10-Q 1 d02-50661_10q.txt QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 From 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 IRS Employer of incorporation or organization) (Identification Number) 655 Montgomery Street San Francisco, California 94111 (Address of Principal Executive Offices) (Zip Code) (415) 616-8111 (Registrant's Telephone Number, Including Area Code) Indicate by check 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 the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As May 3, 2002 there were 17,543,379 shares of the issuer's common stock, par value $.001 per share, outstanding. 1 Part I. - Financial Information Item 1. - Consolidated Financial Statements Consolidated balance sheets as of March 31, 2002 (Unaudited) 3-4 and June 30, 2001 Consolidated statements of operations for the three months and nine months 5 ended March 31, 2002 and 2001 (Unaudited) Consolidated statements of cash flows for the nine months 6-7 ended March 31, 2002 and 2001 (Unaudited) Notes to consolidated financial statements 8-13 Item 2. - Management's Discussion and Analysis of Financial Condition 14-20 and Results of Operations Item 3. - Quantitative and Qualitative Disclosures About Market Risk 20 Part II. - Other Information Item 1. - Legal Proceedings 21 Item 6. - Exhibits and Reports on Form 8-K 21 Signatures 21 2 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
March 31, 2002 June 30, 2001 ---------------- --------------- (Unaudited) Assets Current Cash and cash equivalents $ -- $ 2,724,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $1,272,000 and $1,260,000 24,369,000 19,483,000 Inventories 12,311,000 11,043,000 Prepaid expenses and other current assets 966,000 697,000 Refundable income taxes 535,000 653,000 Deferred tax asset 1,205,000 1,205,000 Net current assets of discontinued operations -- 371,000 ------------------------------------------------------------------------------------------------- Total Current Assets 39,386,000 36,176,000 Property and Equipment, net 5,173,000 5,994,000 Intangible Assets Excess of cost over net assets acquired, net 59,632,000 59,632,000 Deferred financing costs, net of accumulated amortization of $475,000 and $562,000 3,600,000 3,001,000 Non-compete agreements, net of accumulated amortization of $318,000 and $132,000 1,192,000 1,378,000 Package tooling costs, net of accumulated amortization of $1,727,000 and $1,390,000 1,275,000 1,371,000 Product rights, patents and trademarks, net of accumulated amortization of $173,000 and $85,000 560,000 559,000 Officer Receivables 552,000 521,000 Net Long-Term Assets of Discontinued Operations 117,000 -- Other Assets 26,000 304,000 ------------------------------------------------------------------------------------------------- Total Assets $111,513,000 $108,936,000 -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 3 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
March 31, 2002 June 30, 2001 ---------------- --------------- (Unaudited) Liabilities and Stockholders' Equity Current Lines-of-credit $ 9,921,000 $ 21,650,000 Accounts payable 8,871,000 3,293,000 Accrued rebates 1,288,000 1,618,000 Accrued freight 630,000 434,000 Accrued commissions 1,133,000 1,279,000 Accrued co-op advertising 808,000 732,000 Accrued restructuring costs -- 999,000 Accrued expenses 1,334,000 1,285,000 Current portion of bank term loan 400,000 -- ----------------------------------------------------------------------------------------------------- Total Current Liabilities 24,385,000 31,290,000 Revolving Credit Facility 6,000,000 -- Long Term Debt 7,370,000 -- Deferred Tax Liability 1,205,000 1,205,000 Net Long-Term Liabilities of Discontinued Operations -- 263,000 Other Long Term Liabilities -- 20,000 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures 56,951,000 56,951,000 ----------------------------------------------------------------------------------------------------- Total Liabilities 95,911,000 89,729,000 ----------------------------------------------------------------------------------------------------- Minority Interest in Equity of Affiliate 1,239,000 1,239,000 ----------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock, 1,000,000 shares authorized and unissued -- -- Common stock, $0.001 par value - shares authorized, 75,000,000; 21,433,000 shares issued at March 31, 2002 and June 30, 2001 21,000 21,000 Additional paid-in capital 52,337,000 51,846,000 Retained deficit (25,167,000) (21,071,000) ----------------------------------------------------------------------------------------------------- 27,191,000 30,796,000 Less: Treasury Stock, 3,890,000 shares at cost at March 31, 2002 and June 30, 2001 (12,828,000) (12,828,000) ----------------------------------------------------------------------------------------------------- Total Stockholders' Equity 14,363,000 17,968,000 ----------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 111,513,000 $ 108,936,000 -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 4 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Operations ===============================================================================
Three Months Ended Nine Months Ended March 31, March 31, -------------------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------------------------------------------------------------------------------- Unaudited Unaudited -------------------------------------------------------------------- Net sales $ 24,278,000 $ 26,508,000 $ 49,567,000 $ 50,978,000 Cost of Sales 12,826,000 14,660,000 28,148,000 30,775,000 ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit 11,452,000 11,848,000 21,419,000 20,203,000 ----------------------------------------------------------------------------------------------------------------------------------- Operating Expenses Selling and shipping 5,081,000 4,882,000 12,533,000 11,738,000 General and administrative 2,083,000 2,432,000 6,349,000 5,892,000 Restructuring charges -- 650,000 -- 650,000 Depreciation 187,000 216,000 561,000 703,000 Goodwill amortization -- 752,000 -- 2,181,000 Other amortization 241,000 60,000 501,000 337,000 Write off of deferred financing costs -- -- 254,000 -- ----------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 7,592,000 8,992,000 20,198,000 21,501,000 ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Operations 3,860,000 2,856,000 1,221,000 (1,298,000) Other Income (Expense) Investment income 12,000 136,000 82,000 235,000 Interest expense (1,823,000) (1,993,000) (5,400,000) (5,417,000) ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations Before Income Taxes and Extraordinary Gain 2,049,000 999,000 (4,097,000) (6,480,000) Income Tax Benefit (Expense) -- (1,116,000) -- 2,471,000 ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations Before Extraordinary Gain 2,049,000 (117,000) (4,097,000) (4,009,000) Discontinued Operations - Loss from discontinued operations net of tax benefit of $433,000 and $2,882,000, respectively, and minority interest of $343,000 and $769,000, respectively, in 2001 -- (1,654,000) -- (3,514,000) ----------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) Before Extraordinary Gain 2,049,000 (1,771,000) (4,097,000) (7,523,000) Extraordinary gain on purchase of Trust Preferred Securities, net of income taxes -- -- -- 4,000 ----------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 2,049,000 $ (1,771,000) $ (4,097,000) $ (7,519,000) ----------------------------------------------------------------------------------------------------------------------------------- Per Share Amounts: Weighted Average Common Shares Outstanding- Basic 17,543,000 17,638,000 17,543,000 18,212,000 Weighted Average Common Shares Outstanding- Diluted 17,915,000 17,638,000 17,543,000 18,212,000 Income (Loss) from Continuing Operations per Common Share Before Extraordinary Gain - Basic and Diluted $ .12 (.01) ($ .23) ($ .22) Discontinued operations -- (.09) -- (.19) Extraordinary gain -- -- -- -- ----------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ .12 ($ .10) ($ .23) ($ .41) -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 5 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ===============================================================================
Nine months ended March 31, 2002 2001 --------------------------------------------------------------------------------------------- Unaudited ------------------------------ Cash Flows from Operating Activities: Net loss from continuing operations before extraordinary gain $ (4,097,000) $ (4,005,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,278,000 4,169,000 Write off of deferred financing costs 254,000 -- Extraordinary gain -- (4,000) Compensation related to stock options 89,000 231,000 Deferred Income Taxes -- (805,000) Changes in operating assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable (4,886,000) (6,082,000) Inventories (1,268,000) (5,752,000) Prepaid expenses and other current assets (151,000) (215,000) Accounts payable and accrued expenses 4,404,000 2,053,000 Other assets 279,000 224,000 --------------------------------------------------------------------------------------------- Net Cash Used In Operating Activities (3,098,000) (10,186,000) --------------------------------------------------------------------------------------------- Cash Flows for Investing Activities: Purchase of property and equipment (586,000) (932,000) Purchase of intangibles (329,000) (411,000) Increase in officer receivables (31,000) (61,000) Decrease in restricted cash -- 1,582,000 Payment for purchase of business, net of cash acquired -- (413,000) --------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (946,000) (235,000) ---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 6 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Nine months ended March 31, 2002 2001 -------------------------------------------------------------------------------------------- Unaudited ----------------------------- Cash Flows from Financing Activities: (Payments)/proceeds on lines-of-credit $ (5,729,000) $ 17,900,000 Proceeds from long term debt 8,250,000 -- Deferred finance costs (1,059,000) -- Principal payments on long-term debt (133,000) -- Repurchase of common stock for treasury -- (2,082,000) Purchase of mandatorily redeemable preferred securities -- (22,000) Other -- (6,000) --------------------------------------------------------------------------------------------- Net Cash Provided By Financing Activities 1,329,000 15,790,000 --------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents from continuing operations (2,715,000) 5,369,000 Cash used in discontinued operations (9,000) (6,802,000) --------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (2,724,000) (1,433,000) Cash and Cash Equivalents, beginning of period 2,724,000 3,474,000 --------------------------------------------------------------------------------------------- Cash and Cash Equivalents, end of period $ -- $ 2,041,000 --------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 5,099,000 $ 3,190,000 Cash paid (refund received) for income taxes $ 58,000 $ (14,000) --------------------------------------------------------------------------------------------- Non-Cash Investing and Financing Activities Issuance of 16% subordinated notes at 90% of face amount $ 600,000 $ -- Issuance of warrants and options in conjunction with debt refinancing $ 402,000 $ -- ---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 7 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. The accompanying consolidated financial statements at March 31, 2002 and for the three months and nine months ended March 31, 2002 and 2001 are unaudited, but, in the opinion of management, include all adjustments necessary for a fair presentation of consolidated financial position and results of operations for the periods presented. The results for the nine months ended March 31, 2002 are not necessarily indicative of the results of operations for a full year. Certain amounts as previously reported have been reclassified to conform to current year classifications. 2. Refer to the audited consolidated financial statements for the year ended June 30, 2001, for details of accounting policies and detailed notes to the consolidated financial statements. 3. Inventories consist of: March 31, 2002 June 30, 2001 ----------------------------------------------- Raw materials $ 5,658,000 $ 6,290,000 Finished goods 6,653,000 4,753,000 ---------------------------------------------- $12,311,000 $11,043,000 ---------------------------------------------- 4. On November 15, 2001, the Company secured financing from a bank to provide up to $33,000,000 in senior secured financing due three years from the closing date. The financing provides for a $31,000,000 revolving credit facility and a $2,000,000 term loan due in monthly installments of $33,000 plus interest. The term loan balance outstanding, net of current portion of $400,000, of $1,467,000 is included in long term debt. 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% at March 31, 2002). Borrowings on the revolving credit facility are limited based on eligible borrowing bases. At March 31, 2002 the Company had $15,921,000 of borrowings outstanding under the revolving credit facility, of which $9,921,000 has been classified as current. The Company's obligations under the revolving credit facility are guaranteed by its subsidiaries and secured by a security interest in favor of the bank in substantially all of the assets of the Company and its subsidiaries. Upon the occurrence of an event of default as specified in the financing agreement, the maturity of loans outstanding under the financing agreement may be accelerated by the bank, which may also foreclose its security interest on the assets of the Company and its subsidiaries. At March 31, 2002, the Company had borrowings outstanding of $5,903,000, net of discounts of $946,000, pursuant to subordinated secured notes due in November 2007 with an effective interest rate of 18.4%. 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 $600,000. The notes are secured by a second lien on all assets of the Company and rank junior to the senior financing provided by the bank. In connection with this 8 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ financing, the Company issued to the purchasers of the notes warrants to purchase up to 3.75% of the fully diluted common stock of the Company and granted to the purchasers an option to purchase from the Company certain Trust Preferred Securities of the Company's subsidiary, U.S. Home & Garden Trust I, that are owned by the Company, which resulted in a discount of $402,000. Under the two financing agreements, the Company and its subsidiaries are required, among other things, to comply with (a) certain limitations on incurring additional indebtedness, liens and guarantees, on dispositions of assets, payment of cash dividends and cash redemption and repurchases of securities, and (b) certain limitations on mergers, liquidations, changes in business, investments, loans and advances, affiliate transactions and certain acquisitions. In addition, the Company must comply with certain financial tests and ratios. A violation of any of these covenants constitutes an event of default under the financing agreements. At March 31, 2002, the Company was in compliance with the financial covenants. 5. In June 2001, the Company announced that it was discontinuing its e-commerce initiative, which it was conducting through its subsidiary, Egarden, Inc. (Egarden), effective June 30, 2001. During the year ended June 30, 2001, the Company recorded a net loss on disposal of discontinued operations of $4,551,000, net of minority interest of $1,118,000. The loss, prior to minority interest, included the write-off of all long-lived assets of $5,224,000 and severance expense of $445,000 related to the termination of all 39 employees. All severance payments have been made at March 31, 2002. No adjustments were made to the liability recorded for severance payments during the period ended March 31, 2002. The Company had a net loss from the operations of Egarden of $1,654,000 and $3,514,000, net of minority interest of $343,000 and $769,000, for the three months and nine months ended March 31, 2001. Revenues of the discontinued operations for the three months and nine months ended March 31, 2001 were not material. The net assets and liabilities of discontinued operations reported in the consolidated balance sheets consisted of the following:
March 31, 2002 June 30, 2001 ---------------------------------------------------------------------------- Current assets $ 14,000 $ 882,000 Current liabilities (14,000) (511,000) ---------------------------------------------------------------------------- Net current assets $ -- $ 371,000 ---------------------------------------------------------------------------- Net long-term assets (liabilities) $ 117,000 $ (263,000) ---------------------------------------------------------------------------- Minority interest in equity of affiliate $(1,239,000) $(1,239,000) ----------------------------------------------------------------------------
9 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Pursuant to APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, the Company's consolidated financial statements and notes have been restated for all periods presented to reflect the discontinuation of Egarden. The net operating results, net assets and net cash flows of Egarden have been reported as "Discontinued Operations" in the accompanying consolidated financial statements. The restated notes exclude amounts related to these discontinued operations. 6. During the fiscal year ended June 30, 2001, the Company recorded a restructuring charge of $2,860,000 relating to the closing and sale of its subsidiary's Ampro Industries Inc. facility in Michigan. The Company intends to continue to sell products, through a contract manufacturing agreement, being manufactured at the former Ampro facility. As part of this agreement, the Company has a firm commitment to purchase minimum quantities of product in the fiscal year ended June 30, 2002. As of March 31, 2002, the Company has purchased approximately $899,000 of product from the subcontractor. The Company estimates that for the fiscal year ended June 30, 2002, it may have to pay up to an additional $60,000 to meet the minimum quantities requirement. However, the contract includes an exit provision, whereby the maximum cost to the Company of termination of the agreement is $332,000. During the period ended June 30, 2001, the Company recognized approximately $1,709,000 of expenses and losses relating to the closing and sale of property and equipment of the Ampro facility and $1,151,000 for termination benefits to be paid to all 60 former employees at the Ampro facility. Approximately $45,000 of severance payments as a result of the restructuring was unpaid as of March 31, 2002. All payments are expected to be completed by June 30, 2002. No adjustments were made to the liability recorded for severance payments during the nine months ended March 31, 2002. 7. In June 2001, the Financial Accounting Standards Board (FASB) finalized Statement of Financial Accounting Standards (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 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. SFAS No. 141 also requires, upon adoption of SFAS No. 142, that the Company reclassify the carrying amounts of goodwill and other intangible assets 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. In addition, SFAS No. 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidelines in SFAS No. 142. 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. 10 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 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 has elected to adopt SFAS No. 141 and SFAS No. 142 effective July 1, 2001. The adoption of SFAS No. 141 had no effect on the Company's financial statements for the nine months ended March 31, 2002 as the Company engaged in no business acquisitions during this period and there were no reclassifications between goodwill and other intangible assets. During the three months ended September 30, 2001, the Company completed a reassessment of the useful lives of other intangible assets, which total $6,627,000 (net of accumulated amortization of $2,719,000) at March 31, 2002. As a result, no adjustments were made to previously determined amortization periods. The Company has no intangible assets with indefinite useful lives at March 31, 2002. The Company completed step one of the SFAS No. 142 transitional goodwill impairment test during the quarter ended December 31, 2001. The carrying value of the net assets of the Ampro reporting unit exceeds its fair value. Goodwill associated with the purchase of Ampro was approximately $17,078,000, net of accumulated amortization, at March 31, 2002. As disclosed at June 30, 2001, the Company restructured the operations of Ampro during the year ended June 30, 2001. This restructuring included the closing and sale of the Ampro facility in Michigan. The Company currently continues to sell Ampro products, through a contract manufacturing agreement, being manufactured at the former Ampro facility. This restructuring is currently being considered by the Company in conjunction with the transitional goodwill impairment test being completed. Outside valuation professionals are currently assisting the Company with step two of the transitional goodwill impairment test to measure the impairment loss. The impairment loss will be recorded no later than June 30, 2002. The Company's previous business combinations were accounted for using the purchase method. As a result of such combinations, the Company has recognized a significant amount of goodwill, which, in the aggregate, was approximately $59,632,000, net of accumulated amortization, at March 31, 2002. Amortization expense for all intangible assets during the nine months ended March 31, 2002 and 2001 was $1,070,000 and $2,878,000, respectively. Amortization expense included $2,181,000 for goodwill amortization for the nine months ended March 31, 2001. Estimated amortization expense for each of the five succeeding fiscal years is as follows: Year Ended June 30, ----------------------------------------------- 2002 $1,478,000 2003 $1,468,000 2004 $1,468,000 2005 $1,288,000 2006 $1,108,000 11 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The following represents a reconciliation of the reported net loss to the adjusted net loss and the adjusted net loss before extraordinary gain for the three months and the nine months ended March 31, 2001, which exclude goodwill amortization expense, net of tax benefit:
Three Months Ended Nine Months Ended -------------------------------------- March 31, 2001 -------------------------------------------------------------------------------------- Reported Net Loss $ (1,771,000) $(7,519,000) Goodwill amortization, net of tax benefit of $115,000 and $480,000 587,000 1,701,000 -------------------------------------------------------------------------------------- Adjusted Net Loss (1,184,000) (5,818,000) Extraordinary gain -- 4,000 -------------------------------------------------------------------------------------- Adjusted Net Loss Before Extraordinary Gain $ (1,184,000) $(5,822,000) -------------------------------------------------------------------------------------- Per Share Amounts: Reported Net Loss $ (.10) $ (.41) Goodwill amortization, net of tax benefit .03 .09 -------------------------------------------------------------------------------------- Adjusted Net Loss (.07) (.32) Extraordinary gain -- -- -------------------------------------------------------------------------------------- Adjusted Net Loss Before Extraordinary Gain $ (.07) $ (.32) --------------------------------------------------------------------------------------
8. In the normal course of business, the Company is subject to proceedings, lawsuits, and other claims, including proceedings under laws and government regulations related to product safety and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the ultimate amount of monetary liability or financial impact with respect to these matters at March 31, 2002 cannot be ascertained. During fiscal 2001, the U.S. Consumer Product Safety Commission ("CPSC") began an investigation into a product previously distributed by the Company's Weed Wizard subsidiary. This investigation could result in an adverse outcome for the Company. While the amount of loss cannot be reasonably estimated at this time, the approximate maximum potential loss is $1.6 million. The Company has vigorously defended, and will continue to vigorously defend, its actions with respect to this subsidiary and its discontinued product. 12 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ In fiscal 2001, the Company commenced an action against A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) and certain stockholders and officers relating to the purchase from the defendants of substantially all of the assets of Weed Wizard, Inc. by the Company. The Company is seeking to rescind the transaction or to recover monetary damages. A.A.B.B., Inc. has asserted a counterclaim for breach of contract against the Company for $720,000, plus interest, representing an alleged adjustment to the purchase price. In November 2001, the Company was notified by the staff of the CPSC that a cap on one of the Company's products sold prior to June 30, 2000 was found to be defective. The Company recently agreed to a voluntary corrective action providing replacement caps for earlier versions of the caps. Costs related to the voluntary corrective action is not expected to be significant. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 the Company's 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 the Company. These risks and uncertainties include, but are not limited to, those relating to the Company's growth strategy, customer concentration, outstanding indebtedness, dependence on weather conditions, seasonality, expansion and other activities of competitors, ability to successfully integrate 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, litigation, and the general condition of the economy and its effect on the securities markets and other risks detailed in the Company's other filings with the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. General U.S. Home & Garden Inc., ("the Company"), manufactures and markets a broad range of brand-name consumer lawn and garden products through its wholly owned subsidiaries, Ampro Industries, Inc. ("Ampro"), Easy Gardener, Inc. ("Easy Gardener"), and Golden West Agri-Products, Inc., and Easy Gardener's wholly owned subsidiaries, Weatherly Consumer Products Group, Inc. and Weed Wizard Acquisition Corp. Since 1992, the Company consummated eleven acquisitions of complementary lawn and garden companies and product lines for an aggregate consideration of approximately $111,000,000 in cash, notes and equity securities. As a result of such acquisitions, the Company recognized a significant amount of goodwill, which, in the aggregate, was $59,632,000, net of accumulated amortization, at June 30, 2001 and March 31, 2002. Results of Operations The following table sets forth, for the periods indicated, certain selected financial data as a percentage of net sales:
Three Months Ended Nine Months Ended March 31, March 31, 2002 2001 2002 2001 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 52.8 55.3 56.8 60.4 ------------------ ------------------ Gross profit 47.2 44.7 43.2 39.6 Selling and shipping expenses 20.9 18.4 25.3 23.0 General and administrative expenses 8.6 9.2 12.8 11.6 Restructuring -- 2.4 -- 1.3 Depreciation and amortization 1.8 3.9 2.1 6.3 Write off of deferred financing costs -- -- .5 -- ------------------ ------------------ Income (loss) from operations 15.9 10.8 2.5 (2.6) Interest expense, net (7.5) (7.0) (10.8) (10.1) Income tax benefit -- (4.2) -- 4.8 ------------------ ------------------ Income (loss) from continuing operations 8.4 (.4) (8.3) (7.9) Loss from discontinued operations -- (6.3) -- (6.9) ------------------ ------------------ Net income (loss) 8.4% (6.7)% (8.3)% (14.8)% ------------------ ------------------
14 Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 Net sales. Net sales decreased by $2,230,000, or 8.4%, to $24,278,000 during the three months ended March 31, 2002 from $26,508,000 during the comparable period in 2001. The decrease in net sales was due to a change in buying pattern by key customers who are buying less product to be held for their inventory prior to the selling season and replenishing inventory levels only as sales are made. During the three months ended March 31, 2002 the Company increased its product presence at its largest customer and experienced a loss of a product listing at its second largest customer. Gross profit. Gross profit decreased by $396,000, or 3.3%, to $11,452,000 for the three months ended March 31, 2002 from $11,848,000 during the comparable period in 2001. Gross profit as a percentage of net sales increased to 47.2% during the three months ended March 31, 2002, from 44.7% during the comparable period in 2001. This increase in gross profit as a percentage of net sales is due to a decrease in cost of sales as a result of the restructuring and closing of the Bradley, Michigan facility, a reduction in certain raw material costs, and increased operating efficiencies. Selling and shipping expenses. Selling and shipping expenses increased by $199,000, or 4.1%, to $5,081,000 during the three months ended March 31, 2002 from $4,882,000 during the comparable period in 2001. As a percentage of net sales, selling and shipping expenses increased to 20.9% during the three months ended March 31, 2002 from 18.4% during the comparable period in 2001. The increase in expense and increase as a percent of net sales was primarily attributable to increases in outbound freight costs. General and administrative expenses. General and administrative expenses decreased by $349,000, or 14.4%, to $2,083,000 during the three months ended March 31, 2002 from $2,432,000 during the comparable period in 2001. This decrease is primarily due to the closing of Bradley, Michigan facility and management's continued efforts to reduce costs. The decrease was partially offset by write-offs and other charges including the Kmart Corporation bankruptcy and a product corrective action. As a percentage of net sales, general and administrative expenses decreased to 8.6% during the three months ended March 31, 2002 from 9.2% during the comparable period in 2002. Restructuring. The Company reserved $650,000 during the three months ended March 31, 2001 related to the restructuring and closing of the Bradley, Michigan facility. No similar costs were incurred during the comparable period in 2002. Depreciation, amortization, and write off of deferred financing costs. Depreciation, amortization, and write-off of deferred financing costs expenses decreased by $600,000 or 58.4% to $428,000 during the three months ended March 31, 2002 from $1,028,000 during the comparable period in 2001. This decrease is primarily a result of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") in July 2001. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. As a percentage of net sales, depreciation and amortization, decreased to 1.8% during the three months ended March 31, 2002 from 3.9% during the comparable period in 2001. Income (loss) from operations. Income from operations increased by $1,004,000, or 35.2%, to $3,860,000 during the three months ended March 31, 2002, from $2,856,000 during the comparable period in 2001. The increase in income from operations was primarily due to increased gross profit and other expense changes noted above. As a percentage of net sales, income from operations increased to 15.9% for the three months ended March 31, 2002 from 10.8% during the comparable period in 2001. Interest expense, net. Net interest expense decreased $46,000, or 2.5% to $1,811,000 during the three months ended March 31, 2002, from $1,857,000 during the comparable period in 2001. The slight decrease in interest expense results from lower borrowing levels in 2002. 15 Income taxes. Income tax expense decreased to $0 during the three months ended March 31, 2002 from $1,116,000 expense during the comparable period in 2001. No income tax was recorded for the three months ended March 31, 2002, due to the net operating loss carry forward. Discontinued operations. Loss from discontinued operations decreased by $1,654,000 to $0 during the three months ended March 31, 2002, from the comparable period in 2001. The decrease in loss from discontinued operations is due to the Company's decision to discontinue the operations of Egarden, Inc. during the quarter ended June 30, 2001. Net income (loss). Net income increased by $3,820,000 to $2,049,000 during the three months ended March 31, 2002 from a net loss of $1,771,000 during the comparable period in 2001. Net income per common share increased to $.12 per share for the three months ended March 31, 2002 from net loss of $0.10 per share during the comparable period in 2001. The increase in net income and net income per common share is due primarily to not having restructuring costs and the decrease in goodwill amortization costs and not having a loss related to the discontinued operations. There were fewer weighted average common and common equivalent shares outstanding in the three months ended March 31, 2002 compared to the comparable period in the prior year due to the Company's repurchase of shares of its common stock in fiscal 2001. Nine Months Ended March 31, 2002 Compared to Nine Months Ended March 31, 2001 Net sales. Net sales decreased by $1,411,000, or 2.8%, to $49,567,000 during the nine months ended March 31, 2002 from $50,978,000 during the comparable period in 2001. The decrease in net sales was primarily due to a change in buying pattern by key customers who are buying less inventory and replenishing inventory levels as sales are made. Gross profit. Gross profit increased by $1,216,000, or 6.0%, to $21,419,000 for the nine months ended March 31, 2002 from $20,203,000 during the comparable period in 2001. Gross profit as a percentage of net sales increased to 43.2% during the nine months ended March 31, 2002, from 39.6% during the comparable period in 2001. This increase in gross profit as a percentage of net sales is due to a decrease in cost of sales as a result of the restructuring and closing of the Bradley, Michigan facility, a reduction in certain raw material costs and increased operating efficiencies. Selling and shipping expenses. Selling and shipping expenses increased by $795,000, or 6.8%, to $12,533,000 during the nine months ended March 31, 2002 from $11,738,000 during the comparable period in 2001. As a percentage of net sales, selling and shipping expenses increased to 25.3% during the nine months ended March 31, 2002 from 23.0% during the comparable period in 2001. This increase in expense and increase as a percent of net sales was primarily attributable to increases in outbound freight costs for the nine months ended March 31, 2002. General and administrative expenses. General and administrative expenses increased by $457,000, or 7.8%, to $6,349,000 during the nine months ended March 31, 2002 from $5,892,000 during the comparable period in 2001. This increase is primarily due to the allocation of certain costs in the prior year to the discontinued startup operations of Egarden, Inc. The increase also results from write-offs and other charges including the Kmart Corporation bankruptcy and a product corrective action. All general and administrative costs during the nine months ended March 31, 2002 were charged to continuing operations. This increase is partially offset by savings from increased operating efficiencies. As a percentage of net sales, general and administrative expenses increased to 12.8% during the nine months ended March 31, 2002 from 11.6% during the comparable period in 2001. Restructuring. The Company reserved $650,000 during the nine months ended March 31, 2001 related to the restructuring and closing of the Bradley, Michigan facility. No similar costs were incurred during the comparable period in 2001. 16 Depreciation, amortization, and write off of deferred financing costs. Depreciation, amortization, and write-off of deferred financing costs expenses decreased by $1,905,000, or 59.1%, to $1,316,000 during the nine months ended March 31, 2002 from $3,221,000 during the comparable period in 2001. This decrease is primarily a result of the adoption of SFAS No. 142. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. The decrease in depreciation and amortization was mitigated somewhat by the write off of deferred financing costs in conjunction with the restructuring of the Company's debt during the second quarter of fiscal 2002. As a percentage of net sales, depreciation, amortization, and write-off of deferred financing costs decreased to 2.6% during the nine months ended March 31, 2002 from 6.3% during the comparable period in 2001. Income (loss) from operations. Income from operations increased by $2,519,000 to $1,221,000 during the nine months ended March 31, 2002, from a $1,298,000 loss during the comparable period in 2001. The increase in income from operations was primarily due to increased gross profit and other expense changes as noted above. As a percentage of net sales, income from operations increased to 2.5% for the nine months ended March 31, 2002 from a 2.6% loss during the comparable period in 2001. Interest expense, net. Net interest expense increased $136,000, or 2.6%, to $5,318,000 during the nine months ended March 31, 2002, from $5,182,000 during the comparable period in 2001. The increase in interest expense results from the higher cost of the long term subordinated debt offset by the lower interest rates on the revolving credit plus lower borrowing levels. Income taxes. Income tax benefit decreased to $0 during the nine months ended March 31, 2002 from $2,471,000 during the comparable period in 2001. The income tax benefit for each interim period is based upon the Company's estimated effective income tax rate for the year. No income tax benefit was recorded for the nine months ended March 31, 2002 due to the uncertainty of realizing a deferred tax asset. Discontinued operations. Loss from discontinued operations decreased by $3,514,000 to $0 during the nine months ended March 31, 2002, from the comparable period in 2001. The decrease in loss from discontinued operations is due to the Company's decision to discontinue the operations of Egarden, Inc. during the quarter ended June 30, 2001. Net loss. Net loss decreased by $3,422,000 to $4,097,000 during the nine months ended March 31, 2002 from a net loss of $7,519,000 during the comparable period in 2001. Net loss per common share decreased to $0.23 per share for the nine months ended March 31, 2002 from net loss of $0.41 per share during the comparable period in 2001. The decrease in net loss and net loss per common share is due to the elimination of goodwill amortization and restructuring charges and not having a loss related to the discontinued operations partially offset by not reflecting a tax benefit in 2002. There were fewer weighted average common and common equivalent shares outstanding in the nine months ended March 31, 2002 compared to the comparable period in the prior year due to the Company's repurchase of shares of its common stock in fiscal 2001. Seasonality The Company's sales are seasonal due to the nature of the lawn and garden business, in parallel with the annual growing season. The Company's sales and shipping have traditionally been most active from late March through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are increasing their inventory of lawn and garden products. The buying pattern of stores is changing and stores are replenishing supplies when they are sold to their customers rather than in advance of the selling season. Additionally, since the Company has adjusted its operations to respond more closely to the just-in-time inventory management programs increasingly utilized by its major customers, it expects to ship an increasingly larger proportion of its total orders on an annual basis in the seasonally strong fourth quarter of the fiscal year and first quarter of the following fiscal year. 17 Sales of the Company's agricultural products, which were not material during the nine months ended March 31, 2002, are also seasonal. Most shipments occur during the agricultural cultivation period from March through October. Liquidity and Capital Resources Since inception, the Company has financed its operations primarily through cash generated by operations, net proceeds from the Company's private placements and public sales of securities and borrowings from lending institutions. At March 31, 2002, the Company had consolidated cash and short-term investments totaling $0, and working capital of $15,001,000. Under the Company's new credit facility, all cash balances are automatically used to reduce outstanding borrowings. At June 30, 2001, the Company had consolidated cash and short-term investments totaling $2,724,000, and working capital of $4,886,000. The increase in working capital is primarily attributable to the modification in the revolving credit facility allowing balances to be included in long term debt. On November 15, 2001, the Company secured financing from a bank to provide up to $33,000,000 in senior secured financing due three years from the closing date. The financing commitment provides for a $31,000,000 revolving credit facility and a $2,000,000 term loan. 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% at March 31, 2002). Available borrowing on the revolving credit facility is limited based on eligible borrowing bases. The bank has first priority perfected security interest in substantially all of the Company's assets. The Company is subject to certain fees and restrictions in conjunction with the financing. At March 31, 2002, the Company had $15,921,000 of borrowings outstanding under the revolving credit facility of which $9,921,000 has been classified as current. At March 31, 2002, the Company had borrowings outstanding of $5,903,000, net of discounts of $946,000, pursuant to subordinated secured notes due in November 2007 with an effective interest rate of 18.4%. 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 $600,000. The notes are secured by a second lien on all assets of the Company and rank junior to the senior financing provided by the bank. In connection with this financing, the company issued to the purchasers of the notes warrants to purchase up to 3.75% of the fully diluted common stock of the Company and granted to the purchasers an option to purchase from the Company certain Trust Preferred Securities of the Company's subsidiary, U.S. Home & Garden Trust I, that are owned by the Company, which resulted in a discount of $402,000. The Company is required to pay certain fees and is subject to certain restrictions. 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. The Company has 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 the Company's Consolidated Financial Statements at June 30, 2001. Allowance for Doubtful Accounts Receivable and Sales Returns: The Company maintains an allowance for doubtful accounts receivable, which represents the potential estimated losses resulting from the inability of customers to 18 make required payments for amounts owed. The allowance is estimated based on historical experience of write-offs, the level of past due amounts, 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. The Company also maintains 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. Inventories: The Company records 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. Intangible Assets: The Company has consummated eleven acquisitions accounted for using the purchase method. The excess of cost over net assets acquired which relates to the Company's acquisitions has been recorded as goodwill. Intangible assets are tested for impairment by comparing the carrying value of the assets of the individual reporting units of the Company 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: The Company records 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. The Company has recorded a valuation allowance due to the uncertainty of the Company's ability to generate sufficient future taxable income to realize the gross deferred tax assets. If the Company is 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 Vendors 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 is 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 affect on the Company's financial statements. In August 2001, the Financial Accounting Standards Board 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 disposal of a segment of business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. We are currently reviewing the impact of SFAS No. 144. 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 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. 19 SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS NO. 142. 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 transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS No. 142. The Company has elected to adopt SFAS No. 141 and SFAS No. 142, effective July 1, 2001. See Note 7 to the Consolidated Financial Statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a result of its variable rate revolving credit line, the Company is exposed to the risk of rising interest rates. The following table provides information on the Company's fixed maturity debt as of March 31, 2002 that are sensitive to changes in interest rates. The Revolving Credit Facility had an $15.9 million interest rate of 5.25% for the period ended March 31, 2002. 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings In July 2000, the Company's Weed Wizard Acquisition Corp. ("Weed Wizard") commenced an action in the U.S. District Court, Northern District of Georgia, against A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) and certain of its stockholders and officers. In this action the Company alleged that the defendants made certain misrepresentations and omitted to disclose certain facts regarding, among other things, alleged defects in certain of the Weed Wizard products in connection with our purchase from defendants in 1998 of substantially all of the assets of Weed Wizard, Inc. We are seeking to rescind the transaction, or in the alternative, to recover rescissionary monetary damages, and to recover compensatory damages. In addition, we are seeking punitive damages. In October 2000, A.A.B.B., Inc. asserted a counterclaim for breach of contract against Weed Wizard alleging that it is owed $720,267, plus interest, representing an adjustment to the purchase price allegedly required to be made pursuant to the agreement in which Weed Wizard acquired certain A.A.B.B., Inc.'s assets. A.A.B.B., Inc. is also seeking to recover attorney's fees. We deny any liability and intend to vigorously defend this counterclaim. In fiscal 2001, we were notified by the staff of the U.S. Consumer Product Safety Commission ("CPSC") that the staff is considering recommending that the 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 Weed Wizard product previously distributed by us that was the subject of a voluntary recall during fiscal 2000. We believe that the maximum amount of any claim that may be brought by the CPSC will not exceed approximately $1.6 million. We intend to defend any claim against Weed Wizard or us that may be brought by the CPSC. Item 6. Exhibits and Reports on Form 8-K (a) None (b) No reports on Form 8-K were filed during the quarter ended March 31, 2002. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 14, 2002 U.S. Home & Garden Inc. (Registrant) By: /s/ Robert Kassel ------------------------------------ President, Chief Executive Officer By: /s/ Richard Kurz ------------------------------------ Chief Financial Officer 21