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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, 1999
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 0-19899
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this FormE10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 20, 1999 was
approximately $ 46,011,000.
As of September 20, 1999, 19,476,097 shares of the registrant's Common
Stock, par value $.001 per share were outstanding.
Documents Incorporated By Reference: None
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Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for future activities. Such forward-looking information involves
important known and unknown risks and uncertainties that could significantly
affect actual results, performance or achievements of the Company in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of the Company. These risks and uncertainties
include, but are not limited to, those relating to the Company's growth
strategy, customer concentration, outstanding indebtedness, dependence on
weather conditions, seasonality, expansion and other activities of competitors,
ability to successfully integrate recently acquired companies and products
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 the Company's other filings with the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend" and
"plan" and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date the statement was made.
General
The Company is a leading manufacturer and marketer of a broad range of
consumer lawn and garden products. The Company's products include weed
preventive landscape fabrics, fertilizer and plant food spikes, decorative
landscape edging, weed trimmer replacement heads, shade cloth, lawn and garden
fencing, specialty combinations of mulch, fertilizer, grass and flower seeds 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). The Company believes that it has
significant market share and favorable brand-name recognition in several of its
primary product categories. The Company markets its products through most large
national home improvement and mass merchant retailers ("Retail Accounts"),
including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware and Home Base.
The Company was organized under the laws of the State of California in
August 1990 under the name Natural Earth
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Technologies, Inc. In January 1992 the Company reincorporated under the laws of
the State of Delaware and in July 1995 changed its name to U.S. Home & Garden
Inc. The Company's lawn and garden operations are conducted through its
subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy Gardener's
subsidiaries, Ampro Industries, Inc. ("Ampro"), and the Company's agricultural
products operations are conducted through its subsidiary Golden West
Agri-Products, Inc. ("Golden West"). Unless the context suggests otherwise,
references in this Report to the Company mean U.S. Home & Garden Inc. and its
subsidiaries. The Company's executive offices are located at 655 Montgomery
Street, Suite 500, San Francisco, California 94111, and its telephone number is
(415) 616-8111.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the number
of vendors needed to source high volume lawn and garden products, the preference
among home improvement and mass merchant retailers has shifted towards single
source suppliers that offer broad product lines of consumer brand-name
merchandise and the product support necessary to stimulate consumer demand and
ensure timely and cost effective order fulfillment. Smaller regional suppliers
generally lack the capital and other resources necessary to offer the variety
and number of product lines, the product support and the inventory stocking and
tracking capabilities required by home improvement and mass merchant retailers.
According to the 1996-1997 National Gardening Survey, 1996 retail sales of
lawn and garden products were approximately $22 billion, and 64% of the
approximately 101 million households in the United States participated in some
form of gardening activity during 1996. In addition, sales growth in the lawn
and garden industry is being driven in part by the aging of the "baby boomer"
consumer segment. According to the National Gardening Survey, persons 50 years
of age and older spent an average of $400 per household on lawn and garden
activities in 1996.
Prior Acquisitions.
Since August 1992, the Company has consummated the following ten (10)
acquisitions of companies or product lines for a total of over $107 million in
consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic acid-based
products designed to improve crop yield,
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which was 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 was acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5
million promissory note and two convertible notes each in the principal
amount of $1.0 million. Approximately $2.2 million of additional purchase
price was contingent on Easy Gardener meeting certain income requirements.
These contingencies have been met and the Company has paid the entire $2.2
million.
o Emerald Products LLC. A manufacturer of decorative landscape edging which
was acquired in August 1995 for $835,000 in cash and a $100,000 promissory
note.
o Weatherly Consumer Products Group, Inc. ("Weatherly") A manufacturer of
fertilizer spikes and other lawn and garden products, which was acquired in
August 1996 for 1,000,000 shares of Common Stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which was acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, which was acquired in February 1998 for approximately
$16.0 million (plus an additional $1.7 million for excess working capital
and acquisition expenses), of which approximately $5.0 million was based on
the value of certain net assets acquired.
o Landmaster Products, Inc. A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for
approximately $3.0 million (plus an additional $600,000 for certain assets
and acquisition expenses), of which approximately $750,000 was based on the
value of certain assets acquired.
o Tensar(R) consumer products line of The Tensar Corporation. A line of lawn
and garden specialty fencing, which was 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 manufacture and distributor of lawn and garden
products including specialty grass and flower seeds which was acquired in
October 1998 for
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approximately $24.6 million, plus the cost of certain inventory acquired
with a potential additional purchase price amount contingent upon the
acquired business achieving certain specified levels of EBITDA (as defined
in the purchase agreement). An additional $1.0 million was paid for a
non-compete agreement.
o E-Garden, Inc. A supplier of gardening related products which are sold over
the internet under the domain name "egarden.com" which was acquired in June
1999 for approximately $400,000, plus expenses of approximately $100,000.
Up to $250,000 of additional purchase price is contingent upon E-Garden's
net sales exceeding certain targets for each of the years during the
three-year period ending June 30, 2002.
Products
Landscape Fabric. The Company markets different types of landscape fabric
in varying thicknesses and strengths under the trade names WeedBlock(R),
WeedBlock 6(TM), MicroPore(R), Pro WeedBlock(TM), Weedshield(TM) and
Landmaster(R). Landscape fabrics allow water, nutrients and oxygen to filter
through to the soil but prevent weed growth by blocking sunlight. The Company's
primary landscape fabrics are made from non-woven fabrics which are generally
manufactured with extruded polymers, pressed or vacuum formed into thin sheets
having the feel and texture of light plastics. For the fiscal years ended June
30, 1997, 1998 and 1999, sales of landscape fabric represented approximately
44%, 39% and 37%, respectively, of the Company's net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes deliver
plant food nutrients directly to the root of the plant, an alternative method of
maintaining plant health to surface-delivered liquid or solid fertilizers. Some
of the Company's fertilizer spikes have the added feature of containing an
insecticide for the control of unwanted insects. The Company markets a variety
of indoor and outdoor specialty fertilizer and plant food spikes primarily under
the Jobe's(R) tradename, one of the most recognized brands in the consumer lawn
and garden industry. For the year ended June 30, 1999, sales of fertilizer,
plant food and insecticide spikes constituted approximately 13% of the Company's
net sales. For the years ended June 30, 1997 and 1998, sales of fertilizer,
plant food and insecticide spikes constituted approximately 24% and 20%,
respectively, of the Company's net sales.
Landscape Edging. The Company markets a variety of resin-based decorative
landscape edgings under trade names including Emerald Edge and Terra Cotta
Tiles(TM). The Company's decorative edgings are used by consumers to define the
perimeter of planting
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areas with a variety of designs which include stone, log, terra cotta tiles and
picket fences.
Shade Cloth. The Company markets shade cloth fabrics in a variety of sizes
and colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy or
protection from wind for people, plants and pets. The Company markets shade
cloth fabrics as an exclusive United States retail distributor of a shade cloth
manufacturer pursuant to an agreement that expires on December 31, 2000.
Fertilizers and Root Feeders. The Company markets fertilizers under the
Ross trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a
long steel irrigation tube with hose connector that is inserted deep into the
ground, provides the homeowner with a means of deep feeding and irrigating trees
and shrubs. The Ross Root Feeder may also be used without fertilizer as a deep
watering device.
Weed Trimmer Replacement Heads. The Company manufactures and distributes
replacement heads for string weed trimmer products under the Weed Wizard
trademark. The Company's weed trimmer replacement head products consist of a
replacement casing containing either a chain link for heavy duty use or a
plastic blade for routine weed and grass trimming. The products are part of a
multi fit system offered by the Company, which allows the replacement heads to
fit on virtually all consumer gas weed trimmers and most consumer electric weed
trimmers.
Lawn and Garden Fencing. The Company markets resin based fencing for lawns
and gardens. A variety of fencing products are marketed by the Company and are
used by the consumer for numerous applications including preventing animals from
entering a garden or orchard.
Mulch, Fertilizer, Grass and Flower Seed. The Company distributes 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 and lawn and garden fencing and
specialty combinations of mulch, fertilizer, grass and flower seeds, the Company
also sells other complementary lawn and garden products for the home gardener.
The products include a line of animal repellents that are formulated to deter
dogs, cats, deer and rabbits from destroying garden and landscape environs, a
variety of protective plant and tree covers, bird and animal mesh blocks,
protective garden and tree netting to prevent animal damage, synthetic mulch and
fabric pegs.
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Agricultural Products. The Company, through Golden West, manufactures and
distributes certain humic acid-based agricultural products for use on farms and
orchards. Golden West generally sells its products to agricultural distributors,
which in turn market Golden West's products to farms and orchards. The principal
agricultural products manufactured or distributed by the Company are:
Energizer(R), a formulation of humic acids which, when applied in conjunction
with liquid fertilizers, permits crops to absorb a greater amount of the
nutrients in the fertilizer; Penox(R), a surfactant, or penetrating wetting
agent, that contains humic acid which, when applied in conjunction with
herbicides, defoliants and other agricultural products, increases their
effectiveness; and Powergizer(R), a foliar nutrient, or plant food, containing
humic acid which promotes growth and vigor in many types of crops. Sales of the
Company's agricultural products accounted for less than 1% of the Company's net
sales in fiscal 1999.
Conversion, Manufacturing and Supply
Lawn and Garden Products
Except for the materials for WeedBlock, which are obtained from a single
source, the basic materials for the Company's lawn and garden products are
purchased from a variety of suppliers. All of such materials are converted,
packaged and shipped by the Company from either its Waco, Texas facility or its
Paris, Kentucky facility, its Bradley, Michigan facility or at a facility
located in Englewood, Colorado.
The Company purchases all of the landscape fabric used to manufacture
WeedBlock from Tredegar Industries, Inc. ("Tredegar"). The Company purchases
large rolls of various types of landscape fabric from Tredegar for shipment to
its Waco, Texas facility where it sizes, cuts and packages the fabric for
consumer sale. Although the Company has purchased all of its supply from
Tredegar for over 10 years and believes that its relationship with Tredegar is
good, Tredegar is free to terminate its relationship with the Company at any
time and accordingly could market its fabrics to other companies, including
competitors of the Company. Nevertheless, the Company owns the registered
trademark "WeedBlock(R)" and to the extent that it establishes alternative
supply arrangements, its rights to market products under the WeedBlock brand
name would continue without restriction.
The Company manufactures and packages its Jobe's fertilizer spikes at its
Paris, Kentucky facility. The raw materials that comprise the Company's indoor
fertilizer spikes are mixed with a binding agent and then passed through an
extrusion process which feeds a continuous strand of fertilizer through a
heat-drying system. The strand is then cut into ready-to-use fertilizer spikes
which are then machine counted and packaged into shelf-ready
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blisterpacks. The Company's outdoor fertilizer spikes are manufactured in a
similar manner except rather than passing through an extrusion process, the
outdoor spikes are processed through molds which shape the spikes into their
final form. The outdoor spikes' are packaged in either a foil pouch, bag or box.
The specifications for the Company's landscape edging, shade cloth and root
feeder products and packaging are designed by the Company and independent design
consultants. The products are then manufactured and packaged by third party
manufacturers according to the Company's specifications.
The nylon product body (rotary head) and the plastic blades and the chain
links used in the Company's weed trimmer replacement heads are manufactured for
the Company pursuant to open purchase orders. The Company assembles and packages
the weed trimmer replacement heads, at its Bradley, Michigan facility, with the
aid of an electronic packaging machine.
The Company purchases most of the material used to manufacture its resin
based fencing from The Tensar Company pursuant to an agreement that expires in
May 2000. The material is then sized and cut for consumer sale at the Company's
Waco, Texas facility.
The Company manufactures its Ampro and Amturf "ready-to-grow" combination
mulch, fertilizer and seed products at its Bradley, Michigan facility. Newsprint
is shredded and processed into mulch and then combined with seed and fertilizer.
The mixture is now packaged in bags, boxes or canisters.
Agricultural Products
The Company does not own or lease any manufacturing facilities for its
agricultural products. Substantially all of the Company's humic acid-based
agricultural products, Energizer, Penox and Powergizer, are processed by Western
Farm Services, Inc. ("Western Farm") pursuant to purchase orders placed by the
Company from time to time in the ordinary course of business. Furthermore, the
Company, through Western Farm, has an open purchase order arrangement with an
entity which supplies it with leonardite ore, a source of humic acid used in its
agricultural products.
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Customers
The Company's customers include home improvement centers, mass
merchandisers, hardware stores, nurseries, and garden centers and other retail
channels throughout the United States. The Company's three largest customers for
fiscal 1999, Home Depot, Lowes and Kmart, accounted for approximately 24%, 9%
and 7%, respectively, of its net sales during such year. During fiscal 1998,
Home Depot, Lowes and Kmart, accounted for approximately 26%, 11% and 7%,
respectively of its net sales during such year. During fiscal 1997, Home Depot,
Lowes and K-Mart, accounted for approximately 26%, 10% and 7%, respectively, of
the Company's net sales. The Company's ten largest customers as a group
accounted for 63% and 59% of its net sales during fiscal 1998 and 1999,
respectively. Sales to such customers are not governed by any contractual
arrangement and are made pursuant to standard purchase orders. While the Company
believes that relations with its largest customers are good, the loss of any of
these customers could have an adverse effect upon the results of operations of
the Company.
The Company's sales are concentrated in the United States, with
international sales (primarily in Europe and Canada) accounting for
approximately 4% of the Company's net sales for fiscal 1999. The Company is
currently attempting to develop relationships with distributors outside of the
United States.
Sales and Marketing
The Company's sales and marketing efforts have recently been reorganized to
improve both the efficiency and effectiveness of the Company's consolidated
businesses. 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 the Company's eight Regional Sales Managers. Because of
the service oriented nature of the Company's business, the sales managers devote
a substantial amount of their time to servicing and maintaining relationships
with the Company's largest customers in addition to managing the overall sales
operations. The Company also utilizes the services of over 30 non-exclusive
independent sales organizations. This new integrated sales approached is
designed to help achieve sales of all products to all customers.
The Company's marketing activities are coordinated by its National
Marketing Manager. In addition to designing and developing the Company's
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 the Company's key retail
accounts.
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The Company expects that its lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and in-store
consumer promotions in Retail Accounts, hardware stores, nurseries and garden
centers. In addition, the Company believes that a substantial portion of lawn
and garden sales are impulse driven and not overly price sensitive. Therefore,
the Company seeks to increase consumer awareness, understanding and brand
identification of its products through its distinctive packaging and
point-of-sale displays. Retail Accounts and the Company's other customers
receive the Company's products in packaging that is easily displayed. The retail
product packaging is informative to the end-user and incorporates attention
getting, eye-pleasing color schemes. The Company also tailors its displays to
the evolving needs of retailers. Because many home improvement and mass merchant
retailers maintain outdoor sales areas for their lawn and garden products, the
Company utilizes waterproof displays for many of its products. In addition, the
Company meets the specific needs of many of its larger customers by tailoring
the size of its displays to the dimensions requested by such customers. The
Company's independent sales representatives periodically visit individual retail
outlets to assist Retail Accounts in achieving innovative and optimal use of the
Company's distinctive store displays.
In order to anticipate and react quickly to changing consumer preferences,
the Company also engages in market research. During fiscal 1998 the Company
focused its advertising and promotional campaign on the Jobe's brand name, as
well as on the Easy Gardener and Emerald Edge brand names.
In addition, during fiscal 1998, the Company redesigned the Jobe's
packaging, assisted Retail Accounts in their inventory purchasing, in-store
product placement and implementation of displays for Jobe's products and
conducted a national advertising campaign which targeted the "baby boomer"
consumer segment.
The Company spent approximately $3.8 million, in fiscal 1999 on a
combination of media development, print, radio and television advertising,
co-operative advertising (advertising done in conjunction with retailers),
attendance at trade shows and public relations to promote awareness,
understanding and brand identification of its lawn and garden products.
The Company utilized a substantial portion of its marketing budget for
fiscal 1999 on co-op advertising in conjunction with key retail customers.
E-Commerce Initiative
The Company recently commenced selling products on the Internet on a
business-to-business basis through its website www.egarden.com. The Company
intends to expand this site to
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include a new product auction site that will be accessible from the home page of
egarden.com. Beginning in November 1999, the Company's customers will be able to
benefit from increased buying options and conduct business-to-business bidding
as well as private non-auction business-to-business on a wide variety of lawn
and garden products including the Company's niche garden products. The site is
being developed in conjunction with a leading provider of Web auction software.
The Company's auction site for egarden.com will be accessed through
gardenersauction.com and garden.wholesalexchange.com.
The Company receives a fee for facilitating a business-to-business online
transaction on either a private or auction basis. The Company's web site allows
it to make its products available to retailers who do not purchase through the
traditional industry distribution channel. The Company's Web site also serves as
an online resource to manufacturers and lawn and garden industry professionals
seeking information on such items as raw material pricing, business trends of
public and private companies, merger and acquisition activity, stock quotes,
news, industry events, and other helpful information in one convenient location.
Information Systems
The Company maintains a sophisticated retail data information system which
enables it to provide timely and efficient order fulfillment to its Retail
Accounts and other customers. Internally, the Company's information systems
track orders and deliveries and provide exception reports if product is not
delivered on time. The systems "push" the necessary information to the proper
personnel, allowing the Company to react quickly to information. The Company's
purchase order process can be paperless, with most Retail Accounts placing their
orders through an electronic data interchange with the Company.
In addition, in July 1999 the Company contracted to implement during the
fiscal year ending June 30, 2000 the QAD Applications e-business supply-chain
enabled enterprise planning software at its executive offices and at several of
its subsidiaries.
Seasonality
The Company sales are seasonal due to the nature of the lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer. Sales of the Company's agricultural products are
also seasonal. Most shipments occur during the agricultural cultivation period
from March through October.
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Inventory and Distribution
In order to meet product demand, the Company keeps relatively large amounts
of product inventory on hand, particularly from December to May, the months of
highest demand. Despite maintaining these relatively high levels of inventory,
the Company has historically experienced minimal inventory obsolescence.
However, it is possible that inventory obsolescence could increase in the
future. Retail Accounts generally require delivery within five business days.
Orders are normally processed within 48 hours and shipped by common carrier.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. The Company competes with a combination of national and
regional companies 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 the Company's products. Many of the Company's competitors have
achieved significant national, regional and local brand name and product
recognition and engage in frequent and extensive advertising and promotional
programs. Many of these companies have substantially greater financial,
technical, marketing and other resources than the Company.
Large, dominant manufacturers, which manufacture and sell lawn and garden
products, such as the 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 the Company in this industry. Nevertheless,
well capitalized companies and smaller regional firms may develop and markets
landscape fabrics and compete with the Company for customers who purchase such
products.
Among the Company's competitors in the lawn and garden market for the
Jobe's spike line of fertilizer and insecticide products and the Ampro
combination mulch, seed and fertilizer line of products is the Scotts Company,
who markets competing products under the Miracle-Gro brand. Competition for the
Company's agricultural products consist of other manufacturers of products that
are humic acid based but that utilize formulas that are different from Golden
West's. These competitors include Monterey Chemical Corporation and Custom
Formulators, Inc. The Company competes with a variety of regional lawn and
garden manufacturers in the markets for landscape edging, shade cloth and root
feeders. Competition for the Company's weed trimmer replacement heads consist of
other manufacturers of weed trimming
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replacement part products using nylon based lines and blades. These include CMD
Products.
Government Regulation
The Company is subject to many laws and governmental regulations and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by the Company as fertilizers or pesticides are subject to an
extensive and frequently evolving statutory and regulatory framework, at both
the Federal and state levels. The distribution and sale of pesticides is subject
to regulation by the U.S. Environmental Protection Agency ("EPA") pursuant to
the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as
regulation by many states in a manner similar to FIFRA. Under FIFRA and similar
state laws, all pesticides must be registered with the EPA and the state and
must be approved for their intended use. FIFRA and state regulations also impose
other stringent requirements on the marketing of such products. Moreover, many
states also impose similar requirements upon products marketed for use as
fertilizing materials, which are not typically regulated under FIFRA. Failure to
comply with the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
The Company markets certain animal repellent and pesticide products that
are subject to FIFRA and to similar state regulations. The Company also markets
certain fertilizer products that are subject to regulation in some states. The
Company believes that it is in substantial compliance with material FIFRA and
applicable state regulations regarding its material business operations.
However, there can be no assurance that the Company will be able to comply with
future regulations in every jurisdiction in which the Company's material
business operations are conducted without substantial cost or interruption of
operations. Moreover, there can be no assurance that future products marketed by
the Company will not also be subject to FIFRA or to state regulations. If future
costs of compliance with regulations governing pesticides or fertilizers exceed
the Company's budgets for such items, the Company's business could be adversely
affected. If any of the Company's products are distributed or marketed in
violation of any of these regulations, the Company could be subject to a recall
of, or a sales limitation placed on, one or more of its products, or civil or
criminal sanctions, any of which could have a material adverse effect upon the
Company's business.
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Environmental Regulation. The Company's manufacturing operations are
subject to various evolving federal, state and local laws and regulations
relating to the protection of the environment, which laws govern, among other
things, emissions to 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 Ampro, Weatherly and Weed
Wizard each operate one manufacturing facility. Although the Company believes
that its material manufacturing facilities are in substantial compliance with
applicable material environmental laws, it is possible that there are material
environmental liabilities of which the Company is unaware. If the costs of
compliance with the various existing or future environmental laws and
regulations including any penalties which may be assessed for failure to obtain
necessary permits, exceed the Company's budgets for such items, the Company's
business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Ampro, Weatherly and Weed Wizard each operate one manufacturing facility.
Moreover, the Company or its predecessors have owned or operated other
manufacturing facilities in the past and may have liability for remediation of
such facilities in the future, to the extent any is required. In this regard,
Weatherly previously owned a facility that was the subject of certain soil
remediation activities. Although this facility was sold by Weatherly prior to
the Company's acquisition of Weatherly, there can be no assurance that the
Company will not be liable for any previously existing environmental
contamination at the facility. Moreover, although the purchaser of the facility
indemnified Weatherly for any environmental liability and the sellers of
Weatherly, in turn, indemnified the Company from such liability, there can be no
assurance that, if required, the indemnifying parties will be able to fulfill
their respective obligations to indemnify the Company. Furthermore, certain
business operations of the
-15-
Company's subsidiaries also involve shipping hazardous waste off-site for
disposal. As a result, the Company could be subject to liability under these
statutes. The Company could also incur liability under CERCLA or similar state
statutes for any damage caused as a result of the mishandling or release of
hazardous substances owned by the Company but processed and manufactured by
others on the Company's behalf. As a result, there can be no assurance that the
manufacture of the products sold by the Company will not subject the Company to
liability pursuant to CERCLA or a similar state statute. Furthermore, there can
be no assurance that Ampro, Easy Gardener, Weatherly or Weed Wizard will not be
subject to liability relating to manufacturing facilities owned or operated by
them currently or in the past.
Other Regulations. The Company is also subject to various other federal,
state and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants.
Trademarks, Proprietary Information and Patents
The Company believes that product recognition is an important competitive
factor in the lawn and garden care products industry. Accordingly, in connection
with its marketing activities of its lawn and garden care products, the Company
promotes, and intends to promote, certain tradenames and trademarks which are
believed to have value to the Company.
In connection with its acquisition of the assets of Easy Gardener Inc. in
September 1994, the Company acquired certain trademarks and copyrights used by
Easy Gardener, Inc. in connection with its business including, but not limited
to, the trademarks, Weedblock(R), Easy Gardener(R), Weedshield(TM), Micropore(R)
and Birdblock(R). In connection with its acquisition of Weatherly, the Company
acquired certain patents, as well as certain copyrights and trademarks used in
connection with Weatherly's business including, but not limited to, Jobe's(R),
Ross(R), Green Again(R), Gro-Stakes(R), Tree Gard(R) and XP-20(R). The Company
also acquired certain patents and trademarks when it acquired the assets of
Emerald Products, LLC and also acquired certain trademarks in connection with
its purchase of the Plasti-Chain line of products from Plastic Molded Concepts,
Inc. In connection with its acquisition of Weed Wizard, Inc., the Company
acquired the Weed Wizard(TM) product patent and trademark. The Company also
acquired the trademark Landmaster(R) in connection with its acquisition of the
assets of Landmaster Products, Inc. In addition, the Company acquired the
trademarks Polyspun 300(R), Nature Shield(R) and Diamondback(R) in connection
with its acquisition of the Tensar(R) consumer product line. In connection with
the acquisition of the Tensar(R) consumer product line, The Tensar Corporation
granted to the Company an exclusive royalty-free
-16-
perpetual license to use the trademark Tensar(R) in connection with a wide range
of polymeric grid, mesh, net and related products supplied to the Company by The
Tensar Corporation. In connection with its acquisition of Ampro, the Company
acquired certain trademarks used in connection with Ampro's business including,
but not limited to, Amturf(R). There can be no assurance that the Company will
apply for any additional trademark or patent protections relating to its
products or that its current trademarks and patents will be enforceable or
adequately protect the Company from infringement of its proprietary rights.
Although the Company believes that the products sold by it do not and will
not infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, the Company could be required to pay damages and
modify its products or obtain a license for the manufacture or sale of such
products. There can be no assurance that, in such an event, the Company would be
able to do so in a timely manner, upon acceptable terms and conditions or at
all, and the failure to do any of the foregoing could have a material adverse
effect upon the Company.
Product Liability
The Company, as a manufacturer of lawn and garden care and pesticide
products, may be exposed to significant product liability claims by consumers.
Although the Company has obtained product liability insurance coverage for U.S.
Home & Garden Inc., 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 has
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 the Company or will be sufficient to
cover all possible liabilities. In the event a successful suit is brought
against the Company, unavailability or insufficiency of insurance coverage could
have a material adverse effect on the Company. Moreover, any adverse publicity
arising from claims made against the Company, even if such claims were not
successful, could adversely affect the reputation and sales of the Company's
products.
Employees
As of September 20, 1999 the Company had 272 full-time employees. Of such
employees, three are executive officers of the Company, 71 were engaged in
administration and finance, 38 were engaged in sales and marketing, 65 were
engaged in warehouse, shipping and receiving, 87 were engaged in production and
8 were
-17-
temporary full-time employees working in warehouse shipping, receiving and
productions. None of the Company's employees are covered by collective
bargaining agreements. The Company believes that it has a good relationship with
its employees.
Item 2. Properties
The Company's executive offices are currently located in San Francisco,
California, in approximately 3,000 square feet of office space for which the
Company pays $11,275 per month in rent, which amount includes the costs of
utilities and janitorial services. The Company believes that its office space,
which it rents pursuant to a lease expiring in February 2001, is adequate for
the Company's planned future operations.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which the Company pays $17,918 per month in
rent, pursuant to a lease agreement that expires on February 28, 2001. Easy
Gardener's facilities contain landscape fabric converters, packaging equipment
and warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $10,833 per month in rent pursuant to a
lease that expires on June 30, 2001. The Company also leases an additional
53,000 feet of warehouse space in Paris, Kentucky for $5,417 per month in rent
pursuant to a lease that expires on May 6, 2000.
Golden West's offices are located in Merced, California in approximately
900 square feet of space it leases for $1,294 per month base rent, with rent
increases at a rate of 4% a year. The lease expires in June 2001 subject to the
Company's option to renew the lease for an additional one year period.
Ampro owns approximately 200,000 square feet of building on approximately
150 acres of land in Bradley, Michigan. Approximately 60,000 square feet of this
facility was built with grant proceeds received from the Michigan Department of
Natural Resources (MDNR) in 1994 in which the MDNR has a security interest over
the grant period of ten years. The grant proceeds have been recorded as deferred
revenue and is being amortized over the grant period.
With respect to the storage, packaging and distribution of certain of the
Company's landscape fabric products, Easy Gardener has entered into a management
agreement with Landmaster Products, Inc. (the "Management Agreement") pursuant
to which the Company
-18-
is provided with warehouse space in Englewood, Colorado. The Management
Agreement expires on October 21, 2000. The Company currently pays a management
fee of $31,500 per month.
Item 3. Legal Proceedings
In August 1999 an action was commenced against the Company and its
subsidiary, Ampro, in the Circuit Court of the State of Michigan, County of
Kent, by H. Kenneth W. Hilbert, E. Scott Hilbert, John R,. Hilbert and Omer
Messer, who were principal stockholders of Ampro immediately prior to its
acquisition by the Company. The plaintiffs allege that the Company has breached
certain terms of the stock purchase agreement pursuant to which it acquired
Ampro (the "Agreement") that allegedly require the Company to make certain
additional payments to the plaintiffs and that the Company took certain actions
that prevented Ampro from achieving certain earnings levels that would have
triggered additional contingent payments to the plaintiffs under the Agreement.
Plaintiffs seek to recover unspecified damages, together with interest, costs
and attorneys fees and an accounting by Ampro with respect to certain financial
information. Plaintiffs have also notified the Company that they intend to
arbitrate certain other issues concerning closing adjustments under the
Agreement. The Company intends to vigorously defend these matters and to impose
certain counter-claims against the defendants.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of Stockholders was held on June 14, 1999 at which time
the following directors were reappointed to serve until the Annual Meeting of
Stockholders of the Company to be held in the year 2000:
Votes For Votes Withheld
--------- --------------
Robert Kassel 16,786,134 328,138
Richard Raleigh 16,960,659 153,613
Maureen Kassel 16,702,219 412,053
Fred Heiden 16,881,644 232,628
Jon Schulberg 16,881,044 233,228
In addition, at the Meeting, the stockholders approved the adoption of the
Company's 1999 Stock Option Plan by a vote of 15,091,024 in favor, 1,916,569
against and 106,679 abstaining. There were no broker non-votes with respect to
this proposal.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded in the over-the-counter market and
was quoted on the NASDAQ SmallCap Market from
-19-
March 26, 1992 until June 3, 1998 and has been quoted on the NASDAQ National
Market System since June 4, 1998. The NASDAQ symbol for the Company's Common
Stock is "USHG". The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock, as reported by NASDAQ.
Year Ended June 30, 1999
High Low
-------------
First Quarter.............. $6 1/2 $3 1/2
Second Quarter............. 5 9/16 3 5/8
Third Quarter ............. 6 3/16 3 5/8
Fourth Quarter............. 6 7/8 3 11/16
Year Ended June 30, 1998
High Low
-------------
First Quarter......... $5 1/16 $2 15/16
Second Quarter........ 5 1/8 3 7/8
Third Quarter......... 7 13/16 4
Fourth Quarter........ 7 3/8 5 3/8
As of September 20, 1999, the number of stockholders of record of the
Company's Common Stock was 208. The Company believes that, in addition, there
are in excess of 500 beneficial owners of its Common Stock whose shares are held
in "street name".
In June 1999, the Company extended by ten years the expiration date of
options to purchase 161,333 shares of Common Stock previously granted to Robert
Kassel. The foregoing options were exercisable at an average exercise price of
$1.69 per share and the transactions were exempt from the registration
requirements of the Securities Act of 1933 by virtue of Sections 2(a)(3) or 4(2)
thereof.
The Company has not paid any cash dividends on its common stock to date and
does not expect to declare or pay any cash or stock dividends in the foreseeable
future. The lending agreement between the Company and its primary lending
institution prohibits the Company from paying dividends without the lender's
consent.
-20-
Item 6. Selected Financial Data
(in thousands, except per share data)
The following selected financial data at and for the years ended June 30,
1995, 1996, 1997, 1998 and 1999 has been derived from the Company's 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.
-21-
Statement of Income Data:
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
Net sales ................................... $ 19,692 $ 27,031 $ 52,046 $ 67,149 $ 89,346
Cost of sales ............................... 9,151 12,670 23,649 30,431 44,176
------------ ------------ ------------ ------------ ------------
Gross profit ................................ 10,541 14,361 28,397 36,718 45,170
------------ ------------ ------------ ------------ ------------
Selling, shipping, general and administrative 7,152 10,612 17,745 23,065 32,924
expenses
Restructuring charges ....................... -- -- -- -- 1,964
------------ ------------ ------------ ------------ ------------
Income from operations ...................... 3,389 3,749 10,652 13,653 10,282
------------ ------------ ------------ ------------ ------------
Other income (expense) ...................... (1,776) (1,940) (3,262) (3,077) (6,883)
Income tax (expense) benefit ................ (38) 715 (3,200) (3,600) (1,350)
------------ ------------ ------------ ------------ ------------
Income before extraordinary expense ......... 1,575 2,524 4,190 6,976 2,049
Extraordinary expense, net of
income taxes ................................ -- -- (1,007) (1,450) --
------------ ------------ ------------ ------------ ------------
Net income .................................. $ 1,575 $ 2,524 $ 3,183 $ 5,526 $ 2,049
============ ============ ============ ============ ============
Income per share before extraordinary
expense:
Basic ....................................... $ .19 $ .25 $ .31 $ .39 $ .10
Dilutive .................................... $ .16 $ .19 $ .26 $ .31 $ .09
Net income per share:
Basic ....................................... $ .19 $ .25 $ .23 $ .31 $ .10
Dilutive .................................... $ .16 $ .19 $ .20 $ .24 $ .09
Weighted average number of common
and common equivalent shares
outstanding:
Basic ....................................... 8,376,000 10,206,000 13,695,000 17,776,000 19,621,000
Dilutive .................................... 10,125,000 13,361,000 16,068,000 22,808,000 23,595,000
Balance Sheet Data:
June 30,
------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Working capital $ 3,326 $ 5,328 $ 2,292 $ 46,743 $ 32,874
Intangible assets, net 16,692 17,167 44,364 63,395 82,197
Total assets 28,140 33,584 68,475 126,813 137,464
Short-term debt 2,200 3,650 8,990 --
Long-Term debt 8,000 6,238 17,570 63,250 78,750
Total liabilities 12,800 14,214 36,549 75,214 90,980
Stockholders' equity 15,339 19,370 31,926 51,599 46,484
-22-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company manufactures and markets a broad range of brand-name consumer
lawn and garden products through its wholly-owned subsidiaries, E*Garden, Ampro,
Easy Gardener and Golden West, and through Easy Gardener's wholly-owned
subsidiaries, Weatherly and Weed Wizard. Since 1992, the Company has consummated
ten acquisitions of complementary lawn and garden companies and product lines
for an aggregate consideration of over $107 million in cash, notes and equity
securities. As a result of such acquisitions, the Company recognized a
significant amount of goodwill which, in the aggregate, was approximately $82.6
million as of June 30, 1999. The Company is currently amortizing such goodwill
using the straight-line method over various time periods ranging from 20 to 30
years and amortization expenses for the fiscal year ended June 30, 1999 were
$2.6 million or $0.11 per diluted share. See "Summary of Accounting Policies -
Intangible Assets" and Note 1 to Notes to Consolidated Financial Statements.
The Company's results of operations for the fiscal year ended June 30, 1997
were significantly affected by the acquisition of Weatherly in August 1996. In
connection with the acquisition of Weatherly, the Company's outstanding notes
payable were refinanced and replaced with a new line of credit (the
"Refinancing"). As a result of the Refinancing, the Company was required to
record an extraordinary expense of $1.0 million, net of tax benefits, for the
fiscal year ended June 30, 1997, which expense consisted of the write-off of
deferred finance costs at June 30, 1996 plus prepayment penalties. Such
extraordinary expense reduced the Company's dilutive net income per share for
fiscal 1997 by $0.06, from $0.26 to $0.20. In addition, as a result of the
Company's repayment of all of its outstanding bank debt in April 1998, the
Company was required to record an extraordinary expense of $1,450,000, net of
income tax benefit in its fiscal year ended June 30, 1998. Such extraordinary
expense reduced the Company's dilutive net income per share for fiscal 1998 by
$0.07 from $0.31 to $0.24. See Note 14 to Notes to Consolidated Financial
Statements.
The Company's results of operations for the fiscal year ended June 30, 1998
were also significantly affected by the acquisition of Weed Wizard, Inc. in
February 1998, certain assets of Landmaster Products, Inc., in March 1998 and
the Tensar consumer product line in May 1998. Due to the seasonal nature of the
Company's sales the results of operations for fiscal year ended June 30, 1999
were, on a comparative basis, negatively affected by these acquisitions since
both the off season and peak season results of operations for the businesses and
product lines acquired are included in the results of operations for fiscal year
1999, compared to the prior fiscal year when only the peak season results were
included in the Company's results of operations.
-23-
The Company experienced net sales growth of 93% from fiscal 1996 to fiscal
1997, 29% from fiscal 1997 to fiscal 1998 and 33% from fiscal 1998 to fiscal
1999. The Company believes that this growth in net sales was primarily
attributable to expansion of its product lines through the acquisitions of
complementary lawn and garden businesses and product lines. Net sales were also
positively affected by an increase in sales of pre-existing product lines.
Results of Operations
The following table sets forth for the periods indicated certain selected
income data as a percentage of net sales:
Percentages of Net Sales
--------------------------------
Year Ended June 30,
================================
1997 1998 1999
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 45.4 45.3 49.4
------ ------ ------
Gross profit 54.6 54.7 50.6
Selling and shipping expenses 21.6 21.2 21.6
General and administrative expenses 12.5 13.2 15.3
Restructuring charge -- -- 2.2
------ ------ ------
Income from operations 20.5 20.3 11.5
Interest expense, net (6.3) (4.6) (7.7)
Income tax expense (6.2) (5.4) (1.5)
Extraordinary expense, net (1.9) (2.1) --
------ ------ ------
Net income 6.1% 8.2% 2.3%
------ ------ ------
Fiscal Year Ended June 30, 1999 Compared to Fiscal year Ended June 30, 1998
Net sales. Net sales increased by $22.2 million, or 33%, to $89.3 million
during the fiscal year ended June 30, 1999 from $67.1 million during the
comparable period in 1998. The increase in net sales was primarily a result of
the October 1998 acquisition of Ampro Industries, Inc. and internal growth of
the Company's pre-existing product lines.
Gross profit. Gross profit increased by $8.5 million, or 23 %, to $45.2
million for the fiscal year ended June 30, 1999, from $36.7 million during the
comparable period in 1998. This increase was due primarily to the acquisition of
Ampro Industries, Inc.. Gross profit as a percentage of net sales decreased to
50.6% during the fiscal year ended June 30, 1999, from 54.7% during the
comparable period in 1998. The decrease in gross profit as a percentage of net
sales was primarily attributable to an increase in sales of lower-margin
products. The gross profit percent also decreased due to changes in packaging
and new machinery resulting in higher and inefficient production costs.
Furthermore the gross profit percent decreased due to increased overhead
resulting from the inclusion of the off peak season of the acquisitions
purchased at the selling season in the fiscal year ended June 30, 1998.
-24-
Selling and shipping expenses. Selling and shipping expenses increased $5.1
million or 35.9%, to $19.3 million during the fiscal year ended June 30, 1999
from $14.2 million during the comparable period in 1998. This increase was
primarily the result of an increase in the amount of products shipped, which was
a consequence of the October acquisition of Ampro Industries, Inc., the effect
on the full fiscal year ended June 30, 1999 of prior acquisitions that occurred
during fiscal 1998 along with an increase in sales of pre-existing product
lines. Selling and shipping expenses as a percentage of net sales increased to
21.6% during the fiscal year ended June 30, 1999, from 21.2% during the
comparable period in 1998. This increase was a result of reorganization expense
of the sales force and increased shipping expenses.
General and administrative expenses. General and administrative expenses
increased $4.8 million or 53.9% to $13.6 million during the fiscal year ended
June 30, 1999 from $8.9 million during the comparable period in 1998. This
increase was primarily due to increased costs relating to acquisitions,
including amortization of goodwill and the addition of certain administrative
personnel as part of the Company's efforts to build an infrastructure that it
believes will be able to more readily integrate any future products or
businesses that may be acquired. As a percentage of net sales, general and
administrative expenses increased to 15.3% during the fiscal year ended June 30,
1999, from 13.2% during the comparable period in 1998. This is primarily due to
the increase of amortization of goodwill and the addition of certain
administrative personnel.
Restructuring charges. The Company incurred a non-recurring restructuring
charge of $2.0 million during the fiscal year ended June 30, 1999. This
restructuring charge results primarily from the execution of its overall
integration and cost reduction strategy, including the consolidation of
administrative activities and the rationalization of production and distribution
facilities. See Note 16 to Notes to Consolidated Financial Statements.
Income from operations. Income from operations decreased by $3.4 million,
or 24.7%, to $10.3 million during the fiscal year ended June 30, 1999 from $13.7
million during the comparable period in 1998. The decrease in income from
operations in actual dollars was primarily due to the $2.0 million restructuring
costs and the increase in general and administrative expenses in dollars and as
a percentage of net sales during the fiscal year ended June 30, 1999. As a
percentage of net sales, income from operations decreased to 11.5% for the
fiscal year ended June 30, 1999 from 20.3% during the comparable period in 1998.
Interest expense. Interest expense increased by $3.8 million, or 108%, to
$7.4 million during the fiscal year ended June 30, 1999 from $3.6 million during
the comparable period in 1998. The increase in interest expense is primarily
related to
-25-
the interest associated with the increase in debt as a result of financing the
Company's various acquisitions.
Income taxes. Income taxes decreased to $1.3 million during the fiscal year
ended June 30, 1999 from $3.6 million during the comparable period in 1998
primarily due to the decrease in income before income taxes which was partially
offset by an increase in the Company's effective income tax rate for the year.
Net income. Net income decreased by $3.5 million, or 62.9% to $2.0 million
during the fiscal year ended June 30, 1999 from $5.5 million during the
comparable period in 1998. This decrease was primarily attributable to the $2.0
million restructuring costs, sales of lower margin products and the increased
costs relating to acquisitions, including amortization of goodwill and the
addition of certain administrative personnel. Basic net income per common share
decreased $0.21 to $0.10 per share for the fiscal year ended June 30, 1999 from
$0.31 per share during the comparable period in 1998. Diluted net income per
common share decreased $0.15 to $0.09 per share for the fiscal year ended June
30, 1999 from $.24 per share during the comparable period in 1998. The decrease
in both basic and diluted earnings per share is primarily attributable to the
decrease in net income.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Net sales. Net sales increased by $15.1 million, or 29%, to $67.1 million
during the fiscal year ended June 30, 1998 from $52 million during the
comparable period in 1997. The increase in net sales was primarily a result of
the February 1998 acquisition of substantially all of the assets used in the
business of Weed Wizard, Inc. and the March 1998 acquisition of substantially
all of the assets of Landmaster Products, Inc., combined with internal growth of
the Company's pre-existing product lines.
Gross profit. Gross profit increased by $8.3 million, or 29%, to $36.7
million for the fiscal year ended June 30, 1998, from $28.4 million during the
comparable period in 1997. This increase was due primarily to the acquisition of
substantially all of the assets used in the business of Weed Wizard, Inc. and
substantially all of the assets used in the business of Landmaster Products,
Inc. Gross profit as a percentage of net sales increased to 54.7% during the
fiscal year ended June 30, 1998, from 54.6% during the comparable period in
1997. The increase in gross profit as a percentage of net sales was primarily
attributable to the increase in sales of higher-margin products.
Selling and shipping expenses. Selling and shipping expenses increased $3.0
million or 26.5%, to $14.2 million during the fiscal year ended June 30, 1998,
from $11.2 million during the comparable period in 1997. This increase was
primarily the
-26-
result of an increase in the amount of products shipped, which was a consequence
of the February 1998 acquisition of substantially all of the assets used in the
business of Weed Wizard, Inc. and the March 1998 acquisition of substantially
all of the assets used in the business of Landmaster Products, Inc. along with
an increase in sales of pre-existing product lines. Selling and shipping
expenses as a percentage of net sales decreased to 21.2% during the fiscal year
ended June 30, 1998, from 21.6% during the comparable period in 1997. This
decrease was a result of economies of scale achieved from the sale of new
products to existing customers.
General and administrative expenses. General and administrative expenses
increased $2.3 million or 36% to $8.9 million during the fiscal year ended June
30, 1998 from $6.5 million during the comparable period in 1997. This increase
was primarily due to increased costs relating to acquisitions, including
amortization of goodwill and the addition of certain administrative personnel as
part of the Company's efforts to build an infrastructure that it believes will
be able to more readily integrate any future products or businesses that may be
acquired. As a percentage of net sales, general and administrative expenses
increased to 13.2% during the fiscal year ended June 30, 1998, from 12.5% during
the comparable period in 1997. This is primarily due to the increase of
amortization of goodwill and the addition of certain administrative personnel.
Income from operations. Income from operations increased by $3.0 million,
or 28.2%, to $13.6 million during the fiscal year ended June 30, 1998 from $10.6
million during the comparable period in 1997. The increase in income from
operations in actual dollars was primarily due to the increase in net sales for
the year ended June 30, 1998. As a percentage of net sales, income from
operations decreased to 20.3% for the fiscal year ended June 30, 1998 from 20.5%
during the comparable period in 1997.
Interest expense. Interest expense increased by $225,000, or 7%, to $3.6
million during the fiscal year ended June 30, 1998, from $3.3 million during the
comparable period in 1997. The increase in interest expense is primarily related
to the interest associated with the increase in debt associated with the
issuance by U.S. Home & Garden Trust I (the "Trust"), a subsidiary of the
Company of Trust Preferred Securities which was partially offset by a decrease
in the Company's effective borrowing rate.
Income taxes. Income tax expense increased to $3.6 million during the
fiscal year ended June 30, 1998 from $3.2 million during the comparable period
in 1997 primarily due to the increase in the income before income taxes and
extraordinary expense which was partially offset by a decrease in the Company's
effective income tax rate for the year.
Extraordinary expense, net. In April 1998, the Company repaid in full the
indebtedness outstanding under its then existing credit
-27-
facility. As a result, the Company was required to record an extraordinary
expense of $2.2 million, net of tax benefits of $735,000, during the fiscal year
ended June 30, 1998. The expense consisted of deferred finance costs at April
30, 1998, net of accumulated amortization, plus prepayment penalties. In
connection with the acquisition of Weatherly, the Company completed the
Refinancing. As a result of the Refinancing, the Company was required to record
an extraordinary expense of $1.0 million net of tax benefits for fiscal 1997,
which expense consisted of deferred finance costs at June 30, 1996 net of
accumulated amortization, plus prepayment penalties.
Net Income. Net income increased by $2.3 million, or 74%, to $5.5 million
during the fiscal year ended June 30, 1998 from $3.2 million during the
comparable period in 1997. This increase was attributable to the increase in net
sales for the year ended June 30, 1998, which was partially offset by the
extraordinary expense. Basic net income per common share increased $.08 to $.31
per share for the fiscal year ended June 30, 1998 from $.23 per share during the
comparable period in 1997. Diluted net income per common share increased $.04 to
$.24 per share for the fiscal year ended June 30, 1998 from $.20 per share
during the comparable period in 1997. The increase in both basic and diluted
earnings per share is primarily attributable to the increase in net income,
which was partially offset by additional weighted average common and common
equivalent shares outstanding in the fiscal year ended June 30, 1998 compared to
the comparable period in fiscal 1997.
Quarterly Results of Operations and Seasonality
The Company's sales are seasonal due to the nature of he lawn and garden
business, in parallel with the annual growing season. The Company's sales and
shipping are most active from late December through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. Sales typically
decline by early to mid-summer.
Sales of the Company's agricultural products, which were not material for
fiscal 1999, are also seasonal. Most shipments occur during the period from
March through October.
-28-
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,
1997 1997 1998 1998
------------- ------------ ---------- ----------
Net sales $ 7,026 $ 8,513 $ 23,520 $ 28,091
Cost of sales 3,522 3,857 10,482 12,570
---------- ---------- ---------- ----------
Gross profit 3,503 4,656 13,038 15,521
Selling, shipping, general
and administrative 3,963 4,589 5,967 8,546
Restructuring charges
---------- ---------- ---------- ----------
Income (loss) from operations (460) 67 7,071 6,975
Investment income 47 57 245 137
Interest expense (853) (744) (922) (1,044)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary
expense (1,266) (620) 6,394 6,068
Income tax benefit (expense) 550 250 (2,700) (1,700)
Extraordinary expense net
of taxes (1,450)
---------- ---------- ---------- ----------
Net income (loss) $ (716) $ (370) $ 3,694 $ 2,918
========== ========== ========== ==========
Diluted net income (loss)
per share(1) $ (0.05) $ (0.02) $ 0.15 $ 0.11
========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding(1) 14,702 16,384 25,038 25,547
========== ========== ========== ==========
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 50.1% 45.3% 44.6% 44.7%
---------- ---------- ---------- ----------
Gross profit 49.9% 54.7% 55.4% 55.3%
Selling, shipping,general and
administrative 56.4% 53.9% 25.4% 30.4%
Restructuring charges 0.0% 0.0% 0.0% 0.0%
---------- ---------- ---------- ----------
Income (loss) from operations (6.5%) 0.8% 30.0% 24.9%
Investment income 0.7% 0.7% 1.0% 0.5%
Interest expense (12.1%) (8.7%) (3.9%) (3.7%)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary (18.0%) (7.2%) 27.1% 21.7%
expense
Income tax benefit (expense) 7.8% 2.9% (11.5%) (6.1%)
Extraordinary expense net of taxes 0.0% 0.0% 0.0% (5.2%)
---------- ---------- ---------- ----------
Net income (loss) (10.2%) (4.3%) 15.6% 10.4%
========== ========== ========== ==========
Quarter Ended
- ------------------------------------------------------------------------------------------------------
(in thousands, except percentages and per share data)
- ------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
------------- ------------ ---------- ----------
Net sales $ 10,768 $ 15,985 $ 34,769 $ 27,824
Cost of sales 5,312 7,751 16,565 14,548
---------- ---------- ---------- ----------
Gross profit 5,456 8,234 18,204 13,276
Selling, shipping, general
and administrative 6,439 7,730 8,501 10,254
Restructuring charges 1,964
---------- ---------- ---------- ----------
Income (loss) from operations (983) 504 9,703 1,058
Investment income 381 116 15 18
Interest expense (1,541) (1,798) (2,087) (1,987)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary
expense (2,143) (1,178) 7,631 (911)
Income tax benefit (expense) 920 510 (3,200) 420
Extraordinary expense net
of taxes
---------- ---------- ---------- ----------
Net income (loss) $ (1,223) $ (668) $ 4,431 $ (491)
========== ========== ========== ==========
Diluted net income (loss)
per share(1) $ (0.06) $ (0.03) $ 0.19 $ (0.02)
========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding(1) 20,143 19,837 23,509 22,977
========== ========== ========== ==========
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 49.3% 48.5% 47.6% 52.3%
---------- ---------- ---------- ----------
Gross profit 50.7% 51.5% 52.4% 47.7%
Selling, shipping,general and
administrative 59.8% 48.4% 24.4% 36.9%
Restructuring charges 0.0% 0.0% 0.0% 7.1%
---------- ---------- ---------- ----------
Income (loss) from operations (9.1%) 3.1% 27.9% 3.8%
Investment income 3.5% 0.7% 0.0% 0.1%
Interest expense (14.3%) (11.2% ) (6.0%) (7.1%)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary (19.9%) (7.4% ) 21.9% (3.3%)
expense
Income tax benefit (expense) 8.5% 3.2% (9.2%) 1.5%
Extraordinary expense net of taxes 0.0% 0.0% 0.0% 0.0%
---------- ---------- ---------- ----------
Net income (loss) (11.4%) (4.2% ) 12.7% (1.8%)
========== ========== ========== ==========
- ----------
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using
the treasury stock method except for quarters reporting a net loss. Such
quarters only reflect issued and outstanding shares of Common Stock in the
weighted average shares outstanding.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
cash generated by operations; net proceeds from the Company's private and public
sales of securities and borrowings from lending institutions.
At June 30, 1999, the Company had consolidated cash and short-term
investments totaling $3.9 million of which $1.0 million is restricted and
working capital of $32.9 million. At June 30, 1998, the Company had consolidated
cash and short-term investments totaling $27.1 million and working capital of
$46.7 million. The decrease in working capital was primarily attributable to
$24.6 million used in the purchase of substantially all the assets used in the
business of Ampro Industries, Inc., $538,000 used in the purchase of E*Garden,
and $7.3 million used in the repurchase of common stock for treasury. This
decrease is partially offset by proceeds from the Company's bank line of credit
of $15.5 million.
-29-
Net cash used in operating activities for fiscal 1999 was $842,000,
consisting primarily of increases of accounts receivable and inventory,
decreases in accounts payable and accrued expenses, offset in part by net income
plus depreciation, amortization and the non-cash costs included in restructuring
charges.
Net cash used in investing activities for fiscal 1999 was $30.9 million,
consisting primarily of cash used for the purchase of substantially all the
assets used in the business of Ampro Industries, Inc., the purchase of a
non-compete agreement and the purchase of property and equipment.
Net cash provided by financing activities for fiscal 1999 was $7.6 million,
consisting primarily of the net proceeds of $15.5 million from the acquisition
line of credit, partially offset by the repurchase of common stock for treasury.
On October 13, 1998, the Company entered into a credit agreement (the
"Credit Agreement") with Bank of America National Trust & Savings Association
(the "Bank"). The Credit Agreement provides for a revolving credit facility of
up to $25 million to finance the cost of acquisitions by the Company (the
"Acquisition Facility") and a revolving credit facility of up to $20 million to
finance the Company's working capital requirements (the "Working Capital
Facility). Both of such credit facilities expire on October 15, 2001, at which
time borrowings under the Acquisition Facility are payable on a term loan basis
in quarterly installments commencing December 31, 2001, with the final
installment maturing on September 30, 2004 and, unless refinanced, borrowings
under the Working Capital Facility mature on such expiration date. In addition,
borrowings under the Acquisition Facility are subject to mandatory prepayment
from the net proceeds of certain dispositions of assets, and certain losses or
condemnation of property, from excess cash (as defined in the Credit Agreement)
generated by the company and its subsidiaries and 50% of the net proceeds of any
new issuances of the Company's capital stock after such expiration date.
Mandatory prepayments by the Company 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. The
Company has 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 1% of the amount terminated or reduced on or prior to
December 31, 1999 and 0.5% of the amounts terminated or reduced thereafter.
Borrowings under such credit facilities bear interest at variable annual rates
selected by the Company based on LIBOR ("London Interbank Offered Rate"), or the
higher of 0.5% above the then current Federal Funds Rate or the Bank's prime
rate plus, in each case, an applicable marginal rate of interest.
-30-
The Company's obligations under the Credit Agreement are guaranteed by its
subsidiaries and secured by a security interest in favor of the Bank in
substantially all of the assets of the Company and its 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 the assets of the
Company and its subsidiaries.
Under the Credit Agreement, the Company and its 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, the Company must comply with certain financial tests
and ratios. A violation of any of these covenants constitutes an event of
default under the Credit Agreement.
The Company believes that its operations will generate sufficient cash flow
to service the debt incurred. However, if such cash flow is not sufficient to
service such debt, the Company will be required to seek additional financing
which may not be available on commercially acceptable terms or at all.
As of June 30, 1999, the Company has a net deferred tax liability of $1.6
million primarily relating to tax accumulated depreciation and amortization in
excess of the book amount. The deferred tax asset of $500,000 relates primarily
to the allowance for doubtful accounts, net operating loss carryforwards,
alternative minimum and state taxes and certain other balance sheet reserves.
See Note 11 to the Company's consolidated financial statements.
In fiscal 1999 the Company authorized the repurchase from time to time of
up to 2.5 million shares of its common stock through open market purchases and
in privately negotiated transactions. Through June 30, 1999, approximately
1,805,295 shares have been repurchased from non-affiliates in open market
transactions of which 1,569,295 shares were purchased during fiscal 1999.
Subsequent to June 30, 1999 to date, an additional 269,817 shares were
repurchased from non-affiliates in open market transactions. In September 1999
the Company authorized the repurchase of up to $3.0 million of additional shares
of its common stock.
The Company has committed to purchase and implement a new applications
software for approximately $1.2 million during the fiscal year ended June 30,
2000.
-31-
The Company continues to seek attractive acquisitions of complementary
businesses and product lines which can be funded through available cash and the
Acquisition Facility.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings' effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
Historically the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of this new standard on July 1, 2000 to affect its
financial statements.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Year 2000
Overview and Background
The company has implemented a project "the Project" to address the Year
2000 readiness of its information technology systems (e.g. telephones, alarm
systems, copy machines, computer systems, etc.) which have embedded technology
(collectively referred to as Systems). Additionally, the Project includes the
assessment of the Year 2000 readiness of the Company's significant suppliers and
customers.
Status of the Project
The Project is divided into four separate phases - Planning and Awareness,
Inventory, Assessment, and Remediation.
The Planning and Awareness phase began in October 1997 and has been
completed. This phase included: (i.) development and approval of the Project
charter, (ii.) formation of a Project
-32-
management team to carry out the Project charter, (iii.) identification and
assessment of overall Project risks and (iv.) development of a Project budget.
The Inventory phase began in January 1998 and has been completed. This
phase included: (i.) identification of significant Systems to be assessed and
(ii.) identification of all significant suppliers and customers.
The Assessment phase began in November 1998 and is complete as of August
1999. This phase involves: (i.) contacting vendors of significant Systems to
assess the Year 2000 readiness of those systems, (ii.) testing of the assertions
made by the vendors of significant Systems', (iii.) contacting significant
suppliers and customers in order to understand their state of Year 2000
readiness, (iv.) assessment of assertions made by significant suppliers and
customers, (v.) determination of the extent of which remediation will be
required to ensure Year 2000 readiness and (vi.) development of contingency
plans to the extent considered necessary. Although the Company's assessment
identified certain systems that were not currently Year 2000 compliant, these
systems have either been corrected or entered the remediation phase.
The Remediation phase began concurrently with the Assessment phase. Systems
identified during the Assessment phase as not Year 2000 compliant immediately
enter the Remediation phase. The Remediation phase was completed in August 1999.
The activities that were undertaken during this phase included: (i.) repairing,
replacing or reprogramming all significant Systems that are not Year 2000
compliant; (ii.) validation and testing of remediated Systems; and (iii.)
establishment and completion of action plans to address any Year 2000 issues
with significant customers or suppliers.
To date, none of the Company's other information technology projects or
initiatives have been delayed or materially affected due to the implementation
of the Project.
Costs
The Company has and will utilize primarily internal resources to carry out
the Project. Costs incurred to ensure the Company's Systems are Year 2000
compliant have not been and are not expected to be material to the Company's
results of operations, financial position or cash flows. The Project's costs are
expensed as incurred.
Risks and Contingencies
The Company believes the Project has met its Year 2000 objectives. The
ability of suppliers and customers with which the Company interacts to timely
convert their systems to Year 2000 compliant is somewhat uncertain and not
directly under the control of the Company. The Company conducts operations in
-33-
various markets worldwide which may not be Year 2000 compliant because of many
factors, including, but not limited to, lack of resources and lack of attention
to the Year 2000 issue. Disruptions in the economy generally resulting from Year
2000 issues could also have an adverse affect on the Company's operations. Such
failures could materially and adversely effect the Company's results of
operations, liquidity and financial position.
The Company is dependent on several single source raw material
manufacturers for supply of such products as weed block fabric and shade cloth
fabric. Additionally, demand for the Company's products by the Company's
customers is dependent on the ability of certain high volume customers to have
effective systems in place such that Year 2000 issues do not negatively effect
demand. In the event of a major economic slowdown as a result of Year 2000
issues, the Company would likely be adversely effected in kind. When the economy
is down, the home and garden industry generally is down as well. Failure in the
systems of the Company's major suppliers or the Company's major customers could
have adverse effect on the company.
The Company has completed its contingency plans. However, the Company's
contingency plans have not yet been tested to ensure that they will provide
adequate safeguards for Systems that are ultimately not Year 2000 compliant. The
Company intends to continue evaluating its contingency plans until Project
completion.
There can be no assurance that third parties on which the Company relies
will succeed in their Year 2000 compliance efforts or that failure by a third
party would not have a material adverse effect on the Company's results of
operations or financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
This information appears in a separate section of this report following
Part IV.
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
Not applicable.
-34-
Part III
Item 10. Directors and Executive Officers of the Registrant.
The current directors and executive officers of the Company are as follows:
Name Age Position
Robert Kassel(1) 59 Chairman of the Board, Chief Executive
Officer, President and Treasurer
Richard Raleigh(2) 45 Chief Operating Officer and Director
Maureen Kassel 51 Vice President of Public Relations and
Advertising, Secretary and Director
Jon Schulberg(1)(2) 41 Director
Fred Heiden(1)(2) 58 Director
- ----------
(1) Member, Compensation Committee
(2) Member, Audit Committee
Robert Kassel, co-founded the Company and has been Chairman of the Board, Chief
Executive Officer, President and Treasurer of the Company since October 1990.
From 1985 to August 1991, he was a consultant to Comtel Communications, Inc.
("Comtel"), a company specializing in the installation and operation of
telephone systems in hotels. From 1985 to 1990, Mr. Kassel was also a real
estate developer in Long Island, New York and Santa Barbara, California. From
1965 to 1985, he was a practicing attorney in New York City, specializing in
corporate and securities law.
Richard Raleigh, has been a Director of the Company since March 1993, Chief
Operating Officer of the Company since June 1992 and served as the Company's
Executive Vice President-Operations from December 1991 to June 1992. Prior to
joining the Company, Mr. Raleigh was a free-lance marketing consultant to the
lawn and garden industry from January 1991 to December 1991. From April 1988 to
January 1991, he was Director of Marketing, Lawn and Garden of Monsanto
Agricultural Co. From December 1986 to April 1988 he was Vice President of Sales
and Marketing of The Andersons, a company engaged in the sale of consumer and
professional lawn and garden products. From November 1978 to December 1986, he
held a variety of positions at The Andersons, including Operations Manager and
New Products Development Manager.
Maureen Kassel, the wife of Robert Kassel, co-founded the Company and has been
Vice President of Public Relations and Advertising and a director of the Company
since November 1990 and Secretary
-35-
of the Company since February 1992. For the last ten years, she has assisted in
the general administration and operation of real estate and other businesses.
Ms. Kassel is Chairman of the Board of Comtel.
Jon Schulberg, a director of the Company since March 1993, has been employed as
President of Schulberg MediaWorks, a company engaged in the independent
production of television programs and television advertising since January 1992.
From January 1989 to January 1992, he was a producer for Guthy-Renter
Corporation, a television production company. From September 1987 to January
1989 he was Director of Development for Eric Jones Productions.
Fred Heiden, a director of the Company since March 1993, has been a private
investor since November 1989. From April 1984 to November 1989, Mr. Heiden was
President and Principal owner of Bonair Construction, a Florida based home
improvement construction company.
Certain Key Employees
Richard M. Grandy, 53, has been President of Easy Gardener since July 1997 and
served as its Vice President from the date of the Company's acquisition of Easy
Gardener, Inc. in September 1994 until July 1997. Mr. Grandy co-founded Easy
Gardener, Inc. in 1983 after serving as Marketing Director at International
Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a
sales representative of lawn and garden products for the Ortho Division of
Chevron Chemical Co.
Lynda Gustafson, 35, has been Vice President of Finance of the Company since
September 1997 and served as Controller of the Company from November 1993 to
September 1997. From September 1990 through October 1993 Ms. Gustafson was
Supervisor of the Business Consulting Department of the certified public
accounting firm of Hood & Strong. From September 1988 to August 1990, she has
held the positions of Staff Accountant and Senior Accountant at the certified
public accounting firm of Schwartz, McGuire & Co.
Sheila Jones, 44, has been Vice President of Easy Gardener since July 1997 and
has also served as its General Manager from September 1994. Prior to the
acquisition of Easy Gardener, Inc. by the Company, Ms. Jones was employed by
Easy Gardener, Inc. from its inception in September 1983 to September 1994,
where she advanced to the positions of Vice President and General Manager. From
April 1977 to September, 1983, she was employed by International Spike, Inc.,
where she held various project management positions.
Paul Logue, 43, has been Key Accounts Manager of Easy Gardener since the
Company's acquisition of Easy Gardener, Inc. in September 1994. Prior to joining
the Company, Mr. Logue was employed by Easy Gardener, Inc. from September 1989
to September 1994, where he was advanced from the position of Northeastern
-36-
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
Company's officers and directors, and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities, file certain
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by the Company, or representations obtained from certain reporting persons, the
Company believes that during the year ended June 30, 1999 all filing
requirements applicable to its officers, directors, and greater than 10 percent
beneficial stockholders were complied with except that Robert and Maureen Kassel
did not timely file a Form 4 or 5 with respect to the gifts of certain shares of
the Company's common stock from Maureen to Robert Kassel in December 1998, the
extension of the expiration date of certain options previously granted to Mr.
Kassel that occurred in either March or June 1999 and the extension of the
expiration date of an option previously granted to Maureen Kassel that occurred
in March 1999. In addition, Mr. Raleigh did not timely file a Form 4 or 5 to
report the extension of the expiration dates of certain options that occurred in
March 1999.
Item 11. Executive Compensation
The following table discloses the compensation awarded by the Company, for
the three fiscal years ended June 30, 1997, 1998 and 1999, to Mr. Robert Kassel,
its Chief Executive Officer and Mr. Richard J. Raleigh, its Chief Operating
Officer and to Ms. Lynda Gustafson, the Company's Vice President of Finance
(together the "Named Officers"). During the fiscal year ended June 30, 1999, no
other officer of U.S. Home & Garden Inc. received a total salary and bonus that
exceeded $100,000 during such fiscal year.
Summary Compensation Table
Annual Compensation Long-Term Debt
------------------- --------------
Securities Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation(1)
- --------------------------- ---- ---------- --------- ----------- ---------------
Robert Kassel, 1999 450,000 114,000 641,333 (2) $6,169
Chairman, Chief Executive Officer, 1998 450,000 281,667 468,000 (3) $7,523
Presidentand Treasurer 1997 350,000 250,000 1,200,000 (4) $5,995
Richard Raleigh, Chief Operating Officer 1999 250,000 96,000 137,500 (5)(6) $12,169
1998 225,000 115,000 132,500 (5) $9,203
1997 195,000 111,275 600,000 (4)(7) $8,390
Lynda Gustafson, Vice President of Finance 1999 148,000 60,000 - $12,169
1998 125,000 45,000 50,000 $11,273
1997 101,040 20,000 30,000 $ 7,451
-37-
(1) Represents Company contributions to the Named Officers 401(k) account.
Excludes certain perquisites that did not exceed the lesser of $50,000 or
10% of their combined bonus and salary.
(2) Includes 341,333 options that were originally granted to Mr. Kassel in
prior fiscal years, the expiration dates of which were extended in fiscal
1999. Also includes options to purchase 300,000 shares that were granted to
Mr. Kassel in December 1998, and voluntarily forfeited by him during the
fiscal year ended June 30, 1999.
(3) Includes 80,000 options that were originally granted to Mr. Kassel in 1993
and which expiration dates were extended during fiscal 1998.
(4) Includes as to Mr. Kassel 200,000 options previously granted to Mr. Kassel
and as to Mr. Raleigh 100,000 options previously granted to Mr. Raleigh
whose exercise prices were repriced to reflect a reduction in the market
price of the Common Stock at the time of repricing.
(5) Includes 12,500 options that were originally granted to Mr. Raleigh in
1992, the expiration date of which was extended during fiscal 1998 and
further extended during fiscal 1999.
(6) Includes options to purchase 125,000 shares granted to Mr. Raleigh in
December 1998 and voluntarily forfeited by him during the fiscal year ended
June 30, 1999.
(7) Includes 50,000 options previously granted to Mr. Raleigh the expiration
date of which was extended during fiscal 1997.
The following table discloses information concerning options granted in
fiscal 1999 to the Named Officers.
Option Grants in Fiscal Year Ended June 30, 1999
Individual Grants
------------------------------------------------
Number of Percent of Total
Securities Options Granted to Potential Realizable Value
Underlying Employees in at Assumed Annual Rates of
Options Fiscal Year Exercise Stock Price Appreciation
Name Granted ----------- Price Expiration for Option Term ($)(2)
------- (#)(1) (%) ($/Sh) Date -------------------------
---------- ---------- ----- ----------
5% 10%
----- -----
Robert Kassel 100,000(3) 9.4 1.69 9/8/08 106,300 269,400
80,000(4) 7.5 1.69 12/31/08 82,480 207,520
161,333(5) 15.2 1.69 7/1/09 171,497 434,631
300,000 28.2 4.25 (6) (6) (6)
Richard Raleigh 12,500(4) 1.2 1.69 12/31/08 12,867 32,373
125,000 11.9 4.25 (6) (6) (6)
Lynda Gustafson -- -- -- -- -- --
- --------------------
-38-
(1) Unless otherwise noted, all of such options were exercisable in full from
the date of grant.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of options providing for termination of
the option following termination of employment or nontransferability of the
options and do not make any provision for taxes associated with exercise.
Because actual gains will depend upon, among other things, future
performance of the Common Stock, there can be no assurance that the amounts
reflected in this table will be achieved. The realizable value for options
whose expiration dates have been extended assume that the option term
commenced on the date the option expiration dates were last extended.
(3) Reflects extension of expiration date of options that were originally
granted on September 8, 1993. All of such options vest in ten equal annual
installments commencing July 1, 1999.
(4) Reflects extension of expiration date of options that were originally
granted on September 15, 1992. All of such options vest in ten equal annual
installments commencing July 1, 1998.
(5) Reflects extension of expiration date of options that were originally
granted on July 1, 1994. All of such options vest in ten equal installments
commencing June 30, 2000 and each June 30 thereafter with the last 16,133
shares vesting on December 31, 2008.
(6) These options were granted by the Board of Directors in December 1998 and
were subsequently voluntarily forfeited by the Named Officers in the fiscal
year ended June 30, 1999.
-39-
The following table sets forth information concerning options exercised by the
Named Officers during the fiscal year ended June 30, 1999, and the number of
options owned by the Named Officers and the value of any in-the-money
unexercised options as of June 30, 1999:
Aggregated Option Exercises
And Fiscal Year-End Option Values
---------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
S