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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, 1999
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this FormE10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 20, 1999 was
approximately $ 46,011,000.
As of September 20, 1999, 19,476,097 shares of the registrant's Common
Stock, par value $.001 per share were outstanding.
Documents Incorporated By Reference: None
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Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for future activities. Such forward-looking information involves
important known and unknown risks and uncertainties that could significantly
affect actual results, performance or achievements of the Company in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of the Company. These risks and uncertainties
include, but are not limited to, those relating to the Company's growth
strategy, customer concentration, outstanding indebtedness, dependence on
weather conditions, seasonality, expansion and other activities of competitors,
ability to successfully integrate recently acquired companies and products
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 the Company's other filings with the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend" and
"plan" and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date the statement was made.
General
The Company is a leading manufacturer and marketer of a broad range of
consumer lawn and garden products. The Company's products include weed
preventive landscape fabrics, fertilizer and plant food spikes, decorative
landscape edging, weed trimmer replacement heads, shade cloth, lawn and garden
fencing, specialty combinations of mulch, fertilizer, grass and flower seeds 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 believes that it has
significant market share and favorable brand-name recognition in several of its
primary product categories. The Company markets its products through most large
national home improvement and mass merchant retailers ("Retail Accounts"),
including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware and Home Base.
The Company was organized under the laws of the State of California in
August 1990 under the name Natural Earth
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Technologies, Inc. In January 1992 the Company reincorporated under the laws of
the State of Delaware and in July 1995 changed its name to U.S. Home & Garden
Inc. The Company's lawn and garden operations are conducted through its
subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy Gardener's
subsidiaries, Ampro Industries, Inc. ("Ampro"), and the Company's agricultural
products operations are conducted through its subsidiary Golden West
Agri-Products, Inc. ("Golden West"). Unless the context suggests otherwise,
references in this Report to the Company mean U.S. Home & Garden Inc. and its
subsidiaries. The Company's executive offices are located at 655 Montgomery
Street, Suite 500, San Francisco, California 94111, and its telephone number is
(415) 616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the number
of vendors needed to source high volume lawn and garden products, the preference
among home improvement and mass merchant retailers has shifted towards single
source suppliers that offer broad product lines of consumer brand-name
merchandise and the product support necessary to stimulate consumer demand and
ensure timely and cost effective order fulfillment. Smaller regional suppliers
generally lack the capital and other resources necessary to offer the variety
and number of product lines, the product support and the inventory stocking and
tracking capabilities required by home improvement and mass merchant retailers.
According to the 1996-1997 National Gardening Survey, 1996 retail sales of
lawn and garden products were approximately $22 billion, and 64% of the
approximately 101 million households in the United States participated in some
form of gardening activity during 1996. In addition, sales growth in the lawn
and garden industry is being driven in part by the aging of the "baby boomer"
consumer segment. According to the National Gardening Survey, persons 50 years
of age and older spent an average of $400 per household on lawn and garden
activities in 1996.
Prior Acquisitions.
Since August 1992, the Company has consummated the following ten (10)
acquisitions of companies or product lines for a total of over $107 million in
consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic acid-based
products designed to improve crop yield,
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which was 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 was acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5
million promissory note and two convertible notes each in the principal
amount of $1.0 million. Approximately $2.2 million of additional purchase
price was contingent on Easy Gardener meeting certain income requirements.
These contingencies have been met and the Company has paid the entire $2.2
million.
o Emerald Products LLC. A manufacturer of decorative landscape edging which
was acquired in August 1995 for $835,000 in cash and a $100,000 promissory
note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products, which was acquired in
August 1996 for 1,000,000 shares of Common Stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which was acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, which was acquired in February 1998 for approximately
$16.0 million (plus an additional $1.7 million for excess working capital
and acquisition expenses), of which approximately $5.0 million was based on
the value of certain net assets acquired.
o Landmaster Products, Inc. A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for
approximately $3.0 million (plus an additional $600,000 for certain assets
and acquisition expenses), of which approximately $750,000 was based on the
value of certain assets acquired.
o Tensar(R) consumer products line of The Tensar Corporation. A line of lawn
and garden specialty fencing, which was 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 manufacture and distributor of lawn and garden
products including specialty grass and flower seeds which was acquired in
October 1998 for
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approximately $24.6 million, plus the cost of certain inventory acquired
with a potential additional purchase price amount contingent upon the
acquired business achieving certain specified levels of EBITDA (as defined
in the purchase agreement). An additional $1.0 million was paid for a
non-compete agreement.
o E-Garden, Inc. A supplier of gardening related products which are sold over
the internet under the domain name "egarden.com" which was acquired in June
1999 for approximately $400,000, plus expenses of approximately $100,000.
Up to $250,000 of additional purchase price is contingent upon E-Garden's
net sales exceeding certain targets for each of the years during the
three-year period ending June 30, 2002.
Products
Landscape Fabric. The Company markets different types of landscape fabric
in varying thicknesses and strengths under the trade names WeedBlock(R),
WeedBlock 6(TM), MicroPore(R), Pro WeedBlock(TM), Weedshield(TM) and
Landmaster(R). Landscape fabrics allow water, nutrients and oxygen to filter
through to the soil but prevent weed growth by blocking sunlight. The Company's
primary landscape fabrics are made from non-woven fabrics which are generally
manufactured with extruded polymers, pressed or vacuum formed into thin sheets
having the feel and texture of light plastics. For the fiscal years ended June
30, 1997, 1998 and 1999, sales of landscape fabric represented approximately
44%, 39% and 37%, respectively, of the Company's net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver
plant food nutrients directly to the root of the plant, an alternative method of
maintaining plant health to surface-delivered liquid or solid fertilizers. Some
of the Company's fertilizer spikes have the added feature of containing an
insecticide for the control of unwanted insects. The Company markets a variety
of indoor and outdoor specialty fertilizer and plant food spikes primarily under
the Jobe's(R) tradename, one of the most recognized brands in the consumer lawn
and garden industry. For the year ended June 30, 1999, sales of fertilizer,
plant food and insecticide spikes constituted approximately 13% of the Company's
net sales. For the years ended June 30, 1997 and 1998, sales of fertilizer,
plant food and insecticide spikes constituted approximately 24% and 20%,
respectively, of the Company's net sales.
Landscape Edging. The Company markets a variety of resin-based decorative
landscape edgings under trade names including Emerald Edge and Terra Cotta
Tiles(TM). The Company's decorative edgings are used by consumers to define the
perimeter of planting
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areas with a variety of designs which include stone, log, terra cotta tiles and
picket fences.
Shade Cloth. The Company markets shade cloth fabrics in a variety of sizes
and colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy or
protection from wind for people, plants and pets. The Company markets shade
cloth fabrics as an exclusive United States retail distributor of a shade cloth
manufacturer pursuant to an agreement that expires on December 31, 2000.
Fertilizers and Root Feeders. The Company markets fertilizers under the
Ross trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a
long steel irrigation tube with hose connector that is inserted deep into the
ground, provides the homeowner with a means of deep feeding and irrigating trees
and shrubs. The Ross Root Feeder may also be used without fertilizer as a deep
watering device.
Weed Trimmer Replacement Heads. The Company manufactures and distributes
replacement heads for string weed trimmer products under the Weed Wizard
trademark. The Company's weed trimmer replacement head products consist of a
replacement casing containing either a chain link for heavy duty use or a
plastic blade for routine weed and grass trimming. The products are part of a
multi fit system offered by the Company, which allows the replacement heads to
fit on virtually all consumer gas weed trimmers and most consumer electric weed
trimmers.
Lawn and Garden Fencing. The Company markets resin based fencing for lawns
and gardens. A variety of fencing products are marketed by the Company and are
used by the consumer for numerous applications including preventing animals from
entering a garden or orchard.
Mulch, Fertilizer, Grass and Flower Seed. The Company distributes 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 and lawn and garden fencing and
specialty combinations of mulch, fertilizer, grass and flower seeds, the Company
also sells other complementary lawn and garden products for the home gardener.
The products include a line of animal repellents that are formulated to deter
dogs, cats, deer and rabbits from destroying garden and landscape environs, a
variety of protective plant and tree covers, bird and animal mesh blocks,
protective garden and tree netting to prevent animal damage, synthetic mulch and
fabric pegs.
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Agricultural Products. The Company, through Golden West, manufactures and
distributes certain humic acid-based agricultural products for use on farms and
orchards. Golden West generally sells its products to agricultural distributors,
which in turn market Golden West's products to farms and orchards. The principal
agricultural products manufactured or distributed by the Company are:
Energizer(R), a formulation of humic acids which, when applied in conjunction
with liquid fertilizers, permits crops to absorb a greater amount of the
nutrients in the fertilizer; Penox(R), a surfactant, or penetrating wetting
agent, that contains humic acid which, when applied in conjunction with
herbicides, defoliants and other agricultural products, increases their
effectiveness; and Powergizer(R), a foliar nutrient, or plant food, containing
humic acid which promotes growth and vigor in many types of crops. Sales of the
Company's agricultural products accounted for less than 1% of the Company's net
sales in fiscal 1999.
Conversion, Manufacturing and Supply
Lawn and Garden Products
Except for the materials for WeedBlock, which are obtained from a single
source, the basic materials for the Company's lawn and garden products are
purchased from a variety of suppliers. All of such materials are converted,
packaged and shipped by the Company from either its Waco, Texas facility or its
Paris, Kentucky facility, its Bradley, Michigan facility or at a facility
located in Englewood, Colorado.
The Company purchases all of the landscape fabric used to manufacture
WeedBlock from Tredegar Industries, Inc. ("Tredegar"). The Company purchases
large rolls of various types of landscape fabric from Tredegar for shipment to
its Waco, Texas facility where it sizes, cuts and packages the fabric for
consumer sale. Although the Company has purchased all of its supply from
Tredegar for over 10 years and believes that its relationship with Tredegar is
good, Tredegar is free to terminate its relationship with the Company at any
time and accordingly could market its fabrics to other companies, including
competitors of the Company. Nevertheless, the Company owns the registered
trademark "WeedBlock(R)" and to the extent that it establishes alternative
supply arrangements, its rights to market products under the WeedBlock brand
name would continue without restriction.
The Company manufactures and packages its Jobe's fertilizer spikes at its
Paris, Kentucky facility. The raw materials that comprise the Company's indoor
fertilizer spikes are mixed with a binding agent and then passed through an
extrusion process which feeds a continuous strand of fertilizer through a
heat-drying system. The strand is then cut into ready-to-use fertilizer spikes
which are then machine counted and packaged into shelf-ready
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blisterpacks. The Company's outdoor fertilizer spikes are manufactured in a
similar manner except rather than passing through an extrusion process, the
outdoor spikes are processed through molds which shape the spikes into their
final form. The outdoor spikes' are packaged in either a foil pouch, bag or box.
The specifications for the Company's landscape edging, shade cloth and root
feeder products and packaging are designed by the Company and independent design
consultants. The products are then manufactured and packaged by third party
manufacturers according to the Company's specifications.
The nylon product body (rotary head) and the plastic blades and the chain
links used in the Company's weed trimmer replacement heads are manufactured for
the Company pursuant to open purchase orders. The Company assembles and packages
the weed trimmer replacement heads, at its Bradley, Michigan facility, with the
aid of an electronic packaging machine.
The Company purchases most of the material used to manufacture its resin
based fencing from The Tensar Company pursuant to an agreement that expires in
May 2000. The material is then sized and cut for consumer sale at the Company's
Waco, Texas facility.
The Company manufactures its Ampro and Amturf "ready-to-grow" combination
mulch, fertilizer and seed products at its Bradley, Michigan facility. Newsprint
is shredded and processed into mulch and then combined with seed and fertilizer.
The mixture is now packaged in bags, boxes or canisters.
Agricultural Products
The Company does not own or lease any manufacturing facilities for its
agricultural products. Substantially all of the Company's humic acid-based
agricultural products, Energizer, Penox and Powergizer, are processed by Western
Farm Services, Inc. ("Western Farm") pursuant to purchase orders placed by the
Company from time to time in the ordinary course of business. Furthermore, the
Company, through Western Farm, has an open purchase order arrangement with an
entity which supplies it with leonardite ore, a source of humic acid used in its
agricultural products.
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Customers
The Company's customers include home improvement centers, mass
merchandisers, hardware stores, nurseries, and garden centers and other retail
channels throughout the United States. The Company's three largest customers for
fiscal 1999, Home Depot, Lowes and Kmart, accounted for approximately 24%, 9%
and 7%, respectively, of its net sales during such year. During fiscal 1998,
Home Depot, Lowes and Kmart, accounted for approximately 26%, 11% and 7%,
respectively of its net sales during such year. During fiscal 1997, Home Depot,
Lowes and K-Mart, accounted for approximately 26%, 10% and 7%, respectively, of
the Company's net sales. The Company's ten largest customers as a group
accounted for 63% and 59% of its net sales during fiscal 1998 and 1999,
respectively. Sales to such customers are not governed by any contractual
arrangement and are made pursuant to standard purchase orders. While the Company
believes that relations with its largest customers are good, the loss of any of
these customers could have an adverse effect upon the results of operations of
the Company.
The Company's sales are concentrated in the United States, with
international sales (primarily in Europe and Canada) accounting for
approximately 4% of the Company's net sales for fiscal 1999. The Company is
currently attempting to develop relationships with distributors outside of the
United States.
Sales and Marketing
The Company's sales and marketing efforts have recently been reorganized to
improve both the efficiency and effectiveness of the Company's consolidated
businesses. 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 the Company's eight Regional Sales Managers. Because of
the service oriented nature of the Company's business, the sales managers devote
a substantial amount of their time to servicing and maintaining relationships
with the Company's largest customers in addition to managing the overall sales
operations. The Company also utilizes the services of over 30 non-exclusive
independent sales organizations. This new integrated sales approached is
designed to help achieve sales of all products to all customers.
The Company's marketing activities are coordinated by its National
Marketing Manager. In addition to designing and developing the Company's
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 the Company's key retail
accounts.
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The Company expects that its lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and in-store
consumer promotions in Retail Accounts, hardware stores, nurseries and garden
centers. In addition, the Company believes that a substantial portion of lawn
and garden sales are impulse driven and not overly price sensitive. Therefore,
the Company seeks to increase consumer awareness, understanding and brand
identification of its products through its distinctive packaging and
point-of-sale displays. Retail Accounts and the Company's other customers
receive the Company's products in packaging that is easily displayed. The retail
product packaging is informative to the end-user and incorporates attention
getting, eye-pleasing color schemes. The Company also tailors its displays to
the evolving needs of retailers. Because many home improvement and mass merchant
retailers maintain outdoor sales areas for their lawn and garden products, the
Company utilizes waterproof displays for many of its products. In addition, the
Company meets the specific needs of many of its larger customers by tailoring
the size of its displays to the dimensions requested by such customers. The
Company's independent sales representatives periodically visit individual retail
outlets to assist Retail Accounts in achieving innovative and optimal use of the
Company's distinctive store displays.
In order to anticipate and react quickly to changing consumer preferences,
the Company also engages in market research. During fiscal 1998 the Company
focused its advertising and promotional campaign on the Jobe's brand name, as
well as on the Easy Gardener and Emerald Edge brand names.
In addition, during fiscal 1998, the Company redesigned the Jobe's
packaging, assisted Retail Accounts in their inventory purchasing, in-store
product placement and implementation of displays for Jobe's products and
conducted a national advertising campaign which targeted the "baby boomer"
consumer segment.
The Company spent approximately $3.8 million, in fiscal 1999 on a
combination of media development, print, radio and television advertising,
co-operative advertising (advertising done in conjunction with retailers),
attendance at trade shows and public relations to promote awareness,
understanding and brand identification of its lawn and garden products.
The Company utilized a substantial portion of its marketing budget for
fiscal 1999 on co-op advertising in conjunction with key retail customers.
E-Commerce Initiative
The Company recently commenced selling products on the Internet on a
business-to-business basis through its website www.egarden.com. The Company
intends to expand this site to
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include a new product auction site that will be accessible from the home page of
egarden.com. Beginning in November 1999, the Company's customers will be able to
benefit from increased buying options and conduct business-to-business bidding
as well as private non-auction business-to-business on a wide variety of lawn
and garden products including the Company's niche garden products. The site is
being developed in conjunction with a leading provider of Web auction software.
The Company's auction site for egarden.com will be accessed through
gardenersauction.com and garden.wholesalexchange.com.
The Company receives a fee for facilitating a business-to-business online
transaction on either a private or auction basis. The Company's web site allows
it to make its products available to retailers who do not purchase through the
traditional industry distribution channel. The Company's Web site also serves as
an online resource to manufacturers and lawn and garden industry professionals
seeking information on such items as raw material pricing, business trends of
public and private companies, merger and acquisition activity, stock quotes,
news, industry events, and other helpful information in one convenient location.
Information Systems
The Company maintains a sophisticated retail data information system which
enables it to provide timely and efficient order fulfillment to its Retail
Accounts and other customers. Internally, the Company's information systems
track orders and deliveries and provide exception reports if product is not
delivered on time. The systems "push" the necessary information to the proper
personnel, allowing the Company to react quickly to information. The Company's
purchase order process can be paperless, with most Retail Accounts placing their
orders through an electronic data interchange with the Company.
In addition, in July 1999 the Company contracted to implement during the
fiscal year ending June 30, 2000 the QAD Applications e-business supply-chain
enabled enterprise planning software at its executive offices and at several of
its subsidiaries.
Seasonality
The Company sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer. Sales of the Company's agricultural products are
also seasonal. Most shipments occur during the agricultural cultivation period
from March through October.
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Inventory and Distribution
In order to meet product demand, the Company keeps relatively large amounts
of product inventory on hand, particularly from December to May, the months of
highest demand. Despite maintaining these relatively high levels of inventory,
the Company has historically experienced minimal inventory obsolescence.
However, it is possible that inventory obsolescence could increase in the
future. Retail Accounts generally require delivery within five business days.
Orders are normally processed within 48 hours and shipped by common carrier.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. The Company competes with a combination of national and
regional companies 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 the Company's products. Many of the Company's competitors have
achieved significant national, regional and local brand name and product
recognition and engage in frequent and extensive advertising and promotional
programs. Many of these companies have substantially greater financial,
technical, marketing and other resources than the Company.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the 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 the Company in this industry. Nevertheless,
well capitalized companies and smaller regional firms may develop and markets
landscape fabrics and compete with the Company for customers who purchase such
products.
Among the Company's competitors in the lawn and garden market for the
Jobe's spike line of fertilizer and insecticide products and the Ampro
combination mulch, seed and fertilizer line of products is the Scotts Company,
who markets competing products under the Miracle-Gro brand. Competition for the
Company's agricultural products consist of other manufacturers of products that
are humic acid based but that utilize formulas that are different from Golden
West's. These competitors include Monterey Chemical Corporation and Custom
Formulators, Inc. The Company competes with a variety of regional lawn and
garden manufacturers in the markets for landscape edging, shade cloth and root
feeders. Competition for the Company's weed trimmer replacement heads consist of
other manufacturers of weed trimming
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replacement part products using nylon based lines and blades. These include CMD
Products.
Government Regulation
The Company is subject to many laws and governmental regulations and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by the Company as fertilizers or pesticides are subject to an
extensive and frequently evolving statutory and regulatory framework, at both
the Federal and state levels. The distribution and sale of pesticides is subject
to regulation by the U.S. Environmental Protection Agency ("EPA") pursuant to
the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as
regulation by many states in a manner similar to FIFRA. Under FIFRA and similar
state laws, all pesticides must be registered with the EPA and the state and
must be approved for their intended use. FIFRA and state regulations also impose
other stringent requirements on the marketing of such products. Moreover, many
states also impose similar requirements upon products marketed for use as
fertilizing materials, which are not typically regulated under FIFRA. Failure to
comply with the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
The Company markets certain animal repellent and pesticide products that
are subject to FIFRA and to similar state regulations. The Company also markets
certain fertilizer products that are subject to regulation in some states. The
Company believes that it is in substantial compliance with material FIFRA and
applicable state regulations regarding its material business operations.
However, there can be no assurance that the Company will be able to comply with
future regulations in every jurisdiction in which the Company's material
business operations are conducted without substantial cost or interruption of
operations. Moreover, there can be no assurance that future products marketed by
the Company will not also be subject to FIFRA or to state regulations. If future
costs of compliance with regulations governing pesticides or fertilizers exceed
the Company's budgets for such items, the Company's business could be adversely
affected. If any of the Company's products are distributed or marketed in
violation of any of these regulations, the Company could be subject to a recall
of, or a sales limitation placed on, one or more of its products, or civil or
criminal sanctions, any of which could have a material adverse effect upon the
Company's business.
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Environmental Regulation. The Company's manufacturing operations are
subject to various evolving federal, state and local laws and regulations
relating to the protection of the environment, which laws govern, among other
things, emissions to air, discharges to ground, surface water, and groundwater,
and the generation, handling, storage, transportation, treatment and disposal of
a variety of hazardous and non-hazardous substances and wastes. Federal and
state environmental laws and regulations often require manufacturers to obtain
permits for these 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 Ampro, Weatherly and Weed
Wizard each operate one manufacturing facility. Although the Company believes
that its material manufacturing facilities are in substantial compliance with
applicable material environmental laws, it is possible that there are material
environmental liabilities of which the Company is unaware. If the costs of
compliance with the various existing or future environmental laws and
regulations including any penalties which may be assessed for failure to obtain
necessary permits, exceed the Company's budgets for such items, the Company's
business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Ampro, Weatherly and Weed Wizard each operate one manufacturing facility.
Moreover, the Company or its predecessors have owned or operated other
manufacturing facilities in the past and may have liability for remediation of
such facilities in the future, to the extent any is required. In this regard,
Weatherly previously owned a facility that was the subject of certain soil
remediation activities. Although this facility was sold by Weatherly prior to
the Company's acquisition of Weatherly, there can be no assurance that the
Company will not be liable for any previously existing environmental
contamination at the facility. Moreover, although the purchaser of the facility
indemnified Weatherly for any environmental liability and the sellers of
Weatherly, in turn, indemnified the Company from such liability, there can be no
assurance that, if required, the indemnifying parties will be able to fulfill
their respective obligations to indemnify the Company. Furthermore, certain
business operations of the
-15-
Company's subsidiaries also involve shipping hazardous waste off-site for
disposal. As a result, the Company could be subject to liability under these
statutes. The Company could also incur liability under CERCLA or similar state
statutes for any damage caused as a result of the mishandling or release of
hazardous substances owned by the Company but processed and manufactured by
others on the Company's behalf. As a result, there can be no assurance that the
manufacture of the products sold by the Company will not subject the Company to
liability pursuant to CERCLA or a similar state statute. Furthermore, there can
be no assurance that Ampro, Easy Gardener, Weatherly or Weed Wizard will not be
subject to liability relating to manufacturing facilities owned or operated by
them currently or in the past.
Other Regulations. The Company is also subject to various other federal,
state and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants.
Trademarks, Proprietary Information and Patents
The Company believes that product recognition is an important competitive
factor in the lawn and garden care products industry. Accordingly, in connection
with its marketing activities of its lawn and garden care products, the Company
promotes, and intends to promote, certain tradenames and trademarks which are
believed to have value to the Company.
In connection with its acquisition of the assets of Easy Gardener Inc. in
September 1994, the Company acquired certain trademarks and copyrights used by
Easy Gardener, Inc. in connection with its business including, but not limited
to, the trademarks, Weedblock(R), Easy Gardener(R), Weedshield(TM), Micropore(R)
and Birdblock(R). In connection with its acquisition of Weatherly, the Company
acquired certain patents, as well as certain copyrights and trademarks used in
connection with Weatherly's business including, but not limited to, Jobe's(R),
Ross(R), Green Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(R). The Company
also acquired certain patents and trademarks when it acquired the assets of
Emerald Products, LLC and also acquired certain trademarks in connection with
its purchase of the Plasti-Chain line of products from Plastic Molded Concepts,
Inc. In connection with its acquisition of Weed Wizard, Inc., the Company
acquired the Weed Wizard(TM) product patent and trademark. The Company also
acquired the trademark Landmaster(R) in connection with its acquisition of the
assets of Landmaster Products, Inc. In addition, the Company acquired the
trademarks Polyspun 300(R), Nature Shield(R) and Diamondback(R) in connection
with its acquisition of the Tensar(R) consumer product line. In connection with
the acquisition of the Tensar(R) consumer product line, The Tensar Corporation
granted to the Company an exclusive royalty-free
-16-
perpetual license to use the trademark Tensar(R) in connection with a wide range
of polymeric grid, mesh, net and related products supplied to the Company by The
Tensar Corporation. In connection with its acquisition of Ampro, the Company
acquired certain trademarks used in connection with Ampro's business including,
but not limited to, Amturf(R). There can be no assurance that the Company will
apply for any additional trademark or patent protections relating to its
products or that its current trademarks and patents will be enforceable or
adequately protect the Company from infringement of its proprietary rights.
Although the Company believes that the products sold by it do not and will
not infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, the Company could be required to pay damages and
modify its products or obtain a license for the manufacture or sale of such
products. There can be no assurance that, in such an event, the Company would be
able to do so in a timely manner, upon acceptable terms and conditions or at
all, and the failure to do any of the foregoing could have a material adverse
effect upon the Company.
Product Liability
The Company, as a manufacturer of lawn and garden care and pesticide
products, may be exposed to significant product liability claims by consumers.
Although the Company has obtained product liability insurance coverage for U.S.
Home & Garden Inc., 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 has
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 the Company or will be sufficient to
cover all possible liabilities. In the event a successful suit is brought
against the Company, unavailability or insufficiency of insurance coverage could
have a material adverse effect on the Company. Moreover, any adverse publicity
arising from claims made against the Company, even if such claims were not
successful, could adversely affect the reputation and sales of the Company's
products.
Employees
As of September 20, 1999 the Company had 272 full-time employees. Of such
employees, three are executive officers of the Company, 71 were engaged in
administration and finance, 38 were engaged in sales and marketing, 65 were
engaged in warehouse, shipping and receiving, 87 were engaged in production and
8 were
-17-
temporary full-time employees working in warehouse shipping, receiving and
productions. None of the Company's employees are covered by collective
bargaining agreements. The Company believes that it has a good relationship with
its employees.
Item 2. Properties
The Company's executive offices are currently located in San Francisco,
California, in approximately 3,000 square feet of office space for which the
Company pays $11,275 per month in rent, which amount includes the costs of
utilities and janitorial services. The Company believes that its office space,
which it rents pursuant to a lease expiring in February 2001, is adequate for
the Company's planned future operations.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which the Company pays $17,918 per month in
rent, pursuant to a lease agreement that expires on February 28, 2001. Easy
Gardener's facilities contain landscape fabric converters, packaging equipment
and warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $10,833 per month in rent pursuant to a
lease that expires on June 30, 2001. The Company also leases an additional
53,000 feet of warehouse space in Paris, Kentucky for $5,417 per month in rent
pursuant to a lease that expires on May 6, 2000.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $1,294 per month base rent, with rent
increases at a rate of 4% a year. The lease expires in June 2001 subject to the
Company's option to renew the lease for an additional one year period.
Ampro owns approximately 200,000 square feet of building on approximately
150 acres of land in Bradley, Michigan. Approximately 60,000 square feet of this
facility was built with grant proceeds received from the Michigan Department of
Natural Resources (MDNR) in 1994 in which the MDNR has a security interest over
the grant period of ten years. The grant proceeds have been recorded as deferred
revenue and is being amortized over the grant period.
With respect to the storage, packaging and distribution of certain of the
Company's landscape fabric products, Easy Gardener has entered into a management
agreement with Landmaster Products, Inc. (the "Management Agreement") pursuant
to which the Company
-18-
is provided with warehouse space in Englewood, Colorado. The Management
Agreement expires on October 21, 2000. The Company currently pays a management
fee of $31,500 per month.
Item 3. Legal Proceedings
In August 1999 an action was commenced against the Company and its
subsidiary, Ampro, in the Circuit Court of the State of Michigan, County of
Kent, by H. Kenneth W. Hilbert, E. Scott Hilbert, John R,. Hilbert and Omer
Messer, who were principal stockholders of Ampro immediately prior to its
acquisition by the Company. The plaintiffs allege that the Company has breached
certain terms of the stock purchase agreement pursuant to which it acquired
Ampro (the "Agreement") that allegedly require the Company to make certain
additional payments to the plaintiffs and that the Company took certain actions
that prevented Ampro from achieving certain earnings levels that would have
triggered additional contingent payments to the plaintiffs under the Agreement.
Plaintiffs seek to recover unspecified damages, together with interest, costs
and attorneys fees and an accounting by Ampro with respect to certain financial
information. Plaintiffs have also notified the Company that they intend to
arbitrate certain other issues concerning closing adjustments under the
Agreement. The Company intends to vigorously defend these matters and to impose
certain counter-claims against the defendants.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of Stockholders was held on June 14, 1999 at which time
the following directors were reappointed to serve until the Annual Meeting of
Stockholders of the Company to be held in the year 2000:
Votes For Votes Withheld
--------- --------------
Robert Kassel 16,786,134 328,138
Richard Raleigh 16,960,659 153,613
Maureen Kassel 16,702,219 412,053
Fred Heiden 16,881,644 232,628
Jon Schulberg 16,881,044 233,228
In addition, at the Meeting, the stockholders approved the adoption of the
Company's 1999 Stock Option Plan by a vote of 15,091,024 in favor, 1,916,569
against and 106,679 abstaining. There were no broker non-votes with respect to
this proposal.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded in the over-the-counter market and
was quoted on the NASDAQ SmallCap Market from
-19-
March 26, 1992 until June 3, 1998 and has been quoted on the NASDAQ National
Market System since June 4, 1998. The NASDAQ symbol for the Company's Common
Stock is "USHG". The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock, as reported by NASDAQ.
Year Ended June 30, 1999
High Low
-------------
First Quarter.............. $6 1/2 $3 1/2
Second Quarter............. 5 9/16 3 5/8
Third Quarter ............. 6 3/16 3 5/8
Fourth Quarter............. 6 7/8 3 11/16
Year Ended June 30, 1998
High Low
-------------
First Quarter......... $5 1/16 $2 15/16
Second Quarter........ 5 1/8 3 7/8
Third Quarter......... 7 13/16 4
Fourth Quarter........ 7 3/8 5 3/8
As of September 20, 1999, the number of stockholders of record of the
Company's Common Stock was 208. The Company believes that, in addition, there
are in excess of 500 beneficial owners of its Common Stock whose shares are held
in "street name".
In June 1999, the Company extended by ten years the expiration date of
options to purchase 161,333 shares of Common Stock previously granted to Robert
Kassel. The foregoing options were exercisable at an average exercise price of
$1.69 per share and the transactions were exempt from the registration
requirements of the Securities Act of 1933 by virtue of Sections 2(a)(3) or 4(2)
thereof.
The Company has not paid any cash dividends on its common stock to date and
does not expect to declare or pay any cash or stock dividends in the foreseeable
future. The lending agreement between the Company and its primary lending
institution prohibits the Company from paying dividends without the lender's
consent.
-20-
Item 6. Selected Financial Data
(in thousands, except per share data)
The following selected financial data at and for the years ended June 30,
1995, 1996, 1997, 1998 and 1999 has been derived from the Company's 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.
-21-
Statement of Income Data:
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
Net sales ................................... $ 19,692 $ 27,031 $ 52,046 $ 67,149 $ 89,346
Cost of sales ............................... 9,151 12,670 23,649 30,431 44,176
------------ ------------ ------------ ------------ ------------
Gross profit ................................ 10,541 14,361 28,397 36,718 45,170
------------ ------------ ------------ ------------ ------------
Selling, shipping, general and administrative 7,152 10,612 17,745 23,065 32,924
expenses
Restructuring charges ....................... -- -- -- -- 1,964
------------ ------------ ------------ ------------ ------------
Income from operations ...................... 3,389 3,749 10,652 13,653 10,282
------------ ------------ ------------ ------------ ------------
Other income (expense) ...................... (1,776) (1,940) (3,262) (3,077) (6,883)
Income tax (expense) benefit ................ (38) 715 (3,200) (3,600) (1,350)
------------ ------------ ------------ ------------ ------------
Income before extraordinary expense ......... 1,575 2,524 4,190 6,976 2,049
Extraordinary expense, net of
income taxes ................................ -- -- (1,007) (1,450) --
------------ ------------ ------------ ------------ ------------
Net income .................................. $ 1,575 $ 2,524 $ 3,183 $ 5,526 $ 2,049
============ ============ ============ ============ ============
Income per share before extraordinary
expense:
Basic ....................................... $ .19 $ .25 $ .31 $ .39 $ .10
Dilutive .................................... $ .16 $ .19 $ .26 $ .31 $ .09
Net income per share:
Basic ....................................... $ .19 $ .25 $ .23 $ .31 $ .10
Dilutive .................................... $ .16 $ .19 $ .20 $ .24 $ .09
Weighted average number of common
and common equivalent shares
outstanding:
Basic ....................................... 8,376,000 10,206,000 13,695,000 17,776,000 19,621,000
Dilutive .................................... 10,125,000 13,361,000 16,068,000 22,808,000 23,595,000
Balance Sheet Data:
June 30,
------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Working capital $ 3,326 $ 5,328 $ 2,292 $ 46,743 $ 32,874
Intangible assets, net 16,692 17,167 44,364 63,395 82,197
Total assets 28,140 33,584 68,475 126,813 137,464
Short-term debt 2,200 3,650 8,990 --
Long-Term debt 8,000 6,238 17,570 63,250 78,750
Total liabilities 12,800 14,214 36,549 75,214 90,980
Stockholders' equity 15,339 19,370 31,926 51,599 46,484
-22-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company manufactures and markets a broad range of brand-name consumer
lawn and garden products through its wholly-owned subsidiaries, E*Garden, Ampro,
Easy Gardener and Golden West, and through Easy Gardener's wholly-owned
subsidiaries, Weatherly and Weed Wizard. Since 1992, the Company has consummated
ten acquisitions of complementary lawn and garden companies and product lines
for an aggregate consideration of over $107 million in cash, notes and equity
securities. As a result of such acquisitions, the Company recognized a
significant amount of goodwill which, in the aggregate, was approximately $82.6
million as of June 30, 1999. The Company is currently amortizing such goodwill
using the straight-line method over various time periods ranging from 20 to 30
years and amortization expenses for the fiscal year ended June 30, 1999 were
$2.6 million or $0.11 per diluted share. See "Summary of Accounting Policies -
Intangible Assets" and Note 1 to Notes to Consolidated Financial Statements.
The Company's results of operations for the fiscal year ended June 30, 1997
were significantly affected by the acquisition of Weatherly in August 1996. In
connection with the acquisition of Weatherly, the Company's outstanding notes
payable were refinanced and replaced with a new line of credit (the
"Refinancing"). As a result of the Refinancing, the Company was required to
record an extraordinary expense of $1.0 million, net of tax benefits, for the
fiscal year ended June 30, 1997, which expense consisted of the write-off of
deferred finance costs at June 30, 1996 plus prepayment penalties. Such
extraordinary expense reduced the Company's dilutive net income per share for
fiscal 1997 by $0.06, from $0.26 to $0.20. In addition, as a result of the
Company's repayment of all of its outstanding bank debt in April 1998, the
Company was required to record an extraordinary expense of $1,450,000, net of
income tax benefit in its fiscal year ended June 30, 1998. Such extraordinary
expense reduced the Company's dilutive net income per share for fiscal 1998 by
$0.07 from $0.31 to $0.24. See Note 14 to Notes to Consolidated Financial
Statements.
The Company's results of operations for the fiscal year ended June 30, 1998
were also significantly affected by the acquisition of Weed Wizard, Inc. in
February 1998, certain assets of Landmaster Products, Inc., in March 1998 and
the Tensar consumer product line in May 1998. Due to the seasonal nature of the
Company's sales the results of operations for fiscal year ended June 30, 1999
were, on a comparative basis, negatively affected by these acquisitions since
both the off season and peak season results of operations for the businesses and
product lines acquired are included in the results of operations for fiscal year
1999, compared to the prior fiscal year when only the peak season results were
included in the Company's results of operations.
-23-
The Company experienced net sales growth of 93% from fiscal 1996 to fiscal
1997, 29% from fiscal 1997 to fiscal 1998 and 33% from fiscal 1998 to fiscal
1999. The Company believes that this growth in net sales was primarily
attributable to expansion of its product lines through the acquisitions of
complementary lawn and garden businesses and product lines. Net sales were also
positively affected by an increase in sales of pre-existing product lines.
Results of Operations
The following table sets forth for the periods indicated certain selected
income data as a percentage of net sales:
Percentages of Net Sales
--------------------------------
Year Ended June 30,
================================
1997 1998 1999
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 45.4 45.3 49.4
------ ------ ------
Gross profit 54.6 54.7 50.6
Selling and shipping expenses 21.6 21.2 21.6
General and administrative expenses 12.5 13.2 15.3
Restructuring charge -- -- 2.2
------ ------ ------
Income from operations 20.5 20.3 11.5
Interest expense, net (6.3) (4.6) (7.7)
Income tax expense (6.2) (5.4) (1.5)
Extraordinary expense, net (1.9) (2.1) --
------ ------ ------
Net income 6.1% 8.2% 2.3%
------ ------ ------
Fiscal Year Ended June 30, 1999 Compared to Fiscal year Ended June 30, 1998
Net sales. Net sales increased by $22.2 million, or 33%, to $89.3 million
during the fiscal year ended June 30, 1999 from $67.1 million during the
comparable period in 1998. The increase in net sales was primarily a result of
the October 1998 acquisition of Ampro Industries, Inc. and internal growth of
the Company's pre-existing product lines.
Gross profit. Gross profit increased by $8.5 million, or 23 %, to $45.2
million for the fiscal year ended June 30, 1999, from $36.7 million during the
comparable period in 1998. This increase was due primarily to the acquisition of
Ampro Industries, Inc.. Gross profit as a percentage of net sales decreased to
50.6% during the fiscal year ended June 30, 1999, from 54.7% during the
comparable period in 1998. The decrease in gross profit as a percentage of net
sales was primarily attributable to an increase in sales of lower-margin
products. The gross profit percent also decreased due to changes in packaging
and new machinery resulting in higher and inefficient production costs.
Furthermore the gross profit percent decreased due to increased overhead
resulting from the inclusion of the off peak season of the acquisitions
purchased at the selling season in the fiscal year ended June 30, 1998.
-24-
Selling and shipping expenses. Selling and shipping expenses increased $5.1
million or 35.9%, to $19.3 million during the fiscal year ended June 30, 1999
from $14.2 million during the comparable period in 1998. This increase was
primarily the result of an increase in the amount of products shipped, which was
a consequence of the October acquisition of Ampro Industries, Inc., the effect
on the full fiscal year ended June 30, 1999 of prior acquisitions that occurred
during fiscal 1998 along with an increase in sales of pre-existing product
lines. Selling and shipping expenses as a percentage of net sales increased to
21.6% during the fiscal year ended June 30, 1999, from 21.2% during the
comparable period in 1998. This increase was a result of reorganization expense
of the sales force and increased shipping expenses.
General and administrative expenses. General and administrative expenses
increased $4.8 million or 53.9% to $13.6 million during the fiscal year ended
June 30, 1999 from $8.9 million during the comparable period in 1998. This
increase was primarily due to increased costs relating to acquisitions,
including amortization of goodwill and the addition of certain administrative
personnel as part of the Company's efforts to build an infrastructure that it
believes will be able to more readily integrate any future products or
businesses that may be acquired. As a percentage of net sales, general and
administrative expenses increased to 15.3% during the fiscal year ended June 30,
1999, from 13.2% during the comparable period in 1998. This is primarily due to
the increase of amortization of goodwill and the addition of certain
administrative personnel.
Restructuring charges. The Company incurred a non-recurring restructuring
charge of $2.0 million during the fiscal year ended June 30, 1999. This
restructuring charge results primarily from the execution of its overall
integration and cost reduction strategy, including the consolidation of
administrative activities and the rationalization of production and distribution
facilities. See Note 16 to Notes to Consolidated Financial Statements.
Income from operations. Income from operations decreased by $3.4 million,
or 24.7%, to $10.3 million during the fiscal year ended June 30, 1999 from $13.7
million during the comparable period in 1998. The decrease in income from
operations in actual dollars was primarily due to the $2.0 million restructuring
costs and the increase in general and administrative expenses in dollars and as
a percentage of net sales during the fiscal year ended June 30, 1999. As a
percentage of net sales, income from operations decreased to 11.5% for the
fiscal year ended June 30, 1999 from 20.3% during the comparable period in 1998.
Interest expense. Interest expense increased by $3.8 million, or 108%, to
$7.4 million during the fiscal year ended June 30, 1999 from $3.6 million during
the comparable period in 1998. The increase in interest expense is primarily
related to
-25-
the interest associated with the increase in debt as a result of financing the
Company's various acquisitions.
Income taxes. Income taxes decreased to $1.3 million during the fiscal year
ended June 30, 1999 from $3.6 million during the comparable period in 1998
primarily due to the decrease in income before income taxes which was partially
offset by an increase in the Company's effective income tax rate for the year.
Net income. Net income decreased by $3.5 million, or 62.9% to $2.0 million
during the fiscal year ended June 30, 1999 from $5.5 million during the
comparable period in 1998. This decrease was primarily attributable to the $2.0
million restructuring costs, sales of lower margin products and the increased
costs relating to acquisitions, including amortization of goodwill and the
addition of certain administrative personnel. Basic net income per common share
decreased $0.21 to $0.10 per share for the fiscal year ended June 30, 1999 from
$0.31 per share during the comparable period in 1998. Diluted net income per
common share decreased $0.15 to $0.09 per share for the fiscal year ended June
30, 1999 from $.24 per share during the comparable period in 1998. The decrease
in both basic and diluted earnings per share is primarily attributable to the
decrease in net income.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Net sales. Net sales increased by $15.1 million, or 29%, to $67.1 million
during the fiscal year ended June 30, 1998 from $52 million during the
comparable period in 1997. The increase in net sales was primarily a result of
the February 1998 acquisition of substantially all of the assets used in the
business of Weed Wizard, Inc. and the March 1998 acquisition of substantially
all of the assets of Landmaster Products, Inc., combined with internal growth of
the Company's pre-existing product lines.
Gross profit. Gross profit increased by $8.3 million, or 29%, to $36.7
million for the fiscal year ended June 30, 1998, from $28.4 million during the
comparable period in 1997. This increase was due primarily to the acquisition of
substantially all of the assets used in the business of Weed Wizard, Inc. and
substantially all of the assets used in the business of Landmaster Products,
Inc. Gross profit as a percentage of net sales increased to 54.7% during the
fiscal year ended June 30, 1998, from 54.6% during the comparable period in
1997. The increase in gross profit as a percentage of net sales was primarily
attributable to the increase in sales of higher-margin products.
Selling and shipping expenses. Selling and shipping expenses increased $3.0
million or 26.5%, to $14.2 million during the fiscal year ended June 30, 1998,
from $11.2 million during the comparable period in 1997. This increase was
primarily the
-26-
result of an increase in the amount of products shipped, which was a consequence
of the February 1998 acquisition of substantially all of the assets used in the
business of Weed Wizard, Inc. and the March 1998 acquisition of substantially
all of the assets used in the business of Landmaster Products, Inc. along with
an increase in sales of pre-existing product lines. Selling and shipping
expenses as a percentage of net sales decreased to 21.2% during the fiscal year
ended June 30, 1998, from 21.6% during the comparable period in 1997. This
decrease was a result of economies of scale achieved from the sale of new
products to existing customers.
General and administrative expenses. General and administrative expenses
increased $2.3 million or 36% to $8.9 million during the fiscal year ended June
30, 1998 from $6.5 million during the comparable period in 1997. This increase
was primarily due to increased costs relating to acquisitions, including
amortization of goodwill and the addition of certain administrative personnel as
part of the Company's efforts to build an infrastructure that it believes will
be able to more readily integrate any future products or businesses that may be
acquired. As a percentage of net sales, general and administrative expenses
increased to 13.2% during the fiscal year ended June 30, 1998, from 12.5% during
the comparable period in 1997. This is primarily due to the increase of
amortization of goodwill and the addition of certain administrative personnel.
Income from operations. Income from operations increased by $3.0 million,
or 28.2%, to $13.6 million during the fiscal year ended June 30, 1998 from $10.6
million during the comparable period in 1997. The increase in income from
operations in actual dollars was primarily due to the increase in net sales for
the year ended June 30, 1998. As a percentage of net sales, income from
operations decreased to 20.3% for the fiscal year ended June 30, 1998 from 20.5%
during the comparable period in 1997.
Interest expense. Interest expense increased by $225,000, or 7%, to $3.6
million during the fiscal year ended June 30, 1998, from $3.3 million during the
comparable period in 1997. The increase in interest expense is primarily related
to the interest associated with the increase in debt associated with the
issuance by U.S. Home & Garden Trust I (the "Trust"), a subsidiary of the
Company of Trust Preferred Securities which was partially offset by a decrease
in the Company's effective borrowing rate.
Income taxes. Income tax expense increased to $3.6 million during the
fiscal year ended June 30, 1998 from $3.2 million during the comparable period
in 1997 primarily due to the increase in the income before income taxes and
extraordinary expense which was partially offset by a decrease in the Company's
effective income tax rate for the year.
Extraordinary expense, net. In April 1998, the Company repaid in full the
indebtedness outstanding under its then existing credit
-27-
facility. As a result, the Company was required to record an extraordinary
expense of $2.2 million, net of tax benefits of $735,000, during the fiscal year
ended June 30, 1998. The expense consisted of deferred finance costs at April
30, 1998, net of accumulated amortization, plus prepayment penalties. In
connection with the acquisition of Weatherly, the Company completed the
Refinancing. As a result of the Refinancing, the Company was required to record
an extraordinary expense of $1.0 million net of tax benefits for fiscal 1997,
which expense consisted of deferred finance costs at June 30, 1996 net of
accumulated amortization, plus prepayment penalties.
Net Income. Net income increased by $2.3 million, or 74%, to $5.5 million
during the fiscal year ended June 30, 1998 from $3.2 million during the
comparable period in 1997. This increase was attributable to the increase in net
sales for the year ended June 30, 1998, which was partially offset by the
extraordinary expense. Basic net income per common share increased $.08 to $.31
per share for the fiscal year ended June 30, 1998 from $.23 per share during the
comparable period in 1997. Diluted net income per common share increased $.04 to
$.24 per share for the fiscal year ended June 30, 1998 from $.20 per share
during the comparable period in 1997. The increase in both basic and diluted
earnings per share is primarily attributable to the increase in net income,
which was partially offset by additional weighted average common and common
equivalent shares outstanding in the fiscal year ended June 30, 1998 compared to
the comparable period in fiscal 1997.
Quarterly Results of Operations and Seasonality
The Company's sales are seasonal due to the nature of he lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer.
Sales of the Company's agricultural products, which were not material for
fiscal 1999, are also seasonal. Most shipments occur during the period from
March through October.
-28-
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,
1997 1997 1998 1998
------------- ------------ ---------- ----------
Net sales $ 7,026 $ 8,513 $ 23,520 $ 28,091
Cost of sales 3,522 3,857 10,482 12,570
---------- ---------- ---------- ----------
Gross profit 3,503 4,656 13,038 15,521
Selling, shipping, general
and administrative 3,963 4,589 5,967 8,546
Restructuring charges
---------- ---------- ---------- ----------
Income (loss) from operations (460) 67 7,071 6,975
Investment income 47 57 245 137
Interest expense (853) (744) (922) (1,044)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary
expense (1,266) (620) 6,394 6,068
Income tax benefit (expense) 550 250 (2,700) (1,700)
Extraordinary expense net
of taxes (1,450)
---------- ---------- ---------- ----------
Net income (loss) $ (716) $ (370) $ 3,694 $ 2,918
========== ========== ========== ==========
Diluted net income (loss)
per share(1) $ (0.05) $ (0.02) $ 0.15 $ 0.11
========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding(1) 14,702 16,384 25,038 25,547
========== ========== ========== ==========
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 50.1% 45.3% 44.6% 44.7%
---------- ---------- ---------- ----------
Gross profit 49.9% 54.7% 55.4% 55.3%
Selling, shipping,general and
administrative 56.4% 53.9% 25.4% 30.4%
Restructuring charges 0.0% 0.0% 0.0% 0.0%
---------- ---------- ---------- ----------
Income (loss) from operations (6.5%) 0.8% 30.0% 24.9%
Investment income 0.7% 0.7% 1.0% 0.5%
Interest expense (12.1%) (8.7%) (3.9%) (3.7%)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary (18.0%) (7.2%) 27.1% 21.7%
expense
Income tax benefit (expense) 7.8% 2.9% (11.5%) (6.1%)
Extraordinary expense net of taxes 0.0% 0.0% 0.0% (5.2%)
---------- ---------- ---------- ----------
Net income (loss) (10.2%) (4.3%) 15.6% 10.4%
========== ========== ========== ==========
Quarter Ended
- ------------------------------------------------------------------------------------------------------
(in thousands, except percentages and per share data)
- ------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
------------- ------------ ---------- ----------
Net sales $ 10,768 $ 15,985 $ 34,769 $ 27,824
Cost of sales 5,312 7,751 16,565 14,548
---------- ---------- ---------- ----------
Gross profit 5,456 8,234 18,204 13,276
Selling, shipping, general
and administrative 6,439 7,730 8,501 10,254
Restructuring charges 1,964
---------- ---------- ---------- ----------
Income (loss) from operations (983) 504 9,703 1,058
Investment income 381 116 15 18
Interest expense (1,541) (1,798) (2,087) (1,987)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary
expense (2,143) (1,178) 7,631 (911)
Income tax benefit (expense) 920 510 (3,200) 420
Extraordinary expense net
of taxes
---------- ---------- ---------- ----------
Net income (loss) $ (1,223) $ (668) $ 4,431 $ (491)
========== ========== ========== ==========
Diluted net income (loss)
per share(1) $ (0.06) $ (0.03) $ 0.19 $ (0.02)
========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding(1) 20,143 19,837 23,509 22,977
========== ========== ========== ==========
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 49.3% 48.5% 47.6% 52.3%
---------- ---------- ---------- ----------
Gross profit 50.7% 51.5% 52.4% 47.7%
Selling, shipping,general and
administrative 59.8% 48.4% 24.4% 36.9%
Restructuring charges 0.0% 0.0% 0.0% 7.1%
---------- ---------- ---------- ----------
Income (loss) from operations (9.1%) 3.1% 27.9% 3.8%
Investment income 3.5% 0.7% 0.0% 0.1%
Interest expense (14.3%) (11.2% ) (6.0%) (7.1%)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary (19.9%) (7.4% ) 21.9% (3.3%)
expense
Income tax benefit (expense) 8.5% 3.2% (9.2%) 1.5%
Extraordinary expense net of taxes 0.0% 0.0% 0.0% 0.0%
---------- ---------- ---------- ----------
Net income (loss) (11.4%) (4.2% ) 12.7% (1.8%)
========== ========== ========== ==========
- ----------
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using
the treasury stock method except for quarters reporting a net loss. Such
quarters only reflect issued and outstanding shares of Common Stock in the
weighted average shares outstanding.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
cash generated by operations; net proceeds from the Company's private and public
sales of securities and borrowings from lending institutions.
At June 30, 1999, the Company had consolidated cash and short-term
investments totaling $3.9 million of which $1.0 million is restricted and
working capital of $32.9 million. At June 30, 1998, the Company had consolidated
cash and short-term investments totaling $27.1 million and working capital of
$46.7 million. The decrease in working capital was primarily attributable to
$24.6 million used in the purchase of substantially all the assets used in the
business of Ampro Industries, Inc., $538,000 used in the purchase of E*Garden,
and $7.3 million used in the repurchase of common stock for treasury. This
decrease is partially offset by proceeds from the Company's bank line of credit
of $15.5 million.
-29-
Net cash used in operating activities for fiscal 1999 was $842,000,
consisting primarily of increases of accounts receivable and inventory,
decreases in accounts payable and accrued expenses, offset in part by net income
plus depreciation, amortization and the non-cash costs included in restructuring
charges.
Net cash used in investing activities for fiscal 1999 was $30.9 million,
consisting primarily of cash used for the purchase of substantially all the
assets used in the business of Ampro Industries, Inc., the purchase of a
non-compete agreement and the purchase of property and equipment.
Net cash provided by financing activities for fiscal 1999 was $7.6 million,
consisting primarily of the net proceeds of $15.5 million from the acquisition
line of credit, partially offset by the repurchase of common stock for treasury.
On October 13, 1998, the Company entered into a credit agreement (the
"Credit Agreement") with Bank of America National Trust & Savings Association
(the "Bank"). The Credit Agreement provides for a revolving credit facility of
up to $25 million to finance the cost of acquisitions by the Company (the
"Acquisition Facility") and a revolving credit facility of up to $20 million to
finance the Company's working capital requirements (the "Working Capital
Facility). Both of such credit facilities expire on October 15, 2001, at which
time borrowings under the Acquisition Facility are payable on a term loan basis
in quarterly installments commencing December 31, 2001, with the final
installment maturing on September 30, 2004 and, unless refinanced, borrowings
under the Working Capital Facility mature on such expiration date. In addition,
borrowings under the Acquisition Facility are subject to mandatory prepayment
from the net proceeds of certain dispositions of assets, and certain losses or
condemnation of property, from excess cash (as defined in the Credit Agreement)
generated by the company and its subsidiaries and 50% of the net proceeds of any
new issuances of the Company's capital stock after such expiration date.
Mandatory prepayments by the Company 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. The
Company has 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 1% of the amount terminated or reduced on or prior to
December 31, 1999 and 0.5% of the amounts terminated or reduced thereafter.
Borrowings under such credit facilities bear interest at variable annual rates
selected by the Company based on LIBOR ("London Interbank Offered Rate"), or the
higher of 0.5% above the then current Federal Funds Rate or the Bank's prime
rate plus, in each case, an applicable marginal rate of interest.
-30-
The Company's obligations under the Credit Agreement are guaranteed by its
subsidiaries and secured by a security interest in favor of the Bank in
substantially all of the assets of the Company and its subsidiaries. Upon the
occurrence of an event of default specified in the Credit Agreement, the
maturity of loans outstanding under the Credit Agreement may be accelerated by
the Bank, which may also foreclose its security interest on the assets of the
Company and its subsidiaries.
Under the Credit Agreement, the Company and its subsidiaries are required,
among other things to comply with (a) certain limitations on incurring
additional indebtedness, liens and guaranties, on dispositions of assets,
payment of cash dividends and cash redemption and repurchases of securities, and
(b) certain limitations on merger, 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.
The Company believes that its operations will generate sufficient cash flow
to service the debt incurred. However, if such cash flow is not sufficient to
service such debt, the Company will be required to seek additional financing
which may not be available on commercially acceptable terms or at all.
As of June 30, 1999, the Company has a net deferred tax liability of $1.6
million primarily relating to tax accumulated depreciation and amortization in
excess of the book amount. The deferred tax asset of $500,000 relates primarily
to the allowance for doubtful accounts, net operating loss carryforwards,
alternative minimum and state taxes and certain other balance sheet reserves.
See Note 11 to the Company's consolidated financial statements.
In fiscal 1999 the Company authorized the repurchase from time to time of
up to 2.5 million shares of its common stock through open market purchases and
in privately negotiated transactions. Through June 30, 1999, approximately
1,805,295 shares have been repurchased from non-affiliates in open market
transactions of which 1,569,295 shares were purchased during fiscal 1999.
Subsequent to June 30, 1999 to date, an additional 269,817 shares were
repurchased from non-affiliates in open market transactions. In September 1999
the Company authorized the repurchase of up to $3.0 million of additional shares
of its common stock.
The Company has committed to purchase and implement a new applications
software for approximately $1.2 million during the fiscal year ended June 30,
2000.
-31-
The Company continues to seek attractive acquisitions of complementary
businesses and product lines which can be funded through available cash and the
Acquisition Facility.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings' effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
Historically the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of this new standard on July 1, 2000 to affect its
financial statements.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Year 2000
Overview and Background
The company has implemented a project "the Project" to address the Year
2000 readiness of its information technology systems (e.g. telephones, alarm
systems, copy machines, computer systems, etc.) which have embedded technology
(collectively referred to as Systems). Additionally, the Project includes the
assessment of the Year 2000 readiness of the Company's significant suppliers and
customers.
Status of the Project
The Project is divided into four separate phases - Planning and Awareness,
Inventory, Assessment, and Remediation.
The Planning and Awareness phase began in October 1997 and has been
completed. This phase included: (i.) development and approval of the Project
charter, (ii.) formation of a Project
-32-
management team to carry out the Project charter, (iii.) identification and
assessment of overall Project risks and (iv.) development of a Project budget.
The Inventory phase began in January 1998 and has been completed. This
phase included: (i.) identification of significant Systems to be assessed and
(ii.) identification of all significant suppliers and customers.
The Assessment phase began in November 1998 and is complete as of August
1999. This phase involves: (i.) contacting vendors of significant Systems to
assess the Year 2000 readiness of those systems, (ii.) testing of the assertions
made by the vendors of significant Systems', (iii.) contacting significant
suppliers and customers in order to understand their state of Year 2000
readiness, (iv.) assessment of assertions made by significant suppliers and
customers, (v.) determination of the extent of which remediation will be
required to ensure Year 2000 readiness and (vi.) development of contingency
plans to the extent considered necessary. Although the Company's assessment
identified certain systems that were not currently Year 2000 compliant, these
systems have either been corrected or entered the remediation phase.
The Remediation phase began concurrently with the Assessment phase. Systems
identified during the Assessment phase as not Year 2000 compliant immediately
enter the Remediation phase. The Remediation phase was completed in August 1999.
The activities that were undertaken during this phase included: (i.) repairing,
replacing or reprogramming all significant Systems that are not Year 2000
compliant; (ii.) validation and testing of remediated Systems; and (iii.)
establishment and completion of action plans to address any Year 2000 issues
with significant customers or suppliers.
To date, none of the Company's other information technology projects or
initiatives have been delayed or materially affected due to the implementation
of the Project.
Costs
The Company has and will utilize primarily internal resources to carry out
the Project. Costs incurred to ensure the Company's Systems are Year 2000
compliant have not been and are not expected to be material to the Company's
results of operations, financial position or cash flows. The Project's costs are
expensed as incurred.
Risks and Contingencies
The Company believes the Project has met its Year 2000 objectives. The
ability of suppliers and customers with which the Company interacts to timely
convert their systems to Year 2000 compliant is somewhat uncertain and not
directly under the control of the Company. The Company conducts operations in
-33-
various markets worldwide which may not be Year 2000 compliant because of many
factors, including, but not limited to, lack of resources and lack of attention
to the Year 2000 issue. Disruptions in the economy generally resulting from Year
2000 issues could also have an adverse affect on the Company's operations. Such
failures could materially and adversely effect the Company's results of
operations, liquidity and financial position.
The Company is dependent on several single source raw material
manufacturers for supply of such products as weed block fabric and shade cloth
fabric. Additionally, demand for the Company's products by the Company's
customers is dependent on the ability of certain high volume customers to have
effective systems in place such that Year 2000 issues do not negatively effect
demand. In the event of a major economic slowdown as a result of Year 2000
issues, the Company would likely be adversely effected in kind. When the economy
is down, the home and garden industry generally is down as well. Failure in the
systems of the Company's major suppliers or the Company's major customers could
have adverse effect on the company.
The Company has completed its contingency plans. However, the Company's
contingency plans have not yet been tested to ensure that they will provide
adequate safeguards for Systems that are ultimately not Year 2000 compliant. The
Company intends to continue evaluating its contingency plans until Project
completion.
There can be no assurance that third parties on which the Company relies
will succeed in their Year 2000 compliance efforts or that failure by a third
party would not have a material adverse effect on the Company's results of
operations or financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
This information appears in a separate section of this report following
Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
Not applicable.
-34-
Part III
Item 10. Directors and Executive Officers of the Registrant.
The current directors and executive officers of the Company are as follows:
Name Age Position
Robert Kassel(1) 59 Chairman of the Board, Chief Executive
Officer, President and Treasurer
Richard Raleigh(2) 45 Chief Operating Officer and Director
Maureen Kassel 51 Vice President of Public Relations and
Advertising, Secretary and Director
Jon Schulberg(1)(2) 41 Director
Fred Heiden(1)(2) 58 Director
- ----------
(1) Member, Compensation Committee
(2) Member, Audit Committee
Robert Kassel, co-founded the Company and has been Chairman of the Board, Chief
Executive Officer, President and Treasurer of the Company since October 1990.
From 1985 to August 1991, he was a consultant to Comtel Communications, Inc.
("Comtel"), a company specializing in the installation and operation of
telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real
estate developer in Long Island, New York and Santa Barbara, California. From
1965 to 1985, he was a practicing attorney in New York City, specializing in
corporate and securities law.
Richard Raleigh, has been a Director of the Company since March 1993, Chief
Operating Officer of the Company since June 1992 and served as the Company's
Executive Vice President-Operations from December 1991 to June 1992. Prior to
joining the Company, Mr. Raleigh was a free-lance marketing consultant to the
lawn and garden industry from January 1991 to December 1991. From April 1988 to
January 1991, he was Director of Marketing, Lawn and Garden of Monsanto
Agricultural Co. From December 1986 to April 1988 he was Vice President of Sales
and Marketing of The Andersons, a company engaged in the sale of consumer and
professional lawn and garden products. From November 1978 to December 1986, he
held a variety of positions at The Andersons, including Operations Manager and
New Products Development Manager.
Maureen Kassel, the wife of Robert Kassel, co-founded the Company and has been
Vice President of Public Relations and Advertising and a director of the Company
since November 1990 and Secretary
-35-
of the Company since February 1992. For the last ten years, she has assisted in
the general administration and operation of real estate and other businesses.
Ms. Kassel is Chairman of the Board of Comtel.
Jon Schulberg, a director of the Company since March 1993, has been employed as
President of Schulberg MediaWorks, a company engaged in the independent
production of television programs and television advertising since January 1992.
From January 1989 to January 1992, he was a producer for Guthy-Renter
Corporation, a television production company. From September 1987 to January
1989 he was Director of Development for Eric Jones Productions.
Fred Heiden, a director of the Company since March 1993, has been a private
investor since November 1989. From April 1984 to November 1989, Mr. Heiden was
President and Principal owner of Bonair Construction, a Florida based home
improvement construction company.
Certain Key Employees
Richard M. Grandy, 53, has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of Easy
Gardener, Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy
Gardener, Inc. in 1983 after serving as Marketing Director at International
Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a
sales representative of lawn and garden products for the Ortho Division of
Chevron Chemical Co.
Lynda Gustafson, 35, has been Vice President of Finance of the Company since
September 1997 and served as Controller of the Company from November 1993 to
September 1997. From September 1990 through October 1993 Ms. Gustafson was
Supervisor of the Business Consulting Department of the certified public
accounting firm of Hood & Strong. From September 1988 to August 1990, she has
held the positions of Staff Accountant and Senior Accountant at the certified
public accounting firm of Schwartz, McGuire & Co.
Sheila Jones, 44, has been Vice President of Easy Gardener since July 1997 and
has also served as its General Manager from September 1994. Prior to the
acquisition of Easy Gardener, Inc. by the Company, Ms. Jones was employed by
Easy Gardener, Inc. from its inception in September 1983 to September 1994,
where she advanced to the positions of Vice President and General Manager. From
April 1977 to September, 1983, she was employed by International Spike, Inc.,
where she held various project management positions.
Paul Logue, 43, has been Key Accounts Manager of Easy Gardener since the
Company's acquisition of Easy Gardener, Inc. in September 1994. Prior to joining
the Company, Mr. Logue was employed by Easy Gardener, Inc. from September 1989
to September 1994, where he was advanced from the position of Northeastern
-36-
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
Company's officers and directors, and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities, file certain
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by the Company, or representations obtained from certain reporting persons, the
Company believes that during the year ended June 30, 1999 all filing
requirements applicable to its officers, directors, and greater than 10 percent
beneficial stockholders were complied with except that Robert and Maureen Kassel
did not timely file a Form 4 or 5 with respect to the gifts of certain shares of
the Company's common stock from Maureen to Robert Kassel in December 1998, the
extension of the expiration date of certain options previously granted to Mr.
Kassel that occurred in either March or June 1999 and the extension of the
expiration date of an option previously granted to Maureen Kassel that occurred
in March 1999. In addition, Mr. Raleigh did not timely file a Form 4 or 5 to
report the extension of the expiration dates of certain options that occurred in
March 1999.
Item 11. Executive Compensation
The following table discloses the compensation awarded by the Company, for
the three fiscal years ended June 30, 1997, 1998 and 1999, to Mr. Robert Kassel,
its Chief Executive Officer and Mr. Richard J. Raleigh, its Chief Operating
Officer and to Ms. Lynda Gustafson, the Company's Vice President of Finance
(together the "Named Officers"). During the fiscal year ended June 30, 1999, no
other officer of U.S. Home & Garden Inc. received a total salary and bonus that
exceeded $100,000 during such fiscal year.
Summary Compensation Table
Annual Compensation Long-Term Debt
------------------- --------------
Securities Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation(1)
- --------------------------- ---- ---------- --------- ----------- ---------------
Robert Kassel, 1999 450,000 114,000 641,333 (2) $6,169
Chairman, Chief Executive Officer, 1998 450,000 281,667 468,000 (3) $7,523
Presidentand Treasurer 1997 350,000 250,000 1,200,000 (4) $5,995
Richard Raleigh, Chief Operating Officer 1999 250,000 96,000 137,500 (5)(6) $12,169
1998 225,000 115,000 132,500 (5) $9,203
1997 195,000 111,275 600,000 (4)(7) $8,390
Lynda Gustafson, Vice President of Finance 1999 148,000 60,000 - $12,169
1998 125,000 45,000 50,000 $11,273
1997 101,040 20,000 30,000 $ 7,451
-37-
(1) Represents Company contributions to the Named Officers 401(k) account.
Excludes certain perquisites that did not exceed the lesser of $50,000 or
10% of their combined bonus and salary.
(2) Includes 341,333 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in fiscal
1999. Also includes options to purchase 300,000 shares that were granted to
Mr. Kassel in December 1998, and voluntarily forfeited by him during the
fiscal year ended June 30, 1999.
(3) Includes 80,000 options that were originally granted to Mr. Kassel in 1993
and which expiration dates were extended during fiscal 1998.
(4) Includes as to Mr. Kassel 200,000 options previously granted to Mr. Kassel
and as to Mr. Raleigh 100,000 options previously granted to Mr. Raleigh
whose exercise prices were repriced to reflect a reduction in the market
price of the Common Stock at the time of repricing.
(5) Includes 12,500 options that were originally granted to Mr. Raleigh in
1992, the expiration date of which was extended during fiscal 1998 and
further extended during fiscal 1999.
(6) Includes options to purchase 125,000 shares granted to Mr. Raleigh in
December 1998 and voluntarily forfeited by him during the fiscal year ended
June 30, 1999.
(7) Includes 50,000 options previously granted to Mr. Raleigh the expiration
date of which was extended during fiscal 1997.
The following table discloses information concerning options granted in
fiscal 1999 to the Named Officers.
Option Grants in Fiscal Year Ended June 30, 1999
Individual Grants
------------------------------------------------
Number of Percent of Total
Securities Options Granted to Potential Realizable Value
Underlying Employees in at Assumed Annual Rates of
Options Fiscal Year Exercise Stock Price Appreciation
Name Granted ----------- Price Expiration for Option Term ($)(2)
------- (#)(1) (%) ($/Sh) Date -------------------------
---------- ---------- ----- ----------
5% 10%
----- -----
Robert Kassel 100,000(3) 9.4 1.69 9/8/08 106,300 269,400
80,000(4) 7.5 1.69 12/31/08 82,480 207,520
161,333(5) 15.2 1.69 7/1/09 171,497 434,631
300,000 28.2 4.25 (6) (6) (6)
Richard Raleigh 12,500(4) 1.2 1.69 12/31/08 12,867 32,373
125,000 11.9 4.25 (6) (6) (6)
Lynda Gustafson -- -- -- -- -- --
- --------------------
-38-
(1) Unless otherwise noted, all of such options were exercisable in full from
the date of grant.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of options providing for termination of
the option following termination of employment or nontransferability of the
options and do not make any provision for taxes associated with exercise.
Because actual gains will depend upon, among other things, future
performance of the Common Stock, there can be no assurance that the amounts
reflected in this table will be achieved. The realizable value for options
whose expiration dates have been extended assume that the option term
commenced on the date the option expiration dates were last extended.
(3) Reflects extension of expiration date of options that were originally
granted on September 8, 1993. All of such options vest in ten equal annual
installments commencing July 1, 1999.
(4) Reflects extension of expiration date of options that were originally
granted on September 15, 1992. All of such options vest in ten equal annual
installments commencing July 1, 1998.
(5) Reflects extension of expiration date of options that were originally
granted on July 1, 1994. All of such options vest in ten equal installments
commencing June 30, 2000 and each June 30 thereafter with the last 16,133
shares vesting on December 31, 2008.
(6) These options were granted by the Board of Directors in December 1998 and
were subsequently voluntarily forfeited by the Named Officers in the fiscal
year ended June 30, 1999.
-39-
The following table sets forth information concerning options exercised by the
Named Officers during the fiscal year ended June 30, 1999, and the number of
options owned by the Named Officers and the value of any in-the-money
unexercised options as of June 30, 1999:
Aggregated Option Exercises
And Fiscal Year-End Option Values
---------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Acquired Options at Options at
on Exercise (#) Value Realized ($) June 30, 1999 June 30, 1999(1)
--------------- ------------------ --------------------------- ---------------------------
Name
- ---- Exercisable Unexercisable Exercisable Unexercisable
Robert
Kassel -- -- 2,155,320 300,333 $3,455,382 $332,346
Richard
Raleigh 16,000 60,960 626,911 10,000 $918,237 $20,600
Lynda
Gustafson -- -- 36,000 30,000 $60,768 $-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 30, 1999 was $3.75 per share.
-40-
Employment Agreements
The Company has entered into employment agreements with Messrs. Kassel and
Raleigh, each dated as of April 1, 1996. Mr. Kassel currently serves as Chief
Executive Officer and President pursuant to the employment agreement for a term
expiring on March 31, 2000, subject to certain renewal provisions. His current
annual salary is $450,000, and is subject to such bonuses and increases as are
approved at the discretion of the Board of Directors. Mr. Raleigh currently
serves as Chief Operating Officer pursuant to the employment agreement for a
term expiring on March 31, 2000, subject to certain renewal provisions. His
current annual salary is $250,000, and is subject to such bonuses and increases
as are approved at the discretion of the Board of Directors. Each of the
employment agreements requires that substantially all of the employee's business
time be devoted to the Company and that the employee not compete, or engage in a
business competitive with, the Company's current or anticipated business for the
term of the agreement and for two years thereafter (although they each may own
not more than 5% of the securities of any publicly traded competitive company).
Each of Mr. Kassel and Mr. Raleigh is, in addition to salary, entitled to
certain fringe benefits, including the use of an automobile and payment of
related expenses.
Mr. Kassel's employment agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Kassel upon
a change of control of the Company, (as defined in the agreement) a failure by
the Company to comply with its obligations under the agreement, the failure of
the Company to obtain the assumption of the agreement by any successor
corporation, or a change in Mr. Kassel's duties and obligations from those
contemplated by the agreement, and termination by the Company of Mr. Kassel's
employment other than for disability or cause, he will be entitled to receive
severance pay equal to the greater of (i) $350,000 ($3.5 million in the event of
a change of control), or (ii) the total compensation earned by Mr. Kassel from
the Company during the one-year period (multiplied by ten in the event of a
change of control) prior to the date of his termination.
Mr.Raleigh's employment agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Raleigh
upon a change of control of the Company, (as defined in the agreement) a failure
by the Company to comply with its obligations under the agreement, the failure
of the Company to obtain the assumption of the agreement by any successor
corporation, or a change in Mr. Raleigh's duties and obligations from those
contemplated by the agreement, and termination by the Company of Mr. Raleigh's
employment other than for disability or cause, he will be entitled to receive
severance pay equal to the greater of (i) $162,500 ($812,500 in the event of a
change of control), or (ii) the total compensation earned by Mr. Raleigh from
the Company during the one-year period (multiplied by five in the event of a
change of control) prior to the date of his termination.
-41-
Easy Gardener has entered into an employment agreement with Mr. Grandy,
dated as of September 1, 1998 which expires on August 31, 2003. Mr. Grandy
currently serves as President of Easy Gardener. The agreement provides for Mr.
Grandy to receive an annual base salary of $275,000, $300,000, and $330,000
during the first three years of the agreement and $350,000 thereafter. The
Agreement requires Mr. Grandy to devote substantially all of his business time
to Easy Gardener, and in the event Mr. Grandy's employment agreement is
terminated by Easy Gardener without cause (as defined in the agreement) or if
Mr. Grandy resigns with "Good Reason" (as defined in the agreement), Mr. Grandy
will be entitled to receive his base salary through the expiration of the
agreement.
Committees of the Board of Directors
During fiscal 1998 the Company established an Audit Committee comprised of
Messrs. Raleigh, Heiden and Schulberg. The Audit Committee, among other things,
makes recommendations to the Board of Directors with respect to the engagement
of the Company's independent certified public accountants and the review of the
scope and effect of the audit engagement. The Company has established a
Compensation Committee of its Board of Directors, comprised of Messrs. Kassel,
Schulberg and Heiden. The Compensation Committee, among other things, makes
recommendations to the Board of Directors with respect to the compensation of
the executive officers of the Company. The Company maintains a Stock Option
Committee comprised of Messrs. Schulberg and Heiden, which determines the
persons to whom options should be granted under the Company's 1995, 1997 and
1999 Stock Option Plans and the number and other terms of options to be granted
to each person under such plans.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
The Company's Compensation Committee of its Board of Directors, consists of
Messrs. Kassel, Schulberg and Heiden. During fiscal 1999, none of the executive
officers of the Company served on the Board of Directors or the compensation
committee of any other entity, any of whose officers served on the Board of
Directors of the Company.
Stock Option Plans
In September 1991, the Company adopted a stock option plan (the "1991
Plan") pursuant to which 700,000 shares of Common Stock have been reserved for
issuance upon the exercise of options designated as either (i) options intended
to constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs
may be granted under the 1991 Plan to employees and officers of the Company.
NQO's may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company.
The purpose of the 1991 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The 1991 Plan is administered by the
Board of
-42-
Directors. The Board, within the limitations of the 1991 Plan, determines the
persons to whom options will be granted, the number of shares to be covered by
each option, whether the options granted are intended to be ISOs, the duration
and rate of exercise of each option, the option purchase price per share and the
manner of exercise, the time, manner and form of payment upon exercise of an
option, and whether restrictions such as repurchase rights in the Company are to
be imposed on shares subject to options.
ISOs granted under the 1991 Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any related
corporation) may not exceed $100,000. NQO's granted under the 1991 Plan may not
be granted at a price less than the fair market value of the Common Stock on the
date of grant. Options granted under the 1991 Plan will expire not more than ten
years from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of the voting stock of the Company). An aggregate of 463,000
options were outstanding under the 1991 Plan at June 30, 1999.
The Company has adopted, a Non-Employee Director Stock Option Plan (the
"Director Plan"). Only non-employee directors of the Company are eligible to
receive grants under the Director Plan. The Director Plan provides that eligible
directors automatically receive a grant of options to purchase 5,000 shares of
Common stock at fair market value upon first becoming a director and,
thereafter, an annual grant, in January of each year, of 5,000 options at fair
market value. Options to purchase an aggregate of up to 100,000 shares of Common
Stock available for the automatic grants under the Director Plan. An aggregate
of 20,000 options were outstanding under the Director Plan at June 30, 1999.
The Company has also adopted a 1995 Stock Option Plan ("1995 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Stock Option Committee (the "Committee"),
as the case may be, will have discretion to determine the number of shares
subject to each NQO (subject to the number of shares available for grant under
the 1995 Plan and other limitations on grant set forth in the 1995 Plan), the
exercise price thereof (provided such price is not less than the par value of
the underlying shares of Common Stock), the term thereof (but not in excess of
10 years from the date of grant, subject to earlier termination in certain
circumstances), and the manner in which the option becomes exercisable (amounts,
intervals and other conditions). Directors who are employees of the Company will
be eligible to be granted ISOs or NQOs under such plan. The Board or Committee,
as the case may be, also has discretion to determine the number of shares
subject to each ISO, the exercise price and other terms and conditions thereof,
but their discretion as to the exercise price, the term of each ISO and the
number of ISOs that may vest may be limited in any year by the same Code
provisions applicable to ISOs granted under the 1991 Plan. An aggregate of
1,459,000 options were outstanding under the 1995 Plan at June 30, 1999.
-43-
The Company has adopted a 1997 Stock Option Plan ("1997 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock and a 1999 Stock Option Plan ("1999 Plan") which provides for the grants
of options to purchase up to 900,000 shares of Common Stock. The Board of
Directors or the Committee of the 1997 or 1999 Plans, 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 1999 Plan
and other limitations on grant set forth in the 1997 Plan and 1999 Plans), the
exercise price thereof (provided such price is not less than the par value of
the underlying shares of Common Stock for grants made the 1997 Plan and not less
than the fair market value of the Common Stock for grants made under the 1999
Plan), the term thereof (but not in excess of 10 years from the date of grant,
subject to earlier termination in certain circumstances), and the manner in
which the option becomes exercisable (amounts, intervals and other conditions).
Directors who are employees of the Company will be eligible to be granted ISOs
or NQOs under such plans. The Board or Committee, as the case may be, also has
discretion to determine the number of shares subject to each ISO, the exercise
price and other terms and conditions thereof, but their discretion as to the
exercise price, the term of each ISO and the number of ISOs that may vest may be
in any year is limited by the same Code provisions applicable to ISOs granted
under the 1991 Plan. An aggregate of 715,000 options were outstanding under the
1997 Plan at June 30, 1999. No options were outstanding under the 1999 Plan at
June 30, 1999.
The Company has recently adopted the Non-Qualified Deferred Compensation
Plan for Select Employees of U.S. Home & Garden Inc. ("Deferred Plan") and has
amended its stock option plans, as well as certain option agreements which it
has 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 the Company's common stock in which they
have a holding period, for income tax purposes, of at least six months and defer
the receipt of a portion of the shares subject to the option so exercised. The
optionee has the right to designate the time or times of receipt of those shares
pursuant to the Deferred Plan. The Deferred Plan 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 the Company).
The Company from time to time has also granted non-plan options to certain
officers, employees and consultants. As of June 30, 1999, non-plan options to
purchase approximately 2,339,000 shares of common stock were outstanding.
Director Compensation
During fiscal 1999 each of the Company's two non-employee directors,
Messrs. Schulberg and Heiden, received $5,000 for serving as directors of the
Company.
-44-
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information at September 30, 1999, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director, (iii) each Named Officer and (iv) all executive
officers and directors as a group.
-45-
Amount and Nature
Name and Address of Beneficial Percentage
of Beneficial Owner Ownership(1)(2) of Class
- ------------------- --------------- --------
Maureen Kassel 434,550(3) 2.2
Robert Kassel 4,220,662(4)(5) 19.5
Richard Raleigh 626,911(6) 3.1
Lynda Gustafson 36,000(7) *
Fred Heiden 5,258(8) *
Jon Schulberg 5,258(8) *
Richard Grandy 1,026,896(9) 5.2
All executive officers
and directors as a
group (five persons) 5,056,089(3)(4)(5)(6)(8)(10) 22.5
- -------------
*less than 1%
- --------------------------------------------------------------------------------
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from September 30, 1999 upon the
exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from September 30, 1999 have been exercised.
(3) Includes exercisable options and warrants issued to Ms. Kassel to purchase
an aggregate of 198,000 shares of the Company's Common Stock.
(4) Of such shares, (i) 236,550 are owned of record by Maureen Kassel; however,
because Ms. Kassel has appointed her husband as her proxy and
attorney-in-fact to vote all 236,550 of the shares owned of record by her,
Robert Kassel may also be deemed to have beneficial ownership of such
shares; (ii) an aggregate of 914,396 shares are owned of record by each of
Messrs. Joseph Owens and Richard Grandy, who have each entered into a
voting trust agreement (the "Voting Agreement") providing Mr. Kassel with
the right to vote the shares until September 1, 2001. The address of Mr.
Kassel is c/o the Company.
-46-
(5) Includes 1,892,160 shares of Common Stock issuable to Mr. Kassel upon
exercise of options and 263,160 shares whose issuance has been deferred
pursuant to the terms of the Company's Non-Qualified Deferred Compensation
Plan to Mr. Kassel.
(6) Represents shares of Common Stock issuable to Mr. Raleigh upon exercise of
options.
(7) Represents shares of Common Stock issuable upon exercise of options granted
to Ms. Gustafson who is a Named Officer but not an executive officer of the
Company.
(8) Includes 5,000 shares of Common Stock issuable upon exercise of options.
(9) Includes 112,500 shares of Common Stock issuable to Mr. Grandy upon
exercise of options. The address of Mr. Grandy is c/o the Company.
(10) Excludes shares owned by Lynda Gustafson, the Company's Vice President of
Finance.
Item 13. Certain Relationships and Related Transactions.
From time to time Messrs. Kassel and Raleigh have borrowed monies from the
Company. During fiscal 1999 the highest amount owed to the Company by Messrs.
Kassel and Raleigh were $595,995 and $231,199, respectively. The principal
balance of such loans at September 30, 1999 were approximately $523,376 and
$201,384, respectively. The loans bear interest at 7% per annum and mature on
June 30, 2002. Messrs. Kassel and Raleigh will make annual payments of interest
on the outstanding principal balance of their loans through the maturity date.
In addition, payments of principal will be made during each of the next three
years and on maturity of the loans as follows: As to Mr. Kassel -- $50,000,
$100,000, $150,000 and the balance of approximately $223,376, respectively. As
to Mr. Raleigh, $25,000, $50,000, $50,000 and the balance of approximately
$76,384, respectively.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No.
3.1 Certificate of Incorporation, as amended.*
-47-
3.2 By-laws of the Company, incorporated by reference to Exhibit 3(b) of
the Company's Registration Statement on Form S-1 (Registration No.
33-45428).
4.1 Form of certificate evidencing Common Stock, $.001 par value, of the
Company, incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1 (Registration No. 333-38483).
4.2 Form of Unit Purchase Option granted to D.H. Blair & Co.**
4.3 Warrant Agreement with respect to Class B Warrants., incorporated by
reference to Exhibit 4(c) of the Company's Registration Statement on
Form S-3 (Registration No. 33-89800).
4.4 Rights Agreement dated as of October 1, 1998 between the Company and
Continental Stock Transfer & Trust Company, incorporated by reference
to Exhibit 4.1 filed with the Company's Current Report on Form 8-K for
the event dated October 1, 1998.
9.1 Voting Agreement among Joseph A. Owens, II, the Company, and Robert
Kassel.+
9.2 Voting Agreement among Richard M. Grandy, the Company and Robert
Kassel.+
10.1 Employment Agreement of Robert Kassel.++***
10.2 Employment Agreement of Richard Raleigh.++***
10.3 Employment Agreement of Richard Grandy, incorporated by reference to
Exhibit 10.4 filed with the Company'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 Company'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 Asset Purchase Agreement dated as of June 18, 1994 among the Company,
Easy Gardener Acquisition Corp., Joseph A. Owens II, Richard M. Grandy
and Easy Gardener, Inc.+
10.9 Lease with respect to the Company's executive offices, incorporated by
reference to Exhibit 10.14 of the Company's Form 10-KSB for the fiscal
year ended June 30, 1992.
10.10 February 8, 1995 modification to lease with respect to the Company's
executive offices.*
-48-
10.11 May 6, 1997 modification to lease with respect to the Company's
executive offices.+++
10.12 1999 Stock Option Plan (incorporated by reference to Exhibit A filed
with the Company's proxy statement dated May 14, 1999)***
10.13 Underwriting Agreement dated as of December 10, 1997 among the
Company, Everen Securities, Inc. and Josephthal & Co., Inc.
(incorporated by reference to Exhibit 1.1 filed with the Company's
Registration Statement on Form S-1, No. 333-38483).
10.14 Underwriting Agreement dated April 13, 1998 among the Company, Everen
Securities, Inc., Hambrecht & Quist and Josephthal & Co., Inc. ++++
10.15 Lease and lease extension agreements between Crawford-Austin Mfg. Co.
and Easy Gardener.*
10.16 Lease with respect to Weatherly's warehouse facility in Paris,
Kentucky.+++
10.19 Purchase Agreement, dated as of August 9, 1996, by and among the
Company, Easy Gardener, Weatherly and the Weatherly Stockholders
(incorporated by reference to Exhibit 10.1 filed with the Company's
Form 8-K for the event dated August 9, 1996).
10.21 Lease Extension, dated October 16, 1997, between Easy Gardener and
Crawford-Austin Mfg. Co.(incorporated by reference to Exhibit 10.22
filed with the Company's Registration Statement on Form S-1, No.
333-38483).
10.22 Assets Purchase Agreement dated as of February 25, 1998 by and among
the Company, Weed Wizard, Weed Wizard, Inc and the Weed Wizard
stockholders (incorporated by reference to Exhibit 10.1 filed with the
Company's Form 8-K for the event dated February 26, 1998).
10.23 Assets Purchase Agreement dated as of March 20, 1998 by and among Easy
Gardener, Inc., Landmaster Products, Inc., Wayne Murray and Quincy
McMillian.++++
10.24 Commercial Building Lease, dated June 12, 1998 between Easy Gardener,
Inc. and Norman Adams, James Anderson, Donald Bryan and Pamela Butler,
incorporated by reference to Exhibit 10.24 filed with the Company's
Annual Report on form 10-K for the fiscal year ended June 30, 1998.
10.25 Form of Indenture between the Company and Wilmington Delaware
Subordinated Trust, as trustee.++++
-49-
10.26 Stock Purchase Agreement dated October 15, 1998 between the Company
and certain selling stockholders of Ampro (incorporated by reference
to Exhibit 2.1 filed with the Company's Current Report on Form 8-K for
the event dated October 15, 1998)
10.27 Deferred Compensation Plan for Select Employees***
10.28 Credit Agreement dated as of October 13, 1998 between the Company and
Bank of America, incorporated by reference to Exhibit 10.1 filed with
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
21 Subsidiaries of the Company.
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule (for SEC use only).
- -------------
* Incorporated by reference to the comparable exhibit filed with the
Company's Form 10-KSB for the fiscal year ended June 30, 1995.
** Incorporated by reference to the exhibit filed under the same number in the
Company's Registration Statement on Form SB-2 (file no. 33-61984).
*** 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 Company for the event dated September 1, 1994.
++ Incorporated by reference to the applicable exhibit contained in the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30,
1996.
+++ Incorporated by reference to the exhibit filed with the Company's Form 10-K
for the fiscal year ended June 30, 1997.
++++ Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 333-48519).
(b) Report on Form 8-K. A Form 8-K was filed by the Company during its
fiscal quarter ended June 30, 1999 to report the adoption of a Preferred Rights
Plan pursuant to Item 5 of Form 8-K.
-50-
U.S. Home & Garden Inc.
and Subsidiaries
=======================================
Consolidated Financial Statements
At June 30, 1998 and 1999 and for the
Years Ended June 30, 1997, 1998 and 1999
U.S. Home & Garden Inc. and Subsidiaries
Contents
================================================================================
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 1998 and 1999 F-3 - F-4
Consolidated statements of income for the years ended
June 30, 1997, 1998 and 1999 F-5
Consolidated statements of stockholders' equity for the years
ended June 30, 1997, 1998 and 1999 F-6
Consolidated statements of cash flows for the years ended
June 30, 1997, 1998 and 1999 F-7 - F-8
Summary of accounting policies F-9 - F-13
Notes to consolidated financial statements F-14 - F-35
Consolidated Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts F-36
Note: All other schedules have been omitted since the required
information is contained in the Consolidated Financial Statements
or because such schedules are not required.
F-1
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc. and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1999. We have also audited
Schedule II - Valuation and Qualifying Accounts (the Schedule). These financial
statements and the Schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the Schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and Schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
Schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and Schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Francisco, California
August 27, 1999, except for Note 6,
which is as of September 30, 1999
F-2
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
June 30, 1998 1999
======================================================================================================
Assets (Notes 1 and 6)
Current
Cash and cash equivalents $ 27,130,000 $ 2,936,000
Restricted cash (Note 17) -- 1,000,000
Accounts receivable, less allowance for doubtful accounts and sales
returns of $399,000 and $991,000 (Note 2) 17,350,000 20,242,000
Inventories (Note 3) 11,763,000 16,986,000
Prepaid expenses and other current assets 1,130,000 1,137,000
Deferred tax asset (Note 11) 522,000 500,000
- ------------------------------------------------------------------------------------------------------
Total Current Assets 57,895,000 42,801,000
Property and Equipment, net (Note 4) 3,590,000 11,634,000
Intangible Assets (Note 1)
Excess of cost over net assets acquired, net (Note 5) 58,864,000 75,573,000
Deferred financing costs, net of accumulated amortization
of $21,000 and $167,000 (Note 14) 3,186,000 3,524,000
Product rights, patents and trademarks, net of accumulated
amortization of $93,000 and $271,000 165,000 571,000
Non-compete agreements, net of accumulated
amortization of $48,000 and $77,000 462,000 1,433,000
Package design, net of accumulated amortization of
$247,000 and $533,000 718,000 1,096,000
Trade Credits (Notes 12 and 16) 944,000 --
Officer Receivables (Note 8) 850,000 725,000
Other Assets 139,000 107,000
- ------------------------------------------------------------------------------------------------------
$126,813,000 $137,464,000
======================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
June 30, 1998 1999
======================================================================================================
Liabilities and Stockholders' Equity
Current
Accounts payable $ 4,501,000 $ 4,432,000
Accrued expenses 3,922,000 2,314,000
Accrued co-op advertising 645,000 1,499,000
Accrued commissions 1,106,000 1,682,000
Accrued purchase consideration (Note 1) 978,000 --
- ------------------------------------------------------------------------------------------------------
Total Current Liabilities 11,152,000 9,927,000
Acquisition Line of Credit (Note 6) -- 15,500,000
Deferred Tax Liability (Note 11) 812,000 1,600,000
Other Long Term Liabilities -- 703,000
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures (Notes7 and 14) 63,250,000 63,250,000
- ------------------------------------------------------------------------------------------------------
Total Liabilities 75,214,000 90,980,000
- ------------------------------------------------------------------------------------------------------
Commitments and Contingency (Notes 1, 6, 7, 9, 10 and 17) -- --
Stockholders' Equity (Note 10)
Preferred stock, $.001 par value-shares authorized,
1,000,000; no shares outstanding -- --
Common stock, $.001 par value-shares authorized,
75,000,000; 20,133,000 and 21,219,000 shares issued
June 30, 1998 and 1999 20,000 21,000
Additional paid-in capital 50,153,000 50,542,000
Retained earnings 2,733,000 4,703,000
- ------------------------------------------------------------------------------------------------------
52,906,000 55,266,000
Less: Treasury Stock, 236,000 and 1,805,000 shares at cost (1,307,000) (8,782,000)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 51,599,000 46,484,000
- ------------------------------------------------------------------------------------------------------
$ 126,813,000 $ 137,464,000
======================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
================================================================================
Year ended June 30, 1997 1998 1999
======================================================================================================================
Net Sales (Note 2) $ 52,046,000 $ 67,149,000 $ 89,346,000
Cost of Sales (Note 2) 23,649,000 30,431,000 44,176,000
- ----------------------------------------------------------------------------------------------------------------------
Gross Profit 28,397,000 36,718,000 45,170,000
- ----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Selling and shipping 11,232,000 14,205,000 19,291,000
General and administrative 6,513,000 8,860,000 13,633,000
Restructuring charges (Note 16) -- -- 1,964,000
- ----------------------------------------------------------------------------------------------------------------------
17,745,000 23,065,000 34,888,000
- ----------------------------------------------------------------------------------------------------------------------
Income from Operations 10,652,000 13,653,000 10,282,000
Other Income (Expense)
Investment income 76,000 486,000 530,000
Interest expense (Notes 6 and 7) (3,338,000) (3,563,000) (7,413,000)
- ----------------------------------------------------------------------------------------------------------------------
Income before Income Taxes and Extraordinary Expense 7,390,000 10,576,000 3,399,000
Income Tax Expense (Note 11) 3,200,000 3,600,000 1,350,000
- ----------------------------------------------------------------------------------------------------------------------
Income before Extraordinary Expense 4,190,000 6,976,000 2,049,000
Extraordinary expense of $1,459,000 and $2,185,000 on debt
refinancings, net of income taxes of $452,000 and $735,000
(Note 14) 1,007,000 1,450,000 --
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 3,183,000 $ 5,526,000 $ 2,049,000
======================================================================================================================
Basic earnings per share:
Income per common share before extraordinary expense
(Note 15) $ 0.31 $ 0.39 $ 0.10
Extraordinary expense (Notes 14 and 15) (0.08) (0.08) --
- ----------------------------------------------------------------------------------------------------------------------
Net income per common share (Note 15) $ 0.23 $ 0.31 $ 0.10
======================================================================================================================
Diluted earnings per share:
Income per common share before extraordinary expense
(Note 15) $ 0.26 $ 0.31 $ 0.09
Extraordinary expense (Notes 14 and 15) (.06) (.07) --
- ----------------------------------------------------------------------------------------------------------------------
Net income per common share (Note 15) $ 0.20 $ 0.24 $ 0.09
======================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
================================================================================
Preferred Stock Common Stock
------------------ ---------------------- Additional Retained
Number of Number of Paid-In Earnings
Shares Amount Shares Amount Capital (Deficit)
===============================================================================================================================
Balance, July 1, 1996 (Note 10) -- $ -- 10,507,000 $ 11,000 $ 21,413,000 $ (2,054,000)
Exercise of stock options, warrants, and UPOs,
net of issuance costs of approximately
$300,000 -- -- 2,566,000(1) 2,000 5,292,000 --
Stock issued for Weatherly acquisition (Note 1) -- -- 1,000,000 1,000 2,999,000 --
Options and warrants issued for acquisition
and consulting services and bank refinancing
(Note 1) -- -- -- -- 1,079,000 --
Net income -- -- -- -- -- 3,183,000
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (Note 10) -- -- 14,073,000 14,000 30,783,000 1,129,000
Conversion of debt into common stock -- -- 154,000 -- 350,000 --
Repurchase of UPOs -- -- -- -- -- (3,922,000)
Sale of common stock, net of stock issuance
costs of approximately $1,031,000 -- -- 4,290,000 5,000 15,854,000 --
Exercise of stock options and warrants -- -- 1,616,000 1,000 3,166,000 --
Repurchase of common stock for treasury -- -- -- -- -- --
Net income -- -- -- -- -- 5,526,000
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 (Note 10) -- -- 20,133,000 20,000 50,153,000 2,733,000
Repurchase of UPO -- -- -- -- -- (79,000)
Compensation related to repriced stock options -- -- -- -- 268,000 --
Exercise of stock options, warrants and UPOs -- -- 1,086,000 1,000 121,000 --
Repurchase of common stock for treasury -- -- -- -- -- --
Net income -- -- -- -- -- 2,049,000
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (Note 10) -- $ -- 21,219,000 $ 21,000 $ 50,542,000 $ 4,703,000
===============================================================================================================================
Total
Treasury Stockholders'
Stock Equity
================================================================================
Balance, July 1, 1996 (Note 10) $ -- $ 19,370,000
Exercise of stock options, warrants, and UPOs,
net of issuance costs of approximately
$300,000 -- 5,294,000
Stock issued for Weatherly acquisition (Note 1) -- 3,000,000
Options and warrants issued for acquisition
and consulting services and bank refinancing
(Note 1) -- 1,079,000
Net income -- 3,183,000
- --------------------------------------------------------------------------------
Balance, June 30, 1997 (Note 10) -- 31,926,000
Conversion of debt into common stock -- 350,000
Repurchase of UPOs -- (3,922,000)
Sale of common stock, net of stock issuance
costs of approximately $1,031,000 -- 15,859,000
Exercise of stock options and warrants -- 3,167,000
Repurchase of common stock for treasury (1,307,000) (1,307,000)
Net income -- 5,526,000
- --------------------------------------------------------------------------------
Balance, June 30, 1998 (Note 10) (1,307,000) 51,599,000
Repurchase of UPO -- (79,000
Compensation related to repriced stock options -- 268,000
Exercise of stock options, warrants and UPOs -- 122,000
Repurchase of common stock for treasury (7,475,000) (7,475,000)
Net income -- 2,049,000
- --------------------------------------------------------------------------------
Balance, June 30, 1999 (Note 10) $ (8,782,000) $ 46,484,000
================================================================================
(1) Includes 38,000 shares of common stock issued for services relating to cash
proceeds and approximately 60,000 shares issued relating to cashless
exercise of 4 UPOs (Note 10).
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Increase (Decrease) in Cash and Cash Equivalents
Years ended June 30, 1997 1998 1999
=================================================================================================================
Cash Flows from Operating Activities
Net income $ 3,183,000 $ 5,526,000 $ 2,049,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Extraordinary expense 1,007,000 1,450,000 --
Loss on disposal of assets 226,000 18,000 24,000
Bad debt expense 323,000 179,000 827,000
Depreciation and other amortization 1,990,000 2,627,000 4,314,000
Amortization of deferred financing costs 323,000 329,000 146,000
Deferred taxes 2,342,000 191,000 810,000
Compensation related to repriced stock options -- -- 268,000
Restructuring charge for trade credit and products rights
(Note 16) -- -- 1,093,000
Changes in operating assets and liabilities, net
of assets acquired and liabilities assumed:
Accounts receivable (2,763,000) (3,951,000) (4,030,000)
Inventories 444,000 (706,000) (2,470,000)
Prepaid expenses and other current assets 324,000 (548,000) 126,000
Accounts payable and accrued expenses 2,838,000 2,293,000 (4,066,000)
Other assets 308,000 388,000 67,000
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 10,545,000 7,796,000 (842,000)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Payment for purchase of businesses, net of cash acquired (28,358,000) (28,133,000) (27,090,000)
Payment for non-compete agreement (500,000) -- (1,000,000)
(Increase) decrease in officer receivables (77,000) (156,000) 125,000
Increase in restricted cash -- -- (1,000,000)
Purchase of equipment (528,000) (1,000,000) (1,307,000)
Purchase of package design (131,000) (604,000) (664,000)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (29,594,000) (29,893,000) (30,936,000)
- -----------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Years ended June 30, 1997 1998 1999
=============================================================================================================
Cash Flows from Financing Activities
Proceeds from issuances of stock $ 5,294,000 $ 19,026,000 $ 122,000
Repurchase of unit purchase options -- (3,922,000) (79,000)
Repurchase of common stock for treasury -- (1,307,000) (7,475,000)
Proceeds from bank line of credit 41,791,000 23,648,000 33,500,000
Payments on bank line of credit (43,079,000) (23,648,000) (18,000,000)
Proceeds from notes payable 21,345,000 10,000,000 --
Payments of notes payable (3,385,000) (36,560,000) --
Proceeds from mandatorily redeemable preferred securities
-- 63,250,000 --
Deferred finance costs (1,514,000) (3,343,000) (484,000)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 20,452,000 47,144,000 7,584,000
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,403,000 25,047,000 (24,194,000)
Cash and Cash Equivalents, beginning of year 680,000 2,083,000 27,130,000
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 2,083,000 $ 27,130,000 $ 2,936,000
- -------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-8
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Nature of Business U.S. Home & Garden Inc. (the "Company"), through
its wholly-owned subsidiaries, is a leading
manufacturer and marketer of a broad range of
consumer lawn and garden products. The Company's
products include weed preventive landscape
fabrics, fertilizer spikes, decorative landscape
edging, shade cloth, root feeders and weed
trimmer replacement heads, which are sold under
recognized brand names, such as WeedBlock(R),
Jobe's(R), Emerald Edge(R), Shade Fabric(TM),
Ross(R)and Weed Wizard(TM). The Company markets
its products through most large national home
improvement and mass merchant retailers ("Retail
Accounts"), including Home Depot, Lowe's, Kmart,
Ace Hardware, Wal-Mart and Home Base in North
America.
The Company has experienced significant growth in
recent years and believes that its success has
been primarily attributable to the expansion of
its product lines through the acquisition of
complementary lawn and garden businesses (Note
1), the quality of its products, its focus on
providing Retail Accounts with a single source of
lawn and garden products, the efficiency and
reliability of its inventory tracking and order
fulfillment systems and its distinctive
advertising and store displays.
Principles of
Consolidation The financial statements include the accounts of
the Company and its wholly-owned subsidiaries and
the results of operations of Weatherly Consumer
Products Group, Inc. (Weatherly), Easy Gardener,
Inc., Golden West Agri-Products, Inc. (Golden
West), Weed Wizard Acquisition Corp. (Weed
Wizard), Ampro Industries, Inc. (Ampro) and
E-Garden, Inc. (E-Garden) since their dates of
acquisition (Note 1). Additionally, U.S. Home and
Garden Trust I has been included since its
formation in April 1998. Significant intercompany
accounts and transactions have been eliminated.
Inventories Inventories, which consist of raw materials,
finished goods, and packaging materials, are
stated at the lower of cost or market; cost is
determined by the first-in, first-out (FIFO) cost
method.
F-9
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Property and
Equipment Furniture, fixtures and equipment are stated at
cost. Depreciation is computed by the
straight-line method over the estimated five to
forty-year useful lives of the assets.
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 are being amortized over periods of
twenty 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.
Deferred Financing Costs
Direct costs associated with the Company's debt
borrowings are being amortized over the life of
the related debt.
Package Design
Package design costs associated with Easy
Gardener and Weatherly products are being
amortized over a five-year period using the
straight-line method.
Product Rights
Product rights are being amortized over estimated
useful lives of fifteen to twenty years.
Non-Compete Agreement
The non-compete agreements were entered into with
the acquisitions of Ampro and Weatherly. The
Weatherly agreement is being amortized over its
20-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.
Revenue
Recognition Sales are recorded as products are shipped to
customers.
F-10
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Net Income Per
Share During 1998, the Company adopted the provisions
of Statement of Financial Accounting Standards
No. 128, Earnings Per Share (SFAS 128). SFAS 128
provides for the calculation of basic and diluted
earnings per share. Basic earnings per share
includes no dilution and is computed by dividing
income available to common stockholders by the
weighted average number of common shares
outstanding for the period. Diluted earnings per
share reflects the potential dilution of
securities that could share in the earnings of an
entity. As required by SFAS 128, all prior
earnings have been restated to reflect the
retroactive application of this accounting
pronouncement (Note 15).
Income Taxes Income taxes are calculated using the liability
method specified by Statement of Financial
Accounting Standards No. 109, Accounting for
Income Taxes.
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
$2,945,000, $3,402,000 and $3,832,000 during the
years ended June 30, 1997, 1998 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.
F-11
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Stock Based
Compensation The Company has adopted the provisions of
Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based
Compensation. The fair value method is required
for all stock based compensation issued to
nonemployees. Under the fair value method,
compensation cost is measured at the grant date
based on the fair value of the award and is
recognized over the service period, which is
usually the vesting period. Companies are
permitted to continue to account for employee
stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, but are required
to disclose pro forma net income and earnings per
share as if the fair value method had been
adopted. The Company has elected to continue to
account for stock-based compensation under APB
No. 25 (see Note 10).
New Accounting
Pronouncements In June 1998, the Financial Accounting Standards
Board issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133
requires companies to recognize all derivatives
contracts as either assets or liabilities in the
balance sheet and to measure them at fair value.
If certain conditions are met, a derivative may
be specifically designated as a hedge, the
objective of which is to match the timing of gain
or loss recognition on the hedging derivative
with the recognition of (i) the changes in the
fair value of the hedged asset or liability that
are attributable to the hedged risk or (ii) the
earnings' effect of the hedged forecasted
transaction. For a derivative not designated as a
hedging instrument, the gain or loss is
recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into
derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly,
the Company does not expect adoption of this new
standard on July 1, 2000 to affect its financial
statements.
Financial
Instruments The Company's financial instruments consist of
cash, accounts receivable, officer receivables,
debt and Company obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely junior
F-12
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
subordinated debentures. The carrying value of
cash and accounts receivable approximate fair
value based upon the liquidity and short-term
nature of the assets. The carrying value of
officer receivables, short-term and long-term
debt and Company obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely junior subordinated debentures
approximates the fair value based upon short-term
and long-term borrowings at market rate interest.
Cash and cash equivalents are held principally at
three high quality financial institutions. At
times such balances may be in excess of the FDIC
insurance limit.
Segment Reporting The Financial Accounting Standards Board issued
SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, (SFAS 131)
which supersedes SFAS 14, Financial reporting for
Segments of a Business Enterprises. SFAS 131
establishes standards for the way that public
companies report information about operating
segments in annual financial statements and
requires reporting of selected information about
operating segments in interim financial
statements issued to the public. It also
establishes standards for disclosures regarding
products and services, geographic areas and major
customers. SFAS 131 defines operating segments as
components of a company about which separate
financial information is available that is
evaluated regularly by the chief operating
decision maker in deciding how to allocate
resources and in assessing performance.
SFAS 131 is effective for financial statements
for period beginning after December 15, 1997 and
requires comparative information for earlier
years to be restated. The Company believes it
operates under one business segment and complies
with the required financial statement
disclosures. Results of operations and financial
position are unaffected by implementation of this
standard.
F-13
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Business
Acquisitions Since August 1992, the Company has consummated
the following ten acquisitions of lawn and garden
companies or product lines for a total of
approximately $107 million in consideration:
o Golden West Chemical Distributors, Inc. - A
manufacturer of humic acid-based products
designed to improve crop yield, which was
acquired in August 1992 for approximately $1.1
million in cash and $1.1 million of promissory
notes.
o Easy Gardener, Inc. - A manufacturer of
multiple fabric landscaping products including
Weedblock(R), which was acquired in September
1994 for approximately $21.3 million
consisting of $8.8 million in cash, a $10.5
million promissory note and two convertible
notes each in the principal amount of $1.0
million. Approximately $2.2 million of
additional purchase price was contingent on
Easy Gardener meeting certain income
requirements. All of these amounts had been
paid by June 30, 1999.
o Emerald Products LLC - A manufacturer of
decorative landscape edging, which was
acquired in August 1995 for $835,000 in cash
and a $100,000 promissory note.
o Weatherly Consumer Products Group, Inc. - A
manufacturer of fertilizer spikes and other
lawn and garden products, which was acquired
in August 1996 for 1,000,000 shares of Common
Stock valued at $3.0 million and approximately
$22.9 million in cash.
o Plasti-Chain Product Line of Plastic Molded
Concepts, Inc. - A line of plastic chain links
and decorative edgings, which was acquired
from Plastic Molded Concepts, Inc. in May 1997
for approximately $4.3 million in cash.
o Weed Wizard, Inc. - A manufacturer and
distributor of weed trimmer replacement heads,
which was acquired in February 1998 for
approximately $16.0 million, plus an
additional $1.7 million for excess working
capital and acquisition expenses, of which
approximately $5.0 million was based on the
value of certain net assets acquired.
F-14
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 was acquired from The
Tensar Corporation, acquired in May 1998 for
approximately $5.4 million, plus an additional
$1 million for inventory.
o Ampro Industries, Inc. - A manufacturer of
combination grass and flower patch products,
mulch and animal litter. The Company acquired
all of the outstanding stock of Ampro for
approximately $24.6 million in October 1998
with additional purchase price payments over
the next two years based upon its future
operating cash flow.
o E-Garden, Inc. - An internet-based retailer
that sells lawn and garden products through
its own website. The Company acquired all of
the outstanding stock of E-Garden for $538,000
in June 1999 with additional purchase price
payments over the next three years based on
its future net sales.
All of the above acquisitions were accounted for
as purchases and, accordingly, the results of
operations of the acquired companies have been
included in the consolidated statements of income
since their respective acquisition dates. The
following unaudited pro forma summary combines
the consolidated results of operations of the
Company, Ampro, Weed Wizard, and Weatherly as if
the acquisitions had occurred at the beginning of
the year of acquisition and the beginning of the
prior year. Accordingly, Weatherly and Weed
Wizard, have been reflected as if the
acquisitions occurred July 1, 1996 and Ampro as
if the acquisition occurred on July 1, 1997. The
pro forma information gives effect to certain
adjustments, including the amortization of excess
of cost over net assets acquired, the elimination
of certain expenses incurred by Weatherly related
to its acquisition,
F-15
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
salary for an Ampro employee covered by an
employment agreement and additional interest
expense on the notes payable. This pro forma
summary does not necessarily reflect the results
of operations as they would have been if the
Company, Ampro, Weed Wizard, and Weatherly had
constituted a single entity during such periods
and is not necessarily indicative of results
which may be obtained in the future. The pro
forma effect of the E-Garden, Tensar, Landmaster,
Plastic and Emerald acquisitions have not been
reflected since their prior revenue was not
material to the Company's operations.
Year ended June 30, 1997 1998 1999
--------------------------------------------------------------------------------------
Net sales $ 58,135,000 $ 89,811,000 $ 90,496,000
======================================================================================
Net income before extraordinary
expense and income taxes $ 4,236,000 $ 7,339,000 $ 1,245,000
======================================================================================
Net income before extraordinary
expense $ 2,344,000 $ 4,844,000 $ 747,000
======================================================================================
Net income $ 817,000 $ 3,394,000 $ 747,000
======================================================================================
Basic net income per common share
before extraordinary expenses $ .17 $ .27 $ .04
======================================================================================
Basic net income per common share $ .06 $ .19 $ .04
======================================================================================
Diluted net income per common share
before extraordinary expense $ .15 $ .21 $ .03
======================================================================================
Diluted net income per common share $ .05 $ .15 $ .03
======================================================================================
2. Concentration
of Credit Risk
and Significant
Relationships Trade accounts receivable are due primarily 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 the
credit risk of specific customers, historical
trends and other information. The Company does
not require collateral from its customers.
F-16
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
During the years ended June 30, 1997, 1998 and
1999, sales to two customers accounted for
approximately 36% (26% and 10%) 37% (26% and 11%)
and 33% (24% and 9%) of consolidated net sales.
Included in accounts receivable at June 30, 1998
and 1999 is $3,016,000 and $6,765,000 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,
1997, 1998 and 1999, sales of landscape fabric
represented approximately 44%, 39% and 37% of the
Company's total net sales and sales of
fertilizer, plant food and insecticide spikes
constituted 24%, 20% and 13% of the Company's
total net sales.
Substantially all raw material purchases for
Weedblock(R) inventory, representing
approximately 22%, 37% and 29% of the Company's
consolidated raw material purchases during the
years ended June 30, 1997, 1998 and 1999, are
from one vendor. Management believes that other
suppliers could provide a similar product on
comparable terms. A change in suppliers, however,
could cause delays and a possible loss of sales,
which would affect operating results adversely.
Included in accounts payable at June 30, 1998 and
1999 is $854,000 and $326,000 due to this vendor.
3. Inventories Inventories consist of:
June 30, 1998 1999
=================================================
Raw materials $ 5,183,000 $10,103,000
Finished goods 6,580,000 6,883,000
-------------------------------------------------
$11,763,000 $16,986,000
=================================================
At June 30, 1999, the inventory balance has been
reduced by a provision for possible obsolescence
of $263,000. No reserves were recorded in prior
years.
4. Property and Property and equipment consist of:
Equipment
June 30, 1998 1999
=============================================================
Land $ -- $ 515,000
Leasehold improvements 397,000 587,000
Building and improvements -- 3,891,000
Furniture, fixtures and equipment 4,649,000 9,434,000
-------------------------------------------------------------
5,046,000 14,427,000
Less accumulated depreciation 1,456,000 2,793,000
-------------------------------------------------------------
$ 3,590,000 $11,634,000
=============================================================
F-17
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
5. Excess of Cost
Over Net Assets
Acquired The excess of cost over net assets acquired
consists of the following:
June 30, 1998 1999
====================================================================
Weatherly Consumer Products Group, Inc. $22,948,000 $22,948,000
Ampro Industries -- 17,918,000
Easy Gardener, Inc. 15,639,000 15,639,000
Weed Wizard, Inc. 11,495,000 11,973,000
Tensar Polytechnologies, Inc. 4,928,000 5,226,000
Plastic Molded Concepts, Inc. 2,810,000 2,810,000
Landmaster Products, Inc. 2,290,000 2,292,000
Golden West Chemical Distributions, Inc. 2,098,000 2,098,000
Emerald Products, LLC 991,000 1,112,000
E-Garden -- 538,000
--------------------------------------------------------------------
63,199,000 82,554,000
Less accumulated amortization 4,335,000 6,981,000
--------------------------------------------------------------------
$58,864,000 $75,573,000
====================================================================
6. Lines of Credit In October, 1998, the Company completed a
financing agreement with Bank of America. The
agreement provides for a $25 million revolving
acquisition line of credit ("the Acquisition
Facility") to finance acquisitions and a $20
million working capital revolving line of credit
("the Working Capital Facility"). Borrowings
under such credit facilities bear interest at
variable annual rates chosen by the Company based
on either (i) the London Interbank Offered Rate
("LIBOR") plus an applicable marginal rate, or
(ii) the higher of 0.5% above the then current
Federal Funds Rate of the Prime Rate of Bank of
America, in each case, plus an applicable
marginal rate. The Acquisition Facility
terminates at October 15, 2001 and the
outstanding balance is payable in quarterly
payments starting with December 31, 2001 and
ending with December 31, 2004. The Working
Capital Facility terminates with the balance due
on October 15, 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. However, if the Company elects to
terminate the agreement prior to the expiration
date, the outstanding balance must be prepaid
together with a premium of 1% to 0.5% of the
total facility.
F-18
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company's obligations under the Credit
Agreement are guaranteed by its subsidiaries and
secured by a security interest in favor of the
Bank in substantially all of the assets of the
Company and its subsidiaries. Upon the occurrence
of an event of default specified in the Credit
Agreement, the maturity of loans outstanding
under the Credit Agreement maybe accelerated by
the Bank, which may also foreclose its security
interest on the assets of the Company and its
subsidiaries.
Under the Credit Agreement, the Company and its
subsidiaries are required, among other things, to
comply with (a) certain limitations on incurring
additional indebtedness, liens and guaranties, on
dispositions of assets, payment of cash dividends
and cash redemption and repurchases of
securities, and (b) certain limitations on
merger, 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. The Company complies
with its financial covenants as amended on
September 30, 1999.
7. 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 the proceeds therefrom to
acquire the subordinated debentures described
below. Concurrent with the issuance of the Trust
Securities, the Trust invested the proceeds
therefrom in $65.2 million aggregate principal
amount of 9.40% Junior Subordinated Deferrable
Interest Debentures (the "Subordinated
Debentures") issued by the Company.
Distributions on the Trust Securities are payable
monthly in arrears by the Trust.
F-19
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 on April 15,
2028, but may be redeemed at the option of the
Company at any time after April 15, 2003 or
earlier under certain circumstances. The Company
effectively provides a full and unconditional
guarantee of the Trusts' obligations under the
Trust Securities to the extent that the Trust has
funds sufficient to make such payments.
Approximately $40 million of the proceeds
received by the Company from the sale of the
Subordinated Debentures to the Trust, were used
by the Company to repay outstanding long-term
debt and line of credit advances and prepayment
penalties (see Note 14).
8. Officer
Receivables Officer receivables represents notes which bear
interest at 7% and require interest payments on
an annual basis. Principal payments on the notes
are due in aggregate annual installments of
$75,000 to $200,000, with the aggregate balance
of $300,000 due upon maturity in June 2002.
F-20
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Commitments Employment Agreements
The Company has entered into employment
agreements with two of its officers. The
agreements are for one-year periods but are
automatically renewed unless specifically
terminated by the Company or the employee. If the
employment agreements are terminated by the
Company, the officers will be entitled to an
additional ten and five years of annual
compensation. Annual compensation under the
employment agreements are $450,000 and $250,000.
The employment agreements also provide for
certain lump sum payments in the event of a
change in control equal to approximately $5.7
million. A five year agreement with an officer of
Easy Gardener provides for a base aggregate
annual salary of approximately $275,000 beginning
in 1999. In addition, the agreements provide for
incentive and additional compensation under
certain circumstances.
Operating Leases
The Company leases office and warehouse space
under operating leases which expire in various
years through 2002. The Company also leases
certain office equipment and automobiles under
operating leases expiring in 1999 through 2003.
The future minimum lease payments under these
non-cancelable operating leases are as follows:
Year ending June 30, Amount
=================================================
2000 $ 874,000
2001 643,000
2002 116,000
2003 48,000
2004 9,000
-------------------------------------------------
$1,690,000
=================================================
Rent expense was approximately $680,000, $532,000
and $788,000 for the years ended June 30, 1997,
1998 and 1999.
F-21
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Pension Plan
Easy Gardener has established an employee defined
contribution pension plan (the Plan). Employees
of the Company, Weatherly, Easy Gardener, Weed
Wizard and Golden West are eligible to
participate. The Company is required to match the
first 3% of employee contributions up to 5% of
the employees wage base. The plan also allows
discretionary contributions by the Company. The
Company's contribution vests over a seven-year
period. Ampro has established a plan for its
employees with similar terms to the Easy Gardener
Plan. Pension expense associated with the Plan
for the years ended June 30, 1997, 1998 and 1999
was approximately $199,000, $223,000 and
$351,000.
Royalty Agreements
The Company has entered into royalty agreements
which provide for payments based upon a
percentage of net sales of certain products.
These agreements expire in various years from
1999 to 2005. Royalty expense during the years
ended June 30, 1997, 1998 and 1999 was $304,000,
$353,000 and $149,000.
Purchase Commitments
Ampro has entered into a contract with a supplier
to purchase a minimum of $1 million of fertilizer
products in 1999, 2000 and 2001.
In July 1999, the Company entered into a contract
to purchase QAD application software for
approximately $1.2 million.
10. Stockholders'
Equity (a) Preferred Stock
The Company is authorized to issue 1,000,000
shares of preferred stock with such designations,
rights and preferences as may be determined from
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 have been issued.
F-22
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(b) Common Stock
In December 1997, the Company sold approximately
4,290,000 shares in a public offering. Net
proceeds to the Company, after deducting
commissions and expenses of $1,031,000,
approximated $15,859,000.
In June 1998, the Company's stockholders
authorized an increase in common stock from 30 to
75 million shares.
In September 1998, the Company adopted a
Stockholders' Rights Agreement commonly known as
a "poison pill," which provides that in the event
an individual or entity becomes a beneficial
holder of 12% or more of the shares of the
Company's capital stock, other stockholders of
the Company shall have the right to purchase
shares of the Company's (or in some cases, the
acquiror's) common stock at 50% of its then
market value.
(c) Treasury Stock
During 1998, the Company repurchased 236,000
shares of treasury stock for $1,307,000. During
1999, the Company repurchased 1,569,000 shares
for $7,475,000.
(d) Stock Option Plans
The Company adopted the 1991 Stock Option Plan
(the "1991 Plan") pursuant to which 700,000
shares of common stock have been reserved for
issuance upon the exercise of options designated
as either (i) options intended to constitute
incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the
"Code") or (ii) non-qualified options. ISOs may
be granted under the Plan to employees and
officers of the Company. Non-qualified options
may be granted to consultants, directors (whether
or not they are employees), employees and
officers of the Company.
During fiscal 1995, the Board of Directors of the
Company adopted, subject to stockholder approval,
two additional stock option plans. The 1995 Stock
Option Plan (the "1995 Plan") allows the granting
of either ISOs or non-qualified options. The
maximum aggregate number of shares to be granted
under this plan is 1,500,000. The Non-Employee
F-23
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 issued under this plan
is 100,000. During 1997, 1998 and 1999, 10,000
options were granted each year. The 1995 Plan is
administered by a committee of the Board of
Directors and the Non-Employee Director Plan is a
formula plan.
During May 1997, the Board of Directors approved
the 1997 Stock Option Plan. The plan reserves the
issuance of 1,500,000 shares of common stock.
During May 1999, the Board of Directors approved
the 1999 Stock Option Plan. The plan reserves the
issuance of 900,000 shares of common stock.
The 1991 Plan is administered by the Board of
Directors of the Company (the "Board"). The
Board, or committee, as the case may be, within
the limitations of the 1991 and 1995 Plans, as
the case may be, determines the persons to whom
options will be granted, the number of shares to
be covered by each option, whether the options
granted are intended to be ISOs, the duration and
rate of exercise of each option, the option
purchase price per share and the manner of
exercise, the time, manner and form of payment
upon exercise of an option, and whether
restrictions such as repurchase rights in the
Company are to be imposed on shares subject to
options.
ISOs granted under the plans may not be granted
at a price less than the fair market value of the
common stock on the date of grant (or 110% of
fair market value in the case of persons holding
10% or more of the voting stock of the Company).
The aggregate fair market value of shares for
which ISOs granted to any employee are
exercisable for the first time by such employee
during any calendar year (under all stock option
plans of the Company and any related corporation)
may not exceed $100,000. Non-qualified options
granted under the 1991 Plan may not be granted at
a price less than the fair market value of the
common stock on the date of grant (not less than
par value in the case of the 1995 Plan). Options
granted under the plans will expire not more than
ten years from the date of grant (five years in
the case of ISOs granted to persons holding 10%
or more of the voting stock of the Company).
F-24
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
All options granted under the 1991 Plan,
Non-Employee Director Plan and ISOs under the
1995 Plan are not transferable during an
optionee's lifetime but are transferable at death
by will or by the laws of descent and
distribution.
The following is a summary of activity relating
to stock options.
Weighted
Average Option
Price Per Share Outstanding Exercisable
============================================================================
1991 Plan
July 1, 1996 $1.69 688,000 688,000
Expired in 1997 $1.69 (26,000) (26,000)
----------------------------------------------------------------------------
June 30, 1997 $1.69 662,000 662,000(2)
============================================================================
Exercise of options $1.69 (140,000) (140,000)
----------------------------------------------------------------------------
June 30, 1998 $1.69 522,000 522,000(2)
Expired in 1999 $1.69 (9,000) (9,000)
Options extended(1) $1.69 -- (125,000)
Exercise of options $1.69 (50,000) (50,000)
----------------------------------------------------------------------------
June 30, 1999 $1.69 463,000 338,000(2)
============================================================================
1995 Plan
July 1, 1996 $2.26 710,000 410,000
Granted during 1997 $2.06 675,000 675,000
Became exercisable $2.28 -- 75,000
----------------------------------------------------------------------------
June 30, 1997 $2.10 1,385,000 1,160,000(3)
Granted during 1998 $3.25 98,000 98,000
Exercise of options $2.06 (24,000) (24,000)
----------------------------------------------------------------------------
June 30, 1998 $2.18 1,459,000 1,234,000(3)
Became exercisable $2.25 -- 25,000
----------------------------------------------------------------------------
June 30, 1999 $2.18 1,459,000 1,259,000(3)
============================================================================
F-25
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Weighted
Average Option
Price Per Share Outstanding Exercisable
============================================================================
1997 Plan
July 1, 1997 $ -- -- --
Granted during 1998 $3.32 565,000 485,000
----------------------------------------------------------------------------
June 30, 1998 $3.32 565,000 485,000(4)
Granted during 1999 $4.63 150,000 30,000
Became exercisable $3.72 -- 27,000
----------------------------------------------------------------------------
June 30, 1999 $3.59 715,000 542,000(4)
============================================================================
Non-Plan Options
July 1, 1996 $1.83 1,060,000 645,000
Granted during 1997 $1.91 1,225,000 1,225,000
Became exercisable $2.25 -- 125,000
----------------------------------------------------------------------------
June 30, 1997 $1.84 2,285,000 1,995,000(5)
Exercise of options $2.25 (44,000) (44,000)
Granted during 1998 $5.02 190,000 190,000
----------------------------------------------------------------------------
June 30, 1998 $2.08 2,431,000 2,141,000(5)
Exercise of options $1.69 (223,000) (223,000)
Became exercisable $2.25 -- 175,000
Options extended(1) $1.69 -- (337,000)
Granted during 1999 $3.91 131,000 69,000
----------------------------------------------------------------------------
June 30, 1999 $2.84 2,339,000 1,825,000(5)
----------------------------------------------------------------------------
(1) In 1999, the expiration date and vesting
period on 545,000 options was extended in
periods between nine and ten years. As a
result, the Company is recognizing
compensation expense for the intrinsic value
of the options over the new vesting periods.
In 1999, such expense was $268,000.
(2) At June 30, 1997, 1998 and 1999, the
weighted average exercise option price per
share for exercisable options was $1.69 for
all periods.
(3) At June 30, 1997, 1998 and 1999, the
weighted average exercise option price per
share for exercisable options was $1.90,
$2.16 and $2.16.
(4) At June 30, 1998 and 1999, the weighted
average exercise option price per share for
exercisable options was $3.25 and $3.35.
(5) At June 30, 1997, 1998 and 1999, the
weighted average exercise option price per
share for exercisable options was $1.78,
$2.01 and $2.17.
F-26
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following table summarizes stock options
outstanding and exercisable at June 30, 1999.
Outstanding Exercisable
-------------------------------------- -----------------------
Average Weighted Weighted
Range of Remaining Average Average
Exercise Price Options Life Exercise Price Options Exercise Price
====================================================================================
$0.01 200,000 2 years $0.01 200,000 $0.01
$1.69 591,000 7 years $1.69 144,000 $1.69
$2.06-2.38 3,051,000 1.5 years $2.11 2,851,000 $2.11
$3.25-3.94 794,000 3 years $3.40 659,000 $3.32
$4.38-5.25 340,000 4.5 years $4.84 110,000 $5.00
------------------------------------------------------------------------------------
$0.01-5.25 4,976,000 2.5 years $2.36 3,964,000 $2.28
====================================================================================
In addition to certain stock options and warrants
granted to employees, the Company also issued a
total of 925,000 options and warrants to various
consultants and a financial institution relating
to various consulting services, the acquisitions
of Weatherly and PlastiChain, and the bank
agreement entered into during August 1996. The
fair value of such options and warrants was
estimated at approximately $1,079,000. The fair
value of such options and warrants has been
expensed except for the fair value related to
acquisitions and the bank financing for which
these amounts are being amortized over the life
of the excess of cost of net assets acquired and
the bank financing agreement (Note 14).
(e) Unit Purchase Options
In October 1994, the Company granted six unit
purchase options (UPOs), each consisting of
43,860 shares of the Company's common stock and
Class B Warrants to purchase 43,860 shares of
common stock at an exercise price of $2.28. These
UPOs, which expire on August 31, 1999, have a
nominal exercise price. Three of the UPOs were
granted to an officer of the Company for his
personal guarantees in connection with the Easy
Gardener acquisition. Three were granted to an
outside consultant for its services in connection
with financing obtained for the Easy Gardener
acquisition. 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
F-27
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
officer of the Company. All these transactions
were done in lieu of cash compensation in
consideration for certain financial consulting,
and other services, including work performed in
connection with debt and equity financings, and
for the personal guarantee and other collateral
provided in connection with the Company's
acquisition of Easy Gardener, Inc., without which
the Company's transaction with Easy Gardener,
Inc. would not have occurred. These UPOs were
valued at $400,000 and included in deferred
financing costs. During 1997, one UPO and the
related warrants were exercised and during 1999,
five UPOs were exercised.
In connection with the Company's August 1994
Private Placement, the placement agent and its
designees were granted approximately 28 UPOs
exercisable at $100,000 each. Each UPO consists
of 43,860 shares of common stock and warrants to
purchase 43,860 shares of common stock at $2.28
per share. These warrants expire in August 1999,
if the underlying UPO is not exercised. If
exercised, the warrants expire in May 2000.
During 1997, five UPOs were exercised. In
December 1997 and May 1998, the Company
repurchased and retired approximately 20 UPOs
underlying approximately 1,851,000 shares of
common stock for approximately $3,922,000.
The total shares of common stock issuable upon
exercise of the remaining UPOs, including the
underlying warrants, would be approximately
1,100,000 and 975,000 shares at June 30, 1998 and
1999.
In August 1999, all outstanding UPOs were
exercised.
(f) Warrants
In connection with certain business transactions
and stock offerings, the Company has granted
various warrants to purchase common stock.
F-28
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following schedule will summarize the
activity.
Weighted Weighted
Average Average
Warrant Remaining
Price Per Contractual
Share Outstanding(1) Exercisable Life
==================================================================================
July 1, 1996 $2.14 5,616,000 5,616,000 3.5 years
Warrants issued $2.45 525,000 525,000 --
Warrants exercised $2.15 (2,380,000) (2,380,000) --
Expired $6.00 (52,000) (52,000) --
----------------------------------------------------------------------------------
June 30, 1997 $2.18 3,709,000 3,709,000 3 years
Warrants issued $4.75 250,000 250,000 --
Warrants exercised $2.28 (1,408,000) (1,408,000) --
Expired $2.25 (50,000) (50,000) --
----------------------------------------------------------------------------------
June 30, 1998 $2.39 2,501,000 2,501,000 2 years
Warrants issued $2.28 240,000 240,000 --
Warrants 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
==================================================================================
(1) The warrants contain anti-dilution
provisions which could effect the number of
shares of common issuable stock upon the
exercise of the warrants as well as the per
share warrant prices. Additionally, these
warrants contain certain redemption
provisions.
(g) Common Stock Reserved
At June 30, 1999, approximately 9,190,000 shares
of common stock have been reserved for issuance
upon the exercise of warrants, options and UPOs.
F-29
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(h) Stock Based Compensation
The Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations in accounting for the
plan. Under APB Opinion No. 25, because the
exercise price of the Company stock options
equals or exceeds the market price of the
underlying stock on the date of grant, no
compensation cost is recognized.
FASB No. 123, Accounting for Stock-Based
Compensation, requires the Company to provide pro
forma information regarding net income, as if
compensation costs for the Company's stock
options and warrants had been determined in
accordance with the fair value based method
prescribed in FASB No. 123. The Company estimates
the fair value of each stock option and warrant
at the grant date by using a Black-Scholes
pricing model with the following weighted-average
assumptions used for grants in 1997, 1998 and
1999 respectively: no dividend yield for any
year; expected volatility of approximately 30% in
1997 and 1998 and approximately 56% in 1999;
risk-free interest rates of 6.6% in 1997, 1998
and 1999 and expected lives of approximately
three to five years. Pro forma compensation
expense associated with options granted to
employees totaled $1,566,000, $1,013,000 and
$352,000 for 1997, 1998 and 1999. The weighted
average fair value of these options was $0.68,
$1.54 and $2.37 for 1997, 1998 and 1999.
Under the accounting provisions of FASB No. 123,
the Company's net income and net income per
common share would have been decreased to the pro
forma amounts indicated below:
Years ended June 30, 1997 1998 1999
=====================================================================================
Net income
As reported $3,183,000 $5,526,000 $2,049,000
Pro forma 1,617,000 4,513,000 1,697,000
Dilutive per common share 0.20 0.24 0.09
Dilutive per common share pro forma 0.10 0.20 0.07
=====================================================================================
F-30
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The above pro forma information includes only the
effects of 1997 and 1998 and 1999 grants. Because
options potentially vest over several years and
additional awards are made each year, the results
shown above may not be representative of the
effects on net earnings in future years.
11. Income Taxes Deferred income taxes reflect the net tax effects
of temporary differences between the carrying
amounts of assets and liabilities for financial
reporting purposes and the amounts used for
income tax purposes. A valuation allowance is
established for deferred income tax assets when
realization is not deemed more likely than not.
Deferred tax assets (liabilities) consist
principally of the following:
June 30, 1998 1999
===============================================================================
Deferred Tax Assets
Alternative minimum and state taxes $ 325,000 $ 244,000
Accounts receivable allowance and other 193,000 240,000
Net operating loss carryforwards 192,000 113,000
-------------------------------------------------------------------------------
Total deferred tax asset 710,000 597,000
Less valuation allowance (188,000) (97,000)
-------------------------------------------------------------------------------
Net deferred tax asset $ 522,000 $ 500,000
===============================================================================
===============================================================================
Deferred Tax Liability
Tax accumulated depreciation and amortization in
excess of book amount $ (812,000) $(1,600,000)
===============================================================================
At June 30, 1998, the Company had utilized all of
its Federal net operating loss (NOL)
carryforwards. California allows an NOL
carryforward of 50% of a company's California
taxable loss. The carryforward for California
purposes, after the 50% reduction, was
approximately $1,274,000 at June 30, 1999 and
expires through 2002.
F-31
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Use of the Company's NOLs could be limited in the
future as a result of issuance or exercise of
stock options and warrants or sale or issuance of
stock. The Company files its tax returns on a
calendar year basis. Because of the seasonal
nature of the Company's operations, the different
reporting periods for book and tax purposes may
affect the amount of taxes that will ultimately
be payable or deferred.
At June 30, 1998 and 1999, the Company
established a $188,000 and $97,000 valuation
allowance for the benefits pertaining to
California NOLs which are not estimated to be
realizable prior to their expiration. The Company
believes that it is more likely than not that the
remaining deferred tax assets will be realized
through future taxable earnings or alternative
tax strategies.
The income tax provision consists of:
June 30, 1997 1998 1999
================================================================================
Current
Federal $ 126,000 $2,104,000 $ 336,000
State 280,000 570,000 204,000
--------------------------------------------------------------------------------
406,000 2,674,000 540,000
--------------------------------------------------------------------------------
Deferred
Federal 2,286,000 126,000 682,000
State 56,000 65,000 128,000
--------------------------------------------------------------------------------
2,342,000 191,000 810,000
--------------------------------------------------------------------------------
$2,748,000 $2,865,000 $1,350,000
================================================================================
The 1997 income tax expense consists of
$3,200,000 expense from continuing operations
reduced by a $452,000 benefit associated with the
extraordinary expense. The 1998 income tax
expense consists of $3,600,000 expense from
continuing operations reduced by a $735,000
benefit associated with the extraordinary
expense.
F-32
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following is a reconciliation between the
Statutory Federal income tax rate and the
Company's effective tax rate for continuing
operations:
June 30, 1997 1998 1999
==============================================================================
Income tax provision computed at Federal
Statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of Federal tax benefits (4.6) (6.0) (6.0)
Nondeductible amortization and other (4.5) (1.1) (3.4)
Deductible UPOs and stock options -- 7.3 1.0
Changes in valuation allowance on deferred tax
asset (0.2) (0.2) 2.7
------------------------------------------------------------------------------
Provision benefit for income taxes (43.3)% (34.0)% (39.7)%
==============================================================================
12. Trade Credits In April 1996, the Company entered into an
agreement to exchange unsold assets held for sale
for credit against the future purchase of
products and services. This transaction has been
reported at the estimated fair market value of
the assets exchanged by the Company. No gain or
loss was recognized on this transaction as the
Company had previously written down its assets
held for sale to their estimated fair market
value. The agreement requires the Company to pay
a portion of the purchase price of the product or
services received. Depending on the nature of the
products or services purchased, the Company will
receive a credit against the future price ranging
from 10% to 45% of the cash purchase price. The
Company will also receive a percentage of the
cash proceeds from the ultimate sale of the
assets. The agreement provides that the Company
will receive maximum total credits and cash
totaling $1.6 million. In 1999, the Company
expensed the $944,000 carrying value for these
trade credits in conjunction with the
restructuring discussed in Note 16.
13. Supplemental
Cash Flow
Information
June 30, 1997 1998 1999
================================================================================
Cash paid during the period for:
Interest $5,816,000 $7,774,000 $7,540,000
Taxes $ 131,000 $2,038,000 $1,744,000
================================================================================
F-33
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Supplemental schedule of non-cash investing and
financing activities:
During 1997, the Company issued warrants and
options for various consulting services which
were valued at approximately $1,079,000.
During 1998, $350,000 of debt was converted into
154,000 shares of the Company's common stock.
In connection with the business acquisitions in
1997, 1998 and 1999, the following transactions
occurred:
June 30, 1997 1998 1999
===============================================================================
Fair value of assets acquired $ 32,935,000 $ 28,487,000 $ 31,957,000
Promissory notes (3,323,000) -- --
Liabilities assumed (1,254,000) (354,000) (4,867,000)
-------------------------------------------------------------------------------
Cash paid for assets acquired $ 28,358,000 $ 28,133,000 $ 27,090,000
===============================================================================
14. Extraordinary Expense As a result of the refinancing of all of the
Company's outstanding debt in August 1996, the
entire balance of deferred finance costs at June
30, 1996, net of accumulated amortization, plus
certain prepayment penalties totaling
approximately $455,000, was written off as an
extraordinary expense during the year ended June
30, 1997.
As a result of the refinancing of all of the
Company's outstanding debt in April 1998, the
entire balance of deferred financing costs at
April 1, 1998, net of accumulated amortization,
plus certain prepayment penalties totaling
approximately $743,000 was written off as an
extraordinary expense during the year ended June
30, 1998.
F-34
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
15. Earnings per
Share The following is a reconciliation of the weighted
average number of shares used to compute basic
and dilutive earnings per share before
extraordinary expense:
June 30, 1997 1998 1999
================================================================================
Basic weighted average common
shares outstanding 13,695,000 17,776,000 19,621,000
Options and warrants 2,373,000 5,032,000 3,974,000
--------------------------------------------------------------------------------
Dilutive weighted average common
shares outstanding 16,068,000 22,808,000 23,595,000
================================================================================
16. Restructuring
Charges In 1999, the Company recorded restructuring
charges of $1,964,000. The restructuring
initiatives involved the closing of the Weed
Wizard facility in Georgia and a halt in the
manufacturing of a Weed Wizard product line. The
Company recognized approximately $280,000 of
expense related to lease termination fees and the
disposal of property and equipment at the Weed
Wizard facility; $1,093,000 of expense related to
the write-off of trade credits and product rights
associated with the discontinued product line;
and $591,000 of expense for the termination
benefits to be paid to 20 employees involved with
the discontinued product line. Approximately
$200,000 of the termination benefits had not been
paid as of June 30, 1999, and is included in
accrued expenses.
17. Contingency In August 1999, the former principal stockholders
of Ampro have commenced an action against the
Company. The plaintiffs are seeking additional
payments of unspecified amounts to be made to
them pursuant to the Ampro stock purchase
agreement. The plaintiffs have also notified the
Company that they intend to arbitrate certain
other issues concerning closing adjustments under
the stock purchase agreement. The Company intends
to vigorously defend these matters and to file
counterclaims against the selling of Ampro
stockholders.
The Company holds $1 million in a separate escrow
account. These funds were originally intended to
be used to acquire the stock of Ampro. The
ultimate use of these funds is expected to be
determined as the disputes discussed above are
resolved.
F-35
U.S. Home & Garden Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
Charged to Writeoffs
Beginning Costs and of Ending
Balance Expenses Accounts Balance
==========================================================================================================================
Allowance for Doubtful Accounts
o Year ended June 30, 1997 $ 155,000 $ 323,000 $(164,000) $ 314,000
o Year ended June 30, 1998 314,000 179,000 (94,000) 399,000
o Year ended June 30, 1999 399,000 827,000 (235,000) 991,000
==========================================================================================================================
F-36
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 4, 1999
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 4, 1999
- ------------------- of Directors, Chief
Robert Kassel Executive Officer,
President and Treasurer
(Chief Executive
and Financial Officer)
/s/Maureen Kassel Vice-President, October 4, 1999
- ------------------- Secretary and
Maureen Kassel Director
/s/Richard Raleigh Chief Operating October 4, 1999
- ------------------- Officer and Director
Richard Raleigh
/s/Lynda Gustafson Vice President - October 4, 1999
- ------------------- Finance (Principal
Lynda Gustafson Accounting Officer)
/s/Jon Schulberg Director October 4, 1999
- -------------------
Jon Schulberg
/s/Fred Heiden Director October 4, 1999
- -------------------
Fred Heiden