-----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, J+jgE7VeoOMWKmCg0/uaJW9uNmngkRt+OWHPsCVCQZWFIKQN+LPLMv4lHmWss0XT FSV/G6tiRwTtWWm9LDusSg== 0001169232-02-002114.txt : 20021015 0001169232-02-002114.hdr.sgml : 20021014 20021015170745 ACCESSION NUMBER: 0001169232-02-002114 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20021015 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: 001-14015 FILM NUMBER: 02789598 BUSINESS ADDRESS: STREET 1: 655 MONTGOMERY ST STE 500 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4156168111 MAIL ADDRESS: STREET 1: 655 MONTGOMERY ST STREET 2: SUITE 500 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 FORMER COMPANY: FORMER CONFORMED NAME: NATURAL EARTH TECHNOLOGIES INC DATE OF NAME CHANGE: 19930328 10-K 1 d52182_10-k.txt FORM 10-K 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, 2002 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 001-14015 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; Preferred Share Purchase Rights (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. |X| The aggregate market value of the Common Stock held by non-affiliates of the registrant (based upon the closing sale price) on September 30, 2002 was approximately $5,082,000. As of September 30, 2002, 17,752,267 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 our future activities. Such forward-looking information involves important known and unknown risks and uncertainties that could significantly affect actual results, performance or achievements 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 us. These risks and uncertainties include, but are not limited to, those relating to our growth strategy, customer concentration, outstanding indebtedness, dependence on weather conditions, seasonality, expansion and other activities of competitors, ability to successfully integrate acquired companies and product lines, changes in federal or state environmental laws and the administration of such laws, protection of trademarks and other proprietary rights, the ability to maintain adequate financing arrangements necessary to fund operations and the general condition of the economy and its effect on the securities markets and other risks detailed in our 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 We are a leading manufacturer and marketer of a broad range of consumer lawn and garden products. Our products include weed preventive landscape fabrics, fertilizer and plant food spikes, decorative landscape edging, grass and flower seed products, shade cloth and root feeders, which are sold under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald Edge(R), Shade Fabric(TM), Ross(R), Tensar(R), Amturf(R) and Landmaster(R). We believe that we have significant market share and favorable brand-name recognition in several of our primary product categories. We market our products through most large national home improvement and mass merchant retailers ("Retail 2 Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware and TruServe in North America. We were organized under the laws of the State of California in August 1990 under the name Natural Earth Technologies, Inc. In January 1992 we reincorporated under the laws of the State of Delaware and in July 1995 we changed our name to U.S. Home & Garden Inc. Our lawn and garden operations are conducted through our subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy Gardener's subsidiaries and through our subsidiary, Ampro Industries, Inc. ("Ampro"), and our agricultural products operations are conducted through our subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context suggests otherwise, references in this Report to "we", "us", "the Company" or "our" refer to U.S. Home & Garden Inc. and its subsidiaries. Our executive offices are located at 655 Montgomery Street, Suite 830, San Francisco, California 94111, and our 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. 3 Prior Acquisitions Since August 1992, we have consummated the following eleven (11) acquisitions of companies or product lines for a total of approximately $111 million in consideration: o Golden West Chemical Distributors, Inc. A manufacturer of humic acid-based products designed to improve crop yield, which we acquired in August 1992 for approximately $1.1 million in cash and $1.1 million in promissory notes. o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping products including WeedBlock(R), which we 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 were met and we paid the entire $2.2 million. o Emerald Products LLC. A manufacturer of decorative landscape edging which we 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 we acquired in August 1996 for 1,000,000 shares of our 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 we 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, all of whose assets were 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. In June 2002, we decided to discontinue the Weed Wizard operations effective September 30, 2002. 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 4 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 we acquired from The Tensar Corporation in May 1998 for approximately $5.4 million in cash plus an additional $1.0 million for inventory. o Ampro Industries, Inc., a manufacturer and distributor of lawn and garden products including specialty grass and flower seeds which we acquired in October 1998 for approximately $24.6 million. An additional $1.0 million was paid for a non-compete agreement. o Egarden Inc. Our business-to-business Internet subsidiary was acquired in June 1999 for approximately $400,000, plus expenses of approximately $100,000. At the time of acquisition, Egarden's activities were limited to sales of Internet gardening related products to the end consumer. In fiscal 2001, we suspended all of the operations relating to Egarden Inc. and sold the remaining assets during the year ended June 30, 2002. o Findplants.com., an electronic horticulture catalogue and locater business-to-business service for commercial growers and wholesalers all of whose assets were acquired by Egarden Inc. in May 2000 for approximately $537,000 in cash. We suspended all of the operations relating to Findplants.com and sold the assets of Findplants.com back to the former owner in September 2001. Consumer Lawn and Garden Products The primary consumer lawn and garden products marketed by us to our Retail Accounts are: Landscape Fabric. We market different types of landscape fabric in varying thicknesses and strengths under the trade names WeedBlock(R), MicroPore(R), Pro WeedBlock(TM), and Landmaster(R). Landscape fabrics allow water, nutrients and oxygen to filter through to the soil but prevent weed growth by blocking sunlight. Our 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, 2000, 2001 and 2002, sales of landscape fabric 5 represented approximately 44%, 48% and 51%, respectively, of our consolidated 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 our fertilizer spikes have the added feature of containing an insecticide for the control of unwanted insects. We market 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, 2000, 2001 and 2002, sales of fertilizer, plant food and insecticide spikes constituted approximately 15%, 17% and 14%, respectively, of our consolidated net sales. Landscape Edging. We market a variety of resin-based decorative landscape edgings under trade names including Emerald Edge and Terra Cotta Tiles(TM). Our 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. For the years ended June 30, 2000, 2001 and 2002, sales of landscape edging constituted approximately 10%, 9% and 10%, respectively, of our consolidated net sales. Shade Cloth. We market 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. We market shade cloth fabrics as an exclusive United States retail distributor of a shade cloth manufacturer. Fertilizers and Root Feeders. We market fertilizers under the Ross trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a long steel irrigation tube with a hose connector that is inserted deep into the ground, provides the homeowner with a means of deep feeding and irrigating trees and shrubs. The Ross Root Feeder may also be used without fertilizer as a deep watering device. Lawn and Garden Fencing. We market resin-based fencing for lawns and gardens. A variety of fencing products are marketed by us and are used by the consumer for numerous 6 applications including preventing animals from entering a garden or orchard. Mulch, Fertilizer, Grass and Flower Seed. We distribute specialty combinations of mulch, fertilizer, grass and flower seeds. Consumers spread this "ready-to-grow" combination and only need to water regularly for a green lawn or colorful flower garden. Other Products. In addition to landscape fabrics, fertilizer, plant food and insecticide spikes, landscape edging, shade cloth, fertilizer and root feeders, lawn and garden fencing, and specialty mulch, fertilizer, grass and flower seed combinations, we also sell 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. Through Golden West, we manufacture and distribute 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 us 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 our agricultural products accounted for less than 1% of our consolidated net sales in the fiscal years ended June 30, 2000, 2001 and 2002. Conversion, Manufacturing and Supply Lawn and Garden Products. Except for the materials for our WeedBlock landscape fabric, which are obtained primarily from a single source, the basic materials for our consumer lawn and garden products are purchased from a variety of suppliers. 7 All of such materials are converted, packaged and shipped by us from either our Waco, Texas facility, our Paris, Kentucky facility or our facility located in Colorado. We purchase most of the landscape fabric used to manufacture WeedBlock from Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls of various types of landscape fabric from Tredegar for shipment to our Waco, Texas facility where we size, cut and package the fabric for consumer sale. Although we have purchased most of our supply from Tredegar for over 10 years and believe that our relationship with Tredegar is good, Tredegar is free to terminate its relationship with us at any time and accordingly could market its fabrics to other companies, including our competitors. Nevertheless, we own the registered trademark "WeedBlock(R)" and to the extent that we establish alternative supply arrangements, our rights to market products under the WeedBlock brand name would continue without restriction. We manufacture and package our Jobe's fertilizer spikes at our Paris, Kentucky facility. The raw materials that comprise our 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. Our 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 our landscape edging, shade cloth and root feeder products and packaging are designed by us and independent design consultants. The products are then manufactured and packaged by third party manufacturers according to our specifications. The material used in our resin-based fencing is manufactured for us pursuant to open purchase orders. The material is then sized and cut for consumer sale at our Waco, Texas facility. The Ampro and Amturf "ready-to-grow" combination mulch, fertilizer and seed products are produced in Michigan pursuant to a contract manufacturing agreement. Newsprint is shredded 8 and processed into mulch and then combined with seed and fertilizer. The mixture is now packaged in bags, boxes, canisters, and clear jugs. Agricultural Products. We do not own or lease any manufacturing facilities for our agricultural products. Substantially all of our humic acid-based agricultural products, Energizer, Penox and Powergizer, are processed by Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders placed by us from time to time in the ordinary course of business. Furthermore, through Western Farm, we have an open purchase order arrangement with an entity which supplies us with leonardite ore, a source of humic acid used in our agricultural products. Customers Our customers include home improvement centers, mass merchandisers, hardware stores, nurseries, and garden centers and other retail channels throughout the United States. Our two largest customers for fiscal 2000, Home Depot and Lowe's, accounted for approximately 36% and 12%, respectively, of our consolidated net sales during that period. Our two largest customers for fiscal 2001, Home Depot and Lowe's, accounted for approximately 43% and 14%, respectively, of our consolidated net sales during such year. Home Depot and Lowe's, accounted for approximately 49% and 10%, respectively, of our consolidated net sales during fiscal 2002. Our ten largest customers as a group accounted for approximately 54%, 80% and 78% of our consolidated net sales during fiscal 2000, 2001 and 2002, respectively. Sales to such customers are not governed by any contractual arrangement and are made pursuant to standard purchase orders. While we believe that relations with our largest customers are good, the loss of any of these customers could have an adverse effect upon our results of operations. Our sales are concentrated in the United States, with international sales (primarily in Europe and Canada) accounting for approximately 3% of our net sales for each of fiscal 2000 and 2001. International sales accounted for approximately 6% of our net sales for fiscal 2002. We are currently attempting to develop relationships with distributors outside of the United States. Sales and Marketing Our selling efforts are managed by two Vice Presidents of Sales. One specializes in home center customers and the 9 other directs our four regional sales managers responsible for mass merchants, hardware and all other channels. Because of the service-oriented nature of our business, the sales managers devote a substantial amount of their time to servicing and maintaining relationships with our largest customers in addition to managing the overall sales operations. We also utilize the services of over 30 non-exclusive independent sales organizations. This integrated sales approach is designed to help achieve sales of all products to all customers. Our marketing activities are coordinated by our National Marketing Manager. In addition to designing and developing our distinctive packaging and overall advertising and promotional activities, the National Marketing Manager works closely with the sales organization to help develop programs which are tailored to the strategies of our key Retail Accounts. We expect that our 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 we believe that a substantial portion of lawn and garden sales are impulse driven and not overly price sensitive. Therefore we seek to increase consumer awareness, understanding and brand identification of our products through our distinctive packaging and point-of-sale displays. Retail Accounts and our other customers receive our 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. We also tailor our 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, we utilize waterproof displays for many of our products. In addition, we meet the specific needs of many of our larger customers by tailoring the size of our displays to the dimensions requested by such customers. Our independent sales representatives periodically visit individual retail outlets to assist Retail Accounts in achieving innovative and optimal use of our distinctive store displays. We spent approximately $2.9 million in fiscal 2002 on a combination of media development, print, radio and television advertising, cooperative advertising (advertising done in conjunction with retailers), attendance at trade shows and public relations to promote awareness, understanding and brand identification of our lawn and garden products. 10 We utilized a substantial portion of our marketing budget for fiscal 2002 on cooperative advertising in conjunction with key retail customers. Information Systems We maintain a sophisticated retail data information system which enables us to provide timely and efficient order fulfillment to our Retail Accounts and other customers. Internally, our 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 us to react quickly to information. Our purchase order process can be paperless, with most Retail Accounts placing their orders through an electronic data interchange with us. In addition, we have implemented the QAD Applications e-business supply-chain enabled enterprise planning software at our executive offices and at several of our subsidiaries. Seasonality Our sales are seasonal due to the nature of the lawn and garden business and generally parallels the annual growing season. Our sales and shipping are typically most active from late March 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. The buying pattern of retailers is changing and stores are replenishing their inventory when sales are made rather than buying large quantities of inventory in advance of the selling season. Sales of our 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, we historically kept relatively large amounts of product inventory on hand during the months of highest demand. As a result of changes in customer inventory purchasing patterns during fiscal 2002 and improved communications with customers, we improved our ability to meet customer demands without maintaining excess inventory levels 11 during fiscal 2002. Inventory obsolescence has historically not been a major issue but 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. With respect to our sale of consumer lawn and garden products, we compete with a combination of national and regional companies including catalog and Internet e-commerce businesses specializing in the marketing of lawn and garden care products. The Scotts Company, in particular, has captured a significant and controlling share in a variety of categories as a result of their acquisition of the Ortho brand and the licensing of the Roundup brand for the consumer market. Scotts also markets products under the Scotts and Miracle-Gro brands which compete both directly and indirectly with many of our products. Many of our competitors have achieved significant national, regional and local brand name and product recognition and engage in frequent and extensive advertising and promotional programs. Many of these companies have substantially greater financial, technical, marketing and other resources than us. Large, dominant manufacturers, which manufacture and sell lawn and garden products, such as the Scotts Company, and other lawn and garden care companies have, in the past, manufactured and marketed landscape fabrics. Currently, few of such competitors compete with us in this product category. Nevertheless, well-capitalized companies and smaller regional firms may develop and market landscape fabrics and compete with us for customers who purchase such products. Among our competitors in the lawn and garden market for the Jobe's spike line of fertilizer and insecticide products and the Ampro combination mulch, seed and fertilizer line of products is the Scotts Company, which markets competing products under the Miracle-Gro brand. Competition for our agricultural products consists of other manufacturers of products that are humic acid based but that utilize formulas that are different from Golden West's. These competitors include Monterey Chemical Corporation and Custom Formulators, Inc. We compete with a variety of regional lawn and garden manufacturers in the markets for landscape edging, shade cloth and root feeders. 12 Government Regulation We are 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 us 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. We market certain animal repellent and pesticide products that are subject to FIFRA and to similar state regulations. We also market certain fertilizer products that are subject to regulation in some states. We believe that we are in substantial compliance with material FIFRA and applicable state regulations regarding our material business operations. However, there can be no assurance that we will be able to comply with future regulations in every jurisdiction in which our material business operations are conducted without substantial cost or interruption of operations. Moreover, there can be no assurance that future products marketed by us will not also be subject to FIFRA or to state regulations. If future costs of compliance with regulations governing pesticides or fertilizers exceed our budget for such items, our business could be adversely affected. If any of our products are distributed or marketed in violation of any of these regulations, we could be subject to a recall of, or a sales limitation placed on, one 13 or more of our products, or civil or criminal sanctions, any of which could have a material adverse effect upon our business. Environmental Regulation. Our manufacturing operations are subject to various evolving federal, state and local laws and regulations relating to the protection of the environment, which laws govern, among other things, emissions to air, discharges to ground, surface water, and groundwater, and the generation, handling, storage, transportation, treatment and disposal of a variety of hazardous and non-hazardous substances and wastes. Federal and state environmental laws and regulations often require manufacturers to obtain permits for these emissions and discharges. Failure to comply with environmental laws or to obtain, or comply with, the necessary state and federal permits can subject the manufacturer to substantial civil and criminal penalties. Easy Gardener operates two manufacturing facilities and its wholly-owned subsidiary, Weatherly Group, operates one manufacturing facility. Although we believe that our material manufacturing facilities are in substantial compliance with applicable material environmental laws, it is possible that there are material environmental liabilities of which we are 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 our budget for such items, our 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 Group operates one manufacturing facility. Although our Ampro/Weed Wizard facility was sold by us in April 2001, liability could exist for remediation of such facility in the future relating to the operations conducted at that facility while it was owned and operated by us. Moreover, we or our predecessors have owned or 14 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 Group previously owned a facility that was the subject of certain soil remediation activities. Although this facility was sold by Weatherly Group prior to our acquisition of Weatherly, there can be no assurance that we will not be liable for any previously existing environmental contamination at the facility. Moreover, although the purchaser of the facility indemnified Weatherly Group for any environmental liability and the sellers of Weatherly Group, in turn, indemnified us from such liability, there can be no assurance that, if required, the indemnifying parties will be able to fulfill their respective obligations to indemnify us. Furthermore, certain business operations of our subsidiaries also involve shipping hazardous waste off-site for disposal. As a result, we could be subject to liability under these statutes. We could also incur liability under CERCLA or similar state statutes for any damage caused as a result of the mishandling or release of hazardous substances owned by us but processed and manufactured by others on our behalf. As a result, there can be no assurance that the manufacture of the products sold by us will not subject us to liability pursuant to CERCLA or a similar state statute. Furthermore, there can be no assurance that Easy Gardener, Weatherly Group, or Ampro/Weed Wizard will not be subject to liability relating to manufacturing facilities owned or operated by them currently or in the past. Other Regulations. We are 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 We believe that product recognition is an important competitive factor in the lawn and garden care products industry. Accordingly, in connection with our marketing activities of our lawn and garden care products, we promote, and intend to promote, certain trade names and trademarks which are believed to have value to us. In connection with our acquisition, through Easy Gardener, of the assets of Easy Gardener's predecessor in 15 September 1994, we 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), MicroPore(R) and BirdBlock(R). In connection with its acquisition of Weatherly Group, we acquired certain patents, as well as certain copyrights and trademarks used in connection with Weatherly Group's business including, but not limited to, Jobe's(R), Ross(R), Green Again(R), Gro-Stakes(R), Tree Guard(R) and XP-20(R). We also acquired certain patents and trademarks when we acquired the assets of Emerald Products, LLC and also acquired certain trademarks in connection with our purchase of the Plasti-Chain line of products from Plastic Molded Concepts, Inc. We also acquired the trademark Landmaster(R) in connection with our acquisition of substantially all of the assets of Landmaster Products, Inc. In addition, we acquired the trademarks Polyspun 300(R), Nature Shield(R) and Diamondback(R) in connection with our acquisition of the Tensar(R) consumer product line. In connection with the acquisition of the Tensar(R) consumer product line, The Tensar Corporation granted to us 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 us by The Tensar Corporation. In connection with our acquisition of Ampro, we acquired certain trademarks used in connection with Ampro's business including, but not limited to, Amturf(R). There can be no assurance that we will apply for any additional trademark or patent protections relating to our products or that our current trademarks and patents will be enforceable or adequately protect us from infringement of our proprietary rights. Although we believe that the products sold by us 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 us are deemed to infringe upon the patents or proprietary rights of others, we could be required to pay damages and modify our products or obtain a license for the manufacture or sale of such products. There can be no assurance that, in such an event, we 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 us. 16 Product Liability We, as a manufacturer of lawn and garden care and pesticide products, may be exposed to significant product liability claims by consumers. Although we have obtained product liability insurance coverage for U.S. Home & Garden Inc., Golden West, Easy Gardener and Weatherly Group in the aggregate amount of $2.0 million, and for Weed Wizard and Ampro in the aggregate amount of $2.0 million (with all policies limited to $1.0 million per occurrence), and have obtained three umbrella policies in the amounts of $15.0 million, $25.0 million and $15.0 million, respectively, there can be no assurance that such insurance will provide coverage for any claim against us or will be sufficient to cover all possible liabilities. In the event a successful suit is brought against us, unavailability or insufficiency of insurance coverage could have a material adverse effect on us. Moreover, any adverse publicity arising from claims made against us, even if such claims were not successful, could adversely affect the reputation and sales of our products. In June 2002 we decided to discontinue the Weed Wizard product line by September 30, 2002. During the third quarter of 2000, we discontinued production, sale and distribution of one of the products in our Weed Wizard product line. Additionally, in voluntary compliance with the recommendations of the U.S. Consumer Product Safety Commission (the "CPSC") we instituted a recall of the product. Accordingly, we recorded a pretax charge of $928,000 ($510,000 after tax or $.03 per basic and diluted share) to provide for recall costs and inventory write-offs. See Item 3 "Legal Proceedings." Employees As of September 30, 2002 we had 182 full-time employees. Of such employees, 3 are executive officers of U.S. Home & Garden Inc., 61 were engaged in administration and finance, 25 were engaged in sales and marketing, 23 were engaged in warehouse, shipping and receiving, and 70 were engaged in production. None of our employees are covered by collective bargaining agreements. We believe that we have a good relationship with our employees. Segment Information Our primary continuing operations are in one segment - the manufacture and sale of consumer lawn and garden products. 17 Product and major customer information are disclosed separately above. Item 2. Properties. Our executive offices are currently located in San Francisco, California, in approximately 2,000 square feet of office space for which we pay $12,121 per month in rent, which includes the costs of utilities and janitorial services. Our office space is rented pursuant to a lease expiring in February 2004. Easy Gardener leases approximately 250,000 square feet of office and warehouse space in Waco, Texas for which we pay $19,471 per month in rent, pursuant to a lease agreement that expires in February 2005. 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 $9,931 per month in rent pursuant to a lease that expires on June 30, 2006. Weatherly also leases an additional 59,000 feet of warehouse space in Paris, Kentucky for $11,063 per month in rent, pursuant to a lease agreement that expires in June 2006. Golden West's offices are located in Merced, California in approximately 900 square feet of space it leases for $1,399 per month base rent, with rent increases at a rate of 4% a year. The lease expires in May 2003 subject to our option to renew the lease for an additional one year period. With respect to the storage, packaging and distribution of certain of our commercial grade landscape fabric products, Easy Gardener has entered into a lease pursuant to which we are provided with 60,000 square feet of warehouse space in Colorado. The lease, which expires on May 31, 2005, provides for a rental rate of $14,510 per month, which increases 5% per year on June 1 of each year. We believe that our current manufacturing and warehouse space is adequate for our planned future operations. Item 3. Legal Proceedings In July 2000, Weed Wizard Acquisition Corp. ("Weed Wizard"), a subsidiary of Easy Gardener, Inc. commenced an 18 action in the U.S. District Court, Northern District of Georgia, against A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) its stockholders and certain of its officers. In this action we allege that the defendants made certain misrepresentations and omitted to disclose certain facts regarding, among other things, alleged defects in certain of the Weed Wizard products in connection with our purchase from defendants in 1998 of substantially all of the assets of Weed Wizard, Inc. The Complaint seeks to rescind the transaction, or in the alternative, to recover rescissionary monetary damages, and to recover compensatory damages. In addition, we are seeking punitive damages. In October 2000, A.A.B.B., Inc. asserted a counterclaim for breach of contract against Weed Wizard alleging that it is owed $720,267, plus interest, representing an adjustment to the purchase price allegedly required to be made pursuant to the Asset Purchase Agreement in which Weed Wizard acquired certain A.A.B.B. Inc.'s assets. A.A.B.B., Inc. is also seeking to recover attorney's fees. We deny any liability on this counterclaim. In May 2002, the District Court denied the defendants' motion for summary judgment with respect to Weed Wizard's claim for breach of representations and warranties, but granted the motion to dismiss the fraud and rescission claims. In October 2002, we entered into a settlement agreement with the defendants. The settlement involves a payment by the defendants of $442,500 to the U.S. Consumer Products Safety Commission ("CPSC") in payment of the fine described below, a payment of $307,500 to us and the release to us of the escrow funds in the amount of approximately $329,000 being held pursuant to the Asset Purchase Agreement. The settlement agreement will become effective upon the execution of a settlement agreement with the CPSC, as described below. In fiscal 2001, we were notified by the staff of the CPSC that the staff was considering recommending that the CPSC commence an action against Weed Wizard to obtain a monetary fine from Weed Wizard for the alleged failure of Weed Wizard to timely disclose to the CPSC, pursuant to the Consumer Products Safety Act, certain required information concerning a Weed Wizard product previously distributed by us that was the subject of a voluntary recall during 2000. In July 2002, an action was commenced by the United States government on behalf of the CPSC 19 against U.S. Home & Garden Inc., Easy Gardener and Weed Wizard, in the U.S. District Court for the District of Maryland, seeking unspecified civil penalties for alleged failure to provide the CPSC with timely notice of a defective product as required under the Consumer Products Safety Act. We denied the allegations. In September 2002, the U.S. District Court granted our motion to dismiss the complaint for lack of jurisdiction in Maryland. The government has advised us that it intends to commence the action in another jurisdiction. In addition, the government has advised that it intends to pursue claims against A.A.B.B., Inc. and its stockholders for violation of the Consumer Products Safety Act. We have reached an agreement in principle with the government, subject to the execution of a formal settlement agreement. The settlement provides for an aggregate fine of $885,000, against A.A.B.B., INC and us. We will pay $442,500 of that fine. Item 4. Submission of Matters to a Vote of Security Holders. An Annual Meeting of U.S. Home & Garden stockholders was held on June 26, 2002 at which time the following directors were reappointed to serve until the next Annual Meeting of Stockholders. Set forth in the following table is the voting results of the June 26, 2002 Annual Meeting: Votes For Votes Withheld ---------- -------------- Robert Kassel 12,171,952 2,546,186 Richard Raleigh 12,700,872 2,017,266 Fred Heiden 13,096,537 1,621,601 Brad Holsworth 13,202,972 1,575,166 Jon Schulberg 13,095,437 1,622,701 20 Part II. Item 5 Market for Registrant's Common Equity and Related Stockholder Matters. Our common stock has traded in the over-the-counter market and has been quoted on the NASDAQ Stock Market since March 26, 1992. The NASDAQ Smallcap symbol for our 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, 2002 High Low First Quarter $ .98 $ .47 Second Quarter .78 .38 Third Quarter .62 .36 Fourth Quarter .72 .34 Year Ended June 30, 2001 First Quarter $3.38 $1.88 Second Quarter 2.25 1.00 Third Quarter 1.78 1.00 Fourth Quarter 1.09 .63 As of September 30, 2002, the number of holders of record of our common stock was 184. In addition, there are in excess of 500 beneficial owners of our common stock whose shares are held in "street name". We have not paid any cash dividends on our common stock to date and do not expect to declare or pay any cash or stock dividends in the foreseeable future. The lending agreements between us and our primary lending institutions prohibit us from paying dividends without the lenders' consent. The following table sets forth certain information as of June 30, 2002 regarding outstanding options, warrants and other rights to purchase Common Stock that were outstanding on June 30, 2002. 21 - -------------------------------------------------------------------------------- (a) (b) (c) - -------------------------------------------------------------------------------- Plan Category Number of Weighted-average Number of securities to exercise price securities be issued of outstanding remaining for upon exercise options, future issuance of warrants and under equity outstanding rights compensation plans options, (excluding warrants and securities rights reflected in column (a)) - -------------------------------------------------------------------------------- Equity 3,060,000 $2.35 575,000 compensation plans approved by security holders - -------------------------------------------------------------------------------- Equity 3,119,000 (1) $1.55 -- compensation plans not approved by security holders - -------------------------------------------------------------------------------- Total 6,179,000 $1.95 575,000 - -------------------------------------------------------------------------------- (1) Represents the aggregate number of shares of common stock issuable upon exercise of individual arrangements with option and warrant holders. These options and warrants expire at various dates between 2005 and 2009 and contain anti-dilution provisions providing for adjustments of the exercise price under certain circumstances. 22 Item 6. Selected Consolidated Financial Data (in thousands, except per share data). The following selected consolidated financial data at and for the years ended June 30, 1998, 1999, 2000, 2001 and 2002 has been derived from our audited consolidated financial statements. Such information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto appearing elsewhere in this Report. Differences between amounts included below and amounts previously reported are due to the reclassification of discontinued operations. Statement of Operations Data
Year Ended June 30, ---------------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------ ------ Net sales ......................................... $ 63,482 $ 85,024 $ 86,919 $ 78,863 78,947 Cost of sales ..................................... 29,291 42,322 47,802 44,065 43,358 ---------------------------------------------------------------------------- Gross profit ...................................... 34,191 42,702 39,117 34,798 35,589 Selling, shipping, general and administrative expenses .......................................... 22,132 31,683 29,554 30,638 27,940 Restructuring charges (1) ......................... -- -- -- 2,860 -- ---------------------------------------------------------------------------- Income from operations ............................ 12,059 11,019 9,563 1,300 7,649 Other expense, net ................................ (3,077) (6,883) (6,692) (7,335) (7,291) Income tax (expense) benefit ...................... (3,057) (1,643) (1,213) 1,406 (228) ---------------------------------------------------------------------------- Income (loss) from continuing operations before extraordinary gain and cumulative effect of a change in accounting principle .................... 5,925 2,493 1,658 (4,629) 130 Gain (loss) from discontinued operations, net of tax and minority interest (2) .............. 1,051 (444) (3,227) (16,253) (1,760) Gain (loss) on disposal of discontinued operations, net of tax and minority interest (2) .. -- -- -- (4,551) 20 Extraordinary gain (expense), net of tax (3) ...... (1,450) -- 1,224 4 -- ---------------------------------------------------------------------------- Income (loss) before cumulative effect of a change in accounting principle .................... 5,526 2,049 (345) (25,429) (1,610) Cumulative effect of a change in accounting principle (4) ..................................... -- -- -- -- (9,882) ---------------------------------------------------------------------------- Net income (loss) ................................. $ 5,526 $ 2,049 $ (345) $ (25,429) $ (11,492) ============================================================================ Income (loss) from continuing operations per common share before extraordinary gain and cumulative effect of a change in accounting principle: Basic ............................................. $ .33 $ .13 $ .09 $ (.26) $ .01 Dilutive .......................................... $ .26 $ .11 $ .08 $ (.26) $ .01 Net income (loss) per share: Basic ............................................. $ .31 $ .10 $ (.02) $ (1.40) $ (.66) Dilutive .......................................... $ .24 $ .09 $ (.02) $ (1.40) $ (.64) Weighted average number of common and common equivalent shares outstanding: Basic ............................................. 17,776,000 19,621,000 19,031,000 18,181,000 17,555,000 Dilutive .......................................... 22,808,000 23,595,000 20,760,000 18,181,000 18,024,000
23 Balance Sheet Data:
June 30, --------------------------------------------------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Working capital ......... $ 46,743 $ 32,874 $ 25,151 $ 4,867 $ 2,728 Intangible assets, net .. 63,395 82,109 67,839 65,892 56,259 Total assets ............ 126,813 138,263 138,545 109,463 99,365 Short-term debt ......... -- -- 3,125 21,670 22,748 Long-term debt .......... 63,250 78,750 58,338 56,951 56,951 Total liabilities ....... 75,214 91,779 89,331 90,256 92,383 Stockholders' equity .... 51,599 46,484 45,103 17,968 6,982
(1) Amount represents restructuring charges relating to the closing and sale of the Ampro facility. See further discussion at Note 13 to the Consolidated Financial Statements included in Part II, Item 8. (2) Amounts represent operations and estimated gain (loss) on disposal of the Weed Wizard and Egarden subsidiaries. See further discussion at Notes 2 and 11 to the Consolidated Financial Statements included in Part II, Item 8. (3) Amounts represent extraordinary gain (loss) incurred on the repurchase of mandatorily redeemable trust preferred securities of U.S. Home & Garden Trust I. See further discussion at Note 15 to the Consolidated Financial Statements included in Part II, Item 8. (4) Amount represents the cumulative effect of a change in accounting principle related to goodwill. See further discussion at Note 6 to the Consolidated Financial Statements included in Part II, Item 8. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. General We manufacture and market a broad range of brand-name consumer lawn and garden products through our wholly-owned subsidiaries, Ampro, Easy Gardener and Golden West, and through Easy Gardener's wholly-owned subsidiaries, Weatherly and Weed Wizard. In June 2002, we announced the discontinuation of the Weed Wizard operations effective September 30, 2002. Since 1992, we have consummated eleven acquisitions of complementary lawn and garden companies and product lines for an aggregate consideration of approximately $111 million in cash, notes and equity securities. As a result of such acquisitions, we recognized a significant amount of goodwill which, in the 24 aggregate, was approximately $49.9 million as of June 30, 2002. Effective July 1, 2001 we adopted Statement of Financial Accounting Standards (SFAS) No. 142. Accordingly, no amortization of goodwill was reflected in the financial statements for the fiscal year ended June 30, 2002 compared to $2.5 million for the years ended June 30, 2001 and 2000. We completed the transitional goodwill impairment test during fiscal 2002 and recorded an impairment loss of $9.9 million which relates primarily to the Ampro operations. This loss is reflected as a cumulative effect of a change in accounting principle. See also "Summary of Accounting Policies - Intangible Assets" and Note 6 to the Consolidated Financial Statements included in Part II, Item 8. Our results of operations for the fiscal year ended June 30, 2002 were adversely affected by the transitional goodwill impairment test that resulted in the recording of an impairment loss of $9.9 million. Our results were also adversely affected by the discontinued Weed Wizard operations that generated a loss of $1.8 million for the year. Results were also impacted in the third and fourth quarters by changes in the buying pattern of certain of our key customers who carried less inventory than in prior years and replenished their lower inventory levels as sales were made by them. Our results of operations for the fiscal year ended June 30, 2001 were adversely affected by losses attributable to the discontinued operations of Weed Wizard and Egarden Inc., of $16.3 million including the impairment of goodwill of Weed Wizard of $10.8 million, and the estimated net loss on disposal of Egarden assets of $4.6 million. Our results were also adversely affected by the restructuring loss from the closure of the Ampro Industries, Inc. facility in Michigan, an overall soft economy and prolonged periods of inclement weather in many portions of the United States during the late spring and early summer which negatively impacted the lawn and garden industry. There continues to be a consolidation in the lawn and garden industry which creates, over time, a downward pressure on operating margins. Results of Operations The following table sets forth for the periods indicated certain selected income data as a percentage of net sales: 25
Percentages of Net Sales ------------------------ Year Ended June 30, ------------------------ 2000 2001 2002 ---- ----- ----- Net sales .............................................. 100% 100% 100% Cost of sales .......................................... 55.0 55.9 54.9 ---- ----- ----- Gross profit ........................................... 45.0 44.1 45.1 Selling and shipping expenses .......................... 20.0 20.8 23.2 General and administrative expenses .................... 14.0 18.1 12.2 Restructuring charges .................................. -- 3.6 -- ---- ----- ----- Income from operations ................................. 11.0 1.6 9.7 Gain on disposal of property and equipment ............. .6 -- -- Interest expense, net .................................. (8.3) (9.3) (9.3) Income tax (expense) benefit ........................... (1.4) 1.8 (.3) Loss from discontinued operations, net ................. (3.7) (20.6) (2.2) Loss on disposal of discontinued operations, net ....... -- (5.7) -- Extraordinary gain, net ................................ 1.4 -- -- Cumulative effect of a change in accounting principle .. -- -- (12.5) ---- ----- ----- Net loss ............................................... (0.4)% (32.2)% (14.6)% ==== ===== =====
Fiscal Year Ended June 30, 2002 Compared to Fiscal Year Ended June 30, 2001 Net sales. Net sales remained consistent at $78.9 million during the fiscal years ended June 30, 2002 and 2001. There were no significant changes in sales prices or volume. Gross profit. Gross profit increased by $0.8 million, or 2.3%, to $35.6 million for the fiscal year ended June 30, 2002 from $34.8 million during the comparable period in 2001. Gross profit as a percentage of net sales increased to 45.1% during the fiscal year ended June 30, 2002 from 44.1% during the comparable period in 2001. This increase in gross profit is due to a decrease in cost of sales as a result of the restructuring and closing of the Bradley, Michigan facility in late 2001 of approximately $0.3 million, a reduction in certain raw material costs of approximately $0.3 million, and increased operating efficiencies of approximately $0.2 million. Selling and shipping expenses. Selling and shipping expenses increased $1.9 million, or 11.7% to $18.3 million during the fiscal year ended June 30, 2002 from $16.4 million during the comparable period in 2001. Selling and shipping expenses as a percentage of net sales increased to 23.2% during the fiscal year ended June 30, 2002 from 20.8% during the comparable period in 2001. This increase in expense and percentage was primarily a result of increased out bound freight 26 costs resulting from using required carriers stipulated by a significant customer and a reduction in the average size of shipments. General and administrative expenses. General and administrative expenses decreased $4.6 million or 32.4% to $9.6 million during the fiscal year ended June 30, 2002 from $14.2 million during the comparable period in 2001. As a percentage of net sales, general and administrative expenses decreased to 12.2% during the fiscal year ended June 30, 2002 from 18.1% during the comparable period in 2001. This decrease is primarily a result of the adoption of SFAS No. 142 effective July 1, 2002 that requires, among other things, companies to no longer amortize goodwill, but instead test goodwill for impairment at least annually. Goodwill amortization included in general and administrative expenses for the year ended June 30, 2001, totaled approximately $2.5 million. This decrease is also due to the restructuring of Ampro and closing of its Bradley, Michigan facility and the related reduction of costs. The savings related to the closing of the Bradley, Michigan facility totaled approximately $1.6 million. The cost reductions were offset in part by a $0.5 million write off of K-Mart receivables when they declared bankruptcy. We continue to sell to K-mart under secured financing. K-Mart's receivable balance at June 30, 2002 was $0.7 million, all of which has subsequently been collected. Restructuring charges. There were no restructuring costs incurred in fiscal 2002. In 2001, the Company recorded restructuring charges of $2.9 million relating to the closing and sale of the Ampro Industries, Inc. facility in Michigan. The Company continues to sell many of the products that were being manufactured at Ampro's Michigan facility through a contract manufacturing agreement. The Company recognized approximately $1.7 million of expenses and losses relating to the closing and sale of property and equipment of the Ampro facility and $1.2 million for the termination benefits to be paid to all 60 employees involved with the facility. All severance payments as a result of the restructuring were made by June 30, 2002. No adjustments were made to the liability recorded for severance payments during the year ended June 30, 2002. Income from operations. Income from operations increased by $6.3 million, to $7.6 million during the fiscal year ended June 30, 2002 compared to $1.3 million for the comparable period in 2001. The increase in income from 27 operations for the 2002 period is primarily attributable to the matters described above, the most significant matter being the reduction in general and administrative expenses. As a percentage of net sales, income from operations increased to 9.7% for the fiscal year ended June 30, 2002 from 1.6% during the comparable period in 2001. Net interest expense. Net interest expense remained consistent at $7.3 million during the fiscal years ended June 30, 2002 and 2001. Borrowings under our revolving credit facilities decreased and interest rates on the revolving credit facility also decreased, but were offset by the increased cost of subordinated debt. Income tax benefit (expense). Income tax expense was $0.2 million during the fiscal year ended June 30, 2002 compared to an income tax benefit of $1.4 million during the comparable period in 2001. This results from having pre-tax income before discontinued operations of $.4 million in fiscal 2002 and a pre-tax loss of $6.0 million in the comparable period in 2001. See Note 14 to the Consolidated Financial Statements included in Part II, Item 8. Discontinued operations. In June 2002, we announced we were discontinuing the Weed Wizard line of products effective September 30, 2002 due to continued operating losses, the loss of sales due to the product recall in fiscal 2000, and the current and future prospects for the operation. In fiscal 2002, we recorded an estimated net loss on disposal of Weed Wizard of $1.1 million related to the write-down of inventory and long-lived assets. We plan to dispose of the assets and liabilities of Weed Wizard, including amounts written off, through a sale of the assets and liquidation of the liabilities during fiscal 2003. The remaining assets at June 30, 2002 consist of accounts receivable of $0.4 million, inventory of $0.3 million, other current assets of $0.3 million, and net property and equipment of $0.1 million. Remaining liabilities include accounts payable and accrued expenses of $0.3 million. In addition to the estimated loss on disposal in fiscal 2002, we had a net loss from the operations of Weed Wizard of $1.8 million. In June 2001 we wrote off the net goodwill balance related to the Weed Wizard product line. As a result of the decision to discontinue the operations in June 2002, we have 28 reflected this loss on impairment of goodwill of $10.8 million and the loss from operations of $.8 million for the fiscal year ended June 30, 2001, net of income taxes of $2.5 million, as discontinued operations. Also, in June 2001, we announced that we were discontinuing our e-commerce initiative, which we were conducting through our subsidiary, Egarden Inc., effective June 30, 2001. All of the assets of Egarden, including amounts previously written off, were sold during the fiscal year ended June 30, 2002. We recorded a net gain on the disposal of Egarden of $1.1 million, primarily as a result of the elimination of minority interest of $1.2 million as the subsidiary was liquidated. We recorded a net loss on disposal of Egarden of $4.6 million, net of minority interest of $1.1 million in 2001. This included the write-off of all long-lived assets of $5.2 million and $0.5 million of restructuring expense related to the termination of all 39 Egarden employees. All severance payments have been made by June 30, 2002. No adjustments were made to the liability recorded for severance payments during the year ended June 30, 2002. The remaining assets at June 30, 2002 consist of cash of $62,000 and the remaining liabilities consist of accrued expenses of $16,000. In addition to the net loss on disposal in 2001, we had a net loss from the operations of Egarden of $7.1 million, net of minority interest of $1.8 million. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, our consolidated financial statements and notes have been restated for all periods presented to reflect the discontinued components. The assets and liabilities of the discontinued components have been classified as "Held for Sale" and the net operations and net cash flows have been reported as "Discontinued Operations". See Note 2 to the Consolidated Financial Statements included in Part II, Item 8. Extraordinary gain from early extinguishment of debt. There was no extraordinary gain from early extinguishment of debt for the fiscal year ended June 30, 2002 compared to a $4,000 gain during the fiscal year ended June 30, 2001. In 2001 we repurchased 1,200 shares of the mandatorily redeemable trust preferred securities of U.S. Home & Garden Trust I. See Note 15 to the Consolidated Financial Statements included in Part II, Item 8. 29 Cumulative effect of a change in accounting principle. We recorded a cumulative effect of a change in accounting principle for the fiscal year ended June 30, 2002 as a result of the completion of the transitional goodwill impairment test in conjunction with the adoption of SFAS No. 142. The recording of an impairment loss of $9.9 million, which is primarily related to the Ampro operations, is reflected as a cumulative effect of a change in accounting principle. See Note 6 to the Consolidated Financial Statements included in Part II, Item 8. Net loss. Net loss decreased by $13.9 million to a net loss of $11.5 million during the fiscal year ended June 30, 2002 from a net loss of $25.4 million during the comparable period in 2001. The diluted net loss per common share decreased $.76 to a net loss of $.64 per share when compared to the diluted net loss per common share of $1.40 during the comparable period in 2001. The decrease in net loss per common share is primarily attributable to the unusual events in fiscal 2001 which were the impairment of goodwill of one of its subsidiaries, Weed Wizard, Inc., the restructuring charge related to the closure of the Ampro Industries, Inc. facility in Michigan, and the discontinuance of its business-to-business e-commerce subsidiary, Egarden Inc. There were also slightly fewer weighted average common and common equivalent shares outstanding during the year ended June 30, 2002 compared to the comparable period in the prior year. Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000 Net sales. Net sales decreased by $8.1 million, or 9.3%, to $78.9 million during the fiscal year ended June 30, 2001 from $86.9 million during the comparable period in 2000. The decrease in sales was primarily a result of poor spring weather, a generally slower economic environment and major customers moving to just-in-time inventory management programs. Gross profit. Gross profit decreased by $4.3 million, or 11.0%, to $34.8 million for the fiscal year ended June 30, 2001 from $39.1 million during the comparable period in 2000. Gross profit as a percentage of net sales decreased to 44.1% during the fiscal year ended June 30, 2001 from 45.0% during the comparable period in 2000. This decrease was due primarily to delayed order placement by the major retailers, an overall soft 30 economy and poor weather in our key markets in the third quarter. Selling and shipping expenses. Selling and shipping expenses decreased $1.0 million, or 5.9% to $16.4 million during the fiscal year ended June 30, 2001 from $17.4 million during the comparable period in 2000. This decrease in expense was primarily a result of the decrease in net sales offset in part by increased freight costs. Selling and shipping expenses as a percentage of net sales increased to 20.8% during the fiscal year ended June 30, 2001 from 20.0% during the comparable period in 2000. General and administrative expenses. General and administrative expenses increased $2.1 million or 17.3% to $14.2 million during the fiscal year ended June 30, 2001 from $12.1 million during the comparable period in 2000. This increase is primarily due to a write off of certain receivables from customers of $.6 million, a general increase in expense levels, and termination benefits for certain former employees in fiscal 2001. As a percentage of net sales, general and administrative expenses increased to 18.1% during the fiscal year ended June 30, 2001 from 14.0% during the comparable period in 2000. Restructuring charges. In 2001, we recorded restructuring charges of $2.9 million relating to the closing and sale of the Ampro Industries, Inc. facility in Michigan. The Company continues to sell products that were being manufactured at Ampro's Michigan facility. The Company recognized approximately $1.7 million of expenses relating to the sale of property and equipment of the Ampro facility and $1.2 million for the termination benefits to be paid to all 60 employees involved with the facility. Approximately $0.2 million was paid out in termination benefits prior to June 30, 2001, as a result of restructuring. The restructuring was completed in October 2001. Income from operations. Income from operations decreased by $8.3 million, to $1.3 million during the fiscal year ended June 30, 2001 compared to $9.6 million for the comparable period in 2000. The decrease in income from operations for the 2001 period is primarily attributable to the restructuring charges related to the closure of our Ampro Industries, Inc. facility in Michigan, delayed order placement by the major retailers, an overall soft economy and poor weather in the third quarter. As a percentage of net sales, income from 31 operations decreased to 1.6% for the fiscal year ended June 30, 2001 from 11.0% during the comparable period in 2000. Net interest expense. Net interest expense increased $0.1 million, or 1% to $7.3 million during the fiscal year ended June 30, 2001, from $7.2 million during the comparable period in 2000. The increase in net interest expense is primarily related to the decrease in interest income from the prior year. Income tax benefit (expense). Income tax benefit was $1.4 million during the fiscal year ended June 30, 2001 compared to income tax expense of $1.2 million during the comparable period in 2000, primarily due to the loss from continuing operations in the fiscal year ended June 30, 2001. Discontinued operations. In June 2002, we announced that we were discontinuing the Weed Wizard line of products due to continued operating losses, the loss of sales due to the product recall in fiscal 2000, and the current and future prospects for the operation. In June 2001, based on an evaluation of asset impairment under SFAS No. 121 due to operating losses, the product recall in the prior year, and the unsuccessful product launch of the replacement product through a complete sales season, we wrote off the net goodwill balance related to the Weed Wizard line of products by recording an impairment charge to write down the goodwill to its estimated terminal value. As a result of the decision to discontinue the operations in June 2002, we have reflected this loss on impairment of goodwill of $10.8 million and the loss from operations of $0.8 million for the fiscal year ended June 30, 2001, net of income taxes of $2.5 million, as discontinued operations. In June 2001, we announced that we were discontinuing our e-commerce initiative, which we were conducting through our subsidiary, Egarden Inc., effective June 30, 2001. We recorded a net loss on disposal of Egarden of $4.6 million, net of minority interest of $1.1 million. This included the write-off of all long-lived assets of $5.2 million and $0.5 million of restructuring expense related to the termination of all 39 Egarden employees. The remaining assets at June 30, 2001 consisted of cash of $900,000 and prepaid expenses of $10,000 and the remaining liabilities consisted of accrued expenses of $445,000 and a capital lease obligation of $0.3 million. Minority interest in equity of affiliate was $1.2 32 million at June 30, 2001. In addition to the net loss on disposal in 2001, we had a net loss from the operations of Egarden of $7.10 million net of minority interest of $1.8 million. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, our consolidated financial statements and notes have been restated for all periods presented to reflect the discontinued components. The assets and liabilities of the discontinued components have been classified as "Held for Sale" and the net operations and net cash flows have been reported as "Discontinued Operations". See Note 2 to the Consolidated Financial Statements included in Part II, Item 8. Extraordinary gain from early extinguishment of debt. Extraordinary gain from early extinguishment of debt decreased to $4,000 during the fiscal year ended June 30, 2001 from $1.2 million for the comparable period in 2000 (net of tax of $3,000 and $900,000, respectively). In 2001 we repurchased 1,200 shares of the mandatorily redeemable trust preferred securities of U.S. Home & Garden Trust I compared to 250,781 shares in 2000. See Note 15 to the Consolidated Financial Statements included in Part II, Item 8. Net loss. Net loss increased by $25.1 million to a net loss of $25.4 million during the fiscal year ended June 30, 2001 from a net loss of $0.3 million during the comparable period in 2000. Net loss per fully diluted common share increased $1.38 to a net loss of $1.40 per share when compared to net loss per common share of $.02 during the comparable period in 2000. The increase in net loss per common share is primarily attributable to the impairment of goodwill of Weed Wizard, Inc., the restructuring charge related to the closure of the Ampro Industries, Inc. facility in Michigan, the discontinuance of operations of Egarden Inc., reduced sales due to delayed order placement by the major retailers, an overall soft economy and poor weather in the third quarter. There were fewer diluted weighted average common and common equivalent shares outstanding during the year ended June 30, 2001 compared to the comparable period in the prior year due to the repurchase of common stock. Quarterly Results of Operations and Seasonality Our sales are seasonal due to the nature of the lawn and garden business and generally parallels the annual growing season. Our sales have traditionally been most active from late March through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are 33 increasing their inventory of lawn and garden products. The buying pattern of retailers, including our retail customers, is changing and stores are replenishing their inventory when sales are made by them rather than buying large quantities of inventory in advance of the selling season. Sales typically decline by mid-summer. Sales of our agricultural products, which were not material for fiscal 2002, are also seasonal. Most shipments occur during the period from March through October. Related Party Transactions See discussion regarding related party transactions in Item 13 and Note 7 to the Consolidated Financial Statements included in Part II, Item 8. 34 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, 2000 2000 2001 2001 2001 2001 2002 2002 --------- -------- ------- -------- --------- -------- ------- ------- Net sales ........................ $ 12,548 $11,303 $25,768 $ 29,244 $ 13,483 $11,762 $23,913 $29,789 Cost of sales .................... 8,379 7,123 14,124 14,439 7,943 7,010 12,826 15,579 ============================================================================================== Gross profit ..................... 4,169 4,180 11,644 14,805 5,540 4,752 11,087 14,210 Selling, shipping, general and administrative expenses ........ 6,104 5,725 7,909 10,900 6,326 5,848 7,455 8,311 Restructuring charges ............ -- -- 800 2,060 -- -- -- -- ============================================================================================== Income (loss) from operations .... (1,935) (1,545) 2,935 1,845 (786) (1,096) 3,632 5,899 Interest income .................. 29 35 36 49 43 27 12 1 Interest expense ................. (1,625) (1,764) (1,893) (2,202) (1,810) (1,766) (1,822) (1,976) ============================================================================================== Income (loss) from continuing operations before income taxes, extraordinary gain and cumulative effect of a change in accounting principle .......... (3,531) (3,274) 1,078 (308) (2,553) (2,835) 1,822 3,924 Income tax benefit (expense) ..... 1,728 1,503 (1,116) (709) -- -- -- (228) Income (loss) from discontinued operations, net of taxes and minority interest ................ (952) (1,226) (1,733) (12,342) (268) (490) 227 (1,229) Gain (loss) on disposal of discontinued operations, net of taxes and minority interest ... -- -- -- (4,551) -- -- -- 20 Extraordinary gain, net of taxes ............................ 4 -- -- -- -- -- -- -- ============================================================================================== Income (loss) before cumulative effect of a change in accounting principle ... (2,751) (2,997) (1,771) (17,910) (2,821) (3,325) 2,049 2,487 Cumulative effect of a change in accounting principle ... -- -- -- -- (9,882) -- -- -- ============================================================================================== Net income (loss) ................ $ (2,751) $(2,997) $(1,771) $(17,910) $(12,703) $(3,325) $ 2,049 $ 2,487 ============================================================================================== Diluted net income (loss) per share(1) ..................... $ (0.15) $ (0.16) (0.10) $ (1.02) $ (0.72) $ (0.19) $ 0.11 $ 0.14 Weighted average common and common equivalent shares outstanding(1) ................... 18,807 18,313 17,638 17,628 17,543 17,543 17,915 17,929 ============================================================================================== Net sales ........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales .................... 66.8% 63.0% 54.8% 49.4% 58.9% 59.6% 53.6% 52.3% ============================================================================================== Gross profit ..................... 33.2% 37.0% 45.2% 50.6% 41.1% 40.4% 46.4% 47.7% Selling, shipping, general and administrative ................. 48.6% 50.7% 30.7% 37.3% 46.9% 49.7% 31.2% 27.9% Restructuring charges ............ -- -- 3.1% 7.0% -- -- -- -- ============================================================================================== Income (loss) from operations .... (15.4%) (13.7%) 11.4% 6.3% (5.8%) (9.3%) 15.2% 19.8% Interest income .................. 0.2% 0.3% 0.1% 0.2% 0.3% 0.2% -- -- Interest expense ................. (12.9%) (15.6%) (7.3%) (7.5%) (13.4%) (15.0%) (7.6%) (6.6%) ============================================================================================== Income (loss) from continuing operations before income taxes, extraordinary gain and cumulative effect of a change in accounting principle .......... (28.1%) (29.0%) 4.2% (1.0%) (18.9%) (24.1%) 7.6% 13.2% Income tax benefit (expense) ..... 13.8% 13.3% (4.3%) (2.4%) -- -- -- (.7%) Income (loss) from discontinued operations, net of tax and minority interest ................ (7.6%) (10.8%) (6.7%) (42.2%) (2.0%) (4.2%) 1.0% (4.1%) Gain (loss) on disposal of discontinued operations, net of tax and minority interest ..... -- -- -- (15.6%) -- -- -- -- Extraordinary gain, net of taxes ............................ -- -- -- -- -- -- -- -- ============================================================================================== Income (loss) before cumulative effect of a change in accounting principle ........................ (21.9%) (26.5%) (6.8%) (61.2%) (20.9%) (28.3%) 8.6% 8.4% Cumulative effect of a change in accounting principle ........................ -- -- -- -- (73.3%) -- -- -- ============================================================================================== Net income (loss) ................ (21.9%) (26.5%) (6.8%) (61.2%) (94.2%) (28.3%) 8.6% 8.4% ==============================================================================================
- ---------- (1) Pursuant to SFAS No. 128, dilutive income per share was calculated using the treasury stock method except for quarters reporting a net loss from continuing operations. Such quarters only reflect issued and outstanding shares of our common stock in the weighted average shares outstanding. 35 Differences between amounts included above and amounts previously reported on Form 10-Q are due to the reclassification of discontinued operations as described in Note 2 to the Consolidated Financial Statements included in Part II, Item 8, and the cumulative effect of a change in accounting principle of $9.9 million, related to the loss on impairment of goodwill recorded as of July 1, 2001. See Note 6 to the Consolidated Financial Statements included in Part II, Item 8. The fourth quarter of 2001 includes a pre-tax charge of $10.8 million related to the loss on impairment of goodwill and a loss on disposal of discontinued operations of $4.6 million. See Note 2 to the Consolidated Financial Statements included in Part II, Item 8. The fourth quarter of 2002 includes the write off of minority interest of $1.1 million, net of an estimated loss on disposal of discontinued operations of $1.1 million. See Note 2 to the Consolidated Financial Statements included in Part II, Item 8. Liquidity and Capital Resources Since inception, we have financed our operations primarily through cash generated by operations, net proceeds from our private and public sales of securities and borrowings from lending institutions. At June 30, 2002, we had consolidated cash and short-term investments totaling $0.2 million and working capital of $3.0 million. Under our new credit facility with PNC Bank described below, substantially all cash balances are automatically used to reduce outstanding borrowings. At June 30, 2001, we had consolidated cash and short-term investments totaling $2.7 million, and working capital of $4.9 million. During fiscal 2000, the principal source of working capital was proceeds on the new credit facilities discussed below. Net cash provided by operating activities for fiscal 2002 of $0.2 million consisted primarily of net income from continuing operations before extraordinary item and cumulative effect of a change in accounting principle of $0.1 million, 36 adjusted for non-cash expenses of $3.5 million, an increase in accounts payable and accruals of $2.4 million and a decrease in inventory and other assets of $1.5 million, largely offset by an increase in accounts receivable of $7.3 million. The increase in accounts payable and accruals is primarily due to extended credit terms with many material vendors. The decrease in inventory and other assets is primarily due to efforts to reduce inventory levels in conjunction with customer purchasing patterns. The $7.3 million increase in accounts receivable for fiscal 2002, substantially all of which has been collected subsequent to June 30, 2002, is primarily due to extended payment terms from 30 to 60 days with a major customer. Net cash used in investing activities for fiscal 2002 of $1.3 million is primarily due to capital purchases of equipment and intangible assets. Net cash provided by financing activities for fiscal 2002 of $0.3 million is primarily related to the proceeds received as a result of our new credit facilities described below offset by repayment of existing debt and deferred finance costs of $1.1 million. On November 15, 2001, Easy Gardener entered into a credit agreement with PNC Bank (the "PNC Credit Agreement") which, as amended, provides for up to $25,000,000 in senior secured financing until November 2004. The PNC Credit Agreement provides for a $23,000,000 revolving credit facility and a $2.0 million term loan. The term loan balance outstanding at June 30, 2002 of $1,767,000 is included in the current portion of long-term debt due to the violation of certain covenants contained in the PNC Agreement. Interest on borrowings is calculated at variable annual rates based on either the bank's prime rate plus an applicable marginal rate or the federal funds rate plus an applicable marginal rate (effectively 5.25% on the revolving credit facility and 5.75% on the term loan at June 30, 2002). Borrowings on the revolving credit facility are limited based on eligible borrowing bases, effectively $19.6 million at June 30, 2002. The bank has a first priority perfected security interest in substantially all of our consolidated assets and we have guaranteed Easy Gardener's obligations to the bank. We are subject to certain fees and restrictions in conjunction with the financing. At June 30, 2002, we had approximately $15.0 million of borrowings outstanding under the PNC revolving credit facility. 37 At June 30, 2002, Easy Gardener also had borrowings outstanding of $5.9 million, net of discounts of $.9 million, with an effective interest rate of 18.4% pursuant to certain senior subordinated secured notes due in November 2007 that were issued pursuant to a Note and Warrant Purchase Guaranty and Security Agreement (the "Note Agreement"). Interest is charged on the face of the notes at 16% and 14% per annum, payable monthly. The issue price of the 16% notes was 90% of the face amount of the notes resulting in a discount of $0.6 million. The notes are secured by a second lien on all of our assets and rank junior to the senior financing provided by PNC bank. Easy Gardener's obligations under the notes are guaranteed by U.S. Home & Garden Inc. In connection with this financing, we issued to the purchasers of the notes warrants to purchase up to 3.75% of our fully diluted common stock and granted to the purchasers an option to purchase from us certain Trust Preferred Securities which we own, which resulted in a discount of $0.4 million. Under the terms of the agreements with the noteholders and certain of their affiliates, we are also required to pay certain consulting and other fees and are subject to certain covenants, including the covenants set forth below. Under both the PNC Credit Agreement and the Note Agreement, we and our subsidiaries are required, among other things, to comply with certain non financial covenants including, among others, those which limit our ability to incur additional indebtedness, create liens or guaranty obligations, dispose of assets, pay cash dividends, make cash redemptions of our securities or repurchase our securities, merge, liquidate, or change our business, make certain investments, loans and advances, and enter into transactions with affiliates. In addition, under the PNC Credit Agreement and the Note Agreement, we must comply with certain financial covenants. A violation of any of these financial or non financial covenants could constitute an event of default under the applicable credit agreement which could result in an acceleration of the maturity date of the loans, and in the case of the Note Agreement, result in an increase in the loan interest rate. At June 30, 2002, we were in violation of certain covenants under the PNC Agreement. In addition, the holders of the Senior Subordinated Secured notes have alleged that we are in violation of certain covenants contained in the Note Agreement which could constitute events of default under the Note Agreement. As a result of the foregoing, we have classified all debt outstanding under both the PNC Credit Agreement and the Note Agreement as current liabilities on our balance sheet as of June 30, 2002. We have reached an agreement in principle with proposed new lenders to replace borrowings under the PNC Credit Agreement and Note Agreement. Although we expect to consummate the replacement financing in the 38 foreseeable future, there can be no assurance that we will be able to do so. We are required to make monthly interest payments of $0.4 million which are used to make required distributions on the outstanding shares of 9.4% Cumulative Trust Preferred Securities with a liquidation amount of $25 per security issued by our subsidiary, U.S. Home & Garden Trust I. We may, under certain circumstances, defer the payment of interest for a period not to exceed 60 months. The Trust Preferred Securities mature on April 15, 2028. See Note 9 to the Consolidated Financial Statements included in Part II, Item 8. During the year ended June 30, 2002, we paid in full all debt outstanding under out Credit Agreement with Bank of America, entered into in 1998. The agreement provided for a $25 million revolving acquisition line-of-credit ("the Acquisition Facility") to finance acquisitions and a $20 million working capital revolving line-of-credit ("the Working Capital Facility"). Borrowings under these credit facilities bore interest at variable annual rates chosen by the Company based on either (i) the London Interbank Offered Rate ("LIBOR") plus an applicable marginal rate, or (ii) the higher of 0.5% above the then current Federal Funds Rate or the Prime Rate of Bank of America, in each case, plus an applicable marginal rate. The total borrowings under these two facilities were $21.7 million at June 30, 2001. The total included $11.8 million borrowed under the Acquisition Facility and $9.9 million under the Working Capital Facility. Our obligations under the Bank of America Credit Agreement were guaranteed by our subsidiaries and secured by a security interest in favor of the Bank in substantially all of our assets and the assets of our subsidiaries. The Credit Agreement with Bank of America terminated upon our payment of the outstanding debt under the agreement. Commitments The Company leases office and warehouse space, certain office equipment and automobiles under operating leases expiring through 2006. The future minimum lease payments under these non-cancelable operating leases are as follows: Year ended June 30, Amount --------------------------------------------------------------- 2003 $ 843,000 2004 731,000 2005 484,000 2006 252,000 --------------------------------------------------------------- $2,310,000 =============================================================== 39 Critical Accounting Policies The preparation of financial statements requires the adoption and implementation of accounting policies and the use of assumptions and estimates in their presentation. The accounting policies and uncertainties, judgments and estimates make it likely that materially different amounts would be reported under different conditions and different assumptions. We have included below a discussion of the more critical accounting policies that are affected by the significant judgments and estimates used in the preparation of the financial statements, how such policies are applied, and how results differing from the estimates and assumptions would affect the amounts presented in the financial statements. Other accounting policies also have a significant effect on the financial statements, and some of these policies also require the use of estimates and assumptions as discussed in the Summary of Accounting Policies in our Consolidated Financial Statements at June 30, 2002. Allowance for Doubtful Accounts Receivable and Sales Returns. We maintain an allowance for doubtful accounts receivable, which represents the potential estimated losses resulting from the inability of customers to make required payments for amounts owed. The allowance is estimated based on historical experience of write-offs, the level of past due amounts and information known about specific customers with respect to their ability to make payments at the balance sheet date. If the financial condition of the Company's customers were to change, resulting in an impairment or improvement in their ability to make payments, additional allowances may be required or allowances may be reduced. We also maintain an allowance for sales returns. The allowance is estimated based on historical experience of sales returns from customers with agreements that allow the return of product. If actual market conditions for the sale of the products by the customers are less favorable than those anticipated, additional allowances may be required. 40 Inventories. We record inventory reserves for estimated obsolescence of inventory equal to the difference between the cost of inventory owned and the estimated market value. Market value is based upon the age of specific inventory on hand and assumptions about future demand and market conditions. If actual market conditions for the sale of the inventory are less favorable than those anticipated by management, additional reserves may be required. Goodwill. We have consummated eleven acquisitions accounted for using the purchase method. The excess of cost over net assets acquired which relates to our acquisitions has been recorded as goodwill. Goodwill is tested for impairment by comparing the carrying value of the assets of our individual reporting units to their fair value. The fair value of the assets could vary significantly over time and different assumptions and estimates will result in different valuations. Deferred Income Taxes. We record deferred income taxes based on enacted income tax rates in effect on the dates temporary differences between the financial reporting and tax bases of assets and liabilities reverse. To the extent that available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. We have recorded a valuation allowance due to the uncertainty of our ability to generate sufficient future taxable income to realize the gross deferred tax assets. If we are able to generate future taxable income, the valuation allowance may be adjusted. New Accounting Pronouncements The Emerging Issues Task Force (EITF) has issued EITF Issue 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products, and EITF Issue 01-09, Accounting for Consideration Given by a Vendor to a Customer, which provide guidance related to the income statement classification of such consideration. This guidance was effective for the Company for the quarter ended March 31, 2002. The adoption of EITF 00-25 and EITF 01-09 did not have an effect on the Company's financial statements. In June 2001, the FASB finalized SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest 41 method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria of SFAS No. 141. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually and requires the Company to identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS No. 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires the Company to complete a two-step transitional goodwill impairment test, with the first step to be completed within six months of the date of adoption. The first step, used to identify potential impairment, compares the fair value of a reporting unit with its carrying value. If it is determined that the carrying value of the net assets of the reporting unit (including goodwill) exceeds the fair value of that reporting unit, the second step must be performed as soon as possible, but no later than the end of the year of initial adoption, to measure the amount of the impairment loss, if any. An impairment loss resulting from the transitional goodwill impairment test is recognized as the effect of a change in accounting principle. The Company elected to adopt SFAS No. 141 and SFAS No. 142, effective July 1, 2001. See Note 6 to the Consolidated Financial Statements included in Part II, Item 8. In August 2001, the Financial Accounting Standards Board (FASB) finalized SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including the reporting of discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company adopted SFAS No. 144 during the year ended June 30, 2002. See Note 2 to the Consolidated Financial Statements included in Part II, Item 8. 42 In April 2002, the FASB issued SFAS No 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical Corrections. SFAS No. 4 required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 requires any gain or loss from the extinguishment of debt to meet the requirements of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions to be classified as an extraordinary item, otherwise the item would be classified in the results of continuing operations. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods that does not meet the criteria of APB No. 30 for classification as an extraordinary item shall be reclassified. The provisions of the statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002, with early application encouraged. The Company is currently assessing but has not adopted SFAS No. 145. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Currently, the Company is assessing but has not adopted SFAS No. 146. However, because there were no restructuring activities during 2002, the Company believes there would have been no effect on current year operations had the statement been applied early. Inflation Inflation has historically not had a material effect on our operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. As a result of our variable rate revolving credit line and term loan, we are exposed to the risk of rising interest rates. The following table provides information on our fixed 43 maturity debt as of June 30, 2002 that is sensitive to changes in interest rates. The Revolving Credit Facility had an interest rate of 5.25% for the year ended June 30, 2002 $15 million The Term Loan had an interest rate of 5.75% for the year ended June 20, 2002 $1.8 million 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. PART III Item 10. Directors and Executive Officers of the Registrant. Our current directors and executive officers are as follows: Name Age Position - ---- --- -------- Robert Kassel 62 Chairman of the Board, Chief Executive Officer, President, Secretary and Treasurer Richard Grandy 56 Chief Operating Officer Richard Kurz 60 Chief Financial Officer Richard Raleigh (1) 48 Director Fred Heiden(1)(2) 61 Director Brad Holsworth(2) 42 Director Jon Schulberg(1)(2) 44 Director - ---------- (1) Member, Compensation Committee (2) Member, Audit Committee 44 Robert Kassel co-founded U.S. Home & Garden Inc. and has been its Chairman of the Board, Chief Executive Officer, President, and Treasurer since October 1990, and Secretary since July 2002. From 1985 to August 1991, he was a consultant to Comtel Communications, Inc., 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 Grandy, has been Chief Operating Officer of U.S. Home & Garden Inc. since June 30, 2001 and President of Easy Gardener since July 1997. Prior to that time he served as Vice President of Easy Gardener from the date of its acquisition by U.S. Home & Garden in September 1994. Mr. Grandy co-founded Easy Gardener 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. Richard Kurz, 60, has been Chief Financial Officer of U.S. Home & Garden Inc. since October 2001 and served as its Vice President-Finance from June 2001 until October 2001. He has also served as Chief Financial Officer of Easy Gardener since October 2001. From 1997 until December 2000 he was Executive Vice President and Chief Financial Officer for Aircraft Interior Resources, Inc, a company that provides products and services to commercial airlines. From 1994 until 1997 he was Senior Vice President and Chief Financial Officer of American Eagle Group, Inc., a service company that provided insurance services to the aviation and other specialized industries. From 1991 to 1994 he was Chief Financial and Administrative Officer for BDP International, Inc. a logistics service provider. From 1979 to 1991 he held a variety of senior financial positions with CIGNA Corporation, a healthcare provider. Mr. Kurz is a Certified Public Accountant. Richard Raleigh has been a director of U.S. Home & Garden Inc. since March 1993. He served as Chief Operating Officer of U.S. Home & Garden Inc. from June 1992 to June 30, 2001 and has served as a consultant to U.S. Home & Garden, Inc. since then. He served as Executive Vice President-Operations of U.S. Home & Garden Inc. from December 1991 to June 1992. Prior to joining U.S. Home & Garden Inc., 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, 45 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. Fred Heiden, a director of U.S. Home & Garden Inc. 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. Brad Holsworth has been a director of U.S. Home & Garden Inc. since July 2000. Since April 2000, he has been employed by Prescient Capital LLC, a money manager and venture capital firm, as its Chief Financial Officer. From April 1999 to April 2000, he was employed by Banc of America Securities, as a Principal, Accounting and Finance. He was employed by the accounting firm, BDO Seidman, LLP from July 1982 to April 1999 and was a partner of BDO Seidman, LLP from July 1995 to April 1999. Jon Schulberg, a director of U.S. Home & Garden Inc. since March 1993, has been employed as President of Schulberg MediaWorks, a company engaged in the independent production of television programs and television advertising since January 1992. From January 1989 to January 1992, he was a producer for Guthy-Renker Corporation, a television production company. From September 1987 to January 1989 he was Director of Development for Eric Jones Productions. All of our directors hold office until the next annual meeting of the stockholders and the election and qualification of their successors. Our officers are elected annually by the Board and serve at the discretion of the Board. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires that officers and directors, and persons who beneficially own more than 10 percent of a registered class of equity securities of U.S. Home & Garden Inc., 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 46 by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, or representations obtained from certain reporting persons, we believe that during the year ended June 30, 2002 all filing requirements applicable to the officers, directors, and greater than 10 percent beneficial stockholders of U.S. Home & Garden Inc. were complied with. Item 11. Executive Compensation. The following table discloses the compensation awarded by U.S. Home & Garden Inc., for the three fiscal years ended June 30, 2002, 2001 and 2000, to Mr. Robert Kassel, its Chairman, Chief Executive Officer, President, Secretary and Treasurer, Mr. Richard Grandy, its Chief Operating Officer, and Mr. Richard Kurz, its Chief Financial Officer (together, the "Named Officers"). During the fiscal year ended June 30, 2002, no other officer of U.S. Home & Garden Inc. received a total salary and bonus that exceeded $100,000 during such fiscal year. Summary Compensation Table
Annual Compensation Long-Term ------------------- Compensation ------------ Securities Underlying All Other Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)(1) - --------------------------- ---- ---------- --------- ----------- ------------------- Robert Kassel, 2002 450,000 325,000 -- 5,149 Chairman, Chief Executive Officer, 2001 354,000 315,000 1,468,000 (4) 7,000 President, Secretary and Treasurer 2000 477,000 (2) 320,000 (2) 500,000 (3) 6,000 Richard Grandy, Chief Operating Officer 2002 345,300 -- -- 11,000 2001 340,000 100,000 150,000 (4) 12,000 2000 311,000 -- -- 12,000 Richard Kurz, Chief Financial Officer 2002 128,000 -- 10,000 (5) --
(1) Represents our contributions to the Named Officers 401(k)/profit sharing accounts. Excludes certain perquisites that did not exceed the lesser of $50,000 or 10% of their combined bonus and salary. (2) Included in Mr. Kassel's salary is $46,800 of non-cash compensation attributable to his receipt of shares of common stock of Egarden Inc. Mr. Kassel's bonus of $320,000 primarily reflects work performed by him in connection with Egarden Inc. and its initial capitalization, securing E-commerce agreements with certain of the nations largest hardware cooperatives and obtaining vendor arrangements. (3) Includes 200,000 options that were originally granted to Mr. Kassel in prior fiscal years, the expiration dates of which were extended in fiscal 2000. (4) Represents options that were originally granted to the respective officers in prior fiscal years, the expiration dates of which were extended in fiscal 2001. (5) Represents options granted to Mr. Kurz in October 2001. The following table discloses information concerning options granted in fiscal 2002 to Richard Kurz, who was the only Named Officer to be granted options during fiscal 2002. 47 Option Grants in Fiscal Year Ended June 30, 2002
Individual Grants ----------------- Number of Percent of Securities Total Options Underlying Granted to Potential Realizable Value Options Employees in Exercise at Assumed Annual Rates of Granted Fiscal Year Price Expiration Stock Price Appreciation Name (#)(1) (%) ($/Sh) Date for Option Term ($)(2) - ------------- ---------- ------------- -------- ---------- -------------------------- 5% 10% ----- ----- Richard Kurz 10,000 100 $0.53 10/01/02 1,464 3,236
- ---------- (1) All of such options were exercisable in full one year from the date of grant. (2) The potential realizable value columns of the table illustrate values that might be realized upon exercise of the options immediately prior to their expiration, assuming our common stock appreciates at the compounded rates specified over the term of the options. These numbers do not take into account provisions of options providing for termination of the option following termination of employment or nontransferability of the options and do not make any provision for taxes associated with exercise. Because actual gains will depend upon, among other things, future performance of the common stock, there can be no assurance that the amounts reflected in this table will be achieved. 48 The following table sets forth information concerning the number of options owned by the Named Officers and the value of any in-the-money unexercised options as of June 30, 2002. No options were exercised by any Named Officer during the fiscal year ended June 30, 2002: Aggregated Option Exercises And Fiscal Year-End Option Values
Shares Number of Securities Value of Unexercised In-the- Acquired on Value Underlying Unexercised Options Money Options at June 30, Exercise(#) Realized ($) at June 30, 2002 2002(1) ----------- ------------ ------------------------------ ----------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - -------------- ------------ ------------- ----------- ------------- Robert Kassel -- -- 1,973,402 255,931 0 0 Richard Grandy -- -- 150,000 -- 0 0 Richard Kurz -- -- 10,000 -- $1,200 0
- ---------- (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 28, 2002 (the last trading day prior to June 30, 2002)was $0.65 per share. Employment Agreements of Executive Officers We have entered into an employment agreement with Mr. Kassel dated as of April 1, 1996. Mr. Kassel currently serves as Chief Executive Officer and President of U.S. Home & Garden Inc. for a term which expires on March 31, 2003, which is subject to automatic renewal unless terminated. His current annual salary is $450,000, and is subject to such bonuses and increases as are approved at the discretion of the Board of Directors or the Compensation Committee of the Board, as the case may be. The employment agreement requires that substantially all of Mr. Kassel's business time be devoted to us and that he not compete, or engage in a business competitive with, our current or anticipated business for the term of the agreement and for two years thereafter (although he may own not more than 5% of the securities of any publicly traded competitive company). Mr. Kassel is, in addition to salary, entitled to certain fringe benefits, including the use of an automobile and payment of related expenses. Mr. Kassel's agreement also provides that if his employment is terminated under certain circumstances, including termination of Mr. Kassel's employment upon a change of control of U.S. Home & Garden Inc, (as defined in the agreement) a failure by U.S. Home & Garden Inc. to comply with its obligations under the agreement, the failure of U.S. Home & Garden Inc. to obtain the assumption of the agreement by any successor corporation, or a change in Mr. Kassel's duties and 49 obligations from those contemplated by the agreement, and termination by U.S. Home & Garden Inc. of Mr. Kassel's employment other than for disability or cause, he will be entitled to receive severance pay equal to the greater of (i) $350,000 ($3,500,000 in the event of a change of control) or (ii) the total compensation earned by Mr. Kassel from the Company during the one-year period (multiplied by ten in the event of a change of control or termination without cause) prior to the date of his termination. Easy Gardener, a wholly-owned subsidiary of U.S. Home & Garden Inc., has entered into an employment agreement with Mr. Grandy, dated as of September 1, 1998 which expires on August 31, 2003. 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. Mr. Grandy is also entitled to such bonuses, if any, as determined by the Board of Directors of Easy Gardener. 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 U.S. Home & Garden Inc. has established an Audit Committee which is comprised of Messrs. Heiden, Holsworth and Schulberg. The Audit Committee, among other things, makes recommendations to the Board of Directors with respect to the engagement of U.S. Home & Garden Inc.'s independent certified public accountants and the review of the scope and effect of the audit engagement. We have also established a Compensation Committee which is comprised of Messrs. Heiden, Raleigh and Schulberg. The Compensation Committee, among other things, makes recommendations to the Board of Directors with respect to the compensation of the executive officers of U.S. Home & Garden Inc. We maintain a Stock Option Committee comprised of Messrs. Schulberg and Heiden, which determines the persons to whom options should be granted under the 1995 and 1997 Stock Option Plans and the number and other terms of options be granted to each person under such plans. 50 Compensation Committee Interlocks and Insider Participation in Compensation Decisions The Compensation Committee of U.S. Home & Garden Inc.'s Board of Directors consists of Messrs. Heiden, Raleigh and Schulberg. During the fiscal year ended June 30, 2002, none of our executive officers served on the Board of Directors or the compensation committee of any other entity, any of whose officers served on the Board of Directors or Compensation Committee of U.S. Home & Garden Inc. Stock Option Plans In September 1991, we 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 our employees and officers. NQO's may be granted to consultants, directors (whether or not they are employees), and to our employees or officers. The purpose of the 1991 Plan is to encourage stock ownership by certain of our directors, officers and employees and certain other persons instrumental to our success and give them a greater personal interest in our success. 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 U.S. Home & Garden Inc. 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 U.S. Home & Garden Inc.). 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 of our stock option plans and those of any related corporation) may not 51 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 our voting stock). We have adopted a Non-Employee Director Stock Option Plan (the "Director Plan"). Only non-employee directors of U.S. Home & Garden Inc. are eligible to receive grants under the Director Plan. The Director Plan provides that eligible directors automatically receive a grant of options to purchase 5,000 shares of common stock at fair market value upon first becoming a director and, thereafter, an annual grant, in January of each year, of 5,000 options at fair market value. Options to purchase an aggregate of up to 100,000 shares of Common Stock are available for automatic grants under the Director Plan. We have 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 also employed by us 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 in any calendar year is limited by the same Code provisions applicable to ISOs granted under the 1991 Plan. We have 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 52 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 also our employees 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 in any calendar year is limited by the same Code provisions applicable to ISOs granted under the 1991 Plan. We have also adopted a 1999 Stock Option Plan ("1999 Plan") which provides for grants of options to purchase up to 900,000 shares of common stock. The Board of Directors or the Committee of the 1999 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 1999 Plan and other limitations on grant set forth in the 1999 Plan), the exercise price thereof (provided such price is not less than the fair market 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 also our employees 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 in any calendar year is limited by the same Code provisions applicable to ISOs granted under the 1991 Plan. We have adopted the Non-Qualified Deferred Compensation Plan for Select Employees of U.S. Home & Garden Inc. ("Deferred Plan") and have amended our stock option plans, as well as certain option agreements which we had with Robert Kassel. Under the Deferred Plan and such amended stock option plans and agreements, the Board of Directors or its committee which administers the relevant stock option may grant permission to optionees to exercise their options with shares of U.S. Home & 53 Garden Inc.'s common stock in which they have a holding period, for income tax purposes, of a least six months and defer the receipt of a portion of the shares subject to the option so exercised. The optionee has the right to designate the time or times of receipt of those shares pursuant to the Deferred Plan. The Deferred Plan does contain provisions for earlier issuance of those deferred shares on death, disability and other termination of employment (e.g., on a change of control of U.S. Home & Garden Inc.). We have, from time to time, also granted non-plan options to certain officers, employees and consultants. Director Compensation During the fiscal year ended June 30, 2002 each of our three non-employee directors who served as directors during that fiscal year, Messrs. Heiden, Holsworth and Schulberg, received $5,000 for serving on our Board of Directors. 54 Item 12. Security Ownership of Certain Beneficial Owners and Management. VOTING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information at September 30, 2002, 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 us 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 of U.S. Home & Garden Inc. as a group. Amount and Nature of Beneficial Percentage Name of Beneficial Owner Ownership(1)(2) of Class - ------------------------ --------------- -------- Robert Kassel 2,684,000(3)(4) 13.4 Richard Raleigh 756,411(5) 4.1 Richard Grandy 1,084,396(6) 6.1 Richard Kurz 10,000(7) * Fred Heiden 25,258(8) * Brad Holsworth 16,000(9) * Jon Schulberg 25,258(8) * Joseph Owens, II 914,396(10) 5.1 Wellington Management Company, LLP 1,745,000(11) 9.9 Parker Martin 1,029,855(12) 5.8 All executive officers and directors as a group (seven persons) 4,601,323(3)(4)(5)(6)(7)(8)(9) 21.8 - ---------- * less than 1% - -------------------------------------------------------------------------------- (1) Unless otherwise noted, we believe 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 30, 2002 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 30, 2002 have been exercised. (3) Of such shares, (i) 138,650 are owned of record by Mr. Kassel's wife; however, because Ms. Kassel has appointed 55 her husband as her proxy and attorney-in-fact to vote all 138,650 of the shares owned of record by her, Robert Kassel may also be deemed to have beneficial ownership of such shares. The address of Mr. Kassel is c/o U.S. Home & Garden Inc. (4) Includes 2,261,562 shares of Common Stock issuable to Mr. Kassel upon exercise of options and warrants. (5) Includes 754,411 shares of Common Stock issuable upon exercise of options. (6) Includes 150,000 shares of Common Stock issuable upon exercise of options. The address of Mr. Grandy is c/o U.S. Home & Garden Inc. (7) Represents 10,000 shares issuable upon exercise of options. (8) Includes 25,000 shares of Common Stock issuable upon exercise of options. (9) Includes 15,000 shares of Common Stock issuable upon exercise of options. (10) The address of Mr. Owens is 8 Hillandale Road, Waco, Texas. (11) According to a Schedule 13G filed by Wellington Management Company, LLP ("Wellington") with the SEC, these shares are beneficially owned by Wellington in its capacity as an investment advisor for clients of Wellington who are the record holders of such shares. The address of Wellington is 75 State Street, Boston, MA 02109. (12) According to a Schedule 13G filed by Mr. Martin with the SEC. The address for Mr. Martin is 121 S. Hope Street, #106, Los Angeles, California 90012. Item 13. Certain Relationships and Related Transactions From time to time Mr. Kassel has borrowed monies from U.S. Home & Garden Inc. During fiscal 2002, the highest amount owed to U.S. Home & Garden Inc. by Mr. Kassel was $571,000. After deducting principal payments made to date, the principal balance of the loan to Mr. Kassel at September 30, 2002 was approximately $537,000. The loan to Mr. Kassel bears interest at the lower of the prime lending rate or 6% (effectively 4.75%). Principal payments are due in annual installments of 56 $25,000 in 2003 and $50,000 in 2004 through 2007 with the balance due in April 2008. Item 14. Controls and Procedures Not applicable Part IV. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) (1) Financial Statements. The Financial Statements and Index follow this Part IV. (2) Financial Statement Schedule. Schedule II-Valuation and Qualifying Accounts. (3) Exhibits Exhibit No. 3.1 Certificate of Incorporation, as amended.* 3.2 By-laws of the registrant, incorporated by reference to Exhibit 3(b) of the registrant's Registration Statement on Form S-1 (Registration No. 33-45428). 4.1 Form of certificate evidencing Common Stock, $.001 par value, of the registrant, incorporated by reference to Exhibit 4.1 of the registrant's Registration Statement on Form S-1 (Registration No. 333-38483). 4.2 Rights Agreement dated as of October 1, 1998 between the registrant and Continental Stock Transfer & Trust Company, incorporated by reference to Exhibit 4.1 filed with the registrant's Current Report on Form 8-K for the event dated October 1, 1998. 57 10.1 Employment Agreement of Robert Kassel. +# 10.2 Employment Agreement of Richard Grandy, incorporated by reference to Exhibit 10.4 filed with the registrant's Form 10-K for the fiscal year ended June 30, 1998. # 10.3 1991 Stock Option Plan, incorporated by reference to Exhibit 10.5 of the registrant's Registration Statement on Form S-1 (Registration No. 33-45428). # 10.4 1995 Stock Option Plan, as amended. **# 10.5 Non-Employee Director Stock Option Plan. *# 10.6 1997 Stock Option Plan, as amended. **# 10.7 Lease with respect to the registrant's executive offices, incorporated by reference to Exhibit 10.14 of the registrant's Form 10-KSB for the fiscal year ended June 30, 1992. 10.8 February 8, 1995 modification to lease with respect to the registrant's executive offices. * 10.9 May 6, 1997 modification to lease with respect to the registrant's executive offices. ++ 10.10 1999 Stock Option Plan (incorporated by reference to Exhibit A filed with the registrant's Proxy Statement dated May 14, 1999 filed on Schedule 14A). # 10.11 Lease and lease extension agreements between Crawford-Austin Mfg. Co. and Easy Gardener. * 10.12 Leases with respect to Weatherly's warehouse facilities in Paris, Kentucky. 10.13 Lease Extension, dated February 14, 2002, between Easy Gardener and Crawford-Austin Mfg. Co. 10.14 Assets Purchase Agreement dated as of February 25, 1998 by and among the registrant, Weed Wizard, Weed Wizard, Inc and the Weed Wizard stockholders (incorporated by reference to Exhibit 10.1 filed with the registrant's Form 8-K for the event dated February 26, 1998). 58 10.15 Commercial Building Lease, dated June 12, 1998 between Easy Gardener, Inc. and Norman Adams, James Anderson, Donald Bryan and Pamela Butler (incorporated by reference to Exhibit 10.24 filed with the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998). 10.16 Form of Indenture between the registrant and Wilmington Delaware Subordinated Trust, as trustee. +++ 10.17 Deferred Compensation Plan for Select Employees **# 10.18 Separation Agreement and Release between U.S. Home & Garden Inc. and Richard Raleigh (incorporated by reference to Exhibit 10.29 filed with the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001). 10.19 Revolving Credit, Term Loan, Guaranty and Security Agreement dated as of November 15, 2001 among U.S. Home & Garden Inc., Easy Gardener, Inc., each of the direct or indirect subsidiaries of U.S. Home & Garden Inc. which are signatories to the Credit Agreement, the financial institutions which are a party to the Credit Agreement, and PNC Bank, National Association, as agent for the lenders. ++++ 10.20 Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among, U.S. Home & Garden Inc., Easy Gardener, Inc. each of the direct or indirect subsidiaries of U.S. Home & Garden Inc. which are signatories to the Note and Warrant Purchase Agreement and the purchasers listed on the signature page of the Note and Warrant Purchase Agreement. ++++ 10.21 Amendment No. 1 dated June 28, 2002, to PNC Credit Agreement. 21 Subsidiaries. 23 Consent of BDO Seidman, LLP. 99.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 59 99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Incorporated by reference to the comparable exhibit filed with the registrant's Form 10-KSB for the fiscal year ended June 30, 1995. ** Incorporated by reference to the applicable exhibit filed with the registrant's Form 10-K for the fiscal year ended June 30, 1999. # Denotes management compensatory contract or plan or arrangement. + Incorporated by reference to the applicable exhibit contained in the registrant's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996. ++ Incorporated by reference to the exhibit filed with the registrant's Form 10-K for the fiscal year ended June 30, 1997. +++ Incorporated by reference to the exhibit filed with the registrant's Registration Statement on Form S-1 (File No. 333-48519). ++++ Incorporated by reference to the exhibit filed with the registrant's Form 10-Q for the period ended December 31, 2001. (b) Report on Form 8-K. No reports on Form 8-K were filed by the registrant during its fiscal quarter ended June 30, 2002. 60 U.S. Home & Garden Inc. and Subsidiaries Consolidated Financial Statements June 30, 2002 and 2001 and for the Years Ended June 30, 2002, 2001 and 2000 U.S. Home & Garden Inc. and Subsidiaries ======================================== Consolidated Financial Statements June 30, 2002 and 2001 and for the Years Ended June 30, 2002, 2001 and 2000 U.S. Home & Garden Inc. and Subsidiaries Contents ================================================================================ Report of Independent Certified Public Accountants 3 Consolidated Financial Statements Consolidated balance sheets as of June 30, 2002 and 2001 4 and 5 Consolidated statements of operations for the years ended June 30, 2002, 2001 and 2000 6 and 7 Consolidated statements of stockholders' equity for the years ended June 30, 2002, 2001 and 2000 8 Consolidated statements of cash flows for the years ended June 30, 2002, 2001 and 2000 9 and 10 Summary of accounting policies 11 - 16 Notes to consolidated financial statements 17 - 44 Consolidated Financial Statement Schedule Schedule II-Valuation and Qualifying Accounts 45 Note: All other schedules have been omitted since the required information is contained in the Consolidated Financial Statements or such schedules are not required. 2 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, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. We have also audited Schedule II - Valuation and Qualifying Accounts (Schedule). These financial statements and Schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and Schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for goodwill during the year ended June 30, 2002. Also, in our opinion, the Schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP BDO Seidman, LLP Certified Public Accountants Kalamazoo, Michigan August 23, 2002, except for Note 11, which is as of October 11, 2002 3 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
June 30, 2002 2001 - --------------------------------------------------------------------------------------------------- Assets (Notes 1 and 8) Current: Cash and cash equivalents $ 219,000 $ 2,741,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $1,635,000 and $1,237,000 (Note 3) 26,243,000 19,412,000 Inventories (Note 4) 8,023,000 9,218,000 Prepaid expenses and other current assets 988,000 671,000 Refundable income taxes 405,000 653,000 Deferred tax asset (Note 14) 688,000 1,205,000 Current assets of discontinued operations (Note 2) 1,052,000 2,804,000 - --------------------------------------------------------------------------------------------------- Total Current Assets 37,618,000 36,704,000 Property and Equipment, net (Note 5) 4,850,000 5,716,000 Intangible Assets: Goodwill, net (Note 6) 49,861,000 59,632,000 Deferred financing costs, net of accumulated amortization of $578,000 and $562,000 3,570,000 3,001,000 Product rights, patents and trademarks, net of accumulated amortization of $163,000 and $73,000 509,000 510,000 Non-compete agreements, net of accumulated amortization of $407,000 and $132,000 1,103,000 1,378,000 Package tooling costs, net of accumulated amortization of $1,860,000 and $1,390,000 1,216,000 1,371,000 Officer's Receivable (Note 7) 512,000 521,000 Long-Term Assets of Discontinued Operations (Note 2) 100,000 326,000 Other Assets 26,000 304,000 - --------------------------------------------------------------------------------------------------- $ 99,365,000 $109,463,000 ===================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 4 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
June 30, 2002 2001 - -------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current: Revolving credit facility (Note 8) $ 15,036,000 $ 21,650,000 Accounts payable (Note 3) 7,180,000 3,310,000 Accrued commissions 1,437,000 1,279,000 Accrued rebates 931,000 1,618,000 Accrued co-op advertising 740,000 602,000 Accrued restructuring costs (Note 13) -- 999,000 Accrued other expenses 1,577,000 1,623,000 Current portion of long-term debt (Note 8) 7,712,000 20,000 Current liabilities of discontinued operations (Note 2) 277,000 736,000 - -------------------------------------------------------------------------------------------------------- Total Current Liabilities 34,890,000 31,837,000 Deferred Tax Liability (Note 14) 542,000 1,205,000 Long-Term Liabilities of Discontinued Operations (Note 2) -- 263,000 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures (Note 9) 56,951,000 56,951,000 - -------------------------------------------------------------------------------------------------------- Total Liabilities 92,383,000 90,256,000 - -------------------------------------------------------------------------------------------------------- Minority Interest in Equity of Affiliate (Note 2) -- 1,239,000 - -------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes 10 and 11) Stockholders' Equity (Note 12): Preferred stock, 1,000,000 shares authorized and unissued -- -- Common stock, $.001 par value - shares authorized, 75,000,000; 21,641,000 and 21,433,000 shares issued 22,000 21,000 Additional paid-in capital 52,351,000 51,846,000 Retained deficit (32,563,000) (21,071,000) - -------------------------------------------------------------------------------------------------------- 19,810,000 30,796,000 Less: Treasury stock, 3,890,000 shares at cost (12,828,000) (12,828,000) - -------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 6,982,000 17,968,000 - -------------------------------------------------------------------------------------------------------- $ 99,365,000 $ 109,463,000 ========================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 5 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Operations ================================================================================
Year ended June 30, 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Net Sales (Note 3) $ 78,947,000 $ 78,863,000 $ 86,919,000 Cost of Sales (Note 3) 43,358,000 44,065,000 47,802,000 - ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit 35,589,000 34,798,000 39,117,000 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Selling and Shipping 18,302,000 16,389,000 17,409,000 General and administrative 9,638,000 14,249,000 12,145,000 Restructuring charges (Note 13) -- 2,860,000 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 27,940,000 33,498,000 29,554,000 - ----------------------------------------------------------------------------------------------------------------------------------- Income From Operations 7,649,000 1,300,000 9,563,000 Other Income (Expense): Gain on disposal of property and equipment -- -- 551,000 Interest income (Note 7) 83,000 149,000 264,000 Interest expense (7,374,000) (7,484,000) (7,507,000) - ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) From Continuing Operations Before Income Taxes, Extraordinary Gain, and Cumulative Effect of a Change in Accounting Principle 358,000 (6,035,000) 2,871,000 Income Tax Benefit (Expense) (Note 14) (228,000) 1,406,000 (1,213,000) - ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) From Continuing Operations Before Extraordinary Gain and Cumulative Effect of a Change in Accounting Principle 130,000 (4,629,000) 1,658,000 Discontinued Operations (Note 2): Loss from discontinued operations, net of tax benefit of $2,491,000 and $1,771,000 in 2001 and 2000, respectively, and net of minority interest of $1,754,000 and $423,000 in 2001 and 2000, respectively (1,760,000) (16,253,000) (3,227,000) Gain (loss) on disposal of discontinued operations, net of minority interest of $1,239,000 and $1,118,000 in 2002 and 2001, respectively 20,000 (4,551,000) -- - ----------------------------------------------------------------------------------------------------------------------------------- Loss Before Extraordinary Gain and Cumulative Effect of a Change in Accounting Principle (1,610,000) (25,433,000) (1,569,000) Extraordinary Gain of $7,000 and $2,102,000 on Purchase of Trust Preferred Securities, Net of Income Taxes of ($3,000) and ($878,000) (Note 15) -- 4,000 1,224,000 - ----------------------------------------------------------------------------------------------------------------------------------- Loss Before Cumulative Effect of a Change in Accounting Principle (1,610,000) (25,429,000) (345,000) Cumulative Effect of a Change in Accounting Principle (Note 6) (9,882,000) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net Loss $(11,492,000) $(25,429,000) $ (345,000) ===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 6 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Operations ================================================================================
Year ended June 30, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Basic Earnings per Share (Note 16): Income (loss) from continuing operations per common share before extraordinary gain and cumulative effect of a change in accounting principle $ 0.01 $ (0.26) $ 0.09 Discontinued operations (0.10) (1.14) (0.17) Extraordinary gain -- -- 0.06 Cumulative effect of a change in accounting principle (0.57) -- -- - ------------------------------------------------------------------------------------------------------------------ Net Loss per Common Share $ (0.66) $ (1.40) $ (0.02) ================================================================================================================== Diluted Earnings per Share (Note 16): Income (loss) from continuing operations per common share before extraordinary gain and cumulative effect of a change in accounting principle $ 0.01 $ (0.26) $ 0.08 Discontinued operations (0.10) (1.14) (0.16) Extraordinary gain -- -- 0.06 Cumulative effect of a change in accounting principle (0.55) -- -- - ------------------------------------------------------------------------------------------------------------------ Net Loss per Common Share $ (0.64) $ (1.40) $ (0.02) ==================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 7 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity ================================================================================
Common Stock --------------------- Additional Retained Total Number of Paid-In Earnings Treasury Stockholders' Shares Amount Capital (Deficit) Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1999 21,219,000 $ 21,000 $50,542,000 $ 4,703,000 $ (8,782,000) $ 46,484,000 Compensation related to repriced stock options -- -- 166,000 -- -- 166,000 Exercise of stock options, warrants and UPOs 532,000 1,000 205,000 -- -- 206,000 Issuance of stock options for consulting services and business acquisition -- -- 497,000 -- -- 497,000 Repurchase of common stock for treasury -- -- -- -- (1,905,000) (1,905,000) Net loss -- -- -- (345,000) -- (345,000) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2000 21,751,000 22,000 51,410,000 4,358,000 (10,687,000) 45,103,000 Compensation related to repriced stock options -- -- 261,000 -- -- 261,000 Issuance of stock options for consulting services -- -- 175,000 -- -- 175,000 Retirement of shares (318,000) (1,000) -- -- -- (1,000) Repurchase of common stock for treasury -- -- -- -- (2,141,000) (2,141,000) Net loss -- -- -- (25,429,000) -- (25,429,000) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2001 21,433,000 21,000 51,846,000 (21,071,000) (12,828,000) 17,968,000 Compensation related to repriced stock options -- -- 103,000 -- -- 103,000 Issuance of options and warrants to note holders -- -- 402,000 -- -- 402,000 Release of shares from Non-Qualified Deferred Compensation Plan (Note 10) 208,000 1,000 -- -- -- 1,000 Net loss -- -- -- (11,492,000) -- (11,492,000) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2002 21,641,000 $ 22,000 $52,351,000 $(32,563,000) $(12,828,000) $ 6,982,000 ===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 8 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Year ended June 30, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income (loss) from continuing operations before extraordinary item and cumulative effect of a change in accounting principle $ 130,000 $(4,629,000) $ 1,658,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for losses on accounts receivable 425,000 646,000 173,000 Depreciation and other amortization 2,768,000 5,686,000 4,774,000 Gain on disposal of property and equipment -- -- (551,000) Write-off of deferred financing costs 254,000 -- -- Restructuring charges, net of cash -- 2,708,000 -- Deferred income taxes (146,000) (1,148,000) 48,000 Compensation related to repriced stock options 103,000 261,000 166,000 Loan discount amortization 97,000 -- -- Consulting expenses related to stock options -- 175,000 146,000 Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions: Accounts receivable (7,256,000) (474,000) (917,000) Inventories 1,195,000 1,635,000 3,465,000 Prepaid expenses, refundable income taxes and other current assets (94,000) (790,000) 1,198,000 Other assets 278,000 259,000 (171,000) Accounts payable and accrued expenses 2,434,000 (5,799,000) 3,325,000 - ---------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Operating Activities 188,000 (1,470,000) 13,314,000 - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: (Increase) decrease in restricted cash -- 1,582,000 (582,000) Proceeds on sale of property and equipment -- 3,527,000 1,030,000 Purchase of equipment (791,000) (1,311,000) (2,598,000) Purchase of package tooling and other intangibles (384,000) (631,000) (571,000) Decrease in officer receivable 34,000 84,000 70,000 Payment for purchase of businesses, net of cash acquired (111,000) (863,000) (125,000) - ---------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities (1,252,000) 2,388,000 (2,776,000) - ----------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements. 9 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Year ended June 30, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net proceeds from (payments on) revolving credit facility $(6,614,000) $ 4,650,000 $ 1,500,000 Proceeds from issuance of long-term debt 8,250,000 -- -- Payments on long-term debt (233,000) -- -- Changes in other long-term liabilities and purchase of mandatorily redeemable preferred securities (20,000) (797,000) (3,981,000) Deferred finance costs (1,119,000) (99,000) -- Proceeds from issuance of stock -- -- 206,000 Repurchase of common stock for treasury -- (2,141,000) (1,905,000) Release (retirement) of shares 1,000 (1,000) -- - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 265,000 1,612,000 (4,180,000) - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents from continuing operations (799,000) 2,530,000 6,358,000 Cash used in discontinued operations (1,723,000) (3,318,000) (5,520,000) - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,522,000) (788,000) 838,000 Cash and Cash Equivalents, beginning of year 2,741,000 3,529,000 2,691,000 - ---------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, end of year $ 219,000 $ 2,741,000 $ 3,529,000 ==========================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. 10 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Nature of Business U.S. Home & Garden Inc. (the "Company"), through its 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, grass and flower seed products, 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), Amturf(R), and Landmaster(R). The Company markets its products through most large national home improvement and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware and Tru-Serv in North America. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries over which it has financial or management control including Weatherly Consumer Products Group, Inc. (Weatherly), Easy Gardener, Inc. (Easy Gardener), Golden West Agri-Products, Inc. (Golden West), Weed Wizard Acquisition Corp. (Weed Wizard), Ampro Industries, Inc. (Ampro) and Egarden Inc. (EGarden) since their dates of acquisition (See Notes 1 and 2). Additionally, U.S. Home & Garden Trust I (See Note 9) has been included since its formation in April 1998. All 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. Property and Equipment Property and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets or, in the case of leasehold improvements, over the life of the lease, if shorter. Maintenance and repairs are charged to expense as incurred. Major improvements are capitalized. Intangible Assets Goodwill Goodwill, which relates to the Company's acquisitions, represents the excess of cost over net assets acquired. For the years ended June 30, 2001 and 2000, goodwill was amortized over periods of five to thirty years using the straight-line method. Effective July 1, 2001, the Company ceased the amortization of goodwill in conjunction with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. See New Accounting Pronouncements and Note 6. Goodwill is tested for impairment annually by comparing the fair value of each reporting unit with its carrying value. 11 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Deferred Financing Costs Direct costs associated with the Company's debt borrowings are being amortized over the life of the related debt. Product Rights Product rights are being amortized over estimated useful lives of fifteen to twenty years. Non-Compete Agreements The non-compete agreements were entered into with the acquisitions of Ampro and Weatherly. The Weatherly agreement is being amortized over its twenty-year term. The Ampro non-compete agreement, which was triggered when an officer of Ampro was terminated, is being amortized over a three-year period from the date of such termination. Package Tooling Costs Package tooling costs associated with Easy Gardener and Weatherly products, primarily consisting of the design and construction of printing plates and cutting dies used for the production of packaging, are being amortized over periods of three to five years using the straight-line method. Long-Lived Assets Long-lived assets with definite useful lives are tested for recoverability when circumstances suggest a possible impairment. Recovery is evaluated by comparing undiscounted estimated future cash flows to the current carrying value. Revenue Recognition Sales are recorded as products are shipped to customers. Sales are free on board (FOB) shipping point. Sales Incentives The Company enters into contractual agreements with its customers for rebates on certain products it sells. The Company records the amounts as reductions of revenue and records a liability reflected as accrued rebates on the consolidated balance sheets. As these rebate percentages are determined when the contracts are entered into, these revenue reductions are recorded at the time the related revenue is recorded. 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. 12 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Income Taxes The Company provides deferred income taxes based on enacted income tax rates in effect on the dates temporary differences between the financial reporting and tax bases of assets and liabilities reverse. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date. To the extent that available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established (See Note 14). Shipping and Handling Amounts billed to customers for shipping and handling are recorded as revenue. Shipping and handling costs incurred by the Company are included in operating expenses. 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. Cooperative advertising credits are accrued based on sales volume and advertising frequency, pursuant to specific agreements. Such costs are classified as selling expenses. 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 approximately $2,934,000, $3,012,000 and $3,171,000 during the years ended June 30, 2002, 2001 and 2000. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 13 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Stock-Based Compensation The Company has adopted the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, with respect to non-employee stock-based compensation. 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 compensation 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 employee stock-based compensation under APB No. 25. See Note 12. Segment Information The Company's primary continuing operations are in one reportable segment - the manufacture and sale of consumer lawn and garden products. The Company has aggregated its operating segments into a single reportable segment. See disclosure regarding revenue from external customers for each significant type of product and service at Note 3. Financial Instruments and Derivatives The Company's financial instruments consist of cash and cash equivalents, accounts receivable, officer's receivable, debt and mandatorily redeemable preferred securities. The carrying value of cash and cash equivalents and accounts receivable approximate fair value based upon the liquidity and short-term nature of the assets. The carrying value of the officer's receivable and debt approximates the fair value based upon short-term and long-term borrowings at interest rates which approximate current rates. See Note 9 regarding valuation of mandatorily redeemable preferred securities. The Company has used derivative financial instruments to manage the economic impact of fluctuations in interest rates on short-term and long-term debt. The Company entered into an interest rate swap to manage this economic risk. This was viewed as a risk management tool and was not used for trading or speculative purposes. The interest rate differentials associated with the interest rate swap used to hedge debt obligations were recorded as an adjustment to interest payable with the offset to interest expense over the life of the swap. There were no material derivative financial instruments in effect during the years presented. 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. 14 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Reclassifications Certain amounts as previously reported have been reclassified to conform to current year classifications. New Accounting Pronouncements The Emerging Issues Task Force (EITF) has issued EITF Issue 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products, and EITF Issue 01-09, Accounting for Consideration Given by a Vendor to a Customer, which provide guidance related to the income statement classification of such consideration. This guidance was effective for the Company for the quarter ended March 31, 2002. The adoption of EITF 00-25 and EITF 01-09 did not have an effect on the Company's financial statements. In June 2001, the FASB finalized SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria of SFAS No. 141. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually and requires the Company to identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS No. 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires the Company to complete a two-step transitional goodwill impairment test, with the first step to be completed within six months of the date of adoption. The first step, used to identify potential impairment, compares the fair value of a reporting unit with its carrying value. If it is determined that the carrying value of the net assets of the reporting unit (including goodwill) exceeds the fair value of that reporting unit, the second step must be performed as soon as possible, but no later than the end of the year of initial adoption, to measure the amount of the impairment loss, if any. An impairment loss resulting from the transitional goodwill impairment test is recognized as the effect of a change in accounting principle. The Company elected to adopt SFAS No. 141 and SFAS No. 142, effective July 1, 2001. See Note 6. 15 U.S. Home & Garden Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ In August 2001, the Financial Accounting Standards Board (FASB) finalized SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including the reporting of discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company adopted SFAS No. 144 during the year ended June 30, 2002. See Note 2. In April 2002, the FASB issued SFAS No 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical Corrections. SFAS No. 4 required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 requires any gain or loss from the extinguishment of debt to meet the requirements of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions to be classified as an extraordinary item, otherwise the item would be classified in the results of continuing operations. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods that does not meet the criteria of APB No. 30 for classification as an extraordinary item shall be reclassified. The provisions of the statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002, with early application encouraged. The Company is currently assessing but has not adopted SFAS No. 145. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Currently, the Company is assessing but has not adopted SFAS No. 146. However, because there were no restructuring activities during 2002, the Company believes there would have been no effect on current year operations had the statement been applied early. 16 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. Business Acquisitions The Company has consummated the following eleven acquisitions of lawn and garden companies or product lines for a total of approximately $111 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. All of these amounts have been paid. o Emerald Products LLC - Manufacturer of decorative landscaping 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, all of whose assets were acquired in February 1998 for approximately $16.0 million, plus an additional $1.7 million for excess working capital and acquisition expenses. Operations were discontinued during 2002 - see Note 2. 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, plus an additional $600,000 for certain assets and acquisition expenses. 17 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 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, plus an additional $1 million for inventory. o Ampro Industries, Inc. - A manufacturer and distributor of lawn and garden products including specialty grass and flower seeds. The Company acquired all of the outstanding stock of Ampro for approximately $24.6 million in October 1998. o E-Garden, Inc. (now Egarden, Inc.) - The Company's business-to-business Internet subsidiary was acquired in June 1999 for approximately $400,000 plus expenses of approximately $100,000. Operations were discontinued during 2001 - see Note 2. o Findplants.com - An electronic horticulture catalogue and locator that provides business-to-business service for commercial growers and wholesalers which was acquired by Egarden, Inc. in May 2000 for approximately $537,000. Operations were discontinued during 2001 - see Note 2. 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. 2. Discontinued Operations In June 2002, the Company announced that is was discontinuing its Weed Wizard operations effective September 30, 2002. Despite the Company's efforts to increase sales and return to profitability, Weed Wizard experienced continued erosion of its business. The Company plans to dispose of the assets and liabilities of Weed Wizard, including amounts written off, through a sale of the assets and liquidation of the liabilities during fiscal 2003. The Company recorded an estimated net loss on disposal of the Weed Wizard component of $1,116,000, relating to the write-down of all assets to fair value less cost to sell. In addition to the loss on disposal in 2002, the Company had a net loss from operations of Weed Wizard of $1,760,000 for the year ended June 30, 2002, $9,124,000, net of income tax benefit of $2,491,000 for the year ended June 30, 2001, and $1,332,000, net of income tax benefit of $306,000 for the year ended June 30, 2000. During the year ended June 30, 2000, the Company discontinued production, sale and distribution of one of the products in its Weed Wizard product line. Additionally, the Company, in voluntary compliance with the recommendations of the CPSC, instituted a recall of the product. Accordingly, the Company recorded a pretax charge of $645,000, net of tax effect of $283,000, to provide for recall costs and inventory write-offs. An impairment charge of $8,500,000, net of tax effect of $2,320,000, was recorded in June 2001 to write off the net goodwill balance associated with Weed Wizard. The Company's policy is to periodically evaluate its long-lived assets for possible impairment. If the evaluation determines that the long-lived assets have been impaired, the assets are written down to their estimated fair value. Due to the recurring operating losses of Weed Wizard, the product recall in a prior year, and the subsequent unsuccessful product launch of the replacement product through a complete sales season, the evaluation was performed and the estimated impairment loss was recognized during 2001. 18 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Revenues for Weed Wizard for the years ended June 30, 2002, 2001, and 2000, were $672,000, $1,912,000 and $2,746,000, respectively. In June 2001, the Company announced that it was discontinuing its e-commerce imitative, which it was conducting though its subsidiary, Egarden, Inc. (Egarden), effective June 30, 2001. During the year ended June 30, 2001, the Company recorded an estimated net loss on disposal of Egarden of $4,551,000, net of minority interest of $1,118,000. The loss, prior to minority interest, included the write-off of all long-lived assets of $5,224,000 and severance expense of $445,000 related to the termination of all 39 employees. All severance payments have been made at June 30, 2002. No adjustments were made to the liability recorded for severance payments during the year ended June 30, 2002. All of the assets of Egarden, including amounts written off, were sold during the year ended June 30, 2002. During the year ended June 30, 2002, the Company recorded a net gain on the disposal of Egarden of $1,136,000, as a result of the write off of minority interest of $1,239,000 as the subsidiary was liquidated. In addition to the net loss on disposal in 2001, the Company had a net loss from the operations of Egarden of $7,129,000, net of minority interest of $1,754,000 for the year ended June 30, 2001, and $1,895,000, net of tax benefit of $1,465,000 and minority interest of $423,000 for the year ended June 30, 2000. Revenues of Egarden for the years ended June 30, 2002, 2001 and 2000 were not material. The assets and liabilities of discontinued operations held for sale reported in the consolidated balance sheets consist of the following: June 30, 2002 ------------------------------------- Weed Wizard Egarden Total - ------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ -- $ 62,000 $ 62,000 Accounts receivable 385,000 -- 385,000 Inventories 274,000 -- 274,000 Other current assets 331,000 -- 331,000 - ------------------------------------------------------------------ Total Current Assets $ 990,000 $ 62,000 $1,052,000 ================================================================== Long-Term Assets- Property and Equipment, net $ 100,000 $ -- $ 100,000 ================================================================== Current Liabilities: Accounts payable $ 98,000 $ -- $ 98,000 Accrued expenses 163,000 16,000 179,000 - ------------------------------------------------------------------ Total Current Liabilities $ 261,000 $ 16,000 $ 277,000 ================================================================== 19 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ June 30, 2001 ------------------------------------- Weed Wizard Egarden Total - ------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ -- $ 872,000 $ 872,000 Accounts receivable 71,000 -- 71,000 Inventories 1,825,000 -- 1,825,000 Other current assets 26,000 10,000 36,000 - ------------------------------------------------------------------ Total Current Assets $1,922,000 $ 882,000 $2,804,000 ================================================================== Long-Term Assets: Property and equipment, net $ 278,000 $ -- $ 278,000 Intangible assets, net 48,000 -- 48,000 - ------------------------------------------------------------------ Total Long-Term Assets $ 326,000 $ -- $ 326,000 ================================================================== Current Liabilities: Accounts payable $ 17,000 $ -- $ 17,000 Accrued expenses 208,000 445,000 653,000 Current portion of capital lease obligations -- 66,000 66,000 - ------------------------------------------------------------------ Total Current Liabilities $ 225,000 $ 511,000 $ 736,000 ================================================================== Long-Term Liabilities- Capital lease obligations $ -- $ 263,000 $ 263,000 ================================================================== Minority Interest in Equity of Affiliate $ -- $1,239,000 $1,239,000 ================================================================== Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company's consolidated financial statements and notes have been restated for all periods presented to reflect the discontinued components. The assets and liabilities of the discontinued components have been classified as "Held for Sale" and the net operations and net cash flows have been reported as "Discontinued Operations" in the accompanying consolidated financial statements. The restated notes exclude amounts related to these discontinued components. 20 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 3. Concentration of Credit Risk and Significant Relationships Trade accounts receivable are due from numerous customers located in many geographic regions throughout the United States. The Company performs ongoing credit evaluations of its customers' financial condition and establishes an allowance for doubtful accounts based upon credit risk of specific customers, historical trends and other information. The Company does not require collateral from its customers. The Company's two largest customers during the years ended June 30, 2002, 2001 and 2000, each accounted for the following percentage of the Company's revenues: Customer 2002 2001 2000 - -------------------------------------------------------------------------------- A 49% 43% 36% B 10% 14% 12% ================================================================================ Included in accounts receivable at June 30, 2002 and 2001 is approximately $16,520,000 and $9,062,000, respectively, due from the two largest customers. Sales of each of the Company's three significant product lines comprised the following percentages of the Company's total net sales for the years ended June 30, 2002, 2001 and 2000: Product Line 2002 2001 2000 - -------------------------------------------------------------------------------- Landscape fabric 51% 48% 44% Fertilizer, plant food, and insecticide spikes 14% 17% 15% Landscape edging 10% 9% 10% ================================================================================ Substantially all raw material purchases for WeedBlock(R) landscape fabric inventory are from one vendor, representing approximately 12%, 19% and 22% of the Company's consolidated raw material purchases during the years ended June 30, 2002, 2001 and 2000, respectively. 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 adversely affect operating results. Included in accounts payable at June 30, 2002 is $1,609,000, due to this vendor. No amounts were due to this vendor at June 30, 2001. 4. Inventories Inventories consist of: June 30, 2002 2001 - -------------------------------------------------------------------------------- Raw and packaging materials $4,025,000 $5,175,000 Finished goods 3,998,000 4,043,000 - -------------------------------------------------------------------------------- $8,023,000 $9,218,000 ================================================================================ 21 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ At June 30, 2002 and 2001, the inventory balance has been reduced by a provision for possible obsolescence of $225,000 and $1,340,000, respectively. The Company disposed of $1,209,000 of previously reserved inventory during the year ended June 30, 2002. 5. Property and Equipment Property and equipment consist of: Estimated Useful June 30, Life in Years 2002 2001 - -------------------------------------------------------------------------------- Furniture, fixtures and equipment 5 - 7 $10,703,000 $ 9,989,000 Leasehold improvements 7 - 10 791,000 750,000 - -------------------------------------------------------------------------------- 11,494,000 10,739,000 Less accumulated depreciation 6,644,000 5,023,000 - -------------------------------------------------------------------------------- $ 4,850,000 $ 5,716,000 ================================================================================ Depreciation expense was $1,657,000, $2,113,000 and $1,670,000 during the years ended June 30, 2002, 2001 and 2000, respectively. 6. Goodwill Goodwill consists of the following: June 30, 2002 2001 - ------------------------------------------------------------------------------- Weatherly Consumer Products Group, Inc. $22,948,000 $22,948,000 Easy Gardener, Inc. 15,639,000 15,639,000 Ampro Industries, Inc. 9,303,000 18,693,000 Tensar consumer products line 5,226,000 5,226,000 Plasti-Chain product line 2,810,000 2,810,000 Landmaster Products, Inc. 2,292,000 2,292,000 Golden West Chemical Distributions, Inc. 1,606,000 2,098,000 Emerald Products, LLC 1,466,000 1,355,000 - ------------------------------------------------------------------------------- 61,290,000 71,061,000 Less accumulated amortization 11,429,000 11,429,000 - ------------------------------------------------------------------------------- $49,861,000 $59,632,000 =============================================================================== 22 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Effective July 1, 2001, the Company adopted SFAS No. 141 and SFAS No. 142. During 2002, the Company completed a reassessment of the useful lives of all intangible assets other than goodwill which total $6,398,000 (net of accumulated amortization of $3,008,000) at June 30, 2002. No adjustments to previously determined amortization periods were considered necessary. The Company has no intangible assets with indefinite useful lives other than goodwill at June 30, 2002. In conjunction with the adoption of SFAS No. 141 and SFAS No. 142, the Company completed its transitional goodwill impairment test during 2002. Ampro and Golden West were the only reporting units where the carrying value exceeded the fair value of their net assets including goodwill. As of July 1, 2001, the net goodwill related to Ampro was $17,078,000. The Company hired an independent valuation professional to assist the Company in measuring the amount of the impairment. Based on the valuation, the Company recorded an impairment loss of $9,390,000 during the year ended June 30, 2002 in the Consolidated Statement of Operations, as a cumulative effect of a change in accounting principle. The net goodwill related to Golden West at July 1, 2001 was approximately $1,165,000. Based on a valuation prepared by management, an impairment loss of $492,000 was recorded during the year ended June 30, 2002 and is reported as a cumulative effect of a change in accounting principle in the Consolidated Statement of Operations. The Company's previous business combinations were accounted for using the purchase method. As a result of such combinations, the Company has recognized a significant amount of goodwill, which, in the aggregate, was $49,861,000, net of accumulated amortization, at June 30, 2002. Amortization expense for all intangible assets during the years ended June 30, 2002, 2001 and 2000 was $1,111,000, $3,573,000 and $3,104,000, respectively. Goodwill amortization, including amounts reported as discontinued operations, was $2,809,000 and $2,817,000 for the years ended June 30, 2001 and 2000, respectively. Estimated amortization expense for continuing operations for each of the five succeeding fiscal years is as follows: Year Ended June 30, Amount - -------------------------------------------------------------------------------- 2003 $1,245,000 2004 $1,245,000 2005 $ 877,000 2006 $ 667,000 2007 $ 667,000 23 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The following represents a reconciliation of the reported net loss to the adjusted net income (loss) and the adjusted net income (loss) before extraordinary gain for the years ended June 30, 2001 and 2000, which exclude goodwill amortization expense, net of tax benefit: Year Ended June 30, 2001 2000 -------------------------------------------------------------------------- Reported Net Loss $(25,429,000) $ (345,000) Goodwill Amortization, net of tax benefit of $620,000 and $622,000 2,189,000 2,195,000 -------------------------------------------------------------------------- Adjusted net income (loss) (23,240,000) 1,850,000 Extraordinary Gain 4,000 1,224,000 -------------------------------------------------------------------------- Adjusted Net Income (Loss) Before Extraordinary Gain $(23,244,000) $ 626,000 ========================================================================== Per Share Amounts - Basic: Reported Net Loss $ (1.40) $ (.02) Goodwill amortization, net of tax benefit .12 .11 -------------------------------------------------------------------------- Adjusted net income (loss) (1.28) .09 Extraordinary Gain -- (.06) -------------------------------------------------------------------------- Adjusted Net Income (Loss) Before Extraordinary Gain $ (1.28) $ .03 ========================================================================== Per Share Amounts - Diluted: Reported Net Loss $ (1.40) $ (.02) Goodwill Amortization, net of tax benefit .12 .11 -------------------------------------------------------------------------- Adjusted net income (loss) (1.28) .09 Extraordinary Gain -- (.06) -------------------------------------------------------------------------- Adjusted Net Income (Loss) Before Extraordinary Gain $ (1.28) $ .03 ========================================================================== 24 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 7. Officer's Receivable The officer's receivable represents an unsecured note which bears interest at the lower of the prime lending rate or 6% (effectively 4.75% at June 30, 2002). At June 30, 2002 and 2001, the balance on the outstanding note was $537,000 and $571,000, respectively. Total related interest income amounted to $41,000, $43,000 and $48,000 for the years ended June 30, 2002, 2001 and 2000, respectively. Principal payments on the note are due in annual installments as follows with the balance due upon maturity in April 2008: 2003 $25,000 2004 - 2007 $50,000 8. Revolving Credit Facility and Long-Term Debt On November 15, 2001, the Company entered into a financing agreement expiring November 15, 2004 to provide $25,000,000 in senior secured financing, as amended. The agreement provides for a $23,000,000 revolving credit facility and a $2,000,000 term loan due in monthly installments of $33,000 plus interest. The term loan balance outstanding at June 30, 2002 is $1,767,000. Interest on borrowings is calculated at variable annual rates based on either the bank's prime rate plus an applicable marginal rate or the federal funds rate plus an applicable marginal rate (effectively 5.75% on the term loan and 5.25% on the revolving credit facility at June 30, 2002). Borrowings on the revolving credit facility are limited based on eligible borrowing bases, effectively $19,611,000 at June 30, 2002. At June 30, 2002 the Company had $15,036,000 of borrowings outstanding under the revolving credit facility. The Company's obligations under the revolving credit facility are guaranteed by its subsidiaries and secured by a security interest in favor of the bank in substantially all of the assets of the Company and its subsidiaries. The Company is also subject to certain fees and restrictions in conjunction with the financing. Upon the occurrence of an event of default as specified in the financing agreement, the maturity of loans outstanding under the financing agreement may be accelerated by the bank, which may also foreclose its security interest on the assets of the Company and its subsidiaries. On November 15, 2001, the Company also entered into a financing agreement to provide $6,250,000 of subordinated debt. At June 30, 2002, the Company had borrowings outstanding of $5,945,000, net of discounts of $905,000, pursuant to the subordinated secured notes due in November 2007 with an effective interest rate of 18.4%. Interest is charged on the face of the notes at 16% and 14% per annum, payable monthly. The issue price of the 16% notes was 90% of the face amount of the notes resulting in a discount of $600,000. The notes are secured by a second lien on all assets of the Company and rank junior to the senior financing provided by the bank. In connection with this financing, the Company issued to the purchasers of the notes warrants to purchase up to 3.75% of the fully diluted common stock of the Company and an option to purchase from the Company certain Trust Preferred Securities of the Company's subsidiary, U.S. Home and Garden Trust I, that are owned by the Company, which resulted in an additional discount of $402,000. 25 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Under the two financing agreements, the Company and its subsidiaries are required, among other things, to comply with (a) certain limitations on incurring additional indebtedness, liens and guarantees, dispositions of assets, payment of cash dividends and cash redemption and repurchases of securities, and (b) certain limitations on mergers, liquidations, changes in business, investments, loans and advances, affiliate transactions and certain acquisitions. In addition, the Company must comply with certain financial tests and ratios and other covenants. A violation of any of these covenants constitutes an event of default under the financing agreements. At June 30, 2002, the Company was in violation of certain covenants, and all debt outstanding under the agreements has been classified as current at June 30, 2002. The Company is currently seeking to amend the covenants and to obtain financing to replace the borrowings under the current agreements. During the year ended June 30, 2002, the Company paid off the Credit Agreement with Bank of America, entered into in 1998. The agreement provided for a $25 million revolving acquisition line-of-credit ("the Acquisition Facility") to finance acquisitions and a $20 million working capital revolving line-of-credit ("the Working Capital Facility"). Borrowings under these credit facilities bore interest at variable annual rates chosen by the Company based on either (i) the London Interbank Offered Rate ("LIBOR") plus an applicable marginal rate, or (ii) the higher of 0.5% above the then current Federal Funds Rate or the Prime Rate of Bank of America, in each case, plus an applicable marginal rate. The total borrowings under these two facilities was $21,650,000 at June 30, 2001. The total included $11,750,000 borrowed under the Acquisition Facility and $9,900,000 under the Working Capital Facility. The Company's obligations under the Credit Agreement were guaranteed by its subsidiaries and secured by a security interest in favor of the Bank in substantially all of the assets of the Company and its subsidiaries. 26 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 9. Mandatorily Redeemable Preferred Securities In April 1998, U.S. Home & Garden Trust I (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 and completed a public offering of 2,530,000 of 9.40% Cumulative Trust Preferred Securities with a liquidation amount of $25 per security to the Company for a total of $65,200,000 (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 proceeds therefrom to acquire the subordinated debentures described below. Concurrent with the issuance of the Trust Securities, the Trust invested the net proceeds therefrom in $65.2 million aggregate principal amount of 9.40% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company. The Company has since redeemed 251,981 shares leaving 2,278,019 shares outstanding with a face value of $56,951,000. See note 15. The fair value of the mandatorily redeemable preferred securities is approximately $34,740,000 based on quoted market prices of $15.25 per security at June 30, 2002. Distributions of interest 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. 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 in total 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. 27 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 10. Commitments Employment Agreements The Company has entered into employment agreements with two of its officers. One agreement is for a one-year period but is automatically renewed unless specifically terminated by the Company or the employee. If the employment agreement is terminated by the Company without cause, the officer will be entitled to an additional ten years of annual compensation. Annual compensation under the employment agreement is $450,000. The employment agreement also provides for certain lump sum payments in the event of a change in control equal to approximately $7.3 million. The other agreement expires on August 31, 2003, and provides for a base aggregate annual salary of approximately $350,000. In addition, the agreements provide for incentive and additional compensation under certain circumstances. Operating Leases The Company leases office and warehouse space, certain office equipment and automobiles under operating leases expiring through 2006. The future minimum lease payments under these non-cancelable operating leases are as follows: Year ended June 30, Amount - -------------------------------------------------------------------------------- 2003 $ 843,000 2004 731,000 2005 484,000 2006 252,000 - -------------------------------------------------------------------------------- $2,310,000 ================================================================================ Rent expense was approximately $891,000, $860,000 and $836,000 for the years ended June 30, 2002, 2001 and 2000, respectively. 28 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Defined Contribution Benefit Plan Easy Gardener has established an employee defined contribution benefit 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 60% of employee contributions up to 5% of the employee's wage base. The Plan also allows discretionary contributions by the Company. The Company's contribution vests over a seven-year period. Ampro had a separate plan for its employees, with similar terms to the Easy Gardener Plan that was terminated during the year ended June 30, 2001. Total expense associated with the plans for the years ended June 30, 2002, 2001 and 2000 was approximately $321,000, $358,000 and $380,000, respectively. Non-Qualified Deferred Compensation Plan The Company has adopted the Non-Qualified Deferred Compensation Plan for Select Employees of U.S. Home & Garden Inc. (Deferred Plan). Under the Deferred Plan, the Board of Directors or its committee which administers the relevant stock option plan may grant permission to optionees to exercise their options with shares of U.S. Home & Garden, Inc. common stock in which they have a holding period, for income tax purposes, of at least six months and defer the receipt of a portion of the shares subject to the option so exercised. The optionee has the right to designate the time or times of receipt of those shares pursuant to the Deferred Plan. The Deferred Plan contains provisions for earlier issuance of those deferred shares on death, disability and other termination of employment (e.g., on a change of control of U.S. Home & Garden Inc.). At June 30, 2001, 208,000 shares were held in the Deferred Plan. All of the shares were released during the year ended June 30, 2002. 11. Contingencies In the normal course of business, the Company is subject to proceedings, lawsuits, and other claims, including claims by creditors, proceedings under laws and government regulations related to product safety and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the ultimate amount of monetary liability or financial impact with respect to these matters at June 30, 2002 cannot be ascertained. During fiscal 2001, the U.S. Consumer Product Safety Commission ("CPSC") began an investigation into a product previously distributed by the Company's Weed Wizard subsidiary. 29 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The Company has reached an agreement with the CPSC in principle, subject to the execution of a formal settlement agreement. The settlement provides for an aggregate fine of $885,000, against the Company and A.A.B.B., Inc. Pursuant to the settlement agreement, the Company and A.A.B.B. Inc. will each pay $442,500 of the fine. In fiscal 2001, the Company commenced an action against A.A.B.B., Inc. (formerly known as Weed Wizard Inc.) and certain of its stockholders and officers relating to the purchase from the defendants of substantially all of the assets of Weed Wizard, Inc. by the Company. The Company is seeking to rescind the transaction or to recover monetary damages. A.A.B.B., Inc. has asserted a counterclaim for breach of contract against the Company for $720,000, plus interest, representing an alleged adjustment to the purchase price. In October 2002, the Company entered into a settlement agreement with A.A.B.B., Inc. The settlement involves a payment by A.A.B.B., Inc. of $442,500 to the CPSC in payment of the fine discussed above, a payment of approximately $308,000 to the Company, and the release of the escrow funds of approximately $329,000 to the Company. The settlement agreement will become effective upon the execution of the settlement agreement with the CPSC described above. The effects of the agreements have been reflected in the consolidated financial statements as of June 30, 2002. 12. Stockholders' Equity Preferred Stock The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, rights and preference as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or other rights of the holders of the Company's common stock. No shares of the preferred stock are outstanding. Common Stock 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 acquirer's) common stock at 50% of its then market value. 30 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Common Stock Repurchase Program The Company is authorized to repurchase up to 5,500,000 shares of its common stock through open market purchases and in privately negotiated transactions. Repurchased shares are held by the Company as treasury stock. During 2001 and 2000, the Company repurchased 1,336,000 and 749,000 shares of treasury stock for $2,141,000 and $1,905,000, respectively. Prior to fiscal 2000 the Company repurchased 1,805,000 shares for $8,782,000. 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 1991 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. At June 30, 2002, 48,000 options remain available for issuance under the 1991 Plan. During fiscal 1995, the Board of Directors of the Company (the "Board) adopted 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 reserved for issuance under this plan is 1,500,000. At June 30, 2002, 193,000 options remain available for issuance under the 1995 Plan. The Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan") was established to attract, retain and compensate for their services as directors, highly qualified individuals who are not employees of the Company. The maximum aggregate number of shares reserved for issue under this plan is 100,000. The 1995 Plan is administered by a committee of the Board and the Non-Employee Director Plan is a formula plan. At June 30, 2002, 50,000 options remain available for issuance under the Non-Employee Director Plan. During May 1997, the Board approved the 1997 Stock Option Plan. The Plan allows the granting of either ISOs or non-qualified options. The 1997 Plan reserves the issuance of 1,500,000 shares of common stock. At June 30, 2002, 234,000 options remain available for issuance under the 1997 Plan. During May 1999, the Board approved the 1999 Stock Option Plan. The Plan allows for granting of either ISOs or non-qualified options. The 1999 Plan reserves the issuance of 900,000 shares of common stock. At June 30, 2002, 50,000 options remain available for issuance under the 1999 Plan. 31 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The Plans are administered by the Board or a committee of the Board and are approved by the stockholders. The Board, or committee, as the case may be, within the limitations of the plans, 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 plans 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 the 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 Plans are not transferable during an optionee's lifetime but are transferable at death by will or by the laws of descent and distribution. 32 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The following is a summary of activity relating to stock options: Weighted Average Option Price Per Share Outstanding Exercisable ================================================================================ 1991 Plan July 1, 1999 $1.69 397,000 232,000 Became exercisable 1.69 -- 18,000 Exercise of options 1.69 (40,000) (40,000) - -------------------------------------------------------------------------------- June 30, 2000 1.69 357,000 210,000(2) Became exercisable 1.69 -- 18,000 - -------------------------------------------------------------------------------- June 30, 2001 1.69 357,000 228,000(2) Became exercisable 1.69 -- 26,000(1) - -------------------------------------------------------------------------------- June 30, 2002 $1.69 357,000 254,000(2) ================================================================================ 1995 Plan July 1, 1999 $2.18 1,459,000 1,309,000 Became exercisable 2.25 -- 100,000 - -------------------------------------------------------------------------------- June 30, 2000 2.18 1,459,000 1,409,000(3) Expired 2.23 (166,000) (166,000) Became exercisable 2.06 -- 25,000 - -------------------------------------------------------------------------------- June 30, 2001 2.17 1,293,000 1,268,000(3) Became exercisable 2.06 -- 25,000 Expired 2.06 (10,000) (10,000) - -------------------------------------------------------------------------------- June 30, 2002 $2.18 1,283,000 1,283,000(3) ================================================================================ 33 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Weighted Average Option Price Per Share Outstanding Exercisable ================================================================================ Director Stock Option Plan July 1, 1999 $3.47 20,000 20,000 Granted 2.78 10,000 10,000 - -------------------------------------------------------------------------------- June 30, 2000 2.85 30,000 30,000(4) Granted 1.61 20,000 5,000 - -------------------------------------------------------------------------------- June 30, 2001 2.35 50,000 35,000(4) Became exercisable 1.06 -- 15,000 - -------------------------------------------------------------------------------- June 30, 2002 $2.59 50,000 50,000(4) ================================================================================ 1997 Plan July 1, 1999 $3.59 715,000 492,000 Granted 2.56 50,000 50,000 Became exercisable 3.16 -- 82,000 - -------------------------------------------------------------------------------- June 30, 2000 3.12 765,000 624,000(5) Expired 2.68 (55,000) (55,000) Became exercisable 3.16 -- 82,000 - -------------------------------------------------------------------------------- June 30, 2001 3.15 710,000 651,000(5) Became exercisable 2.56 -- 29,000 - -------------------------------------------------------------------------------- June 30, 2002 $3.15 710,000 680,000(5) ================================================================================ 34 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Weighted Average Option Price Per Share Outstanding Exercisable ================================================================================ 1999 Plan July 1, 1999 $ -- -- -- Granted 2.33 833,000 699,000 - -------------------------------------------------------------------------------- June 30, 2000 2.33 833,000 699,000(6) Expired 2.56 (12,000) (12,000) Became exercisable 2.56 -- 110,000 - -------------------------------------------------------------------------------- June 30, 2001 2.32 821,000 797,000(6) Granted .53 10,000 5,000 Expired 2.83 (171,000) (171,000) Became exercisable 2.14 -- 24,000 - -------------------------------------------------------------------------------- June 30, 2002 $2.16 660,000 655,000(6) ================================================================================ Non-Plan Options July 1, 1999 $2.84 2,744,000 2,070,000 Expired 3.57 (402,000) (402,000) Became exercisable 4.09 -- 206,000 Granted 3.60 125,000 125,000 - -------------------------------------------------------------------------------- June 30, 2000 2.34 2,467,000 1,999,000(7) Expired 3.81 (11,000) (11,000) Became exercisable 3.84 -- 168,000 - -------------------------------------------------------------------------------- June 30, 2001 2.33 2,456,000 2,156,000(7) Granted .40 89,000 89,000 Expired 3.63 (691,000) (670,000) Became exercisable 1.69 -- 107,000 - -------------------------------------------------------------------------------- June 30, 2002 $1.76 1,854,000 1,682,000(7) ================================================================================ 35 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ (1) In prior years, the expiration date and vesting period on 545,000 options were extended in periods between nine and ten years. As a result, the Company is recognizing compensation expense for the intrinsic value of the options over the new vesting periods. In 2002, 2001 and 2000 such expense was $103,000, $119,000 and $119,000, respectively. (2) At June 30, 2000, 2001 and 2002, the weighted average exercise option price per share for exercisable options was $1.69 for all periods. (3) At June 30, 2000, 2001 and 2002, the weighted average exercise option price per share for exercisable options was $2.18, $2.17 and $2.18. (4) At June 30, 2000, 2001 and 2002, the weighted average exercise price per share for exercisable options was $2.85, $2.91, and $2.59. (5) At June 30, 2000, 2001 and 2002, the weighted average exercise option price per share for exercisable options was $3.25, $3.20 and $3.18. (6) At June 30, 2000, 2001 and 2002, the weighted average exercise option price per share for exercisable options was $2.25, $2.32 and $2.17. (7) At June 30, 2000, 2001 and 2002, the weighted average exercise option price per share for exercisable options was $2.25, $2.42 and $1.76. During the year ended June 30, 2001, the expiration date of 200,000 options and warrants was extended for two years. The options and warrants remain fully vested. As a result, the Company recognized $142,000 of expense for the value of the options and warrants. The following table summarizes the above stock options outstanding and exercisable at June 30, 2002: Outstanding Exercisable ----------------------------------- -------------------- Weighted Weighted Average Average Average Range of Exercise Remaining Exercise Exercise Price Options Life Price Options Price - -------------------------------------------------------------------------------- $0.01 - 1.00 299,000 2.9 years $0.14 294,000 $0.13 1.01 - 2.00 733,000 4.7 years 1.68 459,000 1.67 2.01 - 3.00 3,158,000 3.3 years 2.13 3,127,000 2.13 3.01 - 4.00 664,000 2.5 years 3.30 664,000 3.30 4.01 - 4.69 60,000 2.1 years 4.22 60,000 4.22 - -------------------------------------------------------------------------------- $0.01 - 4.69 4,914,000 3.3 years $2.13 4,604,000 $2.16 ================================================================================ 36 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Warrants In connection with certain business transactions and stock offerings, the Company has granted various warrants to purchase common stock. The following schedule summarizes the activity: Weighted Weighted Average Average Remaining Warrant Price Contractual Per Share Outstanding(1) Exercisable Life ================================================================================ July 1, 1999 $2.45 1,216,000 1,216,000 1.5 years Granted 2.28 36,000 36,000 Exercised 2.71 (341,000) (341,000) - -------------------------------------------------------------------------------- June 30, 2000 3.02 911,000 911,000 1.5 years Issued 5.00 200,000 100,000 - -------------------------------------------------------------------------------- June 30, 2001 3.31 1,111,000 1,011,000 2 years Granted .40 940,000 940,000 Expired 3.14 (786,000) (786,000) Became exercisable 7.00 -- 100,000 - -------------------------------------------------------------------------------- June 30, 2002 $1.25 1,265,000 1,265,000 6 years ================================================================================ (1) The warrants contain anti-dilution provisions which could affect 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. Common Stock Reserved At June 30, 2002, approximately 7,819,000 shares of common stock have been reserved for issuance upon the exercise of warrants and options. 37 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Stock-Based Compensation The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpertations in accounting for its employee and director stock option plans. Under all the Company's option plans, the exercise price of the options equals or exceeds the market price of the underlying stock on the date of the grant and therefore, no compensation cost is recognized. SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income and earnings per share as if compensation costs for the Company's employee and director stock options and warrants had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimated the fair value of each stock option and warrant at the grant date by using a Black-Scholes pricing model with the following weighted-average assumptions used for grants in 2002, 2001 and 2000, respectively: no dividend yield for any year; expected volatility of approximately 75%, 60% and 55%, risk-free interest rates of 3.5% 5.4% and 6.4%; and expected lives of approximately three to five years. Pro forma compensation expense associated with options granted to employees and directors totaled $2,000, $17,000 and $2,185,000 for 2002, 2001 and 2000 respectively. The per option weighted average fair value was, $.32, $1.08 and $1.53 for 2002, 2001 and 2000, respectively. Under the accounting provisions of SFAS No. 123, the Company's net loss and net loss per common share would have been adjusted to the pro forma amounts indicated below:
Year ended June 30, 2002 2001 2000 - ------------------------------------------------------------------------------------ Net Loss: As reported $(11,492,000) $(25,429,000) $ (345,000) Pro forma (net of tax effect) (11,494,000) (25,442,000) (1,481,000) Dilutive per common share (.64) (1.40) (.02) Dilutive per common share pro forma (.64) (1.40) (.07) ====================================================================================
38 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 13. Restructuring Charges In 2001, the Company recorded a restructuring charge of $2,860,000 relating to the closing and sale of the Ampro Industries Inc. facility in Michigan. The Company intends to continue to sell products, through a contract manufacturing agreement, being manufactured at the former Ampro facility. As part of this agreement, the Company has firm commitments to purchase minimum amounts of product. The contract includes an exit provision, whereby the maximum cost to the Company for termination of the agreement is $350,000. During the year ended June 30, 2001, the Company recognized approximately $1,709,000 of expenses and losses relating to the closing and sale of property and equipment of the Ampro facility and $1,151,000 for termination benefits to be paid to all 60 employees involved with the facility. All severance payments as a result of the restructuring have been paid and no adjustments were made to the liability recorded for severance payments during the year ended June 30, 2002. 14. Income Taxes Deferred tax assets (liabilities) consist principally of the following: June 30, 2002 2001 - -------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforward $ 6,015,000 $ 1,421,000 Accumulated depreciation and amortization 2,971,000 3,382,000 Accounts receivable allowance 475,000 330,000 Inventory allowance 200,000 467,000 Other 13,000 408,000 - -------------------------------------------------------------------------------- Gross deferred tax assets 9,674,000 6,008,000 Less valuation allowance (6,922,000) (3,626,000) - -------------------------------------------------------------------------------- Total deferred tax assets $ 2,752,000 $ 2,382,000 - -------------------------------------------------------------------------------- Deferred tax liabilities- Accumulated depreciation and amortization $ 2,606,000 $ 2,382,000 ================================================================================ 39 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The valuation allowance of $6,922,000 was recorded due to the uncertainty of the Company's ability to generate sufficient future taxable income to realize total gross deferred tax assets. The Company's net operating loss carryforward for federal income tax purposes amounted to $17,691,000 at June 30, 2002, and expires in 2021 if not previously utilized. The net deferred income taxes as of June 30, 2002 and 2001 are presented in the balance sheets as follows: June 30, 2002 2001 - -------------------------------------------------------------------------------- Current asset $688,000 $1,205,000 Long-term liability $542,000 $1,205,000 ================================================================================ The income tax provision (benefit) consists of: Year ended June 30, 2002 2001 2000 - -------------------------------------------------------------------------------- Current: Federal $ -- $ (271,000) $ 2,418,000 State 374,000 16,000 319,000 - -------------------------------------------------------------------------------- 374,000 (255,000) 2,737,000 - -------------------------------------------------------------------------------- Deferred: Federal (146,000) (1,358,000) 258,000 State -- 210,000 (210,000) - -------------------------------------------------------------------------------- (146,000) (1,148,000) 48,000 - -------------------------------------------------------------------------------- $ 228,000 $(1,403,000) $ 2,785,000 ================================================================================ The 2001 and 2000 income tax expense (benefit) includes income tax expense of $3,000 and $878,000 relating to the extraordinary gain. 40 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The following is a reconciliation between the federal statutory income tax rate and the Company's effective tax rate relating to income from continuing operations before minority interest and extraordinary gain: Year ended June 30, 2002 2001 2000 - -------------------------------------------------------------------------------- Income tax provision computed at Federal Statutory rate (34.0)% 34.0% (34.0)% State taxes, net of Federal tax effects (62.3) (2.5) (1.3) Nondeductible amortization and other 1.8 (7.0) (12.3) Changes in valuation allowance on deferred tax assets 36.9 (1.2) 3.4 Deductible UPOs and stock options -- -- 1.9 - -------------------------------------------------------------------------------- Income Tax Benefit (Expense) (57.6)% 23.3% (42.3)% ================================================================================ 15. Extraordinary Gain During the years ended June 30, 2001 and 2000, respectively, the Company purchased 1,200 and 250,781 of the outstanding 9.40% Cumulative Trust Preferred Securities issued by its subsidiary, U.S. Home & Garden Trust I, at approximately $15 and $17 per Trust Preferred Security. The repurchase of these Trust Preferred Securities resulted in extraordinary gains during the years ended June 30, 2001 and 2000, of $4,000 and $1,224,000 (after provisions for income taxes of $3,000 and $878,000), respectively. During the year ended June 30, 2000, the Company purchased 24,000 Trust Preferred Securities from officers and directors under the same terms and conditions as described above. 16. Earnings per Share The following is a reconciliation of the weighted average number of shares used to compute basic and dilutive earnings per share: 2002 2001 2000 - -------------------------------------------------------------------------------- Basic weighted average common shares outstanding 17,555,000 18,181,000 19,031,000 Dilutive effect of stock options and warrants 469,000 -- 1,729,000 - -------------------------------------------------------------------------------- Dilutive weighted average common shares outstanding 18,024,000 18,181,000 20,760,000 ================================================================================ 41 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Options and warrants to purchase 4,939,000, 6,788,000 and 1,503,000 shares of common stock in fiscal years 2002, 2001 and 2000, respectively, were not included in the computation of diluted earnings per share because the option or warrant exercise price was greater than the average market price of the stock. Diluted earnings per share for the year ended June 30, 2001 is based only on the weighted average number of common shares outstanding as the inclusion of 10,000 common share equivalents would have been anti-dilutive. 17. Supplemental Cash Flow Information Year ended June 30, 2002 2001 2000 - -------------------------------------------------------------------------------- Cash paid (received) during the period for: Interest paid $ 6,696,000 $ 7,314,000 $ 7,220,000 Interest received $ (83,000) $ (149,000) $ (264,000) Income taxes refunded $ (100,000) $ (790,000) $(1,020,000) ================================================================================ Supplemental information regarding non-cash investing and financing activities during the year ended June 30, 2002: Discount on issuance of 16% subordinated notes at 90% of face amount $600,000 Discount on issuance of warrants and options in conjunction with debt refinancing $402,000 42 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 18. Quarterly Information (Unaudited)
First Second Third Fourth Fiscal 2002 Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------------- Income sales $ 13,483,000 $11,762,000 $23,913,000 $ 29,789,000 Gross profit $ 5,540,000 $ 4,752,000 $11,087,000 $ 14,210,000 Income (loss) from continuing operations before extraordinary gain and cumulative effect of a change in accounting principle $ (2,553,000) $(2,835,000) $ 1,822,000 $ 3,696,000 Income (loss) from discontinued operations $ (268,000) $ (490,000) $ 227,000 $ (1,229,000) Income on disposal of discontinued operations $ -- $ -- $ -- $ 20,000 Cumulative effect of a change in accounting principle $ (9,882,000) $ -- $ -- $ -- Net income (loss) $(12,703,000) $(3,325,000) $ 2,049,000 $ 2,487,000 Basic earnings per share: Income (loss) from continuing operations before extraordinary gain and cumulative effect of a change in accounting principle $ (.15) $ (.16) $ .11 $ .21 Discontinued operations $ (.01) $ (.03) $ .01 $ (.07) Cumulative effect of a change in accounting principle $ (.56) $ -- $ -- $ -- Net income (loss) per common share $ (.72) $ (.19) $ .12 $ .14 Diluted earnings per share: Income (loss) from continuing operations $ (.15) $ (.16) $ .10 $ .21 Discontinued operations $ (.01) $ (.03) $ .01 $ (.07) Cumulative effect of a change in accounting principle $ (.56) $ -- $ -- $ -- Net income (loss) per common share $ (.72) $ (.19) $ .11 $ .14 First Second Third Fourth Fiscal 2001 Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------------- Net sales $ 12,548,000 $11,303,000 $25,768,000 $ 29,244,000 Gross profit $ 4,169,000 $ 4,180,000 $11,644,000 $ 14,805,000 Loss from continuing operations before extraordinary gain $ (1,803,000) $(1,771,000) $ (38,000) $ (1,017,000) Loss from discontinued operations $ (952,000) $(1,226,000) $(1,733,000) $(12,342,000) Loss on disposal of discontinued operations $ -- $ -- $ -- $ (4,551,000) Extraordinary gain $ 4,000 $ -- $ -- $ -- Net loss $ (2,751,000) $(2,997,000) $(1,771,000) $(17,910,000) Basic earnings per share: Loss from continuing operations before extraordinary gain $ (.10) $ (.10) $ -- $ (.06) Discontinued operations $ (.05) $ (.06) $ (.10) $ (.96) Extraordinary gain $ -- $ -- $ -- $ -- Net loss per common share $ (.15) $ (.16) $ (.10) $ (1.02) Diluted earnings per share: Loss from continuing operations before extraordinary gain $ (.10) $ (.10) $ -- $ (.06) Discontinued operations $ (.05) $ (.06) $ (.10) $ (.96) Extraordinary gain $ -- $ -- $ -- $ -- Net loss per common share $ (.15) $ (.16) $ (.10) $ (1.02)
43 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Differences between amounts included above and amounts previously reported on Form 10-Q are due to the reclassification to discontinued operations as described in Note 2, and the cumulative effect of a change in accounting principle of $9,882,000, related to the loss on impairment of goodwill recorded as of July 1, 2001. See Note 6. The fourth quarter of 2001 includes a pre-tax charge of $10,820,000 related to the loss on impairment of goodwill and a loss on disposal of discontinued operations of $4,551,000. See Note 2. The fourth quarter of 2002 includes the write off of minority interest of $1,136,000 net of an estimated loss on disposal of discontinued operations of $1,116,000. See Note 2. 44 Consolidated Financial Statement Schedule ============================== U.S. Home & Garden Inc. and Subsidiaries Schedule II - Valuation and Qualifying Accounts ================================================================================
Charged to Beginning Costs and Ending Balance Expenses Writeoffs Balance - ------------------------------------------------------------------------------------------------------ Reserves and Allowances Deducted from Asset Accounts (Continuing Operations): Allowance for Doubtful Accounts o Year ended June 30, 2000 $ 991,000 $173,000 $ (589,000) $ 575,000 o Year ended June 30, 2001 $ 575,000 $646,000 $ (250,000) $ 971,000 o Year ended June 30, 2002 $ 971,000 $425,000 $ (15,000) $1,381,000 Reserve for Inventory Obsolescence o Year ended June 30, 2000 $ 513,000 $283,000 $ (256,000) $ 540,000 o Year ended June 30, 2001 $ 540,000 $943,000 $ (143,000) $1,340,000 o Year ended June 30, 2002 $1,340,000 $ 94,000 $(1,209,000) $ 225,000 - ------------------------------------------------------------------------------------------------------
45 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, Chief Executive Officer Dated: October 15, 2002 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 October 15, 2002 - ----------------------- of Directors, Chief Robert Kassel Executive Officer, President, Secretary and Treasurer (Chief Executive Officer) /s/ Richard Kurz Chief Financial Officer October 15, 2002 - ----------------------- (Principal Financial and Richard Kurz Accounting Officer) /s/ Richard Raleigh Director October 15, 2002 - ----------------------- Richard Raleigh /s/ Brad Holsworth Director October 15, 2002 - ----------------------- Brad Holsworth /s/ Jon Schulberg Director October 15, 2002 - ----------------------- Jon Schulberg /s/ Fred Heiden Director October 15, 2002 - ----------------------- Fred Heiden U.S. Home & Garden Inc. Certification of Principal Executive Officer I, Robert Kassel, Chief Executive Officer of U.S. Home & Garden Inc., certify that: 1. I have reviewed this annual report on Form 10-K of U.S. Home & Garden Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 15, 2002 /s/ Robert Kassel ----------------------------- Robert Kassel Chief Executive Officer (Principal Executive Officer) EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the Certification as set forth in this Annual Report on Form 10-K have been omitted, consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427, because this Annual Report on Form 10-K covers a period ending before the Effective Date of Exchange Rules 13a-14 and 15d-14. U.S. Home & Garden Inc. Certification of Principal Financial Officer I, Richard Kurz, Chief Financial Officer of U.S. Home & Garden Inc., certify that: 1. I have reviewed this annual report on Form 10-K of U.S. Home & Garden Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 15, 2002 /s/ Richard Kurz ----------------------------- Richard Kurz Chief Financial Officer (Principal Financial Officer) EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the Certification as set forth in this Annual Report on Form 10-K have been omitted, consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427, because this Annual Report on Form 10-K covers a period ending before the Effective Date of Exchange Act Rules 13a-14 and 15d-14. EX-10.12 3 d52182_ex10-12.txt LEASE AGRMT Ex 10.12 Easy Gardener, Inc. 1750 Seventeenth Street Easy Gardener, Inc.[LOGO] Paris, KY 40361 Phone: 859-987-5389, ext. 214 Fax: 859-987-0428 e-mail: tomb@easygardener.net June 21, 2002 Ms. Sarah Leer P.O. Box 606 Paris, KY 40361 RE: Lease Agreement Dated October 22, 2001 Leased Premises - 1714 Main Street, Paris, KY Dear Ms. Leer: This letter, upon your undersigned agreement, is intended to amend and hereby amends the Lease Agreement dated October 22, 2001 (the "Lease") between Sarah Leer ("Landlord") and Easy Gardener, Inc. ("Tenant"), and in consideration of the terms and conditions hereinafter set forth, Landlord and Tenant agree as follows: 1. Article II of the Lease provides, in part, that the initial term of the Lease shall commence on the earliest to occur of (a) the date which Tenant takes possession, or (b) the date on which Landlord's Improvements have been substantially completed and the Demised Premises have been inspected and accepted in writing by Tenant as being in good condition and repair. Further, Article II provides that the Landlord shall use best efforts to have the improvements completed on or before December 31, 2001 2. Article II of the Lease further provides that if the applicable governmental authority requires a sprinkler system to be installed in the Demised Premises, then the rent may be adjusted in such amount as is agreed upon between Landlord and Tenant; provided, however, if the Landlord is unwilling to commit to make the required capital expenditures for the sprinkler system, or if the Landlord and Tenant are unable to agree on the increase in rent, then either party may terminate the Lease by giving written notice of intent to terminate to the other party. 3. Landlord and Tenant further acknowledge the following: a. That as of this date, which is over five months since the anticipated completion date of Landlord's Improvements, Tenant has not taken possession of the Demised Premises, nor has Landlord completed Landlord's Improvements as described in Exhibit "B" attached to the Lease; b. That the Landlord's Improvements, as set forth on Exhibit "B" to the Lease, which have not been completed are specifically set forth in the attached "List of Uncompleted Landlord Improvements Required Under Exhibit B to Lease"; c. That as of this date, the applicable government authority has required a sprinkler system to be installed in the Leased Premises; d. That there is no agreement between Landlord and Tenant for an increase in rent under the Lease in order to assist Landlord with the capital cost required for installation of a sprinkler system for the Demised Premises; and e. That except for the agreement of Landlord and Tenant as hereinafter set forth, Tenant has the right to terminate the Lease due to Landlord's failure to timely meet Landlord's obligations under Article II with respect to the substantial completion of Landlord's Improvements and the delivery of possession of the Demised Premises. 4. Landlord hereby represents and warrants to Tenant that Landlord has committed to make the required capital expenditures for installation of a sprinkler system, at Landlord's sole expense, and that Landlord has already contracted for the sprinkler system improvements, with Landmark Sprinkler, Inc., Lexington, Kentucky. Moreover, Landlord represents and warrants that the uncompleted Landlord Improvements contained in the attached list, and the installation of the sprinkler system, and the delivery of the Demised Premises will be completed on or before August 14, 2002. 5. In consideration of the Landlord's commitment to install the sprinkler system and Landlord's representations and warranties, as hereinabove set forth, as of this date Tenant waives its right to terminate the Lease under Article II of the Lease as set forth above. Provided, however, if Tenant determines that Landlord is not making good faith efforts to meet the Landlord's obligations as set forth in the Lease and this letter amendment, or that it is not possible for such obligations to be completed on or before August 14, 2002, or that the obligations of Landlord are not fully completed and inspected and accepted in writing by Tenant as being in good condition and repair on or before August 14, 2002, then Tenant shall have the right to give written notice to Landlord to declare the Lease and this letter amendment terminated, and thereupon the Lease and this letter amendment shall be terminated and after which neither party shall have any further obligation to the other. 6. Except as herein amended, the Lease remains in full force and effect, and upon Landlord's timely delivery of the Demised Premises with all of Landlord's Improvements, including the sprinkler system, properly installed and completed on or before August 14, 2002, Tenant shall commence the payment of rent for the first twelve months of the Lease at the rate of $11,062.50 per month. If the foregoing terms and conditions are acceptable to you, please sign where indicated below and return one copy to me no later than June 21, 2002. If the executed letter is not returned by that date, then the Lease Agreement is automatically terminated for the above-described breaches of the Landlord. If you have any questions about any aspects of this letter, please contact the undersigned. Sincerely, /s/ Thomas E. Bensberg, Jr. Thomas E. Bensberg, Jr. Plant Manager The undersigned Landlord, Sarah Leer, agrees to the foregoing terms and conditions as set forth in the foregoing letter to me dated June 21, 2002. /s/ Sarah Leer 6/21/02 - ------------------------ Sarah Leer Date LEASE AGREEMENT THIS LEASE AGREEMENT ("Lease") is made and entered into this 22nd day of October, 2001, by and between SARAH LEER, with a business mailing address at P.O. Box 606, Paris, Kentucky 40361 ("Landlord") and EASY GARDNER, INC., a Delaware corporation, with its principal office and place of business at 3022 Franklin Avenue, P.O. Box 21025 Waco, Texas 76702-1025 ("Tenant"). W I T N E S S E T H: - - - - - - - - - - ARTICLE 1. DEMISED PREMISES Landlord, for and in consideration of the rents, covenants and conditions hereinafter contained to be performed and observed by Tenant, does hereby demise and lease to Tenant a portion of the real property and improvements thereon (the "Real Property"), together with rights, easements and appurtenances thereto, buildings, fixtures and other improvements (the "Improvements"), all located at 1714 Main Street, Paris, Bourbon County, Kentucky. The Real Property and the Improvements leased hereunder contain approximately 59,000 square feet of useable space as shown in the diagram attached hereto as Exhibit "A" and said leased property constitutes a part of the real property more particularly described in Exhibit "A-1," attached hereto and incorporated herein. The Real Property and the Improvements leased hereunder, and all rights, easements and appurtenances thereto are hereinafter called the "Demised Premises," subject nevertheless to the following (collectively, hereinafter referred to as "Permitted Encumbrances"): (i) the existing state of the title to the Demised Premises as of the commencement of the term of this Lease, including a mortgage in favor of Kentucky Bank, provided said state of title does not interfere with Tenant's use and enjoyment of the Demised Premises hereunder; (ii) any state of facts which a physical inspection of the Demised Premises might show; and (iii) all zoning regulations and other laws and regulations now in effect or hereafter adopted by any governmental authority having jurisdiction over the Demised Premises. ARTICLE 2. TERM The initial term of this Lease shall commence on the earliest to occur of the following: (a) the date which Tenant takes possession of the Demised Premises, or (b) the date on which Landlord's improvements (as hereinafter defined) have been substantially completed and the Demised Premises have been inspected and accepted in writing by Tenant as being in good condition and repair (the "Term Commencement Date", which date shall be confirmed in writing by the parties hereto), and shall end at midnight on June 30, 2006, unless sooner terminated by Landlord or Tenant under the terms and conditions hereafter set forth (collectively, the "Expiration Date"). Landlord's Improvements. Landlord, at Landlord's expense, shall cause the following improvements to be made to the Demised Premises and shall use Landlord's best efforts to have said improvements completed on or before _Dec 31, 2001: See attached Exhibit "B" , "Landlord's Warehouse Improvements." Tenant acknowledges that it has reviewed and approved Landlord's improvement plans as to design, location, and quality of materials, and Landlord shall not change said improvement plans without the consent of Tenant, which consent shall not be unreasonably withheld or delayed. Early Termination due to loss of Variance. Landlord and Tenant acknowledge that a variance has been granted by the Division of Building Code Enforcement to allow use of the Demised Premises for storage purposes for a period of twelve (12) months after the Term Commencement Date without requiring the installation of a fire sprinkler system in the storage facility. In the event that said variance is not extended by the Division of Building Code Enforcement for months 13 through 57 of this Lease, or any part thereof, and Landlord is required to install a sprinkler system in the Demised Premises to meet Code, then, due to the capital costs which Landlord shall be required to incur to install the fire sprinkler system, the rent payable hereunder shall be increased an the amount to be agreed upon by Landlord and Tenant; provided, however, in the event Landlord is unwilling to commit to make the required capital expenditures within thirty (30) days after either party's receipt of notice that a fire sprinkler system is required to be installed, or in the event Landlord and Tenant are unable to agree on the increase in rent within said thirty (30) day period, then either party hereto may terminate this Lease by giving written 2 notice of intent to terminate to the other party on or before the expiration of said thirty (30) day period. Except as expressly provided to the contrary in this Lease, all obligations of Landlord and Tenant shall commence on the Term Commencement Date. ARTICLE 3. RENT AND OTHER PAYMENTS Except as expressly provided otherwise in this Lease, the accrual of rent and charges hereunder shall begin with the Term Commencement Date. In the event that the Term Commencement Date shall occur other than on the first day of the month, then the first and last payments of rent and other charges shall be adjusted for the proportionate fraction of the whole month. All other monthly rental payments shall be made and are due and payable on the first day of each month. Beginning with the Term Commencement Date, Tenant does hereby covenant and agree to pay to Landlord, in advance, without notice or demand, at Landlord's address shown above, or at such other place as Landlord may direct in writing, rent as follows: (i) Rent (months 01-12): The sum of One hundred thirty-two thousand seven hundred fifty Dollars ($132,750.00) annually or Eleven thousand sixty two Dollars and Fifty Cents ($11,062.50) per month, which monthly sum shall be paid in advance, on the first day of each and every month ("Due Date"). (ii) Rent (months 13-_): Provided the early termination events set forth in Article 2(ii) hereof have not occurred, the sum of One hundred six thousand two hundred Dollars ($106,200.00) annually or Eight thousand eight hundred fifty Dollars ($8,850.00) per month, which monthly sum shall be paid in advance of the first day of each and every month beginning with month thirteen (13) hereunder. Provided further, however, the rent payable for the second through the fifth Lease Years may be increased to the rent amount agreed upon by the parties if Landlord is required to install a sprinkler system and neither party terminates this Lease as provided under Article 2 hereof. 3 (iii) Interest on Late Payments: In the event Tenant fails to pay the monthly rent or any other payments in full within thirty (30) days after due, such obligation shall automatically, and without limitation to Landlord's other remedies hereunder, accrue interest at the rate of twelve percent (12%) per year for so long as the overdue amount remains unpaid from the day on which such amount was first due and payable. ARTICLE 4. USE OF PREMISES Tenant agrees to use the Demised Premises as a storage lot for plant food spikes and other consumer products, packaging and raw materials, production and material handling machinery, company files and records, and other materials related to Tenant's business, and Tenant may park and store such vehicles and equipment as are reasonably necessary to conduct Tenant's business; provided, however, that Tenant may change or alter such use provided Tenant is not in default of this Lease and Tenant shall have first received Landlord's written consent to Tenant's change in use, which consent shall not be unreasonably withheld. Tenant's use of the Demised Premises shall comply with all federal, state, county, and city laws, ordinances and regulations and all title conditions and restrictions applicable to the Demised Premises. ARTICLE 5. LANDLORD'S RIGHT OF ENTRY AND INSPECTION Landlord and its agents, employees or contractors shall have the right to enter upon the Demised Premises at all reasonable times to inspect the Demised Premises and post such reasonable notices as Landlord may desire to protect the rights of Landlord. Landlord shall also have the right to show the Demised Premises to any prospective purchaser and/or tenant (who is not a competitor of Tenant or a party who might gain a business or proprietary advantage by viewing Tenant's operations)at reasonable times during business hours on twenty-four (24) hour prior notice to Tenant. ARTICLE 6. UTILITIES AND TRASH REMOVAL Beginning with the Term Commencement Date, Tenant shall pay for: (i) all fuel, gas, oil, heat, water, sewer, electricity, 4 power and communication services and other utilities which may be furnished to or used in or about the Demised Premises during the term of this Lease and any renewals or holdovers thereof; and (ii) the removal and disposal of all trash and refuse from the Demised Premises during the term of this Lease and all renewals and holdovers thereof. ARTICLE 7. ASSIGNMENT Tenant may not assign this Lease, or any interest therein, except with the prior written consent of Landlord. If Tenant does assign its interest in the Demised Premises, the assignee shall first be obliged in writing to likewise assume all of the obligations of Tenant under this Lease; and Tenant shall, for the full term of this Lease, or any holdover term, continue to be liable with such assignee for the payment of rents and the performance of all obligations required by Tenant under this Lease. If this Lease is assigned to any person or entity pursuant to the provisions hereof or the provisions of the Bankruptcy Code, 11 U.S.C. ss.101 et seq. (the "Bankruptcy Code"), any and all monies or other considerations payable or otherwise to be delivered in connection with any such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord, and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in a separate account by the trustee or the debtor-in-possession in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. ss.101 et seq., shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall, upon demand, execute and deliver to Landlord an instrument confirming such assumption. Tenant shall not be entitled to sublet all or any portion of the Demised Premises to any subtenant or subtenants except with the prior written consent of Landlord. 5 ARTICLE 8. REAL ESTATE TAXES AND ASSESSMENTS Landlord shall promptly pay to the appropriate governmental agencies before the same become delinquent all real property taxes, school district taxes, assessments (general or special), impositions, and all other claims or charges arising out of Landlord's fee interest in the Demised Premises during the term of this Lease. ARTICLE 9. COVENANT OF TITLE AND QUIET ENJOYMENT Tenant, upon paying the rents and keeping and performing the covenants of this Lease to be performed by Tenant, shall peacefully and quietly hold, occupy and enjoy said Demised Premises, subject to all Permitted Encumbrances, during the initial term of this Lease or any renewal thereof. ARTICLE 10. NONDISTURBANCE AND ESTOPPEL CERTIFICATES This Lease shall automatically be subject and subordinate to the lien of any mortgage which Landlord may at any time place upon the Demised Premises and to all terms, conditions and provisions thereof, to all advances made, and to any renewals, extensions, modifications or replacements thereof. Provided, however, that if this Lease is in full force and effect and there are no defaults thereunder on the part of Tenant, Tenant's right of possession to the Demised Premises and Tenant's rights arising out of this Lease shall not be affected or disturbed by Landlord's mortgagee in the exercise of any of its rights under any mortgage or the note secured thereby. In the event that Landlord's mortgagee, or any other person, acquires title to the Demised Premises pursuant to the exercise of any rights or remedies under a mortgage, then so long as Tenant is not in default under the terms of this Lease, this Lease shall not be terminated or affected by said foreclosure or sale, or any such proceedings, and the mortgagee shall agree that any sale of the Demised Premises pursuant to the exercise of any rights or remedies under any mortgage, or otherwise, shall be made without affecting this Lease and the rights of Tenant hereunder. Tenant agrees to attorn to the mortgagee or such other person as its new Landlord, and this Lease shall continue in full force and effect as a direct Lease between Tenant and such 6 mortgagee or such other person, upon all the terms, covenants and agreements set forth in this Lease. The parties hereto agree to execute or obtain execution of such reasonable documents as may be necessary to insure compliance with the subordination and nondisturbance provisions of this Article 10, including, but not limited to, a nondisturbance agreement executed by Tenant and any such mortgagee setting forth the provisions of this Article 10. Upon request in writing from Landlord, Tenant agrees to promptly, but not later than ten (10) days thereafter, execute, acknowledge and deliver to Landlord, or to the holder of any mortgage lien on the Demised Premises, a statement in writing satisfactory to Landlord or the holder of the mortgage, certifying the facts stated therein, which if true may include, but shall not be limited to, all or any part of the following information: (i) this Lease constitutes the entire agreement between Landlord and Tenant, is unmodified (or if there has been a modification, that the Lease, as modified) and is in full force and effect; (ii) the dates to which the rent and other charges hereunder have been paid; (iii) the Commencement Date of the Lease; (iv) Tenant is occupying the Demised Premises; and (v) Tenant knows of no default under the Lease by Landlord and there is no offset or counterclaim which Tenant has against Landlord, provided that such facts are true and ascertainable. ARTICLE 11. MAINTENANCE, REPAIRS AND ALTERATIONS OF PREMISES AND COMPLIANCE WITH LAWS AND ORDINANCES Tenant shall, at all times during the initial term of this Lease or any renewal or holdover term, comply with all federal, state, county and city statutes, laws and ordinances and all rules, regulations and orders of any duly constituted authority, present or future, affecting or respecting the improvements, use or occupancy of the Demised Premises by Tenant, or the business at any time thereon transacted by Tenant or any assignee or sublessee of Tenant. Tenant, at Tenant's cost, shall at all times keep the Demised Premises, the improvements thereof, and all appurtenances, in a clean, safe, aesthetically pleasing manner and sanitary condition, free of any nuisance, hazard or unreasonable accumulation of trash, garbage, debris, ice and snow. Further, Tenant agrees not to cause or permit any wastes, trash, garbage, noxious odor, debris, ice, snow or other nuisance emanating from 7 the Demised Premises or Tenant's operation to flow into or to be blown (except in the normal course of business), placed or remain upon adjacent property. Tenant shall, during the entire Lease term, and any extensions or holdovers thereof, at its own cost and expense, keep, replace and maintain in good condition and repair, ordinary wear and tear excepted, the Demised Premises and all improvements at any time erected thereon, including, but not limited to, the heating, cooling, plumbing, electric and lighting fixtures located in the Demised Premises. In addition, Tenant shall, during the entire term of this Lease and any extensions and holdovers, use all reasonable precaution to prevent waste, damage or injury to said improvements and the Demised Premises. Notwithstanding the foregoing, and except for damages caused by Tenant or its agents, Landlord shall be responsible for all structural repairs and maintenance including but not limited to the repair of the walls, roof, gutters, floor, and storm and sanitary sewers (provided said sewers are located on Landlord's property); and in this regard, Tenant shall notify Landlord of any roof leak (or other required Landlord repair) to the extent that said leak (or other required Landlord repair) causes more than one hundred (100) square feet of floor space to be unusable for storage. Any roof leak (or other required Landlord repair) which has not been repaired within sixty (60) days of written notice from Tenant shall result in reduction of rent payment (until said repairs are successfully performed) in proportion to the total unusable space compared to the assumed total of fifty-nine thousand square feet of useable space. Further, Tenant shall be entitled to a rent reduction, as provided in this paragraph, if any repairs performed and completed by Landlord hereunder shall fail to restore to Tenant, for a minimum consecutive period of sixty (60) days, the lost useable space which caused Tenant to first give notice to Landlord of required repairs hereunder. All repairs and maintenance required by either party hereunder shall be performed as expeditiously as possible, weather conditions and other events of force majeur permitting. 8 ARTICLE 12. MECHANIC'S LIEN If, because of any act or omission of Tenant or anyone claiming by, through or under Tenant, any mechanic's lien or order or claim for the payment of money is filed against the Demised Premises or any part of it, or Landlord's interest therein, or Landlord (whether or not such lien or order is valid or enforceable as such), Tenant shall, at Tenant's sole expense, cause the same to be cancelled and discharged of record within forty-five (45) days after the date of filing thereof by payment, bonding, or otherwise, as provided by law, and shall also indemnify and save Landlord harmless from and against any and all costs, expenses, claims, losses, liability or damages, including reasonable attorneys' fees, resulting from such lien or order or Tenant's failure to release the same. ARTICLE 13. TRADE FIXTURES, MACHINERY AND EQUIPMENT Landlord agrees that, so long as Tenant is not in default under the Lease, all trade fixtures, machinery, equipment, furniture or other personal property of whatever kind and nature kept or installed on the Demised Premises by Tenant or Tenant's assignees or sublessees shall not become the property of Landlord or a part of the Demised Premises and may be removed by Tenant or its assignees or sublessees, in their discretion, at any time and from time to time during the entire term of the Lease and any renewals. Further, provided Tenant is not in default under this Lease, Landlord agrees to execute and deliver any reasonable consent or waiver forms submitted by any vendors, lessors, chattel mortgagees or holders or owners of any trade fixtures, machinery, equipment, furniture or other personal property kept or installed on the Demised Premises, setting forth the fact that Landlord has waived its contractual or statutory liens in favor of such vendor, lessor, chattel mortgagee or holder or owner. Finally, provided Tenant is not in default under this Lease, Landlord shall further acknowledge that the property covered by such consent or waiver forms is personal property and is not to become a part of the realty, and that such property may be removed from the Demised Premises by the vendor, lessor, chattel mortgagee or other similar holder or owner free and clear of any claim or lien of Landlord. 9 ARTICLE 14. REMOVAL OF TRADE FIXTURES Except as otherwise provided in this Lease, Tenant shall have the right to remove its trade fixtures and equipment on or before the expiration of this Lease or any extensions or renewals thereof. Provided Tenant is not in default under that Lease, Tenant or any assignee or sublessee is hereby expressly given the right at any time during the term of this Lease or any extension thereof and for a period of thirty (30) days after the termination of this Lease, or any extension thereof, by lapse of time or otherwise, to enter upon and remove from said Demised Premises any trade fixtures, equipment, furniture and appliances of Tenant or any assignee or sublessee. In the event Tenant removes any such trade fixtures and furniture, Tenant shall repair any damage to the Demised Premises occasioned by the removal thereof. All of Tenant's trade fixtures, equipment, material and other personal property not removed from the Demised Premises within forty-five (45) days after expiration or termination of this Lease shall be conclusively presumed to have been abandoned by Tenant, and title thereto shall pass to Landlord under this Lease as by a bill of sale, unless such removal has been delayed or hampered by Landlord, in which event, Tenant's abandonment of such property shall be presumed as of the forty-fifth (45th) day following the termination of the hinderance or delay caused by Landlord. ARTICLE 15. INSURANCE Beginning with the Commencement Date, Landlord and Tenant, at their own cost and expense, shall carry and maintain general commercial liability insurance with coverage of not less than Two Million Dollars ($2,000,000.00) per person and property damage of not less than Five Hundred Thousand Dollars ($500,000.00). All property on the Demised Premises belonging to Tenant, its vendors, agents, employees or invitees, or to any occupant of the Demised Premises shall be there at the risk of Tenant or such other person only, and Landlord shall not be liable for damage thereto or theft, misappropriation, or loss thereof. 10 ARTICLE 16. WAIVER OR SUBROGATION Tenant hereby releases Landlord and its members, managers, officers, agents and employees, from any claim for damage or destruction to the Demised Premises and the contents thereof belonging to Tenant, its employees, agents or invitees, for the business interruption of Tenant, caused by fire or any other peril insured under fire and extended coverage insurance, whether due to the negligence of either Landlord or Tenant or otherwise., provided, however, this provision does not apply if such damage is due to the gross negligence or willful misconduct of Landlord. ARTICLE 17. DAMAGE TO OR DESTRUCTION OF IMPROVEMENTS If the building and/or other improvements on the Demised Premises shall be damaged or rendered untenantable by fire or other casualty, Landlord shall repair or replace said improvements. However, with the prior consent of Landlord (which Landlord agrees shall not be unreasonably withheld), Tenant shall have the right to replace the improvements. Tenant shall have the right to use all insurance proceeds from policies maintained and paid by Tenant payable by reason of such damage or destruction, all such proceeds to be used solely to repair or reconstruct the improvements upon the Demised Premises. It is further agreed that the rent herein required to be paid shall abate during said period of untenantability, or if the improvements shall be damaged but not rendered untenantable thereby, the rent shall abate in an amount proportionate to the decrease in the utility of the Demised Premises. In the event that any damage or destruction occurring in the last three (3) months of the initial term of this Lease, or during any renewal or extension of the term, is greater than fifty percent (50%) or more of the insurable value of the building, either Landlord or Tenant may, at its option, to be evidenced by notice in writing given to the other party within thirty (30) days after the occurrence of such damage or destruction, in lieu of repairing or replacing such building, elect to terminate this Lease as of the date of said damage or destruction, and all insurance proceeds payable for damage to the structural improvements shall be paid to Landlord or its mortgagee as their interests may appear. ARTICLE 18. CONDEMNATION If any part of the Demised Premises shall be taken or condemned by an agency with the power of eminent domain and the 11 remaining part thereof can reasonably be used by Tenant hereunder, this Lease shall, as to the part so taken only, terminate as of the date title is vested in the condemnor, but this Lease shall otherwise remain in full force and effect and any rent payable hereunder shall not be adjusted. If all of the Demised Premises or such part thereof be taken or condemned by an agency with the power of eminent domain so that there does not remain a portion reasonably acceptable for Tenant's use and occupancy hereunder, this Lease may be terminated by Tenant, in which event all unearned, prepaid rent shall be returned to Tenant. Tenant shall receive the portion of any award payable to Landlord under a condemnation action attributable to the value of Tenant's Lease, whether by negotiation or condemnation trial for land or improvements taken or damages to remaining land not sought to be acquired. Nothing herein contained shall be deemed or construed to prevent Tenant from interposing and prosecuting in any condemnation proceedings (i) a claim for the value of any trade fixtures installed in the Demised Premises by Tenant, and (ii) in the case of a partial condemnation of the Demised Premises, the cost, loss or damage sustained by Tenant as the result of any alterations, modifications or repairs which may be reasonably required by Tenant in order to place the remaining portion of the Demised Premises not so condemned in a suitable condition for Tenant's further occupancy. ARTICLE 19. NO WAIVER, LACHES OR ACCORD AND SATISFACTION The waiver of any covenant or condition or the acquiesced breach thereof shall not be taken to constitute a waiver of any subsequent breach of such covenant or condition nor to justify or authorize the nonobservance of the same or of any other covenant or condition hereof. Each party waives and disclaims any partnership or joint venture hereunder. 12 ARTICLE 20. SIGNS Tenant may erect signs, awnings or canopies on the roof or walls of the Demised Premises, with written notice to and consent of Landlord, and provided all such signage complies with all local and state ordinances and laws. Any sign or signs shall contain only the name and business of Tenant, and Tenant agrees (i) to maintain all signs in good condition and repair, and (ii) to save and hold Landlord free from all cost, expense, loss or damage which may result from the erection, maintenance, existence, replacement or removal of any signs. Upon vacating the Demised Premises, Tenant agrees to remove all such signs and to repair all damage caused or resulting from such removal. ARTICLE 21. NOTICES Whenever notice is required hereunder, it shall be given in writing and delivered or sent by registered or certified United States Mail, postage prepaid, with return receipt requested, or by private nationally recognized overnight carrier, or by facsimile transmission to the following addresses or to such other addresses as either may hereafter designate in writing to the other: Landlord: Sarah Leer P.O. Box 606 Paris, Kentucky 40361 Phone: Fax: 859-987-1576 Tenant: Easy Gardner, Inc. c/o _____________ P.O. Box 21025 Waco, Texas 76702-1025 Phone: Fax: If such notice is mailed, it shall be deemed to have been served either when received or forty-eight (48) hours after deposited in the United States mail, whichever is earlier. ARTICLE 22. DEFAULTS (i) Should Tenant fail to pay all or any part of the rent or other payments required to be paid by Tenant under this Lease when 13 the same are due; or (ii) should Tenant fail to perform or observe any obligation, covenant or condition on Tenant's part to be performed or observed under the terms of this Lease (other than a failure to pay rent as provided in (i) above) and fail to cure such default within thirty (30) days after written notice from Landlord specifying the failure under this Lease; or (iii) should this leasehold be taken under levy, execution, attachment, foreclosure or other process of law; or (iv) should Tenant make an assignment for benefit of creditors, file a voluntary petition in bankruptcy for liquidation or Reorganization, or suffer an involuntary petition to be filed against Tenant, or suffer a receiver or trustee to be appointed for Tenant, in all or any of such events, a breach of this Lease shall have occurred and Landlord may, at its option, upon ten (10) days' written notice ("10-Day Notice of Default") and Tenant's failure to cure all existing defaults during that ten (10) day period, terminate Tenant's use and possession of the Demised Premises and/or terminate this Lease. Thereafter, Landlord, in either event and in addition to any other remedies available, shall have the immediate right to enter and repossess the Demised Premises by force, summary or dispossession proceedings, or otherwise, and remove therefrom all occupants and take and store any property in a public or private warehouse or elsewhere at the cost of and for the account of Tenant, without becoming liable to prosecution or damages therefor, and thereupon all rights of Tenant and obligations of Landlord to Tenant hereunder shall cease. Notwithstanding any such termination and reentry resulting from Tenant's default of any provision of this Lease, Tenant shall remain liable for any rent or damages which may be done or sustained prior thereto, and in addition, Tenant shall also be liable for all further rents for the remaining term of this Lease and all damages, costs and expenses (including reasonable attorneys' fees) incurred by Landlord, less such net proceeds (proceeds after deduction of all costs of maintenance, repair and reletting of the Demised Premises) as are recovered by Landlord as a result of the reletting of the Demised Premises. Landlord agrees to use its reasonable best efforts to mitigate its damages in the event of Tenant's default by reletting or otherwise utilizing for Landlord's benefit the Demised Premises. 14 In addition to all other remedies, Landlord is entitled to obtain a restraining order and/or injunction against all violations, actual, attempted or threatened of any covenant, condition or provision of this Lease. Landlord may but shall not be obligated to cure, at any time, without notice, any default by Tenant under this Lease, and whenever Landlord so elects, all costs and expenses incurred by Landlord, including, without limitation, reasonable attorneys' fees, together with interest at the rate of twelve percent (12%) per year on the amount of costs and expenses so incurred, shall be paid by Tenant to Landlord on demand. ARTICLE 23. HOLDING OVER AND CONDITION OF PREMISES In the event Tenant holds over beyond the expiration of the term hereof or any renewal term, such holding over shall be deemed a month-to-month tenancy at the monthly rental due and owing during the last year of the then expired term of this Lease, payable on the first day of each and every month thereafter. If Tenant holds over pursuant to this Article, this Lease may be terminated by either party on thirty (30) days' prior written notice to the other. ARTICLE 24. INDEMNIFICATION Tenant agrees to indemnify and save harmless Landlord, its managers, members, officers, agents, employees and representatives against and from any and all claims, costs, injuries, liabilities, losses or damages, including, but not limited to, all expenses, costs and reasonable attorney fees incurred by any of them which may occur, arise or be claimed to occur or arise directly or indirectly from or out of: (i) any breach or default on the part of Tenant of any payment, duty, obligation, promise or covenant made by it or to be performed by it pursuant to the terms of this Lease; (ii) any act or omission of Tenant, or any of its agents, contractors (including independent contractors selected by Lessee), servants, employees, licensees or sublicensees, guests, invitees or any other persons occurring in, on or about the Demised Premises; (iii) any cause on, about or relating to the Demised Premises during the term of this Lease, however or by whomever caused, whether due in whole or in part to the negligent, willful or 15 intentional acts or omissions on the part of Tenant, its employees, agents, guests or invitees, or anyone else not a party to this Lease, including, without limitation, any use, misuse, possession, occupancy or abandonment of the Demised Premises by anyone during the term of this Lease; or (iv) any costs or expenses in prosecuting any of the foregoing, whether threatened or litigated. Notwithstanding any other provision contained in this Lease, Tenant shall fully and promptly pay, perform, discharge, defend, indemnify and hold harmless Landlord, its managers, members, officers, agents and employees from any and all claims, orders, demands, causes of action, proceedings, judgments, or suits and all liabilities, losses, costs or expenses (including, without limitation, technical consultant fees, court costs, expenses paid to third parties and reasonable legal fees) and damages arising out of, or as a result of: (i) any "release," as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), of any "hazardous substance," as defined in CERCLA, or petroleum (including crude oil or any fraction thereof) discharged, deposited, dumped, spilled, leaked or placed into, on or around the Demised Premises at any time during the term of this Lease or any renewal or holdover thereof; (ii) any contamination by Tenant, its employees, licensees or contractors, their agents or employees of the Demised Premises' soil or groundwater or damage to the environment and natural resources of or around the Demised Premises during the term of this Lease or any renewal or holdover thereof, whether arising under CERCLA or other statutes, regulations, or common law; and/or (iii) or any toxic, explosive or otherwise dangerous materials, including, but not limited to, asbestos, which are present at, buried beneath, placed on or concealed within or around the Demised Premises during the term of this Lease or any renewal or holdover thereof. Landlord agrees to indemnify and save harmless Tenant, its officers, directors, shareholders and employees, against and from any and all claims, costs, liabilities, injuries, losses or damages, including, but not limited to, all expenses, costs and reasonable attorneys' fees, incurred by any of them arising directly or indirectly out of: (i) any breach or default on the part of Landlord of any duty, obligation, promise or covenant made by it or to be performed by it pursuant to the terms of this Lease; (ii) any act or omission of Landlord, or any of its agents, 16 contractors (including independent contractors selected by Landlord), servants, employees or licensees or sublicensees, or any other person occurring in, on or about the Demised Premises; or (iii) any costs or expenses in prosecuting any of the foregoing, whether threatened or litigated., and Landlord agrees to indemnify and hold harmless Tenant for any CERCLA claim arising from use of the property prior to the Term Commencement Date of the Lease or from use of that portion of Landlord's Property not included in the Lease. ARTICLE 25. LANDLORD'S REPRESENTATIONS AND WARRANTIES Landlord warrants and represents to Tenant that: (i) Lessor has fee simple title to the Demised Premises; and (ii) The execution and delivery of this Lease by Landlord has been duly authorized, and the persons signing this Lease for Landlord are authorized to do so. ARTICLE 26. ENTIRE AGREEMENT This Lease and the exhibits attached hereto and forming a part hereof set forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Demised Premises. No subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by both of them. ARTICLE 27. MEMORANDUM OF LEASE The parties agree that, upon request of either party, a Memorandum of this Lease may be executed and may be recorded in the Bourbon County, Kentucky Recorder's Office. The Memorandum of Lease shall recite the identity and addresses of the parties, the legal description of the Demised Premises, and the term of this Lease. The cost to prepare and record such Memorandum of Lease shall be paid by the party requesting recordation thereof. 17 ARTICLE 28. JOINT VENTURE Neither this Lease, nor any one or more of the agreements contained herein, is intended, nor shall the same be deemed or construed, to create a partnership between Landlord and Tenant, to make them joint venturers or partners, nor to make Landlord in any way responsible for the debts or losses of Tenant. Tenant acknowledges that Landlord and Tenant are not affiliates, partners, or joint venturers, nor do they have any other legal relationship. ARTICLE 29. PARTIAL INVALIDITY If any provision of the Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the circumstances other than those as to which it is invalid or unenforceable shall be enforced to the fullest extent permitted by law. ARTICLE 30. APPLICABLE LAW This Lease shall be construed and enforced in accordance with the laws of the Commonwealth of Kentucky. ARTICLE 31. BINDING ON TRANSFEREES, GRANTEES, ETC. This Lease shall be binding upon the transferees, grantees, heirs, successors and assigns in interest of Landlord and Tenant, or any subtenants of Tenant herein. Nothing herein, however, shall be construed to allow Tenant to assign or sublet contrary to the provisions and conditions set forth in this Lease. Landlord is hereby granted the right to transfer or assign its rights under this Lease without the prior written consent of Tenant, provided that any transferee or assignee of Landlord assumes and agrees to perform all of Landlord's obligations hereunder. ARTICLE 32. PROVISIONS OF LAW DEEMED INCLUDED Each and every provision and clause required by law or regulation to be included in this Lease shall be deemed to be included herein, and this Lease shall be read, construed and enforced as though the same were included herein. If, through mistake, inadvertence or otherwise, any such provision or clause is not included herein or is incorrectly included herein, then upon 18 application of either party hereto, this Lease shall forthwith be amended to include the same or to correct the inclusion of the same. ARTICLE 33. ELECTION OF REMEDIES NOT EXCLUSIVE It is mutually agreed by Landlord and Tenant that the various rights, powers, options, elections, privileges and remedies of Landlord and Tenant shall be cumulative and no one of them shall be exclusive or exclusive of rights and privileges granted to Landlord or Tenant by statute. ARTICLE 34. ATTORNEYS' FEES In the event it is necessary for either party to employ an attorney to enforce the terms of this Lease, or file an action to enforce any terms, conditions or rights under this Lease, or to defend any action or arbitration, then the prevailing party in any such action shall be entitled to recover from the other, all reasonable attorneys' fees, costs and expenses as may be fixed by the court, and such attorneys' fees, costs and expenses may be made a part of any award or judgment entered. ARTICLE 35. SURVIVAL OF TENANT'S COVENANTS Any covenant or obligation imposed on Tenant by the terms of this Lease which requires any performance on the part of Tenant after the expiration or earlier termination of this Lease shall be deemed to survive such expiration or termination. IN TESTIMONY WHEREOF, Landlord and Tenant have caused this Lease to be signed the day and year first stated above. LANDLORD: By /s/ Sarah Leer - --------------------- ------------------- Witness SARAH LEER /s/ Myron Fryer Date: 10/26/01 - --------------------- -------------------- Witness 19 TENANT: EASY GARNER, INC., A DELAWARE CORPORATION /s/ Samantha Morris By /s/ Sheila B. Jones - ---------------------- ---------------------------- Witness Its VP Operations --------------------------- /s/ Kathy Winters Date: 10/22/01 - ---------------------- -------------------------- Witness STATE OF KENTUCKY ) )SCT. COUNTY OF BOURBON ) Subscribed and sworn to before me by SARAH LEER, this ___ day of ______________, 2001. My commission expires: __________________ ------------------------------ SEAL NOTARY PUBLIC STATE OF Texas ) )SCT. COUNTY OF McLennan ) Subscribed and sworn to before me by Sheila Jones as VP Operations of EASY GARNER, INC., a Delaware corporation 20 for and on behalf of said company, this 23 day of October, 2001. My commission expires: 8/29/05 /s/ Kathy Winters ------------------------------ SEAL NOTARY PUBLIC gmg\Leersar\lease.ag3 21 LEASE THIS LEASE, made and entered into this 26 day of June, 2001, by and between NALOP REALTY COMPANY, a West Virginia Partnership, with a mailing address of P. O. Box 1700, Huntington, West Virginia, 25717, hereinafter referred to as "Landlord", and EASY GARDENER, INC. a Delaware Corporation, with a mailing address of P. O. Box 21025, Waco, Texas, 21025, hereinafter referred to as "Tenant." W I T N E S S E T H: That Landlord hereby demises and leases to Tenant, and Tenant hereby accepts and rents from Landlord, all of that certain piece or parcel of real estate situated in Paris, Bourbon County, Kentucky, as described in Exhibit A which is attached hereto and made a part hereof, together with all of the appurtenances thereto and the improvement thereon, but subject to the exceptions set forth in Exhibit B, which is attached hereto and made a part hereof. The property leased hereby is sometimes referred to herein as the "demised premises". This Lease shall be upon the following terms and provisions: I. TERM 1.1 This Lease shall be for a term of five years beginning on July 1, 2001 and continuing for a period ending on June 30, 2006. II. RENTAL 2.1 Beginning the first day of July, 2001 and continuing through June, 2006, Tenant shall pay rent in the sum of Five Hundred Ninety-five Thousand Eight Hundred and Thirty Three Dollars and Seventy cents ($595,833.70) payable monthly on the first day of each month in advance at Nine Thousand Nine Hundred and Thirty Dollars and Fifty-six Cents ($9,930.56). III. USE OF DEMISED PREMISES 3.1 Tenant agrees that the demised premises shall be used solely for the purpose of conducting a manufacturing operation and in conjunction therewith to make sales of manufactured products from the demised premises and to engage generally in other types of business normally associated with a manufacturing operation including, but not limited to, related office functions and warehousing. 3.2 The Tenant shall not use or occupy, nor permit the Demised Premises or any part thereof to be used or occupied, for any unlawful business, use or purpose, nor for any purpose or in any manner which is in violation of any federal, state, or municipal laws, ordinances or regulations. The Tenant shall, at its sole expense, comply with all laws, orders and regulations of federal, state, and local authorities, including any and all municipal, state or federal environmental laws, orders and regulations, and with any direction of any public officer, pursuant to law, which shall impose any duty upon the Tenant with respect to the Demised Premises. The Tenant shall, at its sole expense, obtain all licenses and permits which may be required for the conduct of its business within the terms of this Lease, or for the making by the Tenant of repairs, replacements, alterations, improvements or additions permitted or required in accordance with the other provisions of this Lease. The Tenant shall indemnify and hold the Landlord harmless from any costs, expenses, liabilities, losses, damages, injunctions, suits, fines, penalties, claims, and demands, including reasonable attorneys' fees, resulting from, otherwise due to, or arising 2 out of: (1) the violations by the Tenant of any federal, state, or municipal law, rule, order, ordinance, or regulation; (2) the occupancy or use of the Demised Premises, or any part thereof, by the Tenant or the Tenant's employees, agents contractors, licensees, or invitees; or (3) any failure by the Tenant to perform its obligations under this Lease. In the event that the Landlord shall, without fault on the Landlord's part, be made a party to any litigation commenced by or against the Tenant, then the Tenant shall protect and hold the Landlord harmless and shall pay all costs, expenses, and reasonable attorneys' fees incurred or paid by the Landlord in connection with such litigation. The Tenant shall pay, satisfy and discharge any and all judgements, orders and decrees which may be recovered against the Landlord which are subject to the foregoing indemnification provisions. 3.3 (a) HAZARDOUS SUBSTANCES The term "Hazardous Substances," as used in this lease, shall include, without limitation, flammables, explosives, radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals known to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances or related materials, petroleum and petroleum products, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority. 3.3 (b) Tenant shall not cause or permit to occur: (1) Any violation of any federal, state or local law, ordinance, or regulation now or hereafter enacted, related to environmental conditions on, under or about the Premises, or arising from Lessee's use of occupancy of the Premises, including but not limited to, soil and ground water conditions; or 3 (2) The use, storage, release, manufacture, refining, production, processing, or disposal of any Hazardous Substance on, under or about the Premises, or the transportation to or from the Premises of any Hazardous Substance; provided, however, Tenant shall be entitled to use hydraulic oils, petroleum products and antifreeze incident to the permitted use of the premises as provided in this Section 3 and shall not be deemed to constitute Hazardous Substances as defined in this Lease so long as the same shall be used, stored and disposed of in accordance with controlling federal, state and local laws. ordinances, and regulations. 3.3 (c) Environmental Cleanup (1) Tenant shall, at Tenant's own expense, comply with all laws ("Laws") regulating the use, generation, storage, transportation or disposal of Hazardous Substances. (2) Tenant shall, at Tenant's own expense, make all submissions to, provide all information required by, and comply with all requirements of all governmental authorities (the "Authorities") under the Laws. Tenant's compliance with Section 1 and 2 above relates only to Tenant's acts or omissions at the Premises during the term of this lease. (3) Should any Authority or Landlord reasonably demand that a cleanup plan be prepared and that a cleanup be undertaken because of any deposit, spill, discharge or other release of Hazardous Substances that occurs during the term of this Lease, at or from the Premises, or which arises at any time from Tenant's use or occupancy of the Premises, then Tenant shall, at Tenant's own expense, prepare and submit the required plans and all related bonds and other financial assurances; and Tenant shall carry out all such cleanup plans. (4) Tenant shall promptly provide all information regarding the use, storage, 4 transportation or disposal of Hazardous Substances that is reasonably requested by Landlord. If Tenant fails to fulfill any duty imposed under this subparagraph (3.3 (c)) within a reasonable time, Landlord may do so; and in such case, Tenant shall cooperate with Landlord in order to prepare all documents Landlord deems necessary or appropriate to determine the applicability of the Laws to the Premises and Tenant's use thereof, and for compliance therewith, and Tenant shall execute all documents promptly upon Landlord's request. No such action by Landlord and no attempt made by Landlord to mitigate damages under any Law shall constitute a waiver of any of Tenant's obligations under this subparagraph (3.3 (c)). (5) Tenant's obligations and liabilities under this subparagraph (c) shall survive the expiration or termination of this Lease. (6) No provision hereof shall make the Tenant responsible for any environmental problems including presence of hazardous substances on the Demised Premises, unless the same were caused by an act of the Tenant or agents, employees, independent contractors or suppliers of Tenant. In particular, the Tenant shall not be responsible for any Hazardous Substances placed on or under the Demised Premises or improvements by persons other that the Tenant or agents, employees, contractors or suppliers of Tenant. IV. TENANT'S ADDITIONAL AGREEMENTS 4.1 Tenant agrees, at its own cost and expense, to: (a) Keep and maintain in a safe, neat and clean condition all portions of the demised premises and appurtenances. (b) Pay when due all personal property taxes assessed against Tenant's 5 fixtures and furnishings, all taxes arising out of the operation of Tenant's business, and pay for all license fees, occupational taxes and other governmental charges assessed by reason of Tenant's use or occupancy of the demised premises; Tenant will permit no mechanics lien, security interest or lien to attach to the demised premises for any reason, including as a result of the non payment of taxes payable by Tenant. (c) Initiate, complete and pay for during the term of this lease a minimum of Two Hundred and Fifty Thousand Dollars ($250,000) of construction for capital improvements to the premises, said improvements to be made for the purpose of curing present deficiencies in the building, improving safety deficiencies and eliminating code violations. Selection of improvements is at Tenant's discretion, but Tenant will keep Landlord fully informed as to the improvements made as well as the deficiencies, which need to be cured. This section addresses the minimum commitment of Tenant for capital improvements and shall not be construed to limit in any way Tenant's responsibility for the maintenance and upkeep of the Demised Premises. 4.2 Tenant agrees that it will not: (a) Permit the demised premises to be used in any way which will injure the reputation or the property of the Landlord. (b) Permit the demised premises to be used for lodging purposes. (c) Use or permit any use of the demised premises which would (i) violate any law, ordinance or regulation; (ii) constitute a nuisance; (iii) constitute a hazardous use or violate any policy or policies of insurance relating to the property or its use. (d) Place a load on any floor in the demised premises which exceeds the 6 floor load per square foot, which said floor, is capable of carrying. Landlord shall provide Tenant with floor loan limits, and Tenant may rely on the same. V. UTILITIES 5.1 From and after the commencement of the Term of this Lease and continuing during the term hereof, Tenant agrees to pay as and when the same become due and payable, all water rents, rates and charges, all sewer rents and all charges for electricity, and gas utilities supplied to the Demised Premises. 5.2 Tenant shall pay any fire service charges, standby water fees, fire protection services, or other charges levied by the municipality or any other governmental unit against the demised premises or the use thereof. VI. REAL ESTATE TAXES 6.1 Beginning with the commencement of the term of this Lease and continuing during the term hereof, Tenant shall pay any and all real estate taxes and assessments, both general and special, imposed by any school district, state or local government or authority against the demised premises, including any charge or special assessment levied by any such governmental body for fire protection service. Taxes shall be deemed and considered as rents. 6.2 Should any governmental taxing authority acting under any present or future law, ordinance or regulation, levy, assess or impose a tax, excise and/or assessment (other than an income or franchise tax) upon or against the rentals payable by Tenant to Landlord, either by way of substitution for or in addition to any existing tax on land and buildings or otherwise, Tenant shall be responsible for and shall pay such tax, excise and/or assessment, or shall reimburse the Landlord for the amount thereof, as the case may be, as additional rent. Tenant shall also pay its 7 pro-share of any tax or charge levied in lieu of real estate taxes. VII. MAINTENANCE 7.1 Landlord covenants and agrees to keep and maintain, in good condition and repair, at its own cost and expense, the foundation of the main structure on the demised property, including footings and supports, subject to ordinary wear and tear, with the exception that the Tenant shall be liable for any damage to the foundation by the negligence or fault of the Tenant or its agents, invitees or employees. The foundation shall be Landlord's only maintenance responsibility. Tenant covenants and agrees to keep and maintain, at its sole cost and expense, in good order, condition and repair, the demised premises and every part thereof, including without limitation, the roof and exterior walls, all exterior and interior portions of all doors, door checks, all heating and air conditioning and vent machinery and equipment and parts, and all plumbing and sewage facilities within or on the demised premises, and all interior walls, floors, ceilings, signs and similar equipment, landscaping and exterior fencing subject to ordinary wear and tear. 7.2 If Tenant refuses or neglects to perform the repairs it is obligated to perform hereunder promptly and adequately, Landlord may, but shall not be required to do so, make or complete said repairs and recover the cost thereof from Tenant on demand. 7.3 Notwithstanding any duties of maintenance imposed on the Tenant by this Lease, the Tenant shall not be obligated to repair the Demised Premises in the event of condemnation or any casualty loss which is not caused by the Tenant or Tenant's employees, agents, contractors, or sub-contractors. VIII. SURRENDER OF DEMISED PREMISES 8.1 Tenant covenants and agrees to deliver up and surrender to the Landlord the 8 possession of the demised premises upon the expiration of this Lease or its earlier termination, as herein provided, in as good condition and repair as the same shall be at the commencement of said term or may have been put by the Landlord during the continuance thereof, ordinary wear and tear or damage by fire or other insured casualty excepted. IX. PROPERTY IN THE DEMISED PREMISES 9.1 The Tenant shall have the right, during the term of this Lease and any extensions thereof, to make any and all improvements, alterations, or additions the Tenant may deem advisable, provided, however, that the written approval of the Landlord is first obtained (which written approval will not be unreasonably withheld); and, provided, further that such improvements, alterations or additions shall not decrease the value of any building or structure or decrease the structural strength of any building or structure. The Tenant shall submit copies of its plans, specifications and drawings to the Landlord for prior approval by the Landlord. The Landlord's approval of the plans, specifications and drawings for the Tenant's improvements, alterations, or additions shall create no responsibility or liability on the part of the Landlord for their completeness, design sufficiency or compliance with all laws, rules and regulations of all governmental agencies or authorities. Any such improvements, alterations or additions shall be entirely at the expense of the Tenant, and the Tenant shall save the Landlord harmless from all mechanics', materialmen's, and laborer's liens with respect thereto. All such improvements, alterations, and additions shall be made in good and workmanlike manner using only first class materials. The Tenant will be responsible to insure that any and all improvements, alterations, and additions it 9 makes to the Demised Premises comply with the Occupational Safety and Health Act of 1970, as amended, the Americans With Disabilities Act of 1990, and all rules and regulations promulgated thereunder. Any such improvements, alterations, or additions shall, after the expiration or termination of this Lease for any reason, become the property of the Landlord without further obligation on the part of the Landlord; provided that any moveable furniture and moveable trade fixtures shall remain the property of Tenant, and, if Tenant is not then in default, may be removed by the Tenant upon termination of this Lease. The Tenant shall repair any damage to the Demised Premises occasioned by the removal by the Tenant of Tenant's furniture or trade fixtures. 9.2 Tenant further agrees that all personal property of every kind or description which may at any time be in the demised premises shall be at the Tenant's sole risk, or at the risk of those claiming under the Tenant, and in no event whatsoever shall Landlord be liable to Tenant for any loss or damage thereto. Landlord shall not be responsible or liable to Tenant for any loss or damage or for any loss or damage resulting to Tenant or its property from water, gas, steam, fire, or the bursting, stoppage or leaking of sewer pipes, or from the heating or plumbing fixtures, or from electric wires, or from gas or odors, or from roof leaks, or caused in any manner whatsoever. However, if said loss or damage is caused solely by the deliberate act of the Landlord, then the Landlord and not the Tenant shall be laible. X. ASSIGNMENT AND SUBLETTING 10.1 Tenant covenants and agrees not to assign this Lease or sublet the demised premises 10 in whole or in part without the prior written consent of the Landlord, which consent will not be unreasonably withheld. An acceptance of rent from any assignee or sublessee shall not be deemed a waiver of a prohibition against assignment or sublease or operate as a consent to such assignment or sublease. An assignment for the benefit of creditors or by operation of law shall be a breach of the prohibition against the assignment or sublease set forth herein. XI. HOLDING OVER 11.1 If the Tenant shall remain in possession of all or any part of the demised premises after the expiration of the term of this Lease or any renewal thereof, then the Tenant shall be deemed a Tenant of the demised premises from month to month at the same rental and subject to all of the terms and provision hereof, except only as to the term of this Lease. XII. ACCESS TO DEMISED PREMISES 12.1 Tenant further agrees to permit the Landlord to inspect or examine the demised premises at any reasonable time. 12.2 Tenant further agrees that during the ninety (90) day period next preceding the expiration of the term of this Lease, the Landlord or its agents shall have the right to show the demised premises to potential tenants. XIII. TRADE FIXTURES 13.1 Except as provided in Paragraph 9.1, Tenant may, at the expiration of said term, remove all the Tenant's trade fixtures which can be removed without substantial injury to, or undue defacement of the demised premises, provided all rents are paid in full and Tenant is not otherwise in default hereunder. Any and all damage to demised premises or to Landlord's property resulting from or caused by such removal shall be promptly repaired at Tenant's 11 expense. XIV. QUIET ENJOYMENT 14.1 Landlord covenants and agrees that if the Tenant shall perform all of the covenants and agreements herein stipulated to be performed on the Tenant's part, the Tenant shall, at all times during said term, have the peaceable and quiet enjoyment and possession of the demised premises without any manner of hindrance from the Landlord or any persons lawfully claiming through the Landlord. Tenant's obligation to pay rent is expressly conditioned upon Landlord's performance of Lanlord's obligations under this Agreement, including section 14.1 Fi for any reason the Tenant fails to pay rent, and landlord has given thirty (30) days' written notice of the rent deficiency, and the Tenant has failed to cure the deficiency, then the Tenant shall promptly vacate the Demised Premises. XV. INSURANCE AND INDEMNITY 15.1 Tenant, at its sole cost and expense, shall obtain and keep in force from the date hereof and continuing during the term of this Lease policies of Commercial General Liability Insurance from financially responsible insurers selected by Tenant subject to the Landlord's reasonable satisfaction insuring Landlord, its mortgagee, if any, and Tenant against liability arising out of the existence, ownership, use, occupancy or maintenance of the Demised Premises, and all areas appurtenant thereto. These polices will provide coverage against Personal and Advertising Injury and Products Liability. Such insurance shall be in an amount of not less than One Million Dollars ($1,000,000.00) for Personal or Advertising Injury, each occurrence and Three Million Dollars ($3,000,000.00) aggregate, and Products and Completed Operations Liability in an amount of Three Million Dollars ($3,000,000.00), each occurrence and Three 12 Million Dollars ($3,000,000.00) aggregate. Further, the Landlord shall be named as an additional insured for all coverages referenced in paragraph 15.1. 15.2 Tenant shall obtain and keep in force from the date hereof and continuing during the term of this Lease a policy or policies of insurance covering loss or damage to the Demised Premises in the amount of the full replacement value thereof, less physical depreciation, excepting therefrom the value of foundations, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief and special extended perils (all risk) and flood if the properties are located in federally designated flood prone areas. 15.3 If Tenant shall fail to procure and maintain any insurance required to be carried by this Section 15, Landlord may, but shall not be obligated to, procure and maintain the same, but at the expense of Tenant and Tenant shall reimburse Landlord for the cost thereof on demand. 15.4 Upon the execution hereof, Tenant shall deliver to Landlord certificates of such insurance naming Landlord and Landlord's mortgagee, if any, as an additional named insured with a loss payable clause satisfactory to Landlord and Landlord's mortgagee. Such insurance shall not be cancelable except after thirty (30) days prior written notice to Landlord and Landlord's mortgagee. Tenant shall, prior to the expiration or cancellation such policies, furnish Landlord with renewals thereof. Tenant shall not do or permit to be done anything which shall invalidate the insurance coverage referred to in this Section 15. 15.5 Tenant, during the term hereof, shall indemnify and hold harmless Landlord from and against any and all claims of any kind of nature arising from the existence of or from Tenant's use or misuse of the Demised Premises, or from the conduct of Tenant's business or from any 13 activity, work or things done, permitted or suffered by Tenant in or about the Demised Premises and shall further indemnify and hold harmless Landlord from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any negligence of Tenant, or the negligence of any of Tenant's agents, invitees, contractors, or employees, sublessees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon. XVI. EMINENT DOMAIN 16.1 If the whole of the demised premises, or such portion thereof as to render the remainder unsuitable for the purposes for which the demised premises were leased, be taken or condemned by any right of eminent domain, then this Lease shall cease and terminate from the time possession thereof is required. 16.2 If any part of the demised premises shall be so taken and this Lease shall not terminate under the provisions of Paragraph 16.1 above, then Landlord at its own expense, shall repair and restore the portion not affected by the taking and thereafter the rental to be paid by Tenant shall be equitably and proportionately adjusted. The cost of the repair and restoration work of Landlord shall not, however, exceed the net proceeds of the condemnation award actually received and retained by Landlord. 16.3 All compensation awarded or paid upon such a total or partial taking shall belong to and be the property of Landlord except that Tenant shall be entitled to a portion of such award in the same proportion that the value of the improvements made by Tenant included in the taking bears to the total value of the property taken for which such award is made. Tenant shall, 14 however, be entitled to claim, prove and receive in such condemnation proceedings, such award, if any, as may be allowed for trade fixtures and other equipment installed by Tenant, provided that no such claim of Tenant shall diminish or otherwise adversely affect Landlord's award. XVII. FIRE OR OTHER CASUALTY 17.1 Should the demised 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, Landlord shall, except as otherwise provided herein, and to the extent it recovers proceeds from such insurance, repair and/or rebuild the same with reasonable diligence. Landlord's obligation hereunder shall be limited to the building and improvements originally provided by Landlord on the first day of this Lease. Landlord shall not be obligated to repair, rebuild or replace any property belonging to Tenant or any improvements to the premises furnished by Tenant. No rent shall be due for that portion of the original building an original improvements to the Demised Premises, which are Landlord's responsibility to repair, rebuild, or replace, until such repairs, rebuilding, or replacement are completed and that portion of the Demised Premises returned to the Tenant in at least as good as a condition as the same were at the commencement of this lease. If there should be a substantial interference with the operation of Tenant's business in the demised premises as a result of such damage or destruction, which requires Tenant to temporarily close its business to the public, the rent shall fully abate during the period when Tenant's business is closed. 17.2 Notwithstanding anything to the contrary contained in Paragraph 17.1 or elsewhere in this Lease, either Landlord or Tenant 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 15 demised premises be damaged or destroyed as a result of a risk which is not covered by insurance, or (2) the demised premises be damaged and the cost to repair the same shall be more than fifty percent (50%) of the cost of replacement thereof. XVIII. WAIVER 18.1 No waiver of any covenant or condition or of the breach of any covenant or condition of this Lease shall be taken to constitute a waiver of any subsequent breach of such covenant or condition, nor to justify or authorize the non-observance on any other occasion of the same or any other covenant or condition hereof; nor shall the acceptance of rent or other payment by the Landlord at anytime when the Tenant is in default under any covenant or condition hereof, be construed as a waiver of such default or of the Landlord's right to terminate this Lease on account of such default; it being expressly understood that if at any time the Tenant shall be in default in any of its covenants or conditions hereunder, the acceptance by the Landlord of rental or other payment during the continuing of said default or the failure of Landlord promptly to avail itself of such other rights or remedies as the Landlord may have, shall not be construed as a waiver of such default. XIX. TENANT'S DEFAULT; REMEDIES OF LANDLORD 19.1 All payments hereunder required to be made by Tenant to Landlord shall be deemed and considered as rent reserved upon contract, and all remedies now or hereafter given by laws of the Commonwealth of Kentucky for the collection of rent and for forfeiture of the leasehold are reserved to Landlord in respect of the sums so payable. 19.2 IT IS EXPRESSLY UNDERSTOOD, AGREED AND STIPULATED TO BY TENANT THAT THE REMEDIES OF REENTRY, FORFEITURE AND 16 TERMINATION OF THE LEASEHOLD AS SET FORTH BELOW ARE AVAILABLE TO THE LANDLORD IN THE EVENT ANY OF SAID PAYMENTS ARE NOT MADE OR IN THE EVENT OF ANY DEFAULT OR BREACH BY TENANT OF ANY COVENANT OR CONDITION SET FORTH IN THIS LEASE. 19.3 IN THE EVENT OF DEFAULT OR BREACH BY TENANT IN THE PAYMENT OF THE RENTALS HEREIN RESERVED OR IN THE PERFORMANCE OF ANY OF THE OTHER COVENANTS, TERMS OR CONDITIONS HEREOF REQUIRED TO BE KEPT OR PERFORMED BY TENANT SUCH AS TO CAUSE A DEFAULT, INCLUDING, BUT NOT LIMITED TO, the failure of Tenant to pay rents, utilities, taxes or assessments when due, failure to maintain adequate and proper insurance coverage, or to fulfill any other obligation set forth in Section III, relating to Use of Demised Premises; Section IV, relating to Tenant's Additional Agreements; Section V, relating to Utilities; Section VI, relating to Real Estate Taxes; Section VII, relating to Maintenance; Section IX, relating to Property in the Demised Premises; Section X, relating to Assignment and Subletting; Section XII, relating to Access to Demised Premises; Section XV, relating to Insurance and Indemnity, and Section XXII, relating to Liens, such as to cause a default, and such default shall continue for a period of thirty (30) days after written notification thereof has been delivered to Tenant, as hereinafter provided, then in such event and as often as the same occurs, Landlord may, at its option, terminate this Lease without any further notice and re-enter upon and take possession of the leased premises, and the Tenant's leasehold shall be forfeited and terminated, and Landlord shall thereby hold and possess the same as its absolute property free and clear of any claims or, by or through Tenant, and Landlord may pursue any and all other remedies 17 available under the laws of the Commonwealth of Kentucky for violation of any covenant or condition hereof, and all such remedies shall be deemed cumulative and not exclusive. No action by Landlord pursuant to this Section XIX shall impair the right to rental due or accrued up to the time of termination and re-entry hereunder or damages caused by the Tenant's breach of the obligations under this Lease, including, but not limited to, future rents as allowed by law. 19.4 Tenant further agrees that if the interest of Tenant in the leased premises shall be sold on execution of judicial sale, of if bankruptcy proceedings are filed by or against Tenant, or if Tenant is adjudged a bankrupt, or it makes an assignment for the benefit of creditors, or a receiver is appointed for the Tenant or the leased premises, or if any assignment of the leasehold occurs by operation of law, then this Lease shall forthwith terminate and be forfeited and the leased premises and all improvements thereon shall forthwith become the property of Landlord, without compensation to Tenant, without refund of any rentals paid hereunder. XX. LANDLORD'S LEIN 20.1 Tenant acknowledges the validity of a Landlord's lien in favor of the Landlord under Kentucky Law. XXI. NOTICES 21.1 Any bill, statement, notice or communication which Landlord or Tenant may desire or be required to give to the other party shall be in writing and shall be sent to the other party by registered or certified mail to the address specified in the opening paragraph of this Lease, or to such other address as either party shall have designated to the other by like notice, and the time of the rendition of such notice shall be when same is deposited in an official United State Post Office, postage prepaid. All payments of rent or other charges shall be sent by Tenant to 18 Landlord at the address specified in the first paragraph of this Lease or such other address as the Landlord may, in writing, designate. XXII. LIENS 22.1 Tenant covenants and agrees that it shall promptly pay all contractors and materialmen for any work and improvements that the Tenant or its agents have contracted for in the demised premises, so as to minimize the possibility of a lien attaching to the demised premises, and should any such lien be made or filed, Tenant shall have the right, at its expense, to contest such lien, provided Tenant shall then furnish Landlord with a security deposit satisfactory to Landlord for an amount at least equal to Two Hundred Percent (200%) of the amount of the lien for the Landlord's protection against all loss or expense, including reasonable attorneys' fees, on account of such asserted lien. If such contest be finally resolved against Tenant, the Tenant shall promptly pay the amount required to be paid to discharge the lien. Upon the discharge of such lien, Landlord shall promptly refund to Tenant the amount of such security deposit; provided, however, if Tenant shall fail to cause such lien to be discharged, Landlord shall have a right to apply such security deposit toward discharge of such lien and collect any additional amount which may be required to discharge said liens from Tenant. 22.2 In addition, Tenant shall, prior to commencement of work by Tenant, provide a performance bond and a payment bond for labor and materials furnished to the demised premises, or shall provide evidence of adequate financing for completion of the work to be done. XXIII. CAPTIONS 23.1 The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit or describe the scope or intent of such sections or articles of this 19 Lease nor in any way affect this Lease. XXIV. GOVERNING LAW 24.1 This Lease shall be governed by and construed in accordance with the applicable laws of the Commonwealth of Kentucky in which the demised premises are located. XXV. INVALIDITY OF PARTICULAR PROVISIONS 25.1 If any term or provision of this Lease or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. XXVI ENTIRE AGREEMENT 26.1 This is the parties' entire integrated agreement and no subsequent alteration, amendment, change, modification or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. IN TESTIMONY WHEREOF, the parties hereto have caused this Lease to be signed upon the day and year first above written. NALOP REALTY COMPANY BY:____________________________________ Its:___________________________________ Landlord STATE OF WEST VIRGINIA COUNTY OF _____________________ This foregoing instrument was acknowledged before me this _____________ day 20 of_________________, 2001, by ________________________________, Partner of Nalop Realty Company. My commission expires:____________________________________ Notary Public EASY GARDENER, INC. By: /s/ Sheila B. Jones ------------------------------------------ Its VP Operations ------------------------------------------ Tenant STATE OF Texas P COUNTY OF McLennan This foregoing instrument was acknowledge before me this 26 day of June, 2001 by Sheila B. Jones, ___________________ of EASY GARDENER, INC. My commission expires: Marilyn Barnes 7/14/03 ------------------------------------- Notary Public 21 EX-10.13 4 d52182_ex10-13.txt LEASE EXTENSION AGREEMENT Exhibit 10.13 LEASE EXTENSION AGREEMENT THIS LEASE EXTENSION AGRREEMENT is made and entered into by and between Crawford-Austin Mfg, Co., as Lessor, and Easy Gardener Acquisition Corp., as Lessee, upon the following terms, conditions, considerations and agreements. WHEREAS by that one certain lease Agreement (the "Lease") dated 8-1-89 executed by Lessor and Lessee, Lessor leased unto Lessee the "Leased Premises" as described therein and being described herein as follows: 3016 Franklin Ave. Waco, Texas 76710 WHEREAS Lessor and Lessee desire to extend the Lease in accordance with the term thereof; NOW THEREFORE, for and in consideration of the following, and the agreements of the parties hereafter set forth, it is agreed as follows: 1. LEASE EXTENSION. The Lease is hereby extended and renewed for a term of Three (3) years, ("Extended Term") with the extended term beginning on the 1st day of March, 2002 and ending on the 28th day of February, 2005. 2. RENT. The monthly base rental for the Extended Term shall be the sum of $19,386.00. 3. OTHER TERMS. All of the terms, provisions, covenants, and agreements contained in the Lease, except as may be specifically modified herein, shall be fully applicable throughout the Extended Term. 4. BINDING EFFECT. The execution hereof and the resulting extension and or/modification of the Lease, shall not in any way relieve or diminish the obligations, responsibilities of liability of any Lessee or any guarantor of any Lessee under the Lease, and it is agreed that all such obligations, responsibilities and liability, and any security therefore, shall continue throughout the Extended Term. This Agreement shall be binding upon the parties hereto and their respective heirs, executors, successors and assigns. 5. CHANGES OR ADDITIONS. 1. Lessee rented #9 Warehouse at a rental rate of nine cents (.09) per square foot or $842.00 per month. EXECUTED THIS 14th day of February, 2002. Crawford-Austin Mfg. Co. Easy Gardener Acquisition, Corp. /s/ Gordon D. Harriman, III /s/ Sheila B. Jones, VP Operations - ----------------------------- ---------------------------------- Gordon D. Harriman, III, President Sheila B. Jones, Vice President "Lessor" "Lessee" EX-10.21 5 d52182_ex10-21.txt AMENDMENT NO. 1 TO PNC CREDIT AGMT Ex 10.21 FIRST AMENDMENT TO REVOLVING CREDIT, TERM LOAN, GUARANTY AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO REVOLVING CREDIT, TERM LOAN, GUARANTY AND SECURITY AGREEMENT, dated as of June 28, 2002 (this "First Amendment"), is entered into by and among EASY GARDENER, INC., a Delaware corporation ("Borrower"), U.S. HOME & GARDEN, INC., a Delaware corporation of which Borrower is a wholly-owned Subsidiary ("Holdings"), the various Subsidiaries of Borrower and Holdings whose names appear on the signature pages hereto or who may hereafter become parties to that certain Revolving Credit, Term Loan, Guaranty and Security Agreement, dated as of November 15, 2001 (as the same may be further amended, modified, supplemented or restated from time to time, the "Loan Agreement"), by executing and delivering an Instrument of Joinder (such Subsidiaries and Holdings sometimes being referred to herein collectively as the "Guarantors" and individually as a "Guarantor"; and the Guarantors and Borrower sometimes being referred to herein collectively as the "Credit Parties" and individually as a "Credit Party"), the financial institutions which are now or which hereafter become a party to the Loan Agreement (collectively, the "Lenders" and individually a "Lender") and PNC BANK, NATIONAL ASSOCIATION ("PNC"), as agent for Lenders (PNC, in such capacity, the "Agent"). RECITALS A. The Credit Parties, Lenders and Agent have previously entered into that certain Loan Agreement, pursuant to which Lenders agreed to make certain credit facilities available to Borrower, secured by the Collateral and guaranteed by Guarantors. B. The parties desire to enter into this First Amendment to modify the Loan Agreement as set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. 2. Undrawn Availability. The entire text of Section 8.1(dd) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(dd) Undrawn Availability. After giving effect to the initial Advances hereunder, Borrower shall have Undrawn Availability of at least $2,900,000;" 3. Permitted Encumbrances. Schedule 1.2 of the Loan Agreement is hereby deleted in its entirety and replaced with Exhibit A attached hereto and incorporated herein by this reference. In furtherance of the foregoing, Lenders and Agent hereby waive any default arising prior to giving effect to this First Amendment due to the failure of the Credit Parties to comply with any requirements of Schedule 1.2 of the Loan Agreement within the time period specified therein. 4. Reduction of Obligations. If the Obligations are not paid in full by the close of business on July 10, 2002, then effective July 11, 2002, the following amendments to the Loan Agreement shall apply: (a) The following text shall be added to the Loan Agreement as a new definition in Section 1.2: " 'Maximum Obligations' shall mean $25,000,000." (b) The definition of "Maximum Revolving Advance Amount in Section 1.2 of the Loan Agreement is changed from "$31,000,000" to $25,000,000 less the amount outstanding from time to time under the Term Loan." (c) The following text shall be added to the Loan Agreement as Section 2.17: "2.17. Maximum Obligations. At no time shall the sum of the outstanding Revolving Advances plus amounts outstanding under the Term Loan plus any other outstanding Obligations exceed the Maximum Obligations." 5. Condition Precedent. The effectiveness of this First Amendment is subject to the payment by Borrower of an Amendment Fee, as follows: $75,000 on June 28, 2002 by PNC charging Borrower's loan account with PNC for such amount on that date; plus the payment by Borrower to PNC of the sum of $25,000 on the Repayment Date or, at the option of Borrower, by the transfer to PNC by Borrower on the Repayment Date of the sum of $17,000,000 pursuant to a money management agreement for a period of not less than one year. For the purposes hereof, "Repayment Date" shall be the first to occur of (a) the date when the Obligations are paid in full or (b) August 11, 2002. 6. General Provisions. This First Amendment shall for all purposes be deemed a part of the Loan Agreement and shall be subject to the terms and conditions thereof, as amended hereby. Without limiting the foregoing, this First Amendment shall be subject to the Miscellaneous provisions set forth in Section 16 of the Loan Agreement. This First Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, including, but not limited to, counterparts transmitted by telecopier, when taken together, shall constitute but one and the same instrument. The effect of this First Amendment is limited to the express terms hereof. No provision of the Loan Agreement or any other Loan Document shall be deemed to have been waived, amended or modified in any respect except as and to the extent expressly provided herein. Subject to the specific terms of this Amendment, each and every term and provision of the Loan Agreement and each of the other Loan Documents remains in full force and effect without modification, and the same are hereby ratified and reaffirmed in all respects. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES OF SUCH STATE). [remainder of page intentionally left blank; signature pages follow] 2 IN WITNESS WHEREOF, each of the parties has caused this First Amendment to be duly executed and delivered by its respective duly authorized officer. EASY GARDENER, INC., as Borrower By: /s/ Robert Kassel --------------------------------------- Name: Robert Kassel ------------------------------------- Title: CEO ------------------------------------ PNC BANK, NATIONAL ASSOCIATION, as Lender and as Agent By: /s/ Ilan Yehros --------------------------------------- Name: Ilan Yehros ------------------------------------- Title: Vice President ------------------------------------ U.S. HOME & GARDEN INC., as Guarantor By: /s/ Robert L. Kassel --------------------------------------- Name: Robert L. Kassel ------------------------------------- Title: CEO ------------------------------------ WEATHERLY CONSUMER PRODUCTS GROUP, INC., as Guarantor By: /s/ Robert L. Kassel --------------------------------------- Name: Robert L. Kassel ------------------------------------- Title: CEO ------------------------------------ WEATHERLY CONSUMER PRODUCTS, INC., as Guarantor By: /s/ Robert L. Kassel --------------------------------------- Name: Robert L. Kassel ------------------------------------- Title: CEO ------------------------------------ GOLDEN WEST AGRI-PRODUCTS, INC., as Guarantor By: /s/ Robert L. Kassel --------------------------------------- Name: Robert L. Kassel ------------------------------------- Title: CEO ------------------------------------ 3 WEED WIZARD ACQUISITION CORP., as Guarantor By: /s/ Robert L. Kassel --------------------------------------- Name: Robert L. Kassel ------------------------------------- Title: CEO ------------------------------------ AMPRO INDUSTRIES, INC., as Guarantor By: /s/ Robert L. Kassel --------------------------------------- Name: Robert L. Kassel ------------------------------------- Title: CEO ------------------------------------ 4 EX-21 6 d52182_ex21.txt EXHIBIT 21 SUBSIDIARIES Ex 21 SUBSIDIARIES OF U.S. HOME & GARDEN INC. Name of Subsidiary State of Incorporation - ------------------ ---------------------- Ampro Industries, Inc. Michigan Egarden Inc. Delaware Easy Gardener, Inc. Delaware Easy Gardener UK Ltd.* United Kingdom Golden West Agri-Products, Inc. California U.S. Home & Garden Trust I Delaware Weatherly Consumer Products Group, Inc.* Delaware Weatherly Consumer Products, Inc.+ Delaware Weed Wizard Acquisition Corp.* Delaware - --------- * Subsidiary of Easy Gardener, Inc. + Subsidiary of Weatherly Consumer Products Group, Inc. EX-23 7 d52182_ex23.txt CONSENT OF BDO SEIDMAN, LLP Ex 23 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, 333-44459 and 333-41332 on Form S-8 of U.S. Home & Garden Inc. of our report dated August 23, 2002 except Note 11 which is as of October 11, 2002, relating to the consolidated financial statements and Schedule of U.S. Home & Garden Inc. appearing in this Annual Report on Form 10-K of U.S. Home & Garden Inc. for the year ended June 30, 2002. /s/ BDO Seidman, LLP BDO Seidman, LLP Kalamazoo, Michigan October 11, 2002 EX-99.1 8 d52182_ex99-1.txt CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of U.S. Home & Garden Inc. (the "Company") on Form 10-K for the fiscal year ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert Kassel, as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert Kassel ------------------ Robert Kassel Chief Executive Officer October 15, 2002 EX-99.2 9 d52182_ex99-2.txt CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of U.S. Home & Garden Inc. (the "Company") on Form 10-K for the fiscal year ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard Kurz, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard Kurz ------------------ Richard Kurz Chief Financial Officer October 15, 2002 -----END PRIVACY-ENHANCED MESSAGE-----