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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, 2001
Or
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 001-14015
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value; Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 17, 2001 was
approximately $10,655,000.
As of September 17, 2001, 17,543,379 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.
Documents Incorporated By Reference: None
Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for our future activities. Such forward-looking information involves
important known and unknown risks and uncertainties that could significantly
affect actual results, performance or achievements in the future and,
accordingly, such actual results, performance or achievements may materially
differ from those expressed or implied in any forward-looking statements made by
or on behalf of us. These risks and uncertainties include, but are not limited
to, those relating to our growth strategy, customer concentration, outstanding
indebtedness, dependence on weather conditions, seasonality, expansion and other
activities of competitors, ability to successfully integrate acquired companies
and product lines, changes in federal or state environmental laws and the
administration of such laws, protection of trademarks and other proprietary
rights, 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 merchant retailers ("Retail Accounts"), including Home
Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware, TruServe and Home Base.
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We were organized under the laws of the State of California in August 1990
under the name Natural Earth Technologies, Inc. In January 1992 we
reincorporated under the laws of the State of Delaware and in July 1995 we
changed our name to U.S. Home & Garden Inc. Our lawn and garden operations are
conducted through our subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy
Gardener's subsidiaries and through our subsidiary, Ampro Industries, Inc.
("Ampro"), and our agricultural products operations are conducted through our
subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context
suggests otherwise, references in this Report to "we", "us", or "our" refer to
U.S. Home & Garden Inc. and its subsidiaries. Our executive offices are located
at 655 Montgomery Street, Suite 830, San Francisco, California 94111, and our
telephone number is (415) 616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the number
of vendors needed to source high volume lawn and garden products, the preference
among home improvement and mass merchant retailers has shifted towards single
source suppliers that offer broad product lines of consumer brand-name
merchandise and the product support necessary to stimulate consumer demand and
ensure timely and cost effective order fulfillment. Smaller regional suppliers
generally lack the capital and other resources necessary to offer the variety
and number of product lines, the product support and the inventory stocking and
tracking capabilities required by home improvement and mass merchant retailers.
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.
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Prior Acquisitions.
Since August 1992, we have consummated the following eleven (11)
acquisitions of companies or product lines for a total of approximately $111
million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which we acquired in August
1992 for approximately $1.1 million in cash and $1.1 million in promissory
notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock(R), which we acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million
promissory note and two convertible notes each in the principal amount of $1.0
million. Approximately $2.2 million of additional purchase price was contingent
on Easy Gardener meeting certain income requirements. These contingencies were
met and we paid the entire $2.2 million.
o Emerald Products LLC. A manufacturer of decorative landscape edging which
we acquired in August 1995 for $835,000 in cash and a $100,000 promissory note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products, which we acquired in
August 1996 for 1,000,000 shares of our common stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain product line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which we acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, all of whose assets were acquired in February 1998 for
approximately $16.0 million (plus an additional $1.7 million for excess working
capital and acquisition expenses), of which approximately $5.0 million was based
on the value of certain net assets acquired.
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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 Egarden Inc. Our business-to-business Internet subsidiary was acquired in
June 1999 for approximately $400,000, plus expenses of approximately $100,000.
At the time of acquisition, Egarden's activities were limited to sales of
Internet gardening related products to the end consumer. We have suspended all
of the operations relating to Egarden Inc.
o Findplants.com., an electronic horticulture catalogue and locater
business-to-business service for commercial growers and wholesalers all of whose
assets were acquired by Egarden Inc. in May 2000 for approximately $537,000 in
cash. Findplants.com(R) offers industry participants more than 10,000 different
types of plants from nearly 140 growers. We have suspended all of the operations
relating to Findplants.com.
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
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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, 1999, 2000 and
2001, sales of landscape fabric represented approximately 37%, 43% and 47%,
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, 1999, 2000 and 2001, sales of fertilizer,
plant food and insecticide spikes constituted approximately 13%, 15% 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, 1999, 2000 and 2001, sales of
landscape edging constituted approximately 8%, 10% and 5%, 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
as an exclusive United States retail distributor of a shade cloth manufacturer
pursuant to an agreement that expires on December 31, 2001.
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.
6
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.
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 the fiscal years ended June 30, 1999, 2000 and
2001.
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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 or our facility located in Colorado.
We purchase most of the landscape fabric used to manufacture WeedBlock from
Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls of various types
of landscape fabric from Tredegar for shipment to our Waco, Texas facility where
we size, cut and package the fabric for consumer sale. Although we have
purchased most of our supply from Tredegar for over 10 years and believe that
our relationship with Tredegar is good, Tredegar is free to terminate its
relationship with us at any time and accordingly could market its fabrics to
other companies, including our competitors. Nevertheless, we own the registered
trademark "WeedBlock(R)" and to the extent that we establish alternative supply
arrangements, our rights to market products under the WeedBlock brand name would
continue without restriction.
We manufacture and package our Jobe's fertilizer spikes at our Paris,
Kentucky facility. The raw materials that comprise our indoor fertilizer spikes
are mixed with a binding agent and then passed through an extrusion process
which feeds a continuous strand of fertilizer through a heat-drying system. The
strand is then cut into ready-to-use fertilizer spikes which are then machine
counted and packaged into shelf-ready blisterpacks. Our outdoor fertilizer
spikes are manufactured in a similar manner except rather than passing through
an extrusion process, the outdoor spikes are processed through molds which shape
the spikes into their final form. The outdoor spikes are packaged in either a
foil pouch, bag or box.
The specifications for our landscape edging, shade cloth and root feeder
products and packaging are designed by us and independent design consultants.
The products are then manufactured and packaged by third party manufacturers
according to our specifications.
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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. The weed trimmer replacement heads will be assembled and packaged in
Michigan pursuant to a contract manufacturing agreement, 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.
The Ampro and Amturf "ready-to-grow" combination mulch, fertilizer and seed
products will be produced in Michigan pursuant to the same contract
manufacturing agreement as the weed trimmer replacement products. 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.
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 2001, Home
Depot, Lowes and Ace Hardware accounted for approximately 42%, 14% and 5%,
respectively, of our net sales during such year. Home Depot, Lowes and Kmart,
accounted for approximately 35%, 13% and 5%, respectively, of our net sales
during fiscal 2000. During fiscal 1999, Home Depot, Lowes and Kmart accounted
for 24%, 9% and 7%, respectively, of our net sales. Our ten largest customers as
a group accounted for 80%, 73% and 59% of our net sales during fiscal 2001, 2000
and 1999, 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.
9
Our sales are concentrated in the United States, with international sales
(primarily in Europe and Canada) accounting for approximately 3% of our net
sales for each of fiscal 2000 and 2001, respectively. 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.
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
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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 $3.2 million in fiscal 2001 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 2001
on co-op advertising in conjunction with key retail customers.
Egarden.com E-Commerce Initiative
During fiscal 2001 we offered products for sale on the Internet on a
business-to-business basis through a website www.egarden.com, which we
established as 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. In May
2001 we suspended the services relating to our egarden.com web site. We have
discontinued all of the operations relating to Egarden Inc. and Findplants.com.
We are exploring different strategic alternatives for Egarden Inc. See Note 2 to
the Consolidated Financial Statements.
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.
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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 typically
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 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.
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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 manufacturers of weed trimming
replacement part products using nylon based lines and blades. These include CMD
Products, which markets the Grass Gator brand.
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
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distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
We market certain animal repellent and pesticide products that are subject
to FIFRA and to similar state regulations. We also market certain fertilizer
products that are subject to regulation in some states. We believe that we are
in substantial compliance with material FIFRA and applicable state regulations
regarding our material business operations. However, there can be no assurance
that we will be able to comply with future regulations in every jurisdiction in
which our material business operations are conducted without substantial cost or
interruption of operations. Moreover, there can be no assurance that future
products marketed by us will not also be subject to FIFRA or to state
regulations. If future costs of compliance with regulations governing pesticides
or fertilizers exceed our budget for such items, our business could be adversely
affected. If any of our products are distributed or marketed in violation of any
of these regulations, we could be subject to a recall of, or a sales limitation
placed on, one 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 operates one manufacturing
facility. Although we believe that our material manufacturing facilities are in
substantial compliance with applicable material environmental laws, it is
possible that there are material environmental liabilities of which we are
unaware. If the costs of compliance with the various existing or future
environmental laws and regulations including any penalties which may be assessed
for failure to obtain necessary permits, exceed our budget for such items, our
business could be adversely affected.
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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 operates one manufacturing facility. Although our Ampro/Weed Wizard
facility was sold by us in April 2001, liability could exist for remediation of
such facilities in the future relating to the operations conducted at that
facility while it was owned and operated by us. Moreover, we or our predecessors
have owned or 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.
15
Other Regulations. We are also subject to various other federal, state and
local regulatory requirements such as worker health and safety, transportation,
and advertising requirements. Failure to comply with these requirements could
result in the imposition of fines by governmental authorities or awards of
damages to private litigants.
Trademarks, Proprietary Information and Patents
We believe that product recognition is an important competitive factor in
the lawn and garden care products industry. Accordingly, in connection with our
marketing activities of our lawn and garden care products, we promote, and
intend to promote, certain 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 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.
16
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 $15.0 million, $25.0 million and $15.0
million, respectively, there can be no assurance that such insurance will
provide coverage for any claim against us or will be sufficient to cover all
possible liabilities. In the event a successful suit is brought against us,
unavailability or insufficiency of insurance coverage could have a material
adverse effect on us. Moreover, any adverse publicity arising from claims made
against us, even if such claims were not successful, could adversely affect the
reputation and sales of our products.
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.
17
Employees
As of September 17, 2001 we had 195 full-time employees. Of such employees,
four are executive officers of U.S. Home & Garden Inc., 52 were engaged in
administration and finance, 22 were engaged in sales and marketing, 32 were
engaged in warehouse, shipping and receiving, and 85 were engaged in production.
None of our employees are covered by collective bargaining agreements. We
believe that we have a good relationship with our employees.
Segment Information
Our primary continuing operations are in one segment - the manufacture and
sale of consumer lawn and garden products. We have no significant export sales.
Product and major customer information are disclosed separately above.
Item 2. Properties.
Our executive offices are currently located in San Francisco, California,
in approximately 2,000 square feet of office space for which we pay $12,121 per
month in rent, which amount includes the costs of utilities and janitorial
services. Our office space is rented pursuant to a lease expiring in February
2004.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which we pay $19,471 per month in rent,
pursuant to a lease agreement that expires on February 28, 2002. We expect to
renew this lease prior to the expiration of its current term. Easy Gardener's
facilities contain landscape fabric converters, packaging equipment and
warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $9,931 per month in rent pursuant to a
lease that expires on June 30, 2006. We also lease an additional 13,200 feet of
warehouse space in Paris, Kentucky for $2,200 per month in rent on a
month-to-month basis.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $1,399 per month base rent, with rent
increases at a rate of 4% a year. The lease expires in May 2002 subject to our
option to renew the lease for an additional one year period.
18
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 leased approximately 4,600 square feet of office space in Raleigh,
North Carolina for which we paid $7,695 per month in rent, pursuant to a lease
agreement that was to expire on December 31, 2004. Due to the discontinuation of
Egarden, this lease was terminated in August 2001, at which time the landlord
was paid a $65,000 termination fee.
We believe that our current manufacturing and warehouse space is adequate
for our planned future operations.
Item 3. Legal Proceedings
In July 2000 our subsidiary, Weed Wizard Acquisition Corp. ("Weed Wizard")
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.
In October 2000 A.A.B.B., Inc. asserted a counterclaim for breach of
contract against Weed Wizard alleging that it is owed $720,267, plus interest,
representing an adjustment to the purchase price allegedly required to be made
pursuant to the agreement in which Weed Wizard acquired certain A.A.B.B. Inc.'s
assets. A.A.B.B., Inc. is also seeking to recover attorney's fees. We deny any
liability and intend to defend this counterclaim.
19
We have recently settled the product liability action Miller v. Weed
Wizard, Inc., et. al., which was commenced in August 2000 in the Iowa District
Court for Des Moines County. The settlement did not have a material adverse
effect on our operations or financial condition.
In fiscal 2001 we were notified by the staff of the U.S. Consumer Product
Safety Commission ("CPSC") that the staff is considering recommending that the
CSPC commence an action against Weed Wizard to obtain a monetary fine from Weed
Wizard for the alleged failure of Weed Wizard to timely disclose to the CPSC,
pursuant to the Consumer Products Safety Act, certain required information
concerning a Weed Wizard product previously distributed by us that was subject
of a voluntary recall during 2000. We believe that the maximum amount of any
claim that may be brought by the CSPC will not exceed approximately $1.6
million. We intend to defend any claim against Weed Wizard or us that may be
brought by the CSPC.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of U.S. Home & Garden stockholders was held on June 25,
2001 at which time the following directors were reappointed to serve until the
Annual Meeting of Stockholders to be held in the year 2002:
Votes For Votes Withheld
--------- --------------
Robert Kassel 14,598,755 1,039,655
Richard Raleigh 14,644,965 993,445
Fred Heiden 14,643,745 994,665
Brad Holsworth 14,646,265 992,145
Jon Schulberg 14,644,465 993,945
20
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters.
Our common stock has traded in the over-the-counter market and has been
quoted on the NASDAQ Stock Market since March 26, 1992. The NASDAQ Smallcap
symbol for our common stock is "USHG". The following table sets forth, for the
periods indicated, the high and low sales prices for the common stock, as
reported by NASDAQ.
Year Ended June 30, 2001 High Low
First Quarter $ 3.38 $ 1.88
Second Quarter 2.25 1.00
Third Quarter 1.78 1.00
Fourth Quarter 1.09 0.63
Year Ended June 30, 2000 High Low
First Quarter $ 4.13 $ 2.25
Second Quarter 2.81 2.13
Third Quarter 5.13 2.56
Fourth Quarter 3.88 2.13
As of September 17, 2001, the number of stockholders of record of our
common stock was 183. 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, 2001, we extended by two years the
expiration date of options and warrants to purchase an aggregate of 200,000
shares of common stock previously granted to certain advisors. The foregoing
transaction was 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 agreement between us and our primary lending institution prohibits
us from paying dividends without the lenders' consent.
21
Item 6. Selected Financial Data (in thousands, except per share data).
The following selected financial data at and for the years ended June 30,
1997, 1998, 1999, 2000 and 2001 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 Operations Data
Year Ended June 30,
----------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Net sales .......................................... $52,046 $67,149 $89,346 $89,665 $80,775
Cost of sales ...................................... 23,649 30,431 44,176 49,101 45,555
Unusual item ....................................... -- -- -- 928 --
------------ ------------ ------------ ------------ ------------
Gross profit ....................................... 28,397 36,718 45,170 39,636 35,220
Selling, shipping, general and administrative
expenses ........................................... 17,745 23,047 32,900 31,711 31,856
Loss on impairment of goodwill ..................... -- -- -- -- 10,820
Restructuring charges .............................. -- -- 1,964 -- 2,860
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ...................... 10,652 13,671 10,306 7,925 (10,316)
Other income (expense) ............................. (3,262) (3,095) (6,907) (6,692) (7,335)
Income tax (expense) benefit ....................... (3,200) (3,600) (1,350) (907) 3,898
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before extraordinary gain (expense) ................ 4,190 6,976 2,049 326 (13,753)
Loss from discontinued operations,
net of tax and minority interest ................... -- -- -- (1,895) (7,129)
Loss on disposal of discontinued operations,
net of tax and minority interest ................... -- -- -- -- (4,551)
Extraordinary (expense) gain, net of tax ........... (1,007) (1,450) -- 1,224 4
------------ ------------ ------------ ------------ ------------
Net income (loss) .................................. $3,183 $5,526 $2,049 $(345) $(25,429)
============ ============ ============ ============ ============
Income (loss) from continuing operations per
share before extraordinary gain (expense):
Basic .............................................. $.31 $.39 $.10 $.02 $(.76)
Dilutive ........................................... $.26 $.31 $.09 $.02 $(.76)
Net income (loss) per share:
Basic .............................................. $.23 $.31 $.10 $(.02) $(1.40)
Dilutive ........................................... $.20 $.24 $.09 $(.02) $(1.40)
Weighted average number of common and common
equivalent shares outstanding:
Basic .............................................. 13,695,000 17,776,000 19,621,000 19,031,000 18,181,000
Dilutive ........................................... 16,068,000 22,808,000 23,595,000 19,031,000 18,181,000
22
Balance Sheet Data:
June 30,
------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Working capital ..................... $2,292 $46,743 $32,874 $25,152 $4,886
Intangible assets, net .............. 44,364 63,395 82,109 78,632 65,941
Total assets ........................ 68,475 126,813 138,263 139,662 108,936
Short-term debt ..................... 8,990 -- -- 3,125 21,650
Long-term debt ...................... 17,570 63,250 78,750 70,855 56,951
Total liabilities ................... 36,549 75,214 91,779 90,448 89,729
Stockholders' equity ................ 31,926 51,599 46,484 45,103 17,968
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
We manufacture and market a broad range of brand-name consumer lawn and
garden products through our wholly-owned subsidiaries, Ampro, Easy Gardener and
Golden West, and through Easy Gardener's wholly-owned subsidiaries, Weatherly
and Weed Wizard. 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 $59.6 million as of June
30, 2001. 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, 2001 was $2.6 million or
$.14 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, 2001 were
adversely affected by the impairment of goodwill of one of our subsidiaries,
Weed Wizard Acquisition Corporation and losses attributable to our Egarden Inc.
subsidiary, whose operations were discontinued in May 2001. Our results of
operations were also adversely affected by the restructuring loss from the
closure of the Ampro Industries, Inc. facility in Michigan, an overall soft
economy and prolonged periods of inclement weather in many portions of the
United States during the early spring which negatively impacted the lawn and
garden industry.
23
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 late 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.
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,
-----------------------------------------
1999 2000 2001
----- ----- -----
Net sales .............................................. 100% 100% 100%
Cost of sales .......................................... 49.4 54.8 56.4
Unusual item ........................................... -- 1.0 --
----- ----- -----
Gross profit ........................................... 50.6 44.2 43.6
Selling and shipping expenses .......................... 21.6 20.8 20.8
General and administrative expenses .................... 15.3 14.6 18.7
Loss on impairment of goodwill ......................... -- -- 13.4
Restructuring charges .................................. 2.2 -- 3.5
----- ----- -----
Income (loss) from operations .......................... 11.5 8.8 (12.8)
Gain (loss) on disposal of property and equipment ...... -- 0.6 --
Interest expense, net .................................. (7.7) (8.1) (9.1)
Income tax (expense) benefit ........................... (1.5) (1.0) 4.8
Loss from discontinued operations, net ................. -- (2.1) (8.8)
Loss on disposal of discontinued operations, net ....... -- -- (5.7)
Extraordinary (expense) gain, net ...................... -- 1.4 --
----- ----- -----
Net income (loss) ...................................... 2.3% (0.4)% (31.6)%
----- ----- -----
24
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Net sales. Net sales decreased by $8.9 million, or 9.9%, to $80.8 million
during the fiscal year ended June 30, 2001 from $89.7 million during the
comparable period in 2000. The decrease in sales was primarily a result of poor
spring weather, a generally slower economic environment and major customers
moving to just-in-time inventory management programs.
Gross Profit. Gross profit decreased by $4.4 million, or 11.1%, to $35.2
million for the fiscal year ended June 30, 2001 from $39.6 million during the
comparable period in 2000. Gross profit as a percentage of net sales decreased
to 43.6% during the fiscal year ended June 30, 2001 from 44.2% during the
comparable period in 2000. This decrease was due primarily to delayed order
placement by the major retailers, an overall soft economy and poor weather in
our key markets in the third quarter.
Selling and shipping expense. Selling and shipping expenses decreased $1.8
million, or 9.9% to $16.8 million during the fiscal year ended June 30, 2001
from $18.6 million during the comparable period in 2000. This decrease in
expense was primarily a result of the decrease in net sales. Selling and
shipping expenses as a percentage of net sales remained consistent at 20.8%
during the fiscal year ended June 30, 2001 compared to the prior year.
General and administrative expenses. General and administrative expenses,
excluding depreciation and amortization, increased $1.9 million or 21.1% to
$10.7 million during the fiscal year ended June 30, 2001 from $8.8 million
during the comparable period in 2000. This increase is primarily due to a write
off of certain receivables from our customers in fiscal 2001, a general increase
in expense levels paid and termination benefits for certain former employees
during the fiscal year ended June 30, 2001. As a percentage of net sales,
general and administrative expenses excluding depreciation and amortization
increased to 13.2% during the fiscal year ended June 30, 2001 from 9.8% during
the comparable period in 2000.
Depreciation and amortization. Depreciation and amortization expenses
remained consistent with the prior year at $4.4 million during the fiscal year
ended June 30, 2001 compared to $4.3 million during the comparable period in
2000. As a percentage of net sales, depreciation and amortization expenses
increased to 5.4% during the fiscal year ended June 30, 2001 from 4.8% during
the comparable period in 2000 primarily due to the decrease in net sales.
25
Restructuring Charges. In fiscal 2001, we recorded restructuring charges of
$2.9 million relating to the closing and sale of our Ampro Industries Inc.
facility in Michigan. We continue to sell products that were previously
manufactured at Ampro's Michigan facility. We recognized approximately $1.7
million of expenses and losses relating to the closing of the Ampro facility and
sale of property and equipment relating to the Ampro facility and approximately
$1.2 million for the termination benefits to be paid to all employees involved
with the facility. Approximately $999,000 in termination benefits were unpaid at
June 30, 2001, as a result of restructuring. The restructuring is expected to be
completed by October 31, 2001.
Goodwill Impairment. An impairment charge of $10,820,000 was recorded in
June 2001 to write off the net goodwill balance associated with our Weed Wizard
subsidiary. Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of"
("SFAS 121") requires periodic evaluation of asset impairment under certain
circumstances. Due to the operating losses incurred by the subsidiary, the
product recall in the prior year, and the unsuccessful product launch of the
replacement product through a complete sales season, the evaluation was
performed. If the evaluation determines that the long-lived assets have been
impaired, SFAS 121 requires that the assets be written down to their fair value,
as determined by estimated terminal value, which was accomplished by the
impairment charge.
Since the remaining assets of Weed Wizard (primarily machinery and product
rights) will remain in service, the remaining net book value of the assets will
be depreciated or amortized over the remaining lives of the assets.
Income (loss) from continuing operations. Loss from continuing operations
increased by $18.3 million, to a loss of $10.4 million during the fiscal year
ended June 30, 2001 compared to $7.9 million in income for the comparable period
in 2000. The decrease in income from operations for the 2001 period is primarily
attributable to the impairment of goodwill of our subsidiary, Weed Wizard
Acquisition Corporation, restructuring charges related to the closure of our
26
Ampro Industries, Inc. facility in Michigan, delayed order placement by the
major retailers, an overall soft economy and poor weather in the third quarter.
As a percentage of net sales, loss from operations increased to 12.8% for the
fiscal year ended June 30, 2001 from income from operations of 8.8% during the
comparable period in 2000.
Net interest expense. Net interest expense increased $92,000, or 1.3% to
$7.3 million during the fiscal year ended June 30, 2001, from $7.2 million
during the comparable period in 2000. The increase in interest expense is
primarily related to the increase in borrowings under our credit facilities.
Income tax benefit. Income tax benefit was $3.9 million during the fiscal
year ended June 30, 2001 compared to income tax expense of $907,000 during the
comparable period in 2000, primarily due to the decrease in income from
operations. See Note 18 to the Consolidated Financial Statements.
Discontinued Operations. In June 2001, we announced that we were
discontinuing our e-commerce initiative, which we were conducting through our
subsidiary, Egarden Inc., effective June 30, 2001. We plan to dispose of the
assets and liabilities of Egarden by either contributing them to another company
in exchange for an ownership interest in a company or through a sale of the
assets and liquidation of the liabilities. The net assets of the discontinued
operations were $108,000 at June 30, 2001 with a minority interest of
$1,239,000.
We recorded a net loss on disposal of discontinued operations of $4.6
million, net of minority interest of $1.1 million. This included the write-off
of all long-lived assets of $5.2 million and $445,000 of restructuring expense
related to the termination of all Egarden employees. In addition to the net loss
on disposal of discontinued operations in 2001, we had a net loss from the
operations of Egarden of $7.1 million, net of minority interest of $1.8 million.
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" (APB 30), our consolidated financial statements have been
reclassified to reflect the discontinuation of Egarden. The net operating
results, net assets and net cash flows of Egarden have been reported as
"Discontinued Operations" in our Consolidated Financial Statements.
27
Extraordinary gain from early extinguishment of debt. Extraordinary gain
from early extinguishment of debt decreased to $4,000 during the fiscal year
ended June 30, 2001 from $1.2 million for the comparable period in 2000 (net of
tax of $3,000 and $878,000, respectively). In 2001 we repurchased 1,200 shares
of the mandatorily redeemable trust preferred securities of U.S. Home & Garden
Trust I compared to 250,781 shares in 2000. See Note 19 to the Consolidated
Financial Statements.
Net loss. Net loss increased by $25.1 million to a net loss of $25.5
million during the fiscal year ended June 30, 2001 from a net loss of $345,000
during the comparable period in 2000. Net loss per common share increased $1.38
to a net loss of $1.40 per share when compared to net loss per common share of
$.02 during the comparable period in 2000. The increase in net loss is primarily
attributable to the impairment of goodwill of one of our subsidiaries, Weed
Wizard Acquisition Corporation, the restructuring charge related to the closure
of the Ampro Industries, Inc. facility in Michigan, the discontinuance of
operations of our business-to-business e-commerce subsidiary, Egarden Inc.,
reduced sales due to delayed order placement by the major retailers, an overall
soft economy and poor weather in the third quarter, offset in part by a
reduction in income tax expense of approximately $4.8 million. There were fewer
weighted average common and common equivalent shares outstanding during the year
ended June 30, 2001 compared to the comparable period in the prior year due to
the repurchase of our common stock during both years.
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.
28
Selling and shipping expense. Selling and shipping expenses decreased $0.7
million, or 3.6% to $18.6 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 decreased to 20.8% during fiscal year
ended June 30, 2000 from 21.6% during the comparable period in 1999.
General and administrative expenses. General and administrative expenses,
excluding depreciation and amortization, decreased $0.5 million or 5.4%, to $8.8
million during the fiscal year ended June 30, 2000 from $9.3 million during the
comparable period in 1999. As a percentage of net sales, general and
administrative expenses excluding depreciation and amortization decreased to
9.8% during the fiscal year ended June 30, 2000 from 10.4% during the comparable
period in 1999. This decrease as a percentage of net sales was primarily due to
the increase in net sales.
Depreciation and amortization. Depreciation and amortization expenses were
consistent at $4.3 million during the fiscal years ended June 30, 2000 and 1999.
As a percentage of net sales, depreciation and amortization expenses were 4.8%
during the fiscal years ended June 30, 2000 and 1999.
Income from operations. Income from operations decreased by $2.4 million,
or 23.1%, to $7.9 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 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 8.8% for the fiscal year ended June
30, 2000 from 11.5% during the comparable period in 1999.
Net interest expense. Net interest expense increased $360,000, or 5.2% to
$7.2 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. Interest expense also decreased in conjunction with our
repurchase of 250,781 shares of the mandatorily redeemable trust preferred
securities of U.S. Home & Garden Trust I.
29
Income taxes. Income tax expense decreased by $0.5 million to $0.9 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. See Note 18 to the Consolidated Financial Statements.
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 250,781 shares of the mandatorily redeemable trust
preferred securities of U.S. Home & Garden Trust I. See Note 19 to the
Consolidated Financial Statements included in Part I, Item 8.
Net income (loss). Net income decreased by $2.4 million to a net loss of
$345,000 during the fiscal year ended June 30, 2000 from net income of $2.1
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 loss
from discontinued operations, 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.
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
2001, are also seasonal. Most shipments occur during the period from March
through October.
30
Set forth below is certain unaudited quarterly financial information:
Quarter ended
(in thousands, except percentages and per share data)
--------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31,
1999 1999 2000 2000 2000 2000
---------- ---------- ---------- ---------- ---------- ----------
Net sales ...................... $12,985 $14,145 $36,494 $26,041 $13,111 $11,360
Cost of sales ................ 7,176 7,420 19,218 15,287 7,424 5,974
Unusual item ................. -- -- 928 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Gross profit ................. 5,809 6,725 16,348 10,754 5,687 5,386
Selling, shipping, general and
administrative expenses ...... 7,645 7,795 8,006 8,265 7,742 7,485
Loss on impairment of
goodwill ....................... -- -- -- -- -- --
Restructuring charges .......... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations ..................... (1,836) (1,070) 8,342 2,489 (2,055) (2,099)
Gain (loss) on sale of
property ....................... -- -- -- 551 -- --
Interest income ................ 73 59 58 74 64 34
Interest expense ............... (1,818) (2,003) (1,875) (1,811) (1,660) (1,763)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes
and extraordinary gain ......... (3,581) (3,014) 6,525 1,303 (3,651) (3,828)
Income tax benefit (expense) ... 1,600 1,353 (2,828) (1,032) 1,779 1,808
Loss from discontinued
operations, net of taxes and
minority interest .............. -- (304) (905) (686) (883) (977)
Loss on disposal of
discontinued operations, net of
taxes and minority interest .... -- -- -- -- -- --
Extraordinary gain, net of
taxes .......................... -- -- 943 281 4 --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .............. $(1,981) $(1,965) $3,735 $(134) $(2,751) $(2,997)
========== ========== ========== ========== ========== ==========
Diluted net income (loss) per
share(1) ....................... $(0.10) $(0.10) $0.17 $(0.01) $(0.15) $(0.16)
========== ========== ========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding(1) ................. 19,335 19,213 21,627 18,988 18,807 18,313
========== ========== ========== ========== ========== ==========
Net sales ...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ................ 55.3% 52.5% 52.7% 58.7% 56.6% 52.6%
Unusual Item ................. -- -- 2.5% -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Gross profit ................. 44.7% 47.5% 44.8% 41.3% 43.4% 47.4%
Selling, shipping, general and
administrative ............. 58.9% 55.1% 22.0% 31.7% 59.0% 65.9%
Loss on impairment of
goodwill ....................... -- -- -- -- -- --
Restructuring charges .......... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations .. (14.2%) (7.6%) 22.8% 9.6% (15.6%) (18.5%)
Gain (loss) on the sale of
property ....................... -- -- -- 2.1% -- --
Interest income ................ 0.6% 0.4% 0.2% 0.3% 0.5% 0.3%
Interest expense ............... (14.0%) (14.1%) (5.1%) (7.0%) (12.7%) (15.5%)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes,
and extraordinary gain ......... (27.6%) (21.3%) 17.9% 5.0% (27.8%) (33.7%)
Income tax benefit (expense) ... 12.3% 9.6% (7.8%) (4.0%) 13.5% 15.9%
Loss from discontinued
operations, net of tax
and minority interest .......... -- (2.2%) (2.5%) (2.6%) (6.7%) (8.6%)
Loss on disposal of discontinued
operations, net of tax
and minority interest .......... -- -- -- -- -- --
Extraordinary gain, net of
taxes .......................... -- -- 2.6% 1.1% -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .............. (15.3%) (13.9%) 10.2% (0.5%) (21.0%) (26.4%)
========== ========== ========== ========== ========== ==========
--------------------------
March 31, June 30,
2001 2001
---------- ----------
Net sales ...................... $26,507 $29,797
Cost of sales ................ 14,165 17,992
Unusual item ................. -- --
---------- ----------
Gross profit ................. 12,342 11,805
Selling, shipping, general and
administrative expenses ...... 8,687 7,942
Loss on impairment of
goodwill ....................... -- 10,820
Restructuring charges .......... 800 2,060
---------- ----------
Income (loss) from
operations ..................... 2,855 (9,017)
Gain (loss) on sale of
property ....................... -- --
Interest income ................ 99 25
Interest expense ............... (1,998) (2,136)
---------- ----------
Income (loss) from continuing
operations before income taxes
and extraordinary gain ......... 956 (11,128)
Income tax benefit (expense) ... (2,311) 2,622
Loss from discontinued
operations, net of taxes and
minority interest .............. (416) (4,853)
Loss on disposal of
discontinued operations, net of
taxes and minority interest .... -- (4,551)
Extraordinary gain, net of
taxes .......................... -- --
---------- ----------
Net income (loss) .............. $(1,771) $(17,910)
========== ==========
Diluted net income (loss) per
share(1) ....................... ($0.10) $(1.02)
========== ==========
Weighted average common and
common equivalent shares
outstanding(1) ................. 17,638 17,628
========== ==========
Net sales ...................... 100.0% 100.0%
Cost of sales ................ 53.4% 60.4%
Unusual Item ................. -- --
---------- ----------
Gross profit ................. 46.6% 39.6%
Selling, shipping, general and
administrative ............. 32.8% 26.7%
Loss on impairment of
goodwill ....................... -- 36.3%
Restructuring charges .......... 3.0% 6.9%
---------- ----------
Income (loss) from operations .. 10.8% (30.3%)
Gain (loss) on the sale of
property ....................... -- _
Interest income ................ 0.4% 0.1%
Interest expense ............... (7.6%) (7.2%)
---------- ----------
Income (loss) from continuing
operations before income taxes,
and extraordinary gain ......... 3.6% (37.4%)
Income tax benefit (expense) ... (8.7%) 8.8%
Loss from discontinued
operations, net of tax
and minority interest .......... (1.6%) (16.3%)
Loss on disposal of discontinued
operations, net of tax
and minority interest .......... -- (15.2%)
Extraordinary gain, net of
taxes .......................... -- --
---------- ----------
Net income (loss) .............. (6.7%) (60.1%)
========== ==========
--------
(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.
31
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, 2001, we had consolidated cash and short-term investments
totaling $2.7 million and working capital of $4.9 million. At June 30, 2000, we
had consolidated cash and short-term investments totaling $5.1 million, of which
$1.6 million was restricted and working capital of $25.2 million. The principal
sources of working capital during fiscal 2001 included proceeds from sale of
property and equipment and net proceeds from our credit facility discussed
below. Major uses of working capital included the purchase of equipment,
expenditures related to Egarden and repurchase of 1,336,000 shares of our common
stock.
Net cash provided by continuing operating activities for fiscal 2001 of
$826,000 consisted primarily of a decrease in inventory and an increase in
non-cash expenses, which includes depreciation and amortization of $5.7 million,
the $10.8 million loss on impairment of goodwill and the $2.7 million of
restructuring charges, net of cash, which was offset, in part, by the loss from
continuing operations and a decrease in accounts payable and accrued expenses.
The $1.8 million decrease in inventories was primarily caused by efficiencies in
inventory management due to improved information systems. The $5.7 million
decrease in accounts payable and accrued expenses is primarily due to decreased
purchases of new material inventories and changes in the timing of certain
tax-related items.
Net cash provided by investing activities for fiscal 2001 was $2.3 million,
consisting primarily of proceeds from the sale of property and equipment and the
decrease in restricted cash partially offset by the purchase of equipment,
package tooling and other intangibles.
32
Net cash provided by financing activities for fiscal 2001 was $1.6 million,
consisting primarily of the net proceeds from the lines of credit partially
offset by the repurchase of common stock for treasury.
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 expired on June 30, 2001,
at which time borrowings became 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 or extended, 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 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 us 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, 2001, the interest rate on any
borrowings under the facilities was 10.12%.
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. We are in violation of certain covenants of the
Credit Facility. We have received from the Bank an extension of the maturity
date of the Working Capital Facility to October 30, 2001.
33
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. Any
balances outstanding under the Acquisition Facility at June 30, 2001 must be
repaid in quarterly installments such that 37.5% is paid in fiscal 2002, 32.5%
is paid in fiscal 2003 and 30.0% is paid in fiscal 2004.
In September 2001, we received a commitment from another commercial bank to
refinance the Working Capital and Acquisition Facilities with a new asset-based
borrowing facility. The proposed new three-year facility will be composed of a
revolving credit line of up to $31 million, which will be limited by, and
secured by, our accounts receivable and inventory. It will also contain a term
loan of $2 million, which will be secured by our fixed assets, and will be paid
down in equal installments on a five-year amortization schedule.
Borrowings under the new credit facility will bear interest at variable
annual rates selected by the Company based on either the bank's Eurodollar rate
or its prime rate plus, in each case, an applicable marginal rate of interest.
As a condition for closing this new credit facility, we must arrange for
new subordinated debt financing of at least $2.25 million and must have cash
and/or borrowing availability under the new facility of at least $3.25 million
at closing.
We have received a commitment for new subordinated debt in an amount that
will provide us with proceeds of approximately $4.0 million. We believe that
this subordinated debt will meet the requirements under the proposed new asset
based credit facility. However, there can be no assurance that either the new
asset based credit facility or the new subordinated debt will be consummated or
that the terms will remain as stated in the commitment letters. See Note 9 to
the Consolidated Financial Statements.
34
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.
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, 2001, 3,889,724 shares have been repurchased from non-affiliates in
open market transactions of which 1,335,552 shares were purchased during fiscal
2001. The Bank, as a condition of waiving non-compliance by us with certain
covenants under the credit facilities, has prohibited further share repurchases.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
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 No. 133 was effective for all
fiscal quarters of fiscal years beginning after June 15, 2000 as amended by SFAS
No. 137 and SFAS No. 138. The adoption of SFAS did not have a material impact on
the Company's consolidated financial statements.
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 was effective
35
July 1, 2000, but certain conclusions in this Interpretation cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
adoption of Interpretation No. 44 did not have a material impact on our
consolidated financial statements.
In June 2001, the FASB finalized Statements No. 141, Business Combinations
("SFAS 141") and No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 requires the use of the purchase method of accounting and prohibits the
use of the pooling-of-interest method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that we recognize acquired
intangible assets apart form goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires, upon adoption of SFAS 142, that we reclassify the
carrying amounts of intangible assets and goodwill based on the criteria of SFAS
141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that we identify reporting units for the purpose of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires that we complete a transitional goodwill
impairment test six months from the date of adoption. We are also required to
reassess the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142.
Our previous business combinations were accounted for using the purchase
method. As of June 30, 2001, the net carrying amount of goodwill is $59.6
million and other intangible assets is $6.3 million. Amortization expense during
the year ended June 30, 2001 was $3.4 million. Currently, we are assessing but
have not yet determined how the adoption of SFAS 141 and SFAS 142 will impact
our financial position and results of operations.
36
In September 2000 the Emerging Issues Task Force (EITF) issued EITF Issue
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor Products, which requires cooperative advertising charges
to be classified as a reduction of revenue. This guidance is effective for
fiscal periods beginning after December 15, 2001. Currently, we are assessing
but have not yet adopted EITF 00-25.
Inflation
Inflation has historically not had a material effect on our operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following table provides information on our fixed maturity debt instruments
as of June 30, 2001 that are sensitive to changes in interest rates.
The Bank lines of credit had interest rates $21.7 million
ranging from 6.62% to 10.87% for the
year ended June 30, 2001
Item 8. Financial Statements and Supplementary Data.
This information appears in a separate section of this report following
Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Our current directors and executive officers are as follows:
Name Age Position
---- --- --------
Robert Kassel(1) 61 Chairman of the Board, Chief
Executive Officer, President and
Treasurer
Richard Grandy 55 Chief Operating Officer
37
Name Age Position
---- --- --------
Richard Raleigh (1) 47 Director
Fred Heiden(1)(2) 60 Director
Brad Holsworth(2) 41 Director
Jon Schulberg(1)(2) 43 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 Grandy, has been Chief Operating Officer of U.S. Home & Garden Inc.
since June 30, 2001. He has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of Easy
Gardener, Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy
Gardener, Inc. in 1983 after serving as Marketing Director at International
Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a
sales representative of lawn and garden products for the Ortho Division of
Chevron Chemical Co.
Richard Raleigh has been a Director of U.S. Home & Garden Inc. since March 1993.
He served as Chief Operating Officer of U.S. Home & Garden Inc. from June 1992
to June 30, 2001 and has served as a consultant to U.S. Home & Garden, Inc.
since then. He served as Executive Vice President-Operations of U.S. Home &
Garden Inc. from December 1991 to June 1992. Prior to joining U.S. Home & Garden
Inc., Mr. Raleigh was a free-lance marketing consultant to the lawn and garden
industry from January 1991 to December 1991. From April 1988 to January 1991, he
was Director of Marketing, Lawn and Garden of Monsanto Agricultural Co. From
38
December 1986 to April 1988 he was Vice President of Sales and Marketing of The
Andersons, a company engaged in the sale of consumer and professional lawn and
garden products. From November 1978 to December 1986, he held a variety of
positions at The Andersons, including Operations Manager and New Products
Development Manager.
Fred Heiden, a director of U.S. Home & Garden Inc. since March 1993, has been a
private investor since November 1989. From April 1984 to November 1989, Mr.
Heiden was President and Principal owner of Bonair Construction, a Florida based
home improvement construction company.
Brad Holsworth has been a director of U.S. Home & Garden Inc. since July 2000.
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 was a partner of BDO Seidman, LLP from July
1995 to April 1999.
Jon Schulberg, a director of U.S. Home & Garden Inc. since March 1993, has been
employed as President of Schulberg MediaWorks, a company engaged in the
independent production of television programs and television advertising since
January 1992. From January 1989 to January 1992, he was a producer for
Guthy-Renker Corporation, a television production company. From September 1987
to January 1989 he was Director of Development for Eric Jones Productions.
Certain Key Employees
Richard Kurz, 59, has been Chief Financial Officer of U.S. Home & Garden Inc.
since October 2001 and served as its Vice President-Finance from June 2001 until
October 2001. From 1997 until December 2000 he was Executive Vice President and
Chief Financial Officer for Aircraft Interior Resources, Inc, a company that
provides products and services to commercial airlines. From 1994 until 1997 he
was Senior Vice President and Chief Financial Officer of American Eagle Group,
Inc., a service company that provided insurance services to the aviation and
other specialized industries. From 1991 to 1994 he was Chief Financial and
Administrative Officer for BDP International, Inc. a logistics service provider.
From 1979 to 1991 he held a variety of senior financial positions with Cigna
Corporation, a healthcare provider. Mr. Kurz is a Certified Public Accountant.
39
David Harper, 49, has been Chief Operating Officer of Egarden 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, 46, 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, 45, 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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that officers
and directors, and persons who beneficially own more than 10 percent of a
registered class of equity securities of U.S. Home & Garden Inc., file certain
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
40
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, 2001 all filing requirements applicable to the officers,
directors, and greater than 10 percent beneficial stockholders of U.S. Home &
Garden Inc. were complied with.
Item 11. Executive Compensation.
The following table discloses the compensation awarded by U.S. Home &
Garden Inc., for the three fiscal years ended June 30, 2001, 2000 and 1999, to
Mr. Robert Kassel, its Chairman, Chief Executive Officer, President and
Treasurer, Mr. Richard Raleigh, its former Chief Operating Officer, and Mr.
Richard Grandy, its current Chief Operating Officer, Ms. Lynda Gustafson, its
former Vice President of Finance, and Mr. Donald Rutishauser, its former Chief
Financial Officer (together, the "Named Officers"). During the fiscal year ended
June 30, 2001, no other officer of U.S. Home & Garden Inc. received a total
salary and bonus that exceeded $100,000 during such fiscal year.
Summary Compensation Table
Annual Compensation Long-Term
Compensation
Name and Principal Position Securities
--------------------------- Underlying All Other
Year Salary ($) Bonus ($) Options (#) Compensation($)(1)
---- ---------- --------- --------------- ------------------
Robert Kassel, 2001 354,000 315,000 1,468,000 (5) 6,593
Chairman, Chief Executive Officer, 2000 477,000 (2) 320,000 (2) 500,000 (3) 6,383
President and Treasurer 1999 450,000 114,000 641,333 (4) 6,169
Richard Raleigh, former Chief Operating 2001 253,000 328,000 537,000 (5) 664,074
Officer 2000 250,000 125,000 225,000 (6) 12,623
1999 250,000 96,000 137,500 (7)(8) 12,169
Richard Grandy, Chief Operating Officer 2001 340,000 100,000 150,000 (5) 11,693
2000 311,000 -- -- 11,806
1999 286,000 -- -- 11,593
Lynda Gustafson, former Vice President of 2001 6,000 -- -- 210,703
Finance 2000 147,000 60,000 50,000 4,763
1999 148,000 60,000 -- 12,169
Donald Rutishauser, former Chief Financial 2001 119,000 26,000 -- 151,719
Officer 2000 71,000 -- 50,000 --
(1) Represents our contributions to the Named Officers 401(k)/profit sharing
accounts and actual or accrued severance payments to Mr. Raleigh
($652,000), Ms. Gustafson ($210,000) and Mr. Rutishauser ($150,000) in
fiscal 2001. Excludes certain perquisites that did not exceed the lesser of
$50,000 or 10% of their combined bonus and salary.
41
(2) Included in Mr. Kassel's salary is $46,800 of non-cash compensation
attributable to his receipt of shares of common stock of Egarden Inc. Mr.
Kassel's bonus of $320,000 primarily reflects work performed by him in
connection with Egarden Inc. and its initial capitalization, securing
E-commerce agreements with certain of the nations largest hardware
cooperatives and obtaining vendor arrangements.
(3) Includes 200,000 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in fiscal
2000.
(4) 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) Represents options that were originally granted to the respective officers
in prior fiscal years, the expiration dates of which were extended in
fiscal 2001.
(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.
(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.
42
No new options were granted to the Named Officers and 10,000 options were
granted to an employee during the fiscal year ended June 30, 2001. The only
other options granted during fiscal 2001 were to outside directors under the
Directors Stock Option Plan. The following table discloses information
concerning options granted to certain of the Named Officers in prior fiscal
years whose expiration dates were extended during the fiscal year ended June 30,
2001.
Option Grants in Fiscal Year Ended June 30, 2001
Individual Grants
--------------------------------------------------------------------------
Number of Securities Percent of Total
Underlying Options Options Granted to Exercise Potential Realizable Value at
Granted Employees in Fiscal Price Expiration Assumed Annual Rates of Stock Price
Name (#)(1) Year (%)(2) ($/Sh) Date Appreciation for Option Term ($)(3)
---------------- -------------------- ------------------- ------------ ------------ -----------------------------------
5% 10%
------------- ----------------
Robert Kassel 80,000 $1.69 11/17/05 -- --
1,000,000 2.06 11/17/05 -- --
388,000 3.25 11/17/05 -- --
Richard Grandy 150,000 2.25 11/17/05 -- --
Richard Raleigh 17,000 1.69 7/1/03 -- --
400,000 2.06 7/1/03 -- --
120,000 3.25 7/1/03 -- --
----------
(1) Represents options that were granted in prior fiscal years but whose
expiration dates were extended during fiscal 2001. All of the options are
exercisable in full at the time of the extension of their expiration dates
except for 80,000 options granted to Mr. Kassel, which vest over a 10-year
period and Mr. Raleigh's 17,000 $1.69 options which vest over a 10-year
period.
(2) No percentages are reflected in the above-table since no new options were
granted to any Named Officer during fiscal 2001. As noted above, in
addition to the extensions of options previously granted to certain of the
Named Officers a total of 10,000 new options were granted to employees
during fiscal 2001.
43
(3) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming our common stock appreciates at the compounded rates
specified over the term of the options. These numbers do not take into
account provisions of options providing for termination of the option
following termination of employment or nontransferability of the options
and do not make any provision for taxes associated with exercise. No
realizable value is shown since the market price of the common stock on the
date the options were extended was substantially lower than the exercise
price of the extended options.
The following table sets forth information concerning the number of options
owned by the Named Officers and the value of any in-the-money unexercised
options as of June 30, 2001. No options were exercised by any Named Officer
during the fiscal year ended June 30, 2001:
Aggregated Option Exercises
And Fiscal Year-End Option Values
Shares Acquired Value Realized Number of Securities Underlying Value of Unexercised In-the-Money
on Exercise(#) ($) Unexercised Options at June 30, 2001 Options at June 30, 2001(1)
--------------- -------------- ------------------------------------ ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------------- ----------- ------------- ----------- -------------
Robert Kassel -- -- 1,964,267 265,066 0 0
Richard Grandy -- -- 150,000 -- 0 0
Richard Raleigh -- -- 753,161 8,750 0 0
Lynda Gustafson -- -- -- -- 0 0
Donald Rutishauser -- -- 20,000 30,000 0 0
----------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year end market
value of the common stock. An Option is "in-the-money" if the fiscal year end
fair market value of the common stock exceeds the option exercise price. The
last sale price (the fair market value) of the common stock on June 29, 2001
(the last trading day prior to June 30, 2001)was $0.70 per share.
Employment Agreements of Executive Officers
We have entered into an employment agreement with Mr. Kassel dated as of
April 1, 1996. Mr. Kassel currently serves as Chief Executive Officer and
President of U.S. Home & Garden Inc. for a term expiring on March 31, 2002,
subject to automatic renewal unless terminated. His current annual salary is
$450,000, and is subject to such bonuses and increases as are approved at the
discretion of the Board of Directors or the
44
Compensation Committee of the Board, as the case may be. The employment
agreement 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 he may own not more than 5% of
the securities of any publicly traded competitive company). Mr. Kassel is, in
addition to salary, entitled to certain fringe benefits, including the use of an
automobile and payment of related expenses.
Mr. Kassel's agreement also provides that if his employment is terminated
under certain circumstances, including termination of Mr. Kassel's employment
upon a change of control of U.S. Home & Garden Inc, (as defined in the
agreement) a failure by U.S. Home & Garden Inc. to comply with its obligations
under the agreement, the failure of U.S. Home & Garden Inc. to obtain the
assumption of the agreement by any successor corporation, or a change in Mr.
Kassel's duties and obligations from those contemplated by the agreement, and
termination by U.S. Home & Garden Inc. of Mr. Kassel's employment other than for
disability or cause, he will be entitled to receive severance pay equal to the
greater of (i) $350,000 ($3,500,000 in the event of a change of control) or (ii)
the total compensation earned by Mr. Kassel from the Company during the one-year
period (multiplied by ten in the event of a change of control) prior to the date
of his termination.
Easy Gardener has entered into an employment agreement with Mr. Grandy,
dated as of September 1, 1998 which expires on August 31, 2003. The agreement
provides for Mr. Grandy to receive an annual base salary of $275,000, $300,000,
and $330,000 during the first three years of the agreement and $350,000
thereafter. Mr. Grandy is also entitled to such bonuses, if any, as determined
by the Board of Directors of Easy Gardener. The Agreement requires Mr. Grandy to
devote substantially all of his business time to Easy Gardener, and in the event
Mr. Grandy's employment agreement is terminated by Easy Gardener without cause
(as defined in the agreement) or if Mr. Grandy resigns with "Good Reason" (as
defined in the agreement), Mr. Grandy will be entitled to receive his base
salary through the expiration of the agreement.
We had entered into an employment agreement with Mr. Raleigh to serve as
our Chief Operating Officer for a term expiring on March 31, 2002 subject to
automatic renewal unless
45
terminated. The agreement provided that Mr. Raleigh was to receive an annual
salary of $250,000, subject to such bonuses and increases as are approved at the
discretion of the Board of Directors. In addition to salary, Mr. Raleigh was
entitled to certain fringe benefits, including the use of an automobile and
payment of related expenses.
Mr. Raleigh's employment agreement also provided that if his employment was
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 us to comply with our obligations under the
agreement, our failure 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 our termination Mr. Raleigh's
employment other than for disability or cause, he would 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 him from us during
the one-year period (multiplied by five in the event of a change of control)
prior to the date of his termination. Mr. Raleigh's employment agreement was
terminated as a result of the Separation Agreement discussed below.
Separation and Termination Agreements and Arrangements
During fiscal 2001 we entered into a Separation Agreement and Release and a
Consulting Agreement with Richard Raleigh, our director and former Chief
Operating Officer. The Separation Agreement provided for Mr. Raleigh's
resignation as an officer or employee of U.S. Home & Garden Inc. and its
subsidiaries effective June 30, 2001. In lieu of any severance benefits which
Mr. Raleigh otherwise might have been entitled to under his employment
agreement, we agreed, among other things, to pay Mr. Raleigh aggregate
separation pay of $476,000 of which $250,000 was paid in July 2001 with the
balance being paid in quarterly installments commencing October 1, 2001 and
released Mr. Raleigh from his obligation to repay the approximately $151,000
principal balance remaining on the loan we previously made to him. At the same
time Mr. Raleigh entered into an agreement to provide us with consulting
services through June 30, 2003 for a fee of $1,000 per month.
We have also entered into a Separation Agreement with Mr. Rutishauser, our
former Chief Financial Officer, that
46
requires that we pay him separation pay of $150,000 upon termination of his
employment with us. Mr. Rutishauser's employment with us terminates in October
2001.
During fiscal 2001 we made severance payments of $210,000 to Lynda
Gustafson, our former Vice President of Finance.
Committees of the Board of Directors
U.S. Home & Garden Inc. has established an Audit Committee which is
comprised of Messrs. Heiden, Holsworth and Schulberg. The Audit Committee, among
other things, makes recommendations to the Board of Directors with respect to
the engagement of U.S. Home & Garden Inc.'s independent certified public
accountants and the review of the scope and effect of the audit engagement. We
have also established a Compensation Committee which is comprised of Messrs.
Kassel, Heiden, Raleigh and Schulberg. The Compensation Committee, among other
things, makes recommendations to the Board of Directors with respect to the
compensation of the executive officers of U.S. Home & Garden Inc. We maintain a
Stock Option Committee comprised of Messrs. Schulberg and Heiden, which
determines the persons to whom options should be granted under the 1995 and 1997
Stock Option Plans and the number and other terms of options to be granted to
each person under such plans.
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, Raleigh and Schulberg. During the fiscal
year ended June 30, 2001, 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
47
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 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
48
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 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
49
(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 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.
Director Compensation
During the fiscal year ended June 30, 2001 each of our three non-employee
directors who served as directors during that fiscal year, Messrs. Heiden,
Holsworth and Schulberg, received $5,000 for serving on our Board of Directors
as well as options under the Director Plan.
50
Item 12. Security Ownership of Certain Beneficial Owners and Management.
VOTING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information at September 30, 2001, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of common stock by (i) each person known by us to
be the owner of more than 5% of the outstanding shares of common stock, (ii)
each director, (iii) each Named Officer, and (iv) all executive officers and
directors of U.S. Home & Garden Inc. as a group.
Amount and
Nature of
Beneficial Percentage
Name of Beneficial Owner Ownership(1)(2) of Class
------------------------ --------------- --------
Robert Kassel 2,836,931(3)(4) 14.2
Richard Raleigh 756,411(5) 4.1
Richard Grandy 1,084,396(6) 6.1
Donald Rutishauser 20,000(7) *
Lynda Gustafson 0 0
Fred Heiden 15,258(8) *
Brad Holsworth 6,000(9) *
Jon Schulberg 15,258(8) *
Joseph Owens, II 914,396(10) 5.2
Wellington Management
Company, LLP 1,510,000(11) 8.6
All executive officers
and directors as a
group (six persons) 4,714,254(3)(4)(5) 22.6
(6)(8)(9)(12)
----------
*less than 1%
51
(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 the Record Date 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 the Record Date have been exercised.
(3) Of such shares, (i) 138,650 are owned of record by Mr. Kassel's wife;
however, because Ms. Kassel has appointed her husband as her proxy and
attorney-in-fact to vote all 138,650 of the shares owned of record by her,
Robert Kassel may also be deemed to have beneficial ownership of such
shares. The address of Mr. Kassel is c/o U.S. Home & Garden Inc.
(4) Includes 2,374,493 shares of Common Stock issuable to Mr. Kassel upon
exercise of options and warrants and 208,388 shares whose issuance to Mr.
Kassel has been deferred pursuant to the terms of our Non-Qualified
Deferred Compensation Plan for Select Employees. Does not include a total
of 1,828,792 shares which Mr. Kassel had the right to vote pursuant to
voting agreements granted to him in 1994 by each of Messrs. Richard Grandy
and Joseph Owens, II. These voting agreements expired by their terms on
September 1, 2001.
(5) Includes 754,411 shares of Common Stock issuable upon exercise of options.
(6) Includes 150,000 shares of Common Stock issuable upon exercise of options.
The address of Mr. Grandy is c/o U.S. Home & Garden Inc.
(7) Represents shares issuable upon exercise of options.
(8) Includes 15,000 shares of Common Stock issuable upon exercise of options.
(9) Includes 5,000 shares of Common Stock issuable upon exercise of options.
52
(10) The address of Mr. Owens is 8 Hillandale Road, Waco, Texas.
(11) According to a Schedule 13G filed by Wellington Management Company, LLP
("Wellington") with the SEC, these shares are beneficially owned by
Wellington in its capacity as an investment advisor for clients of
Wellington who are the record holders of such shares. The address of
Wellington is 75 State Street, Boston, MA 02109.
(12) Excludes shares beneficially owned by Richard Kurz, our Chief Fiancial
Officer, Donald Rutishauser, our former Chief Financial Officer and Lynda
Gustafson, our former Vice President of Finance.
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 2001, the highest amount owed to U.S. Home &
Garden Inc. by Messrs. Kassel and Raleigh were $571,195 and $156,697,
respectively. After deducting principal payments made to date, the principal
balance of the loans to Mr. Kassel at September 17, 2001 was approximately
$596,872. The balance of Mr. Raleigh's loan was forgiven by the Company as part
of Mr. Raleigh's severance agreement. The loans to Mr. Kassel bear interest at
7% per annum and mature on June 30, 2003. Mr. Kassel will make annual payments
of interest on the outstanding principal balance of the loan through the
maturity date. In addition, payments of principal will be made during next year
and on maturity of the loan by Mr. Kassel as follows: $150,000 and the balance
of approximately $446,872, respectively.
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
The financial statements and index follow this Part IV.
(2) Financial Statement Schedule.
Schedule II -- Valuation and Qualifying Accounts.
(3) Exhibits.
Exhibit No.
3.1 Certificate of Incorporation, as amended.*
53
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.
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.*
54
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).
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 ended June 30, 1998.
10.19 Form of Indenture between the registrant and Wilmington Delaware
Subordinated Trust, as trustee.++++
55
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 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.)
10.24 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
10.25 Fifth Amendment dated January 30, 2001 to the Credit Agreement dated
October 13, 1998 between U.S. Home & Garden Inc. and Bank of America,
N.A.
10.26 Sixth Amendment and Waiver dated March 16, 2001 to the Credit
Agreement dated October 13, 1998 between U.S. Home & Garden Inc. and
Bank of America, N.A.
10.27 Seventh Amendment and Waiver dated May 15, 2001 to the Credit
Agreement dated October 13, 1998 between U.S. Home & Garden Inc. and
Bank of America, N.A.
10.29 Separation Agreement and Release between U.S. Home & Garden Inc. and
Richard Raleigh
10.30 Separation Agreement between U.S. Home & Garden Inc. and Donald
Rutishauser
21 Subsidiaries.***
56
23 Consent of BDO Seidman, LLP.
----------
* 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, 2001.
57
U.S. Home & Garden Inc.
and Subsidiaries
Consolidated Financial Statements
At June 30, 2001 and 2000 and for the
Years Ended June 30, 2001, 2000 and 1999
U.S. Home & Garden Inc.
and Subsidiaries
Contents
================================================================================
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2001 and 2000 4 and 5
Consolidated statements of operations for the years ended
June 30, 2001, 2000 and 1999 6 and 7
Consolidated statements of stockholders' equity for the years
ended June 30, 2001, 2000 and 1999 8
Consolidated statements of cash flows for the years ended
June 30, 2001, 2000 and 1999 9 and 10
Summary of accounting policies 11 - 16
Notes to consolidated financial statements 17 - 43
Consolidated Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts 44
Note: All other schedules have been omitted since the required
information is contained in the Consolidated Financial Statements
or such schedules are not required.
2
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc. and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 2001 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, 2001. We have also audited
Schedule II - Valuation and Qualifying Accounts (Schedule). These financial
statements and Schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
Schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and Schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and Schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and Schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001 in conformity with accounting principles generally accepted in the
United States of America.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Certified Public Accountants
September 14, 2001, except Note 9 which
is as of October 10, 2001
3
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
June 30, 2001 2000
-----------------------------------------------------------------------------------------------
Assets (Notes 1 and 9)
Current:
Cash and cash equivalents $ 2,724,000 $ 3,474,000
Restricted cash (Note 13) -- 1,582,000
Accounts receivable, less allowance for doubtful accounts and
sales returns of $1,260,000 and $1,199,000 (Note 3) 19,483,000 19,972,000
Inventories (Note 4) 11,043,000 12,843,000
Prepaid expenses and other current assets 697,000 656,000
Refundable income taxes 653,000 --
Deferred tax asset (Note 18) 1,205,000 210,000
Net current assets of discontinued operations (Note 2) 371,000 3,858,000
-----------------------------------------------------------------------------------------------
Total Current Assets 36,176,000 42,595,000
Property and Equipment, net (Note 5) 5,994,000 12,093,000
Intangible Assets:
Excess of cost over net assets acquired, net (Note 6) 59,632,000 72,221,000
Deferred financing costs, net of accumulated amortization of
$562,000 and $371,000 3,001,000 3,093,000
Product rights, patents and trademarks, net of accumulated
amortization of $85,000 and $271,000 559,000 555,000
Non-compete agreements, net of accumulated amortization of
$132,000 and $106,000 1,378,000 1,404,000
Package tooling costs, net of accumulated amortization of
$1,390,000 and $929,000 1,371,000 1,359,000
Officer Receivables (Note 7) 521,000 555,000
Net Long-Term Assets of Discontinued Operations (Note 2) -- 5,274,000
Other Assets 304,000 513,000
-----------------------------------------------------------------------------------------------
$108,936,000 $139,662,000
===============================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
June 30, 2001 2000
----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current:
Line-of-credit (Note 9) $ 21,650,000 $ 3,125,000
Accounts payable (Note 3) 3,293,000 6,186,000
Accrued rebates 1,618,000 1,075,000
Accrued commissions 1,279,000 1,296,000
Accrued restructuring costs (Note 15) 999,000 --
Accrued co-op advertising 732,000 1,143,000
Income taxes payable -- 2,413,000
Accrued other expenses 1,719,000 2,205,000
----------------------------------------------------------------------------------------------------
Total Current Liabilities 31,290,000 17,443,000
Acquisition Line-of-Credit, less current portion (Note 9) -- 13,875,000
Deferred Tax Liability (Note 18) 1,205,000 1,358,000
Net Long-Term Liabilities of Discontinued Operations (Note 2) 263,000 --
Other Long-Term Liabilities 20,000 792,000
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures (Notes 11 and 19) 56,951,000 56,980,000
----------------------------------------------------------------------------------------------------
Total Liabilities 89,729,000 90,448,000
----------------------------------------------------------------------------------------------------
Minority Interest in Equity of Affiliate (Note 2) 1,239,000 4,111,000
----------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 12, 13, and 15)
Stockholders' Equity (Note 14):
Preferred stock, 1,000 shares authorized and unissued -- --
Common stock, $.001 par value - shares authorized, 75,000,000;
21,433,000 and 21,751,000 shares issued 21,000 22,000
Additional paid-in capital 51,846,000 51,410,000
Retained earnings (deficit) (21,071,000) 4,358,000
----------------------------------------------------------------------------------------------------
30,796,000 55,790,000
Less: Treasury stock, 3,890,000 and 2,554,000 shares at cost (12,828,000) (10,687,000)
----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 17,968,000 45,103,000
----------------------------------------------------------------------------------------------------
$ 108,936,000 $ 139,662,000
====================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements
5
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
Year ended June 30, 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Net Sales (Note 3) $ 80,775,000 $ 89,665,000 $ 89,346,000
Cost of Sales (Note 3) 45,555,000 49,101,000 44,176,000
Unusual Item (Note 16) -- 928,000 --
-------------------------------------------------------------------------------------------------------------------------
Gross Profit 35,220,000 39,636,000 45,170,000
-------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling and Shipping 16,805,000 18,643,000 19,291,000
General and administrative 15,051,000 13,068,000 13,609,000
Loss on impairment of goodwill (Note 17) 10,820,000 -- --
Restructuring charges (Note 15) 2,860,000 -- 1,964,000
-------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 45,536,000 31,711,000 34,864,000
-------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations (10,316,000) 7,925,000 10,306,000
Other Income (Expense):
Gain (loss) on disposal of property and equipment -- 551,000 (24,000)
Interest income (Note 7) 222,000 264,000 530,000
Interest expense (7,557,000) (7,507,000) (7,413,000)
-------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before Income Taxes
and Extraordinary Gain (17,651,000) 1,233,000 3,399,000
Income Tax Benefit (Expense) (Note 18) 3,898,000 (907,000) (1,350,000)
-------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before Extraordinary Gain (13,753,000) 326,000 2,049,000
Discontinued Operations (Note 2):
Loss from discontinued operations, net of tax benefit of $1,465,000
in 2000, and net of minority interest of $1,754,000 and
$423,000 in 2001 and 2000, respectively 7,129,000 1,895,000 --
Loss on disposal of discontinued operations, net of minority interest
of $1,118,000 4,551,000 -- --
-------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Before Extraordinary Gain (25,433,000) (1,569,000) 2,049,000
-------------------------------------------------------------------------------------------------------------------------
Extraordinary gain of $7,000 and $2,102,000
on purchase of Trust Preferred Securities,
net of income taxes of ($3,000) and ($878,000) (Note 19) 4,000 1,224,000 --
-------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $(25,429,000) $ (345,000) $ 2,049,000
=========================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
Year ended June 30, 2001 2000 1999
--------------------------------------------------------------------------------------------------------
Basic Earnings per Share (Note 20):
Income (loss) from continuing operations per common share before
extraordinary gain $ (0.76) $ 0.02 $ 0.10
Discontinued operations (0.64) (0.10) --
Extraordinary gain -- 0.06 --
--------------------------------------------------------------------------------------------------------
Net Income (Loss) per Common Share $ (1.40) $ (0.02) $ 0.10
========================================================================================================
Diluted Earnings per Share (Note 20):
Income (loss) per common share before extraordinary gain $ (0.76) $ 0.02 $ 0.09
Discontinued operations (0.64) (0.10) --
Extraordinary gain -- 0.06 --
--------------------------------------------------------------------------------------------------------
Net Income (Loss) per Common Share $ (1.40) $ (0.02) $ 0.09
========================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
================================================================================
Common Stock
--------------------- Additional Retained Total
Number of Paid-In Earnings Treasury Stockholders'
Shares Amount Capital (Deficit) Stock Equity
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 20,133,000 $20,000 $50,153,000 $ 2,733,000 $ (1,307,000) $ 51,599,000
Repurchase of unit purchase options (UPOs) -- -- -- (79,000) -- (79,000)
Compensation related to repriced stock options -- -- 268,000 -- -- 268,000
Exercise of stock options, warrants and UPOs 1,086,000 1,000 121,000 -- -- 122,000
Repurchase of common stock for treasury -- -- -- -- (7,475,000) (7,475,000)
Net income -- -- -- 2,049,000 -- 2,049,000
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 21,219,000 21,000 50,542,000 4,703,000 (8,782,000) 46,484,000
Compensation related to repriced stock options -- -- 166,000 -- -- 166,000
Exercise of stock options, warrants and UPOs 532,000 1,000 205,000 -- -- 206,000
Issuance of stock options for consulting services
and business acquisition -- -- 497,000 -- -- 497,000
Repurchase of common stock for treasury -- -- -- -- (1,905,000) (1,905,000)
Net loss -- -- -- (345,000) -- (345,000)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 21,751,000 22,000 51,410,000 4,358,000 (10,687,000) 45,103,000
Compensation related to repriced stock options -- -- 261,000 -- -- 261,000
Issuance of stock options for consulting services -- -- 175,000 -- -- 175,000
Retirement of shares (318,000) (1,000) -- -- -- (1,000)
Repurchase of common stock for treasury -- -- -- -- (2,141,000) (2,141,000)
Net loss -- -- -- (25,429,000) -- (25,429,000)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 21,433,000 $21,000 $51,846,000 $(21,071,000) $(12,828,000) $ 17,968,000
===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
8
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Year ended June 30, 2001 2000 1999
------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) from continuing operations
before extraordinary item $(13,753,000) $ 326,000 $ 2,049,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on impairment of goodwill 10,820,000 -- --
Restructuring charges, net of cash 2,708,000 -- 1,093,000
Loss (gain) on disposal of property and equipment -- (551,000) 24,000
Provision for losses on accounts receivable 646,000 173,000 827,000
Depreciation and other amortization 5,686,000 5,229,000 4,460,000
Deferred income taxes (1,148,000) 48,000 810,000
Compensation related to repriced stock options 261,000 166,000 268,000
Consulting expenses related to stock options 175,000 146,000 --
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed in business
acquisitions:
Accounts receivable (157,000) 97,000 (4,030,000)
Inventories 1,800,000 4,143,000 (2,470,000)
Prepaid expenses and other current assets (794,000) 1,280,000 126,000
Other assets 259,000 (156,000) 67,000
Accounts payable and accrued expenses (5,677,000) 2,713,000 (4,066,000)
------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 826,000 13,614,000 (842,000)
------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
(Increase) decrease in restricted cash 1,582,000 (582,000) (1,000,000)
Proceeds on sale of property and equipment 3,527,000 1,030,000 --
Purchase of equipment (1,327,000) (2,673,000) (1,307,000)
Payment for non-compete agreement -- -- (1,000,000)
Purchase of package tooling and other intangibles (663,000) (586,000) (664,000)
Decrease in officer receivable 84,000 70,000 125,000
Payment for purchase of businesses, net of cash acquired (863,000) (125,000) (26,552,000)
------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 2,340,000 (2,866,000) (30,398,000)
------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
9
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Year ended June 30, 2001 2000 1999
------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds from line-of-credit $ 4,650,000 $ 1,500,000 $ 15,500,000
Changes in other long-term liabilities and purchase
of mandatorily redeemable preferred securities (797,000) (3,981,000) --
Deferred finance costs (99,000) -- (484,000)
Proceeds from issuance of stock -- 206,000 122,000
Repurchase of unit purchase options -- -- (79,000)
Repurchase of common stock for treasury (2,141,000) (1,905,000) (7,475,000)
Retirement of shares (1,000) -- --
------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 1,612,000 (4,180,000) 7,584,000
------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents
from continuing operations 4,778,000 6,568,000 (23,656,000)
Cash used in discontinued operations (5,528,000) (6,030,000) (538,000)
------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (750,000) 538,000 (24,194,000)
Cash and Cash Equivalents, beginning of year 3,474,000 2,936,000 27,130,000
------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 2,724,000 $ 3,474,000 $ 2,936,000
============================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
10
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Nature of Business
U.S. Home & Garden Inc. (the "Company"), through its subsidiaries, is a
leading manufacturer and marketer of a broad range of consumer lawn and
garden products. The Company's products include weed preventive landscape
fabrics, fertilizer spikes, decorative landscape edging, grass and flower
seed products, weed trimmer replacement heads, shade cloth and root
feeders, which are sold under recognized brand names, such as WeedBlock(R),
Jobe's(R), Emerald Edge(R), Weed Wizard(R), Shade Fabric(TM), Ross(R),
Tensar(R), Amturf(R), and Landmaster(R). The Company markets its products
through most large national home improvement and mass merchant retailers
("Retail Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Ace
Hardware and Home Base in North America.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries over which it has financial or management control
including Weatherly Consumer Products Group, Inc. (Weatherly), Easy
Gardener, Inc. (Easy Gardener), Golden West Agri-Products, Inc. (Golden
West), Weed Wizard Acquisition Corp. (Weed Wizard), Ampro Industries, Inc.
(Ampro) and Egarden Inc. (EGarden) since their dates of acquisition (See
Notes 1 and 2). Additionally, U.S. Home & Garden Trust I (See Note 11) has
been included since its formation in April 1998. All significant
intercompany accounts and transactions have been eliminated.
Inventories
Inventories, which consist of raw materials, finished goods, and packaging
materials, are stated at the lower of cost or market; cost is determined by
the first-in, first-out (FIFO) cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets or, in
the case of leasehold improvements, over the life of the lease, if shorter.
Maintenance and repairs are charged to expense as incurred. Major
improvements are capitalized.
Intangible Assets
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. (See Note 17).
11
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Deferred Financing Costs
Direct costs associated with the Company's debt borrowings are being
amortized over the life of the related debt.
Product Rights
Product rights are being amortized over estimated useful lives of fifteen
to twenty years.
Non-Compete Agreements
The non-compete agreements were entered into with the acquisitions of Ampro
and Weatherly. The Weatherly agreement is being amortized over its
twenty-year term. The Ampro non-compete agreement, which is triggered in
the event an officer of Ampro is terminated, will be amortized over a
five-year period from date of such termination.
Package Tooling Costs
Package tooling costs associated with Easy Gardener and Weatherly products,
primarily consisting of the design and construction of printing plates and
cutting dies used for the production of packaging, are being amortized over
periods of three to five years using the straight-line method.
Revenue Recognition
Sales are recorded as products are shipped to customers. Sales are free on
board (FOB) shipping point.
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
(See Note 18).
12
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Shipping and Handling
Amounts billed to customers for shipping and handling are recorded as
revenue. Shipping and handling costs incurred by the Company are included
in cost of sales.
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 $3,183,000, $3,889,000 and $3,832,000 during the years ended
June 30, 2001, 2000 and 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all short-term investments purchased with an initial
maturity of three months or less to be cash equivalents.
Stock-Based Compensation
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, with
respect to non-employee stock-based compensation. The fair value method is
required for all stock-based compensation issued to nonemployees. Under the
fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period,
which is usually the vesting period. Companies are permitted to continue to
account for employee stock-based compensation under Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, but
are required to disclose pro forma net income and earnings per share as if
the fair value method had been adopted. The Company has elected to continue
to account for employee stock-based compensation under APB No. 25. (See
Note 14).
13
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Segment Information
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 established standards for
the way in which publicly-held companies report financial and descriptive
information about their operating segments in financial statements for both
interim and annual periods, and requires additional disclosures with
respect to products and services, geographic areas of operation and major
customers. The Company's primary continuing operations are in one segment -
the manufacture and sale of consumer lawn and garden products. The Company
has aggregated its operating segments into a single reportable segment as
prescribed by SFAS No. 131. Revenue from external customers for each type
of product and service is not reported separately as it is not considered
practicable to do so.
Financial Instruments and Derivatives
The Company's financial instruments consist of 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 has used derivative financial instruments to manage the
economic impact of fluctuations in interest rates on short-term and
long-term debt. The Company entered into an interest rate swap to manage
this economic risk. This was viewed as a risk management tool and is not
used for trading or speculative purposes. The interest rate differentials
associated with the interest rate swap used to hedge debt obligations were
recorded as an adjustment to interest payable with the offset to interest
expense over the life of the swap. (See Note 10).
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.
14
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 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 No. 133 was effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 as amended by SFAS No. 137 and SFAS No. 138.
The adoption of SFAS No. 133, as amended, did not have a material impact on
the Company's consolidated financial statements.
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 was effective July 1, 2000, but certain conclusions in
this Interpretation cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The adoption of Interpretation No.
44 did not have a material impact on the Company's consolidated financial
statements.
In June 2001, the FASB finalized SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
the use of the purchase method of accounting and prohibits the use of the
pooling-of-interest method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001. It also requires,
upon adoption of SFAS No. 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria of SFAS No.
141.
15
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least
annually. In addition, SFAS No. 142 requires that the Company identify
reporting units for the purpose of assessing potential future impairments
of goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS No.
142. SFAS No. 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at
that date, regardless of when those assets were initially recognized. SFAS
No. 142 requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption. The Company is also required to
reassess the useful lives of other intangible assets within the first
interim quarter after adoption of SFAS No. 142. See also Note 17.
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2001, the net carrying amount of goodwill
is $59,632,000 and other intangible assets is $6,309,000. Amortization
expense during the year ended June 30, 2001 was $3,422,000. Currently, the
Company is assessing but has not yet determined how the adoption of SFAS
No. 141 and SFAS No. 142 will impact its financial position and results of
operations.
In September 2000, the Emerging Issues Task Force (EITF) issued EITF Issue
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendors Products, which requires certain cooperative
advertising charges to be classified as a reduction of revenue. This
guidance is effective for fiscal periods beginning after December 15, 2001.
Currently, the Company is assessing but has not yet adopted EITF 00-25.
16
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Business Acquisitions
The Company has consummated the following eleven acquisitions of lawn and
garden companies or product lines for a total of approximately $111 million
in consideration:
o Golden West Chemical Distributors, Inc. - A manufacturer of humic
acid-based products designed to improve crop yield, which was acquired
in August 1992 for approximately $1.1 million in cash and $1.1 million
of promissory notes.
o Easy Gardener, Inc. - A manufacturer of multiple fabric landscaping
products including Weedblock(R), which was acquired in September 1994
for approximately $21.3 million consisting of $8.8 million in cash, a
$10.5 million promissory note and two convertible notes each in the
principle 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, 2001.
o Emerald Products LLC - Manufacturer of decorative landscaping edging,
which was acquired in August 1995 for $835,000 in cash and a $100,000
promissory note.
o Weatherly Consumer Products Group, Inc. - a manufacturer of fertilizer
spikes and other lawn and garden products, which was acquired in
August 1996 for 1,000,000 shares of Common Stock valued at $3.0
million and approximately $22.9 million in cash.
o Plasti-Chain product line of Plastic Molded Concepts, Inc. - A line of
plastic chain links and decorative edgings, which was acquired from
Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3
million in cash.
o Weed Wizard, Inc. - A manufacturer and distributor of weed trimmer
replacement heads, all of whose assets were acquired in February 1998
for approximately $16.0 million, plus an additional $1.7 million for
excess working capital and acquisition expenses.
o Landmaster Products, Inc. - A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for
approximately $3.0 million, plus an additional $600,000 for certain
assets and acquisition expenses.
17
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
o Tensar(R) consumer products line of The Tensar Corporation - A line of
lawn and garden specialty fencing, which was acquired from The Tensar
Corporation in May 1998 for approximately $5.4 million, plus
additional $1 million for inventory.
o Ampro Industries, Inc. - A manufacturer and distributor of lawn and
garden products including specialty grass and flower seeds. The
Company acquired all of the outstanding stock of Ampro for
approximately $24.6 million in October 1998.
o E-Garden, Inc. (now Egarden, Inc.) - The Company's
business-to-business Internet subsidiary was acquired in June 1999 for
approximately $400,000 plus expenses of approximately $100,000 with
additional purchase price payments over the next three years based on
its future net sales. (See Note 2).
o Findplants.com - An electronic horticulture catalogue and locator that
provides business-to-business service for commercial growers and
wholesalers which was acquired by Egarden, Inc. in May 2000 for
approximately $537,000. (See Note 2).
All of the above acquisitions were accounted for as purchases and,
accordingly, the results of operations of the acquired companies have been
included in the consolidated statements of income since their respective
acquisition dates. The following unaudited pro forma summary combines the
consolidated results of operations of the Company and Ampro as if the
acquisition had occurred at the beginning of the year of acquisition.
Accordingly, Ampro has been reflected as if the acquisition occurred on
July 1, 1998. 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 and Ampro had constituted a single entity
during such period and is not necessarily indicative of results which may
be obtained in the future. E-Garden, Inc. and Findplants.com acquisitions
have not been reflected since their prior revenue and expenses were not
material to the Company's operations.
Year ended June 30, 1999
--------------------------------------------------------------------------
Net sales $ 90,496,000
--------------------------------------------------------------------------
Income before income taxes $ 1,245,000
--------------------------------------------------------------------------
Net income $ 747,000
--------------------------------------------------------------------------
Basic net income per common share $ .04
--------------------------------------------------------------------------
Diluted net income per common share $ .03
==========================================================================
18
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Discontinued Operations
In June 2001, the Company announced that it was discontinuing its
e-commerce initiative, which it was conducting through its subsidiary,
Egarden, Inc. (Egarden), effective June 30, 2001. The Company plans to
dispose of the assets and liabilities of Egarden, including amounts written
off, by either contributing them to another company in exchange for an
ownership interest in that company or through a sale of the assets and
liquidation of the liabilities.
The Company recorded a net loss on disposal of discontinued operations of
$4,551,000, net of minority interest of $1,118,000. The loss, prior to
minority interest, included the write-off of all long-lived assets of
$5,225,000 and restructuring expense of $445,000 related to the termination
of all 39 employees. In addition to the net loss on disposal in 2001, the
Company had a net loss from the operations of Egarden of $7,129,000, net of
minority interest of $1,754,000, for the year ended June 30, 2001 and a
loss of $1,895,000, net of minority interest of $423,000, for the year
ended June 30, 2000. Revenues of the discontinued operations for the years
ended June 30, 2001 and 2000 were not material.
The net assets and net liabilities of discontinued operations reported in
the consolidated balance sheets consisted of the following:
June 30, 2001 2000
---------------------------------------------------------------------
Current assets $ 882,000 $ 3,914,000
Current liabilities (511,000) (56,000)
---------------------------------------------------------------------
Net current assets $ 371,000 $ 3,858,000
=====================================================================
Net property and equipment $ -- $ 1,529,000
Other assets -- 3,745,000
Long-term liabilities (263,000) --
---------------------------------------------------------------------
Net long-term assets (liabilities) $ (263,000) $ 5,274,000
---------------------------------------------------------------------
Minority interest in equity of affiliate $(1,239,000) $(4,111,000)
=====================================================================
19
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Pursuant to APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
the Company's consolidated financial statements and notes have been
restated for all periods presented to reflect the discontinuation of
Egarden. The net operating results, net assets and net cash flows of
Egarden have been reported as "Discontinued Operations" in the accompanying
consolidated financial statements. The restated notes exclude amounts
related to these discontinued operations.
3. Concentration of Credit Risk and Significant Relationships
Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States. The Company performs
ongoing credit evaluations of its customers' financial conditions and
establishes an allowance for doubtful accounts based upon credit risk of
specific customers, historical trends and other information. The Company
does not require collateral from its customers.
During the years ended June 30, 2001, 2000 and 1999, sales to two customers
accounted for approximately 56% (42% and 14%), 48% (35% and 13%) and 33%
(24% and 9%) of consolidated net sales. Included in accounts receivable at
June 30, 2001 and 2000 is $9,062,000 and $9,428,000 due from the two
largest customers.
The Company's two significant product lines are landscape fabric and
fertilizer, plant food and insecticide spikes. For the years ended June 30,
2001, 2000 and 1999, sales of landscape fabric represented approximately
47%, 43% and 37%, respectively, of the Company's total net sales and, sales
of fertilizer, plant food and insecticide spikes represented approximately
15%, 15% and 13%, respectively, of the Company's total net sales.
20
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Substantially all raw material purchases for WeedBlock(R) landscape fabric
inventory are from two vendors, representing approximately 29% (19% and
10%), 35% (22% and 13%) and 35% (29% and 6%) of the Company's consolidated
raw material purchases during the years ended June 30, 2001, 2000 and 1999,
respectively. Management believes that other suppliers could provide a
similar product on comparable terms. A change in suppliers, however, could
cause delays and a possible loss of sales, which would adversely affect
operating results. Included in accounts payable at June 30, 2000 is
$749,000 ($542,000 and $207,000) due to these vendors. No amounts were due
to these vendors at June 30, 2001.
4. Inventories
Inventories consist of:
June 30, 2001 2000
---------------------------------------------------------------------
Raw materials $ 6,290,000 $ 8,379,000
Finished goods 4,753,000 4,464,000
----------------------------------------------------------------------
$11,043,000 $12,843,000
======================================================================
At June 30, 2001 and 2000, the inventory balance has been reduced by a
provision for possible obsolescence of $1,375,000 and $1,059,000,
respectively.
5. Property and Equipment
Property and equipment consist of:
Estimated Useful
June 30, Life in Years 2001 2000
-------------------------------------------------------------------------------------------
Furniture, fixtures and equipment 5 - 7 $ 10,492,000 $ 12,000,000
Leasehold improvements 7 - 10 750,000 629,000
Building and improvements
(See Note 15) 10 - 40 -- 3,895,000
Land (See Note 15) -- 80,000
-------------------------------------------------------------------------------------------
11,242,000 16,604,000
Less accumulated depreciation 5,248,000 4,511,000
-------------------------------------------------------------------------------------------
$ 5,994,000 $ 12,093,000
===========================================================================================
Depreciation expense was $2,190,000, $1,850,000 and $1,337,000 during the
years ended June 30, 2001, 2000 and 1999, respectively.
21
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired consists of the following:
June 30, 2001 2000
-----------------------------------------------------------------------------------
Weatherly Consumer Products Group, Inc. $ 22,948,000 $ 22,948,000
Ampro Industries, Inc. 18,693,000 17,830,000
Easy Gardener, Inc. 15,639,000 15,639,000
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 1,355,000 1,240,000
Weed Wizard, Inc. (See Note 17) -- 11,973,000
-----------------------------------------------------------------------------------
71,061,000 82,056,000
Less accumulated amortization 11,429,000 9,835,000
-----------------------------------------------------------------------------------
$ 59,632,000 $ 72,221,000
===================================================================================
7. Officer Receivables
Officer receivables represent unsecured notes which bear interest at 7% and
require interest payments on an annual basis. Principal payments on the
notes are due in annual installments of $50,000 to $150,000, with the
balance due upon maturity in July 2003. At June 30, 2001, there was one
note outstanding for $571,000. Total interest income amounted to $43,000,
$48,000 and $52,000 for the years ended June 30, 2001, 2000 and 1999,
respectively.
8. 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 15.
22
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. 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 these 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, 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
(effectively 10.12% at June 30, 2001). The Acquisition Facility terminated
June 30, 2001 and the outstanding balance is payable in quarterly payments
starting on June 30, 2001. The Working Capital Facility terminates with the
balance due on October 31, 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 Credit 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, 2001 and
2000 was $11,750,000 and $17,000,000, respectively. The outstanding balance
on the Working Capital Facility at June 30, 2001 was $9,900,000.
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 as 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 or
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,
2001, the Company was in violation of certain financial covenants.
23
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company is currently in discussions to refinance the expiring Credit
Agreement. There can be no assurances that a new credit agreement will be
executed on terms equal to or more favorable than the expiring Credit
Agreement, or that a new agreement can be completed at all. The Company
would be adversely affected if it was unable to secure a new credit
agreement before expiration of the expiring Credit Agreement. The Company
is currently in discussions regarding a new credit facility, but has not
reached a final agreement as of October 10, 2001. As a result, the Company
has classified all bank debt associated with the expiring Credit Agreement
as a current liability.
Subsequent to June 30, 2001, the Company received a commitment from a bank
to provide up to $33,000,000 in senior secured financing due three years
from the closing date. The financing commitment provides for a $31,000,000
revolving credit facility and a $2,000,000 term loan. Interest on
borrowings will be calculated at variable annual rates based on either the
bank's prime rate plus an applicable marginal rate or the bank's fully
absorbed Eurodollar rate plus an applicable marginal rate. Available
borrowing on the revolving credit facility will be limited based on
eligible borrowing bases. The bank will have first priority perfected
security interest in substantially all of the Company's assets. The Company
will be subject to certain fees and restrictions in conjunction with the
financing. As part of the commitment, the Company is required to obtain an
additional $2,250,000 in subordinated debt on or before the closing date.
Subsequent to June 30, 2001, the company also received a commitment to
receive $4,000,000 of subordinated secured notes due six years from the
closing date. Interest will be charged on the notes at 15.75% per annum,
payable quarterly. The issue price of the notes will be 91.25% of the face
amount of the notes. The notes will be secured by a second lien on all
assets of the Company and will rank junior to the senior financing to be
provided by the bank. The investors shall purchase, for a nominal price,
detachable warrants to purchase 2.5% of the fully diluted equity of the
Company and 2.5% of the Company's Cumulative Trust Preferred Securities.
See Note 11. The Company will be subject to certain fees and restrictions
in conjunction with the notes.
10. Financial Instruments
The Company previously managed its interest rate risk on its line-of-credit
borrowings through the purchase of an interest rate swap agreement which
effectively fixed the base interest rate on $15 million of the $17 million
of variable rate borrowings outstanding at June 30, 2000. Under the
agreement, the Company effectively fixed the base interest rate on a $15
million notional amount at 7.78%. The interest rate swap agreement expired
November 1, 2000 and the Company's line-of-credit borrowings effectively
reverted to a variable interest rate loan.
24
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
11. Mandatorily Redeemable Preferred Securities
In April 1998, U.S. Home & Garden Trust I (the "Trust"), a newly created
Delaware business trust and a wholly-owned subsidiary of the Company,
issued 78,000 common securities with a liquidation amount of $25 per common
security 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 proceeds therefrom
to acquire the subordinated debentures described below. Concurrent with the
issuance of the Trust Securities, the Trust invested the net proceeds
therefrom in $65.2 million aggregate principal amount of 9.40% Junior
Subordinated Deferrable Interest Debentures (the "Subordinated Debentures")
issued by the Company.
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 19). 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.
25
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
12. Commitments
Employment Agreements
The Company has entered into an employment agreement with one of its
officers. The agreement is for a one-year period but is automatically
renewed unless specifically terminated by the Company or the employee. If
the employment agreement is terminated by the Company without cause, the
officer will be entitled to an additional ten years of annual compensation.
Annual compensation under the employment agreement is $450,000. The
employment agreement also provides for certain lump sum payments in the
event of a change in control equal to approximately $7.3 million. A
five-year agreement with an officer of Easy Gardener, which began in 1999,
provides for a base aggregate annual salary of approximately $350,000. In
addition, the agreements provide for incentive and additional compensation
under certain circumstances.
Operating Leases
The Company leases office and warehouse space, certain office equipment and
automobiles under operating leases expiring through 2006. The future
minimum lease payments under these non-cancelable operating leases are as
follows:
Year ended June 30, Amount
--------------------------------------------------------------------------
2002 $ 964,000
2003 341,000
2004 297,000
2005 256,000
2006 83,000
--------------------------------------------------------------------------
$ 1,941,000
==========================================================================
Rent expense was approximately $1,117,000, $924,000 and $788,000 for the
years ended June 30, 2001, 2000 and 1999.
26
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Defined Contribution Benefit Plan
Easy Gardener has established an employee defined contribution benefit plan
(the Plan). Employees of the Company, Weatherly, Easy Gardener, Weed Wizard
and Golden West are eligible to participate. The Company is required to
match the first 60% of employee contributions up to 5% of the employee's
wage base. The Plan also allows discretionary contributions by the Company.
The Company's contribution vests over a seven-year period. Ampro
established a plan for its employees with similar terms to the Easy
Gardener Plan, which was terminated during the year in conjunction with the
Ampro restructuring (See Note 15). Total expense associated with the plans
for the years ended June 30, 2001, 2000 and 1999 was approximately
$376,000, $397,000 and $351,000, respectively.
Royalty Agreements
The Company previously had royalty agreements which required payments based
upon a percentage of net sales of certain products. These agreements
expired during the year ended June 30, 2000. Royalty expense during the
years ended June 30, 2000 and 1999 was $49,000 and $149,000, respectively.
Non-Qualified Deferred Compensation Plan
The Company has adopted the Non-Qualified Deferred Compensation Plan for
Select Employees of U.S. Home & Garden Inc. (Deferred Plan). Under the
Deferred Plan, the Board of Directors or its committee which administers
the relevant stock option plan may grant permission to optionees to
exercise their options with shares of U.S. Home & Garden, Inc. common stock
in which they have a holding period, for income tax purposes, of at least
six months and defer the receipt of a portion of the shares subject to the
option so exercised. The optionee has the right to designate the time or
times of receipt of those shares pursuant to the Deferred Plan. The
Deferred Plan contains provisions for earlier issuance of those deferred
shares on death, disability and other termination of employment (e.g., on a
change of control of U.S. Home & Garden Inc.).
27
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Contingencies
In the normal course of business, the Company is subject to proceedings,
lawsuits, and other claims, including proceedings under laws and government
regulations related to product safety and other matters. Such matters are
subject to many uncertainties, and outcomes are not predictable with
assurance. Consequently, the ultimate amount of monetary liability or
financial impact with respect to these matters at June 30, 2001 cannot be
ascertained.
During fiscal 2001, the U.S. Consumer Product Safety Commission ("CPSC ")
began an investigation into a product previously distributed by the
Company's Weed Wizard subsidiary. This investigation could result in an
adverse outcome for the Company. While the amount of loss cannot be
reasonably estimated at this time, the maximum potential loss is $1.6
million. The Company has vigorously defended, and will continue to
vigorously defend, its actions with respect to this subsidiary and its
discontinued product.
In fiscal 2001, the Company commenced an action against A.A.B.B., Inc.
(formerly known as Weed Wizard Inc.) and certain of its stockholders and
officers relating to the purchase from the defendants of substantially all
of the assets of Weed Wizard, Inc. by the Company. The Company is seeking
to rescind the transaction or to recover monetary damages. A.A.B.B., Inc.
has asserted a counterclaim for breach of contract against the Company for
$720,000, plus interest, representing an alleged adjustment to the purchase
price.
The Company held $1.6 million in a separate escrow account at June 30,
2000, related to an action with the former principal stockholders of Ampro.
This action was settled during the year ended June 30, 2001, and the cash
released from escrow was used to pay an additional purchase price of
$863,000.
14. Stockholders' Equity
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with
such designations, rights and preference as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights, which could
adversely affect the voting power or other rights of the holders of the
Company's common stock. No shares of the preferred stock are outstanding.
28
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Common Stock
In September 1998, the Company adopted a Stockholders' Rights Agreement
commonly known as a "poison pill", which provides that in the event an
individual or entity becomes a beneficial holder of 12% or more of the
shares of the Company's capital stock, other stockholders of the Company
shall have the right to purchase shares of the Company's (or in some cases,
the acquirer's) common stock at 50% of its then market value.
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.
During 2001, 2000 and 1999, the Company repurchased 1,336,000, 749,000 and
1,569,000 shares of treasury stock for $2,141,000, $1,905,000, and
$7,475,000, respectively. Prior to fiscal 1999 the Company repurchased
236,000 shares for $1,307,000.
Stock Option Plans
The Company adopted the 1991 Stock Option Plan (the "1991 Plan") pursuant
to which 700,000 shares of common stock have been reserved for issuance
upon the exercise of options designated as either (i) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended (the "Code") or (ii) non-qualified options. ISOs may be
granted under the 1991 Plan to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or
not they are employees), employees and officers of the Company.
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 issuance under this plan is 1,500,000.
29
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Non-Employee Director Stock Option Plan (the "Non-Employee Director
Plan") was established to attract, retain and compensate for their services
as directors, highly qualified individuals who are not employees of the
Company. The maximum aggregate number of shares reserved for issue under
this plan is 100,000. The 1995 Plan is administered by a committee of the
Board and the Non-Employee Director Plan is a formula plan.
During May 1997, the Board approved the 1997 Stock Option Plan. The Plan
allows the granting of either ISOs or non-qualified options. The 1997 Plan
reserves the issuance of 1,500,000 shares of common stock.
During May 1999, the Board approved the 1999 Stock Option Plan. The Plan
allows for granting of either ISOs or non-qualified options. The 1999 Plan
reserves the issuance of 900,000 shares of common stock.
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 the grant (five years in the case of
ISOs granted to persons holding 10% or more of the voting stock of the
Company).
30
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
All options granted under the 1991 Plan, the 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, 1998 $1.69 522,000 522,000
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)
Became exercisable 1.69 -- 18,000
--------------------------------------------------------------------------------------
June 30, 2001 $1.69 357,000 228,000(2)
======================================================================================
31
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Weighted
Average Option
Price Per Share Outstanding Exercisable
-----------------------------------------------------------------------
1995 Plan
July 1, 1998 $2.18 1,459,000 1,111,000
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)
Expired 2.23 (166,000) (166,000)
Became exercisable 2.06 -- 25,000
-----------------------------------------------------------------------
June 30, 2001 $2.17 1,293,000 1,268,000(3)
-----------------------------------------------------------------------
Director Stock Option Plan
July 1, 1998 $2.25 10,000 10,000
Granted 4.69 10,000 10,000
-----------------------------------------------------------------------
June 30, 1999 3.47 20,000 20,000(4)
Granted 2.78 10,000 10,000
-----------------------------------------------------------------------
June 30, 2000 2.85 30,000 30,000(4)
Granted 1.61 20,000 5,000
-----------------------------------------------------------------------
June 30, 2001 $2.35 50,000 35,000(4)
=======================================================================
1997 Plan
July 1, 1998 $3.32 565,000 410,000
Granted 4.63 150,000 30,000
Became exercisable 3.72 -- 52,000
-----------------------------------------------------------------------
June 30, 1999 3.59 715,000 492,000(5)
Granted 2.56 50,000 50,000
Became exercisable 3.16 -- 82,000
-----------------------------------------------------------------------
June 30, 2000 3.12 765,000 624,000(5)
Expired 2.68 (55,000) (55,000)
Became exercisable 3.16 -- 82,000
-----------------------------------------------------------------------
June 30, 2001 $3.15 710,000 651,000(5)
=======================================================================
1999 Plan
July 1, 1999 $ -- -- --
Granted 2.33 833,000 699,000
=======================================================================
June 30, 2000 2.33 833,000 699,000(6)
Expired 2.56 (12,000) (12,000)
Became exercisable 2.56 -- 110,000
-----------------------------------------------------------------------
June 30, 2001 $2.32 821,000 797,000(6)
=======================================================================
32
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Weighted
Average Option
Price Per Share Outstanding Exercisable
-----------------------------------------------------------------------
Non-Plan Options
July 1, 1998 $2.08 2,431,000 2,196,000
Exercise of options 1.69 (176,000) (176,000)
Became exercisable 2.25 -- 205,000
Options extended (1) 1.69 -- (325,000)
Granted 3.91 489,000 170,000
-----------------------------------------------------------------------
June 30, 1999 2.84 2,744,000 2,070,000(7)
Expired 3.57 (402,000) (402,000)
Became exercisable 4.09 -- 206,000
Granted 3.60 125,000 125,000
-----------------------------------------------------------------------
June 30, 2000 2.34 2,467,000 1,999,000(7)
Expired 3.81 (11,000) (11,000)
Became exercisable 3.84 -- 168,000
-----------------------------------------------------------------------
June 30, 2001 $2.33 2,456,000 2,156,000(7)
=======================================================================
(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 2001 and 2000 such
expense was $119,000. In 1999, such expense was $268,000.
(2) At June 30, 1999, 2000 and 2001, the weighted average exercise option
price per share for exercisable options was $1.69 for all periods.
(3) At June 30, 1999, 2000 and 2001, the weighted average exercise option
price per share for exercisable options was $2.16, $2.18 and $2.17.
(4) At June 30, 1999, 2000 and 2001, the weighted average exercise price
per share for exercisable options was $3.47, $2.85, and $2.91.
(5) At June 30, 1999, 2000 and 2001, the weighted average exercise option
price per share for exercisable options was $3.35, $3.25 and $3.20.
(6) At June 30, 2000 and 2001, the weighted average exercise option price
per share for exercisable options was $2.25 and $2.32.
(7) At June 30, 1999, 2000 and 2001, the weighted average exercise option
price per share for exercisable options was $2.17, $2.25 and $2.42.
33
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
During the year ended June 30, 2001, the expiration date of 200,000 options
and warrants was extended for two years. The options and warrants remain
fully vested. As a result, the Company recognized $142,000 of expense for
the value of the options and warrants.
The following table summarizes the above stock options outstanding and
exercisable at June 30, 2001.
Outstanding Exercisable
---------------------------------------- -----------------------------
Weighted Weighted
Average Average Average
Range of Exercise Remaining Exercise Exercise
Price Options Life Price Options Price
---------------------------------------------------------------------------------------------
$0.01 200,000 2 years $0.01 200,000 $0.01
1.06 15,000 5 years 1.06 -- --
1.69 598,000 7 years 1.69 277,000 1.69
2.06-2.38 3,215,000 1 year 2.10 3,150,000 2.10
2.56-3.94 1,449,000 2 years 3.20 1,348,000 3.28
4.12-4.69 210,000 3.5 years 4.42 160,000 4.39
---------------------------------------------------------------------------------------------
$0.01-4.69 5,687,000 2 years $2.34 5,135,000 $2.38
=============================================================================================
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 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 the 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 financing, 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.
34
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 August 1999, all three remaining UPOs were exercised.
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, 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
Issued 5.00 200,000 100,000
-------------------------------------------------------------------------------------------
June 30, 2001 $3.31 1,111,000 1,011,000 2 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.
35
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Common Stock Reserved
At June 30, 2001, approximately 7,460,000 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 interpertations in accounting for its employee stock
option plans. Under APB Opinion No. 25, because the exercise price of the
Company's stock options equals or exceeds the market price of the
underlying stock on the date of the 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 and earnings per
share 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 estimated the fair value of each
stock option and warrant at the grant date by using a Black-Scholes pricing
model with the following weighted-average assumptions used for grants in
2001, 2000 and 1999, respectively: no dividend yield for any year; expected
volatility of approximately 60%, 55% and 56%; risk-free interest rates of
5.4%, 6.4% and 6.6%; and expected lives of approximately three to five
years. Pro forma compensation expense associated with options granted to
employees totaled $17,000, $2,185,000 and $352,000 for 2001, 2000 and 1999
respectively. The per option weighted average fair value was $1.08, $1.53
and $2.37 for 2001, 2000 and 1999, 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, 2001 2000 1999
-------------------------------------------------------------------------------------------
Net Income (Loss):
As reported $ (25,429,000) $ (345,000) $ 2,049,000
Pro forma (net of tax effect) (25,442,000) (1,481,000) 1,838,000
Dilutive per common share (1.40) (.02) 0.09
Dilutive per common share pro forma (1.40) (.08) 0.08
===========================================================================================
36
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
15. Restructuring Charges
In 2001, the Company recorded a restructuring charge of $2,860,000 relating
to the closing and sale of the Ampro Industries Inc. facility in Michigan.
The Company intends to continue to sell products, through a contract
manufacturing agreement, being manufactured at the former Ampro facility.
As part of this agreement, the Company has a firm commitment to purchase a
minimum amount of product totaling approximately $528,000 in the fiscal
year ended June 30, 2002. However, the contract includes an exit provision,
whereby the maximum cost to the Company of termination of the agreement is
$332,000. The Company recognized approximately $1,709,000 of expenses and
losses relating to the closing and sale of property and equipment of the
Ampro facility and $1,151,000 for termination benefits to be paid to all 60
employees involved with the facility. Approximately $999,000 of severance
payments are unpaid at June 30, 2001, as a result of the restructuring. The
restructuring is expected to be completed by October 31, 2001.
In 1999, the Company recorded restructuring 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 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.
16. 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 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.
17. Loss on Impairment of Goodwill
An impairment charge of $10,820,000 was recorded in June 2001 to write off
the net goodwill balance associated with the Company's Weed Wizard
subsidiary. Following the guidance of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, it is the Company's policy to periodically evaluate its long-lived
assets, including goodwill, for possible impairment. If the evaluation
determines that the long-lived assets have been impaired, SFAS No. 121
requires that the assets be written down to their estimated fair value. Due
to the recurring operating losses of the subsidiary, the product recall in
the prior year (See Note 16), and the subsequent unsuccessful product
launch of the replacement product through a complete sales season, the
evaluation was performed and the estimated impairment loss was recognized.
37
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Since the remaining assets of Weed Wizard (primarily machinery and products
rights) will continue in service, the net book value of these assets will
be depreciated or amortized over their remaining estimated lives.
18. Income Taxes
Deferred tax assets (liabilities) consist principally of the following:
June 30, 2001 2000
------------------------------------------------------------------------------------------
Deferred tax assets:
Accumulated depreciation and amortization $ 3,382,000 $ --
Net operating loss carryforward 1,421,000 --
Accounts receivable allowance 330,000 196,000
Inventory allowance 467,000 360,000
Other 408,000 --
------------------------------------------------------------------------------------------
Gross deferred tax assets 6,008,000 556,000
Less valuation allowance (4,803,000) --
------------------------------------------------------------------------------------------
Total deferred tax assets $ 1,205,000 $ 556,000
==========================================================================================
Deferred tax liabilities:
Accumulated depreciation and amortization $ (1,205,000) $ (1,358,000)
Other -- (346,000)
------------------------------------------------------------------------------------------
Total deferred tax liabilities $ (1,205,000) $ (1,704,000)
==========================================================================================
The valuation allowance of $4,803,000 was recorded at June 30, 2001 due to
the uncertainty of the Company's ability to generate sufficient future
taxable income to realize the gross deferred tax assets.
The Company's net operating loss carryforward for federal income tax
purposes amounted to $4,146,000 at June 30, 2001, and expires in 2021 if
not previously utilized.
The net deferred income taxes as of June 30, 2001 and 2000 are presented in
the balance sheets as follows:
June 30, 2001 2000
------------------------------------------------------------------------
Current asset $ 1,205,000 $ 210,000
Long-term liability $ 1,205,000 $ 1,358,000
========================================================================
38
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The income tax provision (benefit) consists of:
Year ended June 30, 2001 2000 1999
---------------------------------------------------------------------------
Current:
Federal $(2,763,000) $1,418,000 $336,000
State 16,000 319,000 204,000
---------------------------------------------------------------------------
(2,747,000) 1,737,000 540,000
---------------------------------------------------------------------------
Deferred:
Federal (1,358,000) 258,000 682,000
State 210,000 (210,000) 128,000
---------------------------------------------------------------------------
(1,148,000) 48,000 810,000
---------------------------------------------------------------------------
$(3,895,000) $1,785,000 $1,350,000
===========================================================================
The 2001 income tax consists of a benefit of $3,898,000 from continuing
operations reduced by income tax expense of $3,000 relating to the
extraordinary gain.
The 2000 income tax expense consists of expense of $907,000 from continuing
operations and $878,000 relating to the extraordinary gain.
The following is a reconciliation between the Federal Statutory income tax
rate and the Company's effective tax rate relating to income from
continuing operations before minority interest and extraordinary gain:
Year ended June 30, 2001 2000 1999
------------------------------------------------------------------------------------------
Income tax provision computed at
Federal Statutory rate 34.0% (34.0)% (34.0)%
State taxes, net of Federal tax effects (.8) (5.8) (6.0)
Nondeductible amortization and other (2.4) (46.2) (3.4)
Deductible UPOs and stock options -- 4.5 1.0
Changes in valuation allowance on
deferred tax assets (11.2) 7.9 2.7
Other 2.5 -- -
------------------------------------------------------------------------------------------
Income Tax Benefit (Expense) 22.1% (73.6)% (39.7)%
==========================================================================================
39
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
19. Extraordinary Gain
During the years ended June 30, 2001 and 2000, respectively, the Company
purchased 1,200 and 250,781 of the outstanding 9.4% Cumulative Trust
Preferred Securities issued by its subsidiary, U.S. Home & Garden Trust I,
at approximately $15 and $17 per Trust Preferred Security. As of June 30,
2001 and 2000, 2,278,019 and 2,279,219 Trust Preferred Securities were
outstanding, respectively. The repurchase of these Trust Preferred
Securities resulted in extraordinary gains during the years ended June 30,
2001 and 2000, of $4,000 and $1,224,000 (after provisions for income taxes
of $3,000 and $878,000), respectively. During the year ended June 30, 2000,
the Company purchased 24,000 Trust Preferred Securities from officers and
directors under the same terms and conditions as described above.
20. Earnings per Share
The following is a reconciliation of the weighted average number of shares
used to compute basic and dilutive earnings per share:
2001 2000 1999
--------------------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 18,181,000 19,031,000 19,621,000
Dilutive effect of stock options
and warrants -- -- 3,974,000
--------------------------------------------------------------------------------------------
Dilutive weighted average
common shares outstanding 18,181,000 19,031,000 23,595,000
============================================================================================
Options and warrants to purchase 6,788,000, 1,477,000 and 140,000 shares of
common stock in fiscal years 2001 and 2000 and 1999, respectively, were not
included in the computation of diluted earnings per share because the
option or warrant exercise price was greater than the average market price
of the stock. Diluted earnings per share for the years ended June 30, 2001
and 2000 is based only on the weighted average number of common shares
outstanding as the inclusion of 10,000 and 1,407,000 common share
equivalents, respectively, would have been anti-dilutive.
40
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
21. Supplemental Cash Flow Information
Year ended June 30, 2001 2000 1999
---------------------------------------------------------------------------------------------
Cash paid (refunded) during the period for:
Interest $ 7,387,000 $ 7,220,000 $ 7,540,000
Income taxes $ (790,000) $ (1,020,000) $ 1,744,000
=============================================================================================
Supplemental information regarding 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.
In connection with business acquisitions in 2000 and 1999, the following
transactions occurred:
Year ended June 30, 2000 1999
---------------------------------------------------------------------
Fair value of assets acquired $931,000 $31,957,000
Issuance of stock options (132,000) --
Liabilities assumed -- (4,867,000)
---------------------------------------------------------------------
Cash paid for assets acquired $799,000 $27,090,000
=====================================================================
41
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
22. Quarterly Information (Unaudited)
First Second Third Fourth
Fiscal 2001 Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------------------
Net sales $ 13,111,000 $ 11,360,000 $ 26,507,000 $ 29,797,000
Gross profit $ 5,687,000 $ 5,386,000 $ 12,342,000 $ 11,805,000
Net loss from continuing operations
before extraordinary gain $ (1,872,000) $ (2,020,000) $ (1,355,000) $ (8,506,000)
Loss from discontinued operations $ (883,000) $ (977,000) $ (416,000) $ (4,853,000)
Loss on disposal of discontinued operations $ -- $ -- $ -- $ (4,551,000)
Extraordinary gain $ 4,000 $ -- $ -- $ --
Net loss $ (2,751,000) $ (2,997,000) $ (1,771,000) $ (17,910,000)
Basic loss per share:
Net loss from continuing
operations before extraordinary gain $ (.10) $ (.11) $ (.08) $ (.49)
Discontinued operations $ (.05) $ (.05) $ (.02) $ (.53)
Extraordinary gain $ -- $ -- $ -- $ --
Net loss per common share $ (.15) $ (.16) $ (.10) $ (1.02)
Diluted loss per share:
Net loss from continuing
operations $ (.10) $ (.11) $ (.08) $ (.49)
Discontinued operations $ (.05) $ (.05) $ (.02) $ (.53)
Extraordinary gain $ -- $ -- $ -- $ --
Net loss per common share $ (.15) $ (.16) $ (.10) $ (1.02)
First Second Third Fourth
Fiscal 2000 Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------------------
Net sales $ 12,985,000 $ 14,145,000 $ 36,494,000 $ 26,041,000
Gross profit $ 5,809,000 $ 6,725,000 $ 16,348,000 $ 10,754,000
Net income (loss) from continuing operations
before extraordinary gain $ (1,981,000) $ (1,661,000) $ 3,697,000 $ 271,000
Loss from discontinued operations $ -- $ (304,000) $ (905,000) $ (686,000)
Extraordinary gain $ -- $ -- $ 943,000 $ 281,000
Net income (loss) $ (1,981,000) $ (1,965,000) $ 3,735,000 $ (134,000)
Basic earnings (loss) per share:
Net income (loss) from continuing
operations before extraordinary gain $ (.10) $ (.09) $ .19 $ .01
Discontinued operations $ -- $ (.01) $ (.05) $ (.03)
Extraordinary gain $ -- $ -- $ .05 $ .01
Net income (loss) per common share $ (.10) $ (.10) $ .19 $ (.01)
Diluted earnings (loss) per share:
Net income (loss) from continuing
operations before extraordinary gain $ (.10) $ (.09) $ .17 $ .01
Discontinued operations $ -- $ (.01) $ (.04) $ (.03)
Extraordinary gain $ -- $ -- $ .04 $ .01
Net income (loss) per common share $ (.10) $ (.10) $ .17 $ (.01)
42
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Differences between amounts included above and amounts previously reported
on Form 10-Q are due to the exclusion of discontinued operations as
described in Note 2.
The fourth quarter of 2001 includes a pre-tax charge of $10,820,000 related
to the loss on impairment of goodwill (See Note 17) and a loss on disposal
of discontinued operations of $4,551,000 (See Note 2).
43
Consolidated Financial
Statement Schedule
================================================================================
U.S. Home & Garden Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
================================================================================
Charged to
Beginning Costs and Ending
Balance Expenses Writeoffs Balance
---------------------------------------------------------------------------------------------------
Reserves and Allowances Deducted
from Asset Accounts:
Allowance for Doubtful Accounts
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
o Year ended June 30, 2001 $ 575,000 $ 646,000 $ (250,000) $ 971,000
Reserve for Inventory Obsolescence
o Year ended June 30, 1999 $ -- $ 863,000 $ (150,000) $ 713,000
o Year ended June 30, 2000 $ 713,000 $ 601,000 $ (255,000) $1,059,000
o Year ended June 30, 2001 $1,059,000 $ 794,000 $ (478,000) $1,375,000
===================================================================================================
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned thereunto duly authorized.
U.S. Home & Garden Inc.
--------------------------
(Registrant)
By:/s/ Robert Kassel
-----------------------
Robert Kassel, Chief
Executive Officer
Dated: October 12, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert Kassel Chairman of the Board October 12, 2001
------------------------ of Directors, Chief
Robert Kassel Executive Officer,
President and Treasurer
(Chief Executive and
Financial Officer)
/s/ Richard Kurz Chief Financial Officer October 12, 2001
------------------------ (Principal Accounting
Richard Kurz Officer)
/s/ Richard Raleigh Director October 12, 2001
------------------------
Richard Raleigh
/s/ Brad Holsworth Director October 12, 2001
------------------------
Brad Holsworth
/s/ Jon Schulberg Director October 12, 2001
------------------------
Jon Schulberg
/s/ Fred Heiden Director October 12, 2001
------------------------
Fred Heiden