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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 2000
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
- ------------------- ---------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value; Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 15, 2000 was
$42,998,643.
As of September 15, 2000, 18,878,931 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.
Documents Incorporated By Reference: None
Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for our future activities. Such forward-looking information involves
important known and unknown risks and uncertainties that could significantly
affect actual results, performance or achievements in the future and,
accordingly, such actual results, performance or achievements may materially
differ from those expressed or implied in any forward-looking statements made by
or on behalf of us. These risks and uncertainties include, but are not limited
to, those relating to our growth strategy, customer concentration, outstanding
indebtedness, dependence on weather conditions, seasonality, expansion and other
activities of competitors, ability to successfully integrate recently acquired
companies and products lines, our ability to successfully commercialize our new
business-to-business e-commerce website, changes in federal or state
environmental laws and the administration of such laws, protection of trademarks
and other proprietary rights, and the general condition of the economy and its
effect on the securities markets and other risks detailed in our other filings
with the Securities and Exchange Commission. The words "believe," "expect,"
"anticipate," "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date the statement
was made.
General
We are a leading manufacturer and marketer of a broad range of consumer
lawn and garden products. Our products include weed preventive landscape
fabrics, fertilizer and plant food spikes, decorative landscape edging, grass
and flower seed products, weed trimmer replacement heads, shade cloth and root
feeders, which are sold under recognized brand names such as WeedBlock(R),
Jobe's(R), Emerald Edge(R), Weed Wizard(R), Shade Fabric(TM), Ross(R),
Tensar(R), Amturf(R) and Landmaster(R). 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
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merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart,
Wal-Mart, Ace Hardware, TruServe and Home Base.
In the fiscal year ended June 30, 2000, through our E-garden.com
subsidiary, we established the first business-to-business Internet website
designed to bring together buyers and sellers of commercial lawn and garden
merchandise.
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"). Our
business-to-business e-commerce activities are conducted through our subsidiary
Egarden.com Inc. Unless the context suggests otherwise, references in this
Report to "we", "us", or "our" refer to U.S. Home & Garden Inc. and its
subsidiaries. Our executive offices are located at 655 Montgomery Street, Suite
500, San Francisco, California 94111, and our telephone number is (415)
616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the number
of vendors needed to source high volume lawn and garden products, the preference
among home improvement and mass merchant retailers has shifted towards single
source suppliers that offer broad product lines of consumer brand-name
merchandise and the product support necessary to stimulate consumer demand and
ensure timely and cost effective order fulfillment. Smaller regional suppliers
generally lack the capital and other resources necessary to offer the variety
and number of product lines, the product support and the inventory stocking and
tracking capabilities required by home improvement and mass merchant retailers.
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Gardening is one of the most popular activities in the United States.
According to the National Gardening Association, U.S. households spent $46.8
billion on lawn and garden products and landscaping services in 1998, 97% of
which purchased lawn and garden products. According to the 1996-1997 National
Gardening Survey, 1996 retail sales of lawn and garden products were
approximately $22 billion, and 64% of the approximately 101 million households
in the United States participated in some form of gardening activity during
1996. In addition, sales growth in the lawn and garden industry is being driven
in part by the aging of the "baby boomer" consumer segment. According to the
National Gardening Survey, persons 50 years of age and older spent an average of
$400 per household on lawn and garden activities in 1996.
Prior 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.
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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.
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, plus the cost of certain inventory
acquired with a potential additional purchase price amount contingent upon the
acquired business achieving certain specified levels of EBITDA (as defined in
the purchase agreement). An additional $1.0 million was paid for a non-compete
agreement.
o E-Garden, Inc. (now, Egarden.com Inc.) Our business-to-business Internet
subsidiary was acquired in June 1999 for approximately $400,000, plus expenses
of approximately $100,000. Up to $250,000 of additional purchase price is
contingent upon Egarden's net sales exceeding certain targets for each of the
years during the three-year period ending June 30, 2002. At the time of
acquisition, Egarden's activities were limited to sales of Internet gardening
related products to the end consumer.
o Findplants.Com., an electronic horticulture catalogue and locater
business-to-business service for commercial growers and wholesalers all of whose
assets were acquired in May 2000 for approximately $537,000
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in cash. Findplants.com(R) offers industry participants more than 10,000
different types of plants from nearly 140 growers.
Consumer Lawn and Garden Products
The primary 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), WeedBlock 6(TM),
MicroPore(R), Pro WeedBlock(TM), Weedshield(TM) and Landmaster(R). Landscape
fabrics allow water, nutrients and oxygen to filter through to the soil but
prevent weed growth by blocking sunlight. Our primary landscape fabrics are made
from non-woven fabrics which are generally manufactured with extruded polymers,
pressed or vacuum formed into thin sheets having the feel and texture of light
plastics. For the fiscal years ended June 30, 1998, 1999 and 2000, sales of
landscape fabric represented approximately 39%, 37% and 43%, respectively, of
our 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, 1998, 1999 and 2000, sales of fertilizer,
plant food and insecticide spikes constituted approximately 20%, 13% and 15%,
respectively, of our 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, 1998, 1999 and 2000, sales of
landscape edging constituted approximately 11%, 8% and 10%, respectively, of our
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
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as an exclusive United States retail distributor of a shade cloth manufacturer
pursuant to an agreement that expires on December 31, 2000. We are currently
negotiating with this manufacturer for a renewal of the distribution agreement.
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 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.
Weed Trimmer Replacement Heads. We manufacture and distribute replacement
heads for string weed trimmer products under the Weed Wizard trademark. Our weed
trimmer replacement head products consist of a replacement casing containing a
plastic blade for weed and grass trimming. The products are part of a multi-fit
system offered by us, which allows the replacement heads to fit on virtually all
consumer gas weed trimmers and most consumer electric weed trimmers.
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.
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, weed trimmer replacement heads, 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.
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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 net sales in fiscal 2000 and fiscal 1999.
Conversion, Manufacturing and Supply of Lawn and Garden Products
Except for the materials for WeedBlock, 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, our Bradley, Michigan facility or our facility located in
Colorado.
We purchase most of the landscape fabric used to manufacture WeedBlock from
Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls of various types
of landscape fabric from Tredegar for shipment to our Waco, Texas facility where
we size, cut and package the fabric for consumer sale. Although we have
purchased most of our supply from Tredegar for over 10 years and believe that
our relationship with Tredegar is good, Tredegar is free to terminate its
relationship with us at any time and accordingly could market its fabrics to
other companies, including our competitors. Nevertheless, we own the registered
trademark "WeedBlock(R)" and to the extent that we establish alternative supply
arrangements, our rights to market products under the WeedBlock brand name would
continue without restriction.
We manufacture and package our Jobe's fertilizer spikes at our Paris,
Kentucky facility. The raw materials that comprise our indoor fertilizer spikes
are mixed with a binding agent and then passed through an extrusion process
which feeds a continuous strand of fertilizer through a heat-drying system.
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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 nylon product body (rotary head) and the plastic blades used in our
weed trimmer replacement heads are manufactured for us pursuant to open purchase
orders. We assemble and package the weed trimmer replacement heads at our
Bradley, Michigan facility with the aid of an electronic packaging machine.
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. In the future, this conversion
process will take place at our Bradley, Michigan facility.
We manufacture our Ampro and Amturf "ready-to-grow" combination mulch,
fertilizer and seed products at our Bradley, Michigan facility. 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 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.
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Customers
Our customers include home improvement centers, mass merchandisers,
hardware stores, nurseries, and garden centers and other retail channels
throughout the United States. Our three largest customers for fiscal 2000, Home
Depot, Lowes and Kmart, accounted for approximately 35%, 13% and 5%,
respectively, of our net sales during such year. During fiscal 1999, Home Depot,
Lowes and Kmart accounted for approximately 24%, 9% and 7%, respectively, of our
net sales. During fiscal 1998, Home Depot, Lowes and Kmart accounted for
approximately 26%, 11% and 7% respectively, of our net sales. Our ten largest
customers as a group accounted for 59% and 73% of our net sales during fiscal
1999 and 2000, respectively. Sales to such customers are not governed by any
contractual arrangement and are made pursuant to standard purchase orders. While
we believe that relations with our largest customers are good, the loss of any
of these customers could have an adverse effect upon our results of operations.
Our sales are concentrated in the United States, with international sales
(primarily in Europe and Canada) accounting for approximately 4% of our net
sales for fiscal 2000. We are currently attempting to develop relationships with
distributors outside of the United States.
Sales and Marketing
Our selling efforts are coordinated by three key managers, namely, the
National Accounts Director and two Divisional Sales Managers who, in turn,
direct the activities of our eight Regional Sales Managers. Because of the
service oriented nature of our business, the sales managers devote a substantial
amount of their time to servicing and maintaining relationships with our largest
customers in addition to managing the overall sales operations. We also utilize
the services of over 30 non-exclusive independent sales organizations. This
integrated sales approach is designed to help achieve sales of all products to
all customers.
Our marketing activities are coordinated by our National Marketing Manager.
In addition to designing and developing our distinctive packaging and overall
advertising and promotional activities, the Marketing Manager works closely with
the sales organization to help develop programs which are tailored to the
strategies of our key Retail Accounts.
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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 $3.9 million in fiscal 2000 on a combination of
media development, print, radio and television advertising, co-operative
advertising (advertising done in conjunction with retailers), attendance at
trade shows and public relations to promote awareness, understanding and brand
identification of our lawn and garden products.
We utilized a substantial portion of our marketing budget for fiscal 2000
on co-op advertising in conjunction with key retail customers.
Egarden.com E-Commerce Initiative
We recently commenced selling products on the Internet on a
business-to-business basis through our website www.egarden.com, the first
business-to-business Internet service exclusively designed to bring together
buyers and sellers of lawn and garden merchandise, and provide them with new
complementary supply and distribution channels. Our Egarden.com website delivers
online supplier information and offers e-commerce transactions to all members of
the lawn and garden industry, including small and medium size manufacturers,
independent retailers and specialty stores, contractors, and landscapers. Our
website allows our customers to benefit from increased buying options and
conduct business-to-business
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bidding as well as private non-auction business on a wide variety of lawn and
garden products including our niche garden products. Industry participants will
have access to a broad range of products, including barbecue grills, bird
feeders, fencing and edging, flower pots and planters, garden tools and
supplies, irrigation equipment, landscaping supplies and equipment, outdoor
furniture and accessories, and live-goods. In addition to lawn and garden
products, Egarden.com is considering adding other product categories to its
e-marketplace, enabling retailers with the capability to source and purchase a
greater percentage of their total product offerings through Egarden.com.
Suppliers that have joined Egarden.com's marketplace include, among others, The
Andersons Processing Group, C&S Products Co., Inc., Germania Seed Company, Henri
Studio, Inc. and Raindrip Inc.
Our Egarden.com web site provides our customers with a comprehensive
offering for procurement, financial settlement, logistics, and sales/customer
information accessory.
We receive a fee for facilitating a business-to-business online transaction
on either a private or auction basis. Our website allows us to make our products
available to retailers who do not purchase through the traditional industry
distribution channel. Our website also serves as an online resource to
manufacturers and lawn and garden industry professionals seeking information on
such items as raw material pricing, business trends of public and private
companies, merger and acquisition activity, stock quotes, news, industry events,
and other helpful information in one convenient location.
Our web site is divided into two distinct forums:
o Our "Auction Forum" enables manufacturers from all segments of the
lawn and garden industry with new opportunities to effectively and
efficiently sell their surplus inventory to lawn and garden retail and
commercial establishments. Purchasers have access to broader product
offerings and more complete product information than that afforded by
traditional methods of purchasing surplus inventory.
o Our "Wholesale Store" allows manufacturers to broaden their
traditional product distribution channels to retailers and commercial
purchasers while also eliminating the difficulty many of these
purchasers face in locating and purchasing lawn and garden products in
a
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fragmented market. Manufacturers are also able to list their product
offerings and related sales terms on an ongoing basis.
We have entered into long-term e-commerce initiatives with the three
largest 100% member/retailer owned hardware cooperatives in the United States.
We agreed that Egarden.com will provide each cooperative with a dedicated "room"
on the web site where the cooperative's members will be offered a broad based
selection of lawn and garden vendors, products and outdoor accessories and a
convenient, streamlined method of purchasing the products offered.
Information Systems
We maintain a sophisticated retail data information system which enables us
to provide timely and efficient order fulfillment to our Retail Accounts and
other customers. Internally, our information systems track orders and deliveries
and provide exception reports if product is not delivered on time. The systems
"push" the necessary information to the proper personnel, allowing us to react
quickly to information. Our purchase order process can be paperless, with most
Retail Accounts placing their orders through an electronic data interchange with
us.
In addition, in fiscal 2000 we 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,
in parallel with the annual growing season. Our sales and shipping are most
active from late December through May when home lawn and garden customers are
purchasing supplies for spring planting and retail stores are increasing their
inventory of lawn and garden products. Sales typically decline by early to
mid-summer. Sales of 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 keep relatively large amounts of
product inventory on hand, particularly from December to May, the months of
highest demand. Despite
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maintaining these relatively high levels of inventory, we have historically
experienced minimal inventory obsolescence. However, it is possible that
inventory obsolescence could increase in the future. Retail Accounts generally
require delivery within five business days. Orders are normally processed within
48 hours and shipped by common carrier.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. With respect to our sale of consumer lawn and garden
products, we compete with a combination of national and regional companies
including catalog and Internet e-commerce businesses specializing in the
marketing of lawn and garden care products. The Scotts Company, in particular,
has captured a significant and controlling share in a variety of categories with
their recent 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 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 consist of other manufacturers of products that are humic acid based
but that utilize formulas that are different from Golden West's. These
competitors include 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. Competition for our
weed trimmer replacement heads consist of other
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manufacturers of weed trimming replacement part products using nylon based lines
and blades. These include CMD Products, which markets the Grass Gator brand.
With respect to our business-to-business e-commerce operations, we compete
with existing, traditional, non-e-commerce consolidators and brokers that have
historically serviced the lawn and garden industry in dealing with surplus
inventory. Additionally, there are some existing website-based businesses which
provide an auction forum for sellers to place goods for auction and in turn for
buyers to bid on those goods. These sites are not industry specific. There are
also a number of catalogs from segments across the industry that are used to
facilitate business-to-business selling and buying activities that compete with
us.
Additional competitors may also emerge on the Internet. There exist today,
Internet companies whose focus is the sale of lawn and garden products to
consumers. Although these Internet companies currently focus exclusively on the
consumer and not on business-to-business, they may at some point in time expand
their interest to include a business-to-business aspect to their overall site.
Government Regulation
We are subject to many laws and governmental regulations and changes in
these laws and regulations, or their interpretation by agencies and the courts,
occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by us as fertilizers or pesticides are subject to an extensive and
frequently evolving statutory and regulatory framework, at both the Federal and
state levels. The distribution and sale of pesticides is subject to regulation
by the U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by
many states in a manner similar to FIFRA. Under FIFRA and similar state laws,
all pesticides must be registered with the EPA and the state and must be
approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on the marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply with
the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
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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
operates two manufacturing facilities and Weatherly and Ampro/Weed Wizard
Acquisition Corp. ("Weed Wizard") each operate 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.
16
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Weatherly and Ampro/Weed Wizard each operate one manufacturing facility.
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
previously owned a facility that was the subject of certain soil remediation
activities. Although this facility was sold by Weatherly 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 for any
environmental liability and the sellers of Weatherly, in turn, indemnified us
from such liability, there can be no assurance that, if required, the
indemnifying parties will be able to fulfill their respective obligations to
indemnify us. Furthermore, certain business operations of our subsidiaries also
involve shipping hazardous waste off-site for disposal. As a result, we could be
subject to liability under these statutes. We could also incur liability under
CERCLA or similar state statutes for any damage caused as a result of the
mishandling or release of hazardous substances owned by us but processed and
manufactured by others on our behalf. As a result, there can be no assurance
that the manufacture of the products sold by us will not subject us to liability
pursuant to CERCLA or a similar state statute. Furthermore, there can be no
assurance that Easy Gardener, Weatherly, 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
17
result in the imposition of fines by governmental authorities or awards of
damages to private litigants.
With respect to our e-commerce operations, there is an increasing number of
laws and regulations pertaining to the Internet. In addition, a number of
legislative and regulatory proposals are under consideration by federal, state,
local and foreign governments and agencies. Laws or regulations may be adopted
with respect to the Internet relating to liability for information retrieved
from or transmitted over the Internet, online content regulation, visitor
privacy, taxation and quality of products and services. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment and personal privacy is uncertain and
developing. Any new legislation or regulation, or the application or
interpretation of existing laws may have an adverse effect on our e-commerce
business.
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 tradenames and trademarks which are believed to have
value to us.
In connection with our acquisition of the assets of Easy Gardener Inc. 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), Weedshield(TM), Micropore(R) and
Birdblock(R). In connection with its acquisition of Weatherly, we acquired
certain patents, as well as certain copyrights and trademarks used in connection
with Weatherly's business including, but not limited to, Jobe's(R), Ross(R),
Green Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(R). 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. In connection
with our acquisition of the assets of Weed Wizard, Inc., we acquired the Weed
Wizard(TM) product patent and trademark. We also acquired the trademark
Landmaster(R) in connection with our acquisition of substantially all of the
assets of Landmaster Products, Inc. In addition, we acquired the trademarks
Polyspun 300(R), Nature Shield(R) and Diamondback(R) in connection with our
acquisition of the Tensar(R) consumer product
18
line. In connection with the acquisition of the Tensar(R) consumer product line,
The Tensar Corporation granted to us an exclusive royalty-free perpetual license
to use the trademark Tensar(R) in connection with a wide range of polymeric
grid, mesh, net and related products supplied to us by The Tensar Corporation.
In connection with our acquisition of Ampro, we acquired certain trademarks used
in connection with Ampro's business including, but not limited to, Amturf(R).
There can be no assurance that we will apply for any additional trademark or
patent protections relating to our products or that our current trademarks and
patents will be enforceable or adequately protect us from infringement of our
proprietary rights.
Although we believe that the products sold by us do not and will not
infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by us are deemed to infringe upon the patents or proprietary
rights of others, we could be required to pay damages and modify our products or
obtain a license for the manufacture or sale of such products. There can be no
assurance that, in such an event, we would be able to do so in a timely manner,
upon acceptable terms and conditions or at all, and the failure to do any of the
foregoing could have a material adverse effect upon us.
Product Liability
We, as a manufacturer of lawn and garden care and pesticide products, may
be exposed to significant product liability claims by consumers. Although we
have obtained product liability insurance coverage for U.S. Home & Garden Inc.,
Golden West, Easy Gardener and Weatherly in the aggregate amount of $2.0
million, and for Weed Wizard and Ampro in the aggregate amount of $2.0 million
(with all policies limited to $1.0 million per occurrence), and have obtained
three umbrella policies in the amounts of $13.9 million, $25.0 million and $15.0
million, respectively, there can be no assurance that such insurance will
provide coverage for any claim against us or will be sufficient to cover all
possible liabilities. In the event a successful suit is brought against us,
unavailability or insufficiency of insurance coverage could have a material
adverse effect on us. Moreover, any adverse publicity arising from claims made
against us, even if such claims were not successful, could adversely affect the
reputation and sales of our products.
During the third quarter of 2000, we discontinued production, sale and
distribution of one of the products in our Weed Wizard product line.
Additionally, in voluntary compliance with the recommendations of the Consumer
Product Safety Commission we instituted a recall of the product. Accordingly, we
recorded a pretax charge of $928,000 ($510,000 after tax or $.03 per basic and
diluted share) to provide for recall costs and inventory write-offs.
19
Employees
As of September 15, 2000 we had 296 full-time employees. Of such employees,
three are executive officers of U.S. Home & Garden Inc., 67 were engaged in
administration and finance, 44 were engaged in sales and marketing, 34 were
engaged in warehouse, shipping and receiving, and 148 were engaged in
production. None of our employees are covered by collective bargaining
agreements. We believe that we have a good relationship with our employees.
Segment Information
See Note 19 of Notes to Consolidated Financial Statements included in Part
I, Item 8, for information relating to our two reportable segments.
Item 2. Properties.
Our executive offices are currently located in San Francisco, California,
in approximately 3,000 square feet of office space for which we pay $12,352 per
month in rent, which amount includes the costs of utilities and janitorial
services. Our office space is rented pursuant to a lease expiring in February
2001. We intend to renew this lease assuming favorable terms can be negotiated.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which we pay $17,918 per month in rent,
pursuant to a lease agreement that expires on February 28, 2001. Easy Gardener's
facilities contain landscape fabric converters, packaging equipment and
warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $10,833 per month in rent pursuant to a
lease that expires on June 30, 2001. We also lease an additional 53,000 feet of
warehouse space in Paris, Kentucky for $5,417 per month in rent pursuant to a
lease that expires on July 20, 2001.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $1,345 per month base rent, with rent
increases at a rate of
20
4% a year. The lease expires in June 2001 subject to our option to renew the
lease for an additional one year period.
Ampro owns an approximately 200,000 square foot building on approximately
25 acres of land in Bradley, Michigan. Approximately 60,000 square feet of this
facility was built with grant proceeds received from the Michigan Department of
Natural Resources (MDNR) in 1994 in which the MDNR has a security interest over
the grant period of ten years. The grant proceeds have been recorded as deferred
revenue and are being amortized over the grant period.
With respect to the storage, packaging and distribution of certain of our
commercial grade landscape fabric products, Easy Gardener has entered into a
lease agreement (the "Lease Agreement") pursuant to which we are provided with
60,000 square feet of warehouse space in Colorado. The Lease Agreement expires
on May 31, 2005. We currently pay a lease rate of $14,510 per month, which
increases 5% per year beginning June 1, 2002.
Egarden leases approximately 4,600 square feet of office space in Raleigh,
North Carolina for which we pay $7,695 per month in rent, pursuant to a lease
agreement that expires on December 31, 2004. The Egarden facility contains
office furniture and computer equipment.
We believe that our current manufacturing and warehouse space is adequate
for our planned future operations.
Item 3. Legal Proceedings
In August 1999 an action was commenced against us and our subsidiary,
Ampro, in the Circuit Court of the State of Michigan, County of Kent, by H.
Kenneth W. Hilbert, E. Scott Hilbert, John R. Hilbert and Omer Messer, who were
principal stockholders of Ampro immediately prior to its acquisition by us. The
plaintiffs allege that we have breached certain terms of the stock purchase
agreement pursuant to which we acquired Ampro (the "Agreement") that allegedly
require us to make certain additional payments to the plaintiffs, by, among
other things, taking certain actions that prevented Ampro from achieving certain
earnings levels that would have triggered additional contingent payments to the
plaintiffs under the Agreement. Plaintiffs seek to recover unspecified damages,
together with interest, costs and attorneys fees and an accounting by Ampro with
respect to certain financial
21
information. Plaintiffs have also notified us that they intend to arbitrate
certain other issues concerning closing adjustments under the Agreement. In
addition to filing an Answer denying the plaintiffs allegations, we have
asserted certain counterclaims against the plaintiffs alleging various breaches
of the Agreement, including, but not limited to, breaches of representations and
warranties concerning the financial position of the business acquired. We intend
to vigorously defend this matter.
We are defendants in two product liability actions involving alleged
injuries sustained by users of Weed Wizard products. In Kurz v. Weed Wizard
Acquisition Corp., which was brought against our subsidiary in June 2000 in the
circuit court of the State of Oregon for the County of Multnomah, the plaintiff
is seeking $86,000 in economic damages and $750,000 in damages for alleged pain
and suffering. This action has been removed to the United States District Court
for the District of Oregon. The second action, Miller v. Weed Wizard, Inc., et.
al, was commenced in August 2000 in the Iowa District Court for Des Moines
County. The plaintiff in this action seeks unspecified compensatory and punitive
damages for the injuries he allegedly sustained while using a Weed Wizard
product. This action has been removed to the U.S. District Court for Southern
District of Iowa (Eastern Division). We intend to vigorously defend these
matters.
In July 2000 our subsidiary, Weed Wizard Acquisition Corp. commenced an
action in the U.S. District Court, Northern District of Georgia, against
A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) and certain of its
stockholders and officers. In this action we allege that the defendants made
certain misrepresentations and omitted to disclose certain facts regarding,
among other things, alleged defects in certain of the Weed Wizard products in
connection with our purchase from defendants in 1998 of substantially all of the
assets of Weed Wizard, Inc. We are seeking to rescind the transaction, or in the
alternative, to recover rescissionary monetary damages, and to recover
compensatory damages. In addition, we are seeking punitive damages.
22
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of U.S. Home & Garden stockholders was held on June 14,
2000 at which time the following directors were reappointed to serve until the
Annual Meeting of Stockholders to be held in the year 2001:
Votes For Votes Withheld
--------- --------------
Robert Kassel 16,060,794 192,987
Richard Raleigh 15,894,060 359,721
Maureen Kassel 15,835,140 418,641
Fred Heiden 16,089,684 164,097
Jon Schulberg 16,084,169 169,612
23
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters.
Our common stock has traded in the over-the-counter market and has been
quoted on the NASDAQ Stock Market since March 26, 1992. The NASDAQ Smallcap
symbol for our common stock is "USHG". The following table sets forth, for the
periods indicated, the high and low sales prices for the common stock, as
reported by NASDAQ.
Year Ended June 30, 2000 High Low
First Quarter $ 4 1/8 $ 2 1/4
Second Quarter 2 13/16 2 1/8
Third Quarter 5 1/8 2 9/16
Fourth Quarter 3 7/8 2 1/8
Year Ended June 30, 1999 High Low
First Quarter $ 6 1/2 $ 3 1/2
Second Quarter 5 9/16 3 5/8
Third Quarter 6 3/16 3 5/8
Fourth Quarter 6 7/8 3 11/16
As of September 15, 2000, the number of stockholders of record of our
common stock was 189. In addition, there are in excess of 500 beneficial owners
of our common stock whose shares are held in "street name".
During the quarter ended June 30, 2000, we extended by five years the
expiration date of options and warrants to purchase an aggregate of 1,002,460
shares of common stock previously granted to certain officers and advisors. The
foregoing options were exercisable at an average exercise price of $2.17 per
share. We also granted options to purchase an aggregate of 971,000 shares of
common stock at an average exercise price of $2.47 to certain of our employees.
The foregoing transactions were exempt from the registration requirements of the
Securities Act of 1933 by virtue of Sections 2(a)(3) or 4(2) thereof.
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
24
agreement between us and our primary lending institution prohibits us from
paying dividends without the lenders' consent.
Item 6. Selected Financial Data (in thousands, except per share data).
The following selected financial data at and for the years ended June 30,
1996, 1997, 1998, 1999 and 2000 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.
Statement of Income Data:
Year Ended June 30,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
Net sales $ 27,031 $ 52,046 $ 67,149 $ 89,346 $ 89,665
Cost of sales 12,670 23,649 30,431 44,176 49,101
Unusual item -- -- -- -- 928
------------ ------------ ------------ ------------ ------------
Gross profit 14,361 28,397 36,718 45,170 39,636
Selling, shipping, general and administrative
expenses 10,612 17,745 23,047 32,900 35,590
Restructuring charges -- -- -- 1,964 --
------------ ------------ ------------ ------------ ------------
Income from operations 3,749 10,652 13,671 10,306 4,046
Other income (expense) (1,940) (3,262) (3,095) (6,907) (6,596)
Income tax (expense) benefit 715 (3,200) (3,600) (1,350) 558
Minority interest -- -- -- -- 423
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary gain
(expense) 2,524 4,190 6,976 2,049 (1,569)
Extraordinary (expense) gain, net of tax -- (1,007) (1,450) -- 1,224
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 2,524 $ 3,183 $ 5,526 $ 2,049 $ (345)
============ ============ ============ ============ ============
Income (loss) per share
before extraordinary gain (expense):
Basic $.25 $.31 $.39 $.10 $(.08)
Dilutive $.19 $.26 $.31 $.09 $(.08)
Net income (loss) per share:
Basic $.25 $.23 $.31 $.10 $(.02)
Dilutive $.19 $.20 $.24 $.09 $(.02)
Weighted average number of common and common
equivalent shares outstanding:
Basic 10,206,000 13,695,000 17,776,000 19,621,000 19,031,000
Dilutive 13,361,000 16,068,000 22,808,000 23,595,000 19,031,000
25
Balance Sheet Data:
June 30,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
Working capital $ 5,328 $ 2,292 $ 46,743 $ 32,874 $ 25,052
Intangible assets, net 17,167 44,364 63,395 82,109 81,204
Total assets 33,584 68,475 126,813 138,263 138,545
Short-term debt 3,650 8,990 -- -- 3,125
Long-term debt 6,238 17,570 63,250 78,750 70,855
Total liabilities 14,214 36,549 75,214 91,779 89,331
Stockholders' equity 19,370 31,926 51,599 46,484 45,103
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, Egarden, Ampro, Easy
Gardener and Golden West, and through Easy Gardener's wholly-owned subsidiaries,
Weatherly and Weed Wizard. 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 $83.4 million as of June
30, 2000. We are currently amortizing such goodwill using the straight-line
method over various time periods ranging from 5 to 30 years. Goodwill
amortization expense for the fiscal year ended June 30, 2000 was $3.1 million
or $.16 per basic share. See "Summary of Accounting Policies - Intangible
Assets" and Note 1 to Notes to Consolidated Financial Statements included in
Part I, Item 8.
Our results of operations for the fiscal year ended June 30, 2000 were
adversely affected by anticipated losses attributable to the start-up expenses
of our business-to-business Egarden.com Internet initiative. Our results were
also adversely affected by prolonged periods of inclement weather in many
portions of the United States during the spring and early summer which
negatively impacted the lawn and garden industry. Moreover, gross profit was
reduced by $0.9 million due to the recall of a product in the Weed Wizard
product line.
Our results of operations for the fiscal year ended June 30, 1998 were
significantly affected by the acquisition of certain assets of Weed Wizard, Inc.
in February 1998, certain assets of Landmaster
26
Products, Inc., in March 1998 and the Tensar consumer product line in May 1998.
Due to the seasonal nature of our sales, the results of operations for fiscal
year ended June 30, 1999 were, on a comparative basis, negatively affected by
these acquisitions since both the off season and peak season results of
operations for the businesses and product lines acquired are included in the
results of operations for fiscal year 1999, compared to the prior fiscal year
when only the peak season results were included in our results of operations.
We experienced net sales growth of 29% from fiscal 1997 to fiscal 1998 and
33% from fiscal 1998 to fiscal 1999. Sales were relatively constant between
fiscal 1999 and 2000. We believe that this historical growth in net sales was
primarily attributable to expansion of our product lines through the
acquisitions of complementary lawn and garden businesses and product lines. Net
sales were also positively affected by an increase in sales of pre-existing
product lines.
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,
--------------------------------
1998 1999 2000
------ ------ ------
Net sales ....................................... 100% 100% 100%
Cost of sales ................................... 45.3 49.4 54.8
Unusual item .................................... -- -- 1.0
------ ------ ------
Gross profit .................................... 54.7 50.6 44.2
Selling and shipping expenses ................... 21.2 21.6 22.8
General and administrative expenses ............. 13.2 15.3 16.9
Restructuring charges ........................... -- 2.2 --
------ ------ ------
Income from operations .......................... 20.3 11.5 4.5
Gain (loss) on disposal of property and equipment -- -- 0.6
Interest expense, net ........................... (4.6) (7.7) (8.0)
Income tax (expense) benefit .................... (5.4) (1.5) 0.6
Minority interest ............................... -- -- 0.5
Extraordinary (expense) gain, net ............... (2.1) -- 1.4
------ ------ ------
Net income (loss) ............................... 8.2% 2.3% (0.4)%
------ ------ ------
27
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Net sales. Net sales increased by $0.4 million, or 0.4%, to $89.7 million
during the fiscal year ended June 30, 2000 from $89.3 million during the
comparable period in 1999.
Gross Profit. Gross profit decreased by $5.6 million, or 12.3%, to $39.6
million for the fiscal year ended June 30, 2000 from $45.2 million during the
comparable period in 1999. This decrease was due primarily to poor weather in
our key markets in the fourth quarter and the discontinued production of a
product in the Weed Wizard product line. Gross profit as a percentage of net
sales decreased to 44.2% during the fiscal year ended June 30, 2000 from 50.6%
during the comparable period in 1999. The decrease in gross profit as a
percentage of net sales was primarily attributable to poor weather, the
discontinued Weed Wizard product and reduced pricing on certain products sold to
major retailers when compared to the 1999 period.
Selling and shipping expense. Selling and shipping expenses increased $1.2
million, or 6.2% to $20.5 million during the fiscal year ended June 30, 2000
from $19.3 million during the comparable period in 1999. Selling and shipping
expenses as a percentage of net sales increased to 22.8% during fiscal year
ended June 30, 2000 from 21.6% during the comparable period in 1999. This
increase was primarily a result of start-up selling and development costs for
the Company's business-to-business e-commerce initiative, Egarden.com, included
in this period.
General and administrative expenses. General and administrative expenses,
excluding depreciation and amortization, increased $0.3 million or 3.2%, to $9.6
million during the fiscal year ended June 30, 2000 from $9.3 million during the
comparable period in 1999. This increase is primarily due to start-up and
administrative costs for Egarden.com partially offset by savings generated from
the consolidation of the general and administrative functions for Weed Wizard,
previously located in Georgia, into Ampro. As a percentage of net sales, general
and administrative expenses excluding depreciation and amortization increased to
10.7% during the fiscal year ended June 30, 2000 from 10.4% during the
comparable period in 1999.
Depreciation and amortization. Depreciation and amortization expenses
increased by $1.2 million or 27.9% to $5.5 million during the fiscal year ended
June 30, 2000 from $4.3
28
million during the comparable period in 1999. This increase is primarily as a
result of the acquisition of Ampro Industries, Inc. and Egarden.com. As a
percentage of net sales, depreciation and amortization expenses increased to
6.1% during the fiscal year ended June 30, 2000 from 4.8% during the comparable
period in 1999.
Income from operations. Income from operations decreased by $6.3 million,
or 61.2%, to $4.0 million during the fiscal year ended June 30, 2000 compared to
$10.3 million for the comparable period in 1999. The decrease in income from
operations for the 2000 period is primarily attributable to the start-up costs
for Egarden.com, poor weather in the fourth quarter and the discontinued Weed
Wizard product, partially offset by the absence of restructuring charges in the
2000 period. As a percentage of net sales, income from operations decreased to
4.5% for the fiscal year ended June 30, 2000 from 11.5% during the comparable
period in 1999.
Net interest expense. Net interest expense increased $264,000, or 2.9% to
$7.1 million during the fiscal year ended June 30, 2000, from $6.9 million
during the comparable period in 1999. The increase in interest expense is
primarily related to the increase in borrowings under our credit
facility to finance the acquisition of Ampro Industries, Inc. partially offset
by the decreased interest associated with the line of credit in conjunction with
the decrease in inventories and the repurchase of $4.9 million of the
mandatorily redeemable trust preferred securities of U.S. Home & Garden Trust I.
Income taxes. Income tax benefit was $0.6 million during the fiscal year
ended June 30, 2000 compared to $1.4 million in tax expense during the
comparable period in 1999, primarily due to the decrease in income from
operations.
Minority interest in loss of affiliate. Minority interest in loss of
affiliate was $423,000, net of tax expense of $294,000, during the fiscal year
ended June 30, 2000. Minority interest relates to U.S. Home & Garden Inc.'s
partial ownership of Egarden.com Inc. Egarden.com's results are fully
consolidated in the financial statements of U.S. Home & Garden Inc. included in
Part I, Item 8.
Extraordinary gain from early extinguishment of debt. Extraordinary gain
from early extinguishment of debt increased $1.2 million, net of tax expense of
$878,000, during the fiscal year ended June 30, 2000 from the comparable period
in 1999. We repurchased $6.3 million of the mandatorily
29
redeemable trust preferred securities of U.S. Home & Garden Trust I. See Note 14
to the Consolidated Financial Statements included in Part I, Item 8.
Net income. Net income decreased by $2.3 million to a net loss of $345,000
during the fiscal year ended June 30, 2000 from net income of $2.0 million
during the comparable period in 1999. Diluted net income per common share
decreased $.11 to a net loss of $.02 per share when compared to diluted net
income per common share of $.09 during the comparable period in 1999. The
decrease in net income per common share is primarily attributable to the
start-up costs for Egarden.com, reduced sales due to poor weather in the fourth
quarter and the discontinued Weed Wizard product in the fiscal year ended June
30, 2000 compared to the comparable period in the prior year.
Fiscal Year Ended June 30, 1999 Compared to Fiscal year Ended June 30, 1998
Net sales. Net sales increased by $22.2 million, or 33%, to $89.3 million
during the fiscal year ended June 30, 1999 from $67.1 million during the
comparable period in 1998. The increase in net sales was primarily a result of
the October 1998 acquisition of Ampro Industries, Inc. and internal growth of
our pre-existing product lines.
Gross profit. Gross profit increased by $8.5 million, or 23%, to $45.2
million for the fiscal year ended June 30, 1999, from $36.7 million during the
comparable period in 1998. This increase was due primarily to the acquisition of
Ampro Industries, Inc. Gross profit as a percentage of net sales decreased to
50.6% during the fiscal year ended June 30, 1999, from 54.7% during the
comparable period in 1998. The decrease in gross profit as a percentage of net
sales was primarily attributable to an increase in sales of lower-margin
products. The gross profit percent also decreased due to changes in packaging
and new machinery resulting in higher and inefficient production costs.
Furthermore, the gross profit percent decreased due to increased overhead
resulting from the inclusion of the off peak season of the acquisitions
purchased at the selling season in the fiscal year ended June 30, 1998.
Selling and shipping expenses. Selling and shipping expenses increased $5.1
million or 35.9%, to $19.3 million during the fiscal year ended June 30, 1999
from $14.2 million during the comparable period in 1998. This increase was
primarily the result of an increase in the amount of products shipped, which was
a consequence of the October 1998 acquisition of Ampro Industries, Inc., the
effect on the full fiscal year
30
ended June 30, 1999 of prior acquisitions that occurred during fiscal 1998 along
with an increase in sales of pre-existing product lines. Selling and shipping
expenses as a percentage of net sales increased to 21.6% during the fiscal year
ended June 30, 1999, from 21.2% during the comparable period in 1998. This
increase was a result of reorganization expense of the sales force and increased
shipping expenses.
General and administrative expenses. General and administrative expenses
increased $4.7 million or 52.8% to $13.6 million during the fiscal year ended
June 30, 1999 from $8.9 million during the comparable period in 1998. This
increase was primarily due to increased costs relating to acquisitions,
including amortization of goodwill and the addition of certain administrative
personnel as part of our efforts to build an infrastructure that we believe
will be able to more readily integrate any future products or businesses that
may be acquired. As a percentage of net sales, general and administrative
expenses increased to 15.3% during the fiscal year ended June 30, 1999, from
13.2% during the comparable period in 1998. This is primarily due to the
increased amortization of goodwill and the addition of certain administrative
personnel.
Restructuring charges. We incurred a non-recurring restructuring charge of
$2.0 million during the fiscal year ended June 30, 1999. This restructuring
charge results primarily from the execution of our overall integration and cost
reduction strategy, including the consolidation of administrative activities and
the rationalization of production and distribution facilities. See Note 16 to
the Consolidated Financial Statements included in Part I, Item 8.
Income from operations. Income from operations decreased by $3.4 million,
or 24.6%, to $10.3 million during the fiscal year ended June 30, 1999 from $13.7
million during the comparable period in 1998. The decrease in income from
operations in actual dollars was primarily due to the $2.0 million restructuring
costs and the increase in general and administrative expenses in dollars and as
a percentage of net sales during the fiscal year ended June 30, 1999. As a
percentage of net sales, income from operations decreased to 11.5% for the
fiscal year ended June 30, 1999 from 20.3% during the comparable period in 1998.
Net interest expense. Net interest expense increased by $3.8 million, or
123%, to $6.9 million during the fiscal year ended June 30, 1999 from $3.1
million during the comparable
31
period in 1998. The increase in interest expense is primarily related to the
interest associated with the increase in debt as a result of financing our
various acquisitions.
Income taxes. Income taxes decreased to $1.4 million during the fiscal year
ended June 30, 1999 from $3.6 million during the comparable period in 1998
primarily due to the decrease in income before income taxes which was partially
offset by an increase in our effective income tax rate for the year.
Extraordinary expense. Extraordinary expense decreased by $1.5 million from
the comparable period in fiscal 1998. During 1998, we incurred a $1.5 million
charge, net of a $735,000 tax benefit, associated with the write-off of deferred
financing cost in conjunction with a debt refinancing.
Net income. Net income decreased by $3.5 million, or 62.9% to $2.0 million
during the fiscal year ended June 30, 1999 from $5.5 million during the
comparable period in 1998. This decrease was primarily attributable to the $2.0
million restructuring costs, sales of lower margin products and the increased
costs relating to acquisitions, including amortization of goodwill and the
addition of certain administrative personnel. Basic net income per common share
decreased $0.21 to $0.10 per share for the fiscal year ended June 30, 1999 from
$0.31 per share during the comparable period in 1998. Diluted net income per
common share decreased $0.15 to $0.09 per share for the fiscal year ended June
30, 1999 from $0.24 per share during the comparable period in 1998. The decrease
in both basic and diluted earnings per share is primarily attributable to the
decrease in net income.
Quarterly Results of Operations and Seasonality
Our sales are seasonal due to the nature of the lawn and garden business,
in parallel with the annual growing season. Our sales and shipping are most
active from late December through May when home lawn and garden customers are
purchasing supplies for spring planting and retail stores are increasing their
inventory of lawn and garden products. Sales typically decline by early to
mid-summer.
Sales of our agricultural products, which were not material for fiscal
2000, are also seasonal. Most shipments occur during the period from March
through October.
32
Set forth below is certain unaudited quarterly financial information:
Quarter Ended
(in thousands, except percentages and per share data)
----------------------------------------------------------------------------------------------------------
September December March June September December March June
30, 31, 31, 30, 30, 31, 31, 30,
1998 1998 1999 1999 1999 1999 2000 2000
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Net sales ............. $ 10,768 $ 15,985 $ 34,769 $ 27,824 $ 12,985 $ 14,145 $ 36,494 $ 26,041
Cost of sales ....... 5,312 7,751 16,565 14,548 7,176 7,420 19,218 15,287
Unusual item ........ -- -- -- -- -- -- 928 --
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Gross profit ........ 5,456 8,234 18,204 13,276 5,809 6,725 16,348 10,754
Selling, shipping,
general and
administrative
expenses ......... 6,439 7,730 8,501 10,254 7,645 8,346 9,927 9,672
Restructuring charges . -- -- -- 1,964 -- -- -- --
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations ............ (983) 504 9,703 1,058 (1,836) (1,621) 6,421 1,082
Gain on sale of land .. -- -- -- -- -- -- -- 551
Investment income ..... 381 116 15 18 73 59 95 133
Interest expense ...... (1,541) (1,798) (2,087) (1,987) (1,818) (2,003) (1,875) (1,811)
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes, minority
interest and
extraordinary gain
(expenses) ............ (2,143) (1,178) 7,631 (911) (3,581) (3,565) 4,641 (45)
Income tax benefit
(expense)............ 920 510 (3,200) 420 1,600 1,600 (2,108) (534)
Minority interest in
earnings
of affiliate........... -- -- -- -- -- -- 259 164
Extraordinary gain
(expense), net of taxes -- -- -- -- -- -- 943 281
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ..... $ (1,223) $ (668) $ 4,431 $ (491) $ (1,981) $ (1,965) $ 3,735 $ (134)
========== ========== ======== ========== ========== ========== ========== ==========
Diluted net income
(loss) per share(1) ... $ (0.06) $ (0.03) $ 0.19 $ (0.02) $ (0.10) $ (0.10) $ 0.17 $ (0.01)
========== ========== ======== ========== ========== ========== ========== ==========
Weighted average
common and common
equivalent shares
outstanding(1)......... 20,143 19,837 23,509 22,977 19,335 19,213 21,627 18,988
========== ========== ======== ========== ========== ========== ========== ==========
Net sales ............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ....... 49.3% 48.5% 47.6% 52.3% 55.3% 52.5% 52.7% 58.7%
Unusual Item ........ -- -- -- -- -- -- 2.5% --
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Gross profit ........ 50.7% 51.5% 52.4% 47.7% 44.7% 47.5% 44.8% 41.3%
Selling, shipping,
general and
administrative
expenses ............ 59.8% 48.4% 24.4% 36.9% 58.9% 59.0% 27.2% 37.1%
Restructuring charges . -- -- -- 7.1% -- -- -- --
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (9.1%) 3.1% 27.9% 3.7% (14.2%) (11.5%) 17.6% 4.2%
Gain on the sale of
land................... -- -- -- -- -- -- -- 2.1%
Investment income ..... 3.5% 0.7% -- 0.1% 0.6% 0.4% 0.2% 0.5%
Interest expense ...... (14.3%) (11.2%) (6.0%) (7.1%) (14.0%) (14.1%) (5.1%) (7.0%)
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes, minority
interest and
extraordinary gain
(expense).............. (19.9%) (7.4%) 21.9% (3.3%) (27.6%) (25.2%) 12.7% (0.2%)
Income tax benefit
(expense).............. 8.5% 3.2% (9.2%) 1.5% 12.3% 11.3% (5.8%) (2.0%)
Minority interest in
earnings
of affiliate ........ -- -- -- -- -- -- 0.7% 0.6%
Extraordinary gain
(expense) net of taxes -- -- -- -- -- -- 2.6% 1.1%
---------- ---------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ..... (11.4%) (4.2%) 12.7% (1.8%) (15.3%) (13.9%) 10.2% (0.5%)
========== ========== ======== ========== ========== ========== ========== ==========
- ----------
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using
the treasury stock method except for quarters reporting a net loss. Such
quarters only reflect issued and outstanding shares of our common stock in
the weighted average shares outstanding.
33
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, 2000, we had consolidated cash and short-term investments
totaling $8.9 million, of which $1.6 million is restricted, and working capital
of $25.1 million. At June 30, 1999, we had consolidated cash and short-term
investments totaling $3.9 million, of which $1.0 million was restricted, and
working capital of $32.9 million. The principal sources of working capital
during fiscal 2000 included cash flow from operations, proceeds from sale of
property and equipment, proceeds from the private placement of stock in our
Egarden.com subsidiary and net proceeds from our credit facility discussed
below. Major uses of working capital included the purchase of equipment,
purchase of findplants.com, expenditures related to the exclusivity agreements
pertaining to Egarden's future business, repurchase of 749,000 shares of our
common stock and payments on long-term debt.
Net cash provided by operating activities for fiscal 2000 was $10.2
million, consisting primarily of a decrease in inventory, an increase in
accounts payable and an increase in depreciation and amortization. The $4.1
million decrease in inventories was primarily caused by efficiencies in
inventory management due to improved information systems. The $2.5 million
increase in accounts payable and accrued expenses is primarily due to changes in
the timing of certain tax-related items. The $1.1 million increase in
depreciation and amortization is primarily the result of the increase in our
tangible and intangible assets.
Net cash used in investing activities for fiscal 2000 was $6.1 million,
consisting primarily of cash used for the purchase of property and equipment,
package tooling, and exclusivity agreements. The $4.3 million expended for
equipment purchases primarily represents the start-up capital expenditures for
hardware and software for the Egarden web site and the installation of the QAD
enterprise software on a company-wide basis in fiscal 2000. Due to the one-time
nature of these equipment purchases, we do not expect equipment expenditures to
remain at this level in the future. The $1.0 million proceeds from sale of
property and equipment primarily relates to the
34
sale of 135 acres of excess land at our Bradley, Michigan facility. The $0.9
million spent for exclusivity agreements relates to expenditures made in
conjunction with obtaining long-term agreements from certain hardware
cooperatives to use Egarden.com on an exclusive or preferred basis. The $0.8
million for purchases of a business primarily reflects the acquisition of
findplants.com.
Net cash provided by financing activities for fiscal 2000 was $307,000,
consisting primarily of the net proceeds from the lines of credit and the
proceeds from the sale of stock of a subsidiary, partially offset by the
repurchase of mandatorily redeemable preferred securities and common stock for
treasury. We received $4.5 million in net proceeds from the sale of a 16% equity
interest in Egarden.com Inc. This private placement was undertaken to provide
funds for the development of Egarden.com. Due to market conditions, we were also
able to repurchase Trust Preferred Securities of our subsidiary, U.S. Home &
Garden Trust I, and shares of our common stock during fiscal 2000 on terms we
believe were favorable to us. These purchases were partially financed with
proceeds from our bank credit facility.
On October 13, 1998, we entered into a credit agreement (the "Credit
Agreement") with Bank of America N.A. (the "Bank"). The Credit Agreement
provides for a revolving credit facility of up to $25 million to finance the
cost of acquisitions by us (the "Acquisition Facility") and revolving credit
facility of up to $20 million to finance our working capital requirements (the
"Working Capital Facility"). The Acquisition Facility expires on June 30, 2001,
at which time borrowings are payable on a term loan basis in quarterly
installments commencing June 30, 2001, with the final installment maturing on
March 31, 2004 and, unless refinanced, borrowings under the Working Capital
Facility mature on September 30, 2001, the expiration date. In addition,
borrowings under the Acquisition Facility are subject to mandatory prepayment
from the net proceeds of certain disposition of assets, and certain losses or
condemnation of property, from excess cash (as defined in the Credit Agreement)
generated by us and our subsidiaries and 50% of the net proceeds of any new
issuances of our capital stock after such expiration date. Mandatory prepayments
by us prior to such expiration have the effect of reducing the Acquisition
Facility by the prepayment amount. In addition, during a period of 30
consecutive days during the period July 1 to December 1 in each year, no
borrowings can be outstanding under the Working Capital Facility. We have the
right under the Credit Agreement to
35
terminate or permanently reduce the Bank's commitments under such credit
facilities in the minimum amount of $1.0 million and multiples thereof subject
to the payment to the Bank of "reduction fees" of 0.5% of the amounts terminated
or reduced thereafter. Borrowings under such credit facilities bear interest at
variable annual rates selected by the Company based on LIBOR ("London Interbank
Offered Rate"), or the higher of 0.5% above the then current Federal Funds Rate
or the Bank's prime rate plus, in each case, an applicable marginal rate of
interest. At June 30, 2000, the interest rate on any new borrowings for the
Working Capital Facility would have been 7.98%. The interest rate on $15 million
of the $17 million outstanding on the Acquisition Facility is fixed via an
interest rate swap at 7.78%.
Our obligations under the Credit Agreement are guaranteed by our
subsidiaries and secured by a security interest in favor of the Bank in
substantially all of our assets and substantially all of our subsidiaries. Upon
the occurrence of an event of default specified in the Credit Agreement, the
maturity of loans outstanding under the Credit Agreement may be accelerated by
the Bank, which may also foreclose its security interest on our assets and the
assets of our subsidiaries.
Under the Credit Agreement, we and our subsidiaries are required, among
other things, to comply with (a) certain limitations on incurring additional
indebtedness, liens and guaranties, on dispositions of assets, payment of cash
dividends and cash redemption and repurchases of securities, and (b) certain
limitations on merger, liquidations, changes in business, investments, loans and
advances, affiliate transactions and certain acquisitions. In addition, we must
comply with certain financial tests and ratios. A violation of any of these
covenants constitutes an event of default under the Credit Agreement. At June
30, 2000, we were not in compliance with these financial covenants, but the Bank
has waived compliance for this period. As a condition of this waiver, the Bank
has changed the facility termination date for the Acquisition Facility from
September 30, 2001 to June 30, 2001. Any balances outstanding at that date must
be repaid in quarterly installments such that 7.5% is paid in fiscal 2001, 30.0%
is paid in fiscal 2002, 32.5% is paid in fiscal 2003 and 30.0% is paid in fiscal
2004.
Effective March 31, 2000 the Credit Agreement was amended. The principal
feature of this amendment was to require us to repay the $3 million borrowed on
the Acquisition Facility to finance our purchase of certain Trust Preferred
Securities
36
issued by our subsidiary, U.S. Home & Garden Trust I. We were required to repay
this borrowing in $1 million installments due September 30, 2000, December 31,
2000, and June 30, 2001. We repaid $1 million in June 2000 and the remaining $2
million was repaid in July 2000.
We believe that our operations will generate sufficient cash flow to
service the debt incurred. However, if such cash flow is not sufficient to
service such debt, we will be required to seek additional financing which may
not be available on commercially acceptable terms or at all.
As of June 30, 2000, we have a net deferred tax asset of $25,000 primarily
relating to $1.2 million in start-up costs for Egarden.com which are being
expensed for book purposes, but are capitalized for tax purposes, which is
largely offset by tax accumulated depreciation and amortization in excess of the
book amount. Realization of the $1.2 million deferred tax asset depends on U.S.
Home & Garden Inc. maintaining its 80% ownership in Egarden. See Note 11 to our
consolidated financial statements included in Part I, Item 8.
In fiscal 1999, we authorized the repurchase from time to time of up to 2.5
million shares of our common stock through open market purchases and in
privately negotiated transactions. In September 1999 we authorized the
repurchase of up to $3.0 million additional shares of our common stock. Through
June 30, 2000, 2,554,172 shares have been repurchased from non-affiliates in
open market transactions of which 748,877 shares were purchased during fiscal
2000. Subsequent to June 30, 2000 to date, an additional 148,572 shares were
repurchased from non-affiliates in open market transactions.
In December 1999, we commenced a tender offer to purchase up to 700,000 of
the outstanding 9.4% Cumulative Trust Preferred Securities issued by our
subsidiary, U.S. Home & Garden Trust I, at $15.00 per Trust Preferred Security.
The tender offer expired on January 14, 2000. A total of 183,281 Trust Preferred
Securities were purchased by us. The repurchase of these Trust Preferred
Securities resulted in a $943,000 extraordinary gain (after provision for income
taxes). Since the tender offer, the Company purchased an additional 58,600
shares on the open market resulting in an additional $281,000 extraordinary gain
(after provision for income taxes). Approximately 2,279,000 Trust Preferred
Securities were outstanding at June 30, 2000.
37
In January 2000, a private placement of 1,062,000 common shares and
warrants of Egarden.com Inc. was completed. Net proceeds from this private
placement totaled approximately $4.5 million and will be used to fund the
start-up and development expenditures of Egarden.com. After the completion of
this private placement, U.S. Home & Garden Inc. owned approximately 75% of the
common stock of EGarden.com Inc. Through subsequent investment in Egarden.com
Inc., U.S. Home & Garden Inc. now owns 80% of Egarden.com Inc.'s common stock.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings' effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000 as amended by SFAS 137 and SFAS 138.
In June 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. Interpretation No. 44 clarifies the
application of APB No. 25 for certain issues including (i) the definition of
employee for purposes of applying APB No. 25, (ii) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998 or January 12, 2000. The Company does not expect
a material impact on the financial statements upon the adoption of
Interpretation No. 44.
In December 1999, the Security and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition. SAB No. 101 provides the
SEC staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. SAB No. 101 is effective for the fourth
fiscal quarter of fiscal years beginning after December 15, 1999.
In October 1999, we entered into a derivatives contract to hedge interest
rate risk on the Acquisition Facility. Details of this derivative instrument are
described in Item 7A, "Quantitative and Qualitative Disclosures about Market
Risk".
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, we are exposed to
the risk of rising interest rates. To minimize this risk, we hold a derivative
instrument in the form of an interest rate swap, which is viewed as a risk
management
38
tool and is not used for trading or speculative purposes. The intent of the
interest rate swap is to effectively fix the interest rate on part of the
borrowings on our variable rate revolving credit agreement.
The following table provides information on our fixed maturity debt
instruments as of June 30, 2000 that are sensitive to changes in interest rates.
The table also presents the corresponding interest rate swap on this debt. Since
the interest rate swap effectively fixes the interest rate on the notional
amount of debt, changes in interest rates have no current effect on the interest
expense recorded by us on the portion of the debt covered by the interest rate
swap.
The Acquisition Line of Credit had $25 million
an interest rate ranging from
6.58% to 8.25% for the year ended
June 30, 2000
Interest Rate Swaps $15 million
Notional amount
Pay fixed/Receive variable - 6.03%
Pay fixed interest rate - 6.15%
This swap agreement expires
November 1, 2000, and the line-of-
credit borrowings effectively
revert to a variable interest rate
loan
Item 8. Financial Statements and Supplementary Data.
This information appears in a separate section of this report following
Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Our current directors and executive officers are as follows:
39
Name Age Position
- ---- --- --------
Robert Kassel(1) 60 Chairman of the Board, Chief
Executive Officer, President and
Treasurer
Richard Raleigh(2) 46 Chief Operating Officer and
Director
Maureen Kassel 52 Vice President of Public
Relations and Advertising,
Secretary and Director
Fred Heiden(1)(2) 59 Director
Brad Holsworth(2) 40 Director
Jon Schulberg(1)(2) 42 Director
- -------------------
(1) Member, Compensation Committee
(2) Member, Audit Committee
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.
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 Raleigh has been a Director of U.S. Home & Garden Inc. since March 1993,
Chief Operating Officer of U.S. Home & Garden Inc. since June 1992 and served as
its Executive Vice President-Operations 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
40
at The Andersons, including Operations Manager and New Products Development
Manager.
Maureen Kassel, the wife of Robert Kassel, co-founded U.S. Home & Garden Inc.
and has been its Vice President of Public Relations and Advertising and a
director since November 1990 and Secretary since February 1992. Prior to this
she has assisted in the general administration and operation of real estate and
other businesses.
Fred Heiden, a director of U.S. Home & Garden Inc. since March 1993, has been a
private investor since November 1989. From April 1984 to November 1989, Mr.
Heiden was President and Principal owner of Bonair Construction, a Florida based
home improvement construction company.
Brad Holsworth has been a director of U.S. Home & Garden Inc. since July 2000.
He has been employed by Prescient Capital LLC, a money manager and venture
capital firm, as Chief Financial Officer since April 2000. 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 had been a partner of BDO Seidman, LLP since
July 1995.
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.
Certain Key Employees
Donald Rutishauser, 43, has been Chief Financial Officer since his employment
with U.S. Home & Garden Inc. in November 1999. From 1997 to 1999, he was Vice
President, Corporate Development of Miller Energy, Inc., a private oil and gas
exploration and production company. From 1992 to 1997, Mr. Rutishauser was Vice
President and Treasurer of Belden and Blake Corporation, a public oil and gas
exploration and production company. From 1980 to 1992, he held a variety of
financial management positions at Belden and Blake, W.R. Grace and Company, and
Texas Instruments, Inc.
41
Richard Grandy, 54, has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of our acquisition of Easy Gardener,
Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy Gardener,
Inc. in 1983 after serving as Marketing Director at International Spike, Inc.
from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a sales
representative of lawn and garden products for the Ortho Division of Chevron
Chemical Co.
David Harper, 48, has been Chief Operating Officer of Egarden.com Inc. since
June 2000, was a Vice President of U.S. Home & Garden Inc. from May 1999 to June
2000 and has been employed by us 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 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.
Sheila Jones, 45, has been Vice President of Easy Gardener since July 1997 and
has also served as its General Manager from September 1994. Prior to our
acquisition of Easy Gardener, Inc., Ms. Jones was employed by Easy Gardener,
Inc. from its inception in September 1983 to September 1994, where she advanced
to the positions of Vice President and General Manager. From April 1977 to
September, 1983, she was employed by International Spike, Inc., where she held
various project management positions.
Paul Logue, 44, has been Key Accounts Manager of Easy Gardener since our
acquisition of Easy Gardener, Inc. in September 1994. Prior to joining us, Mr.
Logue was employed by Easy Gardener, Inc. from September 1989 to September 1994,
where he advanced from the position of Northeastern Regional Sales Manager to
National Sales Manager. From March 1988 to September 1989, he was Regional Sales
Manager for Hoffman Brand Fertilizers.
42
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 the 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, 2000 all filing requirements applicable to the officers,
directors, and greater than 10 percent beneficial stockholders of U.S. Home &
Garden Inc. were complied with except that Robert and Maureen Kassel did not
timely file a Form 4 with respect to the exercise by Robert Kassel in July 1999
of certain unit purchase options previously granted to Mr. Kassel that had been
placed in our Non-Qualified Deferred Compensation Plan for Select Employees.
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, 2000, 1999 and 1998, to
Mr. Robert Kassel, its Chairman, Chief Executive Officer, President and
Treasurer, Mr. Richard J. Raleigh, its Chief Operating Officer, and Ms. Lynda
Gustafson, its former Vice President of Finance (together, the "Named
Officers"). During the fiscal year ended June 30, 2000, no other executive
officer of U.S. Home & Garden Inc. received a total salary and bonus that
exceeded $100,000 during such fiscal year.
43
Summary Compensation Table
Annual Compensation Long-Term
------------------- Compensation
------------
Name and Principal Position Securities
- --------------------------- Underlying All Other
Year Salary ($) Bonus ($) Options (#) Compensation(1)
---- ---------- --------- --------------- ---------------
Robert Kassel, 2000 477,000(2) 320,000(2) 500,000 (3) $6,383
Chairman, Chief Executive Officer, 1999 450,000 114,000 641,333 (4) $6,169
President and Treasurer 1998 450,000 281,667 468,000 (5) $7,523
Richard Raleigh, Chief Operating Officer 2000 250,000 125,000 225,000 (6) $12,623
1999 250,000 96,000 137,500 (7)(8) $12,169
1998 225,000 115,000 132,500 (7) $9,203
Lynda Gustafson, Vice President of Finance* 2000 147,000 60,000 50,000 $ 4,763
1999 148,000 60,000 -- $12,169
1998 125,000 45,000 50,000(9) $11,273
- ----------
(1) Represents our contributions to the Named Officers 401(k) account.
Excludes certain perquisites that did not exceed the lesser of $50,000
or 10% of their combined bonus and salary.
(2) Included in Mr. Kassel's salary is $46,800 of non-cash compensation
attributable to his receipt of shares of common stock of Egarden.com
Inc. Mr. Kassel's bonus of $320,000 primarily reflects work performed
by him in connection with Egarden.com Inc. and its initial
capitalization, securing e-commerce agreements with certain of the
nations largest hardware cooperatives and obtaining vendor
arrangements.
(3) Includes 200,000 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in
fiscal 2000.
(4) Includes 341,333 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in
fiscal 1999. Also includes options to purchase 300,000 shares that
were granted to Mr. Kassel in December 1998, and voluntarily forfeited
by him during the fiscal year ended June 30, 1999.
(5) Includes 80,000 options that were originally granted to Mr. Kassel in
1993, the expiration dates of which were extended during fiscal 1998.
(6) Includes 100,000 options that were originally granted to Mr. Raleigh
in prior fiscal years, the expiration dates of which were extended in
fiscal 2000.
- ----------
* Ms. Gustafson's employment with us ceased in August 2000.
44
(7) Includes 12,500 options that were originally granted to Mr. Raleigh in
1992, the expiration date of which was extended during fiscal 1998 and
further extended during fiscal 1999.
(8) Includes options to purchase 125,000 shares granted to Mr. Raleigh in
December 1998 and voluntarily forfeited by him during the fiscal year
ended June 30, 1999.
(9) Ms. Gustafson's fiscal 1998 option grant covering 50,000 shares has
been voluntarily forfeited by her during fiscal 2000.
45
The following table discloses information concerning options granted in
fiscal 2000 to the Named Officers.
Option Grants in Fiscal Year Ended June 30, 2000
Individual Grants
-------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted to Potential Realizable
Underlying Employees in Value at Assumed
Options Fiscal Year (%) Exercise Annual Rates of Stock
Granted -------------- Price Expiration Price Appreciation for
Name (#)(1) ($/Sh) Date Option ($) (2)
- ---- ------- ----- ---------- ----------------------
5% 10%
---- ----