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, 1998
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 21, 1998 was
approximately $90,390,000.
As of September 21, 1998, 20,842,615 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 future activities. Such forward-looking information involves
important known and unknown risks and uncertainties that could significantly
affect actual results, performance or achievements of the Company in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of the Company. These risks and uncertainties
include, but are not limited to, those relating to the Company's growth
strategy, customer concentration, outstanding indebtedness, dependence on
weather conditions, seasonality, expansion and other activities of competitors,
changes in federal or state environmental laws and the administration of such
laws, protection of trademarks and other proprietary rights, and the general
condition of the economy and its effect on the securities markets and other
risks detailed in the Company's other filings with the Securities and Exchange
Commission. The words "believe," "expect," "anticipate," "intend" and "plan" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date the statement was made.
General
The Company is a leading manufacturer and marketer of a broad range of
consumer lawn and garden products. The Company's products include weed
preventive landscape fabrics, fertilizer spikes, decorative landscape edging,
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) and Landmaster(R). The
Company believes that it has significant market share and favorable brand-name
recognition in several of its primary product categories. The Company markets
its products through most large national home improvement and mass merchant
retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Builder's
Square, Wal-Mart and Home Base.
The Company was organized under the laws of the State of California in
August 1990 under the name Natural Earth Technologies, Inc. In January 1992 the
Company reincorporated under the laws of the State of Delaware and in July 1995
changed
3
its name to U.S. Home & Garden Inc. The Company's lawn and garden operations are
conducted through its subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy
Gardener's subsidiaries, and the Company's agricultural products operations are
conducted through its subsidiary Golden West Agri-Products, Inc. ("Golden
West"). Unless the context suggests otherwise, references in this Report to the
Company mean U.S. Home & Garden Inc. and its subsidiaries. The Company's
executive offices are located at 655 Montgomery Street, Suite 500, San
Francisco, California 94111, and its telephone number is (415) 616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the number
of vendors needed to source high volume lawn and garden products, the preference
among home improvement and mass merchant retailers has shifted towards single
source suppliers that offer broad product lines of consumer brand-name
merchandise and the product support necessary to stimulate consumer demand and
ensure timely and cost effective order fulfillment. Smaller regional suppliers
generally lack the capital and other resources necessary to offer the variety
and number of product lines, the product support and the inventory stocking and
tracking capabilities required by home improvement and mass merchant retailers.
According to the 1996-1997 National Gardening Survey, 1996 retail sales of
lawn and garden products were approximately $22 billion, and 64% of the
approximately 101 million households in the United States participated in some
form of gardening activity during 1996. In addition, sales growth in the lawn
and garden industry is being driven in part by the aging of the "baby boomer"
consumer segment. According to the National Gardening Survey, persons 50 years
of age and older spent an average of $400 per household on lawn and garden
activities in 1996.
Prior and Proposed Acquisitions.
Since August 1992, the Company has consummated the following eight (8)
acquisitions of companies or product lines for a total of over $80 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 in promissory
notes.
4
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping products
including WeedBlock(R), which was acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5
million promissory note and two convertible notes each in the principal
amount of $1.0 million. Approximately $2.2 million of additional purchase
price was contingent on Easy Gardener meeting certain income requirements.
These contingencies have been met and the Company has paid the entire $2.2
million.
o Emerald Products LLC. A manufacturer of decorative landscape edging which
was acquired in August 1995 for $835,000 in cash and a $100,000 promissory
note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products, which was acquired in
August 1996 for 1,000,000 shares of Common Stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which was acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, which was acquired in February 1998 for approximately
$16.0 million, of which approximately $5.0 million was based on the value
of certain net assets acquired.
o Landmaster Products, Inc. A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for
approximately $3.0 million, of which approximately $750,000 was based on
the value of certain assets acquired.
o Tensar(R) consumer products line of The Tensar Corporation. A line of lawn
and garden specialty fencing, which was acquired from The Tensar
Corporation in May 1998 for approximately $5.4 million in cash.
In addition, in August 1998 the Company entered into a non-binding letter
of intent to acquire Ampro Industries, Inc., a manufacture and distributor of
lawn and garden products including specialty grass and flower seeds. The
anticipated purchase price is approximately $25 million with a potential
additional purchase price amount contingent upon future operating cash flow.
5
Products
Landscape Fabric. The Company markets different types of landscape fabric
in varying thicknesses and strengths under the trade names WeedBlock(R),
WeedBlock 6(TM), MicroPore(R), Pro WeedBlock(TM), Weedshield(TM) and
Landmaster(R). Landscape fabrics allow water, nutrients and oxygen to filter
through to the soil but prevent weed growth by blocking sunlight. The Company's
primary landscape fabrics are made from non-woven fabrics which are generally
manufactured with extruded polymers, pressed or vacuum formed into thin sheets
having the feel and texture of light plastics. For the fiscal years ended June
30, 1996, 1997 and 1998, sales of landscape fabric represented approximately
69%, 44% and 36%, respectively, of the Company's net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver
plant food nutrients directly to the root of the plant, an alternative method of
maintaining plant health to surface-delivered liquid or solid fertilizers. Some
of the Company's fertilizer spikes have the added feature of containing an
insecticide for the control of unwanted insects. The Company markets a variety
of indoor and outdoor specialty fertilizer and plant food spikes primarily under
the Jobe's(R)tradename, one of the most recognized brands in the consumer lawn
and garden industry. For the years ended June 30, 1997 and 1998, sales of
fertilizer, plant food and insecticide spikes constituted approximately 24% and
20%, respectively, of the Company's net sales.
Landscape Edging. The Company markets a variety of resin-based decorative
landscape edgings under trade names including Emerald Edge and Terra Cotta Tiles
(TM). The Company's decorative edgings are used by consumers to define the
perimeter of planting areas with a variety of designs which include stone, log,
terra cotta tiles and picket fences.
Shade Cloth. The Company markets shade cloth fabrics in a variety of sizes
and colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy or
protection from wind for people, plants and pets. The Company markets shade
cloth fabrics as an exclusive United States retail distributor of a shade cloth
manufacturer pursuant to an agreement that expires on September 30, 1998. The
Company is currently discussing with the manufacturer a possible one year
extension of the distributorship arrangement.
Fertilizers and Root Feeders. The Company markets fertilizers under the
Ross trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a
long steel irrigation tube with hose connector that is inserted deep into the
ground, provides the homeowner with a means of deep feeding and
6
irrigating trees and shrubs. The Ross Root Feeder may also be used without
fertilizer as a deep watering device.
Weed Trimmer Replacement Heads. The Company manufactures and distributes
replacement heads for string weed trimmer products under the Weed Wizard
trademark. The Company's weed trimmer replacement head products consist of a
replacement casing containing either a chain link for heavy duty use or a
plastic blade for routine weed and grass trimming. The products are part of a
multi fit system offered by the Company, which allows the replacement heads to
fit on virtually all consumer gas weed trimmers and most consumer electric weed
trimmers.
Lawn and Garden Fencing. The Company markets resin based fencing for lawns
and gardens. A variety of fencing products are marketed by the Company and are
used by the consumer for numerous applications including preventing animals from
entering a garden or orchard.
Other Products. In addition to landscape fabrics, fertilizer, plant food
and insecticide spikes, landscape edging, shade cloth, fertilizer and root
feeders, weed trimmer replacement heads and lawn and garden fencing, the Company
also sells 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. The Company, through Golden West, manufactures and
distributes certain humic acid-based agricultural products for use on farms and
orchards. Golden West generally sells its products to agricultural distributors,
which in turn market Golden West's products to farms and orchards. The principal
agricultural products manufactured or distributed by the Company are:
Energizer(R), a formulation of humic acids which, when applied in conjunction
with liquid fertilizers, permits crops to absorb a greater amount of the
nutrients in the fertilizer; Penox(R), a surfactant, or penetrating wetting
agent, that contains humic acid which, when applied in conjunction with
herbicides, defoliants and other agricultural products, increases their
effectiveness; and Powergizer(R), a foliar nutrient, or plant food, containing
humic acid which promotes growth and vigor in many types of crops. Sales of the
Company's agricultural products accounted for less than 2% of the Company's net
sales in fiscal 1998.
7
Conversion, Manufacturing and Supply
Lawn and Garden Products
Except for the materials for WeedBlock, which are obtained from a single
source, the basic materials for the Company's lawn and garden products are
purchased from a variety of suppliers. All of such materials are converted,
packaged and shipped by the Company from either its Waco, Texas facility or its
Paris, Kentucky facility, its Dahlonega, Georgia facility or at a facility
located in Englewood, Colorado.
The Company purchases all of the landscape fabric used to manufacture
WeedBlock from Tredegar Industries, Inc. ("Tredegar"). The Company purchases
large rolls of various types of landscape fabric from Tredegar for shipment to
its Waco, Texas facility where it sizes, cuts and packages the fabric for
consumer sale. Although the Company has purchased all of its supply from
Tredegar for over 10 years and believes that its relationship with Tredegar is
good, Tredegar is free to terminate its relationship with the Company at any
time and accordingly could market its fabrics to other companies, including
competitors of the Company. Nevertheless, the Company owns the registered
trademark "WeedBlock(R)" and to the extent that it establishes alternative
supply arrangements, its rights to market products under the WeedBlock brand
name would continue without restriction.
The Company manufactures and packages its Jobe's fertilizer spikes at its
Paris, Kentucky facility. The raw materials that comprise the Company's indoor
fertilizer spikes are mixed with a binding agent and then passed through an
extrusion process which feeds a continuous strand of fertilizer through a
heat-drying system. The strand is then cut into ready-to-use fertilizer spikes
which are then machine counted and packaged into shelf-ready blisterpacks. The
Company's outdoor fertilizer spikes are manufactured in a similar manner except
rather than passing through an extrusion process, the outdoor spikes are
processed through molds which shape the spikes into their final form. The
outdoor spikes' are packaged in either a foil pouch, bag or box.
The specifications for the Company's landscape edging, shade cloth and root
feeder products and packaging are designed by the Company and independent design
consultants. The products are then manufactured and packaged by third party
manufacturers according to the Company's specifications.
The nylon product body (rotary head) and the plastic blades and the chain
links used in the Company's weed trimmer replacement heads are manufactured for
the Company pursuant to open purchase orders. The Company assembles and
packages the
8
weed trimmer replacement heads with the aid of an electronic packaging machine.
The Company purchases all of the material used to manufacture its resin
based fencing from The Tensar Company pursuant to an agreement that expires in
May 2000. The material is then sized and cut for consumer sale at the Company's
Waco, Texas facility.
Agricultural Products
The Company does not own or lease any manufacturing facilities for its
agricultural products. Substantially all of the Company's humic acid-based
agricultural products, Energizer, Penox and Powergizer, are processed by Western
Farm Services, Inc. ("Western Farm") pursuant to purchase orders placed by the
Company from time to time in the ordinary course of business. Furthermore, the
Company, through Western Farm, has an open purchase order arrangement with an
entity which supplies it with leonardite ore, a source of humic acid used in its
agricultural products.
Customers
The Company's customers include home improvement centers, mass
merchandisers, hardware stores, nurseries, and garden centers and other retail
channels throughout the United States. The Company's three largest customers for
fiscal 1998, Home Depot, Lowes and Kmart, accounted for approximately 26%, 11%
and 7%, respectively of its net sales during such year. During fiscal 1997, Home
Depot, Lowes and K-Mart, accounted for approximately 26%, 10% and 7%,
respectively, of the Company's net sales. During fiscal 1996, Home Depot,
Lowe's, Kmart and Builder's Square accounted for 27%, 9%, 7% and 5%,
respectively, of the Company's net sales. The Company's ten largest customers as
a group accounted for 65% and 63% of its net sales during fiscal 1997 and 1998,
respectively. Sales to such customers are not governed by any contractual
arrangement and are made pursuant to standard purchase orders. While the Company
believes that relations with its largest customers are good, the loss of any of
these customers could have an adverse effect upon the results of operations of
the Company.
The Company's sales are concentrated in the United States, with
international sales (primarily in Europe and Canada) accounting for
approximately 4.0% of the Company's net sales for fiscal 1998. The Company is
currently attempting to develop relationships with distributors outside of the
United States.
Sales and Marketing
The Company's sales efforts are coordinated by its national sales manager,
whose duties include overseeing key accounts and
9
directing the activities of the Company's eight regional sales managers. Because
of the service oriented nature of the Company's business, the national and
regional sales managers devote a substantial amount of their time to servicing
and maintaining relationships with the Company's largest customers in addition
to managing the overall sales operations. The Company also utilizes the services
of over 40 non-exclusive independent sales organizations, on a commission basis,
who are responsible primarily for sales to customers not serviced regularly by
the regional sales managers. Sales of the Company's agricultural products are
coordinated primarily by two full-time employees who are compensated on a salary
plus commission basis.
The Company's marketing activities are coordinated by its marketing
manager. The marketing manager designs and develops the Company's distinctive
packaging and point-of-sale displays and oversees, among other things, the
Company's advertising campaigns, which are created and placed by advertising and
public relations firms.
The Company expects that its lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and in-store
consumer promotions in Retail Accounts, hardware stores, nurseries and garden
centers. In addition, the Company believes that a substantial portion of lawn
and garden sales are impulse driven and not overly price sensitive. Therefore,
the Company seeks to increase consumer awareness, understanding and brand
identification of its products through its distinctive packaging and
point-of-sale displays. Retail Accounts and the Company's other customers
receive the Company's products in packaging that is easily displayed. The retail
product packaging is informative to the end-user and incorporates attention
getting, eye-pleasing color schemes. The Company also tailors its displays to
the evolving needs of retailers. Because many home improvement and mass merchant
retailers maintain outdoor sales areas for their lawn and garden products, the
Company utilizes waterproof displays for many of its products. In addition, the
Company meets the specific needs of many of its larger customers by tailoring
the size of its displays to the dimensions requested by such customers. The
Company's independent sales representatives periodically visit individual retail
outlets to assist Retail Accounts in achieving innovative and optimal use of the
Company's distinctive store displays.
In order to anticipate and react quickly to changing consumer preferences,
the Company also engages in market research. During fiscal 1998 the Company
focused its advertising and promotional campaign on the Jobe's brand name, as
well as on the Easy Gardener and Emerald Edge brand names.
In addition, during fiscal 1998, the Company redesigned the Jobe's
packaging, assisted Retail Accounts in their inventory
10
purchasing, in-store product placement and implementation of displays for Jobe's
products and conducted a national advertising campaign which targeted the "baby
boomer" consumer segment.
The Company anticipates spending approximately $4.0 million, including
anticipated use of a portion of existing trade credits, in the current fiscal
year ending June 30, 1999 on a combination of media development, print, radio
and television advertising, co-operative advertising (advertising done in
conjunction with retailers), attendance at trade shows and public relations to
promote awareness, understanding and brand identification of its lawn and garden
products.
The Company intends to utilize a substantial portion of its marketing
budget for the fiscal year ending June 30, 1999 on the enhancement of brand-name
recognition of the Jobe's and Weed Wizard product lines and, to a lesser extent,
on the Easy Gardener and Emerald Edge brand names. There can be no assurance
that any attempt to increase such recognition will be successful or have any
favorable effect on the Company's net sales.
Information Systems
The Company maintains a sophisticated retail data information system which
enables it to provide timely and efficient order fulfillment to its Retail
Accounts and other customers. Internally, the Company's information systems
track orders and deliveries and provide exception reports if product is not
delivered on time. The systems "push" the necessary information to the proper
personnel, allowing the Company to react quickly to information. The Company's
purchase order process can be paperless, with most Retail Accounts placing their
orders through an electronic data interchange with the Company.
Seasonality
The Company sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer. Sales of the Company's agricultural products are
also seasonal. Most shipments occur during the agricultural cultivation period
from March through October.
Inventory and Distribution
In order to meet product demand, the Company keeps relatively large amounts
of product inventory on hand, particularly from December to May, the months of
highest demand. Despite maintaining these relatively high levels of inventory,
11
the Company has historically experienced minimal inventory obsolescence.
However, it is possible that inventory obsolescence could increase in the
future. Retail Accounts generally require delivery within five business days.
Orders are normally processed within 48 hours and shipped by common carrier.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. The Company competes with a combination of national and
regional companies ranging from large petrochemical companies to garden catalog
businesses and companies specializing in the manufacture of lawn and garden care
products. Several of such companies, such as Solaris Group, a division of
Monsanto Company, and the Scotts Miracle-Gro Products, Inc. have captured a
significant, and in certain cases controlling, share of such markets. Many of
the Company's competitors have achieved significant national, regional and local
brand name and product recognition and engage in frequent and extensive
advertising and promotional programs, both generally and in response to efforts
by other competitors entering the market or existing competitors introducing new
products. Many of these companies have substantially greater financial,
technical, marketing and other resources than the Company.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the Solaris Group, a division of Monsanto Company, and other
lawn and garden care companies have, in the past, manufactured and marketed
landscape fabrics. Currently, few of such competitors compete with the Company
in this industry. Nevertheless, well capitalized companies and smaller regional
firms may develop and market landscape fabrics and compete with the Company for
customers who purchase such products.
Among the Company's competitors in the lawn and garden market for the
Jobe's spike line of fertilizer and insecticide products are large agri-chemical
companies such as Solaris Group and Scotts Miracle-Gro Products, Inc.
Competition for the Company's agricultural products consist of other
manufacturers of products that are humic acid based but that utilize formulas
that are different from Golden West's. These competitors include American
Colloid Company and Monterey Chemical Corporation. The Company competes with a
variety of regional lawn and garden manufacturers in the markets for landscape
edging, shade cloth and root feeders. Competition for the Company's weed trimmer
replacement heads consists of other manufacturers of weed trimming replacement
part products using nylon based lines and blades. These include The Source
Company.
12
Government Regulation
The Company is subject to many laws and governmental regulations and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by the Company as fertilizers or pesticides are subject to an
extensive and frequently evolving statutory and regulatory framework, at both
the Federal and state levels. The distribution and sale of pesticides is subject
to regulation by the U.S. Environmental Protection Agency ("EPA") pursuant to
the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as
regulation by many states in a manner similar to FIFRA. Under FIFRA and similar
state laws, all pesticides must be registered with the EPA and the state and
must be approved for their intended use. FIFRA and state regulations also impose
other stringent requirements on the marketing of such products. Moreover, many
states also impose similar requirements upon products marketed for use as
fertilizing materials, which are not typically regulated under FIFRA. Failure to
comply with the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
The Company markets certain animal repellent and pesticide products that
are subject to FIFRA and to similar state regulations. The Company also markets
certain fertilizer products that are subject to regulation in some states. The
Company believes that it is in substantial compliance with material FIFRA and
applicable state regulations regarding its material business operations.
However, there can be no assurance that the Company will be able to comply with
future regulations in every jurisdiction in which the Company's material
business operations are conducted without substantial cost or interruption of
operations. Moreover, there can be no assurance that future products marketed by
the Company will not also be subject to FIFRA or to state regulations. If future
costs of compliance with regulations governing pesticides or fertilizers exceed
the Company's budgets for such items, the Company's business could be adversely
affected. If any of the Company's products are distributed or marketed in
violation of any of these regulations, the Company could be subject to a recall
of, or a sales limitation placed on, one or more of its products, or civil or
criminal sanctions, any of which could have a material adverse effect upon the
Company's business.
Environmental Regulation. The Company's manufacturing operations are
subject to various evolving federal, state and local laws and regulations
relating to the protection of the environment, which laws govern, among other
things, emissions to
13
air, discharges to ground, surface water, and groundwater, and the generation,
handling, storage, transportation, treatment and disposal of a variety of
hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. Easy Gardener
operates two manufacturing facilities and Weatherly and Weed Wizard each operate
one manufacturing facility. Although the Company believes that all of its
facilities are in substantial compliance with all applicable material
environmental laws, it is possible that there are material environmental
liabilities of which the Company is unaware. If the costs of compliance with the
various existing or future environmental laws and regulations including any
penalties which may be assessed for failure to obtain necessary permits, exceed
the Company's budgets for such items, the Company's business could be adversely
affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Weatherly and Weed Wizard each operate one manufacturing facility. Moreover, the
Company or its predecessors have owned or operated other manufacturing
facilities in the past and may have liability for remediation of such facilities
in the future, to the extent any is required. In this regard, Weatherly
previously owned a facility that was the subject of certain soil remediation
activities. Although this facility was sold by Weatherly prior to the Company's
acquisition of Weatherly, there can be no assurance that the Company will not be
liable for any previously existing environmental contamination at the facility.
Moreover, although the purchaser of the facility indemnified Weatherly for any
environmental liability and the sellers of Weatherly, in turn, indemnified the
Company from such liability, there can be no assurance that, if required, the
indemnifying parties will be able to fulfill their respective obligations to
indemnify the Company. Furthermore, certain business operations of the Company's
subsidiaries also involve shipping hazardous waste off-site for disposal. As a
result, the Company could be subject to liability under these statutes. The
Company could also incur liability under CERCLA or similar state statutes for
any damage
14
caused as a result of the mishandling or release of hazardous substances owned
by the Company but processed and manufactured by others on the Company's behalf.
As a result, there can be no assurance that the manufacture of the products sold
by the Company will not subject the Company to liability pursuant to CERCLA or a
similar state statute. Furthermore, there can be no assurance that Easy Gardener
or Weatherly will not be subject to liability relating to manufacturing
facilities owned or operated by them currently or in the past.
Other Regulations. The Company is also subject to various other federal,
state and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants.
Trademarks, Proprietary Information and Patents
The Company believes that product recognition is an important competitive
factor in the lawn and garden care products industry. Accordingly, in connection
with its marketing activities of its lawn and garden care products, the Company
promotes, and intends to promote, certain tradenames and trademarks which are
believed to have value to the Company.
In connection with its acquisition of the assets of Easy Gardener Inc. in
September 1994, the Company acquired certain trademarks and copyrights used by
Easy Gardener, Inc. in connection with its business including, but not limited
to, the trademarks, Weedblock(R), Easy Gardener(R), Weedshield(TM), Micropore(R)
and Birdblock(R). In connection with its acquisition of Weatherly, the Company
acquired certain patents, as well as certain copyrights and trademarks used in
connection with Weatherly's business including, but not limited to, Jobe's(R),
Ross(R), Green Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(R). The Company
also acquired certain patents and trademarks when it acquired the assets of
Emerald Products, LLC and also acquired certain trademarks in connection with
its purchase of the Plasti-Chain line of products from Plastic Molded Concepts,
Inc. In connection with its acquisition of Weed Wizard, Inc., the Company
acquired the Weed Wizard(TM) product patent and trademark. The Company also
acquired the trademark Landmaster(R) in connection with its acquisition of the
assets of Landmaster Products, Inc. In addition, the Company acquired the
trademarks Polyspun 300(R), Nature Shield(R) and Diamondback(R) in connection
with its acquisition of the Tensar(R) consumer product line. In connection with
the sale of the Tensar(R) consumer product line, The Tensar Corporation ganted
to the Company 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 the Company by the Tensar Corporation. There can be
no assurance that the Company will apply for any additional trademark or patent
protections relating to its products or that its current trademarks and patents
will be enforceable or adequately protect the Company from infringement of its
proprietary rights.
15
Although the Company believes that the products sold by it do not and will
not infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, the Company could be required to pay damages and
modify its products or obtain a license for the manufacture or sale of such
products. There can be no assurance that, in such an event, the Company would be
able to do so in a timely manner, upon acceptable terms and conditions or at
all, and the failure to do any of the foregoing could have a material adverse
effect upon the Company.
Product Liability
The Company, as a manufacturer of lawn and garden care and pesticide
products, may be exposed to significant product liability claims by consumers.
Although the Company has obtained product liability insurance coverage for U.S.
Home & Garden Inc. and Golden West in the aggregate amount of $3.0 million, and
for Easy Gardener, Weatherly and Weed Wizard in the aggregate amount of $2.0
million (with all policies limited to $1.0 million per occurrence), and has
obtained two umbrella policies in the amounts of $15.0 million, and $20.0
million, respectively, there can be no assurance that such insurance will
provide coverage for any claim against the Company or will be sufficient to
cover all possible liabilities. In the event a successful suit is brought
against the Company, unavailability or insufficiency of insurance coverage could
have a material adverse effect on the Company. Moreover, any adverse publicity
arising from claims made against the Company, even if such claims were not
successful, could adversely affect the reputation and sales of the Company's
products.
Employees
As of September 21, 1998 the Company had 210 full-time employees. Of such
employees, three are executive officers of the Company, 52 were engaged in
administration and finance, 21 were engaged in sales and marketing, 33 were
engaged in warehouse, shipping and receiving and 101 were engaged in production.
None of the Company's employees are covered by collective bargaining agreements.
The Company believes that it has a good relationship with its employees.
Item 2. Properties
The Company's executive offices are currently located in San Francisco,
California, in approximately 3,000 square feet of office space for which the
Company pays $11,275 per month in rent, which amount includes the costs of
utilities and janitorial services. The Company believes that its office space,
which it
16
rents pursuant to a lease expiring in February 2001, is adequate for the
Company's planned future operations.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which the Company pays $18,544 per month in
rent, pursuant to a lease agreement that expires on February 28, 2001. Easy
Gardener's facilities contain landscape fabric converters, packaging equipment
and warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $10,833 per month in rent pursuant to a
lease that expires on June 30, 2001. The Company also leases an additional
53,000 feet of warehouse space in Paris, Kentucky for $5,417 per month in rent
pursuant to a lease that expires on May 6, 1999.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $1,150 per month base rent, with rent
increases at a rate of 4% a year. The lease expires in June 1999 subject to the
Company's option to renew the lease for an additional three year period.
With respect to Weed Wizard, the Company leases, for $14,750 per month, a
one story office/manufacturing facility of approximately 50,600 feet in
Dahlonega, Georgia pursuant to a lease that expires in August 2001.
With respect to the storage, packaging and distribution of the Company's
landscape fabric products, Easy Gardener has entered into a management agreement
with Landmaster Products, Inc. (the "Management Agreement") pursuant to which
the Company is provided with warehouse space in Englewood, Colorado. The
Management Agreement expires on October 21, 2000 and provides for payment of a
management fee of $31,500 per month until March 1999; thereafter $24,000 per
month until September 1999, after which time the management fee will be mutually
determined by the parties but in no event be less than 70% of the prior period's
monthly fee.
Item 3. Legal Proceedings
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of Stockholders was held on June 22, 1998 at which time
the following directors were reappointed to serve until the Annual Meeting of
Stockholders of the Company to be held in 1999:
17
Votes For Votes Withheld
--------- --------------
Robert Kassel 16,539,341 128,518
Richard Raleigh 16,539,526 128,333
Maureen Kassel 16,476,951 190,908
Fred Heiden 16,537,756 130,103
Jon Schulberg 16,489,856 178,003
In addition, at the Meeting, the stockholders approved an amendment to the
Company's Certificate of Incorporation to effect an increase in the Company's
authorized common stock to 75 million shares by a vote of 14,104,400 in favor,
2,469,038 against and 94,421 abstaining. There were no broker non-votes with
respect to this proposal.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded in the over-the-counter market and
was quoted on the NASDAQ SmallCap Market from March 26, 1992 until June 3, 1998
and has been quoted on the NASDAQ National Market System since June 4, 1998. The
NASDAQ symbol for the Company's Common Stock is "USHG". The following table sets
forth, for the periods indicated, the high and low sales prices for the Common
Stock, as reported by NASDAQ.
Year Ended June 30, 1997
High Low
---- ---
First Quarter.............. $3 1/2 $2 1/4
Second Quarter............. 2 15/16 1 15/16
Third Quarter.............. 2 15/16 2 1/16
Fourth Quarter............. 3 1/2 2 1/8
Year Ended June 30, 1998
High Low
---- ---
First Quarter......... $5 1/16 2 15/16
Second Quarter........ 5 1/8 3 7/8
Third Quarter......... 7 13/16 4
Fourth Quarter........ 7 3/8 5 3/8
As of September 21, 1998, the number of stockholders of record of the
Company's Common Stock was 225. The Company believes that, in addition, there
are in excess of 500 beneficial owners of its Common Stock whose shares are held
in "street name".
In March 1998, the Company extended by ten years the expiration date of
options to purchase 150,000 shares of Common Stock previously granted to Maureen
Kassel. The foregoing options were exercisable at $1.69 per share and the
transactions were exempt from the registration requirements of the Securities
Act of 1933 by virtue of Sections 2(3) or 4(2) thereof.
18
The Company has not paid any cash dividends on its common stock to date and
does not expect to declare or pay any cash or stock dividends in the foreseeable
future. It is anticipated that the proposed lending agreement among the Company,
Easy Gardener and Easy Gardener's anticipated primary lending institution will
prohibit Easy Gardener from paying dividends without the lenders' consent, which
would adversely affect the Company's ability to pay dividends.
Item 6. Selected Financial Data
(in thousands, except per share data)
The following selected financial data at and for the years ended June 30,
1994, 1995, 1996, 1997 and 1998 has been derived from the Company's audited
financial statements. Such information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes thereto appearing
elsewhere in this Report.
Statement of Income Data:
Year Ended June 30,
----------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Net sales .................................................... $ 3,063 $ 19,692 $ 27,031 $ 52,046 $ 67,149
Cost of sales ................................................ 1,455 9,151 12,670 23,649 30,431
-------- -------- -------- -------- --------
Gross profit ................................................. 1,608 10,541 14,361 28,397 36,718
Selling, general and administrative
expenses ..................................................... 6,786 7,152 10,612 17,745 23,065
-------- -------- -------- -------- --------
Income (loss) from operations ................................ (5,178) 3,389 3,749 10,652 13,653
Other income (expense) ....................................... (41) (1,776) (1,940) (3,262) (3,077)
Income tax (expense) benefit ................................. -- (38) 715 (3,200) (3,600)
-------- -------- -------- -------- --------
Income (loss) before extraordinary expense ................... (5,219) 1,575 2,524 4,190 6,976
Extraordinary expense net .................................... -- -- -- (1,007) (1,450)
-------- -------- -------- -------- --------
Net income (loss) ............................................ $ (5,219) $ 1,575 $ 2,524 $ 3,183 $ 5,526
======== ======== ======== ======== ========
Income (loss) per share before extraordinary expense:
Basic ........................................................ $ (1.31) $ .19 $ .25 $ .31 $ .39
Dilutive ..................................................... $ (1.31) $ .16 $ .19 $ .26 $ .31
Net income (loss) per share:
Basic ........................................................ $ (1.31) $ .19 $ .25 $ .23 $ .31
Dilutive ..................................................... $ (1.31) $ .16 $ .19 $ .20 $ .24
19
Weighted average number of common and
common equivalent shares outstanding:
Basic......................................................... 3,980,318 8,376,000 10,206,000 13,695,000 17,776,000
Dilutive...................................................... 3,980,318 10,125,000 13,361,000 16,068,000 22,808,000
Balance Sheet Data:
June 30,
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Working capital (deficiency) ................. $ (347) $ 3,326 $ 5,328 $ 2,292 $ 46,743
Intangible assets, net ....................... 2,046 16,692 17,167 44,364 63,395
Total assets ................................. 5,654 28,140 33,584 68,475 126,813
Short-term debt .............................. 594 2,200 3,650 8,990 --
Long-term debt ............................... -- 8,000 6,238 17,570 63,250
Total liabilities ............................ 2,504 12,800 14,214 36,549 75,214
Stockholders' equity ......................... 3,150 15,339 19,370 31,926 51,599
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company manufactures and markets a broad range of brand-name consumer
lawn and garden products through its wholly-owned subsidiaries, Easy Gardener
and Golden West, and through Easy Gardener's wholly-owned subsidiaries,
Weatherly and Weed Wizard. Since 1992, the Company has consummated eight
acquisitions of complementary lawn and garden companies and product lines for an
aggregate consideration of over $80 million in cash, notes and equity
securities. As a result of such acquisitions, the Company recognized a
significant amount of goodwill which, in the aggregate, was approximately $58.9
million at June 30, 1998. The Company is currently amortizing such goodwill
using the straight-line method over various time periods ranging from 20 to 30
years and amortization expenses for the fiscal year ended June 30, 1998 were
$1.7 million or $0.08 per diluted share. See "Summary of Accounting Policies -
Intangible Assets" and Note 1 to Notes to Consolidated Financial Statements.
The Company's results of operations for the fiscal year ended June 30, 1997
were significantly affected by the acquisition of Weatherly in August 1996. In
connection with the acquisition of Weatherly, the Company's outstanding notes
payable were refinanced and replaced with a new line of credit (the
"Refinancing"). As a result of the Refinancing, the Company was required to
record an extraordinary expense of $1.0 million, net of tax benefits, for the
fiscal year ended June 30, 1997, which expense consisted of the write-off of
deferred finance costs at June 30, 1996 plus prepayment penalties. Such
extraordinary expense reduced the Company's dilutive net income per share for
fiscal 1997 by $0.06, from $0.26 to $0.20. In addition, as a result of the
Company's repayment of all of its outstanding bank debt in April 1998, the
Company was required to record an extraordinary expense of $1,450,000, net of
income tax benefit. Such
20
extraordinary expense reduced the Company's dilutive net income per share for
fiscal 1998 by $.07 from $0.31 to $0.24. See Notes 6 and 14 to Notes to
Consolidated Financial Statements.
The Company experienced net sales growth of 93% from fiscal 1996 to fiscal
1997 and 29% from fiscal 1997 to fiscal 1998. The Company believes that this
growth in net sales was primarily attributable to expansion of its product lines
through the acquisition of complementary lawn and garden businesses and product
lines. Net sales were also positively affected by an increase in sales of
pre-existing product lines.
The Company was required to calculate its net income per share for all
periods presented in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share," which is effective for periods ending
after December 15, 1997 and requires the Company to report basic earnings per
share (giving no dilutive effect to derivative securities) and diluted earnings
per share (reflecting the dilutive effect of all derivative securities). Under
the SFAS No. 128 dilutive earnings per share calculation, all derivative
securities with exercise prices below the market price have been assumed
exercised. All proceeds from the exercise of such derivative securities have
been assumed to have been used to repurchase common stock (at an average stock
price).
Results of Operations
The following table sets forth for the periods indicated certain selected
income data as a percentage of net sales:
21
Percentages of Net Sales
-------------------------------
Year Ended June 30,
-------------------------------
1996 1997 1998
---- ---- ----
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 46.9 45.4 45.3
----- ----- -----
Gross profit ............................... 53.1 54.6 54.7
Selling and shipping expenses .............. 23.2 21.6 21.2
General and administrative expenses ........ 16.1 12.5 13.2
----- ----- -----
Income from operations ..................... 13.9 20.5 20.3
Interest expense, net....................... (7.3) (6.3) (5.3)
Income tax (expense) benefit ............... 2.7 (6.2) (5.4)
Extraordinary expense, net ................. -- (1.9) (2.1)
----- ----- -----
Net income ................................. 9.3% 6.1% 8.2%
===== ===== =====
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Net sales. Net sales increased by $15.1 million, or 29%, to $67.1 million
during the fiscal year ended June 30, 1998 from $52 million during the
comparable period in 1997. The increase in net sales was primarily a result of
the February 1998 acquisition of substantially all of the assets used in the
business of Weed Wizard, Inc. and the March 1998 acquisition of substantially
all of the assets of Landmaster Products, Inc., combined with internal growth of
the Company's pre-existing product lines.
Gross profit. Gross profit increased by $8.3 million, or 29%, to $36.7
million for the fiscal year ended June 30, 1998, from $28.4 million during the
comparable period in 1997. This increase was due primarily to the acquisition of
substantially all of the assets used in the business of Weed Wizard, Inc. and
substantially all of the assets used in the business of Landmaster Products,
Inc. Gross profit as a percentage of net sales increased to 54.7% during the
fiscal year ended June 30, 1998, from 54.6% during the comparable period in
1997. The increase in gross profit as a percentage of net sales was primarily
attributable to the increase in sales of higher-margin products.
Selling and shipping expenses. Selling and shipping expenses increased $3.0
million or 26.5%, to $14.2 million during the fiscal year ended June 30, 1998,
from $11.2 million during the comparable period in 1997. This increase was
primarily the result of an increase in the amount of products shipped, which was
a consequence of the February 1998 acquisition of substantially all of the
assets used in the business of Weed Wizard, Inc. and the March 1998 acquisition
of substantially all of the assets used in the business of Landmaster Products,
Inc. along with an increase in sales of pre-existing product lines. Selling and
shipping expenses as a percentage of net sales decreased to 21.2% during the
fiscal year ended June 30, 1998, from 21.6% during the comparable period in
1997. This decrease was a result of economies of scale achieved from the sale of
new products to existing customers.
22
General and administrative expenses. General and administrative expenses
increased $2.3 million or 36% to $8.9 million during the fiscal year ended June
30, 1998 from $6.5 million during the comparable period in 1997. This increase
was primarily due to increased costs relating to acquisitions, including
amortization of goodwill and the addition of certain administrative personnel
as part of the Company's efforts to build an infrastructure that it believes
will be able to more readily integrate any future products or businesses that
may be acquired. As a percentage of net sales, general and administrative
expenses increased to 13.2% during the fiscal year ended June 30, 1998, from
12.5% during the comparable period in 1997. This is primarily due to the
increase of amortization of goodwill and the addition of certain administrative
personnel.
Income from operations. Income from operations increased by $3.0 million,
or 28.2%, to $13.6 million during the fiscal year ended June 30, 1998 from $10.6
million during the comparable period in 1997. The increase in income from
operations in actual dollars was primarily due to the increase in net sales for
the year ended June 30, 1998. As a percentage of net sales, income from
operations decreased to 20.3% for the fiscal year ended June 30, 1998 from 20.5%
during the comparable period in 1997.
Interest expense. Interest expense increased by $225,000, or 7%, to $3.6
million during the fiscal year ended June 30, 1998, from $3.3 million during the
comparable period in 1997. The increase in interest expense is primarily related
to the interest associated with the increase in debt associated with the
issuance by U.S. Home & Garden Trust I (the "Trust"), a wholly-owned subsidiary
of the Company of the Trust Preferred Securities (as hereinafter defined) which
was partially offset by a decrease in the Company's effective borrowing rate.
Income taxes. Income tax expense increased to $3.6 million during the
fiscal year ended June 30, 1998 from $3.2 million during the comparable period
in 1997 primarily due to the increase in the income before income taxes and
extraordinary expense which was partially offset by a decrease in the Company's
effective income tax rate for the year.
Extraordinary expense, net. In April 1998, the Company repaid in full the
indebtedness outstanding under the Credit Facility (as hereinafter defined). As
a result, the Company was required to record an extraordinary expense of $2.2
million, net of tax benefits of $735,000, during the fiscal year ended June 30,
1998. The expense consisted of deferred finance costs at April 30, 1998, net of
accumulated amortization, plus prepayment penalties. In connection with the
acquisition of Weatherly, the Company completed the Refinancing. As a result of
the Refinancing, the Company was required to record an extraordinary expense of
$1.0 million net of tax benefits for fiscal 1997, which expense consisted of
deferred finance costs at June 30, 1996
Net Income. Net income increased by $2.3 million, or 74%, to $5.5 million
during the fiscal year ended June 30, 1998 from $3.2 million during the
comparable period in 1997. This increase was attributable to the increase in net
sales for the year ended June 30, 198, which was partially offset by the
extraordinary expense. Basic net income per common share increased $.08 to $.31
per share for the fiscal year ended June 30, 1998 from $.23
23
per share during the comparable period in 1997. Diluted net income per common
share increased $.04 to $.24 per share for the fiscal year ended June 30, 1998
from $.20 per share during the comparable period in 1997. The increase in both
basic and diluted earnings per share is primarily attributable to the increase
in net income, which was partially offset by additional weighted average common
and common equivalent shares outstanding in the fiscal year ended June 30, 1998
compared to the comparable period in fiscal 1997.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Net sales. Net sales increased by $25.0 million, or 93%, to $52.0 million
in fiscal from $27.0 million in fiscal 1996. The increase in net sales was
primarily a result of the August 1996 acquisition of Weatherly and increased
sales of the Company's landscape fabrics and landscape edging products.
Gross profit. Gross profit increased by $14.0 million, or 98%, to $28.4
million in fiscal 1997 from $14.4 million in fiscal 1996. The increase was due
primarily to the Weatherly acquisition. Gross profit as a percentage of net
sales increased to 54.6% in fiscal 1997 from 53.1% in fiscal 1996. The increase
in gross profit as a percentage of net sales was primarily attributable to the
sales of higher-margin products acquired in the Weatherly acquisition.
Selling and shipping expenses. Selling and shipping expenses increased $4.9
million, or 78%, to $11.2 million in fiscal 1997 from $6.3 million in fiscal
1996. This increase was primarily the result of an increase in the amount of
products shipped, which was a consequence of the acquisition of Weatherly and an
increase in sales of pre-existing product lines, particularly landscape fabrics
and landscape edging products. Selling and shipping expenses as a percentage of
net sales decreased from 23.2% in fiscal 1996 to 21.6% in fiscal 1997. This
decrease was primarily due to the consolidation of the Company's customer
services at the Waco, Texas office and the elimination of the majority of the
Weatherly sales positions in connection with the integration of the acquisition.
General and administrative expenses. General and administrative expenses
increased $2.1 million, or 50%, to $6.5 million in fiscal 1997 from $4.4 million
in fiscal 1996. This increase was primarily the result of the acquisition of
Weatherly. As a percentage of net sales, general and administrative expenses
decreased from 16.1% in fiscal 1996 to 12.5% in fiscal 1997. This improvement is
primarily due to the closing of the Weatherly administrative offices in February
1997 and the integration of certain administrative functions into the Company's
existing infrastructure.
Income from operations. Income from operations increased by $6.9 million,
or 184%, to $10.7 million in fiscal 1997 from $3.8 million in fiscal 1996. The
growth in income from operations in
24
actual dollars was primarily due to the increase in net sales and gross profit
as a result of the Weatherly acquisition. As a percentage of net sales, income
from operations increased to 20.5% in fiscal 1997 from 13.9% in fiscal 1996.
This increase was due to the decreases in selling and shipping and general and
administrative expenses as a percentage of net sales.
Interest expense. Interest expense increased by $1.3 million, or 65%, to
$3.3 million in fiscal 1997 from $2.0 million in fiscal 1996. The increase in
interest expense is primarily related to the interest associated with the
increase in both term and working capital debt and expenses associated with the
Weatherly acquisition, partially offset by a decrease in the Company's effective
borrowing rate.
Income taxes. In fiscal 1996, the Company reported a tax benefit of
$715,000 which was related to the recognition of a deferred tax asset relating
to available future net operating loss carryforwards. In fiscal 1997, the
Company incurred a tax expense of $3.2 million, excluding the benefit associated
with the extraordinary expense, reflecting the Company's profitability and
exhaustion of the majority of net operating loss carryforwards.
Extraordinary expense, net. In connection with the acquisition of
Weatherly, the Company completed the Refinancing. As a result of the
Refinancing, the Company was required to record an extraordinary expense of $1.0
million net of tax benefits for fiscal 1997, which expense consisted of deferred
finance costs at June 30, 1996 net of accumulated amortization, plus prepayment
penalties.
Net income. Net income increased $659,000, or 26%, to $3.2 million in
fiscal 1997 from $2.5 million in fiscal 1996. This increase was attributable to
successful integration into Easy Gardener of the Weatherly organization in
fiscal 1997, partially offset by the $1.0 million extraordinary expense, net of
tax benefits, incurred due to the Refinancing.
Dilutive earnings per common share increased $0.01 to $0.20 in fiscal 197
from $0.19 in fiscal 1996. The increase was due primarily to the increase in
income from operations, which was partially offset by increases in interest and
income tax expense and the extraordinary expense of approximately $1.0 million
net of tax benefits in fiscal 1997 which did not occur in fiscal 1996.
Quarterly Results of Operations and 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 December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer.
25
Sales of the Company's agricultural products, which were not material for
fiscal 1997, are also seasonal. Most shipments occur during the period from
March through October.
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,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- ----- ---- --------- -------- ------ -------
Net sales ........................... $ 5,523 $ 7,416 $20,558 $18,549 $ 7,025 $ 8,513 $23,520 $28,091
Cost of sales ..................... 2,607 3,217 9,025 8,800 3,522 3,857 10,482 12,570
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ...................... 2,916 4,199 11,533 9,749 3,503 4,656 13,038 15,521
Selling, general and administrative
expenses ........................... 3,264 4,048 5,538 4,894 3,963 4,589 5,967 8,546
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations ....... (348) 151 5,995 4,855 (460) 67 7,071 6,975
Investment income ................... 26 16 16 17 47 57 245 137
Interest expense .................... (563) (812) (993) (970) (853) (744) (922) (1,044)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes ... (885) (645) 5,018 3,902 (1,266) (620) 6,394 6,068
Income tax benefit (expense) ...... 280 195 (2,075) (1,600) 550 250 (2,700) (1,700)
Extraordinary expense net ........... (1,007) (1,450)
------- ------- ------- ------- ------- ------- ------- -------
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) ................... $(1,612) $ (450) $ 2,943 $ 2,302 $ (716) $ (370) $ 3,694 $ 2,918
======= ======= ======= ======= ======= ======= ======= =======
Diluted Net income (loss)
per share(1) ...................... $ (0.12) $ (0.03) $ 0.18 $ 0.14 (0.05) $ (.02) $ 0.15 $ 0.11
======= ======= ======= ======= ======= ======= ======= =======
Weighted average common and
common equivalent shares
outstanding(1) ...................... 12,915 13,917 16,059 16,524 14,702 16,384 25,038 25,547
======= ======= ======= ======= ======= ======= ======= =======
Net sales ........................... 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales ..................... 47.2% 43.4% 43.9% 47.4% 50.1% 45.3% 44.6% 44.7%
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ...................... 52.8% 56.6% 56.1% 52.6% 49.9% 54.7% 55.4% 55.3%
Selling, general and administrative 59.1% 54.6% 26.9% 26.4% 56.4% 53.9% 25.4% 30.4%
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations ....... (6.3%) 2.0% 29.2% 26.2% (6.5%) 0.8% 30.0% 24.9%
Investment income ................... 0.5% 0.2% 0.1% 0.1% 0.7% 0.7% 1.0% 0.5%
Interest expense .................... (10.2%) (11.0%) (4.8%) (5.3%) (12.1%) (8.7%) (3.9%) (3.7%)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes ... (16.0%) (8.8%) 24.5% 21.0% (18.0%) (7.2%) 27.1% 21.7%
Income tax benefit (expense) ........ 5.1% 2.6% (10.1%) (8.6%) 7.8% 2.9% (11.5%) (6.1%)
Extraordinary expense ............... 18.2% 0% 0% 0% 0% 0% 0% (5.2%)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ................... (29.1%) (6.2%) 14.3% 12.4% (10.2%) (4.3%) 15.6% 10.4%
======= ======= ======= ======= ======= ======= ======= =======
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using
the treasury stock method except for quarters reporting a net loss. Such
quarters only reflect issued and outstanding shares of Common Stock in the
weighted average shares outstanding.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
cash generated by operations, net proceeds from the Company's private and public
sales of securities and borrowings from lending institutions.
26
At June 30, 1998, the Company had consolidated cash and short-term
investments totalling $27.1 million and working capital of $46.7 million. At
June 30, 1997, the Company had consolidated cash and short-term investments
totalling $2.1 million and working capital of $2.3 million. The increase in
working capital at June 30, 1998 was due primarily to the proceeds from the
Company's sale of Subordinated Debentures (as defined below) in April 1998 to
the Trust, which resulted in net proceeds to the Company of approximately $63
million. In addition, during the fiscal year ended June 30, 1998, the Company
sold 4,290,000 shares of common stock in December 1997, which generated net
proceeds to the Company of approximately $16.0 million.
Net cash provided by operating activities for fiscal 1998 was $7.8 million,
consisting primarily of net income plus depreciation and amortization and an
extraordinary expense resulting from the payoff of the term debt and an increase
in accounts payable, offset in part by an increase in accounts receivables.
Net cash used in investing financing activities for fiscal 1998 was $29.9
million, consisting primarily of cash used for the asset acquisition of Weed
Wizard, Inc., the purchase of certain assets of Landmaster Products, Inc. and
the purchase of certain assets from the Tensar Corporation and the purchase of
property and equipment and payment for new package design.
Net cash provided by financing activities for fiscal 1998 was $47.1
million, consisting primarily of the proceeds from the mandatorily redeemable
preferred securities and the proceeds from the issuances of common stock offset
in part by the payoff of the Term debt.
In April 1998, the Trust, a newly created Delaware business trust and a
wholly-owned subsidiary of the Company, issued 78,000 common securities with a
liquidation amount of $25 per common security to the Company for $1,950,000 and
completed a public offering of 2,530,000 9.4% Cumulative Trust Preferred
Securities with a liquidation amount of $25 per security (the "Trust Preferred
Securities" and together with the common securities the "Trust Securities"). The
Trust exists for the sole purpose of issuing Trust Securities and using the
proceeds therefrom to acquire the Subordinated Debentures described below.
Concurrent with the issuance of the Trust Securities, the Trust invested the
proceeds therefrom in $65.2 million aggregate principal amount of 9.4% Junior
Subordinated Debentures (the "Subordinated Debentures") issued by the Company.
Interest only payments are due through April 2028 when the entire balance is
due. Approximately $40 million of the proceeds were used to repay all
outstanding long-term debt and line of credit advances made under Easy
Gardener's then existing credit facility (the "Credit Facility") with certain
institutional lenders, and certain prepayment penalties. As a result of the
early repayment, the Company wrote off deferred financing costs of approximately
$1.4 million and incurred a prepayment penalty of approximately $737,000 during
its quarter ended June 30, 1998 which reduced its reported income. Upon the
Company's repayment of the outstanding indebtedness, the Credit Facility
27
was terminated. Subsequent to June 30, 1998, the Company received a commitment
letter with a lending institution relating to a proposed $25 million revolving
acquisition line of credit and a $20 million revolving line of credit for
working capital. There can be no assurance that the Company will close the new
credit facility on terms acceptable to it, or at all. Failure to obtain a new
credit facility would materially adversely affect the Company's operations.
As of June 30, 1998, the Company had a deferred tax liability of $812,000
primarily relating to depreciation and amortization in excess of the book
amount. The deferred tax asset of $522,000 relates to the allowance of accounts
receivable, vacation accrual and certain other balance sheet reserves. See Note
11 to the Company's consolidated financial statements.
The Company spent approximately $3.4 million, including use of a portion of
existing trade credits, in the fiscal year ending June 30, 1998 on a combination
of media development, print, radio and television advertising, cooperative
advertising (advertising done in conjunction with retailers) and attendance at
trade shows and public relations to promote awareness, understanding and brand
identification of its lawn and garden products.
In fiscal 1998 the Company authorized the repurchase from time to time of
up to 1.5 million shares of its Common Stock through open market purchases and
in privately negotiated transactions. To date, approximately 793,000 shares have
been repurchased from non-affiliates in open market transactions of which
236,000 shares were purchased during fiscal 1998.
In February 1998, the Company completed its acquisition of Weed Wizard,
Inc. for a purchase price of approximately $16.0 million, of which approximately
$5.0 million was based on the value of certain current assets acquired.
In March 1998, the Company completed its acquisition of substantially all
of the assets of Landmaster Products, Inc. for a purchase price of approximately
$3.0 million, of which approximately $750,000 was based on the value of certain
net assets acquired.
In May 1998, the Company acquired the lawn and garden specialty fencing
product lines of the Tensar Corporation for $5.4 million plus an additional
$977,000 for inventory.
In August 1998, the Company entered into a non-binding letter of intent to
purchase Ampro Industries, Inc., a manufacturer and distributor of outdoor lawn
and garden products. The anticipated purchase price is approximately $25 million
with a potential additional purchase price amount contingent upon future
operating cash flow.
28
New Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all times that are required to be recognized under current account
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Management does not believe that the Company's current financial
statement disclosures will need to be modified based upon current operations.
Results of operations and financial position, however, will be unaffected by
future implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
Disclosures about Segments of an Enterprise and Related Information, (SFAS 131)
which supersedes SFAS 14, Financial reporting for Segments of a Business
Enterprises. SFAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for financial statements for period beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. The Company believes it operates under one business segment and has
already substantially complied with the required financial segment disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of this standard.
In February 1998, the Financial Accounting Standard Board issued SFAS 132,
Employers' Disclosures about Pensions and Other Post Retirement Benefits. SFAS
132 standardizes the disclosure requirements for pensions and other
post-retirement benefits to the extent practicable, requires additional
information on changes in benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when previous related accounting standards
were issued.
SFAS 132 is effective for financial statements for fiscal years beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated unless the information is not readily available, in which case
the notes to
29
the financial statements should include all available information and a
description of the information not available. Management believes that the
Company's current financial statement disclosures will not need to be modified
based upon current operations. Results of operations and financial position will
be unaffected by implementations of this standard.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133, requires
companies to recognize all derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions ar
met, a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings' effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of this new standard on July 1, 1999 to affect its
financial statements.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Year 2000
The Company has appointed an internal task force to assess its state of
readiness for possible "Year 2000" issues. The task force is evaluating internal
business systems, software and other components which affect the performance of
the Company's products and the Company's vulnerability to possible "Year 2000"
exposures due to suppliers and other third parties lack of preparedness for the
year 2000.
In addition, the Company has been in contact with its suppliers and other
third parties to determine the extent which they may be vulnerable to "Year
2000" issues. As this assessment progresses, matters may come to the Company's
attention which could give rise to the need for remedial measures which have not
yet been identified. The Company cannot currently predict the potential effect
of third parties "Year 2000" issues on its business. It is expected that
assessment, remediation and contingency planning activities will be on-going
throughout 1998 and 1999 with the goal of appropriately resolving all material
internal systems and third party issues. The Company intends to utilize both
internal and external resources to reprogram, replace and test the systems for
the year 2000 modifications.
30
The Company does not expect expenditures relating to the year 2000 issues
to be material and does not expect costs associated with the year 2000 to have a
significant impact on the Company's results of operations or financial position.
However, there can be no assurance that the Company will not experience
unexpected difficulties in connection with the year 2000 or that the systems of
other companies on which the Company's systems rely will be timely converted.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
This information appears in a separate section of this report following
Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure.
Not applicable.
31
Part III
Item 10. Directors and Executive Officers of the Registrant.
The current directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Robert Kassel(1) 58 Chairman of the Board, Chief
Executive Officer, President and
Treasurer
Richard Raleigh(2) 44 Chief Operating Officer and
Director
Maureen Kassel 50 Vice President of Public Relations
and Advertising, Secretary and
Director
Jon Schulberg(1)(2) 40 Director
Fred Heiden(1)(2) 57 Director
- ----------
(1) Member, Compensation Committee
(2) Member, Audit Committee
Robert Kassel, co-founded the Company and has been Chairman of the Board, Chief
Executive Officer, President and Treasurer of the Company since October 1990.
From 1985 to August 1991, he was a consultant to Comtel Communications, Inc.
("Comtel"), a company specializing in the installation and operation of
telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real
estate developer in Long Island, New York and Santa Barbara, California. From
1965 to 1985, he was a practicing attorney in New York City, specializing in
corporate and securities law.
Richard Raleigh, has been a Director of the Company since March 1993, Chief
Operating Officer of the Company since June 1992 and served as the Company's
Executive Vice President-Operations from December 1991 to June 1992. Prior to
joining the Company, Mr. Raleigh was a free-lance marketing consultant to the
lawn and garden industry from January 1991 to December 1991. From April 1988 to
January 1991, he was Director of Marketing, Lawn and Garden of Monsanto
Agricultural Co. From December 1986 to April 1988 he was Vice President of Sales
and Marketing of The Andersons, a company engaged in the sale of consumer and
professional lawn and garden products. From November 1978 to December 1986, he
held a variety of positions at The Andersons, including Operations Manager and
New Products Development Manager.
Maureen Kassel, the wife of Robert Kassel, co-founded the Company and has been
Vice President of Public Relations and Advertising and a director of the Company
since November 1990 and Secretary
32
of the Company since February 1992. For the last ten years, she has assisted in
the general administration and operation of real estate and other businesses.
Ms. Kassel is Chairman of the Board of Comtel.
Jon Schulberg, a director of the Company since March 1993, has been employed as
President of Schulberg MediaWorks, a company engaged in the independent
production of television programs and television advertising since January 1992.
From January 1989 to January 1992, he was a producer for Guthy-Renter
Corporation, a television production company. From September 1987 to January
1989 he was Director of Development for Eric Jones Productions.
Fred Heiden, a director of the Company since March 1993, has been a private
investor since November 1989. From April 1984 to November 1989, Mr. Heiden was
President and Principal owner of Bonair Construction, a Florida based home
improvement construction company.
Certain Key Employees
Richard M. Grandy, 52, has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of Easy
Gardener, Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy
Gardener, Inc. in 1983 after serving as Marketing Director at International
Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a
sales representative of lawn and garden products for the Ortho Division of
Chevron Chemical Co.
Lynda Gustafson, 34, has been Vice President of Finance of the Company since
September 1997 and served as Controller of the Company from November 1993 to
September 1997. From September 1990 through October 1993 Ms. Gustafson was
Supervisor of the Business Consulting Department of the certified public
accounting firm of Hood & Strong. From September 1988 to August 1990, she has
held the positions of Staff Accountant and Senior Accountant at the certified
public accounting firm of Schwartz, McGuire & Co.
Sheila Jones, 43, has been Vice President of Easy Gardener since July 1997 and
has also served as its General Manager from September 1994. Prior to the
acquisition of Easy Gardener, Inc. by the Company, Ms. Jones was employed by
Easy Gardener, Inc. from its inception in September 1983 to September 1994,
where she advanced to the positions of Vice President and General Manager. From
April 1977 to September, 1983, she was employed by International Spike, Inc.,
where she held various project management positions.
Paul Logue, 42, has been National Sales Manager of Easy Gardener since the
Company's acquisition of Easy Gardener, Inc. in September 1994. Prior to joining
the Company, Mr. Logue was employed by Easy Gardener, Inc. from September 1989
to September 1994, where he was advanced from the position of Northeastern
Regional Sales Manager to National Sales Manager. From March 1988 to September
1989, he was Regional Sales Manager for Hoffman Brand Fertilizers.
33
Compliance with Section 16(a) of the Securities Exchange Act of
1934
Section 16(a) of the Securities Exchange Act of 1934 requires that
Company's officers and directors, and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities, file
certain reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by the Company, or representations obtained from certain reporting persons, the
Company believes that during the year ended June 30, 1998 all filing
requirements applicable to its officers, directors, and greater than 10 percent
beneficial stockholders were complied with except that Robert and Maureen Kassel
failed to timely file a Form 5 with respect to the extension of the expiration
date of certain options previously granted to Ms. Kassel that occurred in March
1998 and the disposition to the Company of certain shares of Common Stock owned
of record by Maureen Kassel in repayment of certain expenses. In addition, Ms.
Gustafson failed to timely file a Form 5 to report the grant to her of certain
stock options in February 1998.
Item 11. Executive Compensation
The following table discloses the compensation awarded by the Company, for
the three fiscal years ended June 30, 1996, 1997 and 1998, to Mr. Robert Kassel,
its Chief Executive Officer and Mr. Richard J. Raleigh, its Chief Operating
Officer and to Ms. Lynda Gustafson, the Company's Vice President of Finance
(together the "Named Officers"). During the fiscal year ended June 30, 1998, no
other officer of U.S. Home & Garden Inc. received a total salary and bonus that
exceeded $100,000 during such fiscal year.
Summary Compensation Table
Annual Compensation Long-Term Debt
---------------------- --------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation (1)
- --------------------------- ---- ---------- --------- ----------- ---------------
Robert Kassel, 1998 450,000 281,667 468,000(2) $7,523
Chairman, Chief Executive Officer, 1997 350,000 250,000 1,200,000(3) $5,995
President and Treasurer 1996 250,000 100,000 200,000(4) --
Richard Raleigh, Chief Operating Officer 1998 225,000 115,000 132,500(5) $9,203
1997 195,000 111,275 600,000(3)(6) $8,390
1996 150,000 10,000 100,000(4) --
Lynda Gustafson, Vice President of Finance 1998 125,000 45,000 50,000 $11,273
1997 101,040 20,000 30,000 $ 7,451
1996 67,500 11,000 10,000 $ 2,790
- ------------
(1) Represents Company contributions to the Named Officers 401(k) account.
34
(2) Includes 80,000 options that were originally granted to Mr. Kassel in 1993
and which expiration dates were extended during fiscal 1998.
(3) Includes as to Mr. Kassel 200,000 options previously granted to Mr. Kassel
and as to Mr. Raleigh 100,000 options previously granted to Mr. Raleigh
whose exercise prices were repriced to reflect a reduction in the market
price of the Common Stock at the time of repricing.
(4) Includes as to Mr. Kassel five-year options to purchase 200,000 shares
granted to Mr. Kassel and as to Mr. Raleigh, five-year options to purchase
100,000 shares granted to Mr. Raleigh in June 1995 under the Company's 1995
Stock Option Plan, which grants were subject to stockholder approval of the
plan obtained in February 1996.
(5) Includes 12,500 options that were originally granted to Mr. Raleigh in 1992
the expiration date of which was extended during fiscal 1998.
(6) Includes 50,000 options previously granted to Mr. Raleigh the expiration
date of which was extended during fiscal 1997.
The following table discloses information concerning options granted in
fiscal 1998 to the Named Officers.
Option Grants in Fiscal Year Ended June 30, 1998
Individual Grants
------------------------------------------------
Number of Percent of Potential Realizable Value
Securities Total Options at Assumed Annual Rates of
Underlying Granted to Stock Price Appreciation
Options Employees in Exercise for Option Term ($)(2)
Granted Fiscal Year Price Expiration ---------------------------
Name (#)(1) (%) ($/Sh) Date 5% 10%
- ---- ---------- ------------- -------- ---------- ------ -------
Robert Kassel 310,000 34.6 3.25 8/4/02 278,354 615,089
78,000 8.7 3.25 8/4/02 70,037 154,764
80,000(3) 8.9 1.69 12/31/02 40,804 91,251
Richard Raleigh 100,000 11.2 3.25 8/4/02 89,792 198,416
20,000 2.2 3.25 8/4/02 17,958 39,683
12,500(3) 1.4 1.69 12/31/02 6,376 14,258
Lynda Gustafson 50,000 5.6 4.375 2/5/03 60,437 133,549
- ----------
(1) Unless otherwise noted, all of such options were exercisable in full from
the date of grant.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of options providing for termination of
the option
35
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.
(3) Reflects extension of expiration date of options that were originally
granted on September 15, 1992. All of such options vest in three equal
annual installments commencing August 5, 1998.
36
The following table sets forth information concerning options exercised by the
Named Officers during the fiscal year ended June 30, 1998, and the number of
options owned by the Named Officers and the value of any in-the-money
unexercised options as of June 30, 1998:
Aggregated Option Exercises
And Fiscal Year-End Option Values
----------------------------------
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired on Value Options at Options at
Exercise(#) Realized ($) June 30, 1998 June 30, 1998(1)
----------- ------------ ---------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Robert -- -- 2,297,653 158,000 $10,045,760 $1,128,504
Kassel
Richard 104,598 249,007 620,411 32,500 $2,603,461 $123,110
Raleigh
Lynda 34,000 69,168 26,000 40,000 $90,638 $82,520
Gustafson
- ----------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year end
market value of the common stock. An Option is "in-the-money" if the fiscal
year end fair market value of the Common Stock exceeds the option exercise
price. The last sale price (the fair market value) of the Common Stock on
June 30, 1998 was $6.438 per share.
37
Employment Agreements
The Company has entered into employment agreements with Messrs. Kassel and
Raleigh, each dated as of April 1, 1996. Mr. Kassel currently serves as Chief
Executive Officer and President pursuant to the employment agreement for a term
expiring on March 31, 1999, subject to certain renewal provisions. His current
annual salary is $450,000, and is subject to such bonuses and increases as are
approved at the discretion of the Board of Directors. Mr. Raleigh currently
serves as Chief Operating Officer pursuant to the employment agreement for a
term expiring on March 31, 1999, subject to certain renewal provisions. His
current annual salary is $250,000, and is subject to such bonuses and increases
as are approved at the discretion of the Board of Directors. Each of the
employment agreements requires that substantially all of the employee's business
time be devoted to the Company and that the employee not compete, or engage in a
business competitive with, the Company's current or anticipated business for the
term of the agreement and for two years thereafter (although they each may own
not more than 5% of the securities of any publicly traded competitive company).
Each of Mr. Kassel and Mr. Raleigh is, in addition to salary, entitled to
certain fringe benefits, including the use of an automobile and payment of
related expenses.
Mr. Kassel's employment agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Kassel upon
a change of control of the Company, (as defined in the agreement) a failure by
the Company to comply with its obligations under the agreement, the failure of
the Company to obtain the assumption of the agreement by any successor
corporation, or a change in Mr. Kassel's duties and obligations from those
contemplated by the agreement, and termination by the Company of Mr. Kassel's
employment other than for disability or cause, he will be entitled to receive
severance pay equal to the greater of (i) $350,000 ($3.5 million in the event of
a change of control), or (ii) the total compensation earned by Mr. Kassel from
the Company during the one-year period (multiplied by ten in the event of a
change of control) prior to the date of his termination.
Mr. Raleigh's employment agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Raleigh
upon a change of control of the Company, (as defined in the agreement) a failure
by the Company to comply with its obligations under the agreement, the failure
of the Company to obtain the assumption of the agreement by any successor
corporation, or a change in Mr. Raleigh's duties and obligations from those
contemplated by the agreement, and termination by the Company of Mr. Raleigh's
employment other than for disability or cause, he will be entitled to receive
severance pay equal to the greater of (i) $162,500 ($812,500 in the event of a
change of control), or (ii) the total compensation earned by Mr. Raleigh from
the Company during the one-year period (multiplied by five in the event of a
change of control) prior to the date of his termination.
38
The Company has entered into an employment agreement with Ms. Gustafson
which provides for her continued employment through June 30, 1999. Her current
annual base salary is $148,000.
Easy Gardener has entered into an employment agreement with Mr. Grandy,
dated as of September 1, 1998 which expires on August 31, 2003. Mr. Grandy
currently serves as President of Easy Gardener. The agreement provides for Mr.
Grandy to receive an annual base salary of $275,000, $300,000, and $330,000
during the first three years of the agreement and $350,000 thereafter. The
Agreement requires Mr. Grandy to devote substantially all of his business time
to Easy Gardener, and in the event Mr. Grandy's employment agreement is
terminated by Easy Gardener without cause (as defined in the agreement) or if
Mr. Grandy resigns with "Good Reason" (as defined in the agreement), Mr. Grandy
will be entitled to receive his base salary through the expiration of the
agreement.
Committees of the Board of Directors
During fiscal 1998 the Company established an Audit Committee comprised of
Messrs. Raleigh, Heiden and Schulberg. The Audit Committee will, among other
things, make recommendations to the Board of Directors with respect to the
engagement of the Company's independent certified public accountants and the
review of the scope and effect of the audit engagement. During fiscal 1998 the
Company established a Compensation Committee of its Board of Directors,
comprised of Messrs. Kassel, Schulberg and Heiden. The Compensation Committee
will, among other things, make recommendations to the Board of Directors with
respect to the compensation of the executive officers of the Company. The
Company maintains a Stock Option Committee comprised of Messrs. Schulberg and
Heiden, which determines the persons to whom options should be granted under the
Company's 1995 and 1997 Stock Option Plans and the number and other terms of
options to be granted to each person under such plans.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
The Company's Compensation Committee of its Board of Directors consisting
of Messrs. Kassal, Schulberg and Heiden, was established in September 1997.
Prior thereto, decisions as to compensation were made by the Company's Board of
Directors. Prior to the establishment of the compensation committee, Messrs.
Kassel and Raleigh, in their capacity as directors, each participated in the
Board of Directors deliberations concerning compensation of executive officers
for fiscal 1998. During fiscal 1998, none of the executive officers of the
Company served on the Board of Directors or the compensation committee of any
other entity, any of whose officers served on the Board of Directors of the
Company.
Stock Option Plans
In September 1991, the Company adopted a stock option plan (the "1991
Plan") pursuant to which 700,000 shares of Common Stock have been reserved for
issuance upon the exercise of options designated as either (i) options intended
to constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs
may be granted under the 1991 Plan to employees and officers of the Company.
NQO's may be granted to
39
consultants, directors (whether or not they are employees), employees or
officers of the Company.
The purpose of the 1991 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The 1991 Plan is administered by the
Board of Directors. The Board, within the limitations of the 1991 Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company are to be imposed on shares subject to options.
ISOs granted under the 1991 Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any related
corporation) may not exceed $100,000. NQO's granted under the 1991 Plan may not
be granted at a price less than the fair market value of the Common Stock on the
date of grant. Options granted under the 1991 Plan will expire not more than ten
years from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of the voting stock of the Company). An aggregate of 522,000
options were outstanding under the 1991 Plan at June 30, 1998.
The Company has adopted, a Non-Employee Director Stock Option Plan (the
"Director Plan"). Only non-employee directors of the Company are eligible to
receive grants under the Director Plan. The Director Plan provides that eligible
directors automatically receive a grant of options to purchase 5,000 shares of
Common stock at fair market value upon first becoming a director and,
thereafter, an annual grant, in January of each year, of 5,000 options at fair
market value. Options to purchase an aggregate of up to 100,000 shares of Common
Stock available for the automatic grants under the Director Plan. An aggregate
of 10,000 options were outstanding under the Director Plan at June 30, 1998.
The Company has also adopted a 1995 Stock Option Plan ("1995 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Stock Option Committee (the "Committee"),
as the case may be, will have discretion to determine the number of shares
subject to each NQO (subject to the number of shares available for grant under
the 1995 Plan and other limitations on grant set forth in the 1995 Plan), the
exercise price thereof (provided such price is not less than the par value of
the underlying shares of Common Stock), the term thereof (but not in excess of
10 years from the date of grant, subject to earlier termination in certain
circumstances), and the manner in which the option becomes exercisable (amounts,
intervals and other conditions). Directors who are employees of the Company will
be eligible to be granted
40
ISOs or NQOs under such plan. The Board or Committee, as the case may be, also
has discretion to determine the number of shares subject to each ISO, the
exercise price and other terms and conditions thereof, but their discretion as
to the exercise price, the term of each ISO and the number of ISOs that may vest
may be limited in any year by the same Code provisions applicable to ISOs
granted under the 1991 Plan. An aggregate of 1,459,000 options were outstanding
under the 1995 Plan at June 30, 1998.
The Company has adopted a 1997 Stock Option Plan ("1997 Plan") which
provides for grants of options to purchase up to 1,500,000 shares of Common
Stock. The Board of Directors or the Committee of the 1997 Plan, as the case may
be, will have discretion to determine the number of shares subject to each NQO
(subject to the number of shares available for grant under the 1997 Plan and
other limitations on grant set forth in the 1997 Plan), the exercise price
thereof (provided such price is not less than the par value of the underlying
shares of Common Stock), the term thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances), and
the manner in which the option becomes exercisable (amounts, intervals and other
conditions). Directors who are employees of the Company will be eligible to be
granted ISOs or NQOs under such plan. The Board or Committee, as the case may
be, also has discretion to determine the number of shares subject to each ISO,
the exercise price and other terms and conditions thereof, but their discretion
as to the exercise price, the term of each ISO and the number of ISOs that may
vest may be in any year is limited by the same Code provisions applicable to
ISOs granted under the 1991 Plan. An aggregate of 565,000 options were
outstanding under the 1997 Plan at June 30, 1998.
The Company from time to time has also granted non-plan options to certain
officers, employees and consultants. As of June 30, 1998, approximately 2.4
million non-plan options were outstanding.
Director Compensation
During fiscal 1998 each of the Company's two non-employee directors,
Messrs. Schulberg and Heiden, received $5,000 for serving as directors of the
Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information at September 21, 1998, based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director, (iii) each Named Officer and (iv) all executive
officers and directors as a group.
41
Amount and Nature
Name and Address of Beneficial Percentage
of Beneficial Owner Ownership(1)(2) of Class
- ---------------- ------------- ----------
Maureen Kassel 535,383(3) 2.5
Robert Kassel 4,478,162(4)(5) 19.3
Richard Raleigh 647,578(6) 3.0
Lynda Gustafson 26,000(7) *
Fred Heiden 258 *
Jon Schulberg 258 *
Joseph Owens II 1,114,396(8) 5.3
Richard Grandy 1,114,396(8) 5.3
Warburg Pincus Asset
Management, Inc. (9) 1,310,500(9) 6.2
All executive officers
and directors as a
group (five persons) 5,314,589(3)(4)(5)(6)(10) 20.6
- ----------
*less than 1%
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from September 21, 1998 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 21, 1998 have been exercised.
(3) Includes exercisable options and warrants issued to Ms. Kassel to purchase
an aggregate of 188,333 shares of the Company's Common Stock.
(4) Of such shares, (i) 347,050 are owned of record by Maureen Kassel; however,
because Ms. Kassel has appointed her husband as her proxy and
attorney-in-fact to vote all 347,050 of the shares owned of record by her,
Robert Kassel may also be deemed to have beneficial ownership of such
shares; (ii) an aggregate of 914,396 shares are owned of record by each of
Messrs. Joseph Owens and Richard Grandy, who have each entered into a
voting trust agreement (the "Voting Agreement") providing Mr. Kassel with
the right to vote the shares until September 1, 2001. The address of Mr.
Kassel is c/o the Company.
42
(5) Includes 2,302,320 shares of Common Stock issuable to Mr. Kassel upon
exercise of options and warrants.
(6) Includes 644,578 shares of Common Stock issuable to Mr. Raleigh upon
exercise of options and warrants.
(7) Represents shares of Common Stock issuable upon exercise of options granted
to Ms. Gustafson who is a Named Officer but not an executive officer of the
Company.
(8) Includes 175,000 shares of Common Stock issuable to each of Messrs. Grandy
and Owens upon exercise of options. The address of Mr. Grandy is c/o the
Company. The address of Mr. Owens is 8 Hillendale, Waco, Texas 76710.
(9) According to a Schedule 13G filed with the Securities and Exchange
Commission, the shares are held by accounts for which Warburg Pincus Asset
Management, Inc. acts as investment advisor. The address of Warburg Pincus
Asset Management, Inc. is 466 Lexington Avenue, New York, New York 10017.
(10) Excludes shares owned by Lynda Gustafson, the Company's Vice President of
Finance.
Item 13. Certain Relationships and Related Transactions.
From time to time Messrs. Kassel and Raleigh have borrowed monies from the
Company. During fiscal 1998, the highest amount owed to the Company by Messrs.
Kassel and Raleigh were $605,764 and $244,038, respectively, which amounts were
outstanding on September 21, 1998. The loans bear interest at 7% per annum and
mature on June 30, 2002. Messrs. Kassel and Raleigh will make annual payments of
interest on the outstanding principal balance of their loans through the
maturity date. In addition, payments of principal will be made during each of
the first four years and on maturity of the loans as follows: As to Mr. Kassel
- -- $50,000, $50,000, $50,000, $100,000, $150,000 and the balance of
approximately $205,919, respectively. As to Mr. Raleigh, $25,000, $25,000,
$50,000, $50,000 and the balance of approximately $85,608, respectively.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No.
3.1 Certificate of Incorporation, as amended.*
3.2 By-laws of the Company, incorporated by reference to
Exhibit 3(b) of the Company's Registration Statement on
Form S-1 (Registration No. 33-45428).
4.1 Form of certificate evidencing Common Stock,
$.001 par value, of the Company,
incorporated by reference to
43
Exhibit 4.1 of the Company's Registration Statement on
Form S-1 (Registration No. 333-38483).
4.2 Form of Unit Purchase Option granted to D.H. Blair &
Co.**
4.3 Warrant Agreement with respect to Class B Warrants.,
incorporated by reference to Exhibit 4(c) of the
Company's Registration Statement on Form S-3
(Registration No. 33-89800).
9.1 Voting Agreement among Joseph A. Owens, II, the
Company, and Robert Kassel.+
9.2 Voting Agreement among Richard M. Grandy, the Company
and Robert Kassel.+
10.1 Employment Agreement of Robert Kassel.++
10.2 Employment Agreement of Richard Raleigh.++
10.3 Employment Agreement of Lynda Gustafson.
10.4 Employment Agreement of Richard Grandy.
10.5 1991 Stock Option Plan, incorporated by reference to
Exhibit 10.5 of the Company's Registration Statement on
Form S-1 (Registration No. 33-45428).
10.6 1995 Stock Option Plan.*
10.7 Non-Employee Director Stock Option Plan.*
10.8 1997 Stock Option Plan, incorporated by reference to
Exhibit A to the Company's proxy statement dated May 27,
1997.
10.9 Asset Purchase Agreement dated as of June 18, 1994 among
the Company, Easy Gardener Acquisition Corp., Joseph A.
Owens II, Richard M. Grandy and Easy Gardener, Inc.+
10.10 Lease with respect to the Company's executive offices,
incorporated by reference to Exhibit 10.14 of the
Company's Form 10-KSB for the fiscal year ended June 30,
1992.
10.11 February 8, 1995 modification to lease with respect to
the Company's executive offices.*
10.12 May 6, 1997 modification to lease with respect to the
Company's executive offices.+++
10.13 Lease with respect to Weatherly's warehouse facilities
in Paris, Kentucky.+++
44
10.14 Form of Mergers and Acquisitions Agreement between the
Company and D.H. Blair Investment Banking Corp.**
10.15 Underwriting Agreement dated as of December 10, 1997
among the Company, Everen Securities, Inc. and
Josephthal & Co., Inc. (incorporated by reference to
Exhibit 1.1 filed with the Company's Registration
Statement on Form S-1, No. 333-38483).
10.16 Underwriting Agreement dated April 13, 1998 among the
Company, Everen Securities, Inc., Hambrecht & Quist and
Josephthal & Co., Inc.++++
10.17 Lease and lease extension agreements between Crawford-
Austin Mfg. Co. and Easy Gardener.*
10.18 Warehouse Lease, dated May 26, 1998 between Sarah C.
Leer and Easy Gardener, Inc.
10.19 Purchase Agreement, dated as of August 9, 1996, by and
among the Company, Easy Gardener, Weatherly and the
Weatherly Stockholders (incorporated by reference to
Exhibit 10.1 filed with the Company's Form 8-K for the
event dated August 9, 1996).
10.20 Purchase Agreement, dated as of May 9, 1997, by and
among the Company, Easy Gardener and Plastic Molded
Concepts, Inc.+++
10.21 Lease Extension, dated October 16, 1997, between Easy
Gardener and Crawford-Austin Mfg. Co. (incorporated by
reference to Exhibit 10.22 filed with the Company's
Registration Statement on Form S-1, No. 333-38483).
10.22 Assets Purchase Agreement dated as of February 25, 1998
by and among the Company, Weed Wizard, Weed Wizard, Inc
and the Weed Wizard stockholders (incorporated by
reference to exhibit 10.1 filed with the Company's Form
8-K for the event dated February 26, 1998).
10.23 Assets Purchase Agreement dated as of March 20, 1998 by
and among Easy Gardener, Inc., Landmaster Products,
Inc., Wayne Murray and Quincy McMillian.++++
10.24 Commercial Building Lease, dated June 12, 1998 between
Easy Gardener, Inc. and Norman Adams, James Anderson,
Donald Bryan and Pamela Butler.
10.25 Form of Subordinated Indenture between the Company and Wilmington
Delaware Trust, as trustee.++++
21 Subsidiaries of the Company.++++
23 Consent of BDO Seidman, LLP.
45
27 Financial Data Schedule (for SEC use only).
- ----------
* Incorporated by reference to the comparable exhibit filed with the Company's
Form 10-KSB for the fiscal year ended June 30, 1995.
** Incorporated by reference to the exhibit filed under the same number in the
Company's Registration Statement on Form SB-2 (file no. 33-61984).
+ Incorporated by reference to the exhibit contained in the Current Report on
form 8-K filed by the Company for the event dated September 1, 1994.
++ Incorporated by reference to the applicable exhibit contained in the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996.
+++ Incorporated by reference to the exhibit filed with the Company's Form 10-K
for the fiscal year ended June 30, 1997.
++++ Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 333-48519).
(b) Report on Form 8-K. A Form 8-K/A was filed by the Company during its
fiscal quarter ended June 30, 1998 to report the financial statements of Weed
Wizard, Inc. and related pro forma financial statements pursuant to Item 7 of
the Form 8-K.
46
U.S Home & Garden Inc. and Subsidiaries
Contents
================================================================================
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 1997 and
1998 F-3-F-4
Consolidated statements of income for the years
ended June 30, 1996, 1997 and 1998 F-5
Consolidated statements of stockholders' equity
for the years ended June 30, 1996, 1997 and 1998 F-6
Consolidated statements of cash flows for the years
ended June 30, 1996, 1997 and 1998 F-7-F-8
Summary of accounting policies F-9-F-14
Notes to consolidated financial statements F-15-F-34
Consolidated Financial Statement Schedule F-35
Schedule II-valuation and qualifying accounts
Note: All other schedules have been omitted since the
required information is contained in the
Consolidated Financial Statements or because such
schedules are not required.
F-1
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc. and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 1997 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1998. We have also audited
Schedule II - Valuation and Qualifying Accounts (the Schedule). These financial
statements and the Schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the Schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Francisco, California
August 12, 1998
F-2
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
====================================================================================================================================
June 30, 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Assets (Notes 1 and 6)
Current
Cash and cash equivalents $ 2,083,000 $ 27,130,000
Accounts receivable, less allowance for doubtful accounts and sales
returns of $314,000 and $399,000 (Note 2) 11,542,000 17,350,000
Inventories (Note 3) 5,254,000 11,763,000
Prepaid expenses and other current assets 419,000 1,130,000
Deferred tax asset (Note 11) 448,000 522,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 19,746,000 57,895,000
Furniture, Fixtures and Equipment, net (Note 4) 2,315,000 3,590,000
Intangible Assets (Note 1)
Excess of cost over net assets acquired, net (Note 5) 41,834,000 58,864,000
Deferred financing costs, net of accumulated amortization of
$302,000 and $21,000 (Note 14) 1,621,000 3,186,000
Product rights, patents and trademarks, net of accumulated
amortization of $75,000 and $93,000 180,000 165,000
Non-compete agreement, net of accumulated amortization of $22,000
and $48,000 478,000 462,000
Package design, net of accumulated amortization
of $110,000 and $247,000 251,000 718,000
Trade Credits (Note 12) 1,149,000 944,000
Officer Receivables (Note 8) 694,000 850,000
Other Assets 207,000 139,000
- ------------------------------------------------------------------------------------------------------------------------------------
$ 68,475,000 $126,813,000
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Income
====================================================================================================================================
June 30, 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity (Note 1)
Current
Line of credit (Notes 1, 6 and 14) $ -- $ --
Current maturities of notes payable (Notes 1, 6 and 14) 8,990,000 --
Accounts payable 1,774,000 4,501,000
Accrued expenses 4,244,000 3,922,000
Accrued co-op advertising 1,098,000 645,000
Accrued commissions 859,000 1,106,000
Accrued purchase consideration (Note 1) 489,000 978,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 17,454,000 11,152,000
Accrued Purchase Consideration (Note 1) 978,000 --
Deferred Tax Liability (Note 11) 547,000 812,000
Notes Payable, less current maturities (Notes 1, 6 and 14) 17,570,000 --
Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures (Notes 7 and 14) -- 63,250,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 36,549,000 75,214,000
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments, Contingency and Subsequent Events (Notes 1, 6, 9, 10 and 16) -- --
Stockholders' Equity (Note 10)
Convertible Preferred stock, $.001 par value-shares authorized, 1,000,000; no
shares outstanding -- --
Common stock, $.001 par value-shares authorized, 75,000,000;
14,073,000 and 20,133,000 shares issued and outstanding at June 30,
1997 and 1998 14,000 20,000
Additional paid-in capital 30,783,000 50,153,000
Retained earnings 1,129,000 2,733,000
- ------------------------------------------------------------------------------------------------------------------------------------
31,926,000 52,906,000
Less: Treasury Stock, 236,000 shares at cost -- (1,307,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 31,926,000 51,599,000
- ------------------------------------------------------------------------------------------------------------------------------------
$ 68,475,000 $ 126,813,000
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
=======================================================================================================================
June 30, 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------------
Net Sales (Note 2) $27,031,000 $52,046,000 $67,149,000
Cost of Sales (Note 2) 12,670,000 23,649,000 30,431,000
- -----------------------------------------------------------------------------------------------------------------------
Gross Profit 14,361,000 28,397,000 36,718,000
- -----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Selling and shipping 6,264,000 11,232,000 14,205,000
General and administrative 4,348,000 6,513,000 8,860,000
- -----------------------------------------------------------------------------------------------------------------------
10,612,000 17,745,000 23,065,000
- -----------------------------------------------------------------------------------------------------------------------
Income from Operations 3,749,000 10,652,000 13,653,000
Other Income (Expense)
Investment income 69,000 76,000 486,000
Interest expense (Notes 6 and 7) (2,009,000) (3,338,000) (3,563,000)
- -----------------------------------------------------------------------------------------------------------------------
Income before Income Taxes and Extraordinary Expense 1,809,000 7,390,000 10,576,000
Income Tax (Expense) Benefit (Note 11) 715,000 (3,200,000) (3,600,000)
- -----------------------------------------------------------------------------------------------------------------------
Income before Extraordinary Expense 2,524,000 4,190,000 6,976,000
Extraordinary expense of $1,459,000 and $2,185,000 on debt
refinancings, net of income taxes of $452,000 and $735,000
(Note 14) - (1,007,000) (1,450,000)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 2,524,000 $ 3,183,000 $ 5,526,000
=======================================================================================================================
Basic earnings per share:
Income per common share before extraordinary expense
(Note 15) $ 0.25 $ 0.31 $ 0.39
Extraordinary expense (Notes 14 and 15) - (0.08) (0.08)
- -----------------------------------------------------------------------------------------------------------------------
Net income per common share (Note 15) $ 0.25 $ 0.23 $ 0.31
=======================================================================================================================
Diluted earnings per share:
Income per common share before extraordinary expense
(Note 15) $ 0.19 $ 0.26 $ 0.31
Extraordinary expense (Notes 14 and 15) - (.06) (.07)
- -----------------------------------------------------------------------------------------------------------------------
Net income per common share (Note 15) $ 0.19 $ 0.20 $ 0.24
=======================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
====================================================================================================================================
Convertible
Preferred Stock Common Stock
------------------- ---------------------------
Number of Number of
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 (Note 10) -- $ -- 9,737,000 $ 10,000
Exercise of stock warrants, net of stock issuance
costs of approximately $114,000 -- -- 770,000 1,000
Net income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 (Note 10) -- -- 10,507,000 11,000
Exercise of stock options, warrants, and UPOs,
net of issuance costs of approximately $300,000
-- -- 2,566,000 2,000
Stock issued for Weatherly acquisition (Note 1) -- -- 1,000,000 1,000
Options and warrants issued for acquisition and
consulting services and bank refinancing
(Note 1) -- -- -- --
Net income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (Note 10) -- -- 14,073,000 14,000
Conversion of debt into common stock -- -- 154,000 --
Repurchase of UPOs -- -- -- --
Sale of common stock, net of stock issuance costs
of approximately $1,031,000 -- -- 4,290,000 5,000
Exercise of stock options and warrants -- 1,616,000 1,000
Repurchase of common stock for treasury -- -- -- --
Net income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 (Note 10) -- $ -- 20,133,000 $ 20,000
====================================================================================================================================
Additional Retained Total
Paid-In Earnings Treasury Stockholders'
Capital (Deficit) Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 (Note 10) $ 19,907,000 $ (4,578,000) $ -- $ 15,339,000
Exercise of stock warrants, net of stock issuance
costs of approximately $114,000 1,506,000 -- -- 1,507,000
Net income -- 2,524,000 -- 2,524,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 (Note 10) 21,413,000 (2,054,000) -- 19,370,000
Exercise of stock options, warrants, and UPOs,
net of issuance costs of approximately $300,000
5,292,000 -- -- 5,294,000
Stock issued for Weatherly acquisition (Note 1) 2,999,000 -- -- 3,000,000
Options and warrants issued for acquisition and
consulting services and bank refinancing
(Note 1) 1,079,000 -- -- 1,079,000
Net income -- 3,183,000 -- 3,183,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (Note 10) 30,783,000 1,129,000 -- 31,926,000
Conversion of debt into common stock 350,000 -- -- 350,000
Repurchase of UPOs -- (3,922,000) -- (3,922,000)
Sale of common stock, net of stock issuance costs
of approximately $1,031,000 15,854,000 -- -- 15,859,000
Exercise of stock options and warrants 3,166,000 -- -- 3,167,000
Repurchase of common stock for treasury -- -- (1,307,000) (1,307,000)
Net income -- 5,526,000 -- 5,526,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 (Note 10) $ 50,153,000 $ 2,733,000 $ (1,307,000) $ 51,599,000
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Includes 38,000 shares of common stock issued for services relating to cash
proceeds and approximately 60,000 shares issued relating to cashless exercise of
4 UPOs (Note 10).
F-6
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
====================================================================================================================================
Increase (Decrease) in Cash and Cash Equivalents
Years ended June 30, 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 2,524,000 $ 3,183,000 $ 5,526,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary expense -- 1,007,000 1,450,000
Loss on disposal of assets -- 226,000 18,000
Bad debt expense 167,000 323,000 179,000
Depreciation and other amortization 834,000 1,990,000 2,627,000
Amortization of deferred financing costs 264,000 323,000 329,000
Deferred taxes (1,005,000) 2,342,000 191,000
Changes in operating assets and liabilities, net
of assets acquired and liabilities assumed:
Accounts receivable (2,622,000) (2,763,000) (3,951,000)
Inventories (940,000) 444,000 (706,000)
Prepaid expenses and other current assets (159,000) 324,000 (548,000)
Accounts payable and accrued expenses 1,393,000 2,838,000 2,293,000
Other assets 162,000 308,000 388,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 618,000 10,545,000 7,796,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Payment for purchase of businesses, net of cash acquired (1,602,000) (28,358,000) (28,133,000)
Payment for non-compete agreement -- (500,000) --
Increase in officer receivables (131,000) (77,000) (156,000)
Purchase of furniture, fixtures and equipment (261,000) (528,000) (1,000,000)
Purchase of package design (109,000) (131,000) (604,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,103,000) (29,594,000) (29,893,000)
- ------------------------------------------------------------------------------------------------------------------------------------
F-7
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
====================================================================================================================================
Years ended June 30, 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuances of stock $ 1,507,000 $ 5,294,000 $ 19,026,000
Repurchase of unit purchase options -- -- (3,922,000)
Repurchase of common stock for treasury -- -- (1,307,000)
Proceeds from bank line of credit 17,496,000 41,791,000 23,648,000
Payment on bank line of credit (16,208,000) (43,079,000) (23,648,000)
Proceeds from notes payable -- 21,345,000 10,000,000
Payments of notes payable (1,600,000) (3,385,000) (36,560,000)
Proceeds from mandatorily redeemable preferred securities -- -- 63,250,000
Acquisition finance costs -- (1,514,000) (3,343,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,195,000 20,452,000 47,144,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (290,000) 1,403,000 25,047,000
Cash and Cash Equivalents, beginning of year 970,000 680,000 2,083,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 680,000 $ 2,083,000 $ 27,130,000
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-8
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Nature of Business U.S. Home & Garden Inc. (the "Company"), through its
wholly-owned subsidiaries, is a leading manufacturer and
marketer of a broad range of consumer lawn and garden
products. The Company's products include weed preventive
landscape fabrics, fertilizer spikes, decorative landscape
edging, shade cloth, root feeders and weed trimmer
replacement heads, which are sold under recognized brand
names, such as WeedBlock(R), Jobe's(R), Emerald Edge(R),
Shade Fabric(TM), Ross(R)and Weed Wizard(TM). The Company
markets its products through most large national home
improvement and mass merchant retailers ("Retail Accounts"),
including Home Depot, Lowe's, Kmart, Builder's Square,
Wal-Mart and Home Base in North America.
The Company has experienced significant growth in recent
years and believes that its success has been primarily
attributable to the expansion of its product lines through
the acquisition of complementary lawn and garden businesses
(Note 1), the quality of its products, its focus on
providing Retail Accounts with a single source of lawn and
garden products, the efficiency and reliability of its
inventory tracking and order fulfillment systems and its
distinctive advertising and store displays.
Principles The financial statements include the accounts of the Company
of Consolidation and its wholly-owned subsidiaries and the results of
operations of Weatherly Consumer Products Group (Weatherly),
Easy Gardener, Plasti-Chain Product Line of Plastic Molded
Concepts, Inc. (Plastic), Golden West Chemical Distributors
(Golden West), Emerald Products, Tensar Polytechnologies,
Inc. (Tensar), Landmaster Products, Inc. (Landmaster), and
Weed Wizard, since their dates of acquisition (Note 1).
Additionally, U.S. Home and Garden Trust I since its
formation in April 1998. Significant intercompany accounts
and transactions have been eliminated.
Inventories Inventories, which consist of raw materials, finished goods,
and packaging materials, are stated at the lower of cost or
market; cost is determined by the first-in, first-out (FIFO)
cost method.
Furniture,
Fixtures and
Equipment Furniture, fixtures and equipment are stated at cost.
Depreciation is computed by the Equipment straight-line
method over the estimated five to seven year useful lives of
the assets.
Intangible Assets Excess of Cost over Net Assets Acquired
The excess of cost over net assets acquired, which relates
to the Company's acquisitions of Weatherly, Easy Gardener,
Plastic, Golden West, Emerald
F-9
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Products, Tensar, Landmaster and Weed Wizard, are being
amortized over periods of twenty to thirty years using the
straight-line method. Periodically, the recoverability of
goodwill is evaluated by comparing undiscounted estimated
future net cash flows to the estimated net cash flows
projected at the time of acquisition.
Deferred Financing Costs
Direct costs associated with the Company's mandatorily
redeemable preferred securities debt are being amortized
over the life of the related debt, a period of approximately
thirty years.
Package Design
Package design costs associated with Easy Gardener and
Weatherly products are being amortized over a five-year
period using the straight-line method.
Product Rights
Product rights are being amortized over a 15-year estimated
useful life.
Non-Compete Agreement
The non-compete agreement was entered into with the
acquisition of Weatherly. The agreement is being amortized
over its 20 year term.
Revenue
Recognition Sales are recorded as products are shipped to customers.
Net Income Per
Share During 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per
Share (SFAS 128). SFAS 128 provides for the calculation of
basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing
income available to common stockholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution
of securities that could share in the earnings of an entity.
As required by SFAS 128, all prior earnings have been
restated to reflect the retroactive application of this
accounting pronouncement (Note 15).
F-10
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Income Taxes Income taxes are calculated using the liability method
specified by Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes.
Reclassification Certain 1997 financial statement amounts have been
reclassified to conform to the 1998 presentation.
Advertising Costs The Company incurs advertising expense primarily relating to
cooperative advertising credits granted to customers based
on qualified expenses incurred by the customers to advertise
the Company's products. Cooperative advertising credits are
usually limited to a percentage of an agreed-upon sales
volume. The Company also incurs advertising expense relating
to the distribution of catalogs and the broadcasting of
radio and television commercials. Advertising costs are
expensed as incurred. Advertising expense was $1,823,000,
$2,945,000 and $3,402,000 during the years ended June 30,
1996, 1997 and 1998.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Equivalents The Company considers all short-term investments purchased
with an initial maturity of three months or less to be cash
equivalents.
Stock Based
Compensation Effective July 1, 1996, the Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation. Under this
standard, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee
stock-based transactions. The fair value method is required
for all stock based compensation issued to nonemployees.
Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and
is recognized over the service period, which is usually the
vesting period. Companies are permitted to continue to
account for employee stock-based transactions
F-11
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
under Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, but are required
to disclose pro forma net income and earnings per share as
if the fair value method had been adopted. The Company has
elected to continue to account for stock-based compensation
under APB No. 25 (see Note 10).
New Accounting
Pronouncements In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130), which establishes
standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except
those resulting from investments by owners and distributions
to owners. Among other disclosures, SFAS 130 requires that
all items that are required to be recognized under current
accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS 130 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. Management
does not believe that the Company's current financial
statement disclosures will need to be modified based upon
current operations. Results of operations and financial
position, however, will be unaffected by future
implementation of this standard.
In June 1997, the Financial Accounting Standards Board
issued SFAS 131, Disclosures about Segments of an Enterprise
and Related Information, (SFAS 131) which supersedes SFAS
14, Financial reporting for Segments of a Business
Enterprises. SFAS 131 establishes standards for the way that
public companies report information about operating segments
in annual financial statements and requires reporting of
selected information about operating segments in interim
financial statements issued to the public. It also
establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131
defines operating segments as components of a company about
which separate financial information is available that is
evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing
performance.
F-12
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
SFAS 131 is effective for financial statements for period
beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. The Company
believes it operates under one business segment and has
already substantially complied with the required financial
statement disclosures. Results of operations and financial
position will be unaffected by implementation of this
standard.
In February 1998, the Financial Accounting Standard Board
issued SFAS 132, Employers' Disclosures about Pensions and
Other Post Retirement Benefits. SFAS 132 standardizes the
disclosure requirements for pensions and other
post-retirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when previous related
accounting standards were issued.
SFAS 132 is effective for financial statements for fiscal
years beginning after December 15, 1997 and requires
comparative information for earlier years to be restated
unless the information is not readily available, in which
case the notes to the financial statements should include
all available information and a description of the
information not available. Management believes that the
Company's current financial statement disclosures will not
need to be modified based upon current operations. Results
of operations and financial position will be unaffected by
implementation of this standard.
In June 1998, the Financial Accounting Standards Board
issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133 requires companies to recognize
all derivatives contracts as either assets or liabilities in
the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the
fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings' effect
of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning
after June 15, 1999.
F-13
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Historically, the Company has not entered into derivatives
contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption
of this new standard on July 1, 1999 to affect its financial
statements.
Financial
Instruments The Company's financial instruments consist of cash,
accounts receivable, debt and Company obligated mandatorily
redeemable preferred securities of subsidary trust holding
solely junior subordinated debentures. The carrying value of
cash and accounts receivable approximate fair value based
upon the liquidity and short-term nature of the assets. The
carrying value of short-term and long-term debt and Company
obligated mandatorily redeemable preferred securities of
subsidary trust holding solely junior subordinated
debentures approximates the fair value based upon short-term
and long-term borrowings at market rate interest.
Cash and cash equivalents are held principally at three high
quality financial institutions. At times such balances may
be in excess of the FDIC insurance limit.
F-14
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Business
Acquisitions Since August 1992, the Company has consummated the following
eight (8) acquisitions of lawn and garden companies or
product lines for a total of approximately 80.0 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. A total of approximately $1.2 million of
the additional amount has been paid to date and the
remaining $978,000 is payable in fiscal 1999.
o Emerald Products LLC - A manufacturer of decorative
landscape edging, which was acquired in August 1995 for
$835,000 in cash and a $100,000 promissory note.
o Weatherly Consumer Products Group, Inc. - A
manufacturer of fertilizer spikes and other lawn and
garden products, which was acquired in August 1996 for
1,000,000 shares of Common Stock valued at $3.0 million
and approximately $22.9 million in cash.
o Plasti-Chain Product Line of Plastic Molded Concepts,
Inc. - A line of plastic chain links and decorative
edgings, which was acquired from Plastic Molded
Concepts, Inc. in May 1997 for approximately $4.3
million in cash.
o Weed Wizard, Inc. - A manufacturer and distributor of
weed trimmer replacement heads, which was acquired in
February 1998 for approximately $16.0 million plus an
additional $1.7 million for excess working capital and
acquisition expenses, of which approximately $5.0
million was based on the value of certain net assets
acquired.
o Landmaster Products, Inc. - A manufacturer and
distributor of polyspun landscape fabrics for use by
consumers and professional
F-15
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
landscapers, substantially all of whose assets were
acquired in March 1998 for approximately $3.0 million,
plus an additional $600,000 for certain assets and
acquisition expenses, of which approximately $750,000
was based on the value of certain assets acquired.
o Tensar(R) consumer products line of the Tensar
Corporation. A line of lawn and garden specialty
fencing, which was acquired from the Tensar Corporation
in May 1998 for appoprixmately $5.4 million plus an
additional $1 million for inventory.
In addition, the Company has entered into a non-binding
letter of intent to purchase a manufacturer and distributor
of lawn and garden products for approximately $25 million
plus additional contingent payments based upon future
operating cash flows.
All of the above acquisitions were accounted for as
purchases and, accordingly, the results of operations of the
acquired companies have been included in the consolidated
statements of income since their respective acquisition
dates. The following unaudited pro forma summary combines
the consolidated results of operations of the Company, Weed
Wizard, Weatherly and Easy Gardener as if the acquisitions
had occurred at the beginning of the year of acquisition and
the beginning of the prior year. Accordingly, Easy Gardener
and Weatherly have been reflected as if the acquisition
occurred on July 1, 1995 and Weed Wizard, as if the
acquisitions occurred July 1, 1996. The pro forma
information gives effect to certain adjustments, including
the amortization of excess of cost over net assets acquired,
the elimination of certain expenses incurred by Weatherly
related to its acquisition and additional interest expense
on the notes payable. This pro forma summary does not
necessarily reflect the results of operations as they would
have been if the Company, Weed Wizard, Weatherly and Easy
Gardener had constituted a single entity during such periods
and is not necessarily indicative of results which may be
obtained in the future. The pro forma effect of the Tensar,
Landmaster, Plastic and Emerald acquisitions have not been
reflected since their prior revenue was not material to the
Company's operations.
Year ended June 30, 1996 1997 1998
- --------------------------------------------------------------------------------
Net sales $46,102,000 $58,135,000 $69,451,000
================================================================================
Net income before extraordinary
expense and income taxes $ 2,369,000 $ 4,236,000 $ 8,697,000
================================================================================
Net income before extraordinary
expense $ 3,462,000 $ 2,344,000 $ 5,741,000
================================================================================
F-16
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Year ended June 30, 1996 1997 1998
- --------------------------------------------------------------------------------
================================================================================
Net income $1,542,000 $2,121,000 $4,291,000
================================================================================
Basic net income per common share
before extraordinary expenses $ .25 $ .17 $ .32
================================================================================
Basic net income per common share $ .11 $ .06 $ .24
================================================================================
2. Concentration Concentration of Trade accounts receivable are due primarily
of Credit Risk from numerous customers located in many Credit Risk and
and Significant geographic regions throughout the United States. The Company
Relationships performs ongoing credit Significant evaluations of its
customers' financial conditions and establishes an allowance
for Relationships doubtful accounts based upon the credit
risk of specific customers, historical trends and other
information. The Company does not require collateral from
its customers.
During the years ended June 30, 1996, 1997 and 1998, sales
to two Easy Gardener customers accounted for approximately
36% (27% and 9%), 36% (26% and 10%) and 37% (26% and 11%) of
consolidated net sales. Included in accounts receivable at
June 30, 1997 and 1998 is $2,320,000 and $3,016,000 due from
the largest customer.
Substantially all of Easy Gardener's raw material purchases
for Weedblock(R) inventory, representing approximately 50%,
22% and 37% of the Company's consolidated raw material
purchases during the years ended June 30, 1996, 1997 and
1998, are from one vendor. Management believes that other
suppliers could provide a similar product on comparable
terms. A change in suppliers, however, could cause delays
and a possible loss of sales, which would affect operating
results adversely. Included in accounts payable at June 30,
1997 and 1998 is $349,000 and $854,000 due to this vendor.
3. Inventories Inventories consist of:
June 30, 1997 1998
------------------------------------------------------------
Raw materials $ 578,000 $ 5,183,000
Finished goods 4,676,000 6,580,000
------------------------------------------------------------
$5,254,000 $11,763,000
============================================================
F-17
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
=================================================================================================
4. Furniture, Furniture, fixtures and equipment consist of: and
Fixtures
Equipment June 30, 1997 1998
-----------------------------------------------------------------------------
Leasehold improvements $ 397,000 $ 397,000
Furniture, fixtures and equipment 2,761,000 4,649,000
-----------------------------------------------------------------------------
3,158,000 5,046,000
Less accumulated depreciation 843,000 1,456,000
-----------------------------------------------------------------------------
$2,315,000 $3,590,000
5. Excess of Cost The excess of cost over net assets acquired consists of
Over Net Assets
Acquired June 30, 1997 1998
------------------------------------------------------------------------------
Weatherly Consumer Products Group, Inc. $23,046,000 $22,948,000
Easy Gardener, Inc. 15,639,000 15,639,000
Weed Wizard, Inc. -- 11,495,000
Tensar Polytechnologies, Inc. -- 4,928,000
Plastic Molded Concepts, Inc. 2,760,000 2,810,000
Landmaster Products, Inc. -- 2,290,000
Golden West Chemical Distributions, Inc. 2,098,000 2,098,000
Emerald Products, LLC 870,000 991,000
------------------------------------------------------------------------------
44,413,000 63,199,000
Less accumulated amortization 2,579,000 4,335,000
------------------------------------------------------------------------------
$41,834,000 $58,864,000
==============================================================================
F-18
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Notes Payable Notes payable consist of the following:
and Line of
Credit
June 30, 1997 1998
----------------------------------------------------------------------------------
$23,000,000 note payable, interest due monthly at
prime (8.5% at June 30, 1997) plus 1.25% or
LIBOR (5.72% at June 30, 1997) plus 3.50%,
quarterly principal payments ranging from
$570,000 to $1,350,000 beginning September 30,
1996 through June 30, 2002, collateralized by
Easy Gardener's assets and guaranteed by the
Company.
$20,510,000 $ --
$2,250,000 note payable, interest due monthly at
prime (8.5% at June 30, 1997) plus 6.0%,
quarterly principal payments of $140,625
beginning September 30, 1998 through June 30,
2002, collateralized by Easy Gardener's assets
and guaranteed by the Company.
2,250,000 --
$3,800,000 note payable, interest only due
monthly at 12% with the full principal paid
in November 1997. 3,800,000 --
----------------------------------------------------------------------------------
26,560,000 --
Less current portion 8,990,000 --
----------------------------------------------------------------------------------
$17,570,000 $ --
==================================================================================
At June 30, 1997, the Company's financing arrangements
include a $13,000,000 revolving credit facility expiring
June 2002, bearing interest at the lower of prime or LIBOR
rates plus an additional marginal amount; collateralized by
Easy Gardener's assets and guaranteed by the Company. The
credit facility's availability increases to $16,000,000 for
the months of February through May. As of June 30, 1997, no
amounts were outstanding on the credit line. If the
revolving credit facility is terminated prior to June 2002,
the Company is subject to certain prepayment penalties (Note
14).
F-19
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In connection with the mandatorily redeemable preferred
securities financing obtained in April 1998, the remaining
unpaid balance of the above term notes payable were
refinanced and the revolving credit facility was terminated.
The Company is currently negotiating with several financial
institutions for a new revolving credit facility. See Notes
7 and 14.
7. Mandatorily In April 1998, U.S. Home & Garden Trust I (the "Trust"), a
Redemmable newly created Delaware Redeemable Preferred business trust
Preferred and a wholly-owned subsidiary of the Company, issued 78,000
Securities common Securities securities with a liquidation amount of
$25 per common security to the Company for $1,950,000 and
completed a public offering of 2,530,000 of 9.40% Cumulative
Trust Preferred Securities with a liquidation amount of $25
per security (the "Trust Preferred Securities" and, together
with the common securities, the "Trust Securities"). The
Trust exists for the sole purpose of issuing Trust
Securities and using the proceeds therefrom to acquire the
subordinated debentures described below. Concurrent with the
issuance of the Trust Securities, the Trust invested the
proceeds therefrom in $65.2 million aggregate principal
amount of 9.40% Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debentures") issued by the
Company.
Distributions on the Trust Securities are payable monthly in
arrears by the Trust.
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.
F-20
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Trust Securities are subject to mandatory redemption
upon the repayment of the Subordinated Debentures at a
redemption price equal to the aggregate liquidation amount
of the Securities plus any accumulated and unpaid
distributions. The Subordinated Debentures mature on April
15, 2028, but may be redeemed at the option of the Company
at any time after April 15, 2003 or earlier under certain
circumstances. The Company effectively provides a full and
unconditional guarantee of the Trusts' obligations under the
Trust Securities to the extent that the Trust has funds
sufficient to make such payments.
Approximately $40 million of the proceeds received by the
Company from the sale of the Subordinated Debentures to the
Trust, were used by the Company to repay outstanding
long-term debt and line of credit advances and prepayment
penalties (see Note 6).
8. Officer
Receivables Officer receivables represents notes which bear interest at
7% and require interest payments on an annual basis.
Principal payments on the notes are due in aggregate annual
installments of $75,000 to $200,000, with the aggregate
balance of $330,000 due upon maturity in June 2002.
9. Commitments Employment Agreements
During 1996 and 1997, the Company entered into new
employment agreements with three of its officers. The
agreements are for one-year periods but are automatically
renewed unless specifically terminated by the Company or the
employee. If the employment agreements are terminated by the
Company, the officers will be entitled to an additional ten
and five years of annual compensation. Annual compensation
under the employment agreements are $450,000, $195,000 and
$125,000. The employment agreements also provide for certain
lump sum payments in the event of a change in control equal
to approximately $5.6 million. A five year agreement with an
officer of Easy Gardener provides for a base aggregate
annual salary of approximately $275,000 beginning in 1999.
In addition, the agreements provide for incentive and
additional compensation under certain circumstances.
Operating Leases
The Company leases office and warehouse space under
operating leases which expire in various years through 2002.
The Company also leases
F-21
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
certain office equipment and automobiles under operating
leases expiring in 1999 through 2003. The future minimum
lease payments under these non-cancelable operating leases
are as follows:
Year ending June 30, Amount
------------------------------------------------------------
1999 $1,164,000
2000 1,011,000
2001 594,000
2002 27,000
2003 6,000
------------------------------------------------------------
$2,802,000
============================================================
Rent expense was approximately $336,000, $680,000 and
$532,000 for the years ended June 30, 1996, 1997 and 1998.
Pension Plan
Easy Gardener has established an employee defined
contribution pension plan (the Plan). Employees of the
Company, Weatherly, Easy Gardener, Weed Wizard and Golden
West are eligible to participate. The Company is required to
match the first 3% of employee contributions up to 5% of the
employees wage base. The plan also allows discretionary
contributions by the Company. The Company's contribution
vests over a seven-year period. Pension expense associated
with the Plan for the years ended June 30, 1996, 1997 and
1998 was approximately $180,000, $199,000 and $223,000.
Royalty Agreements
The Company has entered into royalty agreements which
provide for payments based upon a percentage of net sales of
certain products. These agreements expire in various years
from 1999 to 2005. Royalty expense during the years ended
June 30, 1996, 1997 and 1998 was $104,000, $304,000 and
$353,000.
10. Stockholders'
Equity (a) Convertible Preferred Stock
The Company is authorized to issue 1,000,000 shares of
preferred stock with such designations, rights and
preferences as may be determined from
F-22
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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
convertible preferred stock have been issued.
(b) Common Stock
In December 1997, the Company sold approximately 4,290,000
shares in a public offering. Net proceeds to the Company,
after deducting commissions and expenses of $1,031,000,
approximated $15,859,000.
In June 1998, the Company's shareholders authorized an
increase in common stock from 30 to 75 million shares.
In September 1998, the Company adopted a Stockholders'
Rights Agreement commonly known as a "poison pill," which
provides that in the event an individual or entity becomes a
beneficial holder of 12% or more of the shares of the
Company's capital stock, other stockholders of the Company
shall have the right to purchase shares of the Company's (or
in some cases, the acquiror's) common stock at 50% of its
then market value.
(c) Treasury Stock
During 1998, the Company repurchased 236,000 shares of
treasury stock for $1,307,000.
(d) Stock Option Plans
The Company adopted the 1991 Stock Option Plan (the "1991
Plan") pursuant to which 700,000 shares of common stock have
been reserved for issuance upon the exercise of options
designated as either (i) options intended to constitute
incentive stock options ("ISOs") under the Internal Revenue
Code of 1986, as amended (the "Code") or (ii) non-qualified
options. ISOs may be granted under the Plan to employees and
officers of the Company. Non-qualified options may be
granted to consultants, directors (whether or not they are
employees), employees and officers of the Company.
During fiscal 1995, the Board of Directors of the Company
adopted, subject to stockholder approval, two additional
stock option plans. The 1995 Stock Option Plan (the "1995
Plan") allows the granting of either ISOs or non-qualified
options. The maximum aggregate number of shares to be
granted under this plan is 1,500,000. The Non-Employee
Director Stock Option Plan (the "Non-Employee Director
Plan") was established to attract, retain and compensate for
their services as directors, highly
F-23
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
qualified individuals who are not employees of the Company.
The maximum aggregate number of shares issued under this
plan is 100,000. During 1996, 1997 and 1998, 10,000 options
were granted each year. The 1995 Plan is administered by a
committee of the Board of Directors and the Non-Employee
Director Plan is a formula plan.
During May 1997, the Board of Directors approved the 1997
Stock Option Plan. The plan reserves the issuance of
1,500,000 shares of common stock.
The 1991 Plan is administered by the Board of Directors of
the Company (the "Board"). The Board, or committee, as the
case may be, within the limitations of the 1991 and 1995
Plans, as the case may be, determines the persons to whom
options will be granted, the number of shares to be covered
by each option, whether the options granted are intended to
be ISOs, the duration and rate of exercise of each option,
the option purchase price per share and the manner of
exercise, the time, manner and form of payment upon exercise
of an option, and whether restrictions such as repurchase
rights in the Company are to be imposed on shares subject to
options.
ISOs granted under the plans may not be granted at a price
less than the fair market value of the common stock on the
date of grant (or 110% of fair market value in the case of
persons holding 10% or more of the voting stock of the
Company). The aggregate fair market value of shares for
which ISOs granted to any employee are exercisable for the
first time by such employee during any calendar year (under
all stock option plans of the Company and any related
corporation) may not exceed $100,000. Non-qualified options
granted under the 1991 Plan may not be granted at a price
less than the fair market value of the common stock on the
date of grant (not less than par value in the case of the
1995 Plan). Options granted under the plans will expire not
more than ten years from the date of grant (five years in
the case of ISOs granted to persons holding 10% or more of
the voting stock of the Company).
All options granted under the 1991 Plan, Non-Employee
Director Plan and ISOs under the 1995 Plan are not
transferable during an optionee's lifetime but are
transferable at death by will or by the laws of descent and
distribution.
F-24
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
====================================================================================================================================
The Board of Directors also has authorization to issue stock options ("Non-Plan
Options") to employees or consultants for services performed.
The following is a summary of activity relating to stock options.
Weighted Weighted
Average Average
Option Remaining
Price Available Contractual
Per Share Outstanding Exercisable for Grant Life
- ------------------------------------------------------------------------------------------------------------------------------------
1991 Plan
June 30, 1995 $ 1.69(1) 688,000 588,000 12,000 5 years
Became exercisable -- -- 100,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1996 $ 1.69(1) 688,000 688,000 12,000 4 years
Expired in 1997 $ 1.69 (26,000) (26,000) 26,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1997 $ 1.69(1) 662,000 662,000 38,000 3 years
Cashless exercise of
options(5) $ 1.69 (140,000) (140,000) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998 $ 1.69(1) 522,000 522,000 38,000 2 years
- ------------------------------------------------------------------------------------------------------------------------------------
1995 Plan
June 30, 1995 $ 2.28 400,000 -- 1,100,000 5 years
Granted during 1996 $ 2.25 310,000(3) 10,000 (310,000) --
Became exercisable -- -- 400,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1996 $ 2.26 710,000 410,000 790,000 4.5 years
Granted during 1997 $ 2.06(4) 675,000 675,000 (675,000) --
Became exercisable $ 2.28 -- 75,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1997 $ 2.10(4) 1,385,000 1,160,000 115,000 4 years
Granted during 1998 $ 3.25 98,000 98,000 (98,000) --
Cashless exercise of
options(5) $ 2.06 (24,000) (24,000) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998 $ 2.18 1,459,000 1,234,000 17,000 3.5 years
- ------------------------------------------------------------------------------------------------------------------------------------
1997 Plan
June 30, 1997 $ -- -- -- -- --
Granted during 1998 $3.32 565,000 485,000 935,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998 $3.32 565,000 485,000 935,000 4 years
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Plan Options
June 30, 1995 $1.85 745,000(2) 645,000 -- 4 years
Granted during 1996 $2.25 315,000(3) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
F-25
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
====================================================================================================================================
Weighted Weighted
Average Average
Option Remaining
Price Available Contractual
Per Share Outstanding Exercisable for Grant Life
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1996 $1.83(1) 1,060,000 645,000 -- 3.5 years
Became exercisable $2.25 -- 125,000 -- --
Granted during 1997 $1.91 1,225,000 1,225,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1997 $1.84(4) 2,285,000 1,995,000 -- 4 years
Cashless exercise of $2.25 (44,000) (44,000) -- --
options(5)
Granted during 1998 $5.02 190,000 190,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998 $2.08 2,431,000 2,141,000 -- 3.5 years
- ------------------------------------------------------------------------------------------------------------------------------------
(1) During fiscal 1995, the Board of Directors authorized a reduction in the
exercise price. The ending option price per share reflects the reduced
exercise price. During fiscal 1995, approximately 1.1 million options to
purchase common stock were repriced to $1.69.
(2) Options outstanding reflect the effect of certain antidilution provisions.
(3) Options vest over four years with the exception of 10,000 immediately
vesting 1995 Plan options.
(4) In December 1996, 1,490,000 options granted subsequent to June 1995 were
repriced to $2.06 per share.
(5) Options were exercised and immediately sold in one transaction.
In addition to certain stock options and warrants granted to employees, the
Company also issued a total of 925,000 options and warrants to various
consultants and a financial institution relating to various consulting
services, the acquisitions of Weatherly and PlastiChain, and the bank
agreement entered into during August 1996. The fair value of such options
and warrants was estimated at approximately $1,079,000. The fair value of
such options and warrants has been expensed except for the fair value
related to acquisitions and the bank financing for which
F-26
[STAMP] U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
these amounts are being amortized over the life of the bank
financing agreement (Note 14) and the excess of cost of net
assets acquired.
(e) Unit Purchase Options
In October 1994, the Company granted six unit purchase
options (UPOs), each consisting of 43,860 shares of the
Company's common stock and Class B Warrants to purchase
43,860 shares of common stock at an exercise price of $2.28.
These UPOs, which expire on August 31, 1999, have a nominal
exercise price. Three of the UPOs were granted to an officer
of the Company for his personal guarantees in connection
with the Easy Gardener acquisition. Three were granted to an
outside consultant for its services in connection with
financing obtained for the Easy Gardener acquisition. The
six UPOs issued with the nominal exercise price were valued
at $400,000 and included in deferred financing costs.
Concurrently, the Company also granted six UPOs, consisting
of the same components, each with a current exercise price
of approximately $75,000, three of which were granted to an
officer of the Company. All these transactions were done in
lieu of cash compensation in consideration for certain
financial consulting and other services and for the personal
guarantee and other collateral provided in connection with
the Company's acquisition of Easy Gardener, Inc., without
which the Company's transaction with Easy Gardener, Inc.
would not have occurred. During 1997, one UPO and the
related warrants were exercised by the outside consultant.
Proceeds to the Company were approximately $175,000.
In connection with the Company's August 1994 Private
Placement, the placement agent and its designees were
granted approximately 28 UPOs exercisable at $100,000 each.
Each UPO consists of 43,860 shares of common stock and
warrants to purchase 43,860 shares of common stock at $2.28
per share. These warrants expire in August 1999, if the
underlying UPO is not exercised. If exercised, the warrants
expire in May 2000. During 1997, 5 UPOs were terminated in a
cashless exercise and approximately 60,000 shares of common
stock was issued.
F-27
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In December 1997 and May 1998, the Company repurchased and
retired approximately 21 UPOs underlying approximately
1,851,000 shares of common stock for approximately
$3,922,000.
The total shares of common stock issuable upon exercise of
the remaining UPOs, including the underlying warrants, would
be approximately 3,000,000 and 1,100,000 shares at June 30,
1997 and 1998.
(f) Warrants
In connection with certain business transactions and stock
offerings, the Company has granted various warrants to
purchase common stock.
The following schedule will summarize the activity.
Weighted Weighted
Average Average
Warrant Remaining
Price Per Contractual
Share Outstanding(1) Exercisale Life
- --------------------------------------------------------------------------------
June 30, 1995 $2.12 6,233,000 6,233,000 4.5 years
Increase for antidilution $2.28 153,000 153,000 -
Warrants exercised $2.24 (770,000) (770,000) -
- --------------------------------------------------------------------------------
June 30, 1996 $2.14 5,616,000 5,616,000 3.5 years
Warrants issued $2.45 525,000 525,000 -
Warrants exercised $2.15 (2,380,000) (2,380,000) -
Expired $6.00 (52,000) (52,000) -
- --------------------------------------------------------------------------------
June 30, 1997 $2.18 3,709,000 3,709,000 3 years
Warrants issued $4.75 250,000 250,000 -
Warrants exercised $2.28 (1,408,000) (1,408,000) -
Expired $2.25 (50,000) (50,000) -
- --------------------------------------------------------------------------------
June 30, 1998 $2.39 2,501,000 2,501,000 2 years
- --------------------------------------------------------------------------------
F-28
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(1) The warrants contain anti-dilution provisions which
could effect the number of shares of common issuable
stock upon the exercise of the warrants as well as the
per share warrant prices. Additionally, these warrants
contain certain redemption provisions.
(g) Common Stock Reserved
At June 30, 1998, approximately 9,750,000 shares of common
stock have been reserved for issuance upon the exercise of
warrants, options and UPOs.
(h) Stock Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations in
accounting for the plan. Under APB Opinion No. 25, because
the exercise price of the Company stock options equals or
exceeds the market price of the underlying stock on the date
of grant, no compensation cost is recognized.
FASB Statement No. 123, Accounting for Stock-Based
Compensation, requires the Company to provide pro forma
information regarding net loss as if compensation costs for
the Company's stock options and warrants had been determined
in accordance with the fair value based method prescribed in
FASB Statement No. 123. The Company estimates the fair value
of each stock option and warrant at the grant date by using
a modified Black-Scholes pricing model with the following
weighted-average assumptions used for grants in 1997 and
1998, respectively: no dividend yield for any year; expected
volatility of approximately 30% in both years; risk-free
interest rates of 6.6% in both years and expected lives of
approximately three to five years. Pro forma compensation
expense associated with options granted to employees
totalled $132,000, $1,566,000 and $1,013,000 in 1996, 1997
and 1998, respectively.
Under the accounting provisions of FASB Statement No. 123,
the Company net income and net income per common share would
have been decreased to the pro forma amounts indicated
below:
F-29
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Years ended June 30, 1996 1997 1998
- --------------------------------------------------------------------------------
Net income
As reported $2,524,000 $3,183,000 $5,526,000
Pro forma 2,392,000 1,617,000 4,513,000
Dilutive per share 0.19 0.20 0.24
Dilutive per share pro forma 0.18 0.10 0.20
- --------------------------------------------------------------------------------
The above pro forma information includes only the effects of
1997 and 1998 grants. Because options potentially vest over
several years and additional awards are made each year, the
results shown above may not be representative of the effects
on net earnings in future years.
11. Income Taxes Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance
is established for deferred income tax assets when
realization is not deemed more likely than not. Deferred tax
assets (liabilities) consist principally of the following:
June 30, 1997 1998
-------------------------------------------------------------------------------
Deferred Tax Assets
Alternative minimum and state taxes $ - $ 325,000
Accounts receivable allowance and other 58,000 193,000
Net operating loss carryforwards 555,000 192,000
-------------------------------------------------------------------------------
Total deferred tax asset 613,000 710,000
Less valuation allowance (165,000) (188,000)
-------------------------------------------------------------------------------
Net deferred tax asset $ 448,000 $ 522,000
===============================================================================
-------------------------------------------------------------------------------
Deferred Tax Liability
Depreciation and amortization in
excess of book amount $(547,000) $(812,000)
===============================================================================
F-30
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
At June 30, 1998, the Company had utilized all of its Federal net
operating loss (NOL) carryforwards. California allows an NOL
carryforward of 50% of a company's California taxable loss. The
carryforward for California purposes, after the 50% reduction, was
approximately $1,449,000 at June 30, 1998 and expires through 2001.
Use of the Company's NOLs could be limited in the future as a result
of issuance or exercise of stock options and warrants or sale or
issuance of stock. The Company files its tax returns on a calendar
year basis. Because of the seasonal nature of the Company's
operations, the different reporting periods for book and tax purposes
may affect the amount of taxes that will ultimately be payable or
deferred.
At June 30, 1997 and 1998, the Company established a $165,000 and
$188,000 valuation allowance for the benefits pertaining to California
NOLs which are not estimated to be realizable prior to their
expiration. The Company believes that it is more likely than not that
the remaining deferred tax assets will be realized through future
taxable earnings or alternative tax strategies.
The income tax (provision) benefit consists of:
June 30, 1996 1997 1998
----------------------------------------------------------------------
Current
Federal $ -- $ (126,000) $(2,104,000)
State (290,000) (280,000) (570,000)
----------------------------------------------------------------------
(290,000) (406,000) (2,674,000)
----------------------------------------------------------------------
Deferred
Federal 1,013,000 (2,286,000) (126,000)
State (8,000) (56,000) (65,000)
----------------------------------------------------------------------
1,005,000 (2,342,000) (191,000)
----------------------------------------------------------------------
$ 715,000 $(2,748,000) $(2,865,000)
======================================================================
F-31
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The 1997 income tax expense consists of $3,200,000 expense
from continuing operations reduced by a $452,000 benefit
associated with the extraordinary expense. The 1988 income
tax expense consists of $3,600,000 expense from continuing
operations reduced by a $735,000 benefit associated with the
extraordinary expense.
The following is a reconciliation between the Statutory
Federal income tax rate and the Company's effective tax rate
for continuing operations:
June 30, 1996 1997 1998
- --------------------------------------------------------------------------------
Income tax (provision) computed at Federal
Statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of Federal tax benefits (16.5) (4.6) (6.0)
Nondeductible amortization and other (4.1) (4.5) (1.1)
Deductible UPOs and stock options - - 7.3
Changes in valuation allowance on deferred tax
asset 94.1 (0.2) (0.2)
- --------------------------------------------------------------------------------
(Provision) benefit for income taxes 39.5% (43.3)% (34.0)%
================================================================================
12. Trade Credits In April 1996, the Company entered into an agreement to
exchange unsold assets held for sale for credit against the
future purchase of products and services. This transaction
has been reported at the estimated fair market value of the
assets exchanged by the Company. No gain or loss was
recognized on such transaction as the Company had previously
written down its assets held for sale to their estimated
fair market value. The agreement requires the Company to pay
a portion of the purchase price of the product or services
received. Depending on the nature of the products or
services purchased, the Company will receive a credit
against the future price ranging from 10% to 45% of the cash
purchase price. The Company will also receive a percentage
of the cash proceeds from the ultimate sale of the assets.
The agreement provides that the Company will receive maximum
total credits and cash totaling $1.6 million. The agreement,
which was originally scheduled to expire in April 1999, was
extended during 1998 to April 2002 and requires the Company
to use all credits by this date. The Company expects to use
the credits primarily by purchasing operating assets and
advertising time. The Company expects to use all available
credits by the expiration date and will continually evaluate
this asset based upon credits utilized and future operating
goals.
F-32
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Supplemental June 30, 1996 1997 1998
Cash Flow ---------------------------------------------------------------------------------------
Information Cash paid during the period for:
Interest, including deferred
financing costs and
extraordinary expense $1,296,000 $5,816,000 $7,774,000
Taxes $ 96,000 $ 131,000 $2,038,000
=======================================================================================
Supplemental schedule of non-cash investing and financing
activities:
During 1996, the Company exchanged assets held for sale with
a book value of approximately $1.4 million for future trade
credits.
During 1997, the Company issued warrants and options for
various consulting services which were valued at
approximately $1,079,000.
During 1998, $350,000 of debt was converted into 154,000
shares of the Company's common stock.
In connection with the business acquisitions in 1997 and
1998, the following transactions occurred.
1997 1998
---- ----
Fair value of assets acquired $32,935,000 $28,487,000
Liabilities assumed (1,254,000) (354,000)
Promissory Notes (3,323,000) --
----------- -----------
Cash paid for assets acquired $28,358,000 $28,133,000
=========== ===========
14. Extraordinary As a result of the refinancing of all of the Company's
Expense outstanding debt in August Expense 1996, the entire balance
of deferred finance costs at June 30, 1996, net of
accumulated amortization, plus certain prepayment penalties
totaling approximately $455,000, was written off as an
extraordinary expense during the year ended June 30, 1997.
F-33
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
As a result of the refinancing of all of the Company's
outstanding debt in April 1998 (see Note 6), the entire
balance of deferred financing costs at April 1, 1998, net of
accumulated amortization, plus certain prepayment penalties
totaling approximately $743,000 was written off as an
extraordinary expense during the year ended June 30, 1998.
15. Earnings
Per Share The following is a reconciliation of the weighted average
number of shares used to compute basic and dilutive earnings
per share before extraordinary expense:
June 30, 1996 1997 1998
----------------------------------------------------------------------------------------
Basic earnings per common share 10,206,000 13,695,000 17,776,000
Options and warrants 3,155,000 2,373,000 5,032,000
----------------------------------------------------------------------------------------
Dilutive earnings per common share 13,361,000 16,068,000 22,808,000
========================================================================================
16. Subsequent Subsequent to June 30, 1998, the Company signed a letter of
Events intent to purchase a manufacturer and distributor of lawn
and garden products for approximately $25,000,000 plus
additional contingent payments based upon future operating
cash flows.
Subsequent to June 30, 1998, the Company repurchased
approximately 793,000 shares of its common stock for
approximately $3,860,000.
During July and August 1998, 710,000 warrants were exercised
generating $1,555,000 in cash proceeds to the Company.
Subsequent to June 30, 1998, the Company received a
commitment letter from a bank to provide $25 million of
acquisition financing and a $20 million revolving line of
credit for working capital. The Company and the bank are
negotiating final terms of the agreement.
F-34
U.S. Home & Garden Inc. and Subsidiaries
Schedule II-Valuation and Qualifying Accounts
=====================================================================================================================
Beginning Charged to Costs Writeoffs Ending
Balance and Expenses of Accounts Balance
- ---------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
- -- Year ended June 30, 1996 $ 5,000 $167,000 $ (17,000) $155,000
- -- Year ended June 30, 1997 155,000 323,000 (164,000) 314,000
- -- Year ended June 30, 1998 $ 314,000 $179,000 $ (94,000) $399,000
- ---------------------------------------------------------------------------------------------------------------------
F-35
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, President
Dated: September 25, 1998
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 September 25, 1998
- --------------------- of Directors, President
Robert Kassel and Treasurer (Chief
Executive and Financial
Officer)
/s/ Maureen Kassel Vice-President, September 25, 1998
- --------------------- Secretary and
Maureen Kassel Director
/s/ Richard Raleigh Chief Operating September 25, 1998
- --------------------- Officer and Director
Richard Raleigh
/s/ Lynda Gustafson Vice President - September 25, 1998
- --------------------- Finance (Principal
Lynda Gustafson Accounting Officer)
/s/ Jon Schulberg Director September 25, 1998
- ---------------------
Jon Schulberg
/s/ Fred Heiden Director September 25, 1998
- ---------------------
Fred Heiden