UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2003
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 001-14015
U.S. HOME & GARDEN INC.
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(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
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(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
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(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
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value; Preferred Share Purchase Rights
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).Yes___No__X_
The aggregate market value of the Common Stock held by non-affiliates
of the registrant (based upon the closing sale price) on December 31, 2002 was
approximately $8,616,480.
As of September 15, 2003, 17,951,267 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.
Documents Incorporated By Reference: None
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PART I.
ITEM 1. BUSINESS
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information included in
this Report contains statements that are forward-looking, such as statements
relating to plans for our future activities. Such forward-looking information
involves important known and unknown risks and uncertainties that could
significantly affect actual results, performance or achievements in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of us. These risks and uncertainties include,
but are not limited to, those relating to our historical operations, including
growth strategy, customer concentration, outstanding indebtedness, dependence on
weather conditions, seasonality, expansion and other activities of competitors,
ability to successfully integrate acquired companies and product lines, changes
in federal or state environmental laws and the administration of such laws,
protection of trademarks and other proprietary rights, the ability to maintain
adequate financing arrangements necessary to fund operations and the general
condition of the economy and its effect on the securities markets and other
risks detailed in our other filings with the Securities and Exchange Commission.
If the proposed asset sale described below under "Recent Developments" is
consummated, the risks and uncertainties described above will not be applicable
to our ongoing business operations insofar as any such factors apply only to our
historical lawn and garden businesses, which we will be divesting. Moreover, if
the asset sale is consummated we will also be subject to the risks of a company
with limited operations that will be seeking to supplement its remaining
business operations. The words "believe," "expect," "anticipate," "intend" and
"plan" and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date the statement was made.
GENERAL
We are a leading manufacturer and marketer of a broad range of consumer
lawn and garden products. Our products include weed preventive landscape
fabrics, fertilizer and plant food spikes, decorative landscape edging, grass
and flower seed products, shade cloth and root feeders, which are
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sold under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald
Edge(R), Shade Fabric(TM), Ross(R), Tensar(R), Amturf(R) and Landmaster(R). We
believe that we have significant market share and favorable brand-name
recognition in several of our primary product categories. We market our products
through most large national home improvement and mass merchant retailers
("Retail Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware
and TruServe in North America.
We were organized under the laws of the State of California in August
1990 under the name Natural Earth Technologies, Inc. In January 1992 we
reincorporated under the laws of the State of Delaware and in July 1995 we
changed our name to U.S. Home & Garden Inc. Our lawn and garden operations are
conducted through our subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy
Gardener's subsidiaries and through our subsidiary, Ampro Industries, Inc.
("Ampro"), and our agricultural products operations are conducted through our
subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context
suggests otherwise, references in this Report to "we", "us", "the Company", or
"our" refer to U.S. Home & Garden Inc. and its subsidiaries. Our executive
offices are located at 655 Montgomery Street, Suite 830, San Francisco,
California 94111, and our telephone number is (415) 616-8111.
RECENT DEVELOPMENTS
We and our primary operating subsidiaries, Easy Gardener and Ampro,
have entered into an asset purchase agreement with an entity formed by current
and former members of management of those subsidiaries, Easy Gardener Products,
Ltd. ("Easy Gardener Products"). Under the terms of the asset purchase
agreement, Easy Gardener and Ampro are to sell their operations, including
substantially all of their assets to Easy Gardener Products. These operations
comprise approximately 99% of our consolidated sales and 98% of our consolidated
assets. The assets to be acquired by Easy Gardener Products consist of:
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o substantially all of the assets of Easy Gardener and Ampro,
including:
o all of their business operations and assets,
o the capital stock and operations of Easy Gardener's
wholly-owned subsidiaries, Easy Gardener UK Ltd. and Weatherly
Consumer Products Group, Inc. and
o indirectly, the capital stock and operations of Weatherly
Consumer Products, Inc., a wholly-owned subsidiary of
Weatherly Consumer Products Group, Inc; and
o from us, all of the common securities of our subsidiary, U.S.
Home & Garden Trust I (the "Trust"), as well as the 251,981
trust preferred securities previously issued by the Trust and
currently owned by us.
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The proposed management buyout, which is expected to close in October
2003, is also structured to include Easy Gardener Products' assumption of
substantially all of the selling subsidiaries liabilities and the transfer by us
of our obligations relating to the Trust. These liabilities comprise
approximately 99% of our consolidated liabilities.
o Easy Gardener Products will pay us a total purchase price of
$11,950,000, less certain expenses related to the transaction
for the assets it is acquiring. Of this amount, $10,350,000
will be paid to us in cash at the closing and $1,600,000 will
be paid to us in the form of a subordinated promissory note.
The note will mature in 2009 subject to certain prepayments
from excess cash flow. Interest on the principal amount
outstanding from time to time will accrue at the rate of 9%
per annum and will be capitalized by increasing the principal
amount of the note. The note will be subordinated to the
indebtedness of Easy Gardener Products under its senior credit
facility and under its note to be issued to Central Garden &
Pet Company. It will be senior to the debentures underlying
the trust preferred securities issued by the Trust.
In addition, Easy Gardener Products is to:
o pay or assume our senior credit facility, including all
borrowings outstanding under the facility as of the closing.
There was a total of $24,000,000 outstanding under this
facility as of September 15, 2003. In connection with this
payment or assumption we are to be discharged from any future
obligations under the facility;
o assume our obligations under the Trust-related documents,
including its issuance of a guarantee and new debentures in
the aggregate principal amount of $57,035,000, each identical
to the current guarantee and debentures. In connection with
this assumption, we will be discharged from any further
obligations under the Trust-related documents; and
o assume our obligations under an outstanding option granted by
us in November 2001 to our prior subordinated lenders, which
is exercisable for 94,875 of the trust preferred securities
currently owned by us.
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o Assume substantially all of our selling subsidiaries'
operational (non-debt) liabilities;
If the proposed asset sale is consummated, then under the terms of a
settlement agreement with our prior subordinated lenders, upon the closing of
the proposed asset sale the warrants to purchase our common stock held by these
former lenders will be amended to increase the number of shares that may be
issued upon exercise of the warrants and to reduce the per share exercise price.
In addition to the consideration to be received upon consummation of
the proposed asset sale we will be retaining the capital stock and assets of
Golden West, which accounted for less than 1% of our consolidated net sales for
each of the last three fiscal years. After the asset sale we intend to explore
certain business opportunities to supplement or replace the operations of Golden
West that we will be retaining after the sale.
The asset sale will result in the elimination of our historical lawn
and garden operations. Immediately after the sale, our only operations will
consist of those of Golden West. Therefore, the asset sale will result in the
elimination of a significant amount of our historical operating expenses and the
elimination of all of our debt, with a corresponding elimination of the interest
expense associated with the debt.
The discussion of our historical business set forth below does not
reflect the effects on our operations which will result from the consummation of
the proposed asset sale.
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
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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.
PRIOR ACQUISITIONS
Since August 1992, we have consummated the following eleven (11)
acquisitions of companies or product lines for a total of approximately $111
million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which we acquired in August
1992 for approximately $1.1 million in cash and $1.1 million in promissory
notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock(R), which we acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million
promissory note and two convertible notes each in the principal amount of $1.0
million. Approximately $2.2 million of additional purchase price was contingent
on Easy Gardener meeting certain income requirements. These contingencies were
met and we paid the entire $2.2 million.
o Emerald Products LLC. A manufacturer of decorative landscape edging
which we acquired in August 1995 for $835,000 in cash and a $100,000 promissory
note.
o Weatherly Consumer Products Group, Inc. ("Weatherly"). A manufacturer
of fertilizer spikes and other lawn and garden products, which we acquired in
August 1996 for 1,000,000 shares of our common stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain product line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which we acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, all of whose assets were acquired in February 1998 for
approximately $16.0 million (plus an additional $1.7 million for excess working
capital and acquisition expenses), of which approximately $5.0 million was based
on the value of certain net assets acquired. In June 2002, we decided to
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discontinue the Weed Wizard operations effective September 30, 2002.
o Landmaster Products, Inc. A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for approximately
$3.0 million (plus an additional $600,000 for certain assets and acquisition
expenses), of which approximately $750,000 was based on the value of certain
assets acquired.
o Tensar(R) consumer products line of The Tensar Corporation. A line of
lawn and garden specialty fencing, which we acquired from The Tensar Corporation
in May 1998 for approximately $5.4 million in cash plus an additional $1.0
million for inventory.
o Ampro Industries, Inc., a manufacturer and distributor of lawn and
garden products including specialty grass and flower seeds which we acquired in
October 1998 for approximately $24.6 million. An additional $1.0 million was
paid for a non-compete agreement.
o Egarden Inc. Our business-to-business Internet subsidiary was
acquired in June 1999 for approximately $400,000, plus expenses of approximately
$100,000. At the time of acquisition, Egarden's activities were limited to sales
of Internet gardening related products to the end consumer. In fiscal 2001, we
suspended all of the operations relating to Egarden Inc. and sold the remaining
assets during the year ended June 30, 2002.
o Findplants.com., an electronic horticulture catalogue and locater
business-to-business service for commercial growers and wholesalers all of whose
assets were acquired by Egarden Inc. in May 2000 for approximately $537,000 in
cash. We suspended all of the operations relating to Findplants.com and sold the
assets of Findplants.com back to the former owner in September 2001.
CONSUMER LAWN AND GARDEN PRODUCTS
The primary consumer lawn and garden products marketed by us to our
Retail Accounts are:
Landscape Fabric. We market different types of landscape fabric in
varying thicknesses and strengths under the trade names WeedBlock(R),
MicroPore(R), Pro WeedBlock(TM), and Landmaster(R). Landscape fabrics allow
water, nutrients and oxygen to filter through to the soil but prevent weed
growth by blocking sunlight. Our primary landscape fabrics are made from
non-woven fabrics which are generally manufactured with extruded polymers,
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pressed or vacuum formed into thin sheets having the feel and texture of light
plastics. For the fiscal years ended June 30, 2003, 2002 and 2001, sales of
landscape fabric represented approximately 48%, 51% and 48%, respectively, of
our consolidated net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes
deliver plant food nutrients directly to the root of the plant, an alternative
method of maintaining plant health to surface-delivered liquid or solid
fertilizers. Some of our fertilizer spikes have the added feature of containing
an insecticide for the control of unwanted insects.
We market a variety of indoor and outdoor specialty fertilizer and plant food
spikes primarily under the Jobe's(R) tradename, one of the most recognized
brands in the consumer lawn and garden industry. For the years ended June 30,
2003, 2002 and 2001, sales of fertilizer, plant food and insecticide spikes
constituted approximately 12%, 14% and 17%, respectively, of our consolidated
net sales.
Landscape Edging. We market a variety of resin-based decorative
landscape edgings under trade names including Emerald Edge and Terra Cotta
Tiles(TM). Our decorative edgings are used by consumers to define the perimeter
of planting areas with a variety of designs which include stone, log, terra
cotta tiles and picket fences. For the years ended June 30, 2003, 2002 and 2001,
sales of landscape edging constituted approximately 10%, 10% and 9%,
respectively, of our consolidated net sales.
Shade Cloth. We market shade cloth fabrics in a variety of sizes and
colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy or
protection from wind for people, plants and pets. We market shade cloth fabrics
as an exclusive United States retail distributor of a shade cloth manufacturer.
Fertilizers and Root Feeders. We market fertilizers under the Ross
trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a long
steel irrigation tube with a hose connector that is inserted deep into the
ground, provides the homeowner with a means of deep feeding and irrigating trees
and shrubs. The Ross Root Feeder may also be used without fertilizer as a deep
watering device.
Lawn and Garden Fencing. We market resin-based fencing for lawns and
gardens. A variety of fencing products are marketed by us and are used by the
consumer for numerous applications including preventing animals from entering a
garden or orchard.
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Mulch, Fertilizer, Grass and Flower Seed. We distribute specialty
combinations of mulch, fertilizer, grass and flower seeds. Consumers spread this
"ready-to-grow" combination and only need to water regularly for a green lawn or
colorful flower garden.
Other Products. In addition to landscape fabrics, fertilizer, plant
food and insecticide spikes, landscape edging, shade cloth, fertilizer and root
feeders, lawn and garden fencing, and specialty mulch, fertilizer, grass and
flower seed combinations, we also sell complementary lawn and garden products
for the home gardener. The products include a line of animal repellents that are
formulated to deter dogs, cats, deer and rabbits from destroying garden and
landscape environs, a variety of protective plant and tree covers, bird and
animal mesh blocks, protective garden and tree netting to prevent animal damage,
synthetic mulch and fabric pegs.
Agricultural Products. Through Golden West, we manufacture and
distribute certain humic acid-based agricultural products for use on farms and
orchards. Golden West generally sells its products to agricultural distributors,
which in turn market Golden West's products to farms and orchards. The principal
agricultural products manufactured or distributed by us are: Energizer(R), a
formulation of humic acids which, when applied in conjunction with liquid
fertilizers, permits crops to absorb a greater amount of the nutrients in the
fertilizer; Penox(R), a surfactant, or penetrating wetting agent, that contains
humic acid which, when applied in conjunction with herbicides, defoliants and
other agricultural products, increases their effectiveness; and Powergizer(R), a
foliar nutrient, or plant food, containing humic acid which promotes growth and
vigor in many types of crops. Sales of our agricultural products accounted for
less than 1% of our consolidated net sales in the fiscal years ended June 30,
2003, 2002 and 2001.
CONVERSION, MANUFACTURING AND SUPPLY
Lawn and Garden Products. Except for the materials for our WeedBlock
landscape fabric, which are obtained primarily from a single source, the basic
materials for our consumer lawn and garden products are purchased from a variety
of suppliers. All of such materials are converted, packaged and shipped by us
from either our Waco, Texas facility, our Paris, Kentucky facility or our
facility located in Colorado.
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We purchase most of the landscape fabric used to manufacture WeedBlock
from Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls of various
types of landscape fabric from Tredegar for shipment to our Waco, Texas facility
where we size, cut and package the fabric for consumer sale. Although we have
purchased most of our supply from Tredegar for over 10 years and believe that
our relationship with Tredegar is good, Tredegar is free to terminate its
relationship with us at any time and accordingly could market its fabrics to
other companies, including our competitors. Nevertheless, we own the registered
trademark "WeedBlock(R)" and to the extent that we establish alternative supply
arrangements, our rights to market products under the WeedBlock brand name would
continue without restriction.
We manufacture and package our Jobe's fertilizer spikes at our Paris,
Kentucky facility. The raw materials that comprise our indoor fertilizer spikes
are mixed with a binding agent and then passed through an extrusion process
which feeds a continuous strand of fertilizer through a heat-drying system. The
strand is then cut into ready-to-use fertilizer spikes which are then machine
counted and packaged into shelf-ready blisterpacks. Our outdoor fertilizer
spikes are manufactured in a similar manner except rather than passing through
an extrusion process, the outdoor spikes are processed through molds which shape
the spikes into their final form. The outdoor spikes are packaged in either a
foil pouch, bag or box.
The specifications for our landscape edging, shade cloth and root
feeder products and packaging are designed by us and independent design
consultants. The products are then manufactured and packaged by third party
manufacturers according to our specifications.
The material used in our resin-based fencing is manufactured for us
pursuant to open purchase orders. The material is then sized and cut for
consumer sale at our Waco, Texas facility.
The Ampro and Amturf "ready-to-grow" combination mulch, fertilizer and
seed products are produced in Michigan pursuant to a contract manufacturing
agreement. Newsprint is shredded and processed into mulch and then combined with
seed and fertilizer. The mixture is now packaged in bags, boxes, canisters, and
clear jugs.
Agricultural Products. We do not own or lease any manufacturing
facilities for our agricultural products. Substantially all of our humic
acid-based agricultural products, Energizer, Penox and Powergizer, are processed
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by Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders
placed by us from time to time in the ordinary course of business. Furthermore,
through Western Farm, we have an open purchase order arrangement with an entity
which supplies us with leonardite ore, a source of humic acid used in our
agricultural products.
CUSTOMERS
Our customers include home improvement centers, mass merchandisers,
hardware stores, nurseries, and garden centers and other retail channels
throughout the United States. Our two largest customers for fiscal 2003, Home
Depot and Ace Hardware, accounted for approximately 54% and 6%, respectively, of
our consolidated net sales during that period. Our two largest customers for
fiscal 2002, Home Depot and Lowe's, accounted for approximately 49% and 10%,
respectively, of our consolidated net sales during such year. Home Depot and
Lowe's, accounted for approximately 43% and 14%, respectively, of our
consolidated net sales during fiscal 2001. Our ten largest customers as a group
accounted for approximately 77%, 78% and 80% of our consolidated net sales
during fiscal 2003, 2002 and 2001, respectively. Sales to such customers are not
governed by any contractual arrangement and are made pursuant to standard
purchase orders. While we believe that relations with our largest customers are
good, the loss of any of these customers could have an adverse effect upon our
results of operations. Our International sales are subject to certain risks in
doing business in foreign countries including, but not limited to, currency
exchange rate fluctuations and tariffs.
Our sales are concentrated in the United States, with international
sales (primarily in Europe and Canada) accounting for approximately 10%, 6%, and
3% of our net sales for each of fiscal 2003, 2002 and 2001, respectively. We are
currently attempting to develop relationships with distributors outside of the
United States.
SALES AND MARKETING
Our selling efforts are managed by two Vice Presidents of Sales. One
specializes in home center customers and the other directs our four regional
sales managers responsible for mass merchants, hardware and all other channels.
Because of the service-oriented nature of our business, the sales managers
devote a substantial amount of their time to servicing and maintaining
relationships with our largest customers in addition to managing the overall
sales operations. We also utilize the services of over 30 non-exclusive
independent sales organizations. This integrated sales approach is designed to
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help achieve sales of all products to all customers.
Our marketing activities are coordinated by our National Marketing
Manager. In addition to designing and developing our distinctive packaging and
overall advertising and promotional activities, the National Marketing Manager
works closely with the sales organization to help develop programs which are
tailored to the strategies of our key Retail Accounts.
We expect that our lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and in-store
consumer promotions in Retail Accounts, hardware stores, nurseries and garden
centers. In addition we believe that a substantial portion of lawn and garden
sales are impulse driven and not overly price sensitive. Therefore we seek to
increase consumer awareness, understanding and brand identification of our
products through our distinctive packaging and point-of-sale displays. Retail
Accounts and our other customers receive our products in packaging that is
easily displayed. The retail product packaging is informative to the end-user
and incorporates attention getting, eye-pleasing color schemes. We also tailor
our displays to the evolving needs of retailers. Because many home improvement
and mass merchant retailers maintain outdoor sales areas for their lawn and
garden products, we utilize waterproof displays for many of our products. In
addition, we meet the specific needs of many of our larger customers by
tailoring the size of our displays to the dimensions requested by such
customers. Our independent sales representatives periodically visit individual
retail outlets to assist Retail Accounts in achieving innovative and optimal use
of our distinctive store displays.
We spent approximately $2.6 million in fiscal 2003 on a combination of
media development, print, radio and television advertising, cooperative
advertising (advertising done in conjunction with retailers), attendance at
trade shows and public relations to promote awareness, understanding and brand
identification of our lawn and garden products.
We utilized a substantial portion of our marketing budget for fiscal
2003 on cooperative advertising in conjunction with key retail customers.
INFORMATION SYSTEMS
We maintain a sophisticated retail data information system which
enables us to provide timely and efficient order fulfillment to our Retail
Accounts and other customers. Internally, our information systems track orders
and deliveries and provide exception reports if product is not delivered on
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time. The systems "push" the necessary information to the proper personnel,
allowing us to react quickly to information. Our purchase order process can be
paperless, with most Retail Accounts placing their orders through an electronic
data interchange with us.
In addition, we have implemented the QAD Applications e-business
supply-chain enabled enterprise planning software at our executive offices and
at several of our subsidiaries.
SEASONALITY
Our sales are seasonal due to the nature of the lawn and garden
business and generally parallels the annual growing season. Our sales and
shipping are typically most active from late March through May when home lawn
and garden customers are purchasing supplies for spring planting and retail
stores are increasing their inventory of lawn and garden products. The buying
pattern of retailers is changing and stores are replenishing their inventory
when sales are made rather than buying large quantities of inventory in advance
of the selling season. Sales of our agricultural products are also seasonal.
Most shipments occur during the agricultural cultivation period from March
through October.
INVENTORY AND DISTRIBUTION
In order to meet product demand, we historically kept relatively large
amounts of product inventory on hand during the months of highest demand. As a
result of changes in customer inventory purchasing patterns described in the
preceding paragraph and improved communications with customers, we improved our
ability to meet customer demands without maintaining excess inventory levels
during the last two fiscal years. Inventory obsolescence has historically not
been a major issue but could increase in the future. Retail Accounts generally
require delivery within five business days. Orders are normally processed within
48 hours and shipped by common carrier. Our shipping and freight costs have
increased during the last two fiscal years due to smaller orders, higher costs
from the freight carriers and increased volume to a significant customer that
stipulates we use a required carrier.
COMPETITION
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. With respect to our sale of consumer lawn and garden
products, we compete with a combination of national and regional companies
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including catalog and Internet e-commerce businesses specializing in the
marketing of lawn and garden care products. The Scotts Company, in particular,
has captured a significant and controlling share in a variety of categories as a
result of their acquisition of the Ortho brand and the licensing of the Roundup
brand for the consumer market. Scotts also markets products under the Scotts and
Miracle-Gro brands which compete both directly and indirectly with many of our
products. Many of our competitors have achieved significant national, regional
and local brand name and product recognition and engage in frequent and
extensive advertising and promotional programs. Many of these companies have
substantially greater financial, technical, marketing and other resources than
us.
Large, dominant manufacturers, which manufacture and sell lawn and
garden products, such as the Scotts Company, and other lawn and garden care
companies have, in the past, manufactured and marketed landscape fabrics.
Currently, few of such competitors compete with us in this product category.
Nevertheless, well-capitalized companies and smaller regional firms may develop
and market landscape fabrics and compete with us for customers who purchase such
products.
Among our competitors in the lawn and garden market for the Jobe's
spike line of fertilizer and insecticide products and the Ampro combination
mulch, seed and fertilizer line of products is the Scotts Company, which markets
competing products under the Miracle-Gro brand. Competition for our agricultural
products consists of other manufacturers of products that are humic acid based
but that utilize formulas that are different from Golden West's. These
competitors include Monterey Chemical Corporation and Custom Formulators, Inc.
We compete with a variety of regional lawn and garden manufacturers in the
markets for landscape edging, shade cloth and root feeders.
GOVERNMENT REGULATION
We are subject to many laws and governmental regulations and changes in
these laws and regulations, or their interpretation by agencies and the courts,
occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by us as fertilizers or pesticides are subject to an extensive and
frequently evolving statutory and regulatory framework, at both the Federal and
state levels. The distribution and sale of pesticides is subject to regulation
by the U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by
many states in a manner similar to FIFRA. Under FIFRA and similar state laws,
all pesticides must be registered with the EPA and the state and must be
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approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on the marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply with
the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
We market certain animal repellent and pesticide products that are
subject to FIFRA and to similar state regulations. We also market certain
fertilizer products that are subject to regulation in some states. We believe
that we are in substantial compliance with material FIFRA and applicable state
regulations regarding our material business operations. However, there can be no
assurance that we will be able to comply with future regulations in every
jurisdiction in which our material business operations are conducted without
substantial cost or interruption of operations. Moreover, there can be no
assurance that future products marketed by us will not also be subject to FIFRA
or to state regulations. If future costs of compliance with regulations
governing pesticides or fertilizers exceed our budget for such items, our
business could be adversely affected. If any of our products are distributed or
marketed in violation of any of these regulations, we could be subject to a
recall of, or a sales limitation placed on, one or more of our products, or
civil or criminal sanctions, any of which could have a material adverse effect
upon our business.
Environmental Regulation. Our manufacturing operations are subject to
various evolving federal, state and local laws and regulations relating to the
protection of the environment, which laws govern, among other things, emissions
to air, discharges to ground, surface water, and groundwater, and the
generation, handling, storage, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. Easy Gardener
16
operates two manufacturing facilities and its wholly-owned subsidiary, Weatherly
Group, operates one manufacturing facility. Although we believe that our
material manufacturing facilities are in substantial compliance with applicable
material environmental laws, it is possible that there are material
environmental liabilities of which we are unaware. If the costs of compliance
with the various existing or future environmental laws and regulations including
any penalties which may be assessed for failure to obtain necessary permits,
exceed our budget for such items, our business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Weatherly Group operates one manufacturing facility. Although our Ampro/Weed
Wizard facility was sold by us in April 2001, liability could exist for
remediation of such facility in the future relating to the operations conducted
at that facility while it was owned and operated by us. Moreover, we or our
predecessors have owned or operated other manufacturing facilities in the past
and may have liability for remediation of such facilities in the future, to the
extent any is required. In this regard, Weatherly Group previously owned a
facility that was the subject of certain soil remediation activities. Although
this facility was sold by Weatherly Group prior to our acquisition of Weatherly,
there can be no assurance that we will not be liable for any previously existing
environmental contamination at the facility. Moreover, although the purchaser of
the facility indemnified Weatherly Group for any environmental liability and the
sellers of Weatherly Group, in turn, indemnified us from such liability, there
can be no assurance that, if required, the indemnifying parties will be able to
fulfill their respective obligations to indemnify us. Furthermore, certain
business operations of our subsidiaries also involve shipping hazardous waste
off-site for disposal. As a result, we could be subject to liability under these
statutes. We could also incur liability under CERCLA or similar state statutes
for any damage caused as a result of the mishandling or release of hazardous
17
substances owned by us but processed and manufactured by others on our behalf.
As a result, there can be no assurance that the manufacture of the products sold
by us will not subject us to liability pursuant to CERCLA or a similar state
statute. Furthermore, there can be no assurance that Easy Gardener, Weatherly
Group, or Ampro/Weed Wizard will not be subject to liability relating to
manufacturing facilities owned or operated by them currently or in the past.
Other Regulations. We are also subject to various other federal, state
and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants.
TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS
We believe that product recognition is an important competitive factor
in the lawn and garden care products industry. Accordingly, in connection with
our marketing activities of our lawn and garden care products, we promote, and
intend to promote, certain trade names and trademarks which are believed to have
value to us.
In connection with our acquisition, through Easy Gardener, of the
assets of Easy Gardener's predecessor in September 1994, we acquired certain
trademarks and copyrights used by Easy Gardener, Inc. in connection with its
business including, but not limited to, the trademarks, WeedBlock(R), Easy
Gardener(R), MicroPore(R) and BirdBlock(R). In connection with its acquisition
of Weatherly Group, we acquired certain patents, as well as certain copyrights
and trademarks used in connection with Weatherly Group's business including, but
not limited to, Jobe's(R), Ross(R), Green Again(R), Gro-Stakes(R), Tree Guard(R)
and XP-20(R). We also acquired certain patents and trademarks when we acquired
the assets of Emerald Products, LLC and also acquired certain trademarks in
connection with our purchase of the Plasti-Chain line of products from Plastic
Molded Concepts, Inc. We also acquired the trademark Landmaster(R) in connection
with our acquisition of substantially all of the assets of Landmaster Products,
Inc. In addition, we acquired the trademarks Polyspun 350(R), Nature Shield(R)
and Diamondback(R) in connection with our acquisition of the Tensar(R) consumer
product line. In connection with the acquisition of the Tensar(R) consumer
product line, The Tensar Corporation granted to us an exclusive royalty-free
perpetual license to use the trademark Tensar(R) in connection with a wide range
of polymeric grid, mesh, net and related products supplied to us by The Tensar
18
Corporation. In connection with our acquisition of Ampro, we acquired certain
trademarks used in connection with Ampro's business including, but not limited
to, Amturf(R). There can be no assurance that we will apply for any additional
trademark or patent protections relating to our products or that our current
trademarks and patents will be enforceable or adequately protect us from
infringement of our proprietary rights.
Although we believe that the products sold by us do not and will not
infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by us are deemed to infringe upon the patents or proprietary
rights of others, we could be required to pay damages and modify our products or
obtain a license for the manufacture or sale of such products. There can be no
assurance that, in such an event, we would be able to do so in a timely manner,
upon acceptable terms and conditions or at all, and the failure to do any of the
foregoing could have a material adverse effect upon us.
PRODUCT LIABILITY
We, as a manufacturer of lawn and garden care and pesticide products,
may be exposed to significant product liability claims by consumers. Although we
have obtained product liability insurance coverage in the aggregate amount of
$2.0 million with all policies limited to $1.0 million per occurrence, and have
obtained an umbrella policy in the amount of $10.0 million, which excludes Weed
Wizard, there can be no assurance that such insurance will provide coverage for
any claim against us or will be sufficient to cover all possible liabilities. In
the event a successful suit is brought against us, unavailability or
insufficiency of insurance coverage could have a material adverse effect on us.
Moreover, any adverse publicity arising from claims made against us, even if
such claims were not successful, could adversely affect the reputation and sales
of our products.
EMPLOYEES
As of September 15, 2003 we had 178 full-time employees. Of such
employees, 3 are executive officers of U.S. Home & Garden Inc., 51 were engaged
in administration and finance, 29 were engaged in sales and marketing, 30 were
engaged in warehouse, shipping and receiving, and 65 were engaged in production.
None of our employees are covered by collective bargaining agreements. We
19
believe that we have a good relationship with our employees. If our proposed
sale of assets to Easy Gardener Products is consummated, most of these employees
will become employees of Easy Gardener Products and we will retain only certain
executive and administrative employees and the employees of our Golden West
subsidiary.
SEGMENT INFORMATION
Our primary continuing operations are in one segment - the manufacture
and sale of consumer lawn and garden products. Product and major customer
information are disclosed separately above.
ITEM 2. PROPERTIES.
Our executive offices are currently located in San Francisco,
California, in approximately 2,000 square feet of office space for which we pay
$12,121 per month in rent, which includes the costs of utilities and janitorial
services. Our office space is rented pursuant to a lease expiring in February
2004.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which we pay $19,386 per month in rent,
pursuant to a lease agreement that expires in February 2005. Easy Gardener's
facilities contain landscape fabric converters, packaging equipment and
warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $9,931 per month in rent pursuant to a
lease that expires in June 2006. Weatherly also leases an additional 59,000 feet
of warehouse space in Paris, Kentucky for $9,845 per month in rent, pursuant to
a lease agreement that expires in June 2006.
Golden West's offices are located in Merced, California in
approximately 900 square feet of space it leases for $1,500 per month base rent
on a month to month basis.
With respect to the storage, packaging and distribution of certain of
our commercial grade landscape fabric products, Easy Gardener has entered into a
lease pursuant to which we are provided with 60,000 square feet of warehouse
space in Colorado. The lease, which expires on May 31, 2005, provides for a
rental rate of $16,010 per month, which increases 5% per year on June 1 of each
year.
20
We believe that our current manufacturing and warehouse space is
adequate for our planned future operations.
If our proposed sale of assets to Easy Gardener Products is consummated
we will retain only our executive offices and Golden West's offices.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
21
PART II.
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Our common stock has traded in the over-the-counter market and was
quoted on the NASDAQ Stock Market from March 26, 1992 until April 18, 2003. Our
common stock has been traded on the over-the-counter bulletin board since April
18, 2003. The symbol for our common stock is "USHG.OB". The following table sets
forth, for the periods indicated, the high and low sales prices for the common
stock, for the following periods as reported by Nasdaq.
Year Ended June 30, 2003 High Low
First Quarter $.67 $ .20
Second Quarter .68 .16
Third Quarter .59 .44
Fourth Quarter .60 .31
Year Ended June 30, 2002
First Quarter $.98 $ .47
Second Quarter .78 .38
Third Quarter .62 .36
Fourth Quarter .72 .34
As of September 15, 2003, the number of holders of record of our common
stock was 200. In addition, there are in excess of 500 beneficial owners of our
common stock whose shares are held in "street name".
We have not paid any cash dividends on our common stock to date and do
not expect to declare or pay any cash or stock dividends in the foreseeable
future. The lending agreements between us and our primary lending institutions
prohibit us from paying dividends without the lenders' consent.
The following table sets forth certain information as of June 30, 2003
regarding outstanding options, warrants and other rights to purchase Common
Stock that were outstanding on June 30, 2003.
22
- -------------------------------- ---------------------- ------------------------- ------------------------------
(a) (b) (c)
- -------------------------------- ---------------------- ------------------------- ------------------------------
Plan Category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining for future
exercise of outstanding options, issuance under equity
outstanding options, warrants and rights compensation plans
warrants and rights (excluding securities
reflected in column (a))
- -------------------------------- ---------------------- ------------------------- ------------------------------
Equity compensation plans 3,099,000 $2.33 536,000
approved by security holders
- -------------------------------- ---------------------- ------------------------- ------------------------------
Equity compensation plans not 3,069,000 (1) $1.71 -
approved by security holders
- -------------------------------- ---------------------- ------------------------- ------------------------------
Total 6,168,000 $2.02 536,000
- -------------------------------- ---------------------- ------------------------- ------------------------------
(1) Represents the aggregate number of shares of common stock issuable
upon exercise of individual arrangements with option and warrant holders. These
options and warrants expire at various dates between 2005 and 2009 and contain
anti-dilution provisions providing for adjustments of the exercise price under
certain circumstances.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT
PER SHARE DATA).
The following selected consolidated financial data at and for the years
ended June 30, 1999, 2000, 2001, 2002 and 2003 has been derived from our audited
consolidated financial statements. Such information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto appearing elsewhere in this Report. Differences between amounts
included below and amounts previously reported are due to the reclassification
of discontinued operations.
23
Statement of Operations Data
Year Ended June 30,
------------- -------------- ------------- ---------------- -------------
1999 2000 2001 2002 2003
------------- -------------- ------------- ---------------- -------------
Net sales.................................. $85,024 $86,919 $78,863 $78,947 $76,244
Cost of sales.............................. 42,322 47,802 44,065 43,358 43,453
------------- -------------- ------------- ---------------- -------------
Gross profit............................... 42,702 39,117 34,798 35,589 32,791
Selling, shipping, general and administrative
expenses................................... 31,683 29,554 30,638 27,686 28,025
Restructuring charges (1).................. - - 2,860 - -
------------- -------------- ------------- ---------------- -------------
Income from operations..................... 11,019 9,563 1,300 7,903 4,766
Refinancing and transaction costs.......... - - - (254) (4,291)
Other (3).................................. - 1,224 - - -
Interest expense, net...................... (6,883) (6,692) (7,331) (7,291) (7,994)
Income tax (expense) benefit............... (1,643) (1,213) 1,406 (228) (133)
------------- -------------- ------------- ---------------- -------------
Income (loss) from continuing operations before 2,493 2,882 (4,625) 130 (7,652)
cumulative effect of a change in accounting
principle..................................
Loss from discontinued operations,
net of tax and minority interest (2)....... (444) (3,227) (16,253) (1,760) (1,436)
Gain (loss) on disposal of discontinued
operations, net of tax and minority interest (2) - - (4,551) 20 (49)
------------- -------------- ------------- ---------------- -------------
Income (loss) before cumulative effect of a
change in accounting principle............. 2,049 (345) (25,429) (1,610) (9,137)
Cumulative effect of a change in accounting
principle (4).............................. - - - (9,882) -
------------- -------------- ------------- ---------------- -------------
Net income (loss).......................... $2,049 $(345) $(25,429) $(11,492) $(9,137)
============= ============== ============= ================ =============
Income (loss) from continuing operations per
common share before cumulative effect of a
change in accounting principle:
Basic...................................... $.13 $.09 $(.26) $.01 $(.43)
Dilutive................................... $.11 $.08 $(.26) $.01 $(.43)
Net income (loss) per share:
Basic ..................................... $.10 $(.02) $(1.40) $(.66) $(.51)
Dilutive................................... $.09 $(.02) $(1.40) $(.64) $(.51)
Weighted average number of common and common
equivalent shares outstanding:
Basic...................................... 19,621,000 19,031,000 18,181,000 17,555,000 17,951,000
Dilutive................................... 23,595,000 20,760,000 18,181,000 18,024,000 18,068,000
Balance Sheet Data:
June 30,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Working capital (deficit)...... $32,874 $25,151 $4,867 $2,728 $(5,532)
Intangible assets, net......... 82,109 67,839 65,892 56,259 56,268
Total assets................... 138,263 138,545 109,463 99,365 96,559
Short-term debt................ -- 3,125 21,670 22,748 27,227
Long-term debt................. 78,750 58,338 56,951 56,951 57,092
Total liabilities.............. 91,779 89,331 90,256 92,383 98,595
Stockholders' equity (deficit). 46,484 45,103 17,968 6,982 (2,036)
24
(1) Amount represents restructuring charges relating to the closing and sale of
the Ampro facility. See further discussion at Note 15 to the Consolidated
Financial Statements included in Part II, Item 8.
(2) Amounts represent operations and estimated loss on disposal of the Weed
Wizard and Egarden subsidiaries. See further discussion at Note 2 to the
Consolidated Financial Statements included in Part II, Item 8.
(3) Amount represents gain incurred on the repurchase of mandatorily redeemable
trust preferred securities of U.S. Home & Garden Trust I. Amount was
reclassified from extraordinary gain upon adoption of Statement of Financial
Accounting Standards No. 145. See summary of Accounting Policies in the
Consolidated Financial Statements included in Part II, Item 8.
(4) Amount represents the cumulative effect of a change in accounting principle
related to goodwill. See further discussion at Note 7 to the Consolidated
Financial Statements included in Part II, Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
We manufacture and market a broad range of brand-name consumer lawn and
garden products through our wholly-owned subsidiaries, Ampro, Easy Gardener and
Golden West, and through Easy Gardener's wholly-owned subsidiaries, Weatherly
and Easy Gardener UK. Since 1992, we have consummated eleven acquisitions of
complementary lawn and garden companies and product lines for an aggregate
consideration of approximately $111 million in cash, notes and equity
securities. As a result of such acquisitions, we recognized a significant amount
of goodwill which, in the aggregate, was approximately $49.9 million as of June
30, 2003. Effective July 1, 2001 we adopted Statement of Financial Accounting
Standards (SFAS) No. 142. Accordingly, no amortization of goodwill was reflected
in the financial statements for the fiscal years ended June 30, 2003 and 2002
compared to $2.5 million for the year ended June 30, 2001. We completed the
transitional goodwill impairment test during fiscal 2002 and recorded an
impairment loss of $9.9 million which relates primarily to the Ampro operations.
This loss is reflected as a cumulative effect of a change in accounting
principle. See also "Summary of Accounting Policies - Intangible Assets" and
25
Note 7 to the Consolidated Financial Statements included in Part II, Item 8.
Our results of operations for the fiscal year ended June 30, 2003 were
adversely affected by the prolonged periods of inclement weather in many
portions of the United States during the late spring and early summer which
negatively impacted the lawn and garden industry. Our results were also
adversely affected by the refinancing costs and related write-offs and
transaction expenses related to the proposed sale of Easy Gardener assets. Our
results were also adversely affected by the discontinued Weed Wizard operations
that generated a loss of $1.4 million for the year. Results were also impacted
in the third and fourth quarters by changes in the buying pattern of certain of
our key customers who carried less inventory than in prior years and replenished
their lower inventory levels as sales were made by them.
Our results of operations for the fiscal year ended June 30, 2002 were
adversely affected by the transitional goodwill impairment test that resulted in
the recording of an impairment loss of $9.9 million. Our results were also
adversely affected by the discontinued Weed Wizard operations that generated a
loss of $1.8 million for the year. Results were also impacted in the third and
fourth quarters by changes in the buying pattern of certain of our key customers
who carried less inventory than in prior years and replenished their lower
inventory levels as sales were made by them.
Our results of operations for the fiscal year ended June 30, 2001 were
adversely affected by losses attributable to the discontinued operations of Weed
Wizard and Egarden Inc., of $16.3 million including the impairment of goodwill
of Weed Wizard of $10.8 million, and the estimated net loss on disposal of
Egarden assets of $4.6 million. Our results were also adversely affected by the
restructuring loss from the closure of the Ampro Industries, Inc. facility in
Michigan, an overall soft economy and prolonged periods of inclement weather in
many portions of the United States during the late spring and early summer which
negatively impacted the lawn and garden industry.
There continues to be a consolidation in the lawn and garden industry
which creates, over time, a downward pressure on operating margins.
If our proposed sale of assets to Easy Gardener Products is consummated
there will be a material reduction in our net sales and operating expenses and
in our assets and liabilities as a result of our divestiture of substantially
26
all of the assets and operations of our material operating subsidiaries. Except
as specifically set forth below, the discussion below does not give effect to
the consummation of the proposed sale of assets.
Historical Results of Operations
The following table sets forth for the periods indicated certain
selected income data as a percentage of net sales:
Percentages of Net Sales
----------------------------------------------------------
Year Ended June 30,
----------------------------------------------------------
2001 2002 2003
---- ---- ----
Net sales............................................ 100% 100% 100%
Cost of sales........................................ 55.9 54.9 57.0
---- ---- ----
Gross profit......................................... 44.1 45.1 43.0
Selling and shipping expenses........................ 20.8 23.2 24.5
General and administrative expenses.................. 18.1 11.9 12.2
Restructuring charges................................ 3.6 - -
--- - -
Income from operations............................... 1.6 10.0 6.3
Refinancing and transaction costs - (.3) (5.6)
Interest expense, net................................ (9.3) (9.3) (10.5)
Income tax (expense) benefit......................... 1.8 (.3) (.2)
Loss from discontinued operations, net............... (20.6) (2.2) (1.9)
Loss on disposal of discontinued operations, net..... (5.7) - (.1)
Cumulative effect of a change in accounting principle - (12.5) -
- ------ -
Net loss ............................................ (32.2)% (14.6)% (12.0)%
------- ------- -------
27
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2002
Net sales. Net sales decreased $2.7 million, or 3.4%, to $76.2 million
for the fiscal year ended June 30, 2003 from $78.9 million during the fiscal
year ended June 30, 2002. The decline was due to prolonged periods of inclement
weather in many areas of the United States as well as increased discounts,
returns and allowances.
Gross profit. Gross profit decreased by $2.8 million, or 7.9%, to $32.8
million for the fiscal year ended June 30, 2003 from $35.6 million during the
comparable period in 2002. Gross profit as a percentage of net sales decreased
to 43.0% during the fiscal year ended June 30, 2003 from 45.1% during the
comparable period in 2002. The decrease in gross profit is due to the decrease
in sales volume and the increased discounts, returns and allowances.
Selling and shipping expenses. Selling and shipping expenses increased
$.4 million, or 2.2% to $18.7 million during the fiscal year ended June 30, 2003
from $18.3 million during the comparable period in 2002. Selling and shipping
expenses as a percentage of net sales increased to 24.5% during the fiscal year
ended June 30, 2003 from 23.2% during the comparable period in 2002. This
increase in expense and percentage was primarily a result of increased out bound
freight costs resulting from a reduction in the average size of shipments,
increase in freight costs, and increase in volume to a significant customer that
stipulates we use a required carrier.
General and administrative expenses. General and administrative
expenses decreased $0.1 million or 0.7% to $9.3 million during the fiscal year
ended June 30, 2003 from $9.4 million during the comparable period in 2002. As a
percentage of net sales, general and administrative expenses increased to 12.2%
during the fiscal year ended June 30, 2003 from 11.9% during the comparable
period in 2002.
Income from operations. Income from operations decreased by $3.1
million, or 39.7% to $4.8 million during the fiscal year ended June 30, 2003
compared to $7.9 million for the comparable period in 2002. The decrease in
income from operations for the 2003 period is primarily attributable to the
reduction in sales and increase in discounts, returns and allowances. As a
percentage of net sales, income from operations decreased to 6.3% for the fiscal
year ended June 30, 2003 from 10.0% during the comparable period in 2002.
27
Refinancing and transaction costs. Refinancing and transaction costs
increased $4.0 to $4.3 million during the year ended June 30, 2003 from $0.3
million during the comparable period in 2002. Included in such costs for the
year ended 2003 is $2.0 million of previously deferred finance costs and
discounts related to the replaced finance agreements and $2.3 million of
refinancing and transaction expenses. We wrote-off $0.3 million of deferred
finance costs during the comparable period in 2002 as a result of refinancing.
Net interest expense. Net interest expense increased $0.7 million, or
9.6% to $8.0 million during the fiscal year ended June 30, 2003 compared to $7.3
million during the comparable period in 2002. The increase in expense is
primarily due to increased borrowings under the term loan and the revolver and
increased borrowing rates at the end of the year due to covenant violations.
Income tax expense. Income tax expense was $0.1 million during the
fiscal year ended June 30, 2003 compared to $0.2 million during the comparable
period in 2002.
Discontinued operations. In June 2002, we announced we were
discontinuing the Weed Wizard line of products effective September 30, 2002 due
to continued operating losses, the loss of sales due to the product recall in
fiscal 2000, and the current and future prospects for the operation.
The net loss from discontinued operations was $1.4 million during the
year ended June 30, 2003 compared to $1.8 million in fiscal 2002. In fiscal
2002, we recorded an estimated net loss on disposal of Weed Wizard of $1.1
million related to the write-down of inventory and long-lived assets. As of June
30, 2003, all Weed Wizard assets have been written off. The remaining assets at
June 30, 2002 consisted of accounts receivable of $0.4 million, inventory of
$0.3 million, other current assets of $0.3 million, and net property and
equipment of $0.1 million. Remaining liabilities included accounts payable and
accrued expenses of $0.3 million. As of June 30, 2003, we recorded cash of $0.1
million and accrued liabilities of less than $0.1 million for our discontinued
Egarden operation. Such liabilities exclude leases guaranteed having an unpaid
balance of $0.1 million at June 30, 2003.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, our consolidated financial statements and notes have been
restated for all periods presented to reflect the discontinued components. The
assets and liabilities of the discontinued components have been classified as
"Held for Sale" and the net operations and net cash flows have been reported as
"Discontinued Operations". See Note 2 to the Consolidated Financial Statements
included in Part II, Item 8.
28
Cumulative effect of a change in accounting principle. We recorded a
cumulative effect of a change in accounting principle for the fiscal year ended
June 30, 2002 as a result of the completion of the transitional goodwill
impairment test in conjunction with the adoption of SFAS No. 142. The recording
of an impairment loss of $9.9 million, which is primarily related to the Ampro
operations, is reflected as a cumulative effect of a change in accounting
principle. See Note 7 to the Consolidated Financial Statements included in Part
II, Item 8.
Net loss. Net loss decreased by $2.4 million to $9.1 million during
the fiscal year ended June 30, 2003 from a net loss of $11.5 million during the
comparable period in 2002 due to the matters described above.
The diluted net loss per common share decreased $.13 to a net loss of $.51
per share when compared to the diluted net loss per common share of $.64 during
the comparable period in 2002.
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001
Net sales. Net sales remained consistent at $78.9 million during the
fiscal years ended June 30, 2002 and 2001. There were no significant changes in
sales prices or volume.
Gross profit. Gross profit increased by $0.8 million, or 2.3%, to $35.6
million for the fiscal year ended June 30, 2002 from $34.8 million during the
comparable period in 2001. Gross profit as a percentage of net sales increased
to 45.1% during the fiscal year ended June 30, 2002 from 44.1% during the
comparable period in 2001. This increase in gross profit is due to a decrease in
cost of sales as a result of the restructuring and closing of the Bradley,
Michigan facility in late 2001 of approximately $0.3 million, a reduction in
certain raw material costs of approximately $0.3 million, and increased
operating efficiencies of approximately $0.2 million.
Selling and shipping expenses. Selling and shipping expenses increased
$1.9 million, or 11.7% to $18.3 million during the fiscal year ended June 30,
2002 from $16.4 million during the comparable period in 2001. Selling and
shipping expenses as a percentage of net sales increased to 23.2% during the
fiscal year ended June 30, 2002 from 20.8% during the comparable period in 2001.
This increase in expense and percentage was primarily a result of increased out
bound freight costs resulting from using required carriers stipulated by a
significant customer and a reduction in the average size of shipments.
29
General and administrative expenses. General and administrative
expenses decreased $4.9 million or 34.1% to $9.4 million during the fiscal year
ended June 30, 2002 from $14.3 million during the comparable period in 2001. As
a percentage of net sales, general and administrative expenses decreased to
11.9% during the fiscal year ended June 30, 2002 from 18.1% during the
comparable period in 2001. This decrease is primarily a result of the adoption
of SFAS No. 142 effective July 1, 2002 that requires, among other things,
companies to no longer amortize goodwill, but instead test goodwill for
impairment at least annually. Goodwill amortization included in general and
administrative expenses for the year ended June 30, 2001, totaled approximately
$2.5 million. This decrease is also due to the restructuring of Ampro and
closing of its Bradley, Michigan facility and the related reduction of costs.
The savings related to the closing of the Bradley, Michigan facility totaled
approximately $1.6 million. The cost reductions were offset in part by a $0.5
million write off of K-Mart receivables when they declared bankruptcy. We
continue to sell to K-mart under secured financing. K-Mart's receivable balance
at June 30, 2002 was $0.7 million, all of which has subsequently been collected.
Restructuring charges. There were no restructuring costs incurred in
fiscal 2002. In 2001, we recorded restructuring charges of $2.9 million relating
to the closing and sale of the Ampro Industries, Inc. facility in Michigan. We
continue to sell many of the products that were being manufactured at Ampro's
Michigan facility through a contract manufacturing agreement. We recognized
approximately $1.7 million of expenses and losses relating to the closing and
sale of property and equipment of the Ampro facility and $1.2 million for the
termination benefits to be paid to all 60 employees involved with our facility.
All severance payments as a result of the restructuring were made by June 30,
2002. No adjustments were made to the liability recorded for severance payments
during the year ended June 30, 2002.
Income from operations. Income from operations increased by $6.6
million, to $7.9 million during the fiscal year ended June 30, 2002 compared to
$1.3 million for the comparable period in 2001. The increase in income from
operations for the 2002 period is primarily attributable to the matters
described above, the most significant matter being the reduction in general and
administrative expenses. As a percentage of net sales, income from operations
30
increased to 10.0% for the fiscal year ended June 30, 2002 from 1.6% during the
comparable period in 2001.
Net interest expense. Net interest expense remained consistent at $7.3
million during the fiscal years ended June 30, 2002 and 2001. Borrowings under
our revolving credit facilities decreased and interest rates on the revolving
credit facility also decreased, but were offset by the increased cost of
subordinated debt.
Income tax benefit (expense). Income tax expense was $0.2 million
during the fiscal year ended June 30, 2002 compared to an income tax benefit of
$1.4 million during the comparable period in 2001. This results from having
pre-tax income before discontinued operations of $.4 million in fiscal 2002 and
a pre-tax loss of $6.0 million in the comparable period in 2001. See Note 16 to
the Consolidated Financial Statements included in Part II, Item 8.
Discontinued operations. In June 2002, we announced we were
discontinuing the Weed Wizard line of products effective September 30, 2002 due
to continued operating losses, the loss of sales due to the product recall in
fiscal 2000, and the current and future prospects for the operation.
In fiscal 2002, we recorded an estimated net loss on disposal of Weed
Wizard of $1.1 million related to the write-down of inventory and long-lived
assets. We plan to dispose of the assets and liabilities of Weed Wizard,
including amounts written off, through a sale of the assets and liquidation of
the liabilities during fiscal 2003. The remaining assets at June 30, 2002
consist of accounts receivable of $0.4 million, inventory of $0.3 million, other
current assets of $0.3 million, and net property and equipment of $0.1 million.
Remaining liabilities include accounts payable and accrued expenses of $0.3
million. In addition to the estimated loss on disposal in fiscal 2002, we had a
net loss from the operations of Weed Wizard of $1.8 million.
In June 2001 we wrote off the net goodwill balance related to the Weed
Wizard product line. As a result of the decision to discontinue the operations
in June 2002, we have reflected this loss on impairment of goodwill of $10.8
million and the loss from operations of $.8 million for the fiscal year ended
June 30, 2001, net of income taxes of $2.5 million, as discontinued operations.
Also, in June 2001, we announced that we were discontinuing our
31
e-commerce initiative, which we were conducting through our subsidiary, Egarden
Inc., effective June 30, 2001. All of the assets of Egarden, including amounts
previously written off, were sold during the fiscal year ended June 30, 2002. We
recorded a net gain on the disposal of Egarden of $1.1 million, primarily as a
result of the elimination of minority interest of $1.2 million as the subsidiary
was liquidated.
We recorded a net loss on disposal of Egarden of $4.6 million, net of
minority interest of $1.1 million in 2001. This included the write-off of all
long-lived assets of $5.2 million and $0.5 million of restructuring expense
related to the termination of all 39 Egarden employees. All severance payments
have been made by June 30, 2002. No adjustments were made to the liability
recorded for severance payments during the year ended June 30, 2002. The
remaining assets at June 30, 2002 consist of cash of $62,000 and the remaining
liabilities consist of accrued expenses of $16,000. In addition to the net loss
on disposal in 2001, we had a net loss from the operations of Egarden of $7.1
million, net of minority interest of $1.8 million.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, our consolidated financial statements and notes have been
restated for all periods presented to reflect the discontinued components. The
assets and liabilities of the discontinued components have been classified as
"Held for Sale" and the net operations and net cash flows have been reported as
"Discontinued Operations". See Note 2 to the Consolidated Financial Statements
included in Part II, Item 8.
Cumulative effect of a change in accounting principle. We recorded a
cumulative effect of a change in accounting principle for the fiscal year ended
June 30, 2002 as a result of the completion of the transitional goodwill
impairment test in conjunction with the adoption of SFAS No. 142. The recording
of an impairment loss of $9.9 million, which is primarily related to the Ampro
operations, is reflected as a cumulative effect of a change in accounting
principle. See Note 7 to the Consolidated Financial Statements included in Part
II, Item 8.
Net loss. Net loss decreased by $13.9 million to a net loss of $11.5
million during the fiscal year ended June 30, 2002 from a net loss of $25.4
million during the comparable period in 2001.
The diluted net loss per common share decreased $.75 to a net loss of
$.65 per share when compared to the diluted net loss per common share of $1.40
during the comparable period in 2001. The decrease in net loss per common share
32
is primarily attributable to the unusual events in fiscal 2001 which were the
impairment of goodwill of one of its subsidiaries, Weed Wizard, Inc., the
restructuring charge related to the closure of the Ampro Industries, Inc.
facility in Michigan, and the discontinuance of its business-to-business
e-commerce subsidiary, Egarden Inc. There were also slightly fewer weighted
average common and common equivalent shares outstanding during the year ended
June 30, 2002 compared to the comparable period in the prior year.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
Our sales are seasonal due to the nature of the lawn and garden
business and generally parallels the annual growing season. Our sales have
traditionally been most active from late March through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. The buying pattern
of retailers, including our retail customers, is changing and stores are
replenishing their inventory when sales are made by them rather than buying
large quantities of inventory in advance of the selling season. Sales typically
decline by mid-summer.
Sales of our agricultural products, which were not material for fiscal
2003, are also seasonal. Most shipments occur during the period from March
through October.
RELATED PARTY TRANSACTIONS
See discussion regarding related party transactions in Part II, Item 13 and Note
8 to the Consolidated Financial Statements included in Part II, Item 8.
33
Set forth below is certain unaudited quarterly financial information:
Quarter ended
(in thousands, except percentages and per share data)
-----------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
2001 2001 2002 2002 2002 2002 2003 2003
------------- ------------ ---------- --------- ------------- ------------ --------- ----------
Net sales.............. $13,483 $11,762 $23,913 $29,789 $13,151 $12,351 $24,036 $26,706
Cost of sales.......... 7,943 7,010 12,826 15,579 8,186 7,167 12,758 15,342
-----------------------------------------------------------------------------------------------
Gross profit........... 5,540 4,752 11,087 14,210 4,965 5,184 11,278 11,364
Selling, shipping,
general and
administrative
expenses............... 6,326 5,594 7,455 8,311 6,815 5,657 7,895 7,658
Restructuring charges.. - - - - - - - -
-----------------------------------------------------------------------------------------------
Income (loss) from (786) (842) 3,632 5,899 (1,850) (473) 3,383 3,706
operations.............
Interest income........ 43 27 12 1 - - - -
Refinancing and
transaction costs...... - (254) - - (194) (3,869) (116) (112)
Interest expense.......
(1,810) (1,766) (1,822) (1,976) (1,834) (1,826) (1,998) (2,336)
-----------------------------------------------------------------------------------------------
Income (loss) from (2,553) (2,835) 1,822 3,924 (3,878) (6,168) 1,269 1,258
continuing operations
before income taxes
and cumulative effect
of a change in
accounting principle...
Income tax benefit
(expense).............. - - - (228) - (108) (3) (22)
Income (loss) from
discontinued
operations, net of
taxes and minority
interest..... (268) (490) 227 (1,229) (978) (215) (41) (202)
Gain (loss) on
disposal of
discontinued
operations, net of
taxes and minority
interest............... - - - 20 - - - (49)
-----------------------------------------------------------------------------------------------
Income (loss) before (2,821) (3,325) 2,049 2,487 (4,856) (6,491) 1,225 985
cumulative effect of a
change in accounting
principle.........
Cumulative effect of a
change in accounting
principle......... (9,882) - - - - - - -
-----------------------------------------------------------------------------------------------
Net income (loss)...... $(12,703) $(3,325) $2,049 $2,487 $(4,856) $(6,491) $1,225 $985
-----------------------------------------------------------------------------------------------
Diluted net income $(0.72) $(0.19) $0.11 $0.14 $ (0.27) $(0.36) $0.07 $0.06
(loss) per share(1)....
Weighted average
common and common
equivalent shares
outstanding(1)......... 17,543 17,543 17,915 17,929 17,752 17,879 18,124 17,863
-----------------------------------------------------------------------------------------------
Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......... 58.9% 59.6% 53.6% 52.3% 62.2% 58.0% 53.1% 57.4%
-----------------------------------------------------------------------------------------------
Gross profit........... 41.1% 40.4% 46.4% 47.7% 37.8% 42.0% 46.9% 42.6%
Selling, shipping,
general and
administrative..... 46.9% 47.6% 31.2% 27.9% 51.8% 45.8% 32.8% 28.7%
Restructuring
charges............ - - - - - - - -
-----------------------------------------------------------------------------------------------
Income (loss) from (5.8%) (7.2%) 15.2% 19.8% (14.0%) (3.8%) 14.1% 13.9%
operations.............
Interest income........ 0.3% 0.2% - - - - - -
Refinancing and
transaction costs...... - (2.1%) - - (1.5%) (31.3%) (0.5%) (0.4%)
Interest expense....... (13.4%) (15.0%) (7.6%) (6.6%) (14.0%) (14.8%) (8.3%) (8.8%)
-----------------------------------------------------------------------------------------------
Income (loss) from (18.9%) (24.1%) 7.6% 13.2% (29.5%) (49.9%) 5.3% 4.7%
continuing operations
before income taxes
and cumulative effect
of a change in
accounting
principle.........
Income tax benefit
(expense)............. - - - (0.7%) - (0.9%) - (0.1%)
Income (loss) from
discontinued
operations, net of tax
and minority interest.. (2.0%) (4.2%) 1.0% (4.1%) (7.4%) (1.7%) (0.2%) (0.7%)
Gain (loss) on
disposal of
discontinued
operations, net of tax
and minority interest.. - - - - - - - (0.2%)
-----------------------------------------------------------------------------------------------
Income (loss) before
cumulative effect of a
change in accounting
principle......... (20.9%) (28.3%) 8.6% 8.4% (36.9%) (52.5%) 5.1% 3.7%
Cumulative effect of a
change in accounting
principle........... (73.3%) - - - - - - -
-----------------------------------------------------------------------------------------------
Net income (loss)...... (94.2%) (28.3%) 8.6% 8.4% (36.9%) (52.5%) 5.1% 3.7%
-----------------------------------------------------------------------------------------------
34
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using the
treasury stock method except for quarters reporting a net loss from continuing
operations. Such quarters only reflect issued and outstanding shares of our
common stock in the weighted average shares outstanding.
Differences between amounts included above and amounts previously
reported on Form 10-Q are due to the reclassification of discontinued operations
as described in Note 2 to the Consolidated Financial Statements included in Part
II, Item 8, and the cumulative effect of a change in accounting principle of
$9.9 million, related to the loss on impairment of goodwill recorded as of July
1, 2001. See Note 7 to the Consolidated Financial Statements included in Part
II, Item 8.
The fourth quarter of 2002 includes the write off of minority interest
of $1.1 million, net of an estimated loss on disposal of discontinued operations
of $1.1 million. See Note 2 to the Consolidated Financial Statements included in
Part II, Item 8.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through cash
generated by operations, net proceeds from our private and public sales of
securities and borrowings from lending institutions.
At June 30, 2003, we had consolidated cash and short-term investments
totaling $0.8 million and a working deficit of $5.5 million due to classifying
the revolver and the term loan in short-term debt. Under our credit facility
with Wells Fargo Foothill described below, substantially all cash balances are
automatically used to reduce outstanding borrowings. At June 30, 2002, we had
consolidated cash and short-term investments totaling $0.2 million and working
capital of $3.0 million. Under our credit facility with PNC Bank described
below, substantially all cash balances were automatically used to reduce
outstanding borrowings. At June 30, 2001, we had consolidated cash and
short-term investments totaling $2.7 million, and working capital of $4.9
million.
Net cash provided by operating activities for fiscal 2003 of $1.2
million consisted primarily of an increase in accounts payable and accruals of
$2.4 million and an increase in accounts receivable and other current assets of
$2.0 million, offset in part by a decrease in inventory of $1.1 million and the
net loss from continuing operations adjusted for non-cash expenses of $2.1
million. The increase in accounts payable and accruals is primarily due to
35
extended credit terms with certain vendors. The decrease in inventory is
primarily due to increased demand late in the year due to the poor weather
earlier in the season.
Net cash used in investing activities for fiscal 2003 of $1.4 million
is primarily due to capital purchases of equipment and intangible assets.
Net cash provided by financing activities for fiscal 2003 of $1.4
million is primarily related to the $3.4 of net proceeds received as a result of
our new credit facilities described below offset by repayment of existing debt
and deferred finance costs of $2.0 million.
We entered into a senior credit facility dated as of October 30, 2002
for us and our material subsidiaries. Wells Fargo Foothill, which is the
administrative agent for the facility, is also the revolving credit lender, and
Ableco Finance LLC is providing a term loan. The total amount of the new credit
facility is $35 million, of which $23 million is a revolving credit facility and
$12 million is a term loan. The new credit facility matures October 30, 2005.
Interest on the revolving credit facility is at variable annual interest rates
based on the prime rate or LIBOR plus applicable marginal rates. Interest on the
term loan is at variable annual interest rates based on the prime rate with a
minimum rate of 9.75% plus 2% of accrued interest payable upon maturity (payment
in kind interest). The balance of the term loan at June 30, 2003 including
payment in kind interest, was $12,142,000. The interest rate on the term loan
increases 2% each year the balance is outstanding. Borrowings on the revolving
credit facility were $15,085,000 at June 30, 2003 and are limited based on
eligible borrowing bases, effectively $17,659,000 at June 30, 2003.
Our obligations and the obligations of our material subsidiaries under
the new credit facility are secured by a security interest in favor of the
lenders in substantially all of our assets. We and our material subsidiaries are
subject to certain financial and other covenants under the new credit facility.
At the end of January 2003, our financial performance created a "Triggering
Event" which increased the interest rate on the term loan in February through
June by 2.5% points, to 14.25%. At June 30, 2003, we were in violation of
certain covenants under the credit facility. Due to the covenant violations, the
interest rates on both the term loan and the revolver increased by 3% points, to
17.25%, and the lender could require us to pay all principal and accrued
interest at any time.
36
As a result of the loan covenant violations, the opinion of our
certified public accountants on our consolidated financial statements included
in Part II, Item 8 was modified due to the uncertainty of our ability to obtain
financing at a commercially reasonable rate, which raised doubt about our
ability to continue as a going concern. However, management believes the
proposed transaction described in the Business -- Recent Developments section of
this report beginning on page 3 will close by October 31, 2003, and all
outstanding bank debt will be repaid at the closing. If this transaction does
not close, management believes, although there can be no assurance, we will be
able to obtain alternative financing arrangements at commercially reasonable
terms.
We had a financing agreement to provide $25,000,000 in senior secured
financing. The agreement provided for a $23,000,000 revolving credit facility
and a $2,000,000 term loan due in monthly installments of $33,000 plus interest.
The term loan balance outstanding at June 30, 2002 was $1,767,000. Interest on
borrowings was calculated at variable annual rates based on either the bank's
prime rate plus an applicable marginal rate or the federal funds rate plus an
applicable marginal rate. At June 30, 2002 we had $15,036,000 of borrowings
outstanding under the revolving credit facility. These borrowings were paid in
full on November 1, 2002 with proceeds from the new financing agreements
discussed above.
We also had a financing agreement to provide $6,250,000 of subordinated
debt. At June 30, 2002, we had borrowings outstanding of $5,945,000, net of
discounts of $905,000, pursuant to the subordinated secured notes. Interest was
charged on the face of the notes at 16% and 14% per annum, payable monthly. The
issue price of the 16% notes was 90% of the face amount of the notes resulting
in a discount of $600,000. In connection with this financing, we issued to the
purchasers of the notes warrants to purchase up to 3.75% of our fully diluted
common stock and an option to purchase from us certain Trust Preferred
Securities of our subsidiary, U.S. Home and Garden Trust I, that are owned by
us, which resulted in an additional discount of $402,000. These borrowings were
paid in full on November 1, 2002 with proceeds from the new financing agreements
discussed above.
Upon repayment of the $6,250,000 subordinated debt, we continue to have
certain ongoing obligations under the subordinated debt financing agreement to
the holders of the warrants to purchase our common stock and option to purchase
Trust Preferred Securities described above by virtue of these
37
agreements. Under the option agreement, payments of interest on the Trust
Preferred option securities is used to reduce the option price and is recorded
as additional Trust Preferred liability. When the option price is reduced to
zero, we will issue the underlying Trust Preferred Securities to the holders of
the options. If the proposed asset sale to Easy Gardener Products is consummated
the obligation under the option agreement to purchase Trust Prefered Securities
will be assumed by Easy Gardener Products.
COMMITMENTS
We lease office and warehouse space, certain office equipment and
automobiles under operating leases expiring through 2006. The future minimum
lease payments under these non-cancelable operating leases are as follows:
Year ended June 30, Amount
-------------------------------------------------------------------
2004 819,000
2005 595,000
2006 214,000
-------------------------------------------------------------------
$ 1,628,000
-------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the adoption and
implementation of accounting policies and the use of assumptions and estimates
in their presentation. The accounting policies and uncertainties, judgments and
estimates make it likely that materially different amounts would be reported
under different conditions and different assumptions.
We have included below a discussion of the more critical accounting
policies that are affected by the significant judgments and estimates used in
the preparation of the financial statements, how such policies are applied, and
how results differing from the estimates and assumptions would affect the
amounts presented in the financial statements. Other accounting policies also
have a significant effect on the financial statements, and some of these
policies also require the use of estimates and assumptions as discussed in the
Summary of Accounting Policies in our Consolidated Financial Statements at June
30, 2003.
38
Allowance for Doubtful Accounts Receivable. We maintain an allowance
for doubtful accounts receivable, which represents the potential estimated
losses resulting from the inability of customers to make required payments for
amounts owed. The allowance is estimated based on historical experience of
write-offs, the level of past due amounts and information known about specific
customers with respect to their ability to make payments at the balance sheet
date. If the financial condition of our customers were to change, resulting in
an impairment or improvement in their ability to make payments, additional
allowances may be required or allowances may be reduced.
Inventories. We record inventory reserves for estimated obsolescence of
inventory equal to the difference between the cost of inventory owned and the
estimated market value. Market value is based upon the age of specific inventory
on hand and assumptions about future demand and market conditions. If actual
market conditions for the sale of the inventory are less favorable than those
anticipated by management, additional reserves may be required.
Goodwill. We have consummated eleven acquisitions accounted for using
the purchase method. The excess of cost over net assets acquired which relates
to our acquisitions has been recorded as goodwill. Goodwill is tested for
impairment by comparing the carrying value of the assets of our individual
reporting units to their fair value. The fair value of the assets could vary
significantly over time and different assumptions and estimates will result in
different valuations.
Deferred Income Taxes. We record deferred income taxes based on enacted
income tax rates in effect on the dates temporary differences between the
financial reporting and tax bases of assets and liabilities reverse. To the
extent that available evidence about the future raises doubt about the
realization of a deferred tax asset, a valuation allowance is established. We
have recorded a valuation allowance due to the uncertainty of our ability to
generate sufficient future taxable income to realize the gross deferred tax
assets. If we are able to generate future taxable income, the valuation
allowance may be adjusted.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical
39
Corrections. SFAS No. 4 required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. SFAS No. 145 requires any gain or loss from the
extinguishment of debt to meet the requirements of APB No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions to be classified as an extraordinary item, otherwise the item would
be classified in the results of continuing operations. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods that does not meet the criteria of APB No. 30 for classification as an
extraordinary item shall be reclassified. The provisions of the statement
related to the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. SFAS No. 145 did not have an effect on our
financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002. SFAS No. 146 did not have an effect on our financial
statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We adopted SFAS No. 148 during the year ended June 30,
2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The provisions of this statement are effective for contracts
40
entered into or modified after June 30, 2003. We do not expect SFAS No. 149 to
have an effect on our financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS
No. 150 established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for us for periods ending after June
30, 2003. SFAS No. 150 did not have an effect on our financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of the
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in the
Interpretation were effective for us for the period ended March 31, 2003, and
did not have an effect on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. This Interpretation addresses consolidation by
business enterprises of variable interest entities. The Interpretation will
apply to us for the periods ended after June 30, 2003. We do not expect the
Interpretation to have an effect on the financial statements.
INFLATION
Inflation has historically not had a material effect on our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a result of our variable rate revolving credit line and term loan,
we are exposed to the risk of rising interest rates. The following table
provides information on our fixed maturity debt as of June 30, 2003 that is
sensitive to changes in interest rates.
41
The Revolving Credit Facility had an interest rate varying from 5.25%
to 8.25% for the year ended June 30, 2003 $15.1 million
The Term Loan had an interest rate varying from 11.75% to 17.25% for
the year ended June 20, 2003 $12.1 million
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information appears in a separate section of this report following
Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. As of the
end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer of
the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the evaluation of
the effectiveness of the design and operation of our
disclosure controls and procedures, our Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective in timely
alerting them to material information required to be included
in our periodic SEC filings at the reasonable assurance level.
(b) Changes in internal control over financial reporting. There
has been no change in our internal control over financial
reporting that occurred during our fiscal quarter ended June
30, 2003 that has materially affected or is reasonably likely
to materially affect our internal control over financial
reporting.
42
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our current directors and executive officers are as follows:
Name Age Position
- ---- --- --------
Robert Kassel 63 Chairman of the Board, Chief
Executive Officer, President,
Secretary and Treasurer
Richard Kurz * 61 Chief Financial Officer
David Harper 52 Executive Vice President
Richard Raleigh (1) 49 Director
Fred Heiden(1)(2) 62 Director
Brad Holsworth(2) 43 Director
Jon Schulberg(1)(2) 45 Director
- -------
(1) Member, Compensation Committee
(2) Member, Audit Committee
* It is anticipated that if the proposed sale of assets to Easy Gardener
Products is consummated that Mr. Kurz will shortly thereafter become an employee
of Easy Gardener Products and will no longer be employed by us.
Robert Kassel co-founded U.S. Home & Garden Inc. and has been its
Chairman of the Board, Chief Executive Officer, President, and Treasurer since
October 1990, and Secretary since July 2002. From 1985 to August 1991, he was a
consultant to Comtel Communications, Inc., a company specializing in the
installation and operation of telephone systems in hotels. From 1985 to 1990,
Mr. Kassel was also a real estate developer in Long Island, New York and Santa
Barbara, California. From 1965 to 1985, he was a practicing attorney in New York
City, specializing in corporate and securities law.
Richard Kurz has been Chief Financial Officer of U.S. Home & Garden
Inc. since October 2001 and served as its Vice President-Finance from June 2001
43
until October 2001. He has also served as Chief Financial Officer of Easy
Gardener since October 2001. From 1997 until December 2000 he was Executive Vice
President and Chief Financial Officer for Aircraft Interior Resources, Inc, a
company that provides products and services to commercial airlines. From 1994
until 1997 he was Senior Vice President and Chief Financial Officer of American
Eagle Group, Inc., a service company that provided insurance services to the
aviation and other specialized industries. From 1991 to 1994 he was Chief
Financial and Administrative Officer for BDP International, Inc. a logistics
service provider. From 1979 to 1991 he held a variety of senior financial
positions with CIGNA Corporation, a healthcare provider. Mr. Kurz is a Certified
Public Accountant.
David Harper has been a Vice President of U.S. Home & Garden Inc. since
May 1999, has been an Executive Vice President of U.S. Home & Garden Inc. since
July 2003 and has been employed by U.S. Home & Garden Inc. since May 1998. From
1995 to May 1998 he was an independent consultant within the lawn and garden
industry where his clients included selected manufacturers, distributors,
retailers and industry associations. From 1975 to 1994, he was employed by
Monsanto Company in a variety of positions of increasing responsibility. From
1988 to 1994, Mr. Harper headed Monsanto's efforts to introduce its Roundup
product line and the creation of its Solaris division with Monsanto's
acquisition of Ortho Consumer Products in 1993.
Richard Raleigh has been a director of U.S. Home & Garden Inc. since
March 1993. He served as Chief Operating Officer of U.S. Home & Garden Inc. from
June 1992 to June 30, 2001 and served as a consultant to U.S. Home & Garden,
Inc. from July 2001 through June 2003. He served as Executive Vice
President-Operations of U.S. Home & Garden Inc. from December 1991 to June 1992.
Prior to joining U.S. Home & Garden Inc., Mr. Raleigh was a free-lance marketing
consultant to the lawn and garden industry from January 1991 to December 1991.
From April 1988 to January 1991, he was Director of Marketing, Lawn and Garden
of Monsanto Agricultural Co. From December 1986 to April 1988, he was Vice
President of Sales and Marketing of The Andersons, a company engaged in the sale
of consumer and professional lawn and garden products. From November 1978 to
December 1986, he held a variety of positions at The Andersons, including
Operations Manager and New Products Development Manager.
Fred Heiden, a director of U.S. Home & Garden Inc. since March 1993,
has been President and principal owner of Marlin Mortgage Group, a mortgage
banker business, since February 2002. He was a private investor from November
1989 to February 2002. From April 1984 to November 1989, Mr. Heiden was
President and Principal owner of Bonair Construction, a Florida based home
improvement construction company.
44
Brad Holsworth has been a director of U.S. Home & Garden Inc. since
July 2000. Since February 2003, he has been employed by Senetek, PLC, a
biopharmaceutical company, as its chief financial officer. From April 2000 to
February 2003, he was employed by Prescient Capital LLC, a money manager and
venture capital firm, as its chief financial officer. From April 1999 to April
2000, he was employed by Banc of America Securities, as a Principal, Accounting
and Finance. He was employed by the accounting firm, BDO Seidman, LLP from July
1982 to April 1999 and was a partner of BDO Seidman, LLP from July 1995 to April
1999.
Jon Schulberg, a director of U.S. Home & Garden Inc. since March 1993,
has been employed as President of Schulberg MediaWorks, a company engaged in the
independent production of television programs and television advertising since
January 1992. From January 1989 to January 1992, he was a producer for
Guthy-Renker Corporation, a television production company. From September 1987
to January 1989 he was Director of Development for Eric Jones Productions.
All of our directors hold office until the next annual meeting of the
stockholders and the election and qualification of their successors. Our
officers are elected by the Board and serve at the discretion of the Board.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of equity securities of U.S. Home & Garden Inc., file certain
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us,
or representations obtained from certain reporting persons, we believe that
during the year ended June 30, 2003 all filing requirements applicable to the
officers, directors, and greater than 10 percent beneficial stockholders of U.S.
Home & Garden Inc. were complied with.
45
ITEM 11. EXECUTIVE COMPENSATION.
The following table discloses the compensation awarded by U.S. Home &
Garden Inc., for the three fiscal years ended June 30, 2003, 2002 and 2001, to
Mr. Robert Kassel, its Chairman, Chief Executive Officer, President, Secretary
and Treasurer, Mr. Richard Grandy, its former Chief Operating Officer, and Mr.
Richard Kurz, its Chief Financial Officer (together, the "Named Officers").
During the fiscal year ended June 30, 2003, no other person who served as an
executive officer of U.S. Home & Garden Inc. during the fiscal year ended June
30, 2003 received a total salary and bonus that exceeded $100,000 during such
fiscal year.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation
Securities
Name and Principal Position Underlying All Other
- --------------------------- Year Salary ($) Bonus ($) Options (#) Compensation($)(1)
---- ---------- --------- --------------- ------------------
Robert Kassel, 2003 450,000 239,500 - -
Chairman, Chief Executive Officer, 2002 450,000 325,000 - 5,149
President, Secretary and Treasurer 2001 354,000 315,000 1,468,000 (2) 7,000
Richard Grandy, former Chief Operating 2003 345,300 28,000 - -
Officer (3) 2002 345,300 - - 11,000
2001 340,000 100,000 150,000 (2) 12,000
Richard Kurz, Chief Financial Officer 2003 176,000 22,000 - 5,763
2002 128,000 - 10,000 (4) -
(1) Represents our contributions to the Named Officers 401(k)/profit
sharing accounts. Excludes certain perquisites that did not exceed the
lesser of $50,000 or 10% of their combined bonus and salary.
(2) Represents options that were originally granted to the respective
officers in prior fiscal years, the expiration dates of which were
extended in fiscal 2001.
(3) Mr. Grandy's termination date was effective July 1, 2003.
(4) Represents options granted to Mr. Kurz in October 2001.
46
There were no new option grants to any Named Officers of the Company during the
fiscal year ended June 30, 2003.
The following table sets forth information concerning the number of
options owned by the Named Officers and the value of any in-the-money
unexercised options as of June 30, 2003. No options were exercised by any Named
Officer during the fiscal year ended June 30, 2003:
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES
---------------------------------
SHARES ACQUIRED VALUE REALIZED NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
ON EXERCISE(#) ($) UNEXERCISED OPTIONS AT JUNE 30, 2003 OPTIONS AT JUNE 30, 2003(1)
--------------- -------------- ------------------------------------ ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------------- --------------- ----------------- ----------------
Robert Kassel -- -- 1,973,402 255,931 0 0
Richard Grandy -- -- 150,000 -- 0 0
Richard Kurz -- -- 10,000 -- $1,200 0
- -------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year end market
value of the common stock. An Option is "in-the-money" if the fiscal year end
fair market value of the common stock exceeds the option exercise price. The
last sale price (the fair market value) of the common stock on June 30, 2003 was
$0.37 per share.
EMPLOYMENT AGREEMENTS OF EXECUTIVE OFFICERS
We have entered into an employment agreement with Mr. Kassel dated as
of April 1, 1996. Mr. Kassel currently serves as Chief Executive Officer and
President of U.S. Home & Garden Inc. for a term which expires on March 31, 2004,
which is subject to automatic renewal unless terminated. His current annual
salary is $450,000, and is subject to such bonuses and increases as are approved
at the discretion of the Board of Directors or the Compensation Committee of the
Board, as the case may be. The employment agreement requires that substantially
all of Mr. Kassel's business time be devoted to us and that he not compete, or
engage in a business competitive with, our current or anticipated business for
the term of the agreement and for two years thereafter (although he may own not
47
more than 5% of the securities of any publicly traded competitive company). Mr.
Kassel is, in addition to salary, entitled to certain fringe benefits, including
the use of an automobile and payment of related expenses.
Mr. Kassel's agreement also provides that if his employment is
terminated under certain circumstances, including termination of Mr. Kassel's
employment upon a change of control of U.S. Home & Garden Inc, (as defined in
the agreement) a failure by U.S. Home & Garden Inc. to comply with its
obligations under the agreement, the failure of U.S. Home & Garden Inc. to
obtain the assumption of the agreement by any successor corporation, or a change
in Mr. Kassel's duties and obligations from those contemplated by the agreement,
and termination by U.S. Home & Garden Inc. of Mr. Kassel's employment other than
for disability or cause, he will be entitled to receive severance pay equal to
the greater of (i) $350,000 ($3,500,000 in the event of a change of control) or
(ii) the total compensation earned by Mr. Kassel from the Company during the
one-year period (multiplied by ten in the event of a change of control or
termination without cause) prior to the date of his termination.
COMMITTEES OF THE BOARD OF DIRECTORS
We have established an Audit Committee which is comprised of Messrs.
Heiden, Holsworth and Schulberg. The Audit Committee, among other things, makes
recommendations to the Board of Directors with respect to the engagement of our
independent certified public accountants and the review of the scope and effect
of the audit engagement. We have also established a Compensation Committee which
is comprised of Messrs. Heiden, Raleigh and Schulberg. The Compensation
Committee, among other things, makes recommendations to the Board of Directors
with respect to the compensation of the executive officers of U.S. Home & Garden
Inc. We maintain a Stock Option Committee comprised of Messrs. Schulberg and
Heiden, which determines the persons to whom options should be granted under the
1995 and 1997 Stock Option Plans and the number and other terms of options be
granted to each person under such plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee of U.S. Home & Garden Inc.'s Board of
Directors consists of Messrs. Heiden, Raleigh and Schulberg. During the fiscal
48
year ended June 30, 2003, none of our executive officers served on the Board of
Directors or the compensation committee of any other entity, any of whose
officers served on the Board of Directors or Compensation Committee of U.S. Home
& Garden Inc.
STOCK OPTION PLANS
In September 1991, we adopted a stock option plan (the "1991 Plan")
pursuant to which 700,000 shares of Common Stock have been reserved for issuance
upon the exercise of options designated as either (i) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code of
1986, as amended (the "Code") or (ii) non-qualified options ("NQO's"). ISOs may
be granted under the 1991 Plan to our employees and officers. NQO's may be
granted to consultants, directors (whether or not they are employees), and to
our employees or officers.
The purpose of the 1991 Plan is to encourage stock ownership by certain
of our directors, officers and employees and certain other persons instrumental
to our success and give them a greater personal interest in our success. The
1991 Plan is administered by the Board of Directors. The Board, within the
limitations of the 1991 Plan, determines the persons to whom options will be
granted, the number of shares to be covered by each option, whether the options
granted are intended to be ISOs, the duration and rate of exercise of each
option, the option purchase price per share and the manner of exercise, the
time, manner and form of payment upon exercise of an option, and whether
restrictions such as repurchase rights in U.S. Home & Garden Inc. are to be
imposed on shares subject to options.
ISOs granted under the 1991 Plan may not be granted at a price less
than the fair market value of the common stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the voting stock
of U.S. Home & Garden Inc.). The aggregate fair market value of shares for which
ISOs granted to any employee are exercisable for the first time by such employee
during any calendar year (under all of our stock option plans and those of any
related corporation) may not exceed $100,000. NQO's granted under the 1991 Plan
may not be granted at a price less than the fair market value of the Common
Stock on the date of grant. Options granted under the 1991 Plan will expire not
more than ten years from the date of grant (five years in the case of ISOs
granted to persons holding 10% or more of our voting stock).
48
We have adopted a Non-Employee Director Stock Option Plan (the
"Director Plan"). Only non-employee directors of U.S. Home & Garden Inc. are
eligible to receive grants under the Director Plan. The Director Plan provides
that eligible directors automatically receive a grant of options to purchase
5,000 shares of common stock at fair market value upon first becoming a director
and, thereafter, an annual grant, in January of each year, of 5,000 options at
fair market value. Options to purchase an aggregate of up to 100,000 shares of
Common Stock are available for automatic grants under the Director Plan.
We have adopted a 1995 Stock Option Plan ("1995 Plan") which provides
for grants of options to purchase up to 1,500,000 shares of common stock. The
Board of Directors or the Stock Option Committee (the "Committee"), as the case
may be, will have discretion to determine the number of shares subject to each
NQO (subject to the number of shares available for grant under the 1995 Plan and
other limitations on grant set forth in the 1995 Plan), the exercise price
thereof (provided such price is not less than the par value of the underlying
shares of Common Stock), the term thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances), and
the manner in which the option becomes exercisable (amounts, intervals and other
conditions). Directors who are also employed by us will be eligible to be
granted ISOs or NQOs under such plan. The Board or Committee, as the case may
be, also has discretion to determine the number of shares subject to each ISO,
the exercise price and other terms and conditions thereof, but their discretion
as to the exercise price, the term of each ISO and the number of ISOs that may
vest in any calendar year is limited by the same Code provisions applicable to
ISOs granted under the 1991 Plan.
We have adopted a 1997 Stock Option Plan ("1997 Plan") which provides
for grants of options to purchase up to 1,500,000 shares of Common Stock. The
Board of Directors or the Committee of the 1997 Plan, as the case may be, will
have discretion to determine the number of shares subject to each NQO (subject
to the number of shares available for grant under the 1997 Plan and other
limitations on grant set forth in the 1997 Plan), the exercise price thereof
(provided such price is not less than the par value of the underlying shares of
Common Stock), the term thereof (but not in excess of 10 years from the date of
grant, subject to earlier termination in certain circumstances), and the manner
in which the option becomes exercisable (amounts, intervals and other
conditions). Directors who are also our employees will be eligible to be granted
ISOs or NQOs under such plan. The Board or Committee, as the case may be, also
50
has discretion to determine the number of shares subject to each ISO, the
exercise price and other terms and conditions thereof, but their discretion as
to the exercise price, the term of each ISO and the number of ISOs that may vest
in any calendar year is limited by the same Code provisions applicable to ISOs
granted under the 1991 Plan.
We have also adopted a 1999 Stock Option Plan ("1999 Plan") which
provides for grants of options to purchase up to 900,000 shares of common stock.
The Board of Directors or the Committee of the 1999 Plan, as the case may be,
will have discretion to determine the number of shares subject to each NQO
(subject to the number of shares available for grant under the 1999 Plan and
other limitations on grant set forth in the 1999 Plan), the exercise price
thereof (provided such price is not less than the fair market value of the
underlying shares of Common Stock), the term thereof (but not in excess of 10
years from the date of grant, subject to earlier termination in certain
circumstances), and the manner in which the option becomes exercisable (amounts,
intervals and other conditions). Directors who are also our employees will be
eligible to be granted ISOs or NQOs under such plan. The Board or Committee, as
the case may be, also has discretion to determine the number of shares subject
to each ISO, the exercise price and other terms and conditions thereof, but
their discretion as to the exercise price, the term of each ISO and the number
of ISOs that may vest in any calendar year is limited by the same Code
provisions applicable to ISOs granted under the 1991 Plan.
We have adopted the Non-Qualified Deferred Compensation Plan for Select
Employees of U.S. Home & Garden Inc. ("Deferred Plan") and have amended our
stock option plans, as well as certain option agreements which we had with
Robert Kassel. Under the Deferred Plan and such amended stock option plans and
agreements, the Board of Directors or its committee which administers the
relevant stock option may grant permission to optionees to exercise their
options with shares of U.S. Home & Garden Inc.'s common stock in which they have
a holding period, for income tax purposes, of a least six months and defer the
receipt of a portion of the shares subject to the option so exercised. The
optionee has the right to designate the time or times of receipt of those shares
pursuant to the Deferred Plan. The Deferred Plan does contain provisions for
earlier issuance of those deferred shares on death, disability and other
termination of employment (e.g., on a change of control of U.S. Home & Garden
Inc.).
We have, from time to time, also granted non-plan options to certain
officers, employees and consultants.
51
DIRECTOR COMPENSATION
During the fiscal year ended June 30, 2003 each of our three
non-employee directors who served as directors during that fiscal year, Messrs.
Heiden, Holsworth and Schulberg, received $5,000 for serving on our Board of
Directors and received a grant of 5,000 options under the Non-Employee Director
Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
VOTING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information at September 15,
2003, based on information obtained from the persons named below, with respect
to the beneficial ownership of shares of common stock by (i) each person known
by us to be the owner of more than 5% of the outstanding shares of common stock,
(ii) each director, (iii) each Named Officer, and (iv) all executive officers
and directors of U.S. Home & Garden Inc. as a group.
52
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS
- ------------------------ --------------- --------
Robert Kassel 2,736,131(3)(4) 13.5
Richard Raleigh 2,000 *
Richard Grandy 934,396(5) 5.2
Richard Kurz 10,000 (6) *
Fred Heiden 15,258(7) *
Brad Holsworth 11,000(8) *
Jon Schulberg 15,258(7) *
Joseph Owens, II 914,396(9) 5.1
Parker Martin 1,049,335(10) 5.8
All executive officers
and directors as a
group (seven persons) 2,947,647(3)(4)(6) 14.4
_____________ (7)(8)(11)
*less than 1%
- -----------------------------------------------------------------------------
(1) Unless otherwise noted, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can
be acquired by such person within 60 days from September 15, 2003 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 15,
2003 have been exercised.
(3) Of such shares, (i) 138,650 are owned of record by Mr. Kassel's wife;
however, because Ms. Kassel has appointed her husband as her proxy and
attorney-in-fact to vote all 138,650 of the shares owned of record by
her, Robert Kassel may also be deemed to have beneficial ownership of
such shares. The address of Mr. Kassel is c/o U.S. Home & Garden Inc.
53
(4) Includes 2,313,693 shares of Common Stock issuable to Mr. Kassel upon
exercise of options and warrants.
(5) The address of Mr. Grandy is c/o Easy Gardener Products, Ltd. 3022
Franklin Avenue, Waco, TX 76710
(6) Represents shares issuable upon exercise of options.
(7) Includes 15,000 shares of Common Stock issuable upon exercise of
options.
(8) Includes 10,000 shares of Common Stock issuable upon exercise of
options.
(9) The address of Mr. Owens is 8 Hillandale Road, Waco, Texas.
(10) According to Schedule 13G filed by Mr. Martin with the SEC, the address
for Mr. Martin is 121 S. Hope Street, #106, Los Angeles, California
90112.
(11) Includes 2,513,693 shares of common stock issuable upon exercise of
options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time Mr. Kassel has borrowed monies from U.S. Home &
Garden Inc. which borrowings are represented by an unsecured note. The note
bears interest at the lower of the prime lending rate or 6% (effectively 4.00%
at June 30, 2003). At June 30, 2003 and 2002, the balance on the outstanding
note was $537,000. Total related interest income amounted to $24,000, $41,000
and $43,000 for the years ended June 30, 2003, 2002 and 2001, respectively.
Principal payments are due in annual installments of $50,000 in 2004 through
2007 with the balance due in April 2008. As of the date of this report, the
balance was $512,000.
As noted under "Item 1-Business--Recent Developments" during the fiscal
year ended June 30, 2003 we and our primary operating subsidiaries, Easy
Gardener and Ampro, entered into an asset purchase agreement with Easy Gardener
Products, an entity formed by current and former members of management of those
subsidiaries, including Richard Grandy, our former Chief Operating Officer.
Richard Kurz, our current Chief Financial Officer, will become an equity owner
and a member of management of Easy Gardener Products after the consummation of
the asset sale. Under the terms of the asset purchase agreement, Easy Gardener
and Ampro are to sell their operations, including substantially all of their
assets to this management buy-out group. These operations comprise approximately
99% of our consolidated sales and 98% of our consolidated assets. The proposed
management buyout, which is expected to close in October 2003, is also
54
structured to include Easy Gardener Products' assumption of substantially all of
the selling subsidiaries liabilities and the transfer by us of our obligations
relating to the Trust. These liabilities comprise approximately 99% of our
consolidated liabilities.
Easy Gardener Products will pay us a total purchase price of
$11,950,000, less certain expenses related to the transaction for the assets it
is acquiring. Of this amount, $10,350,000 will be paid to us in cash at the
closing and $1,600,000 will be paid to us in the form of a subordinated
promissory note. The note will mature in 2009 subject to certain prepayments
from excess cash flow. Interest on the principal amount outstanding from time to
time will accrue at the rate of 9% per annum and will be capitalized by
increasing the principal amount of the note. The note will be subordinated to
the indebtedness of Easy Gardener Products under its senior credit facility and
under its note to be issued to Central Garden & Pet Company. It will be senior
to the debentures underlying the trust preferred securities issued by the Trust.
In addition, Easy Gardener Products is to pay or assume our senior credit
facility, including all borrowings outstanding under the facility as of the
closing. In connection with this payment or assumption we are to be discharged
from any future obligations under the facility. Easy Gardener Products will also
assume our obligations under the Trust-related documents, including its issuance
of a Guarantee and new debentures in the aggregate principal amount of
$57,035,000, each identical to the current Guarantee and debentures. In
connection with this assumption, we will be discharged from any further
obligations under the Trust-related documents; and Easy Gardener Products will
assume our obligations under an outstanding option granted by us in November
2001, which is exercisable for 94,875 of the trust preferred securities
currently owned by us. In addition, in connection with the transaction Easy
Gardener Products will pay Robert Kassel, our Chairman, Chief Executive Officer
and President, $1,250,000 for entering into a non-compete agreement.
55
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable pursuant to SEC Release No. 33-8183 (as corrected by
Release No. 33-8183A), which provides that the disclosure requirements of this
Item are not effective until the Annual Report on Form 10-K for the first fiscal
year ending after December 15, 2003.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) (1) Financial Statements.
The Financial Statements and Index follow this
(2) Financial Statement Schedule.
Schedule II-Valuation and Qualifying Accounts.
(3) Exhibits
Exhibit No.
2.1 Asset Purchase Agreement, dated December 11, 2002, by and between Easy
Gardener Products, Ltd., EYAS International, Inc., U.S. Home & Garden
Inc., Easy Gardener, Inc., Ampro Industries, Inc., and Weed Wizard
Acquisition Corp, as amended (incorporated by reference to Exhibit 2.1
and Annex A to the Registration Statement on Form S-4 of Easy Gardener
Products, Ltd. and U.S. Home & Garden Trust I (SEC File no.
333-102296).
3.1 Certificate of Incorporation, as amended.*
3.2 By-laws of the registrant, incorporated by reference to Exhibit 3(b) of
the registrant's Registration Statement on Form S-1 (Registration No.
33-45428).
4.1 Form of certificate evidencing Common Stock, $.001 par value, of the
registrant, incorporated by reference to Exhibit 4.1 of the
registrant's Registration Statement on Form S-1 (Registration No.
333-38483).
56
4.2 Rights Agreement dated as of October 1, 1998 between the registrant and
Continental Stock Transfer & Trust Company, incorporated by reference
to Exhibit 4.1 filed with the registrant's Current Report on Form 8-K
for the event dated October 1, 1998.
10.1 Employment Agreement of Robert Kassel. +#
10.2 1991 Stock Option Plan, incorporated by reference to Exhibit 10.5 of
the registrant's Registration Statement on Form S-1 (Registration No.
33-45428).#
10.3 1995 Stock Option Plan, as amended.** #
10.4 Non-Employee Director Stock Option Plan.* #
10.5 1997 Stock Option Plan, as amended. ** #
10.6 Lease with respect to the registrant's executive offices, incorporated
by reference to Exhibit 10.14 of the registrant's Form 10-KSB for the
fiscal year ended June 30, 1992.
10.7 February 8, 1995 modification to lease with respect to the registrant's
executive offices.*
10.8 May 6, 1997 modification to lease with respect to the registrant's
executive offices. ++
10.9 1999 Stock Option Plan (incorporated by reference to Exhibit A filed
with the registrant's Proxy Statement dated May 14, 1999 filed on
Schedule 14A).#
10.10 Lease and lease extension agreements between Crawford-Austin Mfg. Co.
and Easy Gardener. *
10.11 Leases with respect to Weatherly's warehouse facilities in Paris,
Kentucky. (Incorporated by reference to Exhibit 10.12 filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
10.12 Lease Extension, dated February 14, 2002, between Easy Gardener and
Crawford-Austin Mfg. Co. (Incorporated by reference to Exhibit 10.13
filed with the registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002).
57
10.13 Asset Purchase Agreement dated as of February 25, 1998 by and among the
registrant, Weed Wizard, Weed Wizard, Inc and the Weed Wizard
stockholders (incorporated by reference to Exhibit 10.1 filed with the
registrant's Form 8-K for the event dated February 26, 1998).
10.14 Commercial Building Lease, dated June 12, 1998 between Easy Gardener,
Inc. and Norman Adams, James Anderson, Donald Bryan and Pamela Butler
(incorporated by reference to Exhibit 10.24 filed with the registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998).
10.15 Form of Indenture between the registrant and Wilmington Delaware
Subordinated Trust, as trustee.+++
10.16 Deferred Compensation Plan for Select Employees ** #
10.17 Note and Warrant Purchase, Guaranty and Security Agreement dated as of
November 15, 2001 among, U.S. Home & Garden Inc., Easy Gardener, Inc.
each of the direct or indirect subsidiaries of U.S. Home & Garden Inc.
which are signatories to the Note and Warrant Purchase Agreement and
the purchasers listed on the signature page of the Note and Warrant
Purchase Agreement. ++++
10.18 The Loan and Security Agreement between U.S. Home & Garden, Inc., Ampro
Industries, Inc., Easy Gardener, Inc., Wells Fargo Foothill, and Abelco
Finance, LLC dated October 30, 2002. (Incorporated by reference to
Exhibit 10.1 filed with the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
10.19 Settlement Agreement, dated as of November 1, 2002 by and between U.S.
Home & Garden Inc., Easy Gardener, Inc., LEG Partners Debenture SBIC,
L.P., a Delaware limited partnership, LEG Partners III SBIC, L.P., a
Delaware limited partnership, LEG Co-Investors, LLC, a Delaware limited
liability company, 555 Madison Investors II LLC, f/k/a LEG Co-Investors
II, LLC, a Delaware limited liability company, 555 Madison Investors,
LLC, a Delaware limited liability company, Golub Associates LLC, a New
York limited liability company and Golub Associates Incorporated, a New
York corporation. (incorporated by reference to Exhibit 10.1 filed with
the registrant's Quarterly Report on Form 10-Q for the qaurter ended
December 31, 2002).
58
10.20 Non-plan option agreements, as amended, between the Registrant and
Robert Kassel with respect to options originally granted on September
8, 1993, July 1, 1994, August 30, 1996, and December 24, 1996. #
10.21 Class B Warrant agreement between the Registrant and Robert Kassel.#
10.22 Amendment No. 2 to the November 1, 2002 Settlement Agreement between
U.S. Home & Garden Inc., Easy Gardener, Inc. LEG Partners Debenture
SBIC, L.P., a Delaware limited partnership, LEG Partners III SBIC,
L.P., a Delaware limited partnership, LEG Co-Investors, LLC, a Delaware
limited liability company, 555 Madison Investors II LLC, f/k/a LEG
Co-Investors II, LLC, a Delaware limited liability company, 555 Madison
Investors, LLC, a Delaware limited liability company, Golub Associates
LLC, a New York limited liability company and Golub Associates
Incorporated, a New York corporation.
21 Subsidiaries. (Incorporated by reference to Exhibit 21 filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2002).
23 Consent of BDO Seidman, LLP.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 or
15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 or
15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Incorporated by reference to the comparable exhibit filed with the
registrant's Form 10-KSB for the fiscal year ended June 30, 1995.
** Incorporated by reference to the applicable exhibit filed with the
registrant's Form 10-K for the fiscal year ended June 30, 1999.
# Denotes management compensatory contract or plan or arrangement.
59
+ Incorporated by reference to the applicable exhibit contained in the
registrant's Annual Report on Form 10-KSB for the fiscal year ended June 30,
1996.
++ Incorporated by reference to the exhibit filed with the registrant's Form
10-K for the fiscal year ended June 30, 1997.
+++ Incorporated by reference to the exhibit filed with the registrant's
Registration Statement on Form S-1 (File No. 333-48519).
++++ Incorporated by reference to the exhibit filed with the registrant's Form
10-Q for the period ended December 31, 2001.
(b) Report on Form 8-K. No reports on Form 8-K were filed by the
registrant during its fiscal quarter ended June 30, 2003.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
U.S. Home & Garden Inc.
-------------------------------------------
(Registrant)
By:/s/ Robert Kassel
-----------------------------------------
Robert Kassel, Chief Executive Officer
Dated: October 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this 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 of Directors, Chief October 14, 2003
- ------------------ Executive Officer, President, Secretary
Robert Kassel and Treasurer (Chief Executive Officer)
/s/ Richard Kurz Chief Financial Officer (Principal October 14, 2003
- ------------------ Financial and Accounting Officer)
Richard Kurz
/s/ Richard Raleigh Director October 14, 2003
- ---------------------------
Richard Raleigh
/s/ Brad Holsworth Director October 14, 2003
- ---------------------------
Brad Holsworth
/s/ Jon Schulberg Director October 14, 2003
- ------------------
Jon Schulberg
/s/ Fred Heiden Director October 14, 2003
- ------------------
Fred Heiden
61
U.S. Home & Garden Inc.
and Subsidiaries
================================================================================
Consolidated Financial Statements
June 30, 2003 and 2002 and for the
Years Ended June 30, 2003, 2002 and 2001
U.S. Home & Garden Inc.
and Subsidiaries
Contents
================================================================================
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2003 and 2002 4 and 5
Consolidated statements of operations for the years ended
June 30, 2003, 2002 and 2001 6 and 7
Consolidated statements of stockholders' equity (deficit) for the years
ended June 30, 2003, 2002 and 2001 8
Consolidated statements of cash flows for the years ended
June 30, 2003, 2002 and 2001 9 and 10
Summary of accounting policies 11 - 17
Notes to consolidated financial statements 18 - 43
Consolidated Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts 44
Note: All other schedules have been omitted since the required information
is contained in the Consolidated Financial Statements or such schedules
are not required.
2
Report of Independent Certified Public Accountants
Board of Directors
U.S. Home & Garden Inc. and Subsidiaries
San Francisco, California
We have audited the accompanying consolidated balance sheets of U.S. Home &
Garden Inc. and Subsidiaries as of June 30, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended June 30, 2003. We have
also audited Schedule II - Valuation and Qualifying Accounts (Schedule). These
financial statements and Schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and Schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and Schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and Schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and Schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Home & Garden
Inc. and Subsidiaries at June 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2003 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for goodwill during the year ended June 30,
2002.
Also, in our opinion, the Schedule presents fairly, in all material respects,
the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company is in violation of certain loan covenants,
which raises substantial doubt about its ability to continue as a going concern.
As a result of the default the bank can demand payment at anytime. Management's
plans in regard to this matter are described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
Certified Public Accountants
Kalamazoo, Michigan
August 23, 2003
3
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
June 30, 2003 2002
----------------------------------------------------------------------------------------------------------------------
Assets (Notes 1,3, and 9)
Current:
Cash and cash equivalents $ 822,000 $ 219,000
Accounts receivable, less allowance for doubtful accounts
of $630,000 and $1,381,000 (Note 4) 24,467,000 26,243,000
Inventories (Note 5) 9,138,000 8,023,000
Prepaid expenses and other current assets 721,000 988,000
Refundable income taxes 137,000 405,000
Deferred tax asset (Note 16) 385,000 688,000
Current assets of discontinued operations (Note 2) 62,000 1,052,000
----------------------------------------------------------------------------------------------------------------------
Total Current Assets 35,732,000 37,618,000
Property and Equipment, net (Note 6) 4,018,000 4,850,000
Intangible Assets:
Goodwill (Note 7) 49,878,000 49,861,000
Deferred financing costs, net of accumulated amortization of
$807,000 and $578,000 3,975,000 3,570,000
Product rights, patents and trademarks, net of accumulated
amortization of $205,000 and $163,000 467,000 509,000
Non-compete agreements, net of accumulated amortization of
$766,000 and $407,000 744,000 1,103,000
Package tooling costs, net of accumulated amortization of
$2,418,000 and $1,860,000 1,204,000 1,216,000
Officer's Receivable (Note 8) 512,000 512,000
Long-Term Assets of Discontinued Operations (Note 2) -- 100,000
Other Assets 29,000 26,000
----------------------------------------------------------------------------------------------------------------------
$ 96,559,000 $ 99,365,000
======================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
June 30, 2003 2002
---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current:
Revolving credit facility (Note 9) $ 15,085,000 $ 15,036,000
Accounts payable (Note 4) 8,954,000 7,180,000
Accrued rebates 1,433,000 931,000
Accrued commissions 1,074,000 1,437,000
Accrued co-op advertising 774,000 740,000
Accrued other expenses 1,786,000 1,577,000
Current portion of long-term debt (Note 9) 12,142,000 7,712,000
Current liabilities of discontinued operations (Note 2) 16,000 277,000
---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 41,264,000 34,890,000
Deferred Tax Liability (Note 16) 239,000 542,000
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures (Note 10) 57,092,000 56,951,000
---------------------------------------------------------------------------------------------------------------------
Total Liabilities 98,595,000 92,383,000
---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Equity (Deficit) (Note 13):
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $.001 par value - shares authorized, 75,000,000;
21,841,000 and 21,641,000 shares issued 22,000 22,000
Additional paid-in capital 52,470,000 52,351,000
Retained deficit (41,700,000) (32,563,000)
---------------------------------------------------------------------------------------------------------------------
10,792,000 19,810,000
Less: Treasury stock, 3,890,000 shares at cost (12,828,000) (12,828,000)
---------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) (2,036,000) 6,982,000
---------------------------------------------------------------------------------------------------------------------
$ 96,559,000 $ 99,365,000
=====================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
Year ended June 30, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Net Sales (Note 4) $ 76,244,000 $ 78,947,000 $ 78,863,000
Cost of Sales (Note 4) 43,453,000 43,358,000 44,065,000
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 32,791,000 35,589,000 34,798,000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling and shipping 18,710,000 18,302,000 16,389,000
General and administrative 9,315,000 9,384,000 14,249,000
Restructuring charges (Note 15) -- -- 2,860,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 28,025,000 27,686,000 33,498,000
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations 4,766,000 7,903,000 1,300,000
Other Income (Expense):
Refinance and transaction costs (Note 14) (4,291,000) (254,000) --
Interest expense, net (7,994,000) (7,291,000) (7,331,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before Income Taxes
and Cumulative Effect of a Change in Accounting Principle (7,519,000) 358,000 (6,031,000)
Income Tax Benefit (Expense) (Note 16) (133,000) (228,000) 1,406,000
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations Before
Cumulative Effect of a Change in Accounting Principle (7,652,000) 130,000 (4,625,000)
Discontinued Operations (Note 2):
Loss from discontinued operations, net of tax benefit of $2,491,000
in 2001 and net of minority interest of $1,754,000 in 2001 (1,436,000) (1,760,000) (16,253,000)
Gain (loss) on disposal of discontinued operations, net of minority
interest of $1,239,000 and $1,118,000 in 2002 and 2001, respectively (49,000) 20,000 (4,551,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss Before Cumulative Effect of a Change in Accounting Principle (9,137,000) (1,610,000) (25,429,000)
Cumulative Effect of a Change in Accounting Principle (Note 7) -- (9,882,000) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loss $ (9,137,000) $(11,492,000) $(25,429,000)
===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
Year ended June 30, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Basic Earnings(loss)per Share (Note 17):
Income (loss) from continuing operations per common share before
cumulative effect of a change in accounting principle $ (0.43) $ 0.01 $ (0.26)
Discontinued operations (0.08) (0.10) (1.14)
Cumulative effect of a change in accounting principle -- (0.57) --
- -----------------------------------------------------------------------------------------------------------------
Net Loss per Common Share $ (0.51) $ (0.66) $ (1.40)
- -----------------------------------------------------------------------------------------------------------------
Diluted Earnings (loss)per Share (Note 17):
Income (loss) from continuing operations per common share before
cumulative effect of a change in accounting principle $ (0.43) $ 0.01 $ (0.26)
Discontinued operations (0.08) (0.10) (1.14)
Cumulative effect of a change in accounting principle -- (0.55) --
- -----------------------------------------------------------------------------------------------------------------
Net Loss per Common Share $ (0.51) $ (0.64) $ (1.40)
=================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
================================================================================
Common Stock
------------------------ Additional Retained Total
Number of Paid-In Earnings Treasury Stockholders'
Shares Amount Capital (Deficit) Stock Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 21,751,000 $ 22,000 $ 51,410,000 $ 4,358,000 $(10,687,000) $ 45,103,000
Compensation related to repriced stock options -- -- 261,000 -- -- 261,000
Issuance of stock options for consulting services -- -- 175,000 -- -- 175,000
Retirement of shares (318,000) (1,000) -- -- -- (1,000)
Repurchase of common stock for treasury -- -- -- -- (2,141,000) (2,141,000)
Net loss -- -- -- (25,429,000) -- (25,429,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 21,433,000 21,000 51,846,000 (21,071,000) (12,828,000) 17,968,000
Compensation related to repriced stock options -- -- 103,000 -- -- 103,000
Issuance of options and warrants to note holders -- -- 402,000 -- -- 402,000
Release of shares from Non-Qualified Deferred
Compensation Plan (Note 13) 208,000 1,000 -- -- -- 1,000
Net loss -- -- -- (11,492,000) -- (11,492,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 21,641,000 22,000 52,351,000 (32,563,000) (12,828,000) 6,982,000
Compensation related to repriced stock options -- -- 119,000 -- -- 119,000
Exercise of options 200,000 -- -- -- -- --
Net loss -- -- -- (9,137,000) -- (9,137,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 21,841,000 $ 22,000 $ 52,470,000 $(41,700,000) $(12,828,000) $ (2,036,000)
===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
8
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Year ended June 30, 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) from continuing operations
before cumulative effect of a change in
accounting principle $(7,652,000) $ 130,000 $(4,625,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for losses on accounts receivable 25,000 425,000 646,000
Depreciation and other amortization 3,113,000 2,768,000 5,686,000
Write-off of deferred financing costs 1,928,000 254,000 --
Trust Preferred payments retained and applied against
note receivable 141,000 -- --
Payment-in-kind interest 142,000 -- --
Restructuring charges, net of cash -- -- 2,708,000
Deferred income taxes -- (146,000) (1,148,000)
Compensation related to repriced stock options 119,000 103,000 261,000
Loan discount amortization 67,000 97,000 --
Consulting expenses related to stock options -- -- 175,000
Changes in operating assets and liabilities:
Accounts receivable 1,751,000 (7,256,000) (474,000)
Inventories (1,115,000) 1,195,000 1,635,000
Prepaid expenses, refundable income taxes
and other current assets 267,000 (94,000) (790,000)
Other assets (3,000) 278,000 259,000
Accounts payable and accrued expenses 2,424,000 2,434,000 (5,799,000)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 1,207,000 188,000 (1,466,000)
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Decrease in restricted cash -- -- 1,582,000
Proceeds on sale of property and equipment -- -- 3,527,000
Purchase of equipment (797,000) (791,000) (1,311,000)
Purchase of package tooling and other intangibles (555,000) (384,000) (631,000)
Decrease in officer receivable -- 34,000 84,000
Payment for purchase of businesses, net of cash acquired (17,000) (111,000) (863,000)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (1,369,000) (1,252,000) 2,388,000
- ----------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
9
U.S. Home & Garden Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
Year ended June 30, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds from (payments on) revolving
credit facility $ 49,000 $ (6,614,000) $ 4,650,000
Proceeds from issuance of long-term debt 12,000,000 8,250,000 --
Payments on long-term debt (8,616,000) (233,000) --
Changes in other long-term liabilities and purchase
of mandatorily redeemable preferred securities -- (20,000) (801,000)
Deferred capitalization of finance costs (2,012,000) (1,119,000) (99,000)
Proceeds from issuance of stock -- -- --
Repurchase of common stock for treasury -- -- (2,141,000)
Release (retirement) of shares -- 1,000 (1,000)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,421,000 265,000 1,608,000
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents
from continuing operations 1,259,000 (799,000) 2,530,000
Cash used in discontinued operations (656,000) (1,723,000) (3,318,000)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 603,000 (2,522,000) (788,000)
Cash and Cash Equivalents, beginning of year 219,000 2,741,000 3,529,000
- -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 822,000 $ 219,000 $ 2,741,000
- -------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
10
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Nature of Business U.S. Home & Garden Inc. (the "Company"), through its
subsidiaries, is a leading manufacturer and marketer
of a broad range of consumer lawn and garden
products. The Company's products include weed
preventive landscape fabrics, fertilizer spikes,
decorative landscape edging, grass and flower seed
products, shade cloth and root feeders, which are
sold under recognized brand names, such as
WeedBlock(R), Jobe's(R), Emerald Edge(R), Shade
Fabric(TM), Ross(R), Tensar(R), Amturf(R), and
Landmaster(R). The Company markets its products
through most large national home improvement and mass
merchant retailers ("Retail Accounts"), including
Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware and
Tru-Serv in North America and other outlets in
Europe.
Principles of
Consolidation The consolidated financial statements include the
accounts of the Company and its subsidiaries over
which it has financial or management control
including Weatherly Consumer Products Group, Inc.
(Weatherly), Easy Gardener, Inc. (Easy Gardener),
Golden West Agri-Products, Inc. (Golden West), Ampro
Industries, Inc. (Ampro), and its discontinued
operations Weed Wizard Acquisition Corp. (Weed
Wizard) and Egarden Inc. (EGarden) since their dates
of acquisition (See Notes 1 and 2). Additionally,
U.S. Home & Garden Trust I (See Note 10) has been
included since its formation in April 1998. All
significant intercompany accounts and transactions
have been eliminated.
Inventories Inventories, which consist of raw materials, finished
goods, and packaging materials, are stated at the
lower of cost or market; cost is determined by the
first-in, first-out (FIFO) cost method.
Property and
Equipment Property and equipment are stated at cost.
Depreciation is computed by the straight-line method
over the estimated useful lives of the assets or, in
the case of leasehold improvements, over the life of
the lease, if shorter. Maintenance and repairs are
charged to expense as incurred. Major improvements
are capitalized.
Intangible Assets Goodwill
Goodwill, which relates to the Company's
acquisitions, represents the excess of cost over net
assets acquired. For the year ended June 30, 2001
goodwill was amortized over periods of five to thirty
years using the straight-line method. Effective July
1, 2001, the Company ceased the amortization of
goodwill in conjunction with the adoption of
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. See
New Accounting Pronouncements and Note 7. Goodwill is
tested for impairment annually by comparing the fair
value of each reporting unit with its carrying value.
11
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Deferred Financing Costs
Direct costs associated with the Company's debt
borrowings are being capitalized and amortized over the
life of the related debt.
Product Rights
Product rights are being amortized over estimated useful
lives of fifteen to twenty years.
Non-Compete Agreements
The non-compete agreements were entered into with the
acquisitions of Ampro and Weatherly. The Weatherly
agreement is being amortized over its twenty-year term.
The Ampro non-compete agreement, which was triggered
when an officer of Ampro was terminated, is being
amortized over a three-year period from the date of such
termination.
Package Tooling Costs
Package tooling costs associated with Easy Gardener and
Weatherly products, primarily consisting of the design
and construction of printing plates and cutting dies
used for the production of packaging, are being
amortized over three years using the straight-line
method.
Long-Lived Assets Long-lived assets with definite useful lives are tested
for recoverability when circumstances suggest a possible
impairment. Recovery is evaluated by comparing
undiscounted estimated future cash flows to the current
carrying value.
Revenue Recognition Sales are recorded as products are shipped to customers.
Sales are free on board (FOB) shipping point.
Sales Incentives The Company enters into contractual agreements with its
customers for rebates on certain products it sells. The
Company records the amounts as reductions of revenue and
records a liability reflected as accrued rebates on the
consolidated balance sheets. As these rebate percentages
are determined when the contracts are entered into,
these revenue reductions are recorded at the time the
related revenue is recorded based upon the expected
sales levels for the period covered by the rebate.
Earnings Per Share Basic earnings (loss)per share includes no dilution and
is computed by dividing income (loss) available to
common stockholders by the weighted average number of
common shares outstanding for the period. Diluted
earnings (loss) per share reflects the potential
dilution of securities that could share in the earnings
(loss) of an entity.
12
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Income Taxes The Company provides deferred income taxes based on
enacted income tax rates in effect on the dates
temporary differences between the financial reporting
and tax bases of assets and liabilities reverse. The
effect on deferred tax assets and liabilities of a
change in income tax rates is recognized in income in
the period that includes the enactment date. To the
extent that available evidence about the future raises
doubt about the realization of a deferred tax asset, a
valuation allowance is established (See Note 16).
Income Statement Cost of Goods Sold
Classifications
The caption cost of goods sold is comprised of standard
material costs, including a factor for inbound freight,
standard labor costs, and standard overheads applied
with variation accounts for material consumption
variances and material purchase price variances, labor
usage and labor consumption variances and overhead
absorption and expenses variances as well as obsolete
inventory. Generally, cost of goods sold are the costs
incurred to complete the finished inventory ready for
delivery to customers.
Selling and Shipping
The caption selling and shipping expenses includes the
cost of the sales and marketing departments, the cost of
the shipping, handling and warehousing functions, co-op
advertising, commissions on sales, in store service
representatives costs and outbound freight.
General and Administrative
The caption general and administrative includes all
other costs of the operation including customer service,
finance, general management and uncollectible balances.
Shipping and Handling Amounts billed to customers for shipping and handling
are recorded as revenue. All shipping and handling
expenses are included in the selling and shipping
caption and totaled approximately $6,816,000, $5,363,000
and $4,698,000 for the years ended June 30, 2003, 2002
and 2001, respectively.
Advertising Costs The Company incurs advertising expense primarily
relating to cooperative advertising credits granted to
customers based on qualified expenses incurred by the
customers to advertise the Company's products.
Cooperative advertising credits are usually limited to a
percentage of an agreed-upon sales volume. Cooperative
advertising credits are accrued based on sales volume
and advertising frequency, pursuant to specific
agreements. Such costs are classified as selling
expenses. The Company also incurs advertising expense
relating to the distribution of catalogs and the
broadcasting of radio and television commercials.
Advertising costs are expensed as incurred. Advertising
expense was approximately $2,592,000, $2,934,000 and
$3,012,000 during the years ended June 30, 2003, 2002
and 2001.
13
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Use of Estimates The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents The Company considers all short-term investments
purchased with an initial maturity of three months or
less to be cash equivalents.
Stock-Based
Compensation The Company has adopted the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, with respect to
non-employee stock-based compensation. The fair value
method is required for all stock-based compensation
issued to nonemployees. Under the fair value method,
compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the
service period, which is usually the vesting period.
Companies are permitted to continue to account for
employee stock-based compensation under Accounting
Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, but are required to disclose
pro forma net income and earnings per share as if the
fair value method had been adopted. The Company has
elected to continue to account for employee stock-based
compensation under APB No. 25.
Under the accounting provisions of SFAS No. 123, the
Company's net loss and net loss per common share for
2003, 2002 and 2001 would have been adjusted to the pro
forma amounts indicated below:
Year ended June 30, 2003 2002 2001
----------------------------------------------------------------------------------------------------------------
Net Loss:
As reported $ (9,137,000) $ (11,492,000) $ (25,429,000)
Pro forma (net of tax effect) (9,140,000) (11,494,000) (25,442,000)
Net Loss per common share:
Basic, as reported (.51) (.66) (1.40)
Basic, pro forma (.51) (.66) (1.40)
Dilutive, as reported (.51) (.64) (1.40)
Dilutive, pro forma (.51) (.64) (1.40)
----------------------------------------------------------------------------------------------------------------
14
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
Segment Information The Company's primary continuing operations are in one
reportable segment - the manufacture and sale of
consumer lawn and garden products. The Company has
aggregated its operating segments into a single
reportable segment. See disclosure regarding revenue
from external customers for each significant type of
product and service at Note 4.
Financial
Instruments The Company's financial instruments consist of cash and
cash equivalents, accounts receivable, officer's
receivable, debt and mandatorily redeemable preferred
securities. The carrying value of cash and cash
equivalents and accounts receivable approximate fair
value based upon the liquidity and short-term nature of
the assets. The carrying value of the officer's
receivable and debt approximates the fair value based
upon short-term and long-term borrowings at interest
rates which approximate current rates. See Note 10
regarding valuation of mandatorily redeemable preferred
securities.
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.
Reclassifications Certain amounts as previously reported have been
reclassified to conform to current year classifications.
New Accounting
Pronouncements In April 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No 13, and
Technical Corrections. SFAS No. 4 required all gains and
losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of
related income tax effect. SFAS No. 145 requires any
gain or loss from the extinguishment of debt to meet the
requirements of APB No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions to be
classified as an extraordinary item, otherwise the item
would be classified in the results of continuing
operations. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior
periods that does not meet the criteria of APB No. 30
for classification as an extraordinary item shall be
reclassified. The provisions of the statement related to
the rescission of SFAS No. 4 were adopted in fiscal 2003
and the effect was not material.
In June 2002, the FASB issued SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits
15
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
and Other Costs to Exit an Activity. The provisions of
this statement are effective for exit or disposal
activities that are initiated after December 31, 2002.
SFAS No. 146 did not have an effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and
Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting
for Stock-Based Compensation to provide alternative
methods of transition for a voluntary change to the fair
value based method of accounting for stock-based
employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the
method used on reported results. The Company adopted
SFAS No. 148 during the year ended June 30, 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments,
including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities. The provisions of this statement are
effective for contracts entered into or modified after
June 30, 2003. The Company does not expect SFAS No. 149
to have an effect on the financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity. SFAS No. 150 established
standards for how an issuer classifies and measures
certain financial instruments with characteristics of
both liabilities and equity. This statement is effective
for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for the Company
for periods ending after June 30, 2003. SFAS No. 150 did
not have an effect on the Company's financial
statements.
In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This Interpretation elaborates
on the disclosures to be made by a guarantor in its
interim and annual financial statements about its
obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and
measurement provisions of the Interpretation are
applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure
requirements in the Interpretation were effective for
the Company for the period ended March 31, 2003, and did
not have an effect on the Company's financial
statements.
16
U.S. Home & Garden Inc. and Subsidiaries
Summary of Accounting Policies
================================================================================
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This
Interpretation addresses consolidation by business
enterprises of variable interest entities. The
Interpretation will apply to the Company for the periods
ended after June 30, 2003. The Company does not expect
the Interpretation to have an effect on the financial
statements.
17
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Business The Company has consummated the following eleven acquisitions
of lawn and garden Acquisitions companies or product lines for a total
of approximately $111 million in consideration:
o Golden West Chemical Distributors, Inc. - A manufacturer of
humic acid-based products designed to improve crop yield, which
was acquired in August 1992 for approximately $1.1 million in
cash and $1.1 million of promissory notes.
o Easy Gardener, Inc. - A manufacturer of multiple fabric
landscaping products including Weedblock(R), which was acquired
in September 1994 for approximately $21.3 million consisting of
$8.8 million in cash, a $10.5 million promissory note and two
convertible notes each in the principal amount of $1.0 million.
Approximately $2.2 million of additional purchase price was
contingent on Easy Gardener meeting certain income requirements.
All of these amounts have been paid.
o Emerald Products LLC - Manufacturer of decorative landscaping
edging, which was acquired in August 1995 for $835,000 in cash
and a $100,000 promissory note.
o Weatherly Consumer Products Group, Inc. - a manufacturer of
fertilizer spikes and other lawn and garden products, which was
acquired in August 1996 for 1,000,000 shares of common stock
valued at $3.0 million and approximately $22.9 million in cash.
o Plasti-Chain product line of Plastic Molded Concepts, Inc. - A
line of plastic chain links and decorative edgings, which was
acquired from Plastic Molded Concepts, Inc. in May 1997 for
approximately $4.3 million in cash.
o Weed Wizard, Inc. - A manufacturer and distributor of weed
trimmer replacement heads, all of whose assets were acquired in
February 1998 for approximately $16.0 million, plus an
additional $1.7 million for excess working capital and
acquisition expenses. Operations were discontinued during 2002 -
see Note 2.
o Landmaster Products, Inc. - A manufacturer and distributor of
polyspun landscape fabrics for use by consumers and professional
landscapers, substantially all of whose assets were acquired in
March 1998 for approximately $3.0 million, plus an additional
$600,000 for certain assets and acquisition expenses.
18
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
o Tensar(R) consumer products line of The Tensar
Corporation - A line of lawn and garden specialty
fencing, which was acquired from The Tensar
Corporation in May 1998 for approximately $5.4
million, plus an additional $1 million for
inventory.
o Ampro Industries, Inc. - A manufacturer and
distributor of lawn and garden products including
specialty grass and flower seeds. The Company
acquired all of the outstanding stock of Ampro for
approximately $24.6 million in October 1998.
o E-Garden, Inc. (now Egarden, Inc.) - The Company's
business-to-business Internet subsidiary was
acquired in June 1999 for approximately $400,000
plus expenses of approximately $100,000. Operations
were discontinued during 2001 - see Note 2.
o Findplants.com - An electronic horticulture
catalogue and locator that provides
business-to-business service for commercial growers
and wholesalers which was acquired by Egarden, Inc.
in May 2000 for approximately $537,000. Operations
were discontinued during 2001 - see Note 2.
All of the above acquisitions were accounted for as
purchases and, accordingly, the results of operations of
the acquired companies have been included in the
consolidated statements of income since their respective
acquisition dates.
2. Discontinued
Operations In June 2002, the Company announced that is was
discontinuing its Weed Wizard operations effective
September 30, 2002. Despite the Company's efforts to
increase sales and return to profitability, Weed Wizard
experienced continued erosion of its business.
The Company recorded an estimated net loss on disposal
of the Weed Wizard component of $49,000 and $1,116,000
for the years ended June 30, 2003 and 2002,
respectively, relating to the write-down of all assets
to fair value less cost to sell. In addition to the loss
on disposal, the Company had a net loss from operations
of Weed Wizard of $1,436,000 for the year ended June 30,
2003, $1,760,000 for the year ended June 30, 2002, and
$9,124,000, net of income tax benefit of $2,491,000 for
the year ended June 30, 2001.
An impairment charge of $8,500,000, net of tax effect of
$2,320,000, was recorded in June 2001 to write off the
net goodwill balance associated with Weed Wizard. The
Company's policy is to periodically evaluate its
long-lived assets for possible impairment. If the
evaluation determines that the long-lived assets have
been impaired, the assets are written down to their
estimated fair value. Due to the recurring operating
losses of Weed Wizard, the product recall in a prior
year, and the subsequent unsuccessful product launch of
the replacement product through a complete sales season,
the evaluation was performed and the estimated
impairment loss was recognized during 2001.
Revenues for Weed Wizard for the years ended June 30,
2003, 2002, and 2001, were $7,000, $672,000 and
$1,912,000, respectively.
In June 2001, the Company announced that it was
discontinuing its e-commerce imitative, which it was
conducting though its subsidiary, Egarden, Inc.
(Egarden), effective June 30, 2001. During the year
ended June 30, 2001, the Company recorded an estimated
net loss on disposal of Egarden of $4,551,000, net of
minority interest of $1,118,000. The loss, prior to
minority interest, included the write-off of all
long-lived assets of $5,224,000 and severance expense of
$445,000 related to the termination of all 39 employees.
19
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
All severance payments have been made, and no
adjustments were made to the liability previously
recorded for severance payments. All of the assets of
Egarden, including amounts written off, were sold during
the year ended June 30, 2002. During the year ended June
30, 2002, the Company recorded a net gain on the
disposal of Egarden of $1,136,000, as a result of the
write off of minority interest of $1,239,000 as the
subsidiary was liquidated.
In addition to the net loss on disposal in 2001, the
Company had a net loss from the operations of Egarden of
$7,129,000, net of minority interest of $1,754,000 for
the year ended June 30, 2001. Revenues of Egarden for
the year ended June 30, 2001 were not material.
The assets and liabilities of discontinued operations
held for sale reported in the consolidated balance
sheets consist of the following:
June 30, 2003
Egarden
------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 62,000
------------------------------------------------------------
Current Liabilities:
Accrued expenses $ 16,000
------------------------------------------------------------
June 30, 2002
---------------------------------------------------------
Weed Wizard Egarden Total
-------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ -- $ 62,000 $ 62,000
Accounts receivable 385,000 -- 385,000
Inventories 274,000 -- 274,000
Other current assets 331,000 -- 331,000
-------------------------------------------------------------------------------------------------
Total Current Assets $ 990,000 $ 62,000 $ 1,052,000
-------------------------------------------------------------------------------------------------
Long-Term Assets-
Property and Equipment, net $ 100,000 $ -- $ 100,000
-------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 98,000 $ -- $ 98,000
Accrued expenses 163,000 16,000 179,000
-------------------------------------------------------------------------------------------------
Total Current Liabilities $ 261,000 $ 16,000 $ 277,000
-------------------------------------------------------------------------------------------------
20
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Pursuant to SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the
Company's consolidated financial statements and
notes have been restated for all periods
presented to reflect the discontinued
components. The assets, liabilities, net
operations, and net cash flows have been
reported as "Discontinued Operations" in the
accompanying consolidated financial statements.
The restated notes exclude amounts related to
these discontinued components.
3. Proposed Asset Sale Management has been actively pursuing a plan to
sell substantially all of the assets of the
Company as discussed below.
In December 2002, the Company announced an
agreement to sell assets comprising
substantially all of its assets on a
consolidated basis to a management group led by
Richard Grandy, the former Chief Operating
Officer of the Company.
Under the terms of the Asset Purchase Agreement,
as amended, Easy Gardener Products Ltd., a new
entity owned by the management group will
acquire substantially all of the assets and
assume substantially all of the liabilities of
Easy Gardener, Inc. and its subsidiaries, Easy
Gardener, UK, Ltd, Weatherly Consumer Products
Group, Inc. and Weatherly Consumer Products,
Inc. and Ampro Industries, Inc. The new company
will pay or assume our senior credit facility,
including all borrowings outstanding under the
facility at closing. The new company will also
assume the obligations of the parent company, US
Home & Garden, Inc., (USHG) to U.S. Home &
Garden Trust I, including the obligation to make
monthly payments, which will allow the Trust to
make distributions to holders of its Trust
Preferred Securities. The proposed sale is
subject to a number of conditions including the
buyer obtaining the required financing.
Before subtracting costs of the transaction
including certain estimated costs which the
Company agrees to pay at closing, the Company
expects to receive net cash of $11,950,000 upon
the following terms: net cash of $10,350,000
paid at closing, and an additional $1,600,000 in
the form of a subordinated promissory note
delivered at closing.
The Asset Purchase Agreement provides that the
proposed transaction must be completed on or
before October 31, 2003.
21
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
4. Concentration of Credit
Risk and Significant
Relationships Trade accounts receivable are due from numerous
customers located in many geographic regions
throughout the United States. The Company performs
ongoing credit evaluations of its customers'
financial condition and establishes an allowance
for doubtful accounts based upon credit risk of
specific customers, historical trends and other
information. The Company does not require
collateral from its customers. Accounts receivable
balances that are determined to be uncollectible
are included in the allowance for doubtful
accounts. After all attempts to collect a
receivable have failed, the receivable is written
off against the allowance. Based on the
information available, management believes the
allowance for doubtful accounts is adequate.
However, actual write-offs might exceed the
recorded allowances.
The Company's two largest customers during the
years ended June 30, 2003, 2002 and 2001, each
accounted for the following percentage of the
Company's revenues:
Customer 2003 2002 2001
--------------------------------------------------------------------------------------
A 54% 49% 43%
B 6% 10% 14%
--------------------------------------------------------------------------------------
Included in accounts receivable at June 30, 2003
and 2002 is approximately $16,452,000 and
$16,520,000, respectively, due from the two
largest customers.
Sales of each of the Company's three significant
product lines comprised the following percentages
of the Company's total net sales for the years
ended June 30, 2003, 2002 and 2001:
Product Line 2003 2002 2001
--------------------------------------------------------------------------------------
Landscape fabric 48% 51% 48%
Fertilizer, plant food, and
insecticide spikes 12% 14% 17%
Landscape edging 10% 10% 9%
--------------------------------------------------------------------------------------
International sales, primarily in Europe and
Canada, were approximately 10%, 6%, and 3% of the
Company's net sales for the years ended June 30,
2003, 2002, and 2001, respectively.
Substantially all raw material purchases for
WeedBlock(R) landscape fabric inventory are from
one vendor, representing approximately 22%, 25%
and 23% of the Company's consolidated raw material
purchases during the years ended June 30, 2003,
2002 and 2001, respectively. Management believes
that other suppliers could provide a similar
product on comparable terms. A change in
suppliers, however, could cause delays and a
possible loss of sales, which would adversely
affect operating results. Included in accounts
payable at June 30, 2003 and 2002, respectively is
$1,723,000 and $1,609,000, due to this vendor. No
amounts were due to this vendor at June 30, 2001.
5. Inventories Inventories consist of:
22
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
June 30, 2003 2002
-------------------------------------------------------------------------
Raw and packaging materials $ 4,834,000 $ 4,025,000
Finished goods 4,304,000 3,998,000
-------------------------------------------------------------------------
$ 9,138,000 $ 8,023,000
-------------------------------------------------------------------------
At June 30, 2003 and 2002, the inventory balance has
been reduced by a provision for possible obsolescence of
$191,000 and $225,000, respectively. The Company
disposed of $1,209,000 of previously reserved inventory
during the year ended June 30, 2002.
6. Property and
Equipment Property and equipment consist of:
Estimated Useful
June 30, Life in Years 2003 2002
----------------------------------------------------------------------------------------------
Furniture, fixtures and equipment 5 - 7 $ 11,423,000 $ 10,703,000
Leasehold improvements 7 - 10 858,000 791,000
----------------------------------------------------------------------------------------------
12,281,000 11,494,000
Less accumulated depreciation 8,263,000 6,644,000
----------------------------------------------------------------------------------------------
$ 4,018,000 $ 4,850,000
----------------------------------------------------------------------------------------------
Depreciation expense was $1,630,000, $1,657,000 and
$2,113,000 during the years ended June 30, 2003, 2002
and 2001, respectively.
7. Goodwill Goodwill consists of the following:
June 30, 2003 2002
------------------------------------------------------------------------------------------------
Weatherly Consumer Products Group, Inc. $ 22,948,000 $ 22,948,000
Easy Gardener, Inc. 15,639,000 15,639,000
Ampro Industries, Inc. 9,303,000 9,303,000
Tensar consumer products line 5,226,000 5,226,000
Plasti-Chain product line 2,810,000 2,810,000
Landmaster Products, Inc. 2,292,000 2,292,000
Golden West Chemical Distributions, Inc. 1,606,000 1,606,000
Emerald Products, LLC 1,483,000 1,466,000
------------------------------------------------------------------------------------------------
61,307,000 61,290,000
Less accumulated amortization, prior to July 1, 2001 11,429,000 11,429,000
------------------------------------------------------------------------------------------------
$ 49,878,000 $ 49,861,000
------------------------------------------------------------------------------------------------
23
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Effective July 1, 2001, the Company adopted SFAS No. 141
and SFAS No. 142. During 2002, the Company completed a
reassessment of the useful lives of all intangible assets
other than goodwill which total $6,382,000 (net of
accumulated amortization of $4,196,000) at June 30, 2003.
No adjustments to previously determined amortization
periods were considered necessary. The Company has no
intangible assets with indefinite useful lives other than
goodwill at June 30, 2003. Remaining useful lives of
intangible assets range from less than a year to 25
years.
In conjunction with the adoption of SFAS No. 141 and SFAS
No. 142, the Company completed its transitional goodwill
impairment test during 2002. Ampro and Golden West were
the only reporting units where the carrying value
exceeded the fair value of their net assets including
goodwill. As of July 1, 2001, the net goodwill related to
Ampro was $17,078,000. The Company hired an independent
valuation professional to assist the Company in measuring
the amount of the impairment. Based on the valuation, the
Company recorded an impairment loss of $9,390,000 during
the year ended June 30, 2002 in the Consolidated
Statement of Operations, as a cumulative effect of a
change in accounting principle.
The net goodwill related to Golden West at July 1, 2001
was approximately $1,165,000. Based on a valuation
prepared by management, an impairment loss of $492,000
was recorded during the year ended June 30, 2002 and is
reported as a cumulative effect of a change in accounting
principle in the Consolidated Statement of Operations.
The Company's previous business combinations were
accounted for using the purchase method. As a result of
such combinations, the Company has recognized a
significant amount of goodwill, which, in the aggregate,
was $49,878,000, net of accumulated amortization, from
prior years. Amortization expense for all intangible
assets during the years ended June 30, 2003, 2002 and
2001 was $1,483,000, $1,111,000 and $3,573,000,
respectively. Goodwill amortization, including amounts
reported as discontinued operations, was $2,809,000 for
the year ended June 30, 2001. Estimated amortization
expense for continuing operations for each of the five
succeeding fiscal years is as follows:
Year Ended June 30, Amount
-------------------------------------------
2004 $ 1,434,000
2005 $ 1,170,000
2006 $ 1,086,000
2007 $ 1,086,000
2008 $ 1,086,000
24
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following represents a reconciliation of the reported net loss to the
adjusted net loss and the adjusted net loss before extraordinary gain for the
year ended June 30, 2001, which excludes goodwill amortization expense, net of
tax benefit:
Year Ended June 30, 2001
------------------------------------------------------------------------
Reported Net Loss $(25,429,000)
Goodwill Amortization, net of tax benefit of
$620,000 2,189,000
------------------------------------------------------------------------
Adjusted Net Loss $(23,240,000)
------------------------------------------------------------------------
Per Share Amounts - Basic:
Reported Net Loss $ (1.40)
Goodwill amortization, net of tax benefit .12
------------------------------------------------------------------------
Adjusted Net Loss $ (1.28)
------------------------------------------------------------------------
Per Share Amounts - Diluted:
Reported Net Loss $ (1.40)
Goodwill Amortization, net of tax benefit .12
------------------------------------------------------------------------
Adjusted Net Loss $ (1.28)
------------------------------------------------------------------------
25
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
8. Officer's Receivable The officer's receivable represents an unsecured
note which bears interest at the lower of the prime
lending rate or 6% (effectively 4.00% at June 30,
2003). At June 30, 2003 and 2002, the balance on the
outstanding note was $537,000, of which $25,000 is
classified as current. Total related interest income
amounted to $24,000, $41,000 and $43,000 for the
years ended June 30, 2003, 2002 and 2001,
respectively. Principal payments on the note are due
in annual installments as follows with the balance
due upon maturity in April 2008:
2004 - 2007 $ 50,000
9. Revolving Credit
Facility and
Long-Term Debt The company entered into a senior credit facility
dated as of October 30, 2002 for the company and its
material subsidiaries. Wells Fargo Foothill, which
is the administrative agent for the facility, is
also the revolving credit lender, and Ableco Finance
LLC is providing a term loan. The total amount of
the new credit facility is $35 million, of which $23
million is a revolving credit facility and $12
million is a term loan. The new credit facility
matures October 30, 2005. Interest on the revolving
credit facility is at variable annual interest rates
based on the prime rate or LIBOR plus applicable
marginal rates. Interest on the term loan is at
variable annual interest rates based on the prime
rate with a minimum rate of 9.75% plus 2% of accrued
interest payable upon maturity (payment in kind
interest). The balance of the term loan at June 30,
2003 including payment in kind interest, was
$12,142,000. The interest rate on the term loan
increases 2% each year the balance is outstanding.
Borrowings on the revolving credit facility were
$15,085,000 at June 30, 2003 and are limited based
on eligible borrowing bases, effectively $17,659,000
at June 30, 2003.
The company's obligations and the obligations its
our material subsidiaries under the new credit
facility are secured by a security interest in favor
of the lenders in substantially all of the assets of
the Company and its material subsidiaries. The
company and its material subsidiaries are subject to
certain financial and other covenants under the new
credit facility. At the end of January 2003, the
company's financial performance created a
"Triggering Event" which increased the interest rate
on the term loan in February through June by 2.5%
points, to 14.25%. At June 30, 2003, the company was
in violation of certain covenants. Due to the
covenant violations, the interest rates on both the
term loan and the revolver increased by 3% points,
to 17.25%, and the lender could require the company
to pay all principal and accrued interest at any
time. Consequently the company has reclassified all
of the revolving credit facility and long-term debt
as short term obligations.
The completion of the proposed asset sale as
described in Note 3 would result in the payment or
assumption of these obligations by the buyer in that
transaction. In the event the asset sale is not
completed, management believes they will be able to
obtain financing arrangements at commercially
reasonable terms that will allow the Company to
continue as a going concern.
We had a financing agreement to provide $25,000,000
in senior secured financing. The agreement provided
for a $23,000,000 revolving credit facility and a
$2,000,000 term loan due in monthly installments of
$33,000 plus interest. The term loan balance
outstanding at June 30, 2002 was $1,767,000.
Interest on borrowings was calculated at variable
annual rates based on either
26
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
the bank's prime rate plus an applicable marginal
rate or the federal funds rate plus an applicable
marginal rate. At June 30, 2002 we had $15,036,000
of borrowings outstanding under the revolving credit
facility. These borrowings were paid in full on
November 1, 2002 with proceeds from the new
financing agreements discussed above.
We also had a financing agreement to provide
$6,250,000 of subordinated debt. At June 30, 2002,
we had borrowings outstanding of $5,945,000, net of
discounts of $905,000, pursuant to the subordinated
secured notes. Interest was charged on the face of
the notes at 16% and 14% per annum, payable monthly.
The issue price of the 16% notes was 90% of the face
amount of the notes resulting in a discount of
$600,000. In connection with this financing, we
issued to the purchasers of the notes warrants to
purchase up to 3.75% of the fully diluted common
stock and an option to purchase from us certain
Trust Preferred Securities of our subsidiary, U.S.
Home and Garden Trust I, that are owned by us, which
resulted in an additional discount of $402,000.
These borrowings were paid in full on November 1,
2002 with proceeds from the new financing agreements
discussed above.
Upon repayment of the $6,250,000 subordinated debt,
we continue to have certain ongoing obligations
under the subordinated debt financing agreement to
the holders of the warrants to purchase common stock
of the Company and option to purchase Trust
Preferred Securities described above by virtue of
these agreements. Under the option agreement,
payments of interest on the Trust Preferred option
securities is used to reduce the option price and is
recorded as additional Trust Preferred liability.
When the option price is reduced to zero, we will
issue the underlying Trust Preferred Securities. If
the proposed asset sale to Easy Gardener is
consummated the obligation under the option
agreement will be assumed by Easy Gardener. See Note
14 for costs related to the refinancing.
10. Mandatorily
Redeemable
Preferred
Securities In April 1998, U.S. Home & Garden Trust I (the
"Trust"), a newly created Delaware business trust
and a wholly-owned subsidiary of the Company, issued
78,000 common securities with a liquidation amount
of $25 per common security and completed a public
offering of 2,530,000 of 9.40% Cumulative Trust
Preferred Securities with a liquidation amount of
$25 per security to the Company for a total of
$65,200,000 (the "Trust Preferred Securities" and,
together with the common securities, the "Trust
Securities"). The Trust exists for the sole purpose
of issuing Trust Securities and using proceeds
therefrom to acquire the subordinated debentures
described below. Concurrent with the issuance of the
Trust Securities, the Trust invested the net
proceeds therefrom in $65.2 million aggregate
principal amount of 9.40% Junior Subordinated
Deferrable Interest Debentures (the "Subordinated
27
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Debentures") issued by the Company. The Company has
since redeemed 251,981 shares leaving 2,278,019
shares outstanding with a face value of $57,092,000.
See note 17. The fair value of the mandatorily
redeemable preferred securities is approximately
$29,159,000 based on quoted market prices of $12.80
per security at June 30, 2003.
Distributions of interest on the Trust Securities
are payable monthly in arrears by the Trust.
The Subordinated Debentures are unsecured
obligations of the Company and are subordinate and
junior in right of payment to certain other
indebtedness of the Company.
The Company may, under certain circumstances, defer
the payment of interest on the Subordinated
Debentures for a period not to exceed 60 consecutive
months. If interest payments on the Subordinated
Debentures are so deferred, distributions on the
Trust Securities will also be deferred. During any
such deferral period, interest on the Subordinated
Debentures and distributions on the Trust Securities
will accrue and compound monthly and, subject to
certain exceptions, the Company may not declare or
pay distributions on its capital stock or debt
securities that rank equal or junior to the
Subordinated Debentures.
The Trust Securities are subject to mandatory
redemption upon the repayment of the Subordinated
Debentures at a redemption price equal to the
aggregate liquidation amount of the securities plus
any accumulated and unpaid distributions. The
Subordinated Debentures mature in total on April 15,
2028, but may be redeemed at the option of the
Company at any time. 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.
11. Commitments Employment Agreements
The Company has entered into an employment agreement
with one of its officers. The agreement is for a
one-year period but is automatically renewed unless
specifically terminated by the Company or the
employee. If the employment agreement is terminated
by the Company without cause, the officer will be
entitled to an additional ten years of annual
compensation. Annual base compensation under the
employment agreement is $450,000. The employment
agreement also provides for certain lump sum
payments in the event of a change in control equal
to approximately $7.3 million.
28
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Operating Leases
The Company leases office and warehouse space,
certain office equipment and automobiles under
operating leases expiring through 2006. The future
minimum lease payments under these non-cancelable
operating leases are as follows:
Year ended June 30, Amount
---------------------------------------------------
2004 $ 819,000
2005 595,000
2006 214,000
---------------------------------------------------
$ 1,628,000
---------------------------------------------------
Rent expense was approximately $944,000, $891,000
and $860,000 for the years ended June 30, 2003, 2002
and 2001, respectively.
Defined Contribution Benefit Plan
Easy Gardener has established an employee defined
contribution benefit plan (the Plan). Employees of
the Company, Weatherly, Easy Gardener and Golden
West are eligible to participate. The Company is
required to match the first 60% of employee
contributions up to 5% of the employee's wage base.
The Plan also allows discretionary contributions by
the Company. The Company's contribution vests over a
seven-year period. Ampro had a separate plan for its
employees, with similar terms to the Easy Gardener
Plan that was terminated during the year ended June
30, 2001. Total expense associated with the plans
for the years ended June 30, 2003, 2002 and 2001 was
approximately $174,000, $321,000 and $358,000,
respectively.
12. Contingencies In the normal course of business, the Company is
subject to proceedings, lawsuits, and other claims,
including claims by creditors, proceedings under
laws and government regulations related to product
safety and other matters. Such matters are subject
to many uncertainties, and outcomes are not
predictable with assurance. Consequently, the
ultimate amount of monetary liability or financial
impact with respect to these matters at June 30,
2003 cannot be ascertained.
13. Stockholders' Preferred Stock
Equity
The Company is authorized to issue 1,000,000 shares
of preferred stock with such designations, rights
and preference as may be determined from time to
29
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights,
which could adversely affect the voting power or
other rights of the holders of the Company's common
stock. No shares of the preferred stock are
outstanding.
Common Stock
In September 1998, the Company adopted a
Stockholders' Rights Agreement commonly known as a
"poison pill", which provides that in the event an
individual or entity becomes a beneficial holder of
12% or more of the shares of the Company's capital
stock, other stockholders of the Company shall have
the right to purchase shares of the Company's (or in
some cases, the acquirer's) common stock at 50% of
its then market value.
Common Stock Repurchase Program
The Company is authorized by its Board of Directors
("the Board") to repurchase up to 5,500,000 shares
of its common stock through open market purchases
and in privately negotiated transactions.
Repurchased shares are held by the Company as
treasury stock. During 2001, the Company repurchased
1,336,000 shares of treasury stock for $2,141,000.
Prior to fiscal 2001 the Company repurchased
2,554,000 shares for $10,687,000.
Stock Option Plans
The Company adopted the 1991 Stock Option Plan (the
"1991 Plan") pursuant to which 700,000 shares of
common stock have been reserved for issuance upon
the exercise of options designated as either (i)
options intended to constitute incentive stock
options ("ISOs") under the Internal Revenue Code of
1986, as amended (the "Code") or (ii) non-qualified
options. ISOs may be granted under the 1991 Plan to
employees and officers of the Company. Non-qualified
options may be granted to consultants, directors
(whether or not they are employees), employees and
officers of the Company. At June 30, 2003, 48,000
options remain available for issuance under the 1991
Plan.
During fiscal 1995, the Board adopted two additional
stock option plans. The 1995 Stock Option Plan (the
"1995 Plan") allows the granting of either ISOs or
non-qualified options. The maximum aggregate number
of shares reserved for issuance under this plan is
1,500,000. At June 30, 2003, 193,000 options remain
available for issuance under the 1995 Plan.
The Non-Employee Director Stock Option Plan (the
"Non-Employee Director Plan") was established to
attract, retain and compensate for their services as
directors, highly qualified individuals who are not
employees of the Company.
30
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The maximum aggregate number of shares reserved for
issue under this plan is 100,000. The 1995 Plan is
administered by a committee of the Board and the
Non-Employee Director Plan is a formula plan. At
June 30, 2003, 40,000 options remain available for
issuance under the Non-Employee Director Plan.
During May 1997, the Board approved the 1997 Stock
Option Plan. The plan allows the granting of either
ISOs or non-qualified options. The 1997 Plan
reserves the issuance of 1,500,000 shares of common
stock. At June 30, 2003, 199,000 options remain
available for issuance under the 1997 Plan.
During May 1999, the Board approved the 1999 Stock
Option Plan. The plan allows for granting of either
ISOs or non-qualified options. The 1999 Plan
reserves the issuance of 900,000 shares of common
stock. At June 30, 2003, 56,000 options remain
available for issuance under the 1999 Plan.
The plans are administered by the Board or a
committee of the Board and are approved by the
stockholders. The Board, or committee, as the case
may be, within the limitations of the plans,
determines the persons to whom options will be
granted, the number of shares to be covered by each
option, whether the options granted are intended to
be ISOs, the duration and rate of exercise of each
option, the option purchase price per share and the
manner of exercise, the time, manner and form of
payment upon exercise of an option, and whether
restrictions such as repurchase rights in the
Company are to be imposed on shares subject to
options.
ISOs granted under the plans may not be granted at a
price less than the fair market value of the common
stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of
the voting stock of the Company).
The aggregate fair market value of shares for which
ISOs granted to any employee are exercisable for the
first time by such employee during any calendar year
(under all stock option plans of the Company and any
related corporation) may not exceed $100,000.
Non-qualified options granted under the plans may
not be granted at a price less than the fair market
value of the common stock on the date of grant (not
less than par value in the case of the 1995 Plan).
Options granted under the plans generally will
expire not more than ten years from the date of the
grant (five years in the case of ISOs granted to
persons holding 10% or more of the voting stock of
the Company).
All options granted under the plans are not
transferable during an optionee's lifetime but are
transferable at death by will or by the laws of
descent and distribution.
31
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following is a summary of activity relating to stock options:
Weighted
Average Option
Price Per Share Outstanding Exercisable
-------------------------------------------------------------------------------
1991 Plan
June 30, 2000 $1.69 357,000 210,000
Became exercisable 1.69 -- 18,000(1)
-------------------------------------------------------------------------------
June 30, 2001 1.69 357,000 228,000(2)
Became exercisable 1.69 -- 26,000(1)
-------------------------------------------------------------------------------
June 30, 2002 1.69 357,000 254,000(2)
Became exercisable 1.69 -- 18,000(1)
-------------------------------------------------------------------------------
June 30, 2003 $1.69 357,000 272,000(2)
-------------------------------------------------------------------------------
1995 Plan
June 30, 2000 $2.18 1,459,000 1,409,000
Expired 2.23 (166,000) (166,000)
Became exercisable 2.06 -- 25,000
-------------------------------------------------------------------------------
June 30, 2001 2.17 1,293,000 1,268,000(3)
Became exercisable 2.06 -- 25,000
Expired 2.06 (10,000) (10,000)
-------------------------------------------------------------------------------
June 30, 2002 and 2003 $2.18 1,283,000 1,283,000(3)
-------------------------------------------------------------------------------
32
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Weighted
Average Option
Price Per Share Outstanding Exercisable
-------------------------------------------------------------------------------
Director Stock Option Plan
-------------------------------------------------------------------------------
June 30, 2000 $2.85 30,000 30,000
Granted 1.61 20,000 5,000
-------------------------------------------------------------------------------
June 30, 2001 2.35 50,000 35,000(4)
Became exercisable 1.06 -- 15,000
-------------------------------------------------------------------------------
June 30, 2002 2.59 50,000 50,000(4)
Granted 0.48 20,000 --
Expired 2.25 (10,000) (10,000)
-------------------------------------------------------------------------------
June 30, 2003 $1.90 60,000 40,000(4)
-------------------------------------------------------------------------------
1997 Plan
June 30, 2000 $3.12 765,000 624,000
Expired 2.68 (55,000) (55,000)
Became exercisable 3.16 -- 82,000
-------------------------------------------------------------------------------
June 30, 2001 3.15 710,000 651,000(5)
Issued 3.13 95,000 95,000
Became exercisable 2.56 -- 29,000
-------------------------------------------------------------------------------
June 30, 2002 3.15 805,000 775,000(5)
Expired 3.84 (60,000) (60,000)
Became exercisable 2.56 -- 30,000
-------------------------------------------------------------------------------
June 30, 2003 $3.10 745,000 745,000(5)
-------------------------------------------------------------------------------
33
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Weighted
Average Option
Price Per Share Outstanding Exercisable
--------------------------------------------------------------------------
1999 Plan
June 30, 2000 $ 2.33 833,000 699,000
Expired 2.56 (12,000) (12,000)
Became exercisable 2.56 -- 110,000
--------------------------------------------------------------------------
June 30, 2001 2.32 821,000 797,000(6)
Granted .53 10,000 5,000
Expired 2.83 (171,000) (171,000)
Became exercisable 2.14 -- 24,000
--------------------------------------------------------------------------
June 30, 2002 2.16 660,000 655,000(6)
Became exercisable .53 -- 5,000
Expired 2.56 (6,000) (6,000)
--------------------------------------------------------------------------
June 30, 2003 $ 2.16 654,000 654,000(6)
--------------------------------------------------------------------------
Non-Plan Options
June 30, 2000 $ 2.34 2,467,000 1,999,000
Expired 3.81 (11,000) (11,000)
Became exercisable 3.84 -- 168,000
--------------------------------------------------------------------------
June 30, 2001 2.33 2,456,000 2,156,000(7)
Granted .40 89,000 89,000
Expired 3.63 (691,000) (670,000)
Became exercisable 1.69 -- 26,000
--------------------------------------------------------------------------
June 30, 2002 1.76 1,854,000 1,601,000(7)
Expired .40 (89,000) (89,000)
Became exercisable 1.69 -- 36,000
Exercised .001 (200,000) (200,000)
--------------------------------------------------------------------------
June 30, 2003 $ 2.06 1,565,000 1,348,000(7)
--------------------------------------------------------------------------
34
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(1) In prior years, the expiration date and vesting period on
545,000 options were extended in periods between nine and ten
years. As a result, the Company is recognizing compensation
expense for the intrinsic value of the options over the new
vesting periods. In 2003, 2002 and 2001 such expense was
$119,000, $103,000 and $119,000, respectively.
(2) At June 30, 2003, 2002 and 2001, the weighted average exercise
option price per share for exercisable options was $1.69 for
all periods.
(3) At June 30, 2003, 2002 and 2001, the weighted average exercise
option price per share for exercisable options was $2.18,
$2.18 and $2.17.
(4) At June 30, 2003, 2002 and 2001, the weighted average exercise
price per share for exercisable options was $2.67, $2.59, and
$2.91.
(5) At June 30, 2003, 2002 and 2001, the weighted average exercise
option price per share for exercisable options was $3.10,
$3.18 and $3.20.
(6) At June 30, 2003, 2002 and 2001, the weighted average exercise
option price per share for exercisable options was $2.16,
$2.16 and $2.32.
(7) At June 30, 2003, 2002 and 2001, the weighted average exercise
option price per share for exercisable options was $2.12,
$1.76 and $2.42.
During the year ended June 30, 2001, the expiration date of 200,000
options and warrants was extended for two years. The options and
warrants remain fully vested. As a result, the Company recognized
$142,000 of expense for the value of the options and warrants.
The following table summarizes the above stock options outstanding and
exercisable at June 30, 2003:
Outstanding Exercisable
---------------------------------------- -----------------------------
Average Weighted Weighted
Range of Exercise Remaining Average Average
Price Options Life Exercise Price Options Exercise Price
---------------------------------------------------------------------------------------------
$0.01 - 1.00 30,000 4.3 years $0.50 10,000 $0.53
1.01 - 2.00 733,000 3.0 years 1.68 431,000 1.67
2.01 - 3.00 3,142,000 1.9 years 2.13 3,142,000 2.13
3.01 - 4.00 699,000 2.0 years 3.23 699,000 3.23
4.01 - 4.69 60,000 .9 years 4.22 60,000 4.22
---------------------------------------------------------------------------------------------
$0.01 - 4.69 4,664,000 1.9 years $2.24 4,342,000 $2.29
---------------------------------------------------------------------------------------------
35
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Warrants
In connection with certain business transactions and stock offerings,
the Company has granted various warrants to purchase common stock.
The following schedule summarizes the activity:
Weighted
Weighted Average
Average Remaining
Warrant Price Contractual
Per Share Outstanding(1) Exercisable Life
--------------------------------------------------------------------------------------------
June 30, 2000 3.02 911,000 911,000 1.5 years
Issued 5.00 200,000 100,000
--------------------------------------------------------------------------------------------
June 30, 2001 3.31 1,111,000 1,011,000 2 years
Granted .70 1,179,000 1,179,000
Expired 3.14 (786,000) (786,000)
Became exercisable 7.00 -- 100,000
--------------------------------------------------------------------------------------------
June 30, 2003 and 2002 $1.35 1,504,000 1,504,000 4.3 years
--------------------------------------------------------------------------------------------
(1) The warrants contain anti-dilution provisions which could
affect the number of shares of common issuable stock upon the
exercise of the warrants as well as the per share warrant
prices. Additionally, these warrants contain certain
redemption provisions.
Common Stock Reserved
At June 30, 2003, approximately 7,819,000 shares of common stock have
been reserved for issuance upon the exercise of warrants and options.
36
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Stock-Based Compensation
The Company applies APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related
interpertations in accounting for its employee and
director stock option plans. Under all the Company's
option plans, the exercise price of the options
equals or exceeds the market price of the underlying
stock on the date of the grant and therefore, no
compensation cost is recognized.
SFAS No. 123, Accounting for Stock-Based
Compensation, requires the Company to provide pro
forma information regarding net income and earnings
per share as if compensation costs for the Company's
employee and director stock options and warrants had
been determined in accordance with the fair value
based method prescribed in SFAS No. 123. The Company
estimated the fair value of each stock option and
warrant at the grant date by using a Black-Scholes
pricing model with the following weighted-average
assumptions used for grants in 2003, 2002 and 2001,
respectively: no dividend yield for any year;
expected volatility of approximately 75%, 75% and
60%; risk-free interest rates of 2.8%, 3.5% and 5.4%;
and expected lives of approximately three to five
years. Pro forma compensation expense associated with
options granted to employees and directors totaled
$3,000, $2,000 and $17,000 for 2003, 2002 and 2001,
respectively. The per option weighted average fair
value was $.30, $.32 and $1.08 for 2003, 2002 and
2001, respectively.
14. Refinancing and
Transaction Costs Refinancing and transaction costs included in the
Consolidated Statements of Operations for the year
ended June 30, 2003 relate to the refinancing
described in Note 9 to the financial statements and
the proposed asset sale described in Note 3 to the
financial statements. As a result of the refinancing,
the Company wrote-off $1,928,000 of previously
deferred financing costs and discounts related to the
replaced financing agreements and also recorded fees
and expenses of $2,363,000 in the year ended June 30,
2003. The Company capitalized $2,012,000 of deferred
financing costs related to the new financing during
the year ended June 30, 2003.
15. Restructuring Charges In 2001, the Company recorded a restructuring charge
of $2,860,000 relating to the closing and sale of the
Ampro Industries Inc. facility in Michigan. The
Company continues to sell products, through a
contract manufacturing agreement, being manufactured
at the former Ampro facility. As part of this
agreement, the Company has firm commitments to
purchase minimum amounts of product. The contract
includes an exit provision, whereby the maximum cost
to the Company for termination of the agreement is
$350,000. During the year ended June 30, 2001, the
Company recognized approximately $1,709,000 of
expenses and losses relating to the closing and sale
of property and equipment of the Ampro facility and
$1,151,000 for termination benefits to be paid to all
60 employees involved with the facility. All
severance payments as a result of the restructuring
have been paid and no adjustments were made to the
liability previously recorded for severance payments.
37
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
16. Income Taxes Deferred tax assets (liabilities) consist principally
of the following:
June 30, 2003 2002
----------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 9,975,000 $ 6,015,000
Accumulated depreciation and
amortization 2,752,000 2,971,000
Accounts receivable allowance 220,000 475,000
Inventory allowance 152,000 200,000
Other 13,000 13,000
----------------------------------------------------------------------------------------
Gross deferred tax assets 13,112,000 9,674,000
Less valuation allowance (9,778,000) (6,922,000)
----------------------------------------------------------------------------------------
Total deferred tax assets $ 3,334,000 $ 2,752,000
----------------------------------------------------------------------------------------
Deferred tax liabilities-
Accumulated depreciation and amortization $ 3,188,000 $ 2,606,000
----------------------------------------------------------------------------------------
The valuation allowance of $9,778,000 was recorded
due to the uncertainty of the Company's ability to
generate sufficient future taxable income to realize
total gross deferred tax assets.
The Company's net operating loss carryforward for
federal income tax purposes amounted to $29,339,000
at June 30, 2003, and expires in 2022 if not
previously utilized.
The net deferred income taxes as of June 30, 2003 and
2002 are presented in the balance sheets as follows:
June 30, 2003 2002
------------------------------------------------------------------------------------------
Current asset $ 385,000 $ 688,000
Long-term liability $ 239,000 $ 542,000
------------------------------------------------------------------------------------------
The income tax provision (benefit) consists of:
38
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Year ended June 30, 2003 2002 2001
-------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ (271,000)
State 133,000 374,000 16,000
-------------------------------------------------------------------------
133,000 374,000 (255,000)
-------------------------------------------------------------------------
Deferred:
Federal -- (146,000) (1,358,000)
State -- -- 210,000
-------------------------------------------------------------------------
-- (146,000) (1,148,000)
-------------------------------------------------------------------------
$ 133,000 $ 228,000 $(1,403,000)
-------------------------------------------------------------------------
39
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The income tax expense for the year ended June 30, 2003 was
due to state income taxes. No income tax benefit was recorded
during the year due to the effects of recording the valuation
allowance noted above. The following is a reconciliation
between the federal statutory income tax rate and the
Company's effective tax rate relating to income from
continuing operations before minority interest and
extraordinary gain:
Year ended June 30, 2002 2001
-------------------------------------------------------------------------
Income tax provision computed at
Federal Statutory rate (34.0)% 34.0%
State taxes, net of Federal tax effects (62.3) (2.5)
Nondeductible amortization and other 1.8 (7.0)
Changes in valuation allowance on
deferred tax assets 36.9 (1.2)
-------------------------------------------------------------------------
Income Tax Benefit (Expense) (57.6) % 23.3%
-------------------------------------------------------------------------
17. Loss per
Share The following is a reconciliation of the weighted average
number of shares used to compute basic and dilutive loss per
share:
2003 2002 2001
--------------------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 17,868,000 17,555,000 18,181,000
Dilutive effect of stock options
and warrants -- 469,000 --
--------------------------------------------------------------------------------------------
Dilutive weighted average
common shares outstanding 17,868,000 18,024,000 18,181,000
--------------------------------------------------------------------------------------------
40
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Options and warrants to purchase 5,157,000, 5,332,000 and
6,788,000 shares of common stock in fiscal years 2003, 2002
and 2001, respectively, were not included in the computation
of diluted earnings per share because the option or warrant
exercise price was greater than the average market price of
the stock. Diluted earnings per share for the years ended June
30, 2003 and 2001 is based only on the weighted average number
of common shares outstanding as the inclusion of 896,000 and
10,000 common share equivalents, respectively, would have been
anti-dilutive.
18. Supplemental Cash
Flow Information Year ended June 30, 2003 2002 2001
---------------------------------------------------------------------------------------------
Cash paid (received) during the
period for:
Interest paid $ 7,846,000 $ 6,696,000 $ 7,314,000
Interest received $ -- $ (83,000) $ (149,000)
Income taxes refunded $ (248,000) $ (100,000) $ (790,000)
---------------------------------------------------------------------------------------------
Supplemental information regarding non-cash investing
and financing activities during the year ended June
30, 2002:
Discount on issuance of 16% subordinated notes
at 90% of face amount $ 600,000
Discount on issuance of warrants and options
in conjunction with debt refinancing $ 402,000
41
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
19. Quarterly Information (Unaudited)
First Second Third Fourth
Fiscal 2003 Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------------------------------------------
Net sales $ 13,151,000 $ 12,351,000 $ 24,036,000 $ 26,706,000
Gross profit $ 4,965,000 $ 5,184,000 $ 11,278,000 $ 11,364,000
Income (loss) from continuing operations $ (3,878,000) $ (6,276,000) $ 1,266,000 $ 1,236,000
Loss from discontinued operations $ (978,000) $ (215,000) $ (41,000) $ (202,000)
Loss on disposal of discontinued operations $ -- $ -- $ -- $ (49,000)
Net income (loss) $ (4,856,000) $ (6,491,000) $ 1,225,000 $ 985,000
Basic earnings per share:
Income (loss) from continuing operations $ (.22) $ (.35) $ .07 $ .07
Discontinued operations $ (.05) $ (.01) $ -- $ (.01)
Net income (loss) per common share $ (.27) $ (.36) $ .07 $ .06
Diluted earnings per share:
Income (loss) from continuing operations $ (.22) $ (.35) $ .07 $ .07
Discontinued operations $ (.05) $ (.01) $ -- $ (.01)
Net income (loss) per common share $ (.27) $ (.36) $ .07 $ .06
First Second Third Fourth
Fiscal 2002 Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------------------------------------------
Net sales $ 13,483,000 $ 11,762,000 $ 23,913,000 $ 29,789,000
Gross profit $ 5,540,000 $ 4,752,000 $ 11,087,000 $ 14,210,000
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle $ (2,553,000) $ (2,835,000) $ 1,822,000 $ 3,696,000
Income (loss) from discontinued operations $ (268,000) $ (490,000) $ 227,000 $ (1,229,000)
Income on disposal of discontinued operations $ -- $ -- $ -- $ 20,000
Cumulative effect of a change in accounting principle $ (9,882,000) $ -- $ -- $ --
Net income (loss) $ (12,703,000) $ (3,325,000) $ 2,049,000 $ 2,487,000
Basic earnings per share:
Income (loss) from continuing operations
before cumulative effect of a change in
accounting principle $ (.15) $ (.16) $ .11 $ .21
Discontinued operations $ (.01) $ (.03) $ .01 $ (.07)
Cumulative effect of a change in accounting
principle $ (.56) $ -- $ -- $ --
Net income (loss) per common share $ (.72) $ (.19) $ .12 $ .14
Diluted earnings per share:
Income (loss) from continuing operations $ (.15) $ (.16) $ .10 $ .21
Discontinued operations $ (.01) $ (.03) $ .01 $ (.07)
Cumulative effect of a change in accounting
principle $ (.56) $ -- $ -- $ --
Net income (loss) per common share $ (.72) $ (.19) $ .11 $ .14
42
U.S. Home & Garden Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Differences between amounts included above and amounts previously reported on
Form 10-Q are due to the reclassification to discontinued operations as
described in Note 2, and the cumulative effect of a change in accounting
principle of $9,882,000, related to the loss on impairment of goodwill
recorded as of July 1, 2001. See Note 7.
The fourth quarter of 2002 includes the write off of minority interest of
$1,136,000 net of an estimated loss on disposal of discontinued operations of
$1,116,000. See Note 2.
43
Consolidated Financial
Statement Schedule
====================================================
U.S. Home & Garden Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Charged to
Beginning Costs and Ending
Balance Expenses Writeoffs Balance
- --------------------------------------------------------------------------------------------------------------------------
Reserves and Allowances Deducted
from Asset Accounts (Continuing
Operations):
Allowance for Doubtful Accounts
o Year ended June 30, 2001 $ 575,000 $ 646,000 $ (250,000) $ 971,000
o Year ended June 30, 2002 $ 971,000 $ 425,000 $ (15,000) $ 1,381,000
o Year ended June 30, 2003 $1,381,000 $ 25,000 $ (776,000) $ 630,000
Reserve for Inventory Obsolescence
o Year ended June 30, 2001 $ 540,000 $ 943,000 $ (143,000) $ 1,340,000
o Year ended June 30, 2002 $1,340,000 $ 94,000 $ (1,209,000) $ 225,000
o Year ended June 30, 2003 $ 225,000 $ 16,000 $ (50,000) $ 191,000
- ----------------------------------------------------------------------------------------------------------------------
44