-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UxF0CQYCdFD9fzJfjYAdsWQlr9rAFHiV1YuzwPIRmCbxk1b/4Y6/ou7uE/IfGFN7 2rrDBlm0yQ/6iXNuDgp0WQ== 0000891554-98-000635.txt : 20030213 0000891554-98-000635.hdr.sgml : 20030213 19980515171736 ACCESSION NUMBER: 0000891554-98-000635 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US HOME & GARDEN INC CENTRAL INDEX KEY: 0000879911 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 770262908 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19899 FILM NUMBER: 98626462 BUSINESS ADDRESS: STREET 1: 655 MONTGOMERY ST STE 830 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4156168111 MAIL ADDRESS: STREET 1: 655 MONTGOMERY ST STREET 2: SUITE 830 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 FORMER COMPANY: FORMER CONFORMED NAME: NATURAL EARTH TECHNOLOGIES INC DATE OF NAME CHANGE: 19930328 10-Q 1 QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISION 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, 1998 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 0-19899 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) (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 of May11, 1998 there were 20,116,197 shares of the issuer's common stock, par value $.001 per share, outstanding. Part 1.- Financial Information Item 1. Consolidated Financial Statements Consolidated balance sheet as of June 30, 1997 and March 31, 1998 (Unaudited) 1-2 Consolidated statements of Income for the three months and nine months ended March 31, 1997 and 1998 (unaudited) 3-4 Consolidated statements of cash flows for the nine months ended March 31, 1997 and 1998 (Unaudited) 5-6 Notes to consolidated financial statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10-16 Part II.- Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
June 30, March 31, 1997 1998 - --------------------------------------------------------------------------------------- (Unaudited) Assets Current Cash and cash equivalents $ 2,083,000 $ 1,931,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $314,000 and $361,000 11,542,000 25,708,000 Inventories 5,254,000 13,209,000 Prepaid expenses and other current assets 419,000 2,176,000 Deferred tax asset 448,000 200,000 - --------------------------------------------------------------------------------------- Total current assets 19,746,000 43,224,000 Furniture, fixtures and equipment, net 2,315,000 3,266,000 Intangible assets Excess of cost over net assets acquired, net of accumulated amortization of $2,579,000 and $3,807,000 41,834,000 53,763,000 Deferred financing costs, net of accumulated amor- tization of $302,000 and $609,000 1,621,000 1,436,000 Product rights, patents and trademarks, net of accumulated amortization of $75,000 and $88,000 180,000 169,000 Non-compete agreement, net of accumulated amortization of $22,000 and $41,000 478,000 469,000 Package design, net of accumulated amortization of $110,000 and $194,000 251,000 601,000 Trade credits 1,149,000 984,000 Officer receivables 694,000 848,000 Other assets 207,000 176,000 - --------------------------------------------------------------------------------------- $ 68,475,000 $104,936,000 =======================================================================================
See accompanying notes to consolidated financial statements. 1 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
June 30, March 31, 1997 1998 - ----------------------------------------------------------------------------------------- (Unaudited) Liabilities and Stockholders' Equity Current Line of credit $ -- $ 8,166,000 Current maturities of notes payable 8,990,000 3,500,000 Accounts payable 1,774,000 5,432,000 Accrued expenses 3,983,000 7,039,000 Accrued co-op advertising 1,098,000 1,267,000 Accrued commissions 859,000 1,115,000 Accrued interest 261,000 460,000 Accrued purchase consideration 489,000 978,000 - ----------------------------------------------------------------------------------------- Total current liabilities 17,454,000 27,957,000 Accrued purchase consideration 978,000 -- Deferred tax liability 547,000 700,000 Notes payable, less current maturities 17,570,000 25,770,000 - ----------------------------------------------------------------------------------------- Total liabilities 36,549,000 54,427,000 - ----------------------------------------------------------------------------------------- Commitments, contingency and subsequent events (Note 4) Stockholders' equity Preferred stock, $.001 par value - shares authorized, 1,000,000; no shares outstanding -- -- Common stock, $.001 par value - shares authorized, 30,000,000; 14,073,000 and 20,049,000 shares issued and outstanding at June 30, 1997 and March 31, 1998 14,000 20,000 Additional paid-in capital 30,783,000 49,974,000 Retained earnings 1,129,000 515,000 - ----------------------------------------------------------------------------------------- Total stockholders' equity 31,926,000 50,509,000 - ----------------------------------------------------------------------------------------- $ 68,475,000 $104,936,000 =========================================================================================
See accompanying notes to consolidated financial statements. 2 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Income ================================================================================
Three Months Ended Nine Months Ended March 31, March 31, ---------------------------- ---------------------------- 1997 1998 1997 1998 - ------------------------------------------------------------------------------------------------ Unaudited Unaudited ---------------------------- ---------------------------- Net sales $ 20,558,000 $ 23,520,000 $ 33,497,000 $ 39,058,000 Cost of sales 9,025,000 10,482,000 14,849,000 17,861,000 - ------------------------------------------------------------------------------------------------ Gross profit 11,533,000 13,038,000 18,648,000 21,197,000 - ------------------------------------------------------------------------------------------------ Operating expenses Selling and shipping 3,704,000 3,797,000 7,694,000 8,458,000 General and administrative 1,834,000 2,170,000 5,157,000 6,061,000 - ------------------------------------------------------------------------------------------------ 5,538,000 5,967,000 12,851,000 14,519,000 - ------------------------------------------------------------------------------------------------ Income from operations 5,995,000 7,071,000 5,797,000 6,678,000 Other income expense Investment income 16,000 245,000 59,000 349,000 Interest expense (993,000) (922,000) (2,368,000) (2,519,000) - ------------------------------------------------------------------------------------------------ Income before income taxes and extraordinary expense 5,018,000 6,394,000 3,488,000 4,508,000 Income tax (expense) (2,075,000) (2,700,000) (1,600,000) (1,900,000) - ------------------------------------------------------------------------------------------------ Income before extraordinary expense 2,943,000 3,694,000 1,888,000 2,608,000 Extraordinary expense of $1,459,000 on debt refinancing, net of income taxes of $452,000 -- -- (1,007,000) -- - ------------------------------------------------------------------------------------------------ Net income $ 2,943,000 $ 3,694,000 $ 881,000 $ 2,608,000 ================================================================================================
3 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Income ================================================================================ Three Months Ended Nine Months Ended March 31, March 31, ------------------ ----------------- 1997 1998 1997 1998 - -------------------------------------------------------------------------------- Unaudited Unaudited ------------------ ----------------- Basic earnings per share: Income per common share before extraordinary expense $.21 $.19 $.14 $.15 Extraordinary expense -- -- (.07) -- Net income per common share $.21 $.19 $.07 $.15 ================================================================================ Diluted earnings per share: Income per common share before extraordinary expense $.18 $.15 $.12 $.12 Extraordinary expense -- -- (.06) -- Net income per share $.18 $.15 $.06 $.12 ================================================================================ See accompanying notes to consolidated financial statements. 4 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================ Increase (Decrease) in Cash
Nine months ended March 31, 1997 1998 - ------------------------------------------------------------------------------------------- (Unaudited) Cash flows from operating activities Net income $ 881,000 $ 2,608,000 Adjustments to reconcile net income to net cash used in operating activities: Extraordinary expense 1,007,000 -- Depreciation and amortization 1,513,000 1,921,000 Amortization of deferred financing costs 216,000 301,000 Changes in operating assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable (12,939,000) (11,966,000) Inventories (2,427,000) (2,658,000) Prepaid expenses and other current assets 225,000 (1,716,000) Accounts payable and accrued expenses 5,120,000 6,037,000 Other assets 227,000 203,000 Deferred tax asset 1,092,000 401,000 - ------------------------------------------------------------------------------------------- Net cash used in operating activities (5,085,000) (4,869,000) - ------------------------------------------------------------------------------------------- Cash flows from investing activities Payment for purchase of business, net of cash acquired (23,265,000) (20,274,000) Payment for non-compete (500,000) -- Increase in officer receivables (148,000) (154,000) Purchase of furniture, fixtures and equipment (476,000) (799,000) Purchase of package design -- (435,000) - ------------------------------------------------------------------------------------------- Net cash used in investing activities (24,389,000) (21,662,000) - -------------------------------------------------------------------------------------------
5 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Nine months ended March 31, 1997 1998 - ------------------------------------------------------------------------------------- (Unaudited) Cash flows from financing activities Proceeds from issuances of stock $ 5,297,000 $ 18,847,000 Buyout of unit purchase options -- (3,221,000) Proceeds from bank line of credit 27,944,000 18,808,000 Payment on bank line of credit (16,919,000) (10,643,000) Proceeds from notes payable 16,783,000 10,000,000 Payments of notes payable (2,623,000) (7,290,000) Acquisition finance costs (1,399,000) (122,000) - ------------------------------------------------------------------------------------- Net cash provided by financing activities 29,083,000 26,379,000 - ------------------------------------------------------------------------------------- Net decrease in cash (391,000) (152,000) Cash and cash equivalents, beginning of period 680,000 2,083,000 - ------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 289,000 $ 1,931,000 ===================================================================================== Supplemental disclosure of cash flow information Cash paid for interest, including deferred financing costs $ 4,098,000 $ 2,223,000 Cash paid for taxes $ 13,000 $ 238,000 =====================================================================================
See accompanying notes to consolidated financial statements. 6 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. The accompanying consolidated financial statements at March 31, 1998, and for the three and nine months ended March 31, 1997 and 1998 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. 2. Refer to the audited consolidated financial statements for the year ended June 30, 1997, for details of accounting policies and accounts. 3. On August 9, 1996, Easy Gardener, Inc., a wholly-owned subsidiary of the Company, acquired all of the outstanding stock of Weatherly Consumer Products Group, Inc. (Weatherly), a lawn and garden care company, for 1,000,000 shares of the Company's common stock (valued at $3 per share) and approximately $22.9 in cash. On February 28, 1998, Weed Wizard Acquisition Corporation, a wholly owned subsidiary of the Company, acquired substantially all the assets and assumed certain liabilities of Weed Wizard, Inc., a lawn and garden company, for approximately $16.3 million. The acquisitions were accounted for as a purchase and, accordingly, the results of operations have been included in the consolidated statement of the operations since the respective acquisition dates. The value of intangibles purchased and the excess of the purchase price over the fair value of assets acquired totalled approximately $34 million and will be amortized on a straight line basis over the estimated useful life of thirty years. The following unaudited pro forma summary combines the consolidated results of operations of the Company, Weed Wizard Inc. and Weatherly as if the acquisition had occurred at the beginning of fiscal 1997, after giving effect to certain adjustments, including the amortization of excess costs over assets acquired increased interest expense and the elimination of certain expenses incurred by Weatherly related to the acquisition. This pro forma summary does not necessarily reflect the results of operations as they would have been if the Company, Weed Wizard Inc. and and Weatherly had constituted a single entity during such period and is not necessarily indicative of results which may be obtained in the future. 7 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Nine months ended March 31, 1997 1998 - -------------------------------------------------------------------------------- (000) (000) Net sales $ 36,809 $ 41,360 Net (loss) income before extraordinary expense (42) 1,500 Net (loss) income (1,569) 1,500 Diluted net (loss) income per common share before extraordinary expense (.01) .07 Diluted net (loss) income per common share (.11) .07 ================================================================================ 4. The following is a reconciliation of the weighted average number of shares used to compute basic and dilutive earnings per share before extraordinary expense: Three months Nine months ended March 31, ended March 31, ------------------------ ----------------------- 1997 1998 1997 1998 - -------------------------------------------------------------------------------- Basic earnings per common share 13,973,000 19,943,000 13,552,000 16,987,000 Options and warrants 2,086,000 5,095,000 2,339,000 4,900,000 - -------------------------------------------------------------------------------- Diluted earnings per common share 16,059,000 25,038,000 15,891,000 21,887,000 ================================================================================ 5. Company Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary Trust Holding Solely Subordinated Debt Securities of the Company In April 1998, U.S. Home & Garden Trust I (the "Trust"), a newly created Delaware business trust and a wholly-owned subsidiary of the Company, issued 78,000 common securities with a liquidation amount of $25 per common security to the Company for $1,950,000 and completed a public offering of 2,530,000 9.40% Cumulative Trust Preferred Securities with a liquidation amount of $25 per security (the "Trust Preferred Securities" and together with the common securities the "Trust Securities"). The Trust exists for the sole purpose of issuing Trust Securities and using the proceeds therefrom to acquire the Subordinated Debentures described below. Concurrent with the issuance of the Trust Securities, the Trust invested the proceeds therefrom in $65.2 million aggregate principal amount of 9.40% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company. 8 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Distributions on the Trust Securities are payable monthly in arrears by the Trust. The Subordinated Debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to certain other indebtedness of the Company. The Company may under certain circumstances defer the payment of interest on the Subordinated Debenture for a period not to exceed 60 consecutive months. If interest payments on the Subordinated Debenture are so deferred, distributions on the Trust Securities will also be deferred. During any such deferral period, interest on the Subordinated Debentures and distributions on the Trust Securities will accrue and compound monthly, and subject to certain exceptions, the Company may not declare or pay distributions on its capital stock or debt securities that rank equal or junior to the Subordinated Debentures. The Trust Securities are subject to mandatory redemption upon the repayment of the Subordinated Debentures at a redemption price equal to the aggregate liquidation amount of the Securities plus any accumulated and unpaid distributions. The Subordinated Debentures mature on April 15, 2028, but may be redeemed at the option of the Company at any time after April 15, 2003 and earlier under certain circumstances. The Company effectively provides a full and unconditional guarantee of the Trust's obligations under the Trust Securities to the extent that the Trust has funds sufficient to make such payments. Approximately $39 million of the proceeds received by the Company from the sale of the Subordinated Debentures to the Trust were used by the Company to repay outstanding long-term debt and line of credit advances. In December 1997, the Company completed a public offering of 4,290,000 shares of common stock which generated net proceeds to the Company of approximately $16 million. Approximately $3.2 million of the proceeds were used to repurchase approximately 1.7 million shares of stock underlying unit purchase options and warrants. Subsequent to June 30, 1997, a $350,000 liability was converted into 154,000 shares of common stock. Subsequent to June 30, 1997, approximately 1,350,000 warrants to purchase common stock were exercised resulting in net proceeds to the Company of approximately $2.7 million. Subsequent to June 30, 1997, the Company granted stock options to acquire approximately 700,000 shares of common stock under the 1997 and 1995 stock option plans. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain information included in this Item 2. and elsewhere in the Form 10-Q that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to, the Company's growth strategy, customer concentration, outstanding indebtedness, dependence on weather conditions, seasonality, expansion and other activities of competitors, changes in federal or state environmental laws and the administration of such laws, protection of trademarks and other proprietary rights, the general condition of the economy and other risks detailed in the Company's Securities and Exchange Commission filings." 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 Easy Gardener, Inc., ("Easy Gardener"), and Golden West Agri-Products, Inc., ("Golden West"), and through Easy Gardener's wholly-owned subsidiaries, Weatherly Consumer Products Group, Inc., ("Weatherly") and Weed Wizard Acquisition, Corp. ("Weed Wizard"). Since 1992, the Company has consummated seven acquisitions of complementary lawn and garden companies and product lines for an aggregate consideration of over $75 million in cash, notes and equity securities. As a result of such acquisitions, the Company recognized a significant amount of goodwill, which, in the aggregate, was approximately $57.6 million at March 31, 1998. The Company is currently amortizing such goodwill using the straight-line method over various time periods ranging from 20 to 30 years. 10 Results of Operations The following table sets forth, for the periods indicated, certain selected financial data as a percentage of net sales: Percentage of Net Sales ----------------------- Three Months Ended Nine Months Ended ------------------ ----------------- March 31, March 31, --------- --------- 1997 1998 1997 1998 ------ ------ ------ ------ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 43.9 44.6 44.3 45.7 ------ ------ ------ ------ Gross profit 56.1 55.4 55.7 54.3 Selling and shipping expenses 18.0 16.1 23.0 21.7 General and administrative expenses 8.9 9.2 15.4 15.5 ------ ------ ------ ------ Income from operations 29.2 30.1 17.3 17.1 Interest expense (4.8) (3.9) (7.1) (6.4) Investment income 1.0 1.0 .2 .9 Income tax expense (10.1) (11.5) (4.8) (4.9) Extraordinary expense, net -- -- (3.0) -- ====== ====== ====== ====== Net Income 14.3% 15.7% 2.6% 6.7% ====== ====== ====== ====== Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Net sales. Net sales increased by $3.0 million, or 14.4%, to $23.5 million during the three months ended March 31, 1998 from $20.6 million during the comparable period in 1997. The increase in net sales was primarily a result of the internal growth of the Company's pre-existing product lines combined with the Company's May 1997 acquisition of the Plasti-Chain product line of plastic chain links and decorative edgings, and the February 1998 acquisition substantially all of the assets used in the business of Weed Wizard, Inc. Gross profit. Gross profit increased by $1.5 million, or 13%, to $13 million for the three months ended March 31, 1998 from $11.5 million during the comparable period in 1997. This increase was due primarily to the increase in net sales. Gross profit as a percentage of net sales decreased to 55.4% during the three months ended March 31, 1998 from 56.1 % during the comparable period in 1997. The decrease in gross profit as a percentage of net sales was primarily attributable to a decrease in sales of higher-margin products. Selling and shipping expenses. Selling and shipping expenses increased $93,000, or 2.5%, to $3.8 million during the three months ended March 31, 1998 from $3.7 million during the comparable period in 1997. This increase was primarily the result of an increase in the amount of products shipped, which was a consequence of the increase in internal growth of the Company's pre-existing product lines combined with the acquisition of the Plasti-Chain product line of plastic chain links and decorative edgings and the acquisition of substantially all of the assets used in the business of Weed Wizard, Inc. Selling and shipping expenses as a percentage of net sales decreased to 16.1% during the three months ended March 31, 1998 from 18% during the comparable period in 1997. This decrease was primarily as a result of economies of scale gained from the sale of new products to existing customers. 11 General and administrative expenses. General and administrative expenses increased $336,000, or 18.3%, to $2.2 million during the three months ended March 31, 1998 from $1.8 million during the comparable period in 1997. This increase was primarily due to increased amortization of goodwill and depreciation as a result of the acquisition of the Plasti-chain product line and the asset acquisition of Weed Wizard, Inc. Furthermore, the increase is due to the addition of certain administrative personnel as part of the Company's efforts to build an infrastructure that it believes will be able to more readily integrate any future product lines or businesses that may be acquired. As a percentage of net sales, general and administrative expenses increased to 9.2% during the three months ended March 31, 1998 from 8.9% during the comparable period in 1997. Income from operations. Income from operations increased by $1.1 million, or 18%, to $7.1 million during the three months ended March 31, 1998 from $6.0 million during the comparable period in 1997. The increase in the income from operations for the 1998 period was primarily attributable to the increase in net sales. As a percentage of net sales, income from operations increased to 30.1% for the three months ended March 31, 1998 from 29.2% in during the comparable period in 1997. Interest expense. Interest expense decreased by $71,000, or 7.1%, to $922,000 during the three months ended March 31, 1998, from $993,000 during the comparable period in 1997. The decrease in interest expense was primarily the result of an aggressive inventory control program put into place in December 1997combined with the decrease in the outstanding principal amount of term debt associated with the Weatherly acquisition. In addition, the balance outstanding under the Company's Revolving Credit Facility at March 31, 1998 decreased to $8.2 million from $12.3 million at March 31, 1997. Income taxes. Income tax expense increased to $2.7 million during the three months ended March 31, 1998 from $2.1 million during the comparable period in 1997 primarily due to the increase in net income before taxes. The Income tax expense for each interim period is based upon the Company's estimated effective income tax rate for the year. Net Income. Net income increased by $751,000, or 25.5%, to $3.7 million during the three months ended March 31, 1998 from $2.9 million during the comparable period in 1997. Basic net income per common share decreased $.02 to $.19 per share for the three months ended March 31, 1998 from $.21 per share during the comparable period in 1997. Diluted net income per common share decreased $.03 to $.15 per share for the three months ended March 31, 1998 from $.18 per share during the comparable period in 1997. The decrease in both basic and diluted earnings per share is primarily attributable to more weighted average common and common equivalent shares outstanding in the three months ended March 31, 1998 compared to the comparable period in the prior year due to the Company selling $4.3 million shares of common stock in a December 1997 public offering. Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31, 1997 Net sales. Net sales increased by $5.6 million, or 16.6%, to $39.1 million during the nine months ended March 31, 1998 from $33.5 million during the comparable period in 1997. The increase in net sales was primarily a result of the internal growth of the Company's pre-existing product lines combined with the August 1996 acquisition of Weatherly, the May 1997 acquisition of the Plasti-Chain Product line and the February 1998 acquisition asset of Weed Wizard, Inc. Gross profit. Gross profit increased by $2.5 million, or 13.7%, to $21.2 million for the nine months ended March 31, 1998 from $18.6 million during the comparable period in 1997. This increase was due primarily to the increase in internal growth of the Company's pre-existing product lines combined with the Weatherly acquisition, the Plasti-Chain product line acquisition and the Weed Wizard, Inc. asset acquisition. Gross profit as a percentage of net sales decreased to 54.3% during the nine months ended March 31, 1998 from 55.7 % during the comparable period in 1997. The decrease in gross profit as a percentage of net sales was primarily attributable to a decrease in sales of higher-margin products. 12 Selling and shipping expenses. Selling and shipping expenses increased $764,000, or 9.9%, to $8.5 million during the nine months ended March 31, 1998 from $7.7 million during the comparable period in 1997. This increase was primarily the result of an increase in the amount of products shipped, which was a consequence of the increase in internal growth of the Company's pre-existing product lines combined with the acquisition of Weatherly, the Plasti-Chain product line, and substantially all the assets used in the business of Weed Wizard, Inc. Selling and shipping expenses as a percentage of net sales decreased to 21.7% during the nine months ended March 31, 1998 from 23% during the comparable period in 1997. This decrease was a result of economies of scale gained from the sale of new products to existing customers. General and administrative expenses. General and administrative expenses increased $904,000, or 17.5%, to $6.1 million during the nine months ended March 31, 1998 from $5.2 million during the comparable period in 1997. This increase was primarily due to increased amortization of goodwill as a result of the acquisition of Weatherly, the Plasti-Chain Product line and substantially all of the assets used in the business of Weed Wizard, Inc. Furthermore, the increase is due to the addition of certain administrative personnel as part of the Company's efforts to build an infrastructure that it believes will be able to more readily integrate any future product lines or businesses that may be acquired. As a percentage of net sales, general and administrative expenses increased to 15.5% during the nine months ended March 31, 1998 from 15.4% during the comparable period in 1997. Income from operations. Income from operations increased by $881,000, or 15.2%, to $6.7 million during the nine months ended March 31, 1998 from $5.8 million during the comparable period in 1997. The increase in the income from operations for the 1998 period was primarily attributable to the increase in net sales. As a percentage of net sales, income from operations decreased to 17.1% for the nine months ended March 31, 1998 from 17.3% during the comparable period in 1997. Interest expense. Interest expense increased by $151,000, or 6.4%, to $2.5 million during the nine months ended March 31, 1998 from $2.4 million during the comparable period in 1997. The increase in interest expense is primarily related to the interest associated with the increase in term debt associated with the Weatherly acquisition and the acquisition of the Plasti-chain product line, which was partially offset by a decrease in the Company's effective borrowing rate and certain principal payments made. Income taxes. Income tax expense increased to $1.9 million during the nine months ended March 31, 1998 from $1.6 million during the comparable period in 1997 primarily due to the increase in the Company's net income before taxes. The income tax expense for each interim period is based upon the Company's estimated effective income tax rate for the year. Extraordinary expense, net, In connection with the acquisition of Weatherly in August 1996, the Company refinanced its term debt and its revolving line of credit. As a result of its refinancing, the Company was required to record an extraordinary expense of $1.0 million, net of tax benefits of $452,000, during the nine months ended March 31, 1998. The expense consisted of deferred finance costs at June 30, 1996, net of accumulated amortization, plus prepayment penalties. Net Income. Net income increased by $1.7 million, or 196%, to $2.6 million during the nine months ended March 31, 1998 from $881,000, during the comparable period in 1997. This increase was attributable to the $1.0 million extraordinary expense incurred in the 1997 period related to the debt refinancing. There is no comparable expense in the 1998 period. In addition, the increase in net income is attributable to the increase in net sales. Basic net income per common share increased $0.08 to $.15 during the nine months ended March 31, 1998 from $.07 during the comparable period in 1997. The increase was primarily attributable to an extraordinary expense of approximately $0.07 per common share incurred 13 during the 1997 period. Diluted net income per common share increased $.06 to $.12 during the nine months ended March 31, 1998 from $.06 during the comparable period in 1997. The increase was primarily attributable to an extraordinary expense of approximately $.06 per common share incurred during the 1997 period. There was no corresponding expense in the 1998 period. The number of weighted average common and common equivalent shares outstanding for the nine months ended March 31, 1998 was 21,887,000 compared to the comparable period in the prior year of 15,891,000. This increase was primarily due to the Company completing a public offering of 4.3 million shares of common stock in December 1997. 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 are most active from late December through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are increasing their inventory of lawn and garden products. Sales typically decline by early to mid-summer. Sales of the Company's agriculture products, which were not material during the nine months ended March 31, 1998, are also seasonal. Most shipments occur during the agriculture cultivation period from March through October. Liquidity and Capital Resources Since inception, the Company had financed its operations primarily through cash generated by operations, net proceeds from the Company's private and public sales of securities and borrowings from lending institutions. At March 31, 1998, the Company had consolidated cash and short-term investments totaling $1.9 million and working capital of $15.3 million. At June 30, 1997, the Company had consolidated cash and short-term investments totaling $2.1 million and working capital of $2.3 million. This increase in working capital was due primarily to the Company selling 4,290,000 shares of common stock in December 1997, which generated net proceeds to the Company of approximately $16.0 million. In addition, warrants exercised to purchase common stock resulted in net proceeds to the Company of $2.9 million during the nine months ended March 31, 1998. Net cash used in operating activities during the nine months ended March 31, 1998 was $4.9 million consisting primarily of an increase in inventory and accounts receivable, offset in part by an increase in accounts payable the net income for the nine months ended, plus depreciation and amortization. Net cash used in investing activities during the nine months ended March 31, 1998 was $21.7 million consisting primarily of cash used for the asset acquisition price for Weed Wizard, Inc. and the purchase of certain assets of Landmaster, Inc. Net cash provided by financing activities during the nine months ended March 31, 1998 was $26.4 million consisting of the Company selling 4,290,000 shares of common stock which generated net proceeds to the Company of approximately $16.0 million, net borrowings of $8.2 million under the Company's Revolving Credit Facility, borrowings of $10 million in notes payable used for the purchase of substantially all of the assets used in the business of Weed Wizard, Inc. and the purchase of certain assets of Landmaster Products, Inc. and approximately $2.9 million which was received from the exercise of warrants to purchase common stock. The buyout of unit purchase options for $3.2 million combined with the $7.3 million payments of notes payable, offset the cash provided by financing activities. 14 In connection with the acquisition of Weatherly, Easy Gardener entered into a credit agreement (the " Credit Agreement") with certain institutional lenders (the "Lenders"). Pursuant to the Credit Agreement, the Lenders have provided the Company with the following revolving credit and term loan facilities as amended: (a) Revolving Credit Facility: the maximum amount available for borrowing under the revolving credit facility (the "Revolving Credit Facility") from time to time is equal to the lesser of $20 million and a borrowing base determined by reference to specified percentages of Easy Gardener's consolidated accounts receivable and inventory deemed to be "eligible" by the Lenders. As of March 31, 1998 based on this formula, $19.5 million was available for borrowing and $8.2 million was outstanding. At March 31, 1998, the annual rate for borrowings under the Revolving Credit Facility was 9.75%. (b) Term Loan Facility: Pursuant to this facility, Easy Gardener obtained three term loans (the "Term Loans"), one in the principal amount of $23.0 million ("Term Loan I"), $18.0 million of which was outstanding at March 31, 1998, one in the principal amount of $2.25 million ("Term Loan II"), all of which was outstanding at March 31, 1998, and one in the principal amount of $3.8 million ("Term Loan III"), all of which was paid in full and expired in November 1997. In connection with the Company's acquisition of Weed Wizard, Inc. in February 1998 Term Loan I and Term Loan II were consolidated into a single term loan (the "Term Loan") and the balance of the Term Loan was increased to $30.3 million. At March 31, 1998, the effective annual rate of interest for the Term Loan was 9.75%. In April 1998, U.S. Home & Garden Trust I (the "Trust"), a newly created Delaware business trust and a wholly-owned subsidiary of the Company, issued 78,000 common securities with a liquidation amount of $25 per common security to the Company for $1,950,000 and completed a public offering of 2,530,000 9.40% Cumulative Trust Preferred Securities with a liquidation amount of $25 per security (the "Trust Preferred Securities" and together with the common securities the "Trust Securities"). The Trust exists for the sole purpose of issuing Trust Securities and using the proceeds therefrom to acquire the Subordinated Debentures described below. Concurrent with the issuance of the Trust Securities, the Trust invested the proceeds therefrom in $65.2 million aggregate principal amount of 9.40% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company. Interest only payments are due through April 15, 2028 when the entire balance is due. Approximately $39 million of the proceeds received by the Company from the sale of Subordinated Debentures to the Trust were used to repay outstanding long-term debt and line of credit advances. As a result of this early repayment, the Company will write off deferred financing costs of approximately $1.4 million and incur a prepayment penalty of approximately $735,000 during its quarter ended June 30, 1998 which will reduce its reported income. Although the Company is currently negotiating new credit facilities with several banks, there can be no assurance that the Company will be able to obtain a new credit facility on terms acceptable to it, or at all. Failure to obtain a new credit facility would materially adversely affect the Company's operations. The Company believes that its operations will generate sufficient cash flow to service the debt incurred in connection with its prior acquisitions. However, if such cash flow is not sufficient to service such debt, the Company will be required to seek additional financing which may not be available on commercially acceptable terms or at all. As of March 31, 1998, the Company has a net deferred tax liability of $700,000 primarily relating to depreciation and amortization in excess of the book amount. The deferred tax asset of $200,000 relates to the allowance of accounts receivable, vacation accrual and certain other balance sheet reserves. In January 1997, the Company borrowed $550,000 in the aggregate from certain lenders. The loans were used to satisfy short-term working capital requirements. In July 1997, the Company repaid $200,000 of the loans and $350,000 was converted into 154,000 shares of Common Stock. 15 In May 1997, the Company purchased from Plastic Molded Concepts, Inc. certain assets relating to its Plasti-Chain Line of products for approximately $4.3 million. The purchase price was paid for through the use of the Revolving Credit Facility and Term Loan III. In February 1998, Easy Gardener, through its wholly owned subsidiary Weed Wizard, purchased certain assets of Weed Wizard, Inc. for approximately $16.3 million, of which approximately $5 million was based on the value of certain current assets acquired. In March 1998, Easy Gardener completed its acquisition of substantially all of the assets of Landmaster Products Inc. for the purchase price of approximately $3.0 million, of which approximately $750,000 was based on the value of certain net assets acquired. The Company anticipates spending approximately $4.0 million, including anticipated use of a portion of existing trade credits, in the fiscal year ending June 30, 1998 on a combination of media development, print, radio and television advertising, co-operative advertising (advertising done in conjunction with retailers), and attendance at trade shows and public relations to promote awareness, understanding and brand identification of its lawn and garden products. On May 14, 1998 the Company acquired the lawn and garden specialty fencing product lines of the Tensar Coporation for $5.4 million plus an additional $977,000 for inventory. In February 1997, the Financial Accounting Standards Board ("FASB") issued a Statement of Financial Accounting Standards (SFAS") No. 128, "Earnings Per Share," which is effective for both interim and annual periods ending after December 15, 1997. SFAS No. 128 requires the calculation and presentation of basis earnings per share (giving no dilutive effect to derivative securities) and dilutive earnings per share (reflecting the dilutive effect of all derivative securities). Accordingly, the Company has adopted SFAS No. 128 in its December 31, 1997 interim financial statements. As required by SFAS No. 128, all prior earnings have been restated to reflect the retroactive application of this pronouncement. 16 Part II - OTHER INFORMATION Item 1. Legal Proceedings The Company, Easy Gardener and Dalen Products, Inc. ("Dalen") have recently settled the July 30, 1997 lawsuit brought by Easy Gardener against Dalen in the United States District Court for the Western District of Texas, Waco Division, and the counterclaims and third party complaint brought by Dalen against Easy Gardener and the Company, respectively. While other terms of the settlement are confidential, Dalen has agreed to make a minor change on certain products to reflect Dalen's association with Gardeneer. In addition, Easy Gardener has agreed to withdraw the WeedShield brand name from the marketplace as part of the settlement. Item 2. Changes in Securities In February 1998, the Company issued (i) five-year options to purchase 50,000 shares of common stock at $4.375 per share to its Vice President of Finance pursuant to the Company's 1997 stock option plan and (ii) five-year non-plan options to purchase an aggregate of 140,000 shares of Common Stock at $5.25 per share to two individuals as an inducement for their employment with Wizard, a subsidiary of the Company. In addition, in January 1998 five year options to purchase 2,500 shares of common stock at $4.125 per share were granted to each of the Company's two outside directors pursuant to the Company's Non-Employee Director Stock Option Plan. The options were issued by the Company in private transactions pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933. Item 5. Other Information The Company currently intends to hold its next Annual Meeting of Stockholders on or about June 22, 1998. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (For SEC use only) (b) During the quarter ended March 31, 1998 the company filed a current report on Form 8-K, (under Item 2 of Form 8-K) for the event dated February 26, 1998, to report the purchase of certain assets of Weed Wizard, Inc. 17 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. Dated May 15, 1998 U.S. Home & Garden Inc. (Registrant) /s/ Robert Kassel ----------------- President, Chief Executive Officer and Treasurer /s/ Lynda Gustafson ------------------- Vice President of Finance (Principal Accounting Officer) 18 EX-27 2 ART. 5 FDS FOR 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS JUN-30-1998 MAR-31-1998 1,931,000 0 26,069,000 361,000 13,209,000 43,224,000 3,266,000 0 104,936,000 27,957,000 0 0 0 20,000 50,489,000 104,936,000 39,058,000 39,058,000 17,861,000 17,861,000 0 0 2,519,000 4,508,000 1,900,000 2,608,000 0 0 0 2,608,000 .15 .12
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