Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
From the transition period from ____________ to ____________
Commission File Number 001-14015
U.S. HOME & GARDEN INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0262908
(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification Number)
655 Montgomery Street
San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of May 12, 2003 there were 17,951,090 shares of the issuer's common stock,
par value $.001 per share, outstanding.
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of March 31, 2003 (Unaudited) 1-2
and June 30, 2002
Consolidated statements of operations for the three months and 3
nine months ended March 31, 2003 and 2002 (Unaudited)
Consolidated statements of cash flows for the nine months 4-5
ended March 31, 2003 and 2002 (Unaudited)
Notes to consolidated financial statements 6-11
Item 2. - Management's Discussion and Analysis of Financial 12-20
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. - Controls and Procedures 20
Part II. - Other Information
Item 5. - Other Information 20-21
Item 6. - Exhibits and Reports on Form 8-K 21
Signatures 21
Certifications 22-23
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
March 31, 2003 June 30, 2002
-------------- -------------
(Unaudited)
Assets
Current
Cash and cash equivalents $ 479,000 $ 219,000
Accounts receivable, less allowance for doubtful
accounts and sales returns of $1,131,000 and $1,635,000 27,261,000 26,243,000
Inventories 12,498,000 8,023,000
Prepaid expenses and other current assets 877,000 988,000
Refundable income taxes 137,000 405,000
Deferred tax asset 688,000 688,000
Current assets of discontinued operations 214,000 1,052,000
- -----------------------------------------------------------------------------------------------------
Total Current Assets 42,154,000 37,618,000
Property and Equipment, net 4,317,000 4,850,000
Intangible Assets
Goodwill, net 49,878,000 49,861,000
Deferred financing costs, net of accumulated
amortization of $939,000 and $578,000 4,093,000 3,570,000
Non-compete agreements, net of accumulated
amortization of $676,000 and $407,000 834,000 1,103,000
Package tooling costs, net of accumulated
amortization of $2,266,000 and $1,860,000 1,237,000 1,216,000
Product rights, patents and trademarks, net of
accumulated amortization of $195,000 and $163,000 477,000 509,000
Officer Receivables 512,000 512,000
Property and Equipment of Discontinued Operations
Held For Sale -- 100,000
Other Assets 23,000 26,000
- -----------------------------------------------------------------------------------------------------
Total Assets $103,525,000 $99,365,000
=====================================================================================================
See accompanying notes to consolidated financial statements.
1
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
March 31, 2003 June 30, 2002
-------------- -------------
(Unaudited)
Liabilities and Stockholders' Equity (Deficit)
Current
Revolving credit facility $ 20,013,000 $ 15,036,000
Accounts payable 12,008,000 7,180,000
Accrued rebates 1,086,000 931,000
Accrued commissions 1,059,000 1,437,000
Accrued co-op advertising 908,000 740,000
Accrued expenses 1,728,000 1,577,000
Current portion of long-term debt 12,080,000 7,712,000
Current liabilities of discontinued operations 116,000 277,000
- ------------------------------------------------------------------------------------------------------
Total Current Liabilities 48,998,000 34,890,000
Deferred Tax Liability 542,000 542,000
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures 57,035,000 56,951,000
- ------------------------------------------------------------------------------------------------------
Total Liabilities 106,575,000 92,383,000
- ------------------------------------------------------------------------------------------------------
Stockholders' Equity (Deficit)
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $0.001 par value - shares authorized,
75,000,000; 21,841,000 and 21,641,000 shares issued 22,000 22,000
Additional paid-in capital 52,441,000 52,351,000
Retained deficit (42,685,000) (32,563,000)
- ------------------------------------------------------------------------------------------------------
9,778,000 19,810,000
Less: Treasury Stock, 3,890,000 shares at cost (12,828,000) (12,828,000)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) (3,050,000) 6,982,000
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity (Deficit) $ 103,525,000 $ 99,365,000
======================================================================================================
See accompanying notes to consolidated financial statements.
2
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
Unaudited Unaudited
------------------------------------------------------------------
Net Sales $ 24,036,000 $ 23,913,000 $ 49,538,000 $ 49,158,000
Cost of Sales 12,758,000 12,559,000 28,111,000 27,512,000
- -------------------------------------------------------------------------------------------------------------------------------
Gross Profit 11,278,000 11,354,000 21,427,000 21,646,000
- -------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Selling and shipping 5,413,000 4,983,000 12,969,000 12,200,000
General and administrative 2,028,000 2,081,000 6,108,000 6,121,000
Depreciation 176,000 187,000 539,000 561,000
Other amortization 278,000 204,000 751,000 492,000
- -------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 7,895,000 7,455,000 20,367,000 19,374,000
- -------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 3,383,000 3,899,000 1,060,000 2,272,000
Other Expenses
Refinancing and transaction costs (116,000) -- (4,179,000) (254,000)
Interest expense, net (1,998,000) (1,811,000) (5,658,000) (5,318,000)
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations Before
Income Tax and Cumulative Effect of a Change in
Accounting Principle 1,269,000 2,088,000 (8,777,000) (3,300,000)
Income Tax Expense (3,000) -- (111,000) --
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations Before
Cumulative Effect of a Change in Accounting
Principle 1,266,000 2,088,000 (8,888,000) (3,300,000)
Discontinued Operations -
Loss from discontinued operations (41,000) (39,000) (1,234,000) (797,000)
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Cumulative Effect of a
Change In Accounting Principle 1,225,000 2,049,000 (10,122,000) (4,097,000)
Cumulative effect of a change in accounting principle -- -- -- (9,882,000)
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 1,225,000 $ 2,049,000 $(10,122,000) $(13,979,000)
===============================================================================================================================
Per Share Amounts:
Weighted Average Common Shares
Outstanding - Basic 17,951,000 17,543,000 17,863,000 17,543,000
Weighted Average Common Shares
Outstanding - Diluted 18,124,000 17,915,000 17,863,000 17,543,000
Income (Loss) from Continuing Operations per
Common Share Before Cumulative Effect of a
Change in Accounting Principle - Basic and Diluted $ 0.07 $ 0.12 $ (0.50) $ (0.19)
Discontinued operations -- -- (0.07) (0.05)
Cumulative effect of a change in accounting principle -- -- -- (0.56)
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 0.07 $ 0.12 $ (0.57) $ (0.80)
===============================================================================================================================
See accompanying notes to consolidated financial statements.
3
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Nine months ended March 31, 2003 2002
- --------------------------------------------------------------------------------------------------------
Unaudited
----------------------------
Cash Flows from Operating Activities:
Net loss from continuing operations before cumulative
effect of a change in accounting principle $(8,888,000) $(3,300,000)
Adjustments to reconcile net loss from continuing
operations before cumulative effect of a change in accounting
principle to net cash used in operating activities:
Depreciation and amortization 2,374,000 2,203,000
Write-off of deferred finance costs and discounts 1,928,000 254,000
Trust Preferred payments retained and applied against note
receivable 84,000 --
Compensation related to stock options 90,000 89,000
Payment-in-kind interest 80,000 --
Changes in operating assets and liabilities:
Accounts receivable (1,018,000) (4,610,000)
Inventories (4,475,000) (1,494,000)
Prepaid expenses and other current assets 111,000 (157,000)
Accounts payable and accrued expenses 4,924,000 3,347,000
Refundable income taxes 268,000 1,375,000
Other assets 3,000 279,000
- --------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (4,519,000) (2,014,000)
- --------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments related to purchase of business (17,000) --
Increase in officer receivables -- (31,000)
Purchase of property and equipment (707,000) (586,000)
Purchase of intangibles (427,000) (329,000)
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,151,000) (946,000)
========================================================================================================
See accompanying notes to consolidated financial statements.
4
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Nine months ended March 31, 2003 2002
- -------------------------------------------------------------------------------------------
Unaudited
-----------------------------
Cash Flows from Financing Activities:
Deferred finance costs $ (1,974,000) $(1,059,000)
Net borrowings (payments) on lines-of-credit 4,977,000 (5,729,000)
Proceeds from long-term debt 12,000,000 8,250,000
Principal payments on long-term debt (8,616,000) (133,000)
- -------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 6,387,000 1,329,000
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents from
continuing operations 717,000 (1,631,000)
Cash used in discontinued operations (457,000) (1,093,000)
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 260,000 (2,724,000)
Cash and Cash Equivalents, beginning of period 219,000 2,724,000
- -------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 479,000 $ --
===========================================================================================
Supplemental Disclosure of Cash Flow
Information
Cash paid for interest $ 5,556,000 $ 5,230,000
Cash paid (refund received) for taxes - net $ (157,000) $ 58,000
===========================================================================================
Non-Cash Investing and Financing Activities
Issuance of 16% subordinated notes at
90% of face amount $ -- $ 600,000
Issuance of warrants and options in
conjunction with debt refinancing $ -- $ 402,000
===========================================================================================
See accompanying notes to consolidated financial statements.
5
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. The accompanying consolidated financial statements at March 31, 2003 and
for the three months and nine months ended March 31, 2003 and 2002 are
unaudited, but, in the opinion of management, include all adjustments
necessary for a fair presentation of consolidated financial position and
results of operations for the periods presented. The results for the nine
months ended March 31, 2003 are not necessarily indicative of the results
of operations for a full year.
2. Refer to the audited consolidated financial statements for the year ended
June 30, 2002, for details of accounting policies and detailed notes to
the consolidated financial statements.
3. Inventories consist of:
March 31, 2003 June 30, 2002
----------------------------------------------------------------------
Raw materials $ 5,751,000 $4,025,000
Finished goods 6,747,000 3,998,000
----------------------------------------------------------------------
$12,498,000 $8,023,000
======================================================================
4. All shipping and handling expenses are included in the selling and
shipping caption and totaled approximately $1,936,000 and $1,622,000 for
the three months ended March 31, 2003 and 2002 respectively and $4,369,000
and $3,633,000 for the nine months ended March 31, 2003 and 2002
respectively.
5. The Company entered into a senior credit facility dated as of October 30,
2002 for the Company and its material subsidiaries. Foothill Capital
Corporation, which is the administrative agent for the facility, is also
the revolving credit lender, and Ableco Finance LLC is providing a term
loan. The total amount of the new credit facility is $35 million, of which
$23 million is a revolving credit facility and $12 million is a term loan.
The new credit facility matures October 30, 2005. Interest on the
revolving credit facility is at variable annual interest rates based on
the prime rate or LIBOR plus applicable marginal rates. Interest on the
term loan is at variable annual interest rates based on the prime rate
with a minimum rate of 9.75% plus 2% of accrued interest payable upon
maturity (payment in kind interest). The interest rate on the term loan
increases 2% each year the balance is outstanding. Borrowings on the
revolving credit facility are limited based on eligible borrowing bases,
effectively $23,000,000 at March 31, 2003, the maximum on the revolving
credit facility.
The Company and its material subsidiaries' obligations under the new
credit facility are secured by a security interest in favor of the lenders
in substantially all of the assets of the Company and its material
subsidiaries. The Company and its material subsidiaries are subject to
certain financial and other covenants under the new credit facility. At
the end of January 2003, the Company's financial performance created a
"Triggering Event" which increased the interest rate on the term loan in
February and March by 2.5% points, to 14.25%. At March 31, 2003, the
Company was in violation of a covenant and received a waiver from the
lenders for the March 31, 2003 violation. The Company was in violation of
a covenant at April 30, 2003 and will request a waiver from the lenders
for the violation. Amounts outstanding under the new credit facility have
been classified as short-term debt, as the bank waiver does not cover the
period subsequent to March 31, 2003.
6
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company had a financing agreement to provide $25,000,000 in senior
secured financing. The agreement provided 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
was $1,767,000. Interest on borrowings was 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. At June
30, 2002 the Company had $15,036,000 of borrowings outstanding under the
revolving credit facility. These borrowings were paid in full on November
1, 2002 with proceeds from the new financing agreements discussed above.
The Company also had 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. Interest was 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. 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. These borrowings were paid
in full on November 1, 2002 with proceeds from the new financing
agreements discussed above.
Upon repayment of the $6,250,000 subordinated debt, the Company continues
to have certain ongoing obligations under the subordinated debt financing
agreement to the holders of the warrants to purchase common stock of the
Company and option to purchase Trust Preferred Securities described above
by virtue of these agreements. Under the option agreement, payments of
interest on the Trust Preferred option securities is used to reduce the
option price and is recorded as additional Trust Preferred liability. When
the option price is reduced to zero, the Company will issue the underlying
Trust Preferred Securities.
6. In December 2002, the Company announced an agreement to sell assets
comprising substantially all of its assets on a consolidated basis to a
management group led by Richard Grandy, Chief Operating Officer of the
Company.
Under the terms of the agreement, Easy Gardener Products Ltd., a new
entity owned by the management group will acquire substantially all of the
assets and assume substantially all of the liabilities of Easy Gardener,
Inc. and its subsidiaries, Easy Gardener, UK, Ltd, Weatherly Consumer
Products Group, Inc. and Weatherly Consumer Products, Inc. and Ampro
Industries, Inc. The new company will also assume the obligations of the
parent company, US Home & Garden, Inc., (USHG) to U.S. Home & Garden Trust
I, including the obligation to make monthly payments, which will allow the
Trust to make distributions to holders of its Trust Preferred Securities.
The transaction is subject to the approval of the holders of the Trust
Preferred Securities and a proxy statement seeking such approval has been
filed with the SEC as part of a registration statement of Easy Gardener
Products Ltd. and U.S. Home & Garden Trust I that is subject to SEC review
and effectiveness. The proposed sale is also subject to a number of
additional conditions including the buyer obtaining the required
financing.
The Asset Purchase Agreement provides that the proposed transaction must
be completed on or before June 30, 2003.
7
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
After subtracting costs of the transaction including certain estimated
costs which the Company agrees to pay at closing, the Company expects to
receive net cash of $18,700,000 upon the following terms: net cash of
$17,100,000 paid at closing, and an additional $1,600,000 in the form of a
subordinated promissory note delivered at closing.
7. Refinancing and transaction costs included in the Consolidated Statements
of Operations for the nine month period ended March 31, 2003 relate to the
refinancing described in note 5 to the financial statements and the
proposed asset sale described in note 6 to the financial statements. As a
result of the refinancing, the Company wrote-off $1,928,000 of previously
deferred financing costs and discounts related to the replaced financing
agreements and also recorded fees and expenses of $2,251,000 in the nine
months ended March 31, 2003. The Company incurred $116,000 of costs during
the quarter ended March 31, 2003 related to the proposed asset sale. The
Company capitalized $1,974,000 of deferred financing costs related to the
new financing during the nine months ended March 31, 2003.
8. In June 2002, the Company announced that is was discontinuing the
operations conducted through its subsidiary Weed Wizard Acquisition Corp.
("Weed Wizard") effective September 30, 2002. Despite the Company's
efforts to increase sales and return to profitability, Weed Wizard
experienced continued erosion of its business. The Company plans to
liquidate the assets and liabilities of Weed Wizard during fiscal 2003.
Revenues for Weed Wizard for the three months and nine months ended March
31, 2003 and 2002 were not material. The Company had a net loss from the
discontinued operations of Weed Wizard of $41,000 and $39,000 for the
three months ended March 31, 2003 and 2002, respectively, and $1,234,000
and $797,000 for the nine months ended March 31, 2003 and 2002,
respectively.
In June 2001, the Company announced that it was discontinuing its
e-commerce initiative, which it was conducting though its subsidiary,
Egarden, Inc. (Egarden), effective June 30, 2001. All severance payments
were made by June 30, 2002. No adjustments were required to the liability
recorded for severance payments since June 30, 2001.
8
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The assets and liabilities of discontinued Weed Wizard and Egarden
operations reported in the consolidated balance sheets consist of the
following:
March 31, 2003
==================================================================
Weed Wizard Egarden Total
==================================================================
Current Assets:
Cash and cash equivalents $ -- $63,000 $ 63,000
Accounts receivable -
Trade 117,000 -- 117,000
Other current assets 34,000 -- 34,000
------------------------------------------------------------------
Total Current Assets $151,000 $63,000 $ 214,000
==================================================================
Current Liabilities:
Accounts payable $ 2,000 $ -- $ 2,000
Accrued expenses 98,000 16,000 114,000
------------------------------------------------------------------
Total Current Liabilities $100,000 $16,000 $ 116,000
==================================================================
June 30, 2002
-------------------------------------
Weed Wizard Egarden Total
------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ -- $62,000 $ 62,000
Accounts receivable:
Trade 385,000 -- 385,000
Settlement 195,000 -- 195,000
Inventories 274,000 -- 274,000
Other current assets 136,000 -- 136,000
------------------------------------------------------------------
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
==================================================================
9
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the
Company's consolidated financial statements and notes have been restated
for all periods presented to reflect the discontinued components. The
current assets and current liabilities of the discontinued components have
been separately stated and the property and equipment of discontinued
operations has been classified as "Held for Sale" on the balance sheet.
The net losses and net cash flows have been reported as "Discontinued
Operations" in the accompanying consolidated financial statements. The
notes have been restated to exclude amounts related to these discontinued
components.
9. Effective July 1, 2001, the Company adopted SFAS No. 141 and SFAS No. 142
and completed a reassessment of the useful lives of all intangible assets
other than goodwill which total $6,641,000 and $6,398,000 (net of
accumulated amortization of $4,081,000 and $3,008,000) at March 31, 2003
and June 30, 2002, respectively. No adjustments to previously determined
amortization periods were considered necessary. The Company has no
intangible assets with indefinite useful lives other than goodwill at
March 31, 2003.
Amortization expense for all intangible assets having definite useful
lives during the three months ended March 31, 2003 and 2002 was $442,000
and $301,000, respectively, and for the nine months ended March 31, 2003
and 2002 was $1,214,000 and $809,000, respectively. Estimated amortization
expense for continuing operations for each of the five succeeding fiscal
years is as follows:
Year Ended June 30, Amount
---------------------------------------------
2003 $1,600,000
2004 $1,600,000
2005 $ 877,000
2006 $ 667,000
2007 $ 667,000
The Company's previous business combinations were accounted for using the
purchase method. As a result of such combinations, the Company has
recognized a significant amount of goodwill, which, in the aggregate, was
$49,878,000 and $49,861,000, net of accumulated amortization, at March 31,
2003 and June 30, 2002, respectively.
In conjunction with the adoption of SFAS No. 141 and SFAS No. 142, the
Company completed its transitional goodwill impairment test. Ampro
Industries, Inc. ("Ampro") and Golden West Agri-Products, Inc. ("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 at the end of the prior fiscal year of $9,390,000. 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 was recorded at the end of the prior fiscal year of $492,000. In
accordance with the applicable accounting literature, for interim
reporting purposes these impairment losses were reflected as of July 1,
10
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2001 and were reported as a cumulative effect of a change in accounting
principle in the Consolidated Statements of Operations.
10. In the normal course of business, the Company is subject to proceedings,
lawsuits, and other claims, including proceedings under laws and
government regulations related to product safety and other matters. Such
matters are subject to many uncertainties, and outcomes are not
predictable with assurance.
11. The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations 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 fiscal 2002: no dividend yield, expected
volatility of approximately 75%, risk-free interest rate of 3.5%, and
expected lives of approximately three to five years.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation:
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
==================================================================
Net income (loss), as reported $ 1,225,000 $ 2,049,000 $(10,122,000) $(13,979,000)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards -- -- (1,000) (2,000)
------------------------------------------------------------------
Pro forma net income (loss) $ 1,225,000 $ 2,049,000 $(10,123,000) $(13,981,000)
==================================================================
Earnings (loss) per share -
Basic and Diluted
As reported $ 0.07 $ 0.12 $ (0.57) $ (0.80)
Pro forma $ 0.07 $ 0.12 $ (0.57) $ (0.80)
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Report
contains statements that are forward-looking, such as statements relating to
plans for the Company's future activities. Such forward-looking information
involves important known and unknown risks and uncertainties that could
significantly affect actual results, performance or achievements in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those relating to
the Company's 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, dependence on a limited number of suppliers, changes in federal or state
environmental laws and the administration of such laws, protection of trademarks
and other proprietary rights, the listing of the Company's common stock on the
over-the-counter market via the Electronic Bulletin Board, and the general
condition of the economy and its effect on the securities markets and other
risks detailed in the Company's other filings with the Securities and Exchange
Commission. The words "believe," "expect," "anticipate," "intend" and "plan" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date the statement was made.
General
U.S. Home & Garden Inc., ("the Company"), manufactures and markets a broad range
of brand-name consumer lawn and garden products through its wholly owned
subsidiaries, Ampro, Easy Gardener, Inc. ("Easy Gardener"), and Golden West and
Easy Gardener's wholly owned subsidiaries, Weatherly Consumer Products Group,
Inc. and Weed Wizard. In June 2002, the Company announced the discontinuation of
the Weed Wizard operations effective September 30, 2002. Since 1992, the Company
consummated eleven acquisitions of complementary lawn and garden companies and
product lines for an aggregate consideration of approximately $111,000,000 in
cash, notes and equity securities. As a result of such acquisitions, the Company
recognized a significant amount of goodwill, which, in the aggregate, was
$49,878,000 and $49,861,000, net of accumulated amortization, at March 31, 2003
and June 30, 2002, respectively.
The consumer lawn and garden market continues to become more consolidated with
fewer retailers accounting for an increasing percentage of all lawn and garden
products sold. This increasing concentration provides the largest retailers with
greater leverage over their suppliers, such as the Company. This leverage could
result in decreased margins for suppliers, including the Company, which may be
required to make greater price concessions to their large retail accounts
without being able to reduce the costs of the products sold by them to the
retailers. This leverage by the large retailers could also increase sales
volatility for the Company as well as other suppliers of lawn and garden
products.
12
Results of Operations
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of net sales:
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
=================== ===================
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.1 52.5 56.8 56.0
------------------- -------------------
Gross profit 46.9 47.5 43.2 44.0
Selling and shipping expenses 22.5 20.8 26.2 24.8
General and administrative expenses 8.4 8.7 12.3 12.5
Depreciation and amortization 1.9 1.7 2.6 2.1
------------------- -------------------
Income from continuing operations 14.1 16.3 2.1 4.6
Refinancing and transaction costs (0.5) -- (8.4) (0.5)
Interest expense, net (8.3) (7.6) (11.4) (10.8)
------------------- -------------------
Income (loss) from continuing operations before
cumulative effect of a change in accounting
principle 5.3 8.7 (17.7) (6.7)
Income tax expense -- -- (0.2) --
------------------- -------------------
Income (loss) from continuing operations before
cumulative effect of a change in accounting
principle 5.3 8.7 (17.9) (6.7)
Loss from discontinued operations (0.2) (0.2) (2.5) (1.6)
=================== ===================
Income (loss) before cumulative effect of a change
in accounting principle 5.1 8.5 (20.4) (8.3)
Cumulative effect of a change in accounting principle -- -- -- (20.1)
=================== ===================
Net income (loss) 5.1% 8.5% (20.4%) (28.4%)
=================== ===================
13
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Net sales. Net sales increased by $123,000, or 0.5%, to $24,036,000 during the
three months ended March 31, 2003, from $23,913,000 during the comparable period
in 2002. The increase in net sales was the result of an increase in volume of
products sold to existing customers, offset in part by increased discounts,
rebates and allowances granted by the Company.
Cost of sales. Cost of sales increased by $199,000, or 1.6% to $12,758,000 for
the three months ended March 31, 2003 from $12,559,000 during the comparable
period in 2002. The increase was partially a result of the increase in sales.
Cost of sales as a percentage of net sales increased to 53.1% during the three
months ended March 31, 2003 from 52.5% during the comparable period in 2002. The
percentage increase is primarily a result of increased discounts, rebates and
allowances. Cost of sales as a percent of sales before rebates and discounts
decreased slightly.
Gross profit. Gross profit decreased by $76,000, or 0.7%, to $11,278,000 for the
three months ended March 31, 2003 from $11,354,000 during the comparable period
in 2002. Gross profit as a percentage of net sales decreased to 46.9% during the
three months ended March 31, 2003, from 47.5% during the comparable period in
2002. This decrease in gross profit dollars and as a percentage of net sales
resulted from the increased discounts, rebates and allowances as noted above.
Selling and shipping expenses. Selling and shipping expenses increased by
$430,000, or 8.6% to $5,413,000 during the three months ended March 31, 2003
from $4,983,000 during the comparable period in 2002. This increase in expense
was attributable to the increased number of smaller shipments and increased
outbound freight costs. As a percentage of net sales, selling and shipping
expenses increased to 22.5% during the three months ended March 31, 2003 from
20.8% during the comparable period in 2002.
General and administrative expenses. General and administrative expenses
decreased by $53,000 or 2.5%, to $2,028,000 during the three months ended March
31, 2003 from $2,081,000 during the comparable period in 2002 due primarily to
cost reduction measures. As a percentage of net sales, general and
administrative expenses decreased to 8.4% during the three months ended March
31, 2003 from 8.7% during the comparable period in 2002.
Depreciation and amortization. Depreciation and amortization expenses increased
by $63,000 or 16.1% to $454,000 during the three months ended March 31, 2003
from $391,000 during the comparable period in 2002. This increase is primarily
due to increased amortization of deferred financing costs. As a percentage of
net sales, depreciation and amortization expenses increased to 1.9% during the
three months ended March 31, 2003 from 1.7% during the comparable period in
2002.
Income from continuing operations. Income from continuing operations decreased
by $516,000 or 13.2% to $3,383,000 during the three months ended March 31, 2003,
from $3,899,000 during the comparable period in 2002. The decrease in income
from continuing operations was primarily due to increased discounts, rebates and
allowances and outbound freight costs being greater than the increased sales
volume as noted above. As a percentage of net sales, income from operations
decreased to 14.1% for the three months ended March 31, 2003 from 16.3% during
the comparable period in 2002.
Refinancing and transaction costs. The Company incurred $116,000 in transaction
costs during the quarter ended March 31, 2003. The Company did not incur any
refinancing and transaction costs in the comparable quarter in 2002.
Interest expense. Net interest expense increased $187,000, or 10.3% to
$1,998,000 during the three months ended March 31, 2003, from $1,811,000 during
the comparable period in 2002. The increase in interest expense is related to an
increase in borrowing levels.
14
Income taxes. Income taxes increased to $3,000 during the three months ended
March 31, 2003 from zero during the comparable quarter.
Discontinued operations. Loss from discontinued operations increased to $41,000
from $39,000 during the three months ended March 31, 2003, from the comparable
period in 2002.
Net income. Net income decreased by $824,000, or 40% to $1,225,000 during the
three months ended March 31, 2003 from $2,049,000 during the comparable period
in 2002. Net income per common share decreased to $0.07 per share for the three
months ended March 31, 2003 from net income of $0.12 per share during the
comparable period in 2002. The decrease in net income and net income per common
share is due to increased discounts, rebates and allowances, selling and
shipping costs, refinancing and transaction costs and interest expense as noted
above.
Nine Months Ended March 31, 2003 Compared to Nine Months Ended March 31, 2002
Net sales. Net sales increased by $380,000, or 0.8%, to $49,538,000 during the
nine months ended March 31, 2003, from $49,158,000 during the comparable period
in 2002. The increase in net sales was the result of an increase in volume of
products sold to existing customers, offset in part by increased discounts,
rebates and allowances.
Cost of sales. Cost of sales increased by $599,000, or 2.2% to $28,111,000 for
the nine months ended March 31, 2003 from $27,512,000 during the comparable
period in 2002 due partially to increased sales volume. Cost of sales as a
percentage of net sales increased to 56.8% during the nine months ended March
31, 2003 from 56.0% during the comparable period in 2002 due to increased
discounts, rebates and allowances noted above. Cost of sales as a percent of
sales before rebates and discounts decreased slightly.
Gross profit. Gross profit decreased by $219,000, or 1.0%, to $21,427,000 for
the nine months ended March 31, 2003 from $21,646,000 during the comparable
period in 2002. Gross profit as a percentage of net sales decreased to 43.2%
during the nine months ended March 31, 2003, from 44.0% during the comparable
period in 2002. This decrease in gross profit dollars and as a percentage of net
sales resulted from the increased discounts, rebates and allowances noted above.
Selling and shipping expenses. Selling and shipping expenses increased by
$769,000, or 6.3% to $12,969,000 during the nine months ended March 31, 2003
from $12,200,000 during the comparable period in 2002. The increase in expense
was attributable to the increased number of smaller shipments and to increased
outbound freight costs. As a percentage of net sales, selling and shipping
expenses increased to 26.2% during the nine months ended March 31, 2003 from
24.8% during the comparable period in 2002.
General and administrative expenses. General and administrative expenses
decreased by $13,000 or 0.2%, to $6,108,000 during the nine months ended March
31, 2003 from $6,121,000 during the comparable period in 2002. As a percentage
of net sales, general and administrative expenses during the nine months ended
March 31, 2003 decreased to 12.3% from 12.5% in the comparable period.
Depreciation and amortization. Depreciation and amortization expenses increased
by $237,000 or 22.5% to $1,290,000 during the nine months ended March 31, 2003
from $1,053,000 during the comparable period in 2002. This increase is primarily
due to additional amortization related to a non-compete agreement that the
Company began amortizing in October 2001 as well as increased amortization of
deferred financing costs. As a percentage of net sales, depreciation and
amortization expenses increased to 2.6% during the nine months ended March 31,
2003 from 2.1% during the comparable period in 2002.
Income from continuing operations. Income from continuing operations decreased
by $1,212,000 or 53.3% to $1,060,000 during the nine months ended March 31,
2003, from $2,272,000 during the comparable period in 2002. The decrease in
income from continuing operations was primarily due to
15
increased discounts, rebates and allowances, outbound freight costs and
amortization expenses as noted above. As a percentage of net sales, income from
continuing operations decreased to 2.1% for the nine months ended March 31, 2003
from 4.6% during the comparable period in 2002.
Refinancing and transaction costs. The Company incurred $4,179,000 in
refinancing and transaction costs during the nine months ended March 31, 2003.
Included in the above is a write-off of $1,928,000 for deferred financing costs
and discounts, $1,668,000 of fees and expenses related to the replaced financing
arrangements, and $583,000 of transaction costs. In the comparable period in the
prior year, the Company incurred a $254,000 write-off of deferred financing
costs. See Note 7 to the Consolidated Financial Statements.
Interest expense. Net interest expense increased $340,000, or 6.4% to $5,658,000
during the nine months ended March 31, 2003, from $5,318,000 during the
comparable period in 2002. The increase in interest expense is related to an
increase in borrowing levels.
Income taxes. Income taxes increased to $111,000 during the nine months ended
March 31, 2003 from zero during the comparable quarter.
Discontinued operations. Loss from discontinued operations increased to
$1,234,000 from $797,000, or 54.8% during the nine months ended March 31, 2003,
from the comparable period in 2002. The $437,000 increase in loss from
discontinued operations is primarily due to legal costs associated with settling
the U.S. Consumer Products Safety Commission ("CPSC") and A.A.B.B., Inc.
litigation and a write-down of assets, offset in part by management's decision
to discontinue selling Weed Wizard products as of September 30, 2002.
Cumulative effect of a change in accounting principle. The cumulative effect of
a change in accounting principle during the nine months ended March 31, 2002
resulted from the transitional goodwill impairment test required in conjunction
with the adoption of SFAS No. 142. The recording of an impairment loss of
$9,882,000, which is primarily related to the Ampro operations, is reflected as
a cumulative effect of a change in accounting principle. See Note 9 to the
Consolidated Financial Statements.
Net loss. Net loss decreased by $3,857,000 to $10,122,000 during the nine months
ended March 31, 2003 from a net loss of $13,979,000 during the comparable period
in 2002. Net loss per common share decreased to $0.57 per share for the nine
months ended March 31, 2003 from a net loss of $0.80 per share during the
comparable period in 2002. The decrease in net loss and net loss per common
share is due primarily to the cumulative effect of a change in accounting
principle recorded in the three months ended September 30, 2001 of $9,882,000
noted above, offset in part by the refinancing and transaction costs recorded in
the nine months ended March 31, 2003 of $4,179,000 and the other matters as
noted above.
Seasonality
The Company's sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late March through May when home lawn and garden
customers are purchasing supplies for spring planting and retail stores are
increasing their inventory of lawn and garden products. The buying pattern of
retailers, including 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 in mid-summer.
Sales of the Company's agricultural products, which were not material during the
three and nine months ended March 31, 2003, are also seasonal. Most shipments
occur during the agricultural cultivation period from March through October.
16
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through cash
generated by operations, net proceeds from the Company's private placements and
public sales of securities and borrowings from lending institutions.
At March 31, 2003, the Company had consolidated cash and short-term investments
totaling $479,000, and a working capital deficit of $6,844,000. At June 30,
2002, the Company had consolidated cash and short-term investments totaling
$219,000, and working capital of $2,728,000. The decrease in working capital was
attributable to classifying borrowings under the Company's revolving and
long-term credit facilities as short term liabilities due to the covenant
violations discussed below.
Net cash used in operating activities for the nine months ended March 31, 2003
of $4.5 million consisted primarily of the net loss from continuing operations
of $8.9 million adjusted for non-cash expenses of $4.6 million and an increase
in accounts receivable and inventory of $5.5 million. This was offset in part by
an increase in accounts payable and accrued expenses of $4.9 million. The
increase in accounts receivable and inventory and accounts payable and accrued
expenses is consistent with the seasonal nature of the Company's business.
Net cash used in investing activities for the nine months ended March 31, 2003
of $1.2 million is primarily due to capital purchases of equipment and
intangible assets.
Net cash provided by financing activities for the nine months ended March 31,
2003 of $6.4 million is primarily due to an increase in long-term debt and the
line of credit and amounts paid for deferred finance costs in conjunction with
the new financing.
The Company entered into a senior credit facility dated as of October 30, 2002
for the Company and its material subsidiaries. Foothill Capital Corporation,
which is the administrative agent for the facility, is also the revolving credit
lender, and Ableco Finance LLC is providing a term loan. The total amount of the
new credit facility is $35 million, of which $23 million is a revolving credit
facility and $12 million is a term loan. The new credit facility matures October
30, 2005. Interest on the revolving credit facility is at variable annual
interest rates based on the prime rate or LIBOR plus applicable marginal rates.
Interest on the term loan is at variable annual interest rates based on the
prime rate with a minimum rate of 9.75% plus 2% of accrued interest payable upon
maturity (payment in kind interest). The interest rate on the term loan
increases 2% each year the balance is outstanding. Borrowings on the revolving
credit facility are limited based on eligible borrowing bases, effectively
$23,000,000 at March 31, 2003, the maximum on the revolving credit facility.
The Company and its material subsidiaries' obligations under the new credit
facility are secured by a security interest in favor of the lenders in
substantially all of the assets of the Company and its material subsidiaries.
The Company and its material subsidiaries are subject to certain financial and
other covenants under the new credit facility. At the end of January 2003, the
Company's financial performance created a "Triggering Event" which increased the
interest rate on the term loan in February and March by 2.5% points, to 14.25%.
At March 31, 2003, the Company was in violation of a covenant and received a
waiver from the lenders for the March 31, 2003 violation. The Company was in
violation of a covenant at April 30, 2003 and will request a waiver from the
lenders for the violation. Amounts outstanding under the new credit facility
have been classified as short-term debt, as the bank waiver does not cover the
period subsequent to March 31, 2003.
The Company had a financing agreement to provide $25,000,000 in senior secured
financing. The agreement provided 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 was $1,767,000. Interest on
borrowings was 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. At June 30, 2002 the Company had $15,036,000 of
borrowings outstanding under the revolving credit facility. These borrowings
were paid in full on November 1, 2002 with proceeds from the new financing
agreements discussed above.
17
The Company also had 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.
Interest was 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. 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. These borrowings were paid in full on
November 1, 2002 with proceeds from the new financing agreements discussed
above.
Upon repayment of the $6,250,000 subordinated debt, the Company continues to
have certain ongoing obligations under the subordinated debt financing agreement
to the holders of the warrants to purchase common stock of the Company and
option to purchase Trust Preferred Securities described above by virtue of these
agreements. Under the option agreement, payments of interest on the Trust
Preferred option securities is used to reduce the option price and is recorded
as additional Trust Preferred liability. When the option price is reduced to
zero, the Company will issue the underlying Trust Preferred Securities.
Commitments
The Company leases office and warehouse space, certain office equipment and
automobiles under operating leases expiring through 2006. The future minimum
annual lease payments under these non-cancelable operating leases are as
follows:
Year Ended June 30, Amount
------------------------------------------------
2003 $ 843,000
2004 731,000
2005 484,000
2006 252,000
2007 55,000
------------------------------------------------
$2,365,000
------------------------------------------------
Critical Accounting Policies
The preparation of financial statements requires the adoption and implementation
of accounting policies and the use of assumptions and estimates in their
presentation. The accounting policies and uncertainties, judgments and estimates
make it likely that materially different amounts would be reported under
different conditions and different assumptions.
The Company has 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 the Company's Consolidated Financial
Statements at June 30, 2002.
Allowance for Doubtful Accounts Receivable and Sales Returns. The Company
maintains an allowance for doubtful accounts receivable, which represents the
potential estimated losses resulting from the inability of customers to make
required payments for amounts owed. The allowance is estimated based on
historical experience of write-offs, the level of past due amounts and
information known about specific customers with respect to their ability to make
payments at the balance sheet date. If the financial condition of the
18
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.
The Company also maintains an allowance for sales returns. The Company does not
have formal agreements with customers that allow the return of product. The
Company reviews requests to return product on a case-by-case basis. An accrual
is made for authorized returns.
Inventories. The Company records inventory reserves for estimated obsolescence
of inventory equal to the difference between the cost of inventory owned and the
estimated market value. Market value is based upon the age of specific inventory
on hand and assumptions about future demand and market conditions. If actual
market conditions for the sale of the inventory are less favorable than those
anticipated by management, additional reserves may be required.
Goodwill. The Company has consummated eleven acquisitions accounted for using
the purchase method. The excess of cost over net assets acquired which relates
to these acquisitions has been recorded as goodwill. Goodwill is tested for
impairment by comparing the carrying value of the assets of individual reporting
units to their fair value. The fair value of the assets could vary significantly
over time and different assumptions and estimates will result in different
valuations.
Deferred Income Taxes. The Company records deferred income taxes based on
enacted income tax rates in effect on the dates temporary differences between
the financial reporting and tax bases of assets and liabilities reverse. To the
extent that available evidence about the future raises doubt about the
realization of a deferred tax asset, a valuation allowance is established. The
Company has recorded a valuation allowance due to the uncertainty of its ability
to generate sufficient future taxable income to realize the gross deferred tax
assets. If the Company is able to generate future taxable income, the valuation
allowance may be adjusted.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (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 are applicable for the Company for the fiscal year ended June 30, 2003.
The adoption of SFAS No. 145 did not have an effect on the Company's financial
statements for the periods presented.
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. The adoption of SFAS No. 146 did not have an effect on
the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of
19
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of the statement are effective for the
Company for the quarter ended March 31, 2003. The Company adopted SFAS No. 148
during the quarter ended March 31, 2003.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of its variable rate revolving credit line, the Company is exposed
to the risk of rising interest rates. The following table provides information
on the Company's fixed maturity debt as of March 31, 2003 that are sensitive to
changes in interest rates.
The Revolving Credit Facility had an interest
rate of 5.25% for the period ended
March 31, 2003 $20.0 million
The Term Loan had interest rates of 11.75% and
14.25% for the period ended March 31, 2003 $12.1 million
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and the Chief
Financial Officer ("CFO"), of the effectiveness of the Company's disclosure
controls and procedures. Based on that evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 5. Other Information
As previously disclosed, in December 2002 the Company entered into an
Asset Purchase Agreement to sell substantially all of the assets of
certain of its subsidiaries to a management group led by Richard Grandy,
the Chief Operating Officer of the Company. The Asset Purchase Agreement
provides that the transaction must be closed on or before June 30,
2003.
At the time in November 2002 that the Company repaid all amounts
outstanding under its subordinated debt facility the Company also entered
into a settlement agreement with the holders of the repaid subordinated
debt, in which they irrevocably agreed and consented to the Company's
execution of the asset purchase agreement and the consummation of the
transactions contemplated by that agreement, provided certain conditions
are met prior to the closing. Agreement of these former debt holders to
the proposed asset sale was required under the terms of the then existing
agreements they had with the Company.
20
The conditions to the consent included the following:
o that Easy Gardener Products Ltd. become the obligor under the
Trust documents;
o that Easy Gardener Products Ltd. acquire the 251,981 Trust
Preferred Securities currently owned by the Company;
o that Easy Gardener Products Ltd. grant to these former
subordinated lenders options to purchase 189,750 of the
foregoing Trust Preferred Securities, in replacement of the
currently existing options granted to them by the Company
which are exercisable for the purchase of only 94,875 of these
Trust Preferred Securities;
o that the former subordinated debtholders and related parties
receive the monies due to them under the settlement agreement
(an estimated $1,145,000) at the closing of the asset sale;
and
o that the Company receive no less than approximately $16.5
million of immediately available cash proceeds at the closing.
The settlement agreement also provides for certain amendments to the Trust
Preferred options held by these former debtholders and provides that, upon
the closing of the proposed asset sale and the satisfaction of the
foregoing conditions, the warrants to purchase common stock of the Company
held by these former debtholders will be amended and certain obligations
of the Company and Easy Gardener Inc. to these holders and related parties
that survived the November 2002 repayment of the subordinated loan
facility, will expire.
Commencing April 18, 2003, the Company's common stock ceased trading on
Nasdaq and commenced trading on the over-the-counter bulletin board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer pursuant to section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer pursuant to section 906
of the Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K were filed during the quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 14, 2003
U.S. Home & Garden Inc.
(Registrant)
By: /s/ Robert Kassel
------------------------------------
President, Chief Executive Officer
By: /s/ Richard Kurz
------------------------------------
Chief Financial Officer
21
U.S. Home & Garden Inc.
Certification of Principal Executive Officer
I, Robert Kassel, President and Chief Executive Officer of U.S. Home & Garden
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Home & Garden
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Robert Kassel
------------------------------------
Robert Kassel
Chief Executive Officer
(Principal Executive Officer)
22
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 quarterly report on Form 10-Q of U.S. Home & Garden
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Richard Kurz
------------------------------------
Richard Kurz
Chief Financial Officer
(Principal Financial Officer)
23