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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
From the transition period from _________________ to___________________
Commission File Number 001-14015
U.S. HOME & GARDEN INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0262908
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
655 Montgomery Street
San Francisco, California 94111
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(Address of Principal Executive Offices) (Zip Code)
(415) 616-8111
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(Registrant's Telephone Number, Including Area Code)
Indicate by check 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 whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of November 3, 2003 there were 17,951,090 shares of the issuer's common
stock, par value $.001 per share, outstanding.
18
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of September 30, 2003 (Unaudited)
and June 30, 2003 1-2
Consolidated statements of operations for the three months ended
September 30, 2003 and 2002 (Unaudited) 3
Consolidated statements of cash flows for the three months
ended September 30, 2003 and 2002 (Unaudited) 4-5
Notes to consolidated financial statements 6-8
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-15
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 15-16
Item 4. - Controls and Procedures 16
Part II. - Other Information
Item 6. - Exhibits and Reports on Form 8-K 17
Signatures 17
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
September 30, 2003 June 30, 2003
------------------ -------------
(Unaudited)
Assets
Current
Cash and cash equivalents $ 1,402,000 $ 822,000
Accounts receivable, less allowance for doubtful
accounts of $630,000 14,777,000 24,467,000
Inventories 8,417,000 9,138,000
Prepaid expenses and other current assets 779,000 721,000
Refundable income taxes 96,000 137,000
Deferred tax asset 385,000 385,000
Current assets of discontinued operations 61,000 62,000
- -------------------------------------------------------------------------------------------------
Total Current Assets 25,917,000 35,732,000
Property and Equipment, net 3,783,000 4,018,000
Intangible Assets
Goodwill, net 49,878,000 49,878,000
Deferred financing costs, net of accumulated
amortization of $969,000 and $807,000 4,040,000 3,975,000
Non-compete agreements, net of accumulated
amortization of $855,000 and $766,000 655,000 744,000
Package tooling costs, net of accumulated
amortization of $1,956,000 and $2,418,000 1,091,000 1,204,000
Product rights, patents and trademarks, net of
accumulated amortization of $213,000 and $205,000 459,000 467,000
Officer Receivable 487,000 512,000
Other Assets 29,000 29,000
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Total Assets $86,339,000 $96,559,000
- -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
1
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
September 30, 2003 June 30, 2003
------------------ -------------
(Unaudited)
Liabilities and Stockholders' Equity
Current
Revolving credit facility $ 10,880,000 $ 15,085,000
Accounts payable 8,043,000 8,954,000
Accrued rebates 934,000 1,433,000
Accrued commissions 615,000 1,074,000
Accrued co-op advertising 433,000 774,000
Accrued expenses 1,413,000 1,786,000
Current portion of long-term debt 12,121,000 12,142,000
Current liabilities of discontinued operations 15,000 16,000
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 34,454,000 41,264,000
Deferred Tax Liability 239,000 239,000
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures 57,148,000 57,092,000
- --------------------------------------------------------------------------------------------------------
Total Liabilities 91,841,000 98,595,000
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Stockholders' Deficit
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $0.001 par value - shares authorized,
75,000,000; 21,642,000 and 21,641,000 shares issued 22,000 22,000
Additional paid-in capital 52,500,000 52,470,000
Retained deficit (45,196,000) (41,700,000)
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7,326,000 10,792,000
Less: Treasury Stock, 3,890,000 shares at cost (12,828,000) (12,828,000)
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Deficit (5,502,000) (2,036,000)
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Total Liabilities and Stockholders' Deficit $ 86,339,000 $ 96,559,000
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
Three Months Ended September 30,
2003 2002
Unaudited
----------------------------------
Net sales $ 14,517,000 $ 13,151,000
Cost of Sales 8,784,000 8,186,000
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Gross Profit 5,733,000 4,965,000
- ----------------------------------------------------------------------------------------------
Operating Expenses
Selling and shipping 4,637,000 4,156,000
General and administrative 1,817,000 2,232,000
Depreciation 68,000 180,000
Other amortization 291,000 247,000
- ----------------------------------------------------------------------------------------------
Total Operating Expenses 6,813,000 6,815,000
- ----------------------------------------------------------------------------------------------
Loss from Operations (1,080,000) (1,850,000)
Other Expense
Refinancing and transaction costs (159,000) (194,000)
Interest expense, net (2,188,000) (1,834,000)
- ----------------------------------------------------------------------------------------------
Loss from Continuing Operations Before Income Taxes (3,427,000) (3,878,000)
Income Tax Benefit 5,000 --
- ----------------------------------------------------------------------------------------------
Loss from Continuing Operations (3,422,000) (3,878,000)
Discontinued Operations -
Loss from discontinued operations (74,000) (978,000)
- ----------------------------------------------------------------------------------------------
Net Loss $ (3,496,000) $ (4,856,000)
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Per Share Amounts:
Weighted Average Common Shares Outstanding-
Basic and Diluted 17,951,000 17,752,000
Loss from Continuing Operations per Common Share-
Basic and Diluted ($.19) ($.22)
Discontinued operations -- (.05)
- ----------------------------------------------------------------------------------------------
Net Loss ($.19) ($.27)
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Three months ended September 30, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Unaudited
---------------------------------
Cash Flows from Operating Activities:
Net loss from continuing operations $(3,422,000) $(3,878,000)
Adjustments to reconcile net loss from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 702,000 847,000
Trust Preferred payments retained and applied
against note receivable 56,000 --
Compensation related to stock options 30,000 30,000
Changes in operating assets and liabilities:
Accounts receivable 9,690,000 15,579,000
Inventories 721,000 (701,000)
Prepaid expenses and other current assets (17,000) (284,000)
Accounts payable and accrued expenses (2,583,000) (2,493,000)
Other assets 25,000 2,000
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 5,202,000 9,102,000
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments related to purchase of business -- (17,000)
Purchase of property and equipment (57,000) (340,000)
Purchase of intangibles (38,000) (82,000)
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Net Cash Used in Investing Activities (95,000) (439,000)
- -----------------------------------------------------------------------------------------------------------------
4
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Three months ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------
Unaudited
--------------------------------
Cash Flows from Financing Activities:
Deferred finance costs $ (227,000) $ (241,000)
Net payments on lines-of-credit (4,205,000) (7,433,000)
Payments on long-term debt (21,000) (100,000)
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Net Cash Used In Financing Activities (4,453,000) (7,774,000)
- ---------------------------------------------------------------------------------------
Net increase in cash and cash equivalents from
continuing operations 654,000 889,000
Cash used in discontinued operations (74,000) (431,000)
- ---------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 580,000 458,000
Cash and Cash Equivalents, beginning of period 822,000 219,000
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Cash and Cash Equivalents, end of period $ 1,402,000 $ 677,000
- ---------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow
Information
Cash paid for interest $ 2,165,000 $ 1,751,000
Cash received for taxes $ 36,000 $ --
- ---------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financials Statements
================================================================================
1. The accompanying consolidated financial statements at September 30,
2003 and for the three months ended September 30, 2003 and 2002 are
unaudited, but, in the opinion of management, include all adjustments
necessary for a fair presentation of consolidated financial position
and results of operations for the periods presented. The results for
the three months ended September 30, 2003 are not necessarily
indicative of the results of operations for a full year.
2. Refer to the audited consolidated financial statements for the year
ended June 30, 2003, for details of accounting policies and detailed
notes to the consolidated financial statements.
3. Inventories consist of:
September 30, 2003 June 30, 2003
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Raw materials $ 4,105,000 $ 4,834,000
Finished goods 4,312,000 4,304,000
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$ 8,417,000 $ 9,138,000
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4. All shipping and handling expenses are included in the selling and
shipping caption and totaled approximately $1,690,000 and $1,372,000
for the three months ended September 30, 2003 and 2002 respectively.
5. The Company entered into a senior credit facility dated as of October
30, 2002 for the Company and its material subsidiaries. Wells Fargo
Foothill, which is the administrative agent for the facility, is also
the revolving credit lender, and Ableco Finance LLC is providing a term
loan. The total amount of the credit facility is $35 million, of which
$23 million is a revolving credit facility and $12 million is a term
loan. The credit facility matures October 30, 2005. Interest on the
revolving credit facility is at variable annual interest rates based on
the prime rate or LIBOR plus applicable marginal rates. Interest on the
term loan is at variable annual interest rates based on the prime rate
with a minimum rate of 11.75%. The balance of the term loan at
September 30, 2003 including payment in kind interest, was $12,121,000.
The interest rate on the term loan increases 2% each year the balance
is outstanding. Borrowings on the revolving credit facility were
$10,880,000 at September 30, 2003 and are limited based on eligible
borrowing bases, effectively $15,659,000 at September 30, 2003.
The Company and its material subsidiaries are subject to certain
financial and other covenants under its credit facility. At the end of
January 2003, the Company's financial performance created a "Triggering
Event" which increased the interest rate on the term loan in February
through September by 2.5% points, to 14.75%. During the quarter ended
September 30, 2003, the Company was in violation of a covenant. Due to
the covenant violation, the interest rates on both the term loan and
the revolver increased by 3% points, to 8.25% per year on the revolver
and 17.25% per year on the term loan. The lender could have required
the Company to pay all principal and accrued interest at any time.
Consequently, the Company has reclassified all of the revolving credit
facility and term debt as short-term obligations. At September 30,
2003, the Company was no longer in a "Triggering Event", reducing the
interest rate on the term loan to 14.75% effective October 1, 2003.
6
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financials Statements
================================================================================
The completion of the asset sale as described in Note 6 resulted in the
repayment of the term loan and assumption by the buyer of the Company's
obligations under the revolving credit facility.
6. In December 2002, the Company entered into an agreement to sell assets
comprising substantially all of its assets on a consolidated basis to a
management group led by Richard Grandy, the former Chief Operating
Officer of the Company. The sale of assets was completed at the end of
October 2003.
Under the terms of the Asset Purchase Agreement, as amended, Easy
Gardener Products Ltd., a new entity owned by the management group
acquired substantially all of the assets and assumed substantially all
of the liabilities of the Company's operating subsidiaries Easy
Gardener, Inc. and its subsidiaries, Easy Gardener, UK, Ltd, Weatherly
Consumer Products Group, Inc. and Weatherly Consumer Products, Inc. and
Ampro Industries, Inc. The new company assumed the revolving credit
facility and paid off the term debt. The new company also assumed the
obligations of US Home & Garden, Inc. to U.S. Home & Garden Trust I
(the "Trust"), including the obligation to make monthly payments, which
allows the Trust to make distributions to holders of its Trust
Preferred Securities.
After subtracting costs of the transaction, the Company received net
proceeds of $11,494,000 upon the following terms: net cash of
$9,894,000 paid at closing, and an additional $1,600,000 in the form of
a subordinated promissory note delivered at closing.
7. In June 2002, the Company announced that is was discontinuing the
operations conducted through its subsidiary Weed Wizard Acquisition
Corp. ("Weed Wizard") effective September 30, 2002.
Revenues for Weed Wizard for the three months ended September 30, 2003
and 2002 were not material. The Company had a net loss from operations
of Weed Wizard of $74,000 and $978,000 for the three months ended
September 30, 2003 and 2002, respectively. There were no assets or
liabilities of discontinued Weed Wizard operations reported in the
consolidated balance sheets.
In June 2001, the Company announced that it was discontinuing its
e-commerce initative, which it was conducting though its subsidiary,
Egarden, Inc. (Egarden), effective June 30, 2001. The assets and
liabilities of discontinued Egarden operations reported in the
consolidated balance sheets consist of the following:
---------------------------------------------------------------
September 30, 2003 June 30, 2003
---------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 61,000 $ 62,000
Current Liabilities:
Accrued expenses $ 15,000 $ 16,000
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the
Company's consolidated financial statements and notes have been
restated for all periods presented to reflect the discontinued
components. The current assets and current liabilities of the
discontinued components have been separately stated on the balance
sheet. The net losses and net cash flows have been reported as
"Discontinued Operations" in the accompanying consolidated financial
statements. The notes have been restated to exclude amounts related to
these discontinued components.
7
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financials Statements
================================================================================
8. Intangible assets other than goodwill total $6,245,000 and $6,390,000
(net of accumulated amortization of $3,993,000 and $4,196,000) at
September 30, 2003 and June 30, 2003, respectively. The Company has no
intangible assets with indefinite useful lives other than goodwill at
September 30, 2003.
The Company's previous business combinations were accounted for using
the purchase method. As a result of such combinations, the Company has
recognized a significant amount of goodwill, which, in the aggregate,
was $49,878,000, net of accumulated amortization, at September 30, 2003
and June 30, 2003.
Amortization expense for all intangible assets during the three months
ended September 30, 2003 and 2002 was $442,000 and $351,000,
respectively. Estimated amortization expense for continuing operations,
all of which was assumed by the buyer, for each of the five succeeding
fiscal years is as follows:
Year Ended June 30, Amount
-------------------------------------------------------------------
2004 $ 1,600,000
2005 $ 877,000
2006 $ 667,000
2007 $ 667,000
2008 $ 667,000
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the Company's future activities. Such forward-looking
information involves important known and unknown risks and uncertainties
that could significantly affect actual results, performance or achievements
in the future and, accordingly, such actual results, performance or
achievements may materially differ from those expressed or implied in any
forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those
relating to the Company's historical operations, including growth strategy,
customer concentration, outstanding indebtedness, dependence on weather
conditions, seasonality, expansion and other activities of competitors,
ability to successfully integrate acquired companies and product lines,
changes in federal or state environmental laws and the administration of
such laws, protection of trademarks and other proprietary rights, the
ability to maintain adequate financing arrangements necessary to fund
operations and the general condition of the economy and its effect on the
securities markets and other risks detailed in the Company's other filings
with the Securities and Exchange Commission. Due to the consummation of the
asset sale in late October 2003, the risks and uncertainties described above
are not applicable to the Company's ongoing business operations insofar as
any such factors apply to the Company's historical lawn and garden business,
which the Company has divested. Moreover, the Company is now subject to the
risks of a company with limited operations that are seeking to supplement
its remaining business operations. 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.
Recent Developments
On October 29, 2003 the Company consummated the sale of substantially all of
the operations and assets of the Company's primary operating subsidiaries,
Easy Gardener, Inc. ("Easy Gardener") and its subsidiaries and Ampro
Industries, Inc. ("Ampro") to Easy Gardener Products, Ltd. ("Easy Gardener
Products"), an entity formed by current and former members of management of
those subsidiaries. At the time of the sale these operations comprised
approximately 99% of the Company's consolidated sales and 98% of its
consolidated assets. The assets acquired by Easy Gardener Products consisted
of:
o substantially all of the assets of Easy Gardener and Ampro,
including:
o all of their business operations and assets,
o the capital stock and operations of Easy Gardener's
wholly-owned subsidiaries, Easy Gardener UK Ltd. and
Weatherly Consumer Products Group, Inc., and
o indirectly, the capital stock and operations of
Weatherly Consumer Products, Inc., a wholly-owned
subsidiary of Weatherly Consumer Products Group, Inc;
and
o from the Company, all of the common securities of its
subsidiary, U.S. Home & Garden Trust I (the "Trust"), as well
as certain trust preferred securities previously issued by the
Trust and owned by the Company at the time of the sale.
In addition, Easy Gardener Products assumed substantially all of the selling
subsidiaries' liabilities as well as the Company's obligations relating to
the Trust. These liabilities comprised approximately 99% of the Company's
consolidated liabilities at the time of the sale.
Easy Gardener Products paid the Company a total purchase price of
$11,950,000, less certain expenses related to the transaction for the assets
it acquired resulting in the Company's receipt of net proceeds of
approximately $11,494,000. Of this amount, $9,894,000 was paid in cash at
the closing and $1,600,000 was paid in the form of a subordinated promissory
note. The note matures in 2009 subject to certain prepayments from excess
cash flow. Interest on the principal amount outstanding from time to time
9
will accrue at the rate of 9% per annum and will be capitalized by
increasing the principal amount of the note. The note is subordinated to the
indebtedness of Easy Gardener Products under its senior credit facility and
under its note issued to Central Garden & Pet Company in connection with the
transaction. It is senior to the debentures underlying the trust preferred
securities issued by the Trust.
In addition, Easy Gardener Products:
o paid the Company's obligations under the Company's then
existing term loan and assumed all borrowings outstanding
under the revolving credit facility as of the closing and the
Company was discharged from any future obligations under the
facility;
o assumed the Company's obligations under the Trust-related
documents and the Company was discharged from any further
obligations under the Trust-related documents;
o assumed the Company's obligations to sell trust preferred
securities under an option previously granted by the Company
in November 2001 to the Company's prior subordinated lenders;
and
o assumed substantially all of the Company's selling
subsidiaries' operational (non-debt) liabilities;
The Company retained the capital stock and assets of the Company's Golden
West Agri-Products, Inc. subsidiary, which accounted for less than 1% of the
Company's consolidated net sales for each of the last three fiscal years.
The Company intends to explore certain business opportunities to supplement
or replace the operations of Golden West.
The asset sale resulted in the elimination of the Company's historical lawn
and garden operations with a corresponding elimination in substantially all
of the Company's operating revenue and related expenses. The Company's only
operations currently consist of those of Golden West. Therefore, except as
otherwise specifically set forth below, the results of operations of the
historical business set forth below and elsewhere in this report do not
reflect the effects on the Company's operations which resulted from the
consummation of the asset sale.
The taxable gain generated as a result of the asset sale described above
will be offset by the utilization of net operating loss carry forwards.
General
Prior to the consummation of the asset sale described above, the Company,
manufactured and marketed a broad range of brand-name consumer lawn and
garden products through its wholly owned subsidiaries, Ampro, Easy Gardener,
and Golden West and Easy Gardener's wholly owned subsidiaries, Weatherly
Consumer Products Group, Inc. and Weed Wizard. In June 2002, the Company
announced the discontinuation of the Weed Wizard operations effective
September 30, 2002. Since 1992, the Company consummated eleven acquisitions
of complementary lawn and garden companies and product lines for an
aggregate consideration of approximately $111,000,000 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
$49,878,000, net of accumulated amortization, at September 30, 2003 and June
30, 2003.
10
Historical Results of Operations
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of net sales:
September 30,
2003 2002
------------------------------------
Net sales 100.0% 100.0%
Cost of sales 60.5 62.2
------------------------------------
Gross profit 39.5 37.8
Selling and shipping expenses 31.9 31.6
General and administrative expenses 12.5 17.0
Depreciation and amortization 2.5 3.3
------------------------------------
Loss from operations (7.4) (14.1)
Refinancing and transaction costs (1.1) (1.5)
Interest expense, net (15.1) (13.9)
------------------------------------
Loss from continuing operations (23.6) (29.5)
Loss from discontinued operations (0.5) (7.4)
------------------------------------
Net loss (24.1%) (36.9%)
------------------------------------
11
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Net sales. Net sales increased by $1,366,000, or 10.4%, to $14,517,000
during the three months ended September 30, 2003, from $13,151,000
during the comparable period in 2002. The increase in net sales was the
result of an increase in the volume of products sold.
Cost of sales. Cost of sales increased by $598,000, or 7.3% to
$8,784,000 for the three months ended September 30, 2003 from $8,186,000
during the comparable period in 2002. The increase was a result of the
increase in the volume of products sold. Cost of sales as a percentage
of net sales decreased to 60.5% during the three months ended September
30, 2003 from 62.2% during the comparable period in 2002 due to
increased sales of higher margin products.
Gross profit. Gross profit increased by $768,000, or 15.5%, to
$5,733,000 for the three months ended September 30, 2003 from $4,965,000
during the comparable period in 2002. Gross profit as a percentage of
net sales increased to 39.5% during the three months ended September 30,
2003, from 37.8% during the comparable period in 2002. This increase in
gross profit dollars and as a percentage of net sales results from the
increased sales volume and decreased cost of sales and sales mix as
noted above.
Selling and shipping expenses. Selling and shipping expenses increased
by $481,000, or 11.6% to $4,637,000 during the three months ended
September 30, 2003 from $4,156,000 during the comparable period in 2002.
As a percentage of net sales, selling and shipping expenses increased to
31.9% during the three months ended September 30, 2003 from 31.6% during
the comparable period in 2002. This increase in expense and increase as
a percent of net sales was attributable to the increase in volume of
products sold and a slight increase in outbound freight costs.
General and administrative expenses. General and administrative expenses
decreased by $415,000 or 18.6%, to $1,817,000 during the three months
ended September 30, 2003 from $2,232,000 during the comparable period in
2002. This decrease is primarily related to a reduction in bonuses of
$162,000 and other expense reductions. As a percentage of net sales,
general and administrative expenses decreased to 12.5% during the three
months ended September 30, 2003 from 17.0% during the comparable period
in 2002.
Depreciation and amortization. Depreciation and amortization expenses
decreased by $68,000 or 15.9% to $359,000 during the three months ended
September 30, 2003 from $427,000 during the comparable period in 2002.
This decrease is primarily due to reduced depreciation as many assets
have become fully depreciated, offset in part by increased amortization
of deferred financing costs. As a percentage of net sales, depreciation
and amortization expenses decreased to 2.5% during the three months
ended September 30, 2003 from 3.3% during the comparable period in 2002.
Loss from continuing operations. Loss from continuing operations
decreased by $770,000 or 41.6% to $1,080,000 during the three months
ended September 30, 2003, from $1,850,000 during the comparable period
in 2002. The decrease in loss from continuing operations was primarily
due to increased revenue and gross margin as well as reduced expenses as
noted above. As a percentage of net sales, loss from operations
decreased to 7.4% for the three months ended September 30, 2003 from
14.1% during the comparable period in 2002.
Refinancing and transaction costs. The Company incurred $159,000 in
transaction costs during the quarter ended September 30, 2003 related to
costs incurred for the asset sale. In the comparable quarter in the
prior year, the Company incurred $194,000 in refinancing and transaction
costs.
Interest expense. Net interest expense increased $354,000, or 19.3% to
$2,188,000 during the three months ended September 30, 2003, from
$1,834,000 during the comparable period in 2002. The increase
12
in interest expense is primarily related to an increase in the interest
rate under both the revolving credit facility and the term loan as well
as increased borrowing levels.
Income taxes. An income tax benefit of $5,000 was recorded during the
three months ended September 30, 2003. No income tax benefit was
recorded for the three months ended September 30, 2002.
Discontinued Operations. Loss from discontinued operations decreased
from $978,000, or 92.4% to $74,000 during the three months ended
September 30, 2003, from the comparable period in 2002. The $904,000
decrease in loss from discontinued operations is primarily due to legal
costs associated with settling the Consumer Products Safety Commission
and A.A.B.B., Inc. litigation, and a write-down of assets in the prior
comparable period.
Net loss. Net loss decreased by $1,360,000 to $3,496,000 during the
three months ended September 30, 2003 from a net loss of $4,856,000
during the comparable period in 2002. Net loss per common share
decreased to $0.19 per share for the three months ended September 30,
2003 from net loss of $0.27 per share during the comparable period in
2002. The decrease in net loss and net loss per common share is due
primarily to the increased sales and gross margin and decreased expenses
as noted above.
Seasonality
The Company's historical sales were seasonal due to the nature of the
lawn and garden business, in parallel with the annual growing season.
The Company's sales and shipping were most active from late March
through May when home lawn and garden customers are purchasing supplies
for spring planting and retail stores are increasing their inventory of
lawn and garden products. The buying pattern of retailers, including the
Company's retail customers, is changing and stores are replenishing
their inventory when sales are made by them rather than buying large
quantities of inventory in advance of the selling season. Sales
typically decline in mid-summer.
Sales of the Company's agricultural products, which were not material
during the three months ended September 30, 2003, are also seasonal.
Most shipments occur during the agricultural cultivation period from
March through October.
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 placements and public sales of securities and borrowings from
lending institutions.
At September 30, 2003, the Company had consolidated cash and short-term
investments totaling $1,402,000, and a working capital deficit of
$8,537,000. At June 30, 2003, the Company had consolidated cash and
short-term investments totaling $822,000, and a working capital deficit
of $5,532,000. The increase in working capital deficit was primarily
attributable to the net loss for the quarter.
Net cash provided by operating activities for the three months ended
September 30, 2003 of $5.2 million consisted primarily of a decrease in
accounts receivable of $9.7 million and decreases in inventories and
prepaid expenses of $0.7 million. This was partially offset by the net
loss from continuing operations of $3.4 million, adjusted for non-cash
expenses of $0.8 million, a decrease in accounts payable and accrued
expenses of $2.6 million. These changes are consistent with the seasonal
nature of the Company's business.
Net cash used in investing activities for the three months ended
September 30, 2003 of $0.1 million is due to capital purchases of
equipment and intangible assets.
Net cash used in financing activities for the three months ended
September 30, 2003 of $4.5 million is primarily due to payments made on
the revolving credit facility with cash provided by operating
activities.
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The Company entered into a senior credit facility dated as of October 30,
2002 for the Company and its material subsidiaries. Wells Fargo Foothill,
which is the administrative agent for the facility, is also the revolving
credit lender, and Ableco Finance LLC is providing a term loan. The total
amount of the credit facility is $35 million, of which $23 million is a
revolving credit facility and $12 million is a term loan. The credit
facility matures October 30, 2005. Interest on the revolving credit
facility is at variable annual interest rates based on the prime rate or
LIBOR plus applicable marginal rates. Interest on the term loan is at
variable annual interest rates based on the prime rate with a minimum
rate of 11.75%. The balance of the term loan at September 30, 2003
including payment in kind interest, was $12,121,000. The interest rate on
the term loan increases 2% each year the balance is outstanding.
Borrowings on the revolving credit facility were $10,880,000 at September
30, 2003 and are limited based on eligible borrowing bases, effectively
$15,659,000 at September 30, 2003.
The Company and its material subsidiaries were subject to certain
financial and other covenants under the credit facility. At the end of
January 2003, the Company's financial performance created a "Triggering
Event" which increased the interest rate on the term loan in February
through September by 2.5% points, to 14.75%. During the quarter ended
September 30, 2003, the Company was in violation of a covenant. Due to
the covenant violation, the interest rates on both the term loan and the
revolver increased by 3% points, to 8.25% per year on the revolver and
17.25% per year on the term loan. As a result of the covenant violations,
the lender could have required the Company to pay all principal and
accrued interest at any time. Consequently, the Company has reclassified
all of the revolving credit facility and term debt as short-term
obligations. At September 30, 2003, the Company was no longer in a
"Triggering Event", reducing the interest rate on the term loan to 14.75%
effective October 1, 2003.
The completion of the asset sale as described in Note 6 resulted in the
repayment of the term loan and assumption by the buyer of the revolving
credit facility.
Commitments
The Company leases office and warehouse space, certain office equipment
and automobiles under operating leases expiring through 2006. The future
minimum annual lease payments under these non-cancelable operating leases
and the amounts assumed by Easy Gardener Products in connection with the
asset sale and the amount for which the Company remains responsible are
as follows:
Assumed by Not assumed
Year Ended June 30, the buyer by the buyer Amount
-------------------------------------------------------------------------------------------------
2004 $ 658,000 $ 161,000 $ 819,000
2005 531,000 64,000 595,000
2006 185,000 29,000 214,000
------------------------------------------------------------------------------------------------
$ 1,374,000 $ 254,000 $ 1,628,000
-------------------------------------------------------------------------------------------------
Critical Accounting Policies
The preparation of financial statements requires the adoption and
implementation of accounting policies and the use of assumptions and
estimates in their presentation. The accounting policies and
uncertainties, judgments and estimates make it likely that materially
different amounts would be reported under different conditions and
different assumptions.
Included below is a discussion of the more critical accounting policies
that are affected by the significant judgments and estimates used in the
preparation of the financial statements included in this report, how
14
such policies are applied, and how results differing from the estimates
and assumptions would affect the amounts presented in the financial
statements. Other accounting policies also have a significant effect on
the financial statements, and some of these policies also require the use
of estimates and assumptions as discussed in the Summary of Accounting
Policies in the Company's Consolidated Financial Statements at June 30,
2003 included in its Form 10-K for the year ended June 30, 2003.
Allowance for Doubtful Accounts Receivable. The Company maintains an
allowance for doubtful accounts receivable, which represents the
potential estimated losses resulting from the inability of customers to
make required payments for amounts owed. The allowance is estimated
based on historical experience of write-offs, the level of past due
amounts and information known about specific customers with respect to
their ability to make payments at the balance sheet date. If the
financial condition of the Company's customers were to change, resulting
in an impairment or improvement in their ability to make payments,
additional allowances may be required or allowances may be reduced.
Inventories. The Company records inventory reserves for estimated
obsolescence of inventory equal to the difference between the cost of
inventory owned and the estimated market value. Market value is based
upon the age of specific inventory on hand and assumptions about future
demand and market conditions. If actual market conditions for the sale
of the inventory are less favorable than those anticipated by
management, additional reserves may be required.
Goodwill. The Company has consummated eleven acquisitions accounted for
using the purchase method. The excess of cost over net assets acquired
which relates to the Company's acquisitions has been recorded as
goodwill. Goodwill is tested for impairment by comparing the carrying
value of the assets of the Company's individual reporting units to their
fair value. The fair value of the assets could vary significantly over
time and different assumptions and estimates will result in different
valuations.
Deferred Income Taxes. The Company records deferred income taxes based
on enacted income tax rates in effect on the dates temporary differences
between the financial reporting and tax bases of assets and liabilities
reverse. To the extent that available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation
allowance is established. The Company has recorded a valuation allowance
due to the uncertainty of the Company's ability to generate sufficient
future taxable income to realize the gross deferred tax assets. If the
Company is able to generate future taxable income, the valuation
allowance may be adjusted.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation addresses consolidation
by business enterprises of variable interest entities. The
Interpretation will apply to the Company for the periods ended after
December 15, 2003. The Company does not expect the Interpretation to
have an effect on the financial statements.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of its variable rate revolving credit line, the Company was
exposed to the risk of rising interest rates. The following table
provides information on the Company's fixed maturity debt as of
September 30, 2003 that was sensitive to changes in interest rates.
15
The Revolving Credit Facility had an interest rate of 8.25%
for the three month period ended September 30, 2003 $10.9 million
The Term Loan had an interest rate of 17.25%
for the three month period ended September 30, 2003 $12.1 million
As noted above, in connection with the asset sale the Company has no
further obligations under the Credit Facility or term loan.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the Company's
disclosure controls and procedures. Based on that evaluation, the CEO and
CFO have concluded that the Company's disclosure controls and procedures
are effective at the reasonable assurance level to timely alert them of
information required to be disclosed by the Company in reports that it
files or submit under the Securities Exchange Act of 1934. During the
quarter ended September 30, 2003 there were no changes in the Company's
internal controls over financial reporting that have materially affected,
or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-14 and 15d-14 implementing Section 302 of the
Sarbanes-Oxley act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-14 and 15d-14 implementing Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to section
906 of the Sarbanes-Oxley Act of 2002
(b) A report on Form 8-K for the event dated July 31, 2003 was filed during the
quarter ended September 30, 2003 pursuant to Item 5 of that form to report an
amendment to the Asset Purchase Agreement between the registrant, certain of its
material operating subsidiaries and Easy Gardener Products Ltd. In addition, a
Form 8-K for the event dated June 26, 2003 was furnished under Item 9 in lieu of
Item 12 to report the issuence of a press release relating to an adjournment of
a special meeting of trust preferred securityholders of U.S. Home & Garden Trust
I.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2003
U.S. Home & Garden Inc.
(Registrant)
By: /s/ Robert Kassel
----------------------------------
President, Chief Executive Officer
By: /s/ Richard Kurz
----------------------------------
Chief Financial Officer
17