-----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, MBesp0n32RuOmE3t31qLvgOFtRqkYl3LzYIO9PwFBD/ikvH+7NyIQymfEph1t6zf fXKDD8sz13rCtuE9M6tjfQ== 0000891554-98-001231.txt : 20030213 0000891554-98-001231.hdr.sgml : 20030213 19980929172455 ACCESSION NUMBER: 0000891554-98-001231 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980929 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: 1934 Act SEC FILE NUMBER: 000-19899 FILM NUMBER: 98717752 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 UNITED STATES 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, 1998 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 (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 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. [ ] The aggregate market value of the Common Stock held by non-affiliates of the registrant (based upon the closing sale price) on September 21, 1998 was approximately $90,390,000. As of September 21, 1998, 20,842,615 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 known and unknown risks and uncertainties that could significantly affect actual results, performance or achievements of the Company in the future and, accordingly, such actual results, performance or achievements may materially differ from those expressed or implied in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to the Company's growth strategy, customer concentration, outstanding indebtedness, dependence on weather conditions, seasonality, expansion and other activities of competitors, changes in federal or state environmental laws and the administration of such laws, protection of trademarks and other proprietary rights, and the general condition of the economy and its effect on the securities markets and other risks detailed in the Company's other filings with the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made. 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, weed trimmer replacement heads, shade cloth and root feeders, which are sold under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald Edge(R), Weed Wizard(R), Shade Fabric(TM), Ross(R), Tensar(R) and Landmaster(R). The Company believes that it has significant market share and favorable brand-name recognition in several of its primary product categories. The Company markets its products through most large national home improvement and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Builder's Square, Wal-Mart and Home Base. The Company 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 3 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 products operations are conducted through its subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context suggests otherwise, 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, Suite 500, San Francisco, California 94111, and its telephone number is (415) 616-8111. Lawn and Garden Industry Historically, the lawn and garden industry was comprised of relatively small regional manufacturers and distributors whose products were sold to consumers primarily through local nurseries and garden centers. As the industry has grown, national home improvement and mass merchant retailers have replaced many of these local garden centers as the primary retail source for lawn and garden products. In an effort to improve operating margins and reduce the number of vendors needed to source high volume lawn and garden products, the preference among home improvement and mass merchant retailers has shifted towards single source suppliers that offer broad product lines of consumer brand-name merchandise and the product support necessary to stimulate consumer demand and ensure timely and cost effective order fulfillment. Smaller regional suppliers generally lack the capital and other resources necessary to offer the variety and number of product lines, the product support and the inventory stocking and tracking capabilities required by home improvement and mass merchant retailers. According to the 1996-1997 National Gardening Survey, 1996 retail sales of lawn and garden products were approximately $22 billion, and 64% of the approximately 101 million households in the United States participated in some form of gardening activity during 1996. In addition, sales growth in the lawn and garden industry is being driven in part by the aging of the "baby boomer" consumer segment. According to the National Gardening Survey, persons 50 years of age and older spent an average of $400 per household on lawn and garden activities in 1996. Prior and Proposed Acquisitions. Since August 1992, the Company has consummated the following eight (8) acquisitions of companies or product lines for a total of over $80 million in consideration: o Golden West Chemical Distributors, Inc. A manufacturer of humic acid-based products designed to improve crop yield, which was acquired in August 1992 for approximately $1.1 million in cash and $1.1 million in promissory notes. 4 o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping products including WeedBlock(R), which was acquired in September 1994 for approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million promissory note and two convertible notes each in the principal amount of $1.0 million. Approximately $2.2 million of additional purchase price was contingent on Easy Gardener meeting certain income requirements. These contingencies have been met and the Company has paid the entire $2.2 million. o Emerald Products LLC. A manufacturer of decorative landscape edging which was acquired in August 1995 for $835,000 in cash and a $100,000 promissory note. o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of fertilizer spikes and other lawn and garden products, which was acquired in August 1996 for 1,000,000 shares of Common Stock valued at $3.0 million and approximately $22.9 million in cash. o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of plastic chain links and decorative edgings, which was acquired from Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash. o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer replacement heads, which was acquired in February 1998 for approximately $16.0 million, of which approximately $5.0 million was based on the value of certain net assets acquired. o Landmaster Products, Inc. A manufacturer and distributor of polyspun landscape fabrics for use by consumers and professional landscapers, substantially all of whose assets were acquired in March 1998 for approximately $3.0 million, of which approximately $750,000 was based on the value of certain assets acquired. o Tensar(R) consumer products line of The Tensar Corporation. A line of lawn and garden specialty fencing, which was acquired from The Tensar Corporation in May 1998 for approximately $5.4 million in cash. In addition, in August 1998 the Company entered into a non-binding letter of intent to acquire Ampro Industries, Inc., a manufacture and distributor of lawn and garden products including specialty grass and flower seeds. The anticipated purchase price is approximately $25 million with a potential additional purchase price amount contingent upon future operating cash flow. 5 Products Landscape Fabric. The Company markets different types of landscape fabric in varying thicknesses and strengths under the trade names WeedBlock(R), WeedBlock 6(TM), MicroPore(R), Pro WeedBlock(TM), Weedshield(TM) and Landmaster(R). Landscape fabrics allow water, nutrients and oxygen to filter through to the soil but prevent weed growth by blocking sunlight. 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, 1996, 1997 and 1998, sales of landscape fabric represented approximately 69%, 44% and 36%, respectively, of the Company's net sales. Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver plant food nutrients directly to the root of the plant, an alternative method of maintaining plant health to surface-delivered liquid or solid fertilizers. Some of the Company's fertilizer spikes have the added feature of containing an insecticide for the control of unwanted insects. The Company markets a variety of indoor and outdoor specialty fertilizer and plant food spikes primarily under the Jobe's(R)tradename, one of the most recognized brands in the consumer lawn and garden industry. For the years ended June 30, 1997 and 1998, sales of fertilizer, plant food and insecticide spikes constituted approximately 24% and 20%, respectively, of the Company's net sales. Landscape Edging. The Company markets a variety of resin-based decorative landscape edgings under trade names including Emerald Edge and Terra Cotta Tiles (TM). The Company's decorative edgings are used by consumers to define the perimeter of planting areas with a variety of designs which include stone, log, terra cotta tiles and picket fences. Shade Cloth. The Company markets shade cloth fabrics in a variety of sizes and colors. Shade cloth is utilized generally in conjunction with some type of outdoor structure such as a patio veranda, and provides shade, privacy 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. The Company is currently discussing with the manufacturer a possible one year extension of the distributorship arrangement. Fertilizers and Root Feeders. The Company markets fertilizers under the Ross trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a long steel irrigation tube with hose connector that is inserted deep into the ground, provides the homeowner with a means of deep feeding and 6 irrigating trees and shrubs. The Ross Root Feeder may also be used without fertilizer as a deep watering device. Weed Trimmer Replacement Heads. The Company manufactures and distributes replacement heads for string weed trimmer products under the Weed Wizard trademark. The Company's weed trimmer replacement head products consist of a replacement casing containing either a chain link for heavy duty use or a plastic blade for routine weed and grass trimming. The products are part of a multi fit system offered by the Company, which allows the replacement heads to fit on virtually all consumer gas weed trimmers and most consumer electric weed trimmers. Lawn and Garden Fencing. The Company markets resin based fencing for lawns and gardens. A variety of fencing products are marketed by the Company and are used by the consumer for numerous applications including preventing animals from entering a garden or orchard. Other Products. In addition to landscape fabrics, fertilizer, plant food and insecticide spikes, landscape edging, shade cloth, fertilizer and root feeders, weed trimmer replacement heads and lawn and garden fencing, the Company also sells complementary lawn and garden products for the home gardener. The products include a line of animal repellents that are formulated to deter dogs, cats, deer and rabbits from destroying garden and landscape environs, a variety of protective plant and tree covers, bird and animal mesh blocks, protective garden and tree netting to prevent animal damage, synthetic mulch and fabric pegs. Agricultural Products. The Company, through Golden West, manufactures and distributes certain humic acid-based agricultural products for use on farms and orchards. Golden West generally sells its products to agricultural distributors, which in turn market Golden West's products to farms and orchards. The principal agricultural products manufactured or distributed by the Company are: Energizer(R), a formulation of humic acids which, when applied in conjunction with liquid fertilizers, permits crops to absorb a greater amount of the nutrients in the fertilizer; Penox(R), a surfactant, or penetrating wetting agent, that contains humic acid which, when applied in conjunction with herbicides, defoliants and other agricultural products, increases their effectiveness; and Powergizer(R), a foliar nutrient, or plant food, containing humic acid which promotes growth and vigor in many types of crops. Sales of the Company's agricultural products accounted for less than 2% of the Company's net sales in fiscal 1998. 7 Conversion, Manufacturing and Supply Lawn and Garden Products Except for the materials for WeedBlock, which are obtained from a single source, the basic materials for the Company's lawn and garden products are purchased from a variety of suppliers. All of such materials are converted, packaged and shipped by the Company from either its Waco, Texas facility or its Paris, Kentucky facility, its Dahlonega, Georgia facility or at a facility located in Englewood, Colorado. The Company purchases all of the landscape fabric used to manufacture WeedBlock 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 sizes, cuts and packages the fabric for consumer sale. Although the Company has purchased all of its supply from Tredegar for over 10 years and believes that its relationship with Tredegar is good, Tredegar is free to terminate its relationship with the Company at any time and accordingly could market its fabrics to other companies, including competitors of the Company. Nevertheless, the Company owns the registered trademark "WeedBlock(R)" and to the extent that it establishes alternative supply arrangements, its rights to market products under the WeedBlock brand name would continue without restriction. The Company manufactures and packages its Jobe's fertilizer spikes at its Paris, Kentucky facility. The raw materials that comprise the Company's indoor fertilizer spikes are mixed with a binding agent and then passed through an extrusion process which feeds a continuous strand of fertilizer through a heat-drying system. The strand is then cut into ready-to-use fertilizer spikes which are then machine counted and packaged 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. The specifications for the Company's landscape edging, shade cloth and root feeder products and packaging are designed by the Company and independent design consultants. The products are then manufactured and packaged by third party manufacturers according to the Company's specifications. The nylon product body (rotary head) and the plastic blades and the chain links used in the Company's weed trimmer replacement heads are manufactured for the Company pursuant to open purchase orders. The Company assembles and packages the 8 weed trimmer replacement heads with the aid of an electronic packaging machine. The Company purchases all of the material used to manufacture its resin based fencing from The Tensar Company pursuant to an agreement that expires in May 2000. The material is then sized and cut for consumer sale at the Company's Waco, Texas facility. 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, 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. Customers The Company's customers include home improvement centers, mass merchandisers, hardware stores, nurseries, and garden centers and other retail channels throughout the United States. The Company's three largest customers for fiscal 1998, Home Depot, Lowes and Kmart, accounted for approximately 26%, 11% and 7%, respectively of its net sales during such year. During fiscal 1997, Home Depot, Lowes and K-Mart, accounted for approximately 26%, 10% and 7%, respectively, of the Company's net sales. During fiscal 1996, Home Depot, Lowe's, Kmart and Builder's Square accounted for 27%, 9%, 7% and 5%, respectively, of the Company's net sales. The Company's ten largest customers as a group accounted for 65% and 63% of its net sales during fiscal 1997 and 1998, respectively. Sales to such customers are not governed by any contractual arrangement and are made pursuant to standard purchase orders. While the Company believes that relations with its largest customers are good, the loss of any of these customers could have an adverse effect upon the results of operations of the Company. The Company's sales are concentrated in the United States, with international sales (primarily in Europe and Canada) accounting for approximately 4.0% of the Company's net sales for fiscal 1998. The Company is currently attempting to develop relationships with distributors outside of the United States. Sales and Marketing The Company's sales efforts are coordinated by its national sales manager, whose duties include overseeing key accounts and 9 directing the activities of the Company's eight regional sales managers. Because of the service oriented nature of the Company's business, the national and regional sales managers devote a substantial amount of their time to servicing and maintaining relationships with the Company's largest customers in addition to managing the overall sales operations. The Company also utilizes the services of over 40 non-exclusive independent sales organizations, on a commission basis, who are responsible primarily for sales to customers not serviced regularly by the regional sales managers. Sales of the Company's agricultural products are coordinated primarily by two full-time employees who are compensated on a salary plus commission basis. The Company's marketing activities are coordinated by its marketing manager. The marketing manager designs and develops the Company's distinctive packaging and point-of-sale displays and oversees, among other things, the Company's advertising campaigns, which are created and placed by advertising and public relations firms. The Company expects that its lawn and garden products will continue to be marketed by retailers primarily through the use of special displays and in-store consumer promotions in Retail Accounts, hardware stores, nurseries and garden centers. In addition, the Company believes that a substantial portion of lawn and garden sales are impulse driven and not overly price sensitive. Therefore, the Company seeks to increase consumer awareness, understanding and brand identification of its products through its distinctive packaging and point-of-sale displays. Retail Accounts and the Company's other customers receive the Company's products in packaging that is easily displayed. The retail product packaging is informative to the end-user and incorporates attention getting, eye-pleasing color schemes. The Company also tailors its displays to the evolving needs of retailers. Because many home improvement and mass merchant retailers maintain outdoor sales areas for their lawn and garden products, the Company utilizes waterproof displays for many of its products. In addition, the Company meets the specific needs of many of its larger customers by tailoring the size of its displays to the dimensions requested by such customers. The Company's independent sales representatives periodically visit individual retail outlets to 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 1998 the Company focused its advertising and promotional campaign on the Jobe's brand name, as well as on the Easy Gardener and Emerald Edge brand names. In addition, during fiscal 1998, the Company redesigned the Jobe's packaging, assisted Retail Accounts in their inventory 10 purchasing, in-store product placement and implementation of displays for Jobe's products and conducted a national advertising campaign which targeted the "baby boomer" consumer segment. The Company anticipates spending approximately $4.0 million, including anticipated use of a portion of existing trade credits, in the current fiscal year ending June 30, 1999 on a combination of media development, print, radio and television advertising, co-operative 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. The Company intends to utilize a substantial portion of its marketing budget for the fiscal year ending June 30, 1999 on the enhancement of brand-name recognition of the Jobe's and Weed Wizard product lines and, to a lesser extent, on the Easy Gardener and Emerald Edge brand names. There can be no assurance that any attempt to increase such recognition will be successful or have any favorable effect on the Company's net sales. Information Systems The Company maintains a sophisticated retail data information system which enables it to provide timely and efficient order fulfillment to its Retail Accounts and other customers. Internally, the Company's information systems track orders and deliveries and provide exception reports if product is not delivered on time. The systems "push" the necessary information to the proper personnel, allowing the Company to react quickly to information. The Company's purchase order process can be paperless, with most Retail Accounts placing their orders through an electronic data interchange with the Company. Seasonality The Company sales are seasonal due to the nature of the lawn and garden business, in parallel with the annual growing season. The Company's sales and shipping are most active from late December through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are increasing their inventory of lawn and garden products. Sales typically decline by early to mid-summer. Sales of the Company's agricultural products are also seasonal. Most shipments occur during the agricultural cultivation period from March through October. Inventory and Distribution In order to meet product demand, the Company keeps relatively large amounts of product inventory on hand, particularly from December to May, the months of highest demand. Despite maintaining these relatively high levels of inventory, 11 the Company has historically experienced minimal inventory obsolescence. However, it is possible that inventory obsolescence could increase in the future. Retail Accounts generally require delivery within five business days. Orders are normally processed within 48 hours and shipped by common carrier. Competition The consumer lawn and garden care industry is highly competitive and somewhat fragmented. The Company competes with a combination of national and regional companies ranging from large petrochemical companies to garden catalog businesses and companies specializing in the manufacture of lawn and garden care products. Several of such companies, such as Solaris Group, a division of Monsanto Company, and the Scotts Miracle-Gro Products, Inc. have captured a significant, and in certain cases controlling, share of such markets. Many of the Company's competitors have achieved significant national, regional and local brand name and product recognition and engage in frequent and extensive advertising and promotional programs, both generally and in response to efforts by other competitors entering the market or existing competitors introducing new products. Many of these companies have substantially greater financial, technical, marketing and other resources than the Company. 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 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 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 and Monterey Chemical Corporation. The Company competes with a variety of regional lawn and garden manufacturers in the markets for landscape edging, shade cloth and root feeders. Competition for the Company's weed trimmer replacement heads consists of other manufacturers of weed trimming replacement part products using nylon based lines and blades. These include The Source Company. 12 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 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 substantial compliance with material 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. 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 13 air, discharges to ground, surface water, and groundwater, and the generation, handling, storage, transportation, treatment and disposal of a variety of hazardous and non-hazardous substances and wastes. Federal and state environmental laws and regulations often require manufacturers to obtain permits for these emissions and discharges. Failure to comply with environmental laws or to obtain, or comply with, the necessary state and federal permits can subject the manufacturer to substantial civil and criminal penalties. Easy Gardener operates two manufacturing facilities and Weatherly and Weed Wizard each operate one manufacturing facility. Although the Company believes that all of its facilities are in substantial compliance with all applicable material environmental laws, it is possible that there are material environmental liabilities of which the Company is unaware. If the costs of compliance with the various existing or future environmental laws and regulations including any penalties which may be assessed for failure to obtain necessary permits, exceed the Company's budgets for such items, the Company's business could be adversely affected. Potential Environmental Cleanup Liability. The Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), and many similar state statutes, impose joint and several liability for environmental damages and cleanup costs on past or current owners and operators of facilities at which hazardous substances have been discharged, as well as on persons who generate, transport, or arrange for disposal of hazardous wastes at a particular site. In addition, the operator of a facility may be subject to claims by third parties for personal injury, property damage or other costs resulting from contamination present at or emanating from property on which its facility is located. Easy Gardener operates two manufacturing facilities and Weatherly and Weed Wizard each operate one manufacturing facility. Moreover, the Company or its predecessors have owned or operated other manufacturing facilities in the past and may have liability for remediation of such facilities in the future, to the extent any is required. In this regard, Weatherly previously owned a facility that was the subject of certain soil remediation activities. Although this facility was sold by Weatherly prior to the Company's acquisition of Weatherly, there can be no assurance that the Company will not be liable for any previously existing environmental contamination at the facility. Moreover, although the purchaser of the facility indemnified Weatherly for any environmental liability and the sellers of Weatherly, in turn, indemnified the Company from such liability, there can be no assurance that, if required, the indemnifying parties will be able to fulfill their respective obligations to indemnify the Company. Furthermore, certain business operations of the Company's subsidiaries also involve shipping hazardous waste off-site for disposal. As a result, the Company could be subject to liability under these statutes. The Company could also incur liability under CERCLA or similar state statutes for any damage 14 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. in September 1994, the Company acquired certain trademarks and copyrights used by Easy Gardener, Inc. 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, the Company 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(R). The Company 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. In connection with its acquisition of Weed Wizard, Inc., the Company acquired the Weed Wizard(TM) product patent and trademark. The Company also acquired the trademark Landmaster(R) in connection with its acquisition of the assets of Landmaster Products, Inc. In addition, the Company acquired the trademarks Polyspun 300(R), Nature Shield(R) and Diamondback(R) in connection with its acquisition of the Tensar(R) consumer product line. In connection with the sale of the Tensar(R) consumer product line, The Tensar Corporation ganted to the Company an exclusive royalty-free perpetual license to use the trademark Tensar(R) in connection with a wide range of polymeric grid, mesh, net and related products supplied to the Company by the Tensar Corporation. There can be no assurance that the Company will apply for any additional trademark or patent protections relating to its products or that its current trademarks and patents will be enforceable or adequately protect the Company from infringement of its proprietary rights. 15 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. Product Liability The Company, as a manufacturer of lawn and garden care and pesticide products, may be exposed to significant product liability claims by consumers. Although the Company has obtained product liability insurance coverage for U.S. Home & Garden Inc. and Golden West in the aggregate amount of $3.0 million, and for Easy Gardener, Weatherly and Weed Wizard in the aggregate amount of $2.0 million (with all policies limited to $1.0 million per occurrence), and has obtained two umbrella policies in the amounts of $15.0 million, and $20.0 million, respectively, there can be no assurance that such insurance will provide coverage for any claim against the Company or will be sufficient to cover all possible liabilities. In the event a successful suit is brought against the Company, unavailability or insufficiency of insurance coverage could have a material adverse effect on the Company. Moreover, any adverse publicity arising from claims made against the Company, even if such claims were not successful, could adversely affect the reputation and sales of the Company's products. Employees As of September 21, 1998 the Company had 210 full-time employees. Of such employees, three are executive officers of the Company, 52 were engaged in administration and finance, 21 were engaged in sales and marketing, 33 were engaged in warehouse, shipping and receiving and 101 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 3,000 square feet of office space for which the Company pays $11,275 per month in rent, which amount includes the costs of utilities and janitorial services. The Company believes that its office space, which it 16 rents pursuant to a lease expiring in February 2001, is adequate for the Company's planned future operations. Easy Gardener leases approximately 250,000 square feet of office and warehouse space in Waco, Texas for which the Company pays $18,544 per month in rent, pursuant to a lease agreement that expires on February 28, 2001. Easy Gardener's facilities contain landscape fabric converters, packaging equipment and warehouse and shipping facilities. Weatherly leases approximately 72,000 square feet of manufacturing and warehouse space in Paris, Kentucky for $10,833 per month in rent pursuant to a lease that expires on June 30, 2001. 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, 1999. Golden West's offices are located in Merced, California in approximately 900 square feet of space it leases for $1,150 per month base rent, with rent increases at a rate of 4% a year. The lease expires in June 1999 subject to the Company's option to renew the lease for an additional three year period. With respect to Weed Wizard, the Company leases, for $14,750 per month, a one story office/manufacturing facility of approximately 50,600 feet in Dahlonega, Georgia pursuant to a lease that expires in August 2001. With respect to the storage, packaging and distribution of the Company's landscape fabric products, Easy Gardener has entered into a management agreement with Landmaster Products, Inc. (the "Management Agreement") pursuant to which the Company is provided with warehouse space in Englewood, Colorado. The Management Agreement expires on October 21, 2000 and provides for payment of a management fee of $31,500 per month until March 1999; thereafter $24,000 per month until September 1999, after which time the management fee will be mutually determined by the parties but in no event be less than 70% of the prior period's monthly fee. Item 3. Legal Proceedings Not Applicable Item 4. Submission of Matters to a Vote of Security Holders. An Annual Meeting of Stockholders was held on June 22, 1998 at which time the following directors were reappointed to serve until the Annual Meeting of Stockholders of the Company to be held in 1999: 17 Votes For Votes Withheld --------- -------------- Robert Kassel 16,539,341 128,518 Richard Raleigh 16,539,526 128,333 Maureen Kassel 16,476,951 190,908 Fred Heiden 16,537,756 130,103 Jon Schulberg 16,489,856 178,003 In addition, at the Meeting, the stockholders approved an amendment to the Company's Certificate of Incorporation to effect an increase in the Company's authorized common stock to 75 million shares by a vote of 14,104,400 in favor, 2,469,038 against and 94,421 abstaining. There were no broker non-votes with respect to this proposal. 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 was quoted on the NASDAQ SmallCap Market from March 26, 1992 until June 3, 1998 and has been quoted on the NASDAQ National Market System since June 4, 1998. The NASDAQ symbol for the Company's Common Stock is "USHG". The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock, as reported by NASDAQ. Year Ended June 30, 1997 High Low ---- --- First Quarter.............. $3 1/2 $2 1/4 Second Quarter............. 2 15/16 1 15/16 Third Quarter.............. 2 15/16 2 1/16 Fourth Quarter............. 3 1/2 2 1/8 Year Ended June 30, 1998 High Low ---- --- First Quarter......... $5 1/16 2 15/16 Second Quarter........ 5 1/8 3 7/8 Third Quarter......... 7 13/16 4 Fourth Quarter........ 7 3/8 5 3/8 As of September 21, 1998, the number of stockholders of record of the Company's Common Stock was 225. 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". In March 1998, the Company extended by ten years the expiration date of options to purchase 150,000 shares of Common Stock previously granted to Maureen Kassel. The foregoing options were exercisable at $1.69 per share and the transactions were exempt from the registration requirements of the Securities Act of 1933 by virtue of Sections 2(3) or 4(2) thereof. 18 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. It is anticipated that the proposed lending agreement among the Company, Easy Gardener and Easy Gardener's anticipated primary lending institution will prohibit Easy Gardener from paying dividends without the lenders' consent, which would adversely affect the Company's ability to pay dividends. Item 6. Selected Financial Data (in thousands, except per share data) The following selected financial data at and for the years ended June 30, 1994, 1995, 1996, 1997 and 1998 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, ---------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Net sales .................................................... $ 3,063 $ 19,692 $ 27,031 $ 52,046 $ 67,149 Cost of sales ................................................ 1,455 9,151 12,670 23,649 30,431 -------- -------- -------- -------- -------- Gross profit ................................................. 1,608 10,541 14,361 28,397 36,718 Selling, general and administrative expenses ..................................................... 6,786 7,152 10,612 17,745 23,065 -------- -------- -------- -------- -------- Income (loss) from operations ................................ (5,178) 3,389 3,749 10,652 13,653 Other income (expense) ....................................... (41) (1,776) (1,940) (3,262) (3,077) Income tax (expense) benefit ................................. -- (38) 715 (3,200) (3,600) -------- -------- -------- -------- -------- Income (loss) before extraordinary expense ................... (5,219) 1,575 2,524 4,190 6,976 Extraordinary expense net .................................... -- -- -- (1,007) (1,450) -------- -------- -------- -------- -------- Net income (loss) ............................................ $ (5,219) $ 1,575 $ 2,524 $ 3,183 $ 5,526 ======== ======== ======== ======== ======== Income (loss) per share before extraordinary expense: Basic ........................................................ $ (1.31) $ .19 $ .25 $ .31 $ .39 Dilutive ..................................................... $ (1.31) $ .16 $ .19 $ .26 $ .31 Net income (loss) per share: Basic ........................................................ $ (1.31) $ .19 $ .25 $ .23 $ .31 Dilutive ..................................................... $ (1.31) $ .16 $ .19 $ .20 $ .24
19 Weighted average number of common and common equivalent shares outstanding: Basic......................................................... 3,980,318 8,376,000 10,206,000 13,695,000 17,776,000 Dilutive...................................................... 3,980,318 10,125,000 13,361,000 16,068,000 22,808,000
Balance Sheet Data:
June 30, ---------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Working capital (deficiency) ................. $ (347) $ 3,326 $ 5,328 $ 2,292 $ 46,743 Intangible assets, net ....................... 2,046 16,692 17,167 44,364 63,395 Total assets ................................. 5,654 28,140 33,584 68,475 126,813 Short-term debt .............................. 594 2,200 3,650 8,990 -- Long-term debt ............................... -- 8,000 6,238 17,570 63,250 Total liabilities ............................ 2,504 12,800 14,214 36,549 75,214 Stockholders' equity ......................... 3,150 15,339 19,370 31,926 51,599
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 subsidiaries, Weatherly and Weed Wizard. Since 1992, the Company has consummated eight acquisitions of complementary lawn and garden companies and product lines for an aggregate consideration of over $80 million in cash, notes and equity securities. As a result of such acquisitions, the Company recognized a significant amount of goodwill which, in the aggregate, was approximately $58.9 million at June 30, 1998. The Company is currently amortizing such goodwill using the straight-line method over various time periods ranging from 20 to 30 years and amortization expenses for the fiscal year ended June 30, 1998 were $1.7 million or $0.08 per diluted share. See "Summary of Accounting Policies - Intangible Assets" and Note 1 to Notes to Consolidated Financial Statements. The Company's results of operations for the fiscal year ended June 30, 1997 were significantly affected by the acquisition of Weatherly in August 1996. In connection with the acquisition of Weatherly, the Company's outstanding notes payable were refinanced and replaced with a new 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 dilutive net income per share for fiscal 1997 by $0.06, from $0.26 to $0.20. In addition, as a result of the Company's repayment of all of its outstanding bank debt in April 1998, the Company was required to record an extraordinary expense of $1,450,000, net of income tax benefit. Such 20 extraordinary expense reduced the Company's dilutive net income per share for fiscal 1998 by $.07 from $0.31 to $0.24. See Notes 6 and 14 to Notes to Consolidated Financial Statements. The Company experienced net sales growth of 93% from fiscal 1996 to fiscal 1997 and 29% from fiscal 1997 to fiscal 1998. The Company believes that this growth in net sales was primarily attributable to expansion of its product lines through the acquisition of complementary lawn and garden businesses and product lines. Net sales were also positively affected by an increase in sales of pre-existing product lines. The Company was required to calculate its net income per share for all periods presented in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share," which is effective for periods ending after December 15, 1997 and requires the Company to report basic earnings per share (giving no dilutive effect to derivative securities) and diluted earnings per share (reflecting the dilutive effect of all derivative securities). Under the SFAS No. 128 dilutive earnings per share calculation, all derivative securities with exercise prices below the market price have been assumed exercised. All proceeds from the exercise of such derivative securities have been assumed to have been used to repurchase common stock (at an average stock price). Results of Operations The following table sets forth for the periods indicated certain selected income data as a percentage of net sales: 21 Percentages of Net Sales ------------------------------- Year Ended June 30, ------------------------------- 1996 1997 1998 ---- ---- ---- Net sales .................................. 100.0% 100.0% 100.0% Cost of sales .............................. 46.9 45.4 45.3 ----- ----- ----- Gross profit ............................... 53.1 54.6 54.7 Selling and shipping expenses .............. 23.2 21.6 21.2 General and administrative expenses ........ 16.1 12.5 13.2 ----- ----- ----- Income from operations ..................... 13.9 20.5 20.3 Interest expense, net....................... (7.3) (6.3) (5.3) Income tax (expense) benefit ............... 2.7 (6.2) (5.4) Extraordinary expense, net ................. -- (1.9) (2.1) ----- ----- ----- Net income ................................. 9.3% 6.1% 8.2% ===== ===== ===== Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997 Net sales. Net sales increased by $15.1 million, or 29%, to $67.1 million during the fiscal year ended June 30, 1998 from $52 million during the comparable period in 1997. The increase in net sales was primarily a result of the February 1998 acquisition of substantially all of the assets used in the business of Weed Wizard, Inc. and the March 1998 acquisition of substantially all of the assets of Landmaster Products, Inc., combined with internal growth of the Company's pre-existing product lines. Gross profit. Gross profit increased by $8.3 million, or 29%, to $36.7 million for the fiscal year ended June 30, 1998, from $28.4 million during the comparable period in 1997. This increase was due primarily to the acquisition of substantially all of the assets used in the business of Weed Wizard, Inc. and substantially all of the assets used in the business of Landmaster Products, Inc. Gross profit as a percentage of net sales increased to 54.7% during the fiscal year ended June 30, 1998, from 54.6% during the comparable period in 1997. The increase in gross profit as a percentage of net sales was primarily attributable to the increase in sales of higher-margin products. Selling and shipping expenses. Selling and shipping expenses increased $3.0 million or 26.5%, to $14.2 million during the fiscal year ended June 30, 1998, from $11.2 million during the comparable period in 1997. This increase was primarily the result of an increase in the amount of products shipped, which was a consequence of the February 1998 acquisition of substantially all of the assets used in the business of Weed Wizard, Inc. and the March 1998 acquisition of substantially all of the assets used in the business of Landmaster Products, Inc. along with an increase in sales of pre-existing product lines. Selling and shipping expenses as a percentage of net sales decreased to 21.2% during the fiscal year ended June 30, 1998, from 21.6% during the comparable period in 1997. This decrease was a result of economies of scale achieved from the sale of new products to existing customers. 22 General and administrative expenses. General and administrative expenses increased $2.3 million or 36% to $8.9 million during the fiscal year ended June 30, 1998 from $6.5 million during the comparable period in 1997. This increase was primarily due to increased costs relating to acquisitions, including amortization of goodwill and the addition of certain administrative personnel as part of the Company's efforts to build an infrastructure that it believes will be able to more readily integrate any future products or businesses that may be acquired. As a percentage of net sales, general and administrative expenses increased to 13.2% during the fiscal year ended June 30, 1998, from 12.5% during the comparable period in 1997. This is primarily due to the increase of amortization of goodwill and the addition of certain administrative personnel. Income from operations. Income from operations increased by $3.0 million, or 28.2%, to $13.6 million during the fiscal year ended June 30, 1998 from $10.6 million during the comparable period in 1997. The increase in income from operations in actual dollars was primarily due to the increase in net sales for the year ended June 30, 1998. As a percentage of net sales, income from operations decreased to 20.3% for the fiscal year ended June 30, 1998 from 20.5% during the comparable period in 1997. Interest expense. Interest expense increased by $225,000, or 7%, to $3.6 million during the fiscal year ended June 30, 1998, from $3.3 million during the comparable period in 1997. The increase in interest expense is primarily related to the interest associated with the increase in debt associated with the issuance by U.S. Home & Garden Trust I (the "Trust"), a wholly-owned subsidiary of the Company of the Trust Preferred Securities (as hereinafter defined) which was partially offset by a decrease in the Company's effective borrowing rate. Income taxes. Income tax expense increased to $3.6 million during the fiscal year ended June 30, 1998 from $3.2 million during the comparable period in 1997 primarily due to the increase in the income before income taxes and extraordinary expense which was partially offset by a decrease in the Company's effective income tax rate for the year. Extraordinary expense, net. In April 1998, the Company repaid in full the indebtedness outstanding under the Credit Facility (as hereinafter defined). As a result, the Company was required to record an extraordinary expense of $2.2 million, net of tax benefits of $735,000, during the fiscal year ended June 30, 1998. The expense consisted of deferred finance costs at April 30, 1998, net of accumulated amortization, plus prepayment penalties. 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 Income. Net income increased by $2.3 million, or 74%, to $5.5 million during the fiscal year ended June 30, 1998 from $3.2 million during the comparable period in 1997. This increase was attributable to the increase in net sales for the year ended June 30, 198, which was partially offset by the extraordinary expense. Basic net income per common share increased $.08 to $.31 per share for the fiscal year ended June 30, 1998 from $.23 23 per share during the comparable period in 1997. Diluted net income per common share increased $.04 to $.24 per share for the fiscal year ended June 30, 1998 from $.20 per share during the comparable period in 1997. The increase in both basic and diluted earnings per share is primarily attributable to the increase in net income, which was partially offset by additional weighted average common and common equivalent shares outstanding in the fiscal year ended June 30, 1998 compared to the comparable period in fiscal 1997. 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. The increase was due primarily to the Weatherly acquisition. Gross profit as a percentage of net sales increased to 54.6% in fiscal 1997 from 53.1% in fiscal 1996. The increase in gross profit as a percentage of net sales was primarily attributable to the sales of higher-margin products acquired in the Weatherly acquisition. Selling and shipping expenses. Selling and shipping expenses increased $4.9 million, or 78%, to $11.2 million in fiscal 1997 from $6.3 million in fiscal 1996. This increase was primarily the result of an increase in the amount of products shipped, which was a consequence of the acquisition of Weatherly and an increase in sales of pre-existing product lines, particularly landscape fabrics and landscape edging products. Selling and shipping expenses as a percentage of net sales decreased from 23.2% in fiscal 1996 to 21.6% in fiscal 1997. This decrease was primarily due to the consolidation of the Company's customer services at the Waco, Texas office and the elimination of the majority of the Weatherly sales positions in connection with the integration of the acquisition. General and administrative expenses. General and administrative expenses increased $2.1 million, or 50%, to $6.5 million in fiscal 1997 from $4.4 million in fiscal 1996. This increase was primarily the result of the acquisition of Weatherly. As a percentage of net sales, general and administrative expenses decreased from 16.1% in fiscal 1996 to 12.5% in fiscal 1997. This improvement is primarily due to the closing of the Weatherly administrative offices in February 1997 and the integration of certain administrative functions into the Company's existing infrastructure. Income from operations. Income from operations increased by $6.9 million, or 184%, to $10.7 million in fiscal 1997 from $3.8 million in fiscal 1996. The growth in income from operations in 24 actual dollars was primarily due to the increase in net sales and gross profit as a result of the Weatherly acquisition. As a percentage of net sales, income from operations increased to 20.5% in fiscal 1997 from 13.9% in fiscal 1996. This increase was due to the decreases in selling and shipping and general and administrative expenses as a percentage of net sales. Interest expense. Interest expense increased by $1.3 million, or 65%, to $3.3 million in fiscal 1997 from $2.0 million in fiscal 1996. The increase in interest expense is primarily related to the interest associated with the increase in both term and working capital debt and expenses associated with the Weatherly acquisition, partially offset by a decrease in the Company's effective borrowing rate. Income taxes. In fiscal 1996, the Company reported a tax benefit of $715,000 which was 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 into Easy Gardener of the Weatherly organization in fiscal 1997, partially offset by the $1.0 million extraordinary expense, net of tax benefits, incurred due to the Refinancing. Dilutive earnings per common share increased $0.01 to $0.20 in fiscal 197 from $0.19 in fiscal 1996. The increase was due primarily to the increase in income from operations, which was partially offset by increases in interest and income tax expense and the extraordinary expense of approximately $1.0 million net of tax benefits in fiscal 1997 which did not occur in fiscal 1996. 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. 25 Sales of the Company's agricultural products, which were not material for fiscal 1997, are also seasonal. Most shipments occur during the period from March through October. Set forth below is certain unaudited quarterly financial information:
Quarter Ended -------------------------------------------------------------------------------------------- (in thousands, except percentages and per share data) -------------------------------------------------------------------------------------------- September December March June September December March June 30, 31, 31, 30, 30, 31, 31, 30, 1996 1996 1997 1997 1997 1997 1998 1998 --------- -------- ----- ---- --------- -------- ------ ------- Net sales ........................... $ 5,523 $ 7,416 $20,558 $18,549 $ 7,025 $ 8,513 $23,520 $28,091 Cost of sales ..................... 2,607 3,217 9,025 8,800 3,522 3,857 10,482 12,570 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit ...................... 2,916 4,199 11,533 9,749 3,503 4,656 13,038 15,521 Selling, general and administrative expenses ........................... 3,264 4,048 5,538 4,894 3,963 4,589 5,967 8,546 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations ....... (348) 151 5,995 4,855 (460) 67 7,071 6,975 Investment income ................... 26 16 16 17 47 57 245 137 Interest expense .................... (563) (812) (993) (970) (853) (744) (922) (1,044) ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes ... (885) (645) 5,018 3,902 (1,266) (620) 6,394 6,068 Income tax benefit (expense) ...... 280 195 (2,075) (1,600) 550 250 (2,700) (1,700) Extraordinary expense net ........... (1,007) (1,450) ------- ------- ------- ------- ------- ------- ------- ------- ======= ======= ======= ======= ======= ======= ======= ======= Net income (loss) ................... $(1,612) $ (450) $ 2,943 $ 2,302 $ (716) $ (370) $ 3,694 $ 2,918 ======= ======= ======= ======= ======= ======= ======= ======= Diluted Net income (loss) per share(1) ...................... $ (0.12) $ (0.03) $ 0.18 $ 0.14 (0.05) $ (.02) $ 0.15 $ 0.11 ======= ======= ======= ======= ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding(1) ...................... 12,915 13,917 16,059 16,524 14,702 16,384 25,038 25,547 ======= ======= ======= ======= ======= ======= ======= ======= Net sales ........................... 100% 100% 100% 100% 100% 100% 100% 100% Cost of sales ..................... 47.2% 43.4% 43.9% 47.4% 50.1% 45.3% 44.6% 44.7% ------- ------- ------- ------- ------- ------- ------- ------- Gross profit ...................... 52.8% 56.6% 56.1% 52.6% 49.9% 54.7% 55.4% 55.3% Selling, general and administrative 59.1% 54.6% 26.9% 26.4% 56.4% 53.9% 25.4% 30.4% ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations ....... (6.3%) 2.0% 29.2% 26.2% (6.5%) 0.8% 30.0% 24.9% Investment income ................... 0.5% 0.2% 0.1% 0.1% 0.7% 0.7% 1.0% 0.5% Interest expense .................... (10.2%) (11.0%) (4.8%) (5.3%) (12.1%) (8.7%) (3.9%) (3.7%) ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes ... (16.0%) (8.8%) 24.5% 21.0% (18.0%) (7.2%) 27.1% 21.7% Income tax benefit (expense) ........ 5.1% 2.6% (10.1%) (8.6%) 7.8% 2.9% (11.5%) (6.1%) Extraordinary expense ............... 18.2% 0% 0% 0% 0% 0% 0% (5.2%) ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) ................... (29.1%) (6.2%) 14.3% 12.4% (10.2%) (4.3%) 15.6% 10.4% ======= ======= ======= ======= ======= ======= ======= =======
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using the treasury stock method except for quarters reporting a net loss. Such quarters only reflect issued and outstanding shares of Common Stock in the weighted average shares outstanding. Liquidity and Capital Resources Since inception, the Company has financed its operations primarily through cash generated by operations, net proceeds from the Company's private and public sales of securities and borrowings from lending institutions. 26 At June 30, 1998, the Company had consolidated cash and short-term investments totalling $27.1 million and working capital of $46.7 million. At June 30, 1997, the Company had consolidated cash and short-term investments totalling $2.1 million and working capital of $2.3 million. The increase in working capital at June 30, 1998 was due primarily to the proceeds from the Company's sale of Subordinated Debentures (as defined below) in April 1998 to the Trust, which resulted in net proceeds to the Company of approximately $63 million. In addition, during the fiscal year ended June 30, 1998, the Company sold 4,290,000 shares of common stock in December 1997, which generated net proceeds to the Company of approximately $16.0 million. Net cash provided by operating activities for fiscal 1998 was $7.8 million, consisting primarily of net income plus depreciation and amortization and an extraordinary expense resulting from the payoff of the term debt and an increase in accounts payable, offset in part by an increase in accounts receivables. Net cash used in investing financing activities for fiscal 1998 was $29.9 million, consisting primarily of cash used for the asset acquisition of Weed Wizard, Inc., the purchase of certain assets of Landmaster Products, Inc. and the purchase of certain assets from the Tensar Corporation and the purchase of property and equipment and payment for new package design. Net cash provided by financing activities for fiscal 1998 was $47.1 million, consisting primarily of the proceeds from the mandatorily redeemable preferred securities and the proceeds from the issuances of common stock offset in part by the payoff of the Term debt. In April 1998, the Trust, a newly created Delaware business trust and a wholly-owned subsidiary of the Company, issued 78,000 common securities with a liquidation amount of $25 per common security to the Company for $1,950,000 and completed a public offering of 2,530,000 9.4% Cumulative Trust Preferred Securities with a liquidation amount of $25 per security (the "Trust Preferred Securities" and together with the common securities the "Trust Securities"). The Trust exists for the sole purpose of issuing Trust Securities and using the proceeds therefrom to acquire the Subordinated Debentures described below. Concurrent with the issuance of the Trust Securities, the Trust invested the proceeds therefrom in $65.2 million aggregate principal amount of 9.4% Junior Subordinated Debentures (the "Subordinated Debentures") issued by the Company. Interest only payments are due through April 2028 when the entire balance is due. Approximately $40 million of the proceeds were used to repay all outstanding long-term debt and line of credit advances made under Easy Gardener's then existing credit facility (the "Credit Facility") with certain institutional lenders, and certain prepayment penalties. As a result of the early repayment, the Company wrote off deferred financing costs of approximately $1.4 million and incurred a prepayment penalty of approximately $737,000 during its quarter ended June 30, 1998 which reduced its reported income. Upon the Company's repayment of the outstanding indebtedness, the Credit Facility 27 was terminated. Subsequent to June 30, 1998, the Company received a commitment letter with a lending institution relating to a proposed $25 million revolving acquisition line of credit and a $20 million revolving line of credit for working capital. There can be no assurance that the Company will close the new credit facility on terms acceptable to it, or at all. Failure to obtain a new credit facility would materially adversely affect the Company's operations. As of June 30, 1998, the Company had a deferred tax liability of $812,000 primarily relating to depreciation and amortization in excess of the book amount. The deferred tax asset of $522,000 relates to the allowance of accounts receivable, vacation accrual and certain other balance sheet reserves. See Note 11 to the Company's consolidated financial statements. The Company spent approximately $3.4 million, including use of a portion of existing trade credits, in the fiscal year ending June 30, 1998 on a combination of media development, print, radio and television advertising, cooperative advertising (advertising done in conjunction with retailers) and attendance at trade shows and public relations to promote awareness, understanding and brand identification of its lawn and garden products. In fiscal 1998 the Company authorized the repurchase from time to time of up to 1.5 million shares of its Common Stock through open market purchases and in privately negotiated transactions. To date, approximately 793,000 shares have been repurchased from non-affiliates in open market transactions of which 236,000 shares were purchased during fiscal 1998. In February 1998, the Company completed its acquisition of Weed Wizard, Inc. for a purchase price of approximately $16.0 million, of which approximately $5.0 million was based on the value of certain current assets acquired. In March 1998, the Company completed its acquisition of substantially all of the assets of Landmaster Products, Inc. for a purchase price of approximately $3.0 million, of which approximately $750,000 was based on the value of certain net assets acquired. In May 1998, the Company acquired the lawn and garden specialty fencing product lines of the Tensar Corporation for $5.4 million plus an additional $977,000 for inventory. In August 1998, the Company entered into a non-binding letter of intent to purchase Ampro Industries, Inc., a manufacturer and distributor of outdoor lawn and garden products. The anticipated purchase price is approximately $25 million with a potential additional purchase price amount contingent upon future operating cash flow. 28 New Accounting Pronouncement In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all times that are required to be recognized under current account 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 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS 131) which supersedes SFAS 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 segment disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. In February 1998, the Financial Accounting Standard Board issued SFAS 132, Employers' Disclosures about Pensions and Other Post Retirement Benefits. SFAS 132 standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable, requires additional information on changes in benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when previous related accounting standards were issued. SFAS 132 is effective for financial statements for fiscal years beginning after December 15, 1997 and requires comparative information for earlier years to be restated unless the information is not readily available, in which case the notes to 29 the financial statements should include all available information and a description of the information not available. Management believes that the Company's current financial statement disclosures will not need to be modified based upon current operations. Results of operations and financial position will be unaffected by implementations of this standard. In June 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133, requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions ar met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings' effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of this new standard on July 1, 1999 to affect its financial statements. Inflation Inflation has historically not had a material effect on the Company's operations. Year 2000 The Company has appointed an internal task force to assess its state of readiness for possible "Year 2000" issues. The task force is evaluating internal business systems, software and other components which affect the performance of the Company's products and the Company's vulnerability to possible "Year 2000" exposures due to suppliers and other third parties lack of preparedness for the year 2000. In addition, the Company has been in contact with its suppliers and other third parties to determine the extent which they may be vulnerable to "Year 2000" issues. As this assessment progresses, matters may come to the Company's attention which could give rise to the need for remedial measures which have not yet been identified. The Company cannot currently predict the potential effect of third parties "Year 2000" issues on its business. It is expected that assessment, remediation and contingency planning activities will be on-going throughout 1998 and 1999 with the goal of appropriately resolving all material internal systems and third party issues. The Company intends to utilize both internal and external resources to reprogram, replace and test the systems for the year 2000 modifications. 30 The Company does not expect expenditures relating to the year 2000 issues to be material and does not expect costs associated with the year 2000 to have a significant impact on the Company's results of operations or financial position. However, there can be no assurance that the Company will not experience unexpected difficulties in connection with the year 2000 or that the systems of other companies on which the Company's systems rely will be timely converted. 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 IV. Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure. Not applicable. 31 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(1) 58 Chairman of the Board, Chief Executive Officer, President and Treasurer Richard Raleigh(2) 44 Chief Operating Officer and Director Maureen Kassel 50 Vice President of Public Relations and Advertising, Secretary and Director Jon Schulberg(1)(2) 40 Director Fred Heiden(1)(2) 57 Director - ---------- (1) Member, Compensation Committee (2) Member, Audit Committee Robert Kassel, co-founded the Company and has been Chairman of the Board, Chief Executive Officer, President and Treasurer of the Company since October 1990. From 1985 to August 1991, he was a consultant to Comtel Communications, Inc. ("Comtel"), a company specializing in the installation and operation of telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real estate developer in Long Island, New York and Santa Barbara, California. From 1965 to 1985, he was a practicing attorney in New York City, specializing in corporate and securities law. Richard Raleigh, has been a Director of the Company since March 1993, Chief Operating Officer of the Company since June 1992 and served as the Company's Executive Vice President-Operations from December 1991 to June 1992. Prior to joining the Company, Mr. Raleigh was a free-lance marketing consultant to the lawn and garden industry from January 1991 to December 1991. From April 1988 to January 1991, he was Director of Marketing, Lawn and Garden of Monsanto Agricultural Co. From December 1986 to April 1988 he was Vice President of Sales and Marketing of The Andersons, a company engaged in the sale of consumer and professional lawn and garden products. From November 1978 to December 1986, he held a variety of positions at The Andersons, including Operations Manager and New Products Development Manager. Maureen Kassel, the wife of Robert Kassel, co-founded the Company and has been Vice President of Public Relations and Advertising and a director of the Company since November 1990 and Secretary 32 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-Renter Corporation, a television production company. From September 1987 to January 1989 he was Director of Development for Eric Jones Productions. Fred Heiden, a director of the Company since March 1993, has been a private investor since November 1989. From April 1984 to November 1989, Mr. Heiden was President and Principal owner of Bonair Construction, a Florida based home improvement construction company. Certain Key Employees Richard M. Grandy, 52, has been President of Easy Gardener since July 1997 and served as its Vice President from the date of the Company's acquisition of Easy Gardener, Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy Gardener, Inc. in 1983 after serving as Marketing Director at International Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a sales representative of lawn and garden products for the Ortho Division of Chevron Chemical Co. Lynda Gustafson, 34, 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, 43, has been Vice President of Easy Gardener since July 1997 and has also served as its General Manager from September 1994. Prior to the acquisition of Easy Gardener, Inc. by the Company, Ms. Jones was employed by Easy Gardener, Inc. from its inception in September 1983 to September 1994, where she advanced to the positions of Vice President and General Manager. From April 1977 to September, 1983, she was employed by International Spike, Inc., where she held various project management positions. Paul Logue, 42, has been National Sales Manager of Easy Gardener since the Company's acquisition of Easy Gardener, Inc. in September 1994. Prior to joining the Company, Mr. Logue was employed by Easy Gardener, Inc. 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. 33 Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires that Company's officers and directors, and persons who beneficially own more than 10 percent of a registered class of the Company's equity securities, file certain reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors, and greater than 10 percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms received by the Company, or representations obtained from certain reporting persons, the Company believes that during the year ended June 30, 1998 all filing requirements applicable to its officers, directors, and greater than 10 percent beneficial stockholders were complied with except that Robert and Maureen Kassel failed to timely file a Form 5 with respect to the extension of the expiration date of certain options previously granted to Ms. Kassel that occurred in March 1998 and the disposition to the Company of certain shares of Common Stock owned of record by Maureen Kassel in repayment of certain expenses. In addition, Ms. Gustafson failed to timely file a Form 5 to report the grant to her of certain stock options in February 1998. Item 11. Executive Compensation The following table discloses the compensation awarded by the Company, for the three fiscal years ended June 30, 1996, 1997 and 1998, to Mr. Robert Kassel, its Chief Executive Officer and Mr. Richard J. Raleigh, its Chief Operating Officer and to Ms. Lynda Gustafson, the Company's Vice President of Finance (together the "Named Officers"). During the fiscal year ended June 30, 1998, no other officer of U.S. Home & Garden Inc. received a total salary and bonus that exceeded $100,000 during such fiscal year. Summary Compensation Table
Annual Compensation Long-Term Debt ---------------------- -------------- Securities Underlying All Other Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation (1) - --------------------------- ---- ---------- --------- ----------- --------------- Robert Kassel, 1998 450,000 281,667 468,000(2) $7,523 Chairman, Chief Executive Officer, 1997 350,000 250,000 1,200,000(3) $5,995 President and Treasurer 1996 250,000 100,000 200,000(4) -- Richard Raleigh, Chief Operating Officer 1998 225,000 115,000 132,500(5) $9,203 1997 195,000 111,275 600,000(3)(6) $8,390 1996 150,000 10,000 100,000(4) -- Lynda Gustafson, Vice President of Finance 1998 125,000 45,000 50,000 $11,273 1997 101,040 20,000 30,000 $ 7,451 1996 67,500 11,000 10,000 $ 2,790
- ------------ (1) Represents Company contributions to the Named Officers 401(k) account. 34 (2) Includes 80,000 options that were originally granted to Mr. Kassel in 1993 and which expiration dates were extended during fiscal 1998. (3) Includes as to Mr. Kassel 200,000 options previously granted to Mr. Kassel and as to Mr. Raleigh 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. (4) Includes as to Mr. Kassel five-year options to purchase 200,000 shares granted to Mr. Kassel and as to Mr. Raleigh, five-year options to purchase 100,000 shares granted to Mr. Raleigh in June 1995 under the Company's 1995 Stock Option Plan, which grants were subject to stockholder approval of the plan obtained in February 1996. (5) Includes 12,500 options that were originally granted to Mr. Raleigh in 1992 the expiration date of which was extended during fiscal 1998. (6) Includes 50,000 options previously granted to Mr. Raleigh the expiration date of which was extended during fiscal 1997. The following table discloses information concerning options granted in fiscal 1998 to the Named Officers. Option Grants in Fiscal Year Ended June 30, 1998 Individual Grants ------------------------------------------------
Number of Percent of Potential Realizable Value Securities Total Options at Assumed Annual Rates of Underlying Granted to Stock Price Appreciation Options Employees in Exercise for Option Term ($)(2) Granted Fiscal Year Price Expiration --------------------------- Name (#)(1) (%) ($/Sh) Date 5% 10% - ---- ---------- ------------- -------- ---------- ------ ------- Robert Kassel 310,000 34.6 3.25 8/4/02 278,354 615,089 78,000 8.7 3.25 8/4/02 70,037 154,764 80,000(3) 8.9 1.69 12/31/02 40,804 91,251 Richard Raleigh 100,000 11.2 3.25 8/4/02 89,792 198,416 20,000 2.2 3.25 8/4/02 17,958 39,683 12,500(3) 1.4 1.69 12/31/02 6,376 14,258 Lynda Gustafson 50,000 5.6 4.375 2/5/03 60,437 133,549
- ---------- (1) Unless otherwise noted, 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 35 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. (3) Reflects extension of expiration date of options that were originally granted on September 15, 1992. All of such options vest in three equal annual installments commencing August 5, 1998. 36 The following table sets forth information concerning options exercised by the Named Officers during the fiscal year ended June 30, 1998, and the number of options owned by the Named Officers and the value of any in-the-money unexercised options as of June 30, 1998:
Aggregated Option Exercises And Fiscal Year-End Option Values ---------------------------------- Number of Securities Value of Underlying Unexercised Shares Unexercised In-the-Money Acquired on Value Options at Options at Exercise(#) Realized ($) June 30, 1998 June 30, 1998(1) ----------- ------------ ---------------------------- -------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Robert -- -- 2,297,653 158,000 $10,045,760 $1,128,504 Kassel Richard 104,598 249,007 620,411 32,500 $2,603,461 $123,110 Raleigh Lynda 34,000 69,168 26,000 40,000 $90,638 $82,520 Gustafson
- ---------- (1) Year-end values for unexercised in-the-money options represent the positive spread between the exercise price of such options and the fiscal year end market value of the common stock. An Option is "in-the-money" if the fiscal year end fair market value of the Common Stock exceeds the option exercise price. The last sale price (the fair market value) of the Common Stock on June 30, 1998 was $6.438 per share. 37 Employment Agreements The Company has entered into employment agreements with Messrs. Kassel and Raleigh, each dated as of April 1, 1996. Mr. Kassel currently serves as Chief Executive Officer and President pursuant to the employment agreement for a term expiring on March 31, 1999, subject to certain renewal provisions. His current annual salary is $450,000, and is subject to such bonuses and increases as are approved at the discretion of the Board of Directors. Mr. Raleigh currently serves as Chief Operating Officer pursuant to the employment agreement for a term expiring on March 31, 1999, subject to certain renewal provisions. His current annual salary is $250,000, and is subject to such bonuses and increases as are approved at the discretion of the Board of Directors. Each of the employment agreements requires that substantially all of the employee's business time be devoted to the Company and that the employee not compete, or engage in a business competitive with, the Company's current or anticipated business for the term of the agreement and for two years thereafter (although they each may own not more than 5% of the securities of any publicly traded competitive company). Each of Mr. Kassel and Mr. Raleigh is, in addition to salary, entitled to certain fringe benefits, including the use of an automobile and payment of related expenses. Mr. Kassel's employment agreement also provides that if his employment is terminated under certain circumstances, including termination of Mr. Kassel upon a change of control of the Company, (as defined in the agreement) a failure by the Company to comply with its obligations under the agreement, the failure of the Company to obtain the assumption of the agreement by any successor corporation, or a change in Mr. Kassel's duties and obligations from those contemplated by the agreement, and termination by the Company of Mr. Kassel's employment other than for disability or cause, he will be entitled to receive severance pay equal to the greater of (i) $350,000 ($3.5 million in the event of a change of control), or (ii) the total compensation earned by Mr. Kassel from the Company during the one-year period (multiplied by ten in the event of a change of control) prior to the date of his termination. Mr. Raleigh's employment agreement also provides that if his employment is terminated under certain circumstances, including termination of Mr. Raleigh upon a change of control of the Company, (as defined in the agreement) a failure by the Company to comply with its obligations under the agreement, the failure of the Company to obtain the assumption of the agreement by any successor corporation, or a change in Mr. Raleigh's duties and obligations from those contemplated by the agreement, and termination by the Company of Mr. Raleigh's employment other than for disability or cause, he will be entitled to receive severance pay equal to the greater of (i) $162,500 ($812,500 in the event of a change of control), or (ii) the total compensation earned by Mr. Raleigh from the Company during the one-year period (multiplied by five in the event of a change of control) prior to the date of his termination. 38 The Company has entered into an employment agreement with Ms. Gustafson which provides for her continued employment through June 30, 1999. Her current annual base salary is $148,000. Easy Gardener has entered into an employment agreement with Mr. Grandy, dated as of September 1, 1998 which expires on August 31, 2003. Mr. Grandy currently serves as President of Easy Gardener. The agreement provides for Mr. Grandy to receive an annual base salary of $275,000, $300,000, and $330,000 during the first three years of the agreement and $350,000 thereafter. The Agreement requires Mr. Grandy to devote substantially all of his business time to Easy Gardener, and in the event Mr. Grandy's employment agreement is terminated by Easy Gardener without cause (as defined in the agreement) or if Mr. Grandy resigns with "Good Reason" (as defined in the agreement), Mr. Grandy will be entitled to receive his base salary through the expiration of the agreement. Committees of the Board of Directors During fiscal 1998 the Company established an Audit Committee comprised of Messrs. Raleigh, Heiden and Schulberg. The Audit Committee will, among other things, make recommendations to the Board of Directors with respect to the engagement of the Company's independent certified public accountants and the review of the scope and effect of the audit engagement. During fiscal 1998 the Company established a Compensation Committee of its Board of Directors, comprised of Messrs. Kassel, Schulberg and Heiden. The Compensation Committee will, among other things, make recommendations to the Board of Directors with respect to the compensation of the executive officers of the Company. The Company maintains a Stock Option Committee comprised of Messrs. Schulberg and Heiden, which determines the persons to whom options should be granted under the Company's 1995 and 1997 Stock Option Plans and the number and other terms of options to be granted to each person under such plans. Compensation Committee Interlocks and Insider Participation in Compensation Decisions The Company's Compensation Committee of its Board of Directors consisting of Messrs. Kassal, Schulberg and Heiden, was established in September 1997. Prior thereto, decisions as to compensation were made by the Company's Board of Directors. Prior to the establishment of the compensation committee, Messrs. Kassel and Raleigh, in their capacity as directors, each participated in the Board of Directors deliberations concerning compensation of executive officers for fiscal 1998. During fiscal 1998, none of the executive officers of the Company served on the Board of Directors or the compensation committee of any other entity, any of whose officers served on the Board of Directors of the Company. Stock Option Plans In September 1991, the Company adopted a stock option plan (the "1991 Plan") pursuant to which 700,000 shares of Common Stock have been reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs may be granted under the 1991 Plan to employees and officers of the Company. NQO's may be granted to 39 consultants, directors (whether or not they are employees), employees or officers of the Company. The purpose of the 1991 Plan is to encourage stock ownership by certain directors, officers and employees of the Company and certain other persons instrumental to the success of the Company and give them a greater personal interest in the success of the Company. The 1991 Plan is administered by the Board of Directors. The Board, within the limitations of the 1991 Plan, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an option, and whether restrictions such as repurchase rights in the Company are to be imposed on shares subject to options. ISOs granted under the 1991 Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). The aggregate fair market value of shares for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans of the Company and any related corporation) may not exceed $100,000. NQO's granted under the 1991 Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant. Options granted under the 1991 Plan will expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). An aggregate of 522,000 options were outstanding under the 1991 Plan at June 30, 1998. The Company has adopted, a Non-Employee Director Stock Option Plan (the "Director Plan"). Only non-employee directors of the Company are eligible to receive grants under the Director Plan. The Director Plan provides that eligible directors automatically receive a grant of options to purchase 5,000 shares of Common stock at fair market value upon first becoming a director and, thereafter, an annual grant, in January of each year, of 5,000 options at fair market value. Options to purchase an aggregate of up to 100,000 shares of Common Stock available for the automatic grants under the Director Plan. An aggregate of 10,000 options were outstanding under the Director Plan at June 30, 1998. The Company has also adopted a 1995 Stock Option Plan ("1995 Plan") which provides for grants of options to purchase up to 1,500,000 shares of Common Stock. The Board of Directors or the Stock Option Committee (the "Committee"), as the case may be, will have discretion to determine the number of shares subject to each NQO (subject to the number of shares available for grant under the 1995 Plan and other limitations on grant set forth in the 1995 Plan), the exercise price thereof (provided such price is not less than the par value of the underlying shares of Common Stock), the term thereof (but not in excess of 10 years from the date of grant, subject to earlier termination in certain circumstances), and the manner in which the option becomes exercisable (amounts, intervals and other conditions). Directors who are employees of the Company will be eligible to be granted 40 ISOs or NQOs under such plan. The Board or Committee, as the case may be, also has discretion to determine the number of shares subject to each ISO, the exercise price and other terms and conditions thereof, but their discretion as to the exercise price, the term of each ISO and the number of ISOs that may vest may be limited in any year by the same Code provisions applicable to ISOs granted under the 1991 Plan. An aggregate of 1,459,000 options were outstanding under the 1995 Plan at June 30, 1998. The Company has adopted a 1997 Stock Option Plan ("1997 Plan") which provides for grants of options to purchase up to 1,500,000 shares of Common Stock. The Board of Directors or the Committee of the 1997 Plan, as the case may be, will have discretion to determine the number of shares subject to each NQO (subject to the number of shares available for grant under the 1997 Plan and other limitations on grant set forth in the 1997 Plan), the exercise price thereof (provided such price is not less than the par value of the underlying shares of Common Stock), the term thereof (but not in excess of 10 years from the date of grant, subject to earlier termination in certain circumstances), and the manner in which the option becomes exercisable (amounts, intervals and other conditions). Directors who are employees of the Company will be eligible to be granted ISOs or NQOs under such plan. The Board or Committee, as the case may be, also has discretion to determine the number of shares subject to each ISO, the exercise price and other terms and conditions thereof, but their discretion as to the exercise price, the term of each ISO and the number of ISOs that may vest may be in any year is limited by the same Code provisions applicable to ISOs granted under the 1991 Plan. An aggregate of 565,000 options were outstanding under the 1997 Plan at June 30, 1998. The Company from time to time has also granted non-plan options to certain officers, employees and consultants. As of June 30, 1998, approximately 2.4 million non-plan options were outstanding. Director Compensation During fiscal 1998 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 21, 1998, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of Common Stock by (i) each person known by the Company to be the owner of more than 5% of the outstanding shares of Common Stock, (ii) each director, (iii) each Named Officer and (iv) all executive officers and directors as a group. 41 Amount and Nature Name and Address of Beneficial Percentage of Beneficial Owner Ownership(1)(2) of Class - ---------------- ------------- ---------- Maureen Kassel 535,383(3) 2.5 Robert Kassel 4,478,162(4)(5) 19.3 Richard Raleigh 647,578(6) 3.0 Lynda Gustafson 26,000(7) * Fred Heiden 258 * Jon Schulberg 258 * Joseph Owens II 1,114,396(8) 5.3 Richard Grandy 1,114,396(8) 5.3 Warburg Pincus Asset Management, Inc. (9) 1,310,500(9) 6.2 All executive officers and directors as a group (five persons) 5,314,589(3)(4)(5)(6)(10) 20.6 - ---------- *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 21, 1998 upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days from September 21, 1998 have been exercised. (3) Includes exercisable options and warrants issued to Ms. Kassel to purchase an aggregate of 188,333 shares of the Company's Common Stock. (4) Of such shares, (i) 347,050 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 347,050 of the shares owned of record by her, Robert Kassel may also be deemed to have beneficial ownership of such shares; (ii) an aggregate of 914,396 shares are owned of record by each of Messrs. Joseph Owens and Richard Grandy, who have each entered into a voting trust agreement (the "Voting Agreement") providing Mr. Kassel with the right to vote the shares until September 1, 2001. The address of Mr. Kassel is c/o the Company. 42 (5) Includes 2,302,320 shares of Common Stock issuable to Mr. Kassel upon exercise of options and warrants. (6) Includes 644,578 shares of Common Stock issuable to Mr. Raleigh upon exercise of options and warrants. (7) Represents shares of Common Stock issuable upon exercise of options granted to Ms. Gustafson who is a Named Officer but not an executive officer of the Company. (8) Includes 175,000 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. (9) According to a Schedule 13G filed with the Securities and Exchange Commission, the shares are held by accounts for which Warburg Pincus Asset Management, Inc. acts as investment advisor. The address of Warburg Pincus Asset Management, Inc. is 466 Lexington Avenue, New York, New York 10017. (10) Excludes shares owned by Lynda Gustafson, the Company's Vice President of Finance. Item 13. Certain Relationships and Related Transactions. From time to time Messrs. Kassel and Raleigh have borrowed monies from the Company. During fiscal 1998, the highest amount owed to the Company by Messrs. Kassel and Raleigh were $605,764 and $244,038, respectively, which amounts were outstanding on September 21, 1998. The loans bear interest at 7% per annum and mature on June 30, 2002. Messrs. Kassel and Raleigh will make annual payments of interest on the outstanding principal balance of their loans through the maturity date. In addition, payments of principal will be made during each of the first four years and on maturity of the loans as follows: As to Mr. Kassel - -- $50,000, $50,000, $50,000, $100,000, $150,000 and the balance of approximately $205,919, respectively. As to Mr. Raleigh, $25,000, $25,000, $50,000, $50,000 and the balance of approximately $85,608, respectively. PART IV 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 43 Exhibit 4.1 of the Company's Registration Statement on Form S-1 (Registration No. 333-38483). 4.2 Form of Unit Purchase Option granted to D.H. Blair & Co.** 4.3 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 Lynda Gustafson. 10.4 Employment Agreement of Richard Grandy. 10.5 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). 10.6 1995 Stock Option Plan.* 10.7 Non-Employee Director Stock Option Plan.* 10.8 1997 Stock Option Plan, incorporated by reference to Exhibit A to the Company's proxy statement dated May 27, 1997. 10.9 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.+ 10.10 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. 10.11 February 8, 1995 modification to lease with respect to the Company's executive offices.* 10.12 May 6, 1997 modification to lease with respect to the Company's executive offices.+++ 10.13 Lease with respect to Weatherly's warehouse facilities in Paris, Kentucky.+++ 44 10.14 Form of Mergers and Acquisitions Agreement between the Company and D.H. Blair Investment Banking Corp.** 10.15 Underwriting Agreement dated as of December 10, 1997 among the Company, Everen Securities, Inc. and Josephthal & Co., Inc. (incorporated by reference to Exhibit 1.1 filed with the Company's Registration Statement on Form S-1, No. 333-38483). 10.16 Underwriting Agreement dated April 13, 1998 among the Company, Everen Securities, Inc., Hambrecht & Quist and Josephthal & Co., Inc.++++ 10.17 Lease and lease extension agreements between Crawford- Austin Mfg. Co. and Easy Gardener.* 10.18 Warehouse Lease, dated May 26, 1998 between Sarah C. Leer and Easy Gardener, Inc. 10.19 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). 10.20 Purchase Agreement, dated as of May 9, 1997, by and among the Company, Easy Gardener and Plastic Molded Concepts, Inc.+++ 10.21 Lease Extension, dated October 16, 1997, between Easy Gardener and Crawford-Austin Mfg. Co. (incorporated by reference to Exhibit 10.22 filed with the Company's Registration Statement on Form S-1, No. 333-38483). 10.22 Assets Purchase Agreement dated as of February 25, 1998 by and among the Company, Weed Wizard, Weed Wizard, Inc and the Weed Wizard stockholders (incorporated by reference to exhibit 10.1 filed with the Company's Form 8-K for the event dated February 26, 1998). 10.23 Assets Purchase Agreement dated as of March 20, 1998 by and among Easy Gardener, Inc., Landmaster Products, Inc., Wayne Murray and Quincy McMillian.++++ 10.24 Commercial Building Lease, dated June 12, 1998 between Easy Gardener, Inc. and Norman Adams, James Anderson, Donald Bryan and Pamela Butler. 10.25 Form of Subordinated Indenture between the Company and Wilmington Delaware Trust, as trustee.++++ 21 Subsidiaries of the Company.++++ 23 Consent of BDO Seidman, LLP. 45 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. ++ 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. +++ Incorporated by reference to the exhibit filed with the Company's Form 10-K for the fiscal year ended June 30, 1997. ++++ Incorporated by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (File No. 333-48519). (b) Report on Form 8-K. A Form 8-K/A was filed by the Company during its fiscal quarter ended June 30, 1998 to report the financial statements of Weed Wizard, Inc. and related pro forma financial statements pursuant to Item 7 of the Form 8-K. 46 U.S Home & Garden Inc. and Subsidiaries Contents ================================================================================ Report of Independent Certified Public Accountants F-2 Consolidated Financial Statements Consolidated balance sheets as of June 30, 1997 and 1998 F-3-F-4 Consolidated statements of income for the years ended June 30, 1996, 1997 and 1998 F-5 Consolidated statements of stockholders' equity for the years ended June 30, 1996, 1997 and 1998 F-6 Consolidated statements of cash flows for the years ended June 30, 1996, 1997 and 1998 F-7-F-8 Summary of accounting policies F-9-F-14 Notes to consolidated financial statements F-15-F-34 Consolidated Financial Statement Schedule F-35 Schedule II-valuation and qualifying accounts Note: All other schedules have been omitted since the required information is contained in the Consolidated Financial Statements or because such schedules are not required. 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, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. We have also audited Schedule II - Valuation and Qualifying Accounts (the Schedule). These financial statements and the 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, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 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 12, 1998 F-2 U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets ==================================================================================================================================== June 30, 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Assets (Notes 1 and 6) Current Cash and cash equivalents $ 2,083,000 $ 27,130,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $314,000 and $399,000 (Note 2) 11,542,000 17,350,000 Inventories (Note 3) 5,254,000 11,763,000 Prepaid expenses and other current assets 419,000 1,130,000 Deferred tax asset (Note 11) 448,000 522,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Current Assets 19,746,000 57,895,000 Furniture, Fixtures and Equipment, net (Note 4) 2,315,000 3,590,000 Intangible Assets (Note 1) Excess of cost over net assets acquired, net (Note 5) 41,834,000 58,864,000 Deferred financing costs, net of accumulated amortization of $302,000 and $21,000 (Note 14) 1,621,000 3,186,000 Product rights, patents and trademarks, net of accumulated amortization of $75,000 and $93,000 180,000 165,000 Non-compete agreement, net of accumulated amortization of $22,000 and $48,000 478,000 462,000 Package design, net of accumulated amortization of $110,000 and $247,000 251,000 718,000 Trade Credits (Note 12) 1,149,000 944,000 Officer Receivables (Note 8) 694,000 850,000 Other Assets 207,000 139,000 - ------------------------------------------------------------------------------------------------------------------------------------ $ 68,475,000 $126,813,000 ====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-3 U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income ==================================================================================================================================== June 30, 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity (Note 1) Current Line of credit (Notes 1, 6 and 14) $ -- $ -- Current maturities of notes payable (Notes 1, 6 and 14) 8,990,000 -- Accounts payable 1,774,000 4,501,000 Accrued expenses 4,244,000 3,922,000 Accrued co-op advertising 1,098,000 645,000 Accrued commissions 859,000 1,106,000 Accrued purchase consideration (Note 1) 489,000 978,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Current Liabilities 17,454,000 11,152,000 Accrued Purchase Consideration (Note 1) 978,000 -- Deferred Tax Liability (Note 11) 547,000 812,000 Notes Payable, less current maturities (Notes 1, 6 and 14) 17,570,000 -- Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures (Notes 7 and 14) -- 63,250,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 36,549,000 75,214,000 - ------------------------------------------------------------------------------------------------------------------------------------ Commitments, Contingency and Subsequent Events (Notes 1, 6, 9, 10 and 16) -- -- Stockholders' Equity (Note 10) Convertible Preferred stock, $.001 par value-shares authorized, 1,000,000; no shares outstanding -- -- Common stock, $.001 par value-shares authorized, 75,000,000; 14,073,000 and 20,133,000 shares issued and outstanding at June 30, 1997 and 1998 14,000 20,000 Additional paid-in capital 30,783,000 50,153,000 Retained earnings 1,129,000 2,733,000 - ------------------------------------------------------------------------------------------------------------------------------------ 31,926,000 52,906,000 Less: Treasury Stock, 236,000 shares at cost -- (1,307,000) - ------------------------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 31,926,000 51,599,000 - ------------------------------------------------------------------------------------------------------------------------------------ $ 68,475,000 $ 126,813,000 ====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-4 U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets ======================================================================================================================= June 30, 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------- Net Sales (Note 2) $27,031,000 $52,046,000 $67,149,000 Cost of Sales (Note 2) 12,670,000 23,649,000 30,431,000 - ----------------------------------------------------------------------------------------------------------------------- Gross Profit 14,361,000 28,397,000 36,718,000 - ----------------------------------------------------------------------------------------------------------------------- Operating Expenses Selling and shipping 6,264,000 11,232,000 14,205,000 General and administrative 4,348,000 6,513,000 8,860,000 - ----------------------------------------------------------------------------------------------------------------------- 10,612,000 17,745,000 23,065,000 - ----------------------------------------------------------------------------------------------------------------------- Income from Operations 3,749,000 10,652,000 13,653,000 Other Income (Expense) Investment income 69,000 76,000 486,000 Interest expense (Notes 6 and 7) (2,009,000) (3,338,000) (3,563,000) - ----------------------------------------------------------------------------------------------------------------------- Income before Income Taxes and Extraordinary Expense 1,809,000 7,390,000 10,576,000 Income Tax (Expense) Benefit (Note 11) 715,000 (3,200,000) (3,600,000) - ----------------------------------------------------------------------------------------------------------------------- Income before Extraordinary Expense 2,524,000 4,190,000 6,976,000 Extraordinary expense of $1,459,000 and $2,185,000 on debt refinancings, net of income taxes of $452,000 and $735,000 (Note 14) - (1,007,000) (1,450,000) - ----------------------------------------------------------------------------------------------------------------------- Net income $ 2,524,000 $ 3,183,000 $ 5,526,000 ======================================================================================================================= Basic earnings per share: Income per common share before extraordinary expense (Note 15) $ 0.25 $ 0.31 $ 0.39 Extraordinary expense (Notes 14 and 15) - (0.08) (0.08) - ----------------------------------------------------------------------------------------------------------------------- Net income per common share (Note 15) $ 0.25 $ 0.23 $ 0.31 ======================================================================================================================= Diluted earnings per share: Income per common share before extraordinary expense (Note 15) $ 0.19 $ 0.26 $ 0.31 Extraordinary expense (Notes 14 and 15) - (.06) (.07) - ----------------------------------------------------------------------------------------------------------------------- Net income per common share (Note 15) $ 0.19 $ 0.20 $ 0.24 =======================================================================================================================
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 ==================================================================================================================================== Convertible Preferred Stock Common Stock ------------------- --------------------------- Number of Number of Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 (Note 10) -- $ -- 9,737,000 $ 10,000 Exercise of stock warrants, net of stock issuance costs of approximately $114,000 -- -- 770,000 1,000 Net income -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1996 (Note 10) -- -- 10,507,000 11,000 Exercise of stock options, warrants, and UPOs, net of issuance costs of approximately $300,000 -- -- 2,566,000 2,000 Stock issued for Weatherly acquisition (Note 1) -- -- 1,000,000 1,000 Options and warrants issued for acquisition and consulting services and bank refinancing (Note 1) -- -- -- -- Net income -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997 (Note 10) -- -- 14,073,000 14,000 Conversion of debt into common stock -- -- 154,000 -- Repurchase of UPOs -- -- -- -- Sale of common stock, net of stock issuance costs of approximately $1,031,000 -- -- 4,290,000 5,000 Exercise of stock options and warrants -- 1,616,000 1,000 Repurchase of common stock for treasury -- -- -- -- Net income -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 (Note 10) -- $ -- 20,133,000 $ 20,000 ==================================================================================================================================== Additional Retained Total Paid-In Earnings Treasury Stockholders' Capital (Deficit) Stock Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 (Note 10) $ 19,907,000 $ (4,578,000) $ -- $ 15,339,000 Exercise of stock warrants, net of stock issuance costs of approximately $114,000 1,506,000 -- -- 1,507,000 Net income -- 2,524,000 -- 2,524,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1996 (Note 10) 21,413,000 (2,054,000) -- 19,370,000 Exercise of stock options, warrants, and UPOs, net of issuance costs of approximately $300,000 5,292,000 -- -- 5,294,000 Stock issued for Weatherly acquisition (Note 1) 2,999,000 -- -- 3,000,000 Options and warrants issued for acquisition and consulting services and bank refinancing (Note 1) 1,079,000 -- -- 1,079,000 Net income -- 3,183,000 -- 3,183,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997 (Note 10) 30,783,000 1,129,000 -- 31,926,000 Conversion of debt into common stock 350,000 -- -- 350,000 Repurchase of UPOs -- (3,922,000) -- (3,922,000) Sale of common stock, net of stock issuance costs of approximately $1,031,000 15,854,000 -- -- 15,859,000 Exercise of stock options and warrants 3,166,000 -- -- 3,167,000 Repurchase of common stock for treasury -- -- (1,307,000) (1,307,000) Net income -- 5,526,000 -- 5,526,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 (Note 10) $ 50,153,000 $ 2,733,000 $ (1,307,000) $ 51,599,000 ====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. Includes 38,000 shares of common stock issued for services relating to cash proceeds and approximately 60,000 shares issued relating to cashless exercise of 4 UPOs (Note 10). F-6 U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows ==================================================================================================================================== Increase (Decrease) in Cash and Cash Equivalents Years ended June 30, 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net income $ 2,524,000 $ 3,183,000 $ 5,526,000 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary expense -- 1,007,000 1,450,000 Loss on disposal of assets -- 226,000 18,000 Bad debt expense 167,000 323,000 179,000 Depreciation and other amortization 834,000 1,990,000 2,627,000 Amortization of deferred financing costs 264,000 323,000 329,000 Deferred taxes (1,005,000) 2,342,000 191,000 Changes in operating assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable (2,622,000) (2,763,000) (3,951,000) Inventories (940,000) 444,000 (706,000) Prepaid expenses and other current assets (159,000) 324,000 (548,000) Accounts payable and accrued expenses 1,393,000 2,838,000 2,293,000 Other assets 162,000 308,000 388,000 - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 618,000 10,545,000 7,796,000 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities Payment for purchase of businesses, net of cash acquired (1,602,000) (28,358,000) (28,133,000) Payment for non-compete agreement -- (500,000) -- Increase in officer receivables (131,000) (77,000) (156,000) Purchase of furniture, fixtures and equipment (261,000) (528,000) (1,000,000) Purchase of package design (109,000) (131,000) (604,000) - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (2,103,000) (29,594,000) (29,893,000) - ------------------------------------------------------------------------------------------------------------------------------------
F-7 U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows ==================================================================================================================================== Years ended June 30, 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities Proceeds from issuances of stock $ 1,507,000 $ 5,294,000 $ 19,026,000 Repurchase of unit purchase options -- -- (3,922,000) Repurchase of common stock for treasury -- -- (1,307,000) Proceeds from bank line of credit 17,496,000 41,791,000 23,648,000 Payment on bank line of credit (16,208,000) (43,079,000) (23,648,000) Proceeds from notes payable -- 21,345,000 10,000,000 Payments of notes payable (1,600,000) (3,385,000) (36,560,000) Proceeds from mandatorily redeemable preferred securities -- -- 63,250,000 Acquisition finance costs -- (1,514,000) (3,343,000) - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Financing Activities 1,195,000 20,452,000 47,144,000 - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (290,000) 1,403,000 25,047,000 Cash and Cash Equivalents, beginning of year 970,000 680,000 2,083,000 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents, end of year $ 680,000 $ 2,083,000 $ 27,130,000 ====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-8 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Nature of Business U.S. Home & Garden Inc. (the "Company"), through its wholly-owned subsidiaries, is a leading manufacturer and marketer of a broad range of consumer lawn and garden products. The Company's products include weed preventive landscape fabrics, fertilizer spikes, decorative landscape edging, shade cloth, root feeders and weed trimmer replacement heads, which are sold under recognized brand names, such as WeedBlock(R), Jobe's(R), Emerald Edge(R), Shade Fabric(TM), Ross(R)and Weed Wizard(TM). The Company markets its products through most large national home improvement and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Builder's Square, Wal-Mart and Home Base in North America. The Company has experienced significant growth in recent years and believes that its success has been primarily attributable to the expansion of its product lines through the acquisition of complementary lawn and garden businesses (Note 1), the quality of its products, its focus on providing Retail Accounts with a single source of lawn and garden products, the efficiency and reliability of its inventory tracking and order fulfillment systems and its distinctive advertising and store displays. Principles The financial statements include the accounts of the Company of Consolidation and its wholly-owned subsidiaries and the results of operations of Weatherly Consumer Products Group (Weatherly), Easy Gardener, Plasti-Chain Product Line of Plastic Molded Concepts, Inc. (Plastic), Golden West Chemical Distributors (Golden West), Emerald Products, Tensar Polytechnologies, Inc. (Tensar), Landmaster Products, Inc. (Landmaster), and Weed Wizard, since their dates of acquisition (Note 1). Additionally, U.S. Home and Garden Trust I since its formation in April 1998. Significant intercompany accounts and transactions have been eliminated. Inventories Inventories, which consist of raw materials, finished goods, and packaging materials, are stated at the lower of cost or market; cost is determined by the first-in, first-out (FIFO) cost method. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are stated at cost. Depreciation is computed by the Equipment 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, Emerald F-9 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Products, Tensar, Landmaster and Weed Wizard, 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 mandatorily redeemable preferred securities debt are being amortized over the life of the related debt, a period of approximately thirty 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. Revenue Recognition Sales are recorded as products are shipped to customers. Net Income Per Share During 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. As required by SFAS 128, all prior earnings have been restated to reflect the retroactive application of this accounting pronouncement (Note 15). F-10 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ 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 1997 financial statement amounts have been reclassified to conform to the 1998 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 $1,823,000, $2,945,000 and $3,402,000 during the years ended June 30, 1996, 1997 and 1998. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all short-term investments purchased with an initial maturity of three months or less to be cash equivalents. Stock Based Compensation Effective July 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under this standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. The fair value method is required for all stock based compensation issued to nonemployees. 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 F-11 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ 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 10). New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Management does not believe that the Company's current financial statement disclosures will need to be modified based upon current operations. Results of operations and financial position, however, will be unaffected by future implementation of this standard. In June 1997, the Financial Accounting Standards Board issued SFAS 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS 131) which supersedes SFAS 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. F-12 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ SFAS 131 is effective for financial statements for period beginning after December 15, 1997 and requires comparative information for earlier years to be restated. The Company believes it operates under one business segment and has already substantially complied with the required financial statement disclosures. Results of operations and financial position will be unaffected by implementation of this standard. In February 1998, the Financial Accounting Standard Board issued SFAS 132, Employers' Disclosures about Pensions and Other Post Retirement Benefits. SFAS 132 standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when previous related accounting standards were issued. SFAS 132 is effective for financial statements for fiscal years beginning after December 15, 1997 and requires comparative information for earlier years to be restated unless the information is not readily available, in which case the notes to the financial statements should include all available information and a description of the information not available. Management believes that the Company's current financial statement disclosures will not need to be modified based upon current operations. Results of operations and financial position will be unaffected by implementation of this standard. In June 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings' effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. F-13 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of this new standard on July 1, 1999 to affect its financial statements. Financial Instruments The Company's financial instruments consist of cash, accounts receivable, debt and Company obligated mandatorily redeemable preferred securities of subsidary trust holding solely junior subordinated debentures. 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 and Company obligated mandatorily redeemable preferred securities of subsidary trust holding solely junior subordinated debentures 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-14 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. Business Acquisitions Since August 1992, the Company has consummated the following eight (8) acquisitions of lawn and garden companies or product lines for a total of approximately 80.0 million in consideration: o Golden West Chemical Distributors, Inc. - A manufacturer of humic acid-based products designed to improve crop yield, which was acquired in August 1992 for approximately $1.1 million in cash and $1.1 million of promissory notes. o Easy Gardener, Inc. - A manufacturer of multiple fabric landscaping products including Weedblock(R), which was acquired in September 1994 for approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million promissory note and two convertible notes each in the principal amount of $1.0 million. Approximately $2.2 million of additional purchase price was contingent on Easy Gardener meeting certain income requirements. A total of approximately $1.2 million of the additional amount has been paid to date and the remaining $978,000 is payable in fiscal 1999. o Emerald Products LLC - A manufacturer of decorative landscape edging, which was acquired in August 1995 for $835,000 in cash and a $100,000 promissory note. o Weatherly Consumer Products Group, Inc. - A manufacturer of fertilizer spikes and other lawn and garden products, which was acquired in August 1996 for 1,000,000 shares of Common Stock valued at $3.0 million and approximately $22.9 million in cash. o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. - A line of plastic chain links and decorative edgings, which was acquired from Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash. o Weed Wizard, Inc. - A manufacturer and distributor of weed trimmer replacement heads, which was acquired in February 1998 for approximately $16.0 million plus an additional $1.7 million for excess working capital and acquisition expenses, of which approximately $5.0 million was based on the value of certain net assets acquired. o Landmaster Products, Inc. - A manufacturer and distributor of polyspun landscape fabrics for use by consumers and professional F-15 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ landscapers, substantially all of whose assets were acquired in March 1998 for approximately $3.0 million, plus an additional $600,000 for certain assets and acquisition expenses, of which approximately $750,000 was based on the value of certain assets acquired. o Tensar(R) consumer products line of the Tensar Corporation. A line of lawn and garden specialty fencing, which was acquired from the Tensar Corporation in May 1998 for appoprixmately $5.4 million plus an additional $1 million for inventory. In addition, the Company has entered into a non-binding letter of intent to purchase a manufacturer and distributor of lawn and garden products for approximately $25 million plus additional contingent payments based upon future operating cash flows. All of the above acquisitions were accounted for as purchases and, accordingly, the results of operations of the acquired companies have been included in the consolidated statements of income since their respective acquisition dates. The following unaudited pro forma summary combines the consolidated results of operations of the Company, Weed Wizard, 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 and Weatherly have been reflected as if the acquisition occurred on July 1, 1995 and Weed Wizard, as if the acquisitions occurred July 1, 1996. The pro forma 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, Weed Wizard, 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 Tensar, Landmaster, Plastic and Emerald acquisitions have not been reflected since their prior revenue was not material to the Company's operations. Year ended June 30, 1996 1997 1998 - -------------------------------------------------------------------------------- Net sales $46,102,000 $58,135,000 $69,451,000 ================================================================================ Net income before extraordinary expense and income taxes $ 2,369,000 $ 4,236,000 $ 8,697,000 ================================================================================ Net income before extraordinary expense $ 3,462,000 $ 2,344,000 $ 5,741,000 ================================================================================ F-16 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Year ended June 30, 1996 1997 1998 - -------------------------------------------------------------------------------- ================================================================================ Net income $1,542,000 $2,121,000 $4,291,000 ================================================================================ Basic net income per common share before extraordinary expenses $ .25 $ .17 $ .32 ================================================================================ Basic net income per common share $ .11 $ .06 $ .24 ================================================================================ 2. Concentration Concentration of Trade accounts receivable are due primarily of Credit Risk from numerous customers located in many Credit Risk and and Significant geographic regions throughout the United States. The Company Relationships performs ongoing credit Significant evaluations of its customers' financial conditions and establishes an allowance for Relationships 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, 1997 and 1998, sales to two Easy Gardener customers accounted for approximately 36% (27% and 9%), 36% (26% and 10%) and 37% (26% and 11%) of consolidated net sales. Included in accounts receivable at June 30, 1997 and 1998 is $2,320,000 and $3,016,000 due from the largest customer. Substantially all of Easy Gardener's raw material purchases for Weedblock(R) inventory, representing approximately 50%, 22% and 37% of the Company's consolidated raw material purchases during the years ended June 30, 1996, 1997 and 1998, 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, 1997 and 1998 is $349,000 and $854,000 due to this vendor. 3. Inventories Inventories consist of: June 30, 1997 1998 ------------------------------------------------------------ Raw materials $ 578,000 $ 5,183,000 Finished goods 4,676,000 6,580,000 ------------------------------------------------------------ $5,254,000 $11,763,000 ============================================================ F-17 U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements ================================================================================================= 4. Furniture, Furniture, fixtures and equipment consist of: and Fixtures Equipment June 30, 1997 1998 ----------------------------------------------------------------------------- Leasehold improvements $ 397,000 $ 397,000 Furniture, fixtures and equipment 2,761,000 4,649,000 ----------------------------------------------------------------------------- 3,158,000 5,046,000 Less accumulated depreciation 843,000 1,456,000 ----------------------------------------------------------------------------- $2,315,000 $3,590,000 5. Excess of Cost The excess of cost over net assets acquired consists of Over Net Assets Acquired June 30, 1997 1998 ------------------------------------------------------------------------------ Weatherly Consumer Products Group, Inc. $23,046,000 $22,948,000 Easy Gardener, Inc. 15,639,000 15,639,000 Weed Wizard, Inc. -- 11,495,000 Tensar Polytechnologies, Inc. -- 4,928,000 Plastic Molded Concepts, Inc. 2,760,000 2,810,000 Landmaster Products, Inc. -- 2,290,000 Golden West Chemical Distributions, Inc. 2,098,000 2,098,000 Emerald Products, LLC 870,000 991,000 ------------------------------------------------------------------------------ 44,413,000 63,199,000 Less accumulated amortization 2,579,000 4,335,000 ------------------------------------------------------------------------------ $41,834,000 $58,864,000 ==============================================================================
F-18 U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements ================================================================================ 6. Notes Payable Notes payable consist of the following: and Line of Credit June 30, 1997 1998 ---------------------------------------------------------------------------------- $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 paid in November 1997. 3,800,000 -- ---------------------------------------------------------------------------------- 26,560,000 -- Less current portion 8,990,000 -- ---------------------------------------------------------------------------------- $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. If the revolving credit facility is terminated prior to June 2002, the Company is subject to certain prepayment penalties (Note 14). F-19 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ In connection with the mandatorily redeemable preferred securities financing obtained in April 1998, the remaining unpaid balance of the above term notes payable were refinanced and the revolving credit facility was terminated. The Company is currently negotiating with several financial institutions for a new revolving credit facility. See Notes 7 and 14. 7. Mandatorily In April 1998, U.S. Home & Garden Trust I (the "Trust"), a Redemmable newly created Delaware Redeemable Preferred business trust Preferred and a wholly-owned subsidiary of the Company, issued 78,000 Securities common Securities securities with a liquidation amount of $25 per common security to the Company for $1,950,000 and completed a public offering of 2,530,000 of 9.40% Cumulative Trust Preferred Securities with a liquidation amount of $25 per security (the "Trust Preferred Securities" and, together with the common securities, the "Trust Securities"). The Trust exists for the sole purpose of issuing Trust Securities and using the proceeds therefrom to acquire the subordinated debentures described below. Concurrent with the issuance of the Trust Securities, the Trust invested the proceeds therefrom in $65.2 million aggregate principal amount of 9.40% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company. Distributions on the Trust Securities are payable monthly in arrears by the Trust. The Subordinated Debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to certain other indebtedness of the Company. The Company may, under certain circumstances, defer the payment of interest on the Subordinated Debentures for a period not to exceed 60 consecutive months. If interest payments on the Subordinated Debentures are so deferred, distributions on the Trust Securities will also be deferred. During any such deferral period, interest on the Subordinated Debentures and distributions on the Trust Securities will accrue and compound monthly, and subject to certain exceptions, the Company may not declare or pay distributions on its capital stock or debt securities that rank equal or junior to the Subordinated Debentures. F-20 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The Trust Securities are subject to mandatory redemption upon the repayment of the Subordinated Debentures at a redemption price equal to the aggregate liquidation amount of the Securities plus any accumulated and unpaid distributions. The Subordinated Debentures mature on April 15, 2028, but may be redeemed at the option of the Company at any time after April 15, 2003 or earlier under certain circumstances. The Company effectively provides a full and unconditional guarantee of the Trusts' obligations under the Trust Securities to the extent that the Trust has funds sufficient to make such payments. Approximately $40 million of the proceeds received by the Company from the sale of the Subordinated Debentures to the Trust, were used by the Company to repay outstanding long-term debt and line of credit advances and prepayment penalties (see Note 6). 8. Officer Receivables Officer receivables represents notes which bear interest at 7% and require interest payments on an annual basis. Principal payments on the notes are due in aggregate annual installments of $75,000 to $200,000, with the aggregate balance of $330,000 due upon maturity in June 2002. 9. 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 $450,000, $195,000 and $125,000. The employment agreements also provide for certain lump sum payments in the event of a change in control equal to approximately $5.6 million. A five year agreement with an officer of Easy Gardener provides for a base aggregate annual salary of approximately $275,000 beginning in 1999. 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 2002. The Company also leases F-21 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ certain office equipment and automobiles under operating leases expiring in 1999 through 2003. The future minimum lease payments under these non-cancelable operating leases are as follows: Year ending June 30, Amount ------------------------------------------------------------ 1999 $1,164,000 2000 1,011,000 2001 594,000 2002 27,000 2003 6,000 ------------------------------------------------------------ $2,802,000 ============================================================ Rent expense was approximately $336,000, $680,000 and $532,000 for the years ended June 30, 1996, 1997 and 1998. Pension Plan Easy Gardener has established an employee defined contribution pension plan (the Plan). Employees of the Company, Weatherly, Easy Gardener, Weed Wizard 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 the years ended June 30, 1996, 1997 and 1998 was approximately $180,000, $199,000 and $223,000. 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 1999 to 2005. Royalty expense during the years ended June 30, 1996, 1997 and 1998 was $104,000, $304,000 and $353,000. 10. 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 F-22 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 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. No shares of the convertible preferred stock have been issued. (b) Common Stock In December 1997, the Company sold approximately 4,290,000 shares in a public offering. Net proceeds to the Company, after deducting commissions and expenses of $1,031,000, approximated $15,859,000. In June 1998, the Company's shareholders authorized an increase in common stock from 30 to 75 million shares. In September 1998, the Company adopted a Stockholders' Rights Agreement commonly known as a "poison pill," which provides that in the event an individual or entity becomes a beneficial holder of 12% or more of the shares of the Company's capital stock, other stockholders of the Company shall have the right to purchase shares of the Company's (or in some cases, the acquiror's) common stock at 50% of its then market value. (c) Treasury Stock During 1998, the Company repurchased 236,000 shares of treasury stock for $1,307,000. (d) 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 and 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 F-23 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ qualified individuals who are not employees of the Company. The maximum aggregate number of shares issued under this plan is 100,000. During 1996, 1997 and 1998, 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 the issuance of 1,500,000 shares of common stock. 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-24 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 Remaining Price Available Contractual Per Share Outstanding Exercisable for Grant Life - ------------------------------------------------------------------------------------------------------------------------------------ 1991 Plan June 30, 1995 $ 1.69(1) 688,000 588,000 12,000 5 years Became exercisable -- -- 100,000 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1996 $ 1.69(1) 688,000 688,000 12,000 4 years Expired in 1997 $ 1.69 (26,000) (26,000) 26,000 -- - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1997 $ 1.69(1) 662,000 662,000 38,000 3 years Cashless exercise of options(5) $ 1.69 (140,000) (140,000) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1998 $ 1.69(1) 522,000 522,000 38,000 2 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 Granted during 1998 $ 3.25 98,000 98,000 (98,000) -- Cashless exercise of options(5) $ 2.06 (24,000) (24,000) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1998 $ 2.18 1,459,000 1,234,000 17,000 3.5 years - ------------------------------------------------------------------------------------------------------------------------------------ 1997 Plan June 30, 1997 $ -- -- -- -- -- Granted during 1998 $3.32 565,000 485,000 935,000 -- - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1998 $3.32 565,000 485,000 935,000 4 years - ------------------------------------------------------------------------------------------------------------------------------------ Non-Plan Options June 30, 1995 $1.85 745,000(2) 645,000 -- 4 years Granted during 1996 $2.25 315,000(3) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------
F-25 U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements ==================================================================================================================================== Weighted Weighted Average Average Option Remaining Price Available Contractual Per Share Outstanding Exercisable for Grant Life - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1996 $1.83(1) 1,060,000 645,000 -- 3.5 years Became exercisable $2.25 -- 125,000 -- -- Granted during 1997 $1.91 1,225,000 1,225,000 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1997 $1.84(4) 2,285,000 1,995,000 -- 4 years Cashless exercise of $2.25 (44,000) (44,000) -- -- options(5) Granted during 1998 $5.02 190,000 190,000 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1998 $2.08 2,431,000 2,141,000 -- 3.5 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. (5) Options were exercised and immediately sold in one transaction. In addition to certain stock options and warrants granted to employees, the Company also issued a total of 925,000 options and warrants to various consultants and a financial institution relating to various consulting services, the acquisitions of Weatherly and PlastiChain, and the 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 F-26 [STAMP] U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ these amounts are being amortized over the life of the bank financing agreement (Note 14) and the excess of cost of net assets acquired. (e) Unit Purchase Options In October 1994, the Company granted six unit purchase options (UPOs), each consisting of 43,860 shares of the Company's common stock and Class B Warrants to purchase 43,860 shares of common stock at an exercise price of $2.28. These UPOs, which expire on August 31, 1999, have a nominal exercise price. Three of the UPOs were granted to an officer of the Company for his personal guarantees in connection with the Easy Gardener acquisition. Three were granted to an outside consultant for its services in connection with financing obtained for the Easy Gardener acquisition. The six UPOs issued with the nominal exercise price were valued at $400,000 and included in deferred financing costs. Concurrently, the Company also granted six UPOs, consisting of the same components, each with a current exercise price of approximately $75,000, three of which were granted to an officer of the Company. All these transactions were done in lieu of cash compensation in consideration for certain financial consulting and other services and for the personal guarantee and other collateral provided in connection with the Company's acquisition of Easy Gardener, Inc., without which the Company's transaction with Easy Gardener, Inc. would not have occurred. During 1997, one UPO and the related warrants were exercised by the outside consultant. Proceeds to the Company were approximately $175,000. In connection with the Company's August 1994 Private Placement, the placement agent and its designees were granted approximately 28 UPOs exercisable at $100,000 each. Each UPO consists of 43,860 shares of common stock and warrants to purchase 43,860 shares of common stock at $2.28 per share. These warrants expire in August 1999, if the underlying UPO is not exercised. If exercised, the warrants expire in May 2000. During 1997, 5 UPOs were terminated in a cashless exercise and approximately 60,000 shares of common stock was issued. F-27 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ In December 1997 and May 1998, the Company repurchased and retired approximately 21 UPOs underlying approximately 1,851,000 shares of common stock for approximately $3,922,000. The total shares of common stock issuable upon exercise of the remaining UPOs, including the underlying warrants, would be approximately 3,000,000 and 1,100,000 shares at June 30, 1997 and 1998. (f) 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 Warrant Remaining Price Per Contractual Share Outstanding(1) Exercisale Life - -------------------------------------------------------------------------------- June 30, 1995 $2.12 6,233,000 6,233,000 4.5 years Increase for antidilution $2.28 153,000 153,000 - Warrants exercised $2.24 (770,000) (770,000) - - -------------------------------------------------------------------------------- June 30, 1996 $2.14 5,616,000 5,616,000 3.5 years Warrants issued $2.45 525,000 525,000 - Warrants exercised $2.15 (2,380,000) (2,380,000) - Expired $6.00 (52,000) (52,000) - - -------------------------------------------------------------------------------- June 30, 1997 $2.18 3,709,000 3,709,000 3 years Warrants issued $4.75 250,000 250,000 - Warrants exercised $2.28 (1,408,000) (1,408,000) - Expired $2.25 (50,000) (50,000) - - -------------------------------------------------------------------------------- June 30, 1998 $2.39 2,501,000 2,501,000 2 years - -------------------------------------------------------------------------------- F-28 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ (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. (g) Common Stock Reserved At June 30, 1998, approximately 9,750,000 shares of common stock have been reserved for issuance upon the exercise of warrants, options and UPOs. (h) Stock Based Compensation The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for the plan. Under APB Opinion No. 25, because the exercise price of the Company stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation cost is recognized. FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net loss as if compensation costs for the Company's stock options and warrants had been determined in accordance with the fair value based method prescribed in FASB Statement No. 123. The Company estimates the fair value of each stock option and warrant at the grant date by using a modified Black-Scholes pricing model with the following weighted-average assumptions used for grants in 1997 and 1998, respectively: no dividend yield for any year; expected volatility of approximately 30% in both years; risk-free interest rates of 6.6% in both years and expected lives of approximately three to five years. Pro forma compensation expense associated with options granted to employees totalled $132,000, $1,566,000 and $1,013,000 in 1996, 1997 and 1998, respectively. 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: F-29 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Years ended June 30, 1996 1997 1998 - -------------------------------------------------------------------------------- Net income As reported $2,524,000 $3,183,000 $5,526,000 Pro forma 2,392,000 1,617,000 4,513,000 Dilutive per share 0.19 0.20 0.24 Dilutive per share pro forma 0.18 0.10 0.20 - -------------------------------------------------------------------------------- The above pro forma information includes only the effects of 1997 and 1998 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. 11. 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, 1997 1998 ------------------------------------------------------------------------------- Deferred Tax Assets Alternative minimum and state taxes $ - $ 325,000 Accounts receivable allowance and other 58,000 193,000 Net operating loss carryforwards 555,000 192,000 ------------------------------------------------------------------------------- Total deferred tax asset 613,000 710,000 Less valuation allowance (165,000) (188,000) ------------------------------------------------------------------------------- Net deferred tax asset $ 448,000 $ 522,000 =============================================================================== ------------------------------------------------------------------------------- Deferred Tax Liability Depreciation and amortization in excess of book amount $(547,000) $(812,000) =============================================================================== F-30 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ At June 30, 1998, the Company had utilized all of its Federal net operating loss (NOL) carryforwards. 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 $1,449,000 at June 30, 1998 and expires through 2001. Use of the Company's NOLs could be limited in the future as a result of issuance or exercise of stock options and warrants or sale or issuance of stock. The Company files its tax returns on a calendar year basis. Because of the seasonal nature of the Company's operations, the different reporting periods for book and tax purposes may affect the amount of taxes that will ultimately be payable or deferred. At June 30, 1997 and 1998, the Company established a $165,000 and $188,000 valuation allowance for the benefits pertaining to California NOLs which are not estimated to be realizable prior to their expiration. The Company believes that it is more likely than not that the remaining deferred tax assets will be realized through future taxable earnings or alternative tax strategies. The income tax (provision) benefit consists of: June 30, 1996 1997 1998 ---------------------------------------------------------------------- Current Federal $ -- $ (126,000) $(2,104,000) State (290,000) (280,000) (570,000) ---------------------------------------------------------------------- (290,000) (406,000) (2,674,000) ---------------------------------------------------------------------- Deferred Federal 1,013,000 (2,286,000) (126,000) State (8,000) (56,000) (65,000) ---------------------------------------------------------------------- 1,005,000 (2,342,000) (191,000) ---------------------------------------------------------------------- $ 715,000 $(2,748,000) $(2,865,000) ====================================================================== F-31 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The 1997 income tax expense consists of $3,200,000 expense from continuing operations reduced by a $452,000 benefit associated with the extraordinary expense. The 1988 income tax expense consists of $3,600,000 expense from continuing operations reduced by a $735,000 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: June 30, 1996 1997 1998 - -------------------------------------------------------------------------------- Income tax (provision) computed at Federal Statutory rate (34.0)% (34.0)% (34.0)% State taxes, net of Federal tax benefits (16.5) (4.6) (6.0) Nondeductible amortization and other (4.1) (4.5) (1.1) Deductible UPOs and stock options - - 7.3 Changes in valuation allowance on deferred tax asset 94.1 (0.2) (0.2) - -------------------------------------------------------------------------------- (Provision) benefit for income taxes 39.5% (43.3)% (34.0)% ================================================================================ 12. 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. The agreement provides that the Company will receive maximum total credits and cash totaling $1.6 million. The agreement, which was originally scheduled to expire in April 1999, was extended during 1998 to April 2002 and requires the Company to use all credits by this date. The Company expects to use the credits primarily by purchasing operating assets and advertising time. The Company expects to use all available credits by the expiration date and will continually evaluate this asset based upon credits utilized and future operating goals. F-32 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================
13. Supplemental June 30, 1996 1997 1998 Cash Flow --------------------------------------------------------------------------------------- Information Cash paid during the period for: Interest, including deferred financing costs and extraordinary expense $1,296,000 $5,816,000 $7,774,000 Taxes $ 96,000 $ 131,000 $2,038,000 =======================================================================================
Supplemental schedule of non-cash investing and financing activities: 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. During 1998, $350,000 of debt was converted into 154,000 shares of the Company's common stock. In connection with the business acquisitions in 1997 and 1998, the following transactions occurred. 1997 1998 ---- ---- Fair value of assets acquired $32,935,000 $28,487,000 Liabilities assumed (1,254,000) (354,000) Promissory Notes (3,323,000) -- ----------- ----------- Cash paid for assets acquired $28,358,000 $28,133,000 =========== =========== 14. Extraordinary As a result of the refinancing of all of the Company's Expense outstanding debt in August Expense 1996, the entire balance of deferred finance costs at June 30, 1996, net of accumulated amortization, plus certain prepayment penalties totaling approximately $455,000, was written off as an extraordinary expense during the year ended June 30, 1997. F-33 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ As a result of the refinancing of all of the Company's outstanding debt in April 1998 (see Note 6), the entire balance of deferred financing costs at April 1, 1998, net of accumulated amortization, plus certain prepayment penalties totaling approximately $743,000 was written off as an extraordinary expense during the year ended June 30, 1998. 15. Earnings Per Share The following is a reconciliation of the weighted average number of shares used to compute basic and dilutive earnings per share before extraordinary expense:
June 30, 1996 1997 1998 ---------------------------------------------------------------------------------------- Basic earnings per common share 10,206,000 13,695,000 17,776,000 Options and warrants 3,155,000 2,373,000 5,032,000 ---------------------------------------------------------------------------------------- Dilutive earnings per common share 13,361,000 16,068,000 22,808,000 ========================================================================================
16. Subsequent Subsequent to June 30, 1998, the Company signed a letter of Events intent to purchase a manufacturer and distributor of lawn and garden products for approximately $25,000,000 plus additional contingent payments based upon future operating cash flows. Subsequent to June 30, 1998, the Company repurchased approximately 793,000 shares of its common stock for approximately $3,860,000. During July and August 1998, 710,000 warrants were exercised generating $1,555,000 in cash proceeds to the Company. Subsequent to June 30, 1998, the Company received a commitment letter from a bank to provide $25 million of acquisition financing and a $20 million revolving line of credit for working capital. The Company and the bank are negotiating final terms of the agreement. F-34 U.S. Home & Garden Inc. and Subsidiaries
Schedule II-Valuation and Qualifying Accounts ===================================================================================================================== Beginning Charged to Costs Writeoffs Ending Balance and Expenses of Accounts Balance - --------------------------------------------------------------------------------------------------------------------- Allowance for Doubtful Accounts - -- 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 - -- Year ended June 30, 1998 $ 314,000 $179,000 $ (94,000) $399,000 - ---------------------------------------------------------------------------------------------------------------------
F-35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended 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 25, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this amended 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 25, 1998 - --------------------- of Directors, President Robert Kassel and Treasurer (Chief Executive and Financial Officer) /s/ Maureen Kassel Vice-President, September 25, 1998 - --------------------- Secretary and Maureen Kassel Director /s/ Richard Raleigh Chief Operating September 25, 1998 - --------------------- Officer and Director Richard Raleigh /s/ Lynda Gustafson Vice President - September 25, 1998 - --------------------- Finance (Principal Lynda Gustafson Accounting Officer) /s/ Jon Schulberg Director September 25, 1998 - --------------------- Jon Schulberg /s/ Fred Heiden Director September 25, 1998 - --------------------- Fred Heiden EX-10.3 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT AGREEMENT dated as of July 1, 1996 between U.S. HOME & GARDEN, INC., a Delaware corporation (the "Employer" or the "Company"), and LYNDA GUSTAFSON (the "Employee"). W I T N E S S E T H : WHEREAS, the Employer desires to employ the Employee as Corporate Controller of the Company, and to be assured of her services as such on the terms and conditions hereinafter set forth; and WHEREAS, the Employee is willing to accept such employment on such terms and conditions; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and intending to be legally bound hereby, the Employer and the Employee hereby agree as follows: 1. Term. Employer hereby agrees to employ Employee, and Employee hereby agrees to serve Employer as herein provided, commencing effective as of the date of this Agreement (the "Effective Date") and terminating on the third anniversary of the Effective Date (the "Term"). 2. Employee Duties. (a) During the term of this Agreement, the Employee shall have the duties and responsibilities of the Corporate Controller of the Company, reporting to the President and the Board of Directors of the Employer (the "Board"). It is understood that such duties and responsibilities shall be reasonably related to the Employee's position. The Employee shall also act as corporate controller, chief financial officer or in such other capacity, as may be requested from time to time by Employer, for any of the Company's subsidiaries. (b) The Employee shall devote substantially all of her business time, attention, knowledge and skills faithfully, diligently and to the best of her ability, in furtherance of the business and activities of the Company. The principal place of performance by the Employee of her duties hereunder shall be the Company's principal executive offices in San Francisco, California. 3. Compensation. (a) During the term of this Agreement, the Employer shall pay the Employee a salary (the "Salary") at a rate of $101,040 per annum, payable in equal installments bi-weekly, or at such other times as may mutually be agreed upon between the Employer and the Employee. Such Salary may be increased from time to time at the discretion of the Board. (b) In addition to the foregoing, the Employee shall be entitled to such other cash bonuses as may from time to time be awarded to her by the Board during or in respect of her employment hereunder. 4. Benefits. (a) During the term of this Agreement, the Employee shall have the right to receive or participate in all benefits and plans which the Company may from time to time institute during such period for its employees of like position, tenure and standing and for which the Employee is eligible, including, but not limited to, pension plans, profit-sharing plans, disability or sick-pay plan, medical reimbursement plans, group life insurance plans, thrift and/or savings plans, disability insurance plans, hospitalization insurance plans, major medical insurance plans, or other employee benefit plans. Nothing paid to the Employee under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary or any other obligation payable to the Employee pursuant to this Agreement. (b) During the term of this Agreement, the Employee shall be granted the number of paid holidays, personal days off, vacation days and sick leave days as are determined by the Company from time to time. Such vacation may be taken in the Employee's discretion with the prior approval of the Employer, and at such time or times as are not inconsistent with the reasonable business needs of the Company. (c) The Company shall reimburse Employee or all expenses incurred by Employee in connection with (i) continuing professional education obligations, including all travel, meals and other costs associated therewith, (ii) the payment of professional dues, and (iii) the maintenance of necessary licenses. 5. Travel Expenses. All travel and other expenses incident to the rendering of services reasonably incurred on behalf of the Company by the Employee during the term of this Agreement shall be paid by the Employer. If any such expenses are paid in the first instance by the Employee, the Employer shall reimburse her therefor on presentation of appropriate receipts for any such expenses. 6. Termination By Employer. Employee's employment under this Agreement may be terminated, effective as of the Date -2- of Termination pursuant to Section 8 of this Agreement, without any breach of this Agreement only on the following circumstances: 6.1. Death. The Employee's employment under this Agreement shall terminate upon her death. 6.2. Disability. If, as a result of the Employee's incapacity due to physical or mental illness, the Employee shall have been absent from her duties under this Agreement for 90 calendar days during any calendar year, the Employer may terminate the Employee's employment under this Agreement by giving the Notice of Termination (as defined in Section 7 below) anytime after the 90th calendar day. 6.3. Cause. The Employer may terminate the Employee's employment under this Agreement for Cause. For purposes of this Agreement, the Employer shall have "Cause" to terminate the Employee's employment under this Agreement upon (a) the willful and continued failure by the Employee to substantially perform her duties under this Agreement (other than any such failure resulting from the Employee's incapacity due to physical or mental illness) after demand for substantial performance is delivered by the Employer, in writing, specifically identifying the manner in which the Employer believes the Employee has not substantially performed her duties and the Employee fails to perform as required within 15 business days after such demand is made, (b) the willful engaging by the Employee in criminal misconduct (including embezzlement and criminal fraud) which is materially injurious to the Company, monetarily or otherwise, or (c) the conviction of the Employee of a felony. For purposes of this paragraph, no act, or failure to act, on the Employee's part shall be considered "willful" unless done, or omitted to be done, by her not in good faith and without reasonable belief that her action or omission was in the best interest of the Employer. Notwithstanding anything contained in this Agreement to the contrary, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Employee a Notice of Termination (as defined in Section 7 below). 6.4. Termination by the Employee. The Employee may terminate her employment under this Agreement (a) for Good Reason (as hereinafter defined), (b) at any time within six months after a Change of Control, or (c) if her health should become impaired to any extent that makes the continued performance of her duties under this Agreement hazardous to her physical or mental health or her life, provided that, in the latter case, the Employee shall have furnished the Employer with a written statement from a qualified doctor to such effect and provided, further, that at the Employer's request and expense the Employee shall submit to an examination by a doctor selected by -3- the Employer and such doctor shall have concurred in the conclusion of the Employee's doctor. 6.4.1. Good Reason. For purposes of this Agreement, "Good Reason" shall mean (a) any assignment to the Employee of any duties or reporting obligations other than those contemplated by, or any limitation of the powers of the Employee in any respect not contemplated by, this Agreement, (b) failure by the Employer to comply with its material obligations and agreements contained in this Agreement, or (c) failure of the Employer to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 9(f) of this Agreement. With respect to the matters set forth in clauses (a), (b) and (c) of this paragraph, the Employee must give the Employer thirty (30) days prior written notice of her intent to terminate this Agreement as a result of any breach or alleged breach of the applicable provision and the Employer shall have the right to cure any such breach or alleged breach within such thirty (30) day period. 6.4.2. Change of Control. For purposes of this Agreement, a "Change of Control" shall be deemed to occur, unless previously consented to in writing by the Employee, upon (a) the actual acquisition or the execution of an agreement to acquire 20% or more of the voting securities of the Employer by any person or entity not affiliated with the Employee (other than pursuant to a bona fide underwriting agreement relating to a public distribution of securities of the Employer), (b) the commencement of a tender or exchange offer for more than 20% of the voting securities of the Employer by any person or entity not affiliated with the Employee, (c) the commencement of a proxy contest against the management for the election of a majority of the Board of the Employer if the group conducting the proxy contest owns, has or gains the power to vote at least 20% of the voting securities of the Employer, (d) a vote by the Board to merge, consolidate, sell all or substantially all of the assets of the Employer to any person or entity not affiliated with the Employee, or (e) the election of directors constituting a majority of the Board of Directors who have not been nominated or approved by the Employee. 7. Notice of Termination. Any termination of the Employee's employment by the Employer or by the Employee (other than termination by reason of the Employee'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 Employee's employment under the provision so indicated. -4- 8. Date of Termination. The "Date of Termination" shall mean (a) if the Employee's employment is terminated by her death, the date of her death, (b) if the Employee's employment is terminated pursuant to Section 6.2 above, the date on which the Notice of Termination is given, (c) if the Employee's employment is terminated pursuant to Section 6.3 above, the date specified on the Notice of Termination after the expiration of any cure periods, and (e) if the Employee's employment is terminated for any other reason, the date on which a Notice of Termination is given after the expiration of any relevant cure periods. 9. Compensation Upon Termination or During Disability. (a) If the Employee's employment shall be terminated by reason of her death, the Employer shall pay to such person as she shall designate in a notice filed with the Employer, or if no such person shall be designated, to her estate as a lump sum benefit, her full Salary to the date of her death in addition to any payments the Employee'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 Employer, and such payments shall, assuming the Employer is in compliance with the provisions of this Agreement, fully discharge the Employer's obligations with respect to Section 3 of this Agreement, but all other obligations of the Employer under this Agreement, including the obligations to indemnify, defend and hold harmless the Employee, shall remain in effect. (b) During any period that the Employee fails to perform her duties hereunder as a result of incapacity due to physical or mental illness, the Employee shall continue to receive her Salary and other compensation until the Employee's employment is terminated pursuant to Sections 6.2 of this Agreement, or until the Employee terminates her employment pursuant to Section 6.4(a) of this Agreement, whichever first occurs. (c) After termination by Employer without Cause or pursuant to Section 6.2 of this Agreement or termination by Employee pursuant to Section 6.4 of this Agreement, the Employee shall be paid, in one lump sum, 100% of her Salary and other compensation and the benefits set forth in Sections 4(a) and (c), at the rate in effect at the time Notice of Termination is given, for one year. (d) If the Employee's employment shall be terminated for Cause, the Employer shall pay the Employee her full Salary and other compensation through the Date of Termination, at the rate in effect at the time Notice of Termination is given, and the Employer shall, assuming the Employer is in compliance with -5- the provisions of this Agreement, have no further obligations with respect to Section 3 of this Agreement, but all other obligations of the Employer under this Agreement, including the obligations to indemnify, defend and hold harmless the Employee, shall remain in effect. (e) The Employee shall not be required to mitigate the amount of any payment provided for in this Section 9 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 9 be reduced by any compensation earned by the Employee as the result of employment by another employer or business or by profits earned by the Employee from any other source at any time before and after the Date of Termination. The amounts payable to Employee under this Agreement shall not be treated as damages but as severance compensation to which Employee is entitled by reason of her employment in the circumstances contemplated by this Agreement. (f) The Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer, by agreement, in form and reasonably substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place. Failure of the Employer to obtain such Agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Employer in the same amount and on the same terms as she would be entitled to hereunder if she terminated her employment within six months after a Change in Control, except for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Employer" shall mean the Employer and any successor to its business and/or assets which executes the Agreement or which otherwise becomes bound by the terms and conditions of this Agreement by operation of law. 10. Confidentiality; Noncompetition. (a) The Employer and the Employee acknowledge that the services to be performed by the Employee under this Agreement are unique and extraordinary and, as a result of such employment, the Employee will be in possession of confidential information relating to the business practices of the Company. The term "confidential information" shall mean any and all information (verbal and written) relating to the Company or any of its affiliates, or any of their respective activities, other than such information which can be shown by the Employee to be in the public domain (such information not being deemed to be in the public domain merely because it is embraced by more general information which is in the public domain) other than as the -6- result of breach of the provisions of this Section 10(a), including, but not limited to, information relating to: trade secrets, personnel lists, financial information, research projects, services used, pricing, customers, customer lists and prospects, product sourcing, marketing and selling and servicing. The Employee agrees that she will not, during or for a period of two years after the termination of employment, except as may be required in the course of the performance of her duties hereunder, directly or indirectly, use, communicate, disclose or disseminate to any person, firm or corporation any confidential information regarding the clients, customers or business practices of the Company acquired by the Employee, without the prior written consent of Employer; provided, however, that the Employee understands that Employee will be prohibited from misappropriating any trade secret at any time during or after the termination of employment. (b) The Employee hereby agrees that she shall not, during the period of her employment and for a period of two (2) years following such employment, directly or indirectly, within any county (or adjacent county) in any State within the United States or territory outside the United States in which the Company is engaged in business during the period of the Employee's employment or on the date of termination of the Employee's employment, engage, have an interest in or render any services to any business (whether as owner, manager, operator, licensor, licensee, lender, partner, stockholder, joint venturer, employee, consultant or otherwise) competitive with the Company's business activities. Notwithstanding the foregoing, nothing herein shall prevent the Employee from owning stock in a publicly traded corporation whose activities compete with those of the Company's, provided that such stock holdings are not greater than 5% of such corporation. The Employee agrees, during the term of this Agreement, to disclose to the Company all investments which the Employee has, directly or indirectly, in an entity which competes with the Company, or an entity which does business with the Company. (c) The Employee hereby agrees that she shall not, during the period of her employment and for a period of two (2) years following such employment, directly or indirectly, take any action which constitutes an interference with or a disruption of any of the Company's business activities including, without limitation, the solicitations of the Company's customers, or persons listed on the personnel lists of the Company. At no time during the term of this Agreement, or thereafter shall the Employee directly or indirectly, disparage the commercial, business or financial reputation of the Company. (d) For purposes of clarification, but not of limitation, the Employee hereby acknowledges and agrees that the provisions of subparagraphs 10(b) and (c) above shall serve as a prohibition against her, during the period referred to therein, -7- directly or indirectly, hiring, offering to hire, enticing, soliciting or in any other manner persuading or attempting to persuade any officer, employee, agent, lessor, lessee, licensor, licensee or customer who has been previously contacted by either a representative of the Company, including the Employee, (but only those suppliers existing during the time of the Employee's employment by the Company, or at the termination of her employment), to discontinue or alter her, her or its relationship with the Company. (e) Upon the termination of the Employee's employment for any reason whatsoever, all documents, records, notebooks, equipment, price lists, specifications, programs, customer and prospective customer lists and other materials which refer or relate to any aspect of the business of the Company which are in the possession of the Employee including all copies thereof, shall be promptly returned to the Company. (f) (i) The Employee agrees that all processes, technologies and inventions ("Inventions"), including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by her during her employment by Employer shall belong to the Company, provided that such Inventions grew out of the Employee's work with the Company are related in any manner to the business (commercial or experimental) of the Company or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Employee shall further: (a) promptly disclose such Inventions to the Company; (b) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (c) sign all papers necessary to carry out the foregoing; and (d) give testimony in support of her inventorship; (ii) If any Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by the Employee within two years after the termination of her employment by the Company, it is to be presumed that the Invention was conceived or made during the period of the Employee's employment by the Company; and (iii) The Employee agrees that she will not assert any rights to any Invention as having been made or acquired by her prior to the date of this Agreement, except for Inventions, if any, disclosed to the Company in writing prior to the date hereof. (g) The Company shall be the sole owner of all products and proceeds of the Employee's services hereunder, including, but not limited to, all materials, ideas, concepts, formats, suggestions, developments, arrangements, packages, programs and other intellectual properties that the Employee may acquire, obtain, develop or create in connection with and during -8- the term of the Employee's employment hereunder, free and clear of any claims by the Employee (or anyone claiming under the Employee) of any kind or character whatsoever (other than the Employee's right to receive payments hereunder). The Employee shall, at the request of the Company, execute such assignments, certificates or other instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, or title and interest in or to any such properties. (h) The parties hereto hereby acknowledge and agree that (i) the Company would be irreparably injured in the event of a breach by the Employee of any of her obligations under this Section 10, (ii) monetary damages would not be an adequate remedy for any such breach, and (iii) the Company shall be entitled to injunctive relief, in addition to any other remedy which it may have, in the event of any such breach. (i) The parties hereto hereby acknowledge that, in addition to any other remedies the Company may have under Section 10(h) hereof, the Company shall have the right and remedy to require the Employee to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively, "Benefits") derived or received by the Employee as the result of any transactions constituting a breach of any of the provisions of Section 10, and the Employee hereby agrees to account for any pay over such Benefits to the Company. (j) Each of the rights and remedies enumerated in Section 10(h) and 10(i) shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. (k) If any provision contained in this Section 10 is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portions. (l) If any provision contained in this Section 10 is found to be unenforceable by reason of the extent, duration or scope thereof, or otherwise, then the court making such determination shall have the right to reduce such extent, duration, scope or other provision and in its reduced form any such restriction shall thereafter be enforceable as contemplated hereby. (m) It is the intent of the parties hereto that the covenants contained in this Section 10 shall be enforced to the fullest extent permissible under the laws and public policies -9- of each jurisdiction in which enforcement is sought (the Employee hereby acknowledging that said restrictions are reasonably necessary for the protection of the Company). Accordingly, it is hereby agreed that if any of the provisions of this Section 10 shall be adjudicated to be invalid or unenforceable for any reason whatsoever, said provision shall be (only with respect to the operation thereof in the particular jurisdiction in which such adjudication is made) construed by limiting and reducing it so as to be enforceable to the extent permissible, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of said provision in any other jurisdiction. 11. Indemnification. The Employer shall indemnify and hold harmless the Employee against any and all expenses reasonably incurred by her in connection with or arising out of (a) the defense of any action, suit or proceeding in which she is a party, or (b) any claim asserted or threatened against her, in either case by reason of or relating to her being or having been an employee, officer or director of the Company, whether or not she continues to be such an employee, officer or director at the time of incurring such expenses, except insofar as such indemnification is prohibited by law. Such expenses shall include, without limitation, the fees and disbursements of attorneys, amounts of judgments and amounts of any settlements, provided that such expenses are agreed to in advance by the Employer. The foregoing indemnification obligation is independent of any similar obligation provided in the Employer's Certificate of Incorporation or Bylaws, and shall apply with respect to any matters attributable to periods prior to the Effective Date, and to matters attributable to her employment hereunder, without regard to when asserted. 12. General. This Agreement is further governed by the following provisions: (a) Notices. All notices relating to this Agreement shall be in writing and shall be either personally delivered, sent by telecopy (receipt confirmed) or mailed by certified mail, return receipt requested, to be delivered at such address as is indicated below, or at such other address or to the attention of such other person as the recipient has specified by prior written notice to the sending party. Notice shall be effective when so personally delivered, one business day after being sent by telecopy or five days after being mailed. To the Employer: U.S. Home & Garden Inc. 655 Montgomery Street Suite 830 San Francisco, CA 94111 Attention: Robert L. Kassel, President -10- To the Employee: Lynda Gustafson 1688 Sacramento Street San Francisco, California 94109 With, in either case, a copy in the same manner to: Tenzer Greenblatt LLP 405 Lexington Avenue New York, New York 10174 Attention: Barry S. Rutcofsky, Esq. (b) Parties in Interest. Employee may not delegate her duties or assign her 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. (c) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of the Employee by the Employer and contains all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever. Any modification or termination of this Agreement will be effective only if it is in writing signed by the party to be charged. (d) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. (e) Warranty. Employee hereby warrants and represents as follows: (i) That the execution of this Agreement and the discharge of Employee's obligations hereunder will not breach or conflict with any other contract, agreement, or understanding between Employee and any other party or parties. (ii) Employee has ideas, information and know-how relating to the type of business conducted by Employer, and Employee's disclosure of such ideas, information and know-how to Employer will not conflict with or violate the rights of any third party or parties. (f) Severability. In the event that any term or condition in this Agreement shall for any reason be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or condition of this Agreement, but this Agreement shall be construed as if such -11- invalid or illegal or unenforceable term or condition had never 1been contained herein. (g) 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. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. U.S. HOME & GARDEN, INC. By: /s/ Robert L. Kassel --------------------------- Robert L. Kassel, President /s/ Lynda Gustafson --------------------------- LYNDA GUSTAFSON -12- EX-10.4 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made as of the 1st day of September 1998, by and between EASY GARDENER Inc., a Delaware corporation (the "Company"), and Richard M. Grandy (the "Executive"). W I T N E S S E T H : WHEREAS, the Employer desires to employ the Executive as a President of the Company, and to be assured of his services as such on the terms and conditions hereinafter set forth; and WHEREAS, the Executive is willing to accept such employment on such terms and conditions; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and intending to be legally bound, the Employer and the Executive 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 five-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 President of the Company and shall have such duties as may be from time to time delegated to him by the Board of Directors. The Executive shall report to Richard Raleigh and 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, of 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. The Company will also provide Director's and Officer's insurance to the Executive which includes all subsidiaries, current and future. 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 $275,000, payable in advance, in installments, and in the same manner as other employees of the Company are paid. During the second year of this Agreement the Executive shall be paid a salary at the annual rate of $300,000 and during the third full year of this Agreement the Executive shall be paid a salary at the annual rate of $300,000 and during the fourth and fifth full year of this Agreement, the Executive shall be paid a salary at the annual rate of $350,000. Such salary is hereinafter referred to as the "Base Salary." 6.2 In addition to the foregoing, the Executive shall be entitled to such other bonuses as may from time to time be awarded to him by the Board during or in respect of his employment hereunder. These bonuses shall be granted in conjunction with bonuses awarded to other key management in a mutually agreed upon proportion. During the term of this Agreement, the Company shall reimburse the Executive for such costs and expenses as the 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. -2- 7. 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. 8. 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. 9. 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. 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. -3- 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 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. -4- 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 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 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). -5- (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 a 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. Miscellaneous Provisions. 16.1 Executed 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. 16.2 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 U.S. Home & Garden, Inc. 655 Montgomery Street Suite 500 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 76712 -6- 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). 16.3 Amendments. This Agreement may only be amended by a written instrument executed by each of the parties hereto. 16.4 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. 16.5 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. 16.6 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. 16.7 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 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. 16.8 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. -7- IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. EASY GARDENER Inc. By:/s/ Richard J. Raleigh ---------------------------- Name: Richard J. Raleigh Title: Vice President /s/Richard M. Grandy ---------------------------- Richard M. Grandy -8- EX-10.18 4 LEASE OF WAREHOUSE LEASE OF WAREHOUSE This Lease made and executed this 26 day of May , 1998, by and between SARAH C. LEER, hereinafter called "LESSOR", and EASY GARDENER, INC., hereinafter called "LESSEE", WITNESSETH: 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: 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 the 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 for 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. Lessor will complete the ongoing replacement of the remaining 1/4th of the roof. 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 Page 1 of 3 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 convenants 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 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 agent 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 that they cannot be used by the Lessee for the Page 2 of 3 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 and 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 EASY GARDENER, INC. By: /s/ Sheila B. Jones --------------------------- Name: Sheila B. Jones Title: VP Operations Prepared By: /s/ Henry C. Prewitt - ----------------------------- Henry C. Prewitt Attorney at Law P.O Box 350 Paris, Kentucky 40362-035 Page 3 of 3 EX-10.24 5 COMMERCIAL BUILDING LEASE COMMERCIAL BUILDING LEASE STATE OF GEORGIA LUMPKIN COUNTY This indenture, made, executed and entered into this 12th day of June , 1998, for a period of three years shall be considered a ground Lease and not a usufruct by and between the following parties and concerning the premises as hereinbelow provided: Lessor: Norman Adams James A. "Tony" Anderson Donald E. Bryan Pamela J. Butler Known and doing business as AABB P. 0. Box 98 Dahlonega, Georgia 30533 Lessee: Easy Gardener, Inc. 3022 Franklin Waco, Texas 76710 Premises: That property shown on Exhibit "A" and located at 6195 Highway 52 East and the adjacent 25 Starbridge Road and 74 Starbridge Road, Dahlonega, Lumpkin County, Georgia (Being known and identified locally as "Weed Wizard), but not including the area marked "OUT" on Exhibit"A." WHEREAS, Lessor, sometimes also referred to as Landlord, is the owner of the Premises and desires to rent and Lease to Lessee for a period of time under the terns and conditions as hereinbelow provided; and WHEREAS, Lessee, sometimes also referred to as Tenant, desires to rent and Lease said Premises from Landlord under said terms and conditions; NOW, THEREFORE, in consideration of the mutual benefits which shall accrue to the benefit of the parties hereto, and in consideration of the promises each gives and makes to the other, and various other valuable considerations, the sufficiency of which shall not be questioned, which are delivered and in hand paid, at and before the delivery of these presents, the parties hereto agree as follows: 1. EFFECTIVE COMMENCEMENT DATE. Without regard to the date of the signing of this Lease by the parties hereto, the Effective Commencement Date of this Lease, also referred to herein as the Effective Date, shall be August 26, 1998 , and all times and terms shall be calculated from said Effective Date unless otherwise specifically provided. 2. LEASE AGREEMENT. This Lease agreement shall become effective and binding upon the parties hereto as of the Effective Commencement Date. As of the Effective Commencement Date, each and every provision of this Lease Agreement shall thereupon become fully and totally effective. The Effective Commencement Date shall be the Effective Date hereinabove set out, and shall be the date from which all times are computed hereunder. The Effective Commencement Date shall be the date when Lessee is deemed to take possession of the Premises and the date from which liability for Lease payments shall be calculated. 3. TERM OF LEASE. a. Subject to Section 3.c. hereof and any other provisions of this Lease regarding the right of termination, this Lease shall be for a term beginning as of the Effective Commencement Date and ending at midnight on the day -2- prior to the third anniversary of the Effective Commencement Date. b. Upon written notice to Lessor prior to ninety calendar days prior to the termination of the term of this Lease as provided next above, Lessee may negotiate for such terms and conditions as may be mutually agreeable and acceptable to continue the Term of the Lease for an additional period as may be agreed by the parties hereto. After the ninetieth day prior to the termination of the term of this initial Lease Lessor shall have the tight to advertise the Premises for Lease and to card the Premises in a bona fide effort to market the Premises. c. Lessee may terminate this Lease with or without cause upon each anniversary date following the Effective Date and upon giving Lessor at least sixty (60) days prior written notice before such anniversary date. 4. NATURE OF ESTATE. This Lease is intended by the parties to convey a leasehold estate as set forth by Official Code of Georgia and not a usufruct. The leasehold shall be subject to any liens for debt in such cases where Lessor has pledged the subject property as security for existing loans, and it is further agreed that Lessor shall be free to modify existing loans and to acquire additional financing which shall be secured by the subject property, with or without notice to Lessee, but in the event the agreement of Lessee is required by any Lender, such agreement shall not be unreasonably withheld. 5. RENTAL. As of the Effective Commencement Date, Lessee shall commence payment of rent to Lessor, with monthly rentals -3- payable in arrears on the 1st day of each month for the month preceding, prorated for any portion of a month. The initial payment shall be due on the 1st day of the month following the Effective Date and shall be in the amount of Four Hundred Ninety-One and No/100 Dollars ($491.00) per day for the remainder of the month following the Effective Date. a. The initial basic rent shall be Fourteen Thousand Seven Hundred Fifty and No/100 Dollars ($14,750.00) per month. The regular monthly payment shall be due on the first day of the month following the month in which the first payment occurs, and on the first day of each month thereafter as provided herein. b. Lessee shall pay electric, water and garbage charges, and all other utility charges, (including heating and air conditioning and the costs of operating any air compressor units) accruing after the Effective Date and before the final date, unless otherwise provided in writing. c. Lessor shall pay and discharge all real estate taxes or assessments. Lessee shall pay all personal property taxes on furniture and equipment, all business licenses and fees, and shall further comply with all appropriate and applicable governmental regulations. d. Any payment of rent received in hand paid by Lessor or postmarked by the 5th day of the month when payment first became due shall be considered a timely payment. e. Lessor's obligation to pay rent is dependent upon Lessor's performance of Lessor's obligations hereunder, including Lessor's covenant of quiet enjoyment. -4- 6. LATE PAYMENT. Any payment of rent postmarked after the 5th day of the month in which said payment first became due, or if paid by any means other than U.S. Mail, if such rent is received by Lessor later than such date as aforesaid shall be considered a late payment. Any payments by check which is dishonored by the payor bank shall also constitute a late payment. a. Lessee agrees to pay a late charge of One Hundred and No/100 Dollars ($100.00) for any late payment as defined above. Such charge becomes due and payable on the 6th day of the month in which the monthly payment became due, and will be deducted first from any subsequent payments received before determining if the total payment submitted amounts to a timely payment. b. Failure to make any payment plus the late fee by the 15th day of the month in which such payment became due, or on the first business day following said 15th day of the month if the 15th day of the month falls on a weekend or holiday shall, under the bargained agreement of Lessor and Lessee, constitute constructive abandonment of the Premises and a breach of the Lease such that Lessor may prove to evict Lessee and rent the Premises. c. If any rent owing under this Lease is collected by or through an attorney at law, Lessee agrees to pay an additional fifteen percent (15%) of the amount of such delinquent rent as attorney's fees. -5- 7. USE. Both parties have bargained and agreed that the Premises may be used for legal purposes only, with the following additional limitations. a. The building located on the Premises is intended to be leased for use as a manufacturing, administrative management and shipping center and warehouse for the use by Lessee and those persons identified in the application or on this Lease as occupants. No additional persons shall be permitted to operate on the premises except with written permission of Lessor or as may be provided under the terms and conditions of this Lease. b. Failure to use the premises as provided herein shall constitute a condition of default or breach under the terms of the Lease. 8. ASSIGNMENT. Both parties have bargained and agreed that this Lease shall not be assigned without the written consent of the Lessor, and will as a minimum require submission of a full and complete application and financial statement by the proposed substitute Lessee. Such permission shall be at the sole discretion of Lessor. In any event, any approval of assignment of this Lease acts as an early termination of the Lease unless otherwise agreed by the parties as a result of a bargained agreement supported by additional consideration. 9. PROTECTION OF TITLE. Lessee shall protect Lessor's title to the property from mechanic's liens as to any persons doing work at the request of Lessee. Except as expressly authorized in this Lease, Lessee shall not have the authority to -6- take any action which would affect Lessor's title to the Premises. 10. REPAIRS. a. Lessor, from and after the Effective Commencement Date, shall maintain the Premises in good repair and shall have the obligation to make any repairs to the Premises (except repairs caused by or resulting from any acts of Lessee), to include routine repairs, (unless the cost of such repairs is covered by insurance, in which case the insurance proceeds shall be used to pay for repairs). b. Lessor shall maintain the Premises during the term hereof. c. If Lessor shall deem it necessary or desirable to effect renovations or redecoration of the Premises, such action shall be made at Lessor's expense. Lessee may abate the rent proportionate to the amount of Premises being so renovated or redecorated. If any such repair, alterations, reconstruction, improvement, removal or construction shall be required by reason of Lessee's use or occupancy of the Premises, then such action shall be at Lessee's expense. 11. DEFAULT. In the event that Lessee shall default in the payment of any rentals due hereunder, or if Lessee shall fail to observe or perform any of the covenants, agreements, or conditions of this Lease on the part of the Lessee to be kept and performed, or if Lessee shall file a petition in bankruptcy or be adjudicated a bankrupt, or if Lessee shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, or liquidation, then in any of such events, Lessee -7- shall be deemed to be in default under this Lease. Lessor's remedy in the event of any default includes, but is not limited to, the termination of this Lease as of the expiration of thirty (30) days after written notice specifying such default to Lessee, unless during such thirty (30) days period Lessee shall either cure such default if the default is capable of being cured within such thirty (30) day period, or in the event that such default is incapable of being cured within such thirty (30) day period, Lessee commences to cure such default and thereafter diligently pursues the same. In the event that this Lease is terminated, as aforesaid, then this Lease shall become null and void as of the date of termination, Lessee shall have no further rights in respect to the Premises thereafter, and the Lease Agreement shall thereupon become null and void.o Lessor shall have such other remedies as are or may be provided by law. This remedy is specifically in addition to any other remedy set forth in this Lease Agreement. Should bankruptcy proceedings be filed by or against Lessor, or if Lessor is adjudged a bankrupt, or if Lessor makes an assignment for the benefit of creditors, or a receiver is appointed for Lessor or the leased premises, Lessee shall have the option to terminate this Lease effective immediately on any date chosen by Lessee. 12. LEASEHOLD MORTGAGE. Lessee shall not have any right to mortgage its Lease interest in the Premises. Any mortgage by Lessor of the fee title to the Premises shall provide Lessee may remain a tenant if Lessee is not in default hereunder. -8- 13. CONDEMNATION; FIRE OR OTHER CASUALTY. If the Premises or any part of the Premises shall be taken, appropriated or condemned by any public authority to the degree that the Premises are rendered unsuitable for Lessee's use, or if by any law, ordinance or other reason the use of the Premises by the Lessee is deemed unlawful, then, at the option of Lessee and upon thirty (30) days notice in writing to Lessor, all obligations of the parties under this Lease shall terminate. Each party shall have the full right to make a claim against the condemning authority for his interest in the Premises which have been so taken and condemned. Should the Premises (or any part thereof) be damaged or destroyed by fire or other casualty insured under the standard fire and insurance policy, with approved standard extended coverage endorsement applicable to the premises, Lessor shall, except es otherwise provided herein, and to the extent it recovers proceeds from such insurance, repair and/or rebuild the same with reasonable diligence. Lessor shall not be obligated to repair, rebuild or replace any property belonging to Lessee or any improvements to the premises furnished by Lessee. No rent shall be due for that portion of the Promises being repaired or restored until such repairs or restoration are completed to the satisfaction of Lessee. If there should be a substantial interference with the operation of Lessee's business in the Premises as a result of such damage or destruction which requires Lessee to temporarily close its business to the public, the rent shall abate totally. -9- Notwithstanding anything to the contrary contained in Paragraph 13 or elsewhere in this Lease, either Lessor or Lessee may terminate this Lease on thirty (30) days' notice to the other, given within sixty (60) days after the occurrence of any damage or destruction if (1) the Premises be damaged or destroyed as a result of a risk which is not covered by insurance, or (2) the Premises be damaged and the cost to repair the same shall be more than fifty percent (50%) of the cost of replacement thereof, 14. QUIET ENJOYMENT. Lessor covenants that so long as Lessee performs Lessee's obligation hereunder Lessee shall have the right of quiet enjoyment of the Premises. Lessee's obligation hereunder, including the obligation to pay rent, are dependent upon Lessor's fulfillment of Lessor's obligations hereunder, including the convent of quiet enjoyment. 15. SURRENDER. Upon expiration or earlier termination of this Lease, Lessee shall deliver up and surrender to Lessor possession of the Premises, and any improvements thereon, in the condition as the same may then exist. In the event Lessee has failed to maintain the Premises in good repair, subject only to fair wear and tear, then Lessor shall have a right of action for any damages, to include cost of suit and attorney fees. 16. NOTIFICATION OF INTENT TO QUIT. In the event that Lessee becomes unable to fulfill Lessee's obligations under this Lease Agreement, or for any reason desires to terminate the Lease and quit the Premises, Lessee may do so. In that event, Lessee shall be liable for the balance of the rent due until the next -10- anniversary date hereof, less any rent collected by Lessor in mitigation for the same period. 17. TIME. Time is of the essence in this Lease. 18. INSURANCE. Lessee shall maintain such insurance as it deems necessary to protect its interest in the Premises (i.e., Lessee's leasehold interest), the contents thereof, and others, and Lessee shall hold harmless and indemnify Lessor against any claim arising from Lessees use of or presence on the Premises, to include any claim by third party invitees or licensees. As a minimum' Lessee shall maintain at all times a general hazard policy, to include fire, theft, and storm damage to Lessee's property, plus a liability policy in the total amount of $1,000,000.00 or greater, with a per claim limit of no less than $1,000,000.00, and Lessee shall ensure that Lessor is named as an insured party on said liability policy. Lessor shall maintain insurance on the building. The liability of each party to the other shall not extend to any matter against which such party shall be effectively protected by insurance; provided, however, that if any such liability shall exceed the amount of the insurance in effect, then liability as may be provIded herein shall be applicable with respect to such excess. 19. NOTICE. All notices to either party shall be in writing and shall be given by hand delivery with signed receipt or by mailing by certified mail, return receipt requested, to the address hereinabove set out. Any notice required of Lessor to Lessee shall be conclusively shown to be complete notice by -11- placing such notice in the U.S. Mail as certified mail and addressed to Lessee at such nailing address as it provides to Lessor in writing, or by placing in the UPS or Federal Express system. 20. PERMITS AND LICENSES. Lessee shall have full and total responsibility for the qualification for and acquisition of all permits and licenses for its intended operations. 21. FIXTURES INSTALLED BY LESSEE. Lessee shall have the right, at its own expense, to install such additional fixtures and equipment as may be necessary for its operation. At the end of the Lease period, Lessee shall be entitled to remove only such fixtures and equipment as can be removed without physical modification or damage to the remaining structure, to include walls, ceiling and floors. 22. MAINTENANCE OF EXTERIOR. Lessor is responsible for the maintenance of the outside of the building to include parking lot. Lessee is responsible for routine cleanup of the interior of the Premises. 23. IMPROVEMENTS BY LESSEE. Lessee shall be responsible for all expenses incurred for leasehold improvements desired by Lessee. Lessor shall be responsible for all repairs to all doors, windows, and electrical systems serving the Premises after commencement of Lease and during the Term, unless such repairs are needed because of harm caused by the Lessee. Lessee agrees throughout the initial term of this Lease, at its expense, to maintain in good order the heating and air conditioning equipment, including replacement parts, compressors and air -12- handling units, to include changing of the air-conditioning filters. 24. APPLICABLE LAW. This Lease Agreement shall be governed by the laws of the State of Georgia. Lessee agrees that it has entered into the County of Lumpkin for the purpose of conducting business, that it has sought out Lessor for the purpose Of entering into this business agreement, that its acts constitute doing business in the County, that as of the Effective Date of this Lease it shall be deemed that Lessee has an office and a place of business in said County, and that venue is proper in any Lumpkin County Court with necessary jurisdiction over the subject matter, and that Lessee further agrees to accept venue and jurisdictions in any appropriate Lumpkin County Court for settlement of any issue arising between Lessor and Lessee, or to which Lessee may be joined as a party by Lessor. 25. BINDING EFFECT. This Lease and each and every provision hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, administrators, executors, successors and assigns. 26. RIGHT OF ACCESS. Lessor shall have the right of access to the Premises, without notice, for inspection during reasonable hours. In case of emergency, Lessor may enter at any time to protect life and prevent damage to the Premises. 27. WHOLE AGREEMENT. This Lease constitutes the entire agreement between Lessor and Lessee. No oral agreement shall be enforceable to modify or amend this agreement unless reduced in -13- writing, signed by the Parties hereto and attached by reference as an amendment to this agreement. Witness our hands and seals the day and year first set out above. LESSOR: LESSEE: /s/ Norman Adams Easy Gardener Inc. - --------------------------- ------------------------ Norman Adams /s/ James A. Tony Anderson By: /s/ Sheila B. Jones - --------------------------- ------------------------ James A. "Tony" Anderson VP Operations /s/ Donald E. Bryan - --------------------------- Donald E. Bryan /s/ Pamela J. Butler - --------------------------- Pamela J. Butler -14- EX-23 6 CONSENT INDEPENDENT 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 Nos. 33-55020, 33-71978 and 333-44459 on Form S-8 of U.S. Home & Garden Inc. of our report dated August 12, 1998, relating to the consolidated financial statements and Schedule of U.S. Home & Garden Inc. appearing in this Annual Report of Form 10-K of U.S. Home & Garden Inc. for the year ended June 30, 1998. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP San Francisco, California September 28, 1998 EX-27 7 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUN-30-1998 JUN-30-1998 27,130,000 0 17,749,000 399,000 11,763,000 57,895,000 5,046,000 1,456,000 126,813,000 11,152,000 63,250,000 0 0 20,000 51,579,000 126,813,000 67,149,000 67,149,000 30,431,000 30,431,000 0 0 3,563,000 10,576,000 3,600,000 6,976,000 0 (1,450,000) 0 5,526,000 .31 .24
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