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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, 2002
Or
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 001-14015
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
- ------------------- ---------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value; Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 30, 2002 was
approximately $5,082,000.
As of September 30, 2002, 17,752,267 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.
Documents Incorporated By Reference: None
Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information included in
this Report contains statements that are forward-looking, such as statements
relating to plans for our future activities. Such forward-looking information
involves important known and unknown risks and uncertainties that could
significantly affect actual results, performance or achievements in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of us. These risks and uncertainties include,
but are not limited to, those relating to our growth strategy, customer
concentration, outstanding indebtedness, dependence on weather conditions,
seasonality, expansion and other activities of competitors, ability to
successfully integrate acquired companies and product lines, changes in federal
or state environmental laws and the administration of such laws, protection of
trademarks and other proprietary rights, 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
our other filings with the Securities and Exchange Commission. The words
"believe," "expect," "anticipate," "intend" and "plan" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date the
statement was made.
General
We are a leading manufacturer and marketer of a broad range of
consumer lawn and garden products. Our products include weed preventive
landscape fabrics, fertilizer and plant food spikes, decorative landscape
edging, grass and flower seed products, shade cloth and root feeders, which are
sold under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald
Edge(R), Shade Fabric(TM), Ross(R), Tensar(R), Amturf(R) and Landmaster(R). We
believe that we have significant market share and favorable brand-name
recognition in several of our primary product categories. We market our products
through most large national home improvement and mass merchant retailers
("Retail
2
Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware and
TruServe in North America.
We were organized under the laws of the State of California in
August 1990 under the name Natural Earth Technologies, Inc. In January 1992 we
reincorporated under the laws of the State of Delaware and in July 1995 we
changed our name to U.S. Home & Garden Inc. Our lawn and garden operations are
conducted through our subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy
Gardener's subsidiaries and through our subsidiary, Ampro Industries, Inc.
("Ampro"), and our agricultural products operations are conducted through our
subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context
suggests otherwise, references in this Report to "we", "us", "the Company" or
"our" refer to U.S. Home & Garden Inc. and its subsidiaries. Our executive
offices are located at 655 Montgomery Street, Suite 830, San Francisco,
California 94111, and our telephone number is (415) 616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of
relatively small regional manufacturers and distributors whose products were
sold to consumers primarily through local nurseries and garden centers. As the
industry has grown, national home improvement and mass merchant retailers have
replaced many of these local garden centers as the primary retail source for
lawn and garden products. In an effort to improve operating margins and reduce
the number of vendors needed to source high volume lawn and garden products, the
preference among home improvement and mass merchant retailers has shifted
towards single source suppliers that offer broad product lines of consumer
brand-name merchandise and the product support necessary to stimulate consumer
demand and ensure timely and cost effective order fulfillment. Smaller regional
suppliers generally lack the capital and other resources necessary to offer the
variety and number of product lines, the product support and the inventory
stocking and tracking capabilities required by home improvement and mass
merchant retailers.
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Prior Acquisitions
Since August 1992, we have consummated the following eleven (11)
acquisitions of companies or product lines for a total of approximately $111
million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which we acquired in August
1992 for approximately $1.1 million in cash and $1.1 million in promissory
notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock(R), which we acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million
promissory note and two convertible notes each in the principal amount of $1.0
million. Approximately $2.2 million of additional purchase price was contingent
on Easy Gardener meeting certain income requirements. These contingencies were
met and we paid the entire $2.2 million.
o Emerald Products LLC. A manufacturer of decorative landscape edging
which we acquired in August 1995 for $835,000 in cash and a $100,000 promissory
note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products, which we acquired in
August 1996 for 1,000,000 shares of our common stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain product line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which we acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, all of whose assets were acquired in February 1998 for
approximately $16.0 million (plus an additional $1.7 million for excess working
capital and acquisition expenses), of which approximately $5.0 million was based
on the value of certain net assets acquired. In June 2002, we decided to
discontinue the Weed Wizard operations effective September 30, 2002.
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
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acquired in March 1998 for approximately $3.0 million (plus an additional
$600,000 for certain assets and acquisition expenses), of which approximately
$750,000 was based on the value of certain assets acquired.
o Tensar(R) consumer products line of The Tensar Corporation. A line of
lawn and garden specialty fencing, which we acquired from The Tensar Corporation
in May 1998 for approximately $5.4 million in cash plus an additional $1.0
million for inventory.
o Ampro Industries, Inc., a manufacturer and distributor of lawn and
garden products including specialty grass and flower seeds which we acquired in
October 1998 for approximately $24.6 million. An additional $1.0 million was
paid for a non-compete agreement.
o Egarden Inc. Our business-to-business Internet subsidiary was acquired
in June 1999 for approximately $400,000, plus expenses of approximately
$100,000. At the time of acquisition, Egarden's activities were limited to sales
of Internet gardening related products to the end consumer. In fiscal 2001, we
suspended all of the operations relating to Egarden Inc. and sold the remaining
assets during the year ended June 30, 2002.
o Findplants.com., an electronic horticulture catalogue and locater
business-to-business service for commercial growers and wholesalers all of whose
assets were acquired by Egarden Inc. in May 2000 for approximately $537,000 in
cash. We suspended all of the operations relating to Findplants.com and sold the
assets of Findplants.com back to the former owner in September 2001.
Consumer Lawn and Garden Products
The primary consumer lawn and garden products marketed by us to our
Retail Accounts are:
Landscape Fabric. We market different types of landscape fabric in
varying thicknesses and strengths under the trade names WeedBlock(R),
MicroPore(R), Pro WeedBlock(TM), and Landmaster(R). Landscape fabrics allow
water, nutrients and oxygen to filter through to the soil but prevent weed
growth by blocking sunlight. Our primary landscape fabrics are made from
non-woven fabrics which are generally manufactured with extruded polymers,
pressed or vacuum formed into thin sheets having the feel and texture of light
plastics. For the fiscal years ended June 30, 2000, 2001 and 2002, sales of
landscape fabric
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represented approximately 44%, 48% and 51%, respectively, of our consolidated
net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes
deliver plant food nutrients directly to the root of the plant, an alternative
method of maintaining plant health to surface-delivered liquid or solid
fertilizers. Some of our fertilizer spikes have the added feature of containing
an insecticide for the control of unwanted insects.
We market a variety of indoor and outdoor specialty fertilizer and plant food
spikes primarily under the Jobe's(R) tradename, one of the most recognized
brands in the consumer lawn and garden industry. For the years ended June 30,
2000, 2001 and 2002, sales of fertilizer, plant food and insecticide spikes
constituted approximately 15%, 17% and 14%, respectively, of our consolidated
net sales.
Landscape Edging. We market a variety of resin-based decorative
landscape edgings under trade names including Emerald Edge and Terra Cotta
Tiles(TM). Our decorative edgings are used by consumers to define the perimeter
of planting areas with a variety of designs which include stone, log, terra
cotta tiles and picket fences. For the years ended June 30, 2000, 2001 and 2002,
sales of landscape edging constituted approximately 10%, 9% and 10%,
respectively, of our consolidated net sales.
Shade Cloth. We market shade cloth fabrics in a variety of sizes and
colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy or
protection from wind for people, plants and pets. We market shade cloth fabrics
as an exclusive United States retail distributor of a shade cloth manufacturer.
Fertilizers and Root Feeders. We market fertilizers under the Ross
trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a long
steel irrigation tube with a 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.
Lawn and Garden Fencing. We market resin-based fencing for lawns and
gardens. A variety of fencing products are marketed by us and are used by the
consumer for numerous
6
applications including preventing animals from entering a garden or orchard.
Mulch, Fertilizer, Grass and Flower Seed. We distribute specialty
combinations of mulch, fertilizer, grass and flower seeds. Consumers spread this
"ready-to-grow" combination and only need to water regularly for a green lawn or
colorful flower garden.
Other Products. In addition to landscape fabrics, fertilizer, plant
food and insecticide spikes, landscape edging, shade cloth, fertilizer and root
feeders, lawn and garden fencing, and specialty mulch, fertilizer, grass and
flower seed combinations, we also sell complementary lawn and garden products
for the home gardener. The products include a line of animal repellents that are
formulated to deter dogs, cats, deer and rabbits from destroying garden and
landscape environs, a variety of protective plant and tree covers, bird and
animal mesh blocks, protective garden and tree netting to prevent animal damage,
synthetic mulch and fabric pegs.
Agricultural Products. Through Golden West, we manufacture and
distribute certain humic acid-based agricultural products for use on farms and
orchards. Golden West generally sells its products to agricultural distributors,
which in turn market Golden West's products to farms and orchards. The principal
agricultural products manufactured or distributed by us are: Energizer(R), a
formulation of humic acids which, when applied in conjunction with liquid
fertilizers, permits crops to absorb a greater amount of the nutrients in the
fertilizer; Penox(R), a surfactant, or penetrating wetting agent, that contains
humic acid which, when applied in conjunction with herbicides, defoliants and
other agricultural products, increases their effectiveness; and Powergizer(R), a
foliar nutrient, or plant food, containing humic acid which promotes growth and
vigor in many types of crops. Sales of our agricultural products accounted for
less than 1% of our consolidated net sales in the fiscal years ended June 30,
2000, 2001 and 2002.
Conversion, Manufacturing and Supply
Lawn and Garden Products. Except for the materials for our WeedBlock
landscape fabric, which are obtained primarily from a single source, the basic
materials for our consumer lawn and garden products are purchased from a variety
of suppliers.
7
All of such materials are converted, packaged and shipped by us from either our
Waco, Texas facility, our Paris, Kentucky facility or our facility located in
Colorado.
We purchase most of the landscape fabric used to manufacture
WeedBlock from Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls
of various types of landscape fabric from Tredegar for shipment to our Waco,
Texas facility where we size, cut and package the fabric for consumer sale.
Although we have purchased most of our supply from Tredegar for over 10 years
and believe that our relationship with Tredegar is good, Tredegar is free to
terminate its relationship with us at any time and accordingly could market its
fabrics to other companies, including our competitors. Nevertheless, we own the
registered trademark "WeedBlock(R)" and to the extent that we establish
alternative supply arrangements, our rights to market products under the
WeedBlock brand name would continue without restriction.
We manufacture and package our Jobe's fertilizer spikes at our
Paris, Kentucky facility. The raw materials that comprise our indoor fertilizer
spikes are mixed with a binding agent and then passed through an extrusion
process which feeds a continuous strand of fertilizer through a heat-drying
system. The strand is then cut into ready-to-use fertilizer spikes which are
then machine counted and packaged into shelf-ready blisterpacks. Our outdoor
fertilizer spikes are manufactured in a similar manner except rather than
passing through an extrusion process, the outdoor spikes are processed through
molds which shape the spikes into their final form. The outdoor spikes are
packaged in either a foil pouch, bag or box.
The specifications for our landscape edging, shade cloth and root
feeder products and packaging are designed by us and independent design
consultants. The products are then manufactured and packaged by third party
manufacturers according to our specifications.
The material used in our resin-based fencing is manufactured for us
pursuant to open purchase orders. The material is then sized and cut for
consumer sale at our Waco, Texas facility.
The Ampro and Amturf "ready-to-grow" combination mulch, fertilizer
and seed products are produced in Michigan pursuant to a contract manufacturing
agreement. Newsprint is shredded
8
and processed into mulch and then combined with seed and fertilizer. The mixture
is now packaged in bags, boxes, canisters, and clear jugs.
Agricultural Products. We do not own or lease any manufacturing
facilities for our agricultural products. Substantially all of our humic
acid-based agricultural products, Energizer, Penox and Powergizer, are processed
by Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders
placed by us from time to time in the ordinary course of business. Furthermore,
through Western Farm, we have an open purchase order arrangement with an entity
which supplies us with leonardite ore, a source of humic acid used in our
agricultural products.
Customers
Our customers include home improvement centers, mass merchandisers,
hardware stores, nurseries, and garden centers and other retail channels
throughout the United States. Our two largest customers for fiscal 2000, Home
Depot and Lowe's, accounted for approximately 36% and 12%, respectively, of our
consolidated net sales during that period. Our two largest customers for fiscal
2001, Home Depot and Lowe's, accounted for approximately 43% and 14%,
respectively, of our consolidated net sales during such year. Home Depot and
Lowe's, accounted for approximately 49% and 10%, respectively, of our
consolidated net sales during fiscal 2002. Our ten largest customers as a group
accounted for approximately 54%, 80% and 78% of our consolidated net sales
during fiscal 2000, 2001 and 2002, respectively. Sales to such customers are not
governed by any contractual arrangement and are made pursuant to standard
purchase orders. While we believe that relations with our largest customers are
good, the loss of any of these customers could have an adverse effect upon our
results of operations.
Our sales are concentrated in the United States, with international
sales (primarily in Europe and Canada) accounting for approximately 3% of our
net sales for each of fiscal 2000 and 2001. International sales accounted for
approximately 6% of our net sales for fiscal 2002. We are currently attempting
to develop relationships with distributors outside of the United States.
Sales and Marketing
Our selling efforts are managed by two Vice Presidents of Sales. One
specializes in home center customers and the
9
other directs our four regional sales managers responsible for mass merchants,
hardware and all other channels. Because of the service-oriented nature of our
business, the sales managers devote a substantial amount of their time to
servicing and maintaining relationships with our largest customers in addition
to managing the overall sales operations. We also utilize the services of over
30 non-exclusive independent sales organizations. This integrated sales approach
is designed to help achieve sales of all products to all customers.
Our marketing activities are coordinated by our National Marketing
Manager. In addition to designing and developing our distinctive packaging and
overall advertising and promotional activities, the National Marketing Manager
works closely with the sales organization to help develop programs which are
tailored to the strategies of our key Retail Accounts.
We expect that our lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and in-store
consumer promotions in Retail Accounts, hardware stores, nurseries and garden
centers. In addition we believe that a substantial portion of lawn and garden
sales are impulse driven and not overly price sensitive. Therefore we seek to
increase consumer awareness, understanding and brand identification of our
products through our distinctive packaging and point-of-sale displays. Retail
Accounts and our other customers receive our products in packaging that is
easily displayed. The retail product packaging is informative to the end-user
and incorporates attention getting, eye-pleasing color schemes. We also tailor
our displays to the evolving needs of retailers. Because many home improvement
and mass merchant retailers maintain outdoor sales areas for their lawn and
garden products, we utilize waterproof displays for many of our products. In
addition, we meet the specific needs of many of our larger customers by
tailoring the size of our displays to the dimensions requested by such
customers. Our independent sales representatives periodically visit individual
retail outlets to assist Retail Accounts in achieving innovative and optimal use
of our distinctive store displays.
We spent approximately $2.9 million in fiscal 2002 on a combination
of media development, print, radio and television advertising, cooperative
advertising (advertising done in conjunction with retailers), attendance at
trade shows and public relations to promote awareness, understanding and brand
identification of our lawn and garden products.
10
We utilized a substantial portion of our marketing budget for fiscal
2002 on cooperative advertising in conjunction with key retail customers.
Information Systems
We maintain a sophisticated retail data information system which
enables us to provide timely and efficient order fulfillment to our Retail
Accounts and other customers. Internally, our information systems track orders
and deliveries and provide exception reports if product is not delivered on
time. The systems "push" the necessary information to the proper personnel,
allowing us to react quickly to information. Our purchase order process can be
paperless, with most Retail Accounts placing their orders through an electronic
data interchange with us.
In addition, we have implemented the QAD Applications e-business
supply-chain enabled enterprise planning software at our executive offices and
at several of our subsidiaries.
Seasonality
Our sales are seasonal due to the nature of the lawn and garden
business and generally parallels the annual growing season. Our sales and
shipping are typically 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 is changing and stores are replenishing their inventory
when sales are made rather than buying large quantities of inventory in advance
of the selling season. Sales of our agricultural products are also seasonal.
Most shipments occur during the agricultural cultivation period from March
through October.
Inventory and Distribution
In order to meet product demand, we historically kept relatively
large amounts of product inventory on hand during the months of highest demand.
As a result of changes in customer inventory purchasing patterns during fiscal
2002 and improved communications with customers, we improved our ability to meet
customer demands without maintaining excess inventory levels
11
during fiscal 2002. Inventory obsolescence has historically not been a major
issue but could increase in the future. Retail Accounts generally require
delivery within five business days. Orders are normally processed within 48
hours and shipped by common carrier.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. With respect to our sale of consumer lawn and garden
products, we compete with a combination of national and regional companies
including catalog and Internet e-commerce businesses specializing in the
marketing of lawn and garden care products. The Scotts Company, in particular,
has captured a significant and controlling share in a variety of categories as a
result of their 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 many of our
products. Many of our competitors have achieved significant national, regional
and local brand name and product recognition and engage in frequent and
extensive advertising and promotional programs. Many of these companies have
substantially greater financial, technical, marketing and other resources than
us.
Large, dominant manufacturers, which manufacture and sell lawn and
garden products, such as the Scotts Company, and other lawn and garden care
companies have, in the past, manufactured and marketed landscape fabrics.
Currently, few of such competitors compete with us in this product category.
Nevertheless, well-capitalized companies and smaller regional firms may develop
and market landscape fabrics and compete with us for customers who purchase such
products.
Among our competitors in the lawn and garden market for the Jobe's
spike line of fertilizer and insecticide products and the Ampro combination
mulch, seed and fertilizer line of products is the Scotts Company, which markets
competing products under the Miracle-Gro brand. Competition for our agricultural
products consists of other manufacturers of products that are humic acid based
but that utilize formulas that are different from Golden West's. These
competitors include Monterey Chemical Corporation and Custom Formulators, Inc.
We compete with a variety of regional lawn and garden manufacturers in the
markets for landscape edging, shade cloth and root feeders.
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Government Regulation
We are subject to many laws and governmental regulations and changes
in these laws and regulations, or their interpretation by agencies and the
courts, occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may
be marketed, by us as fertilizers or pesticides are subject to an extensive and
frequently evolving statutory and regulatory framework, at both the Federal and
state levels. The distribution and sale of pesticides is subject to regulation
by the U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by
many states in a manner similar to FIFRA. Under FIFRA and similar state laws,
all pesticides must be registered with the EPA and the state and must be
approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on the marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply with
the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
We market certain animal repellent and pesticide products that are
subject to FIFRA and to similar state regulations. We also market certain
fertilizer products that are subject to regulation in some states. We believe
that we are in substantial compliance with material FIFRA and applicable state
regulations regarding our material business operations. However, there can be no
assurance that we will be able to comply with future regulations in every
jurisdiction in which our material business operations are conducted without
substantial cost or interruption of operations. Moreover, there can be no
assurance that future products marketed by us will not also be subject to FIFRA
or to state regulations. If future costs of compliance with regulations
governing pesticides or fertilizers exceed our budget for such items, our
business could be adversely affected. If any of our products are distributed or
marketed in violation of any of these regulations, we could be subject to a
recall of, or a sales limitation placed on, one
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or more of our products, or civil or criminal sanctions, any of which could have
a material adverse effect upon our business.
Environmental Regulation. Our manufacturing operations are subject
to various evolving federal, state and local laws and regulations relating to
the protection of the environment, which laws govern, among other things,
emissions to air, discharges to ground, surface water, and groundwater, and the
generation, handling, storage, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. Easy Gardener
operates two manufacturing facilities and its wholly-owned subsidiary, Weatherly
Group, operates one manufacturing facility. Although we believe that our
material manufacturing facilities are in substantial compliance with applicable
material environmental laws, it is possible that there are material
environmental liabilities of which we are unaware. If the costs of compliance
with the various existing or future environmental laws and regulations including
any penalties which may be assessed for failure to obtain necessary permits,
exceed our budget for such items, our business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Weatherly Group operates one manufacturing facility. Although our Ampro/Weed
Wizard facility was sold by us in April 2001, liability could exist for
remediation of such facility in the future relating to the operations conducted
at that facility while it was owned and operated by us. Moreover, we or our
predecessors have owned or
14
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 Group previously owned a facility that was the subject of
certain soil remediation activities. Although this facility was sold by
Weatherly Group prior to our acquisition of Weatherly, there can be no assurance
that we will not be liable for any previously existing environmental
contamination at the facility. Moreover, although the purchaser of the facility
indemnified Weatherly Group for any environmental liability and the sellers of
Weatherly Group, in turn, indemnified us from such liability, there can be no
assurance that, if required, the indemnifying parties will be able to fulfill
their respective obligations to indemnify us. Furthermore, certain business
operations of our subsidiaries also involve shipping hazardous waste off-site
for disposal. As a result, we could be subject to liability under these
statutes. We could also incur liability under CERCLA or similar state statutes
for any damage caused as a result of the mishandling or release of hazardous
substances owned by us but processed and manufactured by others on our behalf.
As a result, there can be no assurance that the manufacture of the products sold
by us will not subject us to liability pursuant to CERCLA or a similar state
statute. Furthermore, there can be no assurance that Easy Gardener, Weatherly
Group, or Ampro/Weed Wizard will not be subject to liability relating to
manufacturing facilities owned or operated by them currently or in the past.
Other Regulations. We are also subject to various other federal,
state and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants.
Trademarks, Proprietary Information and Patents
We believe that product recognition is an important competitive
factor in the lawn and garden care products industry. Accordingly, in connection
with our marketing activities of our lawn and garden care products, we promote,
and intend to promote, certain trade names and trademarks which are believed to
have value to us.
In connection with our acquisition, through Easy Gardener, of the
assets of Easy Gardener's predecessor in
15
September 1994, we acquired certain trademarks and copyrights used by Easy
Gardener, Inc. in connection with its business including, but not limited to,
the trademarks, WeedBlock(R), Easy Gardener(R), MicroPore(R) and BirdBlock(R).
In connection with its acquisition of Weatherly Group, we acquired certain
patents, as well as certain copyrights and trademarks used in connection with
Weatherly Group's business including, but not limited to, Jobe's(R), Ross(R),
Green Again(R), Gro-Stakes(R), Tree Guard(R) and XP-20(R). We also acquired
certain patents and trademarks when we acquired the assets of Emerald Products,
LLC and also acquired certain trademarks in connection with our purchase of the
Plasti-Chain line of products from Plastic Molded Concepts, Inc. We also
acquired the trademark Landmaster(R) in connection with our acquisition of
substantially all of the assets of Landmaster Products, Inc. In addition, we
acquired the trademarks Polyspun 300(R), Nature Shield(R) and Diamondback(R) in
connection with our acquisition of the Tensar(R) consumer product line. In
connection with the acquisition of the Tensar(R) consumer product line, The
Tensar Corporation granted to us an exclusive royalty-free perpetual license to
use the trademark Tensar(R) in connection with a wide range of polymeric grid,
mesh, net and related products supplied to us by The Tensar Corporation. In
connection with our acquisition of Ampro, we acquired certain trademarks used in
connection with Ampro's business including, but not limited to, Amturf(R). There
can be no assurance that we will apply for any additional trademark or patent
protections relating to our products or that our current trademarks and patents
will be enforceable or adequately protect us from infringement of our
proprietary rights.
Although we believe that the products sold by us do not and will not
infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by us are deemed to infringe upon the patents or proprietary
rights of others, we could be required to pay damages and modify our products or
obtain a license for the manufacture or sale of such products. There can be no
assurance that, in such an event, we would be able to do so in a timely manner,
upon acceptable terms and conditions or at all, and the failure to do any of the
foregoing could have a material adverse effect upon us.
16
Product Liability
We, as a manufacturer of lawn and garden care and pesticide products, may
be exposed to significant product liability claims by consumers. Although we
have obtained product liability insurance coverage for U.S. Home & Garden Inc.,
Golden West, Easy Gardener and Weatherly Group in the aggregate amount of $2.0
million, and for Weed Wizard and Ampro in the aggregate amount of $2.0 million
(with all policies limited to $1.0 million per occurrence), and have obtained
three umbrella policies in the amounts of $15.0 million, $25.0 million and $15.0
million, respectively, there can be no assurance that such insurance will
provide coverage for any claim against us or will be sufficient to cover all
possible liabilities. In the event a successful suit is brought against us,
unavailability or insufficiency of insurance coverage could have a material
adverse effect on us. Moreover, any adverse publicity arising from claims made
against us, even if such claims were not successful, could adversely affect the
reputation and sales of our products.
In June 2002 we decided to discontinue the Weed Wizard product line by
September 30, 2002. During the third quarter of 2000, we discontinued
production, sale and distribution of one of the products in our Weed Wizard
product line. Additionally, in voluntary compliance with the recommendations of
the U.S. Consumer Product Safety Commission (the "CPSC") we instituted a recall
of the product. Accordingly, we recorded a pretax charge of $928,000 ($510,000
after tax or $.03 per basic and diluted share) to provide for recall costs and
inventory write-offs. See Item 3 "Legal Proceedings."
Employees
As of September 30, 2002 we had 182 full-time employees. Of such
employees, 3 are executive officers of U.S. Home & Garden Inc., 61 were engaged
in administration and finance, 25 were engaged in sales and marketing, 23 were
engaged in warehouse, shipping and receiving, and 70 were engaged in production.
None of our employees are covered by collective bargaining agreements. We
believe that we have a good relationship with our employees.
Segment Information
Our primary continuing operations are in one segment - the
manufacture and sale of consumer lawn and garden products.
17
Product and major customer information are disclosed separately above.
Item 2. Properties.
Our executive offices are currently located in San Francisco,
California, in approximately 2,000 square feet of office space for which we pay
$12,121 per month in rent, which includes the costs of utilities and janitorial
services. Our office space is rented pursuant to a lease expiring in February
2004.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which we pay $19,471 per month in rent,
pursuant to a lease agreement that expires in February 2005. Easy Gardener's
facilities contain landscape fabric converters, packaging equipment and
warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing
and warehouse space in Paris, Kentucky for $9,931 per month in rent pursuant to
a lease that expires on June 30, 2006. Weatherly also leases an additional
59,000 feet of warehouse space in Paris, Kentucky for $11,063 per month in rent,
pursuant to a lease agreement that expires in June 2006.
Golden West's offices are located in Merced, California in
approximately 900 square feet of space it leases for $1,399 per month base rent,
with rent increases at a rate of 4% a year. The lease expires in May 2003
subject to our option to renew the lease for an additional one year period.
With respect to the storage, packaging and distribution of certain
of our commercial grade landscape fabric products, Easy Gardener has entered
into a lease pursuant to which we are provided with 60,000 square feet of
warehouse space in Colorado. The lease, which expires on May 31, 2005, provides
for a rental rate of $14,510 per month, which increases 5% per year on June 1 of
each year.
We believe that our current manufacturing and warehouse space is
adequate for our planned future operations.
Item 3. Legal Proceedings
In July 2000, Weed Wizard Acquisition Corp. ("Weed Wizard"), a
subsidiary of Easy Gardener, Inc. commenced an
18
action in the U.S. District Court, Northern District of Georgia, against
A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) its stockholders and
certain of its officers. In this action we allege that the defendants made
certain misrepresentations and omitted to disclose certain facts regarding,
among other things, alleged defects in certain of the Weed Wizard products in
connection with our purchase from defendants in 1998 of substantially all of the
assets of Weed Wizard, Inc. The Complaint seeks to rescind the transaction, or
in the alternative, to recover rescissionary monetary damages, and to recover
compensatory damages. In addition, we are seeking punitive damages.
In October 2000, A.A.B.B., Inc. asserted a counterclaim for breach
of contract against Weed Wizard alleging that it is owed $720,267, plus
interest, representing an adjustment to the purchase price allegedly required to
be made pursuant to the Asset Purchase Agreement in which Weed Wizard acquired
certain A.A.B.B. Inc.'s assets. A.A.B.B., Inc. is also seeking to recover
attorney's fees. We deny any liability on this counterclaim.
In May 2002, the District Court denied the defendants' motion for
summary judgment with respect to Weed Wizard's claim for breach of
representations and warranties, but granted the motion to dismiss the fraud and
rescission claims.
In October 2002, we entered into a settlement agreement with the
defendants. The settlement involves a payment by the defendants of $442,500 to
the U.S. Consumer Products Safety Commission ("CPSC") in payment of the fine
described below, a payment of $307,500 to us and the release to us of the escrow
funds in the amount of approximately $329,000 being held pursuant to the Asset
Purchase Agreement. The settlement agreement will become effective upon the
execution of a settlement agreement with the CPSC, as described below.
In fiscal 2001, we were notified by the staff of the CPSC that the
staff was considering recommending that the CPSC commence an action against Weed
Wizard to obtain a monetary fine from Weed Wizard for the alleged failure of
Weed Wizard to timely disclose to the CPSC, pursuant to the Consumer Products
Safety Act, certain required information concerning a Weed Wizard product
previously distributed by us that was the subject of a voluntary recall during
2000. In July 2002, an action was commenced by the United States government on
behalf of the CPSC
19
against U.S. Home & Garden Inc., Easy Gardener and Weed Wizard, in the U.S.
District Court for the District of Maryland, seeking unspecified civil penalties
for alleged failure to provide the CPSC with timely notice of a defective
product as required under the Consumer Products Safety Act. We denied the
allegations.
In September 2002, the U.S. District Court granted our motion to dismiss
the complaint for lack of jurisdiction in Maryland. The government has advised
us that it intends to commence the action in another jurisdiction. In addition,
the government has advised that it intends to pursue claims against A.A.B.B.,
Inc. and its stockholders for violation of the Consumer Products Safety Act.
We have reached an agreement in principle with the government,
subject to the execution of a formal settlement agreement. The settlement
provides for an aggregate fine of $885,000, against A.A.B.B., INC and us. We
will pay $442,500 of that fine.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of U.S. Home & Garden stockholders was held on
June 26, 2002 at which time the following directors were reappointed to serve
until the next Annual Meeting of Stockholders. Set forth in the following table
is the voting results of the June 26, 2002 Annual Meeting:
Votes For Votes Withheld
---------- --------------
Robert Kassel 12,171,952 2,546,186
Richard Raleigh 12,700,872 2,017,266
Fred Heiden 13,096,537 1,621,601
Brad Holsworth 13,202,972 1,575,166
Jon Schulberg 13,095,437 1,622,701
20
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters.
Our common stock has traded in the over-the-counter market and has
been quoted on the NASDAQ Stock Market since March 26, 1992. The NASDAQ Smallcap
symbol for our common stock is "USHG". The following table sets forth, for the
periods indicated, the high and low sales prices for the common stock, as
reported by NASDAQ.
Year Ended June 30, 2002 High Low
First Quarter $ .98 $ .47
Second Quarter .78 .38
Third Quarter .62 .36
Fourth Quarter .72 .34
Year Ended June 30, 2001
First Quarter $3.38 $1.88
Second Quarter 2.25 1.00
Third Quarter 1.78 1.00
Fourth Quarter 1.09 .63
As of September 30, 2002, the number of holders of record of our
common stock was 184. In addition, there are in excess of 500 beneficial owners
of our common stock whose shares are held in "street name".
We have not paid any cash dividends on our common stock to date and
do not expect to declare or pay any cash or stock dividends in the foreseeable
future. The lending agreements between us and our primary lending institutions
prohibit us from paying dividends without the lenders' consent.
The following table sets forth certain information as of June 30,
2002 regarding outstanding options, warrants and other rights to purchase Common
Stock that were outstanding on June 30, 2002.
21
- --------------------------------------------------------------------------------
(a) (b) (c)
- --------------------------------------------------------------------------------
Plan Category Number of Weighted-average Number of
securities to exercise price securities
be issued of outstanding remaining for
upon exercise options, future issuance
of warrants and under equity
outstanding rights compensation plans
options, (excluding
warrants and securities
rights reflected in column
(a))
- --------------------------------------------------------------------------------
Equity 3,060,000 $2.35 575,000
compensation
plans approved by
security holders
- --------------------------------------------------------------------------------
Equity 3,119,000 (1) $1.55 --
compensation
plans not
approved by
security holders
- --------------------------------------------------------------------------------
Total 6,179,000 $1.95 575,000
- --------------------------------------------------------------------------------
(1) Represents the aggregate number of shares of common stock issuable upon
exercise of individual arrangements with option and warrant holders. These
options and warrants expire at various dates between 2005 and 2009 and
contain anti-dilution provisions providing for adjustments of the exercise
price under certain circumstances.
22
Item 6. Selected Consolidated Financial Data (in thousands, except per
share data).
The following selected consolidated financial data at and for the
years ended June 30, 1998, 1999, 2000, 2001 and 2002 has been derived from our
audited consolidated financial statements. Such information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto appearing elsewhere in this Report. Differences between amounts
included below and amounts previously reported are due to the reclassification
of discontinued operations.
Statement of Operations Data
Year Ended June 30,
----------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------
Net sales ......................................... $ 63,482 $ 85,024 $ 86,919 $ 78,863 78,947
Cost of sales ..................................... 29,291 42,322 47,802 44,065 43,358
----------------------------------------------------------------------------
Gross profit ...................................... 34,191 42,702 39,117 34,798 35,589
Selling, shipping, general and administrative
expenses .......................................... 22,132 31,683 29,554 30,638 27,940
Restructuring charges (1) ......................... -- -- -- 2,860 --
----------------------------------------------------------------------------
Income from operations ............................ 12,059 11,019 9,563 1,300 7,649
Other expense, net ................................ (3,077) (6,883) (6,692) (7,335) (7,291)
Income tax (expense) benefit ...................... (3,057) (1,643) (1,213) 1,406 (228)
----------------------------------------------------------------------------
Income (loss) from continuing operations before
extraordinary gain and cumulative effect of a
change in accounting principle .................... 5,925 2,493 1,658 (4,629) 130
Gain (loss) from discontinued operations,
net of tax and minority interest (2) .............. 1,051 (444) (3,227) (16,253) (1,760)
Gain (loss) on disposal of discontinued
operations, net of tax and minority interest (2) .. -- -- -- (4,551) 20
Extraordinary gain (expense), net of tax (3) ...... (1,450) -- 1,224 4 --
----------------------------------------------------------------------------
Income (loss) before cumulative effect of a
change in accounting principle .................... 5,526 2,049 (345) (25,429) (1,610)
Cumulative effect of a change in accounting
principle (4) ..................................... -- -- -- -- (9,882)
----------------------------------------------------------------------------
Net income (loss) ................................. $ 5,526 $ 2,049 $ (345) $ (25,429) $ (11,492)
============================================================================
Income (loss) from continuing operations per
common share before extraordinary gain and
cumulative effect of a change in accounting
principle:
Basic ............................................. $ .33 $ .13 $ .09 $ (.26) $ .01
Dilutive .......................................... $ .26 $ .11 $ .08 $ (.26) $ .01
Net income (loss) per share:
Basic ............................................. $ .31 $ .10 $ (.02) $ (1.40) $ (.66)
Dilutive .......................................... $ .24 $ .09 $ (.02) $ (1.40) $ (.64)
Weighted average number of common and
common equivalent shares outstanding:
Basic ............................................. 17,776,000 19,621,000 19,031,000 18,181,000 17,555,000
Dilutive .......................................... 22,808,000 23,595,000 20,760,000 18,181,000 18,024,000
23
Balance Sheet Data:
June 30,
---------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Working capital ......... $ 46,743 $ 32,874 $ 25,151 $ 4,867 $ 2,728
Intangible assets, net .. 63,395 82,109 67,839 65,892 56,259
Total assets ............ 126,813 138,263 138,545 109,463 99,365
Short-term debt ......... -- -- 3,125 21,670 22,748
Long-term debt .......... 63,250 78,750 58,338 56,951 56,951
Total liabilities ....... 75,214 91,779 89,331 90,256 92,383
Stockholders' equity .... 51,599 46,484 45,103 17,968 6,982
(1) Amount represents restructuring charges relating to the closing and sale
of the Ampro facility. See further discussion at Note 13 to the
Consolidated Financial Statements included in Part II, Item 8.
(2) Amounts represent operations and estimated gain (loss) on disposal of the
Weed Wizard and Egarden subsidiaries. See further discussion at Notes 2
and 11 to the Consolidated Financial Statements included in Part II, Item
8.
(3) Amounts represent extraordinary gain (loss) incurred on the repurchase of
mandatorily redeemable trust preferred securities of U.S. Home & Garden
Trust I. See further discussion at Note 15 to the Consolidated Financial
Statements included in Part II, Item 8.
(4) Amount represents the cumulative effect of a change in accounting
principle related to goodwill. See further discussion at Note 6 to the
Consolidated Financial Statements included in Part II, Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
We manufacture and market a broad range of brand-name consumer lawn
and garden products through our wholly-owned subsidiaries, Ampro, Easy Gardener
and Golden West, and through Easy Gardener's wholly-owned subsidiaries,
Weatherly and Weed Wizard. In June 2002, we announced the discontinuation of the
Weed Wizard operations effective September 30, 2002. Since 1992, we have
consummated eleven acquisitions of complementary lawn and garden companies and
product lines for an aggregate consideration of approximately $111 million in
cash, notes and equity securities. As a result of such acquisitions, we
recognized a significant amount of goodwill which, in the
24
aggregate, was approximately $49.9 million as of June 30, 2002. Effective July
1, 2001 we adopted Statement of Financial Accounting Standards (SFAS) No. 142.
Accordingly, no amortization of goodwill was reflected in the financial
statements for the fiscal year ended June 30, 2002 compared to $2.5 million for
the years ended June 30, 2001 and 2000. We completed the transitional goodwill
impairment test during fiscal 2002 and recorded an impairment loss of $9.9
million which relates primarily to the Ampro operations. This loss is reflected
as a cumulative effect of a change in accounting principle. See also "Summary of
Accounting Policies - Intangible Assets" and Note 6 to the Consolidated
Financial Statements included in Part II, Item 8.
Our results of operations for the fiscal year ended June 30, 2002
were adversely affected by the transitional goodwill impairment test that
resulted in the recording of an impairment loss of $9.9 million. Our results
were also adversely affected by the discontinued Weed Wizard operations that
generated a loss of $1.8 million for the year. Results were also impacted in the
third and fourth quarters by changes in the buying pattern of certain of our key
customers who carried less inventory than in prior years and replenished their
lower inventory levels as sales were made by them.
Our results of operations for the fiscal year ended June 30, 2001
were adversely affected by losses attributable to the discontinued operations of
Weed Wizard and Egarden Inc., of $16.3 million including the impairment of
goodwill of Weed Wizard of $10.8 million, and the estimated net loss on disposal
of Egarden assets of $4.6 million. Our results were also adversely affected by
the restructuring loss from the closure of the Ampro Industries, Inc. facility
in Michigan, an overall soft economy and prolonged periods of inclement weather
in many portions of the United States during the late spring and early summer
which negatively impacted the lawn and garden industry.
There continues to be a consolidation in the lawn and garden industry
which creates, over time, a downward pressure on operating margins.
Results of Operations
The following table sets forth for the periods indicated certain
selected income data as a percentage of net sales:
25
Percentages of Net Sales
------------------------
Year Ended June 30,
------------------------
2000 2001 2002
---- ----- -----
Net sales .............................................. 100% 100% 100%
Cost of sales .......................................... 55.0 55.9 54.9
---- ----- -----
Gross profit ........................................... 45.0 44.1 45.1
Selling and shipping expenses .......................... 20.0 20.8 23.2
General and administrative expenses .................... 14.0 18.1 12.2
Restructuring charges .................................. -- 3.6 --
---- ----- -----
Income from operations ................................. 11.0 1.6 9.7
Gain on disposal of property and equipment ............. .6 -- --
Interest expense, net .................................. (8.3) (9.3) (9.3)
Income tax (expense) benefit ........................... (1.4) 1.8 (.3)
Loss from discontinued operations, net ................. (3.7) (20.6) (2.2)
Loss on disposal of discontinued operations, net ....... -- (5.7) --
Extraordinary gain, net ................................ 1.4 -- --
Cumulative effect of a change in accounting principle .. -- -- (12.5)
---- ----- -----
Net loss ............................................... (0.4)% (32.2)% (14.6)%
==== ===== =====
Fiscal Year Ended June 30, 2002 Compared to Fiscal Year Ended June 30, 2001
Net sales. Net sales remained consistent at $78.9 million during the
fiscal years ended June 30, 2002 and 2001. There were no significant changes in
sales prices or volume.
Gross profit. Gross profit increased by $0.8 million, or 2.3%, to
$35.6 million for the fiscal year ended June 30, 2002 from $34.8 million during
the comparable period in 2001. Gross profit as a percentage of net sales
increased to 45.1% during the fiscal year ended June 30, 2002 from 44.1% during
the comparable period in 2001. This increase in gross profit is due to a
decrease in cost of sales as a result of the restructuring and closing of the
Bradley, Michigan facility in late 2001 of approximately $0.3 million, a
reduction in certain raw material costs of approximately $0.3 million, and
increased operating efficiencies of approximately $0.2 million.
Selling and shipping expenses. Selling and shipping expenses
increased $1.9 million, or 11.7% to $18.3 million during the fiscal year ended
June 30, 2002 from $16.4 million during the comparable period in 2001. Selling
and shipping expenses as a percentage of net sales increased to 23.2% during the
fiscal year ended June 30, 2002 from 20.8% during the comparable period in 2001.
This increase in expense and percentage was primarily a result of increased out
bound freight
26
costs resulting from using required carriers stipulated by a significant
customer and a reduction in the average size of shipments.
General and administrative expenses. General and administrative
expenses decreased $4.6 million or 32.4% to $9.6 million during the fiscal year
ended June 30, 2002 from $14.2 million during the comparable period in 2001. As
a percentage of net sales, general and administrative expenses decreased to
12.2% during the fiscal year ended June 30, 2002 from 18.1% during the
comparable period in 2001. This decrease is primarily a result of the adoption
of SFAS No. 142 effective July 1, 2002 that requires, among other things,
companies to no longer amortize goodwill, but instead test goodwill for
impairment at least annually. Goodwill amortization included in general and
administrative expenses for the year ended June 30, 2001, totaled approximately
$2.5 million. This decrease is also due to the restructuring of Ampro and
closing of its Bradley, Michigan facility and the related reduction of costs.
The savings related to the closing of the Bradley, Michigan facility totaled
approximately $1.6 million. The cost reductions were offset in part by a $0.5
million write off of K-Mart receivables when they declared bankruptcy. We
continue to sell to K-mart under secured financing. K-Mart's receivable balance
at June 30, 2002 was $0.7 million, all of which has subsequently been collected.
Restructuring charges. There were no restructuring costs incurred in
fiscal 2002. In 2001, the Company recorded restructuring charges of $2.9 million
relating to the closing and sale of the Ampro Industries, Inc. facility in
Michigan. The Company continues to sell many of the products that were being
manufactured at Ampro's Michigan facility through a contract manufacturing
agreement. The Company recognized approximately $1.7 million of expenses and
losses relating to the closing and sale of property and equipment of the Ampro
facility and $1.2 million for the termination benefits to be paid to all 60
employees involved with the facility. All severance payments as a result of the
restructuring were made by June 30, 2002. No adjustments were made to the
liability recorded for severance payments during the year ended June 30, 2002.
Income from operations. Income from operations increased by $6.3
million, to $7.6 million during the fiscal year ended June 30, 2002 compared to
$1.3 million for the comparable period in 2001. The increase in income from
27
operations for the 2002 period is primarily attributable to the matters
described above, the most significant matter being the reduction in general and
administrative expenses. As a percentage of net sales, income from operations
increased to 9.7% for the fiscal year ended June 30, 2002 from 1.6% during the
comparable period in 2001.
Net interest expense. Net interest expense remained consistent at
$7.3 million during the fiscal years ended June 30, 2002 and 2001. Borrowings
under our revolving credit facilities decreased and interest rates on the
revolving credit facility also decreased, but were offset by the increased cost
of subordinated debt.
Income tax benefit (expense). Income tax expense was $0.2 million
during the fiscal year ended June 30, 2002 compared to an income tax benefit of
$1.4 million during the comparable period in 2001. This results from having
pre-tax income before discontinued operations of $.4 million in fiscal 2002 and
a pre-tax loss of $6.0 million in the comparable period in 2001. See Note 14 to
the Consolidated Financial Statements included in Part II, Item 8.
Discontinued operations. In June 2002, we announced we were
discontinuing the Weed Wizard line of products effective September 30, 2002 due
to continued operating losses, the loss of sales due to the product recall in
fiscal 2000, and the current and future prospects for the operation.
In fiscal 2002, we recorded an estimated net loss on disposal of
Weed Wizard of $1.1 million related to the write-down of inventory and
long-lived assets. We plan to dispose of the assets and liabilities of Weed
Wizard, including amounts written off, through a sale of the assets and
liquidation of the liabilities during fiscal 2003. The remaining assets at June
30, 2002 consist of accounts receivable of $0.4 million, inventory of $0.3
million, other current assets of $0.3 million, and net property and equipment of
$0.1 million. Remaining liabilities include accounts payable and accrued
expenses of $0.3 million. In addition to the estimated loss on disposal in
fiscal 2002, we had a net loss from the operations of Weed Wizard of $1.8
million.
In June 2001 we wrote off the net goodwill balance related to the
Weed Wizard product line. As a result of the decision to discontinue the
operations in June 2002, we have
28
reflected this loss on impairment of goodwill of $10.8 million and the loss from
operations of $.8 million for the fiscal year ended June 30, 2001, net of income
taxes of $2.5 million, as discontinued operations.
Also, in June 2001, we announced that we were discontinuing our
e-commerce initiative, which we were conducting through our subsidiary, Egarden
Inc., effective June 30, 2001. All of the assets of Egarden, including amounts
previously written off, were sold during the fiscal year ended June 30, 2002. We
recorded a net gain on the disposal of Egarden of $1.1 million, primarily as a
result of the elimination of minority interest of $1.2 million as the subsidiary
was liquidated.
We recorded a net loss on disposal of Egarden of $4.6 million, net
of minority interest of $1.1 million in 2001. This included the write-off of all
long-lived assets of $5.2 million and $0.5 million of restructuring expense
related to the termination of all 39 Egarden employees. All severance payments
have been made by June 30, 2002. No adjustments were made to the liability
recorded for severance payments during the year ended June 30, 2002. The
remaining assets at June 30, 2002 consist of cash of $62,000 and the remaining
liabilities consist of accrued expenses of $16,000. In addition to the net loss
on disposal in 2001, we had a net loss from the operations of Egarden of $7.1
million, net of minority interest of $1.8 million.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, our consolidated financial statements and notes have been
restated for all periods presented to reflect the discontinued components. The
assets and liabilities of the discontinued components have been classified as
"Held for Sale" and the net operations and net cash flows have been reported as
"Discontinued Operations". See Note 2 to the Consolidated Financial Statements
included in Part II, Item 8.
Extraordinary gain from early extinguishment of debt. There was no
extraordinary gain from early extinguishment of debt for the fiscal year ended
June 30, 2002 compared to a $4,000 gain during the fiscal year ended June 30,
2001. In 2001 we repurchased 1,200 shares of the mandatorily redeemable trust
preferred securities of U.S. Home & Garden Trust I. See Note 15 to the
Consolidated Financial Statements included in Part II, Item 8.
29
Cumulative effect of a change in accounting principle. We recorded a
cumulative effect of a change in accounting principle for the fiscal year ended
June 30, 2002 as a result of the completion of the transitional goodwill
impairment test in conjunction with the adoption of SFAS No. 142. The recording
of an impairment loss of $9.9 million, which is primarily related to the Ampro
operations, is reflected as a cumulative effect of a change in accounting
principle. See Note 6 to the Consolidated Financial Statements included in Part
II, Item 8.
Net loss. Net loss decreased by $13.9 million to a net loss of $11.5
million during the fiscal year ended June 30, 2002 from a net loss of $25.4
million during the comparable period in 2001.
The diluted net loss per common share decreased $.76 to a net loss
of $.64 per share when compared to the diluted net loss per common share of
$1.40 during the comparable period in 2001. The decrease in net loss per common
share is primarily attributable to the unusual events in fiscal 2001 which were
the impairment of goodwill of one of its subsidiaries, Weed Wizard, Inc., the
restructuring charge related to the closure of the Ampro Industries, Inc.
facility in Michigan, and the discontinuance of its business-to-business
e-commerce subsidiary, Egarden Inc. There were also slightly fewer weighted
average common and common equivalent shares outstanding during the year ended
June 30, 2002 compared to the comparable period in the prior year.
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Net sales. Net sales decreased by $8.1 million, or 9.3%, to $78.9
million during the fiscal year ended June 30, 2001 from $86.9 million during the
comparable period in 2000. The decrease in sales was primarily a result of poor
spring weather, a generally slower economic environment and major customers
moving to just-in-time inventory management programs.
Gross profit. Gross profit decreased by $4.3 million, or 11.0%, to
$34.8 million for the fiscal year ended June 30, 2001 from $39.1 million during
the comparable period in 2000. Gross profit as a percentage of net sales
decreased to 44.1% during the fiscal year ended June 30, 2001 from 45.0% during
the comparable period in 2000. This decrease was due primarily to delayed order
placement by the major retailers, an overall soft
30
economy and poor weather in our key markets in the third quarter.
Selling and shipping expenses. Selling and shipping expenses
decreased $1.0 million, or 5.9% to $16.4 million during the fiscal year ended
June 30, 2001 from $17.4 million during the comparable period in 2000. This
decrease in expense was primarily a result of the decrease in net sales offset
in part by increased freight costs. Selling and shipping expenses as a
percentage of net sales increased to 20.8% during the fiscal year ended June 30,
2001 from 20.0% during the comparable period in 2000.
General and administrative expenses. General and administrative
expenses increased $2.1 million or 17.3% to $14.2 million during the fiscal year
ended June 30, 2001 from $12.1 million during the comparable period in 2000.
This increase is primarily due to a write off of certain receivables from
customers of $.6 million, a general increase in expense levels, and termination
benefits for certain former employees in fiscal 2001. As a percentage of net
sales, general and administrative expenses increased to 18.1% during the fiscal
year ended June 30, 2001 from 14.0% during the comparable period in 2000.
Restructuring charges. In 2001, we recorded restructuring charges of
$2.9 million relating to the closing and sale of the Ampro Industries, Inc.
facility in Michigan. The Company continues to sell products that were being
manufactured at Ampro's Michigan facility. The Company recognized approximately
$1.7 million of expenses relating to the sale of property and equipment of the
Ampro facility and $1.2 million for the termination benefits to be paid to all
60 employees involved with the facility. Approximately $0.2 million was paid out
in termination benefits prior to June 30, 2001, as a result of restructuring.
The restructuring was completed in October 2001.
Income from operations. Income from operations decreased by $8.3
million, to $1.3 million during the fiscal year ended June 30, 2001 compared to
$9.6 million for the comparable period in 2000. The decrease in income from
operations for the 2001 period is primarily attributable to the restructuring
charges related to the closure of our Ampro Industries, Inc. facility in
Michigan, delayed order placement by the major retailers, an overall soft
economy and poor weather in the third quarter. As a percentage of net sales,
income from
31
operations decreased to 1.6% for the fiscal year ended June 30, 2001 from 11.0%
during the comparable period in 2000.
Net interest expense. Net interest expense increased $0.1 million,
or 1% to $7.3 million during the fiscal year ended June 30, 2001, from $7.2
million during the comparable period in 2000. The increase in net interest
expense is primarily related to the decrease in interest income from the prior
year.
Income tax benefit (expense). Income tax benefit was $1.4 million
during the fiscal year ended June 30, 2001 compared to income tax expense of
$1.2 million during the comparable period in 2000, primarily due to the loss
from continuing operations in the fiscal year ended June 30, 2001.
Discontinued operations. In June 2002, we announced that we were
discontinuing the Weed Wizard line of products due to continued operating
losses, the loss of sales due to the product recall in fiscal 2000, and the
current and future prospects for the operation. In June 2001, based on an
evaluation of asset impairment under SFAS No. 121 due to operating losses, the
product recall in the prior year, and the unsuccessful product launch of the
replacement product through a complete sales season, we wrote off the net
goodwill balance related to the Weed Wizard line of products by recording an
impairment charge to write down the goodwill to its estimated terminal value. As
a result of the decision to discontinue the operations in June 2002, we have
reflected this loss on impairment of goodwill of $10.8 million and the loss from
operations of $0.8 million for the fiscal year ended June 30, 2001, net of
income taxes of $2.5 million, as discontinued operations.
In June 2001, we announced that we were discontinuing our e-commerce
initiative, which we were conducting through our subsidiary, Egarden Inc.,
effective June 30, 2001.
We recorded a net loss on disposal of Egarden of $4.6 million, net
of minority interest of $1.1 million. This included the write-off of all
long-lived assets of $5.2 million and $0.5 million of restructuring expense
related to the termination of all 39 Egarden employees. The remaining assets at
June 30, 2001 consisted of cash of $900,000 and prepaid expenses of $10,000 and
the remaining liabilities consisted of accrued expenses of $445,000 and a
capital lease obligation of $0.3 million. Minority interest in equity of
affiliate was $1.2
32
million at June 30, 2001. In addition to the net loss on disposal in 2001, we
had a net loss from the operations of Egarden of $7.10 million net of minority
interest of $1.8 million.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, our consolidated financial statements and notes have been
restated for all periods presented to reflect the discontinued components. The
assets and liabilities of the discontinued components have been classified as
"Held for Sale" and the net operations and net cash flows have been reported as
"Discontinued Operations". See Note 2 to the Consolidated Financial Statements
included in Part II, Item 8.
Extraordinary gain from early extinguishment of debt. Extraordinary
gain from early extinguishment of debt decreased to $4,000 during the fiscal
year ended June 30, 2001 from $1.2 million for the comparable period in 2000
(net of tax of $3,000 and $900,000, respectively). In 2001 we repurchased 1,200
shares of the mandatorily redeemable trust preferred securities of U.S. Home &
Garden Trust I compared to 250,781 shares in 2000. See Note 15 to the
Consolidated Financial Statements included in Part II, Item 8.
Net loss. Net loss increased by $25.1 million to a net loss of $25.4
million during the fiscal year ended June 30, 2001 from a net loss of $0.3
million during the comparable period in 2000. Net loss per fully diluted common
share increased $1.38 to a net loss of $1.40 per share when compared to net loss
per common share of $.02 during the comparable period in 2000. The increase in
net loss per common share is primarily attributable to the impairment of
goodwill of Weed Wizard, Inc., the restructuring charge related to the closure
of the Ampro Industries, Inc. facility in Michigan, the discontinuance of
operations of Egarden Inc., reduced sales due to delayed order placement by the
major retailers, an overall soft economy and poor weather in the third quarter.
There were fewer diluted weighted average common and common equivalent shares
outstanding during the year ended June 30, 2001 compared to the comparable
period in the prior year due to the repurchase of common stock.
Quarterly Results of Operations and Seasonality
Our sales are seasonal due to the nature of the lawn and garden
business and generally parallels the annual growing season. Our sales have
traditionally been most active from late March through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are
33
increasing their inventory of lawn and garden products. The buying pattern of
retailers, including our 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 by mid-summer.
Sales of our agricultural products, which were not material for
fiscal 2002, are also seasonal. Most shipments occur during the period from
March through October.
Related Party Transactions
See discussion regarding related party transactions in Item 13 and Note 7 to the
Consolidated Financial Statements included in Part II, Item 8.
34
Set forth below is certain unaudited quarterly financial information:
Quarter ended
(in thousands, except percentages and per share data)
----------------------------------------------------------------------------------------------
September December March June September December March June
30, 31, 31, 30, 30, 31, 31, 30,
2000 2000 2001 2001 2001 2001 2002 2002
--------- -------- ------- -------- --------- -------- ------- -------
Net sales ........................ $ 12,548 $11,303 $25,768 $ 29,244 $ 13,483 $11,762 $23,913 $29,789
Cost of sales .................... 8,379 7,123 14,124 14,439 7,943 7,010 12,826 15,579
==============================================================================================
Gross profit ..................... 4,169 4,180 11,644 14,805 5,540 4,752 11,087 14,210
Selling, shipping, general and
administrative expenses ........ 6,104 5,725 7,909 10,900 6,326 5,848 7,455 8,311
Restructuring charges ............ -- -- 800 2,060 -- -- -- --
==============================================================================================
Income (loss) from operations .... (1,935) (1,545) 2,935 1,845 (786) (1,096) 3,632 5,899
Interest income .................. 29 35 36 49 43 27 12 1
Interest expense ................. (1,625) (1,764) (1,893) (2,202) (1,810) (1,766) (1,822) (1,976)
==============================================================================================
Income (loss) from continuing
operations before income taxes,
extraordinary gain and
cumulative effect of a change
in accounting principle .......... (3,531) (3,274) 1,078 (308) (2,553) (2,835) 1,822 3,924
Income tax benefit (expense) ..... 1,728 1,503 (1,116) (709) -- -- -- (228)
Income (loss) from discontinued
operations, net of taxes and
minority interest ................ (952) (1,226) (1,733) (12,342) (268) (490) 227 (1,229)
Gain (loss) on disposal of
discontinued operations, net
of taxes and minority interest ... -- -- -- (4,551) -- -- -- 20
Extraordinary gain, net of
taxes ............................ 4 -- -- -- -- -- -- --
==============================================================================================
Income (loss) before
cumulative effect of a
change in accounting principle ... (2,751) (2,997) (1,771) (17,910) (2,821) (3,325) 2,049 2,487
Cumulative effect of a
change in accounting principle ... -- -- -- -- (9,882) -- -- --
==============================================================================================
Net income (loss) ................ $ (2,751) $(2,997) $(1,771) $(17,910) $(12,703) $(3,325) $ 2,049 $ 2,487
==============================================================================================
Diluted net income (loss)
per share(1) ..................... $ (0.15) $ (0.16) (0.10) $ (1.02) $ (0.72) $ (0.19) $ 0.11 $ 0.14
Weighted average common and
common equivalent shares
outstanding(1) ................... 18,807 18,313 17,638 17,628 17,543 17,543 17,915 17,929
==============================================================================================
Net sales ........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .................... 66.8% 63.0% 54.8% 49.4% 58.9% 59.6% 53.6% 52.3%
==============================================================================================
Gross profit ..................... 33.2% 37.0% 45.2% 50.6% 41.1% 40.4% 46.4% 47.7%
Selling, shipping, general and
administrative ................. 48.6% 50.7% 30.7% 37.3% 46.9% 49.7% 31.2% 27.9%
Restructuring charges ............ -- -- 3.1% 7.0% -- -- -- --
==============================================================================================
Income (loss) from operations .... (15.4%) (13.7%) 11.4% 6.3% (5.8%) (9.3%) 15.2% 19.8%
Interest income .................. 0.2% 0.3% 0.1% 0.2% 0.3% 0.2% -- --
Interest expense ................. (12.9%) (15.6%) (7.3%) (7.5%) (13.4%) (15.0%) (7.6%) (6.6%)
==============================================================================================
Income (loss) from continuing
operations before income taxes,
extraordinary gain and
cumulative effect of a change
in accounting principle .......... (28.1%) (29.0%) 4.2% (1.0%) (18.9%) (24.1%) 7.6% 13.2%
Income tax benefit (expense) ..... 13.8% 13.3% (4.3%) (2.4%) -- -- -- (.7%)
Income (loss) from discontinued
operations, net of tax and
minority interest ................ (7.6%) (10.8%) (6.7%) (42.2%) (2.0%) (4.2%) 1.0% (4.1%)
Gain (loss) on disposal of
discontinued operations, net
of tax and minority interest ..... -- -- -- (15.6%) -- -- -- --
Extraordinary gain, net of
taxes ............................ -- -- -- -- -- -- -- --
==============================================================================================
Income (loss) before
cumulative effect of a
change in accounting
principle ........................ (21.9%) (26.5%) (6.8%) (61.2%) (20.9%) (28.3%) 8.6% 8.4%
Cumulative effect of a
change in accounting
principle ........................ -- -- -- -- (73.3%) -- -- --
==============================================================================================
Net income (loss) ................ (21.9%) (26.5%) (6.8%) (61.2%) (94.2%) (28.3%) 8.6% 8.4%
==============================================================================================
- ----------
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using
the treasury stock method except for quarters reporting a net loss from
continuing operations. Such quarters only reflect issued and outstanding
shares of our common stock in the weighted average shares outstanding.
35
Differences between amounts included above and amounts previously reported
on Form 10-Q are due to the reclassification of discontinued operations as
described in Note 2 to the Consolidated Financial Statements included in Part
II, Item 8, and the cumulative effect of a change in accounting principle of
$9.9 million, related to the loss on impairment of goodwill recorded as of July
1, 2001. See Note 6 to the Consolidated Financial Statements included in Part
II, Item 8.
The fourth quarter of 2001 includes a pre-tax charge of $10.8 million
related to the loss on impairment of goodwill and a loss on disposal of
discontinued operations of $4.6 million. See Note 2 to the Consolidated
Financial Statements included in Part II, Item 8.
The fourth quarter of 2002 includes the write off of minority interest of
$1.1 million, net of an estimated loss on disposal of discontinued operations of
$1.1 million. See Note 2 to the Consolidated Financial Statements included in
Part II, Item 8.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through
cash generated by operations, net proceeds from our private and public sales of
securities and borrowings from lending institutions.
At June 30, 2002, we had consolidated cash and short-term
investments totaling $0.2 million and working capital of $3.0 million. Under our
new credit facility with PNC Bank described below, substantially all cash
balances are automatically used to reduce outstanding borrowings. At June 30,
2001, we had consolidated cash and short-term investments totaling $2.7 million,
and working capital of $4.9 million. During fiscal 2000, the principal source of
working capital was proceeds on the new credit facilities discussed below.
Net cash provided by operating activities for fiscal 2002 of $0.2
million consisted primarily of net income from continuing operations before
extraordinary item and cumulative effect of a change in accounting principle of
$0.1 million,
36
adjusted for non-cash expenses of $3.5 million, an increase in accounts payable
and accruals of $2.4 million and a decrease in inventory and other assets of
$1.5 million, largely offset by an increase in accounts receivable of $7.3
million. The increase in accounts payable and accruals is primarily due to
extended credit terms with many material vendors. The decrease in inventory and
other assets is primarily due to efforts to reduce inventory levels in
conjunction with customer purchasing patterns. The $7.3 million increase in
accounts receivable for fiscal 2002, substantially all of which has been
collected subsequent to June 30, 2002, is primarily due to extended payment
terms from 30 to 60 days with a major customer.
Net cash used in investing activities for fiscal 2002 of $1.3
million is primarily due to capital purchases of equipment and intangible
assets.
Net cash provided by financing activities for fiscal 2002 of $0.3
million is primarily related to the proceeds received as a result of our new
credit facilities described below offset by repayment of existing debt and
deferred finance costs of $1.1 million.
On November 15, 2001, Easy Gardener entered into a credit agreement
with PNC Bank (the "PNC Credit Agreement") which, as amended, provides for up to
$25,000,000 in senior secured financing until November 2004. The PNC Credit
Agreement provides for a $23,000,000 revolving credit facility and a $2.0
million term loan. The term loan balance outstanding at June 30, 2002 of
$1,767,000 is included in the current portion of long-term debt due to the
violation of certain covenants contained in the PNC Agreement. Interest on
borrowings is calculated at variable annual rates based on either the bank's
prime rate plus an applicable marginal rate or the federal funds rate plus an
applicable marginal rate (effectively 5.25% on the revolving credit facility and
5.75% on the term loan at June 30, 2002). Borrowings on the revolving credit
facility are limited based on eligible borrowing bases, effectively $19.6
million at June 30, 2002. The bank has a first priority perfected security
interest in substantially all of our consolidated assets and we have guaranteed
Easy Gardener's obligations to the bank. We are subject to certain fees and
restrictions in conjunction with the financing. At June 30, 2002, we had
approximately $15.0 million of borrowings outstanding under the PNC revolving
credit facility.
37
At June 30, 2002, Easy Gardener also had borrowings outstanding of
$5.9 million, net of discounts of $.9 million, with an effective interest rate
of 18.4% pursuant to certain senior subordinated secured notes due in November
2007 that were issued pursuant to a Note and Warrant Purchase Guaranty and
Security Agreement (the "Note Agreement"). Interest is charged on the face of
the notes at 16% and 14% per annum, payable monthly. The issue price of the 16%
notes was 90% of the face amount of the notes resulting in a discount of $0.6
million. The notes are secured by a second lien on all of our assets and rank
junior to the senior financing provided by PNC bank. Easy Gardener's obligations
under the notes are guaranteed by U.S. Home & Garden Inc. In connection with
this financing, we issued to the purchasers of the notes warrants to purchase up
to 3.75% of our fully diluted common stock and granted to the purchasers an
option to purchase from us certain Trust Preferred Securities which we own,
which resulted in a discount of $0.4 million. Under the terms of the agreements
with the noteholders and certain of their affiliates, we are also required to
pay certain consulting and other fees and are subject to certain covenants,
including the covenants set forth below.
Under both the PNC Credit Agreement and the Note Agreement, we and
our subsidiaries are required, among other things, to comply with certain non
financial covenants including, among others, those which limit our ability to
incur additional indebtedness, create liens or guaranty obligations, dispose of
assets, pay cash dividends, make cash redemptions of our securities or
repurchase our securities, merge, liquidate, or change our business, make
certain investments, loans and advances, and enter into transactions with
affiliates. In addition, under the PNC Credit Agreement and the Note Agreement,
we must comply with certain financial covenants. A violation of any of these
financial or non financial covenants could constitute an event of default under
the applicable credit agreement which could result in an acceleration of the
maturity date of the loans, and in the case of the Note Agreement, result in an
increase in the loan interest rate. At June 30, 2002, we were in violation of
certain covenants under the PNC Agreement. In addition, the holders of the
Senior Subordinated Secured notes have alleged that we are in violation of
certain covenants contained in the Note Agreement which could constitute events
of default under the Note Agreement. As a result of the foregoing, we have
classified all debt outstanding under both the PNC Credit Agreement and the Note
Agreement as current liabilities on our balance sheet as of June 30, 2002. We
have reached an agreement in principle with proposed new lenders to replace
borrowings under the PNC Credit Agreement and Note Agreement. Although we expect
to consummate the replacement financing in the
38
foreseeable future, there can be no assurance that we will be able to do so.
We are required to make monthly interest payments of $0.4 million
which are used to make required distributions on the outstanding shares of 9.4%
Cumulative Trust Preferred Securities with a liquidation amount of $25 per
security issued by our subsidiary, U.S. Home & Garden Trust I. We may, under
certain circumstances, defer the payment of interest for a period not to exceed
60 months. The Trust Preferred Securities mature on April 15, 2028. See Note 9
to the Consolidated Financial Statements included in Part II, Item 8.
During the year ended June 30, 2002, we paid in full all debt
outstanding under out Credit Agreement with Bank of America, entered into in
1998. The agreement provided for a $25 million revolving acquisition
line-of-credit ("the Acquisition Facility") to finance acquisitions and a $20
million working capital revolving line-of-credit ("the Working Capital
Facility"). Borrowings under these credit facilities bore interest at variable
annual rates chosen by the Company based on either (i) the London Interbank
Offered Rate ("LIBOR") plus an applicable marginal rate, or (ii) the higher of
0.5% above the then current Federal Funds Rate or the Prime Rate of Bank of
America, in each case, plus an applicable marginal rate.
The total borrowings under these two facilities were $21.7 million
at June 30, 2001. The total included $11.8 million borrowed under the
Acquisition Facility and $9.9 million under the Working Capital Facility.
Our obligations under the Bank of America Credit Agreement were
guaranteed by our subsidiaries and secured by a security interest in favor of
the Bank in substantially all of our assets and the assets of our subsidiaries.
The Credit Agreement with Bank of America terminated upon our payment of the
outstanding debt under the agreement.
Commitments
The Company leases office and warehouse space, certain office
equipment and automobiles under operating leases expiring through 2006. The
future minimum lease payments under these non-cancelable operating leases are as
follows:
Year ended June 30, Amount
---------------------------------------------------------------
2003 $ 843,000
2004 731,000
2005 484,000
2006 252,000
---------------------------------------------------------------
$2,310,000
===============================================================
39
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.
We have included below 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, how 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 our Consolidated Financial Statements at June
30, 2002.
Allowance for Doubtful Accounts Receivable and Sales Returns. We
maintain 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.
We also maintain an allowance for sales returns. The allowance is
estimated based on historical experience of sales returns from customers with
agreements that allow the return of product. If actual market conditions for the
sale of the products by the customers are less favorable than those anticipated,
additional allowances may be required.
40
Inventories. We record 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. We have consummated eleven acquisitions accounted for
using the purchase method. The excess of cost over net assets acquired which
relates to our acquisitions has been recorded as goodwill. Goodwill is tested
for impairment by comparing the carrying value of the assets of our 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. We record 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. We
have recorded a valuation allowance due to the uncertainty of our ability to
generate sufficient future taxable income to realize the gross deferred tax
assets. If we are able to generate future taxable income, the valuation
allowance may be adjusted.
New Accounting Pronouncements
The Emerging Issues Task Force (EITF) has issued EITF Issue 00-25,
Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products, and EITF Issue 01-09, Accounting for Consideration Given
by a Vendor to a Customer, which provide guidance related to the income
statement classification of such consideration. This guidance was effective for
the Company for the quarter ended March 31, 2002. The adoption of EITF 00-25 and
EITF 01-09 did not have an effect on the Company's financial statements.
In June 2001, the FASB finalized SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires the use of the purchase method of accounting and prohibits the use
of the pooling-of-interest
41
method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS No. 141 applies to all business combinations initiated after June 30, 2001
and for purchase business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS No. 142, that the Company reclassify the
carrying amounts of intangible assets and goodwill based on the criteria of SFAS
No. 141.
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually
and requires the Company to identify reporting units for the purpose of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized.
SFAS No. 142 requires the Company to complete a two-step
transitional goodwill impairment test, with the first step to be completed
within six months of the date of adoption. The first step, used to identify
potential impairment, compares the fair value of a reporting unit with its
carrying value. If it is determined that the carrying value of the net assets of
the reporting unit (including goodwill) exceeds the fair value of that reporting
unit, the second step must be performed as soon as possible, but no later than
the end of the year of initial adoption, to measure the amount of the impairment
loss, if any. An impairment loss resulting from the transitional goodwill
impairment test is recognized as the effect of a change in accounting principle.
The Company elected to adopt SFAS No. 141 and SFAS No. 142, effective July 1,
2001. See Note 6 to the Consolidated Financial Statements included in Part II,
Item 8.
In August 2001, the Financial Accounting Standards Board (FASB)
finalized SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets, including the reporting of discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years, with early application
encouraged. The Company adopted SFAS No. 144 during the year ended June 30,
2002. See Note 2 to the Consolidated Financial Statements included in Part II,
Item 8.
42
In April 2002, the FASB issued SFAS No 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical
Corrections. SFAS No. 4 required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. SFAS No. 145 requires any gain or loss from the
extinguishment of debt to meet the requirements of APB No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions to be classified as an extraordinary item, otherwise the item would
be classified in the results of continuing operations. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods that does not meet the criteria of APB No. 30 for classification as an
extraordinary item shall be reclassified. The provisions of the statement
related to the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002, with early application encouraged. The Company is
currently assessing but has not adopted SFAS No. 145.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. Currently, the Company is
assessing but has not adopted SFAS No. 146. However, because there were no
restructuring activities during 2002, the Company believes there would have been
no effect on current year operations had the statement been applied early.
Inflation
Inflation has historically not had a material effect on our
operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a result of our variable rate revolving credit line and term
loan, we are exposed to the risk of rising interest rates. The following table
provides information on our fixed
43
maturity debt as of June 30, 2002 that is sensitive to changes in interest
rates.
The Revolving Credit Facility had an interest rate
of 5.25% for the year ended June 30, 2002 $15 million
The Term Loan had an interest rate of 5.75% for
the year ended June 20, 2002 $1.8 million
Item 8. Financial Statements and Supplementary Data.
This information appears in a separate section of this report
following Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Our current directors and executive officers are as follows:
Name Age Position
- ---- --- --------
Robert Kassel 62 Chairman of the Board, Chief
Executive Officer, President,
Secretary and Treasurer
Richard Grandy 56 Chief Operating Officer
Richard Kurz 60 Chief Financial Officer
Richard Raleigh (1) 48 Director
Fred Heiden(1)(2) 61 Director
Brad Holsworth(2) 42 Director
Jon Schulberg(1)(2) 44 Director
- ----------
(1) Member, Compensation Committee
(2) Member, Audit Committee
44
Robert Kassel co-founded U.S. Home & Garden Inc. and has been its
Chairman of the Board, Chief Executive Officer, President, and Treasurer since
October 1990, and Secretary since July 2002. From 1985 to August 1991, he was a
consultant to Comtel Communications, Inc., a company specializing in the
installation and operation of telephone systems in hotels. From 1985 to 1990,
Mr. Kassel was also a real estate developer in Long Island, New York and Santa
Barbara, California. From 1965 to 1985, he was a practicing attorney in New York
City, specializing in corporate and securities law.
Richard Grandy, has been Chief Operating Officer of U.S. Home &
Garden Inc. since June 30, 2001 and President of Easy Gardener since July 1997.
Prior to that time he served as Vice President of Easy Gardener from the date of
its acquisition by U.S. Home & Garden in September 1994. Mr. Grandy co-founded
Easy Gardener in 1983 after serving as Marketing Director at International
Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a
sales representative of lawn and garden products for the Ortho Division of
Chevron Chemical Co.
Richard Kurz, 60, has been Chief Financial Officer of U.S. Home &
Garden Inc. since October 2001 and served as its Vice President-Finance from
June 2001 until October 2001. He has also served as Chief Financial Officer of
Easy Gardener since October 2001. From 1997 until December 2000 he was Executive
Vice President and Chief Financial Officer for Aircraft Interior Resources, Inc,
a company that provides products and services to commercial airlines. From 1994
until 1997 he was Senior Vice President and Chief Financial Officer of American
Eagle Group, Inc., a service company that provided insurance services to the
aviation and other specialized industries. From 1991 to 1994 he was Chief
Financial and Administrative Officer for BDP International, Inc. a logistics
service provider. From 1979 to 1991 he held a variety of senior financial
positions with CIGNA Corporation, a healthcare provider. Mr. Kurz is a Certified
Public Accountant.
Richard Raleigh has been a director of U.S. Home & Garden Inc. since
March 1993. He served as Chief Operating Officer of U.S. Home & Garden Inc. from
June 1992 to June 30, 2001 and has served as a consultant to U.S. Home & Garden,
Inc. since then. He served as Executive Vice President-Operations of U.S. Home &
Garden Inc. from December 1991 to June 1992. Prior to joining U.S. Home & Garden
Inc., Mr. Raleigh was a free-lance marketing consultant to the lawn and garden
industry from January 1991 to December 1991. From April 1988 to January 1991,
45
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.
Fred Heiden, a director of U.S. Home & Garden Inc. since March 1993,
has been a private investor since November 1989. From April 1984 to November
1989, Mr. Heiden was President and Principal owner of Bonair Construction, a
Florida based home improvement construction company.
Brad Holsworth has been a director of U.S. Home & Garden Inc. since
July 2000. Since April 2000, he has been employed by Prescient Capital LLC, a
money manager and venture capital firm, as its Chief Financial Officer. From
April 1999 to April 2000, he was employed by Banc of America Securities, as a
Principal, Accounting and Finance. He was employed by the accounting firm, BDO
Seidman, LLP from July 1982 to April 1999 and was a partner of BDO Seidman, LLP
from July 1995 to April 1999.
Jon Schulberg, a director of U.S. Home & Garden Inc. since March
1993, has been employed as President of Schulberg MediaWorks, a company engaged
in the independent production of television programs and television advertising
since January 1992. From January 1989 to January 1992, he was a producer for
Guthy-Renker Corporation, a television production company. From September 1987
to January 1989 he was Director of Development for Eric Jones Productions.
All of our directors hold office until the next annual meeting of
the stockholders and the election and qualification of their successors. Our
officers are elected annually by the Board and serve at the discretion of the
Board.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of equity securities of U.S. Home & Garden Inc., file certain
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required
46
by SEC regulation to furnish us with copies of all Section 16(a) forms they
file.
Based solely on our review of the copies of such forms received by
us, or representations obtained from certain reporting persons, we believe that
during the year ended June 30, 2002 all filing requirements applicable to the
officers, directors, and greater than 10 percent beneficial stockholders of U.S.
Home & Garden Inc. were complied with.
Item 11. Executive Compensation.
The following table discloses the compensation awarded by U.S. Home
& Garden Inc., for the three fiscal years ended June 30, 2002, 2001 and 2000, to
Mr. Robert Kassel, its Chairman, Chief Executive Officer, President, Secretary
and Treasurer, Mr. Richard Grandy, its Chief Operating Officer, and Mr. Richard
Kurz, its Chief Financial Officer (together, the "Named Officers"). During the
fiscal year ended June 30, 2002, no other officer of U.S. Home & Garden Inc.
received a total salary and bonus that exceeded $100,000 during such fiscal
year.
Summary Compensation Table
Annual Compensation Long-Term
------------------- Compensation
------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)(1)
- --------------------------- ---- ---------- --------- ----------- -------------------
Robert Kassel, 2002 450,000 325,000 -- 5,149
Chairman, Chief Executive Officer, 2001 354,000 315,000 1,468,000 (4) 7,000
President, Secretary and Treasurer 2000 477,000 (2) 320,000 (2) 500,000 (3) 6,000
Richard Grandy, Chief Operating Officer 2002 345,300 -- -- 11,000
2001 340,000 100,000 150,000 (4) 12,000
2000 311,000 -- -- 12,000
Richard Kurz, Chief Financial Officer 2002 128,000 -- 10,000 (5) --
(1) Represents our contributions to the Named Officers 401(k)/profit sharing
accounts. Excludes certain perquisites that did not exceed the lesser of
$50,000 or 10% of their combined bonus and salary.
(2) Included in Mr. Kassel's salary is $46,800 of non-cash compensation
attributable to his receipt of shares of common stock of Egarden Inc. Mr.
Kassel's bonus of $320,000 primarily reflects work performed by him in
connection with Egarden Inc. and its initial capitalization, securing
E-commerce agreements with certain of the nations largest hardware
cooperatives and obtaining vendor arrangements.
(3) Includes 200,000 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in fiscal
2000.
(4) Represents options that were originally granted to the respective officers
in prior fiscal years, the expiration dates of which were extended in
fiscal 2001.
(5) Represents options granted to Mr. Kurz in October 2001.
The following table discloses information concerning options granted in fiscal
2002 to Richard Kurz, who was the only Named Officer to be granted options
during fiscal 2002.
47
Option Grants in Fiscal Year Ended June 30, 2002
Individual Grants
-----------------
Number of Percent of
Securities Total Options
Underlying Granted to Potential Realizable Value
Options Employees in Exercise at Assumed Annual Rates of
Granted Fiscal Year Price Expiration Stock Price Appreciation
Name (#)(1) (%) ($/Sh) Date for Option Term ($)(2)
- ------------- ---------- ------------- -------- ---------- --------------------------
5% 10%
----- -----
Richard Kurz 10,000 100 $0.53 10/01/02 1,464 3,236
- ----------
(1) All of such options were exercisable in full one year from the date of
grant.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming our common stock appreciates at the compounded rates
specified over the term of the options. These numbers do not take into
account provisions of options providing for termination of the option
following termination of employment or nontransferability of the options
and do not make any provision for taxes associated with exercise. Because
actual gains will depend upon, among other things, future performance of
the common stock, there can be no assurance that the amounts reflected in
this table will be achieved.
48
The following table sets forth information concerning the number of
options owned by the Named Officers and the value of any in-the-money
unexercised options as of June 30, 2002. No options were exercised by any Named
Officer during the fiscal year ended June 30, 2002:
Aggregated Option Exercises
And Fiscal Year-End Option Values
Shares Number of Securities Value of Unexercised In-the-
Acquired on Value Underlying Unexercised Options Money Options at June 30,
Exercise(#) Realized ($) at June 30, 2002 2002(1)
----------- ------------ ------------------------------ -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------- ------------ ------------- ----------- -------------
Robert Kassel -- -- 1,973,402 255,931 0 0
Richard Grandy -- -- 150,000 -- 0 0
Richard Kurz -- -- 10,000 -- $1,200 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 28, 2002 (the last trading day prior to June 30,
2002)was $0.65 per share.
Employment Agreements of Executive Officers
We have entered into an employment agreement with Mr. Kassel dated
as of April 1, 1996. Mr. Kassel currently serves as Chief Executive Officer and
President of U.S. Home & Garden Inc. for a term which expires on March 31, 2003,
which is subject to automatic renewal unless terminated. His current annual
salary is $450,000, and is subject to such bonuses and increases as are approved
at the discretion of the Board of Directors or the Compensation Committee of the
Board, as the case may be. The employment agreement requires that substantially
all of Mr. Kassel's business time be devoted to us and that he not compete, or
engage in a business competitive with, our current or anticipated business for
the term of the agreement and for two years thereafter (although he may own not
more than 5% of the securities of any publicly traded competitive company). Mr.
Kassel is, in addition to salary, entitled to certain fringe benefits, including
the use of an automobile and payment of related expenses.
Mr. Kassel's agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Kassel's
employment upon a change of control of U.S. Home & Garden Inc, (as defined in
the agreement) a failure by U.S. Home & Garden Inc. to comply with its
obligations under the agreement, the failure of U.S. Home & Garden Inc. to
obtain the assumption of the agreement by any successor corporation, or a change
in Mr. Kassel's duties and
49
obligations from those contemplated by the agreement, and termination by U.S.
Home & Garden Inc. of Mr. Kassel's employment other than for disability or
cause, he will be entitled to receive severance pay equal to the greater of (i)
$350,000 ($3,500,000 in the event of a change of control) or (ii) the total
compensation earned by Mr. Kassel from the Company during the one-year period
(multiplied by ten in the event of a change of control or termination without
cause) prior to the date of his termination.
Easy Gardener, a wholly-owned subsidiary of U.S. Home & Garden Inc.,
has entered into an employment agreement with Mr. Grandy, dated as of September
1, 1998 which expires on August 31, 2003. The agreement provides for Mr. Grandy
to receive an annual base salary of $275,000, $300,000, and $330,000 during the
first three years of the agreement and $350,000 thereafter. Mr. Grandy is also
entitled to such bonuses, if any, as determined by the Board of Directors of
Easy Gardener. The Agreement requires Mr. Grandy to devote substantially all of
his business time to Easy Gardener, and in the event Mr. Grandy's employment
agreement is terminated by Easy Gardener without cause (as defined in the
agreement) or if Mr. Grandy resigns with "Good Reason" (as defined in the
agreement), Mr. Grandy will be entitled to receive his base salary through the
expiration of the agreement.
Committees of the Board of Directors
U.S. Home & Garden Inc. has established an Audit Committee which is
comprised of Messrs. Heiden, Holsworth and Schulberg. The Audit Committee, among
other things, makes recommendations to the Board of Directors with respect to
the engagement of U.S. Home & Garden Inc.'s independent certified public
accountants and the review of the scope and effect of the audit engagement. We
have also established a Compensation Committee which is comprised of Messrs.
Heiden, Raleigh and Schulberg. The Compensation Committee, among other things,
makes recommendations to the Board of Directors with respect to the compensation
of the executive officers of U.S. Home & Garden Inc. We maintain a Stock Option
Committee comprised of Messrs. Schulberg and Heiden, which determines the
persons to whom options should be granted under the 1995 and 1997 Stock Option
Plans and the number and other terms of options be granted to each person under
such plans.
50
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Compensation Committee of U.S. Home & Garden Inc.'s Board of
Directors consists of Messrs. Heiden, Raleigh and Schulberg. During the fiscal
year ended June 30, 2002, none of our executive officers served on the Board of
Directors or the compensation committee of any other entity, any of whose
officers served on the Board of Directors or Compensation Committee of U.S. Home
& Garden Inc.
Stock Option Plans
In September 1991, we adopted a stock option plan (the "1991 Plan")
pursuant to which 700,000 shares of Common Stock have been reserved for issuance
upon the exercise of options designated as either (i) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code of
1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs may
be granted under the 1991 Plan to our employees and officers. NQO's may be
granted to consultants, directors (whether or not they are employees), and to
our employees or officers.
The purpose of the 1991 Plan is to encourage stock ownership by
certain of our directors, officers and employees and certain other persons
instrumental to our success and give them a greater personal interest in our
success. The 1991 Plan is administered by the Board of Directors. The Board,
within the limitations of the 1991 Plan, determines the persons to whom options
will be granted, the number of shares to be covered by each option, whether the
options granted are intended to be ISOs, the duration and rate of exercise of
each option, the option purchase price per share and the manner of exercise, the
time, manner and form of payment upon exercise of an option, and whether
restrictions such as repurchase rights in U.S. Home & Garden Inc. are to be
imposed on shares subject to options.
ISOs granted under the 1991 Plan may not be granted at a price less
than the fair market value of the common stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the voting stock
of U.S. Home & Garden Inc.). The aggregate fair market value of shares for which
ISOs granted to any employee are exercisable for the first time by such employee
during any calendar year (under all of our stock option plans and those of any
related corporation) may not
51
exceed $100,000. NQO's granted under the 1991 Plan may not be granted at a price
less than the fair market value of the Common Stock on the date of grant.
Options granted under the 1991 Plan will expire not more than ten years from the
date of grant (five years in the case of ISOs granted to persons holding 10% or
more of our voting stock).
We have adopted a Non-Employee Director Stock Option Plan (the
"Director Plan"). Only non-employee directors of U.S. Home & Garden Inc. are
eligible to receive grants under the Director Plan. The Director Plan provides
that eligible directors automatically receive a grant of options to purchase
5,000 shares of common stock at fair market value upon first becoming a director
and, thereafter, an annual grant, in January of each year, of 5,000 options at
fair market value. Options to purchase an aggregate of up to 100,000 shares of
Common Stock are available for automatic grants under the Director Plan.
We have adopted a 1995 Stock Option Plan ("1995 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of common
stock. The Board of Directors or the Stock Option Committee (the "Committee"),
as the case may be, will have discretion to determine the number of shares
subject to each NQO (subject to the number of shares available for grant under
the 1995 Plan and other limitations on grant set forth in the 1995 Plan), the
exercise price thereof (provided such price is not less than the par value of
the underlying shares of Common Stock), the term thereof (but not in excess of
10 years from the date of grant, subject to earlier termination in certain
circumstances), and the manner in which the option becomes exercisable (amounts,
intervals and other conditions). Directors who are also employed by us will be
eligible to be granted ISOs or NQOs under such plan. The Board or Committee, as
the case may be, also has discretion to determine the number of shares subject
to each ISO, the exercise price and other terms and conditions thereof, but
their discretion as to the exercise price, the term of each ISO and the number
of ISOs that may vest in any calendar year is limited by the same Code
provisions applicable to ISOs granted under the 1991 Plan.
We have adopted a 1997 Stock Option Plan ("1997 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Committee of the 1997 Plan, as the case may
be, will have discretion to determine the number of shares subject to each NQO
(subject to the number of shares available for grant under the 1997 Plan and
52
other limitations on grant set forth in the 1997 Plan), the exercise price
thereof (provided such price is not less than the par value of the underlying
shares of Common Stock), the term thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances), and
the manner in which the option becomes exercisable (amounts, intervals and other
conditions). Directors who are also our employees will be eligible to be granted
ISOs or NQOs under such plan. The Board or Committee, as the case may be, also
has discretion to determine the number of shares subject to each ISO, the
exercise price and other terms and conditions thereof, but their discretion as
to the exercise price, the term of each ISO and the number of ISOs that may vest
in any calendar year is limited by the same Code provisions applicable to ISOs
granted under the 1991 Plan.
We have also adopted a 1999 Stock Option Plan ("1999 Plan") which
provides for grants of options to purchase up to 900,000 shares of common stock.
The Board of Directors or the Committee of the 1999 Plan, as the case may be,
will have discretion to determine the number of shares subject to each NQO
(subject to the number of shares available for grant under the 1999 Plan and
other limitations on grant set forth in the 1999 Plan), the exercise price
thereof (provided such price is not less than the fair market value of the
underlying shares of Common Stock), the term thereof (but not in excess of 10
years from the date of grant, subject to earlier termination in certain
circumstances), and the manner in which the option becomes exercisable (amounts,
intervals and other conditions). Directors who are also our employees will be
eligible to be granted ISOs or NQOs under such plan. The Board or Committee, as
the case may be, also has discretion to determine the number of shares subject
to each ISO, the exercise price and other terms and conditions thereof, but
their discretion as to the exercise price, the term of each ISO and the number
of ISOs that may vest in any calendar year is limited by the same Code
provisions applicable to ISOs granted under the 1991 Plan.
We have adopted the Non-Qualified Deferred Compensation Plan for
Select Employees of U.S. Home & Garden Inc. ("Deferred Plan") and have amended
our stock option plans, as well as certain option agreements which we had with
Robert Kassel. Under the Deferred Plan and such amended stock option plans and
agreements, the Board of Directors or its committee which administers the
relevant stock option may grant permission to optionees to exercise their
options with shares of U.S. Home &
53
Garden Inc.'s common stock in which they have a holding period, for income tax
purposes, of a least six months and defer the receipt of a portion of the shares
subject to the option so exercised. The optionee has the right to designate the
time or times of receipt of those shares pursuant to the Deferred Plan. The
Deferred Plan does contain provisions for earlier issuance of those deferred
shares on death, disability and other termination of employment (e.g., on a
change of control of U.S. Home & Garden Inc.).
We have, from time to time, also granted non-plan options to certain
officers, employees and consultants.
Director Compensation
During the fiscal year ended June 30, 2002 each of our three
non-employee directors who served as directors during that fiscal year, Messrs.
Heiden, Holsworth and Schulberg, received $5,000 for serving on our Board of
Directors.
54
Item 12. Security Ownership of Certain Beneficial Owners and Management.
VOTING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information at September 30, 2002,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of common stock by (i) each person known by us to
be the owner of more than 5% of the outstanding shares of common stock, (ii)
each director, (iii) each Named Officer, and (iv) all executive officers and
directors of U.S. Home & Garden Inc. as a group.
Amount and
Nature of
Beneficial Percentage
Name of Beneficial Owner Ownership(1)(2) of Class
- ------------------------ --------------- --------
Robert Kassel 2,684,000(3)(4) 13.4
Richard Raleigh 756,411(5) 4.1
Richard Grandy 1,084,396(6) 6.1
Richard Kurz 10,000(7) *
Fred Heiden 25,258(8) *
Brad Holsworth 16,000(9) *
Jon Schulberg 25,258(8) *
Joseph Owens, II 914,396(10) 5.1
Wellington Management
Company, LLP 1,745,000(11) 9.9
Parker Martin 1,029,855(12) 5.8
All executive officers
and directors as a
group (seven persons) 4,601,323(3)(4)(5)(6)(7)(8)(9) 21.8
- ----------
* less than 1%
- --------------------------------------------------------------------------------
(1) Unless otherwise noted, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from September 30, 2002 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, 2002 have been exercised.
(3) Of such shares, (i) 138,650 are owned of record by Mr. Kassel's wife;
however, because Ms. Kassel has appointed
55
her husband as her proxy and attorney-in-fact to vote all 138,650 of the
shares owned of record by her, Robert Kassel may also be deemed to have
beneficial ownership of such shares. The address of Mr. Kassel is c/o U.S.
Home & Garden Inc.
(4) Includes 2,261,562 shares of Common Stock issuable to Mr. Kassel upon
exercise of options and warrants.
(5) Includes 754,411 shares of Common Stock issuable upon exercise of options.
(6) Includes 150,000 shares of Common Stock issuable upon exercise of options.
The address of Mr. Grandy is c/o U.S. Home & Garden Inc.
(7) Represents 10,000 shares issuable upon exercise of options.
(8) Includes 25,000 shares of Common Stock issuable upon exercise of options.
(9) Includes 15,000 shares of Common Stock issuable upon exercise of options.
(10) The address of Mr. Owens is 8 Hillandale Road, Waco, Texas.
(11) According to a Schedule 13G filed by Wellington Management Company, LLP
("Wellington") with the SEC, these shares are beneficially owned by
Wellington in its capacity as an investment advisor for clients of
Wellington who are the record holders of such shares. The address of
Wellington is 75 State Street, Boston, MA 02109.
(12) According to a Schedule 13G filed by Mr. Martin with the SEC. The address
for Mr. Martin is 121 S. Hope Street, #106, Los Angeles, California 90012.
Item 13. Certain Relationships and Related Transactions
From time to time Mr. Kassel has borrowed monies from U.S. Home &
Garden Inc. During fiscal 2002, the highest amount owed to U.S. Home & Garden
Inc. by Mr. Kassel was $571,000. After deducting principal payments made to
date, the principal balance of the loan to Mr. Kassel at September 30, 2002 was
approximately $537,000. The loan to Mr. Kassel bears interest at the lower of
the prime lending rate or 6% (effectively 4.75%). Principal payments are due in
annual installments of
56
$25,000 in 2003 and $50,000 in 2004 through 2007 with the balance due in April
2008.
Item 14. Controls and Procedures
Not applicable
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
The Financial Statements and Index follow this
Part IV.
(2) Financial Statement Schedule.
Schedule II-Valuation and Qualifying Accounts.
(3) Exhibits
Exhibit No.
3.1 Certificate of Incorporation, as amended.*
3.2 By-laws of the registrant, incorporated by reference to Exhibit 3(b) of
the registrant's Registration Statement on Form S-1 (Registration No.
33-45428).
4.1 Form of certificate evidencing Common Stock, $.001 par value, of the
registrant, incorporated by reference to Exhibit 4.1 of the registrant's
Registration Statement on Form S-1 (Registration No. 333-38483).
4.2 Rights Agreement dated as of October 1, 1998 between the registrant and
Continental Stock Transfer & Trust Company, incorporated by reference to
Exhibit 4.1 filed with the registrant's Current Report on Form 8-K for the
event dated October 1, 1998.
57
10.1 Employment Agreement of Robert Kassel. +#
10.2 Employment Agreement of Richard Grandy, incorporated by reference to
Exhibit 10.4 filed with the registrant's Form 10-K for the fiscal year
ended June 30, 1998. #
10.3 1991 Stock Option Plan, incorporated by reference to Exhibit 10.5 of the
registrant's Registration Statement on Form S-1 (Registration No.
33-45428). #
10.4 1995 Stock Option Plan, as amended. **#
10.5 Non-Employee Director Stock Option Plan. *#
10.6 1997 Stock Option Plan, as amended. **#
10.7 Lease with respect to the registrant's executive offices, incorporated by
reference to Exhibit 10.14 of the registrant's Form 10-KSB for the fiscal
year ended June 30, 1992.
10.8 February 8, 1995 modification to lease with respect to the registrant's
executive offices. *
10.9 May 6, 1997 modification to lease with respect to the registrant's
executive offices. ++
10.10 1999 Stock Option Plan (incorporated by reference to Exhibit A filed with
the registrant's Proxy Statement dated May 14, 1999 filed on Schedule
14A). #
10.11 Lease and lease extension agreements between Crawford-Austin Mfg. Co. and
Easy Gardener. *
10.12 Leases with respect to Weatherly's warehouse facilities in Paris,
Kentucky.
10.13 Lease Extension, dated February 14, 2002, between Easy Gardener and
Crawford-Austin Mfg. Co.
10.14 Assets Purchase Agreement dated as of February 25, 1998 by and among the
registrant, Weed Wizard, Weed Wizard, Inc and the Weed Wizard stockholders
(incorporated by reference to Exhibit 10.1 filed with the registrant's
Form 8-K for the event dated February 26, 1998).
58
10.15 Commercial Building Lease, dated June 12, 1998 between Easy Gardener, Inc.
and Norman Adams, James Anderson, Donald Bryan and Pamela Butler
(incorporated by reference to Exhibit 10.24 filed with the registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998).
10.16 Form of Indenture between the registrant and Wilmington Delaware
Subordinated Trust, as trustee. +++
10.17 Deferred Compensation Plan for Select Employees **#
10.18 Separation Agreement and Release between U.S. Home & Garden Inc. and
Richard Raleigh (incorporated by reference to Exhibit 10.29 filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
2001).
10.19 Revolving Credit, Term Loan, Guaranty and Security Agreement dated as of
November 15, 2001 among U.S. Home & Garden Inc., Easy Gardener, Inc., each
of the direct or indirect subsidiaries of U.S. Home & Garden Inc. which
are signatories to the Credit Agreement, the financial institutions which
are a party to the Credit Agreement, and PNC Bank, National Association,
as agent for the lenders. ++++
10.20 Note and Warrant Purchase, Guaranty and Security Agreement dated as of
November 15, 2001 among, U.S. Home & Garden Inc., Easy Gardener, Inc. each
of the direct or indirect subsidiaries of U.S. Home & Garden Inc. which
are signatories to the Note and Warrant Purchase Agreement and the
purchasers listed on the signature page of the Note and Warrant Purchase
Agreement. ++++
10.21 Amendment No. 1 dated June 28, 2002, to PNC Credit Agreement.
21 Subsidiaries.
23 Consent of BDO Seidman, LLP.
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
59
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to the comparable exhibit filed with the
registrant's Form 10-KSB for the fiscal year ended June 30, 1995.
** Incorporated by reference to the applicable exhibit filed with the
registrant's Form 10-K for the fiscal year ended June 30, 1999.
# Denotes management compensatory contract or plan or arrangement.
+ Incorporated by reference to the applicable exhibit contained in the
registrant's Annual Report on Form 10-KSB for the fiscal year ended June
30, 1996.
++ Incorporated by reference to the exhibit filed with the registrant's Form
10-K for the fiscal year ended June 30, 1997.
+++ Incorporated by reference to the exhibit filed with the registrant's
Registration Statement on Form S-1 (File No. 333-48519).
++++ Incorporated by reference to the exhibit filed with the registrant's Form
10-Q for the period ended December 31, 2001.
(b) Report on Form 8-K. No reports on Form 8-K were filed by the
registrant during its fiscal quarter ended June 30, 2002.
60
U.S. Home & Garden Inc.
and Subsidiaries
Consolidated Financial Statements
June 30, 2002 and 2001 and for the
Years Ended June 30, 2002, 2001 and 2000
U.S. Home & Garden Inc.
and Subsidiaries
========================================
Consolidated Financial Statements
June 30, 2002 and 2001 and for the
Years Ended June 30, 2002, 2001 and 2000
U.S. Home & Garden Inc.
and Subsidiaries
Contents
================================================================================
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2002 and 2001 4 and 5
Consolidated statements of operations for the years ended
June 30, 2002, 2001 and 2000 6 and 7
Consolidated statements of stockholders' equity for the
years ended June 30, 2002, 2001 and 2000 8
Consolidated statements of cash flows for the years ended
June 30, 2002, 2001 and 2000 9 and 10
Summary of accounting policies 11 - 16
Notes to consolidated financial statements 17 - 44
Consolidated Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts 45
Note: All other schedules have been omitted since the required information
is contained in the Consolidated Financial Statements or such
schedules are not required.
2
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc. and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 2002. We have also audited
Schedule II - Valuation and Qualifying Accounts (Schedule). These financial
statements and Schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
Schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and Schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and Schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and Schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2002 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for goodwill during the year ended June 30,
2002.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Certified Public Accountants
Kalamazoo, Michigan
August 23, 2002, except for Note 11, which
is as of October 11, 2002
3
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
June 30, 2002 2001
- ---------------------------------------------------------------------------------------------------
Assets (Notes 1 and 8)
Current:
Cash and cash equivalents $ 219,000 $ 2,741,000
Accounts receivable, less allowance for doubtful accounts and
sales returns of $1,635,000 and $1,237,000 (Note 3) 26,243,000 19,412,000
Inventories (Note 4) 8,023,000 9,218,000
Prepaid expenses and other current assets 988,000 671,000
Refundable income taxes 405,000 653,000
Deferred tax asset (Note 14) 688,000 1,205,000
Current assets of discontinued operations (Note 2) 1,052,000 2,804,000
- ---------------------------------------------------------------------------------------------------
Total Current Assets 37,618,000 36,704,000
Property and Equipment, net (Note 5) 4,850,000 5,716,000
Intangible Assets:
Goodwill, net (Note 6) 49,861,000 59,632,000
Deferred financing costs, net of accumulated amortization of
$578,000 and $562,000 3,570,000 3,001,000
Product rights, patents and trademarks, net of accumulated
amortization of $163,000 and $73,000 509,000 510,000
Non-compete agreements, net of accumulated amortization of
$407,000 and $132,000 1,103,000 1,378,000
Package tooling costs, net of accumulated amortization of
$1,860,000 and $1,390,000 1,216,000 1,371,000
Officer's Receivable (Note 7) 512,000 521,000
Long-Term Assets of Discontinued Operations (Note 2) 100,000 326,000
Other Assets 26,000 304,000
- ---------------------------------------------------------------------------------------------------
$ 99,365,000 $109,463,000
===================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
June 30, 2002 2001
- --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current:
Revolving credit facility (Note 8) $ 15,036,000 $ 21,650,000
Accounts payable (Note 3) 7,180,000 3,310,000
Accrued commissions 1,437,000 1,279,000
Accrued rebates 931,000 1,618,000
Accrued co-op advertising 740,000 602,000
Accrued restructuring costs (Note 13) -- 999,000
Accrued other expenses 1,577,000 1,623,000
Current portion of long-term debt (Note 8) 7,712,000 20,000
Current liabilities of discontinued operations (Note 2) 277,000 736,000
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 34,890,000 31,837,000
Deferred Tax Liability (Note 14) 542,000 1,205,000
Long-Term Liabilities of Discontinued Operations (Note 2) -- 263,000
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures (Note 9) 56,951,000 56,951,000
- --------------------------------------------------------------------------------------------------------
Total Liabilities 92,383,000 90,256,000
- --------------------------------------------------------------------------------------------------------
Minority Interest in Equity of Affiliate (Note 2) -- 1,239,000
- --------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 10 and 11)
Stockholders' Equity (Note 12):
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $.001 par value - shares authorized, 75,000,000;
21,641,000 and 21,433,000 shares issued 22,000 21,000
Additional paid-in capital 52,351,000 51,846,000
Retained deficit (32,563,000) (21,071,000)
- --------------------------------------------------------------------------------------------------------
19,810,000 30,796,000
Less: Treasury stock, 3,890,000 shares at cost (12,828,000) (12,828,000)
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 6,982,000 17,968,000
- --------------------------------------------------------------------------------------------------------
$ 99,365,000 $ 109,463,000
========================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
Year ended June 30, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Sales (Note 3) $ 78,947,000 $ 78,863,000 $ 86,919,000
Cost of Sales (Note 3) 43,358,000 44,065,000 47,802,000
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 35,589,000 34,798,000 39,117,000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling and Shipping 18,302,000 16,389,000 17,409,000
General and administrative 9,638,000 14,249,000 12,145,000
Restructuring charges (Note 13) -- 2,860,000 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 27,940,000 33,498,000 29,554,000
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations 7,649,000 1,300,000 9,563,000
Other Income (Expense):
Gain on disposal of property and equipment -- -- 551,000
Interest income (Note 7) 83,000 149,000 264,000
Interest expense (7,374,000) (7,484,000) (7,507,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before Income Taxes,
Extraordinary Gain, and Cumulative Effect of a Change in
Accounting Principle 358,000 (6,035,000) 2,871,000
Income Tax Benefit (Expense) (Note 14) (228,000) 1,406,000 (1,213,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before Extraordinary Gain
and Cumulative Effect of a Change in Accounting Principle 130,000 (4,629,000) 1,658,000
Discontinued Operations (Note 2):
Loss from discontinued operations, net of tax benefit of $2,491,000 and
$1,771,000 in 2001 and 2000, respectively, and net of minority
interest of $1,754,000 and $423,000 in 2001 and 2000, respectively (1,760,000) (16,253,000) (3,227,000)
Gain (loss) on disposal of discontinued operations, net of minority interest
of $1,239,000 and $1,118,000 in 2002 and 2001, respectively 20,000 (4,551,000) --
- -----------------------------------------------------------------------------------------------------------------------------------
Loss Before Extraordinary Gain and Cumulative Effect of
a Change in Accounting Principle (1,610,000) (25,433,000) (1,569,000)
Extraordinary Gain of $7,000 and $2,102,000
on Purchase of Trust Preferred Securities,
Net of Income Taxes of ($3,000) and ($878,000) (Note 15) -- 4,000 1,224,000
- -----------------------------------------------------------------------------------------------------------------------------------
Loss Before Cumulative Effect of a Change in Accounting Principle (1,610,000) (25,429,000) (345,000)
Cumulative Effect of a Change in Accounting Principle (Note 6) (9,882,000) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loss $(11,492,000) $(25,429,000) $ (345,000)
===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
Year ended June 30, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share (Note 16):
Income (loss) from continuing operations per common share before
extraordinary gain and cumulative effect of a change in
accounting principle $ 0.01 $ (0.26) $ 0.09
Discontinued operations (0.10) (1.14) (0.17)
Extraordinary gain -- -- 0.06
Cumulative effect of a change in accounting principle (0.57) -- --
- ------------------------------------------------------------------------------------------------------------------
Net Loss per Common Share $ (0.66) $ (1.40) $ (0.02)
==================================================================================================================
Diluted Earnings per Share (Note 16):
Income (loss) from continuing operations per common share before
extraordinary gain and cumulative effect of a change in
accounting principle $ 0.01 $ (0.26) $ 0.08
Discontinued operations (0.10) (1.14) (0.16)
Extraordinary gain -- -- 0.06
Cumulative effect of a change in accounting principle (0.55) -- --
- ------------------------------------------------------------------------------------------------------------------
Net Loss per Common Share $ (0.64) $ (1.40) $ (0.02)
==================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
================================================================================
Common Stock
--------------------- Additional Retained Total
Number of Paid-In Earnings Treasury Stockholders'
Shares Amount Capital (Deficit) Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 21,219,000 $ 21,000 $50,542,000 $ 4,703,000 $ (8,782,000) $ 46,484,000
Compensation related to repriced stock options -- -- 166,000 -- -- 166,000
Exercise of stock options, warrants and UPOs 532,000 1,000 205,000 -- -- 206,000
Issuance of stock options for consulting
services and business acquisition -- -- 497,000 -- -- 497,000
Repurchase of common stock for treasury -- -- -- -- (1,905,000) (1,905,000)
Net loss -- -- -- (345,000) -- (345,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 21,751,000 22,000 51,410,000 4,358,000 (10,687,000) 45,103,000
Compensation related to repriced stock options -- -- 261,000 -- -- 261,000
Issuance of stock options for consulting
services -- -- 175,000 -- -- 175,000
Retirement of shares (318,000) (1,000) -- -- -- (1,000)
Repurchase of common stock for treasury -- -- -- -- (2,141,000) (2,141,000)
Net loss -- -- -- (25,429,000) -- (25,429,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 21,433,000 21,000 51,846,000 (21,071,000) (12,828,000) 17,968,000
Compensation related to repriced stock options -- -- 103,000 -- -- 103,000
Issuance of options and warrants to note
holders -- -- 402,000 -- -- 402,000
Release of shares from Non-Qualified Deferred
Compensation Plan (Note 10) 208,000 1,000 -- -- -- 1,000
Net loss -- -- -- (11,492,000) -- (11,492,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 21,641,000 $ 22,000 $52,351,000 $(32,563,000) $(12,828,000) $ 6,982,000
===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
8
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Year ended June 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) from continuing operations
before extraordinary item and cumulative
effect of a change in accounting principle $ 130,000 $(4,629,000) $ 1,658,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for losses on accounts receivable 425,000 646,000 173,000
Depreciation and other amortization 2,768,000 5,686,000 4,774,000
Gain on disposal of property and equipment -- -- (551,000)
Write-off of deferred financing costs 254,000 -- --
Restructuring charges, net of cash -- 2,708,000 --
Deferred income taxes (146,000) (1,148,000) 48,000
Compensation related to repriced stock options 103,000 261,000 166,000
Loan discount amortization 97,000 -- --
Consulting expenses related to stock options -- 175,000 146,000
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed in business
acquisitions:
Accounts receivable (7,256,000) (474,000) (917,000)
Inventories 1,195,000 1,635,000 3,465,000
Prepaid expenses, refundable income taxes
and other current assets (94,000) (790,000) 1,198,000
Other assets 278,000 259,000 (171,000)
Accounts payable and accrued expenses 2,434,000 (5,799,000) 3,325,000
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 188,000 (1,470,000) 13,314,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
(Increase) decrease in restricted cash -- 1,582,000 (582,000)
Proceeds on sale of property and equipment -- 3,527,000 1,030,000
Purchase of equipment (791,000) (1,311,000) (2,598,000)
Purchase of package tooling and other intangibles (384,000) (631,000) (571,000)
Decrease in officer receivable 34,000 84,000 70,000
Payment for purchase of businesses, net of cash acquired (111,000) (863,000) (125,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (1,252,000) 2,388,000 (2,776,000)
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
9
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Year ended June 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds from (payments on) revolving
credit facility $(6,614,000) $ 4,650,000 $ 1,500,000
Proceeds from issuance of long-term debt 8,250,000 -- --
Payments on long-term debt (233,000) -- --
Changes in other long-term liabilities and purchase
of mandatorily redeemable preferred securities (20,000) (797,000) (3,981,000)
Deferred finance costs (1,119,000) (99,000) --
Proceeds from issuance of stock -- -- 206,000
Repurchase of common stock for treasury -- (2,141,000) (1,905,000)
Release (retirement) of shares 1,000 (1,000) --
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 265,000 1,612,000 (4,180,000)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents
from continuing operations (799,000) 2,530,000 6,358,000
Cash used in discontinued operations (1,723,000) (3,318,000) (5,520,000)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,522,000) (788,000) 838,000
Cash and Cash Equivalents, beginning of year 2,741,000 3,529,000 2,691,000
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 219,000 $ 2,741,000 $ 3,529,000
==========================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
10
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Nature of Business
U.S. Home & Garden Inc. (the "Company"), through its subsidiaries, is a leading
manufacturer and marketer of a broad range of consumer lawn and garden products.
The Company's products include weed preventive landscape fabrics, fertilizer
spikes, decorative landscape edging, grass and flower seed products, weed
trimmer replacement heads, shade cloth and root feeders, which are sold under
recognized brand names, such as WeedBlock(R), Jobe's(R), Emerald Edge(R), Weed
Wizard(R), Shade Fabric(TM), Ross(R), Tensar(R), Amturf(R), and Landmaster(R).
The Company markets its products through most large national home improvement
and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's,
Kmart, Wal-Mart, Ace Hardware and Tru-Serv in North America.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries over which it has financial or management control including
Weatherly Consumer Products Group, Inc. (Weatherly), Easy Gardener, Inc. (Easy
Gardener), Golden West Agri-Products, Inc. (Golden West), Weed Wizard
Acquisition Corp. (Weed Wizard), Ampro Industries, Inc. (Ampro) and Egarden Inc.
(EGarden) since their dates of acquisition (See Notes 1 and 2). Additionally,
U.S. Home & Garden Trust I (See Note 9) has been included since its formation in
April 1998. All significant intercompany accounts and transactions have been
eliminated.
Inventories
Inventories, which consist of raw materials, finished goods, and packaging
materials, are stated at the lower of cost or market; cost is determined by the
first-in, first-out (FIFO) cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets or, in the
case of leasehold improvements, over the life of the lease, if shorter.
Maintenance and repairs are charged to expense as incurred. Major improvements
are capitalized.
Intangible Assets
Goodwill
Goodwill, which relates to the Company's acquisitions, represents the excess of
cost over net assets acquired. For the years ended June 30, 2001 and 2000,
goodwill was amortized over periods of five to thirty years using the
straight-line method. Effective July 1, 2001, the Company ceased the
amortization of goodwill in conjunction with the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. See New Accounting Pronouncements and Note 6. Goodwill is tested for
impairment annually by comparing the fair value of each reporting unit with its
carrying value.
11
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Deferred Financing Costs
Direct costs associated with the Company's debt borrowings are being amortized
over the life of the related debt.
Product Rights
Product rights are being amortized over estimated useful lives of fifteen to
twenty years.
Non-Compete Agreements
The non-compete agreements were entered into with the acquisitions of Ampro and
Weatherly. The Weatherly agreement is being amortized over its twenty-year term.
The Ampro non-compete agreement, which was triggered when an officer of Ampro
was terminated, is being amortized over a three-year period from the date of
such termination.
Package Tooling Costs
Package tooling costs associated with Easy Gardener and Weatherly products,
primarily consisting of the design and construction of printing plates and
cutting dies used for the production of packaging, are being amortized over
periods of three to five years using the straight-line method.
Long-Lived Assets
Long-lived assets with definite useful lives are tested for recoverability when
circumstances suggest a possible impairment. Recovery is evaluated by comparing
undiscounted estimated future cash flows to the current carrying value.
Revenue Recognition
Sales are recorded as products are shipped to customers. Sales are free on board
(FOB) shipping point.
Sales Incentives
The Company enters into contractual agreements with its customers for rebates on
certain products it sells. The Company records the amounts as reductions of
revenue and records a liability reflected as accrued rebates on the consolidated
balance sheets. As these rebate percentages are determined when the contracts
are entered into, these revenue reductions are recorded at the time the related
revenue is recorded.
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.
12
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Income Taxes
The Company provides deferred income taxes based on enacted income tax rates in
effect on the dates temporary differences between the financial reporting and
tax bases of assets and liabilities reverse. The effect on deferred tax assets
and liabilities of a change in income tax rates is recognized in income in the
period that includes the enactment date. To the extent that available evidence
about the future raises doubt about the realization of a deferred tax asset, a
valuation allowance is established (See Note 14).
Shipping and Handling
Amounts billed to customers for shipping and handling are recorded as revenue.
Shipping and handling costs incurred by the Company are included in operating
expenses.
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.
Cooperative advertising credits are accrued based on sales volume and
advertising frequency, pursuant to specific agreements. Such costs are
classified as selling expenses. 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 approximately $2,934,000, $3,012,000 and $3,171,000 during the years
ended June 30, 2002, 2001 and 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
13
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Stock-Based Compensation
The Company has adopted the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, with respect to non-employee stock-based compensation.
The fair value method is required for all stock-based compensation issued to
nonemployees. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Companies are permitted to
continue to account for employee stock-based compensation under Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
but are required to disclose pro forma net income and earnings per share as if
the fair value method had been adopted. The Company has elected to continue to
account for employee stock-based compensation under APB No. 25. See Note 12.
Segment Information
The Company's primary continuing operations are in one reportable segment - the
manufacture and sale of consumer lawn and garden products. The Company has
aggregated its operating segments into a single reportable segment. See
disclosure regarding revenue from external customers for each significant type
of product and service at Note 3.
Financial Instruments and Derivatives
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, officer's receivable, debt and mandatorily redeemable
preferred securities. The carrying value of cash and cash equivalents and
accounts receivable approximate fair value based upon the liquidity and
short-term nature of the assets. The carrying value of the officer's receivable
and debt approximates the fair value based upon short-term and long-term
borrowings at interest rates which approximate current rates. See Note 9
regarding valuation of mandatorily redeemable preferred securities.
The Company has used derivative financial instruments to manage the economic
impact of fluctuations in interest rates on short-term and long-term debt. The
Company entered into an interest rate swap to manage this economic risk. This
was viewed as a risk management tool and was not used for trading or speculative
purposes. The interest rate differentials associated with the interest rate swap
used to hedge debt obligations were recorded as an adjustment to interest
payable with the offset to interest expense over the life of the swap. There
were no material derivative financial instruments in effect during the years
presented.
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.
14
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Reclassifications
Certain amounts as previously reported have been reclassified to conform to
current year classifications.
New Accounting Pronouncements
The Emerging Issues Task Force (EITF) has issued EITF Issue 00-25, Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products, and EITF Issue 01-09, Accounting for Consideration Given by a Vendor
to a Customer, which provide guidance related to the income statement
classification of such consideration. This guidance was effective for the
Company for the quarter ended March 31, 2002. The adoption of EITF 00-25 and
EITF 01-09 did not have an effect on the Company's financial statements.
In June 2001, the FASB finalized SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interest method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that the Company recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business combinations completed
on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that
the Company reclassify the carrying amounts of intangible assets and goodwill
based on the criteria of SFAS No. 141.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually and
requires the Company to identify reporting units for the purpose of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life. SFAS No. 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized.
SFAS No. 142 requires the Company to complete a two-step transitional goodwill
impairment test, with the first step to be completed within six months of the
date of adoption. The first step, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying value. If it is
determined that the carrying value of the net assets of the reporting unit
(including goodwill) exceeds the fair value of that reporting unit, the second
step must be performed as soon as possible, but no later than the end of the
year of initial adoption, to measure the amount of the impairment loss, if any.
An impairment loss resulting from the transitional goodwill impairment test is
recognized as the effect of a change in accounting principle. The Company
elected to adopt SFAS No. 141 and SFAS No. 142, effective July 1, 2001. See Note
6.
15
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
In August 2001, the Financial Accounting Standards Board (FASB) finalized SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 addresses accounting and reporting for the impairment or disposal of
long-lived assets, including the reporting of discontinued operations. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application encouraged. The
Company adopted SFAS No. 144 during the year ended June 30, 2002. See Note 2.
In April 2002, the FASB issued SFAS No 145, Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No 13, and Technical Corrections. SFAS
No. 4 required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. SFAS No. 145 requires any gain or loss from the extinguishment of debt
to meet the requirements of APB No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions to be classified as
an extraordinary item, otherwise the item would be classified in the results of
continuing operations. Any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods that does not meet the
criteria of APB No. 30 for classification as an extraordinary item shall be
reclassified. The provisions of the statement related to the rescission of SFAS
No. 4 shall be applied in fiscal years beginning after May 15, 2002, with early
application encouraged. The Company is currently assessing but has not adopted
SFAS No. 145.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. Currently, the Company is assessing
but has not adopted SFAS No. 146. However, because there were no restructuring
activities during 2002, the Company believes there would have been no effect on
current year operations had the statement been applied early.
16
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Business Acquisitions
The Company has consummated the following eleven acquisitions of lawn and garden
companies or product lines for a total of approximately $111 million in
consideration:
o Golden West Chemical Distributors, Inc. - A manufacturer of humic
acid-based products designed to improve crop yield, which was acquired in
August 1992 for approximately $1.1 million in cash and $1.1 million of
promissory notes.
o Easy Gardener, Inc. - A manufacturer of multiple fabric landscaping
products including Weedblock(R), which was acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5
million promissory note and two convertible notes each in the 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 have been paid.
o Emerald Products LLC - Manufacturer of decorative landscaping edging,
which was acquired in August 1995 for $835,000 in cash and a $100,000
promissory note.
o Weatherly Consumer Products Group, Inc. - a manufacturer of fertilizer
spikes and other lawn and garden products, which was acquired in August
1996 for 1,000,000 shares of common stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain product line of Plastic Molded Concepts, Inc. - A line of
plastic chain links and decorative edgings, which was acquired from
Plastic Molded Concepts, Inc. in May 1997 for approximately $4.3 million
in cash.
o Weed Wizard, Inc. - A manufacturer and distributor of weed trimmer
replacement heads, all of whose assets were acquired in February 1998 for
approximately $16.0 million, plus an additional $1.7 million for excess
working capital and acquisition expenses. Operations were discontinued
during 2002 - see Note 2.
o Landmaster Products, Inc. - A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for
approximately $3.0 million, plus an additional $600,000 for certain assets
and acquisition expenses.
17
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
o Tensar(R) consumer products line of The Tensar Corporation - A line of
lawn and garden specialty fencing, which was acquired from The Tensar
Corporation in May 1998 for approximately $5.4 million, plus an additional
$1 million for inventory.
o Ampro Industries, Inc. - A manufacturer and distributor of lawn and garden
products including specialty grass and flower seeds. The Company acquired
all of the outstanding stock of Ampro for approximately $24.6 million in
October 1998.
o E-Garden, Inc. (now Egarden, Inc.) - The Company's business-to-business
Internet subsidiary was acquired in June 1999 for approximately $400,000
plus expenses of approximately $100,000. Operations were discontinued
during 2001 - see Note 2.
o Findplants.com - An electronic horticulture catalogue and locator that
provides business-to-business service for commercial growers and
wholesalers which was acquired by Egarden, Inc. in May 2000 for
approximately $537,000. Operations were discontinued during 2001 - see
Note 2.
All of the above acquisitions were accounted for as purchases and, accordingly,
the results of operations of the acquired companies have been included in the
consolidated statements of income since their respective acquisition dates.
2. Discontinued Operations
In June 2002, the Company announced that is was discontinuing its Weed Wizard
operations effective September 30, 2002. Despite the Company's efforts to
increase sales and return to profitability, Weed Wizard experienced continued
erosion of its business. The Company plans to dispose of the assets and
liabilities of Weed Wizard, including amounts written off, through a sale of the
assets and liquidation of the liabilities during fiscal 2003.
The Company recorded an estimated net loss on disposal of the Weed Wizard
component of $1,116,000, relating to the write-down of all assets to fair value
less cost to sell. In addition to the loss on disposal in 2002, the Company had
a net loss from operations of Weed Wizard of $1,760,000 for the year ended June
30, 2002, $9,124,000, net of income tax benefit of $2,491,000 for the year ended
June 30, 2001, and $1,332,000, net of income tax benefit of $306,000 for the
year ended June 30, 2000.
During the year ended June 30, 2000, the Company discontinued production, sale
and distribution of one of the products in its Weed Wizard product line.
Additionally, the Company, in voluntary compliance with the recommendations of
the CPSC, instituted a recall of the product. Accordingly, the Company recorded
a pretax charge of $645,000, net of tax effect of $283,000, to provide for
recall costs and inventory write-offs.
An impairment charge of $8,500,000, net of tax effect of $2,320,000, was
recorded in June 2001 to write off the net goodwill balance associated with Weed
Wizard. The Company's policy is to periodically evaluate its long-lived assets
for possible impairment. If the evaluation determines that the long-lived assets
have been impaired, the assets are written down to their estimated fair value.
Due to the recurring operating losses of Weed Wizard, the product recall in a
prior year, and the subsequent unsuccessful product launch of the replacement
product through a complete sales season, the evaluation was performed and the
estimated impairment loss was recognized during 2001.
18
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Revenues for Weed Wizard for the years ended June 30, 2002, 2001, and 2000, were
$672,000, $1,912,000 and $2,746,000, respectively.
In June 2001, the Company announced that it was discontinuing its e-commerce
imitative, which it was conducting though its subsidiary, Egarden, Inc.
(Egarden), effective June 30, 2001. During the year ended June 30, 2001, the
Company recorded an estimated net loss on disposal of Egarden of $4,551,000, net
of minority interest of $1,118,000. The loss, prior to minority interest,
included the write-off of all long-lived assets of $5,224,000 and severance
expense of $445,000 related to the termination of all 39 employees. All
severance payments have been made at June 30, 2002. No adjustments were made to
the liability recorded for severance payments during the year ended June 30,
2002. All of the assets of Egarden, including amounts written off, were sold
during the year ended June 30, 2002. During the year ended June 30, 2002, the
Company recorded a net gain on the disposal of Egarden of $1,136,000, as a
result of the write off of minority interest of $1,239,000 as the subsidiary was
liquidated.
In addition to the net loss on disposal in 2001, the Company had a net loss from
the operations of Egarden of $7,129,000, net of minority interest of $1,754,000
for the year ended June 30, 2001, and $1,895,000, net of tax benefit of
$1,465,000 and minority interest of $423,000 for the year ended June 30, 2000.
Revenues of Egarden for the years ended June 30, 2002, 2001 and 2000 were not
material.
The assets and liabilities of discontinued operations held for sale reported in
the consolidated balance sheets consist of the following:
June 30, 2002
-------------------------------------
Weed Wizard Egarden Total
- ------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ -- $ 62,000 $ 62,000
Accounts receivable 385,000 -- 385,000
Inventories 274,000 -- 274,000
Other current assets 331,000 -- 331,000
- ------------------------------------------------------------------
Total Current Assets $ 990,000 $ 62,000 $1,052,000
==================================================================
Long-Term Assets-
Property and Equipment, net $ 100,000 $ -- $ 100,000
==================================================================
Current Liabilities:
Accounts payable $ 98,000 $ -- $ 98,000
Accrued expenses 163,000 16,000 179,000
- ------------------------------------------------------------------
Total Current Liabilities $ 261,000 $ 16,000 $ 277,000
==================================================================
19
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
June 30, 2001
-------------------------------------
Weed Wizard Egarden Total
- ------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ -- $ 872,000 $ 872,000
Accounts receivable 71,000 -- 71,000
Inventories 1,825,000 -- 1,825,000
Other current assets 26,000 10,000 36,000
- ------------------------------------------------------------------
Total Current Assets $1,922,000 $ 882,000 $2,804,000
==================================================================
Long-Term Assets:
Property and equipment, net $ 278,000 $ -- $ 278,000
Intangible assets, net 48,000 -- 48,000
- ------------------------------------------------------------------
Total Long-Term Assets $ 326,000 $ -- $ 326,000
==================================================================
Current Liabilities:
Accounts payable $ 17,000 $ -- $ 17,000
Accrued expenses 208,000 445,000 653,000
Current portion of capital
lease obligations -- 66,000 66,000
- ------------------------------------------------------------------
Total Current Liabilities $ 225,000 $ 511,000 $ 736,000
==================================================================
Long-Term Liabilities-
Capital lease obligations $ -- $ 263,000 $ 263,000
==================================================================
Minority Interest in Equity
of Affiliate $ -- $1,239,000 $1,239,000
==================================================================
Pursuant to 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 assets and liabilities of the discontinued components have been
classified as "Held for Sale" and the net operations and net cash flows have
been reported as "Discontinued Operations" in the accompanying consolidated
financial statements. The restated notes exclude amounts related to these
discontinued components.
20
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Concentration of Credit Risk and Significant Relationships
Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States. The Company performs ongoing
credit evaluations of its customers' financial condition and establishes an
allowance for doubtful accounts based upon credit risk of specific customers,
historical trends and other information. The Company does not require collateral
from its customers.
The Company's two largest customers during the years ended June 30, 2002, 2001
and 2000, each accounted for the following percentage of the Company's revenues:
Customer 2002 2001 2000
- --------------------------------------------------------------------------------
A 49% 43% 36%
B 10% 14% 12%
================================================================================
Included in accounts receivable at June 30, 2002 and 2001 is approximately
$16,520,000 and $9,062,000, respectively, due from the two largest customers.
Sales of each of the Company's three significant product lines comprised the
following percentages of the Company's total net sales for the years ended June
30, 2002, 2001 and 2000:
Product Line 2002 2001 2000
- --------------------------------------------------------------------------------
Landscape fabric 51% 48% 44%
Fertilizer, plant food, and
insecticide spikes 14% 17% 15%
Landscape edging 10% 9% 10%
================================================================================
Substantially all raw material purchases for WeedBlock(R) landscape fabric
inventory are from one vendor, representing approximately 12%, 19% and 22% of
the Company's consolidated raw material purchases during the years ended June
30, 2002, 2001 and 2000, respectively. Management believes that other suppliers
could provide a similar product on comparable terms. A change in suppliers,
however, could cause delays and a possible loss of sales, which would adversely
affect operating results. Included in accounts payable at June 30, 2002 is
$1,609,000, due to this vendor. No amounts were due to this vendor at June 30,
2001.
4. Inventories
Inventories consist of:
June 30, 2002 2001
- --------------------------------------------------------------------------------
Raw and packaging materials $4,025,000 $5,175,000
Finished goods 3,998,000 4,043,000
- --------------------------------------------------------------------------------
$8,023,000 $9,218,000
================================================================================
21
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
At June 30, 2002 and 2001, the inventory balance has been reduced by a provision
for possible obsolescence of $225,000 and $1,340,000, respectively. The Company
disposed of $1,209,000 of previously reserved inventory during the year ended
June 30, 2002.
5. Property and Equipment
Property and equipment consist of:
Estimated Useful
June 30, Life in Years 2002 2001
- --------------------------------------------------------------------------------
Furniture, fixtures and equipment 5 - 7 $10,703,000 $ 9,989,000
Leasehold improvements 7 - 10 791,000 750,000
- --------------------------------------------------------------------------------
11,494,000 10,739,000
Less accumulated depreciation 6,644,000 5,023,000
- --------------------------------------------------------------------------------
$ 4,850,000 $ 5,716,000
================================================================================
Depreciation expense was $1,657,000, $2,113,000 and $1,670,000 during the years
ended June 30, 2002, 2001 and 2000, respectively.
6. Goodwill
Goodwill consists of the following:
June 30, 2002 2001
- -------------------------------------------------------------------------------
Weatherly Consumer Products Group, Inc. $22,948,000 $22,948,000
Easy Gardener, Inc. 15,639,000 15,639,000
Ampro Industries, Inc. 9,303,000 18,693,000
Tensar consumer products line 5,226,000 5,226,000
Plasti-Chain product line 2,810,000 2,810,000
Landmaster Products, Inc. 2,292,000 2,292,000
Golden West Chemical Distributions, Inc. 1,606,000 2,098,000
Emerald Products, LLC 1,466,000 1,355,000
- -------------------------------------------------------------------------------
61,290,000 71,061,000
Less accumulated amortization 11,429,000 11,429,000
- -------------------------------------------------------------------------------
$49,861,000 $59,632,000
===============================================================================
22
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Effective July 1, 2001, the Company adopted SFAS No. 141 and SFAS No. 142.
During 2002, the Company completed a reassessment of the useful lives of all
intangible assets other than goodwill which total $6,398,000 (net of accumulated
amortization of $3,008,000) at June 30, 2002. No adjustments to previously
determined amortization periods were considered necessary. The Company has no
intangible assets with indefinite useful lives other than goodwill at June 30,
2002.
In conjunction with the adoption of SFAS No. 141 and SFAS No. 142, the Company
completed its transitional goodwill impairment test during 2002. Ampro and
Golden West were the only reporting units where the carrying value exceeded the
fair value of their net assets including goodwill. As of July 1, 2001, the net
goodwill related to Ampro was $17,078,000. The Company hired an independent
valuation professional to assist the Company in measuring the amount of the
impairment. Based on the valuation, the Company recorded an impairment loss of
$9,390,000 during the year ended June 30, 2002 in the Consolidated Statement of
Operations, as a cumulative effect of a change in accounting principle.
The net goodwill related to Golden West at July 1, 2001 was approximately
$1,165,000. Based on a valuation prepared by management, an impairment loss of
$492,000 was recorded during the year ended June 30, 2002 and is reported as a
cumulative effect of a change in accounting principle in the Consolidated
Statement of Operations.
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 $49,861,000, net of
accumulated amortization, at June 30, 2002. Amortization expense for all
intangible assets during the years ended June 30, 2002, 2001 and 2000 was
$1,111,000, $3,573,000 and $3,104,000, respectively. Goodwill amortization,
including amounts reported as discontinued operations, was $2,809,000 and
$2,817,000 for the years ended June 30, 2001 and 2000, respectively. Estimated
amortization expense for continuing operations for each of the five succeeding
fiscal years is as follows:
Year Ended June 30, Amount
- --------------------------------------------------------------------------------
2003 $1,245,000
2004 $1,245,000
2005 $ 877,000
2006 $ 667,000
2007 $ 667,000
23
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following represents a reconciliation of the reported net loss to the
adjusted net income (loss) and the adjusted net income (loss) before
extraordinary gain for the years ended June 30, 2001 and 2000, which exclude
goodwill amortization expense, net of tax benefit:
Year Ended June 30, 2001 2000
--------------------------------------------------------------------------
Reported Net Loss $(25,429,000) $ (345,000)
Goodwill Amortization, net of tax benefit
of $620,000 and $622,000 2,189,000 2,195,000
--------------------------------------------------------------------------
Adjusted net income (loss) (23,240,000) 1,850,000
Extraordinary Gain 4,000 1,224,000
--------------------------------------------------------------------------
Adjusted Net Income (Loss) Before
Extraordinary Gain $(23,244,000) $ 626,000
==========================================================================
Per Share Amounts - Basic:
Reported Net Loss $ (1.40) $ (.02)
Goodwill amortization, net of tax benefit .12 .11
--------------------------------------------------------------------------
Adjusted net income (loss) (1.28) .09
Extraordinary Gain -- (.06)
--------------------------------------------------------------------------
Adjusted Net Income (Loss) Before
Extraordinary Gain $ (1.28) $ .03
==========================================================================
Per Share Amounts - Diluted:
Reported Net Loss $ (1.40) $ (.02)
Goodwill Amortization, net of tax benefit .12 .11
--------------------------------------------------------------------------
Adjusted net income (loss) (1.28) .09
Extraordinary Gain -- (.06)
--------------------------------------------------------------------------
Adjusted Net Income (Loss) Before
Extraordinary Gain $ (1.28) $ .03
==========================================================================
24
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
7. Officer's Receivable
The officer's receivable represents an unsecured note which bears interest at
the lower of the prime lending rate or 6% (effectively 4.75% at June 30, 2002).
At June 30, 2002 and 2001, the balance on the outstanding note was $537,000 and
$571,000, respectively. Total related interest income amounted to $41,000,
$43,000 and $48,000 for the years ended June 30, 2002, 2001 and 2000,
respectively. Principal payments on the note are due in annual installments as
follows with the balance due upon maturity in April 2008:
2003 $25,000
2004 - 2007 $50,000
8. Revolving Credit Facility and Long-Term Debt
On November 15, 2001, the Company entered into a financing agreement expiring
November 15, 2004 to provide $25,000,000 in senior secured financing, as
amended. The agreement provides for a $23,000,000 revolving credit facility and
a $2,000,000 term loan due in monthly installments of $33,000 plus interest. The
term loan balance outstanding at June 30, 2002 is $1,767,000. Interest on
borrowings is calculated at variable annual rates based on either the bank's
prime rate plus an applicable marginal rate or the federal funds rate plus an
applicable marginal rate (effectively 5.75% on the term loan and 5.25% on the
revolving credit facility at June 30, 2002). Borrowings on the revolving credit
facility are limited based on eligible borrowing bases, effectively $19,611,000
at June 30, 2002. At June 30, 2002 the Company had $15,036,000 of borrowings
outstanding under the revolving credit facility.
The Company's obligations under the revolving credit facility 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. The Company
is also subject to certain fees and restrictions in conjunction with the
financing. Upon the occurrence of an event of default as specified in the
financing agreement, the maturity of loans outstanding under the financing
agreement may be accelerated by the bank, which may also foreclose its security
interest on the assets of the Company and its subsidiaries.
On November 15, 2001, the Company also entered into a financing agreement to
provide $6,250,000 of subordinated debt. At June 30, 2002, the Company had
borrowings outstanding of $5,945,000, net of discounts of $905,000, pursuant to
the subordinated secured notes due in November 2007 with an effective interest
rate of 18.4%. Interest is charged on the face of the notes at 16% and 14% per
annum, payable monthly. The issue price of the 16% notes was 90% of the face
amount of the notes resulting in a discount of $600,000. The notes are secured
by a second lien on all assets of the Company and rank junior to the senior
financing provided by the bank. In connection with this financing, the Company
issued to the purchasers of the notes warrants to purchase up to 3.75% of the
fully diluted common stock of the Company and an option to purchase from the
Company certain Trust Preferred Securities of the Company's subsidiary, U.S.
Home and Garden Trust I, that are owned by the Company, which resulted in an
additional discount of $402,000.
25
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Under the two financing agreements, the Company and its subsidiaries are
required, among other things, to comply with (a) certain limitations on
incurring additional indebtedness, liens and guarantees, dispositions of assets,
payment of cash dividends and cash redemption and repurchases of securities, and
(b) certain limitations on mergers, liquidations, changes in business,
investments, loans and advances, affiliate transactions and certain
acquisitions. In addition, the Company must comply with certain financial tests
and ratios and other covenants. A violation of any of these covenants
constitutes an event of default under the financing agreements. At June 30,
2002, the Company was in violation of certain covenants, and all debt
outstanding under the agreements has been classified as current at June 30,
2002. The Company is currently seeking to amend the covenants and to obtain
financing to replace the borrowings under the current agreements.
During the year ended June 30, 2002, the Company paid off the Credit Agreement
with Bank of America, entered into in 1998. The agreement provided for a $25
million revolving acquisition line-of-credit ("the Acquisition Facility") to
finance acquisitions and a $20 million working capital revolving line-of-credit
("the Working Capital Facility"). Borrowings under these credit facilities bore
interest at variable annual rates chosen by the Company based on either (i) the
London Interbank Offered Rate ("LIBOR") plus an applicable marginal rate, or
(ii) the higher of 0.5% above the then current Federal Funds Rate or the Prime
Rate of Bank of America, in each case, plus an applicable marginal rate.
The total borrowings under these two facilities was $21,650,000 at June 30,
2001. The total included $11,750,000 borrowed under the Acquisition Facility and
$9,900,000 under the Working Capital Facility.
The Company's obligations under the Credit Agreement were 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.
26
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. 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
and completed a public offering of 2,530,000 of 9.40% Cumulative Trust Preferred
Securities with a liquidation amount of $25 per security to the Company for a
total of $65,200,000 (the "Trust Preferred Securities" and, together with the
common securities, the "Trust Securities"). The Trust exists for the sole
purpose of issuing Trust Securities and using proceeds therefrom to acquire the
subordinated debentures described below. Concurrent with the issuance of the
Trust Securities, the Trust invested the net proceeds therefrom in $65.2 million
aggregate principal amount of 9.40% Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debentures") issued by the Company. The Company
has since redeemed 251,981 shares leaving 2,278,019 shares outstanding with a
face value of $56,951,000. See note 15. The fair value of the mandatorily
redeemable preferred securities is approximately $34,740,000 based on quoted
market prices of $15.25 per security at June 30, 2002.
Distributions of interest on the Trust Securities are payable monthly in arrears
by the Trust.
The Subordinated Debentures are unsecured obligations of the Company and are
subordinate and junior in right of payment to certain other indebtedness of the
Company.
The Company may, under certain circumstances, defer the payment of interest on
the Subordinated Debentures for a period not to exceed 60 consecutive months. If
interest payments on the Subordinated Debentures are so deferred, distributions
on the Trust Securities will also be deferred. During any such deferral period,
interest on the Subordinated Debentures and distributions on the Trust
Securities will accrue and compound monthly and, subject to certain exceptions,
the Company may not declare or pay distributions on its capital stock or debt
securities that rank equal or junior to the Subordinated Debentures.
The Trust Securities are subject to mandatory redemption upon the repayment of
the Subordinated Debentures at a redemption price equal to the aggregate
liquidation amount of the securities plus any accumulated and unpaid
distributions. The Subordinated Debentures mature in total on April 15, 2028,
but may be redeemed at the option of the Company at any time after April 15,
2003 or earlier under certain circumstances. 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.
27
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
10. Commitments
Employment Agreements
The Company has entered into employment agreements with two of its officers. One
agreement is for a one-year period but is automatically renewed unless
specifically terminated by the Company or the employee. If the employment
agreement is terminated by the Company without cause, the officer will be
entitled to an additional ten years of annual compensation. Annual compensation
under the employment agreement is $450,000. The employment agreement also
provides for certain lump sum payments in the event of a change in control equal
to approximately $7.3 million. The other agreement expires on August 31, 2003,
and provides for a base aggregate annual salary of approximately $350,000. In
addition, the agreements provide for incentive and additional compensation under
certain circumstances.
Operating Leases
The Company leases office and warehouse space, certain office equipment and
automobiles under operating leases expiring through 2006. The future minimum
lease payments under these non-cancelable operating leases are as follows:
Year ended June 30, Amount
- --------------------------------------------------------------------------------
2003 $ 843,000
2004 731,000
2005 484,000
2006 252,000
- --------------------------------------------------------------------------------
$2,310,000
================================================================================
Rent expense was approximately $891,000, $860,000 and $836,000 for the years
ended June 30, 2002, 2001 and 2000, respectively.
28
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Defined Contribution Benefit Plan
Easy Gardener has established an employee defined contribution benefit plan (the
Plan). Employees of the Company, Weatherly, Easy Gardener, Weed Wizard and
Golden West are eligible to participate. The Company is required to match the
first 60% of employee contributions up to 5% of the employee's wage base. The
Plan also allows discretionary contributions by the Company. The Company's
contribution vests over a seven-year period. Ampro had a separate plan for its
employees, with similar terms to the Easy Gardener Plan that was terminated
during the year ended June 30, 2001. Total expense associated with the plans for
the years ended June 30, 2002, 2001 and 2000 was approximately $321,000,
$358,000 and $380,000, respectively.
Non-Qualified Deferred Compensation Plan
The Company has adopted the Non-Qualified Deferred Compensation Plan for Select
Employees of U.S. Home & Garden Inc. (Deferred Plan). Under the Deferred Plan,
the Board of Directors or its committee which administers the relevant stock
option plan may grant permission to optionees to exercise their options with
shares of U.S. Home & Garden, Inc. common stock in which they have a holding
period, for income tax purposes, of at least six months and defer the receipt of
a portion of the shares subject to the option so exercised. The optionee has the
right to designate the time or times of receipt of those shares pursuant to the
Deferred Plan. The Deferred Plan contains provisions for earlier issuance of
those deferred shares on death, disability and other termination of employment
(e.g., on a change of control of U.S. Home & Garden Inc.). At June 30, 2001,
208,000 shares were held in the Deferred Plan. All of the shares were released
during the year ended June 30, 2002.
11. Contingencies
In the normal course of business, the Company is subject to proceedings,
lawsuits, and other claims, including claims by creditors, proceedings under
laws and government regulations related to product safety and other matters.
Such matters are subject to many uncertainties, and outcomes are not predictable
with assurance. Consequently, the ultimate amount of monetary liability or
financial impact with respect to these matters at June 30, 2002 cannot be
ascertained.
During fiscal 2001, the U.S. Consumer Product Safety Commission ("CPSC") began
an investigation into a product previously distributed by the Company's Weed
Wizard subsidiary.
29
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company has reached an agreement with the CPSC in principle, subject to the
execution of a formal settlement agreement. The settlement provides for an
aggregate fine of $885,000, against the Company and A.A.B.B., Inc. Pursuant to
the settlement agreement, the Company and A.A.B.B. Inc. will each pay $442,500
of the fine.
In fiscal 2001, the Company commenced an action against A.A.B.B., Inc. (formerly
known as Weed Wizard Inc.) and certain of its stockholders and officers relating
to the purchase from the defendants of substantially all of the assets of Weed
Wizard, Inc. by the Company. The Company is seeking to rescind the transaction
or to recover monetary damages. A.A.B.B., Inc. has asserted a counterclaim for
breach of contract against the Company for $720,000, plus interest, representing
an alleged adjustment to the purchase price.
In October 2002, the Company entered into a settlement agreement with A.A.B.B.,
Inc. The settlement involves a payment by A.A.B.B., Inc. of $442,500 to the CPSC
in payment of the fine discussed above, a payment of approximately $308,000 to
the Company, and the release of the escrow funds of approximately $329,000 to
the Company. The settlement agreement will become effective upon the execution
of the settlement agreement with the CPSC described above. The effects of the
agreements have been reflected in the consolidated financial statements as of
June 30, 2002.
12. Stockholders' Equity
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, rights and preference as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights, which could adversely affect
the voting power or other rights of the holders of the Company's common stock.
No shares of the preferred stock are outstanding.
Common Stock
In September 1998, the Company adopted a Stockholders' Rights Agreement commonly
known as a "poison pill", which provides that in the event an individual or
entity becomes a beneficial holder of 12% or more of the shares of the Company's
capital stock, other stockholders of the Company shall have the right to
purchase shares of the Company's (or in some cases, the acquirer's) common stock
at 50% of its then market value.
30
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Common Stock Repurchase Program
The Company is authorized to repurchase up to 5,500,000 shares of its common
stock through open market purchases and in privately negotiated transactions.
Repurchased shares are held by the Company as treasury stock. During 2001 and
2000, the Company repurchased 1,336,000 and 749,000 shares of treasury stock for
$2,141,000 and $1,905,000, respectively. Prior to fiscal 2000 the Company
repurchased 1,805,000 shares for $8,782,000.
Stock Option Plans
The Company adopted the 1991 Stock Option Plan (the "1991 Plan") pursuant to
which 700,000 shares of common stock have been reserved for issuance upon the
exercise of options designated as either (i) options intended to constitute
incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) non-qualified options. ISOs may be granted under
the 1991 Plan to employees and officers of the Company. Non-qualified options
may be granted to consultants, directors (whether or not they are employees),
employees and officers of the Company. At June 30, 2002, 48,000 options remain
available for issuance under the 1991 Plan.
During fiscal 1995, the Board of Directors of the Company (the "Board) adopted
two additional stock option plans. The 1995 Stock Option Plan (the "1995 Plan")
allows the granting of either ISOs or non-qualified options. The maximum
aggregate number of shares reserved for issuance under this plan is 1,500,000.
At June 30, 2002, 193,000 options remain available for issuance under the 1995
Plan.
The Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan")
was established to attract, retain and compensate for their services as
directors, highly qualified individuals who are not employees of the Company.
The maximum aggregate number of shares reserved for issue under this plan is
100,000. The 1995 Plan is administered by a committee of the Board and the
Non-Employee Director Plan is a formula plan. At June 30, 2002, 50,000 options
remain available for issuance under the Non-Employee Director Plan.
During May 1997, the Board approved the 1997 Stock Option Plan. The Plan allows
the granting of either ISOs or non-qualified options. The 1997 Plan reserves the
issuance of 1,500,000 shares of common stock. At June 30, 2002, 234,000 options
remain available for issuance under the 1997 Plan.
During May 1999, the Board approved the 1999 Stock Option Plan. The Plan allows
for granting of either ISOs or non-qualified options. The 1999 Plan reserves the
issuance of 900,000 shares of common stock. At June 30, 2002, 50,000 options
remain available for issuance under the 1999 Plan.
31
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Plans are administered by the Board or a committee of the Board and are
approved by the stockholders. The Board, or committee, as the case may be,
within the limitations of the plans, 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 plans may not be
granted at a price less than the fair market value of the common stock on the
date of grant (not less than par value in the case of the 1995 Plan). Options
granted under the plans will expire not more than ten years from the date of the
grant (five years in the case of ISOs granted to persons holding 10% or more of
the voting stock of the Company).
All options granted under the Plans are not transferable during an optionee's
lifetime but are transferable at death by will or by the laws of descent and
distribution.
32
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following is a summary of activity relating to stock options:
Weighted
Average Option
Price Per Share Outstanding Exercisable
================================================================================
1991 Plan
July 1, 1999 $1.69 397,000 232,000
Became exercisable 1.69 -- 18,000
Exercise of options 1.69 (40,000) (40,000)
- --------------------------------------------------------------------------------
June 30, 2000 1.69 357,000 210,000(2)
Became exercisable 1.69 -- 18,000
- --------------------------------------------------------------------------------
June 30, 2001 1.69 357,000 228,000(2)
Became exercisable 1.69 -- 26,000(1)
- --------------------------------------------------------------------------------
June 30, 2002 $1.69 357,000 254,000(2)
================================================================================
1995 Plan
July 1, 1999 $2.18 1,459,000 1,309,000
Became exercisable 2.25 -- 100,000
- --------------------------------------------------------------------------------
June 30, 2000 2.18 1,459,000 1,409,000(3)
Expired 2.23 (166,000) (166,000)
Became exercisable 2.06 -- 25,000
- --------------------------------------------------------------------------------
June 30, 2001 2.17 1,293,000 1,268,000(3)
Became exercisable 2.06 -- 25,000
Expired 2.06 (10,000) (10,000)
- --------------------------------------------------------------------------------
June 30, 2002 $2.18 1,283,000 1,283,000(3)
================================================================================
33
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Weighted
Average Option
Price Per Share Outstanding Exercisable
================================================================================
Director Stock Option Plan
July 1, 1999 $3.47 20,000 20,000
Granted 2.78 10,000 10,000
- --------------------------------------------------------------------------------
June 30, 2000 2.85 30,000 30,000(4)
Granted 1.61 20,000 5,000
- --------------------------------------------------------------------------------
June 30, 2001 2.35 50,000 35,000(4)
Became exercisable 1.06 -- 15,000
- --------------------------------------------------------------------------------
June 30, 2002 $2.59 50,000 50,000(4)
================================================================================
1997 Plan
July 1, 1999 $3.59 715,000 492,000
Granted 2.56 50,000 50,000
Became exercisable 3.16 -- 82,000
- --------------------------------------------------------------------------------
June 30, 2000 3.12 765,000 624,000(5)
Expired 2.68 (55,000) (55,000)
Became exercisable 3.16 -- 82,000
- --------------------------------------------------------------------------------
June 30, 2001 3.15 710,000 651,000(5)
Became exercisable 2.56 -- 29,000
- --------------------------------------------------------------------------------
June 30, 2002 $3.15 710,000 680,000(5)
================================================================================
34
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Weighted
Average Option
Price Per Share Outstanding Exercisable
================================================================================
1999 Plan
July 1, 1999 $ -- -- --
Granted 2.33 833,000 699,000
- --------------------------------------------------------------------------------
June 30, 2000 2.33 833,000 699,000(6)
Expired 2.56 (12,000) (12,000)
Became exercisable 2.56 -- 110,000
- --------------------------------------------------------------------------------
June 30, 2001 2.32 821,000 797,000(6)
Granted .53 10,000 5,000
Expired 2.83 (171,000) (171,000)
Became exercisable 2.14 -- 24,000
- --------------------------------------------------------------------------------
June 30, 2002 $2.16 660,000 655,000(6)
================================================================================
Non-Plan Options
July 1, 1999 $2.84 2,744,000 2,070,000
Expired 3.57 (402,000) (402,000)
Became exercisable 4.09 -- 206,000
Granted 3.60 125,000 125,000
- --------------------------------------------------------------------------------
June 30, 2000 2.34 2,467,000 1,999,000(7)
Expired 3.81 (11,000) (11,000)
Became exercisable 3.84 -- 168,000
- --------------------------------------------------------------------------------
June 30, 2001 2.33 2,456,000 2,156,000(7)
Granted .40 89,000 89,000
Expired 3.63 (691,000) (670,000)
Became exercisable 1.69 -- 107,000
- --------------------------------------------------------------------------------
June 30, 2002 $1.76 1,854,000 1,682,000(7)
================================================================================
35
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(1) In prior years, the expiration date and vesting period on 545,000 options
were 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 2002, 2001 and 2000 such expense
was $103,000, $119,000 and $119,000, respectively.
(2) At June 30, 2000, 2001 and 2002, the weighted average exercise option
price per share for exercisable options was $1.69 for all periods.
(3) At June 30, 2000, 2001 and 2002, the weighted average exercise option
price per share for exercisable options was $2.18, $2.17 and $2.18.
(4) At June 30, 2000, 2001 and 2002, the weighted average exercise price per
share for exercisable options was $2.85, $2.91, and $2.59.
(5) At June 30, 2000, 2001 and 2002, the weighted average exercise option
price per share for exercisable options was $3.25, $3.20 and $3.18.
(6) At June 30, 2000, 2001 and 2002, the weighted average exercise option
price per share for exercisable options was $2.25, $2.32 and $2.17.
(7) At June 30, 2000, 2001 and 2002, the weighted average exercise option
price per share for exercisable options was $2.25, $2.42 and $1.76.
During the year ended June 30, 2001, the expiration date of 200,000 options and
warrants was extended for two years. The options and warrants remain fully
vested. As a result, the Company recognized $142,000 of expense for the value of
the options and warrants.
The following table summarizes the above stock options outstanding and
exercisable at June 30, 2002:
Outstanding Exercisable
----------------------------------- --------------------
Weighted Weighted
Average Average Average
Range of Exercise Remaining Exercise Exercise
Price Options Life Price Options Price
- --------------------------------------------------------------------------------
$0.01 - 1.00 299,000 2.9 years $0.14 294,000 $0.13
1.01 - 2.00 733,000 4.7 years 1.68 459,000 1.67
2.01 - 3.00 3,158,000 3.3 years 2.13 3,127,000 2.13
3.01 - 4.00 664,000 2.5 years 3.30 664,000 3.30
4.01 - 4.69 60,000 2.1 years 4.22 60,000 4.22
- --------------------------------------------------------------------------------
$0.01 - 4.69 4,914,000 3.3 years $2.13 4,604,000 $2.16
================================================================================
36
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Warrants
In connection with certain business transactions and stock offerings, the
Company has granted various warrants to purchase common stock.
The following schedule summarizes the activity:
Weighted
Weighted Average
Average Remaining
Warrant Price Contractual
Per Share Outstanding(1) Exercisable Life
================================================================================
July 1, 1999 $2.45 1,216,000 1,216,000 1.5 years
Granted 2.28 36,000 36,000
Exercised 2.71 (341,000) (341,000)
- --------------------------------------------------------------------------------
June 30, 2000 3.02 911,000 911,000 1.5 years
Issued 5.00 200,000 100,000
- --------------------------------------------------------------------------------
June 30, 2001 3.31 1,111,000 1,011,000 2 years
Granted .40 940,000 940,000
Expired 3.14 (786,000) (786,000)
Became exercisable 7.00 -- 100,000
- --------------------------------------------------------------------------------
June 30, 2002 $1.25 1,265,000 1,265,000 6 years
================================================================================
(1) The warrants contain anti-dilution provisions which could affect the
number of shares of common issuable stock upon the exercise of the
warrants as well as the per share warrant prices. Additionally, these
warrants contain certain redemption provisions.
Common Stock Reserved
At June 30, 2002, approximately 7,819,000 shares of common stock have been
reserved for issuance upon the exercise of warrants and options.
37
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Stock-Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpertations in accounting for its employee and
director stock option plans. Under all the Company's option plans, the exercise
price of the options equals or exceeds the market price of the underlying stock
on the date of the grant and therefore, no compensation cost is recognized.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company to
provide pro forma information regarding net income and earnings per share as if
compensation costs for the Company's employee and director stock options and
warrants had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimated the fair value of each stock
option and warrant at the grant date by using a Black-Scholes pricing model with
the following weighted-average assumptions used for grants in 2002, 2001 and
2000, respectively: no dividend yield for any year; expected volatility of
approximately 75%, 60% and 55%, risk-free interest rates of 3.5% 5.4% and 6.4%;
and expected lives of approximately three to five years. Pro forma compensation
expense associated with options granted to employees and directors totaled
$2,000, $17,000 and $2,185,000 for 2002, 2001 and 2000 respectively. The per
option weighted average fair value was, $.32, $1.08 and $1.53 for 2002, 2001 and
2000, respectively.
Under the accounting provisions of SFAS No. 123, the Company's net loss and net
loss per common share would have been adjusted to the pro forma amounts
indicated below:
Year ended June 30, 2002 2001 2000
- ------------------------------------------------------------------------------------
Net Loss:
As reported $(11,492,000) $(25,429,000) $ (345,000)
Pro forma (net of tax effect) (11,494,000) (25,442,000) (1,481,000)
Dilutive per common share (.64) (1.40) (.02)
Dilutive per common share pro forma (.64) (1.40) (.07)
====================================================================================
38
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Restructuring Charges
In 2001, the Company recorded a restructuring charge of $2,860,000 relating to
the closing and sale of the Ampro Industries Inc. facility in Michigan. The
Company intends to continue to sell products, through a contract manufacturing
agreement, being manufactured at the former Ampro facility. As part of this
agreement, the Company has firm commitments to purchase minimum amounts of
product. The contract includes an exit provision, whereby the maximum cost to
the Company for termination of the agreement is $350,000. During the year ended
June 30, 2001, the Company recognized approximately $1,709,000 of expenses and
losses relating to the closing and sale of property and equipment of the Ampro
facility and $1,151,000 for termination benefits to be paid to all 60 employees
involved with the facility. All severance payments as a result of the
restructuring have been paid and no adjustments were made to the liability
recorded for severance payments during the year ended June 30, 2002.
14. Income Taxes
Deferred tax assets (liabilities) consist principally of the following:
June 30, 2002 2001
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 6,015,000 $ 1,421,000
Accumulated depreciation and
amortization 2,971,000 3,382,000
Accounts receivable allowance 475,000 330,000
Inventory allowance 200,000 467,000
Other 13,000 408,000
- --------------------------------------------------------------------------------
Gross deferred tax assets 9,674,000 6,008,000
Less valuation allowance (6,922,000) (3,626,000)
- --------------------------------------------------------------------------------
Total deferred tax assets $ 2,752,000 $ 2,382,000
- --------------------------------------------------------------------------------
Deferred tax liabilities-
Accumulated depreciation and amortization $ 2,606,000 $ 2,382,000
================================================================================
39
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The valuation allowance of $6,922,000 was recorded due to the uncertainty of the
Company's ability to generate sufficient future taxable income to realize total
gross deferred tax assets.
The Company's net operating loss carryforward for federal income tax purposes
amounted to $17,691,000 at June 30, 2002, and expires in 2021 if not previously
utilized.
The net deferred income taxes as of June 30, 2002 and 2001 are presented in the
balance sheets as follows:
June 30, 2002 2001
- --------------------------------------------------------------------------------
Current asset $688,000 $1,205,000
Long-term liability $542,000 $1,205,000
================================================================================
The income tax provision (benefit) consists of:
Year ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Current:
Federal $ -- $ (271,000) $ 2,418,000
State 374,000 16,000 319,000
- --------------------------------------------------------------------------------
374,000 (255,000) 2,737,000
- --------------------------------------------------------------------------------
Deferred:
Federal (146,000) (1,358,000) 258,000
State -- 210,000 (210,000)
- --------------------------------------------------------------------------------
(146,000) (1,148,000) 48,000
- --------------------------------------------------------------------------------
$ 228,000 $(1,403,000) $ 2,785,000
================================================================================
The 2001 and 2000 income tax expense (benefit) includes income tax expense of
$3,000 and $878,000 relating to the extraordinary gain.
40
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following is a reconciliation between the federal statutory income tax rate
and the Company's effective tax rate relating to income from continuing
operations before minority interest and extraordinary gain:
Year ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Income tax provision computed at
Federal Statutory rate (34.0)% 34.0% (34.0)%
State taxes, net of Federal tax effects (62.3) (2.5) (1.3)
Nondeductible amortization and other 1.8 (7.0) (12.3)
Changes in valuation allowance on
deferred tax assets 36.9 (1.2) 3.4
Deductible UPOs and stock options -- -- 1.9
- --------------------------------------------------------------------------------
Income Tax Benefit (Expense) (57.6)% 23.3% (42.3)%
================================================================================
15. Extraordinary Gain
During the years ended June 30, 2001 and 2000, respectively, the Company
purchased 1,200 and 250,781 of the outstanding 9.40% Cumulative Trust Preferred
Securities issued by its subsidiary, U.S. Home & Garden Trust I, at
approximately $15 and $17 per Trust Preferred Security. The repurchase of these
Trust Preferred Securities resulted in extraordinary gains during the years
ended June 30, 2001 and 2000, of $4,000 and $1,224,000 (after provisions for
income taxes of $3,000 and $878,000), respectively. During the year ended June
30, 2000, the Company purchased 24,000 Trust Preferred Securities from officers
and directors under the same terms and conditions as described above.
16. Earnings per Share
The following is a reconciliation of the weighted average number of shares used
to compute basic and dilutive earnings per share:
2002 2001 2000
- --------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 17,555,000 18,181,000 19,031,000
Dilutive effect of stock options
and warrants 469,000 -- 1,729,000
- --------------------------------------------------------------------------------
Dilutive weighted average
common shares outstanding 18,024,000 18,181,000 20,760,000
================================================================================
41
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Options and warrants to purchase 4,939,000, 6,788,000 and 1,503,000 shares of
common stock in fiscal years 2002, 2001 and 2000, respectively, were not
included in the computation of diluted earnings per share because the option or
warrant exercise price was greater than the average market price of the stock.
Diluted earnings per share for the year ended June 30, 2001 is based only on the
weighted average number of common shares outstanding as the inclusion of 10,000
common share equivalents would have been anti-dilutive.
17. Supplemental Cash Flow Information
Year ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Cash paid (received) during the
period for:
Interest paid $ 6,696,000 $ 7,314,000 $ 7,220,000
Interest received $ (83,000) $ (149,000) $ (264,000)
Income taxes refunded $ (100,000) $ (790,000) $(1,020,000)
================================================================================
Supplemental information regarding non-cash investing and financing activities
during the year ended June 30, 2002:
Discount on issuance of 16% subordinated notes
at 90% of face amount $600,000
Discount on issuance of warrants and options
in conjunction with debt refinancing $402,000
42
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
18. Quarterly Information (Unaudited)
First Second Third Fourth
Fiscal 2002 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
Income sales $ 13,483,000 $11,762,000 $23,913,000 $ 29,789,000
Gross profit $ 5,540,000 $ 4,752,000 $11,087,000 $ 14,210,000
Income (loss) from continuing operations
before extraordinary gain and cumulative
effect of a change in accounting principle $ (2,553,000) $(2,835,000) $ 1,822,000 $ 3,696,000
Income (loss) from discontinued operations $ (268,000) $ (490,000) $ 227,000 $ (1,229,000)
Income on disposal of discontinued operations $ -- $ -- $ -- $ 20,000
Cumulative effect of a change in accounting principle $ (9,882,000) $ -- $ -- $ --
Net income (loss) $(12,703,000) $(3,325,000) $ 2,049,000 $ 2,487,000
Basic earnings per share:
Income (loss) from continuing operations
before extraordinary gain and cumulative
effect of a change in accounting principle $ (.15) $ (.16) $ .11 $ .21
Discontinued operations $ (.01) $ (.03) $ .01 $ (.07)
Cumulative effect of a change in accounting
principle $ (.56) $ -- $ -- $ --
Net income (loss) per common share $ (.72) $ (.19) $ .12 $ .14
Diluted earnings per share:
Income (loss) from continuing operations $ (.15) $ (.16) $ .10 $ .21
Discontinued operations $ (.01) $ (.03) $ .01 $ (.07)
Cumulative effect of a change in accounting
principle $ (.56) $ -- $ -- $ --
Net income (loss) per common share $ (.72) $ (.19) $ .11 $ .14
First Second Third Fourth
Fiscal 2001 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
Net sales $ 12,548,000 $11,303,000 $25,768,000 $ 29,244,000
Gross profit $ 4,169,000 $ 4,180,000 $11,644,000 $ 14,805,000
Loss from continuing operations before
extraordinary gain $ (1,803,000) $(1,771,000) $ (38,000) $ (1,017,000)
Loss from discontinued operations $ (952,000) $(1,226,000) $(1,733,000) $(12,342,000)
Loss on disposal of discontinued operations $ -- $ -- $ -- $ (4,551,000)
Extraordinary gain $ 4,000 $ -- $ -- $ --
Net loss $ (2,751,000) $(2,997,000) $(1,771,000) $(17,910,000)
Basic earnings per share:
Loss from continuing operations before
extraordinary gain $ (.10) $ (.10) $ -- $ (.06)
Discontinued operations $ (.05) $ (.06) $ (.10) $ (.96)
Extraordinary gain $ -- $ -- $ -- $ --
Net loss per common share $ (.15) $ (.16) $ (.10) $ (1.02)
Diluted earnings per share:
Loss from continuing operations before
extraordinary gain $ (.10) $ (.10) $ -- $ (.06)
Discontinued operations $ (.05) $ (.06) $ (.10) $ (.96)
Extraordinary gain $ -- $ -- $ -- $ --
Net loss per common share $ (.15) $ (.16) $ (.10) $ (1.02)
43
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Differences between amounts included above and amounts previously reported on
Form 10-Q are due to the reclassification to discontinued operations as
described in Note 2, and the cumulative effect of a change in accounting
principle of $9,882,000, related to the loss on impairment of goodwill recorded
as of July 1, 2001. See Note 6.
The fourth quarter of 2001 includes a pre-tax charge of $10,820,000 related to
the loss on impairment of goodwill and a loss on disposal of discontinued
operations of $4,551,000. See Note 2.
The fourth quarter of 2002 includes the write off of minority interest of
$1,136,000 net of an estimated loss on disposal of discontinued operations of
$1,116,000. See Note 2.
44
Consolidated Financial
Statement Schedule
==============================
U.S. Home & Garden Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
================================================================================
Charged to
Beginning Costs and Ending
Balance Expenses Writeoffs Balance
- ------------------------------------------------------------------------------------------------------
Reserves and Allowances Deducted
from Asset Accounts (Continuing
Operations):
Allowance for Doubtful Accounts
o Year ended June 30, 2000 $ 991,000 $173,000 $ (589,000) $ 575,000
o Year ended June 30, 2001 $ 575,000 $646,000 $ (250,000) $ 971,000
o Year ended June 30, 2002 $ 971,000 $425,000 $ (15,000) $1,381,000
Reserve for Inventory Obsolescence
o Year ended June 30, 2000 $ 513,000 $283,000 $ (256,000) $ 540,000
o Year ended June 30, 2001 $ 540,000 $943,000 $ (143,000) $1,340,000
o Year ended June 30, 2002 $1,340,000 $ 94,000 $(1,209,000) $ 225,000
- ------------------------------------------------------------------------------------------------------
45
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 15, 2002
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 15, 2002
- ----------------------- of Directors, Chief
Robert Kassel Executive Officer,
President, Secretary
and Treasurer (Chief
Executive Officer)
/s/ Richard Kurz Chief Financial Officer October 15, 2002
- ----------------------- (Principal Financial and
Richard Kurz Accounting Officer)
/s/ Richard Raleigh Director October 15, 2002
- -----------------------
Richard Raleigh
/s/ Brad Holsworth Director October 15, 2002
- -----------------------
Brad Holsworth
/s/ Jon Schulberg Director October 15, 2002
- -----------------------
Jon Schulberg
/s/ Fred Heiden Director October 15, 2002
- -----------------------
Fred Heiden
U.S. Home & Garden Inc.
Certification of Principal Executive Officer
I, Robert Kassel, Chief Executive Officer of U.S. Home & Garden Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of U.S. Home & Garden
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Date: October 15, 2002
/s/ Robert Kassel
-----------------------------
Robert Kassel
Chief Executive Officer
(Principal Executive Officer)
EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the
Certification as set forth in this Annual Report on Form 10-K have been omitted,
consistent with the Transition Provisions of SEC Exchange Act Release No.
34-46427, because this Annual Report on Form 10-K covers a period ending before
the Effective Date of Exchange Rules 13a-14 and 15d-14.
U.S. Home & Garden Inc.
Certification of Principal Financial Officer
I, Richard Kurz, Chief Financial Officer of U.S. Home & Garden Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of U.S. Home & Garden
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Date: October 15, 2002
/s/ Richard Kurz
-----------------------------
Richard Kurz
Chief Financial Officer
(Principal Financial Officer)
EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the
Certification as set forth in this Annual Report on Form 10-K have been omitted,
consistent with the Transition Provisions of SEC Exchange Act Release No.
34-46427, because this Annual Report on Form 10-K covers a period ending before
the Effective Date of Exchange Act Rules 13a-14 and 15d-14.