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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, 2001
Or
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 001-14015
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value; Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 17, 2001 was
approximately $10,655,000.
As of September 17, 2001, 17,543,379 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.
Documents Incorporated By Reference: None
Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for our future activities. Such forward-looking information involves
important known and unknown risks and uncertainties that could significantly
affect actual results, performance or achievements in the future and,
accordingly, such actual results, performance or achievements may materially
differ from those expressed or implied in any forward-looking statements made by
or on behalf of us. These risks and uncertainties include, but are not limited
to, those relating to our growth strategy, customer concentration, outstanding
indebtedness, dependence on weather conditions, seasonality, expansion and other
activities of competitors, ability to successfully integrate acquired companies
and product lines, changes in federal or state environmental laws and the
administration of such laws, protection of trademarks and other proprietary
rights, 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 merchant retailers ("Retail Accounts"), including Home
Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware, TruServe and Home Base.
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We were organized under the laws of the State of California in August 1990
under the name Natural Earth Technologies, Inc. In January 1992 we
reincorporated under the laws of the State of Delaware and in July 1995 we
changed our name to U.S. Home & Garden Inc. Our lawn and garden operations are
conducted through our subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy
Gardener's subsidiaries and through our subsidiary, Ampro Industries, Inc.
("Ampro"), and our agricultural products operations are conducted through our
subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context
suggests otherwise, references in this Report to "we", "us", or "our" refer to
U.S. Home & Garden Inc. and its subsidiaries. Our executive offices are located
at 655 Montgomery Street, Suite 830, San Francisco, California 94111, and our
telephone number is (415) 616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the number
of vendors needed to source high volume lawn and garden products, the preference
among home improvement and mass merchant retailers has shifted towards single
source suppliers that offer broad product lines of consumer brand-name
merchandise and the product support necessary to stimulate consumer demand and
ensure timely and cost effective order fulfillment. Smaller regional suppliers
generally lack the capital and other resources necessary to offer the variety
and number of product lines, the product support and the inventory stocking and
tracking capabilities required by home improvement and mass merchant retailers.
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.
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Prior Acquisitions.
Since August 1992, we have consummated the following eleven (11)
acquisitions of companies or product lines for a total of approximately $111
million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which we acquired in August
1992 for approximately $1.1 million in cash and $1.1 million in promissory
notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock(R), which we acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million
promissory note and two convertible notes each in the principal amount of $1.0
million. Approximately $2.2 million of additional purchase price was contingent
on Easy Gardener meeting certain income requirements. These contingencies were
met and we paid the entire $2.2 million.
o Emerald Products LLC. A manufacturer of decorative landscape edging which
we acquired in August 1995 for $835,000 in cash and a $100,000 promissory note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products, which we acquired in
August 1996 for 1,000,000 shares of our common stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain product line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which we acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, all of whose assets were acquired in February 1998 for
approximately $16.0 million (plus an additional $1.7 million for excess working
capital and acquisition expenses), of which approximately $5.0 million was based
on the value of certain net assets acquired.
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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 Egarden Inc. Our business-to-business Internet subsidiary was acquired in
June 1999 for approximately $400,000, plus expenses of approximately $100,000.
At the time of acquisition, Egarden's activities were limited to sales of
Internet gardening related products to the end consumer. We have suspended all
of the operations relating to Egarden Inc.
o Findplants.com., an electronic horticulture catalogue and locater
business-to-business service for commercial growers and wholesalers all of whose
assets were acquired by Egarden Inc. in May 2000 for approximately $537,000 in
cash. Findplants.com(R) offers industry participants more than 10,000 different
types of plants from nearly 140 growers. We have suspended all of the operations
relating to Findplants.com.
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
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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, 1999, 2000 and
2001, sales of landscape fabric represented approximately 37%, 43% and 47%,
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, 1999, 2000 and 2001, sales of fertilizer,
plant food and insecticide spikes constituted approximately 13%, 15% 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, 1999, 2000 and 2001, sales of
landscape edging constituted approximately 8%, 10% and 5%, 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
as an exclusive United States retail distributor of a shade cloth manufacturer
pursuant to an agreement that expires on December 31, 2001.
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.
6
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.
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 the fiscal years ended June 30, 1999, 2000 and
2001.
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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 or our facility located in Colorado.
We purchase most of the landscape fabric used to manufacture WeedBlock from
Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls of various types
of landscape fabric from Tredegar for shipment to our Waco, Texas facility where
we size, cut and package the fabric for consumer sale. Although we have
purchased most of our supply from Tredegar for over 10 years and believe that
our relationship with Tredegar is good, Tredegar is free to terminate its
relationship with us at any time and accordingly could market its fabrics to
other companies, including our competitors. Nevertheless, we own the registered
trademark "WeedBlock(R)" and to the extent that we establish alternative supply
arrangements, our rights to market products under the WeedBlock brand name would
continue without restriction.
We manufacture and package our Jobe's fertilizer spikes at our Paris,
Kentucky facility. The raw materials that comprise our indoor fertilizer spikes
are mixed with a binding agent and then passed through an extrusion process
which feeds a continuous strand of fertilizer through a heat-drying system. The
strand is then cut into ready-to-use fertilizer spikes which are then machine
counted and packaged into shelf-ready blisterpacks. Our outdoor fertilizer
spikes are manufactured in a similar manner except rather than passing through
an extrusion process, the outdoor spikes are processed through molds which shape
the spikes into their final form. The outdoor spikes are packaged in either a
foil pouch, bag or box.
The specifications for our landscape edging, shade cloth and root feeder
products and packaging are designed by us and independent design consultants.
The products are then manufactured and packaged by third party manufacturers
according to our specifications.
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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. The weed trimmer replacement heads will be assembled and packaged in
Michigan pursuant to a contract manufacturing agreement, 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.
The Ampro and Amturf "ready-to-grow" combination mulch, fertilizer and seed
products will be produced in Michigan pursuant to the same contract
manufacturing agreement as the weed trimmer replacement products. 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.
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 2001, Home
Depot, Lowes and Ace Hardware accounted for approximately 42%, 14% and 5%,
respectively, of our net sales during such year. Home Depot, Lowes and Kmart,
accounted for approximately 35%, 13% and 5%, respectively, of our net sales
during fiscal 2000. During fiscal 1999, Home Depot, Lowes and Kmart accounted
for 24%, 9% and 7%, respectively, of our net sales. Our ten largest customers as
a group accounted for 80%, 73% and 59% of our net sales during fiscal 2001, 2000
and 1999, 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.
9
Our sales are concentrated in the United States, with international sales
(primarily in Europe and Canada) accounting for approximately 3% of our net
sales for each of fiscal 2000 and 2001, respectively. 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.
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
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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 $3.2 million in fiscal 2001 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 2001
on co-op advertising in conjunction with key retail customers.
Egarden.com E-Commerce Initiative
During fiscal 2001 we offered products for sale on the Internet on a
business-to-business basis through a website www.egarden.com, which we
established as 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. In May
2001 we suspended the services relating to our egarden.com web site. We have
discontinued all of the operations relating to Egarden Inc. and Findplants.com.
We are exploring different strategic alternatives for Egarden Inc. See Note 2 to
the Consolidated Financial Statements.
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.
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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 typically
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 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.
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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 manufacturers of weed trimming
replacement part products using nylon based lines and blades. These include CMD
Products, which markets the Grass Gator brand.
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
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distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
We market certain animal repellent and pesticide products that are subject
to FIFRA and to similar state regulations. We also market certain fertilizer
products that are subject to regulation in some states. We believe that we are
in substantial compliance with material FIFRA and applicable state regulations
regarding our material business operations. However, there can be no assurance
that we will be able to comply with future regulations in every jurisdiction in
which our material business operations are conducted without substantial cost or
interruption of operations. Moreover, there can be no assurance that future
products marketed by us will not also be subject to FIFRA or to state
regulations. If future costs of compliance with regulations governing pesticides
or fertilizers exceed our budget for such items, our business could be adversely
affected. If any of our products are distributed or marketed in violation of any
of these regulations, we could be subject to a recall of, or a sales limitation
placed on, one or more of our products, or civil or criminal sanctions, any of
which could have a material adverse effect upon our business.
Environmental Regulation. Our manufacturing operations are subject to
various evolving federal, state and local laws and regulations relating to the
protection of the environment, which laws govern, among other things, emissions
to air, discharges to ground, surface water, and groundwater, and the
generation, handling, storage, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. Easy Gardener
operates two manufacturing facilities and Weatherly operates one manufacturing
facility. Although we believe that our material manufacturing facilities are in
substantial compliance with applicable material environmental laws, it is
possible that there are material environmental liabilities of which we are
unaware. If the costs of compliance with the various existing or future
environmental laws and regulations including any penalties which may be assessed
for failure to obtain necessary permits, exceed our budget for such items, our
business could be adversely affected.
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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 operates one manufacturing facility. Although our Ampro/Weed Wizard
facility was sold by us in April 2001, liability could exist for remediation of
such facilities in the future relating to the operations conducted at that
facility while it was owned and operated by us. Moreover, we or our predecessors
have owned or operated other manufacturing facilities in the past and may have
liability for remediation of such facilities in the future, to the extent any is
required. In this regard, Weatherly 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.
15
Other Regulations. We are also subject to various other federal, state and
local regulatory requirements such as worker health and safety, transportation,
and advertising requirements. Failure to comply with these requirements could
result in the imposition of fines by governmental authorities or awards of
damages to private litigants.
Trademarks, Proprietary Information and Patents
We believe that product recognition is an important competitive factor in
the lawn and garden care products industry. Accordingly, in connection with our
marketing activities of our lawn and garden care products, we promote, and
intend to promote, certain 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 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.
16
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 $15.0 million, $25.0 million and $15.0
million, respectively, there can be no assurance that such insurance will
provide coverage for any claim against us or will be sufficient to cover all
possible liabilities. In the event a successful suit is brought against us,
unavailability or insufficiency of insurance coverage could have a material
adverse effect on us. Moreover, any adverse publicity arising from claims made
against us, even if such claims were not successful, could adversely affect the
reputation and sales of our products.
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.
17
Employees
As of September 17, 2001 we had 195 full-time employees. Of such employees,
four are executive officers of U.S. Home & Garden Inc., 52 were engaged in
administration and finance, 22 were engaged in sales and marketing, 32 were
engaged in warehouse, shipping and receiving, and 85 were engaged in production.
None of our employees are covered by collective bargaining agreements. We
believe that we have a good relationship with our employees.
Segment Information
Our primary continuing operations are in one segment - the manufacture and
sale of consumer lawn and garden products. We have no significant export sales.
Product and major customer information are disclosed separately above.
Item 2. Properties.
Our executive offices are currently located in San Francisco, California,
in approximately 2,000 square feet of office space for which we pay $12,121 per
month in rent, which amount includes the costs of utilities and janitorial
services. Our office space is rented pursuant to a lease expiring in February
2004.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which we pay $19,471 per month in rent,
pursuant to a lease agreement that expires on February 28, 2002. We expect to
renew this lease prior to the expiration of its current term. Easy Gardener's
facilities contain landscape fabric converters, packaging equipment and
warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $9,931 per month in rent pursuant to a
lease that expires on June 30, 2006. We also lease an additional 13,200 feet of
warehouse space in Paris, Kentucky for $2,200 per month in rent on a
month-to-month basis.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $1,399 per month base rent, with rent
increases at a rate of 4% a year. The lease expires in May 2002 subject to our
option to renew the lease for an additional one year period.
18
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 leased approximately 4,600 square feet of office space in Raleigh,
North Carolina for which we paid $7,695 per month in rent, pursuant to a lease
agreement that was to expire on December 31, 2004. Due to the discontinuation of
Egarden, this lease was terminated in August 2001, at which time the landlord
was paid a $65,000 termination fee.
We believe that our current manufacturing and warehouse space is adequate
for our planned future operations.
Item 3. Legal Proceedings
In July 2000 our subsidiary, Weed Wizard Acquisition Corp. ("Weed Wizard")
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.
In October 2000 A.A.B.B., Inc. asserted a counterclaim for breach of
contract against Weed Wizard alleging that it is owed $720,267, plus interest,
representing an adjustment to the purchase price allegedly required to be made
pursuant to the agreement in which Weed Wizard acquired certain A.A.B.B. Inc.'s
assets. A.A.B.B., Inc. is also seeking to recover attorney's fees. We deny any
liability and intend to defend this counterclaim.
19
We have recently settled the product liability action Miller v. Weed
Wizard, Inc., et. al., which was commenced in August 2000 in the Iowa District
Court for Des Moines County. The settlement did not have a material adverse
effect on our operations or financial condition.
In fiscal 2001 we were notified by the staff of the U.S. Consumer Product
Safety Commission ("CPSC") that the staff is considering recommending that the
CSPC commence an action against Weed Wizard to obtain a monetary fine from Weed
Wizard for the alleged failure of Weed Wizard to timely disclose to the CPSC,
pursuant to the Consumer Products Safety Act, certain required information
concerning a Weed Wizard product previously distributed by us that was subject
of a voluntary recall during 2000. We believe that the maximum amount of any
claim that may be brought by the CSPC will not exceed approximately $1.6
million. We intend to defend any claim against Weed Wizard or us that may be
brought by the CSPC.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of U.S. Home & Garden stockholders was held on June 25,
2001 at which time the following directors were reappointed to serve until the
Annual Meeting of Stockholders to be held in the year 2002:
Votes For Votes Withheld
--------- --------------
Robert Kassel 14,598,755 1,039,655
Richard Raleigh 14,644,965 993,445
Fred Heiden 14,643,745 994,665
Brad Holsworth 14,646,265 992,145
Jon Schulberg 14,644,465 993,945
20
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters.
Our common stock has traded in the over-the-counter market and has been
quoted on the NASDAQ Stock Market since March 26, 1992. The NASDAQ Smallcap
symbol for our common stock is "USHG". The following table sets forth, for the
periods indicated, the high and low sales prices for the common stock, as
reported by NASDAQ.
Year Ended June 30, 2001 High Low
First Quarter $ 3.38 $ 1.88
Second Quarter 2.25 1.00
Third Quarter 1.78 1.00
Fourth Quarter 1.09 0.63
Year Ended June 30, 2000 High Low
First Quarter $ 4.13 $ 2.25
Second Quarter 2.81 2.13
Third Quarter 5.13 2.56
Fourth Quarter 3.88 2.13
As of September 17, 2001, the number of stockholders of record of our
common stock was 183. 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, 2001, we extended by two years the
expiration date of options and warrants to purchase an aggregate of 200,000
shares of common stock previously granted to certain advisors. The foregoing
transaction was 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 agreement between us and our primary lending institution prohibits
us from paying dividends without the lenders' consent.
21
Item 6. Selected Financial Data (in thousands, except per share data).
The following selected financial data at and for the years ended June 30,
1997, 1998, 1999, 2000 and 2001 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 Operations Data
Year Ended June 30,
----------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Net sales .......................................... $52,046 $67,149 $89,346 $89,665 $80,775
Cost of sales ...................................... 23,649 30,431 44,176 49,101 45,555
Unusual item ....................................... -- -- -- 928 --
------------ ------------ ------------ ------------ ------------
Gross profit ....................................... 28,397 36,718 45,170 39,636 35,220
Selling, shipping, general and administrative
expenses ........................................... 17,745 23,047 32,900 31,711 31,856
Loss on impairment of goodwill ..................... -- -- -- -- 10,820
Restructuring charges .............................. -- -- 1,964 -- 2,860
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ...................... 10,652 13,671 10,306 7,925 (10,316)
Other income (expense) ............................. (3,262) (3,095) (6,907) (6,692) (7,335)
Income tax (expense) benefit ....................... (3,200) (3,600) (1,350) (907) 3,898
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before extraordinary gain (expense) ................ 4,190 6,976 2,049 326 (13,753)
Loss from discontinued operations,
net of tax and minority interest ................... -- -- -- (1,895) (7,129)
Loss on disposal of discontinued operations,
net of tax and minority interest ................... -- -- -- -- (4,551)
Extraordinary (expense) gain, net of tax ........... (1,007) (1,450) -- 1,224 4
------------ ------------ ------------ ------------ ------------
Net income (loss) .................................. $3,183 $5,526 $2,049 $(345) $(25,429)
============ ============ ============ ============ ============
Income (loss) from continuing operations per
share before extraordinary gain (expense):
Basic .............................................. $.31 $.39 $.10 $.02 $(.76)
Dilutive ........................................... $.26 $.31 $.09 $.02 $(.76)
Net income (loss) per share:
Basic .............................................. $.23 $.31 $.10 $(.02) $(1.40)
Dilutive ........................................... $.20 $.24 $.09 $(.02) $(1.40)
Weighted average number of common and common
equivalent shares outstanding:
Basic .............................................. 13,695,000 17,776,000 19,621,000 19,031,000 18,181,000
Dilutive ........................................... 16,068,000 22,808,000 23,595,000 19,031,000 18,181,000
22
Balance Sheet Data:
June 30,
------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Working capital ..................... $2,292 $46,743 $32,874 $25,152 $4,886
Intangible assets, net .............. 44,364 63,395 82,109 78,632 65,941
Total assets ........................ 68,475 126,813 138,263 139,662 108,936
Short-term debt ..................... 8,990 -- -- 3,125 21,650
Long-term debt ...................... 17,570 63,250 78,750 70,855 56,951
Total liabilities ................... 36,549 75,214 91,779 90,448 89,729
Stockholders' equity ................ 31,926 51,599 46,484 45,103 17,968
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
We manufacture and market a broad range of brand-name consumer lawn and
garden products through our wholly-owned subsidiaries, Ampro, Easy Gardener and
Golden West, and through Easy Gardener's wholly-owned subsidiaries, Weatherly
and Weed Wizard. 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 $59.6 million as of June
30, 2001. 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, 2001 was $2.6 million or
$.14 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, 2001 were
adversely affected by the impairment of goodwill of one of our subsidiaries,
Weed Wizard Acquisition Corporation and losses attributable to our Egarden Inc.
subsidiary, whose operations were discontinued in May 2001. Our results of
operations were also adversely affected by the restructuring loss from the
closure of the Ampro Industries, Inc. facility in Michigan, an overall soft
economy and prolonged periods of inclement weather in many portions of the
United States during the early spring which negatively impacted the lawn and
garden industry.
23
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 late 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.
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,
-----------------------------------------
1999 2000 2001
----- ----- -----
Net sales .............................................. 100% 100% 100%
Cost of sales .......................................... 49.4 54.8 56.4
Unusual item ........................................... -- 1.0 --
----- ----- -----
Gross profit ........................................... 50.6 44.2 43.6
Selling and shipping expenses .......................... 21.6 20.8 20.8
General and administrative expenses .................... 15.3 14.6 18.7
Loss on impairment of goodwill ......................... -- -- 13.4
Restructuring charges .................................. 2.2 -- 3.5
----- ----- -----
Income (loss) from operations .......................... 11.5 8.8 (12.8)
Gain (loss) on disposal of property and equipment ...... -- 0.6 --
Interest expense, net .................................. (7.7) (8.1) (9.1)
Income tax (expense) benefit ........................... (1.5) (1.0) 4.8
Loss from discontinued operations, net ................. -- (2.1) (8.8)
Loss on disposal of discontinued operations, net ....... -- -- (5.7)
Extraordinary (expense) gain, net ...................... -- 1.4 --
----- ----- -----
Net income (loss) ...................................... 2.3% (0.4)% (31.6)%
----- ----- -----
24
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Net sales. Net sales decreased by $8.9 million, or 9.9%, to $80.8 million
during the fiscal year ended June 30, 2001 from $89.7 million during the
comparable period in 2000. The decrease in sales was primarily a result of poor
spring weather, a generally slower economic environment and major customers
moving to just-in-time inventory management programs.
Gross Profit. Gross profit decreased by $4.4 million, or 11.1%, to $35.2
million for the fiscal year ended June 30, 2001 from $39.6 million during the
comparable period in 2000. Gross profit as a percentage of net sales decreased
to 43.6% during the fiscal year ended June 30, 2001 from 44.2% during the
comparable period in 2000. This decrease was due primarily to delayed order
placement by the major retailers, an overall soft economy and poor weather in
our key markets in the third quarter.
Selling and shipping expense. Selling and shipping expenses decreased $1.8
million, or 9.9% to $16.8 million during the fiscal year ended June 30, 2001
from $18.6 million during the comparable period in 2000. This decrease in
expense was primarily a result of the decrease in net sales. Selling and
shipping expenses as a percentage of net sales remained consistent at 20.8%
during the fiscal year ended June 30, 2001 compared to the prior year.
General and administrative expenses. General and administrative expenses,
excluding depreciation and amortization, increased $1.9 million or 21.1% to
$10.7 million during the fiscal year ended June 30, 2001 from $8.8 million
during the comparable period in 2000. This increase is primarily due to a write
off of certain receivables from our customers in fiscal 2001, a general increase
in expense levels paid and termination benefits for certain former employees
during the fiscal year ended June 30, 2001. As a percentage of net sales,
general and administrative expenses excluding depreciation and amortization
increased to 13.2% during the fiscal year ended June 30, 2001 from 9.8% during
the comparable period in 2000.
Depreciation and amortization. Depreciation and amortization expenses
remained consistent with the prior year at $4.4 million during the fiscal year
ended June 30, 2001 compared to $4.3 million during the comparable period in
2000. As a percentage of net sales, depreciation and amortization expenses
increased to 5.4% during the fiscal year ended June 30, 2001 from 4.8% during
the comparable period in 2000 primarily due to the decrease in net sales.
25
Restructuring Charges. In fiscal 2001, we recorded restructuring charges of
$2.9 million relating to the closing and sale of our Ampro Industries Inc.
facility in Michigan. We continue to sell products that were previously
manufactured at Ampro's Michigan facility. We recognized approximately $1.7
million of expenses and losses relating to the closing of the Ampro facility and
sale of property and equipment relating to the Ampro facility and approximately
$1.2 million for the termination benefits to be paid to all employees involved
with the facility. Approximately $999,000 in termination benefits were unpaid at
June 30, 2001, as a result of restructuring. The restructuring is expected to be
completed by October 31, 2001.
Goodwill Impairment. An impairment charge of $10,820,000 was recorded in
June 2001 to write off the net goodwill balance associated with our Weed Wizard
subsidiary. Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of"
("SFAS 121") requires periodic evaluation of asset impairment under certain
circumstances. Due to the operating losses incurred by the subsidiary, the
product recall in the prior year, and the unsuccessful product launch of the
replacement product through a complete sales season, the evaluation was
performed. If the evaluation determines that the long-lived assets have been
impaired, SFAS 121 requires that the assets be written down to their fair value,
as determined by estimated terminal value, which was accomplished by the
impairment charge.
Since the remaining assets of Weed Wizard (primarily machinery and product
rights) will remain in service, the remaining net book value of the assets will
be depreciated or amortized over the remaining lives of the assets.
Income (loss) from continuing operations. Loss from continuing operations
increased by $18.3 million, to a loss of $10.4 million during the fiscal year
ended June 30, 2001 compared to $7.9 million in income for the comparable period
in 2000. The decrease in income from operations for the 2001 period is primarily
attributable to the impairment of goodwill of our subsidiary, Weed Wizard
Acquisition Corporation, restructuring charges related to the closure of our
26
Ampro Industries, Inc. facility in Michigan, delayed order placement by the
major retailers, an overall soft economy and poor weather in the third quarter.
As a percentage of net sales, loss from operations increased to 12.8% for the
fiscal year ended June 30, 2001 from income from operations of 8.8% during the
comparable period in 2000.
Net interest expense. Net interest expense increased $92,000, or 1.3% to
$7.3 million during the fiscal year ended June 30, 2001, from $7.2 million
during the comparable period in 2000. The increase in interest expense is
primarily related to the increase in borrowings under our credit facilities.
Income tax benefit. Income tax benefit was $3.9 million during the fiscal
year ended June 30, 2001 compared to income tax expense of $907,000 during the
comparable period in 2000, primarily due to the decrease in income from
operations. See Note 18 to the Consolidated Financial Statements.
Discontinued Operations. In June 2001, we announced that we were
discontinuing our e-commerce initiative, which we were conducting through our
subsidiary, Egarden Inc., effective June 30, 2001. We plan to dispose of the
assets and liabilities of Egarden by either contributing them to another company
in exchange for an ownership interest in a company or through a sale of the
assets and liquidation of the liabilities. The net assets of the discontinued
operations were $108,000 at June 30, 2001 with a minority interest of
$1,239,000.
We recorded a net loss on disposal of discontinued operations of $4.6
million, net of minority interest of $1.1 million. This included the write-off
of all long-lived assets of $5.2 million and $445,000 of restructuring expense
related to the termination of all Egarden employees. In addition to the net loss
on disposal of discontinued operations in 2001, we had a net loss from the
operations of Egarden of $7.1 million, net of minority interest of $1.8 million.
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" (APB 30), our consolidated financial statements have been
reclassified to reflect the discontinuation of Egarden. The net operating
results, net assets and net cash flows of Egarden have been reported as
"Discontinued Operations" in our Consolidated Financial Statements.
27
Extraordinary gain from early extinguishment of debt. Extraordinary gain
from early extinguishment of debt decreased to $4,000 during the fiscal year
ended June 30, 2001 from $1.2 million for the comparable period in 2000 (net of
tax of $3,000 and $878,000, respectively). In 2001 we repurchased 1,200 shares
of the mandatorily redeemable trust preferred securities of U.S. Home & Garden
Trust I compared to 250,781 shares in 2000. See Note 19 to the Consolidated
Financial Statements.
Net loss. Net loss increased by $25.1 million to a net loss of $25.5
million during the fiscal year ended June 30, 2001 from a net loss of $345,000
during the comparable period in 2000. Net loss per common share increased $1.38
to a net loss of $1.40 per share when compared to net loss per common share of
$.02 during the comparable period in 2000. The increase in net loss is primarily
attributable to the impairment of goodwill of one of our subsidiaries, Weed
Wizard Acquisition Corporation, the restructuring charge related to the closure
of the Ampro Industries, Inc. facility in Michigan, the discontinuance of
operations of our business-to-business e-commerce subsidiary, Egarden Inc.,
reduced sales due to delayed order placement by the major retailers, an overall
soft economy and poor weather in the third quarter, offset in part by a
reduction in income tax expense of approximately $4.8 million. There were fewer
weighted average common and common equivalent shares outstanding during the year
ended June 30, 2001 compared to the comparable period in the prior year due to
the repurchase of our common stock during both years.
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.
28
Selling and shipping expense. Selling and shipping expenses decreased $0.7
million, or 3.6% to $18.6 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 decreased to 20.8% during fiscal year
ended June 30, 2000 from 21.6% during the comparable period in 1999.
General and administrative expenses. General and administrative expenses,
excluding depreciation and amortization, decreased $0.5 million or 5.4%, to $8.8
million during the fiscal year ended June 30, 2000 from $9.3 million during the
comparable period in 1999. As a percentage of net sales, general and
administrative expenses excluding depreciation and amortization decreased to
9.8% during the fiscal year ended June 30, 2000 from 10.4% during the comparable
period in 1999. This decrease as a percentage of net sales was primarily due to
the increase in net sales.
Depreciation and amortization. Depreciation and amortization expenses were
consistent at $4.3 million during the fiscal years ended June 30, 2000 and 1999.
As a percentage of net sales, depreciation and amortization expenses were 4.8%
during the fiscal years ended June 30, 2000 and 1999.
Income from operations. Income from operations decreased by $2.4 million,
or 23.1%, to $7.9 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 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 8.8% for the fiscal year ended June
30, 2000 from 11.5% during the comparable period in 1999.
Net interest expense. Net interest expense increased $360,000, or 5.2% to
$7.2 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. Interest expense also decreased in conjunction with our
repurchase of 250,781 shares of the mandatorily redeemable trust preferred
securities of U.S. Home & Garden Trust I.
29
Income taxes. Income tax expense decreased by $0.5 million to $0.9 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. See Note 18 to the Consolidated Financial Statements.
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 250,781 shares of the mandatorily redeemable trust
preferred securities of U.S. Home & Garden Trust I. See Note 19 to the
Consolidated Financial Statements included in Part I, Item 8.
Net income (loss). Net income decreased by $2.4 million to a net loss of
$345,000 during the fiscal year ended June 30, 2000 from net income of $2.1
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 loss
from discontinued operations, 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.
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
2001, are also seasonal. Most shipments occur during the period from March
through October.
30
Set forth below is certain unaudited quarterly financial information:
Quarter ended
(in thousands, except percentages and per share data)
--------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31,
1999 1999 2000 2000 2000 2000
---------- ---------- ---------- ---------- ---------- ----------
Net sales ...................... $12,985 $14,145 $36,494 $26,041 $13,111 $11,360
Cost of sales ................ 7,176 7,420 19,218 15,287 7,424 5,974
Unusual item ................. -- -- 928 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Gross profit ................. 5,809 6,725 16,348 10,754 5,687 5,386
Selling, shipping, general and
administrative expenses ...... 7,645 7,795 8,006 8,265 7,742 7,485
Loss on impairment of
goodwill ....................... -- -- -- -- -- --
Restructuring charges .......... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations ..................... (1,836) (1,070) 8,342 2,489 (2,055) (2,099)
Gain (loss) on sale of
property ....................... -- -- -- 551 -- --
Interest income ................ 73 59 58 74 64 34
Interest expense ............... (1,818) (2,003) (1,875) (1,811) (1,660) (1,763)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes
and extraordinary gain ......... (3,581) (3,014) 6,525 1,303 (3,651) (3,828)
Income tax benefit (expense) ... 1,600 1,353 (2,828) (1,032) 1,779 1,808
Loss from discontinued
operations, net of taxes and
minority interest .............. -- (304) (905) (686) (883) (977)
Loss on disposal of
discontinued operations, net of
taxes and minority interest .... -- -- -- -- -- --
Extraordinary gain, net of
taxes .......................... -- -- 943 281 4 --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .............. $(1,981) $(1,965) $3,735 $(134) $(2,751) $(2,997)
========== ========== ========== ========== ========== ==========
Diluted net income (loss) per
share(1) ....................... $(0.10) $(0.10) $0.17 $(0.01) $(0.15) $(0.16)
========== ========== ========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding(1) ................. 19,335 19,213 21,627 18,988 18,807 18,313
========== ========== ========== ========== ========== ==========
Net sales ...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ................ 55.3% 52.5% 52.7% 58.7% 56.6% 52.6%
Unusual Item ................. -- -- 2.5% -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Gross profit ................. 44.7% 47.5% 44.8% 41.3% 43.4% 47.4%
Selling, shipping, general and
administrative ............. 58.9% 55.1% 22.0% 31.7% 59.0% 65.9%
Loss on impairment of
goodwill ....................... -- -- -- -- -- --
Restructuring charges .......... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations .. (14.2%) (7.6%) 22.8% 9.6% (15.6%) (18.5%)
Gain (loss) on the sale of
property ....................... -- -- -- 2.1% -- --
Interest income ................ 0.6% 0.4% 0.2% 0.3% 0.5% 0.3%
Interest expense ............... (14.0%) (14.1%) (5.1%) (7.0%) (12.7%) (15.5%)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes,
and extraordinary gain ......... (27.6%) (21.3%) 17.9% 5.0% (27.8%) (33.7%)
Income tax benefit (expense) ... 12.3% 9.6% (7.8%) (4.0%) 13.5% 15.9%
Loss from discontinued
operations, net of tax
and minority interest .......... -- (2.2%) (2.5%) (2.6%) (6.7%) (8.6%)
Loss on disposal of discontinued
operations, net of tax
and minority interest .......... -- -- -- -- -- --
Extraordinary gain, net of
taxes .......................... -- -- 2.6% 1.1% -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .............. (15.3%) (13.9%) 10.2% (0.5%) (21.0%) (26.4%)
========== ========== ========== ========== ========== ==========
--------------------------
March 31, June 30,
2001 2001
---------- ----------
Net sales ...................... $26,507 $29,797
Cost of sales ................ 14,165 17,992
Unusual item ................. -- --
---------- ----------
Gross profit ................. 12,342 11,805
Selling, shipping, general and
administrative expenses ...... 8,687 7,942
Loss on impairment of
goodwill ....................... -- 10,820
Restructuring charges .......... 800 2,060
---------- ----------
Income (loss) from
operations ..................... 2,855 (9,017)
Gain (loss) on sale of
property ....................... -- --
Interest income ................ 99 25
Interest expense ............... (1,998) (2,136)
---------- ----------
Income (loss) from continuing
operations before income taxes
and extraordinary gain ......... 956 (11,128)
Income tax benefit (expense) ... (2,311) 2,622
Loss from discontinued
operations, net of taxes and
minority interest .............. (416) (4,853)
Loss on disposal of
discontinued operations, net of
taxes and minority interest .... -- (4,551)
Extraordinary gain, net of
taxes .......................... -- --
---------- ----------
Net income (loss) .............. $(1,771) $(17,910)
========== ==========
Diluted net income (loss) per
share(1) ....................... ($0.10) $(1.02)
========== ==========
Weighted average common and
common equivalent shares
outstanding(1) ................. 17,638 17,628
========== ==========
Net sales ...................... 100.0% 100.0%
Cost of sales ................ 53.4% 60.4%
Unusual Item ................. -- --
---------- ----------
Gross profit ................. 46.6% 39.6%
Selling, shipping, general and
administrative ............. 32.8% 26.7%
Loss on impairment of
goodwill ....................... -- 36.3%
Restructuring charges .......... 3.0% 6.9%
---------- ----------
Income (loss) from operations .. 10.8% (30.3%)
Gain (loss) on the sale of
property ....................... -- _
Interest income ................ 0.4% 0.1%
Interest expense ............... (7.6%) (7.2%)
---------- ----------
Income (loss) from continuing
operations before income taxes,
and extraordinary gain ......... 3.6% (37.4%)
Income tax benefit (expense) ... (8.7%) 8.8%
Loss from discontinued
operations, net of tax
and minority interest .......... (1.6%) (16.3%)
Loss on disposal of discontinued
operations, net of tax
and minority interest .......... -- (15.2%)
Extraordinary gain, net of
taxes .......................... -- --
---------- ----------
Net income (loss) .............. (6.7%) (60.1%)
========== ==========
--------
(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.
31
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, 2001, we had consolidated cash and short-term investments
totaling $2.7 million and working capital of $4.9 million. At June 30, 2000, we
had consolidated cash and short-term investments totaling $5.1 million, of which
$1.6 million was restricted and working capital of $25.2 million. The principal
sources of working capital during fiscal 2001 included proceeds from sale of
property and equipment and net proceeds from our credit facility discussed
below. Major uses of working capital included the purchase of equipment,
expenditures related to Egarden and repurchase of 1,336,000 shares of our common
stock.
Net cash provided by continuing operating activities for fiscal 2001 of
$826,000 consisted primarily of a decrease in inventory and an increase in
non-cash expenses, which includes depreciation and amortization of $5.7 million,
the $10.8 million loss on impairment of goodwill and the $2.7 million of
restructuring charges, net of cash, which was offset, in part, by the loss from
continuing operations and a decrease in accounts payable and accrued expenses.
The $1.8 million decrease in inventories was primarily caused by efficiencies in
inventory management due to improved information systems. The $5.7 million
decrease in accounts payable and accrued expenses is primarily due to decreased
purchases of new material inventories and changes in the timing of certain
tax-related items.
Net cash provided by investing activities for fiscal 2001 was $2.3 million,
consisting primarily of proceeds from the sale of property and equipment and the
decrease in restricted cash partially offset by the purchase of equipment,
package tooling and other intangibles.
32
Net cash provided by financing activities for fiscal 2001 was $1.6 million,
consisting primarily of the net proceeds from the lines of credit partially
offset by the repurchase of common stock for treasury.
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 expired on June 30, 2001,
at which time borrowings became 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 or extended, 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 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 us 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, 2001, the interest rate on any
borrowings under the facilities was 10.12%.
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. We are in violation of certain covenants of the
Credit Facility. We have received from the Bank an extension of the maturity
date of the Working Capital Facility to October 30, 2001.
33
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. Any
balances outstanding under the Acquisition Facility at June 30, 2001 must be
repaid in quarterly installments such that 37.5% is paid in fiscal 2002, 32.5%
is paid in fiscal 2003 and 30.0% is paid in fiscal 2004.
In September 2001, we received a commitment from another commercial bank to
refinance the Working Capital and Acquisition Facilities with a new asset-based
borrowing facility. The proposed new three-year facility will be composed of a
revolving credit line of up to $31 million, which will be limited by, and
secured by, our accounts receivable and inventory. It will also contain a term
loan of $2 million, which will be secured by our fixed assets, and will be paid
down in equal installments on a five-year amortization schedule.
Borrowings under the new credit facility will bear interest at variable
annual rates selected by the Company based on either the bank's Eurodollar rate
or its prime rate plus, in each case, an applicable marginal rate of interest.
As a condition for closing this new credit facility, we must arrange for
new subordinated debt financing of at least $2.25 million and must have cash
and/or borrowing availability under the new facility of at least $3.25 million
at closing.
We have received a commitment for new subordinated debt in an amount that
will provide us with proceeds of approximately $4.0 million. We believe that
this subordinated debt will meet the requirements under the proposed new asset
based credit facility. However, there can be no assurance that either the new
asset based credit facility or the new subordinated debt will be consummated or
that the terms will remain as stated in the commitment letters. See Note 9 to
the Consolidated Financial Statements.
34
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.
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, 2001, 3,889,724 shares have been repurchased from non-affiliates in
open market transactions of which 1,335,552 shares were purchased during fiscal
2001. The Bank, as a condition of waiving non-compliance by us with certain
covenants under the credit facilities, has prohibited further share repurchases.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
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 No. 133 was effective for all
fiscal quarters of fiscal years beginning after June 15, 2000 as amended by SFAS
No. 137 and SFAS No. 138. The adoption of SFAS did not have a material impact on
the Company's consolidated financial statements.
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 was effective
35
July 1, 2000, but certain conclusions in this Interpretation cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
adoption of Interpretation No. 44 did not have a material impact on our
consolidated financial statements.
In June 2001, the FASB finalized Statements No. 141, Business Combinations
("SFAS 141") and No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 requires the use of the purchase method of accounting and prohibits the
use of the pooling-of-interest method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that we recognize acquired
intangible assets apart form goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires, upon adoption of SFAS 142, that we reclassify the
carrying amounts of intangible assets and goodwill based on the criteria of SFAS
141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that we identify reporting units for the purpose of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires that we complete a transitional goodwill
impairment test six months from the date of adoption. We are also required to
reassess the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142.
Our previous business combinations were accounted for using the purchase
method. As of June 30, 2001, the net carrying amount of goodwill is $59.6
million and other intangible assets is $6.3 million. Amortization expense during
the year ended June 30, 2001 was $3.4 million. Currently, we are assessing but
have not yet determined how the adoption of SFAS 141 and SFAS 142 will impact
our financial position and results of operations.
36
In September 2000 the Emerging Issues Task Force (EITF) issued EITF Issue
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor Products, which requires cooperative advertising charges
to be classified as a reduction of revenue. This guidance is effective for
fiscal periods beginning after December 15, 2001. Currently, we are assessing
but have not yet adopted EITF 00-25.
Inflation
Inflation has historically not had a material effect on our operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following table provides information on our fixed maturity debt instruments
as of June 30, 2001 that are sensitive to changes in interest rates.
The Bank lines of credit had interest rates $21.7 million
ranging from 6.62% to 10.87% for the
year ended June 30, 2001
Item 8. Financial Statements and Supplementary Data.
This information appears in a separate section of this report following
Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Our current directors and executive officers are as follows:
Name Age Position
---- --- --------
Robert Kassel(1) 61 Chairman of the Board, Chief
Executive Officer, President and
Treasurer
Richard Grandy 55 Chief Operating Officer
37
Name Age Position
---- --- --------
Richard Raleigh (1) 47 Director
Fred Heiden(1)(2) 60 Director
Brad Holsworth(2) 41 Director
Jon Schulberg(1)(2) 43 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 Grandy, has been Chief Operating Officer of U.S. Home & Garden Inc.
since June 30, 2001. He has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of Easy
Gardener, Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy
Gardener, Inc. in 1983 after serving as Marketing Director at International
Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a
sales representative of lawn and garden products for the Ortho Division of
Chevron Chemical Co.
Richard Raleigh has been a Director of U.S. Home & Garden Inc. since March 1993.
He served as Chief Operating Officer of U.S. Home & Garden Inc. from June 1992
to June 30, 2001 and has served as a consultant to U.S. Home & Garden, Inc.
since then. He served as Executive Vice President-Operations of U.S. Home &
Garden Inc. from December 1991 to June 1992. Prior to joining U.S. Home & Garden
Inc., Mr. Raleigh was a free-lance marketing consultant to the lawn and garden
industry from January 1991 to December 1991. From April 1988 to January 1991, he
was Director of Marketing, Lawn and Garden of Monsanto Agricultural Co. From
38
December 1986 to April 1988 he was Vice President of Sales and Marketing of The
Andersons, a company engaged in the sale of consumer and professional lawn and
garden products. From November 1978 to December 1986, he held a variety of
positions at The Andersons, including Operations Manager and New Products
Development Manager.
Fred Heiden, a director of U.S. Home & Garden Inc. since March 1993, has been a
private investor since November 1989. From April 1984 to November 1989, Mr.
Heiden was President and Principal owner of Bonair Construction, a Florida based
home improvement construction company.
Brad Holsworth has been a director of U.S. Home & Garden Inc. since July 2000.
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 was a partner of BDO Seidman, LLP from July
1995 to April 1999.
Jon Schulberg, a director of U.S. Home & Garden Inc. since March 1993, has been
employed as President of Schulberg MediaWorks, a company engaged in the
independent production of television programs and television advertising since
January 1992. From January 1989 to January 1992, he was a producer for
Guthy-Renker Corporation, a television production company. From September 1987
to January 1989 he was Director of Development for Eric Jones Productions.
Certain Key Employees
Richard Kurz, 59, has been Chief Financial Officer of U.S. Home & Garden Inc.
since October 2001 and served as its Vice President-Finance from June 2001 until
October 2001. From 1997 until December 2000 he was Executive Vice President and
Chief Financial Officer for Aircraft Interior Resources, Inc, a company that
provides products and services to commercial airlines. From 1994 until 1997 he
was Senior Vice President and Chief Financial Officer of American Eagle Group,
Inc., a service company that provided insurance services to the aviation and
other specialized industries. From 1991 to 1994 he was Chief Financial and
Administrative Officer for BDP International, Inc. a logistics service provider.
From 1979 to 1991 he held a variety of senior financial positions with Cigna
Corporation, a healthcare provider. Mr. Kurz is a Certified Public Accountant.
39
David Harper, 49, has been Chief Operating Officer of Egarden 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, 46, 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, 45, 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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that officers
and directors, and persons who beneficially own more than 10 percent of a
registered class of equity securities of U.S. Home & Garden Inc., file certain
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
40
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, 2001 all filing requirements applicable to the officers,
directors, and greater than 10 percent beneficial stockholders of U.S. Home &
Garden Inc. were complied with.
Item 11. Executive Compensation.
The following table discloses the compensation awarded by U.S. Home &
Garden Inc., for the three fiscal years ended June 30, 2001, 2000 and 1999, to
Mr. Robert Kassel, its Chairman, Chief Executive Officer, President and
Treasurer, Mr. Richard Raleigh, its former Chief Operating Officer, and Mr.
Richard Grandy, its current Chief Operating Officer, Ms. Lynda Gustafson, its
former Vice President of Finance, and Mr. Donald Rutishauser, its former Chief
Financial Officer (together, the "Named Officers"). During the fiscal year ended
June 30, 2001, no other officer of U.S. Home & Garden Inc. received a total
salary and bonus that exceeded $100,000 during such fiscal year.
Summary Compensation Table
Annual Compensation Long-Term
Compensation
Name and Principal Position Securities
--------------------------- Underlying All Other
Year Salary ($) Bonus ($) Options (#) Compensation($)(1)
---- ---------- --------- --------------- ------------------
Robert Kassel, 2001 354,000 315,000 1,468,000 (5) 6,593
Chairman, Chief Executive Officer, 2000 477,000 (2) 320,000 (2) 500,000 (3) 6,383
President and Treasurer 1999 450,000 114,000 641,333 (4) 6,169
Richard Raleigh, former Chief Operating 2001 253,000 328,000 537,000 (5) 664,074
Officer 2000 250,000 125,000 225,000 (6) 12,623
1999 250,000 96,000 137,500 (7)(8) 12,169
Richard Grandy, Chief Operating Officer 2001 340,000 100,000 150,000 (5) 11,693
2000 311,000 -- -- 11,806
1999 286,000 -- -- 11,593
Lynda Gustafson, former Vice President of 2001 6,000 -- -- 210,703
Finance 2000 147,000 60,000 50,000 4,763
1999 148,000 60,000 -- 12,169
Donald Rutishauser, former Chief Financial 2001 119,000 26,000 -- 151,719
Officer 2000 71,000 -- 50,000 --
(1) Represents our contributions to the Named Officers 401(k)/profit sharing
accounts and actual or accrued severance payments to Mr. Raleigh
($652,000), Ms. Gustafson ($210,000) and Mr. Rutishauser ($150,000) in
fiscal 2001. Excludes certain perquisites that did not exceed the lesser of
$50,000 or 10% of their combined bonus and salary.
41
(2) Included in Mr. Kassel's salary is $46,800 of non-cash compensation
attributable to his receipt of shares of common stock of Egarden Inc. Mr.
Kassel's bonus of $320,000 primarily reflects work performed by him in
connection with Egarden Inc. and its initial capitalization, securing
E-commerce agreements with certain of the nations largest hardware
cooperatives and obtaining vendor arrangements.
(3) Includes 200,000 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in fiscal
2000.
(4) 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) Represents options that were originally granted to the respective officers
in prior fiscal years, the expiration dates of which were extended in
fiscal 2001.
(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.
(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.
42
No new options were granted to the Named Officers and 10,000 options were
granted to an employee during the fiscal year ended June 30, 2001. The only
other options granted during fiscal 2001 were to outside directors under the
Directors Stock Option Plan. The following table discloses information
concerning options granted to certain of the Named Officers in prior fiscal
years whose expiration dates were extended during the fiscal year ended June 30,
2001.
Option Grants in Fiscal Year Ended June 30, 2001
Individual Grants
--------------------------------------------------------------------------
Number of Securities Percent of Total
Underlying Options Options Granted to Exercise Potential Realizable Value at
Granted Employees in Fiscal Price Expiration Assumed Annual Rates of Stock Price
Name (#)(1) Year (%)(2) ($/Sh) Date Appreciation for Option Term ($)(3)
---------------- -------------------- ------------------- ------------ ------------ -----------------------------------
5% 10%
------------- ----------------
Robert Kassel 80,000 $1.69 11/17/05 -- --
1,000,000 2.06 11/17/05 -- --
388,000 3.25 11/17/05 -- --
Richard Grandy 150,000 2.25 11/17/05 -- --
Richard Raleigh 17,000 1.69 7/1/03 -- --
400,000 2.06 7/1/03 -- --
120,000 3.25 7/1/03 -- --
----------
(1) Represents options that were granted in prior fiscal years but whose
expiration dates were extended during fiscal 2001. All of the options are
exercisable in full at the time of the extension of their expiration dates
except for 80,000 options granted to Mr. Kassel, which vest over a 10-year
period and Mr. Raleigh's 17,000 $1.69 options which vest over a 10-year
period.
(2) No percentages are reflected in the above-table since no new options were
granted to any Named Officer during fiscal 2001. As noted above, in
addition to the extensions of options previously granted to certain of the
Named Officers a total of 10,000 new options were granted to employees
during fiscal 2001.
43
(3) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming our common stock appreciates at the compounded rates
specified over the term of the options. These numbers do not take into
account provisions of options providing for termination of the option
following termination of employment or nontransferability of the options
and do not make any provis