-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K8dsNd+PMCQZOX1x2MHCpTvYPaEKkXRxz9/YR3fGsY6DitR+qVdhHjJe7D8F4OCB 4rvTr4MtT8NV/UI868TbEQ== 0000891554-97-000916.txt : 19971001 0000891554-97-000916.hdr.sgml : 19971001 ACCESSION NUMBER: 0000891554-97-000916 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: US HOME & GARDEN INC CENTRAL INDEX KEY: 0000879911 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 770262908 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19899 FILM NUMBER: 97688276 BUSINESS ADDRESS: STREET 1: 655 MONTGOMERY ST STE 830 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4156168111 MAIL ADDRESS: STREET 1: 655 MONTGOMERY ST STREET 2: SUITE 830 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 FORMER COMPANY: FORMER CONFORMED NAME: NATURAL EARTH TECHNOLOGIES INC DATE OF NAME CHANGE: 19930328 10-K 1 ANNUAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 0-19899 U.S. HOME & GARDEN INC. (Exact Name of Registrant as specified in its charter) Delaware 77-0262908 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 655 Montgomery Street, San Francisco, California 94111 (Address of Principal Executive (Zip Code) Offices) (415) 616-8111 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Exchange Act: Name of Each Exchange Title of each class on Which Registered - ------------------- ------------------- None Not Applicable Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.001 par value and Class A Common Stock Purchase Warrants ------------------------------------------------------------------------ (Title of Class) Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the Common Stock held by non-affiliates of the registrant (based upon the closing sale price) on September 25, 1997 was approximately $61,900,000. As of September 25, 1997, 15,295,331 shares of the Registrant's Common Stock, par value $.001 per share were outstanding. Documents Incorporated By Reference: None Part I. Item 1. Business The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Report contains statements that are forward-looking, such as statements relating to plans for future activities. Such forward-looking information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to the Company's growth strategy, customer concentration, outstanding indebtedness, seasonal and weather fluctuations, expansion and other activities of competitors, changes in federal or state environmental laws and the administration of such laws and the general condition of the economy and its effect on the securities markets. General The Company is a leading manufacturer and marketer of a broad range of consumer lawn and garden products. The Company's products include weed preventive landscape fabrics, fertilizer spikes, decorative landscape edging, shade fabric and root feeders which are sold under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald Edge(R),Shade Fabric(R) and Ross(R). The Company believes that it has significant market share and favorable brand-name recognition in several of these product categories. The Company markets its products through most large national home improvement and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Builder's Square and Home Base. The Company was organized under the laws of the State of California in August 1990 under the name Natural Earth Technologies, Inc. In January 1992 the Company reincorporated under the laws of the State of Delaware and in July 1995 changed its name to U.S. Home & Garden Inc. The Company's lawn and garden operations are conducted through its subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy Gardener's subsidiaries, and the Company's agricultural operations are conducted through its subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context otherwise requires, references in this Report to "the Company" mean U.S. Home & Garden Inc. and its subsidiaries. The Company's executive offices are located at 655 Montgomery Street, San Francisco, California 94111, and its telephone number is (415)616-8111. Lawn and Garden Industry Historically, the lawn and garden industry has been comprised of relatively small regional manufacturers and distributors whose products have been sold to consumers primarily through local nurseries and garden centers. As the industry has grown, home improvement and mass merchant retailers have replaced many of these local garden centers as the dominant retail source for lawn and garden products. In an effort to improve operating margins and reduce the number of vendors needed to source high volume lawn and garden products, the preference among Retail Accounts has shifted towards single source suppliers such as the Company that offer broad product lines of consumer brand-name merchandise and the service necessary to stimulate consumer demand and ensure timely and cost effective order fulfillment. According to the 1996-1997 National Gardening Survey conducted by the Gallup organization, 1996 retail sales of lawn and garden products were approximately $22 billion and 64% of the approximately 101 million households in the United States participated in some form of gardening activity during 1996. Moreover, according to the National Gardening Survey, persons 50 years of age and older spent an average of $400 per household on lawn and garden activities in 1996. Sales growth in the lawn and garden industry is being driven in part by the "baby boomer" consumer segment reaching such age group. -3- Recent and Proposed Acquisitions. Since August 1992, the Company has consummated the following five (5) acquisitions of companies or product lines for a total of over $56 million in consideration: o Golden West Chemical Distributors, Inc. A manufacturer of humic acid-based products designed to improve crop yield which was acquired in August 1992 for approximately $1.1 million in cash and $1,075,000 of promissory notes. o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping products including WeedBlock(R), was acquired in September 1994 for approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million promissory note and two convertible notes in the principal amount of $1 million. Approximately $2.2 million of additional purchase price was contingent on Easy Gardener meeting certain income requirements. A total of approximately $1.2 million of the additional amount has been paid to date and the remaining $978,000 is payable in the fiscal year ending June 30, 1999. o Emerald Products LLC. A manufacturer of decorative landscape edging was acquired in August 1995 for $835,000 in cash and a $100,000 promissory note. o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of fertilizer spikes and other lawn and garden products was acquired in August 1996 for 1,000,000 shares of Common Stock and approximately $22.9 million in cash. o Plasti-Chain Product Line. A product line of plastic chain links and decorative edgings was acquired from Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash. In addition, the Company has entered into a letter of intent to purchase a manufacturer and distributor of outdoor lawn and garden products for $5.25 million in cash. There can be no assurance that the acquisition will be consummated. Products Landscape Fabric. The Company markets different types of landscape fabric in varying thicknesses and strengths under the trade names WeedBlock(R), WeedBlock 6(R), MicroPore(R), Pro WeedBlock(TM) and Weedshield(TM). Landscape fabrics allow water, nutrients and oxygen to filter through to the soil but prevent weed growth by blocking sunlight, preventing seeds from germinating. The Company's primary landscape fabrics are made from non-woven fabrics which are generally manufactured with extruded polymers, pressed or vacuum formed into thin sheets having the feel and texture of light plastics. For the fiscal years ended June 30, 1995, 1996 and 1997, sales of landscape fabrics represented 71%, 69% and 44%, respectively, of the Company's consolidated net sales. Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver plant food and fertilizer directly to the root of the plant, an alternative method of maintaining plant health to surface-delivered liquid or solid fertilizers. The Company markets a variety of indoor and outdoor specialty fertilizer and plant food spikes primarily under the Jobe's tradename, one of the most recognized brands in the consumer lawn and garden industry. Some of the Company's fertilizer spikes have the added feature of containing an insecticide for the control of unwanted insects. For the fiscal year ended June 30, 1997, sales of fertilizer, plant food and insecticide spikes represented approximately 24% of the Company's consolidated net sales. -4- Fertilizers and Root Feeders. The Company markets fertilizers under the Ross(R) trade name. The Ross(R) fertilizer, when applied through a Ross(R) Root Feeder, a long steel irrigation tube with hose connector that is inserted deep into the ground, provides the homeowner with a means of deep feeding and irrigating trees and shrubs. The Ross(R) Root Feeder may also be used without fertilizer as a deep watering device. Landscape Edging. The Company markets a variety of decorative landscape edgings, which are used by consumers to define the perimeter of planting areas under a variety of trade names including Emerald Edge(R) and Terra Cotta Tiles. The Company recently acquired the Plasti-Chain line of products, which included additional landscape edgings. Shade Cloth. In June 1995, the Company commenced marketing for sale and delivery during fiscal 1996, shade cloth fabrics in a variety of sizes and colors. Shade cloth is utilized generally in conjunction with some type of outdoor structure such as a patio veranda, and provides shade, privacy or protection from wind for people, plants and pets. The Company markets shade cloth fabrics as an exclusive United States retail distributor of a shade cloth manufacturer pursuant to an agreement that expires on September 30, 1998 (unless renewed by the Company for an additional two year period). Animal Repellents. The Company markets a line of animal repellents that are formulated to deter dogs, cats, deer and rabbits from destroying garden and landscape environs. Other Products. In addition to landscape fabrics; fertilizer, plant food and insecticide spikes, root feeders, landscape edging and shade cloth, the Company also sells complementary lawn and garden products for the home gardener. The products include a variety of protective plant and tree covers, bird and animal mesh blocks, protective garden and tree netting to prevent animal damage, synthetic mulch and fabric pegs. Agricultural Products. The Company, through Golden West, manufactures and distributes certain humic acid based agricultural products for use on farms and orchards. Golden West generally sells its products to agricultural distributors, which in turn market Golden West's products to farms and orchards. The principal agricultural products manufactured or distributed by the Company are: Energizer(R) -a formulation of humic acids which, when applied in conjunction with liquid fertilizers, permits crops to absorb a greater amount of the nutrients in the fertilizer; Penox(R) - a surfactant, or penetrating wetting agent, that contains humic acid which, when applied in conjunction with herbicides, defoliants and other agricultural products, increases their effectiveness and Powergizer 45(R) - a foliar nutrient, or plant food, containing humic acid which promotes growth and vigor in many types of crops. -5- Conversion, Manufacturing and Supply Lawn and Garden Products Except for the materials for WeedBlock(R), which is obtained from a single source, the basic materials for the Company's lawn and garden products are purchased from a variety of suppliers. All of such materials are converted, packaged and shipped by the Company from either its Waco, Texas facility or its Paris, Kentucky facility. The Company purchases all of the landscape fabric used to manufacture WeedBlock(R) from Tredegar Industries, Inc. ("Tredegar"). The Company purchases large rolls of various types of landscape fabric from Tredegar for shipment to its Waco, Texas facility where it converts the bulk fabric and then packages the fabric and ships it to customers. Although the Company has purchased all of its supply from Tredegar for in excess of 10 years and the Company believes that its relationship with Tredegar is good, Tredegar is free to terminate its relationship with the Company at any time and accordingly could market its fabrics to other companies, including competitors of the Company. Nevertheless, the Company owns the registered trademark "WeedBlock(R)" and to the extent that it establishes alternative supply arrangements, its rights to market products under the WeedBlock(R) brand name would continue without restriction. The Company manufactures and packages its Jobe's(R) fertilizer spikes at its Paris, Kentucky facility. The raw materials that comprise the Company's indoor fertilizer spikes are mixed with a binding agent and then passed through an extrusion process which feeds a continuous strand of fertilizer through a heat-drying system. The strand is then cut into ready-to-use fertilizer spikes which are then machine counted and packaged into shelf-ready blisterpacks. The Company's outdoor fertilizer spikes are manufactured in a similar manner except rather than passing through an extrusion process, the outdoor spikes are processed through molds which shape the spikes into their final form. The outdoor spikes' are packaged in either a foil pouch, bag or box. Agricultural Products The Company does not own or lease any manufacturing facilities for its agricultural products. Substantially all of the Company's humic acid-based agricultural products, Energizer, Penox and Powergizer 45, are processed by Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders placed by the Company from time to time in the ordinary course of business. Furthermore, the Company, through Western Farm, has an open purchase order arrangement with an entity which supplies it with leonardite ore, a source of humic acid used in its agricultural products. The Company believes that it would have no difficulty in finding alternative processors or suppliers of leonardite ore or other sources of humic acid should this supplier be unable to satisfy the Company's humic acid requirements. Customers The Company's customers include home improvement centers, mass merchandisers, hardware stores and lawn and garden nurseries and other retail channels throughout the United States. The Company's three largest customers for fiscal 1997, Home Depot, Lowes -6- and K-Mart, accounted for approximately 26%, 10% and 7%, respectively, of its net sales during such year. The Company's ten largest customers as a group accounted for 69% and 65% of its net sales during fiscal 1996 and 1997, respectively. During fiscal 1995 and fiscal 1996, sales to Home Depot, Lowes and K-Mart accounted for approximately 27%, 6% and 9%, respectively, and 27%, 9% and 7%, respectively, of the Company's net sales. Sales to such customers are not governed by any contractual arrangement and are made pursuant to standard purchase orders. While the Company believes that relations with its largest customers are good, the loss of any of these customers could have an adverse effect upon the results of operations of the Company. The Company's sales are concentrated in the United States, with sales in Europe and Canada accounting for less than 2% of the Company's net sales for fiscal 1996 and fiscal 1997. The Company is currently attempting to develop relationships with distributors outside of the United States. Sales and Marketing The Company's sales efforts are coordinated by its national sales manager. The national sales manager's duties include directing the activities of the Company's six regional sales managers. Because of the service oriented nature of the Company's business, the national and regional sales managers devote a substantial amount of their time to servicing and maintaining favorable relationship with the Company's largest customers in addition to managing the overall sales operations. The Company also utilizes the services of approximately 26 non-exclusive independent sales organizations, on a commission basis, who are responsible primarily for sales to customers not serviced regularly by the regional sales managers. Sales of the Company's agricultural products are coordinated primarily by two full-time employees who are compensated on a salary plus commission basis. The Company's marketing activities are coordinated by its marketing manager. The marketing manager designs and develops the Company's distinctive packaging and point-of-sale displays and oversees, among other things, the Company's advertising campaigns, which are created and placed by advertising and public relations firms. The Company expects that its lawn and garden products will continue to be marketed by retailers primarily through the use of special displays and in-store consumer promotions in mass-merchandise stores, hardware stores, nurseries and garden centers. In addition, the Company believes that a substantial portion of lawn and garden sales are impulse driven and not overly price sensitive. Therefore, the Company seeks to increase consumer awareness, understanding and brand identification of its products through its distinctive packaging and point-of-sale displays. Retail Accounts and the Company's other customers receive the Company's products in packaging that is easily displayed. The retail product packaging is informative to the end-user and incorporates attention getting, eye-pleasing color schemes. The Company also tailors its displays to the evolving needs of retailers. Because many home improvement and mass merchant retailers maintain outdoor sales areas for their lawn and garden products, the Company utilizes waterproof displays for many of its products. In addition, the Company meets the specific needs of many of its larger customers by tailoring -7- the size of its displays to the dimensions requested by such customers. The Company's independent sales representatives periodically visit individual retail outlets to assist Retail Accounts in achieving innovative and optimal use of the Company's distinctive store displays. In order to anticipate and react quickly to changing consumer preferences, the Company also engages in market research. During fiscal 1997 the Company conducted consumer market research and a regional media advertising campaign of its Jobe's(R) Spikes product line to determine the effectiveness of such advertising in increasing product line sales. Based on the positive data derived from such research, the Company intends to focus its advertising and promotional campaign on the Jobe's brand name, as well as on the Easy Gardener and Emerald Edge(R) brand names. The Company anticipates spending approximately $4.0 million in the fiscal year ending June 30, 1998 on a combination of media development, print, radio and television advertising, cooperative advertising (advertising done in conjunction with retailers), attendance at trade shows and public relations to promote awareness, understanding and brand identification of its lawn and garden products and brands. Information Systems The Company maintains a sophisticated retail data information system which enables it to provide timely and efficient order fulfillment to its Retail Accounts and other customers. The Company's purchase order process can be paperless, with most Retail Accounts placing their orders through an electronic data interchange with the Company. In addition, with Wal-Mart, the Company's system allows it to evaluate in-store inventory, thereby allowing the Company's sales managers to proactively address such Retail Account's needs. Internally, the Company's information systems track orders and deliveries and provide exception reports if product is not delivered on time. The systems "push" the necessary information to the proper personnel, allowing the Company to react quickly to information. -8- Seasonality The Company sales are seasonal due to the nature of the lawn and garden business, in parallel with the annual growing season. The Company's sales and shipping are most active from late December through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are increasing their inventory of lawn and garden products. Sales typically decline by early to mid summer. Sales of the Company's agricultural products are also seasonal. Most shipments occur during the period from March through October (the agricultural cultivation period). Inventory and Distribution In order to meet product demand, the Company keeps relatively large amounts of product inventory on hand, particularly from December to May, the months of highest demand. Despite maintaining these relatively high levels of inventory, the Company has historically experienced minimal inventory obsolescence since the high demand during this season has generally minimized the Company's levels of obsolete inventory. Retail Accounts generally require delivery within five business days. Orders are normally processed within 48 hours and shipped by common carrier. The Company's on-time order fill rate is approximately 99%. The Company is also able to meet certain just-in-time delivery needs when required. Competition The consumer lawn and garden care market generally is highly competitive and somewhat fractionalized, with no single dominant competitor. The Company competes with a combination of national and regional companies ranging from large agri-chemical companies to garden catalog businesses and companies specializing in the manufacture of lawn and garden care products. Several of such companies have captured a significant share of such markets. Many of the Company's competitors have achieved significant national, regional and local brand name and product recognition and engage in extensive advertising and promotional programs, both generally and in response to efforts by other competitors to enter new markets or introduce new products. Many of these companies have substantially greater financial, technical, marketing and other resources than the Company. In addition, the lawn and garden care industry is characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. Large, dominant manufacturers, which manufacture and sell lawn and garden products, such as the Solaris Group, a division of Monsanto Company, and other lawn and garden care companies have, in the past, manufactured and marketed landscape fabrics. Currently, few of such competitors compete with the Company in this industry. Nevertheless, well capitalized companies and smaller regional firms may develop and market landscape fabrics and compete with the Company for customers who purchase such products. Among the Company's competitors in the lawn and garden market for the Jobe's(R) Spike line of fertilizer and insecticide products are large agri-chemical companies such as Solaris Group and Scotts Miracle-Gro Products, Inc. Competition for the Company's -9- agricultural products consist of other manufacturers of products that are humic acid based but that utilize formulas that are different from Golden West's. These competitors include American Colloid Company, Monterey Chemical Corporation and Custom Chemicide Inc. Government Regulation The Company is subject to many laws and governmental regulations and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently. Fertilizer and Pesticide Regulation Products marketed, or which may be marketed, by the Company as fertilizers or pesticides are subject to an extensive and frequently evolving statutory and regulatory framework, at both the Federal and state levels. The distribution and sale of pesticides is subject to regulation by the U.S. Environmental Protection Agency ("EPA") pursuant to the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by many states in a manner similar to FIFRA. Under FIFRA and similar state laws, all pesticides must be registered with the EPA and the state and must be approved for their intended use. FIFRA and state regulations also impose other stringent requirements on the marketing of such products. Moreover, many states also impose similar requirements upon products marketed for use as fertilizing materials, which are not typically regulated under FIFRA. Failure to comply with the requirements of FIFRA and state laws that regulate marketing and distribution of pesticides and fertilizers could result in the imposition of sanctions, including, but not limited to, suspension or restriction of product distribution, civil penalties and/or criminal sanctions. The Company markets certain animal repellent and pesticide products that are subject to FIFRA and to similar state regulations. The Company also markets certain fertilizer products that are subject to regulation in some states. The Company believes that it is in material compliance with FIFRA and applicable state regulations regarding its material business operations. However, there can be no assurance that the Company will be able to comply with future regulations in every jurisdiction in which the Company's material business operations are conducted without substantial cost or interruption of operations. Moreover, there can be no assurance that future products marketed by the Company will not also be subject to FIFRA or to state regulations. If future costs of compliance with regulations governing pesticides or fertilizers exceed the Company's budgets for such items, the Company's business could be adversely affected. If any of the Company's products are distributed or marketed in violation of any of these regulations, the Company could be subject to a recall of, or a sales limitation placed on, one or more of its products, or civil or criminal sanctions, any of which could have a material adverse effect upon the Company's business. -10- Environmental Regulation The Company's manufacturing operations are subject to various evolving federal, state and local laws and regulations relating to the protection of the environment, which laws govern, among other things, emissions to air, discharges to ground, surface water, and groundwater, and the generation, handling, storage, transportation, treatment and disposal of a variety of hazardous and non-hazardous substances and wastes. Federal and state environmental laws and regulations often require manufacturers to obtain permits for these discharges. Failure to comply with environmental laws or to obtain, or comply with, the necessary state and federal permits can subject the manufacturer to substantial civil and criminal penalties. Easy Gardener and Weatherly each lease and operate one manufacturing facility. The Company believes that all of its facilities are in substantial compliance with all applicable material environmental laws. Nonetheless, it is possible that there are material environmental liabilities of which the Company is unaware. If the costs of compliance with the various existing or future environmental laws and regulations, exceed the Company's budgets for such items, the Company's business could be adversely affected. Potential Environmental Cleanup Liability The Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), and many similar state statutes, impose liability for environmental damages and cleanup costs on past or current owners and operators of facilities at which hazardous substances have been discharged, as well as on persons who generate, transport, or arrange for disposal of hazardous wastes at a particular site. Easy Gardener and Weatherly each operate a manufacturing facility. Moreover, the Company or its predecessors have owned or operated other manufacturing facilities in the past and may have liability for remediation of such facilities in the future, to the extent any is required. As a result, the Company could be subject to liability under these statutes. The Company could also incur liability under CERCLA or similar state statutes for any damage caused as a result of the mishandling or release of hazardous substances owned by the Company but processed and manufactured by others on the Company's behalf. As a result, there can be no assurance that the manufacture of the products sold by the Company will not subject the Company to liability pursuant to CERCLA or a similar state statute. Furthermore, there can be no assurance that Easy Gardener or Weatherly will not be subject to liability relating to manufacturing facilities owned or operated by them currently or in the past. Other Regulations The Company is also subject to various other federal, state and local regulatory requirements such as worker health and safety, transportation, and advertising requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. Trademarks, Proprietary Information and Patents The Company believes that product recognition is an important competitive factor in the lawn and garden care products industry. Accordingly, in connection with its marketing activities of its lawn and garden care products, the Company promotes, and intends to promote, certain tradenames and trademarks which are believed to have value to the Company. In connection with its acquisition of the assets of Easy Gardener Inc. ("EGI") in September 1994, Easy Gardener acquired certain trademarks and copyrights used by EGI in connection with its business including, but not limited to, the trademarks, WEEDBLOCK(R), EASY GARDENER(R), WEEDSHIELD(TM), MICROPORE(R) and BIRDBLOCK(R). In connection with its acquisition of Weatherly Consumer Products Group, Inc. in August 1996, Easy Gardener acquired certain patents, as well as certain copyrights and trademarks used in connection with Weatherly's business including, but not limited to, Jobe's(R), Ross(R), Green Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(TM). Easy Gardener also acquired certain patents and trademarks when it acquired the assets of Emerald Products, LLC and also acquired certain trademarks in connection with its purchase of the Plasti-Chain line of products from Plastic Molded Concepts, Inc. Although the Company does not believe that its trademarks violate the proprietary rights of others, there can be no assurance that the Company's marks do not and will not violate the proprietary -11- rights of others, that the Company's marks would be upheld if challenged or that the Company would not be prevented from using its marks, any of which could have an adverse effect upon the Company. Although the Company believes that the products sold by it do not and will not infringe upon the patents or violate the proprietary rights of others, it is possible that such infringement or violation has or may occur. In the event that products sold by the Company are deemed to infringe upon the patents or proprietary rights of others, the Company could be required to pay damages and modify its products or obtain a license for the manufacture or sale of such products. There can be no assurance that, in such an event, the Company would be able to do so in a timely manner, upon acceptable terms and conditions or at all, and the failure to do any of the foregoing could have a material adverse effect upon the Company. Employees As of August 31, 1997 the Company had 123 full-time employees. Of such employees, three are executive officers of the Company, 17 were engaged in administration and finance, 14 were engaged in sales and marketing, 16 were engaged in warehouse, shipping and receiving and 73 were engaged in production. An additional 17 part-time employees were engaged in production. None of the Company's employees are covered by collective bargaining agreements. The Company believes that it has a good relationship with its employees. Item 2. Properties The Company's executive offices are currently located in San Francisco, California, in approximately 2,440 square feet of office space for which the Company pays $4,227 per month in rent, which amount includes the costs of utilities and janitorial services. In March 1998, the Company will be relocating to a 3,000 square foot space in the same building with a monthly rent of $10,275. The Company believes that its office space, which it rents pursuant to a lease expiring in February 2001, is adequate for the Company's planned future operations. Golden West's offices are located in Merced, California in approximately 900 square feet of space it leases for $1,150 per month base rent, with rent increases at a rate of 4% a year. The lease expires in June 1999 subject to the Company's option to renew the lease for an additional three year period. Easy Gardener leases approximately 200,000 square feet of office and warehouse space in Waco, Texas for which the Company pays $17,918 per month in rent pursuant to a one year lease agreement that is renewable annually through November 30, 2000. Easy Gardener's facilities contain landscape fabric converters, packaging equipment and warehouse and shipping facilities. Weatherly leases approximately 72,000 square feet of manufacturing and warehouse space in Paris, Kentucky for $10,000 per month in rent pursuant to a lease that expires on June 30, 1998. The Company also leases an additional 53,000 feet of warehouse space in Paris, Kentucky for $5,417 per month in rent pursuant to a lease that expires on May 6, 1998. -12- Item 3. Legal Proceeding In response to a claim for trademark infringement filed July 30, 1997 by Easy Gardener against Dalen Products, Inc. ("Dalen") in the United States District Court for the Western District of Texas, Waco Division, Dalen filed a counterclaim against Easy Gardener and a third party complaint against the Company. Dalen alleges, among other things, that the Company and Easy Gardener monopolized or attempted to monopolize a relevant market for landscape fabrics; that the Company and Easy Gardener tortiously interfered with Dalen's contractual and prospective contractual relationships; and that Easy Gardener infringed on a Dalen trademark, deceptively advertised the thickness of one of its products, and misrepresented the porosity of a Dalen product. Dalen's counterclaim and third party complaint seek an award of unspecified damages and the entry of unspecified injunctive relief. Item 4. Submission of Matters to a Vote of Security Holders. An Annual Meeting of Stockholders was held on June 27, 1997 at which time the following directors were reappointed to serve until the Annual Meeting of Stockholders of the Company to be held in 1998: Votes For Votes Withheld --------- -------------- Robert Kassel 11,869,446 79,950 Richard Raleigh 11,870,446 78,950 Maureen Kassel 11,868,496 80,900 Fred Heiden 11,828,346 121,050 Jon Schulberg 11,829,346 120,100 In addition, at the Meeting, the stockholders approved the Company's 1997 Stock Option Plan by a vote of 8,186,576 in favor, 843,077 against and 194,475 abstaining. -13- Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock has traded in the over-the-counter market and been quoted on the Nasdaq SmallCap Market since March 26, 1992. The NASDAQ symbol for the Company's Common Stock is "USHG". The following table sets forth, for the periods indicated, the high and low bid quotations for the Common Stock, as reported by NASDAQ. These amounts represent quotations between dealers (not actual transactions) and do not include retail markups, markdowns or commissions. Year Ended June 30, 1996 Bid ------------------------- High Low --------- -------- First Quarter ...................... $ 3.50 $ 2.75 Second Quarter ..................... 3.1875 2.375 Third Quarter ...................... 3.00 2.125 Fourth Quarter ..................... 3.625 2.625 Year Ended June 30, 1997 Bid ------------------------- High Low --------- -------- First Quarter ..................... $ 3.313 $ 2.313 Second Quarter .................... 2.813 2.00 Third Quarter ..................... 2.813 2.063 Fourth Quarter .................... 2.438 2.063 As of September 25, 1997, the number of stockholders of record of the Company's Common Stock was 190. The Company believes that, in addition, there are in excess of 500 beneficial owners of its Common Stock whose shares are held in "street name". The Company has not paid any cash dividends on its common stock to date and does not expect to declare or pay any cash or stock dividends in the foreseeable future. Certain agreements among the Company, Easy Gardener and Easy Gardener's primary lending institutions prohibit Easy Gardener from paying dividends without the lenders' consent. This restriction adversely affects the Company's ability to pay dividends. During the quarter ended June 30, 1997, the Company issued five-year options to purchase 50,000 shares of its common stock at $2.25 per share to an entity for financial consultanting services. The Company also sold a total of 59,969 shares of its common stock to two individuals upon the exercise of options previously granted to them and a total of 5,000 shares were sold for nominal consideration to two charitable organizations. Sales of these securities were made in private transactions pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933. -14- Item 6. Selected Financial Data (in thousands, except share and per share data) The following selected financial data at and for the years ended June 30, 1993, 1994, 1995, 1996 and 1997 has been derived from the Company's audited financial statements. Such information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes thereto appearing elsewhere in this Report. Statement of Income Data:
Year Ended June 30, ------------------------------------------------------------------------------------ 1993 1994 1995 1996 1997 ------------ ------------ ------------ ------------ ------------ Net sales ................................ $ 2,910 $ 3,063 $ 19,692 $ 27,031 $ 52,046 Cost of sales ............................ 1,508 1,455 9,151 12,670 23,649 ------------ ------------ ------------ ------------ ------------ Gross profit ............................. 1,402 1,608 10,541 14,361 28,397 Selling, general and administrative expenses .................. 1,826 6,786 7,152 10,612 17,745 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations ............................... (424) (5,178) 3,389 3,749 10,652 Other income (expense) ................... (45) (41) (1,776) (1,940) (3,262) ------------ ------------ ------------ ------------ ------------ Income tax (expense) benefit ............. -- -- (38) 715 (3,200) Income (loss) before extraordinary expense .................... (469) (5,219) 1,575 2,524 4,190 ------------ ------------ ------------ ------------ ------------ Extraordinary expense, net ............... 389 -- -- -- (1,007) ------------ ------------ ------------ ------------ ------------ Net income (loss) ........................ $ (80) $ (5,219) $ 1,575 $ 2,524 $ 3,183 ============ ============ ============ ============ ============ Income (loss) per share before extraordinary expense ............. $ (.22) $ (1.31) $ .19 $ .25 $ .26 Net income (loss) per share .............. $ (.04) $ (1.31) $ .19 $ .25 $ .20 Weighted average number of common and common equivalent shares outstanding ............ 2,177,968 3,980,318 8,376,000 10,206,000 17,908,000(1)
Balance Sheet Data:
June 30, ------------------------------------------------------------------------ 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- Working capital (deficiency) ...................... $ 607 $ (347) $ 3,326 $ 5,328 $ 2,642 Total assets ...................................... 5,977 5,654 28,140 33,584 68,125 Intangible assets, net ............................ 2,858 2,046 16,692 17,167 44,364 Short-term debt ................................... 1,134 594 2,200 3,650 8,990 Total liabilities ................................. 2,150 2,504 12,800 14,214 36,549 Stockholders' equity .............................. 3,827 3,150 15,399 19,370 31,926
- -------- (1) The income per share calculations for fiscal 1997 are based upon the modified treasury stock method and includes 13,695,000 weighted average common shares outstanding and 4,213,000 common shares issuable from the exercise of outstanding options and warrants for fiscal 1997. The calculation assumes that all outstanding options and warrants have been exercised and the proceeds from such exercises have been used to purchase certain treasury shares of common stock and retire outstanding indebtedness. The retirement of the outstanding indebtedness and related reduction in interest expense is assumed to increase net income by $450,000. See Note 14 to Notes to Financial Statements. -15- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company manufactures and markets a broad range of brand-name consumer lawn and garden products through its wholly-owned subsidiaries, Easy Gardener and Golden West, and through Easy Gardener's wholly-owned subsidiary, Weatherly. Since 1992, the Company has consummated five acquisitions of complementary lawn and garden companies and product lines for an aggregate consideration of approximately $57 million in cash, notes and equity. As a result of such acquisitions, the Company recognized a significant amount of goodwill, which aggregated approximately $44.4 million at June 30, 1997. The Company is currently amortizing such goodwill, using the straight-line method, over various time periods ranging from 20 to 30 years. See "Summary of Accounting Policies - Intangible Assets" and Note 1 to Notes to Financial Statements. The Company's results of operations for the fiscal year ended June 30, 1997 were significantly affected by the acquisition of Weatherly in August 1996. In connection with the acquisition of Weatherly, the Company's outstanding notes payable were refinanced and replaced with a new line of credit (the "Refinancing"). As a result of the Refinancing, the Company was required to record an extraordinary expense of $1.0 million, net of tax benefits, for the fiscal year ended June 30, 1997, which expense consisted of the write-off of deferred finance costs at June 30, 1996 plus prepayment penalties. Such extraordinary expense reduced the Company's net income per share for fiscal 1997 by $.06, from $.26 to $.20. See Notes 13 and 14 to Notes to Financial Statements. Although the Company's net income per common share decreased from $.25 in fiscal 1996 to $.20 in fiscal 1997, the decrease is not reflective of the improved operating results the Company achieved during fiscal 1997. The reduction in earnings per share is the result of several factors, including an extraordinary expense of approximately $1.0 million, net of tax benefits, or $0.06 per common share recorded in fiscal 1997. In addition, during fiscal 1997 the Company incurred a tax expense of approximately $3.2 million, or $0.18 per common share, compared to a tax benefit of approximately $0.07 during fiscal 1996 resulting from the recognition of a deferred tax asset relating to available future net operating loss carryforwards. The net effect of the difference in the income tax rate for 1997 compared to fiscal 1996 was a $0.25 reduction in net income per common share. Moreover, net income per common share in fiscal 1997 was adversely affected by the requirement that the Company use the modified treasury stock method to calculate earnings per share for fiscal 1997. The effect of using this method was to reduce net income per common share by $.05 in the 1997 period. Moreover, if application of the modified treasure stock method had not been required income per share before income taxes and extraordinary expense would have been $0.54 for fiscal 1997 compared to $0.18 in fiscal 1996. -16- Results of Operations The following table sets forth for the periods indicated certain selected income data as a percentage of net sales: Percentages of Net Sales -------------------------------- Year Ended June 30, -------------------------------- 1995 1996 1997 ----- ----- ----- Net sales ................................ 100.0% 100.0% 100.0% Cost of sales ............................ 46.5 46.9 45.4 ----- ----- ----- Gross profit ............................. 53.5 53.1 54.6 Selling and shipping expenses ............ 22.2 23.2 21.6 General and administrative expenses ...... 14.1 16.1 12.5 ----- ----- ----- Income from operations ................... 17.2 13.9 20.5 Interest expense ......................... 9.2 7.4 6.4 Income tax (expense) benefit ............. (0.2) 2.7 (6.2) Extraordinary expense, net ............... -- -- 1.9 Net income ............................... 8.0 9.3 6.1 ===== ===== ===== Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996 Net sales. Net sales increased by $25.0 million, or 93%, to $52.0 million in fiscal from $27.0 million in fiscal 1996. The increase in net sales was primarily a result of the August 1996 acquisition of Weatherly and increased sales of the Company's landscape fabrics and landscape edging products. Gross profit. Gross profit increased by $14.0 million, or 98%, to $28.4 million in fiscal 1997 from $14.4 million in fiscal 1996. Gross profit as a percentage of net sales increased to 54.6% in fiscal 1997 from 53.1% in fiscal 1996. The increase in gross profit as a percentage of net sales was primarily attributable to the sales of higher-margin products acquired in the Weatherly acquisition. Selling and shipping expenses. Selling and shipping expenses increased $4.9 million, or 78%, to $11.2 million in fiscal 1997 from $6.3 million in fiscal 1996. This increase was primarily the result of an increase in the amount of products shipped. The increase in the amount of products shipped was a consequence of the acquisition of Weatherly and an increase in sales of pre-existing product lines, particularly landscape fabrics and landscape edging products. Selling and shipping expenses as a percentage of net sales decreased from 23.2% in fiscal 1996 to 21.6% in fiscal 1997. This decrease was primarily due to the consolidation of the Company's customer services at the Waco, Texas office and the elimination of the majority of the Weatherly sales positions in connection with the integration of the acquisition. General and administrative expenses. General and administrative expenses increased $2.2 million, or 50%, to $6.5 million in fiscal 1997 from $4.4 million in fiscal 1996. This increase was primarily the result of the acquisition of Weatherly. As a percentage of net sales, general and administrative expenses decreased from 16.1% in fiscal 1996 to 12.5% in fiscal 1997. This improvement is primarily due to the -17- closing of the Weatherly administrative offices in February 1997 and the integration of certain administrative functions into the Company's existing infrastructure. Income from operations. Income from operations increased by $6.9 million, or 184%, to $10.7 million in fiscal 1997 from $3.8 million in fiscal 1996. The growth in income from operations in actual dollars was primarily due to the increase in net sales and gross profit as a result of the Weatherly acquisition. As a percentage of net sales, income from operations increased to 20.5% in fiscal 1997 from 13.9% in fiscal 1996. This increase was due to the decreases in selling and shipping general and administrative expenses as a percentage of net sales. Interest expense. Interest expense increased by $1.3 million, or 65%, to $3.3 million in fiscal 1997 from $2.0 million in fiscal 1996. The increase in interest expense is primarily related to the interest associated with the increase in both term and working capital debt and expenses associated with the Weatherly acquisition, partially offset by a decrease in the Company's effective borrowing rate. Income taxes. In fiscal 1996, the Company reported a tax benefit of $715,000 which was related to the recognition of a deferred tax asset relating to available future net operating loss carryforwards. In fiscal 1997 the Company incurred a tax expense of $3.2 million, excluding the benefit associated with the extraordinary expense, reflecting the Company's profitability and exhaustion of the majority of net operating loss carryforwards. Extraordinary expense, net. In connection with the acquisition of Weatherly, the Company completed the Refinancing. As a result of the Refinancing, the Company was required to record an extraordinary expense of $1.0 million, net of tax benefits, for fiscal 1997, which expense consisted of deferred finance costs at June 30, 1996 net of accumulated amortization, plus prepayment penalties. Net income. Net income increased $659,000, or 26%, to $3.2 million in fiscal 1997 from $2.5 million in fiscal 1996. This increase was attributable to successful integration of the Easy Gardener and Weatherly organizations in fiscal 1997, partially offset by the $1.0 million extraordinary expense, net of tax benefits, incurred due to the Refinancing. Net income per common share decreased $.05 to $0.20 in fiscal 1997. The decrease was partially attributable to an extraordinary expense of approximately $1.0 million, net of tax benefits, or $0.06 per common share in 1997. Additionally, during fiscal 1997 the Company incurred a tax expense of approximately $3.2 million, or $0.18 per common share, compared to a tax benefit of approximately $700,000 or $0.07 per share during 1996 resulting from the recognition of a deferred tax asset relating to available net loss carryforwards. The effective income tax rate for fiscal 1997 compared to fiscal 1996 resulted in a $0.25 reduction in net income per common share. The decrease in net -18- income per common share was also adversely affected by the requirement that the Company use the modified treasury stock method to calculate earnings per share in 1997. The effect of using the modified treasury stock method in 1997 was to reduce net income per common share by $0.05. If the modified treasury stock method had not been required, income per common share before income taxes and extraordinary expenses would have been $0.54 for fiscal 1997 compared to $0.18 in fiscal 1996. Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995 Net sales. Net sales increased by $7.3 million, or 37.3%, to $27.0 million in fiscal 1996 from $19.7 million in fiscal 1995. A majority of the increase in net sales resulted from the introduction of new landscape edging and shade cloth products. In addition, the Company believes that its sales were positively affected by continued penetration in existing markets, expansion into new markets and a more widespread recognition of the Easy Gardener brand and products. The increase in net sales also resulted from the inclusion of twelve months of net sales of Easy Gardener products in the fiscal 1996 period compared to ten months in the prior fiscal year. Gross profit. Gross profit increased by $3.8 million, or 36%, to $14.4 million in fiscal 1996 from $10.5 million in fiscal 1995, primarily due to the increase in net sales, partially offset by the inclusion of twelve months of Easy Gardener's cost of goods sold in the 1996 period compared to ten months in fiscal 1995. Gross profit as a percentage of net sales decreased from 54% in fiscal 1995 to 53% in fiscal 1996. The decrease was due to a change in the product mix sold and to higher costs, during the 1996 period, of resin and corrugated cardboard, which are the principal materials used in the manufacturing and packaging of Weedblock(R). Selling and shipping expenses. Selling and shipping expenses increased by $1.9 million, or 43%, to $6.3 million in fiscal 1996 from $4.4 million in fiscal 1995. The increase was primarily the result of the increase in the amount of product shipped and the inclusion of twelve months of Easy Gardener's selling and shipping expenses in fiscal 1996 compared to ten months in fiscal 1995. As a percentage of net sales, selling and shipping expenses increased to 23% for fiscal 1996 compared to 22% for fiscal 1995. This increase was primarily due to introductory advertising on new products. General and administrative expenses. General and administrative expenses increased by $1.6 million, or 57%, to $4.4 million in fiscal 1996 from $2.8 million in fiscal 1995. General and administrative expenses as a percentage of net sales increased to 16% in fiscal 1996 from 14% in fiscal 1995. The increase in general and administrative expenses during fiscal 1996 was primarily a result of the inclusion of twelve months of Easy Gardener's general and administrative expenses in fiscal 1996 compared to ten months in fiscal 1995. The increase in -19- general and administrative expenses was also due to additional amortization and depreciation expense, and additional related overhead expenses, associated with the overall increase in the size of the Company. Income from operations. Income from operations increased by approximately $400,000, or 12%, to $3.8 million in fiscal 1996 from $3.4 million in fiscal 1995. As a percentage of net sales, income from operations decreased to 13.9% in fiscal 1996 from 17.2% in fiscal 1995. The decrease in income from operations as a percentage of net sales was primarily the result of a slight decrease in gross profit as a percentage of net sales, combined with more significant increases in selling and shipping and general and administrative expenses as a percentage of net sales. Interest expense. Interest expense increased by $200,000, or 11%, to $2.0 million during fiscal 1996 from $1.8 million during fiscal 1995 primarily as a result of the inclusion in the 1996 period of twelve months of interest on Easy Gardener's outstanding indebtedness which was incurred in connection with the purchase of the assets of EGI in September 1994 when compared to the inclusion of interest expense for only ten months in the 1995 period. This increase was partially offset by the February 1995 conversion of $2.0 million of convertible notes into Common Stock and principal payments of $1.6 million on other notes payable. The convertible notes and other notes payable were incurred in connection with the purchase of the assets of EGI in September 1994. Income taxes. During fiscal 1996, the Company recorded a $715,000 tax benefit compared to a $38,000 tax expense during the comparable period in 1995 primarily due to the Company's recognition of a deferred tax asset associated with the federal net operating loss carryforwards. See "Liquidity and Capital Resources." Net income. Net income in fiscal 1996 was $2.5 million or $0.25 per share based on 10,206,000 weighted average common and common equivalent shares outstanding compared to net earnings of $1.6 million or $.19 per share in fiscal 1995 based on 8,376,000 common and common equivalent shares outstanding. Such increase was primarily the result of the increase in net sales. Quarterly Results of Operations and Seasonality The Company's sales are seasonal due to the nature of the lawn and garden business, in parallel with the annual growing season. The Company's sales and shipping are most active from late December through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are increasing their inventory of lawn and garden products. Sales typically decline by early to mid-summer. Sales of the Company's agricultural products, which were not material for fiscal 1997, are also seasonal. Most shipments -20- occur during the period from March through October (the agricultural cultivation period). Set forth below is certain unaudited quarterly financial information:
Quarter Ended ----------------------------------------------------------- (in thousands, except percentages and per share data) September 30, December 31, March 31, June 30, 1995 1995 1996 1996 ============= ============= ============ ============ Net sales ..................... $ 3,265 $ 2,715 $ 10,760 $ 10,291 Cost of sales ............... 1,555 1,290 5,156 4,670 ---------- ----------- ------------ ------------ Gross profit ................ 1,710 1,425 5,604 5,621 Selling, general and administrative .............. 2,211 2,394 2,753 3,252 ---------- ----------- ------------ ------------ Income (loss) from operations . (501) (969) 2,851 2,369 Investment income ............. 24 10 19 16 Interest expense .............. (458) (473) (541) (538) ---------- ----------- ------------ ------------ Income (loss) before income taxes ......................... (935) (1,432) 2,329 1,847 Income tax benefit (expense) ................... 100 80 138 397 Extraordinary expense ......... ---------- ----------- ------------ ------------ Net income (loss) ............. $ (835) $ (1,352) $ 2,467 $ 2,244 ========== =========== ============ ============ Net income (loss) per share ... $ (0.08) $ (0.13) $ 0.16(1) $ 0.14(1) ========== =========== ============ ============ Weighted average common and common equivalent shares outstanding ................... 9,944 10,200 19,002(1) 19,721(1) ========== =========== ============ ============ Net sales ..................... 100% 100% 100% 100% Cost of sales ............... 48% 48% 48% 45% ---------- ----------- ------------ ------------ Gross profit ................ 52% 52% 52% 55% Selling, general and administrative .............. 68% 88% 26% 32% ---------- ----------- ------------ ------------ Income (loss) from operations . (16%) (36%) 26% 27% Investment income ............. 1% 0% 0% 0% Interest expense .............. (14%) (17%) (4%) (6%) ---------- ----------- ------------ ------------ Income (loss) before income taxes ....................... (29%) (53%) 22% 18% Income taxes .................. 3% 3% 1% 4% Extraordinary expense ......... 0% 0% 0% 0% ---------- ----------- ------------ ------------ Net income (loss) ............. (26%) (50%) 23% 22% ========== =========== ============ ============ Quarter Ended ----------------------------------------------------------- (in thousands, except percentages and per share data) September 30, December 31, March 31, June 30, 1996 1996 1997 1997 ============= ============= ============ ============ Net sales ..................... $ 5,523 $ 7,416 $ 20,559 $ 18,549 Cost of sales ............... 2,607 3,217 9,025 8,800 ---------- ----------- ------------ ------------ Gross profit ................ 2,916 4,199 11,534 9,749 Selling, general and administrative .............. 3,264 4,048 5,539 4,894 ---------- ----------- ------------ ------------ Income (loss) from operations . (348) 151 5,995 4,855 Investment income ............. 26 17 16 17 Interest expense .............. (563) (813) (993) (970) ---------- ----------- ------------ ------------ Income (loss) before income taxes ......................... (885) (645) 5,018 3,902 Income tax benefit (expense) 280 195 (2,075) (1,600) Extraordinary expense ......... (1,007) ---------- ----------- ------------ ------------ Net income (loss) ............. $ (1,612) $ (450) $ 2,943 $ 2,302 ========== =========== ============ ============ Net income (loss) per share ... $ (0.12) $ (0.03) $ 0.14(1) $ 0.11(1) ========== =========== ============ ============ Weighted average common and common equivalent shares outstanding ................... 12,915 13,917 22,696(1) 22,191(1) ========== =========== ============ ============ Net sales ..................... 100% 100% 100% 100% Cost of sales ............... 47% 43% 44% 47% ---------- ----------- ------------ ------------ Gross profit ................ 53% 57% 56% 53% Selling, general and administrative .............. 59% 55% 27% 26% ---------- ----------- ------------ ------------ Income (loss) from operations . (6%) 2% 29% 27% Investment income ............. 0% 0% 0% 0% Interest expense .............. (10%) (11%) (5%) (6%) ---------- ----------- ------------ ------------ Income (loss) before income taxes ....................... (16%) (9%) 24% 21% Income taxes .................. 5% 3% (10%) (9%) Extraordinary expense ......... (18%) 0% 0% 0% ---------- ----------- ------------ ------------ Net income (loss) ............. (29%) (6%) 14% 12% ========== =========== ============ ============
- ---------- (1) Calculated using the modified treasury stock method. To calculate net income per share, net income must be increased by $418,000, $509,000, $236,000 and $213,000 for the quarters ended March 31 and June 30, 1996 and 1997, respectively. Liquidity and Capital Resources From inception the Company has financed its operations primarily through cash generated by operations, net proceeds from the Company's private and public sales of securities and borrowings from lending institutions. At June 30, 1997, the Company had consolidated cash and short-term investments totalling $2.1 million and working capital of $2.6 million. At June 30, 1996, the Company had consolidated cash and short-term investments totalling $680,000 and working capital of $5.3 million. This decrease in working capital was due primarily to the increase in notes payable relating to the Weatherly acquisition. -21- Net cash provided by operating activities for fiscal 1997 was $10.6 million, consisting primarily of net income plus depreciation and amortization and an extraordinary expense resulting from the Refinancing, an increase in accounts payable and a decrease in deferred taxes, offset in part by an increase in accounts receivables. Net cash used in investing activities for fiscal 1997 was $29.6 million, consisting primarily of cash used for the acquisition of Weatherly. Net cash provided by financing activities for fiscal 1997 was $20.5 million consisting primarily of the additional proceeds from the notes payable used in connection with the purchase of Weatherly, and the exercise of warrants to purchase common stock, the proceeds of which were used primarily for the purchase of Weatherly. At June 30, 1997 the Company had consolidated term debt of $26.6 million which includes debt incurred pursuant to the Refinancing and consists of three outstanding term loans of $20.5 million, $2.3 million and $3.8 million. In connection with the acquisition of Weatherly, Easy Gardener entered into a new credit agreement ("Credit Agreement") with certain institutional lenders. Pursuant to the Credit Agreement, the lenders have provided the Company with the following revolving credit and term loan facilities: (a) Revolving Credit Facility: The maximum amount available for borrowing under this facility from time to time is equal to the lesser of $13 million and a borrowing base determined by reference to specified percentages of Easy Gardener's consolidated accounts receivable and inventory deemed to be "eligible" by the lenders. As of June 30, 1997, based on this formula, $7.4 million was available for borrowing and no amount was outstanding. In April 1997, the Revolving Credit Facility was amended to provide the Company with an additional $3.0 million in available borrowing during the months of February, March, April and May of each fiscal year. Any additional borrowing must be paid by May 31 of the year in which borrowed. This additional increase is for the working capital needs during the peak season months and has the same "eligibility" requirements as the original amount. Revolving credit loans bear interest at an annual rate chosen by Easy Gardener based on the prime rate of one of the lenders or LIBOR (the London inter-bank offered rate) plus an applicable marginal rate. Under certain circumstances, outstanding prime rate loans may be converted to LIBOR rate loans at the Company's option. At June 30, 1997, the effective annual rate for outstanding revolving credit loans was 9.75%. The revolving credit facility expires on June 30, 2002 (the "Expiration Date") and all outstanding revolving credit loans are then due, unless such loans are required to be repaid earlier by the terms of the Credit Agreement. In addition, for a 10-day period in August of each year, all outstanding revolving credit loans must be paid and no revolving credit loans may be borrowed. Revolving credit loans may be prepaid at any time. However, if Easy Gardener elects to terminate the revolving credit facility prior to the Expiration Date, the outstanding revolving credit loan must be prepaid together with a premium of from 1% to 2% of the "Average Yearly Loan Balance" (as defined in the Credit Agreement) of the revolving credit loans. -22- (b) Term Loan Facility: Pursuant to this facility, Easy Gardener obtained three term loans (the "Term Loans"), one in the principal amount of $23 million ("Term Loan I"), $20.5 million of which was outstanding at June 30, 1997, one in the principal amount of $2.3 million ("Term Loan II"), all of which was outstanding at June 30, 1997, and one in the principal amount of $3.8 million ("Term Loan III"), all of which was outstanding at June 30, 1997. Term Loan I and Term Loan II mature on the Expiration Date. Term Loan III expires in November 1997. Term Loans I and II are payable in quarterly installments of principal, commencing as to Term Loan I in September 1996 and as to Term Loan II in September 1998. Term Loan III is payable in full upon its expiration. Term Loan I bears interest, at the election of Easy Gardener, at the adjusted prime rate or LIBOR rate described above, and Easy Gardener may from time to time, subject to certain restrictions, convert Term Loan I from a prime rate loan to a LIBOR rate loan. At June 30, 1997, the effective annual rate of interest for Term Loan I was 9.75%. Term Loan II bears interest at a floating rate equal to the prime rate of one of the lenders plus 6%. At June 30, 1997, the effective annual rate of interest for Term Loan II was 14.5%. The annual rate of interest for Term Loan III is 12% and interest is payable monthly in arrears. Interest on Term Loans I and II is payable monthly in arrears on prime rate loans and at the end of the interest period for a LIBOR rate loan if the interest period is three months or less or on the last day of each three-month interval during the interest period if it is longer than three months. If Easy Gardener elects to pay Term Loan I in full at any time prior to the Expiration Date, Easy Gardener is also obligated to pay a premium of from 1% to 2% of the amount prepaid. Term Loan I is subject to certain mandatory prepayments of principal from "excess cash flow" (as defined in the Credit Agreement) of Easy Gardener and certain net proceeds of asset sales, condemnation awards and insurance recoveries. Mandatory prepayment of principal of Term Loan I on account of "excess cash flow", if any, will be due in October of the following fiscal year. No mandatory prepayment is due in October 1997. Easy Gardener's obligation to pay the principal of, interest on, premium, if any, and all other amounts payable on account of the revolving credit loans and the Term Loans is secured by substantially all of the assets of Easy Gardener and its subsidiaries and the irrevocable guaranties of the Company and Easy Gardener's subsidiaries. Upon the occurrence of an event of default specified in the Credit Agreement, the maturity of the outstanding principal amounts of the revolving credit loans and the Term Loans may be accelerated by the lenders who may also foreclose on the secured assets of Easy Gardener and its subsidiaries. Under the Credit Agreement (a) Easy Gardener is required, among other things, to comply with certain limitations on incurring additional indebtedness, liens, guaranties, capital and operating lease expenses in excess of a specified amount per year, and sales of assets and payment of dividends and (b) Easy Gardener and the Company must comply with certain limitations on merger, liquidations, changes in business, investments, loans and advances, or certain acquisition of subsidiaries. In addition, Easy Gardener must comply with certain minimum interest coverage, debt service and fixed charge rates, not permit its Net Worth (as defined in the Credit Agreement) to be less than certain amounts and generate certain minimum amounts of income before interest expenses, taxes, depreciation and amortization. A violation of -23- any of these covenants constitutes an event of default under the Credit Agreement. The Company believes that its operations will generate sufficient cash flow to service the debt incurred in connection with its prior acquisitions. However, if such cash flow is not sufficient to service such debt, the Company will be required to seek additional financing which may not be available on commercially acceptable terms or at all. As of June 30, 1997, the Company had a net deferred tax asset of $448,000, the majority of which relates to the tax benefit associated with the accumulated net operating losses of approximately $1.0 million for Federal income tax purposes which expire in 2011. For California income tax purposes, the Company has accumulated net operating losses of approximately $2.2 million which expire at various times through 2001. Based upon the estimated taxable income to be apportioned to California over the next few fiscal years and considering the expiration date of the net operating loss carryovers, the Company has established a valuation reserve relating to the majority of the estimated $165,000 benefit associated with the California net operating loss carryovers. In January 1997, the Company borrowed $550,000 in the aggregate from certain lenders. The loans were used to satisfy short term working capital requirements. In July 1997, the Company repaid $200,000 of the loan and the $350,000 balance was converted into 154,000 shares of Common Stock. In May 1997, the Company purchased from Plastic Molded Concepts, Inc. certain assets relating to its Plasti-Chain Line of products for approximately $4.3 million. The purchase price was paid through the use of the Revolving Credit Facility and a $3.8 million increase in the Company's term debt. The additional term debt is payable in November 1997. Recent Accounting Pronouncement In February 1997, the Financial Accounting Standards Board ("FASB") issued a Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which is effective for both interim and annual periods ending after December 15, 1997. SFAS No. 128 requires a calculation of basic (giving no dilutive effect to all derivative securities) earnings per share and dilutive (reflecting the dilutive effect of all derivative securities) earnings per share. Accordingly, the Company plans to adopt SFAS No. 128 in its December 31, 1997 interim financial statements. The Company has not yet determined the effect that SFAS No. 128 would have had on the earnings per share, if it had been adopted in the first quarter of fiscal 1997. Inflation Inflation has historically not had a material effect on the Company's operations. -24- Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data This information appears in a separate section of this report following Part III. Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure. Not applicable. -25- Part III Item 10. Directors and Executive Officers of the Registrant. The current directors and executive officers of the Company are as follows: Name Age Position ---- --- -------- Robert Kassel 57 Chairman of the Board, Chief Executive Officer, President and Treasurer Richard Raleigh 43 Chief Operating Officer and Director Maureen Kassel 49 Vice President of Public Relations and Advertising, Secretary and Director Jon Schulberg 38 Director Fred Heiden 56 Director Robert Kassel co-founded the Company and has been Chairman of the Board, Chief Executive Officer, President and Treasurer of the Company since October 1990. In addition, from 1985 to August 1991 he was a consultant to Comtel Communications, Inc. ("Comtel"), a company specializing in the installation and operation of telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real estate developer in Long Island, New York and Santa Barbara, California. From 1965 to 1985, he was a practicing attorney in New York City, specializing in corporate and securities law. Richard Raleigh has been a Director of the Company since March 1993, Chief Operating Officer of the Company since June 1992 and served as the Company's Executive Vice President-Operations from December 1991 to June 1992. Prior to joining the Company, Mr. Raleigh was a free-lance marketing consultant to the lawn and garden industry from January 1991 to December 1991. From April 1988 to January 1991 he was Director of Marketing, Lawn and Garden of Monsanto Agricultural Co. From December 1986 to April 1988 he was Vice President of Sales and Marketing of The Andersons, a company engaged in the sale of consumer and professional lawn and garden products. From November 1978 to December 1986 he held a variety of positions at The Andersons, including Operations Manager and New Products Development Manager. Maureen Kassel, the wife of Robert Kassel, co-founded the Company and has been Vice President of Public Relations and Advertising and a director of the Company since November 1990 and Secretary of the Company since February 1992. For the last ten years, she has assisted in the general administration and operation of real estate and other businesses. Ms. Kassel is Chairman of the Board of Comtel. Jon Schulberg, a director of the Company since March 1993, has been employed as president of Schulberg MediaWorks, a company engaged in the independent production of television programs and television advertising since January 1992. From January 1989 to January 1992, he was a producer for Guthy-Renker Corporation, a television production company. From September 1987 to January 1989 he was the director of development for Eric Jones -26- Productions. For the three years prior thereto, he was the Director of Video Publishing for Preview Media. Fred Heiden, a director of the Company since March 1993, has been a private investor since November 1989. From April 1984 to November 1989 Mr. Heiden was the president and principal owner of Bonair Construction, a Florida based home improvement construction company. Certain Key Employees Richard M. Grandy, 51, has been President of Easy Gardener since July 1997 and served as its Vice President from the date of the Company's acquisition of EGI in September 1994 until July 1997. Mr. Grandy co-founded EGI in 1983 after serving as Marketing Director at International Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a sales representative of lawn and garden products for the Ortho Division of Chevron Chemical Co. Lynda Gustafson, 33, has been Vice President of Finance of the Company since September 1997 and served as Controller of the Company from November 1993 to September 1997. From September 1990 through October 1993 Ms. Gustafson was Supervisor of the Business Consulting Department of the certified public accounting firm of Hood & Strong. From September 1988 to August 1990, she has held the positions of Staff Accountant and Senior Accountant at the certified public accounting firm of Schwartz, McGuire & Co. Sheila Jones, 42, has been Vice President of Easy Gardener since July 1997 and has also served as its General Manager from September 1994. Prior to the acquisition of EGI by the Company, Ms. Jones was employed by EGI from its inception in September 1983 to September 1994, where she advanced to the positions of Vice President and General Manager. From April 1977 to September, 1983, she was employed by International Spike, Inc., where she held various project management positions. Paul Logue, 41, has been National Sales Manager of Easy Gardener since the Company's acquisition of EGI in September 1994. Prior to joining the Company, Mr. Logue was employed by EGI from September 1989 to September 1994, where he was advanced from the position of Northeastern Regional Sales Manager to National Sales Manager. From March 1988 to September 1989, he was Regional Sales Manager for Hoffman Brand Fertilizers. Item 11. Executive Compensation The following table discloses the compensation awarded by the Company, for the three fiscal years ended June 30, 1997, 1996 and 1995, to Mr. Robert Kassel, its Chief Executive Officer and Mr. Richard J. Raleigh, its Chief Operating Officer (the "Named Executives"). During fiscal 1997, no other executive officer of the Company received a salary and bonus that exceeded $100,000 during such fiscal year. Summary Compensation Table
Annual Compensation ------------ Name and Long Term All Other Principal Position Year Salary ($) Bonus ($) Compensation Compensation(1) - ------------------ ---- ---------- --------- ------------ --------------- Securities Underlying Options (#) ------------ Robert Kassel, 1997 350,000 250,000 1,200,000(2) $5,995 Chairman, Chief Executive 1996 250,000 100,000 200,000(3) -- Officer, President and 1995 150,000 100,000 687,653(4) -- Treasurer Richard Raleigh, 1997 195,000 111,275 500,000(2) $8,390 Chief Operating Officer 1996 150,000 10,000 100,000(3) -- 1995 120,000 10,000 50,000(4) --
- ------------ (1) Represents Company contributions to the Named Executives' 401(k) Account. (2) Includes 200,000 options previously granted to Mr. Kassel and 100,000 options previously granted to Mr. Raleigh whose exercise prices were repriced to reflect a reduction in the market price of the Common Stock at the time of repricing. Does not include 50,000 options previously granted to Mr. Raleigh the expiration date of which was extended during fiscal 1997. (3) Includes 200,000 five-year options granted to Mr. Kassel and 100,000 five-year options granted to Mr. Raleigh in June 1995 under the Company's 1995 Stock Option Plan which grants were subject to stockholder approval of -27- the plan obtained in February 1996. (4) Does not include the options referenced in footnote (3) above. The following table discloses information concerning stock options granted in the year ended June 30, 1997 to the Named Executives. Option Grants in Fiscal Year Ended June 30, 1997
Individual Grants ----------------------------------------------------------------------- Potential Realizable Number of Value at Assumed Securities Percent of Annual Rates of Stock Underlying Total Options Price Appreciation Options Granted to Exercise for Option Term (2) Granted Employees in Price Expiration ------------------------------- Name (#)(1) Fiscal Year ($/Sh) Date 5% 10% - ---- ----------- -------------- ------------ ------------ -------- ---------- Robert Kassel 350,000 19.8 $2.06 7/24/01 $199,000 $440,000 450,000 25.5 2.06 8/30/01 256,000 566,000 200,000 11.3 2.06 12/24/01 114,000 252,000 200,000 11.3 2.06 6/01/00 114,000 252,000 Richard Raleigh 125,000 7.0 2.06 7/24/01 71,000 158,000 175,000 9.5 2.06 8/30/01 100,000 220,000 100,000 5.7 2.06 12/24/01 57,000 126,000 100,000 5.7 2.06 6/01/00 57,000 126,000
- -------------------- (1) All of such options were exercisable in full from the date of grant. (2) The potential realizable value columns of the table illustrate values that might be realized upon exercise of the options immediately prior to their expiration, assuming the Company's Common Stock appreciates at the compounded rates specified over the term of the options. These numbers do not take into account provisions of options providing for termination of the option following termination of employment or nontransferability of the options and do not make any provision for taxes associated with exercise. Because actual gains will depend upon, among other things, future performance of the Common Stock, there can be no assurance that the amounts reflected in this table will be achieved. -28- The following table sets forth information concerning the number of options owned by the Named Executives and the value of any in-the-money unexercised stock options as of June 30, 1997. No stock options were exercised by the Named Executives during fiscal 1997: Aggregated Option Exercises And Fiscal Year-End Option Values ---------------------------------
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at June 30, 1997 June 30, 19979(1) ------------------------------------- ------------------------------------ Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Robert 2,067,653 -0- $3,214,598 $-0- Kassel Richard 637,500 -0- $887,938 $-0- Raleigh
(1) Year-end values for unexercised in-the-money options represent the positive spread between the exercise price of such options and the fiscal year-end market value of the common stock. Options are "in-the-money" if the fiscal year end fair market value of the Common Stock exceeds the option exercise price. The last sale price of the Common Stock on June 30, 1997 was $3.375 per share. Employment Agreements The Company has entered into employment agreements with Messrs. Kassel and Raleigh, each dated as of April 1, 1996. Mr. Kassel currently serves as Chief Executive Officer and President pursuant to the employment agreement for a term expiring in March 31, 1998, subject to certain renewal provisions. His current annual salary is $350,000, and is subject to such bonuses and increases as are approved at the discretion of the Board of Directors. Mr. Raleigh currently serves as Chief Operating Officer pursuant to the employment agreement for a term expiring in March 31, 1998, subject to certain renewal provisions. His current annual salary is $195,000, and is subject to such bonuses and increases as are approved at the discretion of the Board. Each of the employment agreements requires that substantially all of the employee's business time be devoted to the Company and that the employee not compete, or engage in a business competitive with, the Company's current or anticipated business for the term of the agreement and for two years thereafter (although they each may own not more than 5% of the securities of any publicly traded competitive company). Mr. Kassel's agreement also provides that if his employment is terminated under certain circumstances, including termination of Mr. Kassel upon a change of control of the Company (as defined -29- in the agreement), a failure by the Company to comply with its obligations under the agreement, the failure of the Company to obtain the assumption of the agreement by any successor corporation, or a change in Mr. Kassel's duties and obligations from those contemplated by the agreement, and termination by the Company of Mr. Kassel's employment other than for disability or cause, he will be entitled to receive severance pay equal to the greater of (i) $350,000 ($3,500,000 in the event of a change of control) or (ii) the total compensation earned by Mr. Kassel from the Company during the one-year period (multiplied by ten in the event of a change of control) prior to the date of his termination. Mr. Raleigh's agreement also provides that if his employment is terminated under certain circumstances, including termination of Mr. Raleigh upon a change of control of the Company, (as defined in the agreement) a failure by the Company to comply with its obligations under the agreement, the failure of the Company to obtain the assumption of the agreement by any successor corporation, or a change in Mr. Raleigh's duties and obligations from those contemplated by the agreement, and termination by the Company of Mr. Raleigh's employment other than for disability or cause, he will be entitled to receive severance pay equal to the greater of (i) $162,500 ($812,500 in the event of a change of control) or (ii) the total compensation earned by Mr. Raleigh from the Company during the one-year period (multiplied by five in the event of a change of control) prior to the date of his termination. Each of Mr. Kassel and Mr. Raleigh is, in addition to salary, entitled to certain fringe benefits, including the use of an automobile and payment of related expenses. Easy Gardener has entered into a four-year employment agreement with Mr. Grandy, dated as of September 1, 1994, which expires on August 31, 1998. Mr. Grandy currently serves as President of Easy Gardener. His current annual salary is $200,000. The agreement requires Mr. Grandy to devote substantially all of his business time to Easy Gardener, and in the event Mr. Grandy's employment agreement is terminated by Easy Gardener without "Cause" (as defined in the agreement) or if Mr. Grandy resigns with "Good Reason" (as defined in the agreement), Mr. Grandy will be entitled to receive his base salary through the expiration of agreement. Committees of the Board of Directors The Company recently established an Audit Committee comprised of Messrs. Raleigh, Schulberg and Heiden. The Audit Committee will, among other things, make recommendations to the Board of Directors with respect to the engagement of the Company's independent certified public accountants and the review of the scope and effect of the audit engagement. The Company has recently established a Compensation Committee of its Board of Directors, consisting of Messrs. Kassel, Heiden and Schulberg. The Compensation Committee will, among other things, make recommendations to the Board of Directors with respect to the compensation of the executive officers of the Company. The Company maintains a Stock Option Committee comprised of Messrs. Schulberg and Heiden, which -30- determines the persons to whom options should be granted under the Company's 1995 and 1997 Stock Option Plans and the number and other terms of options to be granted to each person under such plans. Compensation Committee Interlocks and Insider Participation in Compensation Decisions The Company did not have a Compensation Committee of its Board of Directors during fiscal 1997. Decisions as to compensation during fiscal 1997 were made by the Company's Board of Directors. Messrs. Kassel and Raleigh, in their capacity as directors, each participated in the deliberations of the Board of Directors concerning compensation of executive officers for fiscal 1997. During fiscal 1997, none of the executive officers of the Company served on the Board of Directors or the compensation committee of any other entity, any of whose officers has served on the Board of Directors of the Company. Stock Option Plans In September 1991, the Company adopted a stock option plan (the "1991 Plan") pursuant to which 700,000 shares of Common Stock have been reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs may be granted under the Option Plan to employees and officers of the Company. NQO's may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. The purpose of the 1991 Plan is to encourage stock ownership by certain directors, officers and employees of the Company and certain other persons instrumental to the success of the Company and give them a greater personal interest in the success of the Company. The 1991 Plan is administered by the Board of Directors. The Board, within the limitations of the 1991 Plan, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an option, and whether restrictions such as repur chase rights in the Company are to be imposed on shares subject to options. ISOs granted under the 1991 Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant (or 110% of fair market value in the case of per sons holding 10% or more of the voting stock of the Company). The aggregate fair market value of shares for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans -31- of the Company and any related corporation) may not exceed $100,000. NQO's granted under the 1991 Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant. Options granted under the 1991 Plan will expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). An aggregate of 562,000 options were outstanding under the 1991 Plan at June 30, 1997. The Company has adopted, a Non-Employee Director Stock Option Plan (the "Director Plan"). Only non-employee directors of the Company are eligible to receive grants under the Director Plan. The Director Plan provides that eligible directors automatically receive a grant of options to purchase 5,000 shares of Common stock at fair market value upon first becoming a director and, thereafter, an annual grant, in January of each year, of 5,000 options at fair market value. Options to purchase an aggregate of up to 100,000 shares of Common Stock are available for the automatic grants under the Director Plan. An aggregate of 20,000 options were outstanding under the Director Plan at June 30, 1997. The Company has also adopted, a 1995 Stock Option Plan ("1995 Plan") which provides for grants of options to purchase up to 1,500,000 shares of Common Stock. The Board of Directors or the Stock Option Committee (the "Committee") of the 1995 Plan, as the case may be, will have discretion to determine the number of shares subject to each NQO (subject to the number of shares available for grant under the 1995 Plan and other limitations on grant set forth in the 1995 Plan), the exercise price thereof (provided such price is not less than the par value of the underlying shares of Common Stock), the term thereof (but not in excess of 10 years from the date of grant, subject to earlier termination in certain circumstances), and the manner in which the option becomes exercisable (amounts, intervals and other conditions). Directors who are employees of the Company will be eligible to be granted ISO's or NQO's under such plan. The Board or Committee, as the case may be, also has discretion to determine the number of shares subject to each ISO, the exercise price and other terms and conditions thereof, but their discretion as to the exercise price, the term of each ISO and the number of ISOs that may vest may be in any year is limited by the same provisions of the Code applicable to IS0s granted under the 1991 Plan. An aggregate of 1,385,000 options were outstanding under the 1995 Plan at June 30, 1997. The Company has adopted a 1997 Stock Option Plan ("1997 Plan") which provides for grants of options to purchase up to 1,500,000 shares of Common Stock. The Board of Directors or the Committee of the 1997 Plan, as the case may be, will have discretion to determine the number of shares subject to each nonqualified option (subject to the number of shares available for grant under the 1997 Plan and other limitations on grant set forth in the 1997 Plan), the exercise price thereof (provided such price is not less than the par value -32- of the underlying shares of Common Stock), the term thereof (but not in excess of 10 years from the date of grant, subject to earlier termination in certain circumstances), and the manner in which the option becomes exercisable (amounts, intervals and other conditions). Directors who are employees of the Company will be eligible to be granted incentive stock options or nonqualified options under such plan. The Board or Committee, as the case may be, also has discretion to determine the number of shares subject to each ISO, the exercise price and other terms and conditions thereof, but their discretion as to the exercise price, the term of each ISO and the number of ISOs that may vest may be in any year is limited by the same provisions of the Code applicable to ISOs granted under the 1991 Plan. An aggregate of 500,000 options were granted under the 1997 Plan subsequent to June 30, 1997. To date, no options have been exercised under the Option Plan, the Director Plan, the 1995 Plan or the 1997 Plan. The Company from time to time has also granted non-plan options to certain officers, employees and consultants. Director Compensation During the fiscal year ended June 30, 1997 each of the Company's two non-employee directors, Messrs. Schulberg and Heiden, received $5,000 for serving as directors of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information at September 25, 1997, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of Common Stock by (i) each person known by the Company to be the owner of more than 5% of the outstanding shares of Common Stock, (ii) each director, (ii) each Named Executive and (iv) all executive officers and directors as a group. -33- Amount and Nature of Name and Address Beneficial Percentage of Beneficial Owner Ownership(1)(2) of Class - ------------------- --------------- -------- Maureen Kassel(3) 910,650(4) 5.8 Robert Kassel(3) 4,712,095(5)(6) 26.8 Richard Raleigh 743,320(7) 4.6 Fred Heiden 7,500(8) * Jon Schulberg 7,500(9) * Joseph Owens II 1,064,396(10) 6.5 Richard Grandy 1,064,396(10) 6.5 Alan Stahler 899,368(11) 5.6 All executive officers and directors as a group (five persons) 5,795,415(4)(5)(6) 28.3 (7)(8)(9) - ---------- *less than 1% - -------------------------------------------------------------------------------- (1) Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. (2) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from September 25, 1997 upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other per son) and which are exercisable within 60 days from September 25, 1997 have been exercised. (3) The address of Maureen and Robert Kassel is c/o the Company. (4) Includes presently exercisable options and warrants issued to Ms. Kassel to purchase an aggregate of 325,000 shares of the Company's Common Stock. (5) Of such shares, (i) 585,650 are owned of record by Maureen Kassel; however, because Ms. Kassel has appointed her husband as her proxy and attorney-in-fact to vote all 585,650 of the shares owned of record by her, Robert Kassel may also be deemed to have beneficial ownership of such shares; (ii) an aggregate of 914,396 shares are owned of record by each of Messrs. Joseph Owens and Richard Grandy who have each entered into a voting trust agreement (the "Voting Agreement") -34- providing Mr. Kassel with the right to vote the shares until September 1, 2001. (6) Includes 2,297,653 shares of Common Stock issuable upon exercise of options and warrants. (7) Includes 726,320 shares of Common Stock issuable upon exercise of options and warrants. (8) Includes 7,500 shares of Common Stock issuable upon exercise of options. (9) Includes 7,500 shares of Common Stock issuable upon exercise of options. (10) Includes 125,000 shares of Common Stock issuable to each of Messrs. Grandy and Owens upon exercise of options. The address of Mr. Grandy is c/o the Company. The address of Mr. Owens is 8 Hillendale, Waco, Texas 76710. (11) The address for Mr. Stahler is 44 Wall Street, New York, New York 10005. Includes shares issuable upon the exercise of (i) options to purchase an aggregate of 89,441 shares of Common Stock underlying a five-year Unit Purchase Option granted on August 12, 1993 ("1993 Unit Purchase Option") and (ii) options to purchase up to 785,094 shares underlying a five-year Unit Purchase Option granted on August 29, 1994 ("1994 Unit Purchase Option"). Also includes options to purchase an aggregate of 24,833 shares underlying additional 1993 Unit Purchase Options granted to D.H. Blair & Co., Inc. Mr. Stahler is the Vice-Chairman and he and his wife are stockholders of D.H. Blair and Co., Inc. The information with respect to Mr. Stahler is derived from his Schedule 13D filed with the Securities and Exchange Commission. -35- Item 13. Certain Relationships and Related Transactions. To obtain a portion of the financing for the Company's acquisition of EGI, Mr. Kassel provided for the benefit of the lender $500,000 cash collateral and a personal guarantee of $333,000. in consideration of providing such collateral and guarantee, the Company granted Mr. Kassel options to purchase an aggregate of 526,300 shares of Common Stock for an aggregate exercise price of approximately $822,000. In connection with certain acquisitions, during the fiscal year ended June 30, 1997, the Company granted five year non-plan options to Messrs. Kassel and Raleigh to purchase an aggregate of 650,000 and 275,000 shares of Common Stock, respectively, at an exercise price of $2.0625 per share. From time to time Messrs. Kassel and Raleigh have borrowed monies from the Company. During the fiscal year ended June 30, 1997, the highest amount owed to the Company by Messrs. Kassel and Raleigh were $607,472 and $225,294, respectively, and at September 26, 1997, the balance of such indebtedness was $556,452 and $235,653, respectively. The loans bear interest at 7% per annum and mature on July 1, 2002. Company loans to all officers of the Company are restricted to a maximum of $850,000 by the terms of the Credit Agreement. The Company's Board of Directors has adopted a policy pursuant to which any loan between the Company and one or more of its officers or directors, or any third party in which one or more or its officers or directors has a material interest, must be approved by a majority of the disinterested members of the Audit Committee, or the Board of Directors. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Exhibits Exhibit No. - ----------- 3.1 Certificate of Incorporation, as amended.** 3.2 By-laws of the Company, incorporated by reference to Exhibit 3(b) of the Company's Registration Statement on Form S-1 (Registration No. 33-45428). 4.1 Form of certificate evidencing Common Stock, $.001 par value, of the Company, incorporated by reference to Exhibit 4(a) of the Company's Registration Statement on Form S-1 (Registration No. 33-45428). -36- 4.3 Form of Unit Purchase Option granted to D.H. Blair & Co.** 4.4 Form of Public Warrant Agreement with respect to Class A Warrants.** 4.5 Warrant Agreement with respect to Class B Warrants., incorporated by reference to Exhibit 4(c) of the Company's Registration Statement on Form S-3 (Registration No. 33-89800). 9.1 Voting Agreement among Joseph A. Owens, II, the Company, and Robert Kassel.+ 9.2 Voting Agreement among Richard M. Grandy, the Company and Robert Kassel.+ 10.1 Employment Agreement of Robert Kassel.++ 10.2 Employment Agreement of Richard Raleigh.++ 10.3 Employment Agreement of Richard Grandy. 10.4 1991 Stock Option Plan, incorporated by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-1 (Registration No. 33-45428). 10.5 1995 Stock Option Plan.* 10.6 Non-Employee Director Stock Option Plan.* 10.7 1997 Stock Option Plan, incorporated by reference to Exhibit A to the Company's proxy statement dated May 27, 1997. 10.8 Asset Purchase Agreement dated as of June 18, 1994 among the Company, Easy Gardener Acquisition Corp., Joseph A. Owens II, Richard M. Grandy and Easy Gardener, Inc.+ 10.9 Lease with respect to the Company's executive offices, incorporated by reference to Exhibit 10.14 of the Company's Form 10-KSB for the fiscal year ended June 30, 1992. 10.10 February 8, 1995 modification to lease with respect to the Company's executive offices.* 10.11 May 6, 1997 modification to lease with respect to the Company's executive offices. 10.12 Lease with respect to Weatherly's warehouse facilities in Paris, Kentucky. -37- 10.13 Form of Mergers and Acquisitions Agreement between the Company and D.H. Blair Investment Banking Corp.** 10.14 Agreement dated as of April 16, 1996 between the Company and The Intrac Group.++ 10.15 Credit Agreement among Easy Gardener, the Company, The Provident Bank, as Administrative and Collateral Agent,and The Provident Bank and other certain lending institutions, dated as of August 9, 1996.++ 10.16 First Amendment, dated April 3, 1997 to the Credit Agreement. 10.17 Second Amendment, dated May 9, 1997 to the Credit Agreement. 10.18 Third Amendment, dated June 30, 1997 to the Credit Agreement. 10.19 Lease and lease extension agreements between Crawford- Austin Mfg. Co. and Easy Gardener.* 10.20 Warehouse Lease, dated May 7, 1997, between Weatherly Consumer Products, Inc. and Sarah C. Lear. 10.21 Purchase Agreement, dated as of August 9, 1996, by and among the Company, Easy Gardener, Weatherly and the Weatherly Stockholders (incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K for the event dated August 9, 1996) 10.22 Purchase Agreement, dated as of May 9, 1997, by and among the Company, Easy Gardener and Plastic Molded Concepts, Inc. 21 Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP. 27 Financial Data Schedule (for SEC use only). - ---------- * Incorporated by reference to the comparable exhibit filed with the Company's Form 10-KSB for the fiscal year ended June 30, 1995. ** Incorporated by reference to the exhibit filed under the same number in the Company's Registration Statement on Form SB-2 (file no. 33-61984). + Incorporated by reference to the exhibit contained in the Current Report on form 8-K filed by the Company for the event dated September 1, 1994. -38- ++ Incorporated by reference to the applicable exhibit contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996. (b) Report on Form 8-K. No reports on Form 8-K were filed by the Company during its fiscal quarter ended June 30, 1997. -39- U.S. Home & Garden Inc. and Subsidiaries Index to Consolidated Financial Statements ================================================================================ Report of Independent Certified Public Accountants F-2 Consolidated Financial Statements Consolidated balance sheets as of June 30, 1996 and 1997 F-3 - F-4 Consolidated statements of income for the years ended June 30, 1995, 1996 and 1997 F-5 Consolidated statements of stockholders' equity for the years ended June 30, 1995, 1996 and 1997 F-6 - F-7 Consolidated statements of cash flows for the years ended June 30, 1995, 1996 and 1997 F-8 - F-9 Summary of accounting policies F-10 - F-15 Notes to consolidated financial statements F-16 - F-39 Consolidated Financial Statement Schedules Schedule II--valuation and qualifying accounts F-40 Note: All other schedules have been omitted since the required information is contained in the Consolidated Financial Statements or because such schedules are not required. F-1 Report of Independent Certified Public Accountants Board of Directors U.S. Home & Garden Inc. and Subsidiaries San Francisco, California We have audited the accompanying consolidated balance sheets of U.S. Home & Garden Inc. and Subsidiaries as of June 30, 1996 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. We have also audited Schedule II - Valuation and Qualifying Accounts (the Schedule). These financial statements and Schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Home & Garden Inc. and Subsidiaries at June 30, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the Schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP ----------------------- BDO Seidman, LLP San Francisco, California August 1, 1997, except for Note 15 which is as of September 15, 1997 F-2 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
June 30, 1996 1997 - ----------------------------------------------------------------------------------- Assets (Notes 1 and 6) Current Cash and cash equivalents $ 680,000 $ 2,083,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $155,000 and $314,000 7,109,000 11,542,000 Inventories (Note 3) 3,392,000 5,254,000 Prepaid expenses and other current assets 462,000 419,000 Deferred tax asset (Note 10) 1,333,000 448,000 - ----------------------------------------------------------------------------------- Total current assets 12,976,000 19,746,000 Furniture, fixtures and equipment, net (Note 4) 1,216,000 2,315,000 Intangible assets (Note 1) Excess of cost over net assets acquired (Note 5) 15,784,000 41,834,000 Deferred financing costs, net of accumulated amor- tization of $467,000 and $302,000 1,005,000 1,621,000 Product rights, patents and trademarks, net of accumulated amortization of $56,000 and $75,000 198,000 180,000 Non-compete agreement, net of accumulated amortization of $22,000 -- 478,000 Package design, net of accumulated amortization of $56,000 and $110,000 180,000 251,000 Trade credits (Note 2) 1,295,000 1,149,000 Officer receivables (Note 7) 617,000 694,000 Other assets 313,000 207,000 - ----------------------------------------------------------------------------------- $33,584,000 $68,475,000 ===================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-3 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
June 30, 1996 1997 - ----------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity (Note 1) Current Line of credit (Notes 1, 6 and 13) $ 1,288,000 $ -- Current maturities of notes payable (Notes 1, 6 and 13) 2,362,000 8,990,000 Accounts payable 1,285,000 1,774,000 Accrued expenses 901,000 3,983,000 Accrued co-op advertising 185,000 1,098,000 Accrued commissions 546,000 859,000 Accrued interest (Note 6) 592,000 261,000 Accrued purchase consideration (Note 1) 489,000 489,000 - ----------------------------------------------------------------------------------------- Total current liabilities 7,648,000 17,454,000 Accrued purchase consideration (Note 1) -- 978,000 Deferred tax liability (Note 10) 328,000 547,000 Notes payable, less current maturities (Notes 1, 6 and 13) 6,238,000 17,570,000 - ----------------------------------------------------------------------------------------- Total liabilities 14,214,000 36,549,000 - ----------------------------------------------------------------------------------------- Commitments, contingency and subsequent events (Notes 1, 6, 8, 9 and 15) Stockholders' equity (Note 9) Preferred stock, $.001 par value - shares authorized, 1,000,000; no shares outstanding -- -- Common stock, $.001 par value - shares authorized, 30,000,000; 10,507,000 and 14,073,000 shares issued and outstanding at June 30, 1996 and 1997 11,000 14,000 Additional paid-in capital 21,413,000 30,783,000 Retained earnings (deficit) (2,054,000) 1,129,000 - ----------------------------------------------------------------------------------------- Total stockholders' equity 19,370,000 31,926,000 - ----------------------------------------------------------------------------------------- $ 33,584,000 $ 68,475,000 =========================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-4 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Income ================================================================================
Years ended June 30, 1995 1996 1997 - ---------------------------------------------------------------------------------------- Net sales (Note 11) $ 19,692,000 $ 27,031,000 $ 52,046,000 Cost of sales 9,151,000 12,670,000 23,649,000 - ---------------------------------------------------------------------------------------- Gross profit 10,541,000 14,361,000 28,397,000 - ---------------------------------------------------------------------------------------- Operating expenses Selling and shipping 4,374,000 6,264,000 11,232,000 General and administrative 2,778,000 4,348,000 6,513,000 - ---------------------------------------------------------------------------------------- 7,152,000 10,612,000 17,745,000 - ---------------------------------------------------------------------------------------- Income from operations 3,389,000 3,749,000 10,652,000 Other income (expense) Investment income 34,000 69,000 76,000 Interest expense (Note 6) (1,810,000) (2,009,000) (3,338,000) - ---------------------------------------------------------------------------------------- Income before income taxes and extraordinary expense 1,613,000 1,809,000 7,390,000 Income tax (expense) benefit (Note 10) (38,000) 715,000 (3,200,000) - ---------------------------------------------------------------------------------------- Income before extraordinary expense 1,575,000 2,524,000 4,190,000 Extraordinary expense of $1,459,000 on debt refinancing, net of income taxes of $452,000 (Note 13) -- -- (1,007,000) - ---------------------------------------------------------------------------------------- Net income $ 1,575,000 $ 2,524,000 $ 3,183,000 ======================================================================================== Income per common share before extraordinary expense (Note 14) $ .19 $ 0.25 $ .26 Extraordinary expense (Notes 13 and 14) -- -- (.06) - ---------------------------------------------------------------------------------------- Net income per common share (Note 14) $ .19 $ 0.25 $ .20 - ---------------------------------------------------------------------------------------- Weighted average common and common equivalent shares outstanding (Note 14) 8,376,000 10,206,000 17,908,000 - ----------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-5 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity ================================================================================
Preferred Stock Common Stock ------------------- --------------------- Additional Retained Total Number of Number of Paid-in Earnings Stockholders' Shares Amount Shares Amount Capital (Deficit) Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, July 1, 1994 (Note 9) -- -- 4,600,000 $ 5,000 $ 9,298,000 $(6,153,000) $ 3,150,000 Sale of common stock, net of stock issuance costs of approximately $1,300,000 -- -- 3,775,000 4,000 7,432,000 -- 7,436,000 Issuance of common stock for payment of trade payables -- -- 417,000 -- 683,000 -- 683,000 Exercise of stock options and warrants -- -- 31,000 -- 35,000 -- 35,000 Issuance of unit purchase options -- -- -- -- 400,000 -- 400,000 Conversion of debt and accrued interest into common stock (Note 1) -- -- 914,000 1,000 2,059,000 -- 2,060,000 Net income -- -- -- -- -- 1,575,000 1,575,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 (Note 9) -- -- 9,737,000 10,000 19,907,000 (4,578,000) 15,339,000 Exercise of stock warrants, net of stock issuance costs of approximately $114,000 -- -- 770,000 1,000 1,506,000 -- 1,507,000 Net income -- -- -- -- -- 2,524,000 2,524,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1996 (Note 9) -- -- 10,507,000 11,000 21,413,000 (2,054,000) 19,370,000 - ------------------------------------------------------------------------------------------------------------------------------------
F-6 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity ================================================================================
Preferred Stock Common Stock ------------------- --------------------- Additional Retained Total Number of Number of Paid-in Earnings Stockholders' Shares Amount Shares Amount Capital (Deficit) Equity - ------------------------------------------------------------------------------------------------------------------------------------ Exercise of stock options, warrants, and UPOs, net of issuance costs of approximately $300,000 -- -- (1)2,566,000 2,000 5,292,000 -- 5,294,000 Stock issued for Weatherly acquisition (Note 1) -- -- 1,000,000 1,000 2,999,000 -- 3,000,000 Options and warrants issued for acquisition and consulting services and bank refinancing (Notes 1) -- -- -- -- 1,079,000 -- 1,079,000 Net income -- -- -- -- -- 3,183,000 3,183,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997 (Note 9) -- -- 14,073,000 $ 14,000 $30,783,000 $ 1,129,000 $31,926,000 ====================================================================================================================================
(1) Includes 38,000 shares of common stock issued for services relating to cash proceeds and approximately 60,000 issued relating to cashless exercise of 4 UPOs (Note 9). See accompanying summary of accounting policies and notes to consolidated financial statements. F-7 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================ Increase (decrease) in cash and cash equivalents
Years ended June 30, 1995 1996 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities Net income $ 1,575,000 $ 2,524,000 $ 3,183,000 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary expense -- -- 1,007,000 Loss on disposal of assets -- -- 226,000 Bad debt expense 3,000 167,000 323,000 Depreciation and other amortization 637,000 834,000 1,990,000 Amortization of deferred financing costs 219,000 264,000 323,000 Changes in operating assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable (2,523,000) (2,622,000) (2,763,000) Inventories 637,000 (940,000) 444,000 Prepaid expenses and other current assets (201,000) (159,000) 324,000 Accounts payable and accrued expenses 54,000 1,393,000 2,838,000 Trade credits 200,000 257,000 46,000 Other assets (163,000) (95,000) 262,000 Deferred taxes -- (1,005,000) 2,342,000 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 438,000 618,000 10,545,000 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities Payment for purchase of businesses, net of cash acquired (15,387,000) (1,602,000) (28,358,000) Payment for non-compete agreement -- -- (500,000) Sale of short-term investments 501,000 -- -- Increase in officer receivables (352,000) (131,000) (77,000) Purchase of product rights (105,000) -- -- Purchase of furniture, fixtures and equipment (151,000) (261,000) (528,000) Purchase of package design (82,000) (109,000) (131,000) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (15,576,000) (2,103,000) (29,594,000) - ------------------------------------------------------------------------------------------------------------------------------------
F-8 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Years ended June 30, 1995 1996 1997 - ------------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from issuances of stock $ 7,452,000 $ 1,507,000 $ 5,294,000 Proceeds from bank line of credit 11,514,000 17,496,000 41,791,000 Payment on bank line of credit (12,109,000) (16,208,000) (43,079,000) Proceeds from notes payable 11,000,000 -- 21,345,000 Payments of notes payable (800,000) (1,600,000) (3,385,000) Acquisition finance costs (1,036,000) -- (1,514,000) - ------------------------------------------------------------------------------------------- Net cash provided by financing activities 16,021,000 1,195,000 20,452,000 - ------------------------------------------------------------------------------------------- Net increase (decrease) in cash 883,000 (290,000) 1,403,000 Cash and cash equivalents, beginning of year 87,000 970,000 680,000 - ------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 970,000 $ 680,000 $ 2,083,000 ===========================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-9 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Nature of Business U.S. Home & Garden Inc. (the "Company" - formerly known as Natural Earth Technologies, Inc. until July 1995), through its wholly- owned subsidiaries, is a manufacturer and distributor of lawn and garden care products to retailers primarily throughout North America. Golden West Agri-Products, Inc. ("Golden West"), a wholly-owned subsidiary, is a manufacturer and distributor of humic acid based agricultural products. Golden West currently sells its products in the Western United States, Mexico and Central America. On September 1, 1994, the Company, through its wholly-owned subsidiary Easy Gardener Acquisition Corporation ("Easy Gardener"), acquired all of the assets of Easy Gardener, Inc., a developer, manufacturer and marketer of lawn and garden care products. Easy Gardener primarily sells its products throughout North America. On August 11, 1995, Emerald Products Corporation, a wholly-owned subsidiary of Easy Gardener, acquired the assets of Emerald Products, LLC. Emerald Products sells its product, Emerald Edge(R), throughout North America. On August 9, 1996, Easy Gardener acquired all of the outstanding stock of Weatherly Consumer Products Group, Inc. ("Weatherly"), a lawn and garden care company which primarily sells its products throughout North America. On May 12, 1997, Easy Gardener acquired the Plasti-Chain product line from Plastic Molded Concepts, Inc. ("Plastic"). Principles of Consolidation The financial statements include the accounts of the Company and its wholly-owned subsidiaries and the results of operations of Weatherly, Easy Gardener, Plastic, Golden West and Emerald Products since their date of acquisition (Note 1). Significant intercompany accounts and transactions have been eliminated. F-10 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Inventories Inventories, which consist of raw materials, finished goods, and packaging materials, are stated at the lower of cost or market; cost is determined by the first-in, first-out (FIFO) cost method. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated five to seven year useful lives of the assets. Intangible Assets Excess of Cost over Net Assets Acquired The excess of cost over net assets acquired, which relates to the Company's acquisitions of Weatherly, Easy Gardener, Plastic, Golden West, and Emerald Products, are being amortized over periods of twenty to thirty years using the straight-line method. Periodically, the recoverability of goodwill is evaluated by comparing undiscounted estimated future net cash flows to the estimated net cash flows projected at the time of acquisition. Deferred Financing Costs Direct costs associated with the Company's long-term financing arrangements are being amortized over the life of the loans, a period of approximately six years. Package Design Package design costs associated with Easy Gardener and Weatherly products are being amortized over a five-year period using the straight-line method. Product Rights Product rights are being amortized over a 15-year estimated useful life. Non-Compete Agreement The non-compete agreement was entered into with the acquisition of Weatherly. The agreement is being amortized over its 20 year term. F-11 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Revenue Recognition Sales are recorded as products are shipped to customers. Net Income Per Share Net income per common share has been computed following Accounting Principles Board Opinion No. 15 (APB No. 15). Net income per share for 1995 and 1996 has been computed by dividing the net income by the weighted average number of common shares outstanding. For 1997, common stock equivalents such as common stock options and warrants were included in the computation of average shares outstanding because their inclusion was dilutive. 1997 earnings per share was calculated using the modified treasury stock method (Note 14). Income Taxes Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Reclassification Certain 1996 financial statement amounts have been reclassified to conform to the 1997 presentation. Advertising Costs The Company incurs advertising expense primarily relating to cooperative advertising credits granted to customers based on qualified expenses incurred by the customers to advertise the Company's products. Cooperative advertising credits are usually limited to a percentage of an agreed-upon sales volume. The Company also incurs advertising expense relating to the distribution of catalogs and the broadcasting of radio and television commercials. Advertising costs are expensed as incurred. Advertising expense was $1,236,000, $1,823,000 and $2,945,000 during the years ended June 30, 1995, 1996 and 1997. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Cash Equivalents The Company considers all short-term investments purchased with an initial maturity of three months or less to be cash equivalents. Stock Based Compensation Effective July 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under this standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. The fair value method is required for all stock based compensation issued to non-employees. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Companies are permitted to continue to account for employee stock-based transactions under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," but are required to disclose pro forma net income and earnings per share as if the fair value method had been adopted. The Company has elected to continue to account for stock-based compensation under APB No. 25 (see Note 9). New Accounting Pronouncements On March 3, 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per share. This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APB No. 15, Earnings per Share. SFAS No. 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. SFAS No. 128 is effective for periods ending after December 15, 1997. Early application is not allowed and restatement of prior earnings will be required. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which establishes standards for F-13 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Management does not believe that the Company's current financial statement disclosures will need to be modified based upon current operations. Results of operations and financial position, however, will be unaffected by future implementation of this standard. In June 1997, the Financial Accounting Standards Board issued SFAS No.131, Disclosures about Segments of an Enterprise and Related Information, (SFAS 131) which supersedes SFAS No. 14., Financial reporting for Segments of a Business Enterprises. SFAS 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for financial statements for period beginning after December 15, 1997 and requires comparative information for earlier years to be restated. The Company believes it operates under one business segment and has already substantially complied with the required financial statement disclosures. Results of F-14 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ operations and financial position, however, will be unaffected by any future implementation of this standard. Financial Instruments The Company's financial instruments consist of cash, accounts receivable and debt. The carrying value of cash and accounts receivable approximate fair value based upon the liquidity and short-term nature of the assets. The carrying value of short-term and long-term debt approximates the fair value based upon short-term and long-term borrowings at market rate interest. Cash and cash equivalents are held principally at three high quality financial institutions. At times such balances may be in excess of the FDIC insurance limit. F-15 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. Business Acquisitions On May 12, 1997, Easy Gardener acquired from Plastic substantially all of the assets, including product rights and all other intangible assets, of Plastic used in connection with Plastic's home lawn and garden care distribution business for approximately $4,300,000. On August 9, 1996, Easy Gardener acquired all of the outstanding stock of Weatherly, a lawn and garden care company, for 1,000,000 shares of the Company's common stock (valued at $3 per share) and $22,937,000, less an amount required to discharge certain outstanding indebtedness of the acquired company, and adjusted dollar for dollar based upon the ultimate value of the acquired company's net current assets (approximately $2.5 million). The acquisition was accounted for as a purchase and, accordingly, the results of operations of Weatherly have been included in the consolidated statement of income since August 9, 1996. The Company operates the acquired company as a subsidiary of Easy Gardener. In connection with the above acquisition, the Company's outstanding notes payable were refinanced and a new line of credit arrangement was established (See Note 6). On August 11, 1995, Emerald Products Corporation, a newly-formed, wholly-owned subsidiary of Easy Gardener, acquired from Emerald Products, LLC ("Emerald") all of the assets, including product rights and all other intangible assets, of Emerald used in connection with Emerald's home lawn and garden care distribution business. The purchase price, subject to adjustment as described below, was $835,000 in cash and a $100,000 non-interest bearing promissory note, which was paid off during fiscal 1996 using cash from operations. The purchase price is subject to increase based upon the Company achieving certain annual gross sales levels of acquired product lines through September 2002. This additional consideration is payable in cash annually and based upon 2.5% of annual Emerald gross sales of up to $4,000,000, 1.5% of annual gross sales between $4,000,001 and $5,000,000 and 1% of annual gross sales greater than $5,000,000. On September 1, 1994 (the "Closing Date"), Easy Gardener Acquisition F-16 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Corp., a newly formed, wholly-owned subsidiary of the Company, acquired from Easy Gardener, Inc. (the "Seller"), all of the assets of the Seller used in connection with the Seller's home lawn and garden care products distribution business (the "Purchased Assets") pursuant to an assets purchase agreement dated as of June 19, 1994. The purchase price was $20,500,000 (subject to adjustment as described below) which was paid by the delivery of (i) $8,000,000 in cash (ii) a promissory note (the "Note") issued by Easy Gardener Acquisition Corp. in the initial principal amount of $10,500,000, and (iii) two convertible promissory notes (the "Convertible Notes") issued by the Company each in the initial principal amount of $1,000,000. The Note was paid from the proceeds of the Company's bank financing in September 1994. The Convertible Notes plus accrued interest were each converted into 457,198 shares of the Company's common stock and Class B warrants to acquire 457,198 shares of common stock at an exercise price of $2.28 per share. The Convertible Notes were automatically converted upon the February 1995 approval by the stockholders of the Company of an Amendment to the Company's Certificate of Incorporation increasing the amount of the Company's authorized common stock to 30,000,000 shares. The shares of common stock issued upon exercise of the Convertible Notes, and the shares of common stock issuable upon exercise of the warrants, are subject to a seven-year voting agreement with Mr. Robert Kassel, Chairman of the Company. The purchase price was subject to increase, if and to the extent that on the Closing Date current assets of Easy Gardener, Inc. exceeded current liabilities by $6,600,000. This additional amount approximated $783,000 at the date of closing and was paid in October 1994. Approximately $2,200,000 was contingently payable to the Seller over the four years following the Closing Date based upon the acquired business generating certain specified levels of net income. As of June 30, 1997, the entire $2,200,000 has been added to the excess of cost over net assets acquired of Easy Gardener based upon operating results obtained through June 30, 1997 and forecasted results for fiscal year 1998. As of June 30, 1997, approximately $1,467,000 is payable for this additional purchase price. F-17 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The following unaudited pro forma summary combines the consolidated results of operations of the Company, Weatherly and Easy Gardener as if the acquisitions had occurred at the beginning of the year of acquisition and the beginning of the prior year. Accordingly, Easy Gardener is reflected as if the acquisition occurred on July 1, 1994 and Weatherly as if the acquisition occurred July 1, 1995. The proforma information gives effect to certain adjustments, including the amortization of excess of cost over net assets acquired, the elimination of certain expenses incurred by Weatherly related to its acquisition and additional interest expense on the notes payable. This pro forma summary does not necessarily reflect the results of operations as they would have been if the Company, Weatherly and Easy Gardener had constituted a single entity during such periods and is not necessarily indicative of results which may be obtained in the future. The pro forma effect of the Emerald and Plastic acquisitions have not been reflected since their prior revenue was not material to the Company's operations. Years ended June 30, 1995 1996 1997 -------------------------------------------------------------------- Net sales $21,349,000 $46,102,000 $52,788,000 ==================================================================== Net income before extra- ordinary expense and income taxes $ 1,420,000 $ 2,369,000 $ 6,990,000 ==================================================================== Net income before extra- ordinary expense $ 1,382,000 $ 3,462,000 $ 4,098,000 ==================================================================== Net income $ 1,382,000 $ 1,542,000 $ 2,571,000 ==================================================================== Net income per common share before extra- ordinary expenses $ .16 $ .25 .22 ==================================================================== F-18 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Years ended June 30, 1995 1996 1997 --------------------------------------------------------------------------- Net income per common share $ .16 $ .11 $ .15 =========================================================================== 2. Trade Credits In April 1996, the Company entered into an agreement to exchange unsold assets held for sale for credit against the future purchase of products and services. This transaction has been reported at the estimated fair market value of the assets exchanged by the Company. No gain or loss was recognized on such transaction as the Company had previously written down its assets held for sale to their estimated fair market value. The agreement requires the Company to pay a portion of the purchase price of the product or services received. Depending on the nature of the products or services purchased, the Company will receive a credit against the future price ranging from 10% to 45% of the cash purchase price. The Company will also receive a percentage of the cash proceeds from the ultimate sale of the assets. As of June 30, 1996, included in accounts receivable is approximately $105,000 of cash subsequently received on the sale of a portion of the assets by the third party. The agreement provides that the Company will receive maximum total credits and cash totaling $1.6 million. The agreement expires in April 1999 and requires the Company to use all credits by this date. The Company expects to use the credits primarily by purchasing operating assets and advertising time. The Company expects to use all available credits by the expiration date and will continually evaluate this asset based upon credits utilized and future operating goals. 3. Inventories Inventories consist of: June 30, 1996 1997 --------------------------------------------------------------------------- Raw materials $ 82,000 $ 578,000 Finished goods 3,310,000 4,676,000 --------------------------------------------------------------------------- $ 3,392,000 $ 5,254,000 =========================================================================== F-19 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 4. Furniture, Fixtures and Equipment Furniture, fixtures and equipment consist of: June 30, 1996 1997 --------------------------------------------------------------------------- Leasehold improvements $ 74,000 $ 397,000 Furniture, fixtures and equipment 1,575,000 2,761,000 --------------------------------------------------------------------------- 1,649,000 3,158,000 Less accumulated depreciation 433,000 843,000 --------------------------------------------------------------------------- $1,216,000 $2,315,000 =========================================================================== 5. Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired consists of the following: June 30, 1996 1997 --------------------------------------------------------------------------- Weatherly Consumer Products Group, Inc. $ -- $23,046,000 Easy Gardener, Inc. 14,172,000 15,639,000 Plastic Molded Concepts, Inc. -- 2,760,000 Golden West Chemical Distributions, Inc. 2,098,000 2,098,000 Emerald Products, LLC 778,000 870,000 --------------------------------------------------------------------------- 17,048,000 44,413,000 Less accumulated amortization 1,264,000 2,579,000 --------------------------------------------------------------------------- $15,784,000 $41,834,000 =========================================================================== F-20 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 6. Notes Payable and Line of Credit Notes payable consist of the following: June 30, 1996 1997 --------------------------------------------------------------------------- $23,000,000 note payable, interest due monthly at prime (8.5% at June 30, 1997) plus 1.25% or LIBOR (5.72% at June 30, 1997) plus 3.50%, quarterly principal payments ranging from $570,000 to $1,350,000 beginning September 30, 1996 through June 30, 2002, collateralized by Easy Gardener's assets and guaranteed by the Company. $ -- $ 20,510,000 $2,250,000 note payable, interest due monthly at prime (8.5% at June 30, 1997) plus 6.0%, quarterly principal payments of $140,625 beginning September 30, 1998 through June 30, 2002, collateralized by Easy Gardener's assets and guaranteed by the Company. -- 2,250,000 $3,800,000 note payable, interest only due monthly at 12% with the full principal due November 1997. -- 3,800,000 $8,000,000 note payable, interest at 12.25%, monthly principal payments of $133,333, plus interest, commencing January 31, 1995 until January 2000, collateralized by the assets of Easy Gardener and a guaranty of the Company. This note was refinanced during 1997. 5,600,000 -- F-21 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ June 30, 1996 1997 --------------------------------------------------------------------------- $3,000,000 note payable, interest at 12%, equal monthly principal payments of $125,000, plus interest, commencing the earlier of the repayment of the $8,000,000 note payable or January 31, 2000, collateralized by assets of Easy Gardener and a guaranty of the Company. This note was refinanced during 1997. 3,000,000 -- --------------------------------------------------------------------------- 8,600,000 26,560,000 Less current portion 2,362,000 8,990,000 --------------------------------------------------------------------------- $6,238,000 17,570,000 =========================================================================== At June 30, 1997, the Company's financing arrangements include a $13,000,000 revolving credit facility expiring June 2002, bearing interest at the lower of prime or LIBOR rates plus an additional marginal amount; collateralized by Easy Gardener's assets and guaranteed by the Company. The credit facility's availability increases to $16,000,000 for the months of February through May. As of June 30, 1997, no amounts were outstanding on the credit line. The credit agreement contains various restrictions which require, among other things, maintenance of certain financial ratios and an annual zero balance for ten consecutive days during August. At June 30, 1997, the Company was in compliance with all such covenants. If the revolving credit facility is terminated prior to June 2002, the Company will be subject to certain prepayment penalties. At June 30, 1996, the Company's had a $6,000,000 revolving credit facility bearing interest at prime (8.25% at June 30, 1996) plus 2%, payable in monthly installments commencing January 1, 1995 and collateralized by assets of Easy Gardener and a guaranty of the Company. As of June 30, 1996, there was $1,288,000 outstanding on the credit line which was refinanced during August 1996 utilizing the $13,000,000 revolving credit facility noted above. F-22 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The $3 million note payable also required the Company to pay additional interest (defined as a success fee) when the loan was paid off. The success fee ranges from $300,000 in the first year to $4,140,000 in the seventh year. As of June 30, 1996, the accrued success fee was approximately $481,000 (Note 13). The $8 million note payable was subject to certain mandatory prepayments of "excess cash flow" of Easy Gardener and certain net proceeds of asset sales, condemnation awards and insurance recoveries. As of June 30, 1996, $762,000 is the payment for "excess cash flow" which was made subsequent to year end. This amount has been included in the current portion of notes payable. Also, certain optional prepayments of advances under the revolving facility and the $8 million note payable require the payment of a premium (Note 13). In connection with the acquisition of Weatherly Products Inc. on August 9, 1996, both of the above term notes payable were refinanced and a new line of credit agreement was executed (Note 13). Future minimum principal payments are as follows: Year ending June 30, Amount ---------------------------------------------- 1998 $ 8,990,000 1999 4,402,000 2000 4,403,000 2001 4,402,000 2002 4,363,000 ---------------------------------------------- $26,560,000 ============================================== 7. Officer Receivables Officer receivables represents notes which bear interest at 7% and require interest only payments on an annual basis. The notes are due June 2002. F-23 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 8. Commitments Employment Agreements During 1996 and 1997, the Company entered into new employment agreements with three of its officers. The agreements are for one-year periods but are automatically renewed unless specifically terminated by the Company or the employee. If the employment agreements are terminated by the Company, the officers will be entitled to an additional ten and five years of annual compensation. Annual compensation under the employment agreements are $350,000, $162,000 and $101,000. The employment agreements also provide for certain lump sum payments in the event of a change in control equal to approximately $5 million. An agreement with an officer of Easy Gardener provides for a base aggregate annual salary of approximately $200,000 in 1998. In addition, the agreements provide for incentive and additional compensation under certain circumstances. Operating Leases The Company leases office and warehouse space under operating leases which expire in various years through 2001. The Company also leases certain office equipment and automobiles under operating leases expiring in 1998 through 2002. The future minimum lease payments under these non-cancelable operating leases are as follows: Year ending June 30, Amount ---------------------------------------- 1998 $ 729,000 1999 591,000 2000 410,000 2001 176,000 2002 1,000 ---------------------------------------- $1,907,000 ======================================== Rent expense was approximately $303,000, $336,000 and $680,000 for the years ended June 30, 1995, 1996 and 1997. F-24 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Pension Plan Easy Gardener has established an employee defined contribution pension plan (the Plan). Employees of the Company, Weatherly, Easy Gardener and Golden West are eligible to participate. The Company is required to match the first 3% of employee contributions up to 5% of the employees wage base. The plan also allows discretionary contributions by the Company. The Company's contribution vests over a seven-year period. Pension expense associated with the Plan for 1995, 1996 and 1997 was approximately $64,000, $180,000 and $199,000. Royalty Agreements The Company has entered into royalty agreements which provide for payments based upon a percentage of net sales of certain products. These agreements expire in various years from 1998 to 2005. Royalty expense during the years ended June 30, 1995, 1996 and 1997 was $64,000, $104,000 and $304,000. 9. Stockholders' Equity (a) Convertible Preferred Stock The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Company's common stock. (b) Common Stock The Company raised a portion of the Easy Gardener, Inc. purchase price through the August 1994 private placement of $8,025,000 of Units (for which it received net proceeds of approximately $6,900,000), each $100,000 Unit consisting of 44,000 shares of common stock and a class B warrant to purchase 44,000 shares of common stock for $2.28 per share. F-25 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ In June 1994, the Company sold approximately 200,000 shares to various foreign investors. Proceeds to the Company, after deducting commissions and expenses approximated $435,000. In a related transaction during July 1994, the Company sold an additional 240,000 shares to foreign investors resulting in net proceeds to the Company of approximately $518,000. Proceeds were used for the Easy Gardener acquisition. (c) Stock Option Plans The Company adopted the 1991 Stock Option Plan (the "1991 Plan") pursuant to which 700,000 shares of common stock have been reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code") or (ii) non-qualified options. ISOs may be granted under the Plan to employees and officers of the Company. Non-qualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. During fiscal 1995, the Board of Directors of the Company adopted, subject to stockholder approval, two additional stock option plans. The 1995 Stock Option Plan (the "1995 Plan") allows the granting of either ISOs or non-qualified options. The maximum aggregate number of shares to be granted under this plan is 1,500,000. The Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan") was established to attract, retain and compensate for their services as directors, highly qualified individuals who are not employees of the Company. The maximum aggregate number of shares issued under this plan is 100,000. During 1996 and 1997, 10,000 options were granted each year. The 1995 Plan is administered by a committee of the Board of Directors and the Non-Employee Director Plan is a formula plan. During May 1997, the Board of Directors approved the 1997 Stock Option Plan. The plan reserves 1,500,000 shares of common stock. F-26 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The 1997 plan is subject to shareholder approval. No options have been granted as of June 30, 1997. The 1991 Plan is administered by the Board of Directors of the Company (the "Board"). The Board, or committee, as the case may be, within the limitations of the 1991 and 1995 Plans, as the case may be, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an option, and whether restrictions such as repurchase rights in the Company are to be imposed on shares subject to options. ISOs granted under the plans may not be granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). The aggregate fair market value of shares for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans of the Company and any related corporation) may not exceed $100,000. Non-qualified options granted under the 1991 Plan may not be granted at a price less than the fair market value of the common stock on the date of grant (not less than par value in the case of the 1995 Plan). Options granted under the plans will expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). All options granted under the 1991 Plan, Non-Employee Director Plan and ISOs under the 1995 Plan are not transferable during an optionee's lifetime but are transferable at death by will or by the laws of descent and distribution. F-27 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The Board of Directors also has authorization to issue stock options ("Non-Plan Options") to employees or consultants for services performed. The following is a summary of activity relating to stock options.
Weighted Weighted Average Average Option Available Remaining Price Per Out- Exer- for Contractual Share standing cisable Grant Life --------------------------------------------------------------------------------------------- 1991 Plan June 30, 1995 $1.71(1) 588,000 488,000 112,000 5 years Became exercisable -- 100,000 -- --------------------------------------------------------------------------------------------- June 30, 1996 $1.71(1) 588,000 588,000 112,000 4 years Expired in 1997 $1.69 (26,000) (26,000) 26,000 --------------------------------------------------------------------------------------------- June 30, 1997 $1.71(1) 562,000 562,000 138,000 3 years ============================================================================================== 1995 Plan June 30, 1995 $2.28 400,000 -- 1,100,000 5 years Granted during 1996 2.25 310,000(3) 10,000 (310,000) Became exercisable -- 400,000 -- --------------------------------------------------------------------------------------------- June 30, 1996 $2.26 710,000 410,000 790,000 4.5 years Granted during 1997 2.06(4) 675,000 675,000 (675,000) Became exercisable 2.28 -- 75,000 -- --------------------------------------------------------------------------------------------- June 30, 1997 $2.10(4) 1,385,000 1,160,000 115,000 4 years ==============================================================================================
F-28 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================
Weighted Weighted Average Average Option Available Remaining Price Per Out- Exer- for Contractual Share standing cisable Grant Life --------------------------------------------------------------------------------------------- Non-Plan Options June 30, 1995 $1.85 745,000(2) 645,000 -- 4 years Granted during 1996 2.25 315,000(3) -- -- --------------------------------------------------------------------------------------------- June 30, 1996 $1.96(1) 1,060,000 645,000 -- 3.5 years Became exercisable 2.25 -- 125,000 -- Granted during 1997 1.91 1,225,000 1,225,000 -- --------------------------------------------------------------------------------------------- June 30, 1997 $1.84(4) 2,285,000 1,995,000 -- 4 years =============================================================================================
(1) During fiscal 1995, the Board of Directors authorized a reduction in the exercise price. The ending option price per share reflects the reduced exercise price. During fiscal 1995, approximately 1.1 million options to purchase common stock were repriced to $1.69. (2) Options outstanding reflect the effect of certain antidilution provisions. (3) Options vest over four years with the exception of 10,000 immediately vesting 1995 Plan options. (4) In December 1996, 1,490,000 options granted subsequent to June 1995 were repriced to $2.06 per share. In addition to certain stock options and warrants granted to employees, the Company also issued a total of 925,000 options and warrants to various consultants and a financial institution relating to various F-29 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ consulting services, the acquisitions of Weatherly and PlastiChain, and the new bank agreement entered into during August 1996. The fair value of such options and warrants was estimated at approximately $1,079,000. The fair value of such options and warrants has been expensed except for the fair value related to acquisitions and the bank financing for which these amounts are being amortized over the life of the bank financing agreement and the excess of cost of net assets acquired. (d) Unit Purchase Options In October 1994, the Company granted six unit purchase options (UPOs), each consisting of 43,860 shares of the Company's common stock and Class B Warrants to purchase 43,860 shares of common stock at an exercise price of $2.28. These UPOs, which expire on August 31, 1999, have a nominal exercise price. Three of the UPOs were granted to an officer of the Company for his personal guarantees in connection with the Easy Gardener acquisition. Three were granted to an outside consultant for its services in connection with financing obtained for the Easy Gardener acquisition. The six UPOs issued with the nominal exercise price were valued at $400,000 and included in deferred financing costs. Concurrently, the Company also granted six UPOs, consisting of the same components, each with a current exercise price of approximately $75,000, three of which were granted to an officer of the Company. All these transactions were done in lieu of cash compensation in consideration for certain financial consulting and other services and for the personal guarantee and other collateral provided in connection with the Company's acquisition of Easy Gardener, Inc., without which the Company's transaction with Easy Gardener, Inc. would not have occurred. During 1997, one UPO and the related warrants were exercised by the outside consultant. Proceeds to the Company were approximately $175,000. In connection with the Company's August 1994 Private Placement, the placement agent and its designees were granted approximately 28 UPOs exercisable at $100,000 each. Each UPO consists of 43,860 shares of common stock and warrants to purchase 43,860 F-30 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ shares of common stock at $2.28 per share. These warrants expire in August 1999, if the underlying UPO is not exercised. If exercised, the warrants expire in May 2000. During 1997, 5 UPOs were terminated in a cashless exercise and approximately 60,000 shares of common stock was issued. The total shares of common stock issuable upon exercise of the UPOs, including the underlying warrants, would be approximately 3,500,000 and 3,000,000 shares at June 30, 1996 and 1997. (e) Warrants In connection with certain business transactions and stock offerings, the Company has granted various warrants to purchase common stock. The following schedule will summarize the activity.
Weighted Weighted Average Average Option Remaining Price Per Out- Exer- Contractual Share standing(1) cisable Life ------------------------------------------------------------------------------------ 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 -----------------------------------------------------------------------------------
F-31 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================
Weighted Weighted Average Average Option Remaining Price Per Out- Exer- Contractual Share standing(1) cisable Life ------------------------------------------------------------------------------------ Increase for antidilution 2.28 153,000 153,000 Warrants exercised 2.24 (770,000) (770,000) ----------------------------------------------------------------------------------- June 30, 1996 2.14 5,616,000 5,616,000 3.5 years Warrants issued 2.45 525,000 525,000 Warrants exercised 2.15 (2,380,000) (2,380,000) Expired 6.00 (52,000) (52,000) ----------------------------------------------------------------------------------- June 30, 1997 $2.18 3,709,000 3,709,000 3 years ===================================================================================
(1) The warrants contain anti-dilution provisions which could effect the number of shares of common issuable stock upon the exercise of the warrants as well as the per share warrant prices. Additionally, these warrants contain certain redemption provisions. (f) Common Stock Reserved At June 30, 1997, approximately 12,700,000 shares of common stock have been reserved for issuance upon the exercise of warrants, options and UPOs. (g) Stock Based Compensation The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for the plan. F-32 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Under APB Opinion No. 25, because the exercise price of the Company stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation cost is recognized. FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net loss as if compensation costs for the Company's stock options and warrants had been determined in accordance with the fair value based method prescribed in FASB Statement No. 123. The Company estimates the fair value of each stock option and warrant at the grant date by using a modified Black-Scholes pricing model with the following weighted-average assumptions used for grants in 1996 and 1997, respectively: no dividend yield for any year; expected volatility of approximately 30% in both years; risk-free interest rates of 6.65% and 6.6%; and expected lives of approximately three to five years. Under the accounting provisions of FASB Statement No. 123, the Company net income and net income per common share would have been decreased to the pro forma amounts indicated below: Years ended June 30, 1996 1997 --------------------------------------------------------------------------- Net Income As reported $2,524,000 $3,183,000 Pro forma 2,392,000 1,617,000 Per share as reported 0.25 0.20 Pro forma 0.23 0.12 =========================================================================== The above pro forma information includes only the effects of 1996 and 1997 grants. Because options potentially vest over several years and additional awards are made each year, the results shown above may not be representative of the effects on net earnings in future years. F-33 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 10. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is established for deferred income tax assets when realization is not deemed more likely than not. Deferred tax assets (liabilities) consist principally of the following: June 30 1996 1997 -------------------------------------------------------------------------- Deferred tax assets Net operating loss carryforwards $1,384,000 $555,000 Accounts receivable allowance and other 97,000 58,000 -------------------------------------------------------------------------- Total deferred tax asset 1,481,000 613,000 Less valuation allowance (148,000) (165,000) -------------------------------------------------------------------------- Net deferred tax asset $1,333,000 $448,000 ========================================================================== -------------------------------------------------------------------------- Deferred tax liability Depreciation and amortization in excess of book amount $(328,000) $(547,000) ========================================================================== At June 30, 1997, the Company had approximately $1,025,000 of net operating loss (NOL) carryforwards available to reduce future Federal taxable income. These losses are available through 2011. California allows an NOL carryforward of 50% of a company's California taxable loss. The carryforward for California purposes, after the 50% reduction, was approximately $2,217,000 at June 30, 1997 and expires through 2001. Use of the Company's NOLs could be limited in the future as a result of issuance or exercise of stock options and warrants or sale or F-34 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ issuance of stock. The Company files its tax returns on a calendar year basis. Because of the seasonal nature of the Company's operations, the different reporting periods for book and tax purposes may affect the amount of taxes that will ultimately be payable or deferred. At June 30, 1996 and 1997, the Company established a $148,000 and $165,000 valuation allowance for the benefits pertaining to California NOLs which are not estimated to be realizable prior to their expiration. The income tax (provision) benefit consists of: June 30, 1995 1996 1997 --------------------------------------------------------------------------- Current Federal $ -- $ -- $ (283,000) State (38,000) (290,000) (280,000) --------------------------------------------------------------------------- (38,000) (290,000) (563,000) --------------------------------------------------------------------------- Deferred Federal -- 1,013,000 (2,129,000) State -- (8,000) (56,000) --------------------------------------------------------------------------- -- 1,005,000 (2,185,000) --------------------------------------------------------------------------- $ (38,000) $ 715,000 $(2,748,000) ============================================================================ The 1997 income tax expense consists of $3,200,000 expense from continuing operations reduced by $452,000 benefit associated with the extraordinary expense. The following is a reconciliation between the Statutory Federal income tax rate and the Company's effective tax rate for continuing operations: F-35 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1995 1996 1997 -------------------------------------------------------------------------- Income tax (provision) computed at Federal Statutory rate (34.0)% (34.0)% (34.0)% State taxes, net of Federal tax benefits (2.4) (16.5) (4.6) Nondeductible amortization and other (3.6) (4.1) (4.5) Changes in valuation allowance on deferred tax asset (37.6) 94.1 (0.2) -------------------------------------------------------------------------- (Provision) benefit for income taxes (2.4)% 39.5% (43.3)% ========================================================================== 11. Concen- tration of Credit Risk and Significant Relationships Trade accounts receivable are due primarily from numerous customers located in many geographic regions throughout the United States. The Company performs ongoing credit evaluations of its customers' financial conditions and establishes an allowance for doubtful accounts based upon the credit risk of specific customers, historical trends and other information. The Company does not require collateral from its customers. During the years ended June 30, 1996 and 1997, sales to two Easy Gardener customer accounted for approximately 36% (27% and 9%) and 36% (26% and 10%) of consolidated net sales. Included in accounts receivable at June 30, 1996 and 1997 is $1,440,000 and $2,320,000 due from the largest customer. During the year ended June 30, 1995, sales to two Easy Gardener customers accounted for approximately 24% and 9% of consolidated net sales. Substantially all of Easy Gardener's raw material purchases for Weedblock(R) inventory, representing approximately 66%, 50% and 22% of the Company's consolidated raw material purchases during the years ended June 30, 1995, 1996 and 1997, are from one vendor. Management believes that other suppliers could provide a similar product on comparable terms. A change in suppliers, however, could cause delays and a possible loss of sales, which would affect operating results adversely. Included in accounts payable at June 30, 1996 and 1997 is $139,000 and $349,000 due to this vendor. F-36 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 12. Supplemental Cash Flow Information
June 30, 1995 1996 1997 ----------------------------------------------------------------------------- Cash paid during the period for: Interest, including deferred financing costs and extraordinary expense $1,528,000 $1,296,000 $5,816,000 Taxes $ 10,000 $ 96,000 $ 131,000 ============================================================================= Supplemental Schedule of Non-cash Investing and Financing Activities: The Company purchased all of the assets of Easy Gardener, Inc. for $21,283,000 in September 1994. ---------------------------------------------------------------------------- Fair value of assets acquired $ 28,526,000 Cash paid for assets acquired (14,424,000) Promissory notes (12,783,000) ---------------------------------------------------------------------------- Liabilities assumed $ 1,319,000 ============================================================================
During 1995, the Company entered into agreements to issue approximately 417,000 shares of common stock, valued at approximately $683,000 as payment of certain accounts payable. During 1995, $2,000,000 of convertible debentures and related accrued interest was converted into 914,396 shares of common stock and 914,396 Class B warrants. During 1995, deferred financing costs of approximately $400,000 was paid for by the issuance of 6 UPOs with a nominal exercise price. During 1996, the Company exchanged assets held for sale with a book value of approximately $1.4 million for future trade credits. During 1997, the Company issued warrants and options for various consulting services which were valued at approximately $1,079,000. F-37 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 13. Extraordinary Expense As a result of the refinancing of all of the Company's outstanding debt in August 1996 (See Note 6), the entire balance of deferred finance costs at June 30, 1996, net of accumulated amortization, plus certain prepayment penalties totaling approximately $455,000, was written off as an extraordinary expense during the year ended June 30, 1997. 14. Earnings per Share Earnings per share for 1997 was computed under the guidance of APB 15 using the modified treasury stock method. The following will detail how the 1997 earning per share figures were calculated. --------------------------------------------------------------------------- Weighted average common shares outstanding for the period 13,695,000 Weighted average common share equivalents 4,213,000 --------------------------------------------------------------------------- 17,908,000 =========================================================================== Computation for Statement of Operations Reconciliation of net income per statement of operations to amount used in primary earnings per share computation: --------------------------------------------------------------------------- Income before extraordinary expense, as reported $ 4,190,000 Add: Interest (expense reduction) on debt, net of income tax effect, on application of assumed proceeds from exercise of options and warrants in excess of 20% limitations 450,000 -------------------------------------------------------------------------- Income before extraordinary expense 4,640,000 Extraordinary expense (1,007,000) -------------------------------------------------------------------------- F-38 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Net income assumed for the period in computing per share earnings as adjusted $ 3,633,000 -------------------------------------------------------------------------- Income per share before extra- ordinary expense $ 0.26 Extraordinary expense (0.06) -------------------------------------------------------------------------- Net income per share $ 0.20 ========================================================================== 15. Subsequent Events Subsequent to June 30, 1997, a $350,000 liability was converted into 154,000 shares of common stock. Subsequent to June 30, l997, the Company granted stock options to acquire 600,000 shares of common stock at $3.25 per share under the 1997 stock option plan. During July 1997, 453,000 warrants were exercised generating $1,033,000 in cash proceeds to the Company. On August 22, 1997, the Company entered into a non-binding letter of intent which provides for the acquisition of all of the outstanding shares of common stock of a company that manufacturers and distributes outdoor lawn and garden products in exchange for approximately $5,250,000. The purchase is subject to the completion of due diligence, approval by the directors of the Company and the execution and delivery of a stock purchase agreement. The letter of intent terminates, without liability, if the acquisition is not consummated by October 21, 1997. The Company is involved in a lawsuit in which it has claimed a competitor has infringed on a product trademark. The competitor has filed a counter-claim in September 1997 seeking unspecified damages. The Company does not believe the outcome of this matter will have a material impact on future operations. F-39 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Charged to Beginning Costs and Writeoffs Ending Balance Expenses of Accounts Balance - -------------------------------------------------------------------------------- Allowance for Doubtful Accounts Year ended June 30, 1995 $ 5,000 $ 3,000 $ (3,000) $ 5,000 Year ended June 30, 1996 5,000 167,000 (17,000) 155,000 Year ended June 30, 1997 155,000 323,000 (164,000) 314,000 - -------------------------------------------------------------------------------- F-40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. U.S. Home & Garden Inc. (Registrant) By: /s/ Robert Kassel ------------------------------- Robert Kassel, President Dated: September 29, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ Robert Kassel Chairman of the Board September 29, 1997 - ------------------------ of Directors, President Robert Kassel and Treasurer (Chief Executive and Financial Officer) /s/ Maureen Kassel - ------------------------ Vice-President, September 29, 1997 Maureen Kassel Secretary and Director /s/ Richard Raleigh - ------------------------ Chief Operating Officer September 29, 1997 Richard Raleigh and Director /s/ Lynda Gustafson - ------------------------ Vice President - September 29, 1997 Lynda Gustafson Finance (Principal Financial Officer) /s/ Jon Schulberg - ------------------------ Director September 29, 1997 Jon Schulberg /s/ Fred Heiden - ------------------------ Director September 29, 1997 Fred Heiden EX-10.3 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made as of the 1st day of September 1994, by and between EASY GARDENER ACQUISITION CORP., a Delaware corporation (the "Company"), and Richard M. Grandy (the "Executive"). W I T N E S S E T H : WHEREAS, the Company has entered into an Asset Purchase Agreement with Easy Gardener, Inc. ("Easy Gardener") and Natural Earth Technologies, Inc. ("NETX") pursuant to which the Company has agreed to purchase substantially all of the assets (the "Purchased Assets") of Easy Gardener (the "Acquisition"); and WHEREAS, the Executive has been an officer and principal shareholder of Easy Gardener and, as such, possesses an intimate knowledge of the business and affairs of the business represented by the Purchased Assets, its policies, methods, personnel, opportunities and problems; and WHEREAS, the Company recognizes that the Executive's contribution to the growth and success of the Company following the consummation of the Acquisition will be substantial and the Company desires to assure itself of the Executive's employment as the Vice President - Marketing and Sales of the Company and to compensate him for such efforts; and WHEREAS, the Executive is desirous of committing himself to serve the Company on the terms herein provided; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties contained in this Agreement the parties hereto hereby agree as follows: 1. Employment. The Company agrees to employ the Executive and the Executive agrees to be so employed on the terms and conditions set forth in this Agreement, for a four-year period commencing on the date hereof; provided, however, that this Agreement may be extended by the mutual written agreement of the Company and the Executive. 2. Position and Duties. During the term of this Agreement the Executive shall have the title of the Vice President - Marketing and Sales of the Company and shall have such duties as may be from time to time delegated to him by the Board of Directors or the President of the Company. The Executive shall report to Richard Raleigh or Robert Kassel (or another designee of the Board of Directors) and the Board of Directors and shall devote substantially all of his business time, attention, knowledge and skills faithfully, diligently end to the best of his ability, in furtherance of the business and activities of the Company. The Executive shall faithfully and diligently discharge his duties hereunder and use his best efforts to implement the policies established by the Board of Directors. 3. Indemnification of Executives. The Company will indemnify the Executive (and his legal representatives or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Delaware as in effect at the time of the subject act or omission, or such other state in which the Company may be incorporated at such time, or the Certificate of Incorporation and By-Laws of the Company as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive. 4. Place of Performance. In connection with his employment by the Company, the Executive shall be based at the Company's principal executive offices in Waco, Texas. 5. Offices. If mutually agreed between the Company and the Executive, the Executive may serve on the Board of Directors of the Company, without additional compensation. 6. Compensation. 6.1 Base Salary. During the first full year of the term of this Agreement, the Executive shall be paid a base salary at the annual rate of $150,000, payable in advance, in installments, and in the same manner as other employees of the Company are paid. During the second and third full years of this Agreement the Executive shall be paid a salary at the annual rate of $175,000 and during the fourth full year of this Agreement, the Executive shall be paid a salary at the annual rate of $200,000. Such salary is hereinafter referred to as the "Base Salary." 7. Expenses. During the term of this Agreement, the Company shall reimburse the Executive for such costs and expenses as the -2- Executive may reasonably incur in connection with the performance of his duties hereunder, including, but not limited to, expenses for entertainment, travel and similar items. The Company will reimburse the Executive for such expenses upon presentation of expense statements or vouchers or such other supporting information as the Company may require, in accordance with the policies and procedures of the Company for the reimbursement of business expenses of its senior executive officers. 8. Participation in Employee Benefit Plans. During the term of his employment hereunder, the Executive shall have the right, but only to the extent provided in any such plan, to receive or participate in all benefits and plans which the Company may from time to time institute during such period for its employees and for which the Executive is eligible. 9. Participation in Medical Plan. During the term of his employment hereunder, the Executive shall be entitled to participate in the current or any future medical plan of the Company to the extent provided in such plan. 10. Vacations, Holidays and Sick Leave. The Executive will be entitled to four (4) weeks paid vacation and the number of paid holidays, and sick leave days in each calendar year as are determined by the Company from time to time (prorated, in any calendar year during which the Executive is employed under this Agreement for less than the entire such year, in accordance with the number of days in such calendar year during which he is so employed). Such vacation may be taken in the Executive's discretion, and at such time or times as are not inconsistent with the reasonable business needs of the Company. Vacation time may not be carried over from year to year. 11. Insurability; Right to Insure. During the continuance of the Executive's employment hereunder, the Company shall have the right to maintain term life insurance in its own name covering the Executive's life in such amount as shall be determined by the Company, for a term ending on the termination date of this Agreement. The Executive shall aid in the procuring of such insurance by submitting to the required medical examinations, if any, and by filling out, executing and delivering such applications and other instruments in writing as may be reasonably required by an insurance company or companies to which application or applications for insurance may be made by or for the Company. -3- 12. Termination. The Executive's employment under this Agreement may be terminated without any breach of this Agreement only on the following circumstances: 12.1 Death. The Executive's employment under this Agreement shall terminate upon his death. 12.2 Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties under this Agreement for 90 calendar days during any calendar year, the Company may terminate the Executive's employment under this Agreement. 12.3 Cause. The Company may terminate the Executive's employment under this Agreement for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment under this Agreement upon (a) the failure by the Executive to perform his duties under this Agreement (other than any such failure resulting from the Executive's incapacity due to physical or mental illness) after demand for performance is delivered by the Company, in writing, identifying the manner in which the Company believes the Executive has not performed his duties and the Executive fails to perform as required within 15 days after such demand is made, (b) the engaging by the Executive in misconduct (including embezzlement and criminal fraud) which is injurious to the Company, monetarily or otherwise or (c) the indictment of the Executive of a crime involving moral turpitude or dishonesty. 12.4 Termination by the Executive for Good Reason or Because of Ill health. The Executive may terminate his employment under this Agreement (a) for Good Reason (as hereinafter defined), or (b) if his health should become impaired to any extent that makes the continued performance of his duties under this Agreement hazardous to his physical or mental health or his life, provided that, in the latter case, the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that at the Company's request and expense the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor. 12.4.1 Good Reason. For purposes of this Agreement, "Good Reason" shall mean the failure by the Company to comply with its material obligations and agreements contained in this Agreement including, without limitation, the relocation of the Executive's workplace to more than forty (40) miles from its current location or requests by the Company that the Executive engage in illegal conduct. With respect to the matters set forth -4- in this paragraph, the Executive must give the Company 30 days prior written notice of his intent to terminate this Agreement as a result of any breach or alleged breach of the applicable provision and the Company shall have the right to cure any such breach or alleged breach within such 30 day period. 13. Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive (other than termination by reason of the Executive's death) shall be communicated by written Notice of Termination to the other party of this Agreement. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 14. Date of Termination. The "Date of Termination" shall mean (a) if the Executive's employment is terminated by his death, the date of this death, (b) if the Executive's employment is terminated pursuant to Paragraph 12.2 above, the date on which the Notice of Termination is given, (c) if the Executive's employment is terminated pursuant to Paragraph 12.3 above, the date specified in the Notice of Termination after the expiration of any cure periods and (d) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given after the expiration of any cure periods. 15. Compensation Upon Termination or During Disability (a) If the Executive's employment shall be terminated by reason of his death, the Company shall pay to such person as he shall designate in notice filed with the Company, or, if no such person shall be designated, to his estate as a lump sum death benefit, his full salary to the date of his death in addition to any payments the Executive's spouse, beneficiaries or estate may be entitled to receive pursuant to any pension or employee benefit plan or life insurance policy or similar plan or policy then maintained by the Company, and such payments shall , assuming the Company is in compliance with the provisions of this Agreement, fully discharge the Company's obligations with respect to this Agreement. (b) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, the Executive shall continue to receive his Base Salary until the Executive's employment is terminated pursuant to Paragraph 12.2 of this Agreement, or until the Executive terminates his employment pursuant to Paragraph -5- 12.4(b) of this Agreement, whichever first occurs, less, in each case, any disability payments otherwise payable by or pursuant to plans provided by the Company ("Disability Payments"). The Executive shall provide consulting services to the Company during the period that he is receiving payments pursuant to this Paragraph 15(b). (c) If the Executive's employment shall be terminated for Cause, the Company shall pay the Executive his Base Salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, and the Company shall, have no further obligation with respect to this Agreement. (d) If (A) in breach of this Agreement, the Company shall terminate the Executive's employment other than pursuant to Paragraphs 12.2 or 12.3 hereof (it being understood that a purported termination pursuant to Paragraphs 12.2 or 12.3 hereof which is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement), and/or (B) the Executive shall terminate his employment for Good Reason, then the Company shall pay to the Executive his Base Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and through the date of the expiration of the initial term of this Agreement payable in accordance with the Company's normal payroll policies in full satisfaction of the Company's obligation to the Executive hereunder. 16. Stock Options. Simultaneous with the execution hereof, the Company shall cause Natual Earth Technologies, Inc. ("NET") to issue to the Executive options to purchase up to 100,000 shares of NET's common stock at an exercise price equal to the closing price of the NET Common Stock on the date hereof; such options shall be exercisable as follows: 50,000 shares after the first anniversary of the date of this Agreement; up to 75,000 shares after the second anniversary of the date of this Agreement; up to 87,500 shares after the third anniversary of the date of this Agreement, and up to 100,000 shares after the fourth anniversary of the date of the Agreement. 17. Miscellaneous Provisions. 17.1 Execution in Counterparts. This Agreement may be executed by the parties in one or more counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. -6- 17.2 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given or made as of the date delivered or mailed if delivered personally or mailed by registered or certified mail, postage prepaid, return receipt requested, as follows: If to Company, to: c/o Natural Earth Technologies, Inc. 655 Montgomery Street San Francisco, California 94111 Attention: Robert Kassel Copy to: Tenzer, Greenblatt, Fallon & Kaplan 405 Lexington Avenue New York, New York 10174 Attention: Robert J. Mittman, Esq. If to Executive, to: 802 Wooded Crest Waco, Texas 76710 or to such other address as either party hereto shall have designated by like notice to the other party hereto (except that a notice of change of address shall only be effective upon receipt). 17.3 Amendments. This Agreement may only be amended by a written instrument executed by each of the parties hereto. 17.4 Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties hereto, oral and written, with respect to the subject matter hereof. 17.5 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 17.6 Binding Effect; Benefits. Employee may not delegate his duties or assign his rights hereunder. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. 17.7 Waiver, etc. The failure of either of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this -7- Agreement or any provision hereof or the right of either of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party against whom or which enforcement of such waiver is sought; and no waiver of any such breach shall be construed or deemed to be a waiver of any other or subsequent breach. 17.8 Records. Upon the termination of the Executive's employment for any reason whatsoever, all documents, records, notebooks and other materials which refer or relate to any aspect of the business of the Company or any of its parent, subsidiary or affiliated corporations, which are in the possession of the Executive including all copies thereof, shall be promptly returned to the Company. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. EASY GARDENER ACQUISITION CORP. By: /s/ Richard J. Raleigh ------------------------------ Name: Richard J. Raleigh Title: VP /s/ Richard M. Grandy -------------------------------- Richard M. Grandy -8- EX-10.11 3 MODIFICATION OF LEASE AGREEMENT Montgomery Washington Tower May 6, 1997 Mr. Robert Kassel Natural Earth Technologies dba US Home & Garden 655 Montgomery Street, Suite 830 San Francisco, California 94111 Dear Mr. Kassel: This letter shall serve to modify that Lease Agreement dated August 4, 1992 (which together with any amendments, modifications and extensions thereof is herein called the Lease) between Crow-Spieker #99 as Landlord and Natural Earth Technologies dba US Home & Garden. Premises Effective March 1, 1998 your premises shall become a portion of the 5th floor commonly known as Suite 500 as shown on Exhibit A, attached hereto. Tenant's proportionate share of the Premises shall be adjusted to 1.62%. Term The term for Suite 500 shall commence March 1, 1998 for a period of three (3) years until February 28, 2001. Rental The estimated monthly rental shall be as follows: Base Rent: $ 6,938.00 Operating Expenses: 3,337.00* ---------- Total Monthly Rental: $10,275.00 *based on 1997 operating expenses Natural Earth Technologies May 6, 1997 Page 2 If you agree with the above, please sign below and return both copies to the building management office. A fully executed copy will then be returned to you. This offer is valid until 5:00 p.m. Friday, May 9, 1997. Sincerely, /s/ Patrick J. Gilligan - ------------------------------- Patrick J. Gilligan Partner AGREED AND ACCEPTED: /s/ Robert Kassel 5/7/97 - ------------------------------- --------------- Robert Kassel Date Natural Earth Technologies dba US Home & Garden EX-10.12 4 LEASE AGREEMENT THIS LEASE AGREEMENT, made as of July 1, 1988, among ANNETTE FOX, LAKE POLAN, III, MARILYN JABLO, ROSILYN ROSS and LOIS ANNE POLAN, doing business as VALOP REALTY COMPANY, a partnership, hereinafter referred to as "Lessors", and INTERNATIONAL SPIKE, INC., a corporation created and existing under the laws of the Commonwealth of Kentucky, hereinafter referred to as "Lessee". WITNESSETH that for and in consideration of the rentals herein reserved and to be paid by Lessee to Lessors, and of the covenants and agreements herein contained and to be kept and performed by Lessee, Lessors do hereby lease and demise unto Lessee, for a term of ten years, beginning on the 1st day of July, 1988, and ending at midnight on June 30, 1998, all that certain piece or parcel of real estate situated in Paris, Bourbon County, Kentucky, as described in Exhibit A which is attached hereto and made a part hereof, together with all of the appurtenances thereto and the improvements thereon, but subject to the exceptions set forth in Exhibit 3, which is attached hereto and made a part hereof. The premises herein leased and demised are hereinafter sometimes referred to as the "demised premises." Lessee in consideration of said lease and demise, hereby accept the lease of the demised premises from Lessors for the term and period aforesaid upon the following covenants, agreements, term and conditions: I. RENTAL Lessee covenants and agrees to pay to Lessors for the demised premises as rent reserved under contract the sum of $1,200,000.00, payable in equal monthly installments of $10,000.00 each, beginning on the 1st day of July, 1988. II. POSSESSION Lessee has the right to quietly enjoy possession of the demised premises, subject to the terms and conditions contained herein. III. REPAIRS Lessee covenants and agrees that it will, at its own cost and expense, keep the demised premises, including the building to be constructed by Lessors upon the demised premises, in good repair at all times throughout the term of this lease and return the same in such good repair and condition to Lessors at the termination of this lease, reasonable wear and use excepted, and in no event shall any damage to said premises or lack of repair impose any burden upon Lessors whatsoever or affect or diminish the obligations of Lessee to pay the rental herein provided for and to keep and perform the covenants herein contained and to be kept and performed by Lessee. It is expressly provided, however, that in the event the demised premises shall be damaged or destroyed by fire or other casualty, the provisions of this article shall not apply but the provisions of Article XI hereof shall control. Beyond Lessee's hereinabove described duty to keep the demised premises in good repair. The Lessor shall make all repairs, changes, alterations, and additions which may be required by an laws, ordinances, orders, or regulations of any public authorities having jurisdiction over the leased property, except that the Lessee shall make all such repairs, changes, alterations and additions required because of any use made of the demised premises by Lessee peculiar to the use of Lessee. IV. ALTERATIONS (a) Lessors agree that at any time during the term of this lease, if Lessee is not in default of its obligations under this lease, Lessee shall have the right to make any and all improvements or alterations to the demised premises which it shall consider advisable; provided, however, that no such alterations shall lessen the value or weaken the structural integrity of the improvements now located upon the demised premises. (b) Before making any improvements or alterations, Lessee agrees that it will first submit to Lessors the plans and specifications covering the construction details of such proposed improvements or alterations, to the end that Lessors can determine and advise Lessee as to whether such improvements or alterations will lessen the value or weaken the structural integrity of the improvements now located upon the demised premises. Lessors shall notify Lessee in writing of their approval or disapproval of the proposed improvements or alterations within thirty (30) days from the date of receipt by them of the plans and specifications. In the event Lessors should disapprove of any such proposed improvements or alterations, the parties hereto shall jointly endeavor to agree on acceptable plans and specifications, and if the parties cannot agree within sixty (60) days following the receipt by Lessee of Lessor's written disapproval, the Lessee may submit the matter to arbitration before the American Arbitration Association and the decision of such arbitration shall be, and is hereby deemed to be, a condition precedent to litigation by either party. (c) In the event Lessee shall make any such improvements or alterations, it shall before undertaking such work, indemnify and [sic] laborer's liens with respect to the construction of such improvements and alterations by obtaining, at its own cost and expense, and delivering to Lessors a good and appropriate surety bond in a penal amount of not less than the anticipated construction cost. (d) All such alterations or improvements made by Lessee to the demised premises under the provisions of this article shall become a part of the realty and belong to Lessors, subject only to the terms of this lease, and Lessee shall not have the right to remove the same; provided, however, Lessee may at any time prior to or upon the termination of this lease remove from the demised premises all materials, machinery, equipment, and property used in its business conducted by Lessee thereon. V. USE OF PREMISES Lessee covenants and agrees that it will use the demised premises solely for the purposes of conducting a manufacturing operation and in conjunction therewith to make sales of manufactured products from the demised premises and to engage generally in other types of business normally associated with a manufacturing operation, including, but not limited to, warehousing. Lessee further covenants and agrees that it will not use said premises or any part thereof in an unlawful manner or for an unlawful purpose and that it will comply with all federal, state, and municipal laws, ordinances, and regulations with respect to said premises and the use thereof, and will save harmless Lessors from any penalty, damage, or charge imposed or incurred by the violation of any such law, ordinance, or regulation, whether occasioned by lessee or any agent, tenant, contractor or other person then [sic] authority to enter into this lease for the term herein granted and that the leased property may be used by lessee during the entire term for the purposes above set forth. VI. RIGHT OF INSPECTION Lessors, by and through their agent or agents, shall at all reasonable times during the term of this lease have the right to enter upon and inspect the demised premises for the purposes of determining whether or not the covenants, agreements, and obligations by Lessee herein made are being faithfully performed. VII. INSURANCE Lessee shall keep the improvements located upon the demised premises insured throughout the term of this lease against the following: 1. Loss or damage by fire and such other risks as may be included in the broadest form of extended coverage insurance from time to time available, in an amount not less than $650,000.00 which amount may be either increased or decreased upon sixty (60) days' written notice to Lessee from time to time to reflect an appraisal of the demised premises and all improvements thereon to be made by Industrial Appraisal Company or such other recognized appraisal company at the sole cost and expense of Lessors. Any appraisal made pursuant to this paragraph shall be made solely for the purposes of establishing the value of the demised premises and all improvements thereon for purposes of insurance. If Lessee takes exception to any said appraisal made on behalf of Lessors, and the parties cannot agree within thirty [sic] Lessee shall submit the matter to arbitration before the American Arbitration Association, and the decision of such arbitration shall be binding upon the parties. 2. Loss or damage by explosion of steam boilers or other similar apparatus now or hereafter installed in any building located upon the demised premises in such limits with respect to any one accident as may be reasonably requested from time to time by Lessors. Policies of insurance required to be maintained by Lessee as hereinabove provided shall be payable in the event of loss to Lessees and to Lessors, as their interests may appear or, if requested by Lessors, to Lessees, Lessors and their mortgagees as their interests may appear under a standard mortgage clause. All insurance required to be maintained by Lessee shall be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in the Commonwealth of Kentucky. At least thirty (30) days prior to the expiration of any policy of insurance Lessee is obligated to carry under this lease, Lessee shall furnish a binder to Lessors renewing each such policy. Each policy and/or binder shall provide for at least fifteen (15) days' notice to Lessors of any change or cancellation thereof. Lessee shall promptly deliver to Lessors a certification from the insurance carrier evidencing the renewal of the policy and the payment of premium. Notwithstanding any provision to the contrary herein, the Lessee may insure its interest in the leasehold improvements installed on the premises by the Lessee, and the Lessors shall have no claim for the proceeds of insurance payable to the Lessee for loss or damage sustained thereto. VIII. TAXES AND ASSESSMENT Lessee agrees to pay all state, county, municipal and school district taxes and all other assessments of any kind or character assessed against the demised premises with respect to all of the years of its tenancy as called for herein. Lessee covenants that it will, throughout the term of this lease, pay for all water, heating and gas, natural or artificial, electricity for all purposes, and every other service, commodity supplied to Lessee or used upon or in connection with the demised premises. During the final year of this lease taxes will be prorated. IX. DAMAGE OF DESTRUCTION OF PREMISES BY FIRE OR OTHER CASUALTY If, at any time during the term of this lease, the improvements upon the demised premises should be damaged or destroyed by fire or other casualty to an extent that the cost of rebuilding or repairing the same would be an amount in excess of fifty percent or more of the insurable value of such improvements at the time of such fire or other casualty, then either Lessors or Lessee shall have the right to cancel this lease by giving to the other five (5) days written notice thereof within thirty (30) days after the date of any such damage or destruction. If such right shall be exercised by either Lessors or Lessee, this lease shall terminate on the date specified in such notice, and all taxes, rents, and other charges shall be prorated and paid to the date specified in such notice of termination. If such right shall not be exercised by either Lessors or Lessee, this lease shall continue and Lessors shall, at their own expense, proceed promptly to rebuild. In the event the improvements upon the demised premises should be damaged by fire or other casualty at any time during the term of this lease, but not to the extent hereinabove in this article provided, Lessors shall forthwith, at their own expense, repair, replace and rebuild improvements. If any damage resulting from fire or other casualty shall be so extensive as to interfere with the conduct of Lessee's business upon he demised premises, there shall be a just and proportionate abatement of the rent until such time as such damage shall have been repaired. [sic] carriers, hereby waive any claim or subrogation agist Lessee arising as a result of any loss to the improvements upon the demised premises covered by a standard insurance policy or policies and arising by reason of fire or other casualty. X. INDEMNITY Lessee shall save harmless and indemnify Lessors from and against all loss, cost and expense, including attorneys fees, arising in any manner or under any circumstances through the exercise of any rights conferred hereby, including personal injuries sustained on the premises covered by this lease or on the sidewalks or alleys adjacent thereto. For the further protection of Lessors, Lessee covenants and agrees that, throughout the term of this lease, it will, at its sole expense, carry public liability insurance on the demised premises with a proper endorsement naming Lessors as additional insureds thereunder, which insurance shall be for no less than $500,000.00 for injury or death to any one person, $1,000,000.00 for any one occurrence and $100,000.00 for property damage. Lessee shall furnish to Lessors a certificate evidencing the above insurance. XI. WAIVER OF BREACH Each of the parties hereto covenants that any waiver by the other party of the keeping or performance of any covenant, agreement, or undertaking to be kept or performed in the manner and at the time herein provided shall not be construed as a waiver of any subsequent breach or failure to keep or perform that or any other covenant, agreement, or undertaking to be kept or performed, and any indulgence by the other party in enforcing or failing to enforce to tak advantage of any remedy herein provided for or to which it may be entitled at any time shall enforce the same at any other time. XII. QUIET POSSESSION Lessors covenant that, subject to the right of forfeiture and re-entry as hereinabove provided int he event of Lessee's failure to pay all rental and perform all covenants and agreements as herein set forth, Lessee shall have quiet possession of the demised premises during the term of this lease. XIII. FORFEITURE ON DEFAULT Lessee covenants that if at any time default should be made in the payment of any one or more of the payments of rental or in the payment of any other sum due under the terms hereof when and as such rentals or other sums shall be due and payable as herein provided and such default should continue for a period of ten days after written notice thereof by registered mail shall have been given Less by Lessors, or if Lessee should fail to keep or be guilty of breach of any one or more of the covenants or agreement by it herein made other than for the payment of rent or other sums of money as herein provided, and such failure or breach should continue for a period of thirty days after written notice by registered mail shall have been given to Lessee of such breach, or if Lessee should be adjudged a bankrupt or, because of Lessee' insolvency, a receiver should be appointed to take charge of its property or affairs and said receiver should not be discharged within four months, then, in any of these events, this lease shall, at the option of Lessors, become and be forthwith forfeited and terminated, and Lessors shall have the right at any time afterwards, without further notice or demand of any character whatsoever, to re-enter into or upon the demised premises or a part thereof in the name of the whole and repossess and enjoy the same as of their former estate. XIV. CONDEMNATION If the whole of the demised premises should be taken for public or quasi-public use by any public authority under the power of eminent domain or by private purchase in lieu thereof, then this lease shall automatically terminate as of the date that title shall be taken. In the event of such termination, Lessee shall be entitled to be paid by Lessors from the condemnation award an amount equal to the unamortized cost to Lessee of all leasehold improvements made by it during the term of this lease. The phrase "unamortized cost" as used herein shall mean the cost of such improvements during the period beginning on the date of the completion of such improvements and ending on the date of the taking computed in accordance with the method adopted by the Lessee for purposes of federal income taxes and evidenced by its federal income tax returns. No other claim shall be made by Lessee against Lessors with respect to any condemnation proceedings other than the claim herein specifically mentioned, it being the intention of the parties that all proceeds of condemnation, except the aforesaid claim of Lessee, shall be retained by Lessors. XV. ASSIGNMENT OR SUBLETTING This lease shall not be assigned or sublet by Lessee without the express written consent of Lessors, which consent shall not be unreasonably withheld. XVI. NOTICES Any notice which either Lessors or Lessee may desire to serve upon the other party may be served by mailing such notice by registered mail addressed as follows: To Lessors at P.O. Box 1700, Huntington, West Virginia 25717. All rents and other payments to be made hereunder shall be made to Lessors at the above address. Either party may change its mailing address by giving written notice of such change of address to the party by registered mail. IN WITNESS WHEREOF, Lessors have each hereunto set their hand and seal, Lessee has caused its corporate name to be hereunto signed and its corporate seal to be hereunto affixed by its proper officer thereunto duly authorized, and Optionees have each hereunto set their hand and seal, all as the day and date first above written. /s/ ANNETTE FOX (SEAL) ----------------------------- ANNETTE FOX /s/ LAKE POLAN, III (SEAL) ----------------------------- LAKE POLAN, III /s/ MARILYN JABLO (SEAL) ----------------------------- MARILYN JABLO /s/ ROSILYN ROSS (SEAL) ----------------------------- ROSILYN ROSS /s/ LOIS ANNE POLAN (SEAL) ----------------------------- LOIS ANNE POLAN INTERNATIONAL SPIKE, INC. (Corporate Seal) By /s/ JAMES R. MILLS (SEAL) -------------------------- Its Chief Operating Officer This instrument prepared by: _______________________________ Eugene R. Hoyer HOYER, HOYER & SMITH Capitol Street Charleston, WV 25501 EXHIBIT "A" CECIL C. HARP ENGINEERS 180 Market Street Lexington, Kentucky 40507 -------- Telephone November 30, 1973 LEGGETT AND MYERS INCORPORATED ON 17TH STREET, HANSLEY STREET, NORTH CLIFTON STREET EXTENDED AND BRENT STREET IN PARIS, BOURBON COUNTY, KENTUCKY All that tract or parcel of land situated in Paris, Bourbon County, Kentucky and more fully described and bounded as follows, to-wit: Beginning at a point in the southeast extremity of 17th Street, said point being marked by an iron pin 4 feet southwest of the southwest wall of the Bourbon (brick| Warehouse; thence parallel to and four feet from the aforesaid wall S 28(degrees) 52' E. 184.57 feet to an iron pin in the Louisville and Nashville Railroad West right-of-way; thence with said west right-of-way for two calls, S 30(degrees) 58' W 390.2 feet to an iron pin and S 31(degrees) 19' W 340.05 feet to an iron pin, corner to property owned by the Louisville and Nashville Railroad thence with the aforesaid railroad property for two calls, N 29(degrees) 15' W 136.85 feet to an iron pin and S 31(degrees) [sic] feet to an iron fence post corner to Lot [sic] of the Fairground Addition as recorded in Deed Book 89 Page 488 in the Bourbon County Clerk's Office; thence the line of the aforesaid Lot 14, N 55(degrees) 53' W 97.26 feet to an iron fence post in the southeast property line of Brent Street; thence with the property line of Brent Street for two calls, N 33(degrees) 42 1/2' W 121.73 feet to a corner of Lots 10 and 11 of the aforementioned Fairgrounds Addition; thence with the line of the aforementioned Lots 10 and 11, N 51(degrees) 43' E 150 feet; thence with the rear line of the aforementioned Lot 10, N 29(degrees) 15' W 11.53 feet to the fence on the southeast side of North Clifton Street Extended; thence with the aforementioned fence and its line extended N 51o 43' E 297.57 feet, thence N 29(degrees) 53 1/2' W 66.65 feet to a concrete nail in the paving where North Clifton Street Extended comes into Hansley Street; thence N 60(degrees) 01 1/2' E parallel to and thirty feet southeast of the southeast wall of the Paris (brick) Warehouse, now Central District Warehousing Corporation, 161.61 feet to an iron pin; thence N 30(degrees) 11' W parallel to and four feet northeast of the northeast wall of the aforementioned warehouse 115.21 feet to an iron pin thence N 63(degrees) 23' E 183.76 feet to the beginning and containing 4.316 acres. Exhibit B LEASEHOLD EXCEPTION There is excepted and reserved to Lessors, their heirs and assigns, from the demised premises as described in the lease to which this Exhibit is attached, the area outlined in red hereon with the rights appurtenant thereto, which include: 1. The existing boiler house, 2. The existing smokestack, 3. Three feet of land outside the exterior walls of the boiler house and smokestack, 4. A ten foot easement (to be located by Lessors so as not to interfere with Lessee's operations) from the existing boiler house to the property line for underground pipes and conduits, 5. Right of access to the area reserved, and 6. Necessary easements for utilities to the area reserved. Lessors shall have the right to remove the machinery and equipment from the existing boiler house and, as well, to demolish and remove the existing boiler house building and the existing smokestack. EX-10.16 5 FIRST AMENDMENT TO CREDIT AGREEMENT FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("First Amendment") dated as of April 3, 1997 by and among EASY GARDENER ACQUISITION CORP., a Delaware corporation, (the "Borrower") U.S. HOME & GARDEN INC., a Delaware corporation, ("Guarantor"), THE PROVIDENT BANK, an Ohio banking corporation ("Agent") and LASALLE NATIONAL BANK, ANTARES LEVERAGED CAPITAL CORP. and THE PROVIDENT BANK ("Lenders"). PRELIMINARY STATEMENT WHEREAS, Borrower, Agent and Lenders have entered into a Credit Agreement dated as of August 9, 1996, (the "Credit Agreement"); and WHEREAS, Borrower has requested Agent and Lenders to provide additional revolving credit loans to provide Borrower additional working capital to fund its operations; and WHEREAS, Borrower, Agent and Lenders now wish to amend the Credit Agreement in accordance with the terms and provisions hereof; NOW, THEREFORE, the parties hereto agree to supplement and amend the Credit Agreement upon such terms and conditions as follows: 1. Capitalized Terms. All capitalized terms used herein shall have the meanings assigned to them in the Credit Agreement unless the context hereof requires otherwise. Any definitions as capitalized terms set forth herein shall be deemed incorporated into the Credit Agreement as amended by this First Amendment. 2. Definitions; Exhibits; and Schedules; (a) The following definitions contained in Section 1.2 of the Credit Agreement are hereby amended in their entirety to read as follows: "Credit Commitment" means, in the context of more than one Lender hereunder, the maximum amount to be loaned by such Lender to Borrower as set forth on Schedule 1 hereto or as such Credit Commitment may be amended from time to time or as such is adjusted from time to time amended pursuant to Section hereof. "Revolving Credit Commitment" means Thirteen Million and 00/100 Dollars ($13,000,000.00) during the months of January and June through December and Sixteen Million and 00/100 Dollars ($16,000,000.00) during the months of February, March, April and May of each year. (b) Exhibit C of the Credit Agreement is hereby amended in its entirety by Exhibit C attached to this First Amendment. - 2 - 3. Reaffirmation of Covenants, Warranties and Representations. Borrower hereby agrees and covenants that all representations and warranties in the Credit Agreement, including without limitation all of those warranties and representations set forth in Article 4 are true and accurate as of the date hereof. Borrower further reaffirms all covenants in the Credit Agreement, and reaffirm each of the affirmative covenants set forth in Article 5 and negative covenants set forth in Article 6 thereof, as if fully set forth herein, except to the extent modified by this First Amendment. 4. Conditions Precedent to Closing of First Amendment. On or prior to the closing of the First Amendment (hereinafter the "First Amendment Closing Date"), each of the following conditions precedent shall have been satisfied: (a) Proof of Corporate Authority. Agent shall have received from Borrower copies, certified by a duly authorized officer to be true and complete on and as of the First Amendment Closing Date, of records of all action taken by Borrower to authorize (i) the execution and delivery of this First Amendment and all other certificates, documents and instruments to which it is or is to become a party as contemplated or required by this First Amendment, and (ii) its performance of all of its obligations under each of such documents. Agent shall have received from the Delaware Secretary of State a Certificate of Good Standing of recent date certifying the existence and good standing of Borrower and Guarantor under the laws of the State of Delaware and a good standing for Borrower in each state where Borrower is required to qualify to conduct business. (b) Documents. Each of the documents to be executed and delivered at the First Amendment Closing and all other certificates, documents and instruments to be executed in connection herewith shall have been duly and properly authorized, executed and delivered by Borrower and shall be in full force and effect on and as of the First Amendment Closing Date. (c) Legality of Transactions. No change in applicable law shall have occurred as a consequence of which it shall have become and continue to be unlawful (i) for Agent and each Lender to perform any of its agreements or obligations under any of the Loan Documents, or (ii) for Borrower to perform any of its agreements or obligations under any of the Loan Documents. (d) Performance, Etc. Except as set forth herein, Borrower shall have duly and properly performed, complied with and observed each of its covenants, agreements and obligations contained in each of the Loan Documents. Except as set forth herein, no event shall have occurred on or prior to the First Amendment Closing Date, and no condition shall exist on the First Amendment Closing Date, which constitutes a Default or an Event of Default. (e) Proceedings and Documents. All corporate, governmental and other proceedings in connection with the transactions contemplated on the First Amendment - 3 - Closing Date, including execution and delivery of amended and restated Revolving Credit Notes to each Lender in the amounts of their respective Credit Commitments, each of the other Loan Documents and all instruments and documents incidental thereto shall be in form and substance reasonably satisfactory to Agent. (f) Changes; None Adverse. Since the date of the most recent balance sheets of Borrower delivered to Provident, no changes shall have occurred in the assets, liabilities, financial condition, business, operations or prospects of Borrower which, individually or in the aggregate, are material to Borrower, and Provident shall have completed such review of the status of all current and pending legal issues as Agent shall deem necessary or appropriate. (g) Closing Fees. Agent shall have receive, for the benefit of Lenders in accordance with their Participation Percentages, their portion of the closing fee of $60,000 with respect to the amendment to the Revolving Credit Commitment. 5. Miscellaneous. (a) Borrower shall reimburse Agent for all fees and disbursements of legal counsel to Agent which shall have been incurred by Agent in connection with the preparation, negotiation, review, execution and delivery of this First Amendment and the handling of any other matters incidental hereto. (b) All of the terms, conditions and provisions of the Agreement not herein modified shall remain in full force and effect. In the event a term, condition or provision of the Agreement conflicts with a term, condition or provision of this First Amendment, the latter shall govern. (c) This First Amendment shall be governed by and shall be construed and interpreted in accordance with the laws of the State of Ohio. (d) This First Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. (e) This First Amendment may be executed in several counterparts, each of which shall constitute an original, but all which together shall constitute one and the same agreement. [Remainder of page intentionally left blank. Signature page follows.] - 4 - IN WITNESS WHEREOF, this First Amendment has been duly executed and delivered by or on behalf of each of the parties as of the day and in the year first above written. SIGNED IN THE PRESENCE OF: EASY GARDENER ACQUISITION CORP., Borrower /s/ By: /s/ Richard J. Raleigh - ------------------------------ ------------------------------ /s/ Lynda G. Gustafson Name: Richard J. Raleigh - ------------------------------ Title: Corporate Secretary U.S. HOME & GARDEN INC., Guarantor /s/ By: /s/ Richard J. Raleigh - ------------------------------ ------------------------------ /s/ Lynda G. Gustafson Name: Richard J. Raleigh - ------------------------------ Title: C.O.O. THE PROVIDENT BANK, Agent /s/ Joy E. Herald By: /s/ Nick Jevic - ------------------------------ ------------------------------ /s/ Leslie McHugh Name: Nick Jevic - ------------------------------ Title: Vice President THE PROVIDENT BANK, Lender /s/ Joy E. Herald By: /s/ Nick Jevic - ------------------------------ ------------------------------ /s/ Leslie McHugh Name: Nick Jevic - ------------------------------ Title: Vice President - 5 - LASALLE NATIONAL BANK, Lender /s/ Kelly [Whitney] By: /s/ Jeffrey D. Kadlic - ----------------------------- --------------------------------- Name: Jeffrey D. Kadlic Title: Commerical Lending Officer ANTARES LEVERAGED CAPITAL CORP., Lender /s/ Stephanie [Neal] By: /s/ Eric P. Hansen - ------------------------------ -------------------------------- Name: Eric P. Hansen Title: Director /s/ - ------------------------------ SCHEDULE 1 Lender Credit Commitment ------ ----------------- The Provident Bank Revolving Credit Commitment: Percentage: 37.254902% $5,960,784.32 Term Loan I Commitment: $8,568,627.46 Term Loan II Commitment: $838,235.30 LaSalle National Bank Revolving Credit Commitment: Percentage: 29.411765% $4,705,882.36 Term Loan I Commitment: $6,764,705.95 Term Loan II Commitment: $661,764.71 Antares Leveraged Capital Corp. Revolving Credit Commitment: Percentage: 33.333333% $5,333,333.32 Term Loan I Commitment: $7,666,666.59 Term Loan II Commitment: $749,999.99 EX-10.17 6 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT ("Second Amendment") dated as of May 9, 1997 by and among EASY GARDENER ACQUISITION CORP., a Delaware corporation, (the "Borrower") U.S. HOME & GARDEN INC., a Delaware corporation, ("Guarantor"), THE PROVIDENT BANK, an Ohio banking corporation ("Agent") and LASALLE NATIONAL BANK, ANTARES LEVERAGED CAPITAL CORP. and THE PROVIDENT BANK ("Lenders"). PRELIMINARY STATEMENT WHEREAS, Borrower, Agent and Lenders have entered into a Credit Agreement dated as of August 9, 1996, and by a First Amendment to Credit Agreement dated as of April 3, 1997 (the "Credit Agreement"); and WHEREAS, Borrower has requested Agent and Lenders to provide additional loans to fund the purchase by Borrower of the assets of Plasti-Chain; and WHEREAS, Borrower, Agent and Lenders now wish to amend the Credit Agreement in accordance with the terms and provisions hereof; NOW, THEREFORE, the parties hereto agree to supplement and amend the Credit Agreement upon such terms and conditions as follows: 1. Capitalized Terms. All capitalized terms used herein shall have the meanings assigned to them in the Credit Agreement unless the context hereof requires otherwise. Any definitions as capitalized terms set forth herein shall be deemed incorporated into the Credit Agreement as amended by this Second Amendment. 2. Definitions; Exhibits; and Schedules; (a) The following definitions contained in Section 1.2 of the Credit Agreement are hereby amended in their entirety to read as follows: "Borrowing Base" means the sum of (A) Fifty Percent (50%) of the cost or market value, whichever is lower, of Eligible Inventory, not to exceed Seven Million and 00/100 Dollars ($7,000,000.00), and (B) Eighty Percent (80%) of the outstanding amount of Eligible Accounts (excepting those Eligible Accounts which have a due date more than ninety (90) days but not more than one hundred fifty (150) days past the invoice date, with respect to which the advance rate shall be Fifty Percent (50%), not to exceed Four Million Dollars ($4,000,000.00)), less deductions for co-op advertising liability, customer rebate liabilities and the other deductions specified on the Borrowing Base Report. "Credit Commitment" means, in the context of more than one Lender hereunder, the maximum amount to be loaned by such Lender to Borrower as set forth on Schedule 1 hereto or as such Credit Commitment may be amended from - 2 - time to time or as such is adjusted from time to time amended pursuant to Section hereof. "Term Loans" means the Term Loan I, the Term Loan II and the Bridge Loan. "Term Notes" means the Term Notes I, the Term Notes II and the Bridge Notes. (b) Section 1.2 of the Credit Agreement is hereby amended to add the following definitions to read in their entirety as follows: "Bridge Loans" shall have the meaning set forth in Section 2.5A. "Bridge Notes" shall have the meaning set forth in Section 2.5A. "Make-Whole Amount" - means an amount equal to (i) the sum of the present values of the then remaining scheduled payments of principal and interest discounted at the Make-Whole Discount Rate, (ii) minus the sum of the outstanding principal amount and the amount of interest accrued on such principal since the immediately preceding scheduled payment date; provided, however, that in no event shall the Make-Whole Amount be less than zero. "Make-Whole Discount Rate" means, at any time, with respect to the principal amount of the Loan being prepaid, the per annum percentage rate (rounded to the nearest basis point) equal to (i) the arithmetic mean of the average annual yields to maturity for actively traded marketable United States Treasury fixed interest rate securities, adjusted to a rate equal to that reported for U.S. Government--Treasury Constant Maturity (as such term is calculated and defined in the then applicable Statistical Release H.15 published by the Federal Reserve Board) for the two calendar weeks ending on the Saturday next preceding the date of prepayment most nearly equal to the weighted average life to maturity of the outstanding remaining payments of principal. "Plasti-Chain Acquisition" means the acquisition by Borrower of substantially all the properties and assets of Plastic Molded Concepts, Inc., a Wisconsin corporation ("PMC") related to a product line of PMC commonly known as the Plastic-Chain product line, substantially on the terms and conditions of an Asset Purchase Agreement dated as of May 9, 1997 among Guarantor, Borrower and PMC. (c) The Credit Agreement is hereby amended to add a new Exhibit R to read in its entirety as Exhibit R to this Second Amendment. - 3 - (d) Schedule 4.9 of the Credit Agreement is hereby amended to add the Intellectual Property Matters listed on Schedule 4.9A to this Second Amendment. (e) Schedule 4.20 of the Credit Agreement is hereby amended to add the jurisdictions listed on Schedule 4.20A to this Second Amendment. 3. Bridge Loan Commitment and Terms. Article 2 of the Credit Agreement is hereby amended to add a new Section 2.5A to be inserted immediately preceding Section 2.6 to read in its entirety as follows: Section 2.5A Bridge Loan. (a) Commitment. Each Lender, severally and not jointly, subject to the terms and conditions of this Agreement, hereby agrees to make loans to Borrower in an amount equal to its Participation Percentage of the bridge loans of Three Million Eight Hundred Thousand and 00/100 Dollars ($3,800,000.00) ("Bridge Loan"). (b) Bridge Notes. The absolute and unconditional obligation of the Borrower to repay the principal of the Bridge Loans and the interest thereon shall be evidenced by promissory notes executed by the Borrower to each Lender in substantially the form of Exhibit R. In the event of an assignment under Section 10.17(a), Borrower shall issue new notes to reflect the new Credit Commitments of the assigning Lender and the assignee thereof. The Bridge Notes shall include the following terms: (i) Bridge Loan Maturity. Each Bridge Note shall be dated as of the Second Amendment Closing Date and shall mature and be due and payable in full on November 5, 1997. (ii) Interest Rate. Each Bridge Note shall bear interest (computed on the basis of the actual number of days elapsed over a 360-day year) on the daily outstanding principal balance thereunder at a rate per annum equal to Twelve percent (12%) per annum. No part of the Bridge Loan shall be eligible to become a Libor Rate Loan pursuant to Section 2.6. (iii) Interest Payment Dates. Interest on the Bridge Notes shall be payable monthly in arrears on the last Business Day of each month beginning May 31, 1997, for the account of Lenders in accordance with their respective Pro Rata Shares, and on the date a Bridge Loan is due (whether by maturity, acceleration or otherwise). 4. Prepayment of Bridge Loan. Section 2.9(b) of the Credit Agreement is hereby amended to add a new sentence at the end thereof to read as follows: "The Borrower shall have the right to prepay the principal of Bridge Loan in full at any time and in part from time to time upon notice to Lenders at least three (3) Business Days prior to the specified prepayment date and upon payment to - 4 - Lenders of the Make Whole Amount with respect to the Bridge Loan principal being prepaid." 5. Application of Funds. Section 2.11(f) of the Credit Agreement is hereby amended in its entirety to read as follows: "(f) Sixth, to the payment of any outstanding principal on the Bridge Loan, and then, if such payment is received in connection with a prepayment in full of the Term Loan I and a termination of the Revolving Credit Commitment, the payment of any outstanding principal of the Term Loan II Notes; and" 6. Use of Proceeds. Section 2.13 of the Credit Agreement is hereby amended to add a new sentence at the end thereof to read as follows: "The Borrower represents, warrants and covenants to the Agent and each Lender that all proceeds of the Bridge Loan shall be used by the Borrower solely for the purpose of financing all or a portion of the transactions contemplated by the Plasti-Chain Acquisition." 7. Additional Security for Loans. Section 3.3 of the Credit Agreement is hereby amended to delete the word "and" at the end of clause (c), to replace the "." at the end of clause (d) with "; and", to add a new clause (e) to read as follows: (e) each of the following documents with respect to the Plasti-Chain Acquisition: (i) a Collateral Assignment of Purchase Agreement; (ii) a Collateral Assignment of Management and Manufacturing Contracts; (iii) UCC-1 Financing statements for each of the jurisdictions set forth on Schedule 4.20A of the Second Amendment; and 8. EBITDA. Section 6.8 of the Credit Agreement is hereby amended in its entirety to read as follows: Section 6.8 EBITDA. Borrower shall not permit EBITDA for the Reference Period ending on each Computation Date set forth below to be less than the dollar amount set forth below opposite such date. - 5 - - -------------------------------------------------------------------------------- COMPUTATION DATE AMOUNT - -------------------------------------------------------------------------------- December 31, 1996 $1,400,000 - -------------------------------------------------------------------------------- March 31, 1997 6,700,000 - -------------------------------------------------------------------------------- June 30, 1997 11,500,000 - -------------------------------------------------------------------------------- September 30, 1997 12,000,000 - -------------------------------------------------------------------------------- December 31, 1997 12,000,000 - -------------------------------------------------------------------------------- March 31, 1998 13,500,000 - -------------------------------------------------------------------------------- June 30, 1998 14,250,000 September 30, 1998 December 31, 1998 March 31, 1999 - -------------------------------------------------------------------------------- June 30, 1999 16,000,000 September 30, 1999 December 31, 1999 March 31, 2000 - -------------------------------------------------------------------------------- June 30, 2000, and each Computation 17,000,000 Date thereafter - -------------------------------------------------------------------------------- 9. Fixed Charge Coverage. For purposes of calculating compliance with Section 6.9 of the Credit Agreement, for Reference Periods including any period during which the Bridge Loan is outstanding, the calculation of Fixed Charges shall be reduced by the outstanding balance of the Bridge Loan at such time. 10. Reaffirmation of Covenants, Warranties and Representations. Borrower hereby agrees and covenants that all representations and warranties in the Credit Agreement, including without limitation all of those warranties and representations set forth in Article 4 are true and accurate as of the date hereof. Borrower further reaffirms all covenants in the Credit Agreement, and reaffirm each of the affirmative covenants set forth in Article 5 and negative covenants set forth in Article 6 thereof, as if fully set forth herein, except to the extent modified by this Second Amendment. 11. Conditions Precedent to Closing of Second Amendment. On or prior to the closing of the Second Amendment (hereinafter the "Second Amendment Closing Date"), each of the following conditions precedent shall have been satisfied: (a) Proof of Corporate Authority. Agent shall have received from Borrower and Guarantor copies, certified by a duly authorized officer to be true and complete on and as of the Second Amendment Closing Date, of records of all action taken by Borrower to authorize (i) the execution and delivery of this Second Amendment and all - 6 - other certificates, documents and instruments to which it is or is to become a party as contemplated or required by this Second Amendment, and (ii) its performance of all of its obligations under each of such documents. (b) Documents. Each of the documents to be executed and delivered at the Second Amendment Closing and all other certificates, documents and instruments to be executed in connection herewith shall have been duly and properly authorized, executed and delivered by Borrower and shall be in full force and effect on and as of the Second Amendment Closing Date. (c) Legality of Transactions. No change in applicable law shall have occurred as a consequence of which it shall have become and continue to be unlawful (i) for Agent and each Lender to perform any of its agreements or obligations under any of the Loan Documents, or (ii) for Borrower to perform any of its agreements or obligations under any of the Loan Documents. (d) Performance, Etc. Except as set forth herein, Borrower shall have duly and properly performed, complied with and observed each of its covenants, agreements and obligations contained in each of the Loan Documents. Except as set forth herein, no event shall have occurred on or prior to the Second Amendment Closing Date, and no condition shall exist on the Second Amendment Closing Date, which constitutes a Default or an Event of Default. (e) Proceedings and Documents. All corporate, governmental and other proceedings in connection with the transactions contemplated on the Second Amendment Closing Date, including execution and delivery of a Bridge Note to each Lender in the amount of its respective Credit Commitments, each of the other Loan Documents and all instruments and documents incidental thereto shall be in form and substance reasonably satisfactory to Agent. (f) Changes; None Adverse. Since the date of the most recent balance sheets of Borrower delivered to Provident, no changes shall have occurred in the assets, liabilities, financial condition, business, operations or prospects of Borrower which, individually or in the aggregate, are material to Borrower, and Provident shall have completed such review of the status of all current and pending legal issues as Agent shall deem necessary or appropriate. (g) Closing Fees. Agent shall have receive, for the benefit of Lenders in accordance with their Participation Percentages, their portion of the closing fee of $84,000 with respect to the Bridge Loan. (h) Plasti-Chain Acquisition. Borrower shall have closed, or be prepared to close contemporaneously with the closing of this Second Amendment, the Plasti-Chain Acquisition on terms and conditions reasonably satisfactory to Agent. - 7 - 12. Miscellaneous. (a) Borrower shall reimburse Agent for all fees and disbursements of legal counsel to Agent which shall have been incurred by Agent in connection with the preparation, negotiation, review, execution and delivery of this Second Amendment and the handling of any other matters incidental hereto. (b) All of the terms, conditions and provisions of the Agreement not herein modified shall remain in full force and effect. In the event a term, condition or provision of the Agreement conflicts with a term, condition or provision of this Second Amendment, the latter shall govern. (c) This Second Amendment shall be governed by and shall be construed and interpreted in accordance with the laws of the State of Ohio. (d) This Second Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. (e) This Second Amendment may be executed in several counterparts, each of which shall constitute an original, but all which together shall constitute one and the same agreement. [Remainder of page intentionally left blank. Signature page follows.] - 8 - IN WITNESS WHEREOF, this Second Amendment has been duly executed and delivered by or on behalf of each of the parties as of the day and in the year first above written. SIGNED IN THE PRESENCE OF: EASY GARDENER ACQUISITION CORP., Borrower /s/ Kathleen Brown By: /s/ Richard J. Raleigh - -------------------------- ---------------------------- /s/ Lynda G. Gustafson Name: Richard J. Raleigh - -------------------------- Title: VP and Secretary U.S. HOME & GARDEN INC., Guarantor /s/ Kathleen Brown By: /s/ Richard J. Raleigh - -------------------------- ---------------------------- /s/ Lynda G. Gustafson Name: Richard J. Raleigh - -------------------------- Title: C.O.O. THE PROVIDENT BANK, Agent /s/ Joy E. Herald By: /s Nick Jevic - -------------------------- ---------------------------- /s/ Leslie McHugh Name: Nick Jevic - -------------------------- Title: VP THE PROVIDENT BANK, Lender /s/ Joy E. Herald By: /s/ Nick Jevic - -------------------------- ---------------------------- /s/ Leslie McHugh Name: Nick Jevic - -------------------------- Title: VP - 9 - LASALLE NATIONAL BANK, Lender By: /s/ Jeffrey D. Kadlic -------------------------------- Name: Jeffrey D. Kadlic Title: Commercial Lending Officer ANTARES LEVERAGED CAPITAL CORP., Lender By: /s/ Eric P. Hansen -------------------------------- Name: Eric P. Hansen Title: Director SCHEDULE 1 Lender Credit Commitment ------ ----------------- The Provident Bank Revolving Credit Commitment: Percentage: 37.254902% $5,960,784.32 Term Loan I Commitment: $8,568,627.46 Term Loan II Commitment: $838,235.30 Bridge Loan Commitment: $1,415,686.28 LaSalle National Bank Revolving Credit Commitment: Percentage: 29.411765% $4,705,882.40 Term Loan I Commitment: $6,764,705.95 Term Loan II Commitment: $661,764.71 Bridge Loan Commitment: $1,117,647.07 Antares Leveraged Capital Corp. Revolving Credit Commitment: Percentage: 33.333333% $5,333,333.28 Term Loan I Commitment: $7,666,666.59 Term Loan II Commitment: $749,999.99 Bridge Loan Commitment: $1,266,666.65 EX-10.18 7 THIRD AMENDMENT TO CREDIT AGREEMENT THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT ("Third Amendment") dated as of June 30, 1997 by and among EASY GARDENER ACQUISITION CORP., a Delaware corporation, (the "Borrower") U.S. HOME & GARDEN INC., a Delaware corporation, ("Guarantor"), THE PROVIDENT BANK, an Ohio banking corporation ("Agent") and LASALLE NATIONAL BANK, ANTARES LEVERAGED CAPITAL CORP. and THE PROVIDENT BANK ("Lenders"). PRELIMINARY STATEMENT WHEREAS, Borrower, Agent and Lenders have entered into a Credit Agreement dated as of August 9, 1996, as amended by a First Amendment to Credit Agreement dated as of April 3, 1997, and by a Second Amendment dated as of May 9, 1997 (the "Credit Agreement"); and WHEREAS, Borrower has requested Agent and Lenders to amend the restriction on lmitations on making loans and advances to officers and employees of Borrower; and WHEREAS, Borrower, Agent and Lenders now wish to amend the Credit Agreement in accordance with the terms and provisions hereof; NOW, THEREFORE, the parties hereto agree to supplement and amend the Credit Agreement upon such terms and conditions as follows: 1. Capitalized Terms. All capitalized terms used herein shall have the meanings assigned to them in the Credit Agreement unless the context hereof requires otherwise. Any definitions as capitalized terms set forth herein shall be deemed incorporated into the Credit Agreement as amended by this Third Amendment. 2. Loans to Employees. Section 6.16(a) of the Credit Agreement is hereby amended in its entirety to read as follows: "(a) extensions of trade credit, accounts receivable and loans and advances extended to employees, consultants and subcontractors in the ordinary course of business, provided that in the case of employees, such amounts in the case of Borrower shall not exceed $150,000 in the aggregate at any time outstanding, except as set forth on Schedule 6.16(a) , and such amounts in the case of Guarantor shall not exceed $850,000 in the aggregate at any time outstanding;" 3. Waiver Regarding Loans to Employees. The Lenders hereby waive the application of Sections 6.2(a)(i) and 6.16(a) of the Credit Agreement as it relates to the period prior to the date of this Third Amendment insofar as they relate to restrictions on loans and advances to - 2 - employees and officers. This waiver applies only to Sections 6.2(a)(i) and 6.16(a) of the Credit Agreement to the extent referenced herein and does not otherwise modify or waive any other covenant or agreement contained in the Credit Agreement. 4. Reaffirmation of Covenants, Warranties and Representations. Borrower hereby agrees and covenants that all representations and warranties in the Credit Agreement, including without limitation all of those warranties and representations set forth in Article 4 are true and accurate as of the date hereof. Borrower further reaffirms all covenants in the Credit Agreement, and reaffirm each of the affirmative covenants set forth in Article 5 and negative covenants set forth in Article 6 thereof, as if fully set forth herein, except to the extent modified by this Third Amendment. 5. Conditions Precedent to Closing of Third Amendment. On or prior to the closing of the Third Amendment (hereinafter the "Third Amendment Closing Date"), each of the following conditions precedent shall have been satisfied: (a) Documents. Each of the documents to be executed and delivered at the Third Amendment Closing and all other certificates, documents and instruments to be executed in connection herewith shall have been duly and properly authorized, executed and delivered by Borrower and shall be in full force and effect on and as of the Third Amendment Closing Date. (b) Legality of Transactions. No change in applicable law shall have occurred as a consequence of which it shall have become and continue to be unlawful (i) for Agent and each Lender to perform any of its agreements or obligations under any of the Loan Documents, or (ii) for Borrower to perform any of its agreements or obligations under any of the Loan Documents. (c) Changes; None Adverse. Since the date of the most recent balance sheets of Borrower delivered to Provident, no changes shall have occurred in the assets, liabilities, financial condition, business, operations or prospects of Borrower which, individually or in the aggregate, are material to Borrower, and Provident shall have completed such review of the status of all current and pending legal issues as Agent shall deem necessary or appropriate. 6. Miscellaneous. (a) Borrower shall reimburse Agent for all fees and disbursements of legal counsel to Agent which shall have been incurred by Agent in connection with the preparation, negotiation, review, execution and delivery of this Third Amendment and the handling of any other matters incidental hereto. (b) All of the terms, conditions and provisions of the Agreement not herein modified shall remain in full force and effect. In the event a term, condition or provision of the - 3 - Agreement conflicts with a term, condition or provision of this Third Amendment, the latter shall govern. (c) This Third Amendment shall be governed by and shall be construed and interpreted in accordance with the laws of the State of Ohio. (d) This Third Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. (e) This Third Amendment may be executed in several counterparts, each of which shall constitute an original, but all which together shall constitute one and the same agreement. [Remainder of page intentionally left blank. Signature page follows.] - 4 - IN WITNESS WHEREOF, this Third Amendment has been duly executed and delivered by or on behalf of each of the parties as of the day and in the year first above written. SIGNED IN THE PRESENCE OF: EASY GARDENER ACQUISITION CORP., Borrower /s/ Kathleen Brown By: /s/ Richard J. Raleigh - ------------------------- -------------------------- /s/ Bien Fernandez Name: Richard J. Raleigh - ------------------------- Title: Secretary & VP U.S. HOME & GARDEN INC., Guarantor /s/ Kathleen Brown By: /s/ Richard J. Raleigh - ------------------------- -------------------------- /s/ Bien Fernandez Name: Richard J. Raleigh - ------------------------- Title: COO THE PROVIDENT BANK, Agent /s/ Lisa A. Becker By: /s/ Nick Jevic - ------------------------- -------------------------- /s/ Shila B. Zeuni Name: Nick Jevic - ------------------------- Title: VP THE PROVIDENT BANK, Lender /s/ Lisa A. Becker By: /s/ Nick Jevic - ------------------------- -------------------------- /s/ Shila B. Zeuni Name: Nick Jevic - ------------------------- Title: VP - 5 - LASALLE NATIONAL BANK, Lender /s/ By: /s/ Jennifer Bailey - ------------------------- -------------------------- /s/ Rosemary Rodriquez Name: Jennifer Bailey - ------------------------- Title: Assistant Vice President ANTARES LEVERAGED CAPITAL CORP., Lender By: /s/ Eric P. Hansen - ------------------------- -------------------------- /s/ Stephanie [Neal] Name: Eric P. Hansen - ------------------------- Title: Director EX-10.20 8 LEASE OF WAREHOUSE Lease of Warehouse This Lease made and executed this 9th day of May, 1997, by and between SARAH C. LEER, hereinafter called "LESSOR", and WEATHERLY CONSUMER PRODUCTS, INC., hereinafter called "LESSEE". W I T N E S S E T H: The address of the Lessor for all purposes is: Sarah C. Leer, P.O. Box 606, Paris, Kentucky 40361. The address of the Lessee for all purposes is: Weatherly Consumer Products, Inc. c/o Easy Gardener, Inc. P.O. Box 21025, Waco, Texas 76702-1025. 1. The premises leased consist of all of the old Bourbon Warehouse located at Astro Street, Paris, Kentucky. 2. The term of this Lease shall be for one year from the date of execution, provided however, that Lessee shall have the option to terminate this Lease upon 60 days notice in writing to the Lessor. 3. The monthly rental for the premises shall be $5,416.66 per month payable to the Lessor at the address shown above on or about the 15th of each month. In the event that during the term of this Lease the ad valorem taxes and/or the cost of the premium for the present amount of insurance coverage should increase from time to time, then the rental shall be increased by such amounts as exceed 10% of the taxes and insurance at the time of execution of this Lease. Lessor shall give prompt written notice and full documentation of any such increase to the Lessee, and the rent shall thereafter be adjusted accordingly. 4. The Lessor shall maintain the roof of the premises in good order. The Lessee shall promptly notify the Lessor in writing of any defects or leaks which might develop in the roof. During the year 1995, 1/4 of the roof was replaced, and Lessor now agrees to replace the remaining 3/4ths of the roof, in equal parts in the years 1996, 1997 and 1998. The Lessee shall maintain the rest of the premises and keep them in good order; provided, however, that any damages or defects in the upper floor blacktop flooring which might occur, but which are not caused by Lessee's operation and use, shall be repaired by the Lessor. 5. The Lessee shall use the premises for the purpose of storage of plant food spikes and other consumer products and packaging and raw materials and production and material handling machinery and company files and records, and for no other purpose without the written consent of the Lessor. 6. The Lessee agrees to commit no waste on the premises and not permit a nuisance to be committed or to be maintained thereon and to return possession thereof at the termination of the Lease in the same condition as when possession was delivered to the Lessor, natural wear and tear excepted. 7. The Lessor shall have the right of entry on the leased premises at any time for the purpose of inspecting the same and for the further purposes of making any repairs thereto that the Lessor may desire so long as such action does not unreasonably interfere with the Lessee's use of the premises. Lessor will notify Lessee by phone prior to making such entry. 8. The Lessee covenants and agrees to keep the premises at all times in a clean and sanitary condition, not to permit waste or debris to accumulate. 9. The Lessee shall at its expense provide liability insurance covering the leased premises including all improvements, approaches, sidewalks, parking lots and grounds in at least the sum of $200,000.00 any one person and $500,000.00 any one accident and $50,000.00 property damage with both Lessor and Lessee as named insureds therein; and such insurance as it shall desire upon all its property located on the leased premises. 10. The Lessee shall, prior to termination of any term of this Lease remove all personal property of the Lessee. In the event Lessee so fails to remove personal property after termination of any term of the Lease, the Lessor may remove and store such, the Lessee to bear the costs of such removal and storage and the Lessor shall not be responsible to the Lessee for the loss or damage to such property caused by such removal and storage. 11. The Lessor assumes all property located in the premises to be that of the Lessee even though said property has been traded sold or given to a third party. 12. The Lessor shall not be responsible to the Lessee for any loss or damage to any of the property of the Lessee while situated on the leased premises unless such loss or damage is occasioned by the negligent acts of the Lessor, its agents or employees. 13. In the event the leased premises are destroyed or damaged by fire or other casualty without fault or negligence on Lessee's part or due to structural defect of the premises or defect in Lessor installed plumbing or electrical equipment to the extent -2- that they cannot be used by the Lessee for the intended purpose, the rent herein contemplated shall abate until the premises are restored to a usable condition by the Lessor. The Lessor or the Lessee in the event of such destruction or damage may, however, elect to terminate the Lease an the Lessor shall be under no obligation to the Lessee to so restore or rebuild. 14. Lessee shall pay all utilities. 15. The Lessee agrees in the event of condemnation of this building by city, county, state or Federal government or any of their agencies to comply with such condemnation procedures and release the Lessor of any and all obligations that might be remaining on this Lease. 16. The Lessee may sublease all or part of the premises or assign this Lease to another tenant with the express written approval of the Lessor. Such approval will be upon reasonable terms and will not be unreasonably withheld. /s/ SARAH C. LEER ---------------------------------- SARAH C. LEER WEATHERLY CONSUMER PRODUCTS, INC. By: /s/ Sheila B. Jones ------------------------------- Name: Sheila B. Jones Title: VP Operations Prepared By: /s/ Henry Prewitt\ - --------------------------- Henry Prewitt Attorney at Law P.O. Box 350 Paris, Kentucky 40362-0350 -3- EX-10.22 9 ASSET PURCHASE AGREEMENT PLASTIC MOLDED CONCEPTS, INC. ASSET PURCHASE AGREEMENT AGREEMENT, dated as of the 9th day of May 1997, by and among U.S. Home & Garden, Inc., a Delaware corporation (the "Company"), Easy Gardener Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Company (the "Buyer"), and Plastic Molded Concepts, Inc., a Wisconsin corporation ("PMC"). WHEREAS, PMC owns and distributes a series of products (the "Products") (as set forth more fully on Schedule 1.2 hereof) known as its Plasti-Chain product line; WHEREAS, PMC wishes to sell to Buyer, and Buyer wishes to purchase from PMC, as a going concern, the business and substantially all of the properties and assets of PMC related to the Plasti-Chain product line, as specifically described herein (the "Business"), all subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of and in reliance upon the mutual premises and the representations, warranties, covenants and conditions herein contained, the parties agree as follows: 1. Purchase and Sale Agreement. 1.1 Agreement of Purchase and Sale. Subject to the terms and conditions set forth in this Agreement and in reliance upon the representations, warranties, covenants and conditions herein contained, on the Closing Date (as defined in Subsection 2.1 hereof) PMC shall sell, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase from PMC the Purchased Assets (as defined in Section 1.2 hereof), free and clear of any and all liens, claims, charges or encumbrances of any nature whatsoever, other than those which are designated as a "Permitted Encumbrance" on Schedule 1.1 (the liens, claims, charges and encumbrances which are so designated being hereinafter collectively called the "Permitted Encumbrances"). 1.2 Purchased Assets. As used in this Agreement, the term "Purchased Assets" means those properties and assets related to the Plasti-Chain product line owned by PMC or otherwise employed, used or available for use in the Business, personal, tangible and intangible, as the same shall exist on the Closing Date, which are set forth on Schedule 1.2 hereof and all of the following as they relate to the Business: (i) goodwill; pending or executory contracts and commitments for the provision of services in connection with the Business, and other leases and pending or executory contracts and commitments of any nature relating to the Business; deferred charges, advance payments, prepaid expenses and deposits as set forth on Schedule 1.2; rights of offset and credits of all kinds; and rights under governmental and administrative licenses, permits and approvals, (ii) specifications, manuals and technical data, trade secrets, trademarks, tradenames, customer lists, discoveries, know-how, formulations and intangible rights necessary or desirable in connection with the manufacture, sale or distribution of the -2- Products (as hereinafter defined), (iii) purchase orders for customers of the Business, (iv) EDI addresses and telephone numbers, (v) files, books and records relating solely to any of the foregoing, (vi) the Purchased Receivables (as hereinafter defined) and (vii) all inventory of advertising materials related to the Products. The Purchased Assets shall not include, (i) cash, (ii) accounts receivable other than the Purchased Receivables or (iii) Inventory (as defined in paragraph 1.3 below) of the Business other than the Allocated Inventory (as described in Section 1.3 below). 1.3 Inventory. The "Inventory" shall mean all packaging, work in process, finished goods, and purchased components related to the Plasti-Chain product line as of May 6, 1997. The "Allocated Inventory" shall mean Inventory up to a maximum of Five Hundred Thousand Dollars ($500,000) value as identified on Schedule 1.2. For purposes of valuing the Allocated Inventory, all purchased component inventory and packaging material inventory shall be based on the invoice cost thereof and all finished goods inventory shall be valued at the internal cost paid by the Plasti-Chain division to PMC's plastics operation for such inventory. 1.4 Purchased Receivables. The "Purchased Receivables" shall mean the accounts receivable of the Business existing as of the Closing Date and reflected on PMC's books of account up to a maximum of Six Hundred Fifty Thousand Dollars ($650,000). The parties hereto acknowledge and agree that the accounts receivable purchased hereunder as part of the Purchased -3- Assets shall include only the accounts receivable of the Business set forth on Schedule 1.2 which are designated as Purchased Receivables. 1.5 Product Returns. Buyer and PMC acknowledge and agree that Buyer shall be responsible for the payment of all claims of customers for Products returned after the Closing Date, if any, regardless of when such Products were sold (the "Product Returns") provided, however, PMC shall be responsible for reimbursing the Buyer for certain Product returns in accordance with the following: (i) for those Products sold by PMC prior to the Closing Date which are returned in the normal course and the return of which has been approved by PMC, PMC shall pay to Buyer the cost of such returned Product based on retail price at which the returned Product was originally sold, and (ii) for those Products which are sold by Buyer after the Closing Date and provided by PMC to Buyer under the Manufacturing Agreement, PMC shall pay to Buyer the cost for all such Products returned as defective, provided PMC has approved such return, based on the price established in the Manufacturing Agreement for such returned Products. PMC agrees that it shall not unreasonably withhold or delay approval for any product returned in the normal course pursuant to clause (i), above, or returned as defective pursuant to clause (ii), above. 1.6 Assumed Liabilities. Subject to the terms and conditions set forth in this Agreement and in reliance upon the representations, warranties, covenants and conditions herein contained, on the Closing Date Buyer shall, in partial -4- consideration of the Purchased Assets, assume, and shall only assume (i) PMC's obligations under the pending and executory contracts which are included among the Purchased Assets, including, without limitation, open purchase orders for the purchase of Inventory items, but only to the extent that they represent obligations which are by their stated terms to be performed, in the ordinary course of business, subsequent to the Closing Date, (ii) all claims for (a) product liability related to Products that were sold after the Closing Date, and (b) product returns regardless of when sold, subject to PMC's obligations to Buyer with respect to such product returns as set forth in Section 1.5, above, (iii) such additional liabilities related to the Business as Buyer specifically elects to assume in writing (the liabilities and obligations referred to in the immediately preceding clauses (i), (ii) and (iii) being hereinafter collectively called the "Assumed Liabilities"). 1.6 Purchase Price. The purchase price for the Purchased Assets (the "Purchase Price") shall be the sum of the follow: (a) Three Million One Hundred Thousand Dollars ($3,100,000) for the fixed assets of the Business as set forth on Schedule 1.2; plus (b) an amount equal to the book value of the Purchased Receivables as set forth on Schedule 1.2 up to a maximum amount of $650,000; plus -5- (c) an amount equal to the value of the Allocated Inventory as determined in accordance with the provisions of Paragraph 1.3, above and as set forth in Schedule 1.2 up to a maximum amount of $500,000; plus (d) the amount of the prepaids, if any, set forth on Schedule 1.2 which are to be included in the Purchased Assets and transferred to Buyer as of the Closing Date. For the purposes of determining the Purchase Price, PMC shall deliver to Buyer an amended Schedule 1.2 dated as of the Closing Date setting forth the fixed assets, Purchased Receivables, Allocated Inventory and prepaids of the Business existing as of the Closing Date. The purchase price determined as of Closing pursuant to the provisions of this Section 1.6 shall be subject to adjustment after the Closing Date pursuant to the provisions of Section 4.12.1 and Section 8, below. 2. Closing. 2.1 Closing Date. The closing of the sale and purchase provided for herein (the "Closing") shall take place at 10:00 A.M., local time, at the offices of Godfrey & Kahn, S.C. on May 8, 1997, or at such other place, time and date as may hereafter be mutually agreed upon by the parties (such time and date of Closing being hereinafter called the "Closing Date"). -6- 2.2 Action by Buyer. Subject to the terms and conditions herein contained, on the Closing Date Buyer shall deliver to PMC (in addition to the documents and instruments to be delivered by it pursuant to Section 10 hereof), (i) an Assignment and Assumption Agreement substantially in the form of Exhibit A, attached hereto (the "Assignment and Assumption Agreement"), duly executed by Buyer, and (ii) a certified or official bank check, payable to the order of PMC, or a wire transfer in the amount of the Purchase Price. 2.3 Action by PMC. Subject to the terms and conditions herein contained, on the Closing Date PMC shall deliver to Buyer (in addition to the documents and instruments to be delivered by it pursuant to Section 11 hereof): (i) a duly executed Bill of Sale in substantially the form of Exhibit B attached hereto and made a part hereof; (ii) the Assignment and Assumption Agreement, duly executed by PMC; (iii) assignments for all trademarks and tradenames related to the Products, (iv) all third party consents and governmental and administrative approvals, as shall be, in the opinion of Buyer, reasonably necessary or appropriate in order to convey, transfer and assign to and vest in Buyer good and marketable right, title and interest in and to the Purchased Assets, free and clear of all liens, security interests, claims, charges and encumbrances of any nature whatsoever, except for the Permitted Encumbrances. 3. Additional Covenants. 3.1 Further Assurances. PMC, the Company and Buyer each agree that they shall from time to time after the -7- Closing Date, at each party's respective cost and expense, take any and all actions, and execute, acknowledge, deliver, file and/or record any and all documents and instruments, as Buyer or PMC may reasonably request in order to more fully perfect the rights which are intended to be granted to Buyer hereunder and in order to more effectively consummate the transactions contemplated by this Agreement and the documents delivered in connection herewith. 3.2 Consummation of Transaction. Each of the parties hereto hereby agrees to use its best efforts to cause all conditions precedent to its obligations and to the obligations of the other parties hereto to consummate the transactions contemplated hereby to be satisfied, including, but not limited to, using reasonable efforts to obtain all required consents, waivers, amendments, modifications, approvals, authorizations, novations and licenses; provided, however, that nothing herein contained shall be deemed to modify any of the absolute obligations imposed upon any of the parties hereto under this Agreement or any agreement executed and delivered pursuant hereto. 3.3 Cooperation. Each of the parties hereto hereby agrees to fully cooperate with the other party hereto in preparing and filing any notices, applications, reports and other instruments and documents which are required by, or which are desirable in the opinion of either of the parties hereto in respect of, any statute, rule, regulation or order of any -8- governmental or administrative body in connection with the transactions contemplated hereby. 3.4 Accuracy of Representations. Each party hereto agrees that prior to the Closing Date it will enter into no transaction and take no action, and will use its best efforts to prevent the occurrence of any event, which would result in any of its representations, warranties or covenants contained in this Agreement or in any agreement, document or instrument delivered pursuant hereto not to be true and correct, or not to be performed as contemplated, at and as of the time immediately after the occurrence of such transaction or event. 3.5 Conduct of Business Pending the Closing. Subject to the express provisions of this Agreement as to actions to be taken or not to be taken by PMC between the date hereof and the Closing Date, PMC hereby agrees that it shall, during the period commencing of the date hereof and ending on the Closing Date, conduct the Business in a normal manner in accordance with existing policies and practices and that it shall use normal and reasonable efforts to (i) preserve its business organization intact, (ii) maintain and preserve the Purchased Assets, (iii) retain its good will, and (iv) preserve its relationships with its clients and suppliers. 3.6 Management Agreement; Manufacturing Agreement. PMC, the Company and Buyer shall enter into a Management Agreement in the form attached hereto as Exhibit C (the "Management Agreement") and a Manufacturing Agreement in the -9- form attached hereto as Exhibit D (the "Manufacturing Agreement"). 3.7 Payment of Taxes Upon Transfer of Purchased Assets. Buyer shall be responsible for, and shall pay, any and all sales, transfer and similar taxes arising out of the transactions contemplated by this Agreement (the "Taxes"); provided, however, PMC shall pay all such Taxes to the extent that they exceed $1,000. 3.8 Survival of Representations and Warranties. Each of the parties hereto hereby agrees that all representations and warranties made by or on behalf of it in this Agreement or in any document or instrument delivered pursuant hereto shall survive the Closing Date and the consummation of the transactions contemplated until the later of (1) 90 days from the date the Company files its next Form 10K with the Securities and Exchange Commission or (ii) one year following the Closing Date, except for representations and warranties of PMC set forth in Section 5.5 below relating to title to the Purchased Assets, which shall survive for applicable statutes of limitation. 3.9 Books and Records. PMC shall, for a period of at least three years following the Closing Date, maintain and make available to Buyer and its representatives for inspection and reproduction, during regular business hours, all books and records relating to the Purchased Assets, the Business or the Assumed Liabilities which Buyer may reasonably require which are not included among the Purchased Assets and Buyer shall, for a period of three years following the Closing Date, or such longer -10- period as may be required by any governmental authority, maintain and make available to PMC and its representatives, for inspection and reproduction, during regular business hours, all books and records relating to the Business and included among the Purchased Assets. 3.10 Discharge of Liens. PMC shall cause all liens, claims, charges and encumbrances upon any of the Purchased Assets, other than the Permitted Encumbrances, to be terminated or otherwise discharged at or prior to the Closing. 3.11 Accounts Receivable. 3.11.1. Purchased Receivables. For a period of one hundred eighty (180) days immediately following the Closing Date (the "Collection Period"), Buyer shall use reasonable efforts to collect the Purchased Receivables; provided, however, that the Buyer shall not be obligated to retain the services of collection agencies or attorneys, commence legal action or take extraordinary efforts in connection with collection of the Purchased Receivables. Payments received with respect to the Purchased Receivables shall be applied to outstanding receivables in the order of the occurrence unless otherwise directed by the account debtor, in which event payment shall be applied as directed by the account debtor. On or before the 15th day of each calendar month following the Closing Date the Buyer shall provide PMC with a written update of the collection of the Purchased Receivables. Any amounts charged against the Purchased Receivables for returns, allowances or trade credits shall be deemed as amounts collected with respect -11- to such Purchased Receivables. Upon completion of the Collection Period, Buyer shall provide PMC with a statement of all collections made with respect to the Purchased Receivables and provide PMC with reasonable access upon reasonable notice to such records as PMC may reasonably request in order to verify collection of the Purchased Receivables by Buyer. In the event less than the aggregate amount of the Purchased Receivables set forth on Schedule 1.2 is collected by Buyer during the Collection Period, the parties agree that (i) the Purchase Price shall be reduced by the amount of such short fall, and (ii)the Buyer shall transfer to PMC the uncollected Purchased Receivables. If the Purchase Price is reduced pursuant to this Section 3.11.1, then subject to the provisions set forth below, PMC agrees that is shall pay Buyer the amount of such Purchase Price reduction within ten (10) days after the Collection Period. Any amounts received by the Buyer after the Collection Period with respect to the uncollected Purchased Receivables which have been transferred to PMC shall be immediately paid to PMC upon receipt by the Buyer. Notwithstanding any provision of this agreement to the contrary, as a condition to PMC's payment to Buyer for any Purchase Price reduction pursuant to this Section 3.11.1, with respect to those uncollected Purchased Receivables which are to be transferred to PMC, the Buyer shall (i) warrant to PMC that the Buyer has not sold or shipped any products to account debtors of such uncollected Purchased Receivables at any time when such account debtor's account was more than ninety (90) days past due, and (ii) covenant and agree that no product shall be sold or -12- shipped to such account debtor until such time as the uncollected Purchased Receivable is collected by PMC or otherwise settled by PMC. 3.11.2. Retained Receivables. The Buyer acknowledges that accounts receivable of the Business existing through as of the Closing Date other than the Purchased Receivables (the "Retained Receivables") are to be retained and collected solely by PMC after the Closing Date. In the event any of the Retained Receivables are more than ninety (90) days past due during the Collection Period, then, provided PMC has used reasonable efforts to collect such account consistent with past practices, the Buyer agrees that it shall, upon written notice from PMC (the "PMC Notice"), either (i) forestall all shipments or sales of goods to the account debtor of such uncollected Retained Receivable until such time as the Retained Receivable has been paid in full or otherwise settled by PMC, or (ii) purchase such uncollected Retained Receivable from PMC at the value thereof as reflected on PMC's books of account. The Buyer shall notify PMC within seven (7) days after the date of the PMC Notice as to which option under the foregoing clause (i) or clause (ii) above, Buyer has elected to exercise. If Buyer fails to notify PMC within such time of its elected option, the Buyer shall be deemed to have elected the option set forth in clause (i), above. If the Buyer elects to purchase any uncollected Retained Receivable pursuant to clause (ii), above, then (x) payment for such uncollected Retained Receivable shall be made by certified or cashier's check to PMC within ten (10) days of the -13- PMC Notice and simultaneously therewith such uncollected Retained Receivables shall be transferred to Buyer, (y) PMC shall provide access to such accounting records as the Buyer may reasonably request in order to verify the value of such uncollected Retained Receivable, and (z) any amounts received by PMC for such uncollected Retained Receivable after purchase by the Buyer shall be promptly paid to Buyer upon receipt by PMC. 3.12 Disclosure Schedules. The parties hereto agree that while the information set forth in the Disclosure Schedules hereto specifically refer to the paragraph of this Agreement to which the schedules and information is responsive, each such schedule and information shall be deemed to have been disclosed with respect to any other paragraph or section of this Agreement but only if such information appears on such Schedule in such form and detail that it is reasonably responsive to the information required on such other Schedule. All capitalized terms not otherwise defined in the Schedules shall have the meaning set forth in this Agreement for such terms. 4. Representations and Warranties as to PMC. PMC represents and warrants to Buyer as follows: 4.1 Organization, Standing and Power. PMC is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin, with full corporate power and authority to own, lease and operate its properties and to carry on its Business as presently conducted by it. There are no states or jurisdictions in which the conduct of the Business makes it necessary for PMC to qualify to do business as a foreign -14- corporation where the failure to so qualify would have a material adverse effect on the Business or the Purchased Assets. Copies of the Certificate of Incorporation of PMC and all amendments thereof, and of the By-laws of PMC, as amended to date, have been furnished to Buyer and are complete and correct. 4.2 Authority. The execution, delivery and performance by PMC of this Agreement and of all of the agreements to be executed and delivered by it pursuant hereto, the performance by it of its obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of PMC (including, but not limited to, the unanimous consent of its stockholders and Board of Directors) and PMC has all necessary power with respect thereto. This Agreement is, when executed and delivered by PMC (and each of the other agreements to be delivered by it pursuant hereto will be), the valid and binding obligation of PMC in accordance with its terms. 4.3 Noncontravention. Except as set forth on Schedule 4.3, neither the execution and delivery by PMC of this Agreement or of any agreement to be executed and delivered by it pursuant hereto, nor the consummation of any of the transactions contemplated hereby or thereby, nor the performance by it of any of its obligations hereunder or thereunder, will (nor with the giving of notice or the lapse of time or both would) (A) conflict with or result in a breach of any provision of the Certificate of Incorporation or By-laws of PMC, or (B) give rise to a default, -15- or any right of termination, cancellation or acceleration, or otherwise be in conflict with or result in a loss of contractual benefits to it under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation related and material to the Business to which it is a party or by which it or any of the Purchased Assets may be bound, or require any consent, approval or notice under the terms of any such document or instrument, or (C) to the best knowledge of PMC, violate any order, writ, injunction, decree, law, statute, rule or regulation of any court or governmental authority which is applicable to either the Business or any of the Purchased Assets, or (D) result in the creation or imposition of any lien, claim, restriction, charge or encumbrance upon any of the Purchased Assets, or (E) interfere with or otherwise adversely affect the ability of Buyer to carry on the Business after the Closing Date on substantially the same basis as is now conducted by PMC. 4.4 Transactions Since March 31, 1997. Except as otherwise set forth herein, since March 31, 1997, PMC has not entered into any commitment or transaction or experienced any event that is material to this Agreement or to any of the other agreements and documents executed or to be executed pursuant to this Agreement or to the transactions contemplated hereby or thereby, or that has affected, or should reasonably be expected to affect, materially and adversely, the operations, assets, liabilities, financial or other condition of the Business. PMC has not, with respect to the Business, since March 31, 1997: -16- (1) Incurred any liabilities or obligations, either accrued, absolute, contingent, or otherwise except: (i) To the extent specifically set forth in any of the schedules furnished to Buyer in connection herewith; and (ii) Those incurred in or as a result of the ordinary course of business of PMC as consistent with past practices. (2) Mortgaged, pledged or subjected to lien, or otherwise encumbered any of the Purchased Assets, tangible or intangible; (3) Sold, assigned or transferred any patents, trademarks, trade names, copyrights, licenses or other intangible assets related to the Business or the Purchased Assets; (4) Suffered any event or condition of any character materially and adversely affecting the Business; or (5) Altered, in any material way, the customer lists or price lists relating to the Business other than in the ordinary course of business; or (6) Waived any rights of substantial value or entered into any transactions not in the ordinary course of business. 4.5 Properties. Other than inventory in excess of the Allocated Inventory and accounts receivable in excess of -17- the Purchased Receivables, the Purchased Assets comprise all of the properties and assets used solely in the Business as of the Closing Date. Buyer acknowledges that there are certain assets of PMC used in the operation of the Business which are also used by PMC in its other business operations (the "Shared Assets") and that the Shared Assets are not included in the Purchased Assets. PMC has and is transferring to Buyer good and valid title to all of the Purchased Assets, free and clear of all mortgages, liens, pledges, charges or encumbrances of any nature whatsoever, except for the Permitted Encumbrances described on Schedule 1.1 and except for those mortgages, liens, pledges, charges or encumbrances which are described on Schedule 4.5 (all of which liens and encumbrances on the Purchased Assets listed on Schedule 4.5 shall be removed on or prior to the Closing). All machinery and equipment of the Business included as a Purchased Asset (including all tools, molds and dies) is in substantially good operating condition and repair, ordinary wear and tear accepted, and is suitable for the purposes for which it is used. 4.6 Inventory. The Allocated Inventory reflected on Schedule 1.2 consists of items of a quality and quantity usable or saleable in the ordinary course of business as previously conducted by PMC, except for obsolete materials, slow-moving items, materials of below standard quality and not readily marketable items, all of which have been written down to net realizable value or adequately reserved against on the books and records of PMC. -18- 4.7 Absence of Changes. Since March 31, 1997, there has not been (i) any material adverse change in the condition (financial or otherwise), assets, liabilities, business, prospects, or results of operations of the Business (including, without limitation, any such adverse change resulting from damage, destruction or other casualty loss, whether or not covered by insurance) or (ii) any waiver by PMC of any right, or cancellation of any debt or claim, of substantial value related to the Business. 4.8 Litigation. Other than as set forth in Schedule 4.8, there are no suits or actions, or administrative, arbitration or other proceedings or governmental investigations, pending or, to the best of the knowledge of PMC, threatened, against or relating to the Business or any of the Purchased Assets or relating to the manufacture, sale or distribution of any of the Products which, if finally determined against PMC, would have a material adverse affect on the Business or Purchased Assets. There are no judgments, orders, stipulations, injunctions, decrees or awards in effect which relate to the Business or any of the Purchased Assets, the effect of which is (A) to limit, restrict, regulate, enjoin or prohibit any aspect of the Business, or (B) otherwise materially adverse to the Business or any of the Purchased Assets. 4.9 No Violation of Law. To the best knowledge of PMC, PMC is not engaging in any activity or omitting to take any action as a result of which (A) it is in violation of any law, rule, regulation, zoning or other ordinance, statute, order, -19- injunction or decree, or any other requirement of any court or governmental or administrative body or agency, applicable to the Business or any of the Purchased Assets, including, but not limited to, those relating to: occupational safety and health; environmental and ecological protection (e.g., the use, storage, handling, transport or disposal of pollutants, contaminants or hazardous or toxic materials or wastes, and the exposure of persons thereto) and (B) the Business and/or any of the Purchased Assets have been or may be materially and adversely affected. 4.10 Insurance. Schedule 4.10 is a complete and correct list and summary description of all policies of insurance relating to any of the Purchased Assets or the Business in which PMC is an insured party, beneficiary or loss payable payee. Such policies are in full force and effect, all premiums due and payable with respect thereto have been paid, and no notice of cancellation or termination has been received by PMC with respect to any such policy. In the opinion of PMC, such policies cover risks normally insured against, and are in amounts normally carried, by companies engaged in businesses similar to that of the Business. 4.11 Certain Business Matters. Except as is set forth in Schedule 4.11, (A) PMC is not a party to or bound by any distributorship, dealership, sales agency, franchise or similar agreement which relates to the sale or distribution of any of the Purchased Assets or the Products of the Business, (B) with respect to the Business, PMC has no sole-source supplier of significant goods or services (other than utilities) with respect -20- to which practical alternative sources are not available on comparable terms and conditions, (C) there are no pending, or to the best of the knowledge of PMC threatened, labor negotiations, work stoppages or work slowdowns involving or affecting the Business, and (D) PMC is not a party to or bound by any agreement which limits its freedom to compete in any line of business or with any person, or which is otherwise materially burdensome to it. 4.12 Certain Contracts. Schedule 4.12 is a complete and correct list of all contracts, commitments, obligations and understandings which relate to the Business and which are not set forth in any other schedule delivered hereunder and to which PMC is a party or otherwise bound, except for each of those which (A) was made in the ordinary course of business, and (B) either (1) is terminable by PMC (and will be terminable by Buyer) without liability, expense or other obligation on 30 days' notice or less, or (2) may be anticipated to involve aggregate annual payments to or by PMC of $10,000 (or the equivalent) or more. Complete and correct copies of all contracts, commitments, obligations and undertakings set forth on any of the schedules delivered pursuant to this Agreement have been furnished or made available by PMC to Buyer, and except as expressly stated on the schedule on which they are set forth, (A) each of them is in full force and effect, and, to the best knowledge of PMC, no person or entity which is a party thereto or otherwise bound thereby is in default thereunder, and, to the best knowledge of PMC, no event, occurrence, condition or act -21- exists which does (or which with the giving of notice or the lapse of time or both would) give rise to a default or right of cancellation, acceleration or loss of contractual benefits thereunder; (B) to the best knowledge of PMC, there has been no threatened cancellations thereof, and there are no outstanding disputes thereunder; and (C) none of them is materially burdensome to the Business. 4.13 Approvals. Set forth on Schedule 4.13, is a complete and correct list of all governmental and administrative consents, permits, appointments, approvals, licenses, certificates and franchises which, to the best knowledge of PMC, are necessary for the operation of the Business, all of which have been obtained by PMC and are in full force and effect. 4.14 Customers and Suppliers. Set forth on Schedule 4.14, is a complete and correct list setting forth, with respect to the years ended December 31, 1995 and December 31, 1996, and the period ended March 31, 1997, (i) the ten (10) largest customers of the Business and the amount for which each such customer was invoiced and (ii) the ten (10) largest suppliers of the Business and the amount of goods and services purchased from each such supplier. To the best of the knowledge of PMC, (i) there has been no material adverse change in the business relationship between the Business and any such customer or supplier, and (ii) there is no reason to believe that said suppliers and customers will not continue their respective relationships with the Business after the Closing Date on substantially the same basis as now exists. -22- 4.15 Business Practices and Commitments. Set forth on Schedule 4.15 is a summary description of (i) PMC's rebate and volume discount practices and obligations with respect to the Business, (ii) PMC's allowance and customer return practices and obligations with respect to the Business, and (iii) PMC's warranty practices and obligations with respect to the Business. 4.16 Backlog. Set forth on Schedule 4.16 is the backlog of PMC with respect to the Business as at April 24, 1997. 4.17 Brokers. Except as set forth on Schedule 4.17, no agent, broker, person, or firm acting on behalf of PMC, or under its authority, is or will be entitled to a financial advisory fee, brokerage commission or other like payment in connection with any of the transactions contemplated hereby. 4.18 Information as to PMC. None of the representations or warranties made by PMC in this Agreement or in any agreement executed and delivered by or on behalf of any of them pursuant hereto are false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein contained not misleading. 5. Representations and Warranties as to the Company and Buyer. The Company and Buyer jointly and severally represent and warrant to PMC as follows: 5.1 Organization, Standing and Power. The Company and Buyer are each a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease -23- and operate its properties and to carry on its business as presently conducted by it. Copies of the Certificate of Incorporation of Buyer and all amendments thereto, and of the ByLaws of Buyer, as amended to date, have been furnished to PMC and are complete and correct. 5.2 Authority. The execution and delivery by the Company and Buyer of this Agreement and of each agreement to be executed and delivered by them pursuant hereto, the compliance by the Company and Buyer with the provisions hereof and thereof, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of the Company and Buyer, and the Company and Buyer have all necessary corporate power with respect thereto. This Agreement is, when executed and delivered by the Company and Buyer, and each other agreement to be executed and delivered by them pursuant hereto will be, the valid and binding obligation of each of the Company and Buyer in accordance with its terms. Neither the execution and delivery by the Company and Buyer of this Agreement or of any of the aforementioned other agreements, nor the consummation of the transactions contemplated hereby or thereby, nor the compliance by the Company and Buyer with the provisions hereof and thereof, will (nor with the giving of notice or the lapse of time or both, would) conflict with or result in a violation of any provision of the Certificates of Incorporation or By-laws of the Company or Buyer, or in the breach of any material agreement to which the Company or Buyer is a party or otherwise bound or violate any order, writ, -24- injunction, decree, law, statute, rule or regulation of any court or governmental authority which is applicable to either the Company or Buyer or interfere with or otherwise adversely affect the ability of the Company and Buyer to carry out the transactions contemplated by this Agreement. 6. Indemnification. 6.1 Indemnification by PMC. PMC hereby agrees to indemnify and hold the Company and Buyer harmless from and against any and all losses, obligations, deficiencies, liabilities, claims, damages, costs and expenses (including, without limitation, the amount of any settlement entered into pursuant hereto, and all reasonable legal and other expenses incurred in connection with the investigation, prosecution or defense of any matter indemnified pursuant hereto) which Buyer may sustain, suffer or incur and which arise out of, are caused by, relate to, or result or occur from or in connection with (i) the noncompliance with Wisconsin bulk transfer laws, (ii) the breach by PMC of any representation, warranty or covenant made by it in this Agreement or in any agreement or instrument executed and delivered pursuant hereto or (iii) any failure of PMC to pay or perform any liability or obligation of PMC other than the Assumed Liabilities. 6.2 Indemnification by the Company and Buyer. The Company and Buyer hereby agree jointly and severally to indemnify and hold PMC harmless from and against any and all losses, obligations, deficiencies, liabilities, claims, damages, costs and expenses (including, without limitation, the amount of -25- any settlement entered into pursuant hereto, and all reasonable legal and other expenses incurred in connection with the investigation, prosecution or defense of any matter indemnified pursuant hereto), which it may sustain, suffer or incur and which arise out of, are caused by, relate to, or result or occur from or in connection with (i) the failure of Buyer to pay or perform the Assumed Liabilities, or (ii) the breach by Buyer of any representation, warranty or covenant made by it in this Agreement or in any agreement or instrument executed and delivered pursuant hereto, including, without limitation, the Management Agreement, the Manufacturing Agreement and the Confidentiality Agreement. 6.3 Procedure Relative to Indemnification. (a) In the event that any party hereto shall claim that it is entitled to be indemnified pursuant to the terms of this Section 6, it (the "Claiming Party") shall so notify the party or parties against which the claim is made (the "Indemnifying Party") in writing of such claim within thirty (30) days after receipt of a notice of such claim or notice of any claim of a third party that may reasonably be expected to result in a claim by such party against the party to which such notice is given; provided, however, that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the Indemnifying Party shall have been actually prejudiced as a result of such failure. Such notice shall specify the breach of representation, warranty or agreement claim by the Claiming Party and the liability, loss, cost or expense incurred by, or imposed upon the Claiming Party -26- on account thereof. If such liability, loss, cost or expense is liquidated in amount, the notice shall so state and such amount shall be deemed the amount of the claim of the Claiming Party. If the amount is not liquidated, the notice shall so state and in such event a claim shall be deemed asserted against the Indemnifying Party on behalf of the Claiming Party, but no payment shall be made on account thereof until the amount of such claim is liquidated and the claim is finally determined; provided, however that the Indemnifying Party shall nonetheless bear the expenses of investigating, defending and negotiating such claim in accordance with the terms hereof. (b) The following provisions shall apply to any claim of the Claiming Party which is based upon (i) a suit, action or proceeding filed or instituted by any third party, or (ii) any form of proceeding or assessment instituted by any governmental entity: (i) The Indemnifying Party shall, upon receipt of such written notice and at its expense, defend such claim in its own name or, if necessary, in the name of the Claiming Party; provided, however, that if the proceeding involves a matter solely of concern to the Claiming Party in addition to the claim for which indemnification under Section 7 is being sought, such matter of sole concern shall be within the sole responsibility of the Claiming Party and its counsel. The Claiming Party will cooperate with and make available to the Indemnifying Party such assistance and materials as may be reasonably requested of it, and the Claiming Party shall have the -27- right, at its expense, to participate in the defense. The Indemnifying Party shall have the right to settle and compromise such claim only with the consent of the Claiming Party (which consent shall not be unreasonably withheld). (ii) In the event the Indemnifying Party shall notify the Claiming Party that it disputes any claim made by the Claiming Party and/or it shall fail to defend such claim actively and in good faith, then the Claiming Party shall have the right to conduct a defense against such claim and shall have the right to settle and compromise such claim upon ten (10) days prior notice to, and with the consent of, the Indemnifying Party, which consent shall not be unreasonably withheld. The Claiming Party shall be entitled to pursue each and every remedy available to it at law or in equity to enforce the indemnification provisions of this Section 6 and, in the event it is determined, or the Indemnifying Party agrees, that it is obligated to indemnify the Claiming Party for such claim, the Indemnifying Party agrees to pay all costs, expenses and fees, including all reasonable attorneys' fees which may be incurred by the Claiming Party in attempting to enforce indemnification under this Section 6, whether the same shall be enforced by suit or otherwise. 6.4 Limitations. Notwithstanding anything to the contrary contained herein, none of the parties hereto shall be required to make any indemnification payment pursuant to this Section 7 until such time as the total amount of all damages sustained, suffered or incurred by such party seeking -28- indemnification exceeds $50,000 in the aggregate, and if the total amount of such damages exceeds $50,000, then the indemnified party shall be entitled to be indemnified against and compensated and reimbursed for all of such damages in excess of $50,000; provided, however, that if any single claim is in excess of $25,000, the indemnified party shall be entitled to be indemnified against and compensated and reimbursed for all of such damages (provided that the aggregate of such claims equals or exceeds such $50,000 threshold), and provided, further that the maximum aggregate liability of any party hereunder shall in no event exceed $2,000,000. Notwithstanding anything contained herein to the contrary the $50,000 limitation described above shall not apply to claims by Buyer with respect to Buyer's failure to receive amounts due with respect to Purchased Receivables or PMC's failure to fulfill its obligations with respect to Product Returns or the failure to comply with Wisconsin bulk transfer laws. 7. Treatment of Indemnity Payments. Any indemnity payments made pursuant to Section 6 shall be treated as an adjustment to the Purchase Price. 8. Nondisclosure; Noncompete. PMC shall enter into a Confidentiality and Non-Compete Agreement with the Company and Buyer in the form attached hereto as Exhibit E, (the "Confidentiality Agreement"). 9. Right of Buyer to Abandon. Buyer shall have the right to terminate this Agreement and abandon the transactions contemplated hereby in the event that any of the following shall -29- not be true or shall not have occurred, as the case may be, as of the Closing Date: 9.1 Accuracy of Representations and Warranties. The representations and warranties of PMC contained in this Agreement or in any document, agreement or instrument delivered by it pursuant hereto shall have been true in all material respects when made, and, in addition, shall be true, in all material respects, on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. 9.2 Performance of Agreements. PMC shall have performed all material obligations and agreements, and complied, in all material respects, with all covenants and conditions, contained in this Agreement or in any document, agreement or instrument delivered by it pursuant hereto and required to be performed or complied with by it at or prior to the Closing Date. 9.3 Certificate. PMC shall have furnished Buyer with a certificate executed by its President, dated the Closing Date, to the effect that it has fulfilled the conditions specified in Subsections 9.1 and 9.2 above. 9.4 Opinion of Counsel for PMC. Buyer shall have received the opinion of Godfrey & Kahn, S.C., counsel for PMC, dated the Closing Date, in substantially the form of Exhibit F attached hereto and made a part hereof. 9.5 Litigation. No order of any court or administrative agency shall be in effect which restrains or prohibits the transactions contemplated hereby, and no suit, action, inquiry, investigation or proceeding in which it will be, -30- or it is, sought to restrain, prohibit or change the terms of or obtain damages or other material relief in connection with this Agreement or any of the transactions contemplated hereby shall have been instituted or threatened by any person or entity against the Company or Buyer. 9.6 Due Diligence Investigation. Buyer shall have been satisfied with the results of its "due diligence" investigation of PMC's relationship with its customers. 9.7 Financing. Buyer shall have consummated financing arrangements necessary to engage in the transactions set forth herein. 9.8 Consents and Approvals. All consents, waivers, approvals, licenses and authorizations by third parties and governmental and administrative authorities (and all amendments or modifications to existing agreements with third parties) required as a precondition to the performance by PMC of its obligations hereunder and under any agreement delivered pursuant hereto, or which in Buyer's reasonable judgment are necessary to continue unimpaired any rights in and to the Purchased Assets which could be impaired by the purchase and sale hereunder, shall have been duly obtained and shall be in full force and effect. 9.9 Manufacturing Agreement. PMC, the Company and Buyer shall have executed and delivered the Manufacturing Agreement. -31- 9.10 Management Agreement. PMC, the Company and Buyer shall have executed and delivered the Management Agreement in the form attached hereto as Exhibit D. 9.11 Confidentiality Agreement. PMC shall have executed and delivered the Confidentiality Agreement in the form attached hereto as Exhibit E. 9.12 Date of Consummation. The sale and purchase of the Purchased Assets pursuant hereto shall have been consummated on or prior to May 16, 1997. 9.13 Validity of Transactions. The validity of all transactions contemplated hereby, as well as the form and substance of all agreements, instruments, opinions, certificates and other documents delivered by PMC pursuant hereto, shall be reasonably satisfactory in all material respects to Buyer and its counsel. 10. Right of PMC to Abandon. PMC shall have the right to terminate this Agreement and abandon the transactions contemplated hereby in the event that any of the following shall not be true or shall not have occurred, as the case may be, as of the Closing Date: 10.1 Accuracy of Representations and Warranties. The representations and warranties of the Company and Buyer contained in this Agreement or in any document, agreement or instrument delivered by it pursuant hereto shall have been true when made, and, in addition, shall be true on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. -32- 10.2 Performance of Agreements. The Company and Buyer shall have performed all obligations and agreements, and complied with all covenants and conditions, contained in this Agreement or in any document, agreement or instrument delivered by them pursuant hereto and required to be performed or complied with by them at or prior to the Closing Date. 10.3 Certificate. The Company and Buyer shall have furnished PMC with certificates, executed by an executive officer at each of the Company and Buyer, as the case may be, dated the Closing Date, to the effect that each of them has fulfilled the conditions specified in Subsections 10.1 and 10.2 hereof. 10.4 Opinion of Counsel for Buyer. PMC shall have received an opinion of Tenzer Greenblatt LLP, counsel for Buyer, dated the Closing Date, in substantially the form of Exhibit G attached hereto and made a part hereof. 10.5 Manufacturing and Management Agreement. PMC, the Company and Buyer shall have executed and delivered the Manufacturing Agreement and the Management Agreement. 10.6 Litigation. No order of any court or administrative agency shall be in effect which restrains or prohibits the transactions contemplated hereby, and no suit, action, inquiry, investigation or proceeding in which it will be, or it is, sought to restrain, prohibit or change the terms of or obtain damages or other relief in connection with this Agreement or any of the transactions contemplated hereby, and which in the judgment of PMC makes it inadvisable to proceed with the -33- consummation of such transactions, shall have been instituted or threatened by any person or entity. 10.7 Consents and Approvals. All consents, waivers, approvals, licenses and authorizations by third parties and governmental and administrative authorities (and all amendments and modifications to existing agreements with third parties) required as a precondition to the performance by the Company and Buyer of its obligations hereunder shall have been duly obtained and shall be in full force and effect. 10.8 Date of Consummation. The sale and purchase of the Purchased Assets pursuant hereto shall have been consummated on or prior to May 16, 1997. 10.9 Validity of Transactions. The validity of all transactions contemplated hereby, as well as the form and substance of all agreements, instruments, opinions, certificates and other documents delivered by Buyer pursuant hereto, shall be satisfactory in all material respects to PMC and its counsel. 11. Miscellaneous Provisions. 11.1 Effect of Abandonment. In the event that this Agreement is terminated and the transactions contemplated hereby are abandoned pursuant to the terms hereof, this Agreement shall forthwith become wholly void and of no force and effect; provided, however, that nothing in this Agreement contained shall be deemed to relieve any party hereto from liability for any breach of this Agreement prior to termination. 11.2 Expenses. Except as otherwise provided in this Agreement, each of the parties hereto shall pay its own -34- costs and expenses in connection with this Agreement and the transactions contemplated hereby. 11.3 Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. 11.4 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given or made as of the date delivered or mailed if delivered personally or mailed by registered or certified mail, postage prepaid, return receipt requested, as follows: If to the Company, to: U.S. Home & Garden, Inc. 655 Montgomery Street - Suite 830 San Francisco, California 94111 Attn: Robert Kassel If to Buyer, to: Easy Gardener Acquisition Corp. 655 Montgomery Street - Suite 830 San Francisco, California 94111 Attn: Robert Kassel Copy to: Tenzer Greenblatt LLP 405 Lexington Avenue New York, New York 10174 Attn: Barry S. Rutcofsky, Esq. If to PMC, to: Plastic Molded Concepts, Inc. 111 Murphy Drive P.O. Box 490 Eagle, Wisconsin 53119 Attn: Larry K. Floyd -35- Copy to: Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202 Attn: Daniel Ryan, Esq. or to such other address as any party shall have designated by like notice to the other parties hereto (except that a notice of change of address shall only be effective upon receipt). 11.5 Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto. 11.6 Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 11.7 Applicable Law. This Agreement shall be governed by the laws of the State of Wisconsin applicable to contracts made and to be wholly performed therein. 11.8 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 11.9 Assignment. Prior to the Closing Date, neither this Agreement nor any rights, interests or obligations hereunder may be assigned (by operation of law or otherwise) by any party hereto without the prior written consent of all of the -36- parties hereto, except that this Agreement may be assigned to a wholly-owned subsidiary of Buyer without the need for such prior consent; provided, however, in no event shall such assignment relieve the Company or Buyer of any of such party's respective obligations hereunder. 11.10 Binding Effect; Benefits. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective legal representatives, successors and permitted assigns. Nothing herein contained, express or implied, is intended to confer upon any person other than the parties hereto and their respective legal representatives, successors and permitted assigns, any rights or remedies under or by reason of this Agreement. 11.11 Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach shall be construed or deemed to be a waiver of any other or subsequent breach. 11.12 Severability. Any provision of this Agreement which is held by a court of competent jurisdiction to -37- be prohibited or unenforceable in any jurisdiction(s) shall be, as to such jurisdiction(s), ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 11.13 Announcements. No party hereto shall issue any press release or otherwise divulge the existence of this Agreement or the transactions contemplated hereby without the prior approval of the other parties hereto, except as may be required by applicable law or the applicable rules or regulations of any stock exchange. 11.14 Schedules and Exhibits. The Schedules and Exhibits delivered pursuant to this Agreement are an integral part hereof. Notwithstanding any cross-references in the schedules (all of which are included as a matter of convenience only), each schedule shall be deemed to include the information contained in all other schedules such that reference to a matter or item under one schedule shall be deemed to constitute disclosure under all other schedules. Buyer acknowledges and agrees that PMC shall have the right to supplement, on or before the Closing Date, any schedule required by this Agreement; provided, however, that if any such supplement adversely affects the rights of Buyer hereunder, Buyer shall have the right to terminate this Agreement and abandon the transactions contemplated hereby. -38- IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. U.S. HOME & GARDEN, INC. By: /s/ Richard J. Raleigh ------------------------------------ Name: Richard J. Raleigh Title: C.O.O. EASY GARDENER ACQUISITION CORP. By: /s/ Richard J. Raleigh ------------------------------------ Name: Richard J. Raleigh Title: VP and Secretary PLASTIC MOLDED CONCEPTS, INC. By: /s/ Larry K. Floyd ------------------------------------ Name: Larry K. Floyd Title: President -39- EX-21 10 SUBSIDIARIES OF U.S. HOME & GARDEN INC. Exhibit 21 SUBSIDIARIES OF U.S. HOME & GARDEN INC. Name of Subsidiary State of Incorporation - ------------------ ---------------------- Easy Gardener, Inc. Delaware Emerald Products Corp. Delaware Golden West Agri-Products, Inc. California Weatherly Consumer Products Group, Inc.* Delaware Weatherly Consumer Products, Inc.+ Delaware - --------- * Subsidiary of Easy Gardener, Inc. + Subsidiary of Weatherly Consumer Products Group, Inc EX-23 11 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS U.S. Home & Garden Inc. San Francisco, California We hereby consent to the incorporation by reference in the Registration Nos. 33-82758, 33-89800, 33-94924 and 333-21667 on Form S-3 and 33-55020 on Form S-8 of U.S. Home & Garden Inc. of our report dated August 1, 1997, except for Note 15 which is as of September 15, 1997, relating to the consolidated financial statements and Schedule of U.S. Home & Garden Inc. appearing in this Annual Report on Form 10-K of U.S. Home & Garden Inc. for the year ended June 30, 1997. /s/ BDO Seidman, LLP -------------------- BDO SEIDMAN, LLP San Francisco, California September 29, 1997 EX-27 12 ART. 5 FDS FOR 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K AT JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUN-30-1997 JUN-30-1997 2,083,000 0 11,856,000 314,000 5,254,000 19,746,000 3,158,000 843,000 68,475,000 17,454,000 17,570,000 0 0 14,000 31,912,000 68,475,000 52,046,000 52,046,000 23,649,000 23,649,000 0 0 3,338,000 7,390,000 3,200,000 4,190,000 0 1,007,000 0 3,183,000 .20 .20
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