discretion of the Board of
Directors. Each 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). Each of Mr. Kassel and Mr. Raleigh is, in addition
to salary, entitled to certain fringe benefits, including the use of an
automobile and payment of related expenses.
Mr. Kassel's employment agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Kassel
upon a change of control of the Company, (as defined in the agreement) a
failure by the Company to comply with its obligations under the agreement, the
failure of the Company to obtain the assumption of the agreement by any
successor corporation, or a change in Mr. Kassel's duties and obligations from
those contemplated by the agreement, and termination by the Company of Mr.
Kassel's employment other than for disability or cause, he will be entitled to
receive severance pay equal to the greater of (i) $350,000 ($3.5 million in the
event of a change of control), or (ii) the total compensation earned by Mr.
Kassel from the Company during the one-year period (multiplied by ten in the
event of a change of control) prior to the date of his termination.
Mr. Raleigh's employment agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Raleigh
upon a change of control of the Company, (as defined in the agreement) a
failure by the Company to comply with its obligations under the agreement, the
failure of the Company to obtain the assumption of the agreement by any
successor corporation, or a change in Mr. Raleigh's duties and obligations from
those contemplated by the agreement, and termination by the Company of Mr.
Raleigh's employment other than for disability or cause, he will be entitled to
receive severance pay equal to the greater of (i) $162,500 ($812,500 in the
event of a change of control), or (ii) the total compensation earned by Mr.
Raleigh from the Company during the one-year period (multiplied by five in the
event of a change of control) prior to the date of his termination.
Easy Gardener has entered into an employment agreement with Mr. Grandy,
dated as of September 1, 1994 which expires on August 31, 1998. Mr. Grandy
currently serves as President of Easy Gardener. His current annual salary is
$200,000. 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 the agreement.
Committees of the Board of Directors
The Company recently established an Audit Committee comprised of Messrs.
Raleigh, Heiden and Schulberg. The Audit Committee will, among other things,
make recommendations to the Board of Directors with respect to the engagement
of the Company's independent certified public accountants and the review of the
scope and effect of the audit engagement. The Company recently established a
Compensation Committee of its Board of Directors, comprised of Messrs. Kassel,
Schulberg and Heiden. The Compensation Committee will, among other things, make
recommendations to the Board of Directors with respect to the compensation of
the executive officers of the Company. The Company maintains a Stock Option
Committee comprised of Messrs. Schulberg and Heiden, which determines the
persons to whom options should be granted under the Company's 1995 and 1997
Stock Option Plans and the number and other terms of options to be granted to
each person under such plans.
55
<PAGE>
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company did not have a Compensation Committee of its Board of
Directors during fiscal 1997. Decisions as to compensation during fiscal 1997
were made by the Company's Board of Directors. Messrs. Kassel and Raleigh, in
their capacity as directors, each participated in the Board of Directors
deliberations concerning compensation of executive officers for fiscal 1997.
During fiscal 1997, none of the executive officers of the Company served on the
Board of Directors or the compensation committee of any other entity, any of
whose officers served on the Board of Directors of the Company.
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 1991 Plan to employees and officers of the Company.
NQO's may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company.
The purpose of the 1991 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The 1991 Plan is administered by the
Board of Directors. The Board, within the limitations of the 1991 Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights in
the Company are to be imposed on shares subject to options.
ISOs granted under the 1991 Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any related
corporation) may not exceed $100,000. NQO's granted under the 1991 Plan may not
be granted at a price less than the fair market value of the Common Stock on
the date of grant. Options granted under the 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). Options to
acquire an aggregate of approximately 522,000 shares are outstanding under the
1991 Plan.
The Company has adopted, a Non-Employee Director Stock Option Plan (the
"Director Plan"). Only non-employee directors of the Company are eligible to
receive grants under the Director Plan. The Director Plan provides that
eligible directors automatically receive a grant of options to purchase 5,000
shares of Common stock at fair market value upon first becoming a director and,
thereafter, an annual grant, in January of each year, of 5,000 options at fair
market value. Options to purchase an aggregate of up to 100,000 shares of
Common Stock available for the automatic grants under the Director Plan.
Options to acquire an aggregate of 10,000 shares are outstanding under the
Director Plan.
The Company has also adopted a 1995 Stock Option Plan ("1995 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Stock Option Committee (the "Committee"),
as the case may be, will have discretion to determine the number of shares
subject to each NQO (subject to the number of shares available for grant under
the 1995 Plan and other limitations on grant set forth in the 1995 Plan), the
exercise price thereof (provided such price is not less than the par value of
the underlying shares of Common Stock), the term thereof (but not in excess of
10 years from the date of grant, subject to earlier termination in certain
circumstances), and the manner in which the option becomes exercisable
(amounts, intervals and other conditions). Directors who are employees of the
Company will be eligible to be granted ISOs or NQOs under such plan. The Board
or Committee, as the case may be, also has discretion to determine the number
of shares subject to each ISO, the exercise price and other terms and
conditions thereof,
56
<PAGE>
but their discretion as to the exercise price, the term of each ISO and the
number of ISOs that may vest may be in any year is limited by the same Code
provisions applicable to ISOs granted under the 1991 Plan. Options to acquire
an aggregate of approximately 1,460,000 shares are outstanding under the 1995
Plan.
The Company has adopted a 1997 Stock Option Plan ("1997 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Committee of the 1997 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 1997 Plan
and other limitations on grant set forth in the 1997 Plan), the exercise price
thereof (provided such price is not less than the par value of the underlying
shares of Common Stock), the term thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances),
and the manner in which the option becomes exercisable (amounts, intervals and
other conditions). Directors who are employees of the Company will be eligible
to be granted ISOs or NQOs under such plan. The Board or Committee, as the case
may be, also has discretion to determine the number of shares subject to each
ISO, the exercise price and other terms and conditions thereof, but their
discretion as to the exercise price, the term of each ISO and the number of
ISOs that may vest may be in any year is limited by the same Code provisions
applicable to ISOs granted under the 1991 Plan. Options to acquire an aggregate
of 615,000 shares are outstanding under the 1997 Plan.
The Company from time to time has also granted non-plan options to certain
officers, employees and consultants. See Note 9 of Notes to Consolidated
Financial Statements.
The Company has adopted a policy not to grant in the future to its
officers, directors, employees, 5% or greater stockholders or to affiliates of
the Company, any option or warrant having an exercise price less than 85% of
the then fair market value of the Common Stock.
The Company will not issue further options, warrants or other securities
convertible into the Common Stock prior to December 10, 1998, except for (i)
options, warrants, or convertible securities issued in connection with mergers
or acquisitions or in connection with financings obtained from unaffiliated
third parties and (ii) options to purchase shares of Common Stock pursuant to
the Director Plan.
Director Compensation
During fiscal 1997 each of the Company's two non-employee directors,
Messrs. Schulberg and Heiden, received $5,000 for serving as directors of the
Company.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information at March 31, 1998, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director, (iii) each Named Executive and (iv) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage
Name of Beneficial Owner(1) Ownership(2)(3) of Class
- ------------------------------- ------------------------------------ -----------
<S> <C> <C>
Maureen Kassel ................ 680,650(4) 3.3%
Robert Kassel ................. 4,482,095(5)(6) 20.1
Richard Raleigh ............... 621,731(7) 3.0
Fred Heiden ................... 258 *
Jon Schulberg ................. 258 *
Joseph Owens II(8) ............ 1,101,896(8) 5.5
Richard Grandy(8) ............. 1,101,896(8) 5.5
Warburg Pincus Asset
Management, Inc.(9) .......... 1,310,500(9) 6.5
All executive officers
and directors as a
group (five persons) ......... 5,429,342(4)(5)(6)(7) 23.3
</TABLE>
- ------------
*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 March 31, 1998 upon the
exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from March 31, 1998 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) 355,650 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 355,650 of the shares owned of record by her,
Robert Kassel may also be deemed to have beneficial ownership of such
shares; (ii) an aggregate of 914,396 shares are owned of record by each of
Messrs. Joseph Owens and Richard Grandy, who have each entered into a
voting trust agreement (the "Voting Agreement") providing Mr. Kassel with
the right to vote the shares until September 1, 2001.
(6) Includes 2,297,653 shares of Common Stock issuable upon exercise of
options and warrants.
(7) Represents shares of Common Stock issuable upon exercise of options and
warrants.
(8) Includes 162,500 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.
(9) According to a Schedule 13G filed with the Commission, the shares are held
by accounts for which Warburg Pincus Asset Management, Inc. acts as
investment advisor. The address of Warburg Pincus Asset Management, Inc.
is 466 Lexington Avenue, New York, New York 10017.
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CERTAIN TRANSACTIONS
To obtain a portion of the financing for the Company's acquisition of Easy
Gardener, Inc., Mr. Kassel provided for the benefit of the lender $500,000 cash
collateral and a personal guarantee of $333,000. In consideration of providing
such collateral and guarantee, the Company granted Mr. Kassel options to
purchase an aggregate of 526,300 shares of Common Stock for an aggregate
exercise price of approximately $822,000.
In connection with certain acquisitions, during fiscal 1997, the Company
granted five year non-plan options to Messrs. Kassel and Raleigh to purchase an
aggregate of 650,000 and 275,000 shares of Common Stock, respectively at an
exercise price of $2.0625 per share.
The Company will not issue further options, warrants or other securities
convertible into the Common Stock prior to December 10, 1998, except for (i)
options, warrants or convertible securities issued in connection with mergers
or acquisitions or in connection with financings obtained from unaffiliated
third parties and (ii) options to purchase shares of Common Stock which are
issued pursuant to the Director Plan. In addition, pursuant to an agreement
with the underwriters of its December 1997 public offering, the Company has
agreed not to issue any options, warrants or any other securities convertible
into Common Stock for the remainder of fiscal 1999, other than options,
warrants or any other securities convertible into up to an aggregate of 750,000
shares of Common Stock.
From time to time Messrs. Kassel and Raleigh have borrowed monies from the
Company. During fiscal 1997, the highest amounts owed to the Company by Messrs.
Kassel and Raleigh were $607,472 and $225,294, respectively, and at December
31, 1997, the balance of such indebtedness was $589,560 and $239,802,
respectively. The loans bear interest at 7% per annum and mature on June 30,
2002. Company loans to all officers of the Company are restricted to a maximum
of $850,000 by the terms of the Credit Agreement. Messrs. Kassel and Raleigh
will make annual payments of interest on the outstanding principal balance of
their loans through the maturity of the loans. In addition, payments of
principal will be made as follows: As to Mr. Kassel -- $50,000, $50,000,
$100,000 and $150,000 during each of the first four years, respectively, and
the balance of approximately $240,000 on maturity. As to Mr. Raleigh --
$25,000, $25,000, $50,000 and $50,000 during each of the first four years,
respectively, and the balance of approximately $90,000 on maturity.
The above transactions and loans were approved or ratified by the
independent directors of the Company who did not have an interest in such
transactions or loans. All future transactions or loans between the Company and
its officers, directors or 5% or greater stockholders will be made or entered
into on terms no less favorable to the Company than those that can be obtained
from unaffiliated third parties. Furthermore, the Company has adopted a policy
that any future material transactions and loans between the Company and its
officers, directors and 5% or greater stockholders, and any forgiveness of any
such loans, must be approved by a majority of the Company's independent
directors who do not have an interest in the transactions and who have access,
at the Company's expense, to the Company's or independent legal counsel.
Notwithstanding the foregoing, there can be no assurance that conflicts of
interest will not arise with respect to any such transactions, or that if
conflicts do arise, they will be resolved in a manner favorable to the Company.
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DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be issued pursuant to the terms of the
Trust Agreement. The Trust Agreement will be qualified as an indenture under
the Trust Indenture Act. Initially, Wilmington Trust Company will be the
Delaware Trustee and the Property Trustee. The Property Trustee is the
independent trustee whose sole responsibility is to fulfill the trustee
obligations specified in the Trust Indenture Act. Wilmington Trust Company will
act as trustee for the purpose of fulfilling these obligations. The terms of
the Trust Preferred Securities will include those stated in the Trust Agreement
and those made part of the Trust Agreement by the Trust Indenture Act. This
summary of certain terms and provisions of the Trust Preferred Securities and
the Trust Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including the definitions therein of certain terms, and the Trust
Indenture Act. Wherever particular defined terms of the Trust Agreement (as
amended or supplemented from time to time) are referred to herein, such terms
as defined therein are incorporated herein by reference. The form of the Trust
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
General
Pursuant to the terms of the Trust Agreement, the Administrative Trustees
on behalf of the Trust will issue the Trust Preferred Securities and the Common
Securities of the Trust (collectively, the "Trust Securities"). The Trust
Securities represent undivided beneficial interests in the assets of the Trust.
The holders of the Trust Preferred Securities will be entitled to a preference
over the Common Securities (which will be held by the Company) in certain
circumstances with respect to Distributions and amounts payable on redemption
or liquidation, as well as other benefits as described in the Trust Agreement.
The Trust Preferred Securities will rank pari passu, and payments will be
made thereon pro rata, with the Common Securities of the Trust, except as
described under "--Subordination of Common Securities of the Trust Held by the
Company" below. Legal title to the Junior Subordinated Debentures will be held
by the Property Trustee in trust for the benefit of the holders of the Trust
Securities. The Guarantee executed by the Company for the benefit of the
holders of the Trust Preferred Securities (the "Guarantee") will be a guarantee
on a subordinated basis with respect to the Trust Preferred Securities but will
not guarantee payment of Distributions or amounts payable on redemption or on
liquidation of the Trust Preferred Securities if the Trust does not have funds
on hand available to make such payments. See "Description of Guarantee."
Distributions
Payment of Distributions. Distributions on the Trust Preferred Securities
will be paid at the annual rate of 9.40% of the stated Liquidation Amount of
$25, payable monthly in arrears on the 15th day of each calendar month of each
year to the holders of the Trust Preferred Securities on the relevant record
dates (each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). The amount of each Distribution due with
respect to the Trust Preferred Securities will include amounts accrued through
the Distribution Date. Distributions on the Trust Preferred Securities will be
payable to the holders thereof as they appear on the register of the Trust on
the relevant record date which will be, so long as such Securities remain in
book-entry form, one Business Day (as defined below) prior to the relevant
Distribution Date or, in the event that the Trust Preferred Securities are not
then in book-entry form, the relevant record date will be the date 15 days
prior to the relevant Distribution Date. Distributions will accrue from the
date of original issuance and will accumulate whether or nor funds are
available for payment. The first Distribution Date for the Trust Preferred
Securities will be May 15, 1998.
The amount of Distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which Distributions are payable on the Trust Preferred Securities is not a
Business Day, payment of the Distribution payable on such date will be made on
the next Business Day (and without any interest or other payment in respect of
any such delay), with the same force and effect as if made on the date such
payment was originally payable. As used in this Prospectus, a "Business Day"
shall mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in the State of California are authorized or required by law or
executive order to remain closed or a day on which the corporate trust office
of the Property Trustee or the Indenture Trustee is closed for business.
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The funds of the Trust available for distribution to holders of its Trust
Preferred Securities will be limited to payments by the Company under the
Junior Subordinated Debentures in which the Trust will invest the proceeds from
the sale of its Trust Preferred Securities. See "Description of Junior
Subordinated Debentures." If the Company does not make interest payments on the
Junior Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Trust Preferred Securities. The payment
of Distributions (if and to the extent the Trust has funds legally available
for the payment of such Distributions and cash sufficient to make such
payments) is guaranteed by the Company. See "Description of Guarantee."
Extension Period. So long as no Debenture Event of Default has occurred
and is continuing, the Company has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 60 consecutive months with respect to
each such period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. As a consequence of any such election, monthly Distributions on the
Trust Preferred Securities will be deferred by the Trust during any such
Extension Period. Distributions to which holders of Trust Preferred Securities
are entitled will accumulate additional amounts thereon at the rate per annum
of 9.40% thereof, compounded monthly from the relevant Distribution Date, to
the extent permitted under applicable law. The term "Distribution," as used
herein, shall include any such additional accumulated amounts. During any such
Extension Period, the Company may not, and shall not permit any Subsidiary to,
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
capital stock (which includes common and preferred stock), (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company that rank pari passu with or junior
in interest to the Junior Subordinated Debentures or make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks pari passu with or junior
in interest to the Junior Subordinated Debentures (other than (a) dividends or
distributions in the Company's capital stock (which includes common and
preferred stock), (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans for its directors, officers, employees or consultants)
or (iii) redeem, purchase or acquire less than all of the Junior Subordinated
Debentures or any of the Trust Preferred Securities. Prior to the termination
of any such Extension Period, the Company may further extend such Extension
Period, provided that such extension does not cause such Extension Period to
exceed 60 consecutive months or extend beyond the Stated Maturity. Upon the
termination of any such Extension Period and the payment of all amounts then
due, and subject to the foregoing limitations, the Company may elect to begin a
new Extension Period. Subject to the foregoing, there is no limitation on the
number of times that the Company may elect to begin an Extension Period. The
Company has no current intention of exercising its right to defer payments of
interest by extending the interest payment period on the Junior Subordinated
Debentures.
Redemption
Mandatory Redemption of Trust Preferred Securities. Upon the repayment or
redemption at any time, in whole or in part, of any Junior Subordinated
Debentures, the proceeds from such repayment or redemption shall be applied by
the Property Trustee to redeem a Like Amount (as defined below) of the Trust
Securities, upon not less than 30 nor more than 60 days' notice of a date of
redemption (the "Redemption Date"), at the Redemption Price (as defined below).
See "Description of Junior Subordinated Debentures--Redemption." If less than
all of the Junior Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption shall be
allocated to the redemption of the Trust Securities on a pro rata basis. The
amount of premium, if any, paid by the Company upon the redemption of all or
any part of the Junior Subordinated Debentures to be repaid or redeemed on a
Redemption Date shall be allocated to the redemption pro rata of the Trust
Securities.
Optional Redemption of Junior Subordinated Debentures. The Company will
have the right to redeem the Junior Subordinated Debentures (i) on or after
April 15, 2003, in whole at any time or in part from time to time at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof, or (ii) at any time, in
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whole (but not in part), upon the occurrence of a Tax Event or an Investment
Company Event at a redemption price equal to the accrued and unpaid interest on
the Junior Subordinated Debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount thereof. See "Description of
Junior Subordinated Debentures--Redemption."
Tax Event Redemption, Investment Company Event Redemption. If a Tax Event
or an Investment Company Event shall occur and be continuing, the Company has
the right to redeem the Junior Subordinated Debentures in whole (but not in
part) and thereby cause a mandatory redemption of the Trust Securities in whole
(but not in part) at the Redemption Price (as defined below) within 90 days
following the occurrence of such Tax Event or Investment Company Event. If a
Tax Event or an Investment Company Event has occurred and is continuing and the
Company does not elect to redeem the Junior Subordinated Debentures and thereby
cause a mandatory redemption of the Trust Securities or to dissolve the Trust
and cause the Junior Subordinated Debentures to be distributed to holders of
the Trust Securities in liquidation of the Trust as described below, such Trust
Securities will remain outstanding and Additional Sums (as defined below) may
be payable on the Junior Subordinated Debentures.
Definitions
"Additional Sums" means the additional amounts as may be necessary to be
paid by the Company with respect to the Junior Subordinated Debentures in order
that the amount of Distributions then due and payable by the Trust on the
outstanding Trust Securities of the Trust shall not be reduced as a result of
any additional taxes, duties and other governmental charges to which the Trust
has become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Trust Preferred Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities
in connection with a dissolution and liquidation of the Trust, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date, plus the related amount of the premium,
if any, paid by the Depositor upon the concurrent redemption of a Like Amount
of Debentures, allocated on a pro rata basis (based on Liquidation Amounts),
among the Trust Securities.
See "Risk Factors" for definitions of "Tax Event" and "Investment Company
Event."
Distribution of Junior Subordinated Debentures
Subject to the Company and the Trust having received an Opinion of Counsel
to the effect that a proposed liquidating distribution will not be a taxable
event to the holders of the Trust Preferred Securities, the Company will have
the right at any time to dissolve the Trust and, after satisfaction of the
liabilities of creditors of the Trust as provided by applicable law, cause the
Junior Subordinated Debentures to be distributed to the holders of Trust
Securities in liquidation of the Trust. After the liquidation date fixed for
any distribution of Junior Subordinated Debentures for Trust Preferred
Securities (i) such Trust Preferred Securities will no longer be deemed to be
outstanding, and (ii) certificates representing Trust Preferred Securities that
are not then held by the Depositary or its nominee will be deemed to represent
Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of such Trust Preferred Securities, and bearing accrued and
unpaid interest in an amount equal to the accrued and unpaid Distributions on
the Trust Preferred Securities until such certificates are presented to the
Administrative Trustees or their agent for transfer or exchange.
There can be no assurance as to the market prices for the Trust Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Trust Preferred Securities if a dissolution and liquidation of
the Trust were to occur. Accordingly, the Trust Preferred Securities that an
investor may purchase, or the Junior Subordinated Debentures that the investor
may receive on dissolution and liquidation of the Trust, may trade at a
discount to the price that the investor paid to purchase the Trust Preferred
Securities offered hereby.
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Redemption Procedures
Trust Preferred Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the applicable proceeds from the
contemporaneous redemption of the Junior Subordinated Debentures. Redemptions
of the Trust Preferred Securities shall be made and the Redemption Price shall
be payable on each Redemption Date only to the extent that the Trust has funds
on hand available for the payment of such Redemption Price. See "--
Subordination of Common Securities of the Trust Held by the Company" herein and
"Description of Guarantee."
If the Property Trustee gives a notice of redemption in respect of the
Trust Preferred Securities, then, by 12:00 noon, Eastern time on the Redemption
Date, to the extent funds are available and to the extent the Trust Preferred
Securities are no longer in book-entry form, the Property Trustee will deposit
with the Paying Agent for such Trust Preferred Securities funds sufficient to
pay the aggregate Redemption Price and will give such Paying Agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing such Trust Preferred
Securities. If such Trust Preferred Securities are only in book-entry form, the
Property Trustee, to the extent funds are available, will deposit with the
Depositary funds sufficient to pay the aggregate Redemption Price and will give
the Depositary irrevocable instructions and authority to pay the Redemption
Price to the holders of such Trust Preferred Securities. Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date shall be
payable to the holders of such Trust Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption shall
have been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of the Trust Preferred Securities will
cease, except the right of the holders of the Trust Preferred Securities to
receive the applicable Redemption Price, but without interest on such
Redemption Price, and such Trust Preferred Securities will cease to be
outstanding. In the event that any date fixed for redemption of such Trust
Preferred Securities is not a Business Day, then payment of the Redemption
Price payable on such date will be made on the next succeeding Business Day
(and without any interest or other payment in respect of any such delay), with
the same force and effect as if made on the date such payment was originally
payable. In the event that payment of the Redemption Price in respect of Trust
Preferred Securities called for redemption is improperly withheld or refused
and not paid either by the Trust or by the Company pursuant to the Guarantee,
Distributions on such Trust Preferred Securities will continue to accrue at the
then applicable rate, from the Redemption Date originally established by the
Trust for such Trust Preferred Securities to the date such Redemption Price is
actually paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price. See "Description
of Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), and further provided that the Company is not then
exercising its right to defer interest payments on the Junior Subordinated
Debentures, the Company may at any time and from time to time purchase
outstanding Trust Preferred Securities by tender, in the open market or by
private agreement.
Payment of the Redemption Price on the Trust Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Trust Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for such Trust Preferred Securities on the relevant record
date, which date shall be, so long as such securities remain in book-entry
form, one Business Day prior to the Redemption Date or Liquidation Date, as
applicable. In the event that the Trust Preferred Securities are not in
book-entry form, the relevant record date for such Trust Preferred Securities
shall be the date 15 days prior to the relevant Redemption Date.
If less than all of the Trust Securities issued by the Trust are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed shall be allocated pro rata (based on
Liquidation Amounts) to the Trust Preferred Securities and Common Securities
based upon the relative Liquidation Amounts of such classes. The particular
Trust Preferred Securities to be redeemed shall be selected by the Property
Trustee from the outstanding Trust Preferred Securities not previously called
for redemption, by such method as the Property Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
(equal to $25 or an integral multiple thereof) of the Liquidation Amount of
Trust Preferred Securities. The Property Trustee shall promptly notify the
Securities Registrar (as defined below) in writing of the Trust Preferred
Securities selected for redemption and, in the case of any Trust Preferred
Securities
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selected for partial redemption, the Liquidation Amount thereof to be redeemed.
For all purposes of the Trust Agreement, unless the context otherwise requires,
all provisions relating to the redemption of Trust Preferred Securities shall
relate to the portion of the aggregate Liquidation Amount of Trust Preferred
Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities at such
holder's registered address. Unless the Trust defaults in payment of the
applicable Redemption Price, on and after the Redemption Date, Distributions
will cease to accrue on such Trust Preferred Securities called for redemption.
Subordination of Common Securities of the Trust Held by the Company
Payment of Distributions on, and the Redemption Price of, the Trust
Preferred Securities and Common Securities, as applicable, shall be made pro
rata based on the Liquidation Amounts of the Trust Preferred Securities and
Common Securities; provided, however, that if on any Distribution Date or
Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Trust Preferred Securities for all Distribution
periods terminating on or prior thereto, or in the case of payment of the
applicable Redemption Price, the full amount of such Redemption Price on all of
the outstanding Trust Preferred Securities then called for redemption, shall
have been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or the Redemption Price of, the Trust Preferred Securities then due and
payable.
In the case of any Event of Default under the Trust Agreement resulting
from a Debenture Event of Default, the Company as holder of the Common
Securities, will be deemed to have waived any right to act with respect to any
such Event of Default until the effect of all such Events of Default have been
cured, waived or otherwise eliminated. Until any such Events of Default have
been so cured, waived or otherwise eliminated, the Property Trustee shall act
solely on behalf of the holders of the Trust Preferred Securities and not on
behalf of the Company as holder of the Common Securities, and only the holders
of the Trust Preferred Securities will have the right to direct the Property
Trustee to act on their behalf.
Liquidation Distribution Upon Dissolution
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Preferred Securities. See "--Distribution of Junior
Subordinated Debentures" above. The Company might exercise its right to
dissolve the Trust under circumstances where a "Tax Event," "Investment Company
Event" or other undesirable event could be avoided simply by dissolving the
Trust and causing the Junior Subordinated Debentures to be distributed to
holders of the Trust Preferred Securities.
In addition, pursuant to the Trust Agreement, the Trust shall
automatically dissolve upon expiration of its term and shall earlier dissolve
on the first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of the Company; (ii) the distribution of a Like Amount of the
Junior Subordinated Debentures to the holders of its Trust Securities, if the
Company, as Depositor, has delivered written direction to the Property Trustee
to dissolve the Trust (which direction is optional and, except as described
above, wholly within the discretion of the Company, as Depositor); (iii)
redemption of all of the Trust Preferred Securities as described under
"--Redemption" and (iv) the entry of an order for the dissolution of the Trust
by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii), or (iv)
above, the Trust shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of such Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be
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practical, in which event such holders will be entitled to receive out of the
assets of the Trust available for distribution to holders, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, an
amount equal to, in the case of holders of Trust Preferred Securities, the
aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Trust Preferred Securities shall be paid on a pro rata basis. The
holder(s) of the Common Securities will be entitled to receive distributions
upon any such liquidation on a pro rata basis with the holders of the Trust
Preferred Securities, except that if a Debenture Event of Default has occurred
and is continuing, the Trust Preferred Securities shall have a priority over
the Common Securities.
Under current United States federal income tax law and interpretations,
and assuming that the Trust is treated as a grantor trust, a distribution of
the Junior Subordinated Debentures should not be a taxable event to holders of
the Trust Preferred Securities. Should there be a change in law, a change in
distribution, a Tax Event or other circumstances, however, the distribution
could be a taxable event to the Trust and to holders of the Trust Preferred
Securities. See "Certain Federal Income Tax Consequences." If the Company
elects neither to redeem the Junior Subordinated Debentures prior to maturity
nor to liquidate the Trust and distribute the Junior Subordinated Debentures to
holders of the Trust Preferred Securities, the Trust Preferred Securities will
remain outstanding until the repayment of the Junior Subordinated Debentures.
If the Company elects to dissolve the Trust and thereby causes the Junior
Subordinated Debentures to be distributed to holders of the Trust Preferred
Securities in liquidation of the Trust, the Company shall continue to have the
right to shorten the Stated Maturity of such Junior Subordinated Debentures.
See "Description of Junior Subordinated Debentures--General."
Events of Default; Notice
Any one of the following events that has occurred and is continuing
constitutes an "Event of Default" under the Trust Agreement (an "Event of
Default") with respect to the Trust Preferred Securities (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or
be effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures-- Debenture Events of Default"); or
(ii) default by the Property Trustee in the payment of any Distribution
when it becomes due and payable, and continuation of such default for a period
of 30 days; or
(iii) default by the Property Trustee in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Property Trustee in the Trust Agreement (other
than a default or breach in the performance of a covenant or warranty which is
addressed in clause (ii) or (iii) above), and continuation of such default or
breach, for a period of 60 days after there has been given, by registered or
certified mail, to the defaulting Property Trustee by the holders of at least
25% in aggregate Liquidation Amount of the outstanding Trust Preferred
Securities, a written notice specifying such default or breach and requiring it
to be remedied and stating that such notice is a "Notice of Default" under the
Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to a Responsible Officer of the Property Trustee, the Property
Trustee shall transmit notice of such Event of Default to the holders of the
Trust Preferred Securities, the Administrative Trustees and the Company, as
Depositor, unless such
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Event of Default shall have been cured or waived. The Company, as Depositor,
and the Administrative Trustees are required to file annually with the Property
Trustee a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the Trust
Preferred Securities shall have a preference over the Common Securities upon
dissolution of the Trust as described above. See "--Liquidation Distribution
upon Dissolution" herein. Upon a Debenture Event of Default (other than with
respect to certain events in bankruptcy, insolvency or reorganization), unless
the principal of all the Junior Subordinated Debentures has already become due
and payable, either the Property Trustee or the holders of not less than 25% in
aggregate principal amount of the Junior Subordinated Debentures then
outstanding may declare all of the Junior Subordinated Debentures to be due and
payable immediately by giving notice in writing to the Company (and to the
Property Trustee, if notice is given by holders of the Junior Subordinated
Debentures). If the Property Trustee or the holders of the Junior Subordinated
Debentures fail to declare the principal of all of the Junior Subordinated
Debentures due and payable upon a Debenture Event of Default, the holders of at
least 25% in Liquidation Amount of the Trust Preferred Securities then
outstanding shall have the right to declare the Junior Subordinated Debentures
immediately due and payable. In either event, payment of principal and interest
on the Junior Subordinated Debentures shall remain subordinated to the extent
provided in the Indenture. In addition, holders of the Trust Preferred
Securities have the right in certain circumstances to bring a Direct Action (as
hereinafter defined). See "Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of Trust Preferred
Securities."
If a Debenture Event of Default with respect to certain events in
bankruptcy, insolvency or reorganization occurs, the Junior Subordinated
Debentures shall automatically, and without any declaration or other action on
the part of the Property Trustee or the holders of the Junior Subordinated
Debentures, become immediately due and payable. In such event, payment of
principal and interest on the Junior Subordinated Debentures will also remain
subordinated to the extent provided in the Indenture.
Removal of Trustees
Unless a Debenture Event of Default has occurred and is continuing, any of
the Property Trustee, the Delaware Trustee or the Administrative Trustees may
be removed at any time by the holder of the Common Securities. For example, the
holder of the Common Securities may seek to remove such trustees upon
substandard performance or non-performance of their duties or upon a
significant increase in a trustee's fee. If a Debenture Event of Default has
occurred and is continuing, the Property Trustee and the Delaware Trustee also
may be removed at such time by the holders of a majority in Liquidation Amount
of the outstanding Trust Preferred Securities. In no event will the holders of
the Trust Preferred Securities have the right to vote to appoint, remove or
replace the Administrative Trustees, which voting rights are vested exclusively
in the Company as the holder of the Common Securities. No resignation or
removal of an Issuer Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Trust Agreement.
Co-Trustees and Separate Property Trustee
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the Trust property
may at the time be located, the Company, as the holder of the Common
Securities, and the Administrative Trustees shall have power to appoint one or
more persons either to act as a co-trustee, jointly with the Property Trustee,
of all or any part of such Trust property, or to act as separate trustee of any
such property, in either case with such powers as may be provided in the
instrument of appointment, and to vest in such person or persons in such
capacity any property, title, right or power deemed necessary or desirable,
subject to the provisions of the Trust Agreement. In case a Debenture Event of
Default has occurred and is continuing, the Property Trustee alone shall have
power to make such appointment.
Merger or Consolidation of Trustees
Any Person (as defined in the Trust Agreement) into which the Property
Trustee and the Delaware Trustee may be merged or converted or with which it
may be consolidated, or any corporation resulting from any merger,
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conversion or consolidation to which such relevant Trustee shall be a party, or
any corporation succeeding to all or substantially all the corporate trust
business of such Issuer Trustee, shall be the successor of such Trustee under
the Trust Agreement, provided such corporation shall be otherwise qualified and
eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other body, except as
described below or as described in "--Liquidation Distribution Upon
Dissolution." The Trust may, at the request of the Company, with the consent of
the Administrative Trustees and without the consent of the holders of the Trust
Preferred Securities, merge with or into, consolidate, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to a trust organized as such under the laws of any
State; provided, that (i) such successor entity either (a) expressly assumes
all of the obligations of the Trust with respect to the Trust Preferred
Securities or (b) substitutes for the Trust Preferred Securities other
securities having substantially the same terms as the Trust Preferred
Securities (the "Successor Securities") so long as the Successor Securities
rank the same as the Trust Preferred Securities rank in priority with respect
to distributions and payments upon liquidation, redemption and otherwise, (ii)
the Company expressly appoints a trustee of such successor entity, possessing
the same powers and duties as the Property Trustee, as the holder of the Junior
Subordinated Debentures, (iii) the Successor Securities are listed or traded, or
any Successor Securities will be listed upon notification of issuance, on any
national securities exchange, national stock market or other organization on
which the Trust Preferred Securities are then listed or traded, if any, (iv)
such merger, consolidation, amalgamation, conveyance, transfer or lease does not
cause the Trust Preferred Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Preferred Securities (including any Successor Securities)
in any material respect, (vi) such successor entity has a purpose substantially
identical to that of the Trust, (vii) prior to such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease, the Company has
received an Opinion of Counsel to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Trust Preferred Securities (including any Successor Securities) in any material
respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the
Investment Company Act and (viii) the Company or any permitted successor or
designee owns all of the common securities of such successor entity and
guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee. Notwithstanding the
foregoing, the Trust shall not, except with the consent of holders of 100% in
Liquidation Amount of the Trust Preferred Securities, consolidate, amalgamate,
merge with or into, or be replaced by or convey, transfer or loan its properties
and assets substantially as an entirety to any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or loan
would cause the Trust or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of the Trust Agreement
Except as provided below and under "Description of Guarantee--Amendments
and Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Trust Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement, or (ii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that the Trust will be classified for United States federal
income tax purposes as a grantor trust at all times that any Trust Securities
are outstanding or to ensure that the Trust will not be required to register as
an "investment company" under the
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Investment Company Act; provided, however, that in the case of clause (i), such
action shall not adversely affect in any material respect the interests of any
holder of Trust Securities, and any such amendments of the Trust Agreement
shall become effective when notice thereof is given to the holders of the Trust
Securities. The Trust Agreement may be amended by the Administrative Trustees
and the Property Trustee with (i) the consent of holders representing not less
than a majority of the aggregate Liquidation Amount of the outstanding Trust
Securities, and (ii) receipt by such Trustees of an Opinion of Counsel to the
effect that such amendment or the exercise of any power granted to the Issuer
Trustees in accordance with such amendment will not affect the Trust's status
as a grantor trust for United States federal income tax purposes or the Trust's
exemption from registration as an "investment company" under the Investment
Company Act, provided that without the unanimous consent of the holders of the
Trust Securities to be affected thereby, the Trust Agreement may not be amended
to (i) change the amount or timing of any Distribution on the Trust Securities
or otherwise adversely affect the amount of any Distribution required to be
made in respect of the Trust Securities as of a specified date or (ii) restrict
the right of a holder of Trust Securities to institute suit for the enforcement
of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
executing any trust or power conferred on the Indenture Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is
waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or
termination of the Indenture or the Junior Subordinated Debentures, where such
consent shall be required, without, in each case, obtaining the prior approval
of the holders of a majority in aggregate Liquidation Amount of all outstanding
Trust Preferred Securities; provided, however, that where a consent under the
Indenture would require the consent of each holder of Junior Subordinated
Debentures affected thereby, no such consent shall be given by the Property
Trustee without the prior consent of each holder of the Trust Preferred
Securities. The Issuer Trustees shall not revoke any action previously
authorized or approved by a vote of the holders of the Trust Preferred
Securities except by subsequent vote of the holders of the Trust Preferred
Securities. The Property Trustee shall notify each holder of the Trust
Preferred Securities of any notice of default with respect to the Junior
Subordinated Debentures. In addition to obtaining the foregoing approvals of
such holders of the Trust Preferred Securities, prior to taking any of the
foregoing actions, the Issuer Trustees shall obtain an Opinion of Counsel
experienced in such matters to the effect that such action will not cause the
Trust to fail to be classified as a grantor trust for United States federal
income tax purposes.
Any required approval of holders of the Trust Preferred Securities may be
given at a meeting of holders of Trust Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a
notice of any meeting at which holders of the Trust Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be given to each holder of record of the Trust
Preferred Securities in the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Trust Preferred Securities will
be required for the Trust to redeem and cancel the Trust Preferred Securities
in accordance with the Trust Agreement.
Notwithstanding that holders of the Trust Preferred Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Trust Preferred Securities that are owned by the Company, the Issuer
Trustees or any affiliate of the Company or any Issuer Trustees, shall, for
purposes of such vote or consent, be treated as if they were not outstanding.
Global Trust Preferred Securities
The Trust Preferred Securities will be represented by one or more global
certificates registered in the name of the Depositary or its nominee ("Global
Trust Preferred Security"). Beneficial interests in the Global Trust Preferred
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by participants in the Depositary. Except as
described below, Trust Preferred Securities in certificated form will not be
issued in exchange for the Global Trust Preferred Securities. See "Book-Entry
Issuance."
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A Global Trust Preferred Security will be exchanged for Trust Preferred
Securities in certificated form registered in the names of persons other than
the Depositary or its nominee only if (i) the Depositary notifies the Company
that it is unwilling or unable to continue as a depositary for such Global
Trust Preferred Security and no successor depositary shall have been appointed,
or if at any time the Depositary ceases to be a clearing agency registered
under the Exchange Act, at a time when the Depositary is required to be so
registered to act as such depositary, and no successor depositary shall have
been appointed, (ii) the Company in its sole discretion determines that such
Global Trust Preferred Security shall be so exchangeable, or (iii) there shall
have occurred and be continuing a Debenture Event of Default and the owners of
beneficial interests in such Global Trust Preferred Security aggregating at
least a majority in Liquidation Amount of the Trust Preferred Securities inform
the Property Trustee that the continuation of a book-entry registration system
is no longer in the best interests of the holders of Trust Preferred
Securities. Any Global Trust Preferred Security that is exchangeable pursuant
to the preceding sentence shall be exchangeable for definitive certificates
registered in such names as the Depositary shall direct. It is expected that
such instructions will be based upon directions received by the Depositary with
respect to ownership of beneficial interests in such Global Trust Preferred
Security. In the event that Trust Preferred Securities are issued in definitive
form, such Trust Preferred Securities will be in denominations of $25 and
integral multiples thereof and may be transferred or exchanged at the corporate
trust office of the Property Trustee, or the offices of a paying or transfer
agent appointed by the Administrative Trustees.
Unless and until it is exchanged in whole or in part for the individual
Trust Preferred Securities represented thereby, a Global Trust Preferred
Security may not be transferred except as a whole by the Depositary to a
nominee of such Depositary or by a nominee of the Depositary to such Depositary
or another nominee of such Depositary or by the Depositary or any nominee to a
successor Depositary or any nominee of such successor.
Payments on Global Trust Preferred Securities will be made to the
Depositary, as the record holder of the Trust Preferred Securities. In the
event the Trust Preferred Securities are issued in definitive form,
Distributions will be payable, the transfer of the Trust Preferred Securities
will be registrable, and Trust Preferred Securities will be exchangeable for
Trust Preferred Securities of other denominations of a like aggregate
Liquidation Amount, at the corporate trust office of the Property Trustee, or
at the offices of any paying agent or transfer agent appointed by the
Administrative Trustees, provided that payment of any Distribution may be made
at the option of the Administrative Trustees by check mailed to the address of
the persons entitled thereto or by wire transfer, provided that payments will
be made by wire transfer if so requested by a holder of more than $1 million
aggregate Liquidation Amount. In addition, if the Trust Preferred Securities
are issued in definitive, certificated form, the record dates for payment of
Distributions will be the first day of the month in which the relevant
Distribution Date occurs. For a description of the terms of the depositary
arrangements relating to payments, transfer, voting rights, redemptions and
other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of a Global Trust Preferred Security, and the deposit of
such Global Trust Preferred Security with or on behalf of the Depositary, the
Depositary for such Global Trust Preferred Security or its nominee will credit,
on its book-entry registration and transfer system, the respective aggregate
Liquidation Amounts of the individual Trust Preferred Securities represented by
such Global Trust Preferred Securities to the accounts of Participants (as
defined below). Such accounts shall be designated by the dealers, underwriters
or agents with respect to such Trust Preferred Securities. Ownership of
beneficial interests in a Global Trust Preferred Security will be limited to
Participants or persons that may hold interests through Participants. Ownership
of beneficial interests in such Global Trust Preferred Security will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by the applicable Depositary or its nominee (with respect to
interests of Participants) and the records of Participants (with respect to
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the ability
to transfer beneficial interests in a Global Trust Preferred Security.
So long as the Depositary for a Global Trust Preferred Security, or its
nominee, is the registered owner of such Global Trust Preferred Security, such
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Trust Preferred Securities represented by such Global
Trust Preferred Security for all purposes under the Trust Agreement governing
such Trust Preferred Securities. Except as provided herein, owners of
beneficial interests in a Global Trust Preferred Security will not be entitled
to have any of the individual Trust Preferred Securities represented by such
Global Trust Preferred Security registered in their names, will not receive or
be entitled to receive physical delivery of any such Trust Preferred Securities
in definitive form and will not be considered the owners or holders thereof
under the Trust Agreement.
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None of the Company, the Property Trustee, any Paying Agent, or the
Securities Registrar for such Trust Preferred Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global Trust
Preferred Security representing such Trust Preferred Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of
any payment of the Liquidation Amount or Distributions in respect of a
permanent Global Trust Preferred Security, will immediately credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interest in the aggregate Liquidation Amount of such
Global Trust Preferred Security as shown on the records of such Depositary or
its nominee. The Company also expects that payments by Participants to owners
of beneficial interests in such Global Trust Preferred Security held through
such Participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name." Such payments will be
the responsibility of such Participants.
Payment and Paying Agent
Payments in respect of the Trust Preferred Securities shall be made to the
Depositary, which shall credit the relevant accounts at the Depositary on the
applicable Distribution Dates or, if any of the Trust Preferred Securities are
not held by the Depositary, such payments shall be made by check mailed to the
address of the holder entitled thereto as such address shall appear on the
Securities Register. The paying agent (the "Paying Agent") shall initially be
the Property Trustee and any co-paying agent chosen by the Property Trustee and
acceptable to the Administrative Trustees and the Company. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to
the Administrative Trustees, the Property Trustee and the Company. In the event
that the Property Trustee shall no longer be the Paying Agent, the
Administrative Trustees shall appoint a successor (which shall be a bank or
trust company acceptable to the Administrative Trustees and the Company) to act
as Paying Agent.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Trust Preferred Securities. Registration of transfers of the Trust Preferred
Securities will be effected without charge to the holder, but upon payment by
the holder of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. The Trust will not be required to
register or cause to be registered the transfer of the Trust Preferred
Securities after such Trust Preferred Securities have been called for
redemption.
Information Concerning the Property Trustee
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Trust Preferred Securities unless it is offered reasonable indemnity against
the costs, expenses and liabilities that might be incurred thereby. If the
Property Trustee is required to decide between alternative causes of action or
to construe ambiguous provisions in the Trust Agreement or is unsure of the
application of any provision of the Trust Agreement, and the matter is not one
on which holders of the Trust Preferred Securities are entitled under the Trust
Agreement to vote, then the Property Trustee shall take such action as is
directed by the Company and, if not so directed, shall take such action as it
deems advisable and in the best interests of the holders of the Trust
Securities and will have no liability except for its own bad faith, negligence
or willful misconduct.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under
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the Investment Company Act or fail to be classified as a grantor trust for
United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Company and the
Administrative Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Trust or the Trust
Agreement, that the Company and the Administrative Trustees determine in their
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
Trust Preferred Securities. Holders of the Trust Preferred Securities have no
preemptive or similar rights.
The Trust may not borrow money, issue debt or mortgage or pledge any of
its assets.
The Trust Agreement is governed by Delaware law.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
Concurrently with the issuance of the Trust Preferred Securities, the
Trust will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in Junior Subordinated Debentures issued
by the Company. The Junior Subordinated Debentures will be issued as unsecured
debt under the Junior Subordinated Indenture, dated as of April 17, 1998 (the
"Indenture"), between the Company and the Indenture Trustee. The following
summary of the terms and provisions of the Junior Subordinated Debentures and
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Indenture, which has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, and to the Trust Indenture Act. The Indenture is qualified under the
Trust Indenture Act. Whenever particular defined terms of the Indenture are
referred to herein, such terms as defined therein are incorporated herein by
reference.
General
The Junior Subordinated Debentures will bear interest at the annual rate
of 9.40% of the principal amount thereof, payable monthly in arrears on the
15th day of each calendar month of each year (each, an "Interest Payment
Date"), commencing May 15, 1998, to the person in whose name each Junior
Subordinated Debenture is registered, subject to certain exceptions, at the
close of business on the first day of the month in which such payment is made.
Notwithstanding the above, in the event that either the (i) Junior Subordinated
Debentures are held by the Property Trustee and the Trust Preferred Securities
are registered in book-entry only form or (ii) the Junior Subordinated
Debentures are represented by a Global Subordinated Debenture (as defined
herein), the record date for such payment shall be the Business Day next
preceding such Interest Payment Date. The amount of each interest payment due
with respect to the Junior Subordinated Debentures will include amounts accrued
through the date the interest payment is due. It is anticipated that, until the
liquidation, if any, of the Trust, each Junior Subordinated Debenture will be
held in the name of the Property Trustee, in trust for the benefit of the
holders of the Trust Preferred Securities. The amount of interest payable for
any period will be computed on the basis of a 360-day year of twelve 30-day
months. In the event that any date on which interest is payable on the Junior
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next Business Day (and without any
interest or other payment in respect of any such delay), in each case with the
same force and effect as if made on the date such payment was originally
payable. Accrued interest that is not paid on the applicable Interest Payment
Date will bear additional interest on the amount thereof (to the extent
permitted by law) at the rate per annum of 9.40% thereof. The term "interest"
as used herein shall include monthly interest payments, interest on monthly
interest payments not paid on the applicable Interest Payment Date and
Additional Sums (as defined below), as applicable.
The Junior Subordinated Debentures will mature on April 15, 2028 (such
date, as it may be shortened as hereinafter described, the "Stated Maturity").
Such date may be shortened at any time by the Company to any date not earlier
than April 15, 2003. The Company might exercise its right to shorten the
maturity of the Junior Subordinated Debentures under circumstances where a "Tax
Event," "Investment Company Event" or other undesirable event could be avoided
simply by shortening the maturity of the Junior Subordinated Debentures. In
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the event that the Company elects to shorten the Stated Maturity of the Junior
Subordinated Debentures, it shall give notice to the Indenture Trustee, and the
Indenture Trustee shall give notice of such shortening to the holders of the
Junior Subordinated Debentures no less than 60 days prior to the effectiveness
thereof.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Debt and Subordinated Debt
of the Company. Because the Company is a holding company, the right of the
Company to participate in any distribution of assets of any subsidiaries upon
any such subsidiaries' liquidation or reorganization or otherwise (and thus the
ability of holders of the Trust Preferred Securities to benefit indirectly from
such distribution), is subject to the prior claims of creditors of that
subsidiary, except to the extent that the Company may itself be recognized as a
creditor of that subsidiary. Accordingly, the Junior Subordinated Debentures
will be effectively subordinated to all existing and future liabilities of any
subsidiaries of the Company, and holders of Junior Subordinated Debentures
should look only to the assets of the Company for payments on the Junior
Subordinated Debentures. The Indenture does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, including Senior
Debt and Subordinated Debt, whether under the Indenture or any existing or
other indenture that the Company may enter into in the future or otherwise. See
"--Subordination" below.
Option to Defer Interest Payment Period
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Indenture at any time during the term of
the Junior Subordinated Debentures to defer the payment of interest at any time
or from time to time for a period not exceeding 60 consecutive months (each
such period an "Extension Period"), provided that no Extension Period may
extend beyond the Stated Maturity. At the end of such Extension Period, the
Company must pay all interest then accrued and unpaid (together with interest
thereon at the annual rate of 9.40%, compounded monthly, to the extent
permitted by applicable law). During an Extension Period, interest will
continue to accrue and holders of Junior Subordinated Debentures will be
required to accrue interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences--Interest Income and
Original Issue Discount." The default by the Company on any Senior Debt and
Subordinated Debt will not constitute a Debenture Event of Default. See
"--Debenture Events of Default" below.
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock (which
includes common and preferred stock), or (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company (including other Junior Subordinated Debentures) that
rank pari passu with or junior in interest to the Junior Subordinated
Debentures, or make any guarantee payments with respect to any guarantee by the
Company of the debt securities of any subsidiary of the Company if such
guarantee ranks pari passu with or junior in interest to the Junior
Subordinated Debentures (other than (a) dividends or distributions in capital
stock of the Company (which includes common and preferred stock), (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the Guarantee, and (d) purchases of common stock related to
the issuance of common stock or rights under any of the Company's benefit plans
for its directors, officers or employees), or (iii) redeem, purchase or acquire
less than all of the Junior Subordinated Debentures or any of the Trust
Preferred Securities. Prior to the termination of any such Extension Period,
the Company may further extend such Extension Period, provided that such
extension does not cause such Extension Period to exceed 60 consecutive months
or extend beyond the Stated Maturity. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period subject to
the above requirements. No interest shall be due and payable during an
Extension Period, except at the end thereof. The Company must give notice to
the Property Trustee, the Administrative Trustees and the Indenture Trustee of
its election of any Extension Period at least one Business Day prior to the
earlier of (i) the date the distributions on the Trust Preferred Securities
would have been payable but for the election to begin or extend such Extension
Period, (ii) the date the Administrative Trustees are required to give notice
to the American Stock Exchange, the New York Stock Exchange, The Nasdaq Stock
Market or any applicable stock exchange or automated quotation system on which
the Trust Preferred Securities are then listed or
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quoted or to the holders of the Trust Preferred Securities on the record date
or (iii) the date such distributions are payable, but in any event not less
than one Business Day prior to such record date. There is no limitation on the
number of times that the Company may elect to begin an Extension Period.
Distributions on the Trust Preferred Securities will be deferred by the
Trust during any such Extension Period. See "Description of the Trust Preferred
Securities--Distributions." For a description of certain federal income tax
consequences and special considerations applicable to any such Junior
Subordinated Debentures, see "Certain Federal Income Tax Consequences."
Additional Sums
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Junior Subordinated Debentures such amounts
("Additional Sums") as shall be required so that the Distributions payable by
the Trust shall not be reduced as a result of any such additional taxes, duties
or other governmental charges.
Redemption
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after April 15, 2003, in whole at any time or
in part from time to time, or (ii) at any time in whole (but not in part),
within 90 days following the occurrence of a Tax Event or an Investment Company
Event, in each case at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed
for redemption, plus 100% of the principal amount thereof.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at such holder's registered address. Unless the
Company defaults in payment of the redemption price, on and after the
redemption date interest ceases to accrue on such Junior Subordinated
Debentures or portions thereof called for redemption.
The Junior Subordinated Debentures will not be subject to any sinking
fund.
Distribution Upon Liquidation
As described under "Description of the Trust Preferred Securities--
Liquidation Distribution Upon Dissolution," under certain circumstances
involving the dissolution of the Trust, the Junior Subordinated Debentures may
be distributed to the holders of the Trust Preferred Securities in liquidation
of the Trust after satisfaction of liabilities to creditors of the Trust as
provided by applicable law. If the Junior Subordinated Debentures are
distributed to the holders of Trust Preferred Securities upon the liquidation
of the Trust, the Company will use its best efforts to list the Junior
Subordinated Debentures on the American Stock Exchange or the NASDAQ SmallCap
Market or such other stock exchanges or automated quotation system, if any, on
which the Trust Preferred Securities are then listed or quoted. There can be no
assurance that the Company will be able to cause such listing or as to the
market price of any Junior Subordinated Debentures that may be distributed to
the holders of Trust Preferred Securities.
Restrictions on Certain Payments
If at any time (i) there shall have occurred a Debenture Event of Default,
(ii) the Company shall have given notice of its election of an Extension Period
as provided in the Indenture with respect to the Junior Subordinated Debentures
and shall not have rescinded such notice, or such Extension Period, or any
extension thereof, shall be continuing, or (iii) while the Junior Subordinated
Debentures are held by the Trust, the Company shall be in default with respect
to its payment of any obligation under the Guarantee, then the Company will not
(1) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
capital stock, (2) make any payment of principal, interest or premium, if any,
on or repay, repurchase or redeem any debt securities of the Company (including
other Junior Subordinated Debt) that rank pari passu with or junior in interest
to the Junior Subordinated Debentures or make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior in
interest to the Junior Subordinated Debentures
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(other than (a) dividends or distributions in capital stock of the Company, (b)
any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee and (d) purchases of common stock related to
issuance of common stock or rights under any of the Company's benefit plans for
its directors, officers, employees or consultants) or (3) redeem, purchase or
acquire less than all of the Junior Subordinated Debentures or any of the Trust
Preferred Securities.
Subordination
The Indenture provides that the Junior Subordinated Debentures are
subordinated and junior in right of payment to all Senior Debt and Subordinated
Debt whether now existing or hereafter incurred. Senior Debt and Subordinated
Debt may include indebtedness of the Company which is subordinated to other
indebtedness of the Company but nevertheless senior to the Junior Subordinated
Debentures. No payment of principal of (including redemption payments, if any),
premium, if any, or interest on, the Junior Subordinated Debentures may be made
if any event of default with respect to any Senior Debt and Subordinated Debt
shall have occurred and be continuing and the Company and the Trustee receive
notice of such default from any person permitted to give such notice. Upon any
payment by the Company or distribution of assets of the Company to creditors
upon any dissolution, winding-up, liquidation or reorganization of the Company,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, all amounts due on all Senior Debt and Subordinated Debt
must be paid in full before the holders of the Junior Subordinated Debentures
are entitled to receive or retain any payment. Upon payment in full of all
amounts due on the Senior Debt and Subordinated Debt then outstanding, the
rights of the holders of the Junior Subordinated Debentures will be subrogated
to the rights of the holders of Senior Debt and Subordinated Debt to receive
payments or distributions applicable to such Senior Debt and Subordinated Debt
until all amounts owing on the Junior Subordinated Debentures are paid in full.
In the event of the acceleration of the maturity of any Junior
Subordinated Debentures, by reason of a Debenture Event of Default, the holders
of all Senior Debt and Subordinated Debt outstanding at the time of such
acceleration will first be entitled to receive payment in full of all amounts
due thereon (including any amounts due upon acceleration) before the holders of
Junior Subordinated Debentures will be entitled to receive or retain any
payment in respect of the Junior Subordinated Debentures.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent: (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; (vi) all
indebtedness of such Person whether incurred on or prior to the date of the
Indenture or thereafter incurred, for claims in respect of derivative products
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; and (vii) every obligation of the
type referred to in clauses (i) through (vi) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has guaranteed or is responsible or liable for, directly or indirectly, as
obligor or otherwise.
"Senior Debt and Subordinated Debt" means the principal of (and premium,
if any) and interest, if any (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt of the Company whether incurred on or prior to the date of
the Indenture or thereafter incurred, unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
provided that such obligations are not superior in right of payment to the
Junior Subordinated Debentures or to other Debt which is pari passu with, or
subordinated to, the Junior Subordinated Debentures; provided, however, that
Senior Debt and Subordinated Debt shall not be deemed to include (i) any Debt
of the Company which when incurred and without respect to any election under
Section 1111(b) of the United States Bankruptcy Code of 1978, as amended, was
without recourse to the Company, (ii) any Debt of the Company to any of its
subsidiaries, (iii) Debt to any employee of the Company, and (iv) any other
debt securities issued pursuant to the Indenture.
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The Indenture places no limitation on the amount of additional Senior Debt
and Subordinated Debt that may be incurred by the Company. The Company expects
from time to time to incur additional indebtedness constituting Senior Debt and
Subordinated Debt.
Registration, Denomination and Transfer
The Junior Subordinated Debentures will initially be registered in the
name of the Property Trustee. If the Junior Subordinated Debentures are
distributed to holders of Preferred Securities, it is anticipated that the
depository arrangements for the Junior Subordinated Debentures will be
substantially identical to those in effect for the Trust Preferred Securities.
See "Description of the Trust Preferred Securities--Global Trust Preferred
Securities" and "Book-Entry Issuance."
Although the Depositary has agreed to the procedures described above, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. If the Depositary is at any
time unwilling or unable to continue as depositary and a successor depositary
is not appointed by the Company within 90 days of receipt of notice from the
Depositary to such effect, the Company will cause the Junior Subordinated
Debentures to be issued in definitive form.
Payments on Junior Subordinated Debentures represented by a global
certificate will be made to Cede & Co., the nominee for the Depositary as the
registered holder of the Junior Subordinated Debentures, as described under
"Description of the Trust Preferred Securities--Global Trust Preferred
Securities." If Junior Subordinated Debentures are issued in certificate form,
principal and interest will be payable, the transfer of the Junior Subordinated
Debentures will be registrable, and Junior Subordinated Debentures will be
exchangeable for Junior Subordinated Debentures of other authorized
denominations of a like aggregate principal amount, at the corporate trust
office of the Indenture Trustee in Wilmington, Delaware or at the offices of
any paying agent or transfer agent appointed by the Company, provided that
payment of interest may be made at the option of the Company by check mailed to
the address of the persons entitled thereto.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar (the "Securities
Registrar") appointed under the Indenture or at the office of any transfer
agent designated by the Company for such purpose without service charge and
upon payment of any taxes and other governmental charges as described in the
Indenture. The Company will appoint the Indenture Trustee as Securities
Registrar under the Indenture. The Company may at any time designate additional
transfer agents with respect to the Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the date of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Payment and Paying Agents
Payment of principal of (and premium, if any) and any interest on the
Junior Subordinated Debentures will be made at the office of the Indenture
Trustee, except that at the option of the Company payment of any interest may
be made (i) except in the case of Global Junior Subordinated Debentures, by
check mailed to the address of the person entitled thereto as such address
shall appear in the securities register, (ii) by transfer to an account
maintained by the person entitled thereto as specified in the Securities
Register, provided that proper transfer instructions have been received by the
regular record date, or (iii) if the Junior Subordinated Debentures are held by
the Property Trustee, by agreement between the Company and the Property
Trustee. Payment of any interest on Junior Subordinated Debentures will be made
to the person in whose name such Junior Subordinated Debenture is registered at
the close of business on the regular record date for such interest. The Company
may at any
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time designate additional Paying Agents or rescind the designation of any
Paying Agent; however the Company will at all times be required to maintain a
Paying Agent in each place of payment for the Junior Subordinated Debentures.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by the Company in trust, for the payment of the principal of (and premium,
if any) or interest on the Junior Subordinated Debentures and remaining
unclaimed for two years after such principal or interest has become due and
payable shall, at the request of the Company, be repaid to the Company and the
holder of such Junior Subordinated Debenture shall thereafter look, as a
general unsecured creditor, only to the Company for payment thereof.
Modification of Indenture
From time to time the Company and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interests of the holders of the Junior
Subordinated Debentures or the Trust Preferred Securities so long as they
remain outstanding) and qualifying, or maintaining the qualification of, the
Indenture under the Trust Indenture Act. The Indenture contains provisions
permitting the Company and the Indenture Trustee, with the consent of the
holders of not less than a majority in principal amount of the outstanding
Junior Subordinated Debentures, to modify the Indenture in a manner affecting
the rights of the holders of the Junior Subordinated Debentures; provided, that
no such modification may, without the consent of the holder of each outstanding
Junior Subordinated Debenture affected thereby, (i) change the Stated Maturity
of the Junior Subordinated Debentures, or reduce the principal amount thereof,
or reduce the rate or extend the time of payment of interest thereon or (ii)
reduce the percentage of principal amount of Junior Subordinated Debentures,
the holders of which are required to consent to any such modification of the
Indenture; provided that so long as any of the Trust Preferred Securities
remain outstanding, no such modification may be made that adversely affects the
holders of such Trust Preferred Securities in any material respect, and no
termination of the Indenture may occur, and no waiver of any Debenture Event of
Default or compliance with any covenant under the Indenture may be effective,
without the prior consent of the holders of at least a majority of the
aggregate Liquidation Amount of the Trust Preferred Securities unless and until
the principal of the Junior Subordinated Debentures and all accrued and unpaid
interest thereon have been paid in full and certain other conditions have been
satisfied. Where a consent under the Indenture would require the consent of
each holder of Junior Subordinated Debentures, no such consent shall be given
by the Property Trustee without the prior consent of each holder of Trust
Preferred Securities. In addition, the Company and the Indenture Trustee may
execute, without the consent of any holder of Junior Subordinated Debentures,
any supplemental Indenture for the purpose of creating any new series of Junior
Subordinated Debentures.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default," with respect to the
Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case of an
Extension Period), or
(ii) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, upon redemption, by declaration or otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to the
Company from the Indenture Trustee or to the Company and the Indenture Trustee
by the holders of at least 25% in aggregate outstanding principal amount of the
Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company or certain of its Subsidiaries.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to
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the Indenture Trustee. The Indenture Trustee or the holders of not less than
25% in aggregate outstanding principal amount of the Junior Subordinated
Debentures may declare the principal due and payable immediately upon a
Debenture Event of Default. If the Indenture Trustee or such holders of such
Junior Subordinated Debentures fail to make such declaration, the holders of at
least 25% in aggregate Liquidation Amount of the Trust Preferred Securities
shall have such right. The holders of a majority in aggregate outstanding
principal amount of the Junior Subordinated Debentures may annul such
declaration and waive the default if the default (other than the non-payment of
the principal of the Junior Subordinated Debentures which has become due solely
by such acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Indenture Trustee. Should the holders of the Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the Trust
Preferred Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of
Junior Subordinated Debentures affected thereby may, on behalf of the holders
of all the Junior Subordinated Debentures, waive any past default, except a
default in the payment of principal or interest (unless such default has been
cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Indenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Junior Subordinated Debenture.
In case a Debenture Event of Default shall occur and be continuing as to
the Junior Subordinated Debentures, the Property Trustee, as holder of the
Junior Subordinated Debentures, will have the right to declare the principal of
and the interest on such Junior Subordinated Debentures, and any other amounts
payable under the Indenture, to be forthwith due and payable and to enforce its
other rights as a creditor with respect to such Junior Subordinated Debentures.
The Company is required to file annually with the Indenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
Enforcement of Certain Rights by Holders of Trust Preferred Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or
principal on the Junior Subordinated Debentures on the date such interest or
principal is otherwise payable, a holder of Trust Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Trust Preferred Securities of such holder (a "Direct
Action"). The Company may not amend the Indenture to remove the foregoing right
to bring a Direct Action without the prior written consent of the holders of
all of the Trust Preferred Securities outstanding. The Company shall have the
right under the Indenture to set off any payment made to such holder of Trust
Preferred Securities by the Company in connection with a Direct Action.
The holders of the Trust Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of the Trust Preferred Securities--Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that the Company shall not consolidate with or
merge into any other Person or convey, transfer or lease its properties and
assets substantially as an entirety to any Person, and no Person shall
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless (i)
in case the Company consolidates with or merges into another Person or conveys,
transfers or leases its properties and assets substantially as an entirety to
any Person, the successor Person is organized under the laws of the United
States or any state or the District of Columbia, and such successor Person
expressly assumes the Company's obligations on the Junior Subordinated
Debentures issued under the Indenture; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; and (iii) certain other conditions as prescribed in
the Indenture are met.
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The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged or
other similar transaction involving the Company that may adversely affect
holders of the Junior Subordinated Debentures.
Satisfaction and Discharge
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and
payable at their Stated Maturity within one year, and the Company deposits or
causes to be deposited with the Indenture Trustee funds, in trust, for the
purpose and in an amount in the currency or currencies in which the Junior
Subordinated Debentures are payable sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Indenture Trustee for cancellation, for the principal and interest to the
date of the deposit or to the Stated Maturity, as the case may be, then the
Indenture will cease to be of further effect (except as to the Company's
obligations to pay all other sums due pursuant to the Indenture and to provide
the officers' certificates and opinions of counsel described therein), and the
Company will be deemed to have satisfied and discharged the Indenture.
Covenants of the Company
The Company will covenant in the Indenture, as to the Junior Subordinated
Debentures, that if and so long as (i) the Property Trustee on behalf of the
Trust is the holder of all such Junior Subordinated Debentures, (ii) a Tax
Event in respect of the Trust has occurred and is continuing and (iii) the
Company has elected, and has not revoked such election, to pay Additional Sums
(as defined under "Description of the Trust Preferred Securities--Redemption")
in respect of the Trust Preferred Securities, the Company will pay to the Trust
such Additional Sums. The Company will also covenant, as to the Junior
Subordinated Debentures, (i) to maintain directly or indirectly 100% ownership
of the Common Securities of the Trust to which Junior Subordinated Debentures
have been issued, provided that certain successors which are permitted to do so
pursuant to the Indenture may succeed to the Company's ownership of the Common
Securities, (ii) not to voluntarily dissolve, wind up or liquidate the Trust,
except (a) in connection with a distribution of Junior Subordinated Debentures
to the holders of the Trust Preferred Securities in liquidation of the Trust or
(b) in connection with certain mergers, consolidations, or amalgamations
permitted by the Trust Agreement and (iii) to use its reasonable efforts,
consistent with the terms and provisions of the Trust Agreement, to cause the
Trust to remain classified as a grantor trust and not an association taxable as
a corporation for United States federal income tax purposes.
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of New York, except that
the immunities and standard of care of the Indenture Trustee will be governed
by Delaware law.
Information Concerning the Indenture Trustee
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Trust
Preferred Securities and, if the Junior Subordinated Debentures are distributed
to holders of Trust Preferred Securities, the Junior Subordinated Debentures.
The Trust Preferred Securities and, in such event, the Junior Subordinated
Debentures will be issued only as fully-registered securities registered in the
name of Cede & Co. (the Depositary's nominee). One or more fully-registered
global certificates will be issued for the Trust Preferred Securities and the
Junior Subordinated Debentures and will be deposited with the Depositary.
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The Depositary is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds secur-ities that its Participants deposit with the
Depositary. The Depositary also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. "Direct Participants" include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. The Depositary is owned by a number of its Direct Participants
and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and
the National Association of Securities Dealers, Inc. Access to the Depositary
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain custodial
relationships with Direct Participants, either directly or indirectly
("Indirect Participants"). The rules applicable to the Depositary and its
Participants are on file with the Commission.
Purchases of Trust Preferred Securities or Junior Subordinated Debentures
within the Depositary system must be made by or through Direct Participants,
which will receive a credit for the Trust Preferred Securities or Junior
Subordinated Debentures on the Depositary's records. The ownership interest of
each actual purchaser of each Trust Preferred Security and each Junior
Subordinated Debenture ("Beneficial Owner") will be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from the Depositary of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the Direct
or Indirect Participants through which the Beneficial Owners purchased Trust
Preferred Securities or Junior Subordinated Debentures. Transfers of ownership
interests in the Trust Preferred Securities or Junior Subordinated Debentures
are to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in Trust Preferred Securities or Junior
Subordinated Debentures, except in the event that use of the book-entry system
for the Trust Preferred Securities or Junior Subordinated Debentures is
discontinued.
The Depositary has no knowledge of the actual Beneficial Owners of the
Trust Preferred Securities or Junior Subordinated Debentures; the Depositary's
records reflect only the identity of the Direct Participants to whose accounts
such Trust Preferred Securities or Junior Subordinated Debentures are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices will be sent to the Depositary. If less than all of the
Trust Preferred Securities or the Junior Subordinated Debentures are being
redeemed, the Depositary has informed the Trust and the Company that its
practice is to determine by lot the amount of the Trust Preferred Securities of
each Direct Participant to be redeemed.
Although voting with respect to the Trust Preferred Securities or the
Junior Subordinated Debentures is limited to the holders of record of the Trust
Preferred Securities or Junior Subordinated Debentures, as applicable, in those
instances in which a vote is required, neither the Depositary nor Cede & Co.
will itself consent or vote with respect to Trust Preferred Securities or
Junior Subordinated Debentures. Under its usual procedures, the Depositary
would mail an omnibus proxy (the "Omnibus Proxy") to the relevant Trustee as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts such
Trust Preferred Securities or Junior Subordinated Debentures are credited on
the record date (identified in a listing attached to the Omnibus Proxy).
Distribution and Redemption Price payments on the Trust Preferred
Securities or, if applicable, interest payments on the Junior Subordinated
Debentures will be made to Cede & Co., as nominee of the Depositary.
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The Depositary's practice is to credit Direct Participants' accounts on the
relevant payment date in accordance with their respective holdings shown on the
Depositary's records. Payments by Participants to Beneficial Owners will be
governed by standing instructions and customary practices and will be the
responsibility of such Participant and not of the Depositary, the relevant
Trustee, the Trust or the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of Distributions,
Redemption Price payments or interest, as applicable, to Cede & Co. is the
responsibility of the relevant Trustee, disbursement of such payments to Direct
Participants is the responsibility of Cede & Co., and disbursements of such
payments to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
Under certain circumstances set forth in the Trust Agreement, the Global
Trust Preferred Security will be exchangeable for definitive certificated Trust
Preferred Securities. See "Description of the Trust Preferred Securities."
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Trust
and the Company believe to be accurate, but the Trust and the Company assume no
responsibility for the accuracy thereof. Neither the Trust nor the Company has
any responsibility for the performance by the Depositary or its Participants of
their respective obligations as described herein or under the rules and
procedures governing their respective operations.
DESCRIPTION OF GUARANTEE
The Guarantee Agreement will be executed and delivered by the Company
concurrently with the issuance of the Trust Preferred Securities for the
benefit of the holders of the Trust Preferred Securities. Wilmington Trust
Company will act as Guarantee Trustee under the Guarantee Agreement for the
purposes of compliance with the Trust Indenture Act, and the Guarantee
Agreement will be qualified as an indenture under the Trust Indenture Act. The
following summary of certain provisions of the Guarantee does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Guarantee Agreement, including the definition therein
of certain terms, and the Trust Indenture Act. The form of the Guarantee
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. The Guarantee Trustee will hold the Guarantee for
the benefit of the holders of the Trust Preferred Securities.
General
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust's obligations under the Trust Preferred Securities, but will apply
only to the extent that the Trust has funds sufficient to make such payments,
and is not a guarantee of collection.
The Company will irrevocably unconditionally agree to pay in full on a
subordinated basis, to the extent set forth therein, the Guarantee Payments (as
defined below) to the holders of the Trust Preferred Securities, as and when
due, regardless of any defense, right of set-off or counterclaim that the Trust
may have or assert, other than the defense of payment. The following payments
with respect to the Trust Preferred Securities, to the extent not paid by or on
behalf of the Trust (the "Guarantee Payment"), will be subject to the
Guarantee: (i) any accumulated and unpaid Distributions required to be paid on
the Trust Preferred Securities, to the extent that the Trust has funds on hand
available therefor at such time, (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption, to the extent that the Trust
has funds on hand available therefor at such time, and (iii) upon a voluntary
or involuntary dissolution, winding up or liquidation of the Trust (unless the
Junior Subordinated Debentures are distributed to holders of the Trust
Preferred Securities), the lesser of (a) the Liquidation Distribution and (b)
the amount of assets of the Trust remaining available for distribution to
holders of Trust Preferred Securities, after satisfaction of liabilities to
creditors of the Trust as required by law. The Company's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Company to the holders of the Trust Preferred Securities or by causing the
Trust to pay such amounts to such holders.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Trust, the Trust will not be able to pay Distributions
on the Trust Preferred Securities and will not have funds legally available
therefor. The Guarantee will rank subordinate and junior in right of payment to
all Senior Debt and
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Subordinated Debt of the Company. See "--Status of the Guarantee" below.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the
prior claims of creditors of that subsidiary, except to the extent the Company
may itself be recognized as a creditor of that subsidiary. Accordingly, the
Company's obligations under the Guarantee will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, and
claimants should look only to the assets of the Company for payments
thereunder. Except as otherwise described herein, the Guarantee does not limit
the incurrence or issuance of other secured or unsecured debt of the Company,
including Senior Debt and Subordinated Debt whether under the Indenture, any
other indenture that the Company may enter into in the future, or otherwise.
The Company has, through the Guarantee Agreement, the Trust Agreement, the
Junior Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, fully, irrevocably and unconditionally guaranteed all of the Trust's
obligations under the Trust Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Preferred
Securities. See "Relationship Among the Trust Preferred Secur-ities, the Junior
Subordinated Debentures and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt and
Subordinated Debt in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of
collection. For example, the guaranteed party may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against any other person or entity. The
Guarantee will be held for the benefit of the holders of the Trust Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payment in full to the extent not paid by the Trust or upon
distribution of the Junior Subordinated Debentures to the holders of the Trust
Preferred Securities. The Guarantee does not place a limitation on the amount
of additional Senior Debt and Subordinated Debt that may be incurred by the
Company. The Company expects from time to time to incur additional indebtedness
constituting Senior Debt and Subordinated Debt.
Amendments and Assignment
Except with respect to any changes which do not materially adversely
affect the rights of holders of the Trust Preferred Securities (in which case
no vote will be required), the Guarantee Agreement may not be amended without
the prior approval of the holders of not less than a majority of the aggregate
Liquidation Amount of such outstanding Trust Preferred Securities. See
"Description of the Trust Preferred Securities--Vot-ing Rights; Amendment of
the Trust Agreement." All guarantees and agreements contained in the Guarantee
Agreement shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Trust Preferred Securities then outstanding.
Events of Default
An Event of Default under the Guarantee Agreement will occur upon the
failure of the Company to perform any of its payment or other obligations
thereunder and, except for a default in payment of a Guaranty Payment, the
Guarantor shall have received notice of default and shall not have cured such
default within 90 days after receipt of such notice. The holders of not less
than a majority in aggregate Liquidation Amount of the Trust Preferred
Securities have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Guarantee Trustee in respect of
the Guarantee or to direct the exercise of any trust or power conferred upon
the Guarantee Trustee under the Guarantee Agreement. Any holder of the Trust
Preferred Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity.
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The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with
all the conditions and covenants applicable to it under the Guarantee
Agreement.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of
an Event of Default, and after curing all Events of Default that shall have
occurred under the Guarantee Agreement, has undertaken to perform only such
duties as are specifically set forth in the Guarantee Agreement and, after the
occurrence of an Event of Default under the Guarantee Agreement, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by
the Guarantee Agreement at the request of any holder of the Trust Preferred
Securities unless it is offered adequate security and indemnity as would
satisfy a reasonable person in the position of the Guarantee Trustee against
the costs, expenses and liabilities that might be incurred thereby.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Trust Preferred Securities, upon
full payment of the amounts payable upon liquidation of the Trust or upon
distribution of Junior Subordinated Debentures to the holders of the Trust
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Trust
Preferred Securities must restore payment of any sums paid under the Trust
Preferred Securities or the Guarantee.
Governing Law
The Guarantee Agreement will be governed by and construed in accordance
with the laws of the State of New York.
EXPENSE AGREEMENT
Pursuant to the Expense Agreement to be entered into between the Company
and the Trust under the Trust Agreement, the Company will irrevocably and
unconditionally guarantee to each person or entity to whom the Trust becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
the Trust (including, without limitation, expenses relating to the offering of
the Trust Preferred Securities and any expenses the Property Trustee may incur
relating to the enforcement of the rights of the holders of the Trust Preferred
Securities or the Junior Subordinated Debentures pursuant to the Trust
Agreement and the Indenture, respectively), other than obligations of the Trust
to pay to the holders of the Trust Preferred Securities or other similar
interests in the Trust the amounts due such holders pursuant to the terms of
the Trust Preferred Securities or such other similar interests, as the case may
be. The Expense Agreement may be enforced against the Company by any person or
entity to whom the Trust is or becomes indebted or liable.
RELATIONSHIP AMONG THE TRUST PREFERRED
SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Trust Preferred
Securities (to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of Guarantee." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Indenture, the Trust
Agreement, the Expense Agreement and the Guarantee Agreement provide, in the
aggregate, a full, irrevocable and unconditional guarantee of payments of
distributions and other amounts due on the Trust Preferred Securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
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operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Trust's obligations under the
Trust Preferred Securities. If and to the extent that the Company does not make
payments on the Junior Subordinated Debentures, the Trust will not pay
Distributions or other amounts due on the Trust Preferred Securities. The
Guarantee does not cover payment of Distributions when the Trust does not have
sufficient funds to pay such Distributions. In such event, the remedy of a
holder of the Trust Preferred Securities is to institute a legal proceeding
directly against the Company for enforcement of payment on the Junior
Subordinated Debentures. The obligations of the Company under the Guarantee are
subordinate and junior in right of payment to all Senior Debt and Subordinated
Debt of the Company.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Trust Preferred Securities,
primarily because: (i) the aggregate principal amount of the Junior
Subordinated Debentures will be equal to the sum of the aggregate Liquidation
Amount of the Trust Preferred Securities and Common Securities; (ii) the
interest rate and interest and other payment dates on the Junior Subordinated
Debentures will match the Distribution rate and Distribution and other payment
dates for the Trust Preferred Securities; (iii) the Company shall pay for all
and any costs, expenses and liabilities of the Trust, except the Trust's
obligations to holders of Trust Preferred Securities; and (iv) the Trust
Agreement further provides that the Trust will not engage in any activity that
is not consistent with its limited purposes.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set off any payment it is otherwise required to make thereunder to
the extent the Company has theretofore made, or is concurrently on the date of
such payment making, a payment under the Guarantee.
Enforcement Rights of Holders of the Trust Preferred Securities Under the
Guarantee
A holder of any of the Trust Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee, the Trust or any other person or entity.
A default or event of default under any Senior Debt and Subordinated Debt
would not constitute a default or Event of Default under the Guarantee.
However, in the event of a default under Senior Debt and Subordinated Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debentures from and after the time that
the Company and the Indenture Trustee receive notice of such default and while
such default is continuing. Failure to make required payments on Junior
Subordinated Debentures would constitute an Event of Default.
Limited Purpose of the Trust
The Trust Preferred Securities evidence a beneficial interest in the
Trust, and the Trust exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in Junior Subordinated
Debentures. A principal difference between the rights of a holder of the Trust
Preferred Securities and a holder of a Junior Subordinated Debenture is that a
holder of a Junior Subordinated Debenture is entitled to receive from the
Company the principal amount of and interest accrued on Junior Subordinated
Debentures held, while a holder of the Trust Preferred Securities is entitled
to receive Distributions from the Trust (or from the Company under the
Guarantee) if and to the extent the Trust has funds available for the payment
of such Distributions.
Rights upon Dissolution
Upon any voluntary or involuntary dissolution, winding-up or liquidation
of the Trust involving the liquidation of the Junior Subordinated Debentures,
after satisfaction of liabilities to creditors of the Trust as provided by
applicable law, the holders of Trust Preferred Securities will be entitled to
receive, out of assets held by the Trust, the Liquidation Distribution in cash.
See "Description of the Trust Preferred Securities-- Liquidation Distribution
Upon Dissolution." Upon any voluntary or involuntary liquidation or bankruptcy
of the Company, the Property Trustee, as holder of the Junior Subordinated
Debentures, would be a subordinated creditor of the
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Company, subordinated in right of payment to all Senior Debt and Subordinated
Debt as set forth in the Indenture, but entitled to receive payment in full of
principal and interest, before any stockholders of the Company receive payments
or distributions. Since the Company is the guarantor under the Guarantee and
has agreed to pay for all costs, expenses and liabilities of the Trust (other
than the Trust's obligations to the holders of its Trust Preferred Securities),
the positions of a holder of the Trust Preferred Securities and a holder of
Junior Subordinated Debentures relative to other creditors and to stockholders
of the Company in the event of liquidation or bankruptcy of the Company are
substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is the opinion of Tenzer Greenblatt LLP, counsel to the Company
("Counsel") that the following is accurate in all material respects and,
subject to the limitations stated herein, represents the material federal
income tax consequences to holders of the Trust Preferred Securities arising
from the purchase, ownership and disposition thereof. The following opinions
assume the accuracy of the facts set forth in the prospectus. The opinions set
forth in this section, unless otherwise stated, deal only with Trust Preferred
Securities held as capital assets by United States Persons (defined below) who
purchase the Trust Preferred Securities upon original issuance at their
original offering price. As used herein, a "United States Person" means a
person that is (i) a citizen or resident of the United States as determined for
United States federal income tax purposes, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) a trust if a U.S. court is able to exercise primary supervision over the
administration of such trust and one or more United States persons have the
authority to control all substantial decisions of such trust. The tax treatment
of holders may vary depending on their particular situation. The following
opinions do not address all the tax consequences that may be relevant to a
particular holder or to holders who may be subject to special tax treatment,
such as banks, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt investors,
foreign investors, investors that hold the Trust Preferred Securities as part
of a hedging, straddle, constructive sale, or conversion or other risk
reduction transaction or whose functional currency is not the U.S. dollar. In
addition, the following opinions do not include any description of any
alternative minimum tax consequences or the tax laws of any state, local or
foreign government that may be applicable to a holder of Trust Preferred
Securities. The opinions set forth herein are based on the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury regulations promulgated
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis.
The following opinions do not address the tax consequences that might be
relevant to persons that are not United States Persons ("non-United States
Persons"). Non-United States Persons should consult their own tax advisors as
to the specific United States federal income and other tax consequences of the
purchase, ownership and disposition of Trust Preferred Securities.
The authorities on which the opinions set forth herein are based are
subject to various interpretations, and opinions of Counsel are not binding on
the Internal Revenue Service ("Service") or the courts, either of which could
take a contrary position. Moreover, no rulings have been or will be sought from
the Service with respect to the transactions described herein. Accordingly,
there can be no assurance that the Service will not challenge the opinions
expressed herein or that a court would not sustain such a challenge.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED
STATES FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION
OF THE TRUST PREFERRED SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS,
SEE "DESCRIPTION OF THE TRUST PREFERRED SECURITIES--REDEMPTION."
Classification of the Trust
In connection with the issuance of the Trust Preferred Securities, Counsel
will render its opinion that, under current law and assuming compliance with
the terms of the Trust Agreement, and based on certain facts and
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assumptions contained in such opinion, the Trust will be classified as a
grantor trust and not as an association taxable as a corporation for United
States federal income tax purposes. As a result, each beneficial owner of the
Trust Preferred Securities (a "Securityholder") will be treated as owning an
undivided beneficial interest in the Junior Subordinated Debentures.
Accordingly, each Securityholder will be required to include in its gross
income its pro rata share of the interest income or original issue discount
("OID") that is paid or accrued on the Junior Subordinated Debentures. See "--
Interest Income and Original Issue Discount" herein.
Classification of the Junior Subordinated Debentures
The Company intends to take the position that the Junior Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of the Company under current law, and, by acceptance of a Trust
Preferred Security, each holder covenants to treat the Junior Subordinated
Debentures as indebtedness and the Trust Preferred Securities as evidence of an
indirect beneficial ownership interest in the Junior Subordinated Debentures.
Counsel has not delivered any opinion relating to the classification of the
Junior Subordinated Debentures as indebtedness and no assurance can be given
that such position of the Company will not be challenged by the Service or, if
challenged, that such a challenge will not be successful. The remainder of this
"Certain Federal Income Tax Consequences" section assumes that the Junior
Subordinated Debentures will be classified for United States federal income tax
purposes as indebtedness of the Company. No amount included in income with
respect to the Junior Subordinated Debentures and Trust Preferred Securities
will be eligible for the dividends received deduction.
Interest Income and Original Issue Discount
Except as set forth below, stated interest on the Junior Subordinated
Debentures generally will be included in income by a Securityholder at the time
such interest income is paid or accrued in accordance with such Secur-
ityholder's regular method of tax accounting. Under the applicable Treasury
regulations, the Junior Subordinated Debentures will not be considered to have
been issued with OID within the meaning of Section 1273(a) of the Code, so long
as the Junior Subordinated Debentures have terms and conditions that render the
likelihood of the Company's exercising its right to defer payments of interest
on the Junior Subordinated Debentures to be remote. The Company believes that
the terms and conditions of the Junior Subordinated Debentures (including the
restrictions on other payments during the Extension Period) are such that the
likelihood of its exercising such right is remote, and intends to take the
position that the Junior Subordinated Debentures are not issued with OID.
Because this issue is inherently factual, Counsel is unable to express any
opinion regarding whether the Junior Subordinated Debentures are issued with
OID. If, however, the Company exercises its right to defer payments of interest
on the Junior Subordinated Debentures, the Junior Subordinated Debentures will
become OID instruments at such time and all Securityholders will be required to
accrue the stated interest on the Junior Subordinated Debentures as it accrues
on a daily basis during the Extension Period, even though the Company will not
pay such interest until the end of the Extension Period, and even though some
Securityholder otherwise may use the cash method of tax accounting. Moreover,
if the Company exercises such right, the Junior Subordinated Debentures
thereafter will be taxed as OID instruments for as long as they remain
outstanding. Thus, even after the end of the Extension Period, all
Securityholders will be required to continue to include the stated interest on
the Junior Subordinated Debentures in income on a daily economic accrual basis,
regardless of their method of tax accounting and in advance of receipt of the
cash attributable to such interest income. Under the economic accrual rules, a
Securityholder is required to accrue an amount of interest income each year
that approximates the stated interest payments called for under the Junior
Subordinated Debentures, and actual cash payments of interest on the Junior
Subordinated Debentures are not reported separately as taxable income. A
Securityholder's basis in Trust Preferred Securities will be increased by any
OID includible in income.
The Company's determination that there is a remote likelihood of
exercising its right to defer the payment of interest on the Trust Preferred
Securities is binding on each Securityholder unless the holder explicitly
discloses in the manner required by applicable Treasury regulations that its
determination is different from the Company's. The Company's determination is
not, however, binding on the Service.
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The Treasury regulations described above have not yet been addressed in
any definitive interpretations by the Service, and it is possible that the
Service could take a contrary position. If the Service were to assert
successfully that the stated interest on the Junior Subordinated Debentures was
OID regardless of whether the Company exercises its right to defer payments of
interest on such debentures, all Securityholders will be required to include
such stated interest in income on a daily economic accrual basis as described
above.
Distribution of Junior Subordinated Debentures to Holders of Trust Preferred
Securities
Under current law, a distribution by the Trust of the Junior Subordinated
Debentures as described under the captions "Description of the Trust Preferred
Securities--Distribution of Junior Subordinated Debentures" and "Liquidation
Distribution Upon Dissolution" will be non-taxable and will result in the
Securityholder receiving directly its pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Trust, with a holding period
and aggregate tax basis equal to the holding period and aggregate tax basis
such Securityholder had in its Trust Preferred Securities before such
distribution. A Securityholder would continue to recognize interest income in
respect of Junior Subordinated Debentures received from the Trust in the manner
described above under "--Interest Income and Original Issue Discount" herein.
If, however, the liquidation of the Trust were to occur because the Trust is
subject to United States federal income tax with respect to income accrued or
received on the Junior Subordinated Debentures as a result of a Tax Event or
otherwise, the distribution of Junior Subordinated Debentures to
Securityholders by the Trust could be a taxable event to the Trust and each
Securityholder, and a Securityholder could be required to recognize gain or
loss as if the Securityholder had exchanged its Trust Preferred Securities for
the Junior Subordinated Debentures it received upon the liquidation of the
Trust, and the Securityholder's holding period for the Junior Subordinated
Debentures received would not include the holding period for the Trust
Preferred Securities surrendered in the liquidation.
Sales or Redemption of Trust Preferred Securities
Gain or loss will be recognized by a Securityholder on a sale of Trust
Preferred Securities (including a redemption for cash) in an amount equal to
the difference between the amount realized (which for this purpose, will
exclude amounts attributable to accrued interest or OID not previously included
in income) and the Secur-ityholder's adjusted tax basis in the Trust Preferred
Securities sold or so redeemed. Gain or loss recognized by a Securityholder on
Trust Preferred Securities held for more than one year will generally be
taxable as long-term capital gain or loss, although the preferential 20% rate
applicable to individuals applies only in the case of a capital asset sold or
exchanged having a holding period in excess of 18 months. Amounts attributable
to accrued interest or OID with respect to a Securityholder's pro rata share of
the Junior Subordinated Debentures not previously included in income will be
taxable as ordinary income.
Backup Withholding Tax and Information Reporting
The amount of interest and OID accrued on the Trust Preferred Securities
held of record by United States Persons (other than certain exempt
Securityholders), if any, will be reported to the Service. "Backup" with-holding
at a rate of 31% will apply to payments of interest to non-exempt United States
Persons unless the Securityholder furnishes its taxpayer identification number
in the manner prescribed in applicable Treasury Regulations, certifies that
such number is correct, certifies as to no loss of exemption from backup
withholding and meets certain other conditions. Any amounts withheld from a
Securityholder under the backup withholding rules will be allowed as a refund
or a credit against such Securityholder's United States federal income tax
liability, provided the required information is timely furnished to the
Service.
Possible Tax Law Changes Affecting the Trust Preferred Securities
There can be no assurance that future legislative proposals or final
legislation will not affect the ability of the Company to deduct interest on
the Junior Subordinated Debentures. Such a change could give rise to a Tax
Event, which may permit the Company to cause a redemption of the Trust
Preferred Securities. See "Description of the Trust Preferred
Securities--Redemption--Tax Event Redemption, Investment Company Event
Redemption or Distribution of Junior Subordinated Debentures" and "Description
of Junior Subordinated Debentures--Redemption."
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") should consider the fiduciary standards of ERISA in the context of
the plan's particular circumstances before authorizing an investment in the
Trust Preferred Securities. Among other factors, the fiduciary should consider
whether such an investment is in accordance with the documents governing the
plan and whether an investment is appropriate for the plan in view of its
overall investment policy and the composition and diversification of its
portfolio. Other provisions of ERISA and the Code prohibit an employee benefit
plan subject to either ERISA or Section 4975 of the Code (which generally
includes individual retirement accounts and so-called "Keogh" plans as well as
other employer-sponsored plans) from engaging in certain transactions involving
"plan assets" with parties which are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the plan. Therefore, a
fiduciary of an employee benefit plan should also consider whether an
investment in the Trust Preferred Securities might constitute or give rise to a
prohibited transaction under ERISA and the Code.
If the assets of the Trust were deemed to be plan assets of employee
benefit plans that are holders of the Trust Preferred Securities (including
holders, who are not employee benefit plans themselves but are investing "plan
assets" of an employee benefit plan), the plan's investment in the Trust
Preferred Securities might be deemed to constitute a delegation under ERISA of
the duty to manage plan assets by an ERISA plan fiduciary investing in Trust
Preferred Securities, and certain transactions involving the operation of the
Trust might be deemed to constitute prohibited transactions under ERISA and the
Code.
The U.S. Department of Labor (the "DOL") has issued a regulation with
regard to whether the underlying assets of an entity in which employee benefit
plans acquire equity investments would be deemed to be plan assets. The
regulation provides that the underlying assets of an entity will not be
considered to be plan assets if the interests of the entity acquired by the
employee benefit plan are "publicly-offered securities" -- that is, they are
(1) widely held (i.e., owned by more than 100 investors independent of the
entity and of each other), (2) freely transferable, and (3) sold as part of an
offering pursuant to an effective registration statement under the Securities
Act and timely registered under Section 12(b) or 12(g) of the Exchange Act. It
is expected that the Trust Preferred Securities will meet the criteria of
"publicly offered securities" above. The Underwriters expect that the Trust
Preferred Securities will be held by at least 100 independent investors at the
conclusion of the offering. There are no restrictions imposed on the transfer
of the Trust Preferred Securities and the Trust Preferred Securities will be
sold as part of an offering pursuant to an effective registration statement
under the Securities Act, and will be timely registered under the Exchange Act.
Even if the assets of the Trust were deemed to be "plan assets" of
employee benefit plans that are holders of the Trust Preferred Securities,
there are five class exemptions issued by the DOL which could apply to except
certain transactions involving assets of the Trust from the prohibited
transaction provisions of ERISA and the Code--Prohibited Transaction Exemption
84-14, for certain transactions determined by qualified professional asset
managers; Prohibited Transaction Exemption 90-1, for certain transactions
involving insurance company pooled separate accounts; Prohibited Transaction
Exemption 91-38, for certain transactions involving bank collective investment
funds; Prohibited Transaction Exemption 95-60, for certain transactions
involving insurance company general accounts; and Prohibited Transaction
Exemption 96-23, for certain transactions determined by in-house asset
managers.
Even if the assets of the Trust are not deemed "plan assets" of employee
benefit plans that hold Trust Preferred Securities, the Company might be
considered a party in interest or a disqualified person with respect to certain
such employee benefit plans by reason of pre-existing relationships, such as
plans for which the Company, or an affiliate serves as trustee. Therefore,
before such employee benefit plans purchase Trust Preferred Securities, they
should determine that either (a) neither the Company nor any affiliate is a
party in interest on disqualified person with respect to such plan or (b) one
of the class exemptions referred to in the preceding paragraph or any other
exemption from the prohibited transacted rules under ERISA and the Code is
applicable to their purchase and holding of the Trust Preferred Securities.
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is important that an employee
benefit plan considering the purchase of Trust Preferred Securities
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consult with its counsel regarding the consequences under ERISA of the
acquisition and ownership of Trust Preferred Securities. Employee benefit plans
which are governmental plans (as defined in Section 3(32) of ERISA) and certain
church plans (as defined in Section 3(33) of ERISA) generally are not subject
to ERISA requirements of the prohibited transaction provisions of the Code.
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UNDERWRITING
Subject to the terms and certain conditions of the Underwriting Agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom EVEREN Securities, Inc., Hambrecht & Quist, LLC and
Josephthal & Co. Inc. are acting as representatives (the "Representatives"),
have severally agreed to purchase an aggregate of 2,200,000 Trust Preferred
Securities from the Trust. The number of Trust Preferred Securities that each
Underwriter has agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
Underwriters Number of Trust Preferred Securities
- ---------------------------------------- -------------------------------------
<S> <C>
EVEREN Securities, Inc. .......... 1,585,000
Hambrecht & Quist, LLC ........... 440,000
Josephthal & Co. Inc. ............ 175,000
---------
Total .......................... 2,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters who are parties thereunder are subject to certain conditions. If
any of the Trust Preferred Securities are purchased by the Underwriters
pursuant to the Underwriting Agreement, all of such Trust Preferred Securities
(other than the Trust Preferred Securities covered by the over-allotment option
described below) must be so purchased.
The Trust and the Company have been advised by the Representatives that
the Underwriters propose to offer the Trust Preferred Securities to the public
initially at the price to the public set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not to exceed
$.50 per Trust Preferred Security. The Underwriters may allow, and such dealers
may reallow, discounts not to exceed $.25 per Trust Preferred Security to
certain other dealers. After the initial public offering of the Trust Preferred
Securities, the public offering price and the other selling terms may be
changed by the Representatives. In view of the fact that the proceeds of the
sale of the Trust Preferred Securities will be used to purchase the Junior
Subordinated Debentures of the Company, the Underwriting Agreement provides
that the Company will pay as compensation to the Underwriters arranging the
investment therein of such proceeds, an amount in immediately available funds
of $1.00 per Trust Preferred Security (or $2,200,000 in the aggregate) for the
accounts of the Underwriters.
The Trust has granted to the Underwriters an option to purchase up to an
additional $8,250,000 aggregate liquidation amount of Trust Preferred
Securities at the price to the public set forth on the cover page of this
Prospectus, solely to cover over-allotments, if any. To the extent that the
Underwriters exercise such option, each of the Underwriters will be committed,
subject to certain conditions, to purchase a number of option Trust Preferred
Securities proportionate to such Underwriter's initial commitment as indicated
in the preceding table.
The Trust and the Company have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Act, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
The Trust Preferred Securities are a new issue of securities with no
established trading market. The Trust Preferred Securities have been approved
for listing on the American Stock Exchange, subject to notice of issuance. In
order to meet the listing requirements of the American Stock Exchange, the
Representatives have undertaken to distribute the Trust Preferred Securities to
a minimum of 400 public stockholders. The Representatives have advised the
Trust and the Company that the Underwriters presently intend to make a market
in the Trust Preferred Securities after the commencement of trading on the
American Stock Exchange, but no assurances can be made as to the liquidity of
the Trust Preferred Securities or that an active and liquid trading market will
develop or, if developed, that it will continue. The offering price and
distribution rate have been determined by negotiations among representatives of
the Company and the Representatives, and the offering price of the Trust
Preferred Securities may not be indicative of the market price following the
offering. The Underwriters will have no obligation to make a market in the
Trust Preferred Securities, however, and may cease market-making activities, if
commenced, at any time.
The Trust and the Company have agreed with the Underwriters not to (other
than in connection with this offering), directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise issue any Trust
89
<PAGE>
Preferred Securities or Junior Subordinated Debentures, any securities
convertible into or exercisable or exchangeable for Trust Preferred Securities,
or any securities substantially similar to the Trust Preferred Securities or
Junior Subordinated Debentures, enter into any swap or other agreement to do
any of the foregoing, or file any registration statement relating to any of the
foregoing on behalf of itself or any other person, for a period of 180 days
after the date of this Prospectus, without the written consent of EVEREN
Securities, Inc.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Trust Preferred
Securities. Such transactions may include stabilization transactions effected
in accordance with the Securities Exchange Act of 1934 pursuant to which such
persons may bid for or purchase Trust Preferred Securities for the purpose of
stabilizing its market price. The Underwriters also may create a short position
for the account of the Underwriters by selling more Trust Preferred Securities
in connection with this offering than they are committed to purchase from the
Trust, and in such case may purchase Trust Preferred Securities in the open
market following completion of the offering to cover all or a portion of such
Trust Preferred Securities or may exercise the Underwriters' over-allotment
option referred to above. In addition, the Representatives, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby they may reclaim from an Underwriter (or dealer
participating in the offering), for the account of the other Underwriters, the
selling concession with respect to Trust Preferred Securities that are
distributed in this offering but subsequently purchased for the account of the
Underwriters in the open market.
Josephthal & Co. Inc. has performed investment banking and advisory
services for the Company since April 1997 for which it received a $100,000 cash
payment and warrants to purchase 250,000 shares of Common Stock at a price of
$4.25 per share. The warrants issued to Josephthal & Co. Inc. (the "Josephthal
Warrants") are exercisable at any time during the four-year period ending
December 10, 2002 (the "Warrant Exercise Term"). The Josephthal Warrants and
the shares of Common Stock issuable upon exercise of the Josephthal Warrants
may not be sold, transferred, pledged or hypothecated for a period ending
December 10, 1998. Josephthal & Co. Inc. has the right to require the Company
to register the shares of Common Stock issuable upon exercise of the Josephthal
Warrants under the Act, on one occasion, during the Warrant Exercise Term. The
Josephthal Warrants provide that the exercise price will be proportionately
adjusted in the event of a stock split, subdivisions combination of the Common
Stock or the issuance of a stock dividend on the Common Stock.
In connection with the Company's December 1997 public offering, the
Company granted EVEREN Secur-ities, Inc. and Josephthal & Co. Inc. certain
rights of first refusal to underwrite or place any public or private offering
of equity or debt securities of the Company for a period ending December 15,
1998.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Trust
Preferred Securities, the enforceability of the Trust Agreement and the
creation of the Trust will be passed upon by Richards, Layton & Finger, P.A.,
Wilmington, Delaware, special Delaware counsel to the Company and the Trust.
Richard, Layton & Finger, P.A., will also pass on certain matters on behalf of
Wilmington Trust Company in connection with the offering. The validity of the
Guarantee and the Junior Subordinated Debentures will be passed upon for the
Company by Tenzer Greenblatt LLP, counsel to the Company. Certain legal matters
relating to the offering will be passed upon for the Underwriters by Gibson,
Dunn & Crutcher, LLP. Tenzer Greenblatt LLP and Gibson, Dunn & Crutcher LLP
will rely on the opinions of Richards, Layton & Finger, P.A. as to certain
matters of Delaware law. Certain matters relating to United States federal
income tax considerations will be passed upon for the Company by Tenzer
Greenblatt LLP. Certain partners of Tenzer Greenblatt LLP are the beneficial
owners of options and/or warrants to purchase Common Stock.
EXPERTS
The financial statements and schedule included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said
firm as experts in auditing and accounting.
90
<PAGE>
Index to Financial Statements
U.S. Home & Garden Inc. and Subsidiaries
<TABLE>
<CAPTION>
Page
---------------
<S> <C>
Report of Independent Certified Public Accountants ...................................... F-2
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 1996 and 1997 and December 31, 1997
(unaudited) .......................................................................... F-3
Consolidated statements of income for the years ended June 30, 1995, 1996 and 1997
and for the six months ended December 31, 1996 and 1997 (unaudited) .................. F-4
Consolidated statements of stockholders' equity for the years ended June 30, 1995,
1996 and 1997 and for the six months ended December 31, 1997 (unaudited) ............. F-5
Consolidated statements of cash flows for the years ended June 30, 1995, 1996 and
1997 and for the six months ended December 31, 1996 and 1997 (unaudited) ............. F-6
Summary of Accounting Policies ........................................................ F-7 - F-9
Notes to Consolidated Financial Statements ............................................ F-10 - F-23
Weatherly Consumer Products Group, Inc. and Subsidiaries
Report of Independent Public Accountants ................................................ F-24
Consolidated Financial Statements
Consolidated statements of operations for the year ended September 30, 1995 and the
period October 1, 1995 through August 9, 1996 ........................................ F-25
Consolidated statements of stockholders' equity for the year ended September 30,
1995 and the period October 1, 1995 through August 9, 1996 ........................... F-26
Consolidated statements of cash flows for the year ended September 30, 1995 and the
period October 1, 1995 through August 9, 1996 ........................................ F-27
Notes to Financial Statements ......................................................... F-28 - F-32
Proforma Condensed Consolidated Financial Statements
Proforma condensed consolidated financial statements - background ..................... F-33
Proforma condensed consolidated statement of operations for the year ended June 30,
1997 ................................................................................. F-34
Notes to proforma condensed consolidated financial statements ......................... F-35
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc.
and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
San Francisco, California
August 1, 1997, except for Note 15 which
is as of September 15, 1997
F-2
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
-------------------------------- ---------------
1996 1997 1997
--------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C>
Assets (Notes 1 and 6)
Current
Cash and cash equivalents ....................................... $ 680,000 $ 2,083,000 $ 12,734,000
Accounts receivable, less allowance for doubtful accounts
and sales returns of $155,000, $314,000 and $375,000 ........... 7,109,000 11,542,000 7,533,000
Inventories (Note 3) ............................................ 3,392,000 5,254,000 7,673,000
Prepaid expenses and other current assets ....................... 462,000 419,000 674,000
Deferred tax asset (Note 10) .................................... 1,333,000 448,000 1,079,000
------------ ------------ ------------
Total current assets .......................................... 12,976,000 19,746,000 29,693,000
Furniture, fixtures and equipment, net (Note 4) .................... 1,216,000 2,315,000 2,401,000
Intangible assets (Note 1)
Excess of cost over net assets acquired (Note 5) ................ 15,784,000 41,834,000 41,010,000
Deferred financing costs, net of accumulated
amortization of $467,000, $302,000 and $533,000 ................ 1,005,000 1,621,000 1,389,000
Product rights, patents and trademarks, net of accumulated
amortization of $56,000, $75,000 and $83,000 ................... 198,000 180,000 172,000
Non-compete agreement, net of accumulated
amortization of $22,000 and $35,000 ............................ 478,000 465,000
Package design, net of accumulated amortization of $56,000,
$110,000 and $155,000........................................... 180,000 251,000 438,000
Trade credits (Note 2) ............................................. 1,295,000 1,149,000 1,044,000
Officer receivables (Note 7) ....................................... 617,000 694,000 829,000
Other assets ....................................................... 313,000 207,000 195,000
------------ ------------ ------------
$ 33,584,000 $ 68,475,000 $ 77,636,000
============ ============ ============
Liabilities and Stockholders' Equity (Note 1)
Current
Line of credit (Notes 1, 6 and 13) .............................. $ 1,288,000 $ $ 2,246,000
Current maturities of notes payable (Notes 1, 6 and 13) 2,362,000 8,990,000 3,840,000
Accounts payable ................................................ 1,285,000 1,774,000 2,974,000
Accrued expenses ................................................ 901,000 3,983,000 2,415,000
Accrued co-op advertising ....................................... 185,000 1,098,000 890,000
Accrued commissions ............................................. 546,000 859,000 372,000
Accrued interest (Note 6) ....................................... 592,000 261,000 225,000
Accrued purchase consideration (Note 1) ......................... 489,000 489,000 978,000
------------ ------------ ------------
Total current liabilities ..................................... 7,648,000 17,454,000 13,940,000
Accrued purchase consideration (Note 1) ............................ 978,000
Deferred tax liability (Note 10) ................................... 328,000 547,000 650,000
Notes payable, less current maturities (Notes 1, 6 and 13) ......... 6,238,000 17,570,000 16,430,000
------------ ------------ ------------
Total liabilities .................................................. 14,214,000 36,549,000 31,020,000
------------ ------------ ------------
Commitments, contingency and subsequent events (Notes 1, 6, 8,
9 and 15)
Stockholders' equity (Note 9)
Preferred stock, $.001 par value - shares authorized,
1,000,000; no shares outstanding ...............................
Common stock, $.001 par value -- shares authorized,
30,000,000; 10,507,000, 14,073,000 and
19,860,000 shares issued and outstanding at June
30, 1996 and 1997, and December 31, 1997 ....................... 11,000 14,000 20,000
Additional paid-in capital ...................................... 21,413,000 30,783,000 49,775,000
Retained earnings (deficit) ..................................... (2,054,000) 1,129,000 (3,179,000)
------------ ------------ ------------
Total stockholders' equity .................................... 19,370,000 31,926,000 46,616,000
------------ ------------ ------------
$ 33,584,000 $ 68,475,000 $ 77,636,000
============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Six months ended
Years ended June 30, December 31,
------------------------------------------------- ---------------------------------
1995 1996 1997 1996 1997
--------------- --------------- --------------- --------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales (Note 11) ...................... $ 19,692,000 $ 27,031,000 $ 52,046,000 $ 12,939,000 $ 15,538,000
Cost of sales ............................ 9,151,000 12,670,000 23,649,000 5,825,000 7,379,000
------------ ------------ ------------ ------------ ------------
Gross profit ............................. 10,541,000 14,361,000 28,397,000 7,114,000 8,159,000
------------ ------------ ------------ ------------ ------------
Operating expenses
Selling and shipping .................... 4,374,000 6,264,000 11,232,000 3,990,000 4,661,000
General and administrative .............. 2,778,000 4,348,000 6,513,000 3,322,000 3,891,000
------------ ------------ ------------ ------------ ------------
7,152,000 10,612,000 17,745,000 7,312,000 8,552,000
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ............ 3,389,000 3,749,000 10,652,000 (198,000) (393,000)
Other income (expense)
Investment income ....................... 34,000 69,000 76,000 43,000 104,000
Interest expense (Note 6) ............... (1,810,000) (2,009,000) (3,338,000) (1,375,000) (1,597,000)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary expense ................... 1,613,000 1,809,000 7,390,000 (1,530,000) (1,886,000)
Income tax (expense) benefit (Note 10) (38,000) 715,000 (3,200,000) 475,000 800,000
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary
expense ................................. 1,575,000 2,524,000 4,190,000 (1,055,000) (1,086,000)
Extraordinary expense of $1,459,000
on debt refinancing, net of income
taxes of $452,000 (Note 13) ............. (1,007,000) (1,007,000)
------------ ------------ ------------ ------------ ------------
Net income (loss) ........................ $ 1,575,000 $ 2,524,000 $ 3,183,000 $ (2,062,000) $ (1,086,000)
============ ============ ============ ============ ============
Basic earnings (loss) per share:
Income (loss) per common share before
extraordinary expense (Note 14) ......... $ 0.19 $ 0.25 $ 0.31 $ (.08) $ (.07)
Extraordinary expense (Notes 13 and
14) ..................................... (0.08) (.07)
------------ ------------ ------------ ------------ ------------
Net income (loss) per common share
(Note 14) ............................... $ 0.19 $ 0.25 $ 0.23 $ (.15) $ (.07)
============ ============ ============ ============ ============
Dilutive earnings (loss) per share:
Income (loss) per common share before
extraordinary expense (Note 14) ......... $ 0.16 $ 0.19 $ 0.26 $ (.08) $ (.07)
Extraordinary expense (Notes 13 and
14) ..................................... (0.06) (.07)
------------ ------------ ------------ ------------ ------------
Net income (loss) per common share
(Note 14) ............................... $ 0.16 $ 0.19 $ 0.20 $ (.15) $ (.07)
============ ============ ============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- ------------------------------
Number of Number of
Shares Amount Shares Amount
----------- -------- ------------------ ----------
<S> <C> <C> <C> <C>
Balance, July 1, 1994 (Note 9) ...................... 4,600,000 $ 5,000
Sale of common stock, net of stock issuance
costs of approximately $1,300,000.................. 3,775,000 4,000
Issuance of common stock for payment of trade
payables .......................................... 417,000
Exercise of stock options and warrants ............. 31,000
Issuance of unit purchase options ..................
Conversion of debt and accrued interest into
common stock (Note 1) ............................. 914,000 1,000
--------- ---------- ------------ ----------
Net income .........................................
Balance, June 30, 1995 (Note 9) ..................... 9,737,000 10,000
Exercise of stock warrants, net of stock
issuance costs of approximately $114,000........... 770,000 1,000
--------- ---------- ------------ ----------
Net income .........................................
Balance, June 30, 1996 (Note 9) ..................... 10,507,000 11,000
Exercise of stock options, warrants,
and UPOs, net of issuance costs of
approximately $300,000............................. 2,566,000(1) 2,000
Stock issued for Weatherly acquisition
(Note 1) .......................................... 1,000,000 1,000
Options and warrants issued for acquisition and
consulting services and bank
refinancing (Note 1) ..............................
Net income .........................................
--------- ---------- ------------ ----------
Balance, June 30, 1997 (Note 9) ..................... 14,073,000 14,000
Conversion of debt into common stock
(unaudited) ........................................ 154,000
Repurchase of UPOs (unaudited) (Note 9) .............
Sale of common stock, net of stock issuance costs
of approximately $950,000 (unaudited) .............. 4,290,000 5,000
Exercise of stock options and warrants
(unaudited) ........................................ 1,343,000 1,000
--------- ---------- ------------ ----------
Net loss (unaudited) ................................
Balance, December 31, 1997 (unaudited) .............. 19,860,000 $20,000
========= ========== ============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Additional Retained Total
Paid-in Earnings Stockholders'
Capital (Deficit) Equity
-------------- ----------------- --------------
<S> <C> <C> <C>
Balance, July 1, 1994 (Note 9) ...................... $ 9,298,000 $ (6,153,000) $ 3,150,000
Sale of common stock, net of stock issuance
costs of approximately $1,300,000.................. 7,432,000 7,436,000
Issuance of common stock for payment of trade
payables .......................................... 683,000 683,000
Exercise of stock options and warrants ............. 35,000 35,000
Issuance of unit purchase options .................. 400,000 400,000
Conversion of debt and accrued interest into
common stock (Note 1) ............................. 2,059,000 2,060,000
Net income ......................................... 1,575,000 1,575,000
----------- ------------- ------------
Balance, June 30, 1995 (Note 9) ..................... 19,907,000 (4,578,000) 15,339,000
Exercise of stock warrants, net of stock
issuance costs of approximately $114,000........... 1,506,000 1,507,000
Net income ......................................... 2,524,000 2,524,000
----------- ------------- ------------
Balance, June 30, 1996 (Note 9) ..................... 21,413,000 (2,054,000) 19,370,000
Exercise of stock options, warrants,
and UPOs, net of issuance costs of
approximately $300,000............................. 5,292,000 5,294,000
Stock issued for Weatherly acquisition
(Note 1) .......................................... 2,999,000 3,000,000
Options and warrants issued for acquisition and
consulting services and bank
refinancing (Note 1) .............................. 1,079,000 1,079,000
Net income ......................................... 3,183,000 3,183,000
----------- ------------- ------------
Balance, June 30, 1997 (Note 9) ..................... 30,783,000 1,129,000 31,926,000
Conversion of debt into common stock
(unaudited) ........................................ 350,000 350,000
Repurchase of UPOs (unaudited) (Note 9) ............. (3,222,000) (3,222,000)
Sale of common stock, net of stock issuance costs
of approximately $950,000 (unaudited) .............. 15,934,000 15,939,000
Exercise of stock options and warrants
(unaudited) ........................................ 2,708,000 2,709,000
Net loss (unaudited) ................................ (1,086,000) (1,086,000)
----------- ------------- ------------
Balance, December 31, 1997 (unaudited) .............. $49,775,000 $ (3,179,000) $ 46,616,000
=========== ============= ============
</TABLE>
- --------
(1) Includes 38,000 shares of common stock issued for services relating to cash
proceeds and approximately 60,000 issued relating to cashless exercise of
4 UPOs (Note 9).
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) .......................... $ 1,575,000 $ 2,524,000 $ 3,183,000
Adjustments to reconcile net
income (loss) to net cash pro-
vided by (used in) 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 (used in) oper-
ating activities ........................... 438,000 618,000 10,545,000
-------------- -------------- --------------
Cash flows from investing activities
Payment for purchase of busi-
nesses, net of cash acquired ............... (15,387,000) (1,602,000) (28,358,000)
Payment for non-compete
agreement ................................ (500,000)
Sale of short-term investments ............. 501,000
Increase in officer receivables ............ (352,000) (131,000) (77,000)
Purchase of product rights ................. (105,000)
Purchase of furniture, fixtures and
equipment ................................ (151,000) (261,000) (528,000)
Purchase of package design ................. (82,000) (109,000) (131,000)
-------------- -------------- --------------
Net cash used in investing activities . (15,576,000) (2,103,000) (29,594,000)
-------------- -------------- --------------
Cash flows from financing activities .
Proceeds from issuances of stock . 7,452,000 1,507,000 5,294,000
Buyout of unit purchase options ............
Proceeds from bank line of credit . 11,514,000 17,496,000 41,791,000
Payment on bank line of credit ............. (12,109,000) (16,208,000) (43,079,000)
Proceeds from notes payable ................ 11,000,000 21,345,000
Payments of notes payable .................. (800,000) (1,600,000) (3,385,000)
Acquisition finance costs .................. (1,036,000) (1,514,000)
-------------- --------------
Net cash provided by financing
activities ................................. 16,021,000 1,195,000 20,452,000
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents ........................... 883,000 (290,000) 1,403,000
Cash and cash equivalents, begin-
ning of period ............................. 87,000 970,000 680,000
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 970,000 $ 680,000 $ 2,083,000
============== ============== ==============
<PAGE>
<CAPTION>
Six months ended
December 31,
----------------------------------
1996 1997
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) .......................... $ (2,062,000) $ (1,086,000)
Adjustments to reconcile net
income (loss) to net cash pro-
vided by (used in) operating
activities:
Extraordinary expense .................... 1,007,000
Loss on disposal of assets ...............
Bad debt expense .........................
Depreciation and other
amortization ............................ 958,000 1,263,000
Amortization of deferred
financing costs ......................... 119,000 232,000
Changes in operating assets and
liabilities, net of assets
acquired and liabilities
assumed:
Accounts receivable ..................... 2,119,000 4,008,000
Inventories ............................. (4,464,000) (2,419,000)
Prepaid expenses and other
current assets ........................ 541,000 (255,000)
Accounts payable and
accrued expenses ...................... 1,084,000 (651,000)
Trade credits ........................... 105,000
Other assets ............................ 92,000 13,000
Deferred taxes .......................... (934,000) (528,000)
------------- ------------
Net cash provided by (used in) oper-
ating activities ........................... (1,540,000) 682,000
------------- ------------
Cash flows from investing activities
Payment for purchase of busi-
nesses, net of cash acquired ............... (23,801,000) (561,000)
Payment for non-compete
agreement ................................ (500,000)
Sale of short-term investments .............
Increase in officer receivables ............ (136,000) (135,000)
Purchase of product rights .................
Purchase of furniture, fixtures and
equipment ................................ (230,000) (486,000)
Purchase of package design ................. (232,000)
------------- ------------
Net cash used in investing activities . (24,667,000) (1,414,000)
------------- ------------
Cash flows from financing activities .
Proceeds from issuances of stock . 5,193,000 18,648,000
Buyout of unit purchase options ............ (3,221,000)
Proceeds from bank line of credit . 17,884,000 6,010,000
Payment on bank line of credit ............. (11,975,000) (3,764,000)
Proceeds from notes payable ................ 16,783,000
Payments of notes payable .................. (703,000) (6,290,000)
Acquisition finance costs .................. (1,399,000)
------------- ------------
Net cash provided by financing
activities ................................. 25,783,000 11,383,000
------------- ------------
Net increase (decrease) in cash and
cash equivalents ........................... (424,000) 10,651,000
Cash and cash equivalents, begin-
ning of period ............................. 680,000 2,083,000
------------- ------------
Cash and cash equivalents, end of period $ 256,000 $ 12,734,000
============= ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
Nature of Business
U.S. Home & Garden Inc. (the "Company" -- formerly known as Natural Earth
Technologies, Inc. until July 1995), through its wholly-owned subsidiaries, is
a manufacturer and distributor of lawn and garden care products to retailers
primarily throughout North America.
Golden West Agri-Products, Inc. ("Golden West"), a wholly-owned
subsidiary, is a manufacturer and distributor of humic acid based agricultural
products. Golden West currently sells its products in the Western United
States, Mexico and Central America.
On September 1, 1994, the Company, through its wholly-owned subsidiary
Easy Gardener Acquisition Corporation ("Easy Gardener"), acquired all of the
assets of Easy Gardener, Inc., a developer, manufac turer and marketer of lawn
and garden care products. Easy Gardener primarily sells its products throughout
North America.
On August 11, 1995, Emerald Products Corporation, a wholly-owned
subsidiary of Easy Gardener, acquired the assets of Emerald Products, LLC.
Emerald Products sells its product, Emerald Edge(R), throughout North America.
On August 9, 1996, Easy Gardener acquired all of the outstanding stock of
Weatherly Consumer Products Group, Inc. ("Weatherly"), a lawn and garden care
company which primarily sells its products throughout North America.
On May 12, 1997, Easy Gardener acquired the Plasti-Chain product line from
Plastic Molded Concepts, Inc. ("Plastic").
Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries and the results of operations of Weatherly, Easy
Gardener, Plastic, Golden West and Emerald Products since their date of
acquisition (Note 1). Significant intercompany accounts and transactions have
been eliminated.
Inventories
Inventories, which consist of raw materials, finished goods, and packaging
materials, are stated at the lower of cost or market; cost is determined by the
first-in, first-out (FIFO) cost method.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated five to seven year
useful lives of the assets.
Intangible Assets
Excess of Cost over Net Assets Acquired The excess of cost over net assets
acquired, which relates to the Company's acquisitions of Weatherly, Easy
Gardener, Plastic, Golden West, and Emerald Products, are being amortized over
periods of twenty to thirty years using the straight-line method. Periodically,
the recoverability of goodwill is evaluated by comparing undiscounted estimated
future net cash flows to the estimated net cash flows projected at the time of
acquisition.
Deferred Financing Costs Direct costs associated with the Company's
long-term financing arrangements are being amortized over the life of the
loans, a period of approximately six years.
Package Design Package design costs associated with Easy Gardener and
Weatherly products are being amortized over a five-year period using the
straight-line method.
F-7
<PAGE>
Product Rights Product rights are being amortized over a 15-year
estimated useful life.
Non-Compete Agreement The non-compete agreement was entered into with the
acquisition of Weatherly. The agreement is being amortized over its 20 year
term.
Revenue Recognition
Sales are recorded as products are shipped to customers.
Net Income Per Share
Effective for the six months ended December 31, 1997, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 128, Earnings
Per Share (SFAS 128). SFAS 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. As required by SFAS 128, all prior earnings have been
restated to reflect the retroactive application of this accounting
pronouncement. (Note 14).
Income Taxes
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Reclassification
Certain 1996 financial statement amounts have been reclassified to conform
to the 1997 presentation.
Advertising Costs
The Company incurs advertising expense primarily relating to cooperative
advertising credits granted to customers based on qualified expenses incurred
by the customers to advertise the Company's products. Cooperative advertising
credits are usually limited to a percentage of an agreed-upon sales volume. The
Company also incurs advertising expense relating to the distribution of
catalogs and the broadcasting of radio and television commercials. Advertising
costs are expensed as incurred. Advertising expense was $1,236,000, $1,823,000
and $2,945,000 during the years ended June 30, 1995, 1996 and 1997,
respectively, and $757,000 and $963,000 for the six months ended December 31,
1996 and 1997, respectively (unaudited).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all short-term investments purchased with an initial
maturity of three months or less to be cash equivalents.
Stock Based Compensation
Effective July 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under this standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. The fair value method is required for all stock based
compensation issued to non-employees. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Companies are permitted to continue to account for employee
F-8
<PAGE>
stock-based transactions under Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees," but are required to disclose
pro forma net income and earnings per share as if the fair value method had
been adopted. The Company has elected to continue to account for stock-based
compensation under APB No. 25 (see Note 9).
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Management does not believe that the Company's current financial
statement disclosures will need to be modified based upon current operations.
Results of operations and financial position, however, will be unaffected by
future implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No.131,
Disclosures about Segments of an Enterprise and Related Information, (SFAS 131)
which supersedes SFAS No. 14., Financial reporting for Segments of a Business
Enterprises. SFAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources and
in assessing performance.
SFAS 131 is effective for financial statements for period beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. The Company believes it operates under one business segment and has
already substantially complied with the required financial statement
disclosures. Results of operations and financial position, however, will be
unaffected by implementation of this standard.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable
and debt. The carrying value of cash and accounts receivable approximate fair
value based upon the liquidity and short-term nature of the assets. The
carrying value of short-term and long-term debt approximates the fair value
based upon short-term and long-term borrowings at market rate interest.
Cash and cash equivalents are held principally at three high quality
financial institutions. At times such balances may be in excess of the FDIC
insurance limit.
Basis of Presentation
The accompanying balance sheet as of December 31, 1997 and the statements
of operations and cash flows for each of the six months ended December 31, 1996
and 1997 have not been audited. However, in the opinion of management, they
include all adjustments necessary for a fair presentation of the financial
position and the results of operations for the periods presented. The results
of operations for the six months ended December 31, 1997 are not necessarily
indicative of results to be expected for any future period.
F-9
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is Unaudited)
1. Business Acquisitions
On May 12, 1997, Easy Gardener acquired from Plastic substantially all of
the assets, including product rights and all other intangible assets, of
Plastic used in connection with Plastic's home lawn and garden care
distribution business for approximately $4,300,000.
On August 9, 1996, Easy Gardener acquired all of the outstanding stock of
Weatherly, a lawn and garden care company, for 1,000,000 shares of the
Company's common stock (valued at $3 per share) and $22,937,000, less an amount
required to discharge certain outstanding indebtedness of the acquired company,
and adjusted dollar for dollar based upon the ultimate value of the acquired
company's net current assets (approximately $2.5 million). The acquisition was
accounted for as a purchase and, accordingly, the results of operations of
Weatherly have been included in the consolidated statement of income since
August 9, 1996. The Company operates the acquired company as a subsidiary of
Easy Gardener. In connection with the above acquisition, the Company's
outstanding notes payable were refinanced and a new line of credit arrangement
was established (See Note 6).
On August 11, 1995, Emerald Products Corporation, a newly-formed,
wholly-owned subsidiary of Easy Gardener, acquired from Emerald Products, LLC
("Emerald") all of the assets, including product rights and all other
intangible assets, of Emerald used in connection with Emerald's home lawn and
garden care distribution business. The purchase price, subject to adjustment as
described below, was $835,000 in cash and a $100,000 non-interest bearing
promissory note, which was paid off during fiscal 1996 using cash from
operations. The purchase price is subject to increase based upon the Company
achieving certain annual gross sales levels of acquired product lines through
September 2002. This additional consideration is payable in cash annually and
based upon 2.5% of annual Emerald gross sales of up to $4,000,000, 1.5% of
annual gross sales between $4,000,001 and $5,000,000 and 1% of annual gross
sales greater than $5,000,000.
On September 1, 1994 (the "Closing Date"), Easy Gardener Acquisition
Corp., a newly formed, wholly-owned subsidiary of the Company, acquired from
Easy Gardener, Inc. (the "Seller"), all of the assets of the Seller used in
connection with the Seller's home lawn and garden care products distribution
business (the "Purchased Assets") pursuant to an assets purchase agreement
dated as of June 19, 1994. The purchase price was $20,500,000 (subject to
adjustment as described below) which was paid by the delivery of (i) $8,000,000
in cash (ii) a promissory note (the "Note") issued by Easy Gardener Acquisition
Corp. in the initial principal amount of $10,500,000, and (iii) two convertible
promissory notes (the "Convertible Notes") issued by the Company each in the
initial principal amount of $1,000,000. The Note was paid from the proceeds of
the Company's bank financing in September 1994. The Convertible Notes plus
accrued interest were each converted into 457,198 shares of the Company's
common stock and Class B warrants to acquire 457,198 shares of common stock at
an exercise price of $2.28 per share. The Convertible Notes were automatically
converted upon the February 1995 approval by the stockholders of the Company of
an Amendment to the Company's Certificate of Incorporation increasing the
amount of the Company's authorized common stock to 30,000,000 shares. The
shares of common stock issued upon exercise of the Convertible Notes, and the
shares of common stock issuable upon exercise of the warrants, are subject to a
seven-year voting agreement with Mr. Robert Kassel, Chairman of the Company.
The purchase price was subject to increase, if and to the extent that on the
Closing Date current assets of Easy Gardener, Inc. exceeded current liabilities
by $6,600,000. This additional amount approximated $783,000 at the date of
closing and was paid in October 1994.
Approximately $2,200,000 was contingently payable to the Seller over the
four years following the Closing Date based upon the acquired business
generating certain specified levels of net income. As of June 30, 1997, the
entire $2,200,000 has been added to the excess of cost over net assets acquired
of Easy Gardener based upon operating results obtained through June 30, 1997
and forecasted results for fiscal year 1998. As of June 30, 1997, approximately
$1,467,000 is payable for this additional purchase price.
F-10
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
1. Business Acquisitions -- (Continued)
The following unaudited pro forma summary combines the consolidated
results of operations of the Company, Weatherly and Easy Gardener as if the
acquisitions had occurred at the beginning of the year of acquisition and the
beginning of the prior year. Accordingly, Easy Gardener is reflected as if the
acquisition occurred on July 1, 1994 and Weatherly as if the acquisition
occurred July 1, 1995. The proforma information gives effect to certain
adjustments, including the amortization of excess of cost over net assets
acquired, the elimination of certain expenses incurred by Weatherly related to
its acquisition and additional interest expense on the notes payable. This pro
forma summary does not necessarily reflect the results of operations as they
would have been if the Company, Weatherly and Easy Gardener had constituted a
single entity during such periods and is not necessarily indicative of results
which may be obtained in the future. The pro forma effect of the Emerald and
Plastic acquisitions have not been reflected since their prior revenue was not
material to the Company's operations.
<TABLE>
<CAPTION>
Six months ended
Years ended June 30, December 31,
--------------------------------------------------------- -----------------
1995 1996 1997 1997
----------------- ----------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales .................................. $ 21,349,000 $ 46,102,000 $ 52,788,000 $ 13,680,000
============= ============= ============= ============
Net income (loss) before extraordinary
expense and income taxes .................. $ 1,420,000 $ 2,369,000 $ 6,540,000 $ (2,379,000)
============= ============= ============= ============
Net income (loss) before extraordinary
expense ................................... $ 1,382,000 $ 3,462,000 $ 3,648,000 $ (1,429,000)
============= ============= ============= ============
Net income (loss) .......................... $ 1,382,000 $ 1,542,000 $ 2,121,000 $ (2,955,000)
============= ============= ============= ============
Diluted earnings (loss) per share:
Net income (loss) per common share
before extraordinary expenses ............. $ .11 $ .21 $ .22 $ (.10)
============= ============= ============= ============
Net income (loss) per common share ......... $ .11 $ .09 $ .13 $ (.21)
============= ============= ============= ============
</TABLE>
2. Trade Credits
In April 1996, the Company entered into an agreement to exchange unsold
assets held for sale for credit against the future purchase of products and
services. This transaction has been reported at the estimated fair market value
of the assets exchanged by the Company. No gain or loss was recognized on such
transaction as the Company had previously written down its assets held for sale
to their estimated fair market value. The agreement requires the Company to pay
a portion of the purchase price of the product or services received. Depending
on the nature of the products or services purchased, the Company will receive a
credit against the future price ranging from 10% to 45% of the cash purchase
price. The Company will also receive a percentage of the cash proceeds from the
ultimate sale of the assets. As of June 30, 1996, included in accounts
receivable is approximately $105,000 of cash subsequently received on the sale
of a portion of the assets by the third party. The agreement provides that the
Company will receive maximum total credits and cash totaling $1.6 million. The
agreement expires in April 1999 and requires the Company to use all credits by
this date. The Company expects to use the credits primarily by purchasing
operating assets and advertising time. The Company expects to use all available
credits by the expiration date and will continually evaluate this asset based
upon credits utilized and future operating goals.
F-11
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
3. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- -------------
1996 1997 1997
------------ -------------- -------------
(unaudited)
<S> <C> <C> <C>
Raw materials .................................... $ 82,000 $ 578,000 $ 257,000
Finished goods ................................... 3,310,000 4,676,000 7,416,000
--------- ----------- ----------
3,392,000 $ 5,254,000 $ 7,673,000
========= =========== ==========
4. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of:
June 30, December 31,
----------------------------- -------------
1996 1997 1997
------------ -------------- -------------
(unaudited)
Leasehold improvements ........................... $ 74,000 $ 397,000 $ 393,000
Furniture, fixtures and equipment ................ 1,575,000 2,761,000 3,162,000
--------- ----------- ----------
1,649,000 3,158,000 3,555,000
Less accumulated depreciation .................... 433,000 843,000 1,154,000
--------- ----------- ----------
1,216,000 $ 2,315,000 $ 2,401,000
========= =========== ==========
5. Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired consists of the following:
June 30, December 31,
------------------------------ -------------
1996 1997 1997
------------- -------------- -------------
(unaudited)
Weatherly Consumer Products Group, Inc. .......... $ 23,046,000 $22,948,000
Easy Gardener, Inc. .............................. 14,172,000 15,639,000 15,639,000
Plastic Molded Concepts, Inc. .................... 2,760,000 2,810,000
Golden West Chemical Distributions, Inc. ......... 2,098,000 2,098,000 2,098,000
Emerald Products, LLC ............................ 778,000 870,000 894,000
---------- ------------- -----------
17,048,000 44,413,000 44,389,000
Less accumulated amortization .................... 1,264,000 2,579,000 3,379,000
---------- ------------- -----------
15,784,000 $41,834,000 $41,010,000
========== ============= ===========
</TABLE>
F-12
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
6. Notes Payable and Line of Credit
Notes payable consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- -------------
1996 1997 1997
------------ -------------- -------------
(unaudited)
<S> <C> <C> <C>
$23,000,000 note payable, interest due monthly at prime (8.5% at
June 30, 1997) plus 1.25% or LIBOR (5.72% at June 30, 1997)
plus 3.50%, quarterly principal payments ranging from $570,000
to $1,350,000 beginning September 30, 1996 through June 30,
2002, collateralized by Easy Gardener's assets and guaranteed by
the Company. ...................................................... $ $20,510,000 $18,020,000
$2,250,000 note payable, interest due monthly at prime (8.5% at
June 30, 1997) plus 6.0%, quarterly principal payments of
$140,625 beginning September 30, 1998 through June 30, 2002,
collateralized by Easy Gardener's assets and guaranteed by the
Company. .......................................................... 2,250,000 2,250,000
$3,800,000 note payable, interest only due monthly at 12% with the
full principal due November 1997. ................................. 3,800,000
$8,000,000 note payable, interest at 12.25%, monthly principal pay-
ments of $133,333, plus interest, commencing January 31, 1995
until January 2000, collateralized by the assets of Easy Gardener
and a guaranty of the Company. This note was refinanced during
1997. ............................................................. 5,600,000
$3,000,000 note payable, interest at 12%, equal monthly principal
payments of $125,000, plus interest, commencing the earlier of
the repayment of the $8,000,000 note payable or January 31,
2000, collateralized by assets of Easy Gardener and a guaranty of
the Company. This note was refinanced during 1997. ................ 3,000,000
---------- ----------- -----------
8,600,000 26,560,000 20,270,000
Less current portion ............................................... 2,362,000 8,990,000 3,840,000
---------- ----------- -----------
$6,238,000 $17,570,000 $16,430,000
========== =========== ===========
</TABLE>
At June 30 and December 31, 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, and
at December 31, 1997, $2,246,000 was 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 and December 31, 1997, the
Company was in compliance with all such covenants. If the revolving credit
facility is terminated prior to June 2002, the Company will be subject to
certain prepayment penalties.
F-13
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
6. Notes Payable and Line of Credit -- (Continued)
At June 30, 1996, the Company's had a $6,000,000 revolving credit facility
bearing interest at prime (8.25% at June 30, 1996) plus 2%, payable in monthly
installments commencing January 1, 1995 and collateralized by assets of Easy
Gardener and a guaranty of the Company. As of June 30, 1996, there was
$1,288,000 outstanding on the credit line which was refinanced during August
1996 utilizing the $13,000,000 revolving credit facility noted above.
The $3 million note payable also required the Company to pay additional
interest (defined as a success fee) when the loan was paid off. The success fee
ranges from $300,000 in the first year to $4,140,000 in the seventh year. As of
June 30, 1996, the accrued success fee was approximately $481,000 (Note 13).
The $8 million note payable was subject to certain mandatory prepay ments
of "excess cash flow" of Easy Gardener and certain net proceeds of asset sales,
condemnation awards and insurance recoveries. As of June 30, 1996, $762,000 is
the payment for "excess cash flow" which was made subsequent to year end. This
amount has been included in the current portion of notes payable. Also, certain
optional prepayments of advances under the revolving facility and the $8
million note payable require the payment of a premium (Note 13).
In connection with the acquisition of Weatherly Products Inc. on August 9,
1996, both of the above term notes payable were refinanced and a new line of
credit agreement was executed (Note 13).
Future minimum principal payments are as follows:
Year ending June 30, Amount
- ---------------------- --------------
1998 $ 8,990,000
1999 4,402,000
2000 4,403,000
2001 4,402,000
2002 4,363,000
------------
$ 26,560,000
============
7. Officer Receivables
Officer receivables represents notes which bear interest at 7% and require
interest only payments on an annual basis. The notes are due June 2002.
8. Commitments
Employment Agreements
During 1996 and 1997, the Company entered into new employment agreements
with three of its officers. The agreements are for one-year periods but are
automatically renewed unless specifically terminated by the Company or the
employee. If the employment agreements are terminated by the Company, the
officers will be entitled to an additional ten and five years of annual
compensation. Annual compensation under the employment agreements are $350,000,
$162,000 and $101,000. The employment agreements also provide for certain lump
sum payments in the event of a change in control equal to approximately $5
million. An agreement with an officer of Easy Gardener provides for a base
aggregate annual salary of approximately $200,000 in 1998. In addition, the
agreements provide for incentive and additional compensation under certain
circumstances.
Operating Leases
The Company leases office and warehouse space under operating leases which
expire in various years through 2001. The Company also leases certain office
equipment and automobiles under operating leases expiring in 1998 through 2002.
The future minimum lease payments under these non-cancelable operating leases
are as follows:
F-14
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
8. Commitments -- (Continued)
Year ending June 30, Amount
- ---------------------- --------------
1998 $ 729,000
1999 591,000
2000 410,000
2001 176,000
2002 1,000
-----------
$ 1,907,000
===========
Rent expense was approximately $303,000, $336,000 and $680,000 for the
years ended June 30, 1995, 1996 and 1997, respectively, and $322,000 and
$168,000 for the six months ended December 31, 1996 and 1997 respectively.
Pension Plan
Easy Gardener has established an employee defined contribution pension
plan (the Plan). Employees of the Company, Weatherly, Easy Gardener and Golden
West are eligible to participate. The Company is required to match the first 3%
of employee contributions up to 5% of the employees wage base. The plan also
allows discretionary contributions by the Company. The Company's contribution
vests over a seven-year period. Pension expense associated with the Plan for
1995, 1996 and 1997 was approximately $64,000, $180,000 and $199,000. Pension
expense associated with the Plan for the six months ended December 31, 1996 and
1997 was $161,000 and $159,000.
Royalty Agreements
The Company has entered into royalty agreements which provide for payments
based upon a percentage of net sales of certain products. These agreements
expire in various years from 1998 to 2005. Royalty expense during the years
ended June 30, 1995, 1996 and 1997 was $64,000, $104,000 and $304,000. Royalty
expense during the six months ended December 31, 1996 and 1997 was $51,000 and
$132,000.
9. Stockholders' Equity
(a) Convertible Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock
with such designations, rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Company's common
stock.
(b) Common Stock
The Company raised a portion of the Easy Gardener, Inc. purchase price
through the August 1994 private placement of $8,025,000 of Units (for which it
received net proceeds of approximately $6,900,000), each $100,000 Unit
consisting of 44,000 shares of common stock and a class B warrant to purchase
44,000 shares of common stock for $2.28 per share.
In June 1994, the Company sold approximately 200,000 shares to various
foreign investors. Proceeds to the Company, after deducting commissions and
expenses approximated $435,000. In a related transaction during July 1994, the
Company sold an additional 240,000 shares to foreign investors resulting in net
proceeds to the Company of approximately $518,000. Proceeds were used for the
Easy Gardener acquisition.
F-15
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
(c) Stock Option Plans
The Company adopted the 1991 Stock Option Plan (the "1991 Plan") pursuant
to which 700,000 shares of common stock have been reserved for issuance upon
the exercise of options designated as either (i) options intended to constitute
incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) non-qualified options. ISOs may be granted under
the Plan to employees and officers of the Company. Non-qualified options may be
granted to consultants, directors (whether or not they are employees),
employees or officers of the Company.
During fiscal 1995, the Board of Directors of the Company adopted, subject
to stockholder approval, two additional stock option plans. The 1995 Stock
Option Plan (the "1995 Plan") allows the granting of either ISOs or
non-qualified options. The maximum aggregate number of shares to be granted
under this plan is 1,500,000. The Non-Employee Director Stock Option Plan (the
"Non-Employee Director Plan") was established to attract, retain and compensate
for their services as directors, highly qualified individuals who are not
employees of the Company. The maximum aggregate number of shares issued under
this plan is 100,000. During 1996 and 1997, 10,000 options were granted each
year. The 1995 Plan is administered by a committee of the Board of Directors
and the Non-Employee Director Plan is a formula plan.
During May 1997, the Board of Directors approved the 1997 Stock Option
Plan. The plan reserves 1,500,000 shares of common stock.
The 1997 plan is subject to shareholder approval. No options have been
granted as of June 30, 1997.
The 1991 Plan is administered by the Board of Directors of the Company
(the "Board"). The Board, or committee, as the case may be, within the
limitations of the 1991 and 1995 Plans, as the case may be, determines the
persons to whom options will be granted, the number of shares to be covered by
each option, whether the options granted are intended to be ISOs, the duration
and rate of exercise of each option, the option purchase price per share and
the manner of exercise, the time, manner and form of payment upon exercise of
an option, and whether restrictions such as repurchase rights in the Company
are to be imposed on shares subject to options.
ISOs granted under the plans may not be granted at a price less than the
fair market value of the common stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any related
corporation) may not exceed $100,000. Non-qualified options granted under the
1991 Plan may not be granted at a price less than the fair market value of the
common stock on the date of grant (not less than par value in the case of the
1995 Plan). Options granted under the plans will expire not more than ten years
from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of the voting stock of the Company).
All options granted under the 1991 Plan, Non-Employee Director Plan and
ISOs under the 1995 Plan are not transferable during an optionee's lifetime but
are transferable at death by will or by the laws of descent and distribution.
The Board of Directors also has authorization to issue stock options
("Non-Plan Options") to employees or consultants for services performed.
F-16
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
The following is a summary of activity relating to stock options.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Option Available Remaining
Price Per Out- Exer- for Contractual
Share standing cisable Grant Life
-------------- ----------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
1991 Plan
June 30, 1995 ............... $ 1.71(1) 688,000 588,000 12,000 5 years
Became exercisable .......... 100,000
-------
June 30, 1996 ............... $ 1.71(1) 688,000 688,000 12,000 4 years
Expired in 1997 ............. $ 1.69 (26,000) (26,000) 26,000
------- ------- ------- ------
June 30, 1997 ............... $ 1.71(1) 662,000 662,000 38,000 3 years
======= ======= ======= ====== ========
1995 Plan
June 30, 1995 ............... $ 2.28 400,000 1,100,000 5 years
Granted during 1996 ......... 2.25 310,000(3) 10,000 (310,000)
Became exercisable .......... 400,000
------- ------- ------- ------
June 30, 1996 ............... $ 2.26 710,000 410,000 790,000 4.5 years
Granted during 1997 ......... 2.06(4) 675,000 675,000 (675,000)
Became exercisable .......... 2.28 75,000
------- ------- ------- ------
June 30, 1997 ............... $ 2.10(4) 1,385,000 1,160,000 115,000(5) 4 years
========== =========== ========= ======= ========
Non-Plan Options
June 30, 1995 ............... $ 1.85 745,000(2) 645,000 4 years
Granted during 1996 ......... 2.25 315,000(3)
------- -------
June 30, 1996 ............... $ 1.83(1) 1,060,000 645,000 3.5 years
Became exercisable .......... 2.25 125,000
Granted during 1997 ......... 1.91 1,225,000 1,225,000
------- ------- ---------
June 30, 1997 ............... $ 1.84(4) 2,285,000 1,995,000 4 years
========== =========== ========= ========
</TABLE>
- ------------
(1) During fiscal 1995, the Board of Directors authorized a reduction in the
exercise price. The ending option price per share reflects the reduced
exercise price. During fiscal 1995, approximately 1.1 million options to
purchase common stock were repriced to $1.69.
(2) Options outstanding reflect the effect of certain antidilution provisions.
F-17
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
(3) Options vest over four years with the exception of 10,000 immediately
vesting 1995 Plan options.
(4) In December 1996, 1,490,000 options granted subsequent to June 1995 were
repriced to $2.06 per share.
(5) During the period July 1, 1997 to September 30, 1997, the Company granted
options to acquire 98,000 shares of common stock under the 1995 Plan.
In addition to certain stock options and warrants granted to employees,
the Company also issued a total of 925,000 options and warrants to various
consultants and a financial institution relating to various consulting
services, the acquisitions of Weatherly and PlastiChain, and the new bank
agreement entered into during August 1996. The fair value of such options and
warrants was estimated at approximately $1,079,000. The fair value of such
options and warrants has been expensed except for the fair value related to
acquisitions and the bank financing for which these amounts are being amortized
over the life of the bank financing agreement and the excess of cost of net
assets acquired.
(d) Unit Purchase Options
In October 1994, the Company granted six unit purchase options (UPOs),
each consisting of 43,860 shares of the Company's common stock and Class B
Warrants to purchase 43,860 shares of common stock at an exercise price of
$2.28. These UPOs, which expire on August 31, 1999, have a nominal exercise
price. Three of the UPOs were granted to an officer of the Company for his
personal guarantees in connection with the Easy Gardener acquisition. Three
were granted to an outside consultant for its services in connection with
financing obtained for the Easy Gardener acquisition. The six UPOs issued with
the nominal exercise price were valued at $400,000 and included in deferred
financing costs. Concurrently, the Company also granted six UPOs, consisting of
the same components, each with a current exercise price of approximately
$75,000, three of which were granted to an officer of the Company. All these
transactions were done in lieu of cash compensation in consideration for
certain financial consulting and other services and for the personal guarantee
and other collateral provided in connection with the Company's acquisition of
Easy Gardener, Inc., without which the Company's transaction with Easy
Gardener, Inc. would not have occurred. During 1997, one UPO and the related
warrants were exercised by the outside consultant. Proceeds to the Company were
approximately $175,000.
In connection with the Company's August 1994 Private Placement, the
placement agent and its designees were granted approximately 28 UPOs
exercisable at $100,000 each. Each UPO consists of 43,860 shares of common
stock and warrants to purchase 43,860 shares of common stock at $2.28 per
share. These warrants expire in August 1999, if the underlying UPO is not
exercised. If exercised, the warrants expire in May 2000. During 1997, 5 UPOs
were terminated in a cashless exercise and approximately 60,000 shares of
common stock was issued.
The total shares of common stock issuable upon exercise of the UPOs,
including the underlying warrants, would be approximately 3,500,000 and
3,000,000 shares at June 30, 1996 and 1997.
In December 1997, the Company repurchased 1,661,871 shares of common stock
underlying 16.8 UPO's and warrants to acquire 85,000 of common stock for
approximately $3,221,000.
F-18
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
(e) Warrants
In connection with certain business transactions and stock offerings, the
Company has granted various warrants to purchase common stock. The following
schedule will summarize the activity.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Warrant Remaining
Price Per Out- Exer- Contractual
Share standing(1) cisable Life
----------- ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
July 1, 1994 ....................................... $ 1.89 1,729,000 1,729,000 3.5 years
Warrants issued in connection with private placement 2.28 3,520,000 3,520,000
Warrants issued with convertible debenture ......... 2.28 914,000 914,000
Warrants issued .................................... 2.75 100,000 100,000
Warrants exercised ................................. 1.85 (30,000) (30,000)
------- --------- ---------
June 30, 1995 ...................................... 2.12 6,233,000 6,233,000 4.5 years
------- --------- --------- ---------
Increase for antidilution .......................... 2.28 153,000 153,000
Warrants exercised ................................. 2.24 (770,000) (770,000)
------- --------- ---------
June 30, 1996 ...................................... 2.14 5,616,000 5,616,000 3.5 years
Warrants issued .................................... 2.45 525,000 525,000
Warrants exercised ................................. 2.15 (2,380,000) (2,380,000)
Expired ............................................ 6.00 (52,000) (52,000)
------- ---------- ----------
June 30, 1997 ...................................... $ 2.18 3,709,000(2) 3,709,000(2) 3 years
======= ============ ============ =======
</TABLE>
- ------------
(1) The warrants contain anti-dilution provisions which could effect the number
of shares of common issuable stock upon the exercise of the warrants as
well as the per share warrant prices. Additionally, these warrants contain
certain redemption provisions.
(2) During the period July 1, to December 31, 1997, 1,343,000 warrants were
exercised.
(f) Common Stock Reserved
At June 30, 1997, approximately 12,700,000 shares of common stock have
been reserved for issuance upon the exercise of warrants, options and UPOs.
(g) Stock Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for the plan. Under APB
Opinion No. 25, because the exercise price of the Company stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires
the Company to provide pro forma information regarding net loss as if
compensation costs for the Company's stock options and warrants had been
determined in accordance with the fair value based method prescribed in FASB
Statement No. 123. The Company estimates the fair value of each stock option
and warrant at the grant date by using a modified Black-Scholes pricing model
with the following weighted-average assumptions used for grants in 1996 and
1997, respectively: no dividend yield for any year; expected volatility of
approximately 30% in both years; risk-free interest rates of 6.65% and 6.6%;
and expected lives of approximately three to five years.
F-19
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
9. Stockholders' Equity -- (Continued)
Under the accounting provisions of FASB Statement No. 123, the Company net
income and net income per common share would have been decreased to the pro
forma amounts indicated below:
Years ended June 30,
-----------------------------------
1996 1997
---------------- ----------------
Net Income
As reported ................... $ 2,524,000 $ 3,183,000
Pro forma ..................... 2,392,000 1,617,000
Per share as reported ......... 0.25 0.20
Pro forma ..................... 0.23 0.12
============= =============
The above pro forma information includes only the effects of 1996 and 1997
grants. Because options potentially vest over several years and additional
awards are made each year, the results shown above may not be representative of
the effects on net earnings in future years.
10. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is
established for deferred income tax assets when realization is not deemed more
likely than not. Deferred tax assets (liabilities) consist principally of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------------- -------------
1996 1997 1997
--------------- --------------- -------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards ............................... $ 1,384,000 $ 555,000 $1,212,000
Accounts receivable allowance and other ........................ 97,000 58,000 169,000
----------- ----------- ----------
Total deferred tax asset ....................................... 1,481,000 613,000 1,381,000
Less valuation allowance ....................................... (148,000) (165,000) (302,000)
----------- ----------- ----------
Net deferred tax asset ......................................... $ 1,333,000 $ 448,000 $1,079,000
=========== =========== ==========
Deferred tax liability
Depreciation and amortization in excess of book amount ......... $ (328,000) $ (547,000) $ (650,000)
=========== =========== ==========
</TABLE>
At June 30, 1997, the Company had approximately $1,025,000 of net
operating loss (NOL) carryforwards available to reduce future Federal taxable
income. These losses are available through 2011. California allows an NOL
carryforward of 50% of a company's California taxable loss. The carryforward
for California purposes, after the 50% reduction, was approximately $2,217,000
at June 30, 1997 and expires through 2001. Use of the Company's NOLs could be
limited in the future as a result of issuance or exercise of stock options and
warrants or sale or issuance of stock. The Company files its tax returns on a
calendar year basis. Because of the seasonal nature of the Company's
operations, the different reporting periods for book and tax purposes may
affect the amount of taxes that will ultimately be payable or deferred.
At June 30, 1996, June 30, 1997 and December 31, 1997, the Company
established a $148,000, $165,000 and $302,000 valuation allowance for the
benefits pertaining to California NOLs which are not estimated to be realizable
prior to their expiration. The Company believes that it is more likely than not
that the remaining deferred tax assets will be realized through future taxable
earnings or alternative tax strategies.
F-20
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
10. Income Taxes -- (Continued)
The income tax (provision) benefit consists of:
June 30,
--------------------------------------------------
1995 1996 1997
-------------- ------------- -----------------
Current
Federal ......... $ -- $ -- $ (283,000)
State ........... (38,000) (290,000) (280,000)
---------- ---------- -------------
(38,000) (290,000) (563,000)
---------- ---------- -------------
Deferred
Federal ......... -- 1,013,000 (2,129,000)
State ........... -- (8,000) (56,000)
---------- ---------- -------------
-- 1,005,000 (2,185,000)
---------- ---------- -------------
$ (38,000) $ 715,000 $ (2,748,000)
========== ========== =============
The 1997 income tax expense consists of $3,200,000 expense from continuing
operations reduced by $452,000 benefit associated with the extraordinary
expense.
The following is a reconciliation between the Statutory Federal income tax
rate and the Company's effective tax rate for continuing operations:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Income tax (provision) computed at Federal Statutory rate .......... (34.0)% (34.0)% (34.0)%
State taxes, net of Federal tax benefits ........................... ( 2.4) (16.5) ( 4.6)
Nondeductible amortization and other ............................... ( 3.6) ( 4.1) ( 4.5)
Changes in valuation allowance on deferred tax asset ............... (37.6) 94.1 ( 0.2)
----- ----- -----
(Provision) benefit for income taxes ............................... ( 2.4)% 39.5% (43.3)%
===== ===== =====
</TABLE>
The income tax benefit for the six months ended December 31, 1996 and 1997
is computed based upon the Company's estimated effective tax rate for the
respective fiscal year.
11. Concentration of Credit Risk and Significant Relationships
Trade accounts receivable are due primarily from numerous customers
located in many geographic regions throughout the United States. The Company
performs ongoing credit evaluations of its customers' financial conditions and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. The Company does
not require collateral from its customers.
During the years ended June 30, 1996 and 1997, sales to two Easy Gardener
customers accounted for approximately 36% (27% and 9%) and 36% (26% and 10%) of
consolidated net sales. During the six months ended December 31, 1996 and 1997,
sales to two Easy Gardener customers accounted for approximately 34% (25% and
9%) and 35% (26% and 9%) of consolidated net sales. Included in accounts
receivable at June 30, 1996, June 30, 1997 and December 31, 1997 is $1,440,000,
$2,320,000 and $455,000 due from the largest customer.
During the year ended June 30, 1995, sales to two Easy Gardener customers
accounted for approximately 24% and 9% of consolidated net sales.
Substantially all of Easy Gardener's raw material purchases for
Weedblock(R) inventory, representing approximately 66%, 50% and 22% of the
Company's consolidated raw material purchases during the years ended June 30,
1995, 1996 and 1997, are from one vendor.
F-21
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
11. Concentration of Credit Risk and Significant Relationships -- (Continued)
Management believes that other suppliers could provide a similar product
on comparable terms. A change in suppliers, however, could cause delays and a
possible loss of sales, which would affect operating results adversely.
Included in accounts payable at June 30, 1996, June 30, 1997 and December 31,
1997 is $139,000, $349,000 and $520,000 due to this vendor.
12. Supplemental Cash Flow Information
Cash paid for:
<TABLE>
<CAPTION>
Years ended Six months ended
June 30, December 31,
------------------------------------------------ ----------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash paid during the period
for:
Interest, including deferred
financing costs and
extraordinary expense ......... $ 1,528,000 $ 1,296,000 $ 5,816,000 $3,251,000 $1,358,000
=========== =========== =========== ========== ==========
Taxes .......................... $ 10,000 $ 96,000 $ 131,000 $ 7,000 $ 30,000
=========== =========== =========== ========== ==========
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
The Company purchased all of the assets of Easy Gardener, Inc. for
$21,283,000 in September 1994.
Fair value of assets acquired ......... $ 28,526,000
Cash paid for assets acquired ......... (14,424,000)
Promissory notes ...................... (12,783,000)
------------
Liabilities assumed ................... $ 1,319,000
============
During 1995, the Company entered into agreements to issue approximately
417,000 shares of common stock, valued at approximately $683,000 as payment of
certain accounts payable.
During 1995, $2,000,000 of convertible debentures and related accrued
interest was converted into 914,396 shares of common stock and 914,396 Class B
warrants.
During 1995, deferred financing costs of approximately $400,000 was paid
for by the issuance of 6 UPOs with a nominal exercise price.
During 1996, the Company exchanged assets held for sale with a book value
of approximately $1.4 million for future trade credits.
During 1997, the Company issued warrants and options for various
consulting services which were valued at approximately $1,079,000.
13. Extraordinary Expense
As a result of the refinancing of all of the Company's outstanding debt in
August 1996 (See Note 6), the entire balance of deferred finance costs at June
30, 1996, net of accumulated amortization, plus certain prepayment penalties
totaling approximately $455,000, was written off as an extraordinary expense
during the year ended June 30, 1997.
F-22
<PAGE>
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Information for December 31, 1996 and 1997 is Unaudited)
14. Earnings per Share
The following is a reconciliation of the weighted average number of shares
used to compute basic and dilutive earnings per share before extraordinary
expense:
<TABLE>
<CAPTION>
Six months ended
Years ended June 30, December 31,
------------------------------------------ ----------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Basic earnings per common share ........... 8,376,000 10,206,000 13,695,000 13,437,000 15,552,000
Options and warrants ...................... 1,749,000 3,155,000 2,373,000
--------- ---------- ----------
Diluted earnings per common share ......... 10,125,000 13,361,000 16,068,000 13,437,000 15,552,000
---------- ---------- ---------- ---------- ----------
</TABLE>
Options and warrants to purchase 11,274,000 and 8,672,000 shares were
outstanding during the six months ended December 31, 1996 and 1997 but were not
included in the computation of diluted loss per common share because the effect
would be antidilutive.
15. Subsequent Events
Subsequent to June 30, 1997, a $350,000 liability was converted into
154,000 shares of common stock.
Subsequent to June 30, 1997, the Company granted stock options to acquire
565,000 and 98,000 shares of common stock under the 1997 and 1995 stock option
plans.
During July 1997, 453,000 warrants were exercised generating $1,033,000 in
cash proceeds to the Company.
The Company is involved in a lawsuit in which it has claimed a competitor
has infringed on a product trademark. The competitor has filed a counter-claim
in September 1997 seeking unspecified damages. The Company does not believe the
outcome of this matter will have a material impact on future operations.
F-23
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders of
Weatherly Consumer Products Group, Inc.,
and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Weatherly Consumer Products Group, Inc.
(a Delaware Corporation) and Subsidiaries for the year ended September 30, 1995
and the period October 1, 1995 through August 9, 1996, the date of the sale of
the Company (Note 1). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1 to the consolidated financial statements, all
outstanding capital stock of the Company was acquired by Easy Gardener
Acquisition Corp., a wholly-owned subsidiary of U.S. House & Garden Inc., on
August 9, 1996.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Weatherly Consumer Products Group, Inc. and Subsidiaries for the year
ended September 30, 1995 and the period October 1, 1995 through August 9, 1996
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
San Francisco, California,
October 20, 1997
F-24
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Consolidated Statements of Operations
For the Year Ended September 30, 1995
and the Period October 1, 1995 through August 9, 1996 (Note 1)
<TABLE>
<CAPTION>
1995 1996
-------------- ----------------
<S> <C> <C>
NET SALES (Note 7) ...................................... $18,532,297 $ 18,184,995
COST OF GOODS SOLD ...................................... 8,872,354 7,677,707
----------- ------------
Gross profit ...................................... 9,659,943 10,507,288
----------- ------------
OPERATING EXPENSES (Note 1):
Selling and marketing ................................ 4,960,793 5,251,782
Administrative ....................................... 2,552,570 2,414,193
Redemption of employment contracts ................... 6,000,000
------------
7,513,363 13,665,975
----------- ------------
Operating income (loss) ........................... 2,146,580 (3,158,687)
----------- ------------
OTHER EXPENSES:
Interest ............................................. 1,361,987 1,546,311
Other, net ........................................... (67,636) 8,575
----------- ------------
1,294,351 1,554,886
----------- ------------
Income (loss) before (provision) benefit for
income taxes and extraordinary item .............. 852,229 (4,713,573)
(PROVISION) BENEFIT FOR INCOME TAXES (Notes 1
and 3) ................................................. (400,033) 475,535
----------- ------------
Income (loss) before extraordinary item ........... 452,196 (4,238,038)
EXTRAORDINARY ITEM -- Write-off of deferred
financing costs and debt prepayment charges, net of
related income tax benefit of $57,815 (Note 1).......... (520,334)
------------
Net income (loss) ................................. $ 452,196 $ (4,758,372)
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-25
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Year Ended September 30, 1995 and
the Period October 1, 1995 through August 9, 1996 (Note 1)
<TABLE>
<CAPTION>
Preferred Common
Stock Stock Warrants
--------------- -------------- -------------
<S> <C> <C> <C>
BALANCE,
September 30, 1994 ........................ $ 9,983,662 $ (458,850) $ 350,000
Net income ................................
Conversion or retirement of Common and
Preferred Stock and Warrants (Note 8) (9,983,662) 458,950
------------- ----------
BALANCE,
September 30, 1995 ......................... 100 350,000
Net loss ..................................
Accretion of warrants (Note 2) ............ 810,442
----------
BALANCE,
August 9, 1996 ............................ $ $ 100 $1,160,442
============= ============ ==========
<CAPTION>
Additional Accumulated
Paid-In-Capital Deficit Total
----------------- ----------------- ----------------
<S> <C> <C> <C>
BALANCE,
September 30, 1994 ........................ $ $ (11,809,219) $ (1,934,407)
Net income ................................ 452,196 452,196
Conversion or retirement of Common and
Preferred Stock and Warrants (Note 8) 6,324,712 (3,200,000)
---------- ------------
BALANCE,
September 30, 1995 ......................... 6,324,712 (11,357,023) (4,682,211)
Net loss .................................. (4,758,372) (4,758,372)
Accretion of warrants (Note 2) ............ (810,442)
-------------
BALANCE,
August 9, 1996 ............................ $6,324,712 $ (16,925,837) $ (9,440,583)
========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
Weatherly Consumer Products Group, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended September 30, 1995
and the Period October 1, 1995 through August 9, 1996 (Note 1)
<TABLE>
<CAPTION>
1995 1996
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ 452,196 $ (4,758,372)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Depreciation and amortization ........................................ 1,018,594 977,986
Write-off of deferred financing costs and prepayment charges ......... 578,149
Reserves for certain property and other assets ....................... 247,661
(Gain) on disposition of assets ...................................... (63,512)
Future tax benefit ................................................... 10,828 209,902
Income tax receivable ................................................ (1,082,407)
Redemption of employment contracts ................................... 6,000,000
Changes in assets and liabilities-
Accounts receivable .................................................. 67,931 (529,880)
Inventory ............................................................ (714,412) 1,249,718
Prepaid expenses and other ........................................... 37,203 (103,273)
Accounts payable and accrued liabilities ............................. (161,761) (211,949)
------------ ------------
Net cash provided by operating activities ........................... 647,067 2,577,535
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on debt ..................................................... 3,308,801 4,131,547
Payments on debt ....................................................... (4,692,601) (4,978,047)
Proceeds from sale of land and building ................................ 74,492
------------
Net cash used in financing activities ............................... (1,309,308) (846,500)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets ............................................... (53,746) (4,348)
Capital expenditures, net .............................................. (359,134) (327,751)
------------ ------------
Net cash used in investing activities ................................... (412,880) (332,099)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................................ (1,075,121) 1,398,936
CASH AND CASH EQUIVALENTS, beginning of period .......................... 2,128,789 1,053,668
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ................................ $ 1,053,668 $ 2,452,604
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest ............................................... $ 1,295,209 $ 1,039,261
============ ============
Cash paid for income taxes ........................................... $ 192,532 $ 334,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of preferred stock to long-term stockholder debt
(Note 8) ............................................................ $ 3,200,000 $
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
(1) Sale of the Company
Weatherly Consumer Products Group, Inc. (WCPG) and Subsidiaries (the
Company) is engaged in the manufacture and sale of fertilizer, watering,
insecticide and garden netting products.
On August 9, 1996, all outstanding capital stock of the Company was
acquired by Easy Gardener Acquisition Corp. (EGAC), a wholly-owned subsidiary
of U.S. Home & Garden Inc. for approximately $8 million dollars of net cash
consideration and approximately one million shares of U.S. Home & Garden Inc.
stock valued at $3 per share. Prior to and/or in conjunction with the sale;
o Certain of the officer and employee contracts were redeemed for
approximately $6 million. This expense and related obligation has been
included as a component of administrative expenses in the accompanying
1996 consolidated financial statements.
o The holders of the Company's warrants for Class B common shares agreed to
have their warrants redeemed for $1,160,442. Accordingly, the accretion of
the warrants was accelerated in the accompanying 1996 consolidated
financial statements to reflect the warrants at their respective
redemption price.
o Severance agreements were provided to certain Company employees.
Severance of approximately $450,000 was accrued or paid as of August 9,
1996 and is included in selling and marketing (approximately $395,000) and
administrative expenses ($55,000) in the accompanying 1996 consolidated
financial statements.
o Immediately subsequent to the sale of the Company's stock, the
preexisting debt obligations were paid off. Accordingly, the accretion of
the Company's bank loan with detachable warrants was accelerated,
unamortized deferred financing costs were written off and related
prepayment penalties were accrued. The expense associated with the
accretion of the bank loan with detachable warrants (approximately
$271,000) is included as a component of the 1996 interest expense, whereas
the costs associated with the prepayment of the debt obligations
(approximately $578,000) are reflected, net of the related tax benefit, in
the accompanying 1996 consolidated financial statements as an
extraordinary item.
o Immediately prior to the sale, specific assets were transferred to
certain employees and shareholders. The carrying amount of the net assets
transferred (approximately $248,000) is included in administrative
expenses in the accompanying 1996 consolidated financial statements.
o The selling shareholders of the Company entered into an agreement to
indemnify EGAC against any tax liabilities relating to periods prior to
the sale. If any such tax liabilities arise, EGAC would be required to
make the payments to the appropriate tax authority and, in turn, seek
reimbursement from the selling shareholders under their indemnification
agreement. The Internal Revenue Service (IRS) is currently examining
certain tax returns of the Company covering periods prior to the sale. The
Company believes that any payment it may be required to make will not have
a material adverse effect on the accompanying consolidated financial
statements.
(2) Summary of Accounting Policies
(a) Principles of Consolidation--The consolidated financial statements
include the accounts of WCPG and its subsidiaries, Weatherly Consumer
Products, Inc. and Ross Daniels, Inc. (WCP and RDI). All material
intercompany transactions have been eliminated.
(b) Translation of Foreign Currencies--Accounts of the United Kingdom
branch are stated in United States dollars. Currency gains and losses
have been reflected in the statements of operations. Translation
adjustments are not material to the consolidated financial statements
taken as a whole.
(c) Cash and Cash Equivalents--Cash and cash equivalents include operating
cash accounts and money market funds.
F-28
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(2) Summary of Accounting Policies -- (Continued)
(d) Inventories--Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
(e) Equipment and Leasehold Improvements--Equipment and leasehold
improvements are depreciated over their estimated useful lives using the
straight-line method. Major expenditures for renewals and betterments
are charged to the property accounts while repairs and maintenance,
which do not improve or extend the life of the assets, are charged to
operations.
The estimated useful lives of the various classes of assets are as
follows:
Years
--------
Machinery and equipment .......... 3 to 10
Furniture and vehicles ........... 3 to 10
Leasehold improvements ........... 3 to 18
(f) Research and Development--Costs incurred in connection with the
development of new products and changes to existing products are charged
to operations as incurred. Research and development expense for the year
ended September 30, 1995 and the period October 1, 1995 through August
9, 1996 approximated $106,000 and $113,000, respectively.
(g) Other Assets--Patents, trademarks, product packaging costs and goodwill
are amortized over their estimated lives using the straight-line method.
The estimated lives of these assets are summarized as follows:
Years
-------
Patents .............................. 11
Trademarks ........................... 25
Goodwill ............................. 25
Product packaging and other .......... 3 to 8
The Company capitalizes significant expenditures for product packaging
development and design work.
(h) Warrants for Common Stock--Detachable warrants to purchase 15% of
WCPG's common stock were issued to Nations Credit Commerical Corporation
(Nations) as part of the financing agreement with Nations and were
redeemed in conjunction with the sale of Company stock (Note l). Prior
to 1996, the warrants were exercisable through July 30, 2003 and subject
to redemption at the option of Nations on or after July 30, 1997 at a
redemption price equal to the greater of the appraised value of the
Company, liquidation value, consolidated net worth, as defined, or a
multiple of earnings, as defined.
The original value assigned to the warrants was $350,000 and included in
stockholders' equity in the accompanying consolidated financial
statements. The redemption price was estimated annually and adjustments
to accrete the warrants to the estimated redemption price were recorded,
as applicable, with a corresponding charge to retained earnings. No
accretion was recorded in fiscal 1995. In connection with the sale of the
Company, there was a charge of $810,442 to accumulated deficit to accrete
the value of the warrants to the agreed-upon redemption price.
(i) Advertising--The Company expenses the costs of advertising as incurred.
Advertising expense for the year ended September 30, 1995 and the period
October 1, 1995 through August 9, 1996 approximated $782,000 and
$732,000, respectively.
(j) Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-29
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(2) Summary of Accounting Policies -- (Continued)
(k) Reclassifications--Certain reclassifications have been made to the 1995
consolidated financial statements to conform with the 1996 presentation.
(l) New Accounting Pronouncements--In 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of (SFAS 121), effective for fiscal
years beginning after December 15, 1995. The new standard requires that
long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. The Company does not expect that the adoption of SFAS 121
will have a material impact on the consolidated financial statements.
(m) Revenue Recognition--Sales are recorded as products are shipped to
customers.
(3) Income Taxes
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS 109). Under SFAS 109, deferred tax assets or liabilities are
computed based on the difference between the financial statement basis and
income tax basis of assets and liabilities using the enacted marginal tax rate.
Deferred income tax expenses or credits are based on the changes in the asset
or liability from period to period.
The provision (credit) for income taxes includes the following:
<TABLE>
<CAPTION>
1995 1996
------------ ---------------
<S> <C> <C>
Current payable (receivable) ......................... $ 493,801 $ (685,437)
Benefit of net operating loss carryforwards .......... (104,596) (959,709)
Deferred ............................................. 10,828 (68,291)
Change in valuation allowance ........................ 1,237,902
---------- -----------
400,033 (475,535)
Tax benefit of extraordinary item .................... (57,815)
---------- -----------
$ 400,033 $ (533,350)
========== ===========
</TABLE>
The following is a reconciliation between the statutory federal income tax
rate and the provision (benefit) for income taxes:
<TABLE>
<CAPTION>
1995 1996
---------------------------- -------------------------------
Amount Rate Amount Rate
------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Computed provision (benefit) for federal income
taxes at the statutory rate ...................... $ 289,757 34.0% $ (1,602,614) (34.0%)
State and local income taxes, net of federal income
taxes ............................................ 47,432 5.6% (263,960) ( 5.6%)
Changes in valuation allowance .................... (104,596) (12.3%) 1,237,902 26.4%
Nondeductible amortization and other, net ......... 167,440 19.6% 153,137 3.2%
---------- ----- ------------ -----
$ 400,033 46.9% $ (475,535) (10.0%)
========== ===== ============ =====
</TABLE>
F-30
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(3) Income Taxes -- (Continued)
At September 30, 1995 and August 9, 1996, the net future tax benefit
consists of the following:
<TABLE>
<CAPTION>
1995 1996
----------- ---------------
<S> <C> <C>
Advertising and rebate accruals ................................. $ 81,137 $ 65,808
Warranty reserves ............................................... 24,543 16,486
Accounts receivable reserves .................................... 37,367 6,554
Inventory costs ................................................. 29,873 23,586
Other ........................................................... 36,982 63,798
Benefit of net operating loss and credit carryforwards .......... 1,061,670
-------- ------------
209,902 1,237,902
Valuation allowance ............................................. (1,237,902)
-------- ------------
$209,902 $
-------- ------------
</TABLE>
The valuation allowance is required due to the uncertainty of realizing
the net deferred tax assets through future operations.
As of August 9, 1996, the Company has accumulated approximately $2,800,000
of tax net operating losses and approximately $149,000 of tax credits,
substantially all of which expire in 2011, which can be carried forward and
used to reduce future taxable income.
(4) Debt Obligations
The Company's long-term debt obligations outstanding during 1995 and 1996
principally consisted of bank loans with interest at a commercial paper rate
plus 4.5% (10.005% at August 9, 1996) and a floating rate equal to the greater
of 11% or the commercial paper rate plus 6% (11.505% at August 9, 1996), and
subordinated notes due to a shareholder with interest at the prime rate (8.25%
at August 9, 1996). All of these long-term obligations were paid in full on
August 10, 1996 in connection with the sale of the Company (Note 1).
The Company had a $20 million credit arrangement with Nations, which was
secured by substantially all the assets of the Company. The working capital
commitment of $7.5 million included within the arrangement permitted borrowings
based on a percentage of eligible receivables and inventory, as defined. There
were no borrowings outstanding on the working capital loan at September 30,
1995 or August 9, 1996.
The terms of the Nations agreement stipulated, among others, that the
Company maintain certain financial ratios; limit capital expenditures and
retirements; limit lease and debt commitments; may not merge, consolidate,
acquire or sell operating assets; limit compensation to key employees.
The notes payable to shareholders were subordinated to all bank debt.
Accordingly, these notes stipulated that if payments of annual interest to the
shareholders would violate the terms of the Nations agreement, the interest
payments would be deferred until the next annual interest payment date.
(5) Royalty Commitments
WCP has exclusive licenses under patent applications to make, lease, or
sell certain of its products. Royalty expense under the agreements is based on
a percentage of net sales and amounted to approximately $121,000 and $150,000
for the year ended September 30, 1995 and the period October 1, 1995 through
August 9, 1996, respectively.
(6) Commitment
WCP conducts a portion of its operations in leased facilities and leases
equipment under noncancelable operating leases. The total amount charged to
rental expense was approximately $343,000 and $298,000 in 1995 and 1996,
respectively. The minimum scheduled lease payments for the noncancelable
operating leases as of August 9, 1996 are as follows:
F-31
<PAGE>
Weatherly Consumer Products Group, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(6) Commitment -- (Continued)
1997 ............................... $325,000
1998 ............................... 262,000
1999 ............................... 158,000
--------
$745,000
========
(7) Significant Customers and Concentration of Credit Risk
Trade accounts receivable are due primarily from numerous customers
located in many geographic regions throughout the United States. The Company
performs ongoing credit evaluations of its customers' financial conditions and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. The Company does
not require collateral from its customers.
Approximately 14% and 10% of consolidated gross sales in 1995 were with
two customers. These same two customers represented approximately 15% and 12%
of consolidated gross sales in 1996.
(8) Reorganization
In June, 1995, the Board of Directors approved an amendment of the
Certificate of Incorporation which converted all common and preferred shares
outstanding, except for the 12% Preferred "A" stock, into a new class of common
stock (Class A common stock). The 12% Preferred "A" stock, owned by one
shareholder, was converted into a $3,200,000 subordinated note. In addition,
previously accrued dividends owed by WCP to the shareholders were canceled,
preexisting stock option plans were terminated, certain stock was effectively
canceled for no consideration and consideration was provided to certain
shareholders for certain waivers and releases.
(9) Related Party Activities
During 1995 and 1996, the Company had outstanding subordinated notes and
accrued interest due to a stockholder. This related party debt was paid in full
on August 10, 1996 in connection with the sale of the Company (Notes 1 and 4).
In conjunction with the acquisition of the Company by WCPG, the prior sole
shareholder (and a current shareholder of WCPG) entered into a consulting
agreement with the Company which provided for annual consulting fees of
$125,000. This agreement was terminated January 1, 1995. Consulting fees
expensed in 1995 approximated $31,000.
In July 1993, the Company entered into a two year agreement, subject to
renewals, to sublease office space at fair market rental with its prior sole
stockholder. Rentals, as per the agreement, approximated $4,500 in 1995. The
lease agreement was amended and renewed during 1995 and provides for annual
rentals of $1 per year.
In 1993, the Company entered into a fully insured two year renewable
exclusive distributor agreement with its prior sole stockholder whereby WCP
markets and distributes lawn and garden products owned or controlled by its
prior sole stockholder. The Company distributed products under this agreement
in 1995. Commencing October 1, 1995 this agreement expired and the products
were owned and controlled by WCP.
(10) Employee Benefit Plans
(a) Health Plan--The Company has a fully insured health benefit plan which
provides for hospitalization, surgical, major medical and other benefits
for eligible employees.
(b) 401(k) Plan--The Company has a 401(k) plan for the benefit of all
employees meeting certain minimum eligibility requirements. The Company
contributed approximately $45,000 and $43,000 to this plan in matching
contributions in 1995 and 1996, respectively.
F-32
<PAGE>
U.S. HOME & GARDEN, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 9, 1996, Easy Gardener Acquisition Corporation, a wholly owned
subsidiary of U.S. Home & Garden, acquired all of the outstanding stock of
Weatherly Consumer Products (Weatherly), a lawn and garden care company, for
1,000,000 shares of the Company's common stock (valued at $3 per share) and
$22,937,321, less an amount required to discharge certain outstanding
indebtedness of the acquired company, and adjusted dollar for dollar based upon
the ultimate value of the acquired company's net current assets in excess of $2
million.
The acquisition was accounted for as a purchase, with the assets acquired
and liabilities assumed recorded at fair values. The results of Weatherly's
operations have been included in the Company's consolidated financial
statements from the date of acquisition.
The accompanying condensed pro forma consolidated statement of operations
illustrate the effect of the acquisition on the results of operations for the
year ended June 30, 1997 as if the acquisition had taken place on July 1, 1996.
The operating results for Weatherly as reflected on the pro forma statement of
operations represents the period ended July 1, 1996 to August 9, 1996.
The pro forma condensed consolidated results of operations may not be
indicative of the actual result which would have been obtained if the
acquisition had occurred on July 1, 1996.
F-33
<PAGE>
U.S. HOME & GARDEN, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Weatherly
Weatherly Adjustments Pro Forma
----------- ------------------- -----------
<S> <C> <C> <C>
Net sales ............................... $ 742 $ 742
Cost of sales ........................... 544 544
-------- -------
Gross profit ............................ 198 198
Operating Expenses:
Selling and shipping .................. 825 (395)(4) 430
(248)(4)
Administrative and general ............ 6,649 (6,055)(4) 346
-------- ------ -------
Income from operations .................. (7,276) 6,698 (578)
Interest expense, net ................... 463 (271)(4) 192
-------- ------ -------
Income (loss) before income taxes and
extraordinary item ..................... (7,739) 6,969 (770)
Income tax benefit (expense) ............ 886 (578)(5) 308
-------- ------ -------
Income before extraordinary items ....... (6,853) 6,391 (462)
Extraordinary item ...................... (520) (520)
-------- -------
Net income (loss) ....................... $ (7,373) $ 6,391 $ (982)
======== ======= =======
Diluted earnings per share:
(Income) loss per common share
Income before extraordinary item .......
Extraordinary item ......................
Net Income ..............................
Weighted average shares outstanding .....
<CAPTION>
U.S. Home & Consolidated
Garden Adjustments Pro Forma
--------------------- ------------- ----------------------
<S> <C> <C> <C>
Net sales ............................... 52,046 $ 52,788
Cost of sales ........................... 23,649 24,193
------ --------------
Gross profit ............................ 28,397 28,595
Operating Expenses:
Selling and shipping .................. 11,232 11,662
Administrative and general ............ 6,513 80 (1) 6,939
------ -- --------------
Income from operations .................. 10,652 (80) 9,994
Interest expense, net ................... 3,262 (2) 3,454
------ --- --------------
Income (loss) before income taxes and
extraordinary item ..................... 7,390 (80) 6,540
Income tax benefit (expense) ............ (3,200) (2,892)
------ --------------
Income before extraordinary items ....... 4,190 (80) 3,648
Extraordinary item ...................... (1,007) (1,527)
------ --------------
Net income (loss) ....................... $ 3,183 (80) $ 2,121
============= === ==============
Diluted earnings per share:
(Income) loss per common share
Income before extraordinary item ....... $ 0.26 (3) $ 0.22 (3)
Extraordinary item ...................... ( 0.06)(3) (0.09)(3)
------------- --------------
Net Income .............................. $ 0.20 (3) $ 0.13 (3)
============= ==============
Weighted average shares outstanding ..... 16,068,000(3) 16,436,000 (3)
=============== ==============
</TABLE>
F-34
<PAGE>
U.S. HOME & GARDEN, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE A--BASIS OF PRESENTATION
Reference is made to the introduction at page PF-1
NOTE B--PRO FORMA ADJUSTMENTS
The pro forma adjustments to the condensed consolidated statement of operations
are as follows:
(1) Amortization of excess of cost over fair value of net assets acquired over
30 years.
(2) No adjustment to interest expense since the lower interest rate offsets the
increase in principal loan balances.
(3) Weighted average shares have been increased by 368,000 shares to reflect
the exercise of approximately 2,385,000 common stock warrants and the
issuance of 1,000,000 shares of common stock to the Weatherly shareholders
as if they had occurred at the beginning of the year. Approximately
2,373,000 additional shares deemed outstanding in connection with
potential dilution securities. See Note 14 of the June 30, 1997 audited
consolidated financial statements.
(4) To eliminate certain nonrecurring expenses including $6,000,000 buy-out of
employment agreements, severance payments of $450,000, $248,000 salary
expense relating to distribution of assets and nonrecurring interest
expense of $271,000 associated with prior stockholders sale of the
business.
(5) To adjust tax rate to U.S. Home and Garden's statutory tax rate.
F-35
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give
any information or to make representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, the Trust or any of
the underwriters. This Prospectus does not constitute an offer to sell or
solicitation of an offer to buy, any security other than the securities offered
by this Prospectus, or an offer to sell or a solicitation of an offer to buy to
any person in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making the offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information in this Prospectus is correct as of any time subsequent to the date
hereof.
-----------------------------
TABLE OF CONTENTS
Page
---------
Available Information ...................................... 5
Prospectus Summary ......................................... 6
Risk Factors ............................................... 17
Use of Proceeds ............................................ 27
Accounting Treatment ....................................... 28
Capitalization ............................................. 29
Selected Consolidated Financial Data and
Other Information ....................................... 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................................. 32
Business ................................................... 41
Management ................................................. 52
Principal Stockholders ..................................... 58
Certain Transactions ....................................... 59
Description of the Trust Preferred Securities............... 60
Description of Junior Subordinated
Debentures .............................................. 71
Book-Entry Issuance ........................................ 78
Description of Guarantee ................................... 80
Expense Agreement .......................................... 82
Relationship Among the Trust Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee ............................ 82
Certain Federal Income Tax Consequences..................... 84
ERISA Considerations ....................................... 87
Underwriting ............................................... 89
Legal Matters .............................................. 90
Experts .................................................... 90
Index to Financial Statements .............................. F-1
================================================================================
<PAGE>
================================================================================
2,200,000 Trust Preferred Securities
U.S. HOME
& GARDEN TRUST I
9.40% Cumulative Trust
Preferred Securities
(Liquidation Amount $25 Per
Trust Preferred Security)
Fully and Unconditionally Guaranteed
By
[U.S. HOME & GARDEN, INC. LOGO]
-----------------------------------
PROSPECTUS
-----------------------------------
EVEREN Securities, Inc.
Hambrecht & Quist
Josephthal & Co. Inc.
April 13, 1998
================================================================================
