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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 2000
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; Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 15, 2000 was
$42,998,643.
As of September 15, 2000, 18,878,931 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.
Documents Incorporated By Reference: None
Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for our future activities. Such forward-looking information involves
important known and unknown risks and uncertainties that could significantly
affect actual results, performance or achievements in the future and,
accordingly, such actual results, performance or achievements may materially
differ from those expressed or implied in any forward-looking statements made by
or on behalf of us. These risks and uncertainties include, but are not limited
to, those relating to our growth strategy, customer concentration, outstanding
indebtedness, dependence on weather conditions, seasonality, expansion and other
activities of competitors, ability to successfully integrate recently acquired
companies and products lines, our ability to successfully commercialize our new
business-to-business e-commerce website, changes in federal or state
environmental laws and the administration of such laws, protection of trademarks
and other proprietary rights, and the general condition of the economy and its
effect on the securities markets and other risks detailed in our other filings
with the Securities and Exchange Commission. The words "believe," "expect,"
"anticipate," "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date the statement
was made.
General
We are a leading manufacturer and marketer of a broad range of consumer
lawn and garden products. Our products include weed preventive landscape
fabrics, fertilizer and plant food spikes, decorative landscape edging, grass
and flower seed products, weed trimmer replacement heads, shade cloth and root
feeders, which are sold under recognized brand names such as WeedBlock(R),
Jobe's(R), Emerald Edge(R), Weed Wizard(R), Shade Fabric(TM), Ross(R),
Tensar(R), Amturf(R) and Landmaster(R). We believe that we have significant
market share and favorable brand-name recognition in several of our primary
product categories. We market our products through most large national home
improvement and mass
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merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart,
Wal-Mart, Ace Hardware, TruServe and Home Base.
In the fiscal year ended June 30, 2000, through our E-garden.com
subsidiary, we established the first business-to-business Internet website
designed to bring together buyers and sellers of commercial lawn and garden
merchandise.
We were organized under the laws of the State of California in August 1990
under the name Natural Earth Technologies, Inc. In January 1992 we
reincorporated under the laws of the State of Delaware and in July 1995 we
changed our name to U.S. Home & Garden Inc. Our lawn and garden operations are
conducted through our subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy
Gardener's subsidiaries and through our subsidiary Ampro Industries, Inc.
("Ampro"), and our agricultural products operations are conducted through our
subsidiary Golden West Agri-Products, Inc. ("Golden West"). Our
business-to-business e-commerce activities are conducted through our subsidiary
Egarden.com Inc. Unless the context suggests otherwise, references in this
Report to "we", "us", or "our" refer to U.S. Home & Garden Inc. and its
subsidiaries. Our executive offices are located at 655 Montgomery Street, Suite
500, San Francisco, California 94111, and our telephone number is (415)
616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the number
of vendors needed to source high volume lawn and garden products, the preference
among home improvement and mass merchant retailers has shifted towards single
source suppliers that offer broad product lines of consumer brand-name
merchandise and the product support necessary to stimulate consumer demand and
ensure timely and cost effective order fulfillment. Smaller regional suppliers
generally lack the capital and other resources necessary to offer the variety
and number of product lines, the product support and the inventory stocking and
tracking capabilities required by home improvement and mass merchant retailers.
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Gardening is one of the most popular activities in the United States.
According to the National Gardening Association, U.S. households spent $46.8
billion on lawn and garden products and landscaping services in 1998, 97% of
which purchased lawn and garden products. According to the 1996-1997 National
Gardening Survey, 1996 retail sales of lawn and garden products were
approximately $22 billion, and 64% of the approximately 101 million households
in the United States participated in some form of gardening activity during
1996. In addition, sales growth in the lawn and garden industry is being driven
in part by the aging of the "baby boomer" consumer segment. According to the
National Gardening Survey, persons 50 years of age and older spent an average of
$400 per household on lawn and garden activities in 1996.
Prior Acquisitions.
Since August 1992, we have consummated the following eleven (11)
acquisitions of companies or product lines for a total of approximately $111
million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which we acquired in August
1992 for approximately $1.1 million in cash and $1.1 million in promissory
notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock(R), which we acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million
promissory note and two convertible notes each in the principal amount of $1.0
million. Approximately $2.2 million of additional purchase price was contingent
on Easy Gardener meeting certain income requirements. These contingencies were
met and we paid the entire $2.2 million.
o Emerald Products LLC. A manufacturer of decorative landscape edging which
we acquired in August 1995 for $835,000 in cash and a $100,000 promissory note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products, which we acquired in
August 1996 for 1,000,000 shares of our common stock valued at $3.0 million and
approximately $22.9 million in cash.
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o Plasti-Chain product line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which we acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, all of whose assets were acquired in February 1998 for
approximately $16.0 million (plus an additional $1.7 million for excess working
capital and acquisition expenses), of which approximately $5.0 million was based
on the value of certain net assets acquired.
o Landmaster Products, Inc. A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for approximately
$3.0 million (plus an additional $600,000 for certain assets and acquisition
expenses), of which approximately $750,000 was based on the value of certain
assets acquired.
o Tensar(R) consumer products line of The Tensar Corporation. A line of
lawn and garden specialty fencing, which we acquired from The Tensar Corporation
in May 1998 for approximately $5.4 million in cash plus an additional $1.0
million for inventory.
o Ampro Industries, Inc., a manufacturer and distributor of lawn and garden
products including specialty grass and flower seeds which we acquired in October
1998 for approximately $24.6 million, plus the cost of certain inventory
acquired with a potential additional purchase price amount contingent upon the
acquired business achieving certain specified levels of EBITDA (as defined in
the purchase agreement). An additional $1.0 million was paid for a non-compete
agreement.
o E-Garden, Inc. (now, Egarden.com Inc.) Our business-to-business Internet
subsidiary was acquired in June 1999 for approximately $400,000, plus expenses
of approximately $100,000. Up to $250,000 of additional purchase price is
contingent upon Egarden's net sales exceeding certain targets for each of the
years during the three-year period ending June 30, 2002. At the time of
acquisition, Egarden's activities were limited to sales of Internet gardening
related products to the end consumer.
o Findplants.Com., an electronic horticulture catalogue and locater
business-to-business service for commercial growers and wholesalers all of whose
assets were acquired in May 2000 for approximately $537,000
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in cash. Findplants.com(R) offers industry participants more than 10,000
different types of plants from nearly 140 growers.
Consumer Lawn and Garden Products
The primary products marketed by us to our Retail Accounts are:
Landscape Fabric. We market different types of landscape fabric in varying
thicknesses and strengths under the trade names WeedBlock(R), WeedBlock 6(TM),
MicroPore(R), Pro WeedBlock(TM), Weedshield(TM) and Landmaster(R). Landscape
fabrics allow water, nutrients and oxygen to filter through to the soil but
prevent weed growth by blocking sunlight. Our primary landscape fabrics are made
from non-woven fabrics which are generally manufactured with extruded polymers,
pressed or vacuum formed into thin sheets having the feel and texture of light
plastics. For the fiscal years ended June 30, 1998, 1999 and 2000, sales of
landscape fabric represented approximately 39%, 37% and 43%, respectively, of
our net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver
plant food nutrients directly to the root of the plant, an alternative method of
maintaining plant health to surface-delivered liquid or solid fertilizers. Some
of our fertilizer spikes have the added feature of containing an insecticide for
the control of unwanted insects. We market a variety of indoor and outdoor
specialty fertilizer and plant food spikes primarily under the Jobe's(R)
tradename, one of the most recognized brands in the consumer lawn and garden
industry. For the years ended June 30, 1998, 1999 and 2000, sales of fertilizer,
plant food and insecticide spikes constituted approximately 20%, 13% and 15%,
respectively, of our net sales.
Landscape Edging. We market a variety of resin-based decorative landscape
edgings under trade names including Emerald Edge and Terra Cotta Tiles(TM). Our
decorative edgings are used by consumers to define the perimeter of planting
areas with a variety of designs which include stone, log, terra cotta tiles and
picket fences. For the years ended June 30, 1998, 1999 and 2000, sales of
landscape edging constituted approximately 11%, 8% and 10%, respectively, of our
net sales.
Shade Cloth. We market shade cloth fabrics in a variety of sizes and
colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy or
protection from wind for people, plants and pets. We market shade cloth fabrics
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as an exclusive United States retail distributor of a shade cloth manufacturer
pursuant to an agreement that expires on December 31, 2000. We are currently
negotiating with this manufacturer for a renewal of the distribution agreement.
Fertilizers and Root Feeders. We market fertilizers under the Ross trade
name. The Ross fertilizer, when applied through a Ross Root Feeder, a long steel
irrigation tube with hose connector that is inserted deep into the ground,
provides the homeowner with a means of deep feeding and irrigating trees and
shrubs. The Ross Root Feeder may also be used without fertilizer as a deep
watering device.
Weed Trimmer Replacement Heads. We manufacture and distribute replacement
heads for string weed trimmer products under the Weed Wizard trademark. Our weed
trimmer replacement head products consist of a replacement casing containing a
plastic blade for weed and grass trimming. The products are part of a multi-fit
system offered by us, which allows the replacement heads to fit on virtually all
consumer gas weed trimmers and most consumer electric weed trimmers.
Lawn and Garden Fencing. We market resin-based fencing for lawns and
gardens. A variety of fencing products are marketed by us and are used by the
consumer for numerous applications including preventing animals from entering a
garden or orchard.
Mulch, Fertilizer, Grass and Flower Seed. We distribute specialty
combinations of mulch, fertilizer, grass and flower seeds. Consumers spread this
"ready-to-grow" combination and only need to water regularly for a green lawn or
colorful flower garden.
Other Products. In addition to landscape fabrics, fertilizer, plant food
and insecticide spikes, landscape edging, shade cloth, fertilizer and root
feeders, weed trimmer replacement heads, lawn and garden fencing, and specialty
mulch, fertilizer, grass and flower seed combinations, we also sell
complementary lawn and garden products for the home gardener. The products
include a line of animal repellents that are formulated to deter dogs, cats,
deer and rabbits from destroying garden and landscape environs, a variety of
protective plant and tree covers, bird and animal mesh blocks, protective garden
and tree netting to prevent animal damage, synthetic mulch and fabric pegs.
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Agricultural Products. Through Golden West, we manufacture and distribute
certain humic acid-based agricultural products for use on farms and orchards.
Golden West generally sells its products to agricultural distributors, which in
turn market Golden West's products to farms and orchards. The principal
agricultural products manufactured or distributed by us are: Energizer(R), a
formulation of humic acids which, when applied in conjunction with liquid
fertilizers, permits crops to absorb a greater amount of the nutrients in the
fertilizer; Penox(R), a surfactant, or penetrating wetting agent, that contains
humic acid which, when applied in conjunction with herbicides, defoliants and
other agricultural products, increases their effectiveness; and Powergizer(R), a
foliar nutrient, or plant food, containing humic acid which promotes growth and
vigor in many types of crops. Sales of our agricultural products accounted for
less than 1% of our net sales in fiscal 2000 and fiscal 1999.
Conversion, Manufacturing and Supply of Lawn and Garden Products
Except for the materials for WeedBlock, which are obtained primarily from a
single source, the basic materials for our consumer lawn and garden products are
purchased from a variety of suppliers. All of such materials are converted,
packaged and shipped by us from either our Waco, Texas facility, our Paris,
Kentucky facility, our Bradley, Michigan facility or our facility located in
Colorado.
We purchase most of the landscape fabric used to manufacture WeedBlock from
Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls of various types
of landscape fabric from Tredegar for shipment to our Waco, Texas facility where
we size, cut and package the fabric for consumer sale. Although we have
purchased most of our supply from Tredegar for over 10 years and believe that
our relationship with Tredegar is good, Tredegar is free to terminate its
relationship with us at any time and accordingly could market its fabrics to
other companies, including our competitors. Nevertheless, we own the registered
trademark "WeedBlock(R)" and to the extent that we establish alternative supply
arrangements, our rights to market products under the WeedBlock brand name would
continue without restriction.
We manufacture and package our Jobe's fertilizer spikes at our Paris,
Kentucky facility. The raw materials that comprise our indoor fertilizer spikes
are mixed with a binding agent and then passed through an extrusion process
which feeds a continuous strand of fertilizer through a heat-drying system.
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The strand is then cut into ready-to-use fertilizer spikes which are then
machine counted and packaged into shelf-ready blisterpacks. Our outdoor
fertilizer spikes are manufactured in a similar manner except rather than
passing through an extrusion process, the outdoor spikes are processed through
molds which shape the spikes into their final form. The outdoor spikes are
packaged in either a foil pouch, bag or box.
The specifications for our landscape edging, shade cloth and root feeder
products and packaging are designed by us and independent design consultants.
The products are then manufactured and packaged by third party manufacturers
according to our specifications.
The nylon product body (rotary head) and the plastic blades used in our
weed trimmer replacement heads are manufactured for us pursuant to open purchase
orders. We assemble and package the weed trimmer replacement heads at our
Bradley, Michigan facility with the aid of an electronic packaging machine.
The material used in our resin-based fencing is manufactured for us
pursuant to open purchase orders. The material is then sized and cut for
consumer sale at our Waco, Texas facility. In the future, this conversion
process will take place at our Bradley, Michigan facility.
We manufacture our Ampro and Amturf "ready-to-grow" combination mulch,
fertilizer and seed products at our Bradley, Michigan facility. Newsprint is
shredded and processed into mulch and then combined with seed and fertilizer.
The mixture is now packaged in bags, boxes, canisters, and clear jugs.
Agricultural Products
We do not own or lease any manufacturing facilities for our agricultural
products. Substantially all of our humic acid-based agricultural products,
Energizer, Penox and Powergizer, are processed by Western Farm Services, Inc.
("Western Farm") pursuant to purchase orders placed by us from time to time in
the ordinary course of business. Furthermore, through Western Farm, we have an
open purchase order arrangement with an entity which supplies us with leonardite
ore, a source of humic acid used in our agricultural products.
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Customers
Our customers include home improvement centers, mass merchandisers,
hardware stores, nurseries, and garden centers and other retail channels
throughout the United States. Our three largest customers for fiscal 2000, Home
Depot, Lowes and Kmart, accounted for approximately 35%, 13% and 5%,
respectively, of our net sales during such year. During fiscal 1999, Home Depot,
Lowes and Kmart accounted for approximately 24%, 9% and 7%, respectively, of our
net sales. During fiscal 1998, Home Depot, Lowes and Kmart accounted for
approximately 26%, 11% and 7% respectively, of our net sales. Our ten largest
customers as a group accounted for 59% and 73% of our net sales during fiscal
1999 and 2000, respectively. Sales to such customers are not governed by any
contractual arrangement and are made pursuant to standard purchase orders. While
we believe that relations with our largest customers are good, the loss of any
of these customers could have an adverse effect upon our results of operations.
Our sales are concentrated in the United States, with international sales
(primarily in Europe and Canada) accounting for approximately 4% of our net
sales for fiscal 2000. We are currently attempting to develop relationships with
distributors outside of the United States.
Sales and Marketing
Our selling efforts are coordinated by three key managers, namely, the
National Accounts Director and two Divisional Sales Managers who, in turn,
direct the activities of our eight Regional Sales Managers. Because of the
service oriented nature of our business, the sales managers devote a substantial
amount of their time to servicing and maintaining relationships with our largest
customers in addition to managing the overall sales operations. We also utilize
the services of over 30 non-exclusive independent sales organizations. This
integrated sales approach is designed to help achieve sales of all products to
all customers.
Our marketing activities are coordinated by our National Marketing Manager.
In addition to designing and developing our distinctive packaging and overall
advertising and promotional activities, the Marketing Manager works closely with
the sales organization to help develop programs which are tailored to the
strategies of our key Retail Accounts.
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We expect that our lawn and garden products will continue to be marketed by
retailers primarily through the use of special displays and in-store consumer
promotions in Retail Accounts, hardware stores, nurseries and garden centers. In
addition we believe that a substantial portion of lawn and garden sales are
impulse driven and not overly price sensitive. Therefore we seek to increase
consumer awareness, understanding and brand identification of our products
through our distinctive packaging and point-of-sale displays. Retail Accounts
and our other customers receive our products in packaging that is easily
displayed. The retail product packaging is informative to the end-user and
incorporates attention getting, eye-pleasing color schemes. We also tailor our
displays to the evolving needs of retailers. Because many home improvement and
mass merchant retailers maintain outdoor sales areas for their lawn and garden
products, we utilize waterproof displays for many of our products. In addition,
we meet the specific needs of many of our larger customers by tailoring the size
of our displays to the dimensions requested by such customers. Our independent
sales representatives periodically visit individual retail outlets to assist
Retail Accounts in achieving innovative and optimal use of our distinctive store
displays.
We spent approximately $3.9 million in fiscal 2000 on a combination of
media development, print, radio and television advertising, co-operative
advertising (advertising done in conjunction with retailers), attendance at
trade shows and public relations to promote awareness, understanding and brand
identification of our lawn and garden products.
We utilized a substantial portion of our marketing budget for fiscal 2000
on co-op advertising in conjunction with key retail customers.
Egarden.com E-Commerce Initiative
We recently commenced selling products on the Internet on a
business-to-business basis through our website www.egarden.com, the first
business-to-business Internet service exclusively designed to bring together
buyers and sellers of lawn and garden merchandise, and provide them with new
complementary supply and distribution channels. Our Egarden.com website delivers
online supplier information and offers e-commerce transactions to all members of
the lawn and garden industry, including small and medium size manufacturers,
independent retailers and specialty stores, contractors, and landscapers. Our
website allows our customers to benefit from increased buying options and
conduct business-to-business
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bidding as well as private non-auction business on a wide variety of lawn and
garden products including our niche garden products. Industry participants will
have access to a broad range of products, including barbecue grills, bird
feeders, fencing and edging, flower pots and planters, garden tools and
supplies, irrigation equipment, landscaping supplies and equipment, outdoor
furniture and accessories, and live-goods. In addition to lawn and garden
products, Egarden.com is considering adding other product categories to its
e-marketplace, enabling retailers with the capability to source and purchase a
greater percentage of their total product offerings through Egarden.com.
Suppliers that have joined Egarden.com's marketplace include, among others, The
Andersons Processing Group, C&S Products Co., Inc., Germania Seed Company, Henri
Studio, Inc. and Raindrip Inc.
Our Egarden.com web site provides our customers with a comprehensive
offering for procurement, financial settlement, logistics, and sales/customer
information accessory.
We receive a fee for facilitating a business-to-business online transaction
on either a private or auction basis. Our website allows us to make our products
available to retailers who do not purchase through the traditional industry
distribution channel. Our website also serves as an online resource to
manufacturers and lawn and garden industry professionals seeking information on
such items as raw material pricing, business trends of public and private
companies, merger and acquisition activity, stock quotes, news, industry events,
and other helpful information in one convenient location.
Our web site is divided into two distinct forums:
o Our "Auction Forum" enables manufacturers from all segments of the
lawn and garden industry with new opportunities to effectively and
efficiently sell their surplus inventory to lawn and garden retail and
commercial establishments. Purchasers have access to broader product
offerings and more complete product information than that afforded by
traditional methods of purchasing surplus inventory.
o Our "Wholesale Store" allows manufacturers to broaden their
traditional product distribution channels to retailers and commercial
purchasers while also eliminating the difficulty many of these
purchasers face in locating and purchasing lawn and garden products in
a
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fragmented market. Manufacturers are also able to list their product
offerings and related sales terms on an ongoing basis.
We have entered into long-term e-commerce initiatives with the three
largest 100% member/retailer owned hardware cooperatives in the United States.
We agreed that Egarden.com will provide each cooperative with a dedicated "room"
on the web site where the cooperative's members will be offered a broad based
selection of lawn and garden vendors, products and outdoor accessories and a
convenient, streamlined method of purchasing the products offered.
Information Systems
We maintain a sophisticated retail data information system which enables us
to provide timely and efficient order fulfillment to our Retail Accounts and
other customers. Internally, our information systems track orders and deliveries
and provide exception reports if product is not delivered on time. The systems
"push" the necessary information to the proper personnel, allowing us to react
quickly to information. Our purchase order process can be paperless, with most
Retail Accounts placing their orders through an electronic data interchange with
us.
In addition, in fiscal 2000 we implemented the QAD Applications e-business
supply-chain enabled enterprise planning software at our executive offices and
at several of our subsidiaries.
Seasonality
Our sales are seasonal due to the nature of the lawn and garden business,
in parallel with the annual growing season. Our 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 our agricultural products are also seasonal. Most shipments
occur during the agricultural cultivation period from March through October.
Inventory and Distribution
In order to meet product demand, we keep relatively large amounts of
product inventory on hand, particularly from December to May, the months of
highest demand. Despite
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maintaining these relatively high levels of inventory, we have historically
experienced minimal inventory obsolescence. However, it is possible that
inventory obsolescence could increase in the future. Retail Accounts generally
require delivery within five business days. Orders are normally processed within
48 hours and shipped by common carrier.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. With respect to our sale of consumer lawn and garden
products, we compete with a combination of national and regional companies
including catalog and Internet e-commerce businesses specializing in the
marketing of lawn and garden care products. The Scotts Company, in particular,
has captured a significant and controlling share in a variety of categories with
their recent acquisition of the Ortho brand and the licensing of the Roundup
brand for the consumer market. Scotts also markets products under the Scotts and
Miracle-Gro brands which compete both directly and indirectly with our products.
Many of our competitors have achieved significant national, regional and local
brand name and product recognition and engage in frequent and extensive
advertising and promotional programs. Many of these companies have substantially
greater financial, technical, marketing and other resources than us.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the Scotts Company, and other lawn and garden care companies
have, in the past, manufactured and marketed landscape fabrics. Currently, few
of such competitors compete with us in this product category. Nevertheless,
well-capitalized companies and smaller regional firms may develop and market
landscape fabrics and compete with us for customers who purchase such products.
Among our competitors in the lawn and garden market for the Jobe's spike
line of fertilizer and insecticide products and the Ampro combination mulch,
seed and fertilizer line of products is the Scotts Company, which markets
competing products under the Miracle-Gro brand. Competition for our agricultural
products 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 Monterey Chemical Corporation and Custom Formulators, Inc.
We compete with a variety of regional lawn and garden manufacturers in the
markets for landscape edging, shade cloth and root feeders. Competition for our
weed trimmer replacement heads consist of other
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manufacturers of weed trimming replacement part products using nylon based lines
and blades. These include CMD Products, which markets the Grass Gator brand.
With respect to our business-to-business e-commerce operations, we compete
with existing, traditional, non-e-commerce consolidators and brokers that have
historically serviced the lawn and garden industry in dealing with surplus
inventory. Additionally, there are some existing website-based businesses which
provide an auction forum for sellers to place goods for auction and in turn for
buyers to bid on those goods. These sites are not industry specific. There are
also a number of catalogs from segments across the industry that are used to
facilitate business-to-business selling and buying activities that compete with
us.
Additional competitors may also emerge on the Internet. There exist today,
Internet companies whose focus is the sale of lawn and garden products to
consumers. Although these Internet companies currently focus exclusively on the
consumer and not on business-to-business, they may at some point in time expand
their interest to include a business-to-business aspect to their overall site.
Government Regulation
We are subject to many laws and governmental regulations and changes in
these laws and regulations, or their interpretation by agencies and the courts,
occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by us as fertilizers or pesticides are subject to an extensive and
frequently evolving statutory and regulatory framework, at both the Federal and
state levels. The distribution and sale of pesticides is subject to regulation
by the U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by
many states in a manner similar to FIFRA. Under FIFRA and similar state laws,
all pesticides must be registered with the EPA and the state and must be
approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on the marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply with
the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
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sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
We market certain animal repellent and pesticide products that are subject
to FIFRA and to similar state regulations. We also market certain fertilizer
products that are subject to regulation in some states. We believe that we are
in substantial compliance with material FIFRA and applicable state regulations
regarding our material business operations. However, there can be no assurance
that we will be able to comply with future regulations in every jurisdiction in
which our material business operations are conducted without substantial cost or
interruption of operations. Moreover, there can be no assurance that future
products marketed by us will not also be subject to FIFRA or to state
regulations. If future costs of compliance with regulations governing pesticides
or fertilizers exceed our budget for such items, our business could be adversely
affected. If any of our products are distributed or marketed in violation of any
of these regulations, we could be subject to a recall of, or a sales limitation
placed on, one or more of our products, or civil or criminal sanctions, any of
which could have a material adverse effect upon our business.
Environmental Regulation. Our manufacturing operations are subject to
various evolving federal, state and local laws and regulations relating to the
protection of the environment, which laws govern, among other things, emissions
to air, discharges to ground, surface water, and groundwater, and the
generation, handling, storage, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. Easy Gardener
operates two manufacturing facilities and Weatherly and Ampro/Weed Wizard
Acquisition Corp. ("Weed Wizard") each operate one manufacturing facility.
Although we believe that our material manufacturing facilities are in
substantial compliance with applicable material environmental laws, it is
possible that there are material environmental liabilities of which we are
unaware. If the costs of compliance with the various existing or future
environmental laws and regulations including any penalties which may be assessed
for failure to obtain necessary permits, exceed our budget for such items, our
business could be adversely affected.
16
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Weatherly and Ampro/Weed Wizard each operate one manufacturing facility.
Moreover, we or our predecessors have owned or operated other manufacturing
facilities in the past and may have liability for remediation of such facilities
in the future, to the extent any is required. In this regard, Weatherly
previously owned a facility that was the subject of certain soil remediation
activities. Although this facility was sold by Weatherly prior to our
acquisition of Weatherly, there can be no assurance that we will not be liable
for any previously existing environmental contamination at the facility.
Moreover, although the purchaser of the facility indemnified Weatherly for any
environmental liability and the sellers of Weatherly, in turn, indemnified us
from such liability, there can be no assurance that, if required, the
indemnifying parties will be able to fulfill their respective obligations to
indemnify us. Furthermore, certain business operations of our subsidiaries also
involve shipping hazardous waste off-site for disposal. As a result, we could be
subject to liability under these statutes. We could also incur liability under
CERCLA or similar state statutes for any damage caused as a result of the
mishandling or release of hazardous substances owned by us but processed and
manufactured by others on our behalf. As a result, there can be no assurance
that the manufacture of the products sold by us will not subject us to liability
pursuant to CERCLA or a similar state statute. Furthermore, there can be no
assurance that Easy Gardener, Weatherly, or Ampro/Weed Wizard will not be
subject to liability relating to manufacturing facilities owned or operated by
them currently or in the past.
Other Regulations. We are also subject to various other federal, state and
local regulatory requirements such as worker health and safety, transportation,
and advertising requirements. Failure to comply with these requirements could
17
result in the imposition of fines by governmental authorities or awards of
damages to private litigants.
With respect to our e-commerce operations, there is an increasing number of
laws and regulations pertaining to the Internet. In addition, a number of
legislative and regulatory proposals are under consideration by federal, state,
local and foreign governments and agencies. Laws or regulations may be adopted
with respect to the Internet relating to liability for information retrieved
from or transmitted over the Internet, online content regulation, visitor
privacy, taxation and quality of products and services. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment and personal privacy is uncertain and
developing. Any new legislation or regulation, or the application or
interpretation of existing laws may have an adverse effect on our e-commerce
business.
Trademarks, Proprietary Information and Patents
We believe that product recognition is an important competitive factor in
the lawn and garden care products industry. Accordingly, in connection with our
marketing activities of our lawn and garden care products, we promote, and
intend to promote, certain tradenames and trademarks which are believed to have
value to us.
In connection with our acquisition of the assets of Easy Gardener Inc. in
September 1994, we acquired certain trademarks and copyrights used by Easy
Gardener, Inc. in connection with its business including, but not limited to,
the trademarks, Weedblock(R), Easy Gardener(R), Weedshield(TM), Micropore(R) and
Birdblock(R). In connection with its acquisition of Weatherly, we acquired
certain patents, as well as certain copyrights and trademarks used in connection
with Weatherly's business including, but not limited to, Jobe's(R), Ross(R),
Green Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(R). We also acquired
certain patents and trademarks when we acquired the assets of Emerald Products,
LLC and also acquired certain trademarks in connection with our purchase of the
Plasti-Chain line of products from Plastic Molded Concepts, Inc. In connection
with our acquisition of the assets of Weed Wizard, Inc., we acquired the Weed
Wizard(TM) product patent and trademark. We also acquired the trademark
Landmaster(R) in connection with our acquisition of substantially all of the
assets of Landmaster Products, Inc. In addition, we acquired the trademarks
Polyspun 300(R), Nature Shield(R) and Diamondback(R) in connection with our
acquisition of the Tensar(R) consumer product
18
line. In connection with the acquisition of the Tensar(R) consumer product line,
The Tensar Corporation granted to us an exclusive royalty-free perpetual license
to use the trademark Tensar(R) in connection with a wide range of polymeric
grid, mesh, net and related products supplied to us by The Tensar Corporation.
In connection with our acquisition of Ampro, we acquired certain trademarks used
in connection with Ampro's business including, but not limited to, Amturf(R).
There can be no assurance that we will apply for any additional trademark or
patent protections relating to our products or that our current trademarks and
patents will be enforceable or adequately protect us from infringement of our
proprietary rights.
Although we believe that the products sold by us do not and will not
infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by us are deemed to infringe upon the patents or proprietary
rights of others, we could be required to pay damages and modify our products or
obtain a license for the manufacture or sale of such products. There can be no
assurance that, in such an event, we would be able to do so in a timely manner,
upon acceptable terms and conditions or at all, and the failure to do any of the
foregoing could have a material adverse effect upon us.
Product Liability
We, as a manufacturer of lawn and garden care and pesticide products, may
be exposed to significant product liability claims by consumers. Although we
have obtained product liability insurance coverage for U.S. Home & Garden Inc.,
Golden West, Easy Gardener and Weatherly in the aggregate amount of $2.0
million, and for Weed Wizard and Ampro in the aggregate amount of $2.0 million
(with all policies limited to $1.0 million per occurrence), and have obtained
three umbrella policies in the amounts of $13.9 million, $25.0 million and $15.0
million, respectively, there can be no assurance that such insurance will
provide coverage for any claim against us or will be sufficient to cover all
possible liabilities. In the event a successful suit is brought against us,
unavailability or insufficiency of insurance coverage could have a material
adverse effect on us. Moreover, any adverse publicity arising from claims made
against us, even if such claims were not successful, could adversely affect the
reputation and sales of our products.
During the third quarter of 2000, we discontinued production, sale and
distribution of one of the products in our Weed Wizard product line.
Additionally, in voluntary compliance with the recommendations of the Consumer
Product Safety Commission we instituted a recall of the product. Accordingly, we
recorded a pretax charge of $928,000 ($510,000 after tax or $.03 per basic and
diluted share) to provide for recall costs and inventory write-offs.
19
Employees
As of September 15, 2000 we had 296 full-time employees. Of such employees,
three are executive officers of U.S. Home & Garden Inc., 67 were engaged in
administration and finance, 44 were engaged in sales and marketing, 34 were
engaged in warehouse, shipping and receiving, and 148 were engaged in
production. None of our employees are covered by collective bargaining
agreements. We believe that we have a good relationship with our employees.
Segment Information
See Note 19 of Notes to Consolidated Financial Statements included in Part
I, Item 8, for information relating to our two reportable segments.
Item 2. Properties.
Our executive offices are currently located in San Francisco, California,
in approximately 3,000 square feet of office space for which we pay $12,352 per
month in rent, which amount includes the costs of utilities and janitorial
services. Our office space is rented pursuant to a lease expiring in February
2001. We intend to renew this lease assuming favorable terms can be negotiated.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which we pay $17,918 per month in rent,
pursuant to a lease agreement that expires on February 28, 2001. Easy Gardener's
facilities contain landscape fabric converters, packaging equipment and
warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $10,833 per month in rent pursuant to a
lease that expires on June 30, 2001. We also lease 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 July 20, 2001.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $1,345 per month base rent, with rent
increases at a rate of
20
4% a year. The lease expires in June 2001 subject to our option to renew the
lease for an additional one year period.
Ampro owns an approximately 200,000 square foot building on approximately
25 acres of land in Bradley, Michigan. Approximately 60,000 square feet of this
facility was built with grant proceeds received from the Michigan Department of
Natural Resources (MDNR) in 1994 in which the MDNR has a security interest over
the grant period of ten years. The grant proceeds have been recorded as deferred
revenue and are being amortized over the grant period.
With respect to the storage, packaging and distribution of certain of our
commercial grade landscape fabric products, Easy Gardener has entered into a
lease agreement (the "Lease Agreement") pursuant to which we are provided with
60,000 square feet of warehouse space in Colorado. The Lease Agreement expires
on May 31, 2005. We currently pay a lease rate of $14,510 per month, which
increases 5% per year beginning June 1, 2002.
Egarden leases approximately 4,600 square feet of office space in Raleigh,
North Carolina for which we pay $7,695 per month in rent, pursuant to a lease
agreement that expires on December 31, 2004. The Egarden facility contains
office furniture and computer equipment.
We believe that our current manufacturing and warehouse space is adequate
for our planned future operations.
Item 3. Legal Proceedings
In August 1999 an action was commenced against us and our subsidiary,
Ampro, in the Circuit Court of the State of Michigan, County of Kent, by H.
Kenneth W. Hilbert, E. Scott Hilbert, John R. Hilbert and Omer Messer, who were
principal stockholders of Ampro immediately prior to its acquisition by us. The
plaintiffs allege that we have breached certain terms of the stock purchase
agreement pursuant to which we acquired Ampro (the "Agreement") that allegedly
require us to make certain additional payments to the plaintiffs, by, among
other things, taking certain actions that prevented Ampro from achieving certain
earnings levels that would have triggered additional contingent payments to the
plaintiffs under the Agreement. Plaintiffs seek to recover unspecified damages,
together with interest, costs and attorneys fees and an accounting by Ampro with
respect to certain financial
21
information. Plaintiffs have also notified us that they intend to arbitrate
certain other issues concerning closing adjustments under the Agreement. In
addition to filing an Answer denying the plaintiffs allegations, we have
asserted certain counterclaims against the plaintiffs alleging various breaches
of the Agreement, including, but not limited to, breaches of representations and
warranties concerning the financial position of the business acquired. We intend
to vigorously defend this matter.
We are defendants in two product liability actions involving alleged
injuries sustained by users of Weed Wizard products. In Kurz v. Weed Wizard
Acquisition Corp., which was brought against our subsidiary in June 2000 in the
circuit court of the State of Oregon for the County of Multnomah, the plaintiff
is seeking $86,000 in economic damages and $750,000 in damages for alleged pain
and suffering. This action has been removed to the United States District Court
for the District of Oregon. The second action, Miller v. Weed Wizard, Inc., et.
al, was commenced in August 2000 in the Iowa District Court for Des Moines
County. The plaintiff in this action seeks unspecified compensatory and punitive
damages for the injuries he allegedly sustained while using a Weed Wizard
product. This action has been removed to the U.S. District Court for Southern
District of Iowa (Eastern Division). We intend to vigorously defend these
matters.
In July 2000 our subsidiary, Weed Wizard Acquisition Corp. commenced an
action in the U.S. District Court, Northern District of Georgia, against
A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) and certain of its
stockholders and officers. In this action we allege that the defendants made
certain misrepresentations and omitted to disclose certain facts regarding,
among other things, alleged defects in certain of the Weed Wizard products in
connection with our purchase from defendants in 1998 of substantially all of the
assets of Weed Wizard, Inc. We are seeking to rescind the transaction, or in the
alternative, to recover rescissionary monetary damages, and to recover
compensatory damages. In addition, we are seeking punitive damages.
22
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of U.S. Home & Garden stockholders was held on June 14,
2000 at which time the following directors were reappointed to serve until the
Annual Meeting of Stockholders to be held in the year 2001:
Votes For Votes Withheld
--------- --------------
Robert Kassel 16,060,794 192,987
Richard Raleigh 15,894,060 359,721
Maureen Kassel 15,835,140 418,641
Fred Heiden 16,089,684 164,097
Jon Schulberg 16,084,169 169,612
23
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters.
Our common stock has traded in the over-the-counter market and has been
quoted on the NASDAQ Stock Market since March 26, 1992. The NASDAQ Smallcap
symbol for our common stock is "USHG". The following table sets forth, for the
periods indicated, the high and low sales prices for the common stock, as
reported by NASDAQ.
Year Ended June 30, 2000 High Low
First Quarter $ 4 1/8 $ 2 1/4
Second Quarter 2 13/16 2 1/8
Third Quarter 5 1/8 2 9/16
Fourth Quarter 3 7/8 2 1/8
Year Ended June 30, 1999 High Low
First Quarter $ 6 1/2 $ 3 1/2
Second Quarter 5 9/16 3 5/8
Third Quarter 6 3/16 3 5/8
Fourth Quarter 6 7/8 3 11/16
As of September 15, 2000, the number of stockholders of record of our
common stock was 189. In addition, there are in excess of 500 beneficial owners
of our common stock whose shares are held in "street name".
During the quarter ended June 30, 2000, we extended by five years the
expiration date of options and warrants to purchase an aggregate of 1,002,460
shares of common stock previously granted to certain officers and advisors. The
foregoing options were exercisable at an average exercise price of $2.17 per
share. We also granted options to purchase an aggregate of 971,000 shares of
common stock at an average exercise price of $2.47 to certain of our employees.
The foregoing transactions were exempt from the registration requirements of the
Securities Act of 1933 by virtue of Sections 2(a)(3) or 4(2) thereof.
We have not paid any cash dividends on our common stock to date and do not
expect to declare or pay any cash or stock dividends in the foreseeable future.
The lending
24
agreement between us and our primary lending institution prohibits us from
paying dividends without the lenders' consent.
Item 6. Selected Financial Data (in thousands, except per share data).
The following selected financial data at and for the years ended June 30,
1996, 1997, 1998, 1999 and 2000 has been derived from our audited consolidated
financial statements. Such information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
appearing elsewhere in this Report.
Statement of Income Data:
Year Ended June 30,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
Net sales $ 27,031 $ 52,046 $ 67,149 $ 89,346 $ 89,665
Cost of sales 12,670 23,649 30,431 44,176 49,101
Unusual item -- -- -- -- 928
------------ ------------ ------------ ------------ ------------
Gross profit 14,361 28,397 36,718 45,170 39,636
Selling, shipping, general and administrative
expenses 10,612 17,745 23,047 32,900 35,590
Restructuring charges -- -- -- 1,964 --
------------ ------------ ------------ ------------ ------------
Income from operations 3,749 10,652 13,671 10,306 4,046
Other income (expense) (1,940) (3,262) (3,095) (6,907) (6,596)
Income tax (expense) benefit 715 (3,200) (3,600) (1,350) 558
Minority interest -- -- -- -- 423
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary gain
(expense) 2,524 4,190 6,976 2,049 (1,569)
Extraordinary (expense) gain, net of tax -- (1,007) (1,450) -- 1,224
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 2,524 $ 3,183 $ 5,526 $ 2,049 $ (345)
============ ============ ============ ============ ============
Income (loss) per share
before extraordinary gain (expense):
Basic $.25 $.31 $.39 $.10 $(.08)
Dilutive $.19 $.26 $.31 $.09 $(.08)
Net income (loss) per share:
Basic $.25 $.23 $.31 $.10 $(.02)
Dilutive $.19 $.20 $.24 $.09 $(.02)
Weighted average number of common and common
equivalent shares outstanding:
Basic 10,206,000 13,695,000 17,776,000 19,621,000 19,031,000
Dilutive 13,361,000 16,068,000 22,808,000 23,595,000 19,031,000
25
Balance Sheet Data:
June 30,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
Working capital $ 5,328 $ 2,292 $ 46,743 $ 32,874 $ 25,052
Intangible assets, net 17,167 44,364 63,395 82,109 81,204
Total assets 33,584 68,475 126,813 138,263 138,545
Short-term debt 3,650 8,990 -- -- 3,125
Long-term debt 6,238 17,570 63,250 78,750 70,855
Total liabilities 14,214 36,549 75,214 91,779 89,331
Stockholders' equity 19,370 31,926 51,599 46,484 45,103
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
We manufacture and market a broad range of brand-name consumer lawn and
garden products through our wholly-owned subsidiaries, Egarden, Ampro, Easy
Gardener and Golden West, and through Easy Gardener's wholly-owned subsidiaries,
Weatherly and Weed Wizard. Since 1992, we have consummated eleven acquisitions
of complementary lawn and garden companies and product lines for an aggregate
consideration of approximately $111 million in cash, notes and equity
securities. As a result of such acquisitions, we recognized a significant amount
of goodwill which, in the aggregate, was approximately $83.4 million as of June
30, 2000. We are currently amortizing such goodwill using the straight-line
method over various time periods ranging from 5 to 30 years. Goodwill
amortization expense for the fiscal year ended June 30, 2000 was $3.1 million
or $.16 per basic share. See "Summary of Accounting Policies - Intangible
Assets" and Note 1 to Notes to Consolidated Financial Statements included in
Part I, Item 8.
Our results of operations for the fiscal year ended June 30, 2000 were
adversely affected by anticipated losses attributable to the start-up expenses
of our business-to-business Egarden.com Internet initiative. Our results were
also adversely affected by prolonged periods of inclement weather in many
portions of the United States during the spring and early summer which
negatively impacted the lawn and garden industry. Moreover, gross profit was
reduced by $0.9 million due to the recall of a product in the Weed Wizard
product line.
Our results of operations for the fiscal year ended June 30, 1998 were
significantly affected by the acquisition of certain assets of Weed Wizard, Inc.
in February 1998, certain assets of Landmaster
26
Products, Inc., in March 1998 and the Tensar consumer product line in May 1998.
Due to the seasonal nature of our sales, the results of operations for fiscal
year ended June 30, 1999 were, on a comparative basis, negatively affected by
these acquisitions since both the off season and peak season results of
operations for the businesses and product lines acquired are included in the
results of operations for fiscal year 1999, compared to the prior fiscal year
when only the peak season results were included in our results of operations.
We experienced net sales growth of 29% from fiscal 1997 to fiscal 1998 and
33% from fiscal 1998 to fiscal 1999. Sales were relatively constant between
fiscal 1999 and 2000. We believe that this historical growth in net sales was
primarily attributable to expansion of our product lines through the
acquisitions of complementary lawn and garden businesses and product lines. Net
sales were also positively affected by an increase in sales of pre-existing
product lines.
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,
--------------------------------
1998 1999 2000
------ ------ ------
Net sales ....................................... 100% 100% 100%
Cost of sales ................................... 45.3 49.4 54.8
Unusual item .................................... -- -- 1.0
------ ------ ------
Gross profit .................................... 54.7 50.6 44.2
Selling and shipping expenses ................... 21.2 21.6 22.8
General and administrative expenses ............. 13.2 15.3 16.9
Restructuring charges ........................... -- 2.2 --
------ ------ ------
Income from operations .......................... 20.3 11.5 4.5
Gain (loss) on disposal of property and equipment -- -- 0.6
Interest expense, net ........................... (4.6) (7.7) (8.0)
Income tax (expense) benefit .................... (5.4) (1.5) 0.6
Minority interest ............................... -- -- 0.5
Extraordinary (expense) gain, net ............... (2.1) -- 1.4
------ ------ ------
Net income (loss) ............................... 8.2% 2.3% (0.4)%
------ ------ ------
27
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Net sales. Net sales increased by $0.4 million, or 0.4%, to $89.7 million
during the fiscal year ended June 30, 2000 from $89.3 million during the
comparable period in 1999.
Gross Profit. Gross profit decreased by $5.6 million, or 12.3%, to $39.6
million for the fiscal year ended June 30, 2000 from $45.2 million during the
comparable period in 1999. This decrease was due primarily to poor weather in
our key markets in the fourth quarter and the discontinued production of a
product in the Weed Wizard product line. Gross profit as a percentage of net
sales decreased to 44.2% during the fiscal year ended June 30, 2000 from 50.6%
during the comparable period in 1999. The decrease in gross profit as a
percentage of net sales was primarily attributable to poor weather, the
discontinued Weed Wizard product and reduced pricing on certain products sold to
major retailers when compared to the 1999 period.
Selling and shipping expense. Selling and shipping expenses increased $1.2
million, or 6.2% to $20.5 million during the fiscal year ended June 30, 2000
from $19.3 million during the comparable period in 1999. Selling and shipping
expenses as a percentage of net sales increased to 22.8% during fiscal year
ended June 30, 2000 from 21.6% during the comparable period in 1999. This
increase was primarily a result of start-up selling and development costs for
the Company's business-to-business e-commerce initiative, Egarden.com, included
in this period.
General and administrative expenses. General and administrative expenses,
excluding depreciation and amortization, increased $0.3 million or 3.2%, to $9.6
million during the fiscal year ended June 30, 2000 from $9.3 million during the
comparable period in 1999. This increase is primarily due to start-up and
administrative costs for Egarden.com partially offset by savings generated from
the consolidation of the general and administrative functions for Weed Wizard,
previously located in Georgia, into Ampro. As a percentage of net sales, general
and administrative expenses excluding depreciation and amortization increased to
10.7% during the fiscal year ended June 30, 2000 from 10.4% during the
comparable period in 1999.
Depreciation and amortization. Depreciation and amortization expenses
increased by $1.2 million or 27.9% to $5.5 million during the fiscal year ended
June 30, 2000 from $4.3
28
million during the comparable period in 1999. This increase is primarily as a
result of the acquisition of Ampro Industries, Inc. and Egarden.com. As a
percentage of net sales, depreciation and amortization expenses increased to
6.1% during the fiscal year ended June 30, 2000 from 4.8% during the comparable
period in 1999.
Income from operations. Income from operations decreased by $6.3 million,
or 61.2%, to $4.0 million during the fiscal year ended June 30, 2000 compared to
$10.3 million for the comparable period in 1999. The decrease in income from
operations for the 2000 period is primarily attributable to the start-up costs
for Egarden.com, poor weather in the fourth quarter and the discontinued Weed
Wizard product, partially offset by the absence of restructuring charges in the
2000 period. As a percentage of net sales, income from operations decreased to
4.5% for the fiscal year ended June 30, 2000 from 11.5% during the comparable
period in 1999.
Net interest expense. Net interest expense increased $264,000, or 2.9% to
$7.1 million during the fiscal year ended June 30, 2000, from $6.9 million
during the comparable period in 1999. The increase in interest expense is
primarily related to the increase in borrowings under our credit
facility to finance the acquisition of Ampro Industries, Inc. partially offset
by the decreased interest associated with the line of credit in conjunction with
the decrease in inventories and the repurchase of $4.9 million of the
mandatorily redeemable trust preferred securities of U.S. Home & Garden Trust I.
Income taxes. Income tax benefit was $0.6 million during the fiscal year
ended June 30, 2000 compared to $1.4 million in tax expense during the
comparable period in 1999, primarily due to the decrease in income from
operations.
Minority interest in loss of affiliate. Minority interest in loss of
affiliate was $423,000, net of tax expense of $294,000, during the fiscal year
ended June 30, 2000. Minority interest relates to U.S. Home & Garden Inc.'s
partial ownership of Egarden.com Inc. Egarden.com's results are fully
consolidated in the financial statements of U.S. Home & Garden Inc. included in
Part I, Item 8.
Extraordinary gain from early extinguishment of debt. Extraordinary gain
from early extinguishment of debt increased $1.2 million, net of tax expense of
$878,000, during the fiscal year ended June 30, 2000 from the comparable period
in 1999. We repurchased $6.3 million of the mandatorily
29
redeemable trust preferred securities of U.S. Home & Garden Trust I. See Note 14
to the Consolidated Financial Statements included in Part I, Item 8.
Net income. Net income decreased by $2.3 million to a net loss of $345,000
during the fiscal year ended June 30, 2000 from net income of $2.0 million
during the comparable period in 1999. Diluted net income per common share
decreased $.11 to a net loss of $.02 per share when compared to diluted net
income per common share of $.09 during the comparable period in 1999. The
decrease in net income per common share is primarily attributable to the
start-up costs for Egarden.com, reduced sales due to poor weather in the fourth
quarter and the discontinued Weed Wizard product in the fiscal year ended June
30, 2000 compared to the comparable period in the prior year.
Fiscal Year Ended June 30, 1999 Compared to Fiscal year Ended June 30, 1998
Net sales. Net sales increased by $22.2 million, or 33%, to $89.3 million
during the fiscal year ended June 30, 1999 from $67.1 million during the
comparable period in 1998. The increase in net sales was primarily a result of
the October 1998 acquisition of Ampro Industries, Inc. and internal growth of
our pre-existing product lines.
Gross profit. Gross profit increased by $8.5 million, or 23%, to $45.2
million for the fiscal year ended June 30, 1999, from $36.7 million during the
comparable period in 1998. This increase was due primarily to the acquisition of
Ampro Industries, Inc. Gross profit as a percentage of net sales decreased to
50.6% during the fiscal year ended June 30, 1999, from 54.7% during the
comparable period in 1998. The decrease in gross profit as a percentage of net
sales was primarily attributable to an increase in sales of lower-margin
products. The gross profit percent also decreased due to changes in packaging
and new machinery resulting in higher and inefficient production costs.
Furthermore, the gross profit percent decreased due to increased overhead
resulting from the inclusion of the off peak season of the acquisitions
purchased at the selling season in the fiscal year ended June 30, 1998.
Selling and shipping expenses. Selling and shipping expenses increased $5.1
million or 35.9%, to $19.3 million during the fiscal year ended June 30, 1999
from $14.2 million during the comparable period in 1998. This increase was
primarily the result of an increase in the amount of products shipped, which was
a consequence of the October 1998 acquisition of Ampro Industries, Inc., the
effect on the full fiscal year
30
ended June 30, 1999 of prior acquisitions that occurred during fiscal 1998 along
with an increase in sales of pre-existing product lines. Selling and shipping
expenses as a percentage of net sales increased to 21.6% during the fiscal year
ended June 30, 1999, from 21.2% during the comparable period in 1998. This
increase was a result of reorganization expense of the sales force and increased
shipping expenses.
General and administrative expenses. General and administrative expenses
increased $4.7 million or 52.8% to $13.6 million during the fiscal year ended
June 30, 1999 from $8.9 million during the comparable period in 1998. This
increase was primarily due to increased costs relating to acquisitions,
including amortization of goodwill and the addition of certain administrative
personnel as part of our efforts to build an infrastructure that we believe
will be able to more readily integrate any future products or businesses that
may be acquired. As a percentage of net sales, general and administrative
expenses increased to 15.3% during the fiscal year ended June 30, 1999, from
13.2% during the comparable period in 1998. This is primarily due to the
increased amortization of goodwill and the addition of certain administrative
personnel.
Restructuring charges. We incurred a non-recurring restructuring charge of
$2.0 million during the fiscal year ended June 30, 1999. This restructuring
charge results primarily from the execution of our overall integration and cost
reduction strategy, including the consolidation of administrative activities and
the rationalization of production and distribution facilities. See Note 16 to
the Consolidated Financial Statements included in Part I, Item 8.
Income from operations. Income from operations decreased by $3.4 million,
or 24.6%, to $10.3 million during the fiscal year ended June 30, 1999 from $13.7
million during the comparable period in 1998. The decrease in income from
operations in actual dollars was primarily due to the $2.0 million restructuring
costs and the increase in general and administrative expenses in dollars and as
a percentage of net sales during the fiscal year ended June 30, 1999. As a
percentage of net sales, income from operations decreased to 11.5% for the
fiscal year ended June 30, 1999 from 20.3% during the comparable period in 1998.
Net interest expense. Net interest expense increased by $3.8 million, or
123%, to $6.9 million during the fiscal year ended June 30, 1999 from $3.1
million during the comparable
31
period in 1998. The increase in interest expense is primarily related to the
interest associated with the increase in debt as a result of financing our
various acquisitions.
Income taxes. Income taxes decreased to $1.4 million during the fiscal year
ended June 30, 1999 from $3.6 million during the comparable period in 1998
primarily due to the decrease in income before income taxes which was partially
offset by an increase in our effective income tax rate for the year.
Extraordinary expense. Extraordinary expense decreased by $1.5 million from
the comparable period in fiscal 1998. During 1998, we incurred a $1.5 million
charge, net of a $735,000 tax benefit, associated with the write-off of deferred
financing cost in conjunction with a debt refinancing.
Net income. Net income decreased by $3.5 million, or 62.9% to $2.0 million
during the fiscal year ended June 30, 1999 from $5.5 million during the
comparable period in 1998. This decrease was primarily attributable to the $2.0
million restructuring costs, sales of lower margin products and the increased
costs relating to acquisitions, including amortization of goodwill and the
addition of certain administrative personnel. Basic net income per common share
decreased $0.21 to $0.10 per share for the fiscal year ended June 30, 1999 from
$0.31 per share during the comparable period in 1998. Diluted net income per
common share decreased $0.15 to $0.09 per share for the fiscal year ended June
30, 1999 from $0.24 per share during the comparable period in 1998. The decrease
in both basic and diluted earnings per share is primarily attributable to the
decrease in net income.
Quarterly Results of Operations and Seasonality
Our sales are seasonal due to the nature of the lawn and garden business,
in parallel with the annual growing season. Our 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 our agricultural products, which were not material for fiscal
2000, are also seasonal. Most shipments occur during the period from March
through October.
32
Set forth below is certain unaudited quarterly financial information:
Quarter Ended
(in thousands, except percentages and per share data)
----------------------------------------------------------------------------------------------------------
September December March June September December March June
30, 31, 31, 30, 30, 31, 31, 30,
1998 1998 1999 1999 1999 1999 2000 2000
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Net sales ............. $ 10,768 $ 15,985 $ 34,769 $ 27,824 $ 12,985 $ 14,145 $ 36,494 $ 26,041
Cost of sales ....... 5,312 7,751 16,565 14,548 7,176 7,420 19,218 15,287
Unusual item ........ -- -- -- -- -- -- 928 --
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Gross profit ........ 5,456 8,234 18,204 13,276 5,809 6,725 16,348 10,754
Selling, shipping,
general and
administrative
expenses ......... 6,439 7,730 8,501 10,254 7,645 8,346 9,927 9,672
Restructuring charges . -- -- -- 1,964 -- -- -- --
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations ............ (983) 504 9,703 1,058 (1,836) (1,621) 6,421 1,082
Gain on sale of land .. -- -- -- -- -- -- -- 551
Investment income ..... 381 116 15 18 73 59 95 133
Interest expense ...... (1,541) (1,798) (2,087) (1,987) (1,818) (2,003) (1,875) (1,811)
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes, minority
interest and
extraordinary gain
(expenses) ............ (2,143) (1,178) 7,631 (911) (3,581) (3,565) 4,641 (45)
Income tax benefit
(expense)............ 920 510 (3,200) 420 1,600 1,600 (2,108) (534)
Minority interest in
earnings
of affiliate........... -- -- -- -- -- -- 259 164
Extraordinary gain
(expense), net of taxes -- -- -- -- -- -- 943 281
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ..... $ (1,223) $ (668) $ 4,431 $ (491) $ (1,981) $ (1,965) $ 3,735 $ (134)
========== ========== ======== ========== ========== ========== ========== ==========
Diluted net income
(loss) per share(1) ... $ (0.06) $ (0.03) $ 0.19 $ (0.02) $ (0.10) $ (0.10) $ 0.17 $ (0.01)
========== ========== ======== ========== ========== ========== ========== ==========
Weighted average
common and common
equivalent shares
outstanding(1)......... 20,143 19,837 23,509 22,977 19,335 19,213 21,627 18,988
========== ========== ======== ========== ========== ========== ========== ==========
Net sales ............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ....... 49.3% 48.5% 47.6% 52.3% 55.3% 52.5% 52.7% 58.7%
Unusual Item ........ -- -- -- -- -- -- 2.5% --
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Gross profit ........ 50.7% 51.5% 52.4% 47.7% 44.7% 47.5% 44.8% 41.3%
Selling, shipping,
general and
administrative
expenses ............ 59.8% 48.4% 24.4% 36.9% 58.9% 59.0% 27.2% 37.1%
Restructuring charges . -- -- -- 7.1% -- -- -- --
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (9.1%) 3.1% 27.9% 3.7% (14.2%) (11.5%) 17.6% 4.2%
Gain on the sale of
land................... -- -- -- -- -- -- -- 2.1%
Investment income ..... 3.5% 0.7% -- 0.1% 0.6% 0.4% 0.2% 0.5%
Interest expense ...... (14.3%) (11.2%) (6.0%) (7.1%) (14.0%) (14.1%) (5.1%) (7.0%)
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes, minority
interest and
extraordinary gain
(expense).............. (19.9%) (7.4%) 21.9% (3.3%) (27.6%) (25.2%) 12.7% (0.2%)
Income tax benefit
(expense).............. 8.5% 3.2% (9.2%) 1.5% 12.3% 11.3% (5.8%) (2.0%)
Minority interest in
earnings
of affiliate ........ -- -- -- -- -- -- 0.7% 0.6%
Extraordinary gain
(expense) net of taxes -- -- -- -- -- -- 2.6% 1.1%
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ..... (11.4%) (4.2%) 12.7% (1.8%) (15.3%) (13.9%) 10.2% (0.5%)
========== ========== ======== ========== ========== ========== ========== ==========
- ----------
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using
the treasury stock method except for quarters reporting a net loss. Such
quarters only reflect issued and outstanding shares of our common stock in
the weighted average shares outstanding.
33
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through cash
generated by operations, net proceeds from our private and public sales of
securities and borrowings from lending institutions.
At June 30, 2000, we had consolidated cash and short-term investments
totaling $8.9 million, of which $1.6 million is restricted, and working capital
of $25.1 million. At June 30, 1999, we had consolidated cash and short-term
investments totaling $3.9 million, of which $1.0 million was restricted, and
working capital of $32.9 million. The principal sources of working capital
during fiscal 2000 included cash flow from operations, proceeds from sale of
property and equipment, proceeds from the private placement of stock in our
Egarden.com subsidiary and net proceeds from our credit facility discussed
below. Major uses of working capital included the purchase of equipment,
purchase of findplants.com, expenditures related to the exclusivity agreements
pertaining to Egarden's future business, repurchase of 749,000 shares of our
common stock and payments on long-term debt.
Net cash provided by operating activities for fiscal 2000 was $10.2
million, consisting primarily of a decrease in inventory, an increase in
accounts payable and an increase in depreciation and amortization. The $4.1
million decrease in inventories was primarily caused by efficiencies in
inventory management due to improved information systems. The $2.5 million
increase in accounts payable and accrued expenses is primarily due to changes in
the timing of certain tax-related items. The $1.1 million increase in
depreciation and amortization is primarily the result of the increase in our
tangible and intangible assets.
Net cash used in investing activities for fiscal 2000 was $6.1 million,
consisting primarily of cash used for the purchase of property and equipment,
package tooling, and exclusivity agreements. The $4.3 million expended for
equipment purchases primarily represents the start-up capital expenditures for
hardware and software for the Egarden web site and the installation of the QAD
enterprise software on a company-wide basis in fiscal 2000. Due to the one-time
nature of these equipment purchases, we do not expect equipment expenditures to
remain at this level in the future. The $1.0 million proceeds from sale of
property and equipment primarily relates to the
34
sale of 135 acres of excess land at our Bradley, Michigan facility. The $0.9
million spent for exclusivity agreements relates to expenditures made in
conjunction with obtaining long-term agreements from certain hardware
cooperatives to use Egarden.com on an exclusive or preferred basis. The $0.8
million for purchases of a business primarily reflects the acquisition of
findplants.com.
Net cash provided by financing activities for fiscal 2000 was $307,000,
consisting primarily of the net proceeds from the lines of credit and the
proceeds from the sale of stock of a subsidiary, partially offset by the
repurchase of mandatorily redeemable preferred securities and common stock for
treasury. We received $4.5 million in net proceeds from the sale of a 16% equity
interest in Egarden.com Inc. This private placement was undertaken to provide
funds for the development of Egarden.com. Due to market conditions, we were also
able to repurchase Trust Preferred Securities of our subsidiary, U.S. Home &
Garden Trust I, and shares of our common stock during fiscal 2000 on terms we
believe were favorable to us. These purchases were partially financed with
proceeds from our bank credit facility.
On October 13, 1998, we entered into a credit agreement (the "Credit
Agreement") with Bank of America N.A. (the "Bank"). The Credit Agreement
provides for a revolving credit facility of up to $25 million to finance the
cost of acquisitions by us (the "Acquisition Facility") and revolving credit
facility of up to $20 million to finance our working capital requirements (the
"Working Capital Facility"). The Acquisition Facility expires on June 30, 2001,
at which time borrowings are payable on a term loan basis in quarterly
installments commencing June 30, 2001, with the final installment maturing on
March 31, 2004 and, unless refinanced, borrowings under the Working Capital
Facility mature on September 30, 2001, the expiration date. In addition,
borrowings under the Acquisition Facility are subject to mandatory prepayment
from the net proceeds of certain disposition of assets, and certain losses or
condemnation of property, from excess cash (as defined in the Credit Agreement)
generated by us and our subsidiaries and 50% of the net proceeds of any new
issuances of our capital stock after such expiration date. Mandatory prepayments
by us prior to such expiration have the effect of reducing the Acquisition
Facility by the prepayment amount. In addition, during a period of 30
consecutive days during the period July 1 to December 1 in each year, no
borrowings can be outstanding under the Working Capital Facility. We have the
right under the Credit Agreement to
35
terminate or permanently reduce the Bank's commitments under such credit
facilities in the minimum amount of $1.0 million and multiples thereof subject
to the payment to the Bank of "reduction fees" of 0.5% of the amounts terminated
or reduced thereafter. Borrowings under such credit facilities bear interest at
variable annual rates selected by the Company based on LIBOR ("London Interbank
Offered Rate"), or the higher of 0.5% above the then current Federal Funds Rate
or the Bank's prime rate plus, in each case, an applicable marginal rate of
interest. At June 30, 2000, the interest rate on any new borrowings for the
Working Capital Facility would have been 7.98%. The interest rate on $15 million
of the $17 million outstanding on the Acquisition Facility is fixed via an
interest rate swap at 7.78%.
Our obligations under the Credit Agreement are guaranteed by our
subsidiaries and secured by a security interest in favor of the Bank in
substantially all of our assets and substantially all of our subsidiaries. Upon
the occurrence of an event of default specified in the Credit Agreement, the
maturity of loans outstanding under the Credit Agreement may be accelerated by
the Bank, which may also foreclose its security interest on our assets and the
assets of our subsidiaries.
Under the Credit Agreement, we and our subsidiaries are required, among
other things, to comply with (a) certain limitations on incurring additional
indebtedness, liens and guaranties, on dispositions of assets, payment of cash
dividends and cash redemption and repurchases of securities, and (b) certain
limitations on merger, liquidations, changes in business, investments, loans and
advances, affiliate transactions and certain acquisitions. In addition, we must
comply with certain financial tests and ratios. A violation of any of these
covenants constitutes an event of default under the Credit Agreement. At June
30, 2000, we were not in compliance with these financial covenants, but the Bank
has waived compliance for this period. As a condition of this waiver, the Bank
has changed the facility termination date for the Acquisition Facility from
September 30, 2001 to June 30, 2001. Any balances outstanding at that date must
be repaid in quarterly installments such that 7.5% is paid in fiscal 2001, 30.0%
is paid in fiscal 2002, 32.5% is paid in fiscal 2003 and 30.0% is paid in fiscal
2004.
Effective March 31, 2000 the Credit Agreement was amended. The principal
feature of this amendment was to require us to repay the $3 million borrowed on
the Acquisition Facility to finance our purchase of certain Trust Preferred
Securities
36
issued by our subsidiary, U.S. Home & Garden Trust I. We were required to repay
this borrowing in $1 million installments due September 30, 2000, December 31,
2000, and June 30, 2001. We repaid $1 million in June 2000 and the remaining $2
million was repaid in July 2000.
We believe that our operations will generate sufficient cash flow to
service the debt incurred. However, if such cash flow is not sufficient to
service such debt, we will be required to seek additional financing which may
not be available on commercially acceptable terms or at all.
As of June 30, 2000, we have a net deferred tax asset of $25,000 primarily
relating to $1.2 million in start-up costs for Egarden.com which are being
expensed for book purposes, but are capitalized for tax purposes, which is
largely offset by tax accumulated depreciation and amortization in excess of the
book amount. Realization of the $1.2 million deferred tax asset depends on U.S.
Home & Garden Inc. maintaining its 80% ownership in Egarden. See Note 11 to our
consolidated financial statements included in Part I, Item 8.
In fiscal 1999, we authorized the repurchase from time to time of up to 2.5
million shares of our common stock through open market purchases and in
privately negotiated transactions. In September 1999 we authorized the
repurchase of up to $3.0 million additional shares of our common stock. Through
June 30, 2000, 2,554,172 shares have been repurchased from non-affiliates in
open market transactions of which 748,877 shares were purchased during fiscal
2000. Subsequent to June 30, 2000 to date, an additional 148,572 shares were
repurchased from non-affiliates in open market transactions.
In December 1999, we commenced a tender offer to purchase up to 700,000 of
the outstanding 9.4% Cumulative Trust Preferred Securities issued by our
subsidiary, U.S. Home & Garden Trust I, at $15.00 per Trust Preferred Security.
The tender offer expired on January 14, 2000. A total of 183,281 Trust Preferred
Securities were purchased by us. The repurchase of these Trust Preferred
Securities resulted in a $943,000 extraordinary gain (after provision for income
taxes). Since the tender offer, the Company purchased an additional 58,600
shares on the open market resulting in an additional $281,000 extraordinary gain
(after provision for income taxes). Approximately 2,279,000 Trust Preferred
Securities were outstanding at June 30, 2000.
37
In January 2000, a private placement of 1,062,000 common shares and
warrants of Egarden.com Inc. was completed. Net proceeds from this private
placement totaled approximately $4.5 million and will be used to fund the
start-up and development expenditures of Egarden.com. After the completion of
this private placement, U.S. Home & Garden Inc. owned approximately 75% of the
common stock of EGarden.com Inc. Through subsequent investment in Egarden.com
Inc., U.S. Home & Garden Inc. now owns 80% of Egarden.com Inc.'s common stock.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings' effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000 as amended by SFAS 137 and SFAS 138.
In June 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. Interpretation No. 44 clarifies the
application of APB No. 25 for certain issues including (i) the definition of
employee for purposes of applying APB No. 25, (ii) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998 or January 12, 2000. The Company does not expect
a material impact on the financial statements upon the adoption of
Interpretation No. 44.
In December 1999, the Security and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition. SAB No. 101 provides the
SEC staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. SAB No. 101 is effective for the fourth
fiscal quarter of fiscal years beginning after December 15, 1999.
In October 1999, we entered into a derivatives contract to hedge interest
rate risk on the Acquisition Facility. Details of this derivative instrument are
described in Item 7A, "Quantitative and Qualitative Disclosures about Market
Risk".
Inflation
Inflation has historically not had a material effect on our operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a result of our variable rate revolving credit line, we are exposed to
the risk of rising interest rates. To minimize this risk, we hold a derivative
instrument in the form of an interest rate swap, which is viewed as a risk
management
38
tool and is not used for trading or speculative purposes. The intent of the
interest rate swap is to effectively fix the interest rate on part of the
borrowings on our variable rate revolving credit agreement.
The following table provides information on our fixed maturity debt
instruments as of June 30, 2000 that are sensitive to changes in interest rates.
The table also presents the corresponding interest rate swap on this debt. Since
the interest rate swap effectively fixes the interest rate on the notional
amount of debt, changes in interest rates have no current effect on the interest
expense recorded by us on the portion of the debt covered by the interest rate
swap.
The Acquisition Line of Credit had $25 million
an interest rate ranging from
6.58% to 8.25% for the year ended
June 30, 2000
Interest Rate Swaps $15 million
Notional amount
Pay fixed/Receive variable - 6.03%
Pay fixed interest rate - 6.15%
This swap agreement expires
November 1, 2000, and the line-of-
credit borrowings effectively
revert to a variable interest rate
loan
Item 8. Financial Statements and Supplementary Data.
This information appears in a separate section of this report following
Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Our current directors and executive officers are as follows:
39
Name Age Position
- ---- --- --------
Robert Kassel(1) 60 Chairman of the Board, Chief
Executive Officer, President and
Treasurer
Richard Raleigh(2) 46 Chief Operating Officer and
Director
Maureen Kassel 52 Vice President of Public
Relations and Advertising,
Secretary and Director
Fred Heiden(1)(2) 59 Director
Brad Holsworth(2) 40 Director
Jon Schulberg(1)(2) 42 Director
- -------------------
(1) Member, Compensation Committee
(2) Member, Audit Committee
Robert Kassel co-founded U.S. Home & Garden Inc. and has been its Chairman of
the Board, Chief Executive Officer, President and Treasurer since October 1990.
From 1985 to August 1991, he was a consultant to Comtel Communications, Inc., a
company specializing in the installation and operation of telephone systems in
hotels. From 1985 to 1990, Mr. Kassel was also a real estate developer in Long
Island, New York and Santa Barbara, California. From 1965 to 1985, he was a
practicing attorney in New York City, specializing in corporate and securities
law.
Richard Raleigh has been a Director of U.S. Home & Garden Inc. since March 1993,
Chief Operating Officer of U.S. Home & Garden Inc. since June 1992 and served as
its Executive Vice President-Operations from December 1991 to June 1992. Prior
to joining U.S. Home & Garden Inc., Mr. Raleigh was a free-lance marketing
consultant to the lawn and garden industry from January 1991 to December 1991.
From April 1988 to January 1991, 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
40
at The Andersons, including Operations Manager and New Products Development
Manager.
Maureen Kassel, the wife of Robert Kassel, co-founded U.S. Home & Garden Inc.
and has been its Vice President of Public Relations and Advertising and a
director since November 1990 and Secretary since February 1992. Prior to this
she has assisted in the general administration and operation of real estate and
other businesses.
Fred Heiden, a director of U.S. Home & Garden Inc. since March 1993, has been a
private investor since November 1989. From April 1984 to November 1989, Mr.
Heiden was President and Principal owner of Bonair Construction, a Florida based
home improvement construction company.
Brad Holsworth has been a director of U.S. Home & Garden Inc. since July 2000.
He has been employed by Prescient Capital LLC, a money manager and venture
capital firm, as Chief Financial Officer since April 2000. From April 1999 to
April 2000 he was employed by Banc of America Securities, as a Principal,
Accounting and Finance. He was employed by the accounting firm, BDO Seidman, LLP
from July 1982 to April 1999 and had been a partner of BDO Seidman, LLP since
July 1995.
Jon Schulberg, a director of U.S. Home & Garden Inc. since March 1993, has been
employed as President of Schulberg MediaWorks, a company engaged in the
independent production of television programs and television advertising since
January 1992. From January 1989 to January 1992, he was a producer for
Guthy-Renker Corporation, a television production company. From September 1987
to January 1989 he was Director of Development for Eric Jones Productions.
Certain Key Employees
Donald Rutishauser, 43, has been Chief Financial Officer since his employment
with U.S. Home & Garden Inc. in November 1999. From 1997 to 1999, he was Vice
President, Corporate Development of Miller Energy, Inc., a private oil and gas
exploration and production company. From 1992 to 1997, Mr. Rutishauser was Vice
President and Treasurer of Belden and Blake Corporation, a public oil and gas
exploration and production company. From 1980 to 1992, he held a variety of
financial management positions at Belden and Blake, W.R. Grace and Company, and
Texas Instruments, Inc.
41
Richard Grandy, 54, has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of our acquisition of Easy Gardener,
Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy Gardener,
Inc. in 1983 after serving as Marketing Director at International Spike, Inc.
from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a sales
representative of lawn and garden products for the Ortho Division of Chevron
Chemical Co.
David Harper, 48, has been Chief Operating Officer of Egarden.com Inc. since
June 2000, was a Vice President of U.S. Home & Garden Inc. from May 1999 to June
2000 and has been employed by us since May 1998. From 1995 to May 1998 he was an
independent consultant within the lawn and garden industry where his clients
included selected manufacturers, distributors, retailers and industry
associations. From 1975 to 1994, he was employed by Monsanto in a variety of
positions of increasing responsibility. From 1988 to 1994, Mr. Harper headed
Monsanto's efforts to introduce its Roundup product line and the creation of its
Solaris division with Monsanto's acquisition of Ortho Consumer Products in 1993.
Sheila Jones, 45, has been Vice President of Easy Gardener since July 1997 and
has also served as its General Manager from September 1994. Prior to our
acquisition of Easy Gardener, Inc., Ms. Jones was employed by Easy Gardener,
Inc. from its inception in September 1983 to September 1994, where she advanced
to the positions of Vice President and General Manager. From April 1977 to
September, 1983, she was employed by International Spike, Inc., where she held
various project management positions.
Paul Logue, 44, has been Key Accounts Manager of Easy Gardener since our
acquisition of Easy Gardener, Inc. in September 1994. Prior to joining us, Mr.
Logue was employed by Easy Gardener, Inc. from September 1989 to September 1994,
where he advanced from the position of Northeastern Regional Sales Manager to
National Sales Manager. From March 1988 to September 1989, he was Regional Sales
Manager for Hoffman Brand Fertilizers.
42
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that officers
and directors, and persons who beneficially own more than 10 percent of a
registered class of the equity securities of U.S. Home & Garden Inc., file
certain reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us, or
representations obtained from certain reporting persons, we believe that during
the year ended June 30, 2000 all filing requirements applicable to the officers,
directors, and greater than 10 percent beneficial stockholders of U.S. Home &
Garden Inc. were complied with except that Robert and Maureen Kassel did not
timely file a Form 4 with respect to the exercise by Robert Kassel in July 1999
of certain unit purchase options previously granted to Mr. Kassel that had been
placed in our Non-Qualified Deferred Compensation Plan for Select Employees.
Item 11. Executive Compensation.
The following table discloses the compensation awarded by U.S. Home &
Garden Inc., for the three fiscal years ended June 30, 2000, 1999 and 1998, to
Mr. Robert Kassel, its Chairman, Chief Executive Officer, President and
Treasurer, Mr. Richard J. Raleigh, its Chief Operating Officer, and Ms. Lynda
Gustafson, its former Vice President of Finance (together, the "Named
Officers"). During the fiscal year ended June 30, 2000, no other executive
officer of U.S. Home & Garden Inc. received a total salary and bonus that
exceeded $100,000 during such fiscal year.
43
Summary Compensation Table
Annual Compensation Long-Term
------------------- Compensation
------------
Name and Principal Position Securities
- --------------------------- Underlying All Other
Year Salary ($) Bonus ($) Options (#) Compensation(1)
---- ---------- --------- --------------- ---------------
Robert Kassel, 2000 477,000(2) 320,000(2) 500,000 (3) $6,383
Chairman, Chief Executive Officer, 1999 450,000 114,000 641,333 (4) $6,169
President and Treasurer 1998 450,000 281,667 468,000 (5) $7,523
Richard Raleigh, Chief Operating Officer 2000 250,000 125,000 225,000 (6) $12,623
1999 250,000 96,000 137,500 (7)(8) $12,169
1998 225,000 115,000 132,500 (7) $9,203
Lynda Gustafson, Vice President of Finance* 2000 147,000 60,000 50,000 $ 4,763
1999 148,000 60,000 -- $12,169
1998 125,000 45,000 50,000(9) $11,273
- ----------
(1) Represents our contributions to the Named Officers 401(k) account.
Excludes certain perquisites that did not exceed the lesser of $50,000
or 10% of their combined bonus and salary.
(2) Included in Mr. Kassel's salary is $46,800 of non-cash compensation
attributable to his receipt of shares of common stock of Egarden.com
Inc. Mr. Kassel's bonus of $320,000 primarily reflects work performed
by him in connection with Egarden.com Inc. and its initial
capitalization, securing e-commerce agreements with certain of the
nations largest hardware cooperatives and obtaining vendor
arrangements.
(3) Includes 200,000 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in
fiscal 2000.
(4) Includes 341,333 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in
fiscal 1999. Also includes options to purchase 300,000 shares that
were granted to Mr. Kassel in December 1998, and voluntarily forfeited
by him during the fiscal year ended June 30, 1999.
(5) Includes 80,000 options that were originally granted to Mr. Kassel in
1993, the expiration dates of which were extended during fiscal 1998.
(6) Includes 100,000 options that were originally granted to Mr. Raleigh
in prior fiscal years, the expiration dates of which were extended in
fiscal 2000.
- ----------
* Ms. Gustafson's employment with us ceased in August 2000.
44
(7) Includes 12,500 options that were originally granted to Mr. Raleigh in
1992, the expiration date of which was extended during fiscal 1998 and
further extended during fiscal 1999.
(8) Includes options to purchase 125,000 shares granted to Mr. Raleigh in
December 1998 and voluntarily forfeited by him during the fiscal year
ended June 30, 1999.
(9) Ms. Gustafson's fiscal 1998 option grant covering 50,000 shares has
been voluntarily forfeited by her during fiscal 2000.
45
The following table discloses information concerning options granted in
fiscal 2000 to the Named Officers.
Option Grants in Fiscal Year Ended June 30, 2000
Individual Grants
-------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted to Potential Realizable
Underlying Employees in Value at Assumed
Options Fiscal Year (%) Exercise Annual Rates of Stock
Granted -------------- Price Expiration Price Appreciation for
Name (#)(1) ($/Sh) Date Option ($) (2)
- ---- ------- ----- ---------- ----------------------
5% 10%
---- ----
Robert Kassel 300,000 23.6 2.125 11/29/09 400,920 1,016,011
200,000(3) 15.7 2.0625 6/1/05 113,966 251,835
Richard Raleigh 125,000 9.8 2.125 11/29/09 167,050 423,338
100,000(3) 7.9 2.0625 6/1/05 56,914 125,918
Lynda Gustafson 50,000 3.9 2.5625 1/4/05 35,399 78,222
- ----------
(1) All of such options were initially exercisable in full from the date
of grant except for the options granted to Ms. Gustafson which vested
40% on the grant date and the balance on June 1, 2000.
(2) The potential realizable value columns of the table illustrate values
that might be realized upon exercise of the options immediately prior
to their expiration, assuming our common stock appreciates at the
compounded rates specified over the term of the options. These numbers
do not take into account provisions of options providing for
termination of the option following termination of employment or
nontransferability of the options and do not make any provision for
taxes associated with exercise. Because actual gains will depend upon,
among other things, future performance of the common stock, there can
be no assurance that the amounts reflected in this table will be
achieved.
46
(3) Reflects extension of expiration date of options that were originally
granted on June 1, 1995. The potential realizable value for these
options has been calculated using the five-year extended term.
The following table sets forth information concerning options exercised by
the Named Officers during the fiscal year ended June 30, 2000, and the number of
options owned by the Named Officers and the value of any in-the-money
unexercised options as of June 30, 2000:
Aggregated Option Exercises
And Fiscal Year-End Option Values
---------------------------------
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired on Value Options at Options at
Exercise(#) Realized ($) June 30, 2000 June 30, 2000(1)
----------- ------------ ------------- ----------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Name
Robert Kassel 54,772(2) (2) 1,930,133 299,200 $1,829,727 $ 466,752
Richard Raleigh -- -- 751,911 10,000 $ 745,781 $ 15,600
Lynda Gustafson -- -- 66,000 -- $ 53,540 --
- ---------------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year end market
value of the common stock. An Option is "in-the-money" if the fiscal year end
fair market value of the common stock exceeds the option exercise price. The
last sale price (the fair market value) of the common stock on June 30, 2000 was
$3.25 per share.
47
(2) In July 1999 unit purchase options to acquire 263,160 shares of common stock
and 263,160 common stock purchase warrants were exercised by Mr. Kassel pursuant
to the terms of our Non-Qualified Deferred Compensation Plan for Select
Employees. A total of 54,772 shares of common stock owned by Mr. Kassel were
surrendered to us in payment of the exercise price of the options exercised and
in return 54,772 of the shares underlying the options were issued to Mr. Kassel.
No value was realized on the issuance of the new 54,772 shares as for tax
purposes these shares assume the same basis as the shares surrendered by Mr.
Kassel. The issuance to Mr. Kassel of the remaining 208,388 shares and 263,160
common stock warrants underlying the unit purchase option have been deferred
pursuant to an election made by Mr. Kassel under our Non-Qualified Deferred
Compensation Plan for Select Employees.
Employment Agreements of Executive Officers
We have 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 of U.S. Home & Garden Inc. for a term expiring on March
31, 2001, subject to automatic renewal unless terminated. His current annual
salary is $450,000, and is subject to such bonuses and increases as are approved
at the discretion of the Board of Directors. Mr. Raleigh currently serves as our
Chief Operating Officer of U.S. Home & Garden Inc. for a term expiring on March
31, 2001 subject to automatic renewal unless terminated. Mr. Raleigh's current
annual salary is $250,000, and is subject to such bonuses and increases as are
approved at the discretion of the Board of Directors. Each of the employment
agreements requires that substantially all of the employee's business time be
devoted to us and that the employee not compete, or engage in a business
competitive with, our current or anticipated business for the term of the
agreement and for two years thereafter (although they each may own not more than
5% of the securities of any publicly traded competitive company). Each of Mr.
Kassel and Mr. Raleigh is, in addition to salary, entitled to certain fringe
benefits, including the use of an automobile and payment of related expenses.
Mr. Kassel's agreement also provides that if his employment is terminated
under certain circumstances, including termination of Mr. Kassel's employment
upon a change of control of U.S. Home & Garden Inc, (as defined in the
agreement) a failure by U.S. Home & Garden Inc. to comply with its obligations
under the agreement, the failure of U.S. Home & Garden Inc. to obtain the
assumption of the agreement by any successor corporation, or a change in Mr.
Kassel's duties and obligations from those contemplated by the agreement, and
termination by U.S. Home & Garden Inc. of Mr. Kassel's employment other than for
disability or cause, he will be entitled to receive severance pay equal to the
greater of (i) $350,000 ($3,500,000 in the event of a change of control) or
48
(ii) the total compensation earned by Mr. Kassel from the Company during the
one-year period (multiplied by ten in the event of a change of control) prior to
the date of his termination.
Mr. Raleigh's employment agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Raleigh's
employment upon a change of control of U.S. Home & Garden Inc., (as defined in
the agreement) a failure by U.S. Home & Garden Inc. to comply with its
obligations under the agreement, the failure of U.S. Home & Garden Inc. to
obtain the assumption of the agreement by any successor corporation, or a change
in Mr. Raleigh's duties and obligations from those contemplated by the
agreement, and termination by U.S. Home & Garden Inc. 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
U.S. Home & Garden Inc. during the one-year period (multiplied by five in the
event of a change of control) prior to the date of his termination.
Committees of the Board of Directors
U.S. Home & Garden Inc. has established an Audit Committee which is
comprised of Messrs. Raleigh, Heiden, Holsworth and Schulberg. The Audit
Committee, among other things, makes recommendations to the Board of Directors
with respect to the engagement of U.S. Home & Garden Inc.'s independent
certified public accountants and the review of the scope and effect of the audit
engagement. We have also established a Compensation Committee which is comprised
of Messrs. Kassel, Heiden and Schulberg. The Compensation Committee, among other
things, makes recommendations to the Board of Directors with respect to the
compensation of the executive officers of U.S. Home & Garden Inc. We maintain a
Stock Option Committee comprised of Messrs. Schulberg and Heiden, which
determines the persons to whom options should be granted under the 1995 and 1997
Stock Option Plans and the number and other terms of options to be granted to
each person under such plans.
49
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Compensation Committee of U.S. Home & Garden Inc.'s Board of Directors
consists of Messrs. Kassel, Heiden and Schulberg. During the fiscal year ended
June 30, 2000, none of our executive officers served on the Board of Directors
or the compensation committee of any other entity, any of whose officers served
on the Board of Directors or Compensation Committee of U.S. Home & Garden Inc.
Stock Option Plans
In September 1991, we adopted a stock option plan (the "1991 Plan")
pursuant to which 700,000 shares of Common Stock have been reserved for issuance
upon the exercise of options designated as either (i) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code of
1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs may
be granted under the 1991 Plan to our employees and officers. NQO's may be
granted to consultants, directors (whether or not they are employees), and to
our employees or officers.
The purpose of the 1991 Plan is to encourage stock ownership by certain of
our directors, officers and employees and certain other persons instrumental to
our success and give them a greater personal interest in our success. The 1991
Plan is administered by the Board of Directors. The Board, within the
limitations of the 1991 Plan, determines the persons to whom options will be
granted, the number of shares to be covered by each option, whether the options
granted are intended to be ISOs, the duration and rate of exercise of each
option, the option purchase price per share and the manner of exercise, the
time, manner and form of payment upon exercise of an option, and whether
restrictions such as repurchase rights in U.S. Home & Garden Inc. are to be
imposed on shares subject to options.
ISOs granted under the 1991 Plan may not be granted at a price less than
the fair market value of the common stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
U.S. Home & Garden Inc.). The aggregate fair market value of shares for which
ISOs granted to any employee are exercisable for the first time by such employee
during any calendar year (under all of our stock option plans and those of any
related corporation) may not exceed $100,000. NQO's granted under the 1991 Plan
may not be
50
granted at a price less than the fair market value of the Common Stock on the
date of grant. Options granted under the 1991 Plan will expire not more than ten
years from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of our voting stock).
We have adopted, a Non-Employee Director Stock Option Plan (the "Director
Plan"). Only non-employee directors of U.S. Home & Garden Inc. are eligible to
receive grants under the Director Plan. The Director Plan provides that eligible
directors automatically receive a grant of options to purchase 5,000 shares of
common stock at fair market value upon first becoming a director and,
thereafter, an annual grant, in January of each year, of 5,000 options at fair
market value. Options to purchase an aggregate of up to 100,000 shares of Common
Stock are available for automatic grants under the Director Plan.
We have adopted a 1995 Stock Option Plan ("1995 Plan") which provides for
grants of options to purchase up to 1,500,000 shares of common stock. The Board
of Directors or the Stock Option Committee (the "Committee"), as the case may
be, will have discretion to determine the number of shares subject to each NQO
(subject to the number of shares available for grant under the 1995 Plan and
other limitations on grant set forth in the 1995 Plan), the exercise price
thereof (provided such price is not less than the par value of the underlying
shares of Common Stock), the term thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances), and
the manner in which the option becomes exercisable (amounts, intervals and other
conditions). Directors who are also employed by us will be eligible to be
granted ISOs or NQOs under such plan. The Board or Committee, as the case may
be, also has discretion to determine the number of shares subject to each ISO,
the exercise price and other terms and conditions thereof, but their discretion
as to the exercise price, the term of each ISO and the number of ISOs that may
vest in any calendar year is limited by the same Code provisions applicable to
ISOs granted under the 1991 Plan.
We have adopted a 1997 Stock Option Plan ("1997 Plan") which provides for
grants of options to purchase up to 1,500,000 shares of Common Stock. The Board
of Directors or the Committee of the 1997 Plan, as the case may be, will have
discretion to determine the number of shares subject to each NQO (subject to the
number of shares available for grant under the 1997 Plan and other limitations
on grant set forth in the 1997 Plan), the exercise price thereof (provided such
price is not less than the par value of the underlying shares of Common Stock),
the term
51
thereof (but not in excess of 10 years from the date of grant, subject to
earlier termination in certain circumstances), and the manner in which the
option becomes exercisable (amounts, intervals and other conditions). Directors
who are also our employees will be eligible to be granted ISOs or NQOs under
such plan. The Board or Committee, as the case may be, also has discretion to
determine the number of shares subject to each ISO, the exercise price and other
terms and conditions thereof, but their discretion as to the exercise price, the
term of each ISO and the number of ISOs that may vest in any calendar year is
limited by the same Code provisions applicable to ISOs granted under the 1991
Plan.
We have also adopted a 1999 Stock Option Plan ("1999 Plan") which provides
for grants of options to purchase up to 900,000 shares of common stock. The
Board of Directors or the Committee of the 1999 Plan, as the case may be, will
have discretion to determine the number of shares subject to each NQO (subject
to the number of shares available for grant under the 1999 Plan and other
limitations on grant set forth in the 1999 Plan), the exercise price thereof
(provided such price is not less than the fair market value of the underlying
shares of Common Stock), the term thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances), and
the manner in which the option becomes exercisable (amounts, intervals and other
conditions). Directors who are also our employees will be eligible to be granted
ISOs or NQOs under such plan. The Board or Committee, as the case may be, also
has discretion to determine the number of shares subject to each ISO, the
exercise price and other terms and conditions thereof, but their discretion as
to the exercise price, the term of each ISO and the number of ISOs that may vest
in any calendar year is limited by the same Code provisions applicable to ISOs
granted under the 1991 Plan.
We have adopted the Non-Qualified Deferred Compensation Plan for Select
Employees of U.S. Home & Garden Inc. ("Deferred Plan") and have amended our
stock option plans, as well as certain option agreements which we had with
Robert Kassel. Under the Deferred Plan and such amended stock option plans and
agreements, the Board of Directors or its committee which administers the
relevant stock option may grant permission to optionees to exercise their
options with shares of U.S. Home & Garden Inc.'s common stock in which they have
a holding period, for income tax purposes, of a least six months and defer the
receipt of a portion of the shares subject to the option so exercised. The
optionee has the right to designate the time or
52
times of receipt of those shares pursuant to the Deferred Plan. The Deferred
Plan does contain provisions for earlier issuance of those deferred shares on
death, disability and other termination of employment (e.g., on a change of
control of U.S. Home & Garden Inc.).
We have from time to time has also granted non-plan options to certain
officers, employees and consultants.
Our subsidiary, Egarden.Com Inc. has adopted a stock option purchase plan
providing for the grant of options to purchase up to 500,000 shares of its
common stock.
Director Compensation
During the fiscal year ended June 30, 2000 each of our two non-employee
directors who served as directors during that fiscal year, Messrs. Heiden and
Schulberg, received $5,000 for serving on our Board of Directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
VOTING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information at September 15, 2000, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of common stock by (i) each person known by us to
be the owner of more than 5% of the outstanding shares of common stock, (ii)
each director, (iii) each Named Officer, and (iv) all executive officers and
directors of U.S. Home & Garden Inc. as a group.
Amount and
Nature of
Beneficial Percentage
Name of Beneficial Owner Ownership(1)(2) of Class
- ------------------------ --------------- --------
Maureen Kassel 427,050(3) 2.2
Robert Kassel 4,539,524(4)(5) 21.5
Richard Raleigh 751,911(6) 3.8
Lynda Gustafson 66,000(7) *
Fred Heiden 10,258(8) *
Brad Holsworth -- --
Jon Schulberg 10,258(8) *
Richard Grandy 1,089,396(9) 5.7
All executive officers
and directors as a
group (six persons) 5,514,951(3)(4)(5) 25.0
(6)(8)(10)
- -----------------
*less than 1%
53
- --------------------------------------------------------------------------------
(1) Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to all shares of common stock
beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from September 15, 2000 upon the
exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from September 15, 2000 have been exercised.
(3) Includes exercisable options and warrants issued to Ms. Kassel to purchase
an aggregate of 203,000 shares of common stock.
(4) Of such shares, (i) 224,050 are owned of record by Maureen Kassel; however,
because Ms. Kassel has appointed her husband as her proxy and
attorney-in-fact to vote all 224,050 of the shares owned of record by her,
Robert Kassel may also be deemed to have beneficial ownership of such
shares; (ii) an aggregate of 914,396 shares are owned of record by each of
Messrs. Joseph Owens and Richard Grandy, who have entered into a voting
trust agreement providing Mr. Kassel with the right to vote the shares
until September 1, 2001. The address of Mr. Kassel is c/o U.S. Home &
Garden Inc.
(5) Includes 2,203,294 shares of common stock issuable to Mr. Kassel upon
exercise of options and warrants and 208,388
54
shares whose issuance to Mr. Kassel has been deferred pursuant to the terms
of our Non-Qualified Deferred Compensation Plan for Select Employees.
(6) Represents shares of common stock issuable to Mr. Raleigh upon exercise of
options.
(7) Represents shares of common stock issuable upon exercise of options granted
to Ms. Gustafson. Ms. Gustafson's employment with U.S. Home & Garden Inc.
ceased in August 2000.
(8) Includes 10,000 shares issuable upon exercise of options.
(9) Includes 150,000 shares of common stock issuable upon exercise of options.
The address of Mr. Grandy is c/o U.S. Home & Garden Inc.
(10) Excludes shares beneficially owned by Lynda Gustafson.
Item 13. Certain Relationships and Related Transactions
From time to time Messrs. Kassel and Raleigh have borrowed monies from U.S.
Home & Garden Inc. During fiscal 2000, the highest amount owed to U.S. Home &
Garden Inc. by Messrs. Kassel and Raleigh were $603,264 and $207,225,
respectively. After deducting principal payments made to date, the principal
balance of such loans at September 15, 2000 were approximately $484,918 and
$151,382, respectively. The loans bear interest at 7% per annum and mature on
June 30, 2002. Messrs. Kassel and Raleigh will make annual payments of interest
on the outstanding principal balance of their loans through the maturity date.
In addition, payments of principal will be made during next year and on maturity
of the loans as follows: As to Mr. Kassel, $150,000 and the balance of
approximately $334,918, respectively. As to Mr. Raleigh, $50,000 and the balance
of approximately $101,382, respectively.
During fiscal 2000 we purchased from Mr. Kassel and Mr. Raleigh, at market,
an aggregate of $289,250 and $105,750 respectively of Trust Preferred Securities
of our subsidiary U.S. Home & Garden Trust I.
55
In connection with services rendered to it during fiscal 2000, our
Egarden.Com Inc. subsidiary issued to certain of our officers shares of its
common stock as follows: 450,000 shares to Robert Kassel and 35,000 shares to
Richard Raleigh.
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No.
3.1 Certificate of Incorporation, as amended.*
3.2 By-laws of the registrant, incorporated by reference to Exhibit 3(b) of
the registrant's Registration Statement on Form S-1 (Registration No.
33-45428).
4.1 Form of certificate evidencing Common Stock, $.001 par value, of the
registrant, incorporated by reference to Exhibit 4.1 of the registrant's
Registration Statement on Form S-1 (Registration No. 333-38483).
4.2 Rights Agreement dated as of October 1, 1998 between the registrant and
Continental Stock Transfer & Trust Company, incorporated by reference to
Exhibit 4.1 filed with the registrant's Current Report on Form 8-K for the
event dated October 1, 1998.
9.1 Voting Agreement among Joseph A. Owens, II, the registrant, and Robert
Kassel.+
9.2 Voting Agreement among Richard M. Grandy, the registrant and Robert
Kassel.+
10.1 Employment Agreement of Robert Kassel.++ #
10.2 Employment Agreement of Richard Raleigh.++ #
10.3 Employment Agreement of Richard Grandy, incorporated by reference to
Exhibit 10.4 filed with the registrant's Form 10-K for the fiscal year
ended June 30, 1998.
56
10.4 1991 Stock Option Plan, incorporated by reference to Exhibit 10.5 of the
registrant's Registration Statement on Form S-1 (Registration No.
33-45428).#
10.5 1995 Stock Option Plan, as amended.*** #
10.6 Non-Employee Director Stock Option Plan.* #
10.7 1997 Stock Option Plan, as amended. *** #
10.8 Lease with respect to the registrant's executive offices, incorporated by
reference to Exhibit 10.14 of the registrant's Form 10-KSB for the fiscal
year ended June 30, 1992.
10.9 February 8, 1995 modification to lease with respect to the registrant's
executive offices.*
10.10 May 6, 1997 modification to lease with respect to the registrant's
executive offices. +++
10.11 1999 Stock Option Plan (incorporated by reference to Exhibit A filed with
the registrant's Proxy Statement dated May 14, 1999 filed on Schedule
14A).#
10.12 Lease and lease extension agreements between Crawford-Austin Mfg. Co. and
Easy Gardener.*
10.13 Lease with respect to Weatherly's warehouse facility in Paris,
Kentucky.+++
10.14 Purchase Agreement, dated as of August 9, 1996, by and among the
registrant, Easy Gardener, Weatherly and the Weatherly Stockholders
(incorporated by reference to Exhibit 10.1 filed with the registrant's
Form 8-K for the event dated August 9, 1996).
10.15 Lease Extension, dated October 16, 1997, between Easy Gardener and
Crawford-Austin Mfg. Co. (incorporated by reference to Exhibit 10.22 filed
with the registrant's Registration Statement on Form S-1, No. 333-38483).
10.16 Assets Purchase Agreement dated as of February 25, 1998 by and among the
registrant, Weed Wizard, Weed Wizard, Inc and the Weed Wizard stockholders
(incorporated by reference to Exhibit 10.1 filed with the registrant's
Form 8-K for the event dated February 26, 1998).
57
10.17 Assets Purchase Agreement dated as of March 20, 1998 by and among Easy
Gardener, Inc., Landmaster Products, Inc., Wayne Murray and Quincy
McMillian.++++
10.18 Commercial Building Lease, dated June 12, 1998 between Easy Gardener, Inc.
and Norman Adams, James Anderson, Donald Bryan and Pamela Butler,
incorporated by reference to Exhibit 10.24 filed with the registrant's
Annual Report on Form 10-K for the fiscal year edned June 30, 1998.
10.19 Form of Indenture between the registrant and Wilmington Delaware
Subordinated Trust, as trustee.++++
10.20 Stock Purchase Agreement dated October 15, 1998 between U.S. Home & Garden
Inc. and certain selling stockholders of Ampro (incorporated by reference
to Exhibit 2.1 filed with the registrant's Current Report on Form 8-K for
the event dated October 15, 1998)
10.21 Deferred Compensation Plan for Select Employees *** #
10.22 Credit Agreement dated as of October 13, 1998 between the registrant and
Bank of America, incorporated by reference to Exhibit 10.1 filed with the
registrant's Quarterly Report on Form 10-Q for the Quarter Ended September
30, 1998.
10.23 Fourth Amendment dated March 31, 2000 to the Credit Agreement dated
October 13, 1998 between U.S. Home & Garden Inc. and Bank of America N.A.,
Incorporated by reference to Exhibit 10.1 to the registrant's Quarterly
report on Form 10-Q for the Quarter ended March 31, 2000
10.24 Third Amendment dated December 17, 1999 to the Credit Agreement dated
October 13, 1998 between U.S. Home & Garden Inc. and Bank of America, N.A.
(incorporated by reference to Exhibit (b)(4) to Amendment No. 1 to the
registrant's Schedule 13E-4 dated January 25, 2000.)
21 Subsidiaries.
58
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule (for SEC use only).
- -------------
* Incorporated by reference to the comparable exhibit filed with the
registrant's Form 10-KSB for the fiscal year ended June 30, 1995.
** Incorporated by reference to the exhibit filed under the same number in the
registrant's Registration Statement on Form SB-2 (file no. 33-61984).
*** Incorporated by reference to the applicable exhibit filed with the
registrant's Form 10-K for the fiscal year ended June 30, 1999.
#Denotes management compensatory contract or plan or arrangement.
+ Incorporated by reference to the exhibit contained in the Current Report on
form 8-K filed by the registrant for the event dated September 1, 1994.
++ Incorporated by reference to the applicable exhibit contained in the
registrant's Annual Report on Form 10-KSB for the fiscal year ended June 30,
1996.
+++ Incorporated by reference to the exhibit filed with the registrant's Form
10-K for the fiscal year ended June 30, 1997.
++++ Incorporated by reference to the exhibit filed with the registrant's
Registration Statement on Form S-1 (File No. 333-48519).
(b) Report on Form 8-K. No reports on Form 8-K were filed by the registrant
during its fiscal quarter ended June 30, 2000. 8-K.
59
U.S. Home & Garden Inc. and Subsidiaries
Contents
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 1999 and 2000 F-3 and F-4
Consolidated statements of operations for the years ended
June 30, 1998, 1999 and 2000 F-5
Consolidated statements of stockholders' equity for the years
ended June 30, 1998, 1999 and 2000 F-6
Consolidated statements of cash flows for the years ended
June 30, 1998, 1999 and 2000 F-7 and F-8
Summary of accounting policies F-9 - F-13
Notes to consolidated financial statements F-14 - F-39
Consolidated Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts F-40
Note: All other schedules have been omitted since the
required information is contained in the
Consolidated Financial Statements or because such
schedules are not required.
F-1
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc. and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 2000. We have also audited
Schedule II - Valuation and Qualifying Accounts (the Schedule). These financial
statements and the Schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the Schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and Schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
Schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and Schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000 in conformity with generally accepted accounting principles.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Kalamazoo, Michigan
September 6, 2000
F-2
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------------------
June 30, 1999 2000
- -------------------------------------------------------------------------------------------------------------------------
Assets (Notes 1 and 6)
Current:
Cash and cash equivalents $ 2,936,000 $ 7,338,000
Restricted cash (Note 17) 1,000,000 1,582,000
Accounts receivable, less allowance for doubtful accounts
and sales returns of $991,000 and $575,000 (Note 2) 20,242,000 19,972,000
Inventories (Note 3) 16,986,000 12,843,000
Prepaid expenses and other current assets 1,137,000 606,000
Refundable income taxes 799,000 -
Deferred tax asset (Note 11) 500,000 210,000
- -------------------------------------------------------------------------------------------------------------------------
Total Current Assets 43,600,000 42,551,000
Property and Equipment, net (Note 4) 11,634,000 13,622,000
Intangible Assets:
Excess of cost over net assets acquired, net (Note 5) 75,485,000 73,395,000
Deferred financing costs, net of accumulated amortization of
$21,000 and $167,000 3,524,000 3,093,000
Product rights, patents and trademarks, net of accumulated
amortization of $93,000 and $271,000 571,000 555,000
Non-compete agreements, net of accumulated amortization of
$48,000 and $77,000 1,433,000 1,404,000
Package tooling costs, net of accumulated amortization of
$247,000 and $533,000 1,096,000 1,359,000
Exclusivity agreements, net of accumulated amortization of
$62,000 -- 1,398,000
Officer Receivables (Note 8) 725,000 655,000
Other Assets 195,000 513,000
- -------------------------------------------------------------------------------------------------------------------------
$ 138,263,000 $ 138,545,000
- -------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-3
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------------------
June 30, 1999 2000
- -------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current:
Current portion of acquisition line-of-credit (Note 6) $ -- $ 3,125,000
Accounts payable 4,432,000 6,187,000
Income taxes payable -- 2,413,000
Accrued expenses 2,565,000 2,260,000
Accrued commissions 1,682,000 1,296,000
Accrued co-op advertising 1,499,000 1,143,000
Accrued rebates 548,000 1,075,000
- -------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 10,726,000 17,499,000
Acquisition Line-of-Credit, less current portion (Note 6) 15,500,000 13,875,000
Deferred Tax Liability (Note 11) 1,600,000 185,000
Other Long Term Liabilities 703,000 792,000
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures (Notes 7 and 14) 63,250,000 56,980,000
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 91,779,000 89,331,000
- -------------------------------------------------------------------------------------------------------------------------
Minority Interest in Equity of Affiliate -- 4,111,000
- -------------------------------------------------------------------------------------------------------------------------
Commitments and Contingency (Notes 1, 2, 9, 10, 17 and 20)
Stockholders' Equity (Note 10):
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $.001 par value-shares authorized, 75,000,000;
21,219,000 and 21,751,000 shares issued at June 30, 1999 and 2000 21,000 22,000
Additional paid-in capital 50,542,000 51,410,000
Retained earnings 4,703,000 4,358,000
- -------------------------------------------------------------------------------------------------------------------------
55,266,000 55,790,000
Less: Treasury stock, 1,805,000 and 2,554,000 shares at cost (8,782,000) (10,687,000)
- -------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 46,484,000 45,103,000
- -------------------------------------------------------------------------------------------------------------------------
$ 138,263,000 $ 138,545,000
- -------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
- -----------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------------
Net Sales (Note 2) $ 67,149,000 $ 89,346,000 $ 89,665,000
Cost of Sales (Note 2) 30,431,000 44,176,000 49,101,000
Unusual Item (Note 18) -- -- 928,000
- -----------------------------------------------------------------------------------------------------------------------
Gross Profit 36,718,000 45,170,000 39,636,000
- -----------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling and shipping 14,205,000 19,291,000 20,450,000
General and administrative 8,842,000 13,609,000 15,140,000
Restructuring charges (Note 16) -- 1,964,000 --
- -----------------------------------------------------------------------------------------------------------------------
23,047,000 34,864,000 35,590,000
- -----------------------------------------------------------------------------------------------------------------------
Income From Operations 13,671,000 10,306,000 4,046,000
Other Income (Expense):
Gain (loss) on disposal of property and equipment (18,000) (24,000) 551,000
Interest income 486,000 530,000 360,000
Interest expense (3,563,000) (7,413,000) (7,507,000)
- -----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes, Minority Interest, and
Extraordinary Gain (Expense) 10,576,000 3,399,000 (2,550,000)
Income Tax Benefit (Expense) (Note 11) (3,600,000) (1,350,000) 558,000
Minority Interest in Loss of Affiliate -- -- 423,000
- -----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Gain (Expense) 6,976,000 2,049,000 (1,569,000)
Extraordinary gain (expense) of ($2,185,000) and $2,102,000
on debt refinancings and purchase of Trust Preferred
Securities, net of income taxes of $735,000 and ($878,000) (1,450,000) -- 1,224,000
(Note 14)
- -----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 5,526,000 $ 2,049,000 $ (345,000)
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share (Note 15):
Income (loss) per common share before extraordinary gain
(expense) $ 0.39 $ 0.10 $ (0.08)
Extraordinary gain (expense) (Note 14) (0.08) -- 0.06
- -----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) per Common Share $ 0.31 $ 0.10 $ (0.02)
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share (Note 15):
Income (loss) per common share before extraordinary gain
(expense) $ 0.31 $ 0.09 $ (0.08)
Extraordinary gain (expense) (Note 14) (0.07) -- 0.06
- -----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) per Common Share $ 0.24 $ 0.09 $ (0.02)
- -----------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
----------------------------
Number of Paid-In Retained
Shares Amount Capital Earnings
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (Note 10) 14,073,000 $ 14,000 $ 30,783,000 $ 1,129,000 $
Conversion of debt into common stock 154,000 -- 350,000 --
Repurchase of unit purchase options (UPOs) -- -- -- (3,922,000)
Sale of common stock, net of stock issuance
costs of approximately $1,031,000 4,290,000 5,000 15,854,000 --
Exercise of stock options and warrants 1,616,000 1,000 3,166,000 --
Repurchase of common stock for treasury -- -- -- --
Net income -- -- -- 5,526,000
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 (Note 10) 20,133,000 20,000 50,153,000 2,733,000
Repurchase of UPOs -- -- -- (79,000)
Compensation related to repriced stock options -- -- 268,000 --
Exercise of stock options, warrants and UPOs 1,086,000 1,000 121,000 --
Repurchase of common stock for treasury -- -- -- --
Net income -- -- -- 2,049,000
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (Note 10) 21,219,000 21,000 50,542,000 4,703,000
Compensation related to repriced stock options -- -- 166,000 --
Exercise of stock options, warrants and UPOs 532,000 1,000 205,000 --
Issuance of stock options for consulting
services and business acquisition -- -- 497,000 --
Repurchase of common stock for treasury -- -- -- --
Net loss -- -- -- (345,000)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 (Note 10) 21,751,000 $ 22,000 $ 51,410,000 $ 4,358,000 $
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Total
Treasury Stockholders'
Stock Equity
- ------------------------------------------------------------------------------------
Balance, June 30, 1997 (Note 10) -- $ 31,926,000
Conversion of debt into common stock -- 350,000
Repurchase of unit purchase options (UPOs) -- (3,922,000)
Sale of common stock, net of stock issuance
costs of approximately $1,031,000 -- 15,859,000
Exercise of stock options and warrants -- 3,167,000
Repurchase of common stock for treasury (1,307,000) (1,307,000)
Net income -- 5,526,000
- ------------------------------------------------------------------------------------
Balance, June 30, 1998 (Note 10) (1,307,000) 51,599,000
Repurchase of UPOs -- (79,000)
Compensation related to repriced stock options -- 268,000
Exercise of stock options, warrants and UPOs -- 122,000
Repurchase of common stock for treasury (7,475,000) (7,475,000)
Net income -- 2,049,000
- ------------------------------------------------------------------------------------
Balance, June 30, 1999 (Note 10) (8,782,000) 46,484,000
Compensation related to repriced stock options -- 166,000
Exercise of stock options, warrants and UPOs -- 206,000
Issuance of stock options for consulting
services and business acquisition -- 497,000
Repurchase of common stock for treasury (1,905,000) (1,905,000)
Net loss -- (345,000)
- ------------------------------------------------------------------------------------
Balance, June 30, 2000 (Note 10) (10,687,000) $ 45,103,000
- ------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended June 30, 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 5,526,000 $ 2,049,000 $ (345,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary expense (gain) 1,450,000 -- (1,224,000)
Minority interest in loss of affiliate -- -- (423,000)
Loss (gain) on disposal of property and equipment 18,000 24,000 (551,000)
Provision for losses on accounts receivable 179,000 827,000 173,000
Depreciation and other amortization 2,956,000 4,460,000 5,573,000
Deferred income taxes 191,000 810,000 (1,125,000)
Compensation related to repriced stock options -- 268,000 166,000
Consulting expenses related to stock options -- -- 146,000
Restructuring charge for trade credit and product rights
(Note 16) -- 1,093,000 --
Changes in operating assets and liabilities, net
of assets acquired and liabilities assumed in
business acquisitions:
Accounts receivable (3,951,000) (4,030,000) 97,000
Inventories (706,000) (2,470,000) 4,143,000
Prepaid expenses and other current assets (548,000) 126,000 1,330,000
Accounts payable and accrued expenses 2,293,000 (4,066,000) 2,475,000
Other assets 388,000 67,000 (256,000)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 7,796,000 (842,000) 10,179,000
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Payment for purchase of businesses, net of cash acquired (28,133,000) (27,090,000) (799,000)
Proceeds on sale of property and equipment -- -- 1,030,000
(Increase) decrease in officer receivables (156,000) 125,000 70,000
Increase in restricted cash -- (1,000,000) (582,000)
Purchase of equipment (1,000,000) (1,307,000) (4,317,000)
Purchase of package tooling and other intangibles (604,000) (664,000) (586,000)
Purchase of exclusivity agreements -- -- (900,000)
Payment for non-compete agreement -- (1,000,000) --
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (29,893,000) (30,936,000) (6,084,000)
- ------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes
to consolidated financial statements.
F-7
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from line-of-credit $ 23,648,000 $ 33,500,000 $ 16,000,000
Payments on line-of-credit (23,648,000) (18,000,000) (14,500,000)
Proceeds from notes payable 10,000,000 -- --
Payments of notes payable and purchase of mandatorily
redeemable preferred securities (36,560,000) -- (3,981,000)
Proceeds from mandatorily redeemable preferred securities 63,250,000 -- --
Deferred finance costs (3,343,000) (484,000) --
Proceeds from issuance of stock 19,026,000 122,000 206,000
Net proceeds from sale of stock of subsidiary (Note 21) -- -- 4,487,000
Repurchase of unit purchase options (3,922,000) (79,000) --
Repurchase of common stock for treasury (1,307,000) (7,475,000) (1,905,000)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 47,144,000 7,584,000 307,000
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 25,047,000 (24,194,000) 4,402,000
Cash and Cash Equivalents, beginning of year 2,083,000 27,130,000 2,936,000
- ------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 27,130,000 $ 2,936,000 $ 7,338,000
- ------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes
to consolidated financial statements.
F-8
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Nature of Business U.S. Home & Garden Inc. (the "Company"), through its
subsidiaries, is a leading manufacturer and marketer
of a broad range of consumer lawn and garden
products. The Company's products include weed
preventive landscape fabrics, fertilizer spikes,
decorative landscape edging, grass and flower seed
products, weed trimmer replacement heads, shade
cloth and root feeders, which are sold under
recognized brand names, such as WeedBlock(R),
Jobe's(R), Emerald Edge(R), Weed Wizard(R), Shade
Fabric(TM), Ross(R), Tensar(R), Amturf(R), and
Landmaster(R). The Company markets its products
through most large national home improvement and
mass merchant retailers ("Retail Accounts"),
including Home Depot, Lowe's, Kmart, Wal-Mart, Ace
Hardware and Home Base in North America. During the
year ended June 30, 2000, the Company established
through its EGarden.com Inc. subsidiary the first
business-to-business Internet web site designed to
bring together buyers and sellers of commercial lawn
and garden merchandise.
Principles of The consolidated financial statements include the
Consolidation accounts of the Company and its subsidiaries over
which it has financial or management control
including Weatherly Consumer Products Group, Inc.
(Weatherly), Easy Gardener, Inc. (Easy Gardener),
Golden West Agri-Products, Inc. (Golden West), Weed
Wizard Acquisition Corp. (Weed Wizard), Ampro
Industries, Inc. (Ampro) and Egarden.com Inc.
(EGarden) since their dates of acquisition (Note 1).
Additionally, U.S. Home & Garden Trust I has been
included since its formation in April 1998. All
significant intercompany accounts and transactions
have been eliminated.
Inventories Inventories, which consist of raw materials,
finished goods, and packaging materials are stated
at the lower of cost or market; cost is determined
by the first-in, first-out (FIFO) cost method.
Property Property and equipment are stated at cost.
Depreciation is computed by the straight-line method
over the estimated useful lives of the assets or, in
the case of leasehold improvements, over the life of
the lease, if shorter. Maintenance and repairs are
charged to expense as incurred. Major improvements
are capitalized. Depreciation expense was $613,000,
$1,337,000, and $1,850,000 during the years ended
June 30, 1998, 1999, and 2000, respectively.
Intangible Assets Excess of Cost over Net Assets Acquired
The excess of cost over net assets acquired
(Goodwill), which relates to the Company's
acquisitions, is being amortized over periods of
five to thirty years using the straight-line method.
Should a change of circumstances suggest a possible
impairment, the recoverability of Goodwill is
evaluated by comparing undiscounted estimated future
net cash flows to the current carrying value.
F-9
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Deferred Financing Costs
Direct costs associated with the Company's debt
borrowings are being amortized over the life of the
related debt.
Package Tooling Costs
Package tooling costs associated with Easy Gardener
and Weatherly products, primarily consisting of the
design and construction of printing plates and
cutting dies used for the production of packaging,
are being amortized over periods of three to five
years using the straight-line method.
Product Rights, Patents and Trademarks
Product rights are being amortized over estimated
useful lives of fifteen to twenty years.
Non-Compete Agreement
The non-compete agreements were entered into with
the acquisitions of Ampro and Weatherly. The
Weatherly agreement is being amortized over its
twenty-year term. The Ampro non-compete agreement,
which is triggered in the event an officer of Ampro
is terminated, will be amortized over a five-year
period from date of such termination.
Exclusivity Agreements
The exclusivity agreements were entered into with
certain hardware cooperatives relating to the
purchase of products through Egarden.com Inc.
Amounts capitalized are being amortized over the
life of the agreements, which range from three to
five years.
Revenue Sales are recorded as products are shipped to
Recognition customers of the Company's lawn and garden segment.
For the Company's business-to-business electronic
commerce segment, revenues from the sale and
distribution of products will be recorded on a net
commission basis, unless the Company purchases
products for inventory and resale. In this case,
sales will be recorded when products are shipped to
customers.
F-10
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Earnings Per Share During 1998, the Company adopted the provisions
of Statement of Financial Accounting Standards
No. 128, Earnings Per Share (SFAS 128). SFAS 128
provides for the calculation of basic and diluted
earnings per share. Basic earnings per share
includes no dilution and is computed by dividing
income available to common stockholders by the
weighted average number of common shares
outstanding for the period. Diluted earnings per
share reflects the potential dilution of
securities that could share in the earnings of an
entity.
Income Taxes The Company provides deferred income taxes based
on enacted income tax rates in effect on the
dates temporary differences between the financial
reporting and tax bases of assets and liabilities
reverse. The effect on deferred tax assets and
liabilities of a change in income tax rates is
recognized in income in the period that includes
the enactment date. To the extent that available
evidence about the future raises doubt about the
realization of a deferred tax asset, a valuation
allowance is established.
Advertising Costs The Company incurs advertising expense primarily
relating to cooperative advertising credits
granted to customers based on qualified expenses
incurred by the customers to advertise the
Company's products. Cooperative advertising
credits are usually limited to a percentage of an
agreed-upon sales volume. The Company also incurs
advertising expense relating to the distribution
of catalogs and the broadcasting of radio and
television commercials. Advertising costs are
expensed as incurred. Advertising expense was
$3,402,000, $3,832,000, and $3,889,000 during the
years ended June 30, 1998, 1999 and 2000.
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Cash Equivalents The Company considers all short-term investments
purchased with an initial maturity of three
months or less to be cash equivalents.
F-11
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Stock Based The Company has adopted the provisions of
Compensation Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based
Compensation. The fair value method is required
for all stock based compensation issued to
nonemployees. Under the fair value method,
compensation cost is measured at the grant date
based on the fair value of the award and is
recognized over the service period, which is
usually the vesting period. Companies are
permitted to continue to account for employee
stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, but are required
to disclose pro forma net income and earnings per
share as if the fair value method had been
adopted. The Company has elected to continue to
account for employee stock-based compensation
under APB No. 25. See Note 10.
New Accounting In June 1998, the Financial Accounting Standards
Pronouncements Board issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133
requires companies to recognize all derivatives
contracts as either assets or liabilities in the
balance sheet and to measure them at fair value.
If certain conditions are met, a derivative may
be specifically designated as a hedge, the
objective of which is to match the timing of gain
or loss recognition on the hedging derivative
with the recognition of (i) the changes in the
fair value of the hedged asset or liability that
are attributable to the hedged risk or (ii) the
earnings' effect of the hedged forecasted
transaction. For a derivative not designated as a
hedging instrument, the gain or loss is
recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000 as
amended by SFAS 137 and SFAS 138. See Note 20.
In June 2000, the FASB issued Interpretation No.
44, Accounting for Certain Transactions Involving
Stock Compensation. Interpretation No. 44
clarifies the application of APB No. 25 for
certain issues including (i) the definition of
employee for purposes of applying APB No. 25,
(ii) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (iii) the
accounting consequences of various modifications
to the terms of a previously fixed stock option
or award, and (iv) the accounting for an exchange
of stock compensation awards in a business
combination. This Interpretation is effective
July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur
after either December 15, 1998 or January 12,
2000. The Company does not expect a material
impact on the financial statements upon the
adoption of Interpretation No. 44.
F-12
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
In December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition. SAB No. 101
provides the SEC staff's views in applying
generally accepted accounting principles to
selected revenue recognition issues. SAB No. 101
is effective for the fourth fiscal quarter of
fiscal years beginning after December 15, 1999.
The Company believes that its current revenue
recognition policies comply with the provisions
of SAB No. 101.
Financial Instruments The Company's financial instruments consist of
and Derivatives cash and cash equivalents, restricted cash,
accounts receivable, officer receivables, debt
and mandatorily redeemable preferred securities.
The carrying value of cash and cash equivalents,
restricted cash and accounts receivable
approximate fair value based upon the liquidity
and short-term nature of the assets. The carrying
value of officer receivables, debt and
mandatorily redeemable preferred securities
approximates the fair value based upon short-term
and long-term borrowings at interest rates which
approximate current rates.
The Company uses derivative financial instruments
to manage the economic impact of fluctuations in
interest rates on short-term and long-term debt.
The Company entered into an interest rate swap to
manage this economic risk. This is viewed as a
risk management tool and is not used for trading
or speculative purposes. The interest rate
differentials associated with the interest rate
swap used to hedge debt obligations is recorded
as an adjustment to interest payable with the
offset to interest expense over the life of the
swap.
Cash and cash equivalents are held principally at
three high quality financial institutions. At
times, such balances may be in excess of the FDIC
insurance limit.
Reclassifications Certain amounts as previously reported have been
reclassified to conform to current year
classifications.
F-13
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Business The Company has consummated the following eleven
Acquisitions acquisitions of lawn and garden companies or product
lines for a total of approximately $111 million in
consideration:
o Golden West Chemical Distributors, Inc. - A
manufacturer of humic acid-based products designed
to improve crop yield, which was acquired in
August 1992 for approximately $1.1 million in cash
and $1.1 million of promissory notes.
o Easy Gardener, Inc. - A manufacturer of multiple
fabric landscaping products including
Weedblock(R), which was acquired in September 1994
for approximately $21.3 million consisting of $8.8
million in cash, a $10.5 million promissory note
and two convertible notes each in the principal
amount of $1.0 million. Approximately $2.2 million
of additional purchase price was contingent on
Easy Gardener meeting certain income requirements.
All of these amounts had been paid by June 30,
2000.
o Emerald Products LLC - A manufacturer of
decorative landscape edging, which was acquired in
August 1995 for $835,000 in cash and a $100,000
promissory note.
o Weatherly Consumer Products Group, Inc. - A
manufacturer of fertilizer spikes and other lawn
and garden products, which was acquired in August
1996 for 1,000,000 shares of Common Stock valued
at $3.0 million and approximately $22.9 million in
cash.
o Plasti-Chain product line of Plastic Molded
Concepts, Inc. - A line of plastic chain links and
decorative edgings, which was acquired from
Plastic Molded Concepts, Inc. in May 1997 for
approximately $4.3 million in cash.
o Weed Wizard, Inc. - A manufacturer and distributor
of weed trimmer replacement heads, all of whose
assets were acquired in February 1998 for
approximately $16.0 million, plus an additional
$1.7 million for excess working capital and
acquisition expenses.
o Landmaster Products, Inc. - A manufacturer and
distributor of polyspun landscape fabrics for use
by consumers and professional landscapers,
substantially all of whose assets were acquired in
March 1998 for approximately $3.0 million, plus an
additional $600,000 for certain assets and
acquisition expenses.
F-14
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
o Tensar(R) consumer products line of The Tensar
Corporation - A line of lawn and garden specialty
fencing, which was acquired from The Tensar
Corporation in May 1998 for approximately $5.4
million, plus an additional $1 million for
inventory.
o Ampro Industries, Inc. - A manufacturer and
distributor of lawn and garden products including
specialty grass and flower seeds. The Company
acquired all of the outstanding stock of Ampro for
approximately $24.6 million in October 1998.
o E-Garden, Inc. (now EGarden.com Inc.) -The
Company's business-to-business Internet subsidiary
was acquired in June 1999 for approximately
$400,000 plus expenses of approximately $100,000
with additional purchase price payments over the
next three years based on its future net sales.
o Findplants.com - An electronic horticulture
catalogue and locator that provides
business-to-business service for commercial
growers and wholesalers which was acquired in May
2000 for approximately $537,000.
All of the above acquisitions were accounted for as
purchases and, accordingly, the results of operations
of the acquired companies have been included in the
consolidated statements of income since their
respective acquisition dates. The following unaudited
pro forma summary combines the consolidated results
of operations of the Company, Ampro and Weed Wizard
as if the acquisitions had occurred at the beginning
of the year of acquisition and the beginning of the
prior year. Accordingly, Weed Wizard and Ampro, have
been reflected as if the acquisitions occurred on
July 1, 1997. The pro forma information gives effect
to certain adjustments, including the amortization of
excess of cost over net assets acquired, salary for
an Ampro employee covered by an employment agreement,
and additional interest expense on the notes payable.
This pro forma summary does not necessarily reflect
the results of operations as they would have been if
the Company, Ampro, and Weed Wizard had constituted a
single entity during such periods and is not
necessarily indicative of results which may be
obtained in the future. The pro forma effect of the
Findplants.com, EGarden, Tensar and Landmaster
acquisitions have not been reflected since their
prior revenue and expenses were not material to the
Company's operations.
F-15
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year ended June 30, 1998 1999
---------------------------------------------------------------------------------------
Net sales $ 89,811,000 $ 90,496,000
---------------------------------------------------------------------------------------
Income before income taxes
and extraordinary expense $ 7,339,000 $ 1,245,000
---------------------------------------------------------------------------------------
Income before extraordinary expense $ 4,844,000 $ 747,000
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Net income $ 3,394,000 $ 747,000
---------------------------------------------------------------------------------------
Basic net income per common share before $ .27 $ .04
extraordinary expenses
---------------------------------------------------------------------------------------
Basic net income per common share $ .19 $ .04
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Diluted net income per common share before
extraordinary expense $ .21 $ .03
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Diluted net income per common share $ .15 $ .03
---------------------------------------------------------------------------------------
2. Concentration of Trade accounts receivable are due primarily from
Credit Risk and numerous customers located in many geographic
Significant regions throughout the United States. The Company
Relationships performs ongoing credit evaluations of its
customers' financial conditions and establishes an
allowance for doubtful accounts based upon the
credit risk of specific customers, historical trends
and other information. The Company does not require
collateral from its customers.
During the years ended June 30, 1998, 1999, and
2000, sales to two customers accounted for
approximately 37% (26% and 11%), 33% (24% and 9%)
and 48% (35% and 13%) of consolidated net sales.
Included in accounts receivable at June 30, 1999 and
2000 is $6,765,000 and $9,428,000 due from the two
largest customers.
The Company's three significant product lines are
landscape fabrics; fertilizer, plant food and
insecticide spikes; and decorative edging. For the
years ended June 30, 1998, 1999 and 2000, sales of
landscape fabric represented approximately 39%, 37%
and 43%, respectively, of the Company's total net
sales, sales of fertilizer, plant food and
insecticide spikes represented approximately 20%,
13% and 15%, respectively, of the Company's total
net sales, and sales of decorative edging
represented approximately 11%, 8% and 10%,
respectively, of the Company's total net sales.
F-16
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Substantially all raw material purchases for
WeedBlock(R) landscape fabric inventory,
representing approximately 51% (37% and 14%), 35%
(29% and 6%) and 35% (22% and 13%) of the Company's
consolidated raw material purchases during the years
ended June 30, 1998, 1999 and 2000, are from two
vendors. Management believes that other suppliers
could provide a similar product on comparable terms.
A change in suppliers, however, could cause delays
and a possible loss of sales, which would adversely
affect operating results. Included in accounts
payable at June 30, 1999 and 2000 is $446,000
($326,000 and $120,000) and $749,000 ($542,000 and
$207,000) due to these vendors.
3. Inventories Inventories consist of:
June 30, 1999 2000
----------------------------------------------------
Raw materials $ 10,103,000 $ 8,379,000
Finished goods 6,883,000 4,464,000
----------------------------------------------------
$ 16,986,000 $ 12,843,000
----------------------------------------------------
At June 30, 1999 and 2000, the inventory balance has
been reduced by a provision for possible
obsolescence of $263,000 and $1,059,000.
4. Property and Property and equipment consist of:
Equipment
Estimated Useful
June 30, Life in Years 1999 2000
----------------------------------------------------------------------------------------------------
Land $ 515,000 $ 80,000
Leasehold and improvements 7-10 587,000 629,000
Building and improvements 10-40 3,891,000 3,895,000
Furniture, fixtures and equipment 5-7 9,434,000 13,644,000
----------------------------------------------------------------------------------------------------
14,427,000 18,248,000
Less accumulated depreciation 2,793,000 4,626,000
----------------------------------------------------------------------------------------------------
$ 11,634,000 $ 13,622,000
----------------------------------------------------------------------------------------------------
F-17
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Excess of Cost The excess of cost over net assets acquired consists of the following:
Over Net Assets
Acquired
June 30, 1999 2000
--------------------------------------------------------------------------------------------
Weatherly Consumer Products Group, Inc. $ 22,948,000 $ 22,948,000
Ampro Industries, Inc. 17,830,000 17,830,000
Easy Gardener, Inc. 15,639,000 15,639,000
Weed Wizard, Inc. 11,973,000 11,973,000
Tensar consumer products line 5,226,000 5,226,000
Plasti-Chain product line 2,810,000 2,810,000
Landmaster Products, Inc. 2,292,000 2,292,000
Golden West Chemical Distributions, Inc. 2,098,000 2,098,000
Emerald Products, LLC 1,112,000 1,240,000
EGarden 538,000 710,000
Findplants.com -- 631,000
--------------------------------------------------------------------------------------------
82,466,000 83,397,000
Less accumulated amortization 6,981,000 10,002,000
--------------------------------------------------------------------------------------------
$ 75,485,000 $ 73,395,000
--------------------------------------------------------------------------------------------
6. Line-of-Credit In October 1998, the Company completed a Credit
Agreement with Bank of America. The agreement
provides for a $25 million revolving acquisition
line-of-credit ("the Acquisition Facility") to
finance acquisitions and a $20 million working
capital revolving line-of-credit ("the Working
Capital Facility"). Borrowings under such credit
facilities bear interest at variable annual rates
chosen by the Company based on either (i) the London
Interbank Offered Rate ("LIBOR") plus an applicable
marginal rate, (effectively 8.28% at June 30, 2000)
or (ii) the higher of 0.5% above the then current
Federal Funds Rate or the Prime Rate of Bank of
America, in each case, plus an applicable marginal
rate. The Acquisition Facility terminates June 30,
2001 and the outstanding balance is payable in
quarterly payments starting on June 30, 2001,
(resulting in $1,125,000 classified as current on the
Consolidated Balance Sheet) and ending on March 31,
2004. The Working Capital Facility terminates with
the balance due on September 30, 2001. The Company is
required to maintain a zero balance, under the
Working Capital Facility, for at least 30 consecutive
days during the period from July 1 to December 1 of
each year. Moreover, if the Company elects to
terminate the agreement prior to the expiration date,
the outstanding balance must be prepaid together with
a premium of 0.5% of the terminated commitment.
The outstanding balance on the Acquisition Facility
at June 30, 1999 and 2000
F-18
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
was $15,500,000 and $17,000,000, respectively.
The Company's obligations under the Credit Agreement
are guaranteed by its subsidiaries and secured by a
security interest in favor of the Bank in
substantially all of the assets of the Company and
its subsidiaries. Upon the occurrence of an event of
default specified in the Credit Agreement, the
maturity of loans outstanding under the Credit
Agreement may be accelerated by the Bank, which may
also foreclose its security interest on the assets of
the Company and its subsidiaries.
Under the Credit Agreement, the Company and its
subsidiaries are required, among other things, to
comply with (a) certain limitations on incurring
additional indebtedness, liens and guaranties, on
dispositions of assets, payment of cash dividends and
cash redemption and repurchases of securities, and
(b) certain limitations on mergers, liquidations,
changes in business, investments, loans and advances,
affiliate transactions and certain acquisitions. In
addition, the Company must comply with certain
financial tests and ratios. A violation of any of
these covenants constitutes an event of default under
the Credit Agreement. At June 30, 2000, the Company
was in violation of certain financial covenants;
however, a waiver was obtained from the bank.
Effective March 31, 2000, the Credit Agreement was
amended. The principal feature of this amendment was
to require the Company to repay the $3 million
borrowed on the Acquisition Facility to finance the
Company's purchase of certain Trust Preferred
Securities issued by its subsidiary, U.S. Home &
Garden Trust I (see Note 7). The Company was required
to repay this borrowing in $1 million installments
due September 30, 2000, December 31, 2000, and June
30, 2001. Of this amount, $1 million was paid by the
Company prior to June 30, 2000, and the remaining $2
million (classified as current on the Consolidated
Balance Sheet) was paid during July 2000.
7. Mandatorily In April 1998, U.S. Home & Garden Trust I (the
Redeemable "Trust"), a newly created Delaware business trust and
Preferred a wholly-owned subsidiary of the Company, issued
Securities 78,000 common securities with a liquidation amount of
$25 per common security to the Company for $1,950,000
and completed a public offering of 2,530,000 of 9.40%
Cumulative Trust Preferred Securities with a
liquidation amount of $25 per security (the "Trust
Preferred Securities" and, together with the common
securities, the "Trust Securities"). The Trust exists
for the sole purpose of issuing Trust Securities and
using the proceeds therefrom to acquire the
subordinated debentures described below. Concurrent
with the issuance of the Trust Securities, the Trust
invested the proceeds therefrom in $65.2 million
aggregate principal amount of 9.40% Junior
Subordinated Deferrable Interest Debentures (the
"Subordinated Debentures") issued by the Company.
F-19
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Distributions of interest on the Trust Securities
are payable monthly in arrears by the Trust.
The Subordinated Debentures are unsecured
obligations of the Company and are subordinate
and junior in right of payment to certain other
indebtedness of the Company.
The Company may, under certain circumstances,
defer the payment of interest on the Subordinated
Debentures for a period not to exceed 60
consecutive months. If interest payments on the
Subordinated Debentures are so deferred,
distributions on the Trust Securities will also
be deferred. During any such deferral period,
interest on the Subordinated Debentures and
distributions on the Trust Securities will accrue
and compound monthly and, subject to certain
exceptions, the Company may not declare or pay
distributions on its capital stock or debt
securities that rank equal or junior to the
Subordinated Debentures.
The Trust Securities are subject to mandatory
redemption upon the repayment of the Subordinated
Debentures at a redemption price equal to the
aggregate liquidation amount of the Securities
plus any accumulated and unpaid distributions.
The Subordinated Debentures mature in total on
April 15, 2028, but may be redeemed at the option
of the Company at any time after April 15, 2003
or earlier under certain circumstances (see Note
14). The Company effectively provides a full and
unconditional guarantee of the Trusts'
obligations under the Trust Securities to the
extent that the Trust has funds sufficient to
make such payments.
Approximately $40 million of the proceeds
received by the Company from the sale of the
Subordinated Debentures to the Trust, were used
by the Company to repay outstanding long-term
debt, line-of-credit advances, and prepayment
penalties (see Note 14).
8. Officer Officer receivables represents notes which bear
Receivables interest at 7% and require interest payments on
an annual basis. Principal payments on the notes
are due in aggregate annual installments of
$50,000 to $150,000, with the aggregate balance
due upon maturity in June 2002.
F-20
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Commitments Employment Agreements
The Company has entered into employment
agreements with two of its officers. The
agreements are for one-year periods but are
automatically renewed unless specifically
terminated by the Company or the employee. If the
employment agreements are terminated by the
Company, the officers will be entitled to an
additional ten and five years of annual
compensation, respectively. Annual compensation
under the employment agreements are $450,000 and
$250,000, respectively. The employment agreements
also provide for certain lump sum payments in the
event of a change in control equal to
approximately $5.7 million. A five-year agreement
with an officer of Easy Gardener, which began in
1999, provides for a base aggregate annual salary
of approximately $275,000. In addition, the
agreements provide for incentive and additional
compensation under certain circumstances.
Operating Leases
The Company leases office and warehouse space,
certain office equipment and automobiles under
operating leases expiring through 2005. The
future minimum lease payments under these
non-cancelable operating leases are as follows:
Year ending June 30, Amount
-------------------------------------------------
2001 $ 747,000
2002 397,000
2003 306,000
2004 264,000
2005 185,000
-------------------------------------------------
$ 1,899,000
-------------------------------------------------
Rent expense was approximately $532,000, $788,000
and $924,000 for the years ended June 30, 1998,
1999 and 2000.
F-21
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pension Plan
Easy Gardener has established an employee defined
contribution pension plan (the Plan). Employees
of the Company, Weatherly, Easy Gardener, Weed
Wizard and Golden West are eligible to
participate. The Company is required to match the
first 3% of employee contributions up to 5% of
the employee's wage base. The Plan also allows
discretionary contributions by the Company. The
Company's contribution vests over a seven-year
period. Ampro has established a plan for its
employees with similar terms to the Easy Gardener
Plan. Pension expense associated with the plans
for the years ended June 30, 1998, 1999 and 2000
was approximately $223,000, $351,000 and
$397,000.
Royalty Agreements
The Company has royalty agreements which require
payments based upon a percentage of net sales of
certain products. These agreements expire in
various years through 2005. Royalty expense
during the years ended June 30, 1998, 1999 and
2000 was $353,000, $149,000 and $49,000.
Non-Qualified Deferred Compensation Plan
The Company has adopted the Non-Qualified
Deferred Compensation Plan for Select Employees
of U.S. Home & Garden Inc. (Deferred Plan). Under
the Deferred Plan, the Board of Directors or its
committee which administers the relevant stock
option plan may grant permission to optionees to
exercise their options with shares of U.S. Home &
Garden Inc.'s common stock in which they have a
holding period, for income tax purposes, of at
least six months and defer the receipt of a
portion of the shares subject to the option so
exercised. The optionee has the right to
designate the time or times of receipt of those
shares pursuant to the Deferred Plan. The
Deferred Plan contains provisions for earlier
issuance of those deferred shares on death,
disability and other termination of employment
(e.g., on a change of control of U.S. Home &
Garden Inc.).
10. Stockholders' Preferred Stock
Equity
The Company is authorized to issue 1,000,000
shares of preferred stock with such designations,
rights and preferences as may be determined from
time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion,
voting or other rights, which could adversely
affect the voting power or other rights of the
holders of the Company's common stock. No shares
of the preferred stock are outstanding.
F-22
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Common Stock
In June 1998, the Company's stockholders
authorized an increase in common stock from 30 to
75 million shares.
In September 1998, the Company adopted a
Stockholders' Rights Agreement commonly known as
a "poison pill," which provides that in the event
an individual or entity becomes a beneficial
holder of 12% or more of the shares of the
Company's capital stock, other stockholders of
the Company shall have the right to purchase
shares of the Company's (or in some cases, the
acquiror's) common stock at 50% of its then
market value.
Common Stock Repurchase Program
During fiscal 1999, the Company authorized the
repurchase of up to 2,500,000 shares of its
common stock through open market purchases and in
privately negotiated transactions. In September
1999, the Company authorized the repurchase of up
to 3,000,000 additional shares of its common
stock. Repurchased shares are held by the Company
as treasury stock.
Treasury Stock
During 1999, the Company repurchased 1,569,000
shares of treasury stock for $7,475,000. During
2000, the Company repurchased 749,000 shares for
$1,905,000.
Stock Option Plans
The Company adopted the 1991 Stock Option Plan
(the "1991 Plan") pursuant to which 700,000
shares of common stock have been reserved for
issuance upon the exercise of options designated
as either (i) options intended to constitute
incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the
"Code") or (ii) non-qualified options. ISOs may
be granted under the Plan to employees and
officers of the Company. Non-qualified options
may be granted to consultants, directors (whether
or not they are employees), employees and
officers of the Company.
F-23
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During fiscal 1995, the Board of Directors of the
Company (the "Board") adopted, subject to
stockholder approval, two additional stock option
plans. The 1995 Stock Option Plan (the "1995
Plan") allows the granting of either ISOs or
non-qualified options. The maximum aggregate
number of shares reserved for issue under this
plan is 1,500,000. The Non-Employee Director
Stock Option Plan (the "Non-Employee Director
Plan") was established to attract, retain and
compensate for their services as directors,
highly qualified individuals who are not
employees of the Company. The maximum aggregate
number of shares reserved for issue under this
plan is 100,000. During 1998, 1999 and 2000,
10,000 options were granted under this Plan each
year. The 1995 Plan is administered by a
committee of the Board and the Non-Employee
Director Plan is a formula plan.
During May 1997, the Board approved the 1997
Stock Option Plan. The plan reserves the issuance
of 1,500,000 shares of common stock.
During May 1999, the Board approved the 1999
Stock Option Plan. The Plan reserves the issuance
of 900,000 shares of common stock.
The 1991 Plan is administered by the Board. The
Board, or committee, as the case may be, within
the limitations of the 1991 and 1995 Plans, as
the case may be, determines the persons to whom
options will be granted, the number of shares to
be covered by each option, whether the options
granted are intended to be ISOs, the duration and
rate of exercise of each option, the option
purchase price per share and the manner of
exercise, the time, manner and form of payment
upon exercise of an option, and whether
restrictions such as repurchase rights in the
Company are to be imposed on shares subject to
options.
ISOs granted under the plans may not be granted
at a price less than the fair market value of the
common stock on the date of grant (or 110% of
fair market value in the case of persons holding
10% or more of the voting stock of the Company).
The aggregate fair market value of shares for
which ISOs granted to any employee are
exercisable for the first time by such employee
during any calendar year (under all stock option
plans of the Company and any related corporation)
may not exceed $100,000. Non-qualified options
granted under the 1991 Plan may not be granted at
a price less than the fair market value of the
common stock on the date of grant (not less than
par value in the case of the 1995 Plan). Options
granted under the plans will expire not more than
ten years from the date of grant (five years in
the case of ISOs granted to persons holding 10%
or more of the voting stock of the Company).
F-24
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
All options granted under the 1991 Plan,
Non-Employee Director Plan and ISOs under the
1995 Plan are not transferable during an
optionee's lifetime but are transferable at death
by will or by the laws of descent and
distribution.
The following is a summary of activity relating
to stock options.
Weighted
Average Option
Price Per Share Outstanding Exercisable
----------------------------------------------------------------------------------------
1991 Plan
July 1, 1997 $1.69 662,000 662,000
Exercise of options 1.69 (140,000) (140,000)
----------------------------------------------------------------------------------------
June 30, 1998 1.69 522,000 522,000(2)
Expired 1.69 (9,000) (9,000)
Options extended(1) 1.69 -- (165,000)
Exercise of options 1.69 (116,000) (116,000)
----------------------------------------------------------------------------------------
June 30, 1999 1.69 397,000 232,000(2)
Became exercisable 1.69 -- 18,000
Exercise of options 1.69 (40,000) (40,000)
----------------------------------------------------------------------------------------
June 30, 2000 $1.69 357,000 210,000(2)
----------------------------------------------------------------------------------------
F-25
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Weighted
Average Option
Price Per Share Outstanding Exercisable
----------------------------------------------------------------------------------------
1995 Plan
July 1, 1997 $2.10 1,385,000 1,035,000
Granted during 1998 3.25 98,000 --
Became exercisable 2.06 -- 100,000
Exercise of options 2.06 (24,000) (24,000)
----------------------------------------------------------------------------------------
June 30, 1998 2.18 1,459,000 1,111,000(3)
Became exercisable 2.25 -- 198,000
----------------------------------------------------------------------------------------
June 30, 1999 2.18 1,459,000 1,309,000(3)
Became exercisable 2.25 -- 100,000
----------------------------------------------------------------------------------------
June 30, 2000 $2.18 1,459,000 1,409,000(3)
----------------------------------------------------------------------------------------
1997 Plan
July 1, 1997 $ -- -- --
Granted during 1998 3.32 565,000 410,000
----------------------------------------------------------------------------------------
June 30, 1998 3.32 565,000 410,000(4)
Granted during 1999 4.63 150,000 30,000
Became exercisable 3.72 -- 52,000
----------------------------------------------------------------------------------------
June 30, 1999 3.59 715,000 492,000(4)
Granted during 2000 2.56 50,000 50,000
Became exercisable 3.16 -- 82,000
----------------------------------------------------------------------------------------
June 30, 2000 $3.12 765,000 624,000(4)
----------------------------------------------------------------------------------------
1999 Plan
July 1, 1999 $-- -- --
Granted during 2000 2.33 833,000 699,000
----------------------------------------------------------------------------------------
June 30, 2000 $2.33 833,000 699,000(5)
----------------------------------------------------------------------------------------
F-26
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Weighted
Average Option
Price Per Share Outstanding Exercisable
----------------------------------------------------------------------------------------
Non-Plan Options
June 30, 1997 $1.84 2,285,000 2,035,000
Exercise of options 2.25 (44,000) (44,000)
Became exercisable 2.25 -- 125,000
Granted during 1998 5.02 190,000 80,000
----------------------------------------------------------------------------------------
June 30, 1998 2.08 2,431,000 2,196,000(6)
Exercise of options 1.69 (176,000) (176,000)
Became exercisable 2.25 -- 205,000
Options extended(1) 1.69 -- (325,000)
Granted during 1999 3.91 489,000 170,000
----------------------------------------------------------------------------------------
June 30, 1999 2.84 2,744,000 2,070,000(6)
Expired 3.57 (402,000) (402,000)
Became exercisable 4.09 -- 206,000
Granted during 2000 3.60 125,000 125,000
----------------------------------------------------------------------------------------
June 30, 2000 $2.34 2,467,000 1,999,000(6)
----------------------------------------------------------------------------------------
(1) In 1999, the expiration date and vesting period
on 545,000 options was extended in periods
between nine and ten years. As a result, the
Company is recognizing compensation expense for
the intrinsic value of the options over the new
vesting periods. In 1999 and 2000 such expense
was $268,000 and $119,000, respectively.
(2) At June 30, 1998, 1999 and 2000, the weighted
average exercise option price per share for
exercisable options was $1.69 for all periods.
(3) At June 30, 1998, 1999 and 2000, the weighted
average exercise option price per share for
exercisable options was $2.16, $2.16 and $2.18.
(4) At June 30, 1998, 1999 and 2000, the weighted
average exercise option price per share for
exercisable options was $3.25, $3.35 and $3.25.
(5) At June 30, 2000, the weighted average exercise
option price per share for exercisable options
was $2.25.
(6) At June 30, 1998, 1999 and 2000, the weighted
average exercise option price per share for
exercisable options was $2.01, $2.17 and $2.25.
F-27
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following table summarizes the above stock
options outstanding and exercisable at June 30,
2000.
Outstanding Exercisable
---------------------------------------- -----------------------------
Average Weighted Weighted
Range of Remaining Average Average
Exercise Price Options Life Exercise Price Options Exercise Price
----------------------------------------------------------------------------------------
$0.01 200,000 1 year $0.01 200,000 $0.01
1.69 594,000 8 years 1.69 143,000 1.69
2.06-2.38 3,375,000 1.5 years 2.11 3,300,000 2.11
2.56-3.94 1,502,000 3 years 3.27 1,188,000 3.28
4.12-4.69 210,000 4.5 years 4.42 110,000 4.34
----------------------------------------------------------------------------------------
$0.01-4.69 5,881,000 2.5 years $2.36 4,941,000 $2.37
----------------------------------------------------------------------------------------
EGarden.com Inc. Stock Option Plan
EGarden.com Inc. adopted a 1999 Stock Option Plan
that is administered by the Board of Directors,
or a committee of directors appointed by the
Board, and provides for the grant of either ISOs
or non-qualified options. A total of 500,000
shares of EGarden.com Inc. common stock has been
reserved for issuance under the Plan.
F-28
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following is summary of activity relating to
EGarden.com Inc. stock options:
Weighted
Average Option
Price Per Share Outstanding Exercisable
-----------------------------------------------------------------------------------------
1999 Plan
July 1, 1999 $ -- -- --
Granted during 2000 6.38 65,000 12,000
----------------------------------------------------------------------------------------
June 30, 2000 $6.38 65,000 12,000(1)
----------------------------------------------------------------------------------------
Non-Plan Options
July 1, 1999 $ -- -- --
Granted during 2000 5.53 1,074,000 685,000
----------------------------------------------------------------------------------------
June 30, 2000 $5.53 1,074,000 685,000(2)
----------------------------------------------------------------------------------------
(1) At June 30, 2000, the weighted average
exercise option price per share for
exercisable options was $5.00.
(2) At June 30, 2000, the weighted average
exercise option price per share for
exercisable options was $3.89.
The following table summarizes EGarden.com Inc.
stock options outstanding and exercisable at June
30, 2000:
Outstanding Exercisable
---------------------------------------- -----------------------------
Average Weighted Weighted
Range of Remaining Average Average
Exercise Price Options Life Exercise Price Options Exercise Price
----------------------------------------------------------------------------------------
$3.00 400,000 9 years $3.00 390,000 $3.00
5.00 639,000 8 years 5.00 287,000 5.00
6.00 20,000 6 years 6.00 20,000 6.00
8.00 80,000 5 years 8.00 -- --
--------------------------------------------------------------------------------------
$3.00 - $8.00 1,139,000 8 years $4.41 697,000 $3.95
----------------------------------------------------------------------------------------
F-29
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Unit Purchase Options
In October 1994, the Company granted six unit
purchase options (UPOs), each consisting of
43,860 shares of the Company's common stock and
Class B Warrants to purchase 43,860 shares of
common stock at an exercise price of $2.28. These
UPOs have a nominal exercise price. Three of the
UPOs were granted to an officer of the Company
for his personal guarantees in connection with
the Easy Gardener acquisition. Three were granted
to an outside consultant for its services in
connection with financing obtained for the Easy
Gardener acquisition. Concurrently, the Company
also granted six UPOs, consisting of the same
components, each with a current exercise price of
approximately $75,000, three of which were
granted to an officer of the Company. All of
these transactions were done in lieu of cash
compensation in consideration for certain
financial consulting, and other services,
including work performed in connection with debt
and equity financings, and for the personal
guarantee and other collateral provided in
connection with the Company's acquisition of Easy
Gardener, without which the Company's transaction
with Easy Gardener would not have occurred. These
UPOs were valued at $400,000 and included in
deferred financing costs. During 1999, the five
remaining UPOs were exercised.
In connection with the Company's August 1994
Private Placement, the placement agent and its
designees were granted 28 UPOs exercisable at
$100,000 each. Each UPO consists of 43,860 shares
of common stock and warrants to purchase 43,860
shares of common stock at $2.28 per share. These
warrants were scheduled to expire in August 1999,
if the underlying UPO was not exercised. If
exercised, the warrants were scheduled to expire
in May 2000. During 1997, five UPOs were
exercised. In December 1997 and May 1998, the
Company repurchased and retired 20 UPOs
underlying approximately 1,851,000 shares of
common stock for approximately $3,922,000. During
August 1999, all remaining UPOs were exercised.
F-30
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Warrants
In connection with certain business transactions
and stock offerings, the Company has granted
various warrants to purchase common stock.
The following schedule summarizes the activity:
Weighted
Weighted Average
Average Remaining
Warrant Price Contractual
Per Share Outstanding (1)Exercisable Life
----------------------------------------------------------------------------------------
July 1, 1997 $2.18 3,709,000 3,709,000 3 years
Issued 4.75 250,000 250,000
Exercised 2.28 (1,408,000) (1,408,000)
Expired 2.25 (50,000) (50,000)
----------------------------------------------------------------------------------------
June 30, 1998 2.39 2,501,000 2,501,000 2 years
Issued 2.28 240,000 240,000
Exercised 1.89 (1,324,000) (1,324,000)
Expired 1.89 (201,000) (201,000)
----------------------------------------------------------------------------------------
June 30, 1999 2.45 1,216,000 1,216,000 1.5 years
Issued 2.28 36,000 36,000
Exercised 2.71 (341,000) (341,000)
----------------------------------------------------------------------------------------
June 30, 2000 $3.02 911,000 911,000 1.5 years
----------------------------------------------------------------------------------------
(1) The warrants contain anti-dilution
provisions which could affect the number of
shares of common issuable stock upon the
exercise of the warrants as well as the per
share warrant prices. Additionally, these
warrants contain certain redemption
provisions.
F-31
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Common Stock Reserved
At June 30, 2000, approximately 7,680,000 shares of common
stock have been reserved for issuance upon the exercise of
warrants and options.
Stock Based Compensation
The Company applies APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations in
accounting for its employee stock option plans. Under APB
Opinion No. 25, because the exercise price of the Company
stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation
cost is recognized.
SFAS No. 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information
regarding net income as if compensation costs for the
Company's stock options and warrants had been determined
in accordance with the fair value based method prescribed
in SFAS No. 123. The Company estimates the fair value of
each stock option and warrant at the grant date by using a
Black-Scholes pricing model with the following
weighted-average assumptions used for grants in 1998, 1999
and 2000, respectively: no dividend yield for any year;
expected volatility of approximately 30%, 56%, and 55%;
risk-free interest rates of 6.6% in 1998 and 1999 and 6.4%
in 2000, and expected lives of approximately three to five
years. Pro forma compensation expense associated with
options granted to employees totaled $1,013,000, $352,000,
and $2,185,000 for 1998, 1999 and 2000, respectively. The
weighted average fair value of these options was $1.54,
$2.37 and $1.53 for 1998, 1999 and 2000, respectively.
Under the accounting provisions of SFAS No. 123, the
Company's net income (loss) and net income (loss) per
common share would have decreased to the pro forma amounts
indicated below:
Year ended June 30, 1998 1999 2000
-----------------------------------------------------------------------------------------------
Net Income (Loss):
As reported $ 5,526,000 $ 2,049,000 $ (345,000)
Pro forma (net of tax effect) 4,918,000 1,838,000 (1,481,000)
Dilutive per common share 0.24 0.09 (.02)
Dilutive per common share proforma 0.22 0.08 (.08)
-----------------------------------------------------------------------------------------------
F-32
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. Income Taxes Deferred tax assets (liabilities) consist
principally of the following:
June 30, 1999 2000
----------------------------------------------------------------------------------------
Deferred Tax Assets:
Start up costs $ -- $ 1,173,000
Accounts receivable allowance and other 240,000 210,000
Alternative minimum and state taxes 244,000 --
Net operating loss carryforwards 113,000 --
----------------------------------------------------------------------------------------
Total deferred tax asset 597,000 1,383,000
Less valuation allowance (97,000) --
--------------------------------------------------------------------------------------
Net deferred tax asset $ 500,000 $ 1,383,000
----------------------------------------------------------------------------------------
Deferred Tax Liability:
Accumulated depreciation and amortization $ (1,600,000) $ (1,358,000)
----------------------------------------------------------------------------------------
The net deferred income tax liability as of June
30, 1999 and the net deferred income tax asset as
of June 30, 2000 are presented in the balance
sheets as follows:
June 30, 1999 2000
-----------------------------------------------------------------------------------------
Current asset $ 500,000 $ 210,000
Long-term liability $ 1,600,000 $ 185,000
-----------------------------------------------------------------------------------------
The Company has recorded a deferred tax asset at
$1,173,000 relating to start up costs of
Egarden.com Inc. The Company intends to maintain
80% ownership of this subsidiary which is necessary
for these costs to be deductible on a consolidated
basis as they are amortized over a five-year
period. The Company will continue to evaluate
offers and will solicit bids for all or part of
this subsidiary, but will only consider offers that
would not result in material losses to this
deferred tax asset.
At June 30, 1999, the Company established a $97,000
valuation allowance for the benefits pertaining to
California NOLs, which were not estimated to be
realizable prior to their expiration.
F-33
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The income tax provision (benefit) consists of:
Year ended June 30, 1998 1999 2000
---------------------------------------------------------------------------------------
Current:
Federal $ 2,104,000 $ 336,000 $ 1,420,000
State 570,000 204,000 319,000
---------------------------------------------------------------------------------------
2,674,000 540,000 1,739,000
---------------------------------------------------------------------------------------
Deferred:
Federal 126,000 682,000 (915,000)
State 65,000 128,000 (210,000)
---------------------------------------------------------------------------------------
191,000 810,000 (1,125,000)
---------------------------------------------------------------------------------------
$ 2,865,000 $ 1,350,000 $ 614,000
---------------------------------------------------------------------------------------
The 1998 income tax expense consists of $3,600,000
expense from continuing operations reduced by a
$735,000 benefit associated with the extraordinary
expense. The 2000 income tax expense consists of a
benefit of $558,000 from continuing operations
reduced by income tax expense of $1,172,000
relating to the extraordinary gain and minority
interest.
The following is a reconciliation between the
Statutory Federal income tax rate and the Company's
effective tax rate relating to income before
minority interest and extraordinary gain (expense):
Year ended June 30, 1998 1999 2000
---------------------------------------------------------------------------------------
Income tax provision computed at Federal
Statutory rate (34.0)% (34.0)% 34.0%
State taxes, net of Federal tax effects (6.0) (6.0) 2.8
Nondeductible amortization and other (1.1) (3.4) (20.9)
Deductible UPOs and stock options 7.3 1.0 2.2
Changes in valuation allowance on deferred tax
asset (0.2) 2.7 3.8
---------------------------------------------------------------------------------------
Income Tax Benefit (Expense) (34.0)% (39.7)% 21.9%
---------------------------------------------------------------------------------------
F-34
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Trade Credits In April 1996, the Company entered into an
agreement to exchange unsold assets held for sale
for credit against the future purchase of
products and services. This transaction was
reported at the estimated fair market value of
the assets exchanged by the Company. No gain or
loss was recognized on this transaction as the
Company had previously written down its assets
held for sale to their estimated fair market
value. The agreement required the Company to pay
a portion of the purchase price of the product or
services received. Depending on the nature of the
products or services purchased, the Company would
receive a credit against the future price ranging
from 10% to 45% of the cash purchase price. The
Company would also receive a percentage of the
cash proceeds from the ultimate sale of the
assets. The agreement provided that the Company
would receive maximum total credits and cash
totaling $1.6 million. In 1999, the Company
expensed the remaining $944,000 of carrying value
for these trade credits in conjunction with the
restructuring discussed in Note 16.
13. Supplemental Cash
Flow Information Year ended June 30, 1998 1999 2000
----------------------------------------------------------------------------------------
Cash paid (refunded) during the period for:
Interest $ 7,774,000 $ 7,540,000 $ 7,220,000
Income taxes $ 2,038,000 $ 1,744,000 $ (1,020,000)
----------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and
financing activities:
During the year ended June 30, 2000, the Company
granted options in conjunction with the sale of
stock of a subsidiary with an estimated fair
value of approximately $219,000.
During the year ended June 30, 2000, the Company
granted options in conjunction with the
exclusivity agreements discussed in the Summary
of Accounting Policies with an estimated fair
value of approximately $560,000.
During the year ended June 30, 1998, $350,000 of
debt was converted into 154,000 shares of the
Company's common stock.
In connection with business acquisitions in 1998,
1999 and 2000, the following transactions
occurred:
Year ended June 30, 1998 1999 2000
-----------------------------------------------------------------------------------------
Fair value of assets acquired $ 28,487,000 $ 31,957,000 $ 931,000
Issuance of stock options -- -- (132,000)
Liabilities assumed (354,000) (4,867,000) --
-----------------------------------------------------------------------------------------
Cash paid for assets acquired $ 28,133,000 $ 27,090,000 $ 799,000
-----------------------------------------------------------------------------------------
F-35
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. Extraordinary Gain As a result of the refinancing of all of the
(Expense) Company's outstanding debt in April 1998, the
write off of the entire balance of deferred
financing costs at April 1, 1998, net of
accumulated amortization, plus certain prepayment
penalties totaling approximately $743,000 were
recorded as an extraordinary expense during the
year ended June 30, 1998.
During the year ended June 30, 2000, the Company
purchased 250,781 of the outstanding 9.4%
Cumulative Trust Preferred Securities issued by
its subsidiary, U.S. Home & Garden Trust I, at
approximately $15 per Trust Preferred Security. As
of June 30, 2000, 2,279,219 Trust Preferred
Securities were outstanding. The repurchase of
these Trust Preferred Securities resulted in a
$1,224,000 extraordinary gain (after provision for
income taxes of $878,000). The Company purchased
24,000 Trust Preferred Securities from officers
and directors under the same terms and conditions
as described above.
15. Earnings per Share The following is a reconciliation of the weighted
average number of shares used to compute basic and
dilutive earnings per share:
Year ended June 30, 1998 1999 2000
----------------------------------------------------------------------------------------
Basic weighted average common 17,776,000 19,621,000 19,031,000
shares outstanding
Dilutive effect of stock options and
warrants 5,032,000 3,974,000 --
----------------------------------------------------------------------------------------
Dilutive weighted average common 22,808,000 23,595,000 19,031,000
shares outstanding
----------------------------------------------------------------------------------------
Options and warrants to purchase 140,000 and
1,477,000 shares of common stock in fiscal years
1999 and 2000, respectively, were not included in
the computation of diluted earnings per share
because the option exercise price was greater than
the average market price of the stock. Diluted
earnings per share for the year ended June 30,
2000 is based only on the weighted average number
of common shares outstanding as the inclusion of
1,407,000 common share equivalents would have been
anti-dilutive.
F-36
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
16. Restructuring In 1999, the Company recorded restructuring
Charges charges of $1,964,000, relating to the closing of
the Weed Wizard facility in Georgia. The Company
recognized approximately $280,000 of expense
related to lease termination fees and the disposal
of property and equipment at the Weed Wizard
facility; $1,093,000 of expense related to the
write-off of trade credits and product rights
associated with the discontinued product line; and
$591,000 of expense for the termination benefits
to be paid to 20 employees involved with the
discontinued product line. The restructuring was
completed during the year ended June 30, 2000. No
additional costs were recognized during 2000 and
no future costs or payments relating to this
matter are expected.
17. Contingency In August 1999, the former principal stockholders
of Ampro commenced an action against the Company.
The plaintiffs are seeking additional payments of
unspecified amounts to be made to them pursuant to
the Ampro stock purchase agreement. The plaintiffs
have also notified the Company that they intend to
arbitrate certain other issues concerning closing
adjustments under the stock purchase agreement. In
addition to filing an Answer denying the
plaintiff's allegations, the Company has asserted
certain counterclaims against the plaintiffs
alleging various breaches of the purchase
agreement.
The Company holds $1.6 million in a separate
escrow account. These funds were originally
intended to be used to acquire the stock of Ampro.
The ultimate use of these funds is expected to be
determined as the disputes discussed above are
resolved.
The Company and its subsidiaries are, from time to
time, involved in legal proceedings, claims and
litigation arising in the ordinary course of
business. Based on the facts currently available,
management believes that such matters will not
have a material adverse affect on the Company's
consolidated financial condition, results of
operations or cash flows. The amounts claimed may
be substantial, and the ultimate liability cannot
presently be determined because of uncertainties
that exist. Therefore, it is possible the outcome
of such legal proceeding, claims and litigation,
could have a material adverse effect on quarterly
or annual consolidated operating results, cash
flows or financial condition of the Company when
resolved in a future period.
18. Unusual Item During the year ended June 30, 2000, the Company
discontinued production, sale and distribution of
one of the products in its Weed Wizard product
line. Additionally, the Company, in voluntary
compliance with the recommendations of the
Consumer Product Safety Commission ("CPSC"),
instituted a recall of the product. Accordingly,
the Company recorded a pretax charge of $928,000
to provide for recall costs and inventory
write-offs.
F-37
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
19. Segment Reporting The Company operates in two distinctive reportable
segments: (1) the lawn and garden industry and,
(2) the business-to-business electronic commerce
(E-Commerce) industry. The Company's reportable
segments are business units that offer different
products and services and are managed separately
due to different types of customers, technology,
methods of distribution and marketing strategies.
The accounting policies of the segments are the
same as those described in the summary of
accounting policies. The Company evaluates
performance based on operating income or loss of
each segment. Transactions between reportable
segments are eliminated.
The revenues, operating income and identifiable
assets of the reportable segments are as follows
for the year ended June 30, 2000 (in thousands).
The lawn and garden segment was the only
reportable segment at June 30, 1999.
Revenues:
Lawn and garden $ 89,665
E-Commerce --
--------------------------------------------------
Total Revenues $ 89,665
--------------------------------------------------
Operating Income (Loss):
Lawn and garden $ 7,925
E-Commerce (3,879)
--------------------------------------------------
Total Operating Income $ 4,046
--------------------------------------------------
Identifiable Assets:
Lawn and garden $ 137,445
E-Commerce 8,015
Intercompany eliminations (6,915)
--------------------------------------------------
Total Assets $ 138,545
--------------------------------------------------
The Company does not have material revenue,
operating income or assets outside the United
States.
F-38
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
20. Financial Instruments The Company manages its interest rate risk on
its line-of-credit borrowings through the
purchase of an interest rate swap agreement
which has effectively fixed the base interest
rate on $15 million of the $17 million of
variable borrowings outstanding at June 30,
2000. Under the agreement, the Company has
effectively fixed the base rate on a $15
million notional amount at 7.78%. The
interest rate swap agreement expires November
1, 2000 and the Company's line-of-credit
borrowings effectively revert to a variable
interest rate loan. The fair value of the
Company's interest rate swap agreement
represents the estimated receipt or payment
that would be made to terminate the
agreement. At June 30, 2000, the Company
would have received an immaterial amount to
terminate the agreement.
21. Sale of Stock of In January 2000, a private placement of
Subsidiary 1,062,000 common shares and warrants of
EGarden.com Inc. was completed. Net proceeds
from the private placement totaled
approximately $4.5 million and will be used
to fund the start-up and development
expenditures of EGarden.com Inc. After the
completion of the private placement and
subsequent investment by the Company, the
Company owns approximately 80% of the common
stock of EGarden.com Inc.
F-39
Consolidated Financial
Statement Schedule
------------------------------------------------------------
U.S. Home & Garden Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
- --------------------------------------------------------------------------------
Charged to Writeoffs
Beginning Costs and of Ending
Balance Expenses Accounts Balance
- --------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
o Year ended June 30, 1998 $ 314,000 $ 179,000 $ (94,000) $ 399,000
o Year ended June 30, 1999 $ 399,000 $ 827,000 $ (235,000) $ 991,000
o Year ended June 30, 2000 $ 991,000 $ 173,000 $ (589,000) $ 575,000
- --------------------------------------------------------------------------------------------------------
F-40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned thereunto duly authorized.
U.S. Home & Garden Inc.
(Registrant)
By: /s/ Robert Kassel
----------------------
Robert Kassel, Chief
Executive Officer
Dated: September 25, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/Robert Kassel Chairman of the Board of Directors, September 25, 2000
- ---------------------- Chief Executive Officer, President
Robert Kassel and Treasurer (Chief Executive and
Financial Officer)
/s/ Maureen Kassel Vice-President, September 25, 2000
- ---------------------- Secretary and Director
Maureen Kassel
/s/Richard Raleigh Chief Operating Officer September 25, 2000
- ---------------------- and Director
Richard Raleigh
/s/ Donald Rutishauser Chief Financial Officer September 25, 2000
- ---------------------- (Principal Accounting
Donald Rutishauser Officer)
/s/Brad Holsworth Director September 25, 2000
- ----------------------
Brad Holsworth
/s/ John Schulberg Director September 25, 2000
- ----------------------
Jon Schulberg
/s/ Fred Heiden Director September 25, 2000
- --------------------
Fred Heiden
60