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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
- ------------------- -------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value and Class A Common Stock Purchase Warrants
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(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 25, 1997 was
approximately $61,900,000.
As of September 25, 1997, 15,295,331 shares of the Registrant's Common
Stock, par value $.001 per share were outstanding.
Documents Incorporated By Reference: None
Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for future activities. Such forward-looking information involves
important risks and uncertainties that could significantly affect results in the
future and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to the Company's
growth strategy, customer concentration, outstanding indebtedness, seasonal and
weather fluctuations, expansion and other activities of competitors, changes in
federal or state environmental laws and the administration of such laws and the
general condition of the economy and its effect on the securities markets.
General
The Company is a leading manufacturer and marketer of a broad range of
consumer lawn and garden products. The Company's products include weed
preventive landscape fabrics, fertilizer spikes, decorative landscape edging,
shade fabric and root feeders which are sold under recognized brand names such
as WeedBlock(R), Jobe's(R), Emerald Edge(R),Shade Fabric(R) and Ross(R). The
Company believes that it has significant market share and favorable brand-name
recognition in several of these product categories. The Company markets its
products through most large national home improvement and mass merchant
retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart,
Builder's Square and Home Base.
The Company was organized under the laws of the State of California in
August 1990 under the name Natural Earth Technologies, Inc. In January 1992 the
Company reincorporated under the laws of the State of Delaware and in July 1995
changed its name to U.S. Home & Garden Inc. The Company's lawn and garden
operations are conducted through its subsidiary Easy Gardener, Inc. ("Easy
Gardener") and Easy Gardener's subsidiaries, and the Company's agricultural
operations are conducted through its subsidiary Golden West Agri-Products, Inc.
("Golden West"). Unless the context otherwise requires, references in this
Report to "the Company" mean U.S. Home & Garden Inc. and its subsidiaries. The
Company's executive offices are located at 655 Montgomery Street, San Francisco,
California 94111, and its telephone number is (415)616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry has been comprised of relatively
small regional manufacturers and distributors whose products have been sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, home improvement and mass merchant retailers have replaced many of
these local garden centers as the dominant retail source for lawn and garden
products.
In an effort to improve operating margins and reduce the number of vendors
needed to source high volume lawn and garden products, the preference among
Retail Accounts has shifted towards single source suppliers such as the Company
that offer broad product lines of consumer brand-name merchandise and the
service necessary to stimulate consumer demand and ensure timely and cost
effective order fulfillment.
According to the 1996-1997 National Gardening Survey conducted by the
Gallup organization, 1996 retail sales of lawn and garden products were
approximately $22 billion and 64% of the approximately 101 million households in
the United States participated in some form of gardening activity during 1996.
Moreover, according to the National Gardening Survey, persons 50 years of age
and older spent an average of $400 per household on lawn and garden activities
in 1996. Sales growth in the lawn and garden industry is being driven in part by
the "baby boomer" consumer segment reaching such age group.
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Recent and Proposed Acquisitions.
Since August 1992, the Company has consummated the following five (5)
acquisitions of companies or product lines for a total of over $56 million in
consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic acid-based
products designed to improve crop yield which was acquired in August 1992
for approximately $1.1 million in cash and $1,075,000 of promissory notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping products
including WeedBlock(R), was acquired in September 1994 for approximately
$21.3 million consisting of $8.8 million in cash, a $10.5 million
promissory note and two convertible notes in the principal amount of $1
million. Approximately $2.2 million of additional purchase price was
contingent on Easy Gardener meeting certain income requirements. A total of
approximately $1.2 million of the additional amount has been paid to date
and the remaining $978,000 is payable in the fiscal year ending June 30,
1999.
o Emerald Products LLC. A manufacturer of decorative landscape edging was
acquired in August 1995 for $835,000 in cash and a $100,000 promissory
note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products was acquired in August
1996 for 1,000,000 shares of Common Stock and approximately $22.9 million
in cash.
o Plasti-Chain Product Line. A product line of plastic chain links and
decorative edgings was acquired from Plastic Molded Concepts, Inc. in May
1997 for approximately $4.3 million in cash.
In addition, the Company has entered into a letter of intent to purchase a
manufacturer and distributor of outdoor lawn and garden products for $5.25
million in cash. There can be no assurance that the acquisition will be
consummated.
Products
Landscape Fabric. The Company markets different types of landscape fabric
in varying thicknesses and strengths under the trade names WeedBlock(R),
WeedBlock 6(R), MicroPore(R), Pro WeedBlock(TM) and Weedshield(TM). Landscape
fabrics allow water, nutrients and oxygen to filter through to the soil but
prevent weed growth by blocking sunlight, preventing seeds from germinating. The
Company's primary landscape fabrics are made from non-woven fabrics which are
generally manufactured with extruded polymers, pressed or vacuum formed into
thin sheets having the feel and texture of light plastics. For the fiscal years
ended June 30, 1995, 1996 and 1997, sales of landscape fabrics represented 71%,
69% and 44%, respectively, of the Company's consolidated net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver
plant food and fertilizer directly to the root of the plant, an alternative
method of maintaining plant health to surface-delivered liquid or solid
fertilizers. The Company markets a variety of indoor and outdoor specialty
fertilizer and plant food spikes primarily under the Jobe's tradename, one of
the most recognized brands in the consumer lawn and garden industry. Some of the
Company's fertilizer spikes have the added feature of containing an insecticide
for the control of unwanted insects. For the fiscal year ended June 30, 1997,
sales of fertilizer, plant food and insecticide spikes represented approximately
24% of the Company's consolidated net sales.
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Fertilizers and Root Feeders. The Company markets fertilizers under the
Ross(R) trade name. The Ross(R) fertilizer, when applied through a Ross(R) Root
Feeder, a long steel irrigation tube with hose connector that is inserted deep
into the ground, provides the homeowner with a means of deep feeding and
irrigating trees and shrubs. The Ross(R) Root Feeder may also be used without
fertilizer as a deep watering device.
Landscape Edging. The Company markets a variety of decorative landscape
edgings, which are used by consumers to define the perimeter of planting areas
under a variety of trade names including Emerald Edge(R) and Terra Cotta Tiles.
The Company recently acquired the Plasti-Chain line of products, which included
additional landscape edgings.
Shade Cloth. In June 1995, the Company commenced marketing for sale and
delivery during fiscal 1996, shade cloth fabrics in a variety of sizes and
colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy or
protection from wind for people, plants and pets. The Company markets shade
cloth fabrics as an exclusive United States retail distributor of a shade cloth
manufacturer pursuant to an agreement that expires on September 30, 1998 (unless
renewed by the Company for an additional two year period).
Animal Repellents. The Company markets a line of animal repellents that are
formulated to deter dogs, cats, deer and rabbits from destroying garden and
landscape environs.
Other Products. In addition to landscape fabrics; fertilizer, plant food
and insecticide spikes, root feeders, landscape edging and shade cloth, the
Company also sells complementary lawn and garden products for the home gardener.
The products include a variety of protective plant and tree covers, bird and
animal mesh blocks, protective garden and tree netting to prevent animal damage,
synthetic mulch and fabric pegs.
Agricultural Products. The Company, through Golden West, manufactures and
distributes certain humic acid based agricultural products for use on farms and
orchards. Golden West generally sells its products to agricultural distributors,
which in turn market Golden West's products to farms and orchards.
The principal agricultural products manufactured or distributed by the
Company are: Energizer(R) -a formulation of humic acids which, when applied in
conjunction with liquid fertilizers, permits crops to absorb a greater amount of
the nutrients in the fertilizer; Penox(R) - a surfactant, or penetrating wetting
agent, that contains humic acid which, when applied in conjunction with
herbicides, defoliants and other agricultural products, increases their
effectiveness and Powergizer 45(R) - a foliar nutrient, or plant food,
containing humic acid which promotes growth and vigor in many types of crops.
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Conversion, Manufacturing and Supply
Lawn and Garden Products
Except for the materials for WeedBlock(R), which is obtained from a single
source, the basic materials for the Company's lawn and garden products are
purchased from a variety of suppliers. All of such materials are converted,
packaged and shipped by the Company from either its Waco, Texas facility or its
Paris, Kentucky facility.
The Company purchases all of the landscape fabric used to manufacture
WeedBlock(R) from Tredegar Industries, Inc. ("Tredegar"). The Company purchases
large rolls of various types of landscape fabric from Tredegar for shipment to
its Waco, Texas facility where it converts the bulk fabric and then packages the
fabric and ships it to customers. Although the Company has purchased all of its
supply from Tredegar for in excess of 10 years and the Company believes that its
relationship with Tredegar is good, Tredegar is free to terminate its
relationship with the Company at any time and accordingly could market its
fabrics to other companies, including competitors of the Company. Nevertheless,
the Company owns the registered trademark "WeedBlock(R)" and to the extent that
it establishes alternative supply arrangements, its rights to market products
under the WeedBlock(R) brand name would continue without restriction.
The Company manufactures and packages its Jobe's(R) fertilizer spikes at
its Paris, Kentucky facility. The raw materials that comprise the Company's
indoor fertilizer spikes are mixed with a binding agent and then passed through
an extrusion process which feeds a continuous strand of fertilizer through a
heat-drying system. The strand is then cut into ready-to-use fertilizer spikes
which are then machine counted and packaged into shelf-ready blisterpacks. The
Company's outdoor fertilizer spikes are manufactured in a similar manner except
rather than passing through an extrusion process, the outdoor spikes are
processed through molds which shape the spikes into their final form. The
outdoor spikes' are packaged in either a foil pouch, bag or box.
Agricultural Products
The Company does not own or lease any manufacturing facilities for its
agricultural products. Substantially all of the Company's humic acid-based
agricultural products, Energizer, Penox and Powergizer 45, are processed by
Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders placed
by the Company from time to time in the ordinary course of business.
Furthermore, the Company, through Western Farm, has an open purchase order
arrangement with an entity which supplies it with leonardite ore, a source of
humic acid used in its agricultural products. The Company believes that it would
have no difficulty in finding alternative processors or suppliers of leonardite
ore or other sources of humic acid should this supplier be unable to satisfy the
Company's humic acid requirements.
Customers
The Company's customers include home improvement centers, mass
merchandisers, hardware stores and lawn and garden nurseries and other retail
channels throughout the United States. The Company's three largest customers for
fiscal 1997, Home Depot, Lowes
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and K-Mart, accounted for approximately 26%, 10% and 7%, respectively, of its
net sales during such year. The Company's ten largest customers as a group
accounted for 69% and 65% of its net sales during fiscal 1996 and 1997,
respectively.
During fiscal 1995 and fiscal 1996, sales to Home Depot, Lowes and K-Mart
accounted for approximately 27%, 6% and 9%, respectively, and 27%, 9% and 7%,
respectively, of the Company's net sales. Sales to such customers are not
governed by any contractual arrangement and are made pursuant to standard
purchase orders. While the Company believes that relations with its largest
customers are good, the loss of any of these customers could have an adverse
effect upon the results of operations of the Company.
The Company's sales are concentrated in the United States, with sales in
Europe and Canada accounting for less than 2% of the Company's net sales for
fiscal 1996 and fiscal 1997. The Company is currently attempting to develop
relationships with distributors outside of the United States.
Sales and Marketing
The Company's sales efforts are coordinated by its national sales manager.
The national sales manager's duties include directing the activities of the
Company's six regional sales managers. Because of the service oriented nature of
the Company's business, the national and regional sales managers devote a
substantial amount of their time to servicing and maintaining favorable
relationship with the Company's largest customers in addition to managing the
overall sales operations. The Company also utilizes the services of
approximately 26 non-exclusive independent sales organizations, on a commission
basis, who are responsible primarily for sales to customers not serviced
regularly by the regional sales managers. Sales of the Company's agricultural
products are coordinated primarily by two full-time employees who are
compensated on a salary plus commission basis.
The Company's marketing activities are coordinated by its marketing
manager. The marketing manager designs and develops the Company's distinctive
packaging and point-of-sale displays and oversees, among other things, the
Company's advertising campaigns, which are created and placed by advertising and
public relations firms.
The Company expects that its lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and in-store
consumer promotions in mass-merchandise stores, hardware stores, nurseries and
garden centers. In addition, the Company believes that a substantial portion of
lawn and garden sales are impulse driven and not overly price sensitive.
Therefore, the Company seeks to increase consumer awareness, understanding and
brand identification of its products through its distinctive packaging and
point-of-sale displays. Retail Accounts and the Company's other customers
receive the Company's products in packaging that is easily displayed. The
retail product packaging is informative to the end-user and incorporates
attention getting, eye-pleasing color schemes. The Company also tailors its
displays to the evolving needs of retailers. Because many home improvement and
mass merchant retailers maintain outdoor sales areas for their lawn and garden
products, the Company utilizes waterproof displays for many of its products. In
addition, the Company meets the specific needs of many of its larger customers
by tailoring
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the size of its displays to the dimensions requested by such customers. The
Company's independent sales representatives periodically visit individual retail
outlets to assist Retail Accounts in achieving innovative and optimal use of the
Company's distinctive store displays.
In order to anticipate and react quickly to changing consumer preferences,
the Company also engages in market research. During fiscal 1997 the Company
conducted consumer market research and a regional media advertising campaign of
its Jobe's(R) Spikes product line to determine the effectiveness of such
advertising in increasing product line sales. Based on the positive data derived
from such research, the Company intends to focus its advertising and promotional
campaign on the Jobe's brand name, as well as on the Easy Gardener and Emerald
Edge(R) brand names.
The Company anticipates spending approximately $4.0 million in the fiscal
year ending June 30, 1998 on a combination of media development, print, radio
and television advertising, cooperative advertising (advertising done in
conjunction with retailers), attendance at trade shows and public relations to
promote awareness, understanding and brand identification of its lawn and garden
products and brands.
Information Systems
The Company maintains a sophisticated retail data information system which
enables it to provide timely and efficient order fulfillment to its Retail
Accounts and other customers. The Company's purchase order process can be
paperless, with most Retail Accounts placing their orders through an electronic
data interchange with the Company. In addition, with Wal-Mart, the Company's
system allows it to evaluate in-store inventory, thereby allowing the Company's
sales managers to proactively address such Retail Account's needs.
Internally, the Company's information systems track orders and deliveries
and provide exception reports if product is not delivered on time. The systems
"push" the necessary information to the proper personnel, allowing the Company
to react quickly to information.
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Seasonality
The Company sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid summer.
Sales of the Company's agricultural products are also seasonal. Most
shipments occur during the period from March through October (the agricultural
cultivation period).
Inventory and Distribution
In order to meet product demand, the Company keeps relatively large amounts
of product inventory on hand, particularly from December to May, the months of
highest demand. Despite maintaining these relatively high levels of inventory,
the Company has historically experienced minimal inventory obsolescence since
the high demand during this season has generally minimized the Company's levels
of obsolete inventory. Retail Accounts generally require delivery within five
business days. Orders are normally processed within 48 hours and shipped by
common carrier. The Company's on-time order fill rate is approximately 99%. The
Company is also able to meet certain just-in-time delivery needs when required.
Competition
The consumer lawn and garden care market generally is highly competitive
and somewhat fractionalized, with no single dominant competitor. The Company
competes with a combination of national and regional companies ranging from
large agri-chemical companies to garden catalog businesses and companies
specializing in the manufacture of lawn and garden care products. Several of
such companies have captured a significant share of such markets. Many of the
Company's competitors have achieved significant national, regional and local
brand name and product recognition and engage in extensive advertising and
promotional programs, both generally and in response to efforts by other
competitors to enter new markets or introduce new products. Many of these
companies have substantially greater financial, technical, marketing and other
resources than the Company. In addition, the lawn and garden care industry is
characterized by the frequent introduction of new products, accompanied by
substantial promotional campaigns.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the Solaris Group, a division of Monsanto Company, and other
lawn and garden care companies have, in the past, manufactured and marketed
landscape fabrics. Currently, few of such competitors compete with the Company
in this industry. Nevertheless, well capitalized companies and smaller regional
firms may develop and market landscape fabrics and compete with the Company
for customers who purchase such products.
Among the Company's competitors in the lawn and garden market for the
Jobe's(R) Spike line of fertilizer and insecticide products are large
agri-chemical companies such as Solaris Group and Scotts Miracle-Gro Products,
Inc. Competition for the Company's
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agricultural products consist of other manufacturers of products that are humic
acid based but that utilize formulas that are different from Golden West's.
These competitors include American Colloid Company, Monterey Chemical
Corporation and Custom Chemicide Inc.
Government Regulation
The Company is subject to many laws and governmental regulations and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Fertilizer and Pesticide Regulation
Products marketed, or which may be marketed, by the Company as fertilizers
or pesticides are subject to an extensive and frequently evolving statutory and
regulatory framework, at both the Federal and state levels.
The distribution and sale of pesticides is subject to regulation by the
U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by
many states in a manner similar to FIFRA. Under FIFRA and similar state laws,
all pesticides must be registered with the EPA and the state and must be
approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on the marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply with
the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to, suspension or restriction of product
distribution, civil penalties and/or criminal sanctions.
The Company markets certain animal repellent and pesticide products that
are subject to FIFRA and to similar state regulations. The Company also markets
certain fertilizer products that are subject to regulation in some states. The
Company believes that it is in material compliance with FIFRA and applicable
state regulations regarding its material business operations. However, there can
be no assurance that the Company will be able to comply with future regulations
in every jurisdiction in which the Company's material business operations are
conducted without substantial cost or interruption of operations. Moreover,
there can be no assurance that future products marketed by the Company will not
also be subject to FIFRA or to state regulations. If future costs of compliance
with regulations governing pesticides or fertilizers exceed the Company's
budgets for such items, the Company's business could be adversely affected. If
any of the Company's products are distributed or marketed in violation of
any of these regulations, the Company could be subject to a recall of, or a
sales limitation placed on, one or more of its products, or civil or criminal
sanctions, any of which could have a material adverse effect upon the Company's
business.
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Environmental Regulation
The Company's manufacturing operations are subject to various evolving
federal, state and local laws and regulations relating to the protection of the
environment, which laws govern, among other things, emissions to air, discharges
to ground, surface water, and groundwater, and the generation, handling,
storage, transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. Federal and state environmental laws and
regulations often require manufacturers to obtain permits for these discharges.
Failure to comply with environmental laws or to obtain, or comply with, the
necessary state and federal permits can subject the manufacturer to substantial
civil and criminal penalties. Easy Gardener and Weatherly each lease and operate
one manufacturing facility. The Company believes that all of its facilities are
in substantial compliance with all applicable material environmental laws.
Nonetheless, it is possible that there are material environmental liabilities of
which the Company is unaware. If the costs of compliance with the various
existing or future environmental laws and regulations, exceed the Company's
budgets for such items, the Company's business could be adversely affected.
Potential Environmental Cleanup Liability
The Federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and many similar state statutes, impose
liability for environmental damages and cleanup costs on past or current owners
and operators of facilities at which hazardous substances have been discharged,
as well as on persons who generate, transport, or arrange for disposal of
hazardous wastes at a particular site. Easy Gardener and Weatherly each operate
a manufacturing facility. Moreover, the Company or its predecessors have owned
or operated other manufacturing facilities in the past and may have liability
for remediation of such facilities in the future, to the extent any is required.
As a result, the Company could be subject to liability under these statutes. The
Company could also incur liability under CERCLA or similar state statutes for
any damage caused as a result of the mishandling or release of hazardous
substances owned by the Company but processed and manufactured by others on the
Company's behalf. As a result, there can be no assurance that the manufacture of
the products sold by the Company will not subject the Company to liability
pursuant to CERCLA or a similar state statute. Furthermore, there can be no
assurance that Easy Gardener or Weatherly will not be subject to liability
relating to manufacturing facilities owned or operated by them currently or in
the past.
Other Regulations
The Company is also subject to various other federal, state and local
regulatory requirements such as worker health and safety, transportation, and
advertising requirements. Failure to comply with these requirements could result
in the imposition of fines by governmental authorities or awards of damages to
private litigants.
Trademarks, Proprietary Information and Patents
The Company believes that product recognition is an important competitive
factor in the lawn and garden care products industry. Accordingly, in connection
with its marketing activities of its lawn and garden care products, the Company
promotes, and intends to promote, certain tradenames and trademarks which are
believed to have value to the Company.
In connection with its acquisition of the assets of Easy Gardener Inc.
("EGI") in September 1994, Easy Gardener acquired certain trademarks and
copyrights used by EGI in connection with its business including, but not
limited to, the trademarks, WEEDBLOCK(R), EASY GARDENER(R), WEEDSHIELD(TM),
MICROPORE(R) and BIRDBLOCK(R). In connection with its acquisition of Weatherly
Consumer Products Group, Inc. in August 1996, Easy Gardener acquired certain
patents, as well as certain copyrights and trademarks used in connection with
Weatherly's business including, but not limited to, Jobe's(R), Ross(R), Green
Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(TM). Easy Gardener also acquired
certain patents and trademarks when it acquired the assets of Emerald Products,
LLC and also acquired certain trademarks in connection with its purchase of the
Plasti-Chain line of products from Plastic Molded Concepts, Inc. Although the
Company does not believe that its trademarks violate the proprietary rights of
others, there can be no assurance that the Company's marks do not and will not
violate the proprietary
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rights of others, that the Company's marks would be upheld if challenged or that
the Company would not be prevented from using its marks, any of which could have
an adverse effect upon the Company.
Although the Company believes that the products sold by it do not and will
not infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, the Company could be required to pay damages and
modify its products or obtain a license for the manufacture or sale of such
products. There can be no assurance that, in such an event, the Company would be
able to do so in a timely manner, upon acceptable terms and conditions or at
all, and the failure to do any of the foregoing could have a material adverse
effect upon the Company.
Employees
As of August 31, 1997 the Company had 123 full-time employees. Of such
employees, three are executive officers of the Company, 17 were engaged in
administration and finance, 14 were engaged in sales and marketing, 16 were
engaged in warehouse, shipping and receiving and 73 were engaged in production.
An additional 17 part-time employees were engaged in production. None of the
Company's employees are covered by collective bargaining agreements. The Company
believes that it has a good relationship with its employees.
Item 2. Properties
The Company's executive offices are currently located in San Francisco,
California, in approximately 2,440 square feet of office space for which the
Company pays $4,227 per month in rent, which amount includes the costs of
utilities and janitorial services. In March 1998, the Company will be relocating
to a 3,000 square foot space in the same building with a monthly rent of
$10,275. The Company believes that its office space, which it rents pursuant to
a lease expiring in February 2001, is adequate for the Company's planned future
operations.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $1,150 per month base rent, with rent
increases at a rate of 4% a year. The lease expires in June 1999 subject to the
Company's option to renew the lease for an additional three year period.
Easy Gardener leases approximately 200,000 square feet of office and
warehouse space in Waco, Texas for which the Company pays $17,918 per month in
rent pursuant to a one year lease agreement that is renewable annually through
November 30, 2000. Easy Gardener's facilities contain landscape fabric
converters, packaging equipment and warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $10,000 per month in rent pursuant to a
lease that expires on June 30, 1998. The Company also leases an additional
53,000 feet of warehouse space in Paris, Kentucky for $5,417 per month in rent
pursuant to a lease that expires on May 6, 1998.
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Item 3. Legal Proceeding
In response to a claim for trademark infringement filed July 30, 1997 by
Easy Gardener against Dalen Products, Inc. ("Dalen") in the United States
District Court for the Western District of Texas, Waco Division, Dalen filed a
counterclaim against Easy Gardener and a third party complaint against the
Company. Dalen alleges, among other things, that the Company and Easy Gardener
monopolized or attempted to monopolize a relevant market for landscape fabrics;
that the Company and Easy Gardener tortiously interfered with Dalen's
contractual and prospective contractual relationships; and that Easy Gardener
infringed on a Dalen trademark, deceptively advertised the thickness of one of
its products, and misrepresented the porosity of a Dalen product. Dalen's
counterclaim and third party complaint seek an award of unspecified damages and
the entry of unspecified injunctive relief.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of Stockholders was held on June 27, 1997 at which time
the following directors were reappointed to serve until the Annual Meeting of
Stockholders of the Company to be held in 1998:
Votes For Votes Withheld
--------- --------------
Robert Kassel 11,869,446 79,950
Richard Raleigh 11,870,446 78,950
Maureen Kassel 11,868,496 80,900
Fred Heiden 11,828,346 121,050
Jon Schulberg 11,829,346 120,100
In addition, at the Meeting, the stockholders approved the Company's 1997
Stock Option Plan by a vote of 8,186,576 in favor, 843,077 against and 194,475
abstaining.
-13-
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded in the over-the-counter market and
been quoted on the Nasdaq SmallCap Market since March 26, 1992. The NASDAQ
symbol for the Company's Common Stock is "USHG". The following table sets forth,
for the periods indicated, the high and low bid quotations for the Common Stock,
as reported by NASDAQ. These amounts represent quotations between dealers (not
actual transactions) and do not include retail markups, markdowns or
commissions.
Year Ended June 30, 1996 Bid
-------------------------
High Low
--------- --------
First Quarter ...................... $ 3.50 $ 2.75
Second Quarter ..................... 3.1875 2.375
Third Quarter ...................... 3.00 2.125
Fourth Quarter ..................... 3.625 2.625
Year Ended June 30, 1997 Bid
-------------------------
High Low
--------- --------
First Quarter ..................... $ 3.313 $ 2.313
Second Quarter .................... 2.813 2.00
Third Quarter ..................... 2.813 2.063
Fourth Quarter .................... 2.438 2.063
As of September 25, 1997, the number of stockholders of record of the
Company's Common Stock was 190. The Company believes that, in addition, there
are in excess of 500 beneficial owners of its Common Stock whose shares are held
in "street name".
The Company has not paid any cash dividends on its common stock to date and
does not expect to declare or pay any cash or stock dividends in the foreseeable
future. Certain agreements among the Company, Easy Gardener and Easy Gardener's
primary lending institutions prohibit Easy Gardener from paying dividends
without the lenders' consent. This restriction adversely affects the Company's
ability to pay dividends.
During the quarter ended June 30, 1997, the Company issued five-year
options to purchase 50,000 shares of its common stock at $2.25 per share to an
entity for financial consultanting services. The Company also sold a total of
59,969 shares of its common stock to two individuals upon the exercise of
options previously granted to them and a total of 5,000 shares were sold for
nominal consideration to two charitable organizations. Sales of these securities
were made in private transactions pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933.
-14-
Item 6. Selected Financial Data
(in thousands, except share and per share data)
The following selected financial data at and for the years ended June 30,
1993, 1994, 1995, 1996 and 1997 has been derived from the Company's audited
financial statements. Such information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes thereto appearing
elsewhere in this Report.
Statement of Income Data:
Year Ended June 30,
------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
Net sales ................................ $ 2,910 $ 3,063 $ 19,692 $ 27,031 $ 52,046
Cost of sales ............................ 1,508 1,455 9,151 12,670 23,649
------------ ------------ ------------ ------------ ------------
Gross profit ............................. 1,402 1,608 10,541 14,361 28,397
Selling, general and
administrative expenses .................. 1,826 6,786 7,152 10,612 17,745
------------ ------------ ------------ ------------ ------------
Income (loss) from
operations ............................... (424) (5,178) 3,389 3,749 10,652
Other income (expense) ................... (45) (41) (1,776) (1,940) (3,262)
------------ ------------ ------------ ------------ ------------
Income tax (expense) benefit ............. -- -- (38) 715 (3,200)
Income (loss) before
extraordinary expense .................... (469) (5,219) 1,575 2,524 4,190
------------ ------------ ------------ ------------ ------------
Extraordinary expense, net ............... 389 -- -- -- (1,007)
------------ ------------ ------------ ------------ ------------
Net income (loss) ........................ $ (80) $ (5,219) $ 1,575 $ 2,524 $ 3,183
============ ============ ============ ============ ============
Income (loss) per share
before extraordinary expense ............. $ (.22) $ (1.31) $ .19 $ .25 $ .26
Net income (loss) per share .............. $ (.04) $ (1.31) $ .19 $ .25 $ .20
Weighted average number of
common and common
equivalent shares outstanding ............ 2,177,968 3,980,318 8,376,000 10,206,000 17,908,000(1)
Balance Sheet Data:
June 30,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
Working capital (deficiency) ...................... $ 607 $ (347) $ 3,326 $ 5,328 $ 2,642
Total assets ...................................... 5,977 5,654 28,140 33,584 68,125
Intangible assets, net ............................ 2,858 2,046 16,692 17,167 44,364
Short-term debt ................................... 1,134 594 2,200 3,650 8,990
Total liabilities ................................. 2,150 2,504 12,800 14,214 36,549
Stockholders' equity .............................. 3,827 3,150 15,399 19,370 31,926
- --------
(1) The income per share calculations for fiscal 1997 are based upon the
modified treasury stock method and includes 13,695,000 weighted average common
shares outstanding and 4,213,000 common shares issuable from the exercise of
outstanding options and warrants for fiscal 1997. The calculation assumes that
all outstanding options and warrants have been exercised and the proceeds from
such exercises have been used to purchase certain treasury shares of common
stock and retire outstanding indebtedness. The retirement of the outstanding
indebtedness and related reduction in interest expense is assumed to increase
net income by $450,000. See Note 14 to Notes to Financial Statements.
-15-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company manufactures and markets a broad range of brand-name consumer
lawn and garden products through its wholly-owned subsidiaries, Easy Gardener
and Golden West, and through Easy Gardener's wholly-owned subsidiary, Weatherly.
Since 1992, the Company has consummated five acquisitions of complementary lawn
and garden companies and product lines for an aggregate consideration of
approximately $57 million in cash, notes and equity. As a result of such
acquisitions, the Company recognized a significant amount of goodwill, which
aggregated approximately $44.4 million at June 30, 1997. The Company is
currently amortizing such goodwill, using the straight-line method, over various
time periods ranging from 20 to 30 years. See "Summary of Accounting Policies -
Intangible Assets" and Note 1 to Notes to Financial Statements.
The Company's results of operations for the fiscal year ended June 30, 1997
were significantly affected by the acquisition of Weatherly in August 1996. In
connection with the acquisition of Weatherly, the Company's outstanding notes
payable were refinanced and replaced with a new line of credit (the
"Refinancing"). As a result of the Refinancing, the Company was required to
record an extraordinary expense of $1.0 million, net of tax benefits, for the
fiscal year ended June 30, 1997, which expense consisted of the write-off of
deferred finance costs at June 30, 1996 plus prepayment penalties. Such
extraordinary expense reduced the Company's net income per share for fiscal 1997
by $.06, from $.26 to $.20. See Notes 13 and 14 to Notes to Financial
Statements.
Although the Company's net income per common share decreased from $.25 in
fiscal 1996 to $.20 in fiscal 1997, the decrease is not reflective of the
improved operating results the Company achieved during fiscal 1997. The
reduction in earnings per share is the result of several factors, including an
extraordinary expense of approximately $1.0 million, net of tax benefits, or
$0.06 per common share recorded in fiscal 1997. In addition, during fiscal 1997
the Company incurred a tax expense of approximately $3.2 million, or $0.18 per
common share, compared to a tax benefit of approximately $0.07 during fiscal
1996 resulting from the recognition of a deferred tax asset relating to
available future net operating loss carryforwards. The net effect of the
difference in the income tax rate for 1997 compared to fiscal 1996 was a $0.25
reduction in net income per common share. Moreover, net income per common share
in fiscal 1997 was adversely affected by the requirement that the Company use
the modified treasury stock method to calculate earnings per share for fiscal
1997. The effect of using this method was to reduce net income per common share
by $.05 in the 1997 period. Moreover, if application of the modified treasure
stock method had not been required income per share before income taxes and
extraordinary expense would have been $0.54 for fiscal 1997 compared to $0.18 in
fiscal 1996.
-16-
Results of Operations
The following table sets forth for the periods indicated certain selected
income data as a percentage of net sales:
Percentages of Net Sales
--------------------------------
Year Ended June 30,
--------------------------------
1995 1996 1997
----- ----- -----
Net sales ................................ 100.0% 100.0% 100.0%
Cost of sales ............................ 46.5 46.9 45.4
----- ----- -----
Gross profit ............................. 53.5 53.1 54.6
Selling and shipping expenses ............ 22.2 23.2 21.6
General and administrative expenses ...... 14.1 16.1 12.5
----- ----- -----
Income from operations ................... 17.2 13.9 20.5
Interest expense ......................... 9.2 7.4 6.4
Income tax (expense) benefit ............. (0.2) 2.7 (6.2)
Extraordinary expense, net ............... -- -- 1.9
Net income ............................... 8.0 9.3 6.1
===== ===== =====
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Net sales. Net sales increased by $25.0 million, or 93%, to $52.0 million
in fiscal from $27.0 million in fiscal 1996. The increase in net sales was
primarily a result of the August 1996 acquisition of Weatherly and increased
sales of the Company's landscape fabrics and landscape edging products.
Gross profit. Gross profit increased by $14.0 million, or 98%, to $28.4
million in fiscal 1997 from $14.4 million in fiscal 1996. Gross profit as a
percentage of net sales increased to 54.6% in fiscal 1997 from 53.1% in fiscal
1996. The increase in gross profit as a percentage of net sales was primarily
attributable to the sales of higher-margin products acquired in the Weatherly
acquisition.
Selling and shipping expenses. Selling and shipping expenses increased $4.9
million, or 78%, to $11.2 million in fiscal 1997 from $6.3 million in fiscal
1996. This increase was primarily the result of an increase in the amount of
products shipped. The increase in the amount of products shipped was a
consequence of the acquisition of Weatherly and an increase in sales of
pre-existing product lines, particularly landscape fabrics and landscape edging
products. Selling and shipping expenses as a percentage of net sales decreased
from 23.2% in fiscal 1996 to 21.6% in fiscal 1997. This decrease was primarily
due to the consolidation of the Company's customer services at the Waco, Texas
office and the elimination of the majority of the Weatherly sales positions in
connection with the integration of the acquisition.
General and administrative expenses. General and administrative expenses
increased $2.2 million, or 50%, to $6.5 million in fiscal 1997 from $4.4 million
in fiscal 1996. This increase was primarily the result of the acquisition of
Weatherly. As a percentage of net sales, general and administrative expenses
decreased from 16.1% in fiscal 1996 to 12.5% in fiscal 1997. This improvement is
primarily due to the
-17-
closing of the Weatherly administrative offices in February 1997 and the
integration of certain administrative functions into the Company's existing
infrastructure.
Income from operations. Income from operations increased by $6.9 million,
or 184%, to $10.7 million in fiscal 1997 from $3.8 million in fiscal 1996. The
growth in income from operations in actual dollars was primarily due to the
increase in net sales and gross profit as a result of the Weatherly acquisition.
As a percentage of net sales, income from operations increased to 20.5% in
fiscal 1997 from 13.9% in fiscal 1996. This increase was due to the decreases in
selling and shipping general and administrative expenses as a percentage of net
sales.
Interest expense. Interest expense increased by $1.3 million, or 65%, to
$3.3 million in fiscal 1997 from $2.0 million in fiscal 1996. The increase in
interest expense is primarily related to the interest associated with the
increase in both term and working capital debt and expenses associated with the
Weatherly acquisition, partially offset by a decrease in the Company's effective
borrowing rate.
Income taxes. In fiscal 1996, the Company reported a tax benefit of
$715,000 which was related to the recognition of a deferred tax asset relating
to available future net operating loss carryforwards. In fiscal 1997 the Company
incurred a tax expense of $3.2 million, excluding the benefit associated with
the extraordinary expense, reflecting the Company's profitability and exhaustion
of the majority of net operating loss carryforwards.
Extraordinary expense, net. In connection with the acquisition of
Weatherly, the Company completed the Refinancing. As a result of the
Refinancing, the Company was required to record an extraordinary expense of $1.0
million, net of tax benefits, for fiscal 1997, which expense consisted of
deferred finance costs at June 30, 1996 net of accumulated amortization, plus
prepayment penalties.
Net income. Net income increased $659,000, or 26%, to $3.2 million in
fiscal 1997 from $2.5 million in fiscal 1996. This increase was attributable to
successful integration of the Easy Gardener and Weatherly organizations in
fiscal 1997, partially offset by the $1.0 million extraordinary expense, net of
tax benefits, incurred due to the Refinancing.
Net income per common share decreased $.05 to $0.20 in fiscal 1997. The
decrease was partially attributable to an extraordinary expense of approximately
$1.0 million, net of tax benefits, or $0.06 per common share in 1997.
Additionally, during fiscal 1997 the Company incurred a tax expense of
approximately $3.2 million, or $0.18 per common share, compared to a tax benefit
of approximately $700,000 or $0.07 per share during 1996 resulting from the
recognition of a deferred tax asset relating to available net loss
carryforwards. The effective income tax rate for fiscal 1997 compared to fiscal
1996 resulted in a $0.25 reduction in net income per common share. The decrease
in net
-18-
income per common share was also adversely affected by the requirement that the
Company use the modified treasury stock method to calculate earnings per share
in 1997. The effect of using the modified treasury stock method in 1997 was to
reduce net income per common share by $0.05. If the modified treasury stock
method had not been required, income per common share before income taxes and
extraordinary expenses would have been $0.54 for fiscal 1997 compared to $0.18
in fiscal 1996.
Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net sales. Net sales increased by $7.3 million, or 37.3%, to $27.0 million
in fiscal 1996 from $19.7 million in fiscal 1995. A majority of the increase in
net sales resulted from the introduction of new landscape edging and shade cloth
products. In addition, the Company believes that its sales were positively
affected by continued penetration in existing markets, expansion into new
markets and a more widespread recognition of the Easy Gardener brand and
products. The increase in net sales also resulted from the inclusion of twelve
months of net sales of Easy Gardener products in the fiscal 1996 period compared
to ten months in the prior fiscal year.
Gross profit. Gross profit increased by $3.8 million, or 36%, to $14.4
million in fiscal 1996 from $10.5 million in fiscal 1995, primarily due to the
increase in net sales, partially offset by the inclusion of twelve months of
Easy Gardener's cost of goods sold in the 1996 period compared to ten months in
fiscal 1995. Gross profit as a percentage of net sales decreased from 54% in
fiscal 1995 to 53% in fiscal 1996. The decrease was due to a change in the
product mix sold and to higher costs, during the 1996 period, of resin and
corrugated cardboard, which are the principal materials used in the
manufacturing and packaging of Weedblock(R).
Selling and shipping expenses. Selling and shipping expenses increased by
$1.9 million, or 43%, to $6.3 million in fiscal 1996 from $4.4 million in fiscal
1995. The increase was primarily the result of the increase in the amount of
product shipped and the inclusion of twelve months of Easy Gardener's selling
and shipping expenses in fiscal 1996 compared to ten months in fiscal 1995. As a
percentage of net sales, selling and shipping expenses increased to 23% for
fiscal 1996 compared to 22% for fiscal 1995. This increase was primarily due to
introductory advertising on new products.
General and administrative expenses. General and administrative expenses
increased by $1.6 million, or 57%, to $4.4 million in fiscal 1996 from $2.8
million in fiscal 1995. General and administrative expenses as a percentage of
net sales increased to 16% in fiscal 1996 from 14% in fiscal 1995. The increase
in general and administrative expenses during fiscal 1996 was primarily a result
of the inclusion of twelve months of Easy Gardener's general and administrative
expenses in fiscal 1996 compared to ten months in fiscal 1995. The increase in
-19-
general and administrative expenses was also due to additional amortization and
depreciation expense, and additional related overhead expenses, associated with
the overall increase in the size of the Company.
Income from operations. Income from operations increased by approximately
$400,000, or 12%, to $3.8 million in fiscal 1996 from $3.4 million in fiscal
1995. As a percentage of net sales, income from operations decreased to 13.9% in
fiscal 1996 from 17.2% in fiscal 1995. The decrease in income from operations as
a percentage of net sales was primarily the result of a slight decrease in gross
profit as a percentage of net sales, combined with more significant increases in
selling and shipping and general and administrative expenses as a percentage of
net sales.
Interest expense. Interest expense increased by $200,000, or 11%, to $2.0
million during fiscal 1996 from $1.8 million during fiscal 1995 primarily as a
result of the inclusion in the 1996 period of twelve months of interest on Easy
Gardener's outstanding indebtedness which was incurred in connection with the
purchase of the assets of EGI in September 1994 when compared to the inclusion
of interest expense for only ten months in the 1995 period. This increase was
partially offset by the February 1995 conversion of $2.0 million of convertible
notes into Common Stock and principal payments of $1.6 million on other notes
payable. The convertible notes and other notes payable were incurred in
connection with the purchase of the assets of EGI in September 1994.
Income taxes. During fiscal 1996, the Company recorded a $715,000 tax
benefit compared to a $38,000 tax expense during the comparable period in 1995
primarily due to the Company's recognition of a deferred tax asset associated
with the federal net operating loss carryforwards. See "Liquidity and Capital
Resources."
Net income. Net income in fiscal 1996 was $2.5 million or $0.25 per share
based on 10,206,000 weighted average common and common equivalent shares
outstanding compared to net earnings of $1.6 million or $.19 per share in fiscal
1995 based on 8,376,000 common and common equivalent shares outstanding. Such
increase was primarily the result of the increase in net sales.
Quarterly Results of Operations and Seasonality
The Company's sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer.
Sales of the Company's agricultural products, which were not material for
fiscal 1997, are also seasonal. Most shipments
-20-
occur during the period from March through October (the agricultural cultivation
period).
Set forth below is certain unaudited quarterly financial information:
Quarter Ended
-----------------------------------------------------------
(in thousands, except percentages and per share data)
September 30, December 31, March 31, June 30,
1995 1995 1996 1996
============= ============= ============ ============
Net sales ..................... $ 3,265 $ 2,715 $ 10,760 $ 10,291
Cost of sales ............... 1,555 1,290 5,156 4,670
---------- ----------- ------------ ------------
Gross profit ................ 1,710 1,425 5,604 5,621
Selling, general and
administrative .............. 2,211 2,394 2,753 3,252
---------- ----------- ------------ ------------
Income (loss) from operations . (501) (969) 2,851 2,369
Investment income ............. 24 10 19 16
Interest expense .............. (458) (473) (541) (538)
---------- ----------- ------------ ------------
Income (loss) before income
taxes ......................... (935) (1,432) 2,329 1,847
Income tax benefit
(expense) ................... 100 80 138 397
Extraordinary expense .........
---------- ----------- ------------ ------------
Net income (loss) ............. $ (835) $ (1,352) $ 2,467 $ 2,244
========== =========== ============ ============
Net income (loss) per share ... $ (0.08) $ (0.13) $ 0.16(1) $ 0.14(1)
========== =========== ============ ============
Weighted average common and
common equivalent shares
outstanding ................... 9,944 10,200 19,002(1) 19,721(1)
========== =========== ============ ============
Net sales ..................... 100% 100% 100% 100%
Cost of sales ............... 48% 48% 48% 45%
---------- ----------- ------------ ------------
Gross profit ................ 52% 52% 52% 55%
Selling, general and
administrative .............. 68% 88% 26% 32%
---------- ----------- ------------ ------------
Income (loss) from operations . (16%) (36%) 26% 27%
Investment income ............. 1% 0% 0% 0%
Interest expense .............. (14%) (17%) (4%) (6%)
---------- ----------- ------------ ------------
Income (loss) before income
taxes ....................... (29%) (53%) 22% 18%
Income taxes .................. 3% 3% 1% 4%
Extraordinary expense ......... 0% 0% 0% 0%
---------- ----------- ------------ ------------
Net income (loss) ............. (26%) (50%) 23% 22%
========== =========== ============ ============
Quarter Ended
-----------------------------------------------------------
(in thousands, except percentages and per share data)
September 30, December 31, March 31, June 30,
1996 1996 1997 1997
============= ============= ============ ============
Net sales ..................... $ 5,523 $ 7,416 $ 20,559 $ 18,549
Cost of sales ............... 2,607 3,217 9,025 8,800
---------- ----------- ------------ ------------
Gross profit ................ 2,916 4,199 11,534 9,749
Selling, general and
administrative .............. 3,264 4,048 5,539 4,894
---------- ----------- ------------ ------------
Income (loss) from operations . (348) 151 5,995 4,855
Investment income ............. 26 17 16 17
Interest expense .............. (563) (813) (993) (970)
---------- ----------- ------------ ------------
Income (loss) before income
taxes ......................... (885) (645) 5,018 3,902
Income tax benefit (expense) 280 195 (2,075) (1,600)
Extraordinary expense ......... (1,007)
---------- ----------- ------------ ------------
Net income (loss) ............. $ (1,612) $ (450) $ 2,943 $ 2,302
========== =========== ============ ============
Net income (loss) per share ... $ (0.12) $ (0.03) $ 0.14(1) $ 0.11(1)
========== =========== ============ ============
Weighted average common and
common equivalent shares
outstanding ................... 12,915 13,917 22,696(1) 22,191(1)
========== =========== ============ ============
Net sales ..................... 100% 100% 100% 100%
Cost of sales ............... 47% 43% 44% 47%
---------- ----------- ------------ ------------
Gross profit ................ 53% 57% 56% 53%
Selling, general and
administrative .............. 59% 55% 27% 26%
---------- ----------- ------------ ------------
Income (loss) from operations . (6%) 2% 29% 27%
Investment income ............. 0% 0% 0% 0%
Interest expense .............. (10%) (11%) (5%) (6%)
---------- ----------- ------------ ------------
Income (loss) before income
taxes ....................... (16%) (9%) 24% 21%
Income taxes .................. 5% 3% (10%) (9%)
Extraordinary expense ......... (18%) 0% 0% 0%
---------- ----------- ------------ ------------
Net income (loss) ............. (29%) (6%) 14% 12%
========== =========== ============ ============
- ----------
(1) Calculated using the modified treasury stock method. To calculate net
income per share, net income must be increased by $418,000, $509,000,
$236,000 and $213,000 for the quarters ended March 31 and June 30, 1996 and
1997, respectively.
Liquidity and Capital Resources
From inception the Company has financed its operations primarily through
cash generated by operations, net proceeds from the Company's private and public
sales of securities and borrowings from lending institutions.
At June 30, 1997, the Company had consolidated cash and short-term
investments totalling $2.1 million and working capital of $2.6 million. At June
30, 1996, the Company had consolidated cash and short-term investments totalling
$680,000 and working capital of $5.3 million. This decrease in working capital
was due primarily to the increase in notes payable relating to the Weatherly
acquisition.
-21-
Net cash provided by operating activities for fiscal 1997 was $10.6
million, consisting primarily of net income plus depreciation and amortization
and an extraordinary expense resulting from the Refinancing, an increase in
accounts payable and a decrease in deferred taxes, offset in part by an increase
in accounts receivables. Net cash used in investing activities for fiscal 1997
was $29.6 million, consisting primarily of cash used for the acquisition of
Weatherly.
Net cash provided by financing activities for fiscal 1997 was $20.5 million
consisting primarily of the additional proceeds from the notes payable used in
connection with the purchase of Weatherly, and the exercise of warrants to
purchase common stock, the proceeds of which were used primarily for the
purchase of Weatherly.
At June 30, 1997 the Company had consolidated term debt of $26.6 million
which includes debt incurred pursuant to the Refinancing and consists of three
outstanding term loans of $20.5 million, $2.3 million and $3.8 million.
In connection with the acquisition of Weatherly, Easy Gardener entered into
a new credit agreement ("Credit Agreement") with certain institutional lenders.
Pursuant to the Credit Agreement, the lenders have provided the Company with the
following revolving credit and term loan facilities:
(a) Revolving Credit Facility: The maximum amount available for
borrowing under this facility from time to time is equal to the lesser of
$13 million and a borrowing base determined by reference to specified
percentages of Easy Gardener's consolidated accounts receivable and
inventory deemed to be "eligible" by the lenders. As of June 30, 1997,
based on this formula, $7.4 million was available for borrowing and no
amount was outstanding. In April 1997, the Revolving Credit Facility was
amended to provide the Company with an additional $3.0 million in available
borrowing during the months of February, March, April and May of each
fiscal year. Any additional borrowing must be paid by May 31 of the year in
which borrowed. This additional increase is for the working capital needs
during the peak season months and has the same "eligibility" requirements
as the original amount.
Revolving credit loans bear interest at an annual rate chosen by Easy
Gardener based on the prime rate of one of the lenders or LIBOR (the London
inter-bank offered rate) plus an applicable marginal rate. Under certain
circumstances, outstanding prime rate loans may be converted to LIBOR rate
loans at the Company's option. At June 30, 1997, the effective annual rate
for outstanding revolving credit loans was 9.75%. The revolving credit
facility expires on June 30, 2002 (the "Expiration Date") and all
outstanding revolving credit loans are then due, unless such loans are
required to be repaid earlier by the terms of the Credit Agreement. In
addition, for a 10-day period in August of each year, all outstanding
revolving credit loans must be paid and no revolving credit loans may be
borrowed. Revolving credit loans may be prepaid at any time. However, if
Easy Gardener elects to terminate the revolving credit facility prior to
the Expiration Date, the outstanding revolving credit loan must be prepaid
together with a premium of from 1% to 2% of the "Average Yearly Loan
Balance" (as defined in the Credit Agreement) of the revolving credit
loans.
-22-
(b) Term Loan Facility: Pursuant to this facility, Easy Gardener
obtained three term loans (the "Term Loans"), one in the principal amount
of $23 million ("Term Loan I"), $20.5 million of which was outstanding at
June 30, 1997, one in the principal amount of $2.3 million ("Term Loan
II"), all of which was outstanding at June 30, 1997, and one in the
principal amount of $3.8 million ("Term Loan III"), all of which was
outstanding at June 30, 1997. Term Loan I and Term Loan II mature on the
Expiration Date. Term Loan III expires in November 1997. Term Loans I and
II are payable in quarterly installments of principal, commencing as to
Term Loan I in September 1996 and as to Term Loan II in September 1998.
Term Loan III is payable in full upon its expiration. Term Loan I bears
interest, at the election of Easy Gardener, at the adjusted prime rate or
LIBOR rate described above, and Easy Gardener may from time to time,
subject to certain restrictions, convert Term Loan I from a prime rate loan
to a LIBOR rate loan. At June 30, 1997, the effective annual rate of
interest for Term Loan I was 9.75%. Term Loan II bears interest at a
floating rate equal to the prime rate of one of the lenders plus 6%. At
June 30, 1997, the effective annual rate of interest for Term Loan II was
14.5%. The annual rate of interest for Term Loan III is 12% and interest is
payable monthly in arrears. Interest on Term Loans I and II is payable
monthly in arrears on prime rate loans and at the end of the interest
period for a LIBOR rate loan if the interest period is three months or less
or on the last day of each three-month interval during the interest period
if it is longer than three months. If Easy Gardener elects to pay Term Loan
I in full at any time prior to the Expiration Date, Easy Gardener is also
obligated to pay a premium of from 1% to 2% of the amount prepaid. Term
Loan I is subject to certain mandatory prepayments of principal from
"excess cash flow" (as defined in the Credit Agreement) of Easy Gardener
and certain net proceeds of asset sales, condemnation awards and insurance
recoveries. Mandatory prepayment of principal of Term Loan I on account of
"excess cash flow", if any, will be due in October of the following fiscal
year. No mandatory prepayment is due in October 1997.
Easy Gardener's obligation to pay the principal of, interest on, premium,
if any, and all other amounts payable on account of the revolving credit loans
and the Term Loans is secured by substantially all of the assets of Easy
Gardener and its subsidiaries and the irrevocable guaranties of the Company and
Easy Gardener's subsidiaries. Upon the occurrence of an event of default
specified in the Credit Agreement, the maturity of the outstanding principal
amounts of the revolving credit loans and the Term Loans may be accelerated by
the lenders who may also foreclose on the secured assets of Easy Gardener and
its subsidiaries.
Under the Credit Agreement (a) Easy Gardener is required, among other
things, to comply with certain limitations on incurring additional indebtedness,
liens, guaranties, capital and operating lease expenses in excess of a specified
amount per year, and sales of assets and payment of dividends and (b) Easy
Gardener and the Company must comply with certain limitations on merger,
liquidations, changes in business, investments, loans and advances, or certain
acquisition of subsidiaries. In addition, Easy Gardener must comply with certain
minimum interest coverage, debt service and fixed charge rates, not permit its
Net Worth (as defined in the Credit Agreement) to be less than certain amounts
and generate certain minimum amounts of income before interest expenses, taxes,
depreciation and amortization. A violation of
-23-
any of these covenants constitutes an event of default under the Credit
Agreement.
The Company believes that its operations will generate sufficient cash flow
to service the debt incurred in connection with its prior acquisitions. However,
if such cash flow is not sufficient to service such debt, the Company will be
required to seek additional financing which may not be available on commercially
acceptable terms or at all.
As of June 30, 1997, the Company had a net deferred tax asset of $448,000,
the majority of which relates to the tax benefit associated with the accumulated
net operating losses of approximately $1.0 million for Federal income tax
purposes which expire in 2011. For California income tax purposes, the Company
has accumulated net operating losses of approximately $2.2 million which expire
at various times through 2001. Based upon the estimated taxable income to be
apportioned to California over the next few fiscal years and considering the
expiration date of the net operating loss carryovers, the Company has
established a valuation reserve relating to the majority of the estimated
$165,000 benefit associated with the California net operating loss carryovers.
In January 1997, the Company borrowed $550,000 in the aggregate from
certain lenders. The loans were used to satisfy short term working capital
requirements. In July 1997, the Company repaid $200,000 of the loan and the
$350,000 balance was converted into 154,000 shares of Common Stock.
In May 1997, the Company purchased from Plastic Molded Concepts, Inc.
certain assets relating to its Plasti-Chain Line of products for approximately
$4.3 million. The purchase price was paid through the use of the Revolving
Credit Facility and a $3.8 million increase in the Company's term debt. The
additional term debt is payable in November 1997.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
a Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which is effective for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 requires a calculation of basic (giving no
dilutive effect to all derivative securities) earnings per share and dilutive
(reflecting the dilutive effect of all derivative securities) earnings per
share. Accordingly, the Company plans to adopt SFAS No. 128 in its December 31,
1997 interim financial statements. The Company has not yet determined the effect
that SFAS No. 128 would have had on the earnings per share, if it had been
adopted in the first quarter of fiscal 1997.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
-24-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
This information appears in a separate section of this report following
Part III.
Item 9. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure.
Not applicable.
-25-
Part III
Item 10. Directors and Executive Officers of the Registrant.
The current directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Robert Kassel 57 Chairman of the Board, Chief
Executive Officer, President
and Treasurer
Richard Raleigh 43 Chief Operating Officer and
Director
Maureen Kassel 49 Vice President of Public Relations
and Advertising, Secretary and
Director
Jon Schulberg 38 Director
Fred Heiden 56 Director
Robert Kassel co-founded the Company and has been Chairman of the Board, Chief
Executive Officer, President and Treasurer of the Company since October 1990. In
addition, from 1985 to August 1991 he was a consultant to Comtel Communications,
Inc. ("Comtel"), a company specializing in the installation and operation of
telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real
estate developer in Long Island, New York and Santa Barbara, California. From
1965 to 1985, he was a practicing attorney in New York City, specializing in
corporate and securities law.
Richard Raleigh has been a Director of the Company since March 1993, Chief
Operating Officer of the Company since June 1992 and served as the Company's
Executive Vice President-Operations from December 1991 to June 1992. Prior to
joining the Company, Mr. Raleigh was a free-lance marketing consultant to the
lawn and garden industry from January 1991 to December 1991. From April 1988 to
January 1991 he was Director of Marketing, Lawn and Garden of Monsanto
Agricultural Co. From December 1986 to April 1988 he was Vice President of
Sales and Marketing of The Andersons, a company engaged in the sale of consumer
and professional lawn and garden products. From November 1978 to December 1986
he held a variety of positions at The Andersons, including Operations Manager
and New Products Development Manager.
Maureen Kassel, the wife of Robert Kassel, co-founded the Company and has been
Vice President of Public Relations and Advertising and a director of the Company
since November 1990 and Secretary of the Company since February 1992. For the
last ten years, she has assisted in the general administration and operation of
real estate and other businesses. Ms. Kassel is Chairman of the Board of Comtel.
Jon Schulberg, a director of the Company since March 1993, has been employed as
president of Schulberg MediaWorks, a company engaged in the independent
production of television programs and television advertising since January 1992.
From January 1989 to January 1992, he was a producer for Guthy-Renker
Corporation, a television production company. From September 1987 to January
1989 he was the director of development for Eric Jones
-26-
Productions. For the three years prior thereto, he was the Director of Video
Publishing for Preview Media.
Fred Heiden, a director of the Company since March 1993, has been a private
investor since November 1989. From April 1984 to November 1989 Mr. Heiden was
the president and principal owner of Bonair Construction, a Florida based home
improvement construction company.
Certain Key Employees
Richard M. Grandy, 51, has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of EGI
in September 1994 until July 1997. Mr. Grandy co-founded EGI in 1983 after
serving as Marketing Director at International Spike, Inc. from 1977 through
1983. From 1968 through 1977, Mr. Grandy was a sales representative of lawn and
garden products for the Ortho Division of Chevron Chemical Co.
Lynda Gustafson, 33, has been Vice President of Finance of the Company since
September 1997 and served as Controller of the Company from November 1993 to
September 1997. From September 1990 through October 1993 Ms. Gustafson was
Supervisor of the Business Consulting Department of the certified public
accounting firm of Hood & Strong. From September 1988 to August 1990, she has
held the positions of Staff Accountant and Senior Accountant at the certified
public accounting firm of Schwartz, McGuire & Co.
Sheila Jones, 42, has been Vice President of Easy Gardener since July 1997 and
has also served as its General Manager from September 1994. Prior to the
acquisition of EGI by the Company, Ms. Jones was employed by EGI from its
inception in September 1983 to September 1994, where she advanced to the
positions of Vice President and General Manager. From April 1977 to September,
1983, she was employed by International Spike, Inc., where she held various
project management positions.
Paul Logue, 41, has been National Sales Manager of Easy Gardener since the
Company's acquisition of EGI in September 1994. Prior to joining the Company,
Mr. Logue was employed by EGI from September 1989 to September 1994, where he
was advanced from the position of Northeastern Regional Sales Manager to
National Sales Manager. From March 1988 to September 1989, he was Regional Sales
Manager for Hoffman Brand Fertilizers.
Item 11. Executive Compensation
The following table discloses the compensation awarded by the Company, for
the three fiscal years ended June 30, 1997, 1996 and 1995, to Mr. Robert Kassel,
its Chief Executive Officer and Mr. Richard J. Raleigh, its Chief Operating
Officer (the "Named Executives"). During fiscal 1997, no other executive officer
of the Company received a salary and bonus that exceeded $100,000 during such
fiscal year.
Summary Compensation Table
Annual
Compensation
------------
Name and Long Term All Other
Principal Position Year Salary ($) Bonus ($) Compensation Compensation(1)
- ------------------ ---- ---------- --------- ------------ ---------------
Securities
Underlying
Options (#)
------------
Robert Kassel, 1997 350,000 250,000 1,200,000(2) $5,995
Chairman, Chief Executive 1996 250,000 100,000 200,000(3) --
Officer, President and 1995 150,000 100,000 687,653(4) --
Treasurer
Richard Raleigh, 1997 195,000 111,275 500,000(2) $8,390
Chief Operating Officer 1996 150,000 10,000 100,000(3) --
1995 120,000 10,000 50,000(4) --
- ------------
(1) Represents Company contributions to the Named Executives' 401(k) Account.
(2) Includes 200,000 options previously granted to Mr. Kassel and 100,000
options previously granted to Mr. Raleigh whose exercise prices were
repriced to reflect a reduction in the market price of the Common Stock at
the time of repricing. Does not include 50,000 options previously granted
to Mr. Raleigh the expiration date of which was extended during fiscal
1997.
(3) Includes 200,000 five-year options granted to Mr. Kassel and 100,000
five-year options granted to Mr. Raleigh in June 1995 under the Company's
1995 Stock Option Plan which grants were subject to stockholder approval of
-27-
the plan obtained in February 1996.
(4) Does not include the options referenced in footnote (3) above.
The following table discloses information concerning stock options granted
in the year ended June 30, 1997 to the Named Executives.
Option Grants in Fiscal Year Ended June 30, 1997
Individual Grants
-----------------------------------------------------------------------
Potential Realizable
Number of Value at Assumed
Securities Percent of Annual Rates of Stock
Underlying Total Options Price Appreciation
Options Granted to Exercise for Option Term (2)
Granted Employees in Price Expiration -------------------------------
Name (#)(1) Fiscal Year ($/Sh) Date 5% 10%
- ---- ----------- -------------- ------------ ------------ -------- ----------
Robert Kassel 350,000 19.8 $2.06 7/24/01 $199,000 $440,000
450,000 25.5 2.06 8/30/01 256,000 566,000
200,000 11.3 2.06 12/24/01 114,000 252,000
200,000 11.3 2.06 6/01/00 114,000 252,000
Richard Raleigh 125,000 7.0 2.06 7/24/01 71,000 158,000
175,000 9.5 2.06 8/30/01 100,000 220,000
100,000 5.7 2.06 12/24/01 57,000 126,000
100,000 5.7 2.06 6/01/00 57,000 126,000
- --------------------
(1) All of such options were exercisable in full from the date of grant.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of options providing for termination of
the option following termination of employment or nontransferability of the
options and do not make any provision for taxes associated with exercise.
Because actual gains will depend upon, among other things, future
performance of the Common Stock, there can be no assurance that the amounts
reflected in this table will be achieved.
-28-
The following table sets forth information concerning the number of options
owned by the Named Executives and the value of any in-the-money unexercised
stock options as of June 30, 1997. No stock options were exercised by the Named
Executives during fiscal 1997:
Aggregated Option Exercises
And Fiscal Year-End Option Values
---------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
June 30, 1997 June 30, 19979(1)
------------------------------------- ------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Robert 2,067,653 -0- $3,214,598 $-0-
Kassel
Richard 637,500 -0- $887,938 $-0-
Raleigh
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end
market value of the common stock. Options are "in-the-money" if the fiscal
year end fair market value of the Common Stock exceeds the option exercise
price. The last sale price of the Common Stock on June 30, 1997 was $3.375
per share.
Employment Agreements
The Company has entered into employment agreements with Messrs. Kassel and
Raleigh, each dated as of April 1, 1996. Mr. Kassel currently serves as Chief
Executive Officer and President pursuant to the employment agreement for a term
expiring in March 31, 1998, subject to certain renewal provisions. His current
annual salary is $350,000, and is subject to such bonuses and increases as are
approved at the discretion of the Board of Directors. Mr. Raleigh currently
serves as Chief Operating Officer pursuant to the employment agreement for a
term expiring in March 31, 1998, subject to certain renewal provisions. His
current annual salary is $195,000, and is subject to such bonuses and increases
as are approved at the discretion of the Board. Each of the employment
agreements requires that substantially all of the employee's business time be
devoted to the Company and that the employee not compete, or engage in a
business competitive with, the Company's current or anticipated business for the
term of the agreement and for two years thereafter (although they each may own
not more than 5% of the securities of any publicly traded competitive company).
Mr. Kassel's agreement also provides that if his employment is terminated
under certain circumstances, including termination of Mr. Kassel upon a change
of control of the Company (as defined
-29-
in the agreement), a failure by the Company to comply with its obligations under
the agreement, the failure of the Company to obtain the assumption of the
agreement by any successor corporation, or a change in Mr. Kassel's duties and
obligations from those contemplated by the agreement, and termination by the
Company of Mr. Kassel's employment other than for disability or cause, he will
be entitled to receive severance pay equal to the greater of (i) $350,000
($3,500,000 in the event of a change of control) or (ii) the total compensation
earned by Mr. Kassel from the Company during the one-year period (multiplied by
ten in the event of a change of control) prior to the date of his termination.
Mr. Raleigh's agreement also provides that if his employment is terminated
under certain circumstances, including termination of Mr. Raleigh upon a change
of control of the Company, (as defined in the agreement) a failure by the
Company to comply with its obligations under the agreement, the failure of the
Company to obtain the assumption of the agreement by any successor corporation,
or a change in Mr. Raleigh's duties and obligations from those contemplated by
the agreement, and termination by the Company of Mr. Raleigh's employment other
than for disability or cause, he will be entitled to receive severance pay equal
to the greater of (i) $162,500 ($812,500 in the event of a change of control) or
(ii) the total compensation earned by Mr. Raleigh from the Company during the
one-year period (multiplied by five in the event of a change of control) prior
to the date of his termination.
Each of Mr. Kassel and Mr. Raleigh is, in addition to salary, entitled to
certain fringe benefits, including the use of an automobile and payment of
related expenses.
Easy Gardener has entered into a four-year employment agreement with Mr.
Grandy, dated as of September 1, 1994, which expires on August 31, 1998. Mr.
Grandy currently serves as President of Easy Gardener. His current annual salary
is $200,000. The agreement requires Mr. Grandy to devote substantially all of
his business time to Easy Gardener, and in the event Mr. Grandy's employment
agreement is terminated by Easy Gardener without "Cause" (as defined in the
agreement) or if Mr. Grandy resigns with "Good Reason" (as defined in the
agreement), Mr. Grandy will be entitled to receive his base salary through the
expiration of agreement.
Committees of the Board of Directors
The Company recently established an Audit Committee comprised of Messrs.
Raleigh, Schulberg and Heiden. The Audit Committee will, among other things,
make recommendations to the Board of Directors with respect to the engagement of
the Company's independent certified public accountants and the review of the
scope and effect of the audit engagement. The Company has recently established a
Compensation Committee of its Board of Directors, consisting of Messrs. Kassel,
Heiden and Schulberg. The Compensation Committee will, among other things, make
recommendations to the Board of Directors with respect to the compensation of
the executive officers of the Company. The Company maintains a Stock Option
Committee comprised of Messrs. Schulberg and Heiden, which
-30-
determines the persons to whom options should be granted under the Company's
1995 and 1997 Stock Option Plans and the number and other terms of options to be
granted to each person under such plans.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
The Company did not have a Compensation Committee of its Board of Directors
during fiscal 1997. Decisions as to compensation during fiscal 1997 were made by
the Company's Board of Directors. Messrs. Kassel and Raleigh, in their capacity
as directors, each participated in the deliberations of the Board of Directors
concerning compensation of executive officers for fiscal 1997. During fiscal
1997, none of the executive officers of the Company served on the Board of
Directors or the compensation committee of any other entity, any of whose
officers has served on the Board of Directors of the Company.
Stock Option Plans
In September 1991, the Company adopted a stock option plan (the "1991
Plan") pursuant to which 700,000 shares of Common Stock have been reserved for
issuance upon the exercise of options designated as either (i) options intended
to constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs
may be granted under the Option Plan to employees and officers of the Company.
NQO's may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company.
The purpose of the 1991 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The 1991 Plan is administered by the
Board of Directors. The Board, within the limitations of the 1991 Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repur chase rights in
the Company are to be imposed on shares subject to options.
ISOs granted under the 1991 Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of per sons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans
-31-
of the Company and any related corporation) may not exceed $100,000. NQO's
granted under the 1991 Plan may not be granted at a price less than the fair
market value of the Common Stock on the date of grant. Options granted under the
1991 Plan will expire not more than ten years from the date of grant (five years
in the case of ISOs granted to persons holding 10% or more of the voting stock
of the Company). An aggregate of 562,000 options were outstanding under the 1991
Plan at June 30, 1997.
The Company has adopted, a Non-Employee Director Stock Option Plan (the
"Director Plan"). Only non-employee directors of the Company are eligible to
receive grants under the Director Plan. The Director Plan provides that eligible
directors automatically receive a grant of options to purchase 5,000 shares of
Common stock at fair market value upon first becoming a director and,
thereafter, an annual grant, in January of each year, of 5,000 options at fair
market value. Options to purchase an aggregate of up to 100,000 shares of Common
Stock are available for the automatic grants under the Director Plan. An
aggregate of 20,000 options were outstanding under the Director Plan at June 30,
1997.
The Company has also adopted, a 1995 Stock Option Plan ("1995 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Stock Option Committee (the "Committee") of
the 1995 Plan, as the case may be, will have discretion to determine the number
of shares subject to each NQO (subject to the number of shares available for
grant under the 1995 Plan and other limitations on grant set forth in the 1995
Plan), the exercise price thereof (provided such price is not less than the par
value of the underlying shares of Common Stock), the term thereof (but not in
excess of 10 years from the date of grant, subject to earlier termination in
certain circumstances), and the manner in which the option becomes exercisable
(amounts, intervals and other conditions). Directors who are employees of the
Company will be eligible to be granted ISO's or NQO's under such plan. The Board
or Committee, as the case may be, also has discretion to determine the number of
shares subject to each ISO, the exercise price and other terms and conditions
thereof, but their discretion as to the exercise price, the term of each ISO and
the number of ISOs that may vest may be in any year is limited by the same
provisions of the Code applicable to IS0s granted under the 1991 Plan. An
aggregate of 1,385,000 options were outstanding under the 1995 Plan at June 30,
1997.
The Company has adopted a 1997 Stock Option Plan ("1997 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Committee of the 1997 Plan, as the case may
be, will have discretion to determine the number of shares subject to each
nonqualified option (subject to the number of shares available for grant under
the 1997 Plan and other limitations on grant set forth in the 1997 Plan), the
exercise price thereof (provided such price is not less than the par value
-32-
of the underlying shares of Common Stock), the term thereof (but not in excess
of 10 years from the date of grant, subject to earlier termination in certain
circumstances), and the manner in which the option becomes exercisable (amounts,
intervals and other conditions). Directors who are employees of the Company will
be eligible to be granted incentive stock options or nonqualified options under
such plan. The Board or Committee, as the case may be, also has discretion to
determine the number of shares subject to each ISO, the exercise price and other
terms and conditions thereof, but their discretion as to the exercise price, the
term of each ISO and the number of ISOs that may vest may be in any year is
limited by the same provisions of the Code applicable to ISOs granted under the
1991 Plan. An aggregate of 500,000 options were granted under the 1997 Plan
subsequent to June 30, 1997.
To date, no options have been exercised under the Option Plan, the Director
Plan, the 1995 Plan or the 1997 Plan.
The Company from time to time has also granted non-plan options to certain
officers, employees and consultants.
Director Compensation
During the fiscal year ended June 30, 1997 each of the Company's two
non-employee directors, Messrs. Schulberg and Heiden, received $5,000 for
serving as directors of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information at September 25, 1997, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director, (ii) each Named Executive and (iv) all executive
officers and directors as a group.
-33-
Amount and
Nature of
Name and Address Beneficial Percentage
of Beneficial Owner Ownership(1)(2) of Class
- ------------------- --------------- --------
Maureen Kassel(3) 910,650(4) 5.8
Robert Kassel(3) 4,712,095(5)(6) 26.8
Richard Raleigh 743,320(7) 4.6
Fred Heiden 7,500(8) *
Jon Schulberg 7,500(9) *
Joseph Owens II 1,064,396(10) 6.5
Richard Grandy 1,064,396(10) 6.5
Alan Stahler 899,368(11) 5.6
All executive officers
and directors as a
group (five persons) 5,795,415(4)(5)(6) 28.3
(7)(8)(9)
- ----------
*less than 1%
- --------------------------------------------------------------------------------
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from September 25, 1997 upon the
exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other per son) and which are
exercisable within 60 days from September 25, 1997 have been exercised.
(3) The address of Maureen and Robert Kassel is c/o the Company.
(4) Includes presently exercisable options and warrants issued to Ms. Kassel to
purchase an aggregate of 325,000 shares of the Company's Common Stock.
(5) Of such shares, (i) 585,650 are owned of record by Maureen Kassel; however,
because Ms. Kassel has appointed her husband as her proxy and
attorney-in-fact to vote all 585,650 of the shares owned of record by her,
Robert Kassel may also be deemed to have beneficial ownership of such
shares; (ii) an aggregate of 914,396 shares are owned of record by each of
Messrs. Joseph Owens and Richard Grandy who have each entered into a voting
trust agreement (the "Voting Agreement")
-34-
providing Mr. Kassel with the right to vote the shares until September 1,
2001.
(6) Includes 2,297,653 shares of Common Stock issuable upon exercise of options
and warrants.
(7) Includes 726,320 shares of Common Stock issuable upon exercise of options
and warrants.
(8) Includes 7,500 shares of Common Stock issuable upon exercise of options.
(9) Includes 7,500 shares of Common Stock issuable upon exercise of options.
(10) Includes 125,000 shares of Common Stock issuable to each of Messrs. Grandy
and Owens upon exercise of options. The address of Mr. Grandy is c/o the
Company. The address of Mr. Owens is 8 Hillendale, Waco, Texas 76710.
(11) The address for Mr. Stahler is 44 Wall Street, New York, New York 10005.
Includes shares issuable upon the exercise of (i) options to purchase an
aggregate of 89,441 shares of Common Stock underlying a five-year Unit
Purchase Option granted on August 12, 1993 ("1993 Unit Purchase Option")
and (ii) options to purchase up to 785,094 shares underlying a five-year
Unit Purchase Option granted on August 29, 1994 ("1994 Unit Purchase
Option"). Also includes options to purchase an aggregate of 24,833 shares
underlying additional 1993 Unit Purchase Options granted to D.H. Blair &
Co., Inc. Mr. Stahler is the Vice-Chairman and he and his wife are
stockholders of D.H. Blair and Co., Inc. The information with respect to
Mr. Stahler is derived from his Schedule 13D filed with the Securities and
Exchange Commission.
-35-
Item 13. Certain Relationships and Related Transactions.
To obtain a portion of the financing for the Company's acquisition of EGI,
Mr. Kassel provided for the benefit of the lender $500,000 cash collateral and a
personal guarantee of $333,000. in consideration of providing such collateral
and guarantee, the Company granted Mr. Kassel options to purchase an aggregate
of 526,300 shares of Common Stock for an aggregate exercise price of
approximately $822,000.
In connection with certain acquisitions, during the fiscal year ended June
30, 1997, the Company granted five year non-plan options to Messrs. Kassel and
Raleigh to purchase an aggregate of 650,000 and 275,000 shares of Common Stock,
respectively, at an exercise price of $2.0625 per share.
From time to time Messrs. Kassel and Raleigh have borrowed monies from the
Company. During the fiscal year ended June 30, 1997, the highest amount owed to
the Company by Messrs. Kassel and Raleigh were $607,472 and $225,294,
respectively, and at September 26, 1997, the balance of such indebtedness was
$556,452 and $235,653, respectively. The loans bear interest at 7% per annum and
mature on July 1, 2002. Company loans to all officers of the Company are
restricted to a maximum of $850,000 by the terms of the Credit Agreement. The
Company's Board of Directors has adopted a policy pursuant to which any loan
between the Company and one or more of its officers or directors, or any third
party in which one or more or its officers or directors has a material interest,
must be approved by a majority of the disinterested members of the Audit
Committee, or the Board of Directors.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No.
- -----------
3.1 Certificate of Incorporation, as amended.**
3.2 By-laws of the Company, incorporated by reference to Exhibit 3(b)
of the Company's Registration Statement on Form S-1 (Registration
No. 33-45428).
4.1 Form of certificate evidencing Common Stock, $.001 par value, of
the Company, incorporated by reference to Exhibit 4(a) of the
Company's Registration Statement on Form S-1 (Registration No.
33-45428).
-36-
4.3 Form of Unit Purchase Option granted to D.H. Blair & Co.**
4.4 Form of Public Warrant Agreement with respect to Class A
Warrants.**
4.5 Warrant Agreement with respect to Class B Warrants., incorporated
by reference to Exhibit 4(c) of the Company's Registration
Statement on Form S-3 (Registration No. 33-89800).
9.1 Voting Agreement among Joseph A. Owens, II, the Company, and
Robert Kassel.+
9.2 Voting Agreement among Richard M. Grandy, the Company and Robert
Kassel.+
10.1 Employment Agreement of Robert Kassel.++
10.2 Employment Agreement of Richard Raleigh.++
10.3 Employment Agreement of Richard Grandy.
10.