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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 2003
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 001-14015
U.S. HOME & GARDEN INC.
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(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
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(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
- ------------------- ---------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value; Preferred Share Purchase Rights
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).Yes___No__X_
The aggregate market value of the Common Stock held by non-affiliates
of the registrant (based upon the closing sale price) on December 31, 2002 was
approximately $8,616,480.
As of September 15, 2003, 17,951,267 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.
Documents Incorporated By Reference: None
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PART I.
ITEM 1. BUSINESS
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information included in
this Report contains statements that are forward-looking, such as statements
relating to plans for our future activities. Such forward-looking information
involves important known and unknown risks and uncertainties that could
significantly affect actual results, performance or achievements in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of us. These risks and uncertainties include,
but are not limited to, those relating to our historical operations, including
growth strategy, customer concentration, outstanding indebtedness, dependence on
weather conditions, seasonality, expansion and other activities of competitors,
ability to successfully integrate acquired companies and product lines, changes
in federal or state environmental laws and the administration of such laws,
protection of trademarks and other proprietary rights, the ability to maintain
adequate financing arrangements necessary to fund operations and the general
condition of the economy and its effect on the securities markets and other
risks detailed in our other filings with the Securities and Exchange Commission.
If the proposed asset sale described below under "Recent Developments" is
consummated, the risks and uncertainties described above will not be applicable
to our ongoing business operations insofar as any such factors apply only to our
historical lawn and garden businesses, which we will be divesting. Moreover, if
the asset sale is consummated we will also be subject to the risks of a company
with limited operations that will be seeking to supplement its remaining
business operations. The words "believe," "expect," "anticipate," "intend" and
"plan" and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date the statement was made.
GENERAL
We are a leading manufacturer and marketer of a broad range of consumer
lawn and garden products. Our products include weed preventive landscape
fabrics, fertilizer and plant food spikes, decorative landscape edging, grass
and flower seed products, shade cloth and root feeders, which are
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sold under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald
Edge(R), Shade Fabric(TM), Ross(R), Tensar(R), Amturf(R) and Landmaster(R). We
believe that we have significant market share and favorable brand-name
recognition in several of our primary product categories. We market our products
through most large national home improvement and mass merchant retailers
("Retail Accounts"), including Home Depot, Lowe's, Kmart, Wal-Mart, Ace Hardware
and TruServe in North America.
We were organized under the laws of the State of California in August
1990 under the name Natural Earth Technologies, Inc. In January 1992 we
reincorporated under the laws of the State of Delaware and in July 1995 we
changed our name to U.S. Home & Garden Inc. Our lawn and garden operations are
conducted through our subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy
Gardener's subsidiaries and through our subsidiary, Ampro Industries, Inc.
("Ampro"), and our agricultural products operations are conducted through our
subsidiary Golden West Agri-Products, Inc. ("Golden West"). Unless the context
suggests otherwise, references in this Report to "we", "us", "the Company", or
"our" refer to U.S. Home & Garden Inc. and its subsidiaries. Our executive
offices are located at 655 Montgomery Street, Suite 830, San Francisco,
California 94111, and our telephone number is (415) 616-8111.
RECENT DEVELOPMENTS
We and our primary operating subsidiaries, Easy Gardener and Ampro,
have entered into an asset purchase agreement with an entity formed by current
and former members of management of those subsidiaries, Easy Gardener Products,
Ltd. ("Easy Gardener Products"). Under the terms of the asset purchase
agreement, Easy Gardener and Ampro are to sell their operations, including
substantially all of their assets to Easy Gardener Products. These operations
comprise approximately 99% of our consolidated sales and 98% of our consolidated
assets. The assets to be acquired by Easy Gardener Products consist of:
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o substantially all of the assets of Easy Gardener and Ampro,
including:
o all of their business operations and assets,
o the capital stock and operations of Easy Gardener's
wholly-owned subsidiaries, Easy Gardener UK Ltd. and Weatherly
Consumer Products Group, Inc. and
o indirectly, the capital stock and operations of Weatherly
Consumer Products, Inc., a wholly-owned subsidiary of
Weatherly Consumer Products Group, Inc; and
o from us, all of the common securities of our subsidiary, U.S.
Home & Garden Trust I (the "Trust"), as well as the 251,981
trust preferred securities previously issued by the Trust and
currently owned by us.
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The proposed management buyout, which is expected to close in October
2003, is also structured to include Easy Gardener Products' assumption of
substantially all of the selling subsidiaries liabilities and the transfer by us
of our obligations relating to the Trust. These liabilities comprise
approximately 99% of our consolidated liabilities.
o Easy Gardener Products will pay us a total purchase price of
$11,950,000, less certain expenses related to the transaction
for the assets it is acquiring. Of this amount, $10,350,000
will be paid to us in cash at the closing and $1,600,000 will
be paid to us in the form of a subordinated promissory note.
The note will mature in 2009 subject to certain prepayments
from excess cash flow. Interest on the principal amount
outstanding from time to time will accrue at the rate of 9%
per annum and will be capitalized by increasing the principal
amount of the note. The note will be subordinated to the
indebtedness of Easy Gardener Products under its senior credit
facility and under its note to be issued to Central Garden &
Pet Company. It will be senior to the debentures underlying
the trust preferred securities issued by the Trust.
In addition, Easy Gardener Products is to:
o pay or assume our senior credit facility, including all
borrowings outstanding under the facility as of the closing.
There was a total of $24,000,000 outstanding under this
facility as of September 15, 2003. In connection with this
payment or assumption we are to be discharged from any future
obligations under the facility;
o assume our obligations under the Trust-related documents,
including its issuance of a guarantee and new debentures in
the aggregate principal amount of $57,035,000, each identical
to the current guarantee and debentures. In connection with
this assumption, we will be discharged from any further
obligations under the Trust-related documents; and
o assume our obligations under an outstanding option granted by
us in November 2001 to our prior subordinated lenders, which
is exercisable for 94,875 of the trust preferred securities
currently owned by us.
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o Assume substantially all of our selling subsidiaries'
operational (non-debt) liabilities;
If the proposed asset sale is consummated, then under the terms of a
settlement agreement with our prior subordinated lenders, upon the closing of
the proposed asset sale the warrants to purchase our common stock held by these
former lenders will be amended to increase the number of shares that may be
issued upon exercise of the warrants and to reduce the per share exercise price.
In addition to the consideration to be received upon consummation of
the proposed asset sale we will be retaining the capital stock and assets of
Golden West, which accounted for less than 1% of our consolidated net sales for
each of the last three fiscal years. After the asset sale we intend to explore
certain business opportunities to supplement or replace the operations of Golden
West that we will be retaining after the sale.
The asset sale will result in the elimination of our historical lawn
and garden operations. Immediately after the sale, our only operations will
consist of those of Golden West. Therefore, the asset sale will result in the
elimination of a significant amount of our historical operating expenses and the
elimination of all of our debt, with a corresponding elimination of the interest
expense associated with the debt.
The discussion of our historical business set forth below does not
reflect the effects on our operations which will result from the consummation of
the proposed asset sale.
LAWN AND GARDEN INDUSTRY
Historically, the lawn and garden industry was comprised of relatively
small regional manufacturers and distributors whose products were sold to
consumers primarily through local nurseries and garden centers. As the industry
has grown, national home improvement and mass merchant retailers have replaced
many of these local garden centers as the primary retail source for lawn and
garden products. In an effort to improve operating margins and reduce the number
of vendors needed to source high volume lawn and garden products, the preference
among home improvement and mass merchant retailers has shifted towards single
source suppliers that offer broad product lines of consumer brand-name
merchandise and the product support necessary to stimulate consumer demand and
ensure timely and cost effective order fulfillment. Smaller regional suppliers
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generally lack the capital and other resources necessary to offer the variety
and number of product lines, the product support and the inventory stocking and
tracking capabilities required by home improvement and mass merchant retailers.
PRIOR ACQUISITIONS
Since August 1992, we have consummated the following eleven (11)
acquisitions of companies or product lines for a total of approximately $111
million in consideration:
o Golden West Chemical Distributors, Inc. A manufacturer of humic
acid-based products designed to improve crop yield, which we acquired in August
1992 for approximately $1.1 million in cash and $1.1 million in promissory
notes.
o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping
products including WeedBlock(R), which we acquired in September 1994 for
approximately $21.3 million consisting of $8.8 million in cash, a $10.5 million
promissory note and two convertible notes each in the principal amount of $1.0
million. Approximately $2.2 million of additional purchase price was contingent
on Easy Gardener meeting certain income requirements. These contingencies were
met and we paid the entire $2.2 million.
o Emerald Products LLC. A manufacturer of decorative landscape edging
which we acquired in August 1995 for $835,000 in cash and a $100,000 promissory
note.
o Weatherly Consumer Products Group, Inc. ("Weatherly"). A manufacturer
of fertilizer spikes and other lawn and garden products, which we acquired in
August 1996 for 1,000,000 shares of our common stock valued at $3.0 million and
approximately $22.9 million in cash.
o Plasti-Chain product line of Plastic Molded Concepts, Inc. A line of
plastic chain links and decorative edgings, which we acquired from Plastic
Molded Concepts, Inc. in May 1997 for approximately $4.3 million in cash.
o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer
replacement heads, all of whose assets were acquired in February 1998 for
approximately $16.0 million (plus an additional $1.7 million for excess working
capital and acquisition expenses), of which approximately $5.0 million was based
on the value of certain net assets acquired. In June 2002, we decided to
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discontinue the Weed Wizard operations effective September 30, 2002.
o Landmaster Products, Inc. A manufacturer and distributor of polyspun
landscape fabrics for use by consumers and professional landscapers,
substantially all of whose assets were acquired in March 1998 for approximately
$3.0 million (plus an additional $600,000 for certain assets and acquisition
expenses), of which approximately $750,000 was based on the value of certain
assets acquired.
o Tensar(R) consumer products line of The Tensar Corporation. A line of
lawn and garden specialty fencing, which we acquired from The Tensar Corporation
in May 1998 for approximately $5.4 million in cash plus an additional $1.0
million for inventory.
o Ampro Industries, Inc., a manufacturer and distributor of lawn and
garden products including specialty grass and flower seeds which we acquired in
October 1998 for approximately $24.6 million. An additional $1.0 million was
paid for a non-compete agreement.
o Egarden Inc. Our business-to-business Internet subsidiary was
acquired in June 1999 for approximately $400,000, plus expenses of approximately
$100,000. At the time of acquisition, Egarden's activities were limited to sales
of Internet gardening related products to the end consumer. In fiscal 2001, we
suspended all of the operations relating to Egarden Inc. and sold the remaining
assets during the year ended June 30, 2002.
o Findplants.com., an electronic horticulture catalogue and locater
business-to-business service for commercial growers and wholesalers all of whose
assets were acquired by Egarden Inc. in May 2000 for approximately $537,000 in
cash. We suspended all of the operations relating to Findplants.com and sold the
assets of Findplants.com back to the former owner in September 2001.
CONSUMER LAWN AND GARDEN PRODUCTS
The primary consumer lawn and garden products marketed by us to our
Retail Accounts are:
Landscape Fabric. We market different types of landscape fabric in
varying thicknesses and strengths under the trade names WeedBlock(R),
MicroPore(R), Pro WeedBlock(TM), and Landmaster(R). Landscape fabrics allow
water, nutrients and oxygen to filter through to the soil but prevent weed
growth by blocking sunlight. Our primary landscape fabrics are made from
non-woven fabrics which are generally manufactured with extruded polymers,
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pressed or vacuum formed into thin sheets having the feel and texture of light
plastics. For the fiscal years ended June 30, 2003, 2002 and 2001, sales of
landscape fabric represented approximately 48%, 51% and 48%, respectively, of
our consolidated net sales.
Fertilizer, Plant Food and Insecticide Spikes. Fertilizer spikes
deliver plant food nutrients directly to the root of the plant, an alternative
method of maintaining plant health to surface-delivered liquid or solid
fertilizers. Some of our fertilizer spikes have the added feature of containing
an insecticide for the control of unwanted insects.
We market a variety of indoor and outdoor specialty fertilizer and plant food
spikes primarily under the Jobe's(R) tradename, one of the most recognized
brands in the consumer lawn and garden industry. For the years ended June 30,
2003, 2002 and 2001, sales of fertilizer, plant food and insecticide spikes
constituted approximately 12%, 14% and 17%, respectively, of our consolidated
net sales.
Landscape Edging. We market a variety of resin-based decorative
landscape edgings under trade names including Emerald Edge and Terra Cotta
Tiles(TM). Our decorative edgings are used by consumers to define the perimeter
of planting areas with a variety of designs which include stone, log, terra
cotta tiles and picket fences. For the years ended June 30, 2003, 2002 and 2001,
sales of landscape edging constituted approximately 10%, 10% and 9%,
respectively, of our consolidated net sales.
Shade Cloth. We market shade cloth fabrics in a variety of sizes and
colors. Shade cloth is utilized generally in conjunction with some type of
outdoor structure such as a patio veranda, and provides shade, privacy or
protection from wind for people, plants and pets. We market shade cloth fabrics
as an exclusive United States retail distributor of a shade cloth manufacturer.
Fertilizers and Root Feeders. We market fertilizers under the Ross
trade name. The Ross fertilizer, when applied through a Ross Root Feeder, a long
steel irrigation tube with a hose connector that is inserted deep into the
ground, provides the homeowner with a means of deep feeding and irrigating trees
and shrubs. The Ross Root Feeder may also be used without fertilizer as a deep
watering device.
Lawn and Garden Fencing. We market resin-based fencing for lawns and
gardens. A variety of fencing products are marketed by us and are used by the
consumer for numerous applications including preventing animals from entering a
garden or orchard.
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Mulch, Fertilizer, Grass and Flower Seed. We distribute specialty
combinations of mulch, fertilizer, grass and flower seeds. Consumers spread this
"ready-to-grow" combination and only need to water regularly for a green lawn or
colorful flower garden.
Other Products. In addition to landscape fabrics, fertilizer, plant
food and insecticide spikes, landscape edging, shade cloth, fertilizer and root
feeders, lawn and garden fencing, and specialty mulch, fertilizer, grass and
flower seed combinations, we also sell complementary lawn and garden products
for the home gardener. The products include a line of animal repellents that are
formulated to deter dogs, cats, deer and rabbits from destroying garden and
landscape environs, a variety of protective plant and tree covers, bird and
animal mesh blocks, protective garden and tree netting to prevent animal damage,
synthetic mulch and fabric pegs.
Agricultural Products. Through Golden West, we manufacture and
distribute certain humic acid-based agricultural products for use on farms and
orchards. Golden West generally sells its products to agricultural distributors,
which in turn market Golden West's products to farms and orchards. The principal
agricultural products manufactured or distributed by us are: Energizer(R), a
formulation of humic acids which, when applied in conjunction with liquid
fertilizers, permits crops to absorb a greater amount of the nutrients in the
fertilizer; Penox(R), a surfactant, or penetrating wetting agent, that contains
humic acid which, when applied in conjunction with herbicides, defoliants and
other agricultural products, increases their effectiveness; and Powergizer(R), a
foliar nutrient, or plant food, containing humic acid which promotes growth and
vigor in many types of crops. Sales of our agricultural products accounted for
less than 1% of our consolidated net sales in the fiscal years ended June 30,
2003, 2002 and 2001.
CONVERSION, MANUFACTURING AND SUPPLY
Lawn and Garden Products. Except for the materials for our WeedBlock
landscape fabric, which are obtained primarily from a single source, the basic
materials for our consumer lawn and garden products are purchased from a variety
of suppliers. All of such materials are converted, packaged and shipped by us
from either our Waco, Texas facility, our Paris, Kentucky facility or our
facility located in Colorado.
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We purchase most of the landscape fabric used to manufacture WeedBlock
from Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls of various
types of landscape fabric from Tredegar for shipment to our Waco, Texas facility
where we size, cut and package the fabric for consumer sale. Although we have
purchased most of our supply from Tredegar for over 10 years and believe that
our relationship with Tredegar is good, Tredegar is free to terminate its
relationship with us at any time and accordingly could market its fabrics to
other companies, including our competitors. Nevertheless, we own the registered
trademark "WeedBlock(R)" and to the extent that we establish alternative supply
arrangements, our rights to market products under the WeedBlock brand name would
continue without restriction.
We manufacture and package our Jobe's fertilizer spikes at our Paris,
Kentucky facility. The raw materials that comprise our indoor fertilizer spikes
are mixed with a binding agent and then passed through an extrusion process
which feeds a continuous strand of fertilizer through a heat-drying system. The
strand is then cut into ready-to-use fertilizer spikes which are then machine
counted and packaged into shelf-ready blisterpacks. Our outdoor fertilizer
spikes are manufactured in a similar manner except rather than passing through
an extrusion process, the outdoor spikes are processed through molds which shape
the spikes into their final form. The outdoor spikes are packaged in either a
foil pouch, bag or box.
The specifications for our landscape edging, shade cloth and root
feeder products and packaging are designed by us and independent design
consultants. The products are then manufactured and packaged by third party
manufacturers according to our specifications.
The material used in our resin-based fencing is manufactured for us
pursuant to open purchase orders. The material is then sized and cut for
consumer sale at our Waco, Texas facility.
The Ampro and Amturf "ready-to-grow" combination mulch, fertilizer and
seed products are produced in Michigan pursuant to a contract manufacturing
agreement. Newsprint is shredded and processed into mulch and then combined with
seed and fertilizer. The mixture is now packaged in bags, boxes, canisters, and
clear jugs.
Agricultural Products. We do not own or lease any manufacturing
facilities for our agricultural products. Substantially all of our humic
acid-based agricultural products, Energizer, Penox and Powergizer, are processed
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by Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders
placed by us from time to time in the ordinary course of business. Furthermore,
through Western Farm, we have an open purchase order arrangement with an entity
which supplies us with leonardite ore, a source of humic acid used in our
agricultural products.
CUSTOMERS
Our customers include home improvement centers, mass merchandisers,
hardware stores, nurseries, and garden centers and other retail channels
throughout the United States. Our two largest customers for fiscal 2003, Home
Depot and Ace Hardware, accounted for approximately 54% and 6%, respectively, of
our consolidated net sales during that period. Our two largest customers for
fiscal 2002, Home Depot and Lowe's, accounted for approximately 49% and 10%,
respectively, of our consolidated net sales during such year. Home Depot and
Lowe's, accounted for approximately 43% and 14%, respectively, of our
consolidated net sales during fiscal 2001. Our ten largest customers as a group
accounted for approximately 77%, 78% and 80% of our consolidated net sales
during fiscal 2003, 2002 and 2001, respectively. Sales to such customers are not
governed by any contractual arrangement and are made pursuant to standard
purchase orders. While we believe that relations with our largest customers are
good, the loss of any of these customers could have an adverse effect upon our
results of operations. Our International sales are subject to certain risks in
doing business in foreign countries including, but not limited to, currency
exchange rate fluctuations and tariffs.
Our sales are concentrated in the United States, with international
sales (primarily in Europe and Canada) accounting for approximately 10%, 6%, and
3% of our net sales for each of fiscal 2003, 2002 and 2001, respectively. We are
currently attempting to develop relationships with distributors outside of the
United States.
SALES AND MARKETING
Our selling efforts are managed by two Vice Presidents of Sales. One
specializes in home center customers and the other directs our four regional
sales managers responsible for mass merchants, hardware and all other channels.
Because of the service-oriented nature of our business, the sales managers
devote a substantial amount of their time to servicing and maintaining
relationships with our largest customers in addition to managing the overall
sales operations. We also utilize the services of over 30 non-exclusive
independent sales organizations. This integrated sales approach is designed to
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help achieve sales of all products to all customers.
Our marketing activities are coordinated by our National Marketing
Manager. In addition to designing and developing our distinctive packaging and
overall advertising and promotional activities, the National Marketing Manager
works closely with the sales organization to help develop programs which are
tailored to the strategies of our key Retail Accounts.
We expect that our lawn and garden products will continue to be
marketed by retailers primarily through the use of special displays and in-store
consumer promotions in Retail Accounts, hardware stores, nurseries and garden
centers. In addition we believe that a substantial portion of lawn and garden
sales are impulse driven and not overly price sensitive. Therefore we seek to
increase consumer awareness, understanding and brand identification of our
products through our distinctive packaging and point-of-sale displays. Retail
Accounts and our other customers receive our products in packaging that is
easily displayed. The retail product packaging is informative to the end-user
and incorporates attention getting, eye-pleasing color schemes. We also tailor
our displays to the evolving needs of retailers. Because many home improvement
and mass merchant retailers maintain outdoor sales areas for their lawn and
garden products, we utilize waterproof displays for many of our products. In
addition, we meet the specific needs of many of our larger customers by
tailoring the size of our displays to the dimensions requested by such
customers. Our independent sales representatives periodically visit individual
retail outlets to assist Retail Accounts in achieving innovative and optimal use
of our distinctive store displays.
We spent approximately $2.6 million in fiscal 2003 on a combination of
media development, print, radio and television advertising, cooperative
advertising (advertising done in conjunction with retailers), attendance at
trade shows and public relations to promote awareness, understanding and brand
identification of our lawn and garden products.
We utilized a substantial portion of our marketing budget for fiscal
2003 on cooperative advertising in conjunction with key retail customers.
INFORMATION SYSTEMS
We maintain a sophisticated retail data information system which
enables us to provide timely and efficient order fulfillment to our Retail
Accounts and other customers. Internally, our information systems track orders
and deliveries and provide exception reports if product is not delivered on
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time. The systems "push" the necessary information to the proper personnel,
allowing us to react quickly to information. Our purchase order process can be
paperless, with most Retail Accounts placing their orders through an electronic
data interchange with us.
In addition, we have implemented the QAD Applications e-business
supply-chain enabled enterprise planning software at our executive offices and
at several of our subsidiaries.
SEASONALITY
Our sales are seasonal due to the nature of the lawn and garden
business and generally parallels the annual growing season. Our sales and
shipping are typically most active from late March through May when home lawn
and garden customers are purchasing supplies for spring planting and retail
stores are increasing their inventory of lawn and garden products. The buying
pattern of retailers is changing and stores are replenishing their inventory
when sales are made rather than buying large quantities of inventory in advance
of the selling season. Sales of our agricultural products are also seasonal.
Most shipments occur during the agricultural cultivation period from March
through October.
INVENTORY AND DISTRIBUTION
In order to meet product demand, we historically kept relatively large
amounts of product inventory on hand during the months of highest demand. As a
result of changes in customer inventory purchasing patterns described in the
preceding paragraph and improved communications with customers, we improved our
ability to meet customer demands without maintaining excess inventory levels
during the last two fiscal years. Inventory obsolescence has historically not
been a major issue but could increase in the future. Retail Accounts generally
require delivery within five business days. Orders are normally processed within
48 hours and shipped by common carrier. Our shipping and freight costs have
increased during the last two fiscal years due to smaller orders, higher costs
from the freight carriers and increased volume to a significant customer that
stipulates we use a required carrier.
COMPETITION
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. With respect to our sale of consumer lawn and garden
products, we compete with a combination of national and regional companies
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including catalog and Internet e-commerce businesses specializing in the
marketing of lawn and garden care products. The Scotts Company, in particular,
has captured a significant and controlling share in a variety of categories as a
result of their acquisition of the Ortho brand and the licensing of the Roundup
brand for the consumer market. Scotts also markets products under the Scotts and
Miracle-Gro brands which compete both directly and indirectly with many of our
products. Many of our competitors have achieved significant national, regional
and local brand name and product recognition and engage in frequent and
extensive advertising and promotional programs. Many of these companies have
substantially greater financial, technical, marketing and other resources than
us.
Large, dominant manufacturers, which manufacture and sell lawn and
garden products, such as the Scotts Company, and other lawn and garden care
companies have, in the past, manufactured and marketed landscape fabrics.
Currently, few of such competitors compete with us in this product category.
Nevertheless, well-capitalized companies and smaller regional firms may develop
and market landscape fabrics and compete with us for customers who purchase such
products.
Among our competitors in the lawn and garden market for the Jobe's
spike line of fertilizer and insecticide products and the Ampro combination
mulch, seed and fertilizer line of products is the Scotts Company, which markets
competing products under the Miracle-Gro brand. Competition for our agricultural
products consists of other manufacturers of products that are humic acid based
but that utilize formulas that are different from Golden West's. These
competitors include Monterey Chemical Corporation and Custom Formulators, Inc.
We compete with a variety of regional lawn and garden manufacturers in the
markets for landscape edging, shade cloth and root feeders.
GOVERNMENT REGULATION
We are subject to many laws and governmental regulations and changes in
these laws and regulations, or their interpretation by agencies and the courts,
occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may be
marketed, by us as fertilizers or pesticides are subject to an extensive and
frequently evolving statutory and regulatory framework, at both the Federal and
state levels. The distribution and sale of pesticides is subject to regulation
by the U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by
many states in a manner similar to FIFRA. Under FIFRA and similar state laws,
all pesticides must be registered with the EPA and the state and must be
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approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on the marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply with
the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
sanctions, including, but not limited to suspension or restriction of product
distribution, civil penalties or criminal sanctions.
We market certain animal repellent and pesticide products that are
subject to FIFRA and to similar state regulations. We also market certain
fertilizer products that are subject to regulation in some states. We believe
that we are in substantial compliance with material FIFRA and applicable state
regulations regarding our material business operations. However, there can be no
assurance that we will be able to comply with future regulations in every
jurisdiction in which our material business operations are conducted without
substantial cost or interruption of operations. Moreover, there can be no
assurance that future products marketed by us will not also be subject to FIFRA
or to state regulations. If future costs of compliance with regulations
governing pesticides or fertilizers exceed our budget for such items, our
business could be adversely affected. If any of our products are distributed or
marketed in violation of any of these regulations, we could be subject to a
recall of, or a sales limitation placed on, one or more of our products, or
civil or criminal sanctions, any of which could have a material adverse effect
upon our business.
Environmental Regulation. Our manufacturing operations are subject to
various evolving federal, state and local laws and regulations relating to the
protection of the environment, which laws govern, among other things, emissions
to air, discharges to ground, surface water, and groundwater, and the
generation, handling, storage, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. Easy Gardener
16
operates two manufacturing facilities and its wholly-owned subsidiary, Weatherly
Group, operates one manufacturing facility. Although we believe that our
material manufacturing facilities are in substantial compliance with applicable
material environmental laws, it is possible that there are material
environmental liabilities of which we are unaware. If the costs of compliance
with the various existing or future environmental laws and regulations including
any penalties which may be assessed for failure to obtain necessary permits,
exceed our budget for such items, our business could be adversely affected.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and many similar state statutes, impose joint and several liability for
environmental damages and cleanup costs on past or current owners and operators
of facilities at which hazardous substances have been discharged, as well as on
persons who generate, transport, or arrange for disposal of hazardous wastes at
a particular site. In addition, the operator of a facility may be subject to
claims by third parties for personal injury, property damage or other costs
resulting from contamination present at or emanating from property on which its
facility is located. Easy Gardener operates two manufacturing facilities and
Weatherly Group operates one manufacturing facility. Although our Ampro/Weed
Wizard facility was sold by us in April 2001, liability could exist for
remediation of such facility in the future relating to the operations conducted
at that facility while it was owned and operated by us. Moreover, we or our
predecessors have owned or operated other manufacturing facilities in the past
and may have liability for remediation of such facilities in the future, to the
extent any is required. In this regard, Weatherly Group previously owned a
facility that was the subject of certain soil remediation activities. Although
this facility was sold by Weatherly Group prior to our acquisition of Weatherly,
there can be no assurance that we will not be liable for any previously existing
environmental contamination at the facility. Moreover, although the purchaser of
the facility indemnified Weatherly Group for any environmental liability and the
sellers of Weatherly Group, in turn, indemnified us from such liability, there
can be no assurance that, if required, the indemnifying parties will be able to
fulfill their respective obligations to indemnify us. Furthermore, certain
business operations of our subsidiaries also involve shipping hazardous waste
off-site for disposal. As a result, we could be subject to liability under these
statutes. We could also incur liability under CERCLA or similar state statutes
for any damage caused as a result of the mishandling or release of hazardous
17
substances owned by us but processed and manufactured by others on our behalf.
As a result, there can be no assurance that the manufacture of the products sold
by us will not subject us to liability pursuant to CERCLA or a similar state
statute. Furthermore, there can be no assurance that Easy Gardener, Weatherly
Group, or Ampro/Weed Wizard will not be subject to liability relating to
manufacturing facilities owned or operated by them currently or in the past.
Other Regulations. We are also subject to various other federal, state
and local regulatory requirements such as worker health and safety,
transportation, and advertising requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants.
TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS
We believe that product recognition is an important competitive factor
in the lawn and garden care products industry. Accordingly, in connection with
our marketing activities of our lawn and garden care products, we promote, and
intend to promote, certain trade names and trademarks which are believed to have
value to us.
In connection with our acquisition, through Easy Gardener, of the
assets of Easy Gardener's predecessor in September 1994, we acquired certain
trademarks and copyrights used by Easy Gardener, Inc. in connection with its
business including, but not limited to, the trademarks, WeedBlock(R), Easy
Gardener(R), MicroPore(R) and BirdBlock(R). In connection with its acquisition
of Weatherly Group, we acquired certain patents, as well as certain copyrights
and trademarks used in connection with Weatherly Group's business including, but
not limited to, Jobe's(R), Ross(R), Green Again(R), Gro-Stakes(R), Tree Guard(R)
and XP-20(R). We also acquired certain patents and trademarks when we acquired
the assets of Emerald Products, LLC and also acquired certain trademarks in
connection with our purchase of the Plasti-Chain line of products from Plastic
Molded Concepts, Inc. We also acquired the trademark Landmaster(R) in connection
with our acquisition of substantially all of the assets of Landmaster Products,
Inc. In addition, we acquired the trademarks Polyspun 350(R), Nature Shield(R)
and Diamondback(R) in connection with our acquisition of the Tensar(R) consumer
product line. In connection with the acquisition of the Tensar(R) consumer
product line, The Tensar Corporation granted to us an exclusive royalty-free
perpetual license to use the trademark Tensar(R) in connection with a wide range
of polymeric grid, mesh, net and related products supplied to us by The Tensar
18
Corporation. In connection with our acquisition of Ampro, we acquired certain
trademarks used in connection with Ampro's business including, but not limited
to, Amturf(R). There can be no assurance that we will apply for any additional
trademark or patent protections relating to our products or that our current
trademarks and patents will be enforceable or adequately protect us from
infringement of our proprietary rights.
Although we believe that the products sold by us do not and will not
infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by us are deemed to infringe upon the patents or proprietary
rights of others, we could be required to pay damages and modify our products or
obtain a license for the manufacture or sale of such products. There can be no
assurance that, in such an event, we would be able to do so in a timely manner,
upon acceptable terms and conditions or at all, and the failure to do any of the
foregoing could have a material adverse effect upon us.
PRODUCT LIABILITY
We, as a manufacturer of lawn and garden care and pesticide products,
may be exposed to significant product liability claims by consumers. Although we
have obtained product liability insurance coverage in the aggregate amount of
$2.0 million with all policies limited to $1.0 million per occurrence, and have
obtained an umbrella policy in the amount of $10.0 million, which excludes Weed
Wizard, there can be no assurance that such insurance will provide coverage for
any claim against us or will be sufficient to cover all possible liabilities. In
the event a successful suit is brought against us, unavailability or
insufficiency of insurance coverage could have a material adverse effect on us.
Moreover, any adverse publicity arising from claims made against us, even if
such claims were not successful, could adversely affect the reputation and sales
of our products.
EMPLOYEES
As of September 15, 2003 we had 178 full-time employees. Of such
employees, 3 are executive officers of U.S. Home & Garden Inc., 51 were engaged
in administration and finance, 29 were engaged in sales and marketing, 30 were
engaged in warehouse, shipping and receiving, and 65 were engaged in production.
None of our employees are covered by collective bargaining agreements. We
19
believe that we have a good relationship with our employees. If our proposed
sale of assets to Easy Gardener Products is consummated, most of these employees
will become employees of Easy Gardener Products and we will retain only certain
executive and administrative employees and the employees of our Golden West
subsidiary.
SEGMENT INFORMATION
Our primary continuing operations are in one segment - the manufacture
and sale of consumer lawn and garden products. Product and major customer
information are disclosed separately above.
ITEM 2. PROPERTIES.
Our executive offices are currently located in San Francisco,
California, in approximately 2,000 square feet of office space for which we pay
$12,121 per month in rent, which includes the costs of utilities and janitorial
services. Our office space is rented pursuant to a lease expiring in February
2004.
Easy Gardener leases approximately 250,000 square feet of office and
warehouse space in Waco, Texas for which we pay $19,386 per month in rent,
pursuant to a lease agreement that expires in February 2005. Easy Gardener's
facilities contain landscape fabric converters, packaging equipment and
warehouse and shipping facilities.
Weatherly leases approximately 72,000 square feet of manufacturing and
warehouse space in Paris, Kentucky for $9,931 per month in rent pursuant to a
lease that expires in June 2006. Weatherly also leases an additional 59,000 feet
of warehouse space in Paris, Kentucky for $9,845 per month in rent, pursuant to
a lease agreement that expires in June 2006.
Golden West's offices are located in Merced, California in
approximately 900 square feet of space it leases for $1,500 per month base rent
on a month to month basis.
With respect to the storage, packaging and distribution of certain of
our commercial grade landscape fabric products, Easy Gardener has entered into a
lease pursuant to which we are provided with 60,000 square feet of warehouse
space in Colorado. The lease, which expires on May 31, 2005, provides for a
rental rate of $16,010 per month, which increases 5% per year on June 1 of each
year.
20
We believe that our current manufacturing and warehouse space is
adequate for our planned future operations.
If our proposed sale of assets to Easy Gardener Products is consummated
we will retain only our executive offices and Golden West's offices.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
21
PART II.
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Our common stock has traded in the over-the-counter market and was
quoted on the NASDAQ Stock Market from March 26, 1992 until April 18, 2003. Our
common stock has been traded on the over-the-counter bulletin board since April
18, 2003. The symbol for our common stock is "USHG.OB". The following table sets
forth, for the periods indicated, the high and low sales prices for the common
stock, for the following periods as reported by Nasdaq.
Year Ended June 30, 2003 High Low
First Quarter $.67 $ .20
Second Quarter .68 .16
Third Quarter .59 .44
Fourth Quarter .60 .31
Year Ended June 30, 2002
First Quarter $.98 $ .47
Second Quarter .78 .38
Third Quarter .62 .36
Fourth Quarter .72 .34
As of September 15, 2003, the number of holders of record of our common
stock was 200. In addition, there are in excess of 500 beneficial owners of our
common stock whose shares are held in "street name".
We have not paid any cash dividends on our common stock to date and do
not expect to declare or pay any cash or stock dividends in the foreseeable
future. The lending agreements between us and our primary lending institutions
prohibit us from paying dividends without the lenders' consent.
The following table sets forth certain information as of June 30, 2003
regarding outstanding options, warrants and other rights to purchase Common
Stock that were outstanding on June 30, 2003.
22
- -------------------------------- ---------------------- ------------------------- ------------------------------
(a) (b) (c)
- -------------------------------- ---------------------- ------------------------- ------------------------------
Plan Category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining for future
exercise of outstanding options, issuance under equity
outstanding options, warrants and rights compensation plans
warrants and rights (excluding securities
reflected in column (a))
- -------------------------------- ---------------------- ------------------------- ------------------------------
Equity compensation plans 3,099,000 $2.33 536,000
approved by security holders
- -------------------------------- ---------------------- ------------------------- ------------------------------
Equity compensation plans not 3,069,000 (1) $1.71 -
approved by security holders
- -------------------------------- ---------------------- ------------------------- ------------------------------
Total 6,168,000 $2.02 536,000
- -------------------------------- ---------------------- ------------------------- ------------------------------
(1) Represents the aggregate number of shares of common stock issuable
upon exercise of individual arrangements with option and warrant holders. These
options and warrants expire at various dates between 2005 and 2009 and contain
anti-dilution provisions providing for adjustments of the exercise price under
certain circumstances.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT
PER SHARE DATA).
The following selected consolidated financial data at and for the years
ended June 30, 1999, 2000, 2001, 2002 and 2003 has been derived from our audited
consolidated financial statements. Such information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto appearing elsewhere in this Report. Differences between amounts
included below and amounts previously reported are due to the reclassification
of discontinued operations.
23
Statement of Operations Data
Year Ended June 30,
------------- -------------- ------------- ---------------- -------------
1999 2000 2001 2002 2003
------------- -------------- ------------- ---------------- -------------
Net sales.................................. $85,024 $86,919 $78,863 $78,947 $76,244
Cost of sales.............................. 42,322 47,802 44,065 43,358 43,453
------------- -------------- ------------- ---------------- -------------
Gross profit............................... 42,702 39,117 34,798 35,589 32,791
Selling, shipping, general and administrative
expenses................................... 31,683 29,554 30,638 27,686 28,025
Restructuring charges (1).................. - - 2,860 - -
------------- -------------- ------------- ---------------- -------------
Income from operations..................... 11,019 9,563 1,300 7,903 4,766
Refinancing and transaction costs.......... - - - (254) (4,291)
Other (3).................................. - 1,224 - - -
Interest expense, net...................... (6,883) (6,692) (7,331) (7,291) (7,994)
Income tax (expense) benefit............... (1,643) (1,213) 1,406 (228) (133)
------------- -------------- ------------- ---------------- -------------
Income (loss) from continuing operations before 2,493 2,882 (4,625) 130 (7,652)
cumulative effect of a change in accounting
principle..................................
Loss from discontinued operations,
net of tax and minority interest (2)....... (444) (3,227) (16,253) (1,760) (1,436)
Gain (loss) on disposal of discontinued
operations, net of tax and minority interest (2) - - (4,551) 20 (49)
------------- -------------- ------------- ---------------- -------------
Income (loss) before cumulative effect of a
change in accounting principle............. 2,049 (345) (25,429) (1,610) (9,137)
Cumulative effect of a change in accounting
principle (4).............................. - - - (9,882) -
------------- -------------- ------------- ---------------- -------------
Net income (loss).......................... $2,049 $(345) $(25,429) $(11,492) $(9,137)
============= ============== ============= ================ =============
Income (loss) from continuing operations per
common share before cumulative effect of a
change in accounting principle:
Basic...................................... $.13 $.09 $(.26) $.01 $(.43)
Dilutive................................... $.11 $.08 $(.26) $.01 $(.43)
Net income (loss) per share:
Basic ..................................... $.10 $(.02) $(1.40) $(.66) $(.51)
Dilutive................................... $.09 $(.02) $(1.40) $(.64) $(.51)
Weighted average number of common and common
equivalent shares outstanding:
Basic...................................... 19,621,000 19,031,000 18,181,000 17,555,000 17,951,000
Dilutive................................... 23,595,000 20,760,000 18,181,000 18,024,000 18,068,000
Balance Sheet Data:
June 30,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Working capital (deficit)...... $32,874 $25,151 $4,867 $2,728 $(5,532)
Intangible assets, net......... 82,109 67,839 65,892 56,259 56,268
Total assets................... 138,263 138,545 109,463 99,365 96,559
Short-term debt................ -- 3,125 21,670 22,748 27,227
Long-term debt................. 78,750 58,338 56,951 56,951 57,092
Total liabilities.............. 91,779 89,331 90,256 92,383 98,595
Stockholders' equity (deficit). 46,484 45,103 17,968 6,982 (2,036)
24
(1) Amount represents restructuring charges relating to the closing and sale of
the Ampro facility. See further discussion at Note 15 to the Consolidated
Financial Statements included in Part II, Item 8.
(2) Amounts represent operations and estimated loss on disposal of the Weed
Wizard and Egarden subsidiaries. See further discussion at Note 2 to the
Consolidated Financial Statements included in Part II, Item 8.
(3) Amount represents gain incurred on the repurchase of mandatorily redeemable
trust preferred securities of U.S. Home & Garden Trust I. Amount was
reclassified from extraordinary gain upon adoption of Statement of Financial
Accounting Standards No. 145. See summary of Accounting Policies in the
Consolidated Financial Statements included in Part II, Item 8.
(4) Amount represents the cumulative effect of a change in accounting principle
related to goodwill. See further discussion at Note 7 to the Consolidated
Financial Statements included in Part II, Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
We manufacture and market a broad range of brand-name consumer lawn and
garden products through our wholly-owned subsidiaries, Ampro, Easy Gardener and
Golden West, and through Easy Gardener's wholly-owned subsidiaries, Weatherly
and Easy Gardener UK. Since 1992, we have consummated eleven acquisitions of
complementary lawn and garden companies and product lines for an aggregate
consideration of approximately $111 million in cash, notes and equity
securities. As a result of such acquisitions, we recognized a significant amount
of goodwill which, in the aggregate, was approximately $49.9 million as of June
30, 2003. Effective July 1, 2001 we adopted Statement of Financial Accounting
Standards (SFAS) No. 142. Accordingly, no amortization of goodwill was reflected
in the financial statements for the fiscal years ended June 30, 2003 and 2002
compared to $2.5 million for the year ended June 30, 2001. We completed the
transitional goodwill impairment test during fiscal 2002 and recorded an
impairment loss of $9.9 million which relates primarily to the Ampro operations.
This loss is reflected as a cumulative effect of a change in accounting
principle. See also "Summary of Accounting Policies - Intangible Assets" and
25
Note 7 to the Consolidated Financial Statements included in Part II, Item 8.
Our results of operations for the fiscal year ended June 30, 2003 were
adversely affected by the prolonged periods of inclement weather in many
portions of the United States during the late spring and early summer which
negatively impacted the lawn and garden industry. Our results were also
adversely affected by the refinancing costs and related write-offs and
transaction expenses related to the proposed sale of Easy Gardener assets. Our
results were also adversely affected by the discontinued Weed Wizard operations
that generated a loss of $1.4 million for the year. Results were also impacted
in the third and fourth quarters by changes in the buying pattern of certain of
our key customers who carried less inventory than in prior years and replenished
their lower inventory levels as sales were made by them.
Our results of operations for the fiscal year ended June 30, 2002 were
adversely affected by the transitional goodwill impairment test that resulted in
the recording of an impairment loss of $9.9 million. Our results were also
adversely affected by the discontinued Weed Wizard operations that generated a
loss of $1.8 million for the year. Results were also impacted in the third and
fourth quarters by changes in the buying pattern of certain of our key customers
who carried less inventory than in prior years and replenished their lower
inventory levels as sales were made by them.
Our results of operations for the fiscal year ended June 30, 2001 were
adversely affected by losses attributable to the discontinued operations of Weed
Wizard and Egarden Inc., of $16.3 million including the impairment of goodwill
of Weed Wizard of $10.8 million, and the estimated net loss on disposal of
Egarden assets of $4.6 million. Our results were also adversely affected by the
restructuring loss from the closure of the Ampro Industries, Inc. facility in
Michigan, an overall soft economy and prolonged periods of inclement weather in
many portions of the United States during the late spring and early summer which
negatively impacted the lawn and garden industry.
There continues to be a consolidation in the lawn and garden industry
which creates, over time, a downward pressure on operating margins.
If our proposed sale of assets to Easy Gardener Products is consummated
there will be a material reduction in our net sales and operating expenses and
in our assets and liabilities as a result of our divestiture of substantially
26
all of the assets and operations of our material operating subsidiaries. Except
as specifically set forth below, the discussion below does not give effect to
the consummation of the proposed sale of assets.
Historical Results of Operations
The following table sets forth for the periods indicated certain
selected income data as a percentage of net sales:
Percentages of Net Sales
----------------------------------------------------------
Year Ended June 30,
----------------------------------------------------------
2001 2002 2003
---- ---- ----
Net sales............................................ 100% 100% 100%
Cost of sales........................................ 55.9 54.9 57.0
---- ---- ----
Gross profit......................................... 44.1 45.1 43.0
Selling and shipping expenses........................ 20.8 23.2 24.5
General and administrative expenses.................. 18.1 11.9 12.2
Restructuring charges................................ 3.6 - -
--- - -
Income from operations............................... 1.6 10.0 6.3
Refinancing and transaction costs - (.3) (5.6)
Interest expense, net................................ (9.3) (9.3) (10.5)
Income tax (expense) benefit......................... 1.8 (.3) (.2)
Loss from discontinued operations, net............... (20.6) (2.2) (1.9)
Loss on disposal of discontinued operations, net..... (5.7) - (.1)
Cumulative effect of a change in accounting principle - (12.5) -
- ------ -
Net loss ............................................ (32.2)% (14.6)% (12.0)%
------- ------- -------
27
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2002
Net sales. Net sales decreased $2.7 million, or 3.4%, to $76.2 million
for the fiscal year ended June 30, 2003 from $78.9 million during the fiscal
year ended June 30, 2002. The decline was due to prolonged periods of inclement
weather in many areas of the United States as well as increased discounts,
returns and allowances.
Gross profit. Gross profit decreased by $2.8 million, or 7.9%, to $32.8
million for the fiscal year ended June 30, 2003 from $35.6 million during the
comparable period in 2002. Gross profit as a percentage of net sales decreased
to 43.0% during the fiscal year ended June 30, 2003 from 45.1% during the
comparable period in 2002. The decrease in gross profit is due to the decrease
in sales volume and the increased discounts, returns and allowances.
Selling and shipping expenses. Selling and shipping expenses increased
$.4 million, or 2.2% to $18.7 million during the fiscal year ended June 30, 2003
from $18.3 million during the comparable period in 2002. Selling and shipping
expenses as a percentage of net sales increased to 24.5% during the fiscal year
ended June 30, 2003 from 23.2% during the comparable period in 2002. This
increase in expense and percentage was primarily a result of increased out bound
freight costs resulting from a reduction in the average size of shipments,
increase in freight costs, and increase in volume to a significant customer that
stipulates we use a required carrier.
General and administrative expenses. General and administrative
expenses decreased $0.1 million or 0.7% to $9.3 million during the fiscal year
ended June 30, 2003 from $9.4 million during the comparable period in 2002. As a
percentage of net sales, general and administrative expenses increased to 12.2%
during the fiscal year ended June 30, 2003 from 11.9% during the comparable
period in 2002.
Income from operations. Income from operations decreased by $3.1
million, or 39.7% to $4.8 million during the fiscal year ended June 30, 2003
compared to $7.9 million for the comparable period in 2002. The decrease in
income from operations for the 2003 period is primarily attributable to the
reduction in sales and increase in discounts, returns and allowances. As a
percentage of net sales, income from operations decreased to 6.3% for the fiscal
year ended June 30, 2003 from 10.0% during the comparable period in 2002.
27
Refinancing and transaction costs. Refinancing and transaction costs
increased $4.0 to $4.3 million during the year ended June 30, 2003 from $0.3
million during the comparable period in 2002. Included in such costs for the
year ended 2003 is $2.0 million of previously deferred finance costs and
discounts related to the replaced finance agreements and $2.3 million of
refinancing and transaction expenses. We wrote-off $0.3 million of deferred
finance costs during the comparable period in 2002 as a result of refinancing.
Net interest expense. Net interest expense increased $0.7 million, or
9.6% to $8.0 million during the fiscal year ended June 30, 2003 compared to $7.3
million during the comparable period in 2002. The increase in expense is
primarily due to increased borrowings under the term loan and the revolver and
increased borrowing rates at the end of the year due to covenant violations.
Income tax expense. Income tax expense was $0.1 million during the
fiscal year ended June 30, 2003 compared to $0.2 million during the comparable
period in 2002.
Discontinued operations. In June 2002, we announced we were
discontinuing the Weed Wizard line of products effective September 30, 2002 due
to continued operating losses, the loss of sales due to the product recall in
fiscal 2000, and the current and future prospects for the operation.
The net loss from discontinued operations was $1.4 million during the
year ended June 30, 2003 compared to $1.8 million in fiscal 2002. In fiscal
2002, we recorded an estimated net loss on disposal of Weed Wizard of $1.1
million related to the write-down of inventory and long-lived assets. As of June
30, 2003, all Weed Wizard assets have been written off. The remaining assets at
June 30, 2002 consisted of accounts receivable of $0.4 million, inventory of
$0.3 million, other current assets of $0.3 million, and net property and
equipment of $0.1 million. Remaining liabilities included accounts payable and
accrued expenses of $0.3 million. As of June 30, 2003, we recorded cash of $0.1
million and accrued liabilities of less than $0.1 million for our discontinued
Egarden operation. Such liabilities exclude leases guaranteed having an unpaid
balance of $0.1 million at June 30, 2003.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, our consolidated financial statements and notes have been
restated for all periods presented to reflect the discontinued components. The
assets and liabilities of the discontinued components have been classified as
"Held for Sale" and the net operations and net cash flows have been reported as
"Discontinued Operations". See Note 2 to the Consolidated Financial Statements
included in Part II, Item 8.
28
Cumulative effect of a change in accounting principle. We recorded a
cumulative effect of a change in accounting principle for the fiscal year ended
June 30, 2002 as a result of the completion of the transitional goodwill
impairment test in conjunction with the adoption of SFAS No. 142. The recording
of an impairment loss of $9.9 million, which is primarily related to the Ampro
operations, is reflected as a cumulative effect of a change in accounting
principle. See Note 7 to the Consolidated Financial Statements included in Part
II, Item 8.
Net loss. Net loss decreased by $2.4 million to $9.1 million during
the fiscal year ended June 30, 2003 from a net loss of $11.5 million during the
comparable period in 2002 due to the matters described above.
The diluted net loss per common share decreased $.13 to a net loss of $.51
per share when compared to the diluted net loss per common share of $.64 during
the comparable period in 2002.
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001
Net sales. Net sales remained consistent at $78.9 million during the
fiscal years ended June 30, 2002 and 2001. There were no significant changes in
sales prices or volume.
Gross profit. Gross profit increased by $0.8 million, or 2.3%, to $35.6
million for the fiscal year ended June 30, 2002 from $34.8 million during the
comparable period in 2001. Gross profit as a percentage of net sales increased
to 45.1% during the fiscal year ended June 30, 2002 from 44.1% during the
comparable period in 2001. This increase in gross profit is due to a decrease in
cost of sales as a result of the restructuring and closing of the Bradley,
Michigan facility in late 2001 of approximately $0.3 million, a reduction in
certain raw material costs of approximately $0.3 million, and increased
operating efficiencies of approximately $0.2 million.
Selling and shipping expenses. Selling and shipping expenses increased
$1.9 million, or 11.7% to $18.3 million during the fiscal year ended June 30,
2002 from $16.4 million during the comparable period in 2001. Selling and
shipping expenses as a percentage of net sales increased to 23.2% during the
fiscal year ended June 30, 2002 from 20.8% during the comparable period in 2001.
This increase in expense and percentage was primarily a result of increased out
bound freight costs resulting from using required carriers stipulated by a
significant customer and a reduction in the average size of shipments.
29
General and administrative expenses. General and administrative
expenses decreased $4.9 million or 34.1% to $9.4 million during the fiscal year
ended June 30, 2002 from $14.3 million during the comparable period in 2001. As
a percentage of net sales, general and administrative expenses decreased to
11.9% during the fiscal year ended June 30, 2002 from 18.1% during the
comparable period in 2001. This decrease is primarily a result of the adoption
of SFAS No. 142 effective July 1, 2002 that requires, among other things,
companies to no longer amortize goodwill, but instead test goodwill for
impairment at least annually. Goodwill amortization included in general and
administrative expenses for the year ended June 30, 2001, totaled approximately
$2.5 million. This decrease is also due to the restructuring of Ampro and
closing of its Bradley, Michigan facility and the related reduction of costs.
The savings related to the closing of the Bradley, Michigan facility totaled
approximately $1.6 million. The cost reductions were offset in part by a $0.5
million write off of K-Mart receivables when they declared bankruptcy. We
continue to sell to K-mart under secured financing. K-Mart's receivable balance
at June 30, 2002 was $0.7 million, all of which has subsequently been collected.
Restructuring charges. There were no restructuring costs incurred in
fiscal 2002. In 2001, we recorded restructuring charges of $2.9 million relating
to the closing and sale of the Ampro Industries, Inc. facility in Michigan. We
continue to sell many of the products that were being manufactured at Ampro's
Michigan facility through a contract manufacturing agreement. We recognized
approximately $1.7 million of expenses and losses relating to the closing and
sale of property and equipment of the Ampro facility and $1.2 million for the
termination benefits to be paid to all 60 employees involved with our facility.
All severance payments as a result of the restructuring were made by June 30,
2002. No adjustments were made to the liability recorded for severance payments
during the year ended June 30, 2002.
Income from operations. Income from operations increased by $6.6
million, to $7.9 million during the fiscal year ended June 30, 2002 compared to
$1.3 million for the comparable period in 2001. The increase in income from
operations for the 2002 period is primarily attributable to the matters
described above, the most significant matter being the reduction in general and
administrative expenses. As a percentage of net sales, income from operations
30
increased to 10.0% for the fiscal year ended June 30, 2002 from 1.6% during the
comparable period in 2001.
Net interest expense. Net interest expense remained consistent at $7.3
million during the fiscal years ended June 30, 2002 and 2001. Borrowings under
our revolving credit facilities decreased and interest rates on the revolving
credit facility also decreased, but were offset by the increased cost of
subordinated debt.
Income tax benefit (expense). Income tax expense was $0.2 million
during the fiscal year ended June 30, 2002 compared to an income tax benefit of
$1.4 million during the comparable period in 2001. This results from having
pre-tax income before discontinued operations of $.4 million in fiscal 2002 and
a pre-tax loss of $6.0 million in the comparable period in 2001. See Note 16 to
the Consolidated Financial Statements included in Part II, Item 8.
Discontinued operations. In June 2002, we announced we were
discontinuing the Weed Wizard line of products effective September 30, 2002 due
to continued operating losses, the loss of sales due to the product recall in
fiscal 2000, and the current and future prospects for the operation.
In fiscal 2002, we recorded an estimated net loss on disposal of Weed
Wizard of $1.1 million related to the write-down of inventory and long-lived
assets. We plan to dispose of the assets and liabilities of Weed Wizard,
including amounts written off, through a sale of the assets and liquidation of
the liabilities during fiscal 2003. The remaining assets at June 30, 2002
consist of accounts receivable of $0.4 million, inventory of $0.3 million, other
current assets of $0.3 million, and net property and equipment of $0.1 million.
Remaining liabilities include accounts payable and accrued expenses of $0.3
million. In addition to the estimated loss on disposal in fiscal 2002, we had a
net loss from the operations of Weed Wizard of $1.8 million.
In June 2001 we wrote off the net goodwill balance related to the Weed
Wizard product line. As a result of the decision to discontinue the operations
in June 2002, we have reflected this loss on impairment of goodwill of $10.8
million and the loss from operations of $.8 million for the fiscal year ended
June 30, 2001, net of income taxes of $2.5 million, as discontinued operations.
Also, in June 2001, we announced that we were discontinuing our
31
e-commerce initiative, which we were conducting through our subsidiary, Egarden
Inc., effective June 30, 2001. All of the assets of Egarden, including amounts
previously written off, were sold during the fiscal year ended June 30, 2002. We
recorded a net gain on the disposal of Egarden of $1.1 million, primarily as a
result of the elimination of minority interest of $1.2 million as the subsidiary
was liquidated.
We recorded a net loss on disposal of Egarden of $4.6 million, net of
minority interest of $1.1 million in 2001. This included the write-off of all
long-lived assets of $5.2 million and $0.5 million of restructuring expense
related to the termination of all 39 Egarden employees. All severance payments
have been made by June 30, 2002. No adjustments were made to the liability
recorded for severance payments during the year ended June 30, 2002. The
remaining assets at June 30, 2002 consist of cash of $62,000 and the remaining
liabilities consist of accrued expenses of $16,000. In addition to the net loss
on disposal in 2001, we had a net loss from the operations of Egarden of $7.1
million, net of minority interest of $1.8 million.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, our consolidated financial statements and notes have been
restated for all periods presented to reflect the discontinued components. The
assets and liabilities of the discontinued components have been classified as
"Held for Sale" and the net operations and net cash flows have been reported as
"Discontinued Operations". See Note 2 to the Consolidated Financial Statements
included in Part II, Item 8.
Cumulative effect of a change in accounting principle. We recorded a
cumulative effect of a change in accounting principle for the fiscal year ended
June 30, 2002 as a result of the completion of the transitional goodwill
impairment test in conjunction with the adoption of SFAS No. 142. The recording
of an impairment loss of $9.9 million, which is primarily related to the Ampro
operations, is reflected as a cumulative effect of a change in accounting
principle. See Note 7 to the Consolidated Financial Statements included in Part
II, Item 8.
Net loss. Net loss decreased by $13.9 million to a net loss of $11.5
million during the fiscal year ended June 30, 2002 from a net loss of $25.4
million during the comparable period in 2001.
The diluted net loss per common share decreased $.75 to a net loss of
$.65 per share when compared to the diluted net loss per common share of $1.40
during the comparable period in 2001. The decrease in net loss per common share
32
is primarily attributable to the unusual events in fiscal 2001 which were the
impairment of goodwill of one of its subsidiaries, Weed Wizard, Inc., the
restructuring charge related to the closure of the Ampro Industries, Inc.
facility in Michigan, and the discontinuance of its business-to-business
e-commerce subsidiary, Egarden Inc. There were also slightly fewer weighted
average common and common equivalent shares outstanding during the year ended
June 30, 2002 compared to the comparable period in the prior year.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
Our sales are seasonal due to the nature of the lawn and garden
business and generally parallels the annual growing season. Our sales have
traditionally been most active from late March through May when home lawn and
garden customers are purchasing supplies for spring planting and retail stores
are increasing their inventory of lawn and garden products. The buying pattern
of retailers, including our retail customers, is changing and stores are
replenishing their inventory when sales are made by them rather than buying
large quantities of inventory in advance of the selling season. Sales typically
decline by mid-summer.
Sales of our agricultural products, which were not material for fiscal
2003, are also seasonal. Most shipments occur during the period from March
through October.
RELATED PARTY TRANSACTIONS
See discussion regarding related party transactions in Part II, Item 13 and Note
8 to the Consolidated Financial Statements included in Part II, Item 8.
33
Set forth below is certain unaudited quarterly financial information:
Quarter ended
(in thousands, except percentages and per share data)
-----------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
2001 2001 2002 2002 2002 2002 2003 2003
------------- ------------ ---------- --------- ------------- ------------ --------- ----------
Net sales.............. $13,483 $11,762 $23,913 $29,789 $13,151 $12,351 $24,036 $26,706
Cost of sales.......... 7,943 7,010 12,826 15,579 8,186 7,167 12,758 15,342
-----------------------------------------------------------------------------------------------
Gross profit........... 5,540 4,752 11,087 14,210 4,965 5,184 11,278 11,364
Selling, shipping,
general and
administrative
expenses............... 6,326 5,594 7,455 8,311 6,815 5,657 7,895 7,658
Restructuring charges.. - - - - - - - -
-----------------------------------------------------------------------------------------------
Income (loss) from (786) (842) 3,632 5,899 (1,850) (473) 3,383 3,706
operations.............
Interest income........ 43 27 12 1 - - - -
Refinancing and
transaction costs...... - (254) - - (194) (3,869) (116) (112)
Interest expense.......
(1,810) (1,766) (1,822) (1,976) (1,834) (1,826) (1,998) (2,336)
-----------------------------------------------------------------------------------------------
Income (loss) from (2,553) (2,835) 1,822 3,924 (3,878) (6,168) 1,269 1,258
continuing operations
before income taxes
and cumulative effect
of a change in
accounting principle...
Income tax benefit
(expense).............. - - - (228) - (108) (3) (22)
Income (loss) from
discontinued
operations, net of
taxes and minority
interest..... (268) (490) 227 (1,229) (978) (215) (41) (202)
Gain (loss) on
disposal of
discontinued
operations, net of
taxes and minority
interest............... - - - 20 - - - (49)
-----------------------------------------------------------------------------------------------
Income (loss) before (2,821) (3,325) 2,049 2,487 (4,856) (6,491) 1,225 985
cumulative effect of a
change in accounting
principle.........
Cumulative effect of a
change in accounting
principle......... (9,882) - - - - - - -
-----------------------------------------------------------------------------------------------
Net income (loss)...... $(12,703) $(3,325) $2,049 $2,487 $(4,856) $(6,491) $1,225 $985
-----------------------------------------------------------------------------------------------
Diluted net income $(0.72) $(0.19) $0.11 $0.14 $ (0.27) $(0.36) $0.07 $0.06
(loss) per share(1)....
Weighted average
common and common
equivalent shares
outstanding(1)......... 17,543 17,543 17,915 17,929 17,752 17,879 18,124 17,863
-----------------------------------------------------------------------------------------------
Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......... 58.9% 59.6% 53.6% 52.3% 62.2% 58.0% 53.1% 57.4%
-----------------------------------------------------------------------------------------------
Gross profit........... 41.1% 40.4% 46.4% 47.7% 37.8% 42.0% 46.9% 42.6%
Selling, shipping,
general and
administrative..... 46.9% 47.6% 31.2% 27.9% 51.8% 45.8% 32.8% 28.7%
Restructuring
charges............ - - - - - - - -
-----------------------------------------------------------------------------------------------
Income (loss) from (5.8%) (7.2%) 15.2% 19.8% (14.0%) (3.8%) 14.1% 13.9%
operations.............
Interest income........ 0.3% 0.2% - - - - - -
Refinancing and
transaction costs...... - (2.1%) - - (1.5%) (31.3%) (0.5%) (0.4%)
Interest expense....... (13.4%) (15.0%) (7.6%) (6.6%) (14.0%) (14.8%) (8.3%) (8.8%)
-----------------------------------------------------------------------------------------------
Income (loss) from (18.9%) (24.1%) 7.6% 13.2% (29.5%) (49.9%) 5.3% 4.7%
continuing operations
before income taxes
and cumulative effect
of a change in
accounting
principle.........
Income tax benefit
(expense)............. - - - (0.7%) - (0.9%) - (0.1%)
Income (loss) from
discontinued
operations, net of tax
and minority interest.. (2.0%) (4.2%) 1.0% (4.1%) (7.4%) (1.7%) (0.2%) (0.7%)
Gain (loss) on
disposal of
discontinued
operations, net of tax
and minority interest.. - - - - - - - (0.2%)
-----------------------------------------------------------------------------------------------
Income (loss) before
cumulative effect of a
change in accounting
principle......... (20.9%) (28.3%) 8.6% 8.4% (36.9%) (52.5%) 5.1% 3.7%
Cumulative effect of a
change in accounting
principle........... (73.3%) - - - - - - -
-----------------------------------------------------------------------------------------------
Net income (loss)...... (94.2%) (28.3%) 8.6% 8.4% (36.9%) (52.5%) 5.1% 3.7%
-----------------------------------------------------------------------------------------------
34
(1) Pursuant to SFAS No. 128, dilutive income per share was calculated using the
treasury stock method except for quarters reporting a net loss from continuing
operations. Such quarters only reflect issued and outstanding shares of our
common stock in the weighted average shares outstanding.
Differences between amounts included above and amounts previously
reported on Form 10-Q are due to the reclassification of discontinued operations
as described in Note 2 to the Consolidated Financial Statements included in Part
II, Item 8, and the cumulative effect of a change in accounting principle of
$9.9 million, related to the loss on impairment of goodwill recorded as of July
1, 2001. See Note 7 to the Consolidated Financial Statements included in Part
II, Item 8.
The fourth quarter of 2002 includes the write off of minority interest
of $1.1 million, net of an estimated loss on disposal of discontinued operations
of $1.1 million. See Note 2 to the Consolidated Financial Statements included in
Part II, Item 8.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through cash
generated by operations, net proceeds from our private and public sales of
securities and borrowings from lending institutions.
At June 30, 2003, we had consolidated cash and short-term investments
totaling $0.8 million and a working deficit of $5.5 million due to classifying
the revolver and the term loan in short-term debt. Under our credit facility
with Wells Fargo Foothill described below, substantially all cash balances are
automatically used to reduce outstanding borrowings. At June 30, 2002, we had
consolidated cash and short-term investments totaling $0.2 million and working
capital of $3.0 million. Under our credit facility with PNC Bank described
below, substantially all cash balances were automatically used to reduce
outstanding borrowings. At June 30, 2001, we had consolidated cash and
short-term investments totaling $2.7 million, and working capital of $4.9
million.
Net cash provided by operating activities for fiscal 2003 of $1.2
million consisted primarily of an increase in accounts payable and accruals of
$2.4 million and an increase in accounts receivable and other current assets of
$2.0 million, offset in part by a decrease in inventory of $1.1 million and the
net loss from continuing operations adjusted for non-cash expenses of $2.1
million. The increase in accounts payable and accruals is primarily due to
35
extended credit terms with certain vendors. The decrease in inventory is
primarily due to increased demand late in the year due to the poor weather
earlier in the season.
Net cash used in investing activities for fiscal 2003 of $1.4 million
is primarily due to capital purchases of equipment and intangible assets.
Net cash provided by financing activities for fiscal 2003 of $1.4
million is primarily related to the $3.4 of net proceeds received as a result of
our new credit facilities described below offset by repayment of existing debt
and deferred finance costs of $2.0 million.
We entered into a senior credit facility dated as of October 30, 2002
for us and our material subsidiaries. Wells Fargo Foothill, which is the
administrative agent for the facility, is also the revolving credit lender, and
Ableco Finance LLC is providing a term loan. The total amount of the new credit
facility is $35 million, of which $23 million is a revolving credit facility and
$12 million is a term loan. The new credit facility matures October 30, 2005.
Interest on the revolving credit facility is at variable annual interest rates
based on the prime rate or LIBOR plus applicable marginal rates. Interest on the
term loan is at variable annual interest rates based on the prime rate with a
minimum rate of 9.75% plus 2% of accrued interest payable upon maturity (payment
in kind interest). The balance of the term loan at June 30, 2003 including
payment in kind interest, was $12,142,000. The interest rate on the term loan
increases 2% each year the balance is outstanding. Borrowings on the revolving
credit facility were $15,085,000 at June 30, 2003 and are limited based on
eligible borrowing bases, effectively $17,659,000 at June 30, 2003.
Our obligations and the obligations of our material subsidiaries under
the new credit facility are secured by a security interest in favor of the
lenders in substantially all of our assets. We and our material subsidiaries are
subject to certain financial and other covenants under the new credit facility.
At the end of January 2003, our financial performance created a "Triggering
Event" which increased the interest rate on the term loan in February through
June by 2.5% points, to 14.25%. At June 30, 2003, we were in violation of
certain covenants under the credit facility. Due to the covenant violations, the
interest rates on both the term loan and the revolver increased by 3% points, to
17.25%, and the lender could require us to pay all principal and accrued
interest at any time.
36
As a result of the loan covenant violations, the opinion of our
certified public accountants on our consolidated financial statements included
in Part II, Item 8 was modified due to the uncertainty of our ability to obtain
financing at a commercially reasonable rate, which raised doubt about our
ability to continue as a going concern. However, management believes the
proposed transaction described in the Business -- Recent Developments section of
this report beginning on page 3 will close by October 31, 2003, and all
outstanding bank debt will be repaid at the closing. If this transaction does
not close, management believes, although there can be no assurance, we will be
able to obtain alternative financing arrangements at commercially reasonable
terms.
We had a financing agreement to provide $25,000,000 in senior secured
financing. The agreement provided for a $23,000,000 revolving credit facility
and a $2,000,000 term loan due in monthly installments of $33,000 plus interest.
The term loan balance outstanding at June 30, 2002 was $1,767,000. Interest on
borrowings was calculated at variable annual rates based on either the bank's
prime rate plus an applicable marginal rate or the federal funds rate plus an
applicable marginal rate. At June 30, 2002 we had $15,036,000 of borrowings
outstanding under the revolving credit facility. These borrowings were paid in
full on November 1, 2002 with proceeds from the new financing agreements
discussed above.
We also had a financing agreement to provide $6,250,000 of subordinated
debt. At June 30, 2002, we had borrowings outstanding of $5,945,000, net of
discounts of $905,000, pursuant to the subordinated secured notes. Interest was
charged on the face of the notes at 16% and 14% per annum, payable monthly. The
issue price of the 16% notes was 90% of the face amount of the notes resulting
in a discount of $600,000. In connection with this financing, we issued to the
purchasers of the notes warrants to purchase up to 3.75% of our fully diluted
common stock and an option to purchase from us certain Trust Preferred
Securities of our subsidiary, U.S. Home and Garden Trust I, that are owned by
us, which resulted in an additional discount of $402,000. These borrowings were
paid in full on November 1, 2002 with proceeds from the new financing agreements
discussed above.
Upon repayment of the $6,250,000 subordinated debt, we continue to have
certain ongoing obligations under the subordinated debt financing agreement to
the holders of the warrants to purchase our common stock and option to purchase
Trust Preferred Securities described above by virtue of these
37
agreements. Under the option agreement, payments of interest on the Trust
Preferred option securities is used to reduce the option price and is recorded
as additional Trust Preferred liability. When the option price is reduced to
zero, we will issue the underlying Trust Preferred Securities to the holders of
the options. If the proposed asset sale to Easy Gardener Products is consummated
the obligation under the option agreement to purchase Trust Prefered Securities
will be assumed by Easy Gardener Products.
COMMITMENTS
We lease office and warehouse space, certain office equipment and
automobiles under operating leases expiring through 2006. The future minimum
lease payments under these non-cancelable operating leases are as follows:
Year ended June 30, Amount
-------------------------------------------------------------------
2004 819,000
2005 595,000
2006 214,000
-------------------------------------------------------------------
$ 1,628,000
-------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the adoption and
implementation of accounting policies and the use of assumptions and estimates
in their presentation. The accounting policies and uncertainties, judgments and
estimates make it likely that materially different amounts would be reported
under different conditions and different assumptions.
We have included below a discussion of the more critical accounting
policies that are affected by the significant judgments and estimates used in
the preparation of the financial statements, how such policies are applied, and
how results differing from the estimates and assumptions would affect the
amounts presented in the financial statements. Other accounting policies also
have a significant effect on the financial statements, and some of these
policies also require the use of estimates and assumptions as discussed in the
Summary of Accounting Policies in our Consolidated Financial Statements at June
30, 2003.
38
Allowance for Doubtful Accounts Receivable. We maintain an allowance
for doubtful accounts receivable, which represents the potential estimated
losses resulting from the inability of customers to make required payments for
amounts owed. The allowance is estimated based on historical experience of
write-offs, the level of past due amounts and information known about specific
customers with respect to their ability to make payments at the balance sheet
date. If the financial condition of our customers were to change, resulting in
an impairment or improvement in their ability to make payments, additional
allowances may be required or allowances may be reduced.
Inventories. We record inventory reserves for estimated obsolescence of
inventory equal to the difference between the cost of inventory owned and the
estimated market value. Market value is based upon the age of specific inventory
on hand and assumptions about future demand and market conditions. If actual
market conditions for the sale of the inventory are less favorable than those
anticipated by management, additional reserves may be required.
Goodwill. We have consummated eleven acquisitions accounted for using
the purchase method. The excess of cost over net assets acquired which relates
to our acquisitions has been recorded as goodwill. Goodwill is tested for
impairment by comparing the carrying value of the assets of our individual
reporting units to their fair value. The fair value of the assets could vary
significantly over time and different assumptions and estimates will result in
different valuations.
Deferred Income Taxes. We record deferred income taxes based on enacted
income tax rates in effect on the dates temporary differences between the
financial reporting and tax bases of assets and liabilities reverse. To the
extent that available evidence about the future raises doubt about the
realization of a deferred tax asset, a valuation allowance is established. We
have recorded a valuation allowance due to the uncertainty of our ability to
generate sufficient future taxable income to realize the gross deferred tax
assets. If we are able to generate future taxable income, the valuation
allowance may be adjusted.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical
39
Corrections. SFAS No. 4 required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. SFAS No. 145 requires any gain or loss from the
extinguishment of debt to meet the requirements of APB No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions to be classified as an extraordinary item, otherwise the item would
be classified in the results of continuing operations. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods that does not meet the criteria of APB No. 30 for classification as an
extraordinary item shall be reclassified. The provisions of the statement
related to the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. SFAS No. 145 did not have an effect on our
financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002. SFAS No. 146 did not have an effect on our financial
statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We adopted SFAS No. 148 during the year ended June 30,
2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The provisions of this statement are effective for contracts
40
entered into or modified after June 30, 2003. We do not expect SFAS No. 149 to
have an effect on our financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS
No. 150 established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for us for periods ending after June
30, 2003. SFAS No. 150 did not have an effect on our financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of the
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in the
Interpretation were effective for us for the period ended March 31, 2003, and
did not have an effect on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. This Interpretation addresses consolidation by
business enterprises of variable interest entities. The Interpretation will
apply to us for the periods ended after June 30, 2003. We do not expect the
Interpretation to have an effect on the financial statements.
INFLATION
Inflation has historically not had a material effect on our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a result of our variable rate revolving credit line and term loan,
we are exposed to the risk of rising interest rates. The following table
provides information on our fixed maturity debt as of June 30, 2003 that is
sensitive to changes in interest rates.
41
The Revolving Credit Facility had an interest rate varying from 5.25%
to 8.25% for the year ended June 30, 2003 $15.1 million
The Term Loan had an interest rate varying from 11.75% to 17.25% for
the year ended June 20, 2003 $12.1 million
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information appears in a separate section of this report following
Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. As of the
end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer of
the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the evaluation of
the effectiveness of the design and operation of our
disclosure controls and procedures, our Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective in timely
alerting them to material information required to be included
in our periodic SEC filings at the reasonable assurance level.
(b) Changes in internal control over financial reporting. There
has been no change in our internal control over financial
reporting that occurred during our fiscal quarter ended June
30, 2003 that has materially affected or is reasonably likely
to materially affect our internal control over financial
reporting.
42
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our current directors and executive officers are as follows:
Name Age Position
- ---- --- --------
Robert Kassel 63 Chairman of the Board, Chief
Executive Officer, President,
Secretary and Treasurer
Richard Kurz * 61 Chief Financial Officer
David Harper 52 Executive Vice President
Richard Raleigh (1) 49 Director
Fred Heiden(1)(2) 62 Director
Brad Holsworth(2) 43 Director
Jon Schulberg(1)(2) 45 Director
- -------
(1) Member, Compensation Committee
(2) Member, Audit Committee
* It is anticipated that if the proposed sale of assets to Easy Gardener
Products is consummated that Mr. Kurz will shortly thereafter become an employee
of Easy Gardener Products and will no longer be employed by us.
Robert Kassel co-founded U.S. Home & Garden Inc. and has been its
Chairman of the Board, Chief Executive Officer, President, and Treasurer since
October 1990, and Secretary since July 2002. From 1985 to August 1991, he was a
consultant to Comtel Communications, Inc., a company specializing in the
installation and operation of telephone systems in hotels. From 1985 to 1990,
Mr. Kassel was also a real estate developer in Long Island, New York and Santa
Barbara, California. From 1965 to 1985, he was a practicing attorney in New York
City, specializing in corporate and securities law.
Richard Kurz has been Chief Financial Officer of U.S. Home & Garden
Inc. since October 2001 and served as its Vice President-Finance from June 2001
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until October 2001. He has also served as Chief Financial Officer of Easy
Gardener since October 2001. From 1997 until December 2000 he was Executive Vice
President and Chief Financial Officer for Aircraft Interior Resources, Inc, a
company that provides products and services to commercial airlines. From 1994
until 1997 he was Senior Vice President and Chief Financial Officer of American
Eagle Group, Inc., a service company that provided insurance services to the
aviation and other specialized industries. From 1991 to 1994 he was Chief
Financial and Administrative Officer for BDP International, Inc. a logistics
service provider. From 1979 to 1991 he held a variety of senior financial
positions with CIGNA Corporation, a healthcare provider. Mr. Kurz is a Certified
Public Accountant.
David Harper has been a Vice President of U.S. Home & Garden Inc. since
May 1999, has been an Executive Vice President of U.S. Home & Garden Inc. since
July 2003 and has been employed by U.S. Home & Garden Inc. since May 1998. From
1995 to May 1998 he was an independent consultant within the lawn and garden
industry where his clients included selected manufacturers, distributors,
retailers and industry associations. From 1975 to 1994, he was employed by
Monsanto Company in a variety of positions of increasing responsibility. From
1988 to 1994, Mr. Harper headed Monsanto's efforts to introduce its Roundup
product line and the creation of its Solaris division with Monsanto's
acquisition of Ortho Consumer Products in 1993.
Richard Raleigh has been a director of U.S. Home & Garden Inc. since
March 1993. He served as Chief Operating Officer of U.S. Home & Garden Inc. from
June 1992 to June 30, 2001 and served as a consultant to U.S. Home & Garden,
Inc. from July 2001 through June 2003. He served as Executive Vice
President-Operations of U.S. Home & Garden Inc. from December 1991 to June 1992.
Prior to joining U.S. Home & Garden Inc., Mr. Raleigh was a free-lance marketing
consultant to the lawn and garden industry from January 1991 to December 1991.
From April 1988 to January 1991, he was Director of Marketing, Lawn and Garden
of Monsanto Agricultural Co. From December 1986 to April 1988, he was Vice
President of Sales and Marketing of The Andersons, a company engaged in the sale
of consumer and professional lawn and garden products. From November 1978 to
December 1986, he held a variety of positions at The Andersons, including
Operations Manager and New Products Development Manager.
Fred Heiden, a director of U.S. Home & Garden Inc. since March 1993,
has been President and principal owner of Marlin Mortgage Group, a mortgage
banker business, since February 2002. He was a private investor from November
1989 to February 2002. From April 1984 to November 1989, Mr. Heiden was
President and Principal owner of Bonair Construction, a Florida based home
improvement construction company.
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Brad Holsworth has been a director of U.S. Home & Garden Inc. since
July 2000. Since February 2003, he has been employed by Senetek, PLC, a
biopharmaceutical company, as its chief finan