Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2002
Or
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 001-14015
U.S. HOME & GARDEN INC.
(Exact Name of Registrant as specified in its charter)
Delaware 77-0262908
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
655 Montgomery Street,
San Francisco, California 94111
(Address of Principal Executive (Zip Code)
Offices)
(415) 616-8111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered
- ------------------- ---------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value; Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (based upon the closing sale price) on September 30, 2002 was
approximately $5,082,000.
As of September 30, 2002, 17,752,267 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.
Documents Incorporated By Reference: None
Part I.
Item 1. Business
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information included in
this Report contains statements that are forward-looking, such as statements
relating to plans for our future activities. Such forward-looking information
involves important known and unknown risks and uncertainties that could
significantly affect actual results, performance or achievements in the future
and, accordingly, such actual results, performance or achievements may
materially differ from those expressed or implied in any forward-looking
statements made by or on behalf of us. These risks and uncertainties include,
but are not limited to, those relating to our growth strategy, customer
concentration, outstanding indebtedness, dependence on weather conditions,
seasonality, expansion and other activities of competitors, ability to
successfully integrate acquired companies and product lines, changes in federal
or state environmental laws and the administration of such laws, protection of
trademarks and other proprietary rights, 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. 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
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
2
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.
Lawn and Garden Industry
Historically, the lawn and garden industry was comprised of
relatively small regional manufacturers and distributors whose products were
sold to consumers primarily through local nurseries and garden centers. As the
industry has grown, national home improvement and mass merchant retailers have
replaced many of these local garden centers as the primary retail source for
lawn and garden products. In an effort to improve operating margins and reduce
the number of vendors needed to source high volume lawn and garden products, the
preference among home improvement and mass merchant retailers has shifted
towards single source suppliers that offer broad product lines of consumer
brand-name merchandise and the product support necessary to stimulate consumer
demand and ensure timely and cost effective order fulfillment. Smaller regional
suppliers generally lack the capital and other resources necessary to offer the
variety and number of product lines, the product support and the inventory
stocking and tracking capabilities required by home improvement and mass
merchant retailers.
3
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
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
4
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,
pressed or vacuum formed into thin sheets having the feel and texture of light
plastics. For the fiscal years ended June 30, 2000, 2001 and 2002, sales of
landscape fabric
5
represented approximately 44%, 48% and 51%, 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,
2000, 2001 and 2002, sales of fertilizer, plant food and insecticide spikes
constituted approximately 15%, 17% and 14%, 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, 2000, 2001 and 2002,
sales of landscape edging constituted approximately 10%, 9% and 10%,
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
6
applications including preventing animals from entering a garden or orchard.
Mulch, Fertilizer, Grass and Flower Seed. We distribute specialty
combinations of mulch, fertilizer, grass and flower seeds. Consumers spread this
"ready-to-grow" combination and only need to water regularly for a green lawn or
colorful flower garden.
Other Products. In addition to landscape fabrics, fertilizer, plant
food and insecticide spikes, landscape edging, shade cloth, fertilizer and root
feeders, 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,
2000, 2001 and 2002.
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.
7
All of such materials are converted, packaged and shipped by us from either our
Waco, Texas facility, our Paris, Kentucky facility or our facility located in
Colorado.
We purchase most of the landscape fabric used to manufacture
WeedBlock from Tredegar Industries, Inc. ("Tredegar"). We purchase large rolls
of various types of landscape fabric from Tredegar for shipment to our Waco,
Texas facility where we size, cut and package the fabric for consumer sale.
Although we have purchased most of our supply from Tredegar for over 10 years
and believe that our relationship with Tredegar is good, Tredegar is free to
terminate its relationship with us at any time and accordingly could market its
fabrics to other companies, including our competitors. Nevertheless, we own the
registered trademark "WeedBlock(R)" and to the extent that we establish
alternative supply arrangements, our rights to market products under the
WeedBlock brand name would continue without restriction.
We manufacture and package our Jobe's fertilizer spikes at our
Paris, Kentucky facility. The raw materials that comprise our indoor fertilizer
spikes are mixed with a binding agent and then passed through an extrusion
process which feeds a continuous strand of fertilizer through a heat-drying
system. The strand is then cut into ready-to-use fertilizer spikes which are
then machine counted and packaged into shelf-ready blisterpacks. Our outdoor
fertilizer spikes are manufactured in a similar manner except rather than
passing through an extrusion process, the outdoor spikes are processed through
molds which shape the spikes into their final form. The outdoor spikes are
packaged in either a foil pouch, bag or box.
The specifications for our landscape edging, shade cloth and root
feeder products and packaging are designed by us and independent design
consultants. The products are then manufactured and packaged by third party
manufacturers according to our specifications.
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
8
and processed into mulch and then combined with seed and fertilizer. The mixture
is now packaged in bags, boxes, canisters, and clear jugs.
Agricultural Products. We do not own or lease any manufacturing
facilities for our agricultural products. Substantially all of our humic
acid-based agricultural products, Energizer, Penox and Powergizer, are processed
by Western Farm Services, Inc. ("Western Farm") pursuant to purchase orders
placed by us from time to time in the ordinary course of business. Furthermore,
through Western Farm, we have an open purchase order arrangement with an entity
which supplies us with leonardite ore, a source of humic acid used in our
agricultural products.
Customers
Our customers include home improvement centers, mass merchandisers,
hardware stores, nurseries, and garden centers and other retail channels
throughout the United States. Our two largest customers for fiscal 2000, Home
Depot and Lowe's, accounted for approximately 36% and 12%, respectively, of our
consolidated net sales during that period. Our two largest customers for fiscal
2001, Home Depot and Lowe's, accounted for approximately 43% and 14%,
respectively, of our consolidated net sales during such year. Home Depot and
Lowe's, accounted for approximately 49% and 10%, respectively, of our
consolidated net sales during fiscal 2002. Our ten largest customers as a group
accounted for approximately 54%, 80% and 78% of our consolidated net sales
during fiscal 2000, 2001 and 2002, respectively. Sales to such customers are not
governed by any contractual arrangement and are made pursuant to standard
purchase orders. While we believe that relations with our largest customers are
good, the loss of any of these customers could have an adverse effect upon our
results of operations.
Our sales are concentrated in the United States, with international
sales (primarily in Europe and Canada) accounting for approximately 3% of our
net sales for each of fiscal 2000 and 2001. International sales accounted for
approximately 6% of our net sales for fiscal 2002. 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
9
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 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 $2.9 million in fiscal 2002 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.
10
We utilized a substantial portion of our marketing budget for fiscal
2002 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
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 during fiscal
2002 and improved communications with customers, we improved our ability to meet
customer demands without maintaining excess inventory levels
11
during fiscal 2002. 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.
Competition
The consumer lawn and garden care industry is highly competitive and
somewhat fragmented. With respect to our sale of consumer lawn and garden
products, we compete with a combination of national and regional companies
including catalog and Internet e-commerce businesses specializing in the
marketing of lawn and garden care products. The Scotts Company, in particular,
has captured a significant and controlling share in a variety of categories 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.
12
Government Regulation
We are subject to many laws and governmental regulations and changes
in these laws and regulations, or their interpretation by agencies and the
courts, occur frequently.
Fertilizer and Pesticide Regulation. Products marketed, or which may
be marketed, by us as fertilizers or pesticides are subject to an extensive and
frequently evolving statutory and regulatory framework, at both the Federal and
state levels. The distribution and sale of pesticides is subject to regulation
by the U.S. Environmental Protection Agency ("EPA") pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as regulation by
many states in a manner similar to FIFRA. Under FIFRA and similar state laws,
all pesticides must be registered with the EPA and the state and must be
approved for their intended use. FIFRA and state regulations also impose other
stringent requirements on the marketing of such products. Moreover, many states
also impose similar requirements upon products marketed for use as fertilizing
materials, which are not typically regulated under FIFRA. Failure to comply with
the requirements of FIFRA and state laws that regulate marketing and
distribution of pesticides and fertilizers could result in the imposition of
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
13
or more of our products, or civil or criminal sanctions, any of which could have
a material adverse effect upon our business.
Environmental Regulation. Our manufacturing operations are subject
to various evolving federal, state and local laws and regulations relating to
the protection of the environment, which laws govern, among other things,
emissions to air, discharges to ground, surface water, and groundwater, and the
generation, handling, storage, transportation, treatment and disposal of a
variety of hazardous and non-hazardous substances and wastes. Federal and state
environmental laws and regulations often require manufacturers to obtain permits
for these emissions and discharges. Failure to comply with environmental laws or
to obtain, or comply with, the necessary state and federal permits can subject
the manufacturer to substantial civil and criminal penalties. Easy Gardener
operates two manufacturing facilities and 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
14
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
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
15
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 300(R), Nature Shield(R) and Diamondback(R) in
connection with our acquisition of the Tensar(R) consumer product line. In
connection with the acquisition of the Tensar(R) consumer product line, The
Tensar Corporation granted to us an exclusive royalty-free perpetual license to
use the trademark Tensar(R) in connection with a wide range of polymeric grid,
mesh, net and related products supplied to us by The Tensar Corporation. In
connection with our acquisition of Ampro, we acquired certain trademarks used in
connection with Ampro's business including, but not limited to, Amturf(R). There
can be no assurance that we will apply for any additional trademark or patent
protections relating to our products or that our current trademarks and patents
will be enforceable or adequately protect us from infringement of our
proprietary rights.
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.
16
Product Liability
We, as a manufacturer of lawn and garden care and pesticide products, may
be exposed to significant product liability claims by consumers. Although we
have obtained product liability insurance coverage for U.S. Home & Garden Inc.,
Golden West, Easy Gardener and Weatherly Group in the aggregate amount of $2.0
million, and for Weed Wizard and Ampro in the aggregate amount of $2.0 million
(with all policies limited to $1.0 million per occurrence), and have obtained
three umbrella policies in the amounts of $15.0 million, $25.0 million and $15.0
million, respectively, there can be no assurance that such insurance will
provide coverage for any claim against us or will be sufficient to cover all
possible liabilities. In the event a successful suit is brought against us,
unavailability or insufficiency of insurance coverage could have a material
adverse effect on us. Moreover, any adverse publicity arising from claims made
against us, even if such claims were not successful, could adversely affect the
reputation and sales of our products.
In June 2002 we decided to discontinue the Weed Wizard product line by
September 30, 2002. During the third quarter of 2000, we discontinued
production, sale and distribution of one of the products in our Weed Wizard
product line. Additionally, in voluntary compliance with the recommendations of
the U.S. Consumer Product Safety Commission (the "CPSC") we instituted a recall
of the product. Accordingly, we recorded a pretax charge of $928,000 ($510,000
after tax or $.03 per basic and diluted share) to provide for recall costs and
inventory write-offs. See Item 3 "Legal Proceedings."
Employees
As of September 30, 2002 we had 182 full-time employees. Of such
employees, 3 are executive officers of U.S. Home & Garden Inc., 61 were engaged
in administration and finance, 25 were engaged in sales and marketing, 23 were
engaged in warehouse, shipping and receiving, and 70 were engaged in production.
None of our employees are covered by collective bargaining agreements. We
believe that we have a good relationship with our employees.
Segment Information
Our primary continuing operations are in one segment - the
manufacture and sale of consumer lawn and garden products.
17
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 $19,471 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 on June 30, 2006. Weatherly also leases an additional
59,000 feet of warehouse space in Paris, Kentucky for $11,063 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 $1,399 per month base rent,
with rent increases at a rate of 4% a year. The lease expires in May 2003
subject to our option to renew the lease for an additional one year period.
With respect to the storage, packaging and distribution of certain
of our commercial grade landscape fabric products, Easy Gardener has entered
into a lease 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 $14,510 per month, which increases 5% per year on June 1 of
each year.
We believe that our current manufacturing and warehouse space is
adequate for our planned future operations.
Item 3. Legal Proceedings
In July 2000, Weed Wizard Acquisition Corp. ("Weed Wizard"), a
subsidiary of Easy Gardener, Inc. commenced an
18
action in the U.S. District Court, Northern District of Georgia, against
A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) its stockholders and
certain of its officers. In this action we allege that the defendants made
certain misrepresentations and omitted to disclose certain facts regarding,
among other things, alleged defects in certain of the Weed Wizard products in
connection with our purchase from defendants in 1998 of substantially all of the
assets of Weed Wizard, Inc. The Complaint seeks to rescind the transaction, or
in the alternative, to recover rescissionary monetary damages, and to recover
compensatory damages. In addition, we are seeking punitive damages.
In October 2000, A.A.B.B., Inc. asserted a counterclaim for breach
of contract against Weed Wizard alleging that it is owed $720,267, plus
interest, representing an adjustment to the purchase price allegedly required to
be made pursuant to the Asset Purchase Agreement in which Weed Wizard acquired
certain A.A.B.B. Inc.'s assets. A.A.B.B., Inc. is also seeking to recover
attorney's fees. We deny any liability on this counterclaim.
In May 2002, the District Court denied the defendants' motion for
summary judgment with respect to Weed Wizard's claim for breach of
representations and warranties, but granted the motion to dismiss the fraud and
rescission claims.
In October 2002, we entered into a settlement agreement with the
defendants. The settlement involves a payment by the defendants of $442,500 to
the U.S. Consumer Products Safety Commission ("CPSC") in payment of the fine
described below, a payment of $307,500 to us and the release to us of the escrow
funds in the amount of approximately $329,000 being held pursuant to the Asset
Purchase Agreement. The settlement agreement will become effective upon the
execution of a settlement agreement with the CPSC, as described below.
In fiscal 2001, we were notified by the staff of the CPSC that the
staff was considering recommending that the CPSC commence an action against Weed
Wizard to obtain a monetary fine from Weed Wizard for the alleged failure of
Weed Wizard to timely disclose to the CPSC, pursuant to the Consumer Products
Safety Act, certain required information concerning a Weed Wizard product
previously distributed by us that was the subject of a voluntary recall during
2000. In July 2002, an action was commenced by the United States government on
behalf of the CPSC
19
against U.S. Home & Garden Inc., Easy Gardener and Weed Wizard, in the U.S.
District Court for the District of Maryland, seeking unspecified civil penalties
for alleged failure to provide the CPSC with timely notice of a defective
product as required under the Consumer Products Safety Act. We denied the
allegations.
In September 2002, the U.S. District Court granted our motion to dismiss
the complaint for lack of jurisdiction in Maryland. The government has advised
us that it intends to commence the action in another jurisdiction. In addition,
the government has advised that it intends to pursue claims against A.A.B.B.,
Inc. and its stockholders for violation of the Consumer Products Safety Act.
We have reached an agreement in principle with the government,
subject to the execution of a formal settlement agreement. The settlement
provides for an aggregate fine of $885,000, against A.A.B.B., INC and us. We
will pay $442,500 of that fine.
Item 4. Submission of Matters to a Vote of Security Holders.
An Annual Meeting of U.S. Home & Garden stockholders was held on
June 26, 2002 at which time the following directors were reappointed to serve
until the next Annual Meeting of Stockholders. Set forth in the following table
is the voting results of the June 26, 2002 Annual Meeting:
Votes For Votes Withheld
---------- --------------
Robert Kassel 12,171,952 2,546,186
Richard Raleigh 12,700,872 2,017,266
Fred Heiden 13,096,537 1,621,601
Brad Holsworth 13,202,972 1,575,166
Jon Schulberg 13,095,437 1,622,701
20
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters.
Our common stock has traded in the over-the-counter market and has
been quoted on the NASDAQ Stock Market since March 26, 1992. The NASDAQ Smallcap
symbol for our common stock is "USHG". The following table sets forth, for the
periods indicated, the high and low sales prices for the common stock, as
reported by NASDAQ.
Year Ended June 30, 2002 High Low
First Quarter $ .98 $ .47
Second Quarter .78 .38
Third Quarter .62 .36
Fourth Quarter .72 .34
Year Ended June 30, 2001
First Quarter $3.38 $1.88
Second Quarter 2.25 1.00
Third Quarter 1.78 1.00
Fourth Quarter 1.09 .63
As of September 30, 2002, the number of holders of record of our
common stock was 184. 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,
2002 regarding outstanding options, warrants and other rights to purchase Common
Stock that were outstanding on June 30, 2002.
21
- --------------------------------------------------------------------------------
(a) (b) (c)
- --------------------------------------------------------------------------------
Plan Category Number of Weighted-average Number of
securities to exercise price securities
be issued of outstanding remaining for
upon exercise options, future issuance
of warrants and under equity
outstanding rights compensation plans
options, (excluding
warrants and securities
rights reflected in column
(a))
- --------------------------------------------------------------------------------
Equity 3,060,000 $2.35 575,000
compensation
plans approved by
security holders
- --------------------------------------------------------------------------------
Equity 3,119,000 (1) $1.55 --
compensation
plans not
approved by
security holders
- --------------------------------------------------------------------------------
Total 6,179,000 $1.95 575,000
- --------------------------------------------------------------------------------
(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.
22
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, 1998, 1999, 2000, 2001 and 2002 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.
Statement of Operations Data
Year Ended June 30,
----------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------
Net sales ......................................... $ 63,482 $ 85,024 $ 86,919 $ 78,863 78,947
Cost of sales ..................................... 29,291 42,322 47,802 44,065 43,358
----------------------------------------------------------------------------
Gross profit ...................................... 34,191 42,702 39,117 34,798 35,589
Selling, shipping, general and administrative
expenses .......................................... 22,132 31,683 29,554 30,638 27,940
Restructuring charges (1) ......................... -- -- -- 2,860 --
----------------------------------------------------------------------------
Income from operations ............................ 12,059 11,019 9,563 1,300 7,649
Other expense, net ................................ (3,077) (6,883) (6,692) (7,335) (7,291)
Income tax (expense) benefit ...................... (3,057) (1,643) (1,213) 1,406 (228)
----------------------------------------------------------------------------
Income (loss) from continuing operations before
extraordinary gain and cumulative effect of a
change in accounting principle .................... 5,925 2,493 1,658 (4,629) 130
Gain (loss) from discontinued operations,
net of tax and minority interest (2) .............. 1,051 (444) (3,227) (16,253) (1,760)
Gain (loss) on disposal of discontinued
operations, net of tax and minority interest (2) .. -- -- -- (4,551) 20
Extraordinary gain (expense), net of tax (3) ...... (1,450) -- 1,224 4 --
----------------------------------------------------------------------------
Income (loss) before cumulative effect of a
change in accounting principle .................... 5,526 2,049 (345) (25,429) (1,610)
Cumulative effect of a change in accounting
principle (4) ..................................... -- -- -- -- (9,882)
----------------------------------------------------------------------------
Net income (loss) ................................. $ 5,526 $ 2,049 $ (345) $ (25,429) $ (11,492)
============================================================================
Income (loss) from continuing operations per
common share before extraordinary gain and
cumulative effect of a change in accounting
principle:
Basic ............................................. $ .33 $ .13 $ .09 $ (.26) $ .01
Dilutive .......................................... $ .26 $ .11 $ .08 $ (.26) $ .01
Net income (loss) per share:
Basic ............................................. $ .31 $ .10 $ (.02) $ (1.40) $ (.66)
Dilutive .......................................... $ .24 $ .09 $ (.02) $ (1.40) $ (.64)
Weighted average number of common and
common equivalent shares outstanding:
Basic ............................................. 17,776,000 19,621,000 19,031,000 18,181,000 17,555,000
Dilutive .......................................... 22,808,000 23,595,000 20,760,000 18,181,000 18,024,000
23
Balance Sheet Data:
June 30,
---------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Working capital ......... $ 46,743 $ 32,874 $ 25,151 $ 4,867 $ 2,728
Intangible assets, net .. 63,395 82,109 67,839 65,892 56,259
Total assets ............ 126,813 138,263 138,545 109,463 99,365
Short-term debt ......... -- -- 3,125 21,670 22,748
Long-term debt .......... 63,250 78,750 58,338 56,951 56,951
Total liabilities ....... 75,214 91,779 89,331 90,256 92,383
Stockholders' equity .... 51,599 46,484 45,103 17,968 6,982
(1) Amount represents restructuring charges relating to the closing and sale
of the Ampro facility. See further discussion at Note 13 to the
Consolidated Financial Statements included in Part II, Item 8.
(2) Amounts represent operations and estimated gain (loss) on disposal of the
Weed Wizard and Egarden subsidiaries. See further discussion at Notes 2
and 11 to the Consolidated Financial Statements included in Part II, Item
8.
(3) Amounts represent extraordinary gain (loss) incurred on the repurchase of
mandatorily redeemable trust preferred securities of U.S. Home & Garden
Trust I. See further discussion at Note 15 to 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 6 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 Weed Wizard. In June 2002, we announced the discontinuation of the
Weed Wizard operations effective September 30, 2002. 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
24
aggregate, was approximately $49.9 million as of June 30, 2002. 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 year ended June 30, 2002 compared to $2.5 million for
the years ended June 30, 2001 and 2000. 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 Note 6 to the Consolidated
Financial Statements included in Part II, Item 8.
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.
Results of Operations
The following table sets forth for the periods indicated certain
selected income data as a percentage of net sales:
25
Percentages of Net Sales
------------------------
Year Ended June 30,
------------------------
2000 2001 2002
---- ----- -----
Net sales .............................................. 100% 100% 100%
Cost of sales .......................................... 55.0 55.9 54.9
---- ----- -----
Gross profit ........................................... 45.0 44.1 45.1
Selling and shipping expenses .......................... 20.0 20.8 23.2
General and administrative expenses .................... 14.0 18.1 12.2
Restructuring charges .................................. -- 3.6 --
---- ----- -----
Income from operations ................................. 11.0 1.6 9.7
Gain on disposal of property and equipment ............. .6 -- --
Interest expense, net .................................. (8.3) (9.3) (9.3)
Income tax (expense) benefit ........................... (1.4) 1.8 (.3)
Loss from discontinued operations, net ................. (3.7) (20.6) (2.2)
Loss on disposal of discontinued operations, net ....... -- (5.7) --
Extraordinary gain, net ................................ 1.4 -- --
Cumulative effect of a change in accounting principle .. -- -- (12.5)
---- ----- -----
Net loss ............................................... (0.4)% (32.2)% (14.6)%
==== ===== =====
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
26
costs resulting from using required carriers stipulated by a significant
customer and a reduction in the average size of shipments.
General and administrative expenses. General and administrative
expenses decreased $4.6 million or 32.4% to $9.6 million during the fiscal year
ended June 30, 2002 from $14.2 million during the comparable period in 2001. As
a percentage of net sales, general and administrative expenses decreased to
12.2% 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, the Company recorded restructuring charges of $2.9 million
relating to the closing and sale of the Ampro Industries, Inc. facility in
Michigan. The Company continues to sell many of the products that were being
manufactured at Ampro's Michigan facility through a contract manufacturing
agreement. The Company 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 the 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 $6.3
million, to $7.6 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
27
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
increased to 9.7% 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 14 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
28
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
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.
Extraordinary gain from early extinguishment of debt. There was no
extraordinary gain from early extinguishment of debt for the fiscal year ended
June 30, 2002 compared to a $4,000 gain during the fiscal year ended June 30,
2001. In 2001 we repurchased 1,200 shares of the mandatorily redeemable trust
preferred securities of U.S. Home & Garden Trust I. See Note 15 to the
Consolidated Financial Statements included in Part II, Item 8.
29
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 6 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 $.76 to a net loss
of $.64 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 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.
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Net sales. Net sales decreased by $8.1 million, or 9.3%, to $78.9
million during the fiscal year ended June 30, 2001 from $86.9 million during the
comparable period in 2000. The decrease in sales was primarily a result of poor
spring weather, a generally slower economic environment and major customers
moving to just-in-time inventory management programs.
Gross profit. Gross profit decreased by $4.3 million, or 11.0%, to
$34.8 million for the fiscal year ended June 30, 2001 from $39.1 million during
the comparable period in 2000. Gross profit as a percentage of net sales
decreased to 44.1% during the fiscal year ended June 30, 2001 from 45.0% during
the comparable period in 2000. This decrease was due primarily to delayed order
placement by the major retailers, an overall soft
30
economy and poor weather in our key markets in the third quarter.
Selling and shipping expenses. Selling and shipping expenses
decreased $1.0 million, or 5.9% to $16.4 million during the fiscal year ended
June 30, 2001 from $17.4 million during the comparable period in 2000. This
decrease in expense was primarily a result of the decrease in net sales offset
in part by increased freight costs. Selling and shipping expenses as a
percentage of net sales increased to 20.8% during the fiscal year ended June 30,
2001 from 20.0% during the comparable period in 2000.
General and administrative expenses. General and administrative
expenses increased $2.1 million or 17.3% to $14.2 million during the fiscal year
ended June 30, 2001 from $12.1 million during the comparable period in 2000.
This increase is primarily due to a write off of certain receivables from
customers of $.6 million, a general increase in expense levels, and termination
benefits for certain former employees in fiscal 2001. As a percentage of net
sales, general and administrative expenses increased to 18.1% during the fiscal
year ended June 30, 2001 from 14.0% during the comparable period in 2000.
Restructuring charges. In 2001, we recorded restructuring charges of
$2.9 million relating to the closing and sale of the Ampro Industries, Inc.
facility in Michigan. The Company continues to sell products that were being
manufactured at Ampro's Michigan facility. The Company recognized approximately
$1.7 million of expenses relating to the 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 the facility. Approximately $0.2 million was paid out
in termination benefits prior to June 30, 2001, as a result of restructuring.
The restructuring was completed in October 2001.
Income from operations. Income from operations decreased by $8.3
million, to $1.3 million during the fiscal year ended June 30, 2001 compared to
$9.6 million for the comparable period in 2000. The decrease in income from
operations for the 2001 period is primarily attributable to the restructuring
charges related to the closure of our Ampro Industries, Inc. facility in
Michigan, delayed order placement by the major retailers, an overall soft
economy and poor weather in the third quarter. As a percentage of net sales,
income from
31
operations decreased to 1.6% for the fiscal year ended June 30, 2001 from 11.0%
during the comparable period in 2000.
Net interest expense. Net interest expense increased $0.1 million,
or 1% to $7.3 million during the fiscal year ended June 30, 2001, from $7.2
million during the comparable period in 2000. The increase in net interest
expense is primarily related to the decrease in interest income from the prior
year.
Income tax benefit (expense). Income tax benefit was $1.4 million
during the fiscal year ended June 30, 2001 compared to income tax expense of
$1.2 million during the comparable period in 2000, primarily due to the loss
from continuing operations in the fiscal year ended June 30, 2001.
Discontinued operations. In June 2002, we announced that we were
discontinuing the Weed Wizard line of products 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 June 2001, based on an
evaluation of asset impairment under SFAS No. 121 due to operating losses, the
product recall in the prior year, and the unsuccessful product launch of the
replacement product through a complete sales season, we wrote off the net
goodwill balance related to the Weed Wizard line of products by recording an
impairment charge to write down the goodwill to its estimated terminal value. 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 $0.8 million for the fiscal year ended June 30, 2001, net of
income taxes of $2.5 million, as discontinued operations.
In June 2001, we announced that we were discontinuing our e-commerce
initiative, which we were conducting through our subsidiary, Egarden Inc.,
effective June 30, 2001.
We recorded a net loss on disposal of Egarden of $4.6 million, net
of minority interest of $1.1 million. This included the write-off of all
long-lived assets of $5.2 million and $0.5 million of restructuring expense
related to the termination of all 39 Egarden employees. The remaining assets at
June 30, 2001 consisted of cash of $900,000 and prepaid expenses of $10,000 and
the remaining liabilities consisted of accrued expenses of $445,000 and a
capital lease obligation of $0.3 million. Minority interest in equity of
affiliate was $1.2
32
million at June 30, 2001. In addition to the net loss on disposal in 2001, we
had a net loss from the operations of Egarden of $7.10 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.
Extraordinary gain from early extinguishment of debt. Extraordinary
gain from early extinguishment of debt decreased to $4,000 during the fiscal
year ended June 30, 2001 from $1.2 million for the comparable period in 2000
(net of tax of $3,000 and $900,000, respectively). In 2001 we repurchased 1,200
shares of the mandatorily redeemable trust preferred securities of U.S. Home &
Garden Trust I compared to 250,781 shares in 2000. See Note 15 to the
Consolidated Financial Statements included in Part II, Item 8.
Net loss. Net loss increased by $25.1 million to a net loss of $25.4
million during the fiscal year ended June 30, 2001 from a net loss of $0.3
million during the comparable period in 2000. Net loss per fully diluted common
share increased $1.38 to a net loss of $1.40 per share when compared to net loss
per common share of $.02 during the comparable period in 2000. The increase in
net loss per common share is primarily attributable to the impairment of
goodwill of Weed Wizard, Inc., the restructuring charge related to the closure
of the Ampro Industries, Inc. facility in Michigan, the discontinuance of
operations of Egarden Inc., reduced sales due to delayed order placement by the
major retailers, an overall soft economy and poor weather in the third quarter.
There were fewer diluted weighted average common and common equivalent shares
outstanding during the year ended June 30, 2001 compared to the comparable
period in the prior year due to the repurchase of common stock.
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
33
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 2002, are also seasonal. Most shipments occur during the period from
March through October.
Related Party Transactions
See discussion regarding related party transactions in Item 13 and Note 7 to the
Consolidated Financial Statements included in Part II, Item 8.
34
Set forth below is certain unaudited quarterly financial information:
Quarter ended
(in thousands, except percentages and per share data)
----------------------------------------------------------------------------------------------
September December March June September December March June
30, 31, 31, 30, 30, 31, 31, 30,
2000 2000 2001 2001 2001 2001 2002 2002
--------- -------- ------- -------- --------- -------- ------- -------
Net sales ........................ $ 12,548 $11,303 $25,768 $ 29,244 $ 13,483 $11,762 $23,913 $29,789
Cost of sales .................... 8,379 7,123 14,124 14,439 7,943 7,010 12,826 15,579
==============================================================================================
Gross profit ..................... 4,169 4,180 11,644 14,805 5,540 4,752 11,087 14,210
Selling, shipping, general and
administrative expenses ........ 6,104 5,725 7,909 10,900 6,326 5,848 7,455 8,311
Restructuring charges ............ -- -- 800 2,060 -- -- -- --
==============================================================================================
Income (loss) from operations .... (1,935) (1,545) 2,935 1,845 (786) (1,096) 3,632 5,899
Interest income .................. 29 35 36 49 43 27 12 1
Interest expense ................. (1,625) (1,764) (1,893) (2,202) (1,810) (1,766) (1,822) (1,976)
==============================================================================================
Income (loss) from continuing
operations before income taxes,
extraordinary gain and
cumulative effect of a change
in accounting principle .......... (3,531) (3,274) 1,078 (308) (2,553) (2,835) 1,822 3,924
Income tax benefit (expense) ..... 1,728 1,503 (1,116) (709) -- -- -- (228)
Income (loss) from discontinued
operations, net of taxes and
minority interest ................ (952) (1,226) (1,733) (12,342) (268) (490) 227 (1,229)
Gain (loss) on disposal of
discontinued operations, net
of taxes and minority interest ... -- -- -- (4,551) -- -- -- 20
Extraordinary gain, net of
taxes ............................ 4 -- -- -- -- -- -- --
==============================================================================================
Income (loss) before
cumulative effect of a
change in accounting principle ... (2,751) (2,997) (1,771) (17,910) (2,821) (3,325) 2,049 2,487
Cumulative effect of a
change in accounting principle ... -- -- -- -- (9,882) -- -- --
==============================================================================================
Net income (loss) ................ $ (2,751) $(2,997) $(1,771) $(17,910) $(12,703) $(3,325) $ 2,049 $ 2,487
==============================================================================================
Diluted net income (loss)
per share(1) ..................... $ (0.15) $ (0.16) (0.10) $ (1.02) $ (0.72) $ (0.19) $ 0.11 $ 0.14
Weighted average common and
common equivalent shares
outstanding(1) ................... 18,807 18,313 17,638 17,628 17,543 17,543 17,915 17,929
==============================================================================================
Net sales ........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .................... 66.8% 63.0% 54.8% 49.4% 58.9% 59.6% 53.6% 52.3%
==============================================================================================
Gross profit ..................... 33.2% 37.0% 45.2% 50.6% 41.1% 40.4% 46.4% 47.7%
Selling, shipping, general and
administrative ................. 48.6% 50.7% 30.7% 37.3% 46.9% 49.7% 31.2% 27.9%
Restructuring charges ............ -- -- 3.1% 7.0% -- -- -- --
==============================================================================================
Income (loss) from operations .... (15.4%) (13.7%) 11.4% 6.3% (5.8%) (9.3%) 15.2% 19.8%
Interest income .................. 0.2% 0.3% 0.1% 0.2% 0.3% 0.2% -- --
Interest expense ................. (12.9%) (15.6%) (7.3%) (7.5%) (13.4%) (15.0%) (7.6%) (6.6%)
==============================================================================================
Income (loss) from continuing
operations before income taxes,
extraordinary gain and
cumulative effect of a change
in accounting principle .......... (28.1%) (29.0%) 4.2% (1.0%) (18.9%) (24.1%) 7.6% 13.2%
Income tax benefit (expense) ..... 13.8% 13.3% (4.3%) (2.4%) -- -- -- (.7%)
Income (loss) from discontinued
operations, net of tax and
minority interest ................ (7.6%) (10.8%) (6.7%) (42.2%) (2.0%) (4.2%) 1.0% (4.1%)
Gain (loss) on disposal of
discontinued operations, net
of tax and minority interest ..... -- -- -- (15.6%) -- -- -- --
Extraordinary gain, net of
taxes ............................ -- -- -- -- -- -- -- --
==============================================================================================
Income (loss) before
cumulative effect of a
change in accounting
principle ........................ (21.9%) (26.5%) (6.8%) (61.2%) (20.9%) (28.3%) 8.6% 8.4%
Cumulative effect of a
change in accounting
principle ........................ -- -- -- -- (73.3%) -- -- --
==============================================================================================
Net income (loss) ................ (21.9%) (26.5%) (6.8%) (61.2%) (94.2%) (28.3%) 8.6% 8.4%
==============================================================================================
- ----------
(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.
35
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 6 to the Consolidated Financial Statements included in Part
II, Item 8.
The fourth quarter of 2001 includes a pre-tax charge of $10.8 million
related to the loss on impairment of goodwill and a loss on disposal of
discontinued operations of $4.6 million. See Note 2 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, 2002, we had consolidated cash and short-term
investments totaling $0.2 million and working capital of $3.0 million. Under our
new credit facility with PNC Bank described below, substantially all cash
balances are 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. During fiscal 2000, the principal source of
working capital was proceeds on the new credit facilities discussed below.
Net cash provided by operating activities for fiscal 2002 of $0.2
million consisted primarily of net income from continuing operations before
extraordinary item and cumulative effect of a change in accounting principle of
$0.1 million,
36
adjusted for non-cash expenses of $3.5 million, an increase in accounts payable
and accruals of $2.4 million and a decrease in inventory and other assets of
$1.5 million, largely offset by an increase in accounts receivable of $7.3
million. The increase in accounts payable and accruals is primarily due to
extended credit terms with many material vendors. The decrease in inventory and
other assets is primarily due to efforts to reduce inventory levels in
conjunction with customer purchasing patterns. The $7.3 million increase in
accounts receivable for fiscal 2002, substantially all of which has been
collected subsequent to June 30, 2002, is primarily due to extended payment
terms from 30 to 60 days with a major customer.
Net cash used in investing activities for fiscal 2002 of $1.3
million is primarily due to capital purchases of equipment and intangible
assets.
Net cash provided by financing activities for fiscal 2002 of $0.3
million is primarily related to the proceeds received as a result of our new
credit facilities described below offset by repayment of existing debt and
deferred finance costs of $1.1 million.
On November 15, 2001, Easy Gardener entered into a credit agreement
with PNC Bank (the "PNC Credit Agreement") which, as amended, provides for up to
$25,000,000 in senior secured financing until November 2004. The PNC Credit
Agreement provides for a $23,000,000 revolving credit facility and a $2.0
million term loan. The term loan balance outstanding at June 30, 2002 of
$1,767,000 is included in the current portion of long-term debt due to the
violation of certain covenants contained in the PNC Agreement. Interest on
borrowings is 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 (effectively 5.25% on the revolving credit facility and
5.75% on the term loan at June 30, 2002). Borrowings on the revolving credit
facility are limited based on eligible borrowing bases, effectively $19.6
million at June 30, 2002. The bank has a first priority perfected security
interest in substantially all of our consolidated assets and we have guaranteed
Easy Gardener's obligations to the bank. We are subject to certain fees and
restrictions in conjunction with the financing. At June 30, 2002, we had
approximately $15.0 million of borrowings outstanding under the PNC revolving
credit facility.
37
At June 30, 2002, Easy Gardener also had borrowings outstanding of
$5.9 million, net of discounts of $.9 million, with an effective interest rate
of 18.4% pursuant to certain senior subordinated secured notes due in November
2007 that were issued pursuant to a Note and Warrant Purchase Guaranty and
Security Agreement (the "Note Agreement"). Interest is 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 $0.6
million. The notes are secured by a second lien on all of our assets and rank
junior to the senior financing provided by PNC bank. Easy Gardener's obligations
under the notes are guaranteed by U.S. Home & Garden Inc. 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 granted to the purchasers an
option to purchase from us certain Trust Preferred Securities which we own,
which resulted in a discount of $0.4 million. Under the terms of the agreements
with the noteholders and certain of their affiliates, we are also required to
pay certain consulting and other fees and are subject to certain covenants,
including the covenants set forth below.
Under both the PNC Credit Agreement and the Note Agreement, we and
our subsidiaries are required, among other things, to comply with certain non
financial covenants including, among others, those which limit our ability to
incur additional indebtedness, create liens or guaranty obligations, dispose of
assets, pay cash dividends, make cash redemptions of our securities or
repurchase our securities, merge, liquidate, or change our business, make
certain investments, loans and advances, and enter into transactions with
affiliates. In addition, under the PNC Credit Agreement and the Note Agreement,
we must comply with certain financial covenants. A violation of any of these
financial or non financial covenants could constitute an event of default under
the applicable credit agreement which could result in an acceleration of the
maturity date of the loans, and in the case of the Note Agreement, result in an
increase in the loan interest rate. At June 30, 2002, we were in violation of
certain covenants under the PNC Agreement. In addition, the holders of the
Senior Subordinated Secured notes have alleged that we are in violation of
certain covenants contained in the Note Agreement which could constitute events
of default under the Note Agreement. As a result of the foregoing, we have
classified all debt outstanding under both the PNC Credit Agreement and the Note
Agreement as current liabilities on our balance sheet as of June 30, 2002. We
have reached an agreement in principle with proposed new lenders to replace
borrowings under the PNC Credit Agreement and Note Agreement. Although we expect
to consummate the replacement financing in the
38
foreseeable future, there can be no assurance that we will be able to do so.
We are required to make monthly interest payments of $0.4 million
which are used to make required distributions on the outstanding shares of 9.4%
Cumulative Trust Preferred Securities with a liquidation amount of $25 per
security issued by our subsidiary, U.S. Home & Garden Trust I. We may, under
certain circumstances, defer the payment of interest for a period not to exceed
60 months. The Trust Preferred Securities mature on April 15, 2028. See Note 9
to the Consolidated Financial Statements included in Part II, Item 8.
During the year ended June 30, 2002, we paid in full all debt
outstanding under out Credit Agreement with Bank of America, entered into in
1998. The agreement provided for a $25 million revolving acquisition
line-of-credit ("the Acquisition Facility") to finance acquisitions and a $20
million working capital revolving line-of-credit ("the Working Capital
Facility"). Borrowings under these credit facilities bore interest at variable
annual rates chosen by the Company based on either (i) the London Interbank
Offered Rate ("LIBOR") plus an applicable marginal rate, or (ii) the higher of
0.5% above the then current Federal Funds Rate or the Prime Rate of Bank of
America, in each case, plus an applicable marginal rate.
The total borrowings under these two facilities were $21.7 million
at June 30, 2001. The total included $11.8 million borrowed under the
Acquisition Facility and $9.9 million under the Working Capital Facility.
Our obligations under the Bank of America Credit Agreement were
guaranteed by our subsidiaries and secured by a security interest in favor of
the Bank in substantially all of our assets and the assets of our subsidiaries.
The Credit Agreement with Bank of America terminated upon our payment of the
outstanding debt under the agreement.
Commitments
The Company leases office and warehouse space, certain office
equipment and automobiles under operating leases expiring through 2006. The
future minimum lease payments under these non-cancelable operating leases are as
follows:
Year ended June 30, Amount
---------------------------------------------------------------
2003 $ 843,000
2004 731,000
2005 484,000
2006 252,000
---------------------------------------------------------------
$2,310,000
===============================================================
39
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, 2002.
Allowance for Doubtful Accounts Receivable and Sales Returns. 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 the Company's
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.
We also maintain an allowance for sales returns. The allowance is
estimated based on historical experience of sales returns from customers with
agreements that allow the return of product. If actual market conditions for the
sale of the products by the customers are less favorable than those anticipated,
additional allowances may be required.
40
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
The Emerging Issues Task Force (EITF) has issued EITF Issue 00-25,
Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products, and EITF Issue 01-09, Accounting for Consideration Given
by a Vendor to a Customer, which provide guidance related to the income
statement classification of such consideration. This guidance was effective for
the Company for the quarter ended March 31, 2002. The adoption of EITF 00-25 and
EITF 01-09 did not have an effect on the Company's financial statements.
In June 2001, the FASB finalized SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires the use of the purchase method of accounting and prohibits the use
of the pooling-of-interest
41
method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS No. 141 applies to all business combinations initiated after June 30, 2001
and for purchase business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS No. 142, that the Company reclassify the
carrying amounts of intangible assets and goodwill based on the criteria of SFAS
No. 141.
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually
and requires the Company to identify reporting units for the purpose of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized.
SFAS No. 142 requires the Company to complete a two-step
transitional goodwill impairment test, with the first step to be completed
within six months of the date of adoption. The first step, used to identify
potential impairment, compares the fair value of a reporting unit with its
carrying value. If it is determined that the carrying value of the net assets of
the reporting unit (including goodwill) exceeds the fair value of that reporting
unit, the second step must be performed as soon as possible, but no later than
the end of the year of initial adoption, to measure the amount of the impairment
loss, if any. An impairment loss resulting from the transitional goodwill
impairment test is recognized as the effect of a change in accounting principle.
The Company elected to adopt SFAS No. 141 and SFAS No. 142, effective July 1,
2001. See Note 6 to the Consolidated Financial Statements included in Part II,
Item 8.
In August 2001, the Financial Accounting Standards Board (FASB)
finalized SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets, including the reporting of discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years, with early application
encouraged. The Company adopted SFAS No. 144 during the year ended June 30,
2002. See Note 2 to the Consolidated Financial Statements included in Part II,
Item 8.
42
In April 2002, the FASB issued SFAS No 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No 13, and Technical
Corrections. SFAS No. 4 required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. SFAS No. 145 requires any gain or loss from the
extinguishment of debt to meet the requirements of APB No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions to be classified as an extraordinary item, otherwise the item would
be classified in the results of continuing operations. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods that does not meet the criteria of APB No. 30 for classification as an
extraordinary item shall be reclassified. The provisions of the statement
related to the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002, with early application encouraged. The Company is
currently assessing but has not adopted SFAS No. 145.
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, with early application encouraged. Currently, the Company is
assessing but has not adopted SFAS No. 146. However, because there were no
restructuring activities during 2002, the Company believes there would have been
no effect on current year operations had the statement been applied early.
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
43
maturity debt as of June 30, 2002 that is sensitive to changes in interest
rates.
The Revolving Credit Facility had an interest rate
of 5.25% for the year ended June 30, 2002 $15 million
The Term Loan had an interest rate of 5.75% for
the year ended June 20, 2002 $1.8 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.
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 62 Chairman of the Board, Chief
Executive Officer, President,
Secretary and Treasurer
Richard Grandy 56 Chief Operating Officer
Richard Kurz 60 Chief Financial Officer
Richard Raleigh (1) 48 Director
Fred Heiden(1)(2) 61 Director
Brad Holsworth(2) 42 Director
Jon Schulberg(1)(2) 44 Director
- ----------
(1) Member, Compensation Committee
(2) Member, Audit Committee
44
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 Grandy, has been Chief Operating Officer of U.S. Home &
Garden Inc. since June 30, 2001 and President of Easy Gardener since July 1997.
Prior to that time he served as Vice President of Easy Gardener from the date of
its acquisition by U.S. Home & Garden in September 1994. Mr. Grandy co-founded
Easy Gardener in 1983 after serving as Marketing Director at International
Spike, Inc. from 1977 through 1983. From 1968 through 1977, Mr. Grandy was a
sales representative of lawn and garden products for the Ortho Division of
Chevron Chemical Co.
Richard Kurz, 60, has been Chief Financial Officer of U.S. Home &
Garden Inc. since October 2001 and served as its Vice President-Finance from
June 2001 until October 2001. 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.
Richard Raleigh has been a director of U.S. Home & Garden Inc. since
March 1993. He served as Chief Operating Officer of U.S. Home & Garden Inc. from
June 1992 to June 30, 2001 and has served as a consultant to U.S. Home & Garden,
Inc. since then. He served as Executive Vice President-Operations of U.S. Home &
Garden Inc. from December 1991 to June 1992. Prior to joining U.S. Home & Garden
Inc., Mr. Raleigh was a free-lance marketing consultant to the lawn and garden
industry from January 1991 to December 1991. From April 1988 to January 1991,
45
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 a private investor since November 1989. From April 1984 to November
1989, Mr. Heiden was President and Principal owner of Bonair Construction, a
Florida based home improvement construction company.
Brad Holsworth has been a director of U.S. Home & Garden Inc. since
July 2000. Since April 2000, he has been employed by Prescient Capital LLC, a
money manager and venture capital firm, as its Chief Financial Officer. From
April 1999 to April 2000, he was employed by Banc of America Securities, as a
Principal, Accounting and Finance. He was employed by the accounting firm, BDO
Seidman, LLP from July 1982 to April 1999 and was a partner of BDO Seidman, LLP
from July 1995 to April 1999.
Jon Schulberg, a director of U.S. Home & Garden Inc. since March
1993, has been employed as President of Schulberg MediaWorks, a company engaged
in the independent production of television programs